Businesses can choose between nearshoring vs. offshoring to outsource work. The McKinsey report about “Offshoring: Is It a Win-Win Game?” shows that Offshoring can reduce costs by 45-55%, and up to 65-70% with process improvements. It also highlights the wage gap: $60 per hour for a U.S. software developer vs. $6 per hour in India.
Rising skill shortages and hiring costs are driving more companies to outsource. You can outsource tasks to lighten your team’s load. The big question is: Which outsourcing option is the best for your company?
This blog post shows the benefits and weaknesses of different types of outsourcing to help companies decide the best for their success. Let’s get started.
Table of Contents
Nearshoring, Offshoring, and Onshoring: The Best Option?
To help firms decide between nearshoring vs offshoring and onshoring, below is a table comparing the main features of the three outsourcing options:
| Feature | Nearshoring | Offshoring | Onshoring | ||||||
| 1. Geographical proximity | Near the outsourcing firm, often in the same or nearby time zones. | Long distance, often between different countries. | In the same country as the outsourcing firm | ||||||
| 2. Popularity |
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| 3. Applications | IT services, customer support, manufacturing | IT, accounting, finance services
| IT, accounting, customer services | ||||||
| 4. Key advantages |
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| 5. Key disadvantages |
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| 6. Cultural | Similar culture and business practices because of nearby locations and often shared language. | Different cultures can make communication and business practices harder. | good cultural fit and similar business practices | ||||||
| 7. Communication | easier communication because of the same working hours | problems with real-time communication because of different time zones. | easy communication with no big time zone differences | ||||||
| 8. Cost efficiency | cost savings and the advantage of being close | possibly lower costs due to economic differences, but this can change depending on the location | Typically higher costs than nearshore and offshore because of local rates | ||||||
| 9. Ease of integration | Easy to work with in-house teams because of the close cultural and geographic connections | Working together may be harder because of distance and cultural differences | Easy integration because of the same location and rules | ||||||
| 10. Best for? |
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| Local knowledge and easy communication. | ||||||
| 11. Regulatory compliance | Understanding U.S. standards and rules, especially in accounting and finance | Needs careful attention to follow U.S. standards, which can change by location | Built-in compliance with local rules and standards. | ||||||
| 12. Talent access | Access to skilled professionals who know U.S. business practices | Access to a wide range of skilled people with different specialties | Access to local talent who know the local market |
What is Nearshoring?
Nearshore outsourcing is a mid option connecting onshore and offshore outsourcing. It provides a mix of cost savings and easier communication. Here’s what you should understand:
It means hiring a company in a nearby country for your business tasks. These countries are close in time zones and may share similar cultures or languages. For US companies, common nearshore locations are in Latin America (LatAm).
Nearshoring is popular for saving money, easier communication, and fewer cultural differences. For example, a U.S. company might use Mexico or Canada for IT services.
Benefits of Nearshoring | Challenges |
| 1. Cost Savings Workers in Mexico or Argentina are often cheaper than US workers but still skilled. | 1. Checking Skills It can be tricky to check workers’ skills from afar. Using strong assessment tools or experienced hiring firms helps find qualified candidates. |
| 2. Better Communication Being in similar time zones means it’s easier to work together in real-time. Language and cultural differences are smaller compared to offshore options, making communication smoother. | 2. Finding the Right Provider Choosing a reliable nearshore partner can be challenging. It’s important to pick a company with a strong talent pool and good communication skills. |
| 3. Skilled Workers Nearshore countries have skilled, educated workers, especially in tech. | 3. Understanding Local Laws Regional rules and laws still need awareness, even if it’s easier than offshore outsourcing. It comprises agreements like the (United States-Mexico-Canada Agreement). |
According to Forbes nearshoring is rising as companies review offshoring due to carbon concerns, US-China tensions, and COVID-19. For instance, Elon Musk declared that Tesla’s plan to open a factory in Mexico highlights this trend.
Nearshoring is growing post-pandemic. U.S. companies prefer Central America and Mexico for manufacturing due to trade agreements like CAFTA and NAFTA. This approach offers easier communication, faster shipping, and lower carbon footprints. Higher labor costs are offset by shorter transit times and faster deliveries, making it cost-effective.
Understanding Offshoring
Offshoring is moving jobs abroad to save money, like U.S. companies outsourcing to Pakistan. Offshoring can reduce costs and access a different skill range. It includes:
Customer service
Software development
Manufacturing
Administrative work
The main idea is to enjoy lower costs and access to global specialized skills.
| Benefits | Challenges |
One of the major benefits is saving money. Countries like the Philippines, India, Pakistan, and Eastern European nations offer skilled workers at much lower wages than in Western countries. |
Time zone differences, language issues, and cultural differences can make communication difficult. This can lead to misunderstandings and delays, which might affect project timelines and quality. |
Offshore locations often have a large and varied pool of skills. This helps businesses find and hire skilled workers, especially in IT fields where there’s high demand. |
Making sure that the offshore team meets your standards can be challenging. It often requires strong quality control measures and regular checks to make sure the work is up to par. |
Different time zones mean your offshore team can keep working while your in-house team is off. This helps keep your business running around the clock and extends your operational hours. |
Sending data and sensitive information across borders raises security and privacy risks. It’s important to follow international regulations to protect your information. |
According to Forbes, In the 1960s, companies like General Electric began resettling operations in China to reduce costs. But the COVID-19 pandemic highlighted offshoring problems, like delays and time zone troubles. Cultural differences and long shipping distances also made the practice less sustainable and efficient.
According to HBR, In 2003, Alpha Corp. outsourced customer retention tasks to an Indian service provider to cut costs. The vendor’s inexperience with complex products led to poor results and customer dissatisfaction. This is a common issue with offshoring, where many companies fail to achieve the expected benefits.
Three common mistakes in offshoring are:
- Choosing the wrong processes offshore.
- Underestimating risks like cost increases and poor performance.
- Ignoring alternatives like local outsourcing or joint ventures.
To succeed, choose offshoring tasks, set clear metrics, and explore all options.
Nearshoring Vs Offshoring
The key difference between nearshoring and offshoring is that when a company nearshores it outsources its services to a country/location that is nearby. Whereas offshoring means outsourcing services to a (usually) far-off location. Here, the company’s focus is not primarily on the area, rather it’s finding the best talent from the global pool.
What is Onshoring?
Also known as domestic outsourcing, is sometimes preferred for its simplicity. This includes services like customer support, IT help, manufacturing, or administrative duties. According to CNN, Mary Lacity said, “It’s timely given our economic climate.”
“They’re moving people from fast food to IT jobs and letting them use their brains.”
The major benefit is that you’re working with people who are nearby, making it easier to handle the association.
| Benefits | Challenges |
Because you’re in the same time zone and speak the same language, communicating is almost as easy as working with your team. This makes real-time collaboration and quick responses simpler, with fewer misunderstandings. |
Labor costs are usually higher locally, which can strain tight budgets. |
Being close to your outsourcing partner allows you to closely monitor their work. You can meet face-to-face, visit their offices, and supervise tasks easily, ensuring high quality. |
Local talent may be less specialized and limited compared to global options. This could mean more competition for skilled workers. |
Shared cultural norms and business practices help reduce the risk of misalignment. Outsourced workers integrate with your team and understand local market trends. |
Local providers may have higher costs and offer less flexibility. |
Also, David Evans cited, “There’s a real desire to keep things onshore. There’s a backlash against offshoring. There are a lot of horror stories, a lot of jokes.”
“Now when we have a problem, we can get on the phone and talk through the issue in real time. That right there is worth the extra cost.”
According to Bloomberg, The U.S. has changed how it talks about managing national security and costs. First, “offshoring” meant moving jobs to other countries to save money. Then, “onshoring” or “reshoring” meant bringing those jobs back to the U.S. to avoid supply chain problems. Now, “friend-shoring” or “ally-shoring” means working with trusted international partners, not keeping jobs in the U.S.
People have used this term for about a year. Elaine Dezenski and John Austin said Bonnie Glick used “allied shoring” privately.
Monty Hamilton stated, “Companies are stumbling upon us, and it’s growing gangbusters.”
Which Is the Best Outsourcing Model for US Companies
For CPAs, choose nearshoring vs offshoring, or onshoring based on the company’s needs. Here are some things to think about:
- Offshoring: Good for saving costs and routine tasks, but challenging due to time zones and cultural differences.
- Nearshoring: Offers cost savings and better communication with similar time zones and cultures.
- Onshoring: Easiest communication and oversight but can be more expensive.
Zachariah Carlson highlighted, “We’re low-cost because we’re in a rural area with a lower cost of living. I didn’t have to sacrifice anything to get where I am.”
Many companies find nearshoring provides a good balance between cost and communication benefits.
Case studies
Nearshore or offshore outsourcing makes many popular daily services and products possible. For example, Google uses outsourcing to access skills and reduce costs, benefiting from extensive employee perks. WhatsApp’s early success was due to outsourcing teams in Eastern Europe, including Igor Solomennikov, who later joined full-time.
GitHub relied on onshore outsourcing for key feature development, with Scott Chacon becoming CIO after his contract work. Estonian partners developed Skype, while Slack outsourced its website and app design to scale effectively. Alibaba grew into a global marketplace by partnering with a US firm for website development, overcoming local internet restrictions, and establishing a strong global presence.
Key takeaways
- Companies use offshoring and outsourcing to enrich efficiency and manage challenges.
- Nearshoring vs offshoring vs, onshoring: the best choice depends on the company’s outsourcing needs based on your cost, skill, and communication.
- Good communication is key no matter what.
- Nearshoring saves money and simplifies communication for U.S. companies.
- Offshoring is becoming popular as it reduces costs and offers access to specialized skills, promoting innovation.
Expertise Accelerated connects you with skilled global talent, trained by our US team. We drive your growth with expert finance, accounting, and supply chain outsourcing services. We also help reduce payroll costs and enhance process efficiency. Our offshore experts stay up-to-date with industry trends. For help, book a consultation with us. Save time and let us handle your accounting. Good luck!
