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Pros And Cons Of Nearshore And Offshore Outsourcing- How To Identify The Best Partner For Your Engagement

October 26, 2020 |

Outsourcing means the hiring of a third party by a company to perform some specific services that were earlier done by the in-house employees and staff of the company. A company can outsource one or several of its non-core functions.

The functions that are generally outsourced vary from manufacturing of the smaller parts to accounting to customer service as well.

For example, a fast-food giant usually outsources its web designing and social media marketing services to a third party so that its core function of fast food production and sale is not hampered.

App development companies in Los Angeles usually outsource their customer service to a third party.

Why Do Companies Outsource?

Companies tend to outsource their work for two main reasons, the first one being cost reduction. They can save on salaries, overhead expenses, technology, and infrastructure costs by hiring a third party.

The second reason is that the company can focus on its core business and its expansion. They can concentrate on improving the efficiency of their products and their services.

Top e-commerce developers Australia have outsourced their payment portal handing to a third party and this has made the payment process much easier for customers and the company sales are now shooting up.

Software developers in America have outsourced their marketing partners and this has led to faster turnaround time. Competitiveness within the app development sphere has increased a lot and the companies have also reduced their operative cost.

Outsourcing saves time as well. A fine example of this is the e-commerce industry has hired another firm to handle its logistics. Therefore, the delivery time of goods has reduced drastically, causing an increase in customer satisfaction, and the overall revenue of the company is increasing manifold. This has given them a competitive edge over others in the industry.

Some Advantages And Disadvantages Of Outsourcing

Outsourcing is a common practice of industrial giants now because it enables huge cost-cutting. It enables savings on salary overhead, infrastructure, and operation costs.

It also enables the company to focus on its core business and divert all the available resources into business expansion.

As an example, eCommerce development Canada has hired a third party for handling its logistics. This has allowed them to focus on quality, volume, and increasing their market share.

In most cases, a lack of communication between a company and the outsource parties delays the project. This may be due to time differences and cultural differences as well.

Web development firms Chicago had earlier outsourced their customer service to southeast Asian countries but the language and time differences have forced them to hunt for outsourcing partners in eastern Europe.

There may be security issues when an outsider has access to your internal data. Sometimes this leads to a loss of domestic jobs which has caused a lot of changes in government policies and laws regarding labor.

Some Predictions For The Future Of Outsourcing

  • Small businesses and start-ups will actively take advantage of outsourcing and provide Asian solutions so that they themselves can survive in the system.

  • Critical business functions will also be included in the outsourcing job list.

  • Rapid cloud computing will make its development and technical support to be completely outsourced in a few years’ time.

  • As an industry, outsourcing is going to increase in volume, thereby causing a boom in the growth of small businesses and start-ups.

Two Types Of Outsourcing

1. International outsourcing or offshore hiring benefits a company due to the difference in labor costs in the two countries.

Production cost is usually cheap in developing countries, so a company relocates a part of its business to a foreign country in order to increase its profit and also for its survival within the industry.

Hence, for all these reasons, the top web development companies in New York outsource their call service centres to international parties in cheaper countries.

2. When a company hires a  partner for a particular function from an adjacent country with similar language and culture it is termed as nearshore outsourcing.

The two partners are nearly in the same time zone and have similar work culture. Near-shore partnerships allow some cost-cutting and the added benefit is that proximity to the client allows more site visits and better communication.

Due to this, any changes or up-gradation can be decided quickly and implemented fast.

As an example of nearshore outsourcing, app development companies, Los Angeles have hired call centres in Mexico for handling their customer service centres.

This has helped them to ease communication barriers that existed when they were partnering with Asian countries. Since both the possibilities of hiring a partner have some advantages and disadvantages, a detailed study of them is needed.

Some Of The Basic Criteria On Which You Should Choose Your Outsourcing Partner

Cost-effectiveness, time-saving, efficient communication, convenience and collaboration and different time zones are few of the basic criterias to choose your outsourcing partner.

Which outsourcing partner is appropriate will depend on what function you want your partner to perform. If you want to outsource software development as some top web development companies in New York have done, then hiring an international partner will give you the lowest labor charges but chances of miscommunication and production delays are very high. On the other hand, local partners will charge you a very high rate.

Now, comparing the cost involved and the efficiency in communication in the two cases, we see that hiring a near-shore party is the best option here. Labor cost is considerably less while communication is regular and easier, and travel costs are much lower as well.

Some of the mobile app developers in California have outsourced to Mexico because it allows shorter travel time, and being in similar time zones, production delays are reduced as well.

Some of the government regulation policies are similar in both countries, so that will give new and added benefits. Considering the costs involved, time saved, ease of communication, and government policies, Mexico ranked better than Asian countries.

So basically, choosing a third party for performing specific tasks that are a part of your company’s business depends upon your requirements and priorities first and foremost.

If you want quality products, generally all companies are very competitive today and will willingly put their best efforts into satisfying a client.

If you are working on a restricted budget, then an offshore partner is the best choice. But if you prefer similar work ethics then an onshore partner will be more preferable.

Advantages & Disadvantages Of Nearshore Hiring

The Pros

  • No Language Barrier – It allows communication to be easier and more effective. Decision making can be quicker.

  • Similarity In Culture – Similar cultural values and work ethics help in proper collaboration and in the development of solutions that are workable in that culture.

  • Close Proximity – Nearness to the hired partner allows frequent site visits and team meetings which also enable quicker problem solving and easier collaboration.

  • Cost Reduction – Investment is reduced when compared to having a full in-house team, without compromising on the skills of human resources.

  • Similarity In Time Zones – This means no shift adjustments, night shifts, or overtime. This allows the synchronizing of online meetings very easily and increases collaboration among partners.

The Cons

  • Technical Skill Gap – Availability of resources has always been a problem. Your outsourcing partner might have a technical skill gap similar to what your company is experiencing as well.

  • Underdeveloped Industry – Sufficient number of expert service providers may not be available in that country. Even if they have it may not match your desired skill level, and choosing the right partner may be difficult as well as time-consuming.

  • Cultural Differences – Some cultural differences always arise as annual holidays vary from country to country, ultimately causing a slowdown in productivity.

  • Political Instability – In some cases, political instability in your partner’s country may cause a hindrance to efficient collaboration and reduce productivity. An unstable government means unstable policies which will definitely mean renegotiation and re-establishment of the whole partnership process.

Advantages & Disadvantages Of Offshore Hiring

The Pros

  • Cheap Labor – It offers the cheapest hourly labor rates. International partners, especially the ones in Southeast Asia, have the cheapest labor rates, hence there is a huge reduction in costs.

  • Flexible HR – It offers you multiple resources to choose from according to your choices and communicating with them becomes easier.

  • Time Zone Differences – Time zone lag actually means round-the-clock working. It means that when you are asleep a part of the work process is on. Effectively speaking, this increases the company’s productivity and gives it a competitive edge. Mobile app developers in California outsourced their marketing to third parties, which has led to faster turnaround time.

  • Availability Of Talent Pool – A massive talent pool of specialized, trained, and certified professionals are ready to work at the lowest rates

  • Simple Contracts – When you are hiring an offshore partner no significant long-term contracts are needed. This reduces the legal procedures and time is saved.

  • Flexibility In Hiring – It allows you flexibility in hiring staff or changing them according to your needs.

  • No Relocation Needed – Relocating becomes unnecessary, thus saving a lot of expenses.

  • Focus On Core Functions – An offshore partner will reduce your cost so you will be able to focus on your core business and then plan for expansion with the saved budget.

The Cons

  • Cultural Differences – Culture gap between partners is a big drawback because it hampers communication and so goals are not met properly.

  • Accented Language – Difference in accent also causes miscommunication, thus decreasing efficiency.

  • Difference In Time Zones – Due to time zone lag, communication time is highly reduced which hampers effective planning and problem-solving

  • Cultural Differences – International partners may have different annual leaves holidays and labor laws which causes unnecessary delays in production. As a chain effect, cost also increases along with the delay.

  • Distance – If any problem arises, travel time is huge and costly so again problem-solving is delayed.

  • Security Issues – To prevent security breaches, a careful assessment of the data that you have shared with your partner is to be done.

  • Control Of The Project – Following up on the daily progress and synchronization of the deadline becomes difficult due to the geo-demographic differences.

  • Hidden Costs – Taxation and other hidden costs are different in all the countries. So hidden expenses need to be considered before the escalation of the budget.  In some cases, offshoring is simply not feasible. For example, if the top e-com developers Australia outsourced salary payments to any Asian country then it would be a complete disaster. Any sudden change in the policies in the other country may lead to an increase in budget.

Some Examples Of Outsourcing – Nearshore Or Offshore outsourcing

  1. Business Process Outsourcing
  2. Professional Outsourcing
  3. IT Outsourcing
  4. Manufacturing Outsourcing
  5. Project Outsourcing
  6. Production Outsourcing

Business Process Outsourcing:

This is when a third party handles a part of the business process. These include repetitive tasks like customer support and in-house training. Customer support is usually conducted by offshore partners while in-house training is done by hiring nearshore parties.

Professional Outsourcing:

This includes jobs that need additional training for professional licenses. A Web development firm Chicago hires nearshore partners for their accounting and bookkeeping. Marketing strategies are more often handled by offshore parties.

IT Outsourcing:

Either a part of the tech-related services or even the whole InfoTech function is usually outsourced. Nearly all big businesses go for offshore outsourcing for the whole IT section while smaller start-ups prefer nearshore hiring due to the smaller size of their project.

Manufacturing Outsourcing:

Outsourcing the manufacturing of small parts is always cheaper. Most US smartphone giants have hired manufacturers in China for the production of the peripherals. The final assembling and production of the major part are always either done in-house or given to local partners.

Project Outsourcing:

Short on-demand projects are usually handled by nearshore partners. Legal firms hire local lawyers to meet their short-term workload. But an ecommerce development Canada company outsources their overseas logistics to offshore parties due to the time saved and the amount of managerial control that is needed.

Production Outsourcing:

This includes all jobs like cleaning inventory companies, transport fleet operation, etc. is outsourced to other parties. These jobs are usually outsourced to local or International partners depending upon their size and scale and also upon the companies’ budgeting process.

The Endnote:

Whether you hire a local partner or an international partner, both have their own share of advantages and disadvantages. Depending upon what your requirements are and what you want to achieve, you should finalize your third-party hiring process.

Always remember that what works for others may not work for you. Factors like cost, communication, skill, and available technology should be the criteria for choosing an offshore or nearshore partner.

Other factors like the reliability of the third party, the financial stability of the party, and even existing government policies should be considered before you finalize a third-party partner.

Some countries offer free trade zones and tax incentives and have policies to boost export services. Such advantages should also be taken into account because they considerably reduce the operational cost.