Nearshoring, offshoring and onshoring are all forms of IT outsourcing. The distinction between the three terms is where the outsourcing resource is located. But if the level of skills needed for a job being outsourced are equal, does it actually make any difference at all where those skills are based?
The answer is an ambiguous “it depends”. If the decision has been made it makes strategic or practical sense for your company or organisation to outsource certain tasks or projects, the next choice to navigate is between nearshoring, offshoring and onshoring.
Consider this your checklist of what to consider when making that choice.
The geographical location of your outsourced resource doesn’t influence the quality of the professionals that will work on your project. That’s down to their parent company’s recruitment, training, quality control and management standards. Those vary the world over.
But where those professionals are located strongly does influence a number of other important factors. Factors that have a telling influence on the success rate of an outsourcing partnership:
Many an outsourcing partnership has run into trouble because one or more of the above factors was not considered carefully enough at the outset.
What are the typical (the quality of your partner company will ultimately determine your own outsourcing experience) strengths and weaknesses of nearshoring, offshoring and onshoring across these factors?
Consider them all carefully in the context of your own priorities and needs. How you and your organisation weight these factors in your decision-making process for an outsourcing partner will vary. But they should all be weighed up.
Nearshoring is outsourcing in a country that is relatively close to your own geographically and with a time zone that would be expected to be within 1-3 hours of your own. For western European organisations, nearshoring would typically refer to eastern Europe and Turkey (possibly also north Africa for some countries). For an organisation based in North America, nearshoring would typically refer to Mexico, Costa Rica or other central American neighbours.
Offshoring is outsourcing in any other country than those which would be considered nearshoring destinations. Greater geographical distance to offshoring destinations will usually also mean a time zone difference of over 3 hours.
Onshoring is outsourcing that is based in your home nation. It’s similar to contracting with the difference that the professionals are employed full-time by the outsourcing partner instead of freelancers with their own individual contracts.
The table below is an approximation of the relative strengths and weaknesses of the key variables that should be considered during the decision-making process between a nearshored, offshored or onshored outsourcing partner.
If that’s a stage you are currently at, or approaching, a useful exercise would be to give each of these 9 factors a weighting based on their importance to your organisation and/or project. That will give you a good indication on the best choice for your needs.
But let’s first take a slightly closer look at each factor in the context of nearshore, offshore and onshore. Keeping in mind that, ultimately, it is the quality of your outsourcing partner, and their compatibility with your organisation, that is likely to be the decisive factor.
We are looking at this from an IT outsourcing angle but many of the same factors and considerations are applicable to other forms of outsourcing. Based in western Europe with nearshored IT talent centres, we also take a Euro-centric approach. However, wherever you may be based, you will be able to easily localise the underlying principles.
Let’s be direct – in a majority of cases, price is the factor that carries the heaviest weighting in outsourcing decisions. It’s the reason why companies outsource in the first place. If cost were absolutely no object, an organisation could just maintain a huge team of IT specialists with the skills to execute any project as and when required.
But even for the largest, wealthiest organisations, to do so would be absurd. It only makes sense to take on a full-time salary commitment for a role that will be necessary for the foreseeable future. If that role, and skill set, is only guaranteed to be necessary for a specific time period, or project, it makes more sense for organisations to outsource. When that job is done, the expense drops off the balance sheet.
As well as determining if roles should be inhouse or outsourced, price is also a heavily weighted factor when deciding between nearshoring, offshoring and onshoring for an outsourcing partner.
Nearshoring typically offers a middle ground when it comes to price. The most popular nearshoring destinations for organisations from western Europe are Ukraine, Poland, Romania and Bulgaria.
Lower living costs for employees, often less expensive tax regimes for both companies and employees and lower overhead costs (rent, utilities etc.) are also common qualities of nearshoring destinations that allow for lower end costs for client organisation.
IT specialists such as developers, QA and delivery management from that group of 4 countries typically cost 2-3 times less than hiring the same level of professional at home.
For example, a mid-level developer in Germany would be expected to cost €100-€120 an hour. A developer with the same skill set and experience based in Poland or Ukraine would be expected to cost €40-€50 an hour.
Offshored outsourcing typically results in the lowest cost per hour for IT specialists with comparable skill sets and experience to onshore or nearshored alternatives. A mid-level developer based in Asia would be expected to cost $20-$40 an hour.
The most expensive option. IT specialists are almost always in deficit in developed economies and so command a premium. As already mentioned, a mid-level developer based in Germany would be expected to cast €100-€120 an hour. In the USA, pay rates are even higher at $140-$170 an hour.
Another factor which often proves decisive in tipping the balance between a choice of nearshoring, offshoring and onshoring is preferred, or non-negotiable, collaboration models.
Some organisations have arrived at the conclusion that in-person collaboration works best for them to the extent being onsite is non-negotiable. For others, they make a call that varies on the perceived needs of the tasks or project outsourced specialists will work on.
Nearshoring, in a pattern that will become familiar, offers a half-way house. Nearshore locations tend to be close enough to mean it is possible for specialists to travel and spend time onsite. It is not uncommon for nearshored specialists to be based onsite 3-5 days a week if travel time is just a few hours. Or to travel on an ad hoc, as needs, basis.
If you think it will be necessary for nearshored specialists to spend at least some time onsite, it is important to check visa conditions. Can they travel easily and at short notice for limited periods of time? Or are there travel restrictions that might hinder travel even if commute time and expense do not?
Virtual collaboration is also easier with nearshored specialists. With time zones within 1-3 hours of the client, much of the working day usually overlaps, or can be adjusted if needed. That makes it convenient for inhouse and outsourced teams and management to maintain regular communication while executing their jobs.
Convenience of collaboration, both onsite and virtual, can be a challenging compromise when working with offshore outsourced specialists. It will usually be time and cost prohibitive, as well as potentially complicated when it comes to visas etc., for offshore specialists to be present onsite. At least on a regular basis. The same is likely to hold true for management or team members of the client to travel to the outsourcing partner’s location.
Virtual collaboration can also be a challenge if time zones do not overlap by at least half of the working day. There are ways and means to get around such difficulties, such as outsourced specialists working non-standard hours for their geography and strong project management. But this tends to be compromise.
However, if the nature of the project and tasks mean constant real-time collaboration is not crucial on a day-to-day basis this may not be a deal breaker. The extent of offshore outsourcing indicates there are work arounds that are effective or project and tasks that minimise the need for real-time virtual or in-person collaboration.
With onshore outsourcing collaboration needs don’t tend to be a factor. Or at least not a major one. If specialists are based in the same city, they will either spend their working day onsite with the client, or come in whenever necessary. And if they are in the same country it generally isn’t a problem for them to travel to be onsite for all or part of the working week. But this can add to already significant expenses.
If outsourced experts speak English or the native language of the client organisation to a good professional level is often an important consideration. English has become the default international business language.
In another generation, or even decade, it will may well be unusual for outsourced staff, no matter where they come from, to not speak English to a reasonably high level. But it is fair to say that today, language skills are still a significant variable between outsourced staff.
To an extent, the level of competency in English or other languages is down to the recruitment policies and processes of the outsourcing partner. But the average level of competency in languages certainly varies between outsourcing locations.
For example, we have tech talent centres in Ukraine, Poland and Bulgaria. The average level of English competency among candidates for developer and other tech specialisations we hire for is evidently higher in Bulgaria and Poland in comparison to Ukraine. The same can be said of German.
That doesn’t mean it is not possible to recruit tech specialists in Ukraine with a good professional level of spoken English (reading and writing tends to be better). Or German. But it is certainly a greater challenge as the pool is shallower. That increases the market value of Ukrainian specialists who also have strong competency in English, or German.
But the average level of English competency among tech specialists in Ukraine is still higher than typical for other popular outsourcing destinations around the world.
Professional culture is a quality that is harder to screen for than language competency. It also depends much more on the systems and culture of the outsourcing partner. But there are broad-stroke but notable differences between cultures that can impact on things such as how mistakes or problems are acknowledged or reported and more general norms in communication.
Nearshoring outsourced resources continue along the middle ground pattern already established. Outsourced specialists based in eastern Europe working alongside western European client organisations tend to have reasonably strong language and professional culture compatibility.
That’s also an influential factor in why north American client organisations can favour east European outsourcing partners ahead of nearshore central America. That’s despite the fact east Europe is, for them, an offshore destination by geographical distance and time zone.
Compatibility on the basis of average English language level and professional culture is less about geographical proximity. But at least in a European context, nearshore outsourcing tends to offer good average levels of language and professional culture compatibility.
The number of outsourcing locations that would be classified as ‘offshore’, means there is more variability when it comes to language and professional culture compatibility between client organisation and outsourcing partner. As already mentioned, it is perfectly possible that for client organisations from some regions, outsourcing destinations that are geographically further away offer closer language and professional culture compatibility than closer, nearshore options.
Each offshore destination should be judged on its own average language and professional culture compatibility with those of the client organisation.
When working with onshore outsourcing partners, language and professional culture compatibility is, by default, generally not an issue. However, if the client organisation’s working language is English but the native language of their home country isn’t, there’s also no guarantee that onshore outsourced specialists will have a good professional level of English.
If a good level of English is a requirement, that should be clarified with the outsourcing partner at the preliminary discussion stage.
It can make sense to place particular emphasis on the language skills and professional culture of an outsourcing partners management. Depending on circumstances, that might be a more important influence on the success of the partnership than most other factors.
It can be the case that the ownership and/or management of a nearshored or offshored outsourcing partner is not from that geography themselves. For example, K&C’s tech talent is nearshored in Ukraine, Poland and Bulgaria but our ownership and management German and based in Munich, where our head office is located.
With a majority of our client organisations from either the D-A-CH region or other west European countries, we find that helps when it comes to compatibility of professional culture, language and communication standards. We ‘speak the same language’ as our clients in more ways than one.
There are of course undoubtedly many locally owned and managed near and offshore outsourcing companies whose professional culture and language compatibility with their client organisations is excellent. And the inverse will also be the case.
Other than insight from references, you will have to judge language and cultural compatibility with a prospective outsourcing partner’s management over your selection process.
Like language and professional culture compatibility of staff, this factor will vary between nearshore locations and individual companies. In a European context, east European nearshore destinations often offer strong compatibility with west European client organisations.
Like staff compatibility, the huge number of countries that fall into the ‘offshore’ category means language and professional culture compatibility of management can vary greatly. Some offshore locations will be broadly and generally more compatible with the client organisation’s expectations. But how this works out in reality will again be most down to the qualities of an individual company and its management and ownership.
Companies from the same culture certainly don’t necessarily have the same homogenous professional culture. But there do tend to be accepted norms that increase the likelihood of compatibility across expectations and ways of doing things. Language compatibility shouldn’t be in question, though regional accents and dialects can be surprisingly varied, and tricky to the unfamiliar ear! ?
Demand to supply for the skill sets being outsourced can vary significantly between geographies. It’s no secret that especially IT specialists, some more than others, are in very short supply compared to demand in certain geographies.
Price was the first variable we looked at when examining the most typical qualities that influence an outsourcing decision. Price is of course the main mechanism by which free markets balance supply and demand.
Onshore outsourced IT specialists are expensive not only because they can be onsite, speak the same language and tend to have a highly compatible professional culture and expectations. They are also expensive because they are in especially short supply compared to demand.
Speaking from our own experience as a predominantly nearshored IT outsourcing company, but one that also has teams and consultants based in Germany, it is certainly more difficult to hire in our home country than nearshore locations.
Hiring IT specialists is a challenge anywhere in the world, precisely because the feasibility of remote teams has created a global market. But there are still localised nuances in supply and demand.
The salary levels of IT specialists, a majority of whom work remotely for client organisations based elsewhere, are relatively higher compared to other professions in many nearshore locations. Over the past decade or so that has increased the numbers of students, or adults re-training, in computer science subjects.
Where our nearshored tech centres are based, in 3 east European countries, the education system has also historically placed greater emphasis on mathematics than in Germany or west Europe more generally.
It’s certainly not necessary for IT specialists to have a strong foundation in mathematics but it does seem to help encourage more individuals into the sector. It can help the logical basis of software development and other specialisations seem less intimidating.
All of the variables mentioned in relation to nearshore outsourcing destinations are generally applicable to offshore locations. They will vary from country to country, as they do nearshore.
Demand for IT skill sets is highest in developed economies such as western Europe and north America. There is also greater variety in career paths offering comparable levels of remuneration so more competition when it comes to attracting talent into the IT sector.
The combination of these two big factors means IT skill sets are in short supply on the market and can be extremely hard to secure at a cost level that makes business sense.
Convenience, security and trust in legal and tax systems can be very influential factors in any business decision-making process that involves significant sums of money. The legal system any attempt at recourse will rely on if anything does go wrong can have a significant impact on the outcome. And, often just as crucially, how long that outcome may take to be arrived at.
The compatibility and attractiveness of tax regimes and accounting systems can also be a factor.
Legal and tax systems vary from country to country but European nearshoring can benefit from the fact destinations may still be in the EU. This can offer greater security and ease. However, even if a nearshored outsourcing partner’s IT specialists are not based in the EU, they may have a company structure that means legalities, taxes and accounting can be kept within the EU or even the client organisation’s home systems.
Offshore outsourcing locations will often have very different legal and tax systems to those of the client organisation. That can, in certain circumstances, be an advantage. But it can also lead to complications, especially if the two countries have no formal tax agreements between them.
If larger sums of money are involved, ease of legal recourse is certainly a risk factor that should be weighed up.
In an onshoring model, the outsourcing partner will belong to the same legal, tax and accountancy systems. That makes things easy. However, it also means there is no scope for potential tax efficiencies.
Different organisations and projects will have different considerations and priorities that may make the decision between nearshoring, offshoring and onshoring outsourcing an easy one. But it is still always worthwhile to really assess those considerations and priorities to ensure you are not simply taking a default decision based on historical precedent.
The strengths and weaknesses of nearshore and offshore outsourcing opportunities will also potentially vary a lot between different countries. And it should never be forgotten that the most significant influence will often be the quality and professional culture of the particular outsourcing company.
Physical location is becoming less and less significant in the contemporary international IT sector. That’s a trend expected to accelerate as remote work becomes more of a norm for even full-time company employees.
But take the time to weight what’s important to you in your choice of outsourcing partner. The variables highlighted here are, in our long experience, those which most good, sustainable outsourcing decisions take into consideration at an early stage.