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Everyone who is into startups, entrepreneurship, or owes a company is familiar with the term outsourcing. But what about the terms offshore, onshore, and nearshore software development? Except for the primary difference of where they are carried out.
In this article, I'll shed some light on the outsourcing differences that aren't on the surface, such as legal issues, tech proficiency and give some tips on how to choose efficiently. I'll touch the topic of how outsourcing actually developed and why it's not just a cost-saving technique but a key part of your corporate strategy. There's a lot to cover, so let's start.
How It All Began
Every big change starts with a story. The origin of outsourcing goes back to the Industrial Revolution. It was the first time manufacturing companies discovered they could shift the production of consumer goods to companies abroad.
But let's not go that far and focus on the familiar names. The company that laid the foundation for IT outsourcing was Kodak. In the early 1990s, Kodak officially announced that it was outsourcing its information systems function to IBM. It caused a stir in the IT industry, what some have called "the Kodak effect." Nowadays, we name it onshore outsourcing.
Many U.S. companies have followed Kodak's example. Both large and small businesses signed long-term contracts with outsourcing partners. They found outsourcing acceptable, indeed beneficial.
How Outsourcing Has Evolved
Things moved fast. Other companies started to outsource actively and soon, IBM became the dominant IT service provider. Outsourcing has changed how companies work forever.
The latest Statista report showed that the global IT outsourcing market is expected to have 8.7% growth annually by 2026. That's a lot! So outsourcing is on the rise for several reasons:
- It's a cost-effective way to create technology;
- It provides access to talents all over the world;
- It helps to achieve innovations;
- It lets the company focus on core business goals;
- It improves product's quality;
- It simplifies the hiring process.
It all adds up to one thing – outsourcing transforms companies fundamentally and increases their competitiveness. And companies like Alibaba, Basecamp, GitHub, Slack, and Skype are just a few businesses that can credit outsourcing as a considerable aid in their business development.
Onshoring, Offshoring, and Nearshoring: What’s the Difference?
Today we can divide outsourcing into 3 main types, depending on the location the work is done: onshoring, nearshoring, and offshoring. Each has its unique aspects, benefits, and drawbacks.
So let's dot the i's and cross the t's on the difference between offshore, onshore, and nearshore development.
Onshoring or Let’s Keep it Close
Overview: The first one is onshore development. It's geographically the closest type of collaboration. Imagine that you’re building a startup in Silicon Valley and your partner is also from Silicon Valley, that would be onshoring.
Pros: The good part of onshoring is the psychological comfort. It takes you no time to meet with a team and discuss how the project is going. Nice, isn't it.
Second, is culture. No doubt, having a local partner means speaking the same language, living in a similar context and understanding each other at a glance.
The last onshoring advantage is security. American companies follow American law, and you shouldn't worry about legal issues. But it is always good to get a legal consultation before you do anything.
Cons: Onshoring is pricey. If you're not Google or Peter Thiel, it's unlikely that you can afford onshoring. That's why onshoring is a common practice among tech giants, established companies, or startups with big-name founders.
The next one is a lack of talent. Skilled developers, designers, product managers rather choose to work for a product company, not a service one. That's how it usually works. So, it'd be challenging to find an onshoring partner with good professionals.
When is onshoring your best choice: Ask yourself a question “What team will I be comfortable working with?” If you want to have a partner team within close vicinity, have onsite check-ins in a favorite cafe, pick onshoring. Also, onshoring is an option for people with a huge warchest.
Nearshoring or The Golden Mean
Overview: Ok, you still have your startup in Silicon Valley but you’re hiring a partner from Brazil, that would be nearshoring. Nearshore software development has many advantages at first glance and may seem to be a golden mean but let's dive into it.
Pros: Nearshore development means that your service provider is located in a country with a similar time zone or one with minimal differences. So you'll have your slow morning with a cup of coffee.
Nearshore not only benefits communication but also adds up to major cost savings.. The possibility for onsite visits is still there, and compared to onshoring, nearshore software development doesn't have problems with talent shortage.
Cons: Despite the shorter distances in nearshore software development, there is also a concern on culture and language. There’s no 100% guarantee that the nearshoring team will speak English well enough or they will answer you at 7 PM. So make allowances for these two aspects before choosing nearshoring.
When is nearshoring your best choice: No matter whether we’re building a new company or buying a cookie, we want to save up money. In such a case, nearshore outsourcing suits best. It'll definitely reduce costs, and you'll have your partner close.
Among the companies that use nearshoring are Boeing and Toyota. The aerospace giant outsources its wiring to French multinational company – Safran, the world's third-largest aerospace provider. The Japanese automotive manufacturer nearshored its second production unit to Thailand in 1996. It now has three plants running there.
Though nearshore development is affordable, the price is still high compared to offshoring. That’s why nearshoring is mostly an option for established companies. So if you've decided on nearshore services, make sure that the team is fluent in English. It encourages efficient communication and ensures that money isn't wasted.
Offshoring or How to Save the Most
Overview: No matter where you launch a company, the offshoring team supports you from anywhere. Basically, an offshore team refers to a team located in a different country but is still employed by your company. For example, your in-house team is in the U.S and your partner is from Ukraine.
Everyone knows offshore software development as the most cost-effective technique, but there's more to the virtue of offshoring.
Pros: If you face a choice between hiring a software developer at a cost of $170 an hour in the U.S. and one who costs only $50 in Ukraine, who would you choose? Yes, the first offshoring advantage is cost-efficiency. Offshore development prices can hardly be beaten, and that’s why many companies and startups choose it.
Another advantage is language proficiency and mentality. Professionals from Easter European countries have a good level of English. Above all, we’re hard-workers and have a deep sense of responsibility. That's why we're reliable partners.
On top of that is top-notch tech expertise. Coding is our forte and developers from Eastern Europe have a fundamental knowledge base. We deliver products fast and on time. This can be a reason why about 64% of outsourced offshore technology functions have to do with software application development.
Cons: Along with benefits, offshore development may lead to at least one of two pitfalls. First, time zone differences. You shift the process to another country, you save up costs, but there may be a significant difference in time zone. In the case of Uptech, we work with clients from the U.S mostly, and our office is in Ukraine, it's 7-10 hours difference. It may seem to be a problem, but we solved it by defining a common communication framework.
The second one is also about differences. Geographical distances increase cultural differences. For instance, we in Ukraine are less emotional in work communication and more collectivists than individualists.
When is offshoring your best choice: To sum up, offshoring is the best option for early-stage startups or companies that launch new products and want to save up costs, deliver fast, and power up their tech expertise.
In addition, offshoring is a good choice for founders who cut their teeth on developing products or launching startups. From my experience, such founders delegate and communicate better, trust more, and know all product development pitfalls.
Why Uptech Is a Good Offshoring Partner
Every time at the presale meeting with a client, I show these numbers:
- 50+ projects completed
- clients from more than 10 countries worldwide
- team of more than 65 experienced IT professionals
But people remember feelings, not numbers. That's why I can’t be more proud to say that we landed most of our clients through referrals.Our sales team doesn't send cold or outreach emails, we work with the incoming requests. This is the sign that we're doing things right and proof of trust for our clients.
I believe that any good relationship takes time and work to cultivate. We at Uptech are focused on building one. That's why we invest a lot in communication, building trust, and transparent relationships.
Today, outsourcing in-house services isn't a luxury or something out-of-reach, it's a reality. Whether it's an early-stage startup or a tech giant, businesses all over the world shift part of their process to third-party providers. And there are many options to choose from: onshore, nearshore and offshore. You're free to choose the one that suits you and your business better.
In this article, I tried to highlight both sides of the coin to help you make a decision. The key thing here is outsourcing isn't only about cutting costs, it's a corporate strategy. So choose your prospective partner meticulously according to your business and values.