Nearshore, Offshore & Onshore — What Does It Mean?
To better understand how outsourcing software development can help your business, you should take a closer look at types of services you can work with, depending on the location of the given company. But first, let’s look at what these terms mean in the first place.
Onshore Software Development
Onshore software development refers to acquirement of outsourcing services from a company based in the same country.
Nearshore Software Development
Nearshore software development refers to acquirement of outsourcing services from a company based in a nearby country.
Example: For a German company, that would mean working with a company based in Czech Republic. For the United States that would mean working with Canada.
Offshore Software Development
Offshore software development refers to acquirement of outsourcing services from a company based in a faraway country or even overseas.
Example: For a Norwegian company, that would mean working with a company based in China. For the United States that would mean working with Poland.
The distinction between those three types of outsourcing software development services can be summed up in seven categories: costs, legal systems and taxes, distance, time zone, language, culture and network. Let’s dive in to see which type of outsourcing suits your business needs best.
The Difference Between Nearshore, Offshore & Onshore Outsourcing
Since salaries differ all over the world depending on the economy of each country, prices for relevant services might fluctuate between extreme highs and the lowest of lows. You can take advantage of it, just like the reported 35% of companies who outsource primarily for cost cutting reasons. This means that when you search for the best software developers in the outsourcing industry, you might want to consider looking beyond the borders or even across the sea. This way you can procure IT talent for a lower price due to low labor costs.
Offshore outsourcing is well–known for being the cheapest option of the three, while onshore outsourcing is usually the most expensive one.
2. Legal Systems and Taxes
If salaries vary from country to country, it’s even worse with legal systems and taxes. Looking for offshore options means getting to know rather intimately all the necessary legalities to run the whole process smoothly. Surprisingly, there’s less for you to worry about than you might think. The outsourcing company will take care of its own employees, taking care of their salaries, fees, payroll tax costs, insurance and benefits. The only thing you need to pay attention to is invoicing, which may require some further reading.
You also need to consider the tax implications. Potentially, taxes can be something to be taken advantage of. Certain countries like Poland or Romania have introduced tax incentives for IT companies to promote offshore outsourcing. But in some cases, it might generate detrimental costs that would make the proposed transaction unlucrative — that’s why you need to take into account all the tax benefits and tax detriments first.
Onshore outsourcing is a familiar ground. It may turn out to be more expensive, but better the devil you know.
Each option comes with a different form of team cooperation. Onshore outsourcing gives you the possibility of frequent visits on–site and face–to–face meetings, while nearshore might be a bit more complicated. Offshore hardly ever makes travel profitable, restricting the whole software development process to remote work.
Although distance doesn’t have to be an issue. Even 6538 kms didn’t stop our client Placester, a software provider to real estate agents and brokers, from visiting us in our MPC office. Four times a year we had the pleasure of hosting their Leadership Team as well as their CEO for a week–long workshop, during which we reviewed our current progress, made plans for the next stages of product development and strengthened our relations.
Even if you don’t plan any visits, it is worth noting that remote work is considered to be the new standard, with 74% of companies planning to implement permanent remote work post pandemic. It also has been proven to be especially beneficial from an economical standpoint, since it brought $1.3 billion of annual value to the United States thanks to a 4.4% productivity increase.
4. Time Zone Differences
Yes, time zone difference might throw a wrench into the smooth workings of unsuspecting software development companies. But with the ongoing rise of new high-end communication tools that make instant messaging and virtual meetings possible, it all comes down to creating proper ways of managing your teams. With the wrong Project Manager, the same time zone might not save you from miscommunication or misalignment issues.
Offshore software development requires a bit more attention to ensure the right communication processes are set in place, preferably Agile or Scrum. Nearshore outsourcing needs proper care as well, though it’s easier to set up on–site meetings (although travel costs might be high).
In that sense onshore outsourcing requires less work, but it doesn’t mean your communication doesn’t require nourishing to ensure project efficiency.
On the upside, offshore outsourcing ensures that your project is taken care of by your software development team 24/7, so working across a few time zones might actually speed up the whole process. How does it work? Well, if you give any feedback to your outsourcing partner the day before, you can expect to have new updates in the morning. And if you have your own in–house team working on the same project, this means that they have a head start.
On a similar note, how can you create a good communication system with existing language barriers? How will it affect the development process?
Same native language definitely seems like a great benefit to the onshore type. The risks of miscommunication should be significantly reduced, but sometimes overconfidence leads to poor results. Presumptions, making assumptions or just bad management in general can lead to problems just as well. Still, can offshore and nearshore software development keep up?
Nowadays, English is a global language of business, so language skills are particularly attractive in the eyes of the employers. More and more companies educate their own employees as well, offering additional classes and courses. This results in high English proficiency skills, especially in countries with leading outsourcing companies — like Poland or Philippines.
Thanks to globalization, we are more aware than ever before of any cultural misalignments and we do our best to avoid them. But there still exist overlooked pressure points that make working together difficult — such as different work–free holidays. They might create conflicts in schedules, especially when people are unaware that their free days aren’t common knowledge. And when you’re on a tight deadline.
On the other hand, this means that during certain holidays your outsourcing company may be working while you’re busy celebrating. So in the end, it all comes down to proper management that can work with different schedules.
There might be other similar surprises while working with offshore companies. In that case, onshore software development seems like the safest bet, but does it really stop any conflicts that stem from difference of opinions?
To make sure that the company you’re looking into values proper workplace relations, you can check the company’s policy on diversity and whether they employ non–discrimination laws. This may not prevent problems, but might help resolve tough situations.
On the other hand, there are some benefits to having a diverse software development team. It has been predicted that by 2022, 75% of organizations with diverse decision–making teams will exceed their financial targets. Diverse teams usually outperform the non–diverse ones by 50%. Those high numbers are a result of new perspectives creating innovative, unique ideas, which could have not been possible in a homogenous environment.
The biggest downside to nearshore outsourcing is the fact that you are restricted by what your home country has to offer in terms of human resources.
You might be hard–pressed to find someone on short notice, having to settle on an average software development team that might fail to bring your project into fruition. And the price will most definitely be higher.
Offshore outsourcing gives you access to an IT talent pool that otherwise could have been hard to find. This way, the best software engineers might join your team and share their expertise, improving your processes and bringing a real value into your company. And you won’t be the one responsible for any of the employee fees that come with hiring new staff or even training one: you can skip right into creating your own software product, trusting your outsourcing partner to have chosen the best people for the job.
Software development outsourcing requires careful consideration no matter the type. There is no universal answer to which option might bring the most benefits to your business, but hopefully the text above could help you out in making the right decision.
And remember that finding the right outsourcing partner that shares your values and principles is more important than a method of cooperation.