Onshore, Nearshore, or Offshore Outsourcing: What to Choose?

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Olga Demidenko
Author, Geomotiv
Published: May 7, 2021

You've probably already heard the words of Ryan Khan, the founder of The Hired Group: “Master your strengths, outsource your weaknesses.” That’s what many businesses are doing these days. With its hectic speed, multi-functioning, extremely tough competition, and high requirements to the quality of services and products, companies physically can’t cover all the tasks independently and stay in the leading positions in the modern world. Today it is widespread to delegate your non-core activities and focus more on key business goals and functions.

IT Outsourcing Market

Software development and related functions are definitely among the most highly demanded services provided on the outsourcing market.

According to ResearchAndMarkets.com, in 2019, the global IT outsourcing market reached the mark of $337.9 billion. In 2020, amid the COVID-19 pandemic, its value hit US$342.9 billion. And now experts expect to see this figure increase up to $410.2 billion by 2027.

The US market has the largest share of the global IT outsourcing market. In 2020, it accounted for over 27%, which was $92.7 billion. And it is still growing. Just imagine: the second-largest market in this sphere is China. And its share is projected to reach $82.3 billion only in 2027.

Why Do Companies Outsource?

The popularity of outsourced services is explained by the benefits that businesses get.

  • Reduced costs
  • More precise focus on core business
  • Enhancing quality of services
  • Access to a broader pool of talents
  • Avoiding issues and expenses related to hiring and administrative processes
  • Increased flexibility 

4 Basic Types of Outsourcing

  • ITO — Information Technology Outsourcing. This model presupposes hiring resources outside a company to handle specific tasks or functions related to IT, such as data storage. Why do companies do this? The answer is quite simple - it is cheaper to pay a third-party service provider than buy and support your equipment for data storage.
  • BPO — Business Process Outsourcing. Within this model, some company hires another organization or an individual for performing business tasks that are crucial for the successful functioning of the first company. Among the outsourced services of this category, we can name various back office or front office operations such as HR tasks, accounting, data processing, SMM, sales, and many others.
  • KPO – Knowledge Process Outsourcing. This form of outsourcing covers information-related high-end work activities that require deep knowledge and expertise. The range of activities that belong to this category includes (but is not limited to) market research, performance management, data analytics, consultancy and training, design, and animation.
  • Software R&D — software research and development outsourcing. This type is the most popular one these days. It takes place when a company delegates custom software development and related services to a third party. Businesses often choose this model when they do not have an in-house development team or have experts with specific skills required for their project.

But the services outsourced are not the only parameter for determining types or models of outsourcing. Now, let’s focus on such a criterion as geography.

From this perspective, we have nearshore, onshore and offshore outsourcing.

Onshore Outsourcing: Definition and Peculiarities

This model means that software developers that you’ve hired are based in the same country (or region) where your company is located. That’s why this type is also known as local outsourcing.

The key benefits:

  • No language or cultural barriers
  • No significant time difference (if any at all)
  • More accessible communication, possibility to meet offline

The main disadvantage of onshore outsourcing (especially if we speak about the US) is service price. Hiring specialists from your country will be much more expensive in comparison to the costs that you will have to bear if you prefer offshore or even nearshore outsourcing.

Nearshore Outsourcing: Advantages and Disadvantages

We talk about nearshore outsourcing when the team that you work with is located in a neighboring country. This type can be viewed as a transitional form between offshore and onshore. Therefore, it shares some crucial benefits with local outsourcing:

  • Time zone difference is not crucial
  • Price (it is lower than in the first case, but it is still less pleasant than in the case of offshore outsourcing)

As for minuses of this type of collaboration, it is crucial to mention the following ones:

  • Cultural differences that may affect the working process
  • Rather complicated options for conducting offline meetings

Offshore Outsourcing: Pros and Cons

If you opt for this variant, you will work with a development company from another country or another continent situated within a different time zone.

The advantages of offshore outsourcing are:

  • Access to a global pool of experts whom you can hire for your project
  • Lower costs for a high quality of services
  • Possibility to organize round-the-clock work

However, there are also some disadvantages:

  • Cultural and language differences
  • Different time zones
  • In some cases, lack of control over developers due to minimal possibilities of real-life communication

Let’s put it straightforward: though there are risks related to this cooperation model. You can prevent them if you choose the right offshore development team. You can read our guide that will help you to make a good decision.

For example, if you work with responsible developers, it doesn’t matter whether you are based in the same town or the other corner of the globe. Moreover, flexibility in working hours and the fact that today most IT specialists speak English will help avoid the issues related to communication.

Top Destinations for Offshore Outsourcing

Eastern Europe (Belarus, Ukraine), Latin America, India, Singapore are among the most popular destinations for US companies to look for offshore development centers. 

Belarus and Ukraine are rightfully considered as one of the leading markets of tech talents. For example, we’ve also chosen these countries for our regional development centers. So, why Eastern Europe?

  • High level of expertise
  • Strong English skills (in many companies, at least a B1 level is required from a developer to be hired)
  • A vast pool of talented developers
  • Reasonable pricing (we’ve already compared the rates of specialists from Belarus with the rates of the same positions in the US, you can take a look here).

Key Differences between Onshore, Nearshore, and Offshore Outsource

Onshore Nearshore Offshore
Prices High Medium Low
Salary savings Low Medium High
Cultural barrier No Low/medium Medium/high
Language barrier No Low/medium Medium
Time difference No/insignificant No/insignificant Can be rather tangible
Extended workday No No Possibility of day and night shifts (24-hour productivity)

What Prominent Companies Used Offshore Development Services?

One of the brightest examples which prove that offshore outsourcing can help to reduce development costs is WhatApps. It started its way to the market with a very restricted budget for a project of this scale. The company raised $250,000 in the seed funding round, and to keep operation costs down, WhatsApp turned to Eastern Europe for hiring tech talents. Initially, WhatsApp outsourced all development services while in-house employees focused on customer support. Later, the company relocated some contractors to the US.

Another example is IKEA. In 2013, the company hired an offshore development team to build POS solutions for all cash settlement units across the entire network of shops. The 6-year cooperation with the contractor also included the installation and further improvement of POS systems.

Citigroup is another global company that prefers outsourcing IT services. In 2012, the company cut down nearly 25% of in-house IT-related positions to outsource them. By now, the proportion has changed. Now the central part of IT operations is conducted offshore.

Instead of a Closing Word

As you see,  the modern outsourcing market offers a wide range of possibilities and options for companies. Businesses of all sizes and forms can significantly benefit from delegating software development services to external experts while focusing on their core functions.

From all the forms of outsourcing existing today, offshore looks to be the most feasible option for looking for the most attractive price-quality ratio.

If you are still unsure whether outsourcing can be a good option for you, contact us, and our experts will help you make up your mind.

Onshore, Nearshore, or Offshore Outsourcing: What to Choose?
What are the main differences between onshore, nearshore, or offshore outsourcing? Let’s find the best model for your business.

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