Farshoring vs. Offshoring vs. Nearshoring – 3 visions of IT Outsourcing
Software development outsourcing has been big news for quite some time now. Browsing the internet you can easily find out when to do it, how to do it and whether you should do it all.
Looking for qualified IT specialists for your business is considered a somewhat antiquated idea – as well as a massive waste of time, money and energy. This is the very reason, why software outsourcing is becoming the norm for forward-thinking organisations, aspiring to get ahead with their tech.
Yet, when embarking on a software development project, many factors need to be taken into consideration – not least, the location that your developer will be based in. These days, looking for IT specialists for your business is considered a somewhat antiquated idea – as well as an expensive one. It’s for this reason that outsourcing is fast becoming the norm for forward-thinking businesses looking to get ahead with their tech.
Hence, outsourcing can take a number of different shapes and this is what we’re going to talk about in this article.
What is IT outsourcing?
Software development is a complex and highly competitive field, thus finding the right developer for your project can be quite challenging. Due to this fact, more and more organisations use the IT outsourcing model, which offers increasingly comprehensive services and functions, i.e., improving complex processes and operations in many industries.
Put simply, outsourcing is the process of engaging a third party to take care of your software development requirements. The point is to transfer highly specific tasks and projects to external companies or remote teams. By doing this, you commission and pay for specific projects, rather than hiring your own team on a full or part-time basis. Hence, there’s an increase in the competitiveness of a given company, by significantly reducing the cost of running a business.
Cooperation with an outsourcing company allows brands for much greater flexibility and faster response to the ever-changing business environment. Thus, every day more and more enterprises are deciding to benefit from the multitude of benefits that outsourcing development can bring – and, according to the report by the Global Sourcing Association, we can expect to see a huge peak in 2020.
It’s worth to mention, that this model of business cooperation has no restrictions on the location of both the service provider and the Client’s company. However, based on the distance between the parties, we differ three basic types of outsourcing service, which are: offshoring, nearshoring and onshoring. Let’s highlight the basic differences between them.
One of the most popular types of outsourcing – and the one that you’re probably familiar with – is farshoring, also known as offshoring, or the offshore outsourcing. However, it’s probably good to know that the farshoring beginnings are as simple, as the greed for quick profits.
The point is, in the search for the best price for the service, companies often decide to source their software development requirements to the far-flung location, hiring remote employees from the Middle East, India or China. Thus, expensive services provided by local contractors are being gradually replaced by working with specialists from locations with lower operating costs.
The benefits of doing this revolve very much around the price – materials and labour are much cheaper in countries such as these; leaving the enterprise with more budget-free for other projects. Consequently, offshoring has the potential to increase the company’s income.
Although there may be cost savings, this process is not without its issues. Some of these are:
- Language barriers – offshoring often involves dealing with developers whose first language will not be the same as yours. Cultural background (i.e. additional holidays), and far location might impact the quality and frequency of the crucial updates as well. This, however, doesn’t mean that you will be unable to communicate effectively, but you need to take that into consideration
- Time zone issues – by its very nature, farshoring means that when you’re in the office at 9 am looking for an update, your developer may be asleep. Many businesses who choose to offshore often find themselves working unsocial hours, just so that they can remain in contact with their development team
- Custom issues – speak to any company that has used offshoring, and they’ll almost certainly have a list of frustrations including customs problems, country taxation issues and more. When doing business with another country, there are likely to be many rules and regulations (both cultural and legal) that you’re not aware of – which can lead to delays and added expense.
As you can see, choosing the cheapest solution is not always the best. High risk, less stable economic and political situation in the provider’s region, as well as large cultural differences and communication problems, make more and more investors run away from Asian markets. As a result, they are more willing to opt for offshoring the services to the European developers.
The polar opposite of offshoring is onshoring. Here, the process is a lot more straightforward. Essentially, onshoring is the act of sourcing a supplier within the same country as your main business. For example, a company in London may source a software developer in Liverpool to complete a project.
By choosing a developer outside the capital, prices will often be lower. As well as cost savings, there will be no issues with language barriers, extra holidays, different time zones or other cultural-related obstacles, making communication much easier. Although the generated savings are usually not as significant as with offshoring; in terms of convenience, this is a proven solution.
The last – and increasingly popular – method of outsourcing attempts to reap all the benefits of both options, whilst minimising the issues. Analogous to offshoring, nearshoring involves sourcing software development services from a different country. The difference here is that nearshoring targets regions that are only a short distance away, both geographically and culturally.
This means that businesses are able to take advantage of lower costs without the hassle of different time zones and language problems. Hence, companies from Western Europe are more likely to cooperate with the developers from the region of Central and Eastern Europe, and American or Canadian brands will seek partners in Mexico or South America.
For example, a business located in Great Britain or Germany may source a software developer in Poland. In this instance, those countries are only a short distance away, and there are fewer language and cultural barriers to overcome. So, the Client doesn’t have to adapt to a different mentality or organisational and legal culture.
Another undoubted advantage of nearshore outsourcing is a much lower risk among the clients, compared to the offshoring model. European markets, especially the ones located in Eastern Europe (i.e. Poland, Ukraine or Estonia) are more stable, offering well-trained specialists, among whom a much larger percentage speak English fluently than in Asian countries.
The other benefits of nearshoring are:
- Competitive skills – Countries such as Poland have a phenomenal talent base of software development staff. Nearshoring opens access to experts in their fields who aren’t new to modern technologies and most probably gained a lot of experience by dealing with projects similar to yours
- Cost-effectiveness – You can gain great specialists at a reasonable price. Labour costs in Poland are still significantly lower compared to Germany, Great Britain, or Sweden. Although they are still higher than in Asia, the quality of service/price ratio is strongly speaking in favour of nearshoring
- Smooth communication – For obvious reasons, companies tend to choose regions in which English is popular with the potential employees. That’s why more and more of them have already chosen Poland, which is ranked in the 11th place among countries whose citizens speak English best as a non-native language
- Similar culture – Nations, which are in close proximity to one another usually have very few language and cultural differences – which makes communication much more straightforward. Mutual understanding translates into better, more efficient cooperation
- Proximity – It stands to reason that you may want, at some point, to visit your software developer for a face to face meeting. Nearshoring caters for those who appreciate or need frequent communication and personal visits. For example, countries in Europe tend to be fairly accessible and time zones vary only by an hour or two in most cases. This is a strong contrast to spending 10+ hours in the plane to visit your offshoring partner
- Data security – Regions that are members of the European Union are covered by the same data protection regulations, so the risk of data security is significantly reduced. Asian countries have not imposed such stringent standards on the security of information provided by foreign investors
Nearshoring is a highly cost-effective solution, which allows for cost optimization of the service by delegating some tasks to a remote team, yet providing you with an adequate level of control over the external employees. What’s more, it allows for flexible management of central resources, depending on the specific needs of the client. Such a model can be successfully used for companies from various market sectors, with different geographic structure and requirements as to the allocation of the service provider’s resources.
How do you make a decision about outsourcing software development?
Making the right decision all depends on your needs and your budget. Many brands are now adopting the process of ‘rightshoring’ or ‘bestshoring’ where different business needs are sourced from different countries in order to take advantage of the best talent and the best price.
So, what factors to consider when choosing an outsourcing partner?
- Budget – how much do you want to pay for your software development and what are the ‘extra’ costs involved in outsourcing? It’s also important to determine the degree of commitment of each party
- Communication – how involved do you want to be in the project and how important is regular communication to you? The quality of the results of any cooperation is largely dependent on whether we have a smooth flow of information, making communication an issue of great importance when choosing an outsourcing partner
- Cooperation – Cooperation with a remote team requires an appropriate action, especially while deciding on offshoring or nearshoring. Always set the project delivery dates and common goals. At the very beginning point out the need for performing so-called project statuses (like daily statuses, regular meetings or video conferences) by each party
- Culture – how important it is to have a similar culture and work ethics?
- Talent – is there a specific talent required for your project and, if so, have you researched the best place to find that talent? Also, before you make a final decision, check the certifications and experience of your potential IT partner. Always verify, if the team has the competencies you need to deliver the project
- Trust – Are you able to trust the external company? If you are worried about disclosing the confidential data, or you are afraid that it will be transferred to someone else – write an appropriate agreement. Or learn more about overcoming the fear of outsourcing.
Nearshoring vs Offshoring vs Onshoring – which one to choose?
When considering a software development project, you need to do your research to make sure that you know what’s involved in each option. For example, if it’s important for you to be able to have a close relationship with your software developer, then onshoring or nearshoring is probably the right option for you. On the other hand, if the price is your sole concern then you may want to consider offshoring.
Currently, nearshoring is considered the best solution on the market. It allows for more frequent team meetings – so any issues can be discussed (or fixed) basically in real-time. The proximity of nearshoring teams allows you to travel, does not create any visa requirements, and simplifies online communication. It’s usually the same time zone, so you do not have to plan meetings outside business hours.
We advise you to take a good look at the outsourcing team – and the whole company – that is supposed to develop a tailored solution for you. Take some time and find the answers to all the questions in your head before making a call for cooperation. Try some conversations with the chosen member of the team, go through the company website, blog, people section, and make yourself familiar with its working policy. All that will help you to better prepare an agreement with the provider.
Whichever option you decide is right for you, it’s important to know all the facts before making the final decision, by comparing the pros and cons of each model of cooperation. Or, if you need more practical information related to IT outsourcing, we encourage you to have a look at our 2021 guide about Software Development Outsourcing.