What’s the Difference Between Outsourcing and Offshoring? Offshoring and Nearshoring Definitions, and Some Tips on Choosing the Right Option for Your Project

Aug 30, 2016

The world of technology-driven businesses is so fast-paced and dynamic that sometimes you just can’t achieve workable and scalable growth in-house with a home-grown team. This often means that the only sustainable way to get the job done is to attract resources from the outside. We are, of course, referring to what many people call “outsourcing” or “offshoring”. These terms, although quite different, are confused so often that we decided to give you the simplest, clearest outsourcing and offshoring definitions to help you choose the right model for your needs.

We’ll also discuss two other models, nearshoring and remote teams, to round out our set of definitions and give you a better understanding of the world of remote software development.

The difference between outsourcing, offshoring, nearshoring, and remote teams

What’s The Difference Between Outsourcing and Offshoring?

Outsourcing is a broad term which means delegating certain business functions or projects to a third-party company located anywhere in the world – two blocks away from your HQ or on another continent.

A Munich-based digital agency partnering with a software development company located in Hamburg, where the latter develop the former’s website, would be an example of outsourcing.

There are many reasons why companies may want to outsource. Lower costs are often cited as the biggest motivating factor, though that’s not the whole story. Lack of local qualified staff, access to a global talent pool, the ability to scale fast, shorter delivery time, and the fact that there’s no need to spend time and money on recruitment are all pull factors drawing companies large and small alike into the world of outsourcing.

Offshoring Definition

Offshoring definition

Offshoring means outsourcing certain business functions to a third-party vendor located in a distant geographical location. The time difference we’re talking about here is 5–6 hours at least.

If a Munich-based digital marketing agency partnered with a Chinese software development company, we would call it offshoring.

Common offshoring destinations for both the US and Western European countries include India, the Philippines, and China. Additionally, US-based companies that outsource to Eastern European countries such as Romania, Poland, or Ukraine also serve as examples of offshoring.

Nearshoring Definition

Nearshoring definition

Nearshoring means outsourcing certain business functions to a third-party vendor located much closer to your home — usually in the same time zone or one within a couple of hours of it.

A Munich digital agency partnering with a Ukrainian development company is an example of nearshoring.

US companies commonly outsource to Mexico, as well as to many other destinations in Central and South America including Argentina, Brazil, and El Salvador.

In Europe, nearshoring relationships often form between Western European and Eastern European companies. Common nearshoring destinations include Ukraine, Poland, Hungary, Romania, Bulgaria, and the Baltic states.

Both offshoring and nearshoring have their stronger and weaker points. Let’s take a closer look at each of them to help you figure out which model will work best for your business.

Offshoring Pros and Cons

Offshoring works best for:

  • Companies that need round-the-clock tech or customer support
  • Large online platforms that need to run constant updates or maintenance work and don’t want to inconvenience their users with downtime

The Benefits of Offshoring

  • Reduced expenses due to lower production costs, salaries, cost of living of personnel, etc.
  • Uninterrupted workflow achieved thanks to the time difference between the in-house and offshore teams
  • Access to a global talent pool which makes finding professionals with the skills you need a lot easier than trying to find them at home

The Disadvantages of Offshoring

  • Time difference is a double-edged sword. Communication can get very tricky if you’re normally asleep while the offshore team is working.
  • Different work habits stemming from different cultural norms and attitudes about work can get in the way of your established business processes and will definitely require adjustments on both sides.
  • Language barriers can cause misunderstandings and wasted effort unless you and the company you work with have at least one language in common.
  • Long distances between you and the offshore vendor could make business trips a costly and cumbersome experience, especially if you need to visit your partner’s offices regularly.

Nearshoring Pros and Cons

The Benefits of Nearshoring

  • Having a small or non-existent time difference means neither you nor your nearshore partner will have to work overtime or at night to synchronize meetings or stay in touch.
  • Shorter distances between you and your vendor make business trips easy, accessible, and more affordable.
  • Sharing a similar cultural background with your partner eliminates the need to change your work habits.
  • Lower average salaries in nearshore countries can make this option preferable to trying to find personnel in your home country.

The Drawbacks of Nearshoring

  • Fewer options, since you’re limited in your selection to providers located in neighboring countries.
  • More expensive than offshoring if your business operates in Europe or the US.

Both offshoring and nearshoring share a few other risks:

  • Lack of managerial control and oversight of the vendor’s processes, which can cost you a lot of time (and money) if technology is at the core of your business.
  • Data leaks. If any corporate information is going to be transmitted to your offshore/nearshore vendor, there’s always a chance, however small, that your trade secrets will be compromised.
  • Delivery of a low quality product – an outcome that often results from the offshore/nearshore partner running multiple projects at once with the same developers.
  • Cost overages, as every change added to the final product is priced individually.

What’s a Remote Team?

The “Remote Team” model is different from other types of outsourcing in that it gives you a team of full-time developers maintained by a partner company, working exclusively on your project from an offshore/nearshore location. You manage your developers and communicate with them directly, while the partner provides support staff to handle payroll and taxes.

If you find that the risks of offshoring and nearshoring outweigh the benefits, you should definitely give working with remote teams a try.

Remote teams work best for companies that:

  • Are looking for a sustainable and flexible way to increase their development capacity
  • Need to hire experienced developers but have trouble finding them locally
  • Want to oversee the development process without intermediaries but aren’t ready to open their own office abroad

remote model, remote development team, outsourcing, offshoring, nearshoring

The Pros and Cons of the Remote Model

The Advantages of Remote Teams

  • Full involvement in the recruitment process. The vendor preselects candidates based on your requirements, and then you personally interview and approve the members of your remote development team.
  • No need to rent office space, purchase equipment, or hire support staff, as these are provided by your partner.
  • Full managerial control. You or your tech lead communicates with your team directly and manages the development process without third-party involvement or interference.
  • Better quality work. Your remote team is 100% dedicated to your project – a fact which will be reflected in high-quality code, fast response times, and a higher degree of participation from your developers.
  • Cost reduction. The salaries of software developers on remote teams can be two to three times lower than those of local engineers, meaning that you’ll save money on personnel.  

Apart from these benefits, some companies (us included) also offer Agile consulting and training, help you establish an effective professional relationship with your team, advise on project management best practices, and keep your remote team happy and motivated to work even harder.

The Disadvantages of Remote Teams

  • You need an in-house tech lead whose expertise allows him or her to run your remote development team effectively.
  • Not a good fit for short-term projects that don’t require a full team of engineers.

We hope the difference between outsourcing, offshoring, nearshoring, and remote teams is now a little clearer. If you still have questions, feel free to ask us using the contact form below.

Useful Links:

How to Mitigate Risk in Outsourcing

The Only Checklist You’ll Ever Need to Select a Reliable Outstaffing Vendor

Why Our Model Works Better Than IT Outsourcing

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