Onshore vs. Nearshore vs. Offshore Outsourcing: What are the Differences?

Offshore outsourcing of IT services and application development has been with us for decades. The practice is widespread across business sectors and clearly adds value as it has grown steadily over the years. According to International Data Corp. (IDC), the offshore IT services market amounted to more than $80 billion in 2019.

There are many factors that drive organizations to head offshore in search of IT and dev services. Price used to be the big reason. These days, lack of trained resources and speed of development have become just as important.

The top destination for outsourcing is India, followed by China. But there are plenty of other options to choose from. These can be broadly split into three categories of outsourcing.

  • Onshore: This is outsourcing within your own country. IT work such as application development is subcontracted to an outside firm in your own region or country.
  • Offshore: Projects and IT tasks are sent to companies in other countries. Historically, this has meant anywhere in the world. But more recently, the term “nearshore” has emerged as a sub-category.
  • Nearshore: This is sending work to outsourcers in the same or a similar time zone or a neighboring country.

Thus, onshore contractors would work with the U.S.; sending work from the U.S. to Mexico, Costa Rica, or Canada would be nearshore; and  subcontracting projects to India, China, Romania, or the Philippines from the U.S. would be offshore outsourcing as defined here.

Pricing differs by experience and location.

Prices differ widely around the world. Rates in established markets like India and China have tended to rise in recent years. Countries trying to gain a foothold in the offshore world, therefore, tend to charge less. Similarly, the maturity of the provider impacts rates. An Indian outsourcer with established Fortune 500 credentials will charge much more than a couple of college students from Bangalore working from a dorm room.

Generally speaking, less established Southeast Asian offshoring nations like the Philippines and Vietnam are a bit cheaper than India. Similarly, countries in Western Europe charge more than those in Eastern Europe. That said, Romania and Poland have become popular destinations in recent years. Interestingly, Western European rates are quite a bit higher than those in North America on average.

What about nearshore? Typical destinations include Mexico and Costa Rica. Those rates are generally a little less than those in the U.S. But like Asia, prices vary considerably. Mexico is at the high end of the scale, while Costa Rica is quite a bit cheaper.

Know the risks and rewards of outsourcing.

But price isn’t everything. Quality, timeliness, culture, language, and risk also play their part. Developers in Syria, Iraq, or Afghanistan may offer attractive rates. But the risk is high, not only due to the obvious problems caused by ongoing conflicts. The legal, cultural, and infrastructure picture may prove challenging for outsourcing relationships.

Such factors also impact places like India and China. While they remain popular, risk remains high. If an outsourcer fails to deliver or takes the money and runs, it may not be easy to recover costs or fight any resulting legal battles.

That’s why nearshore is gaining in popularity. It currently accounts for about 40% of the global IT services market and it is growing steadily. Those sending work nearshore experience advantages such as being on a similar time zone. This facilitates ease of collaboration. Further, nearby countries typically have mutual legal and trade treaties. And as they are not too far away, it’s not a great hassle to hop on a plane to resolve issues.

Long-distance project management is a must.

Whether your outsourcing takes you across town or across time zones, visibility on workflow and progress toward intermediate and long-term goals is crucial. One-off conversations, email, Zoom meetings, and massive spreadsheets, no matter how organized, are fodder for mixed messages, missed deadlines, and budget overruns.

When planning out resource allocation for upcoming projects, CIOs should ensure that their teams know not only what needs to be and by whom, but how they plan to keep track of work and progress toward completion. When adding the further complexities of sync your internal resources across work across multiple countries, the need for robust project management becomes clear.

 

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Drew Robb
Drew Robb has been writing about IT and engineering for more than 25 years. Originally from Scotland, he now lives in Florida.

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