What is Offshoring?
Outsourcing work to another entity outside your organization is called offshoring, and it can often be done to lower costs. India, China, Vietnam, Ukraine, and the Philippines are popular offshore locations. Due to the large time zone differences and geographic distances, most communication occurs virtually.
Offshoring pros:
- Lower labor costs – Average salaries are much lower than in North America
- Abundant talent pool – Countries have huge populations of skilled, educated workers
- Follows the sun – Time zone offsets allow 24/7 development
Offshoring cons:
- Significant communication/collaboration challenges due to time zones, distance
- Cultural barriers lead to misaligned expectations and confusion
- Higher infrastructure costs for travel, etc.
What is Nearshoring?
Nearshoring refers to outsourcing to a provider in a country that is closer in proximity and time zone. For industries like healthcare, nearshore providers often specialize in custom healthcare software solutions that meet the sector’s specific needs while maintaining close collaboration. Common nearshore locations include Mexico, Costa Rica, Brazil, and Argentina in Latin America.
Nearshoring pros:
- Minimal time zone overlap enables better communication/collaboration
- Lower cultural barriers lead to a better understanding
- Closer proximity allows some in-person visits
- Similar time zones allow real-time collaboration
Nearshoring cons:
- Slightly higher labor costs than extreme offshoring
This article will analyze if the advantages of proximity and alignment outweigh the slight premium in cost.
Communication and Collaboration
Distributed teams across vast distances are very difficult to communicate. Asynchronous communications, such as email and documentation, are the basis of offshore outsourcing. However, software development needs more real-time clarification and collaboration.
The Tyranny of Distance
What if you needed an answer to an important question about a project? For offshore teams, this may mean that you send an email and then have to wait 8-12 hours to receive a response because of the time zone difference. That delay slows progress and causes frustration on both sides.
For nearshore partners, you can call or message and receive an answer within minutes or hours. This real-time connection keeps things moving and allows for more productive collaboration.
According to a survey by Deloitte, over 50% of respondents cited communication as the biggest nearshoring advantage. The ability to talk through issues in real-time, exchange ideas freely, and make rapid decisions is invaluable.
Cultural Alignment
Cultural differences, in addition to distance, make communication with offshore outsourcing even more difficult. Different cultural norms exist regarding communication, requirements gathering, and decision-making, creating misaligned expectations between parties.
Americans have a pretty direct culture, while others are more nuanced and use more indirect communication. When cultural cues are missing, confusion and misinterpretations can occur on both sides.
Communication is better aligned because nearshore countries have more cultural context with the US. It’s a less confusing space and easier to build rapport, trust, and transparency.
Travel Costs
While distributed teams rely primarily on virtual interactions, there is still value in some face-to-face connections. However, the cost of visiting offshore delivery centers can be prohibitive.
According to data, average flight costs to India are over $1000. Combined with hotels, food, etc., the total visit cost easily exceeds $2000-3000 per person.
For nearshore locations, flights are under $500 in most cases. That allows much more frequent visits for relationship building and critical on-site reviews. More in-person collaboration leads to better oversight and accountability.
Visa Logistics
There are also more complex visa logistics associated with business travel to offshore destinations. Pre-approved visas mean more planning and more additional costs. Some countries have even gone so far as to limit laptops or data.
Visitors are much easier to obtain in the nearshore locations in Latin America. Some countries also allow US citizens visa-free entry, so if you need to make a last-minute trip, it is possible.
Talent Advantages
Access to qualified, skilled talent is critical when outsourcing mission-critical software projects. Both nearshore and offshore locations have excellent talent pools, but proximity also impacts hiring and retention.
Hiring Friction
Due to the distances involved, offshore teams are largely hired virtually. It is difficult to properly vet candidates without conducting in-person interviews and skills assessments. That lack of direct contact increases the risk of making poor hiring decisions.
For nearshore teams, clients can easily visit the delivery center to conduct multi-round interviews. It allows for a more thorough analysis of capabilities and cultural fit before the offers and reduces the risk of failed hires, which could delay the projects.
Talent Retention
Keeping good people is important for project success. However, offshore locations have attrition rates that are as high as 15 to 40 percent a year. There’s a lot of churn in employees who switch companies.
In contrast, nearshore attrition rates are more like 10–15% annually. Higher cultural alignment and proximity to the client will increase engagement and retention. That continuity means that knowledge stays in the team for a longer time.
Language Skills
Offshore collaboration is also affected by language barriers. Offshore resources speak English very well, which is not their native language. Over the phone, from a distance, nuances can get lost in translation.
In contrast, nearshore countries provide native language alignment. Nearshore resources speak native-level English or Spanish for US clients, which means communication can be natural and effective without the friction of translation.
Nearshoring on the Rise
Given the advantages around communication, costs, talent, and more, it is not surprising that nearshoring adoption has accelerated rapidly. All projections show double-digit growth continuing for the next decade.
Many leading research groups, such as Gartner, have recognized nearshoring as an increasingly popular alternative to offshoring. They recommend that companies incorporate both offshore and nearshore providers to balance cost and collaboration. This blended approach provides the best of both worlds.
Conclusion and Key Takeaways
In summary, proximity matters when outsourcing mission-critical software projects overseas. Nearshoring provides key advantages over extreme offshoring in communication, talent, cost, and oversight.
Key takeaways:
- Time zone overlap is critical – Lack of proximity causes delays/frustration
- Cultural alignment improves communication – Less room for confusion
- More in-person collaboration – Better oversight
- Eliminates friction to hire/retain talent – Continuity
- Native language abilities help on both sides of things
Offshore will continue to have a cost advantage, but nearshoring strikes the best balance of cost savings and increased probability of project success due to better alignment. As more companies realize the limitations of pure offshoring, we will continue to see massive growth for nearshoring in the coming years.
