Offshoring, outsourcing, nearshoring, onshoring: what’s the difference?
When companies want to scale their development team, it isn’t uncommon to hire locally — put out job adverts, enlist recruiters, and interview the best candidates. However, it’s easier said than done.
Today, an acute shortage of developers, combined with a continuous increase in salary expectations, has prompted more and more companies to assess their options. This has led to the increasing popularity of models like ‘offshoring’, ‘nearshoring’, and ‘outsourcing’.
However, most of the information available on the Internet is vague and limited. So we’ve put the answers together for you. In this piece, we’ll talk through the definitions, pros, and cons of four headline models: outsourcing, onshoring, nearshoring, and offshoring.
Let’s start with some definitions
Outsourcing means engaging third-party vendors on a contract basis to deliver software. This either means working with freelancers, or vendors who work with freelancers and is typically the cheapest way of getting work done.
However, with no control over development, the results can be very hit-or-miss and is thus not considered a sustainable, long-term strategy.
Onshoring is the transfer of your software development to non-metropolitan areas within your own country.
Consider a city like London: rent, bills, and wages are all much higher than the rest of the country. By building a development team in a nearby town instead, you can keep the operational costs a bit lower.
As the name suggests, nearshoring means ‘near’ to home, but not quite. To give an example, developers in Los Angeles are very expensive, and there’s no easy “onshoring” alternative. Good Mexican developers, however, work in a similar time zone and would with much lower costs.
Nearshoring is useful for companies who want constant, real-time collaboration with their in-house staff. For a company based in Paris, nearshoring might be done with Ukraine, who are only a couple of hours ahead.
Offshoring is where you build an independently-functioning development team, anywhere in the world, and everyone on that team is a full-time employee of your company.
Though this adds a time difference, it eliminates the risks of engaging short-term contractors. It also allows companies to hand-pick their developers, with no geographical limitations.
Merits and limits
Outsourcing: a cost-driven model
Outsourcing is a model that is usually defined by low cost. It is traditionally used by companies looking to make significant cost savings, particularly over the short term.
One perceived advantage of outsourcing is flexibility and the lack of commitment. Since the team is not permanently employed, you only pay them for the work that they do for you. If there’s a fall off in demand, no resources are spent on idle workers. This can be a boon for businesses with less predictable capacity.
What’s the downside?
Some outsourcing companies can offer developers for as little as 10% of what you pay at home – but those kinds of savings don’t come without compromise.
For a start, the developers aren’t your employees. They’re not bound to your company, and in reality you won’t always deal with the developer themselves – just those organising them. These developers are probably working on concurrent projects, for clients across the globe, and are invested neither in your business nor the vision of your brand.
Low-cost outsourcing often leads to substandard delivery. Since these contractors aren’t permanent employees, it can be risky to assign them significant or urgent tasks: if they disappear, you have nowhere else to turn.
Will outsourcing work for your business?
The answer is, as always, it depends. If you need a job completed now and you don’t have the in-house capacity to deal with it, outsourcing can be a life-saver. This tends to work best when there’s a strong, ongoing relationship with specific developers you can trust.
When it comes to sustainability or scaling up your development team, outsourcing is the wrong route. The main issue is a lack of control: you don’t manage the developers directly, communication can be difficult, and they could leave halfway through a project.
Offshoring: a more sustainable solution
An offshore development team is a handpicked team of engineers, based in another country, who are full-time employees of your business.
That is the core difference between outsourcing and offshoring. The ideal situation would always be having everyone in the same office – but that is often expensive and difficult. The only difference between offshoring and in-house hiring is that the office space is quite far away — and in 2020, that’s not a significant barrier.
Will offshoring work for your business?
There are a lot of benefits to offshoring versus recruiting at home. You get top-quality engineers with the specialist skills you need, on a permanent basis, usually at about 50% the at-home cost.
With the right offshoring partner you can scale up quickly and sustainably, which is a potent combination. For companies looking for growth or to engage engineers with rare or niche specialties, offshoring is a proven and powerful approach.
Onshoring and nearshoring
In reality, nearshoring is just offshoring with added restrictions.
Sharing a time zone is a nice benefit. It means that logistical challenges are, for the most part, averted. You’re also less likely to experience a significant culture gap between employees. However, what businesses gain from proximity, they often lose in talent scarcity.
On the other hand, onshoring is only leveraged in very expensive cities. A company in central London, for example, might situate their software team in a separate, less expensive city. While wages and premises in this “secondary” area might be cheaper, companies will still struggle to find and recruit quality engineers at a good price.
- Offshoring – A sustainable way to build a permanent software development team, or scale your existing one.
- Outsourcing – A low-cost way to deliver short-term or temporary projects.
- Nearshoring – Effectively a subset of offshoring.
- Onshoring – A rarely implemented model, similar to offshoring without the financial benefit or flexibility.
To learn more about offshoring and its applications, check out our blog. If you’re considering using one of these methods to grow your business, we encourage you to speak with a member of our team to get answers to any of your questions.