The Pros and Cons of Nearshoring and Offshoring vs. Outsourcing

Phoenix, AZ, June 21, 2022 –DIGITANITY. Tech talent is in high demand, but even some of the biggest brands in the world are cutting staff as post-pandemic pressures force them to find ways to keep costs under control.

Consider streaming giant Netflix. Not surprisingly, the company saw massive growth during the pandemic as staying at home became the norm. But as public restrictions began to ease, viewership began to drop. Netflix raised prices in response, but this accelerated the shift to other streaming services. Now, the tech company is laying off at least 150 employees, 2% of its total workforce. Businesses such as entertainment service Cameo and fintech firm Better have announced more significant cuts: Cameo is laying off 25% of its staff, while Better has cut 50% since December 2021, falling from 10,000 to 5,000 employees.

The challenges don’t stop there. As economies stabilize and businesses get back on track, companies that have laid off staff to control costs will find themselves seeking IT pros again — only to find that the growing skills gap makes this no easy task.

The result is many companies turning to alternative staffing options to bridge the gap between critical skills and available budgets. For example, outsourcing remains a popular option to bolster staff, but new options have emerged — nearshoring and offshoring offer a different approach to staffing challenges that may be a better fit for organizations.

Nearshoring, Offshoring, and Outsourcing: What’s the Difference?

Outsourcing is familiar to most customers and companies as the practice of hiring a third party to complete a specific function or offer a specific service. For example, outsourcing IT might take the form of managed services, where companies contract an experienced third-party vendor to provide help desk support, data analytics, or security expertise.

Offshoring is often conflated with outsourcing, but the two aren’t the same. Where outsourcing isn’t dependent on location — outsourced partners can be located anywhere in the world, including your own country — offshoring specifically refers to work done in a different country, often to leverage cost, staffing, and efficiency advantages. Offshoring work can be done by a third party or a satellite office of the company itself.

Nearshoring is similar, the difference being that countries closer to business headquarters are preferred. For example, a company in Greece doing work in Bulgaria via a satellite office or outsourced partner would be considered nearshoring. Moving operations further afield to locations such as India, meanwhile, would be considered offshoring.

The Pros and Cons of Outsourcing

Outsourcing has become a popular option for companies looking to expand the scope of their technology development and deployment without breaking the bank. By working with an outsourcing provider, organizations gain access to a host of tech talent that helps fill existing employment gaps.

Outsourcing Benefits

• Easy setup. Outsourcing organizations make it easy for companies to quickly access tools and talent since they handle all the setup and staffing.

• Simple scalability. Since outsourced staff aren’t full-time company employees, companies can quickly scale up outsourced IT teams as needed to meet specific timelines or complete key deliverables.

Outsourcing Drawbacks

• Lack of control. While outsourced IT talent works with your organization, they fall outside of your operational umbrella. This means that to complete key projects, outsourced staff need access to critical assets and documentation but are outside your direct control, in turn creating a potential security risk.

• Poor customer perception. Customers and stakeholders often have a poor perception of outsourced operations, meaning companies must expend additional effort to ensure stable and open communication.

The Pros and Cons of Nearshoring and Offshoring

Nearshoring and Offshoring Benefits

• Reduced costs. Staffing, office space, and infrastructure costs can be significantly reduced simply by crossing borders, making nearshoring and offshoring a cost-effective choice.
• Increased productivity. Nearshoring and offshoring in disparate time zones can bolster productivity across the organization.

Nearshoring and Offshoring Drawbacks

• Local regulations. Depending on local business regulations around IT contracting, foreign investment and taxation, offshoring and nearshoring may come with regulatory complications.
• Cultural barriers. Lacking a local team on the ground, cultural barriers can hinder efforts to get new offices up and running.

Getting the Best of Both Worlds with BOT

The build-operate-transfer (BOT) model is a best-of-both-worlds solution that combines the biggest benefits of outsourcing with the advantages of offshoring and nearshoring.

Under a BOT model, companies create operational subsidiaries in near- or offshore locations that are entirely set up and managed by a local provider. In other words, a trusted, local third-party builds and operates these subsidiaries in alignment with company processes, policies, and operational goals. What sets the BOT approach apart from outsourcing is the “transfer” aspect — after a specified period of time or when specific goals are reached, ownership of the subsidiary is transferred to the company. This allows organizations to access the speedy setup and deployment of outsourcing models while retaining the control and confidence that comes with near- and offshoring approaches.

Ready to build out your business with BOT-based nearshoring and offshoring?  We’d love to hear from you.