Nearshoring vs Offshoring: What Is Better for Your Company
Over the past few years, nearshore outsourcing has become a significant business. As of 2019, it is estimated that the net revenues from the global outsourcing economy are over $100B. This is an increase of close to $15B from 2018 (statista.com 2019). Particularly in the U.S., a large number of multinational corporations have laid off more than 2.9 million from the early 2000s and resulted in outsourcing.
The more apparent merits of outsourcing to companies have been widely discussed, including shared timezones, secure communication, and cultural linkages. However, even after extended discussions about the critical advantages of this hiring model, there has been conspicuous silence in comparing nearshoring vs. offshoring.
If you are still wondering why nearshoring? Or perhaps looking to cut on costs, time, and nerve cells that come with the recruiting process? It’s pretty understandable.
In this study, we are continuing to look at nearshoring vs. outsourcing, the benefits of each, and the ideal industries that this model can be applied.
While both nearshoring and outsourcing operate under the principle of hiring a third party to work on your behalf, it’s critical to understand the differences.
1. Nearshoring Definition
Nearshoring entails transferring business processes to organizations or teams in a nearby country. In this type of arrangement, both parties reap the benefits that come with the proximity dimension form temporal time zone, language, cultural linkages, economy, and secure communication. Nearshoring examples may include a company in Germany closely working with their Polish counterparts or Ukranian firms collaborating with Hungarian companies.
On the other hand, offshoring means that a business shifts work overseas or to countries where they can benefit from the lower-cost organization.
According to recent research by MicroSourcing, it is estimated that 73% of businesses around the world have had to outsource at some point. In the U.S., manufacturers are outsourcing an average of 70% to 80% of their finished product.
When asked why they outsource, 59% of respondents cited reduced costs as the most significant reason. Another 57% indicated that outsourcing allows them to focus on core business, while 47% cited nearshoring talents help them bridge capacity issues.
The leading outsourcing industries are distribution 31%, industrial 25%, financial services 19%, public 15%, and communications 10%. In terms of future growth, analysts have predicted that the global outsourcing market will grow at an annual rate of 4% in the next five years.
It also goes without saying, in countries like the U.S., offshoring has received its fair share of criticism for shipping out jobs. To defeat this, the administration has started a raft of measures like regulatory and tax cuts to become the competitiveness of the U.S. industry.
As a result, a massive quantity of U.S. companies has started reshoring with over 145,000 jobs being taken back as of 2019.
2. Now let’s look at the benefits of nearshoring vs. offshoring:
a) Merits of Nearshoring
Many hiring managers have always had second thoughts when it comes to outsourcing their projects. If you are running a startup and running on a tight budget, you may want to give outsourcing a try.
3. Here are the benefits and downsides of nearshoring:
a) The Proximity Value
One of the most significant nearshoring benefits is that it reduces the wear and tear inflicted on executives when traveling. Given the fact that nearshoring doesn’t cut across multiple time zones, moving to an offshore location reduces burnout, plus other going associated effects like jet lag and culture shock.
The geographical proximity also eliminates the costs associated with long trips at the same time, make frequent face-to-face interactions possible. With in-person communication, companies can keep close contact with their teams hence increasing their output.
Real-time collaboration also eliminates nasty surprises that may arise due to misunderstandings.
4. Closer Cultural Compatibility
By living within the same time zone, you and the team will face fewer problems in terms of the cultural differences. Possibilities of speaking a similar or identical language are high, making communication more comfortable and faster.
Even better, you may also benefit from similar financial and tax laws. This is because countries living in certain areas tend to have similar legislation and regulations.
Demerits of Nearshoring
Although nearshoring guarantees several benefits like timely decision making and fast communication, you may have difficulties in getting the right vendor to work on your project. This may lead to missed deadlines and delays in launching it.
Merits of Offshoring
One of the purposes, why businesses turn to offshore hiring, is the in-house skills shortfall. As it turns out, it is one of the most popular approaches for software development companies. Despite that, there remain some unanswered questions.
Apart from lower costs, what other benefits can you reap from this hiring model? Are there hidden thin ices to look out for?
Let’s get a more close look at the benefits and drawbacks that you may encounter with offshoring.
5. Lower Costs
We are in a very competitive world. Whether it’s on a personal front or businesswise, you must be proactive at all times if you are to remain relevant. To establish a good rapport with their clients, many offshore outsourcing companies will give supplemental services like short-term support. Moreover, you may also enjoy reduced business taxes, all of which contribute to the bottom line of your company.
Lastly, working with an offshore team allows you to venture into new markets without incurring additional expenses.
6. Work with the Best
As earlier indicated, one of the reasons why companies opt for either nearshoring or offshoring is to bridge the skills gap. A decent vendor typically collaborates with different customers, which means they have to have a team of professionals who are at par with current issues and the industry trends.
When working with such a vendor, you get to choose from a large talent pool and use their experience to your advantage.
7. Get More Done as you Sleep
Depending on how you look at it, varied timeshifts may seem like a drag, but it’s an advantage. For instance, if your software developer in the U.S. is sleeping, your Ukranian one could be testing functionality. By the time the former wakes up, the latter has already fixed all the bugs. Easy peasy, right??
On the other hand, you can send out instructions before heading to sleep and find everything on your table early next morning. Put, you get a lot done at even when you are sleeping.
8. Demerits of Offshoring
a) Constant Monitoring
Since offshoring entails working with individuals scattered away from your physical location, continuous monitoring on the progress of your project becomes almost a natural part of you. And since you don’t have the luxury of flying over to the team twice per week or spending the entire day on the road, it becomes spooky when communication ceases. What’s more appalling, the lack of constant face-to-face communication leaves you exposed to the threat to intellectual property.
To protect the integrity of your business, ensure you establish trustful and long-term relationships with your remote team. Additionally, always divide your tasks into small portions and delegate tasks to match individual team member’s profile.
Lastly, also ensure you hire competent and confident individuals who can self-direct with minimal supervision.
b) Final Thoughts
The battle between nearshoring vs. offshoring is hard to decide. This is because these two variants have their merits and drawbacks. As such, giving a universal recommendation is almost impossible. The key to choosing is pegged on several factors like your business goals, the nature of the project, and the available resources. While offshoring helps you save costs, different timezones and cultural differences may open a pandora box of unexpected expenses.
On the flip side, nearshoring makes communication more comfortable, plus you get to enjoy cultural compatibility. However, you may face difficulties in getting the right match for you. As a general rule of thumb, coordinating a team closer home is better as it will help offset some other costs, which makes nearshoring the lesser “evil.”
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