What Are The Differences Between Outsourcing, Offshoring And Nearshore Outsourcing?
Offshore outsourcing Strategy

What Are The Differences Between Outsourcing, Offshoring And Nearshore Outsourcing?

By Mainak Biswas April 09, 2014 - 11,870 views

We all know that outsourcing work to another company can bring about great results, cut costs and increase productivity in the long run. It helps us to focus on our core business activities instead of wasting time on things that we are not really good at. In fact, companies have been outsourcing work to other professionals from times immemorial. A blacksmith always tried to outsource the procurement of metal to someone else. That someone else was an outsourcing agent.

Outsourcing is growing ever more important

Today, it is a lot more sophisticated than that and there are clear legal & professional boundaries about what is outsourced, how it is outsourced and to whom. While all this sounds nice and attractive, people still do not understand the differences between the 3 confusing terms: outsourcing, offshoring and nearshore outsourcing. All three words are related to each other but are quite different from each other. In order to have a successful outsourcing process, we need to understand all three terms and make sure that we are not going wrong anywhere. It also helps to read up on the latest outsourcing techniques, tips and strategies. One of the best ways is to understand the differences between these three terms.

Outsourcing vs. Offshoring

Let us briefly take a look at what the three terms mean, with a case study as an example.

Company X provides software maintenance services and has a huge office in San Francisco, California. The company has become increasingly busy and is not able to code or maintain the software programs of all its clients. Thus, it likes to get rid of a few of its responsibilities at a fraction of the cost. 6 months ago, it had hired 2 HR managers and a taxation officer, all of which increased the company’s expenditure.

Tax experts in the U.S. cost a lot and H.R. managers with an MBA do not come cheap. It contacted another entity called Company Y, which agreed to take up the taxation responsibilities. Company Y is located in San Diego. Company X was still not satisfied with paying a lot of fees to its HR managers and decided to seek help from Company Z, located in New Delhi, India. Company Z is an expert at providing HR services to its clients. Indian MBA degree holders charge only a fraction of what their American counterparts do because the cost of living and education are both less when compared with the U.S.

If we look at the above example, Company X clearly was overburdened and was not able to focus on its core business activity, which was to engage in software maintenance. It decided to outsource its taxation and HR responsibilities to other companies which are good at it. It outsourced the taxation tasks to Company Y and it ‘offshored’ its HR responsibilities to Company Z in New Delhi.

When a company transfers certain tasks to a different company in order to save costs, gain expertise and focus on core business activities, it is called outsourcing. When the act of outsourcing happens offshore in a different country, it is called offshoring. Offshoring is when outsourcing takes place internationally. Contrary to what most people believe, outsourcing takes place mostly within a single country. Offshoring, on the other hand, is when outsourcing takes place across international borders, in order to save money, gain expertise and other benefits.

Nearshore outsourcing: What the noise is all about

Now let us assume Company Z often require new recruits in Company X to contact them. There is a huge time difference between San Francisco and New Delhi. Thus, Company X decides to outsource some of the HR responsibilities like making the initial contact with recruits to an entity, Company M, located in Buenos Aires, Argentina. Company M, which is located in Buenos Aires is very far from San Francisco but the time differences are not much.

The process of sending work to a country that is not very different in working style, time zone or culture is called nearshoring. Thus, in this case, in order to beat the time difference, Company X transferred some of the tasks from Company Z to Company M, which is located in a nearshore location, in Buenos Aires. Nearshore activities are offshore activities that take place in countries that are similar in time zones, culture and working styles.

What is reshoring

There is also another term that many people do not understand. It is called reshoring. Reshoring is a term that is used to describe the process of bringing certain tasks back to the home country, for a number of reasons. This might be political, economic, professional or just about anything.

If we should consider the case above, Company X suddenly received a notice from its directors that Argentina was going through an emergency because of political turmoil. Company M was shut down indefinitely in order to avoid protests on the streets. Company X then decided to temporarily outsource that part of HR tasks to another company in San Francisco, Company P. Tasks that were previously nearshored to Company M were restored to Company P.

Offshoring vs. Nearshore Outsourcing: Which is better

Offshoring technically means outsourcing work to a company that is located in a different country. Nearshore outsourcing refers to the act of offshore outsourcing work to a country that is closer in time zones, similar in terms of working style and not too different culturally. There are several benefits and disadvantages to both. Let us take the example of the U.S. and the U.K.

When an American or British company wants to hire IT professionals, they usually seek Indian or Filipino professionals. This is mostly because IT professionals in India are cheaper to hire, have a better education and speak at least a decent level of English. American and British companies pay only a fraction of what they would have paid, had they hired professionals from their own countries. It is also possible that their own professionals are not as well-trained as the Indian ones, because of the differences in technical education and the emphasis given to it.

However, American companies often find it very difficult to work according to Indian time. Indian employees usually stay up all night in order to work during American office hours. Indian employees might also not have a westernized frame of mind and there might be culture clashes. In order to fix this problem, American companies might choose to offshore outsource work to a nearby country, in South America. While South American countries are nearshore, they mostly speak Spanish, and in Brazil, only Portuguese is spoken. In spite of similarities between the U.S. and Latin America in terms of time zone and culture, language problems are too difficult to handle.

Likewise, Britain cannot outsource work to European countries because they speak their own languages. British companies prefer Indian companies because of English. However, when it comes to web designing and coding, language skills are not tantamount. In such a case, a British company might outsource work to an African country or an American company might outsource work to a Latin American company.

Choose what is best for you

Thus, there are advantages and disadvantages to both offshore outsourcing and nearshore outsourcing. It is not possible to say that only a certain method is preferable over the others. It all depends on what a company wants and what it intends to achieve. If culture and time zone are more important than anything else, nearshore outsourcing is a better idea.

However, if infrastructure, language ability, skills and other aspects are important as well, offshore outsourcing across the world can be considered. Offshore software development companies provide more opportunities and freedom for Agencies that plan to outsource.

Though all the three terms are similar to each other, there are major differences between all of them. A growing trend is to restore activities back to the home country. This is mainly due to political movements and certain misguided information which make people believe that outsourcing causes loss of jobs in the home country.

On the other hand, outsourcing results in a stronger economy, the ability to start more companies and a general sense of development and achievement. No matter what a company’s requirements are, everything can be outsourced; either within the country or to a location that is close to the home country or to a location that is really far away. The purpose is to save money, reduce costs, increase productivity and focus on core business activities.

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