“Master your strengths, outsource your weaknesses.”- Ryan Khan, the founder of The Hired Group. That’s what many businesses are doing these days. Here’s why.
Hectic market speed, multi-functioning operations, extremely tough competition, and high requirements for the quality of services and products are roadblocks. Companies find it more challenging than ever to cover all the tasks independently and stay in the leading positions.
Instead, they delegate non-core activities such as software development to external service providers using onshore, nearshore, or offshore outsourcing models or opt for a hybrid model. That’s how they focus more on key business goals and functions.
Which model should you choose to meet current needs? What are the differences? In this article, we’ll compare nearshore, onshore and offshore outsourcing and disclose their primary differentiators. But first, let’s focus on the amount of money companies spend in the IT outsourcing industry worldwide and in the US.
The State of IT Outsourcing Market
IT Outsourcing has become familiar in the world’s business ecosystem. This sector has shown exponential growth over the recent couple of years. For example, according to ResearchAndMarkets.com, the global IT outsourcing market reached $526.6 billion in 2021. And now, experts expect this figure to increase to $682.3 billion by 2027.
The US market has the largest share of outsourced services compared to other destinations. Statista, for instance, expects the US to generate the most revenue in the IT outsourcing segment in 2023. The country will likely hit $156.20 billion in revenue by the end of 2023.
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
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As technology advances, companies increasingly rely on specialized IT services for assistance. IT service providers provide the right combination of tools to reach the desired objectives, like solving technical and operational issues or IT consulting services.
Organizations usually delegate the following types of outsourced services to nearshore, onshore, and offshore IT providers.
4 Popular Types of Services for 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 companies hire 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 companies outsource app 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.
Don’t hesitate to navigate to this useful piece. Explore the ins and outs of role-based outsourcing to choose the best option.
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 onshore outsourcing definition implies no significant time difference between your core team and the outsourcing company.
The key benefits of onshore outsourcing:
- No language or cultural barriers;
- Full control over the development process;
- 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. Hence, nearshore software outsourcing takes the best from the two worlds, offering geographical proximity and affordability of service offerings.
Here’s a quick look at core nearshore outsourcing benefits:
- 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 nearshore IT outsourcing, 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
IT offshore outsourcing refers to working with a development company from faraway places around the globe. It can reside in another country or continent with a considerable time zone gap.
Say a US-based company needs to remove additional workloads from in-house teams and decides to source remote developers or L1 support specialists in Poland. Then, we can define offshore outsourcing as a way to gain better focus on their core business operations.
Other 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, we need to balance offshore outsourcing pros and cons to have a full picture.
There are also some disadvantages to consider:
- 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
To reap the many benefits of offshore outsourcing, choosing your destination carefully is crucial. While some offer highly skilled developers at affordable rates, other countries can provide low-quality candidates at the same rates. So searching for service providers in globally recognized destinations is a good idea.
Here’s a glimpse of the best regions to source and hire offshore developers:
This region is an emerging offshore outsourcing destination for Europe-based companies. For companies operating in the US and willing to delegate software development tasks to the skilled workforce in neighboring countries, this is a nearshoring option.
One of the most popular outsourcing locations in the region is Canada. It offers overlapping business hours for European clients, cultural proximity, political stability, and a large pool of experienced candidates. Besides, the country welcomes foreign citizens to join their labor market, including developers and other IT-related specializations.
Latin America (LATAM)
IT outsourcing in LATAM is booming for numerous reasons. European businesses can hire offshore talent at lower rates than in their home countries. Besides, North American companies can use this destination for nearshoring purposes and benefit from shared time zones and cultural similarities while keeping the costs down.
Brazil and Argentina are the most sought-after countries in the region for outsourcing due to their strong engineering university presence and ongoing commitment to educating new tech talent.
Software offshore outsourcing to some European countries also looks attractive because of the cultural fit to Western Europe and the US and lower developer rates. Poland, Portugal, and Lithuania are the US projects' most popular offshoring destinations. Offshore developers there have extensive commercial experience and a high level of English proficiency.
Ukraine is one of the region's best countries to outsource software development projects. Great English speaking skills, moderate developer rates, and optimal price/quality ratio are why US companies choose outsourcing to Ukraine.
Armenia and Georgia are the top options to consider when searching for qualified candidates for your next project. The majority of the talent pool in these countries has technical degrees in technology, math, and engineering areas. The level of English proficiency tends to be higher among educated younger generations.
This region has accumulated IT infrastructure and skills in recent years. US and Western European companies can consider hiring tech talent in countries like Kazakhstan as an alternative to working with European service providers. This provides an opportunity to leverage professional teams at lower costs but with the same quality of deliverables.
What Prominent Companies Used Offshore Development Services?
One of the brightest examples which prove that offshore outsourcing can help to reduce development costs is WhatsApp. 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.
Key Differences between Onshore, Nearshore, and Offshore Outsourcing
The outsourcing models we’ve discussed today offer tangible benefits for businesses with different priorities. Take, for instance, the onshore option. It grants geographical proximity to have complete control over the development process. But consider offshore or nearshore development outsourcing; you will have to delegate a large portion of tasks to outside specialists.
Here’s a quick glance at the key peculiarities of each outsourcing model:
|Time difference||No/insignificant||No/insignificant||Can be rather tangible|
|Extended workday||No||No||Possibility of day and night shifts|
Which is the best option for your case? Unfortunately, there is no immediate answer to that question. However, you can approach this issue by considering your project objectives. Do you need to cover hard-to-fill positions? Will you be satisfied with remote team management while reducing project costs?Once again, you need to be guided by your particular priorities when choosing between offshore, onshore, or nearshore outsourcing. But there is one alternative that can take the best from the three models. The hybrid model could become a go-to solution for companies willing to combine offshore and on-site resources for the best results.
Hybrid Model: a Mix of Local and Remote Resources
A hybrid work model enables you to operate local management or administrative teams and source additional resources in different outsourcing destinations around the globe. You can organize an efficient team structure and control daily operations while delegating non-core tasks to a chosen offshore or nearshore service provider.
Say software development is not your core competence. You can search for tech specialists in different countries and add them to your on-site team. For example, you can opt for Geomotiv’s IT staff augmentation and offshore dedicated development team services to quickly add individual developers or full-cycle teams in no time. With vast experience in forming and operating hybrid development teams, we are sure to add immediate value to your company and comply with stringent budget and time requirements.
Here’s how hybrid, offshore, nearshore, and onshore software development stack up against each other:
|Offshore/Nearshore companies |
like Geomotiv + onshore or on-site management
|Vendors from faraway countries||Vendors from neighboring countries||Vendors in the same county or city|
Instead of a Closing Word
As you see, the modern outsourcing market offers a wide range of possibilities and options for companies. You can significantly benefit from delegating software development services to external experts while focusing on your core functions.
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.
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