Global IT outsourcing industry’s revenue reached $66.5 billion in 2019.
Also, in 2017, about 84% of outsourcing deals originated from the USA.
Traditionally, companies use outsourcing strategies to achieve significant cost savings and/or to focus on revenue-generating work.
In this article we will cover:
- What onshore, nearshore and offshore outsourcing are
- What the advantages and disadvantages of each of these three outsourcing strategies are
- How to build the best outsourcing strategy for your business
- When and what to outsource
What Is Onshore Outsourcing?
Onshoring means outsourcing your project or work to a company in your own country.
This transfer is usually reserved for non-metropolitan areas where the cost of living and wages are lower than in metropolitan areas. Cutting down expenses and costs is not necessarily the priority of companies that onshore. US companies, for instance, use onshore outsourcing when they want to maintain high-quality output.
Onshore outsourcing doesn’t come with risks such as foreign labor taxing policies or cultural differences that are often a factor with offshore and even nearshore outsourcing.
Onshoring, however, is a little-used practice, especially in tech industries such as IT because there is not a lot of financial benefit for the business that outsources the jobs.
What Is Nearshore Outsourcing?
Nearshoring means outsourcing your project or work to a company from a nearby country.
For instance, for a business based in the US, outsourcing the processes to Mexico or Columbia would be nearshoring.
Potential travels and face-to-face meetings come at a lower cost than offshore outsourcing to faraway regions.
Nearshore outsourcing also enables a greater deal of control and can facilitate the cooperation between the business that outsources and the outsourcing partner that does the work.
Also, there is greater cultural and linguistic compatibility that reduces the chances of misunderstanding and facilitates the coordination of work. Nearshoring potentially maximizes business efficiency and reduces the barriers of traditional offshoring.
What Is Offshore Outsourcing?
Offshore outsourcing or offshoring is the most budget-friendly outsourcing approach.
Offshoring is the outsourcing of business and work processes to companies, vendors or individuals in distant countries with low expenses and a great talent pool.
Usually, these destinations include countries in Eastern Europe, such as Ukraine, Bulgaria, Romania, Serbia and Croatia, as well as East and South Asia including China, India and the Philippines.
Offshoring is similar to nearshoring in many regards, only without the proximity restrictions - however, this method comes with a bigger degree of cultural and linguistic differences.
Also, time zone differences play a big role in the functioning of the work.
With offshore outsourcing, you can build the business team of full-time employees that function relatively independently, but with a certain control that is established via video calls and regular communication via email and messenger services.
Offshoring allows businesses that outsource their processes to handpick their employees with no geographical limits that will collaborate with the in-house team on projects and keeping the results of work consistent.
Onshore vs Offshore vs Nearshore: Advantages And Disadvantages Of Each Outsourcing Strategy
Each of these three outsourcing strategies comes with its own strengths and weaknesses.
In this section, we will outline the advantages and disadvantages of onshore, offshore and nearshore outsourcing.
Pros And Cons Of Onshoring
Onshoring is the outsourcing strategy that can provide the biggest degree of coordination, security and control. This is especially important for new US-based businesses and individuals starting out as business owners.
Onshoring is the optimal choice of recruiting competent workforce for startups and broadly defined projects.
- Proximity and ease of communication and organizing: Selecting a workforce from your own country’s smaller cities and lesser regions can provide transparent communication and effective control. You can travel easily to hold meetings with them and check on their work and they can report to your headquarters on a regular basis. In-person communication increases the output of your teamwork.
- Cultural compatibility: Speaking the same language and having the same or similar set of values means a lot with delicate work matters. Delegating the processes, staying on top of things, cooperating and revising necessary changes is a lot easier when you communicate with teams from your own region.
- Investment in local business: Beside real-time communication, security and easier cooperation, onshoring comes with another beneficial side-effect: you effectively boost your country’s economy by giving jobs to native workers.
- Limited talent pool: Your business’s options in terms of talent pool may be quite restricted if you outsource business to the workers in your country’s non-metropolitan areas. There may not be enough required or varied candidates and the recruitment and training process can be lengthy.
- Greater costs: Onshoring is more expensive than nearshoring and offshoring. This can be a great setback for smaller and younger businesses that need a greater ROI in their early stages to survive. Still, certain regions of any country charge less than its greater metropolitan areas, which is something that can be exploited.
Pros And Cons Of Nearshoring
Decision-makers and CEOs of smaller and medium enterprises that are past their startup growth stage may want to consider outsourcing their work processes to nearby countries.
Before breaking into full-blown offshoring, nearshoring provides similar experience to onshoring, with few notable differences.
- Proximity and working in the same time zone: With nearshore partners, there is no need for adjusting their shifts to match yours or night work and overtime. You can synchronize online meetings easily and more frequently thanks to the same timezones, which increases productivity and collaboration. Also, face-to-face meetings can be organized with less expensive trips.
- More cost-effective than onshoring: While nearshoring may not be as cost-effective as offshoring, it certainly can save you a lot more money than recruiting workforce from your own country.
- Faster problem-solving than with offshoring: When urgent issues arise - and they most certainly will, now and then - thanks to proximity, solving them is much easier and faster than with partners from distant countries.
- Still not an optimal selection of candidates: There may not be a sufficient amount of providers in nearby countries or candidates with a desired level of expertise. This may pose a challenge of finding the right partners to meet your project’s needs.
- Cultural differences: Eventual language similarities and general proximity are advantages of working with nearshore partners, but there are still some aspects that need to be considered, such as holidays and other nuances.
Pros And Cons Of Offshoring
For medium-sized and bigger enterprises, as well as new companies whose aim is to reduce costs, hiring an in-house team is a more expensive route than some of these companies can afford.
This is when CEOs and decision-makers turn to offshore outsourcing. For IT industries, like digital agencies and software developers, this is a very popular outsourcing method.
Offshoring is, as we’ve seen, outsourcing of work processes to distant countries that have a more affordable labor force, lower costs and general standards of living, but a great diversity of capable talent.
However, other than huge cost savings and financial benefits that come with that, what are the hidden pitfalls? Are there any other advantages, besides lower costs?
- Lower costs and great financial boons: If a company from, say, the US hires a software development agency from India, it is clear that the company will save a lot of money. Hiring partners with the same skillset from the US would cost much more. This cutting down of expenditures can turn profits very quickly and very generously. Also, there’s
- Greater talent pool: With so many options in terms of countries and regions of the world, there is a huge global talent pool that your business can take advantage of. There are a lot of professionals and very skilled individuals, as well as well-organized and trustworthy organizations to choose from that can do the work at the same quality standards as in your own or any other western country.
- Turn time zone differences into a benefit: While different time zones come with certain drawbacks, you can turn this around and get your work done while you sleep. For instance, a software developer in Manilla may build a solution while a team in Ukraine is testing a functionality they have developed. You can coordinate teams from different parts of the world so as to maximize the efficiencies and speed up the processes, making most of the downtime when you or any of them are not active. And anyway, if you want to keep everyone on the same page and working together, you can align your timezones by requiring offshore teams to work during your working hours.
- Requires greater vigilance and involvement: Offshoring means working with a team or teams that are far away, that may not always understand your instructions completely and that have different habits. You may feel like you need to control and check on their work constantly which can be exhausting and unproductive. With the lack of regular in-person contact, you have to rely on phone calls and video conferences as well as written correspondence which are all limited means of communication. This hands-on management can be a downside for a business.
- Cultural differences: The team you are outsourcing your processes to will adjust to your requirements - but your enterprise will also need to adjust to specifics of their culture and habits, which may not be easy.
- Language barriers: When recruiting companies or individuals from far-away countries, you need to make sure their skills of the language you speak are near-perfect. This can sometimes be a challenge because working with someone who either doesn’t understand your language or can’t articulate themselves properly will lead to misunderstandings and poor work results.
- Time zones: Unless you make alignment to your timezone one of the requirements in your job description, working in different timezones can cause a variety of issues such as broken deadlines and poorly executed work that lacked control. Plus, having in-person meetings on a sensibly regular basis is a near impossibility because of travel costs and time spent traveling
How To Build The Best Outsourcing Strategy For Your Software Development Project In 6 Steps
Regardless of the outsourcing approach you choose, there is a specific set of steps you should take when defining your outsourcing strategy that will determine your choice of outsourcing partners.
1. Outline Your Outsourcing Strategic Levels And Goals For Better Staff Augmentation
To stay one step ahead of your competition, as well as eventual obstacles and adversaries, you should define your outsourcing goals early on.
Doing this, as well as understanding the advantages and disadvantages of outsourcing, helps with quality staff augmentation for your particular industry.
When you define your outsourcing goals, you can also take stock of your outsourcing needs: staff augmentation comes with numerous positives and downfalls and may show that outsourcing is not the way to go in terms of staffing for all businesses.
Staff augmentation, however, can help by providing skilled professionals in instances like when a software development company is readying its next phase in product development or new project launch but lacks the technical or creative expertise.
Typically, businesses have three strategic levels when outsourcing:
- Business enhancement: This approach’s main goal is to improve services through process improvements, new technologies and reengineering.Businesses typically outsource non-essential work to acquire in-depth expertise in a more flexible and cost-effective. Outsourcing gives them access to the top experts and tools, without the pains of in-house recruitment
- Efficiency: Used when the key objective is to keep the existing processes and performance as they are, but with costs reduced.
- Transformation: Businesses want specialized consultants to help them update or reinvent their existing processes and/or tools, with process automation being one of the most sought-after transformations.
When defining your outsourcing goals that can save money, increase productivity and scale supplemental staff, ask yourself:
- What are my key business objectives?
- Is my goal to cut costs?
- Do I need to improve the business or its operations?
- What is our competition doing and how can we increase our competitiveness?
2. Adjust Your Budget For Unexpected Costs
When businesses map out their monthly, quarterly and annual budgets, they also need to consider the staff augmentation needs and factor in how this augmentation can help reduce their personnel costs.
However, they should also budget for the unforeseen circumstances like contracts that require more skilled labor than there is on staff at the moment. In general, operational managers should budget for different business scenarios that arise from working with staff augmentation model.
Outsourcing enterprises can fall short of initial expectations due to hidden costs.
Finding the right balance between affordability and expected results while identifying hidden expenditures can provide your business with the ability to decrease or increase supplemental staff when needed.
Possible unexpected costs in outsourcing include:
- subpar inventory performance
- inappropriate sales and operations planning
- poor or substandard quality.
- supplier management
- cash flow
- unplanned and unforeseen risks
3. Opt For The Suitable Engagement Method
When recruiting an outsourced workforce, a business’s comprehensive outsourcing strategy should make specialized skills a priority. It should also outline which specialized skills and why they’re looking for them.
Defining the technical and creative expertise you’re searching for will make it easier for managerial teams to choose an outsourcing engagement model that matches specific staffing requirements.
Onshore, nearshore and offshore engagement models come with different benefits and risks, as we’ve already discussed. Depending on the requirement profile, companies will approach deciding on this method from different standpoints.
For instance, a company that delegates noncritical technical operations will be interested in an outsourcing model that is quite different to that in which a business that looks for a specific programming skill is interested.
Experiences staffing company should help you with choosing the right outsourcing engagement model.
4. Mitigate Risks
Your company will need to address the risks outsourcing carries. By mitigating these risks you can reduce your financial exposure and increase the efficiency of the outsourcing strategy you have opted for.
The four main risks of any outsourcing endeavor are:
- Control and trust: To mitigate this particular risk, it is advisable to create an internal document or documents that would outline all the main work procedures and standards of workflow that all sides must adhere to. Software development is a very “touchy” process and outsourcing it you need to implement safeguards that will ensure the delivery of a product whose integrity is not compromised.
- Quality issues: Outsourcing carries a lot of risks that relate to quality issues, especially when working with offshore partners, due to different time zones, limited means of communications and oversights surfacing from there. You can mitigate these issues by working with an outsourcing vendor that have a proven track record of quality control with past clients and that have processes in place to resolve these.
5. Track Progress And Added Value
A company that outsources its work processes should establish some clear key performance indicators (KPIs) in order to monitor the advantages, disadvantages and general results of its outsourcing efforts.
KPIs help decision-makers to evaluate whether the staff augmentation model they have chosen os the right for them and which areas they should work to improve.
These KPIs can vary greatly. Assuming your business has already established clear outsourcing objectives, your in-house collaborators or outsourcing vendor can offer multiple indicators such as:
- Measuring outsourcing costs against productivity
- Benchmark procedures for breaking down outsourcing costs vs supplemental staff job performance
- Measuring the output and efficiency of different teams versus expected results in a service-level agreement
- Setting up specific internal protocols to measure and report KPIs
A company can implement corrective steps if their expectations are not met, thanks to measuring of outsourcing engagement model’s progress with these KPIs.
In case the predefined expectations are met, you should still actively track the outsourcing progress to further improve on the model that yields good results and continue the outsourcing success.
6. Create Strong Communication Channels And Strengthen Relationships
Companies that want to hire augmented staff that works remotely need to instate channels that will enable responsive, transparent and responsible communication.
Corporate protocols and culture that your enterprise has can vary greatly from the one the outsourced partners have.
Finding a way to incorporate both into a singular, working mechanism that delegates responsibilities and facilitates communication is one of the pivotal steps to outsourcing success.
Creating strong communication channels between you and your outsourced partners needs to address any issues professionally and promptly.
Communication tips and channels that your business should consider implementing to improve the workflow with your outsourced partners are:
- Email, instant messenger services such as Slack and Skype, project management platforms like Teamwork or Monday and teleconferencing platforms like Zoom are the most used communication channels in the remote business.
- You should outline the necessary bandwidth and connectivity speed that your outsourced partners should have when doing business with you. Their providers should have the infrastructure for technical communication that includes good networking capabilities.
- When defining the means of communication you are going to implement in your organization, ask yourself these questions:
- Would most of your communication be done via email, project management software, chat of video/voice calls?
- What would the secondary channel to the primary, above defined one, be?
- Should everyone in our enterprise have access to these channels and should they be divided according to different teams and sectors?
- Your internal document that outlines the processes that all sides must comply to, that we have discussed in step 4, should also contain the clearly outlines communication tools and channels that are used in your organization. All outsourced employees should abide and install the necessary tools and accounts and be available during working hours.
Takeaways On Onshore, Nearshore and Offshore Outsourcing Strategies
There are three types of outsourcing strategies that your business can opt for when looking for software development companies to work with:
Your ideal outsourcing partner should have:
- Proven track record in your industry and with software development projects of any scope
- Trustworthy references and client testimonials that can provide you with an idea of what their clients’ impressions of them are
- Teams of dedicated and capable individuals that understand your needs and can deliver results
- The good understanding of your business goals that you are trying to achieve with your software solution
- Processes and technology that allow them to provide quality services and end-results
- Post-development support