Nearshoring vs. Offshoring: Choosing an Ideal Technology Delivery Model

Kim Strumwasser
Blog Post
March 14, 2024
Nearshoring vs. Offshoring: Choosing an Ideal Technology Delivery Model

Deciding to outsource technology is a pivotal step, but selecting the optimal outsourcing model is even more vital to organizational success. It is important to carefully evaluate each option by weighing the advantages and potential challenges; this thoughtful consideration ensures the chosen model best aligns with specific needs. What works for one organization may not be a fit for another.  

The offshoring model, a proven solution to many organizations, and the nearshoring model, which, according to Bloomberg, 80% of North American companies are considering adopting, present distinct capabilities. Below are high-level benefits and challenges commonly associated with each model.  

Nearshoring Benefits

Nearshoring involves outsourcing business processes or services to a nearby country typically located in the same region or continent, like U.S.-based organizations choosing to nearshore in Latin America or Canada. Bloomberg highlights the cost savings that can come with nearshoring, noting that skilled tech workers in Latin America make approximately $20,000 less per year on average compared to Asia-based hires, and anywhere from 20-40% less than U.S.-based rates. In addition to potential cost savings, organizations considering nearshoring as the source of their technology delivery should not stop there. Additional benefits to nearshoring include:

  • Location: Being close in proximity to a nearshoring partner provides more direct, and less costly, travel options for any necessary face-to-face meetings. Additionally, Canada and Latin American countries are in similar time zones, creating quicker turnaround times for real-time communication and productivity.  
  • Communication and Collaboration: Nearshore locations, specifically in Latin America, tend to prioritize English proficiency within their academic curriculum. This minimizes language barriers and misunderstandings across communication platforms and facilitates smoother project execution and management.  
  • Regulatory Compliance: Nearshore locations tend to have similar regulatory frameworks and data protection laws as the U.S., making it easier to maintain compliance within legal requirements. As tech companies in the U.S. have outsourced to Latin American countries for over a decade, they have only continued to become more familiar with regulatory compliance requirements in the U.S.
  • Flexibility and Agility: These are key benefits of nearshoring, especially when leveraging a broad base of subject matter experts in technologies like AI (Artificial Intelligence), cloud computing and DevOps. Nearshoring allows organizations to scale their talent pool quickly, benefiting from immediate response times due to the close proximity of the talent base. This means that as project demands fluctuate, companies can easily ramp up or downsize their teams without the delays and challenges often associated with offshoring. Additionally, working with SMEs in nearby countries or regions can result in more effective collaboration, as teams can easily align their schedules and work closely together, leading to faster and more efficient project delivery.
  • Lower Costs: Nearshoring provides cost savings compared to onshore services due to lower labor costs in chosen countries like those in Latin America. While not always as cost-effective as offshore options, nearshoring offers additional savings through reduced overhead expenses, such as lower travel costs and more efficient collaboration. This makes nearshoring a compelling option for companies seeking to balance quality and affordability in their outsourcing strategies.

Nearshoring Challenges  

Though the nearshoring model offers many benefits, organizations should heavily evaluate and consider challenges against their needs and priorities. These include:  

  • Higher Costs: Nearshoring may still be more expensive than offshoring to countries with significantly lower labor costs.
  • Limited Talent Pool: Nearshore locations can struggle in providing specialized talent for a broad range of technologies. Where there is a large base of talent for common technologies, locating and finding talent for niche technologies can be difficult as nearshoring markets continue to mature.
  • Competition for Resources: Nearshoring has become a hot trend over the last 18+ months, resulting in increased labor costs across popular locations. Organizations must do their due diligence when reviewing potential countries to nearshore services to and should move quickly.

Offshoring Benefits  

Offshoring continues to be the cost savings leader for outsourcing projects, processes and platforms for global organizations. Countries commonly used for offshoring include India, Vietnam, the Philippines and Eastern European countries like Poland. Benefits commonly associated with the offshoring model include:

  • Cost Savings: Offshoring canincrease cost savings due to lower labor costs across the region. Often, this is the key driver in organizations selecting the offshoring model.
  • Larger Talent Pool: Offshore locations often have a larger pool of skilled professionals available across a broader selection of technologies, providing a greater likelihood of finding skilled resources, even for the most niche technology tools.  
  • 24/7 Model: The difference in time zones between the U.S. and common offshoring countries creates an opportunity to enable around-the-clock coverage, where, depending on the set up and collaboration, can result in tightened project delivery timelines.  
  • Risk: With the historical success of the offshoring model, there is a lower overall perceived risk of the model. This perception varies by industry, but, overall, organizations are familiar with the success of the offshore model.

Offshoring Challenges  

While organizations may prioritize the cost savings associated with offshoring, it is equally as critical to, at the very least, identify and consider the challenges that come along with it. These include:  

  • Time Zone Differences: Offshoring to distant locations across the world means operations span different time zones. With a limited time overlap with the onshore team, this can lead to inefficiencies like increased response or turnaround times to resolve critical issues. The offshore model typically requires significant coverage from the onshore team and can negatively impact team morale if a lot of oversight is required.
  • Hiring Process: A larger talent pool requires an increased responsibility in sifting through the available talent and identifying the right team member(s). In these instances, finding the right resources requires additional time to identify, vet, interview and hire them – time is a luxury that some organizations cannot afford.
  • Turnover: As the number of organizations adopting the offshore model has increased, so has the demand for the available resources. Given the demand, offshore resources may leave for another opportunity offering an increase in pay. Turnover rates, cost per hour and team morale are all being impacted by the increase in offshore activity.  
  • Scaling Options: As organizations experience the immediate returns of offshoring, they often attempt to scale quickly. However, the combination of talent availability, a larger talent pool and more competitive compensation packages can make scaling, especially quickly, difficult. Retaining qualified talent in the offshore model has continued to become more challenging as offshoring popularity increases.  

Making an Informed Decision

No one-size-fits-all approach exists for outsourcing, as each model presents its own unique set of advantages and challenges that organizations should evaluate against their specific needs and priorities. Asking the following questions during the decision-making process will help guide an organization in making their decision:  

  1. How important is it to match time zones?
  1. How urgent is finding the ideal talent or team?
  1. How much organizational flexibility is needed?  
  1. What are the main objectives in transitioning to this delivery model?

At BUILT, our team of trusted advisors can assist organizations in making informed decisions by maximizing the value of their technology outsourcing initiatives. If your organization is interested in offshoring, nearshoring or onshoring, or if you want to learn more about these options, contact us today:    

About the Author, Kim Strumwasser, Partner at BUILT and Head of Client Strategy & Advisory: Kim joined Vaco after spending 15+ years of professional services experience in Big 4 where she spent her time transforming large organizations focusing on areas such as people, process, technology, and data.  Most recently, as a Managing Director at PwC, Kim drove the digital transformation PwC’s workforce through automation and process redesign and then led the transformation of clients across the retail, technology, manufacturing, PE, transportation, oil & gas, and energy industries.  

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