Nearshore Outsourcing Explained – What, When & Why Plus All The Facts & Stats For The Sector In 2020

Nearshore Outsourcing Explained – What, When & Why Plus All The Facts & Stats For The Sector In 2020

A Complete Guide To Nearshore Outsourcing In 2020 – Advantages, Risks And The State of The Market

With remote work, especially in IT roles, increasingly becomes the norm, nearshore outsourcing services is a vibrant sector. In this guide to the outsourcing, with a focus on nearhshore and IT functions, we’ll define exactly what nearshore outsourcing is, why the business strategy is evolving into a key pillar of  organisational efficiency and productivity by outlining the main advantages, highlight the risks and considerations to be aware of and present the sectors key facts, figures and statistics as of 2020.

What Is Outsourcing?

Outsourcing is defined as a professional relationship between two parties, a client organisation and outsourcer, that involves the former contracting out the provision of a service to the latter. An outsourcer is typically specialised in the provision of the particular service, which supports the core business of the client organisation.

That specialisation means the outsourcer can be expected to provide either higher quality or less expensive execution of the outsourced service. Often both.

Outsourcing Examples:

  • A car manufacturer outsources the production of particular components. The car manufacturer’s core business is designing and manufacturing cars. The outsourcer’s core business is manufacturing particular car components.
  • A car components manufacturer outsources the development of a custom stock control and production line management system to an IT outsourcer. The car components manufacturer’s core business is manufacturing car components. The IT outsourcer’s core business is developing custom software.

Outsourcing follows the economic logic of Adam Smith, the Scottish economist who noticed how division of labour in production facilities vastly increased efficiency. He reached the conclusion that breaking down more complex tasks into smaller tasks individual workers could specialise in, becoming increasingly skilled and efficient, would increase output and quality.

This observation became central to the economic theories that led him to be widely known as ‘The Father of Capitalism’.

Outsourcing takes Adam Smith’s division of labour one step further. Whole companies specialise in the provision of particular services, such as manufacturing garments, microchips or developing software.

Especially in a globalised world where overheads can vary significantly between countries, outsourcing as a form of division of labour can be a crucial competitive advantage for client organisations. Outsourcing can potentially not only offer cost efficiencies but also improve quality because specialists are highly trained and experienced in a particular area.

What Is Nearshore Outsourcing?

Nearshore outsourcing refers to an outsourced resource located in a country in relatively close proximity to that of the client organisation. In a European context, nearshore outsourcing is most commonly associated with west European organisations working with service providers in Eastern Europe. North Africa could also be regarded as a nearshore outsourcing destination for a client organisation from Spain.

There are no specifically defined criteria for what counts as a nearshore outsourcing destination, as opposed to offshore. But as a general rule of thumb, nearshore tends to refer to countries within a few hours flight of where the client organisation is based. The time zone of the nearshored outsourcer would also be expected to be within 2-3 hours of that of the client, meaning majority overlap in the standard working hours.

Relative geographical proximity between the location of a client organisation and nearshore outsourcing provider is also often considered to mean closer cultural and language compatibility between employees of the two.

Nearshore outsourcing is defined in relation to onshore and offshore outsourcing. The former refers to working with an outsourced service provider based in the same country as the client organisation. The latter refers to an outsourcing location further afield from what would be considered nearshore. In a European context, India or Sri Lanka would, for example, be offshore outsourcing destinations and Ukraine, Poland, Belarus or Bulgaria nearshore alternatives.

Nearshore Outsourcing – The Strategic Advantages

Nearshore outsourcing offers client organisations a number of strategic advantages. Some are advantages which apply to outsourcing generally, while others are more specific to nearshore outsourcing destinations more specifically.

Lower costs are perhaps the biggest advantage associated with outsourcing. Because providers are specialised in the service(s) they offer, they can often provide them more cheaply than non-specialists. Experienced, skilled management and staff and efficient processes honed over years of providing specific services should lead to efficiencies that can be passed onto the client organisation.

 Outsourcers are often also based in geographies where general costs and salary levels are lower than for the client organisation. This also helps reduce costs when outsourcing compared to hiring inhouse. Even when this is not the case, such as if using an onshore outsourcing partner, there are other cost advantages.

 No fixed overheads is one such cost advantage of outsourcing and applies regardless of where the outsourcer is based. When a service is provided by staff directly employed by an organisation, the cost of paying those individuals is a fixed cost that has to be met every month.

If the organisation’s demand for that service falls or is variable throughout the year, the fixed cost of full-time employees remains constant.

 Using an outsourced service means, within the framework of the contract, it can be scaled up or down as required without any fixed costs on the client organisation’s balance sheet. Additional resources can be added when demand for the service provided increases and withdrawn when it decreases.

Outsourcers are specialists. We’ve already touched on the specialist nature of outsourcers as a factor in them being able to provide services of a better quality than can be the case inhouse.

Yes, companies can hire experienced specialists directly, but the exposure to a range of projects and scenarios often means outsourced specialists are more experienced, battle hardened professionals than inhouse staff whose experience is typically less varied. Their range of experience can often make outsourced specialists particularly effective and competent professionals.

Outsourcers also become experienced and skilled in recruiting and training specialists in their field.

Client organisation can focus on their core business. Earlier in this blog I offered a couple of examples of outsourcing. A car manufacturer outsourcing the manufacture of components and the component manufacturer outsourcing the development of the custom software they use to run their businesses efficiently.

In both scenarios, the two client organisations have taken the strategic decision to outsource services that support their core businesses – manufacturing cars and manufacturing components used in cars.

Outsourcing those services to reliable partners allows them to focus their efforts on their core businesses, leaving supporting services to partners for whom that is their core business. The client organisation doesn’t spend time recruiting, training and managing professionals they recognise they are not best qualified to recruit, train and manage.

The essence of the efficiencies to productivity strategic division of labour results in.

Time zone compatibility. An outsourcing advantage specific to nearshore outsourcing is time zone compatibility. This is important if outsourced specialists will be in regular communication with employees of the client organisation or even working together on the same project. Having regular working hours that overlap in the majority is both far more sustainable and will hugely improve communication standards.

Professional culture compatibility. Another nearshore outsourcing advantage is often relatively closely aligned professional culture between the client organisation and outsourcer.

Professional culture is by no means reliant on geography. It is most influenced by management standards and practises at outsourcing companies. But as an average, which is a risk factor that deserves consideration, nearshore destinations do often have a professional culture, on an organisational and personal level, that is more closely aligned with that of the client organisation. It’s a major factor in why Eastern Europe is a favoured nearshore outsourcing destination for client organisations from Western Europe.

Language compatibility. If professionals from a client organisation are to have direct contact with professionals from the outsourcing provider, relatively strong competency in a common language on both sides is vital to good communication. There are exceptions, but nearshore outsourcing destinations tend to outperform offshore alternatives in terms of the average language compatibility between professionals from client and outsourcer.

 Onsite presence. One big advantage of nearshore outsourcing is that geographical proximity means that outsourced specialists can spend time onsite with the client organisation if judged beneficial for effective collaboration at certain points. That could potentially be for extended periods of up to weeks or months or for a few days at a time.

 In many circumstances, outsourced specialists working fully remotely may not be an issue. But in others, it can be a major plus to have the choice of bringing nearshored specialists onsite at relevant moments in a project’s lifecycle, even if it is one team leader or project manager who is then the onsite point of contact for the rest of a remote team. This is particularly common in IT outsourcing.

To refer once again to the European context, many nearshore destinations have convenient visa regimes in terms of outsourced specialists easily travelling to be onsite if and when required. A handful of nearshore destinations popular with client organisations from Western Europe are even members of the European Union eg. Poland, Bulgaria, Romania, and there are no restrictions on outsourced specialists traveling to be present onsite.

On the flip side of the coin, it is also convenient for representatives of the client organisation to visit a nearshored outsourcing partner if they wish to at certain times.

Compatibility of Legal & Tax Regimes. Especially in Europe and with regard to nearshore outsourcing destination in Eastern Europe that are members of the EU, there are major advantages when it comes to tax regime compatibility and legal recourse.

 EU members benefit from free trade between each other, which simplifies life for accounting departments, as well as negating additional tax expenses such as VAT. In a worst case scenario, there is also comfort in the fact that legal recourse is more straight forward and reliable when both client organisation and outsourcer are registered in EU members.

Nearshore Outsourcing – Risks & Considerations

Nearshore outsourcing offers many strategic advantages but that doesn’t mean there are not risks and considerations that need to be factored in to any decision by a potential client organisation.

Most are the same risks and considerations that apply to selecting any third-party provider of a service, regardless of their location. Others are specific to the fact that nearshored specialists are usually based majority remotely to the client organisation’s physical seat of operations.

Substandard Communication, Collaboration and Coordination. Less than optimal communication, collaboration and coordination standards are always a risk between any two parties, including between inhouse individuals or departments. But it is fair to say that risk is heightened with regard to communication, collaboration and coordination standards between two companies, as is the case in a client organisation and outsourcer relationship.

That risk is further accentuated if the outsourcer’s specialists are based remotely, especially if there has never been any in-person contact. At least some face-to-face contact often helps improve the communication in a subsequently majority remote relationship.

Mitigating the risk of poor communication standards requires both parties to openly acknowledge the risk and put effective systems and clear, objective benchmarks in place to neutralise it.

Client organisations may feel out-of-touch with the work the outsourcer is carrying out on their behalf. Outsourcers can feel like their work is being held up because the client organisation is less responsive in communication or timely in

The recent Covid-19 pandemic offers a very good example of how organisations can set up communication, collaboration and coordination systems to maintain standards and productivity within remote teams. Organisations with existing effective relationships with outsourcers will have had an advantage here, able to replicate the processes already established across their inhouse projects. There is also a feeling in many quarters that the accelerating trend towards remote work catalysed by the coronavirus crisis will be benefit nearshore outsourcing as a sector.

 Loss of Control. Responsible managers within a client organisation may feel like they have less control of projects where work is being entirely or partly executed by an outsourcer. This is closely connected to the previous point on communication, collaboration and coordination standards. If those are in place, they should neutralise the risk of a feeling of loss of control being experienced by client organisation-side management.

 Loss of Intellectual Capital. When an outsourcing partner is responsible for business critical projects and tasks, the know-how and experience their work results in does not remain within the company but is absorbed by the outsourcer’s employees.

 Intellectual capital being built up by the outsourcer and not the client organisation is an unescapable reality of the relationship. Even if there are processes in place to transfer some of the know-how and take-aways to the client organisation, the fact they have not been directly involved in the execution means this will always be diluted.

It is down to the client organisation to mitigate this risk with a well though-out outsourcing strategy. If strategic division of labour is central to the outsourcing arrangement, there shouldn’t be a problem. The client organisation’s priority is building up inhouse intellectual capital and know-how around their core business, not the non-core supporting functions outsourced.

Sometimes an outsourced resource is relied upon because the client organisation sees the project or task as business critical but lacks the human resources and/or skills to execute inhouse. In this case, the fact the know-how will not be absorbed inhouse is more significant.

But this can be effectively mitigated with the right approach to the outsourcing relationship. A stable, long-term relationship between outsourcing partner and client organisation can mean, on a practical level, there is a less than critical distinction between intellectual capital being absorbed by employees of the outsourcer or client organisation.

If the project or task to be executed is being outsourced due to necessity rather than preference, there is no reason why a clearly defined knowledge transfer strategy cannot be established from the outset. The business-critical project or task is completed on schedule by an outsourcer who then facilitates a well-managed hand-over, which transfers the know-how and intellectual capital in-house.

Us-and-Them Mentality. A poorly managed introduction of an outsourced resource runs the risk of leading to an ‘us-and-them’ attitude establishing itself within inhouse employees. This risk is heightened if work previously handled inhouse is outsourced, resulting in a loss of jobs within the client organisation resulting.

 That can, if not carefully managed, easily result in a loss of organisational trust, with other inhouse employees becoming concerned if their own roles may also be outsourced in future. It can also lead to an uncooperative attitude of inhouse employees in their working relationship with outsourced colleagues. That is obviously not conducive to a productive, effective working relationship between client organisation and outsourcer and can lead to ‘blame game’ scenarios.

It may be hard to entirely mitigate hard feelings inhouse in the short term if previously inhouse roles are subsequently outsourced. This won’t often be the case but if it is, some fall-out as a result of tough strategic decisions that personally impact inhouse is inevitable.

The only approach practically available to client organisation management is to transparently explain why the decision was taken and, where possible, reassure inhouse employees who will work with outsourced colleagues that their roles are not at threat. Additional management oversight to make sure inhouse attitudes are not having a negative impact on the outsourcer’s ability to work effectively may be necessary for a period.

Outside of this particularly tricky scenario, an us-and-them mentality should be easy enough to avoid by ensuring good communication, collaboration and coordination systems and best practises are in place.

If outsourced partners will have access to client organisation systems that contain sensitive data of any kind, security can be considered a risk. However, there is a similar risk with regards to inhouse employees with access to such systems and the mitigation approach will not differ considerably.

Access to systems holding sensitive data should be limited to specialists who genuinely need that access to fulfil their responsibilities and tracking and change logging systems in place. The biggest difference between the security risk of inhouse and outsourced employees having access to confidential data is in if the outsourcer has a strong company policy and guidelines on security.

The outsourcer should have a strict approach to security such as vetting employees and rules around how and where login details are stored or communicated, the use and security of mobile or portable devices used to access such systems etc.

The risks highlighted here can be largely mitigated against by client organisations implementing a strong methodology when selecting a nearshore outsourcing provider.

The Nearshore Outsourcing Market In 2020 – The Stats, Facts and Figures

 The strategic advantages that especially nearshore outsourcing can offer when approached in the right way, and the broader trend towards remote work generally becoming an accepted model, is seeing a very healthy sector. Nearshore outsourcing is also now a mature sector, which has been evolving since the 1980s.

That has led to both a better standard of outsourcer in terms of quality of service and processes, as well as improvements in how client organisations approach outsourcing. Another evolution of the sector is that it is becoming a rich source of innovation, especially with regards to nearshore IT outsourcing. In the past IT outsourcers were more used to execute. Now they can be heavily involved in innovation and the business case, working alongside the client organisation as specialist, strategic partners.

European Nearshore & International Outsourcing Market Statistics & Facts 2020

The following charts and graphs offer an insight into Europe’s nearshore outsourcing market as of 2020.

IT Outsourcing Services Market Revenue In Europe From 2016-2021(in billion U.S. dollars)

IT Outsourcing Services Market Revenue In Europe From 2016-2021

Source: Statista

U.S. IT Services Outsourcing Market Size, By Service 2016-2027 (USD Billion)

U.S. IT Services Outsourcing Market Size, By Service 2016-2027 (USD Billion)

Source: GrandViewResearch.com

Why Do Companies Outsource?

Why do companies outsource? Source: Deloitte’s Global Outsourcing Survey

Most Outsourced or Offshored IT Functions Worldwide

Most Outsourced or Offshored IT Functions Worldwide Source: Statista

Cost Comparison Of Nearshore Outsourcing Destinations Compared To Offshore and Onshore (IT Roles)

Cost Comparison Between Onshore Nearshore and Offshore IT Outsourcing Destinations

D-A-CH Region Companies Choose Nearshore Outsourcing For Over 75% Of Software Development Outsourcing Needs

Software Development Outsourcing Destinations From DACH (Germany, Austria, Switzerland) Countries - 2019

Value Of European Nearshore Outsourcing Markets by Country

Value Of European Nearshore Outsourcing Markets by Country

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