When Is Nearshore Software Development A Better Strategic Choice Than In-House Team?

Comparing Nearshore Software Development Outsourcing With The Alternatives – Pluses, Minuses & Points To Consider

IT OutsourcingUPDATED ON June 15, 2022

John Adam K&C head of marketing


Nearshore IT outsourcing

Nearshore software development is, as a sub-sector of IT outsourcing, a quickly growing service market. IT services outsourcing makes increasing strategic sense for companies and other organisations for a number of reasons:

  • Cost-cutting. Nearshore or offshore software development is typically much cheaper than building the same thing in-house or using local (onshore) outsourcers.
  • The scarcity of software developers and other IT specialists makes hiring in-house complicated.
  • Lack of in-house recruitment expertise and experience (especially in technical competency assessment) for IT roles makes it difficult to successfully hire in-house.
  • Technologies change quickly, which means the skill set of full-time staff can quickly become obsolete.
  • IT capacity needs are variable through time and an in-house team can’t be conveniently scaled up and down with demand cycles.
  • Full-time IT specialists are an expensive overhead that represents a considerable risk for young companies lacking predictable revenue streams or investment capital. Outsourcing software development means expenses can be controlled to match budget cycles.

Companies and other organisations can also be wary of outsourcing software development. Some of the most commonly expressed fears include:

  • Lack of control when working with a third-party provider can mean missed deadlines and poor quality work.
  • More expensive as outsourcing company or software development agency has a margin on top of their direct cost to employ the specialists that will work on the project.
  • Security concerns if work means giving access to in-house systems and data.
  • Communication issues if specialists working on a project are based remotely.
  • Outsourced contractors not vetted for compatibility with company culture or as familiar with products and users.

In this post, we’ll explore why the strategic reasons why organisations opt for nearshore software development are becoming increasingly valid. And why the fears which can block the choice are often not objectively greater risks than those that come with entrusting business-critical functions to permanent in-house employees.

But before we delve into that, let’s quickly define what nearshore outsourcing actually means.

When does IT Outsourcing work?

(And when doesn’t it?)

What Does The ‘Nearshore’ In Nearshore Software Development Mean?

Outsourcing companies, across all sectors and not just IT services providers, often use the terms ‘onshore’, ‘offshore’ and ‘nearshore’. These terms refer to the geographical location of the outsourced resource.

Onshore means outsourced resources are based in the same geography as the client organisation. For example, a consultant from a locally based firm that comes into the office to advise on or troubleshoot a particular issue, or working with a marketing agency from the same city, would be an example of onshore outsourcing.

Offshore means outsourced resources from software developers to call centre support staff are based abroad and work remotely over the phone or online. Cost-cutting is usually, though not always, the main incentive for offshoring work functions. As a result, outsourced resources referred to as ‘offshore’ are usually based in geographies where salaries and other overheads are much lower than typical of the country where the client organisation is based.

Nearshore is a sub-category offshore. The outsourced resource is still based abroad but in a country in relative geographic proximity to the client organisation. In a European context, nearshore software development refers to using developers based in mainly Eastern European countries like Ukraine, Bulgaria, Romania, Poland, Serbia, Belarus etc.

Nearshore is also less frequently used to refer to Southern European countries, like Greece and Portugal, where costs are still usually significantly lower than paying for equivalent skill sets in Western European economies like the UK, Germany, Holland and the Scandinavian countries.

The Advantages Of Nearshore Software Development

Nearshore software development has advantages compared to both in-house, onshore and offshore alternatives. It also has disadvantages. Nothing’s perfect. Whether the balance of advantages outweighs the disadvantages will come down to context.

We’ve already covered the strategic advantages of outsourced software development vs. in-house software development. But what about onshore vs. offshore vs. nearshore software development?

Onshore Software Development vs. Offshore Software Development. What’s The Difference?

The advantages of outsourced onshore software development are:

  • Easy face-to-face collaboration.
  • Problem and conflicts can be talked through and resolved face-to-face, which can be more effective than via remote communication.
  • Language compatibility. Client organisation and onshore outsourcer speak the same native language.
  • Cultural compatibility. Client organisation and outsourced software developers come from the same cultural background, which can ease communication and mean professional norms match up nicely. There can always be poor compatibility on an individual level but this can be less likely when broader cultures are closely aligned.
  • Standard working hours are aligned.

The disadvantages of outsourced but onshore software development are:

  • The fact that it is still outsourced means the overhead is as flexible as the contract, which is an advantage. But the client organisation will pay a premium for that flexibility and the onshore outsourcer has high salary overheads to employ and retain in-demand specialists locally.
  • Lack of software developers on the local market. If one of the primary reasons why software development is being outsourced is difficulty in hiring developers in-house due to local market restrictions, the outsourcer faces the same challenge. This will impact on costs and may also mean the outsourcer stretches and juggles resources to maintain profitability, which can impact on quality and deadlines.

Nearshore Software Development vs. Offshore Software Development

The advantages of outsourced nearshore software development are:

  • Face-to-face collaboration is possible when necessary or preferred. Nearshore software development locations are usually within a couple of hours flight of the client organisation. There can be little practical time and expense difference between specialists or client organisation employees flying when necessary and a train journey to another city in the same country.
  • Time zone compatibility. Nearshore locations would normally be on the same time zone as the client organisation or be within an hour or two at most. Matched up standard working hours make collaboration and communication convenient.
  • Language compatibility. Nearshore software development partners are more likely to employ staff that either speak the native language of the client organisation or a similar level of English than offshore alternatives. There are exceptions to this general rule of thumb. Eg. The Philippines is a popular offshore outsourcing destination for client organisations from native English-speaking countries due to the high level of English common among Filipinos.
  • Cultural compatibility. With nearshore software development destinations typically in relative geographic proximity to client organisations, there is typically a good match in general and professional cultural norms.
  • Costs cutting. On a per hour or salary basis, nearshore locations are generally more expensive than offshore alternatives but still significantly cheaper than in-house or onshore software development.
  • Price-to-value ratio. It is important to caveat this will very much depend on the quality of both nearshore and offshore software development partner, but many organisations reach the conclusion that on a euro for euro, pound for pound or dollar for dollar basis, they get more output from nearshore as a general rule. The price per hour or salary levels might be slightly higher than offshore, but if productivity is higher as a result of other pluses, price-to-value can actually be improved.

The disadvantages of outsourced nearshore software development are:

  • Still majority remote. It may be possible to hop on a plane and be onsite with the client organisation within a few hours of a nearshore destination, and relatively inexpensive. But travel time and expenses are still a factor. Some client organisations prefer a ‘point person’ or project manager from the outsourcer permanently or regularly onsite, coordinating with nearshored colleagues and available for face-to-face communication. This can be a good compromise but does mean accommodation costs and expenses for that person need to be met, even if it can still often work out less expensive than an onshore alternative.
  • Language and cultural compatibility not completely matched up. Yes, nearshore software developers more often have a common language with the client organisation, both literally and culturally, than offshore alternatives. But they still won’t usually share a native tongue and there may be some level of deviation between professional norms.

How Much Does Nearshore Software Development Cost? Price Comparison Table

The following table shows indicative price ranges common across different geographies for various IT specialists of different experience levels. Individual companies or experts may fall out of these ranges but we’ve found them to offer a good general benchmark for expectation setting.

Cost Comparison Between Onshore Nearshore and Offshore IT Outsourcing Destinations

Favoured IT Outsourcing Destinations From The DACH-Region & Beyond

Overall, and on a global level, slightly more IT services are outsourced offshore, including nearshore, compared to onshore. But the balance continues to shift in favour of offshore, particularly nearshore, software development destinations.

That’s a trend that can be expected to not only continue but accelerate. With the 2020 Covid-19 pandemic meaning most staff, especially in IT roles, are working remotely from home anyway, the practical difference between onshore and offshore has significantly decreased.

With a greater degree of remote work expected by many to remain a reality moving forward, that can be expected to lead to further growth in the nearshore outsourcing sector, including in the context of software development services.

Where do Munich-based organisations outsource to?

The right-hand pie chart demonstrates that nearshore software development in other European countries, particularly Eastern Europe, is overwhelmingly favoured by client organisations from the ‘DACH’ region, which consists of Germany, Austria and Switzerland.

Nearshore Software Development Won’t Suit Everyone. But The Data Shows It Increasingly Suits Most

As highlighted at the beginning of this blog post, nearshore software development will not necessarily be the most appropriate or preferred option for every organisation. But occupying the middle ground when it comes to convenience, productivity and cost, and a strong argument that it offers the best price-to-quality ratio between in-house, onshore, offshore and nearshore options, it is the optimal solution for a growing ‘many’.

We’ve outlined the pluses and minuses that should be considered when weighing up the balance of whether a nearshored development resource fits your organisation or specific project’s needs and priorities. Nearshore software development isn’t the best option in every scenario. But can be the best option for many.

Selecting The Right Nearshore Software Development Agency Or Partner

When hiring new employees in-house, there is always a level of risk involved. The right choice is not always made for a variety of reasons. But a strong, stress-tested process goes a long way to reducing the level of risk and making sure there is a successful outcome more often than not.

The same can be said of any organisation selecting a third-party service provider, regardless of whether that provider is based locally or abroad. When going through the process of short listing and selecting a nearshored software development partner, you need to consider a variety of factors including:

Tech Stack – not every software development agency offers specialists in every technology or has the same level of expertise and experience across all the options. Make sure you are speaking to agencies whose tech stack fits your needs.

Agency Size – for some projects and organisations, their needs may mean a larger company will best be able to provide what they need. For others, a smaller partner may be more likely to be a good fit.

Cost Level – nearshore software development may be significantly cheaper than in-house or onshore alternatives. But there is still a framework of cheaper to more expensive nearshore outsourcers. The business case of your project or organisational budget may dictate to an extent where on the cost spectrum you should narrow your selection process to.

Company Culture – a sustainably productive professional relationship usually comes down to a cultural fit and ‘soft’ skills as much as it does the quality of a partner’s ‘hard’ skills, or technical expertise. Use early conversations to ask probing questions and get a feel for the culture and communication standards of nearshore software development agencies under consideration.

For a more detailed dive into a tried and tested methodology for selecting an IT outsourcing provider, read our dedicated blog post on the topic by following the link.

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