Deciding between nearshoring vs offshoring IT outsourcing, companies consider competitive wages, stability, and work culture, among others. Discover why IT firms increasingly benefit from nearshoring destinations within Europe.
The Eurostat statistics speak for themselves. Wages across the Eurozone and the US are rising.
Only from 2009 until 2019, wage growth in Europe averaged 2%, compared to around 5% growth in the USA.
We place value in local employees, assuming a better level of competence. Of course, there is expertise and well-educated populations in other countries. And they too have a near-universal grasp of the English language.
Outsourcing software development, without a doubt, presents opportunities for companies seeking to reduce wage costs. Companies outsource, saving on wage costs while retaining core aspects of their business.
In this article, you will learn:
- Outsourcing in-Practice and its merits.
- Factors to consider while outsourcing IT projects.
- What is offshoring?
- What is nearshoring?
- Nearshoring vs offshoring: final verdict
General Electric represents a prime example of this practice, at the height of 50% of IT outsourced. Former CEO, Jack Welch, famously proclaimed his solution for a global company:
“you’d have every [factory] you own on a barge to move with currencies and changes in the economy.”
Of course, GE never achieved such a nomadic venture. The expression though demonstrates particular insight.
Swedish home furnishings retailer, IKEA now streamlines customer service and payments. This ‘affordable furniture’ giant outsourced Point of Sale (POS) software, across the globe. Provided by the likes of Wincor Nixdorf, the firm tends to all software issues.
One of many financial examples, American Express, takes advantage of Indian call centres. Globally, they are prominent advocates for wholesale outsourcing of entire customer service centres.
At first, outsourcing and offshoring development were closely related terms, consider the first destinations chosen by Western companies.
Merits of Outsourcing
Outsourcing applies to the following principle: cost-reduction. The rationale is the same and exists only for this purpose. Whether communicated, it is the most significant advantage of this business practice.
Wages across the developed world are a world from India, Bangladesh, Vietnam, or China. Because of this, large companies outsource remote help, making astronomical savings.
As with friends, success often comes with some enemies. And while the pitfalls are few, they are worth taking into regard.
Factors to Consider
1. Language Barriers
Language barriers and misunderstandings are significant elements in the criticisms behind offshoring. An example is businesses whose customer service staff lack proper command of a language. The effects on the quality of the brand would be likely to suffer, as could the rapport with customers.
2. Asset Security
Depending on the country of operation, you should assess how safe is IT outsourcing. In essence, this is far more complex than occasional burglary. Outsourced workers privy to relevant information could be vulnerable to external influences. These are either competitors or even hostile world powers, seeking sensitive materials.
3. Government, Policy, & Politics
Politics are a toxic subject, while recommended to avoid, are sometimes unavoidable.
Across the developed world, political demonstrations are aiming to promote local employment. As such, these can play essential roles in government policy. This is the case of larger US-based corporations facing criticism for outsourcing.
Indeed, this is frustration directed at large companies. SMEs, or specialised firms with a deficit of local talent, are not at-risk.
4. Geopolitical Issues
Far-away destinations too must assess for political stability and risk. At present, there exist ongoing conflicts and societal-humanitarian emergencies on every continent.
5. Cultural Missteps
Physical distance is a cause for cultural differences across our world. Fortunately, English, French, and Spanish remain common languages for communication. This does not account for cultural missteps and possible effects on management.
As an example, the subject of Saving Face is a focal point in Asian culture, whereby open criticism must keep to a minimum.
As such, the influence this carries into business relations is decisive. Other factors, such as lunchtimes, punctuality, rest times, as well as China’s famed, ‘daytime napping’. Understanding and managing under this can be counterproductive, and costly.
Many missteps can be avoided following the best practices of managing remote teams.
What is Offshoring – Going Far
This is the most commonly-understood attribute of outsourcing. In fact, outsourcing and offshoring are often confused.
Offshoring development is the practice of moving IT business operations to far-away destinations. This attributes to different time-zones, languages, and cultural landscapes. Read more about offshoring vs outsourcing in this article from Time Doctor.
The most common offshoring destinations for years have been India and the Philippines. These suit to IT, technical, and financial service challenges resolvable via online chat or phone call.
- maintain a grasp of the English language,
- are culturally familiar with the customers’ countries of origin,
- and most importantly, they offer lower wages.
China, Bangladesh, and Vietnam are essential in outsourcing and offshoring for manufacturing and production. Despite these being one of the most prominent examples, the countries are experiencing wage increases.
Central and South America are offshoring destinations for US companies, despite their proximity. The reason for this is a vastly different culture, language, as well as politics.
What is Nearshoring – Keeping Close
If you’re wondering what is nearshoring, actually, it is simply outsourcing with a key attribute – distance. Unlike outsourcing, this refers to outsourcing to countries close to the company’s headquarters or main branches.
Distance itself does not play the only role. There is in-fact no set definition as to which outsourcing arrangements fall into which categories. Depending on the product or service, one option may be more favourable than the other. The IT industry, for instance, is more pleasing to the practice of nearshoring vs offshoring development.
- French-based companies, for instance, favour outsourcing to locations within Europe.
- Popular destinations are Poland, the Netherlands, as well as Ukraine.
- US companies, respectively opt for outsourcing to Canada, Mexico, and the Caribbean.
Notable characteristics of nearshoring are similar: time-zones, culture, and linguistics. There is too relative ease of personal visits due to improved links, and shorter travel distances.
Benefits of Offshoring
Cost reductions and improved travel are significant benefits of offshoring.
With lower operational wages, the to-scale savings for the largest enterprises are tremendous. General Electric, General Motors, and Microsoft, all operate on a colossal scale. They would, therefore, require worker numbers of great measure. By ‘opening shop’ in India, these companies leverage sizeable economies of scale. The result is a much higher per-worker value than their home countries.
Airlines are widening the reach of business in cities and countries across the world. As such, communication lines between emerging regions, and the West are accessible. As a case-in-point, major hubs: Singapore and Dubai face redundancy. Today, direct routes exist: Paris and Kunming, London and Chengdu, and Colombo and Melbourne.
Building up a large-enough facility in far-away destinations does entail initial costs. This accounts for the set-up of the facility, training of staff, and overheads. For larger company offshoring, with overwhelming staff numbers, such as GE, the time to ROI is extensive.
Cultural and linguistic barriers are common, particularly when hiring in non-anglophone/francophone nations. This impacts communication between managers, and outsourced employees in back-end/back-office tasks. Additionally, this impacts negatively on customers, if communicating with outsourced ‘front-office’ staff.
Last-minute problems, requiring immediate solutions will face difficulty due to working hour differences. For example, a gap exists between a London head office, and its Gurgaon, India hub. This means solvable problems in Gurgaon may linger several hours before London’s awareness.
Depending on your outsourcing hub location, diplomatic, political or security-related uncertainty can exist. These pose a risk to company assets and are often beyond the control of the company.
With closer physical distances, come closer cultures which benefit communications, and productivity. Feedback is more likely to flow correctly, based on the expectations of head office. Such is key to building mutual trust.
Financially, the benefits of offshoring and nearshoring are similar. Average European wages between regions vary strikingly, passing on cost savings for employers. Destinations ‘hundreds’ of kilometres from Toulouse to Poland is a safe prospect. This is in stark contrast to ‘several thousand’ from Paris, to Senegal, or Morocco.
By operating within the same or similar time zones, communication is rapid and instantaneous. This means last-minute remedies to problems and issues can be quickly addressed. Short travel times between head office and hub also permit for frequent personal visits.
Some European locations and popular IT hubs are a political risk associated with sanctions and conflict. Russia is one example, as well as Ukraine, and Romania, citing very high corruption. Such factors may have decisive impacts on maintaining an IT hub.
As with every outsourcing operation, there is a need for setting up. This may mean office locations and the opportunity costs of seeking proper real-estate. This can be undertaken by the company – without local assistance.
The need for vetting staff is a valid issue, requiring updated recruitment procedures. Additionally, some companies place great value on an intellectual and digital property. As such, issuing Non-Disclosure Agreements (NDAs) to new staff members is advisable.
European Union member, politically stable, with low corruption; not in the Eurozone. Centrally-located wit good access to Central & East Europe. Cultural affinity to Western Europe.
- Polish (Native)
- English (Near-Universal)
- German (Common)
- Russian (Common)
Average wages approximately 50% of Western Europe.
- High volume of IT graduates
- Famous for Tech, Gaming, App Development industries
- Popular destination for SMEs, and large organisation.
- English fluency widespread.
- Low Wages (ideal for the largest organisations).
- Tech-fluent workers.
- Distant location.
Very tech-oriented society with skilled IT developers, good loyalty and work ethics.
High language barrier and unique work-culture.
‘Great Firewall of China’:
- Slower data transfers
- Data security in-question
Lax enforcement in IP legislation.
Unpredictably rising wages.
Nearshoring vs Offshoring: Final VerdictIn all, I am a strong proponent for outsourcing. Companies can easily seek quality, and technical expertise, especially in the IT field. These are golden opportunities for outsourcing IT staff across the world. But some destinations, frankly, fare better than others. Let’s quickly sum up nearshoring vs offshoring opportunities:
- Risks will exist but can be strictly minimised when selecting the right destination. This must combine lower recruitment costs and a high-level of work ethic. An additional benefit is a close cultural affinity to the US, UK, and Western Europe.
- Poland is an IT nearshoring destination satisfying most, if not all the requirements of an IT hub. The merits for investors are many, such as its location within 2 hours-flight to most European capitals. Political and social stability relative to its neighbours, both EU and non-EU too plays a role. Despite bordering France and Germany, Poland also offers favourable wages for Western companies.
- Large organisations, with thousands of employees, benefit from Poland, India, and China due to economies of scale. SMEs, with a greater focus on dedicated teams, would very much merit from Polish work ethic. And the favorable prospects that are time and time again proven very successful.