"Internet technology first drove the growth of outsourcing away from just low-skilled roles. Now, new technology is helping bridge the gaps in communication that outsourcing can cause," says Jessica Day, Senior Director for Marketing Strategy at Dialpad. In this article, Jessica unlocks the dynamic between nearshoring, offshoring, and onshoring.
Outsourcing is a long-established practice of modern business. It was first popularized in the 90s when Kodak was among the first tech companies to outsource work to another company, in this case IBM. Since then, companies in the tech industry and beyond have used outsourcing in a variety of ways.
Why do businesses use outsourcing?
Depending on the outcomes your business wants to achieve, there are different reasons you might choose to outsource. In the example we talked about above, Kodak was looking to make use of a skillset outside of their business.
They used a kind of outsourcing that we call “onshoring” today. This meant contracting out the technical expertise they needed to a company in the same country. This approach enables companies to avoid issues relating to cultural barriers and time zone differences.
Other businesses have chosen to use outsourcing in different ways. At the turn of the millennium, it was a trend among businesses to contract low-skilled work to cheaper labor markets. Many call centers and customer service functions were contracted overseas in this way.
We call this “offshoring” and this kind of outsourcing was mostly used as a budget-cutting exercise initially. Over time, offshoring has also been used to cover skill gaps in a domestic economy.
Another popular type of outsourcing is “nearshoring”, where businesses source staff from neighboring or nearby countries. This can be due to the availability of skilled employees in these countries, or to avoid some of the cultural barriers that come with offshoring.
Offshoring vs nearshoring vs onshoring: key differences
These three types of outsourcing have different applications. Understanding the key differences between them will let you make the right choice for your business. You might end up using a combination of types for various projects.
Offshoring
When we say offshoring, we’re talking about a team of employees that works for your company from a different country. This practice dates back to manufacturers moving production facilities overseas for low-cost labor benefits.
In a modern setting, it’s more popular with IT and software development vs manufacturing companies as a way to cover gaps in internal resources. Short-term projects and labor-intensive functions especially benefit from reduced costs in offshore markets.
Nearshoring
A very similar process to offshoring, nearshoring involves employing teams in neighboring countries. These are usually territories within three time zones of your home country. For example, a Central European company that seeks cheaper technical skills from Eastern Europe.
The rise of more technically skilled employees in emerging economies has made this kind of offshoring popular. This is often used by software development businesses that want to avoid language barriers with offshoring.
Onshoring
Onshoring means employing external teams or employees in your home country. If you’re a retailer with a strong focus on supply chain resilience that uses an external team in your home country, you’re onshoring. It can also mean relocating a previously offshore department back to your home country.
Onshoring is often used to make up for expertise that you don’t have internally. When you need a large number of skilled employees, traditional hiring processes can be long and costly. So, contracting out services can be a more appealing option.
Let’s say you’re launching an app that needs customers to sign a contract when subscribing to your service. You might have all the software expertise you need but not the legal knowledge. You hire a legal team to deal with the contract and to guide you on the legalities as you work out how to do an electronic signature.
You would need a legal team that is familiar with contract law in your territory. So, onshoring would be your best choice here.
Offshoring: costs and benefits
Traditionally, the main benefit of offshoring is cost reduction. Offshoring is often a buyers' market, which means labor can be sourced at lower rates and contractors are keen to build long-term relationships.
The fact that these teams will operate in different time zones to the rest of your business can be a double-edged sword. On the one hand, this can allow for 24-hour support or round-the-clock development.
Yet, if you’re talking about a role that needs a lot of back and forth communication, this can cause problems. Offshoring is best used for either; roles that require little supervision, or for self-contained departments.
For example, let’s say you’re establishing an offshore sales team. If your sales managers and trainers are all based in your home country, you’ll waste time and resources coordinating the team.
You would need to ensure that any management or coaching for sales can be done within the offshore team. Basically, any offshore employee or team needs some level of autonomy. This will avoid lengthy delays and communication breakdowns.
Nearshoring: costs and benefits
Nearshoring is seen as the middle ground between offshoring and onshoring. You can benefit from reduced costs for skilled workers while avoiding the communication issues that come with offshoring.
Face-to-face communication across similar time zones is possible which makes managing stakeholder relationships much easier. This is important if you’re looking for more of a development partner style of relationship, which is why it is a popular choice for businesses looking to fill skill gaps in a domestic market.
For companies that are concerned about their CSAT scores, nearshoring customer service functions can work better than offshoring. We define CSAT scores as the measurement of customer satisfaction with your products or services. Having a dedicated team working in your native language can help with this.
Onshoring: costs and benefits
Onshoring is seen as the safest bet when it comes to outsourcing. This is especially useful when you’re working on projects that require high levels of data security. Being able to work directly with a local business ensures you’re working within the same legal framework.
Onshoring is also typically the most expensive kind of outsourcing. This is a relative cost though. For a new business, hiring an onshore partner to handle part of your business can be less costly than establishing a new internal team.
Outsourcing within your local economy lets you operate with known quantities and navigate an uncertain world more easily. Yet, if your domestic economy can’t provide the skilled workers you need, then you’ll need to consider other options.
How to choose the right type of outsourcing
To choose the right kind of outsourcing for your business, you need to set out what you want to achieve by outsourcing. There are some key questions you can ask yourself to narrow down your choices.
1. What is the goal of my project and how will outsourcing help me to achieve this?
2. What is the benefit of outsourcing over internal recruitment for this project?
3. How long is my project; do I need a long-term or short-term agreement?
4. Which specialized skills do I need for my project?
5. Do I need to be able to communicate continuously with outsourced staff?
6. What level of security does my project require?
Also, remember that offshore or nearshore labor markets are no more fixed than domestic ones. The conditions will change over time, so make sure you’re aware of the current situation whenever you outsource overseas.
Final Thoughts
Advances in technology have made outsourcing a much more globally accessible practice. Internet technology first drove the growth of outsourcing away from just low-skilled roles. Now, new technology is helping bridge the gaps in communication that outsourcing can cause.
Communication tech like secure instant messaging for business and asynchronous comms platforms keep evolving. This makes nearshoring and offshoring more viable for even more varied and in-depth work.
Whether you’re building a global business or establishing your first startup, you can use outsourcing as a way to help your business grow.
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