Co-founder and CEO of Ideamotive. Entrepreneur, mentor and startup advisor.
(this article has been updated on the 28.12.2020)
Offshoring? Nearshoring? What are the pros and cons and how to choose the best option?
The IT market was never an easy one – there is a limited number of specialists available and a skyrocketing need for their knowledge. The problem is widely seen in Europe where, according to the European Commission, a shortage of up to 900 000 skilled ICT workers can be seen in 2020.
World Economic Forum also highlights the problem, as the need for skilled coders and software engineers is booming in the times of the fourth industrial revolution. WEF experts note that 54% of employees will need reskilling by 2022 both to stay on the market and to deliver the workforce needed.
The natural consequence of this situation is the rising cost of ICT workers, especially good ones. Software engineers’ salaries are rising even by 25% yearly and DevOps even more. So many businesses are clinched between the need for skills and limited resources. That’s why it is getting more common to outsource IT processes, both simple and more sophisticated ones, such as software development outsourcing.
Let’s find out what is better, offshoring vs outsourcing by getting familiar with each one.
IT Outsourcing – What It Is About?
In the basics of outsourcing, there is an idea of taking a business process out of the company and transferring it outside, to a specialized service provider. It is common to outsource accounting and legal operations and companies specialized in these processes get market esteem. KPMG or PwC are among the best examples of international giants providing complex outsourcing services.
According to a Global Industry Analytics report, the global outsourcing market will reach around $220 billion by 2020. The estimation is not including cloud-based processes, which are basically a top-tech form of outsourcing particular needs, be that delivering an internal tool or providing computing power.
Software development outsourcing itself is usually divided into offshoring and nearshoring.
To compare outsourcing vs offshoring, let’s see what the latter is.
What Is IT Offshoring?
What is offshore software development? Offshoring is basically a geographical term, imposing that the job to do is being transferred… well… somewhere far away. It is usually used in the context of transferring the processes from a developed economy into an emerging one. Offshoring can include both simple tasks requiring an unskilled workforce and sophisticated tasks that are to be fulfilled by super-skilled teams of experts. That’s basically not in the core of the idea.
Offshoring usually comes with a great deal of savings coming from economical differences. And that’s a natural thing – offshore workers provide good quality for the money they consider fair. And that’s usually less than the local workforce considers as such.
What Is IT Nearshoring?
Nearshoring is the same concept as offshoring, but the geography changes. In this situation, the company is transferring business processes to the partner in a nearby (or at least close) country. So a single company can be both an offshore and nearshore partner, depending on the client it works with.
What Is IT Onshoring?
Onshoring is the last term when considering the relations between geography and outsourcing. Onshoring transfers the processes to the outsourcing company in the same country, but with all the advantages of IT outsourcing services.
A single company can be an onshore, nearshore, and offshore services provider, depending on the geographical localization of the client. So Ideamotive, a Polish software house, is:
IT onshore partner for a Polish e-commerce market leader
IT nearshore partner for a Germany-based retail company
IT offshore partner for US-based tech giant
Offshoring, Nearshoring and Onshoring – Pros And Cons
Considering the fact that all these -shorings refer only to the geographical location of the partner, and in the age of the Internet it matters only for manufacturing business, most of the pros and cons are common. But not all of them!
Outsourced service providers are solely focused on their business – a service they provide. On the other hand, most companies earn their money somewhere else – in manufacturing, sales or providing another type of service. So any supporting role, be that accounting, marketing or IT, is always a cost and is provided by people who are as good as they are – a team is limited to several individuals usually.
A service provider houses dozens or hundreds of experts who face numerous challenges working for multiple clients. A chance that the in-house team will be better than the outsourced one is limited (to be honest – that’s impossible except narrow cases like IT security in banks). Moreover, IT outsourcing providers are looking for superstars in the field – offering their services makes difference and working for multiple partners justifies a high paycheck. So it is not a surprise that in software houses like Ideamotive there are top-notch UX/UI designers, web developers, and mobile developers, that are unseen in in-house teams.
A company with multiple partners can feel routine over time and start seeing all the clients as the same. That’s a huge challenge, especially considering the fact that every company is different and even a standard service needs to be adjusted to the client.
But that’s a disadvantage of a particular IT outsourcing company, not of IT outsourcing itself. Yet some companies just don’t feel comfortable with that.
That can be both an advantage and a disadvantage, depending on the situation. When it comes to IT nearshoring, the companies are usually in one timezone or the difference is no larger than an hour. Considering that, it is easy to arrange a phone call or a video-conference to discuss any issue. with neighbouring countries, it is also easy to meet, both on the neutral ground of the conferencing center or in the headquarters of any of the partners.
That’s more a challenge when it comes to offshoring. Although it is common for project managers to respond for a call in the middle of their night, reaching technical leaders may be troublesome. Due to the timezones, arranging the ad-hoc call is nearly impossible.
On the other hand, timezones come with a bunch of unexpected advantages. With an IT offshore partner, it is common to ask for something in the evening and get it in the morning – their day just came by. For example, if you are based in the US and your IT team is in Europe you know that when you come to work they have already been working almost all day!
Language And Cultural Barrier
With English being lingua franca odd IT the language barrier seems to perish. But not for all. Apart from the language itself, there are even broader gaps regarding the style of working, sticking to the time schedule or the way of communication.
The best example is the punctuality in Northern Europe, while in the south people are more relaxed. Those cultural differences are seen when working with both offshore and nearshore company. But the nearshore one usually consists of people with a known mindset – Poles work with flexibility that always stuns their German partners, but rarely surprises. Working with a partner from far away is always a riddle.
All the above paragraphs correspond to common features. Now let’s see what are the separate advantages.
Run your business with less cost
This is a very competitive market, which is why many offshore outsourcing companies create the best conditions for their clients. They may even charge nothing for services like short-term support. Executives who choose offshoring can also benefit from lower business taxes or even 0%. It also gives companies the opportunity to enter a new market at no additional cost.
Choose from the best
Offshoring gives you a wide choice. You can expand your staff by selecting professionals from a wide range of talents. A decent outsourcing service provider usually works with many clients, allowing them to understand the current issues and trends in the industry. You can use this experience to your advantage. According to a survey by Deloitte, over 50% of participants agreed that third-party companies add value to the business development process.
Do your work while asleep
Timeshift may look like a brake, but you can turn it to your advantage. Let's say your iOS developer is building a new product in Portland, Oregon. While they sleep, your other employee in Dalian, China, is testing the features they have developed.
By the time the first part wakes up, the tester has logged a critical bug that they can fix by lunchtime. Profit!
You can also send your instructions before heading home in the evening and come to the office the next morning to inquire about completed tasks. By the way, offshoring isn't limited to software development; you can use it for marketing, reporting, customer support and so on.
Pros of Nearshoring
Benefit from geographic proximity
Geographic proximity allows for less expensive travel and more frequent face-to-face meetings. Don't underestimate the power of personal communication. This can increase the effectiveness of your teamwork and help reduce the sudden costs that cause confusion and surprises in the future. The ability to collaborate in real-time reduces the likelihood of misunderstandings during workflow.
Closer cultural compatibility
As you live closer together, you and your partners will face fewer cultural issues. You may also find yourself speaking a similar or even the same language, which will make your communication faster, easier, and more efficient. And don't forget that the seller's country may have similar tax and financial laws.
Reasons to choose onshoring teams
Cheaper solutions are widespread
True, onshoring is more expensive than onshoring and much more expensive than offshoring. But you can always find a good deal. Research by the Harvard Business Review shows that workers in northern France, eastern Germany, and the southern regions of the United States charge less than workers in western metropolitan areas. If you are looking for more transparent communication and effective control, choose employees from small towns.
Invest in your country
Onshoring guarantees even more effective coordination and cooperation, since all participants in the process have a single cultural and linguistic environment. Along with the real-time collaboration, security and control that companies get, onshoring is bringing jobs back to the local workforce. They also use home tools, equipment, and infrastructure.
Offshore Development Centers - What Are They?
First, let’s see what is offshore development center. An offshore software development center is an office dedicated to fulfilling a company's software requirements. You can open your offshore office anywhere in the world.
Here are the best options!
Asia is a region that offers the benefits of rapid technological growth and progress coupled with a highly competitive pace of development. Moreover, most Asians have a decent level of English proficiency. There are many developers in the Asian markets with a variety of technologies.
Along with convenient time zones, Asian countries offer a favorable legal environment, many of which are already internationally recognized as mature offshore markets.
India is a pioneer in IT offshoring; its market has grown rapidly since the 1980s and currently employs over 3 million engineers.
In China, the IT offshoring market is much younger, but has seen exponential growth over the past couple of years and promises to expand further. Currently, IT offshoring companies are investing over $15 billion in the Chinese market.
Eastern Europe Region
A number of countries choose Eastern Europe as the main location for offshoring due to a large number of highly qualified specialists, affordable development rates and the availability of all the necessary infrastructure (for example, high-speed Internet access).
Moreover, short travel distances and small cultural differences contribute to smoother collaboration and increased productivity of recruited professionals from the region. The most preferred places here are Poland and Ukraine.
Hiring Polish programmers is cost-effective and beneficial due to their good English proficiency, low cost of living, and cheap technical education. Some companies offer a favorable legal environment for foreign IT companies and have a strict set of intellectual property laws.
The country currently offers over 250,000 experienced developers, making it the largest offshoring market in the region.
Ukraine is another regional market showing strong growth and expansion in terms of the supply of experienced technicians. In 2018, more than 160,000 programmers offered their services in Ukraine, but the market's impressive growth rate exceeds 30% per year, which suggests that the labor supply will soon catch up with Poland.
Ukraine offers a favorable legal environment, a constantly improving local infrastructure, and a large number of well-trained professionals.
How To Manage Offshore Development Team - What You Need To Remember
This guide is based on our full-scale offshore developer experience, where we provide development services quickly and at an affordable price. We share with you 10 essential tips for managing an offshore development team.
1. Share your result vision
All employees need to understand what the goal is and where the project is going. Please give them a picture of your vision for the product so they can make the right choices on the project.
2. Excessive communication
Every time you work with a remote team, they can easily be left in the dark about many things. When you can roam the office, it's easy to keep track of what's going on in the business.
If all your remote employees see random memes and gifs on Slack, they won't know what's really going on. Make it a rule to talk too much with them about what's going on with the business.
Make sure to chat with them one-on-one daily (if necessary) to really make sure they are doing their job and helping out in any way you can.
3. Cross your schedules
One of the biggest challenges with development teams working offshore is doing business in vastly different time zones.
You may also find that you just need to communicate with your team early in the morning or late at night. After you put the kids to bed, you may have to spend a few minutes talking with your offshore team to check them out.
Shifting working hours can be an advantage. Offer some members of your offshore development team a couple of hundred extra dollars a month, and we're sure you can get some of them to change their work schedule.
4. Don't complicate communication
Depending on where your residence and the offshore team are located, chances are they may not speak your language as fluently as you do. The best thing you can do is make your communication easier.
Simplify it by limiting your vocabulary, avoiding cultural references and metaphors that they won't get.
State the obvious. Get straight to the point. Be very clear about your directions. If they don't know your language well, get down to business, and don't make them assume anything.
5. Keep their work queue full, including task "B"
There are times when your offshore team can get stuck and need someone's help. The last thing you want for them is to get stuck and get nowhere.
There are countless reasons why developers get stuck in the process, from strange compilation issues noted by someone else, business logic issues, lack of exact requirements, etc.
We suggest always having multiple work items in the queue so that they have someone else to work with if they get stuck. If they get stuck on their "A" task, make sure they have a priority "B" or "C" item that they can work on for now.
6. Use video conferencing
Daily meetings by phone or Slack work well. But the video adds a real human element that can help build a team. It's vital that you really get to know your team and build real human relationships with them.
7. Give them a real job
The fact that you can find offshore developers for $25 an hour doesn't mean you only have to give them shitty jobs. They make $25 an hour because the cost of living where they live is Silicon Valley's share, not because they're junior developers.
Just as your developers hate doing crappy projects, so do they. If you want to get to know how to hire offshore software developers and keep the best talent on your offshore team, don't make them do a second-rate job.
Set expectations high. There are highly skilled developers all over the world. Treat them the same way!
8. Don't control them from afar
Nobody likes to be ruled. It is also difficult to scale up a development team if you cannot empower them and trust them to do the work that needs to be done. Your offshore team must have a robust senior developer who can act as the team leader.
9. Get your point of view with images and videos
Software development is about communication. There is nothing better than a screenshot or a quick video.
It may take just a few seconds to take a screenshot and draw on it. This little drawing can help people instantly visualize and understand what you are talking about. This can save hours of time.
10. Treat them like your team, not an offshore one
One of the biggest mistakes is the formation of the "us versus them" mentality. Don't keep your offshore team at arm's length. Treat them as if they are part of your team. They just work remotely.
Considering all the pros and cons, usually the IT nearshoring is the best option available. Knowing the partner and reaching it within the same timezone is a good option when the cooperation needs to be tight – and that’s basically the point of IT outsourcing. Moreover, despite the short geographical distance, economical differences can be significant.
That’s why Eastern Europe (especially Poland) rises as the key IT outsourcing destination. According to Business Insider Poland has the third-best coders in the world, dwarfing Japanese ones and leaving the US or UK ones far behind.
Robert is a co-founder and CEO of Ideamotive. Entrepreneur, who with passion spreads digital revolution all around the internet. Mentor and advisor at startup accelerators. Loves to learn and discover new business models.