Nearshoring v Offshoring v Onshoring in Outsourcing: sometimes geography matters but probably less than you think

Once the strategic decision to outsource has been taken, one of the next big questions is where. We explore when and why the location of outsourced functions and processes can matter. And why it often doesn’t.

IT OutsourcingUPDATED ON February 14, 2023

John Adam K&C head of marketing

Author

Nearshore IT outsourcing

Nearshoring, offshoring and onshoring are terms that represent geography-based subcategories of outsourcing. Outsourcing refers to the organisational strategy of contracting a specialist third-party provider to execute particular business functions or processes. It is a strategic alternative to directly employing specialists in-house.

Software development and IT infrastructure set-up and maintenance, HR functions like payroll, accounting and finance and manufacturing are all processes and business functions that are among the most commonly outsourced. The distinction between nearshore, offshore and onshore outsourcing refers to the geography of where outsourced functions and processes are executed.

Here we’ll explain the distinction between the loose geographical distinction between the three terms. And more importantly, when and why it might matter to an organisation if their outsourcing strategy is nearshore, offshore, onshore or a combination of any of the three.

You can learn more about how and why organisations take the strategic decision to outsource in our blog post – What is outsourcing and why smart outsourcing decisions matter

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Nearshore vs offshore vs onshore – a loosely defined heuristic

Nearshoring refers to outsourcing business processes to a neighbouring country or region eg. Poland and other Eastern European countries are considered nearshore markets in relation to Germany and Western Europe. Mexico is a nearshore market in relation to the USA.

Offshoring means outsourcing functions of processes to a more geographically distant market eg. India or the Philippines are considered offshore markets for Western Europe or North America. However, Australian organisations will see the Philippines as a nearshore outsourcing market.

There is no objective definition of the point at which nearshore outsourcing becomes offshore outsourcing, like x kilometres distant or timezone within x hours. The terms are simply a rough heuristic. One way it can be thought of is nearshore destinations would be reachable with a“short haul” flight and offshore would require a “long haul” ticket.

Onshoring means outsourcing to a third-party provider based in the same country as the end client. Onshore outsourcing is almost always a strategic decision based on an organisation wanting to focus on core competencies where their expertise adds value rather than being influenced by surface-level cost efficiencies.

Why outsource anyway?

Organisations may decide to pursue an outsourcing strategy, the contracting of a specialist third-party provider to take over business functions, like payroll or software development, or processes, like manufacturing,  for a number of common reasons, including:

  • Cost
  • Access to specialist expertise
  • Allows an organisation to focus on core competencies where it adds value
  • Flexibility
  • Lack of in-house recruitment capacity and expertise
  • Risk management

Does it matter if my organisation outsources to a Nearshore or Offshore location?

The geographical location of your strategically outsourced resource doesn’t intrinsically influence the quality of the professionals or facilities your outsourced functions or processes will rely on. That’s down to their parent company’s recruitment, training, quality control, capital investment and management standards. Those vary the world over.

But where those professionals are located can influence other important factors:

  • Typical salary levels of professionals executing outsourced functions
  • Skill set availability
  • Time Zone
  • Travel time & expense if in-person collaboration is required between management or in-house team members and outsourced roles.
  • Language & professional culture of staff
  • Language & professional culture of management

Outsourcing partnerships can run into trouble because one or more of the above factors was not considered carefully enough at the outset.

Consider them all carefully in the context of your priorities and needs. How you weigh these factors in your decision-making process when selecting an outsourcing partner will vary. But they should all be weighed up.

Beware outsourcing stereotypes based on geography

It’s crucial to note that weaknesses associated with a choice between nearshore, offshore and onshore outsourcing markets can often be mitigated, though that can involve some trade-offs. For example, certain countries or geographies may benefit from a higher average level of English than others.

But if you insist on a minimum level of English and processes are in place to ensure that is met, the average level of English language in the country you are outsourcing to is less important than the level of those fulfilling your outsourced functions.

However, there may be trade-offs. If fewer professionals on the market you are outsourcing to speak good English, those that do will be able to command an added premium. Recruitment may also take longer because language requirements mean a shallower pool of potential hires.

The strengths and weaknesses associated with a particular outsourcing market also don’t often neatly reflect the nearshore, offshore, and onshore distinction. For example, the assumption that offshore outsourcing means compromising with lower average levels of English is a sweeping generalisation that is often far from accurate.

The Philippines is seen as an offshore market from the perspective of Europe or North America. But English is an official national language in the Southeast Asian nation and one of its major strengths as an outsourcing destination. In many East European markets considered nearshore from a European perspective, good average levels of English are seen as a strength. But that’s not the case for all East European markets.

Some outsourcing markets have become associated with higher or lower average quality. However, it is often the case that the quality that can be expected from a particular outsourcing market is far more closely aligned with the price point than location.

For example, the stereotype of manufacturing outsourced to China is often that the market offers low prices but also produces low quality. The reality is that it’s just as possible to manufacture high quality products in China as low quality. Apple devices, seen as high quality premium products, have historically been manufactured in China.

But over the years, many organisations outsourcing manufacturing to China were chasing low costs. As a result, consumers saw more examples of cheap, lower quality manufactured goods from China, establishing a somewhat unfair stereotype.

When it comes to outsourcing destinations, nearshore, offshore or onshore, the price-to-quality ratio you benefit from, or otherwise, is much more influenced by your provider, budget and selection process than geography.

Sometimes geography does matter in outsourcing

There are, however, circumstances under which the relative proximity or distance of an outsourcing partner is important.

  • Time zone compatibility can be important if real-time collaboration between in-house and outsourced functions is important. That doesn’t necessarily mean the outsourcing market is physically close (eg. South Africa is only 2 hours ahead of the UK despite being on the other side of the world. English is also an official language so there is a high level of language compatibility too). However, nearshore markets do usually have good time zone compatibility. And it’s obviously no issue with onshore outsourcing.
  • Travel logistics is another factor if in-person collaboration is seen as crucial to the success of an outsourcing strategy. Offshore outsourcing between locations separated by a 10-hour flight won’t be an optimal solution if face-to-face collaboration is a regular necessity or preference.
  • Data and other regulatory requirements some forms of outsourcing need to be compliant with can dictate the geography of outsourcing arrangements. For example, an EU-based company’s IT outsourcing project might involve access to and working with personal data. Outsourced functions also being based in an EU country, eg. Poland, Romania or Bulgaria, may be necessary for GDPR compliance, or mean it is more straightforward.

These are common examples of when geography does matter to outsourcing arrangements but there will be others that may influence a choice between nearshore, offshore and onshore outsourcing in the context of your organisation.

Ultimately, these terms are simply loosely defined tags used to sub-categorise the strategic practice of outsourcing by geography. They mean little in and of themselves. If outsourced functions and processes are based in a market that would be described as onshore, offshore or nearshore may well not be important to the success of your strategy. But it could be.

It’s important to consider all of the factors that will or could influence outcomes when defining an outsourcing strategy and selecting partners. Geography is one.

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