Offshoring vs Onshoring vs Nearshoring: When, What, Why and How
Outsourcing is the cooperation between two organizations that specialize in one related or complementary field of activity and strive for mutual benefit. When, for example, a US company transfers its authority to serve clients to a company in India, given the availability of cheaper labor, the US company benefits from cost savings, and the Indian company attracts customers, thus generating profit. Outsourcing can help meet the demand for labor and services for an interested business. Despite disruptions and force majeure situations, this can be a strategic way to ensure business continuity, since resources are not just located in one place, but create favorable conditions for conducting business and increasing its capacity.
Today we realize that the main goal of outsourcing is to reduce costs. However, there are other reasons why companies choose outsourcing. One of them is time-saving. For example, quite often companies are assigned to perform labor-intensive operational tasks to focus on more important duties, such as preparing business strategies, expansion plans, acquisitions, etc. In addition to this, outsourcing is often used to seek external expertise, which is not enough within the organization. That is, when everyone occupies their niche, the work becomes effective.
Therefore, many well-known companies follow this motto: “Master your strengths, outsource your weaknesses.” For example, at one time Google hired experts from 60 countries for 1000 Adwords support services, and Slack outsourced several designers to create a logo, taking into account marketing aspects and development of web and mobile applications. However, if the level of skills required for the outsourced job is the same, does it even matter where these skills are based?
Outsourcing can be carried out in different forms, depending on the needs of the business. In addition to knowing and understanding what outsourcing is and how it works, you also need to have an understanding of the different types of outsourcing.
Business process outsourcing — traditional original outsourcing
Professional — outsourcingadvisers, consultants, and agencies
IT outsourcing — general outsourcing specialization
Multisourcing — often found in sectors of the economy characterized by a large number of technological processes
Manufacturing outsourcing “Made in China” — stereotypical outsourcing
Outsourcing for specific processes — outsourcing of one specific business function
Project outsourcing—outsourcing usually involves large or complex projects
Offshoring — emphasis on offshore location
Onshoring — outsourcing within the country
Nearshoring — outsourcing to neighboring countries
It should be emphasized that outsourcing is no longer exclusively limited to companies or organizations. Today, anyone can hire a company to perform specific tasks to increase the effectiveness and efficiency of their activities. Consequently, the most interesting in domestic realities are the last three types of outsourcing: offshoring, onshoring, and nearshoring. We will talk about them further.
Despite the entrepreneurial talent of most businessmen, they cannot necessarily complete all tasks. And the practical implementation of all duties on your own can stop the growth of a business. When handing over day-to-day back-office responsibilities, the business owner can focus on generating income. One of the benefits of outsourcing is that it allows an organization to achieve business objectives while simultaneously increasing brand value and a comprehensive resource base.
Given that outsourcing works in favor of a business, it is necessary to decide which model is best suited for a particular need and its advantages and disadvantages.
Thus, offshoring is known as the most budget-friendly approach to outsourcing. Companies outsource suppliers in distant countries like India, China, or the Philippines, where the talent pool is full and costs are low. The difference in time zones plays a significant role here from the point of view of ensuring around-the-clock business.
Nearshoring is outsourcing to a country that is relatively close to the main country of business. In the context of Western European organizations, the “closest relationship” approach usually refers to Eastern Europe and Turkey. For organizations located in North America, nearshoring is usually concentrated in Mexico, Costa Rica, or other neighboring Central American countries.
Onshoring is, in most cases, outsourcing to another city in the country. With this approach, companies do not face offshoring risks such as cultural differences or foreign taxation policies, let alone invest in their country’s economy.
So, what kind of outsourcing should you choose — offshoring, onshoring or nearshoring? To make the right choice, you should, in particular, find out the advantages and disadvantages of each of them.
The geographic location of the outsourced workforce does not affect the quality of the specialists who will work on the company’s project. The professionalism of the performers depends on the standards of recruitment, training, quality control, and management by their parent company.
But the location of the specialists themselves has several important nuances. In particular, factors that have a significant impact on the success of an outsourcing partnership include:
– the cost of providing the service (i.e. wages, taxes, administrative costs);
– internal, remote, or hybrid work with the core team;
– language and professional culture of personnel and management;
– the availability of skills;
– travel time and expenses, if the management needs a personal meeting with the outsourcing partner;
– legal and tax systems.
However, an analysis of world practices has shown that many partnerships with outsourcing face problems if one or more of the above factors were not properly taken into account before entering into an agreement.
With that said, let’s look at each factor in the context of offshoring, onshoring, and nearshoring.
Service cost (i.e. labor, taxes, administrative costs)
In most cases, price is the factor that matters the most when choosing a type of outsourcing. After all, let’s be honest, if the price leveled out in the course of economic activity, then businesses would keep large companies in one place without using schemes that would reduce the cost of goods, works, and services. However, even for the most successful companies, it is absurd and irrational to follow this business model. Therefore, companies choose outsourcing to reduce the tax burden, staff costs, office buildings, etc.
Thus, offshore outsourcing, in comparison with onshoring and nearshoring alternatives, as a rule, provides the lowest labor costs per hour for specialists with similar skills and experience. For an example and clarity of comparison, let us set this indicator approximately at the level of 30–50 USD/h.
Nearshoring in most cases will have an average price policy. The organization’s bottom line costs are reduced thanks to lower labor costs, attractive tax regimes, and lower administrative costs. The most popular nearshoring destinations for Western European organizations are Ukraine, Poland, Romania, and Bulgaria. Specialists hired on the basis of nearshoring, as a rule, are 2–3 times cheaper than the same performers with a company located in a highly developed country. For example, if a mid-level IT worker in Germany costs a company 100–120 euros/hour, then a developer with similar skills and experience, actually located in Poland or Ukraine, will cost 30–50 euros/hour.
Onshoring is the most expensive option. For example, IT specialists are almost always in short supply in developed countries and therefore have a much higher level of wages than representatives of industrial professions that form the lion’s share of the gross national product.
Internal, remote or hybrid work with the core team
Another factor that often becomes decisive in choosing the type of outsourcing is the cooperation model. Some organizations have found that personal collaboration is best and that being on-site is non-negotiable. However, there are also such organizations that, when solving current problems and defining tasks, give preference to remote communication.
Remote cooperation seems to be much simpler, since today’s information technologies, video communication is developing quite actively, which allows you to save financial resources and time for communication.
The type of onshoring cooperation is not the main factor. If the specialists are in the same city, they will either spend their working day on the spot with the client, or they will come when necessary. And if they are in the same country, it is usually not a problem for them to come to be there for part or all of the workweek. However, this can increase the already significant costs.
Language and professional culture of staff
An important factor of outsourcing is whether the outsourcing experts are proficient in English or the native language of the client organization. English has become the default international business language. Proficiency in English or other languages depends on the outsourcing recruitment policies and processes. However, the average level of language proficiency certainly differs depending on the location of outsourcing.
For example, there are centers of “technical talent” in Ukraine, Poland. The average level of English proficiency among candidates is high in Poland and Ukraine. The same can be said for German. This does not mean that it is impossible to hire technical specialists in other places with a good professional level of spoken English or German. However, this is definitely a bigger challenge as there are fewer choices. This increases the market value of Ukrainian and Polish specialists who also speak English or German.
Professional culture is a quality that is more difficult to test than language competence and depends on the culture of the outsourcing partner. At the same time, there are notable differences between cultures that can affect things such as, say, how processes are executed and general norms of communication.
In the case of nearshoring, subordinate outsourcing resources continue to operate according to the already established plan. Outsourcing specialists from Eastern Europe working in conjunction with Western European client organizations, as a rule, have fairly high compatibility in terms of linguistic and professional culture. It is also a significant factor in why North American client organizations may prefer Eastern European outsourcing partners, even though Eastern Europe is an offshore destination for them by geographic distance and time zone.
The number of outsourcing locations that are classified as “offshore” means that there is a lot of variability in language compatibility and professional culture between the client’s organization and the outsourcing partner. As discussed, geographically distant outsourcing destinations may offer greater language and cultural compatibility for client organizations in some regions than the closer nearshoring options.
For onshoring, when working with outsourcing partners, language and cultural compatibility is usually not a problem. However, if the working language of the client organization is English, and the native language of the country is different, then there is no guarantee that foreign specialists will have a professional level of English.
Language and professional culture of the management team
Subject to the circumstances, the language skills and professional culture of the management team of outsourcing partners may be more critical to the success of the partnership than most other factors.
It may happen that the owners or management of the outsourcing partner, located in nearshoring or offshoring, are not associated with the main location of the company. For example, some IT specialists are based in Ukraine and Poland, but the entire management team is in Dublin, where the head office is located. Many local companies are owned and operated by outsourcing and offshore companies, whose professional culture and language compatibility with their client organizations is fully compatible. However, there are also opposite situations.
As well as the compatibility of personnel in terms of language and professional characteristics, the compatibility of management personnel in a nearshoring environment will depend on the location and business plan of the company. In a European context, East European nearshoring destinations often provide a high level of compatibility with Western European organizations.
As well as staff compatibility, the sheer number of countries falling into the offshore category means that leadership compatibility in terms of language and professional culture can be very different. Some offshore companies will generally be more consistent with the client organization’s expectations. However, how it actually works is again a matter of the qualities of the individual company and its management style.
The demand for certain outsourced skills and competencies can vary significantly depending on the location. IT specialists, especially, are in short supply in terms of demand in certain geographic regions. Service cost is the main mechanism by which free markets balance supply and demand. Therefore, the most frequently used types of outsourcing, taking into account the above factor, are considered to be offshoring and nearshoring, since in most cases onshoring does not satisfy the need for the desired skills and abilities, since demand-supply matching is possible only in developed economies, which, as a rule, are concentrated in Western Europe and North America.
Legal and tax systems
Convenience, security, and trust in legal and tax systems can be very influential factors in any business decision-making process to generate and grow profits. Moreover, it is the level of trust in these systems that has a direct impact on the level of the shadow economy. The compatibility and attractiveness of tax regimes and accounting systems is also a determining factor when choosing one or another type of outsourcing.
In the case of nearshoring, the legal and tax systems differ from country to country, but European nearshoring can benefit from the fact that the actual location can still be within the EU. However, even if the IT specialists of a nearby outsourcing partner are not located in the EU, they can have a company structure that will allow them to legally administer taxes and keep accounting in the EU legal framework.
Offshore outsourcing often has very different legal and tax systems than the client organization. Under certain circumstances, this can be an advantage, or it can lead to complications, especially if the two countries do not have formal tax agreements between themselves. At the same time, today the world has quite actively begun the fight against offshores since often business entities consider offshore companies solely for tax evasion.
In the onshoring model, it is acceptable for the outsourcing partner to share the same legal, tax, and accounting systems, but this also means that there is no room for potential tax efficiency.
How to outsource in different countries?
Employer of Record (EOR) — is an intermediary between the employee and company. In other words, you can hire your outsourced talents through an EOR agent and run your business as usual.
The EOR provider has a legal entity to manage local payroll, employment and immigration, and others whatever is required for successful outsourcing.
Being your professional employment provider Acvian will take care of your workforce overseas and all HR related questions:
- Employee onboardings
- Local agreement drafting and approval
- Payroll setup and calculation
- Wages payment and payslips providing
- Benefits compensation and expenses reimbursement
- Tax filing
- Legal consultancy
Contact the Acvian team today and learn what it will take to hire your talents. With our reach in 118 countries and a strong network system, we can make your global outsourcing happen much sooner and at a lower overall cost.