Globalization has opened up new avenues for businesses to shift some of their operations to a different country. You can nearshore to a nearby country or consider relocating to a far-off one with offshoring.
But what are the differences between nearshoring vs offshoring?
In this article, we’ll make a comprehensive comparison between both models.
This article contains:
(use the below links to jump to a specific section)
- Nearshoring vs Offshoring: a Detailed Comparison
- Pros and Cons of Nearshoring
- Pros and Cons of Offshoring
- 3 Key Factors to Help You Decide the Right Shore for Your Business
- How to Manage Nearshore and Offshore Teams
Let’s dive in.
Nearshoring vs offshoring: a detailed comparison
If you’re a small business owner, you may often have to consider staff augmentation — an outsourcing strategy used to staff certain projects that require additional skills.
In the process, you may get confused between terms like nearshoring, outsourcing, and offshoring. They all refer to the practice of conducting business operations away from your company.
Want to explore the differences between offshoring and outsourcing?
Read our offshoring vs. outsourcing guide.
In this article, we’ll look at the differences between nearshoring and offshoring.
Nearshoring involves moving all or some of your business operations to a nearby country. The nearshoring country may share common aspects like time zone, culture, language skills, etc., with your home country.
Read more about how nearshoring services can help your business.
Offshoring involves transferring certain business operations like production or services to cheaper, generally developing countries. This business process aims to minimize the manufacturing costs as well as the costs of other supporting services.
Here’s the difference between the two business processes in terms of location, workforce, and costs.
|Location||Nearshoring is done in a nearby country that may or may not share a border with your home country.|
For example, a company located in North America can nearshore its manufacturing operation to a country in Latin America like Mexico, Costa Rica, etc.
|Offshoring is carried out in a distant country, usually in a different timezone. |
For example, North American companies may offshore software development projects to a country in Asia (like India) or Eastern Europe (like Poland.)
|Workforce||The workforce may be well versed with the trends and requirements of your business — since they may have a similar business culture. |
They can easily understand what is needed to complete the project as per the market expectations.
|The employees in a distant location may not understand the exact needs and culture of your company.|
However, you can use various communication and collaboration tools to help them understand the project requirements.
|Cost||The cost of labor and goods may be higher than offshoring. But nearshoring may reduce additional costs such as travel, transport, etc.||The goods and labor costs are significantly cheaper in an offshore country, but other expenses like travel, shipping, customs, etc., may be higher.|
Pros and cons of nearshoring
Nearshoring is a good way to keep your business operations closer to home. Let’s take a look at the major benefits and challenges of nearshoring.
Some nearshoring advantages include:
1. Time zone similarities
The geographical proximity of a nearshore country gives it a huge advantage over a distant country.
Similar time zones enable your nearshore partner to work along with their colleagues in your home country. This ensures real-time updates regarding project status and timely decision-making for the resolution of any problem.
It also reduces the need for late-night shifts for the employees, leading to a better work-life balance and job satisfaction.
Additionally, you can make a quick trip to the nearshore location if any issues pop up or for a follow-up. Nearshoring to a neighboring country means significantly lower travel costs and durations.
2. Cultural affinity
The nearshore country may have cultural similarities with your home country due to its geographical proximity. These similarities may be in terms of language, business culture, work ethics, holiday seasons, etc.
Cultural similarities can unite the in-house and nearshore teams and may result in better team bonding and collaboration.
3. A vast talent pool
Developing countries such as Mexico, Uruguay, etc., that offer nearshoring services, have a large population of young adults.
Additionally, their governments have been working a great deal on improving the standard of education, providing research and innovation opportunities, etc.
This helps generate a large talent pool for various services like nearshore software development, supply chain management, customer service, finance, accounting, etc.
4. Shorter supply chain
Moving operations such as manufacturing to a nearshoring partner can significantly reduce supply chain issues.
What does it mean for your business?
A shorter supply chain means:
- Faster, cheaper, and more reliable delivery.
- Decreased production cost.
- Shorter lead times (time between starting and completing a production process).
- Reduced transportation expenses.
- Flexibility during uncertain times such as a natural disaster, the COVID-19 pandemic, etc.
While the advantages may make nearshoring the go-to choice for many western companies, there are certain challenges that you need to be aware of.
Here are two major issues of nearshoring:
1. Fewer choices
Not all nearshore countries might offer the service that you require.
Additionally, there may not be enough candidates with the level of expertise you require for your project.
2. Differences in traditions
There may be significant cultural similarities amongst various neighboring nations.
However, each country has its own cultural discrepancies specific to only that geographical location.
For example, Latin American countries share some festivals and holidays with the United States. However, some holidays like Dia de Los Muertos (Day of the Dead), Mistura, etc., are specific to a particular country and might not be observed in the US.
Pros and cons of offshoring
If you’re considering offshoring your business operations, here are its benefits and challenges.
Let’s look at the three main benefits of offshoring:
1. Entry into new markets
Offshoring to different countries can help you work closely with industry experts from those countries.
They can help you easily enter their local markets and even gain insights about how the market works, what people want, etc. This can substantially enhance the growth of your business model.
2. Highly talented candidates
Most offshore countries have many professionals graduating each year.
There will be plenty of candidates to fill your requirements and ensure that you will rarely have a shortage of employees.
Popular countries for offshoring may also offer specialized expertise or benefits such as:
- Information Technology (IT) services for custom software development.
- High level of English fluency, which is beneficial for customer support.
If your business involves multiple specialized processes, you can offshore one particular operation to a country and another one to a different country. You’ll be able to get the work done by some of the best professionals and at a significantly lower cost of labor.
3. Continuous work and development
While the time difference may seem like a possible drawback of offshoring, you can make full use of it with accurate planning.
For example, let’s say you have a software development team working in the US and a hardware outsourcing company in China.
The US team can submit the software for a test run on the hardware. The team in China can test it to identify and report potential bugs while the software team sleeps.
Similarly, the software team can fix the issues and have them ready for the hardware before they wake up. This will ensure that you have someone working on your projects 24/7.
Offshoring may seem like a very cost-effective strategy. However, there are some issues about offshoring that you may need to address.
Here are a few of them:
1. Distance and communication barriers
Having offshore partners on another continent may make it quite challenging to have frequent physical meetings.
The cost and time spent on traveling can be significantly high.
Additionally, time zone differences and language barriers may make communication with offshore teams tricky. The development team may not be able to communicate the issues faced during a particular task in real-time, leading to project delays.
And if the offshore team doesn’t speak your language, you’ll have to limit yourselves to English. But if English isn’t their strong suit, it can lead to communication gaps.
2. Cultural difference in teams
Different countries have different work habits, cultures, and ethics.
These cultural barriers may cause a rift between the offshore team and your home team, and may hamper the workflow.
3. Shipping issues
A major hurdle for your offshoring production facility may be the extremely high shipping costs.
Additionally, overseas shipping can create other logistical issues for manufacturing, such as:
- Delays in delivery due to restricted traffic movement, bad weather, etc.
- Legal constraints in customs processing that can take a few weeks or months to resolve
- Other disruptions in the supply chain.
All these concerns are applicable to air as well as ocean freight.
3 key factors to help you decide the right shore for your business
Nearshoring and offshoring both have their pros and cons.
So how do you choose the right shore for your needs?
In addition to proximity and business needs, there are some other factors that you should consider before nearshoring or offshoring your business operations. Let’s take a look at the important ones:
1. Domain knowledge
The employees you hire, or the company you outsource your operations to, should have excellent knowledge about your industry and the domain.
With the ever-growing and changing technologies, it’s essential that your nearshore or offshore team is capable of handling and implementing any new technology.
Additionally, changes in administration, shifting to different locations, etc., should be a smooth process. It shouldn’t affect the workflow or project delivery timelines.
Cost reduction is certainly an important consideration while selecting your business strategy. However, a lower cost doesn’t mean you have to settle for lower quality services or products.
For your remote team to be cost-effective, they should deliver high-quality products or services at reasonable rates.
Considering these three variables, you can decide whether to nearshore or offshore your business.
In a nutshell:
You can offshore straightforward projects or processes where you don’t require a lot of real-time communication.
For example, you can offshore customer support since you can specify the script, tone of speaking, language proficiency, etc., to an offshore outsourcing company. The outsourced team will handle the logistical aspects like hiring, training, and assessing their agents.
However, nearshoring would be an appropriate solution for companies with tasks that need on-the-spot changes or have a greater need for close monitoring.
For example, let’s say you have a company in Western Europe with unique software projects that need real-time updates from the remote software development team. You could nearshore it to a country with similar time zones and work habits.
This will help you work on the issues and challenges quickly and have faster turnaround times for projects.
How to manage nearshore and offshore teams
Whether you choose nearshoring or offshoring, you’ll have to handle remote work. This makes smooth and effective interactions between teams essential.
Your remote team should have efficient communication and collaboration skills.
You can also use time and performance management tools like Time Doctor to monitor whether your offshore or nearshore team members are productive during work hours.
What’s Time Doctor?
Time Doctor is a powerful employee time tracking and performance management tool used by various major companies as well as by small businesses to enhance their productivity.
You can use Time Doctor to:
- Track employee time to accurately calculate billable hours.
- Manage projects and budgets for maximum efficiency.
- Pay your onshore or offshore employees directly using payment methods like PayPal, Gusto, etc.
- Use detailed productivity reports to determine whether employees are productive or unproductive at work.
- Integrate with your existing business tools like Asana, Google Apps, Trello, etc., using Time Doctor’s robust Chrome extension.
While offshoring and nearshoring can sound similar, they are two different business strategies — each with its own benefits and challenges.
With nearshoring, the focus is on moving operations to a destination that’s close to your business while offshoring involves moving it to a distant location.
If you’re confused about whether you should go for offshoring or nearshoring, use the information we covered here to see which model fits your needs best. Once you’ve found the answer, it’s only a matter of moving your business operations to the right shore.
Andy is a technology & marketing leader who has delivered award-winning and world-first experiences.