Nearshoring Vs. Offshoring: Which IT Outsourcing Model Is Right for You?
The global market for IT outsourcing services is enormous: it is projected to reach nearly one trillion U.S. dollars in the next five years, surpassing $800 billion in market volume by 2029. As of 2024, outsourced application development makes up roughly a quarter of the entire industry—and it is one of the core services offered by ObjectStyle.
Why is this market so big and why do so many companies outsource IT projects to third-party providers? In the past, the main reason was cost savings—this business model allowed firms to slash development costs from 50% to 70%. However, the global market for IT services has matured in the past few decades. Developer rates have gone up, and so has the quality of the services provided. Many outsourcers now strive to bring innovation and niche expertise to the table.
The world of outsourced IT is vast and diverse, with many different types of services available. In this respect, two major outsourcing models are usually contrasted with each other: offshoring vs. nearshoring. While you may have an idea of what they are, in the following article we take a better look at these models and explore them in depth.
Nearshoring Vs. Offshoring: Definitions
First, let us define “nearshoring” and “offshoring” in simple terms.
What Is Nearshoring?
Nearshoring is the practice of transferring work to a third-party vendor who is located in a nearby country.
Proximity is key here. For example:
- A US company outsourcing a business operation to Mexico;
- A German company working with a partner in Poland;
- A Japanese company hiring a contractor in the Philippines.
What Is Offshoring?
Offshoring is the practice of transferring work to a third-party vendor in a far-away location.
As the name suggests, the service provider can be based on another continent altogether. For example:
- A US company working with a vendor in India;
- A Dutch company working with a Costa Rican contractor;
- A UAE client outsourcing work to Eastern Europe.
While both terms are used across industries, in our article, we are going to talk about offshoring vs. nearshoring in the context of outsourced software development (and related services.)
Nearshoring and Offshoring Trends
First, let’s talk about nearshoring and offshoring trends in the global context, regardless of any particular industry, and then zoom in on the IT outsourcing vertical.
On a global scale, the latest tendencies in nearshoring/offshoring are undoubtedly affected by the world’s politics and economy. Since the COVID-19 pandemic hit, the global supply chain as well as consumer demand have been increasingly volatile. Add rising geopolitical tensions to the mix, and it becomes clear that businesses are now willing to switch to domestic sourcing or nearshoring to mitigate risks.
According to a QIMA survey, Mexico surpassed China as U.S.’s #1 trading partner by the end of 2023. There is now a global trend for nearshoring, which shows no signs of slowing down. All in all, businesses seek to increase their supply chain transparency and engage in more ethical labor practices, which is easier to do if you are dealing with a supplier close to home.
And now let’s talk about offshoring and nearshoring trends in the software industry in particular. During the pandemic, the world saw a sudden shift to remote work. As the practice became more of a long-term norm, legislation followed, and many countries now have relatively mature regulatory frameworks that facilitate remote hiring.
What we are observing today are two trends moving in opposite directions: on the one hand, companies exercise caution and hire locally; on the other hand, businesses are now more open to expanding their operations elsewhere on the world map. Ultimately, the choice between nearshoring and offshoring depends on the type of work a business wants to outsource. It may be unwise to ship a core operation to a far-away location, but you can send a not-so-critical project to an offshore provider pretty safely. Just analyse the pros and cons in each case.
Nearshoring Vs. Offshoring Pros and Cons
Let’s perform a detailed analysis of nearshoring and offshoring advantages and disadvantages. First of all, there are certain upsides and downsides of software outsourcing that apply to both models. So let us take a look at them first.
IT Outsourcing Pros and Cons (In General)
Before we dive into the differences between nearshoring vs. offshoring, there are some general points to consider when outsourcing IT to another country.
| Pros of IT Outsourcing | Cons of IT Outsourcing |
|---|---|
| Cost-effectiveness | Linguistic/cultural barriers |
| Faster time to market | Geopolitical risks |
| Access to top talent |
Most companies outsource projects abroad because they want to save money. It’s one of the biggest advantages of this business practice and always has been.
Partnering with an external vendor allows you to get things done quicker, so you can beat your competition with faster releases. With outsourcing (for example, with services like IT staff augmentation), you can scale your IT department on demand since service providers usually have bench resources available and ready to start the next day.
Besides, if you really want to hire top talent, you get a much bigger pool of candidates to choose from if you search internationally. (One day I was in a meeting where the founder of the popular Masquerade app shared how they created such an innovative product: they headhunted top developers across the world and crowdsourced ideas for masks on a global scale. The app ended up going from zero to 15 million users in just three months and was eventually acquired by Facebook.)
At the same time, outsourcing to a foreign country certainly has its drawbacks. Even if your foreign workers speak your language, they may not be fluent. They may not understand what you mean if you use slang words or colloquialisms. (For example, if you say “I’m just sitting on my hands for now” on a conference call, foreign-language speakers may interpret it literally and be puzzled by it. ) In addition, your cultures and worldviews will likely clash in some areas, which may lead to misunderstandings.
Last but not least, even if you choose nearshoring, your partner is still located in another country. Even if it’s right across the border, there are bound to be certain political and regulatory hurdles.
Nearshoring Pros and Cons
And now let’s look at the unique challenges and opportunities presented by the nearshoring outsourcing model.
| Nearshoring Pros | Nearshoring Cons |
|---|---|
| You are in the same timezone | Higher developer rates |
| It’s easy to visit the partner’s office | Limited access to talent |
| Similar mentality | Limited scalability |
- A shared time zone. Being in the same time-zone as your vendor is one of the biggest nearshoring advantages. Your team is at work during your work hours, which is especially helpful if something urgent comes up.
- Ease of travel. Another advantage is that you can easily travel to your partner’s office, meet everybody in person, and have a cup of tea/coffee with them to build rapport. Research indicates that having a good person-to-person relationship with your employees boosts team engagement.
- Similar mentality. People living in neighboring countries usually have similar values and cultural characteristics. However, this principle does not work all the way: in today’s globalist societies it’s hard to talk about cultural affinities—e.g., some Americans may relate more to Mexicans or Canadians, depending on who you ask.
Speaking of the disadvantages of nearshoring, you are likely to get less lucrative rates in nearby countries. Another downside is that the number of potential nearshoring destinations is limited. So you will have to choose from a smaller selection of vendors, which, in turn, could hold back your ability to innovate and scale. And in case your competitors are poaching cheap talent in far-away locations, this may put you at a disadvantage.
Offshoring Pros and Cons
When it comes to offshoring, it also has its advantages and disadvantages.
| Offshoring Pros | Offshoring Cons |
|---|---|
| Affordable developer rates | Asynchronous communication |
| Access to talent around the globe | Difficulty visiting your partner’s location |
| Maximum scalability | Cultural differences |
- The best rates. In terms of cost efficiency, offshoring beats nearshoring hands down. If the cost of living in an outsourcing destination is much lower than in your country, you can often find pretty solid talent at an affordable price there.
- Truly global hiring opportunities. With offshoring, your search for partners is not limited to nearby countries. So you can pick and choose and go with the vendor who really fits the bill.
- Innovation at scale. Some projects are resource-heavy, and being able to scale fast is critical to making them a success. By expanding your reach to far-away outsourcing destinations you can staff your team(s) faster, and do so at a more affordable rate. Besides, if your project requires niche expertise, it makes sense to look for it worldwide, since you may find the best people in unpredictable locations.
Still, offshoring comes with its own challenges. First, it will take some effort to set up effective communication. In our experience, it’s best for the client to choose a specific time-period in the day when they can talk with the team. It may be early in the morning or late in the evening. (By the way, we have found that asynchronous engagement has its advantages, too. For example, you can assign tasks in the evening, and the team can work on them while you sleep. In the morning when you wake up, the task will be complete and you will have an entire day to review it and provide feedback.)
Nearshoring/Offshoring Real-World Examples (+Some Cautionary Tales)
It’s common knowledge that many tech giants have development offices in multiple countries of the world.This can hardly be called “outsourcing” per se. True examples of nearshoring/offshoring are often unknown to the public because of NDAs (non-disclosure agreements).
However, every now and then you come across such cases in real life.
Outsourcing Examples
One nearshoring example is Reuters working with a third-party company, PicRights, to enforce copyright compliance. Whenever someone uses a Reuters photo without permission or a license, PicClick will come after them. Now, Reuters is headquartered in London, UK while PicRights has offices in multiple countries, with its head office located in Switzerland. It’s a classical example of a company outsourcing a part of its business abroad.
In another story, we once had to resolve a Google Ads issue, and we discovered that Google partners with Concentrix, a professional services provider who acts as an implementation partner helping Google Ads clients resolve their issues. In this particular case, it’s hard to tell whether it’s an offshoring example or not, since both companies operate on a global scale, and the employees who were helping us with our account could be based anywhere.
In yet another case study, ObjectStyle served as an implementation partner for Lucidworks, a company that makes Fusion Search, an AI-powered search solution for eCommerce stores. ObjectStyle employees assisted Lucidworks’ B2B clients with integrating Fusion into their store.
Known IT Outsourcing Mistakes
Top failures usually occur around so-called “Big Outsourcing”, that is, large deals involving big household-name contractors. Some smaller, agile nearshoring projects have also failed, but these cases are rarely publicized.
Boeing’s Story
One of the recent examples of outsourcing gone wrong comes from Boeing. To compete with the Airbus A380, the famous aircraft manufacturer decided to outsource 70% of module engineering to outside partners. This was expected to reduce costs and accelerate time-to-market. However, what Boeing did was it signed contracts with over fifty different vendors, which reduced its ability to supervise work being done or effectively control product quality.
Eventually, this led to two deadly crashes of Boeing 737 MAX in 2019. Turns out, Boeing’s outsourcing partners (mostly large Indian firms) relied on dirt-cheap temporary workers—many making only $9 per hour—to develop and test aircraft software. The moral of this unfortunate failure is to always ask who will be doing actual work and stay clear of the deals where quality may be compromised due to a low price.
State of Indiana + IBM Partnership
Back in 2008, the State of Indiana hired IBM to modernize its public welfare system. It was a 10-year, $1.34 billion contract with the envisioned system being something that no one had built successfully before. Three years into the cooperation, Indiana authorities abruptly terminated the contract, quoting serious issues with the new system. They then sought a refund of “every dime” they had paid IBM thus far in court. In their turn, IBM reps said the State of Indiana had not paid them in full for the work they did and was now planning to use IBM-built software without reimbursing the contractor.
In a post-mortem, researchers discovered multiple factors that could have contributed to this project getting derailed: line of command violations (ineffective communication), the existence of the convenience clause, which means both parties could have walked out at any time, shifting project requirements, among others. Perhaps the project was too complex and required too much time to complete, so it was a risky undertaking to begin with. The moral is: be careful with what goes into the contract and avoid changing requirements mid-way.
Tips for Successful IT Outsourcing
On the bright side, there are plenty of IT outsourcing strategies to ensure that your cooperation with a near/offshoring vendor is a success. Here is one such strategy by ObjectStyle, which we put together after 20+ years of working with clients.
1. Perform a thorough background check
Check who the people behind the company are and how long they have been in this business. It makes sense to look for an “About” page on the vendor’s website (here is ObjectStyle’s About page). In addition, you can use resources like Crunchbase and LinkedIn to learn more about the vendor. If the potential provider is being cryptic and it’s hard to find meaningful data about them, it’s a red flag.
2. Verify references
You can trust testimonials on the vendor’s website only as far as you can take them up on their word. At least try googling the companies and people in those references to make sure they are real. You can also pass the onus on to the vendor and ask them to back up those testimonials. For example, a potential client of ObjectStyle—a ‘Big Four’ professional services network—once had us go through a multi-step verification process where they called some of our clients to get feedback from the latter directly.
However, it’s time-consuming, and there are only so many times a provider can ask their client to confirm a reference via a call or an email. You can actually take a shortcut and search for verified references on Clutch.co! Clutch is known for its water-tight process for verifying customer feedback.
3. Start small
We always recommend our clients to do a small project with the vendor first and grow the partnership from there. This way you can get a sense of what it’s like to work with the provider, assess their professional skills and worth ethic, and see whether they meet deadlines. For example, it could make sense to do the Discovery Phase or build an MVP together.
4. Foster effective communication
As a part of your outsourcing plan, you need to decide on the means and the periodicity of your communication with the vendor. Transparency is key here. If you know every team member’s name, talk to them regularly, and can see their logs, then you know for sure who is doing the actual work. ObjectStyle’s clients have full insight into who is working on what, since we give you access to issue trackers, time tracking apps and other essential tools where you can see what the team is engaged in.
5. Provide sufficient product ownership and sponsorship
Data shows that weak product ownership / sponsorship is a frequent reason for IT project failure. A product owner is a person who understands business objectives and ensures that development activities are aligned with the product timeline. Depending on the type of cooperation the vendor, you may also need a product sponsor—a senior executive who communicates business vision to the developer. Unlike the product owner, this person may not be involved in the project on a day-to-day basis, but their job is to keep it on the right track, too.
ObjectStyle’s Nearshoring Capabilities
ObjectStyle has offices in North America (USA) and Central Europe (Poland). We are actively hiring in Latin America and Eastern Europe. So whether you are US-based or EU-based, we can be your nearshoring partner of choice.
When working with us, you can choose from two types of software development services:
- IT Team Augmentation. This service allows you to hire only 1-2 developers into your team for as long as you need them.
- Dedicated Development Teams. You get a complete cross-functional development team ready to work on your project.
Lead image by Parkyuha via Pixabay
