What Is Nearshore Outsourcing In Software Development

Contents:
  1. Nearshore outsourcing definition
  2. What are the major differences between offshore, onshore, and nearshore software outsourcing?
  3. Top nearshore outsourcing examples
  4. What are the opportunities and risks? SWOT analysis.
  5. Benefits of outsourcing nearshore
  6. How to choose the best nearshore outsourcing provider? 9 criteria guidelines

Have heard of nearshore outsourcing and even are thinking about its implementation? Great. Let’s dive into the topic and study it far and wide. Outsourcing, as a part of the globalization concept, has already become a successful widely-used practice. Why? There are only 3 reasons:

  1. Labour arbitrage, a global practice, which means sufficient cost-cutting  
  2. Immediate access to the unlimited pool of talented human resources. It provides a better time-to-market approach 
  3. The required expertise allows hiring top market professionals to do the job better than your team could, and in the meantime, you can focus on your core business and development.

Note, that you also have to understand clearly where you attract vendors and what model of cooperation you use,  which defines the depth of integration.

Nearshore outsourcing definition

So, what is nearshore outsourcing in software development? It’s the delegation of separate parts or a complex of business processes to web developers in countries nearby within close time zones. The idea was born in the USA in the 1990-es, gradually developed in the 2000-es, and has gone truly global so far.

What are the major differences between offshore, onshore, and nearshore software outsourcing?

First, let’s differentiate 3 types based on location: offshore, onshore, and nearshore outsourcing. What do they have in common and what are their major differences?

Offshore

Pros

  • The biggest budget savings
  • Unlimited choice of talented experts over the globe
  • Opportunities to upgrade your products and services to be top-notch

Cons

  • Far away – difficult to reach for face to face meetings
  • Different time zones could cause problems with coordination
  • Possible cultural and language barriers

This model can save you a fortune with labor arbitrage, which has already turned into a worldwide practice.

Onshore

Pros

  • Easy to reach the location for face to face meetings
  • No cultural and language barriers
  • Fast ramp-up time

Cons

  • More expensive than other models
  • Limited choice of software developers

It proves to be a reliable approach but you may face some limitations with the choice of outsourcing companies, the range of services, and the expertise they have. Local IT specialists may lack the skills and experience required for your particular project.

Nearshore

Pros

  • Attractive prices
  • Wide choice of providers
  • Geographical proximity lets you get to the partner in a couple of hours
  • Tiny or no cultural and language barriers
  • Small or no time zone differences give you overlap of working hours for effective communication and management
  • Opportunities to upgrade your service and work to the multinational level, enter new markets

Cons

  • Requires more attention and control than onshore
  • Small inconveniences are driven by other time zones, languages, and cultural background

Nearshore software development outsourcing is the best combination in terms of minimized risks and value for your business, which you can see in the comparison table below. 3 outsourcing directions are evaluated according to 5 key factors. These are important features to ensure a successful, efficient, and reliable partnership with your prospective software development outsourcing provider in the long run.

Top nearshore outsourcing examples

A good nearshore outsourcing example for Sweden, Britain, and other Western Europe is Eastern Europe: Czech Republic, Romania, and Ukraine. Close time zones provide a time overlap to have smooth communication. A huge talent pool and strong higher education, especially in exact sciences, ensure quick and reliable access to experienced, talented, and high-qualified teams.

However, remote team management implies more attention, effort, and control, it has become a real challenge and a must-have skill in pandemic times. Outsourcing nearshore makes possible face-to-face contact with your vendor, organizing negotiations or special training sessions even during the selection period. In fact, the main goal of the nearshore outsourcing model is to drive your costs down with minimum risks, but don’t forget about lots of incentives you get as a bonus.

Eastern Europe can boast of more than 3000 software companies outsourcing nearshore, with an incredible pool of 1.3 million highly qualified and experienced experts. Plenty of Western businesses are already taking advantage of the situation. For example, ⅔ of German companies give preference to Eastern European providers, such as Ukraine.

Ukraine is one of the top well-established destinations for nearshore development outsourcing. It has become popular due to the merger of the lowest hourly rates and high-quality performance.

Ukraine is №1 in the list of countries with a trustworthy reputation, outstanding expertise, and affordable labor force. The popularity has been gained by geographical and mental proximity, similarities in legal base, and business approaches. Just compare! The salary of an ordinary German developer is above 80K $ per year, whereas in Ukraine it’s only a half.

What are the opportunities and risks? SWOT analysis.

SWOT analysis of Nearshore Outsourcing
in the software development field

Strengths

  • A sizeable pool of talented qualified developers
  • Easy to arrange a face to face contact due to geographical proximity
  • Working time overlapping with the same or close time zones to synchronize processes
  • Minor or no cultural and language barriers
  • Cutting-edge tech solutions
  • Versatile high-quality services

Weaknesses

  • More efforts and attention to manage the process are needed
  • Delays, errors, misunderstanding issues may occur

Opportunities

  • Effective cost-cutting with lower hourly rates
  • Delegation means more time for development
  • Possibilities to enter a new market
  • Advantages in taxation and regulatory spheres

Weaknesses

  • Unreliable or unsuitable providers may endanger the project or even company image
  • Lack of relevant experience may impact the quality

Benefits of outsourcing nearshore

  • Transfer( flights) takes less time for real communication and transparency compared with long and tiring traveling overseas.
  • No huge time gaps allow easy collaboration and synchronization of processes within typical working hours.
  • Minor differences in cultural background and language simplify the integration. However, English is a universal tool for communication around the globe and solves the problem with communication. Public holidays in another country may be a hindrance, but accurate planning and coordination help overcome all delays, errors, and misunderstanding issues.
  • Nearshore outsourcing practice is very cost-effective as you spend less for business trips to bordering areas. Except for attractive hourly rates other reduced costs will drive your total expenditure down.
  • A wide choice of professionals in various directions can meet all your business needs with advanced solutions.
  • Outsourcing nearshore you can upgrade your services to the world-class level and even help you expand to new markets.
  • Released resources can be directed to enhance performance efficiency and develop your business.
  • To utilize taxation and legislation privileges of the neighboring country can be a wonderful business solution.

How to choose the best nearshore outsourcing provider? 9 criteria guidelines.

Use our 9 criteria guidelines to shortlist relevant candidates for a long-term and successful partnership. Outline the business tasks, you plan to outsource, allocate the preliminary budget to have the most accurate match. Consider carefully these points when choosing the best nearshore IT provider:

  • Location of business
    Check various options concerning their geographical proximity, time zones, cultural background, and language differences for the most effective management and collaboration.
  • Reputation and record
    Search for the potential provider’s clients, their feedback, and recommendations. Contact them to receive all the answers, if needed, to have a view of the company’s market image.
  • Qualification and proven expertise
    Study carefully the range of services provided, portfolios, cases, the headcount, certification standards, and the structure. Consult the provider’s experts and ask for a presentation, arrange interviews.
  • Guaranteed intellectual property security
    Check the guarantees for intellectual property security to keep your code and software protected.
  • Compliance with best software development practices
    During the selection stage, inquire about the application of best practices to ensure top-level software development.
  • Communication and management approaches
    Compare organizational structures, business models, approaches, administration, and internal processes to match your daily operational needs best, to create a smooth flow of communication and deliverables. For this purpose, you will need a reliable person to keep in touch with your outsourcing provider.
  • Economic situation and taxation policies in the nearshore location
    Consider if there are any advantages in taxation and economy that can be turned into benefits for you.
  • Local legislation
    Speak to your legal advisors to review local regulatory compliance with European, American, or other legislation to prevent any problems in the future.
  • Transparency and flexibility
    Transparency means trustworthy relations with your nearshoring partner. Check if your partner is eager to share enough information about its performance, business structure, internal procedures, etc. Reliability, responsiveness, and flexibility are important to best meet your business needs and preferences.

Final words

Use our 9 criteria guidelines to shortlist relevant candidates for a long-term and successful partnership. Outline the business tasks, you plan to outsource, allocate the preliminary budget to have the most accurate match. Consider carefully these points when choosing the best nearshore IT provider:

How Nearshoring is Filling the Gap of Software Developers

The IT industry is developing more and more, forcing companies to look for new professionals. CompTIA reports that 40% of organizations hired technical staff during the pandemic, and 66% plan to add more staff in 2021. Attracting IT talent from any country has become possible with the proliferation of outsourcing and other models of international cooperation. Companies entrust development to third-party firms to reduce costs and save time for major activities. Today we will explain what nearshore is, its strengths, and ways to fill labor shortages in organizations.

What is nearshore outsourcing: essence and examples

Outsourcing appeared in 1989, showing excellent results. According to Deloitte, 59% of companies that switched to this method of cooperation increased the percentage of net profit. Nearshore outsourcing means assigning specific tasks to contractors located in neighboring countries to the customer. As a rule, third-party organizations develop web or mobile applications, improve their functionality, and completely update the software using modern technologies. The definition of nearshore emphasizes the importance of distance between client and contractor countries. Usually, it is measured by the number of hours spent on the plane.

Examples of nearshore outsourcing are situations where companies from the USA transfer their tasks to the experts from Brazil, Argentina, or Mexico; or businesses in France hire teams from Romania, Bulgaria, or Ukraine. The main reasons for applying nearshore outsourcing are accessible communication, fast movement between locations, and the low cost of the final project.

Below is an infographic that displays the interaction of the subjects of outsourcing services and the approximate cost of the work of professionals.

International companies switch to outsourcing to expand business opportunities. For example, Google has attracted about a thousand employees from 60 countries to develop software and support the virtual assistant. Pricena has also worked with outsourced organizations to build the web platform and improve the mobile app.

Onshoring and Offshoring: Inveterate Competitors to Nearshoring

When a company needs a remote IT team, it typically chooses one of three types of outsourcing: “very close” onshoring, “near-neighbor” nearshoring, or “far” offshoring. Each has pros and cons in terms of cost and location, but they are all evolving rapidly. GrandViewResearch experts believe that the global IT outsourcing market will grow by 7.7% annually and reach $ 937.67 billion by 2027.

Onshoring. A model that involves cooperation with a team of IT specialists in the customer’s country. Companies have the same timezone and invest in the economy of the common state, creating new jobs. But this type is financially disadvantageous and may cause competition in the market.

Offshoring. A type that implies the implementation of the project by remote organizations at a lower cost. Companies often work with a time difference of about 4-6 hours and on the most favorable terms of cooperation. But, unfortunately, data security issues and unplanned costs can arise. According to Statista, India has become the most financially attractive country for this type of service.

Nearshoring is very similar to offshoring but has one essential advantage: the convenient geolocation of the client company. This factor leads to smoother communication between teams and the absence of problems connected with time. Disadvantages of nearshoring versus offshoring are:

  • Higher price for IT services. Nearshoring requires more financial investment and time to find a partner who understands the specifics of business processes. Offshoring is popular due to its cheap wages. For example, in the Philippines, the average salary of professionals who work on outsourcing is   $ 7,605 per year.
  • Small range of IT professionals. Nearshoring outsourcing is limited to the location of the partner’s country. Competitive companies hire developers from all over the world. For example, look in the USA or India, which are major suppliers of labor resources.

If we compare nearshore outsourcing and onshoring, the first model is more profitable financially, but the second one provides better communication between internal and external teams when solving urgent problems. In addition, cooperation between companies from the same country will help avoid legal issues and unite economic interests.

Outsourcing nearshore as a way to attract IT talent

A sharp increase in industry demand has resulted in a lack of IT professionals with the necessary skills. Organizations look for software developers to free up time for their core business activities. McKinsey claims that 44% of companies will experience a skill shortage over the next five years, and another 43% complain about the lack of competence of employees.

Nearshore outsourcing allows you to transfer the main stages of software development to a partner’s team. The client entrusts the improvement of the company’s weak points to professional firms that can offer innovative solutions. The close location provides easy communication, detailed drawing up of a project plan, and comprehensive research of the customer’s company. Nearshore IT outsourcing is an excellent solution to the global lack of developers. A survey of CIOs shows that the global technology skills gap remains high, much the same as before the pandemic. Outsourcing organizations provide teams proficient in several programming languages ​​and are ready to continually improve their skills.

TOP-6 advantages of nearshore outsourcing
  • Effective communication

Geographic closeness allows for face-to-face meetings between in-house developers and partners. Experts can discuss all the details of the project and establish a trusting relationship. McKinsey reports that regular communication between teams increases productivity by 20-25%. Development on the terms of nearshoring outsourcing increases the return on investment and ensures meeting deadlines if a streamlined interaction scheme is established.

  • Save financial and time resources

Keeping teams in constant communication prevents unnecessary budget spending on fixing work or re-doing tasks. Also, less time will be spent on disagreements. If problems arise that cannot be resolved online, representatives of the parties can quickly get to the office. Ticket costs will be insignificant, as the close distance between countries allows you to choose the most advantageous offer among competing airlines.

  • No cultural and linguistic differences

Geographic closeness positively affects the similarity of languages ​​and cultures of neighboring countries. The customer and the outsourcing company work in complete mutual understanding, building trusting and even friendly relations. The development process becomes more structured, and both teams can promptly discuss any questions. There is much less controversy caused by mistranslation or questionable statements than offshoring.

  • Schedule compatibility

Real-time meetings allow you to plan common work, set goals, and agree on project deadlines. The same time zone or a slight difference in time does not lead to an irregular schedule. As a result, additional resources appear for consultations or answers to questions. Organizations also have similar working hours, eliminating the need for calls and messages at inappropriate times.

  • Similar Legal and Tax Regimes

Legal regulations on information confidentiality and data security are often similar in neighboring countries. For example, organizations located in EU member states use the General Data Protection Regulation (GDPR) and compliant tax regime. Companies should consider changes in the legislation of the partner countries where they order services. The nearshore outsourcing model avoids legal nuances, ensuring confident and comfortable cooperation.

  • Large talent pool for IT talent

According to Korn Ferry, the global IT talent gap will reach 85 million by 2030. Therefore, organizations turn to companies that cooperate on the basis of Nearshore outsourcing for software development. A third-party IT team constantly improves their skills and works with popular technologies: Java, Python, .NET, React, Angular, and others. The development company selects a programming language, offers innovative ideas, and gives recommendations to achieve the customer’s goal.

Basic Steps to Selecting a Nearshoring Partner

Nearshore outsourcing is suitable for businesses that need a large number of IT professionals, have a limited budget, and can switch to online communication during project development. Before looking for an outsourcing organization, check 4 main points:

  1. Country Profile. Analyze territorial neighbors, considering the distance, communication methods, travel time, and the average cost of outsourcing services. 
  2. Data security. Investigate the legislation of another country, regulation of the protection of intellectual property rights, and other legal features of cooperation. 
  3. Possibilities of companies. Compare the experience of organizations, the number of IT professionals, their level of skills, and the availability of local representatives for offline meetings. 
  4. Feedback about the partner. Collect information about cooperation with other firms and learn about difficulties and problems they solved while working on projects.

It is also important to focus on the needs of the internal team. The similarity in modes with a partner, holding meetings during working hours, and understanding the specifics of the project by the performers are the foundation for launching a successful project.

Pros and Cons of IT Offshoring: Benefits, Risks, and Limitations

Productive business development has several conditions. Two significant of them are delegation and the search for favorable cooperation conditions. Offshoring is exactly what allows you to fulfill these two requests at once. In essence, this is delegating a task to employees from another country. Many people confuse this concept with outsourcing, but this is not quite true. Each of these models has some nuances and suits one or another business strategy. To make the right choice, you need to learn about offshoring and outsourcing advantages and disadvantages.

What is offshoring and what can it be?
Slide 4_3 - 2

Offshoring suggests hired employees who are full-fledged part of the staff and work within the corporate culture of this company. Outsourcing, in turn, involves the cooperation with freelancers or agencies to perform the tasks of a particular project. Many IT companies practice both of these approaches. They hire employees from Asia or Western Europe, and they work on behalf of this company, performing the assigned tasks.

Slide 4_3 - 3

There are three popular types of offshoring:

  • Offshore outsourcing. These are the tasks delegated to freelancers or agencies. This option is optimal for short-term projects, allows you to significantly reduce the labor cost, obtaining quite acceptable quality. Sometimes this option does not solve your requests, with all offshore outsourcing pros and cons. It’s when you have a long-term project.
  • Onshoring. This means hiring staff from your country. Simply put, you have a company that employs employees from your country but another city, for instance. This does not promise significant savings on labor costs, but it will be the best option if you want to avoid such nuances as time differences with employees, cultural barriers, and differences in technology. 
  • Nearshoring. This offshoring involves hiring employees from a neighboring country. This can provide you with competent employees for a reduced price and at the same time with a small difference in time zones.
  • Offshoring. A case when a company hires an employee from a developing country (Eastern Europe, Asia). Such countries have smart and high-qualified specialists whose services are much cheaper, while they perform high-quality work in compliance with deadlines and the requirements. This option is ideal when it is necessary to avoid too high costs, without losing the work efficiency. 

Offshoring itself can be a very profitable solution and significantly boost your business. The only question is whether it is suitable for you.

IT Offshoring Advantages
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Why do companies often resort to such a model as offshoring? It happens when certain business tasks and processes are delegated to an overseas executor. At the same time, the contractor is part of the company’s staff. Some countries are very popular for IT offshoring. These are India, Ukraine, Poland, Argentina, and other developing countries. The advantages of offshoring can help your business win in many terms, particularly in financial.

Financial benefits

Salaries in developing countries are usually much lower than in prosperous countries, which means that the average fee of a specialist from Asia or, say, Poland will be several times lower than in the USA or Canada. At the same time, everyone will be in the black: 

  • You get a qualified employee who is ready to work on your terms.
  • He or she receives stable cooperation and a salary that is quite decent by local standards.

It is worth saying that developing countries have many excellent specialists: programmers, web designers, developers, and others. And if, say, in the United States, you will be forced to pay such an employee an average of 150 USD per hour, then an offshore employee will work for 40 USD per hour (on average) and will be very satisfied with such conditions.

Incentives from States

Some developing countries encourage such cooperation with their residents because it is an investment in their country. For this, they can offer you reduced taxes and other privileges.

Saved money for labor and reduced rates are the key to business development. You can expand your services and financial opportunities, invest or reinvest the money, etc.

Scale capabilities

Offshoring makes your opportunities more extensive and your business wider. It also means new acquaintances, a big talent pool, and more experience in working with foreign markets. Such background allows you to know all the subtleties and nuances in the overseas market, to know its risks and opportunities. Moreover, you are opening up new horizons, because this can bring world-class pros to your company in every sense of the word.

Offshoring risks and disadvantages
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As with any business model, offshoring has some risks and limitations, with all its economy. So, if you decide to attract specialists in such a way, therefore, take into account that you will have to face some nuances. 

Different time zones

The most frequent stumbling block, especially with full offshoring, is when you cooperate with specialists from distant countries. This issue complicates the communication, because if your office starts at 8 am, then it may already be an evening in the country of the specialist you hired, for example. In some cases, this complicates the possibilities of meetings, conferences, and business calls.

Cultural differences

Whatever one may say, but people with different mentalities will also have different approaches to work, in particular:

  • Setting and understanding tasks.
  • Making and executing decisions.
  • Communication style, etc.

This can lead you to disagreements and in some cases even to conflicts.

Inconsistency of quality standards

The concept of high-quality work in another country may differ significantly from those that are relevant in your one. Especially if you cooperate with a country that has much lower requirements in terms of quality and other technology. As a result, the products that developed offshore won’t meet the quality that your company requires.

Opaque pricing

Sometimes offshore companies require more money for their services, explaining this with additional costs, the need to attract additional human resources, and other nuances. Such molten prices often confuse business owners, because some smart employees set dumping prices, while others, on the contrary, inflate it without justifying why.

Can it be dangerous?

Offshoring carries some risks for your data protection system. This doesn’t always mean aggressive hacking and data theft. The problem may lie again in different legislative norms of information protection and security systems. In this case, the best solution is to take additional measures to protect data, consult with local lawyers.

Shortly about offshoring advantages and disadvantages
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So, offshoring is neither good nor evil, but another option for doing business. Those who decide to take such a step to win in the financial aspect and the corporate one:

  1. Saving money for labor.
  2. Saving on taxes.
  3. Possible incentives from the hiring employee’s country. 
  4. Opportunities for the development of your business.

However, for the sake of these very opportunities, you face several challenges:

  • Time zone difference.
  • Cultural and language barriers.
  • Possible threats to the security system.
  • A mix-up with prices.

Therefore, it’s important to understand how such a decision corresponds to the goals and values of your company…and whether it fits at all. In the end, offshoring is not the only way to delegate tasks and attract worthy IT specialists.

Maybe outsourcing after all?
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Someone will find offshoring benefits and disadvantages too complicated. It’s easier to hire several freelancers, give them a clear task and worry neither about legislative nuances nor about what time it’s now on another continent. And in some cases, outsourcing is a great solution. What aims define offshore outsourcing:

  • You have a short-term project for several months.
  • You need one or more specific specialists for certain tasks. 
  • You want to reduce the financial and physical burden on your company by attracting a subcontractor (an outsourcing company).

At the same time, you can attract a specialist both abroad and within your country, avoiding differences in culture and time zones. But if you want:

  • That your tasks are still by full-fledged employees, that are part of your company. 
  • Move your company’s activities to another country.
  • Reduce labor costs.
  • Expand your staff, business opportunities, or even the range of services. 

Then offshoring is your option. And if you take into account all pros and cons of IT offshoring and think over a strategy, this one will optimize your business and give global opportunities for your development. 

How to avoid risks from offshoring?

To be warned is to be one step ahead. If you understand that offshoring is exactly what you need specifically for your tasks, then it’s a small matter — to adjust all the processes to minimize the impact of disadvantages of offshoring

  • Hire an IT team of real pros. 
  • Consult about local laws regarding your business.
  • Find out the tax system (you may even get some benefits from an offshore country!)
  • Create a clear corporate culture.
  • Take care of strengthening your security system.

Offshoring is nothing more than another model for attracting employees and distributing the workload between them. And like any working model, it has risks and opportunities. 

The primary task, in this case, is to choose the right team. By contacting us, you solve this issue automatically. We know what effective cooperation is with minimal risks.