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Offshoring and nearshoring – what to choose?

Offshoring and nearshoring- what to choose?

What offshoring is, and what is nearshoring? What should you take into account when choosing between them? Who needs these services? Differences are quite substantial and it is worth getting acquainted with them while choosing any.

Offshoring and nearshoring – what to choose?

In recent years we could observe a growth of IT services. However, creating own, inside teams may be very costly. Creating a team on your own also takes a lot of time. For the majority of employers, finding good programmers is quite a challenge. After you find potential team members, you have to also verify their qualifications. Additionally in the age of progressing technology we do not have the guarantee that the employee hired now, tomorrow will meet our expectations. That is why lately IT outsourcing became so popular. According to the KPMG analysis, in the year 2017, seven hundred and twenty-seven contracts related to IT outsourcing were signed and their overall value reached 137,2 billion USD. Majorly outsourcing services are used in bigger firms in the fields of finance, banking, automotive industry, or telecommunication. Often even government institutions decide on this type of hiring. Outsourcing is most popular in countries like France, Spain, Netherlands, Denmark, or the United Kingdom. This method is very beneficial and in a majority of cases works very well. This is shown in the statistics report carried out by IT Outsourcing Statistic. According to this data, 90% of clients using outsourcing is happy with the outcome.

Offshoring – definition

What offshoring is? It is a type of outsourcing. To be specific it is a process of moving business services outside the borders of a country. It refers not only to services, but also production, and the main reason for it is to cut costs. Another reason for considering offshoring can be the lack of the possibility to do something on your own. In that case, there are no restrictions about the location of a hired company, cooperating firms can be located in any place in the world. For example, one firm from Poland can use offshore services from a firm located in Australia, the USA, or China, the distance pays no relevance. It can be done through a foreign direct investment (FDI), or as an international sub-concession. Most often offshoring is used by organizations working on the international market, which are currently in a specific country.

Development of offshoring

Growing development of offshoring is caused mainly because of the progressing technology of telecommunication and IT, growing global competition, and also a globalization of trading services. Most often business services (business process outsourcing, BPO in short) and IT services (T enabled services) make use of offshoring. BPO is most often bookkeeping, finance, administration, law services, analytics, and tests of the market, and when it comes to IT reengineering, security control, building, support, and development of an application.

Nearshoring – definition

Nearshoring is also moving services and business projects over the border of the country, but in this case geographically and culturally closer than offshoring. Nearshoring provides a possibility of consistent contact, communication, and bonding without the obstacle of cultural differences (both when considering organization and the law). Additionally, the upside is no difference in time zones. East Europe developed significantly when it comes to IT services. The most popular countries that offer offshoring services are Poland, Czech Republic, Germany, and Ukraine.

According to the IT Outsourcing Statistic report, 90% of clients are satisfied with outsourcing

Offshoring or nearshoring, which to choose?

Offshoring, or nearshoring? Which type would be best for you? To correctly choose a service to fulfill the needs, you have to take into account a few different criteria. The most important ones are costs, communication, quality, and law.

  1. Cost of the service.

Offshoring is the best choice when our main criteria are low price. The cost of services offered for example in India and other Asian countries is much lower than the cost in European countries. In that case, you should also take into consideration eventual traveling costs and accommodation as well as the time spent on delegation. While offshoring does not come in fully remote form, you have to account for inevitable additional costs, which at first can seem low. When choosing to offshore, the distance to overcome becomes much smaller and getting to know the market as much as the service provider becomes much easier.

  1. Communication

Communication is the key to success. In the case of telecommunication, you have to make sure it is not disrupted and the information we send is clear for the receiver. When it comes to foreign communication, the most popular is English. You should make sure both sides can communicate on a basic level. It is best though, for both sides to communicate at the highest level, then u are sure there will be no misunderstandings. The lower the level of communication, the lower the quality and less effective job done is and with that more time is wasted (sometimes hours, but sometimes days or even weeks). When choosing to offshore it is also important to consider cultural barriers, which will be bigger than in a case of offshoring. Another crucial aspect is time zone differences, you have to take into account that in offshoring one of the sides will communicate in night hours. The undoubted advantage of nearshoring is much bigger compatibility when it comes to working hours.

  1. Quality of service

The more complex the order, the more important the education and knowledge of employees will become. It will be seen in the quality of a project. Poland is a country, where there are many well-known good technical universities and so the popularity of polish companies providing outsourcing services is growing. ONZ study related to education in the world places Poland in 35th place out of 200. For comparison Indies are 135th. The cost of offshoring from India will be lower, but European specialists are worth their pay because of the quality provided.

  1. Law and regulations

Both in offshoring and nearshoring, it is important to have in mind regulations obliging in the country we take service from. It will for sure make cooperation easier. You should check, what is included in the insurance, are traded data is confidential and trade secrets are safe as well as how solved are statements about providers’ errors. You should also pay attention to the political situation in the country in question, how often do regulations change, how is the foreign capital perceived and how do the worker’s rights look.

Offshoring pros and cons

When you decide to choose to offshore it is worth knowing about not only its advantages but what downsides it has. Then, we will know, what actions to take so, we can improve the quality of cooperation.

Advantages:

  • frugality of costs
  • qualified and availability of employees
  • full control over actions of the firm
  • in some countries government subsidies for the cost of work
  • tax breaks
  • Growth of the brand’s prestige

Disadvantages:

  • language and cultural barriers
  • risk involved with confidential data leaks
  • image risk
  • costs of traveling
  • complications due to the difference in time zones
  • risk of lowering the quality

Nearshoring pros and cons

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In the case of nearshoring there is a certain risk, but at the same, it has its advantages. After knowing them it is easier to decide which type to choose to satisfy our needs.

Advantages:

  • Frugality of costs
  • Qualified workers
  • Smaller cultural and language differences
  • Mostly work in the same time zone (1–2-hour difference at most)
  • No need to travel far

Disadvantages:

  • sometimes difficulty in relations when it comes to cultural differences
  • remote work – more control over employees
  • need for constant oversee and readiness for possible changes

Costs - what are they dependent on?

  • Localization- a lot depends on where our partner is located. Here is some data when it comes to average rate:

East Europe- 29-33€

West, Central and North Europe – 41-49€

Asia – 21-25€

  • Job position -- position of hired workers, their knowledge, abilities and experience plays a big part. Depending on what kind of specialist you need, costs will differ. If we hire experienced people for the position of senior, we will have to pay more than a group of juniors. Additionally, firms with many years of operating and being high up on the market will expect a higher price for their services.
  • The deadline - you also have to consider how long will the project last. On one side, long cooperation with a bigger team will generate more costs, but on the other, it may prove more valuable long-term. Sometimes for constant employment, companies are willing to offer better rates to the clients needing their services for a longer period of time.

Summary

Big company, or a smaller start-up, all over the world both nearshoring and offshoring proved to be a great solution for a lot of them. According to a questionnaire from Deloitte conducted in 2016, 78% of organizations are satisfied with outsourcing IT. Both nearshoring and offshoring allow for more flexibility and rids you of the struggle to find and train your own employees, instead, you can hire an outside team, which while working remotely will use its full potential.

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Marta Sarbak
23/08/2021
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