Outsourcing Vs Offshoring: Comparison Guide Between Location-Based Types Of Outsourcing

What Is Outsourcing? A Short Definition

What Is Outsourcing? In simple words, outsourcing means transferring some business process outside of the company to a specialized service provider.

This model became a popular response to the IT market situation when the number of specialists isn’t enough to cover a growing need for their skills. As a result, we see an annual increase of IT engineers’ salaries and software product development costs as well. By outsourcing IT processes, companies benefit from access to the global talent pool and expertise unavailable in-house and can hire skilled specialists at reasonable rates.

Based on the location of a service provider, IT outsourcing is usually divided into three different models: nearshoring, offshoring, and onshoring. Let’s take a look at each of them.

Types Of IT Outsourcing

Nearshoring is the most convenient model of location-based outsourcing. According to it, you hire a company located in a neighboring country (usually in the same time zone or within a couple of hours difference). It allows finding the best cost-quality ratio. You will also benefit from cultural similarities and the same business hours.

Offshoring’s main goal is getting work done in faraway countries where the costs are as low as possible. So it means handing over your product development to a service provider located in a country with an emerging economy, where the cost of living and the salaries of IT specialists are lower. And if you choose your service provider correctly, you will get almost the same quality of services as if it were done in your country. Compared to others, offshoring has more disadvantages, such as time zone differences (from 5 to 12 hours), possible cultural and language barriers, etc. 

Onshoring means transferring software development to a lower-cost location inside the national borders. The main goal of this model is to have maximum proximity, communication without any barriers, and control over the process. Although onshoring is the most expensive model, it still allows some cost optimization. Usually, a service provider is located in a small town and charges less than companies in the metropolitan area. 

Comparison chart of each model

Outsourcing Vs Offshoring Comparison Chart

Advantages and disadvantages of Nearshoring, Offshoring, and Onshoring

Besides differences, some key advantages and disadvantages are common for offshoring, nearshoring, and onshoring. There is a popular opinion that the language barrier can potentially cause a few cooperation problems. But due to globalization, the post-covid digital transformation, and the spread of English, the risks of miscommunication and cultural issues seem to perish. Apart from the language itself, there is a potential risk relevant for all models regarding the style of work of a particular vendor, their ability to follow deadlines and communicate effectively.

The common advantage of all models is the strong expertise that clients don’t have in-house. Specialization makes it possible for all outsourcing service providers to gain strong expertise in the service field they provide. To stay competitive, they hire top-notch experts who face multiple challenges working on projects of varying complexity. 

On the other hand, you should note that according to some cooperation models you will hire specialists that work for multiple projects simultaneously. Some vendors don’t fully immerse into your project. That’s a huge challenge, especially if your startup is currently in the discovery stage. But that’s a disadvantage of a particular IT outsourcing company, not of IT outsourcing itself. 

All the above paragraphs refer to common features. Now here is more detailed information on their particular advantages and disadvantages.

Nearshoring 

Advantages:

  • the teams can collaborate and communicate throughout the workday (for example, additional feature development or bug fixing sometimes requires the exchange of information between a service provider and an in-house developer); 
  • geographical closeness makes it possible to organize offline events to increase the effectiveness of teamwork and personal communication;
  • cultural similarity reduces potential issues;
  • tax and financial laws can be similar.

Disadvantages:

  • there is only one main disadvantage compared to other models: it is more expensive than offshoring.

Offshoring

Advantages:

  • due to intense competition, many offshore outsourcing companies create beneficial conditions for their clients and provide complementary services like short-term support, consulting, free QA services, etc; 
  • access to a larger talent pool; 
  • quicker time to market with the ability to work on projects round the clock (e.g. when an Indian team ends a working day, their US colleagues only start working, as if the second shift); 
  • possible tax holidays, financial incentives, and fewer business regulations.

​​Disadvantages:

  • there are chances that your offshore provider follows business and management processes that are very different from yours;
  • sharing information between systems and locations increases the risk of a security breach, data leaks, or loss of data; 
  • some developing countries have not adapted their educational system to modern technological requirements, so you need to double-check the developers’ competence;
  • deadlines and tasks may also be harder to sync due to local national holidays etc. (of course, this can be avoided with proper planning).

Onshoring

Advantages:

  • possibility to meet with your provider and outsourced team offline as often as needed;
  • no need for late-night meetings as you are in the same time zone; 
  • possibility to check a company’s reputation and references on your local market;
  • onshoring guarantees more effective cooperation, because all participants have common cultural and linguistic background;
  • same business approach.

Disadvantages:

  • onshoring is more expensive than nearshoring and much more expensive than offshoring;
  • hiring locally limits the talent pool you access – there may not be enough candidates with needed skills;
  • very fierce battle for talents on the markets of developed countries.

Conclusion

To sum up, we provided you with comprehensive and objective information to help you make the right choice and maximize benefits. Compared to all models, nearshoring works more effectively in our opinion, so we prefer this model of cooperation with customers.

Feel free to contact us and get answers to all your questions about IT outsourcing from our specialists.