INTechHouse BLOG 17.03.2023
Offshoring vs Nearshoring for IT Companies: What’s the Difference and Which is Better?
INTechHouse BLOG 17.03.2023

Offshoring vs Nearshoring for IT Companies: What’s the Difference and Which is Better?

Krzysztof Pióro Sales Director

In today’s globalized economy, IT companies increasingly seek to expand their operations overseas to reduce costs, access new markets, and tap into pools of talented workers. Two popular outsourcing strategies are offshoring and nearshoring. In this article, we’ll explore the difference between these two approaches and help you decide which is right for your IT company.

Why do Businesses Outsource?

IT businesses outsource for various reasons, including cost savings, access to specialized skills and expertise, improved efficiency and productivity, scalability, access to new technology, and risk mitigation. By outsourcing non-core activities to specialized providers, businesses can focus on their core competencies and achieve their strategic goals more effectively.
Source: Deloitte, Statista

Statista created a special outsourced team attractiveness where you can see four main reasons for outsourcing services global usage:

Source: Statista

1) 35% of financial attractiveness

2) 25% of people skills and availability

3) 25 % of the business environment make up

4) 15% of digital resonance

Nearshoring

Nearshoring, on the other hand, refers to the practice of outsourcing work to a software development company located in a nearby country, often in the same time zone or a nearby time zone. The primary motivation for nearshoring is to reduce costs while maintaining close collaboration and control over the work being done.

By nearshoring, IT software development companies can take advantage of lower labour costs in nearby countries without having to deal with the challenges of working with a company on the other side of the world. This can make communication and collaboration easier, as well as reduce the risk of intellectual property theft and quality control issues.

One of the key benefits of nearshoring is that it can help IT companies to build long-term relationships with their outsourcing partners. By working with a company in a nearby country, it may be easier to visit the partner’s offices, build trust, and develop a deep understanding of the partner’s capabilities and working style.

Pros and Cons of Nearshoring

Nearshoring is another popular outsourcing business model used by software development companies, which involves outsourcing to geographically close countries, often in the same region. Here are some of the pros and cons of IT nearshoring:

Pros of Nearshoring

  • Cultural similarities: Nearshoring allows companies to work with outsourcing partners who share similar cultural norms and values, which can help to foster better communication and collaboration.No time difference: Nearshoring to countries in the same or similar time zones can make it easier to coordinate the work of a partnering company and communicate in real time.Proximity: Nearshoring allows companies to visit their outsourcing partners more easily, which can be useful for building relationships, conducting training, and ensuring quality control.Reduced language barriers: Language barriers can be less of a problem with nearshoring partners in neighboring countries who often have a good command of the same or similar languages.

Cons of Nearshoring

  • Higher costs: Nearshoring may be more expensive than offshoring, as labour costs are generally higher in geographically close countries.Limited talent pool: The pool of available talent may be smaller with nearshoring, particularly for niche or specialized skills.Competition for resources: Nearshoring may lead to competition for resources with other companies in the same region, which can drive up costs.Limited flexibility: Nearshoring may provide less flexibility in terms of work schedules and resources than offshoring, as outsourcing partners may have more rigid structures.

In conclusion, IT nearshoring offers several advantages, including cultural similarities, similar time zones, and proximity. However, it also has some disadvantages, such as higher costs, a limited talent pool, competition for resources, and limited flexibility. Companies should carefully evaluate the pros and cons of nearshoring before deciding whether it is the best outsourcing strategy for their IT services.

What is Offshoring?

Offshoring is the process of outsourcing software development to a business in a foreign nation, sometimes on a different continent. Offshoring is frequently done to save costs since labour usually is less expensive in places like India, China, and the Philippines than it is in places like the United States, Europe, or Australia. Tech businesses may benefit from this cost difference by outsourcing to reduce costs and raise profit margins.

Source: Statista

According to Deloitte, global spending on offshore outsourcing services were over $700 billion in 2022 and is projected to reach $731 billion in 2023. IT outsourcing is the most popular type of outsourcing, accounting for 72% of all spending on business operations.

Companies can successfully reach new markets and talent pools via offshoring. To service the Indian market and access the nation’s extensive pool of highly qualified software development engineers, a firm with headquarters in the United States may choose to open an office there. This may be especially helpful in fields like financial services and healthcare where local knowledge and proficiency are crucial.

Offshoring, though, can also pose substantial difficulties. Time differences, cultural differences, and language limitations can all make it more challenging to communicate and work together. Offshoring can also result in a loss of control over intellectual property and quality since contracted workers might not be as involved in the company’s success as full-time staff would be.

Global Offshoring Market

According to a Clutch survey, 90% of small US businesses plan to outsource business processes in 2022, a 10% increase from 2021. This suggests that businesses must look for development process providers with high-quality services, aim for high flexibility, and leverage updated technology while outsourcing in 2023.

Source: ZIPPIA,Yahoo

Roughly 300,000 U.S. jobs are outsourced each year. The global outsourcing market is valued at $92.5 billion, with the U.S. market bringing in $62 billion of the total international revenue. Most global outsourcing revenue is generated through the information technology sector. U.S. businesses are increasingly outsourcing to China, Western Europe such as Poland and other countries in Asia. The outsourcing market is expected to grow at a compound annual growth rate of 4% between 2021 and 2025.

Pros and Cons of Offshoring

Offshoring is a popular outsourcing strategy used by IT companies to reduce costs and access a large talent pool. However, some drawbacks to offshoring should be considered. Here are some of the pros and cons of IT offshoring:

Pros of Offshoring

  • Cost savings: One of the most significant advantages of IT offshoring is cost savings. By outsourcing to countries with lower labour costs, companies can save a substantial amount of money.
  • Access to a wider talent pool: Offshoring allows companies to access a wider pool of talent. Companies can hire talented IT professionals from different parts of the world, which can be particularly useful for finding specialists in niche areas.
  • 24/7 support: Offshore team can provide 24/7 support for IT services, as companies can take advantage of the time zone differences to provide round-the-clock support.
  • Faster time-to-market: Offshoring can speed up the time-to-market for products and services by allowing IT companies to access talent and resources more quickly.

Cons of Offshoring

  • Communication challenges: Communication can be a challenge when offshoring, particularly when there are language and cultural differences. This can lead to misunderstandings, delays, and lower productivity. So, you need to look for offshore teams with good English levels.
  • Quality control issues: It can be more challenging to maintain quality control when working with offshoring partners. Differences in work standards, cultural norms, and language barriers can make it difficult to ensure consistent quality.
  • Time zone differences: While time zone differences can provide 24/7 support, they can also lead to communication challenges and make it more difficult to coordinate work across different teams. So, you need to think about countries where you have fewer time zones difference.
  • Security risks: Offshoring can present risks, particularly when sensitive data or intellectual property is involved. Companies must ensure that their outsourcing partners have appropriate security measures. In this case, looking for a software development company with proven expertise is extremely important.

In conclusion, IT offshoring can offer significant benefits to companies, including cost savings, access to a broader talent pool, and faster time-to-market. However, it also comes with challenges like communication and quality control issues, time zone differences, and security risks. Companies should carefully evaluate the pros and cons of offshoring before deciding whether to outsource their IT services.

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Choosing the Right Strategy

When deciding between offshoring and nearshoring, IT companies should consider several factors, including:

  • The nature of the work to be outsourced: Some types of work, such as software development or data entry, may be more suitable for offshoring, while others, such as customer support or project management, may be better suited for nearshoring.
  • The level of collaboration required: If the work requires frequent communication and collaboration between teams, nearshoring may be a better option. If the work is more autonomous and requires less collaboration, offshoring may be a viable option.
  • The cost savings: While offshoring may offer significant cost savings, nearshoring may offer a better balance between cost savings and quality control.
  • The quality control standards: Companies should carefully vet potential outsourcing partners to ensure they meet the same quality control standards as the parent company. This is especially important for offshoring, where quality control can be more challenging due to cultural and language differences.

Which is Better: Offshoring vs Nearshoring?

The decision to offshore or nearshore depends on a variety of factors, including the nature of the work being outsourced, the level of control the company wants to maintain, and the level of cost savings the company hopes to achieve.

Deciding whether to offshore vs nearshoring to Poland depends on various factors that IT companies should consider. Here are some of the factors to consider:

  • Cost: One of the most important factors to consider is the cost. While Poland is not considered a low-cost country, it is still cheaper than Western European countries, and the cost of labour is relatively lower than in countries such as the United States. IT companies should evaluate the cost of outsourcing to Poland vs outsourcing to a distant location or keeping the work closely.
  • Talent pool: IT companies should evaluate the talent pool available in Poland for the type of work they need to outsource. Poland has a large pool of talented IT professionals, with a high level of education and proficiency in English.
  • Time zone: Poland is in the Central European Time (CET) zone, which makes it easier for companies in Western Europe to work with outsourcing partners in Poland. However, it may not be as convenient for companies in other parts of the world.
  • Cultural similarities: Poland is a European country, with cultural similarities to other European countries. This can make it easier for IT companies from Europe or other regions to work with Polish outsourcing partners.
  • Communication and collaboration: Communication and collaboration are crucial for successful outsourcing, and IT companies should evaluate how easy it is to communicate and collaborate with outsourcing partners in Poland. Language proficiency in English is generally high in Poland, which can help facilitate communication.
  • Political and economic stability: Poland has a stable political and economic environment, which can provide a level of security for outsourcing companies.

The choice between nearshoring vs offshoring relies on the type of work involved and the degree of cooperation needed. Due to the same time zones and cultural affinities, nearshoring to Poland could be a preferable choice if the job necessitates regular contact and collaboration. Offshoring to Poland may be an alternative if the job is more independent because of the country’s cheaper development team costs and larger talent pool.

In conclusion, the choice between nearshoring and offshoring to Poland should be made after considering several development process variables, such as cost, talent pool, time zone, cultural similarity, communication and collaboration, and political and economic stability.

INTechHouse Nearshoring vs Offshoring Experience

INTechHouse is a software and hardware development company based in Poland that has experience with both nearshoring vs offshoring. Here is a brief overview of their experience with these outsourcing strategies.

SoftBlue has experience with nearshoring to other countries in Western and Eastern Europe including France, the UK, Germany, the Netherlands, andUkraine. According to our clients’ opinion, they found that nearshoring has many business process advantages, including cultural similarity, similar time zones, and proximity, which makes it easier to travel to visit their outsourcing partners without having ocean freight.

INTechHouse has also experience with offshoring to countries such as the USA, Qatar, and Hong Kong. Our clients choose us not because of the lower rates but for having an access to a larger talent pool, and 24/7 availability for certain services.

Overall, we think both nearshoring and offshoring can be effective outsourcing strategies, depending on the specific needs of the company and the project. Our company believes that choosing the right outsourcing partner and investing in effective communication and management practices are critical to success with both nearshoring and offshoring.

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Conclusion

Outsourcing has become a popular strategy for IT businesses looking to reduce software development team costs, access specialized skills and expertise, and improve efficiency and software development process productivity. Two common outsourcing strategies are offshoring and nearshoring, each with its own set of advantages and disadvantages.

Offshoring provides cost savings through lower labour costs and access to a larger talent pool, but can also present challenges such as language and cultural barriers. Nearshoring provides cultural similarities, similar time zones, and proximity, but can be more expensive and have a smaller talent pool.

Despite the benefits, some tech companies may still have fears about outsourcing due to potential risks such as loss of control, quality issues, and cultural differences. However, businesses can mitigate these risks by carefully selecting outsourcing partners, investing in effective communication and management practices, and setting clear expectations and goals.

Ultimately, businesses should not let fear hold them back from exploring the potential benefits of outsourcing. With the right strategy and management approach, outsourcing can provide a competitive advantage and help businesses achieve their goals more effectively.


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