Offshoring, Outsourcing, Nearshoring, Onshoring: What’s The Difference?
When companies want to scale up their development team, the most obvious solution is to hire locally. Put out a job advert, maybe enlist a recruiter, then interview the best candidates. However, this is easier said than done.
An acute shortage of developers, combined with a continuous increase in salary expectations, has prompted more and more companies to assess their options.
A quick Google search for terms like “how to hire good developers without huge costs” or “how to scale my development team affordably” throws up some interesting results. A lot of those results use terms like “offshoring”, “nearshoring”, and “outsourcing” interchangeably.
The problem with these results is that most of the information is vague and limited. So we’ve put the answers together for you. In this piece, we’ll talk through the definitions, pros, and cons of these four headline models: outsourcing, onshoring, nearshoring, and offshoring.
Let’s start with some definitions
Outsourcing means engaging third-party vendors on a contract basis to deliver a specific deliverable.
This either means working with freelancers, or vendors who work with freelancers. This is typically the cheapest way of getting work done. However, with no control over development, the results can be very hit-or-miss. It is not considered a sustainable or long-term strategy.
Simply put, onshoring is the transfer of your software development to non-metropolitan areas within your own country. Consider a city like London: rent, bills, and wages are all much higher than the rest of the country. By building a development team in a nearby town instead, you can keep expenses a bit lower.
As the name suggests, nearshoring means ‘near’ to home, but not quite. To give an example, developers in Los Angeles are very expensive, and there’s no easy “onshoring” alternative. Good Mexican developers, however, work in a similar time zone and would with much lower costs.
Nearshoring is useful for companies who want constant, real-time collaboration with their in-house staff. For a company based in Paris, nearshoring might be done with Ukraine, who are only a couple of hours ahead.
Offshoring is nearshoring without the proximity restriction. You build an independently-functioning development team, anywhere in the world, and everyone on that team is a full-time employee of your company.
This adds a potentially awkward time difference but eliminates the risks of engaging short-term contractors. It also allows companies to hand-pick their developers, with no geographical limits. They collaborate with your in-house team, work on projects, and build software consistently.
Those are the basic differences. Now let’s dive into a bit more detail, looking at the merits and limits of all these methods.
Outsourcing: a cost-driven model
Outsourcing is a model that is usually defined by low cost. It is traditionally used by companies looking to make significant cost savings, particularly over the short term.
One perceived advantage of outsourcing is flexibility and a lack of commitment. Since the team is not permanently employed, you only pay them for the work that they do for you. If there’s a fall-off in demand, no resources are spent on idle workers. This can be a boon for businesses with less predictable capacity.
So what’s the downside?
Some outsourcing companies can offer developers for as little as 10% of what you pay at home — but those kinds of savings don’t come without compromise.
For a start, the developers aren’t your employees. They’re not bound to your company, and in reality, you won’t always deal with the developer themselves — just those organising them. These developers are probably working on concurrent projects, for clients across the globe, and are invested neither in your business nor the vision of your brand.
Low-cost outsourcing often leads to substandard delivery. Since these contractors aren’t permanent employees, it can be risky to assign them significant or urgent tasks: if they disappear, you have nowhere else to turn.
Will outsourcing work for your business?
The answer is, as always, it depends. If you need a job completed **now ****and you don’t have the in-house capacity to deal with it, outsourcing can be a life-saver. This tends to work best when there’s a strong, ongoing relationship with specific developers you can trust.
When it comes to sustainability or scaling up your development team, outsourcing is the wrong route. The main issue is a lack of control: you don’t manage the developers directly, communication can be difficult, and they could leave partway through a project.
Outsourcing has its place, but it’s no substitute for a full-time development team.
Offshoring: a more sustainable solution?
An offshore development team is a handpicked team of engineers, based in another country, who are full-time employees of your business.
That is the core difference between outsourcing and offshoring. The ideal situation would always be having everyone in the same office — but that is often expensive and difficult. The only difference between offshoring and in-house hiring is that the office space is quite far away — and in 2019, that’s not a significant barrier.
Will offshoring work for your business?
There are a lot of benefits to offshoring versus recruiting at home. You get top-quality engineers with the specialist skills you need, on a permanent basis, usually at about 50% the at-home cost.
With the right offshoring partner, you can scale up quickly and sustainably, which is a potent combination. For companies looking for growth or to engage engineers with rare or niche specialities, offshoring is a proven and powerful approach.
Onshoring and nearshoring
In reality, nearshoring is just offshoring with added restrictions.
Sharing a time zone is a nice benefit. It means that logistical challenges are, for the most part, averted. You’re also less likely to experience a significant culture gap between employees. However, what businesses gain from proximity, they often lose in talent scarcity.
The beauty of traditional offshoring is that you place no limits on who you can hire.
Onshoring is only leveraged in very expensive cities. A company in central London, for example, might situate their software team in a separate, less expensive city. While wages and premises in this “secondary” area might be cheaper, companies will still struggle to find and recruit quality engineers at a good price.
We can broadly summarise the four different models as follows:
- Offshoring — A sustainable way to build a permanent software development team, or scale your existing one.
- Outsourcing — A very low-cost way to deliver short-term or temporary projects.
- Nearshoring — Effectively a subset of offshoring.
- Onshoring — A little-used practice, similar to offshoring without the financial benefit or flexibility.
To learn more about offshoring and its applications, check out our blog.