Nearshoring vs. Onshoring vs. Offshoring: Which model fits your software engineering and IT consulting needs?

Frequently, businesses use technology to elevate their performance and decision-making processes. They turn to Nearshoring, Onshoring and Offshoring software engineering providers with a proven track record of strengthening business’ positions on the market. By uncovering deeply-hidden data within their company, they aim to make organisations more flexible, leveraging the latest technologies and improving their speed to market. 

The main reason for hiring external providers is cost reduction, as shown by Deloitte’s 2020 survey. But is cheaper really better? Might there be a middle ground?

Outsourcing software engineering and shared services prove to be complicated, as you have not only a variety of companies to choose from, but also three main outsourcing concepts:

• Nearshoring
• Onshoring
• Offshoring

We’ll go through these approaches and present the pros and cons of each. This will give you a first glance at the variety of software engineering providers in various countries. 

Without further ado, let’s dive into the topic of Nearshoring, Onshoring and Offshoring.

Every organisation has its individual goals and objectives. Still, there are certain reasons why many companies choose to outsource their software development and engineering. In 2020, Deloitte conducted a survey to show the driving factors of why organisations outsource:

As we can see, cost reduction is by far the biggest driver in outsourcing. Indeed, we at VirtusLab see the same results on the market. There is but one difference between reality and a survey. Although cost reduction is the main purpose, and companies seek cheaper solutions, it is wise to audit a new outsourcing partner before working with them. Why? Money is not everything.

Let’s get into details later.

For now, we’ll look at key enablers and challenges in outsourcing software engineering.

Deloitte conducted another survey in 2021 that shows the most desired transformation enablers employed by global business services (GBS), in other words, outsourcers, such as VirtusLab: 

As we can see, robotic process automation has risen to number one over the years. This suggests a strong demand in these areas by B2B customers and aligns with our experience within the business. 

Further down the chart, you’ll see that standard processes, enterprise resource planning (ERP) and a centralised analytics system gain more and more traction. Deloitte suggests that they’ll increase in dominance over the years to come. 

No matter the approach, Nearshoring, Onshoring or Offshoring, clients do struggle with some issues when working with a software engineering outsourcer. So let’s take a look at the challenges.

The most challenging topics when working with Nearshore, Onshore or Offshore business partners are as following:

Companies seek independence with a self-serving approach. As much as 31% of all B2B customers criticised the lack of self-service capabilities. Companies want to keep control over their business and business decisions, especially when it comes to data analytics and robotic process automation. A self-serving approach demands a base to work from, such as a reliable data platform.

Closely following challenges are the inability to resolve issues (19%) and long response times (12%). As you go on reading the article, you’ll see that there are plenty of reasons for such challenges.

Let’s take a look at the individual outsourcing models, now that we know some enabling factors, incentives, and challenges. 

Nearshoring provides specific services to a business as a third-party organisation. The main distinction from other models is nearby the client’s headquarters. 

Say your business is located in Germany or the UK, you might want to nearshore services in Poland. Of all the customers polled in the PWC Global Outsourcing Survey 2007, 66% indicated a clear preference for nearshore versus offshore outsourcing. 

Let’s dive into the advantages of Nearshoring to understand their preference.

The advantages of Nearshoring are often a result of several conditions working together. The most influential factor in Nearshoring is the close proximity of a joint venture between two companies. This means:

• Minimises digital disruption –  Customers demand a way of customer service that can’t be reached without business intelligence. Data enables you to fulfil your customer’s wishes. Yet, digital transformation is not easy to come by. This Forbes article explains that you need a partner by your side, daily conversations and work closely together. 

• No delay in cooperation – Working at the same timezone enables agility and flexibility on several levels. Processes happen in real-time and with no delay. This translates into higher performance for your and your partner’s nearshore teams.

• Scale teams and projects in real-time – The close proximity and same time zone give you the possibility to scale projects immediately if needed. It is hard to find the right specialists in a sensible amount of time, especially when dealing with certain programming languages. Yet, a good nearshore business has this talent at hand.

• Gain flexibility – A nearshoring partner helps you grow your projects and let’s you focus on more pressing matters of your business, or even swap priorities. 

• Close collaboration in real-time with in-house teams from other technical disciplines– Close collaboration helps you escape chaos. You get a better-managed workflow in a smooth and trackable way. A nearshoring approach saves you time during collaboration and increases the productivity of two seemingly separate teams.

• Higher quality products – Steady communication in real-time within a collaborative partnership results in better outcomes in software engineering. Your nearshoring partner knows exactly what you need and supports you in production and maintenance. 

• See effects immediately – Close proximity to your nearshoring partner enables transparency on a higher level. Normally, visible effects take shape after several months of collaboration. A good partner finds ways to let you know your and their progress transparently and immediately.

• Tap into industry knowledge – Gain more independence with a self-serving approach. A nearshoring partner such as VirtusLab shares their knowledge with you and provides skills that haven’t been available in your team before. This means you gain more control over your business and projects. 

• Personal meetings made easy – The geographical closeness between the service provider and service consumer allows you to meet personally at a relatively low cost. This also means ad-hoc face-to-face meetings are possible. 

• Cost efficiency in the long run – A nearshoring service provider offers much better conditions than an onshoring company or an in-house team. They provide you with the same, or even better, level of knowledge, for an attractive price. Use more experts for your project than you could with an onshore or in-house team.
  
• Work with industry leaders – Work together with industry leaders that accumulate talent in one place for your most challenging projects. Tap into their knowledge with languages such as Scala or Kotlin.

There aren’t many disadvantages of Nearshoring once you work with the right software engineering partner. It’s more expensive than Offshoring, yes. But as we already wrote, Nearshoring is cost-efficient in the long run.

Onshoring is mainly a non-IT service that involves logistics. A company takes on the services of a third party within the same country. Manufacturers, from industries such as automotive or steel production, benefit from onshoring services since transportation costs get lower and custom fees vanish completely. 

Companies that want to request services from a software engineering and IT consulting company aren’t restricted to borders. Cloud availability and scalability give organisations the freedom to request and render services from anywhere in the world.

If your company wants to support local businesses and stay within borders, as well as avoid high transportation costs and customs fees, then Onshoring is the way to go. Companies avoid problems with cultural or language differences since they are in the same country. The shared primary language makes it easy to communicate with each other.

Although errors, caused by misunderstandings, are near zero, there are some major disadvantages that companies face when seeking Onshoring software engineering services. The costs of an external team are equal, or even higher, to the ones when building an in-house team.

However, being exposed to similar costs like own staffing while building up skills within an external organisation looks like an expensive plan. Moreover, there might be a limited talent pool in your country. Scala, cloud or data engineering demand seasoned professionals to create stable products. This means Nearshoring and Offshoring are better options for software engineering services. 

If you think about outsourcing, Offshoring is probably the first thing that comes to mind. Offshoring means transferring or basing all or parts of business activities and projects on companies on a different continent. If your company is based in Europe, Offshoring would mean using services from an organisation based in the APAC or Americas regions.

The most common advantage of Offshoring is lower labour costs. The hourly rates are often much lower than the ones from domestic or nearshore engineers. As mentioned above, cutting costs has been the number one priority in global outsourcing since the pandemic. But you’ll see, reducing costs on paper, doesn’t mean reducing costs in the long run, especially for mission-critical projects.

However, the entry-level for companies that just start their software operations, is lower and achievable. This means you can kick off any project with a smaller budget. But as the project grows, you’ll see issues arise.

The longer you work with your offshoring provider, you’ll come to know some issues:

• Communication barriers often arise when people speak different languages. This is especially true when the mother tongue has an antipodal pronunciation. Because of this, there might be some inconsistency in communication.
  
• Large cultural differences add up to communication barriers, since attitude, tone of voice and body language differ from continent to continent. This translates into longer kick-off periods for any project. 
  
• Different time zones impact work and team collaboration. Asynchronous communication postpones the rollout of a project since communication is only done with delay. Meetings have to be scheduled at certain hours, which narrows down the window of communication.
  
• High travel costs fall into consideration as well. Close collaboration is always a plus, as it gives you more oversight and control, which is crucial for any project, especially mission-critical ones. You lose time by travelling long distances, as it’s the only way to see an Offshoring partner face-to-face. To stay within the budget, you must keep these business trips to a minimum.
  

Lower control and oversight is a subsequent issue that comes with Offshoring partnerships. The distance and difference in time cause a disruption in transparency. You need to put more time and effort into oversight than with a Nearshore partner.

Global business services (GBS) and shared services centres (SSC) achieved multiple goals in 2021. The most prominent is the standardisation and efficiency of processes. Inefficient process planning keeps weighing heavily on your budget. If you update your UX, frontend and data handling you’ll see an improvement in time spent on a project and save money that you can allocate somewhere else. This is especially true for the recession that might be coming in the future.

Reducing costs is of course a factor you need to consider. But there are details, you need to be aware of when working with a software house. It’s best to work with a partner you can rely on. 

VirtusLab, for instance, has experience in making the complicated simple. This saves time and money, creates a better attitude among your employees, and gives you the freedom to focus on achieving your business goals instead of fixing plot holes.

Let’s take a look at what really defines a good partner in a world powered by software:

• Together you create an efficient collaboration base.
• They understand your business, needs, and problem space to act accordingly. A domain-driven design helps to generate well-functioning projects that last and are profitable.
• They support you constantly in reaching your goals and keep a transparent workflow to monitor your progress.
• They share their knowledge and foster the self-service approach. A good outsourcing partner mentors and educates. They share their skills and experience, which your own team might lack, but need for certain projects.
• A good GBS partner scales without sacrificing your flexibility.
• They take over higher-level roles in product management, beyond sole implementation to give you the freedom to focus on different tasks and projects.
• They provide technical excellence in more than just a technological area.
• They communicate clearly. This makes language barriers look irrelevant. They create a communication flow that favours transparency.

A reliable software engineering partner sees their customers as a partner and seeks a stable and long-lasting relationship that is commercially beneficial for both parties. They create cloud-native applications, UX designs and data platforms that help you save money in the long run. Moreover, they provide higher-level services such as product managers, engineering leads or architects to support scaling your technical management capabilities as you go.  

If you would like to know more about the benefits of working with a partner that understands software engineering and your business needs, let’s talk.

Written by

Klaus Dambeck Head of Sales VirtusLab Sep 20, 2022