What is nearshore outsourcing and how does it work?

Why organizations opt for nearshore outsourcing

The two main reasons organizations outsource departmental work or processes is to save on operational costs and focus on core revenue-generating business activities. To this end, they can choose to outsource to nearby or distant countries. The choice often depends on which country is more likely to yield higher cost savings. These savings are usually the result of currency mismatches between the two countries. By outsourcing to countries with weaker currencies, companies in countries with a strong currency can save money.

Consider Company A, an organization located in Texas that wants to outsource its software development department. It can opt to select Company Y in Canada or Company Z in India, if the required skills are available in both countries. However, there are other factors to consider.

Outsourcing to Canada is less likely to result in cost savings because the values of the U.S. dollar and Canadian dollar are similar. This means that Company X may not achieve substantial cost savings by outsourcing to Company Y. If cost savings is the primary goal, Company X is more likely to outsource software development to Company Z in India because the Indian rupee is valued less than the U.S. dollar.

But, if time zone similarity is a key outsourcing consideration for Company A -- to ensure proper communication, fewer mistakes and quality project outcomes -- then nearshore outsourcing to Canadian Company Y is a better choice.

Geographical proximity is one of the main reasons why organizations opt for nearshore outsourcing. Other considerations may include ready access to a wide talent pool and cultural and linguistic similarities. Furthermore, the right nearshore outsourcing partner can provide quality service at a lower cost, while also adopting the outsourcing organization's business processes and protocols. The latter ensures minimal friction between the partner's team and the organization's in-house team and increases the potential for successful outcomes from the partnership.

Nearshore vs. onshore vs. offshore outsourcing

Three outsourcing models, nearshore outsourcing, offshoring and onshore outsourcing, are commonly used by organizations. The most common types of jobs that are outsourced include software development, software engineering, digital marketing, technical support and call center operations.

While nearshore outsourcing involves hiring for services in nearby countries, offshoring involves employing or contracting services in countries that are farther away. These options provide a stark contrast from onshore outsourcing, which is simply employing or contracting services from someone outside the organization, but still within the same country. With onshore outsourcing, the primary goal is rarely cost savings (although it can be). Rather, companies choose to outsource to an onshore partner to fill in internal talent gaps and access required skills without having to go through an extensive hiring process.

For example, for companies in the U.S., onshore outsourcing could involve a partner in the same or other state within the U.S. Nearshore outsourcing might be to countries such as Canada or Mexico. However, full offshore outsourcing could be to Asian countries like India or the Philippines; South American countries like Argentina or Brazil; or European countries like Ukraine.

Choosing outsourcing destinations depends heavily on a business's requirements and the type of job to be outsourced. It also depends on factors such as the following:

• Availability of required talent and expertise.
• Outsourcing infrastructure in the destination country (taxation regime, technology, government support, language of communication, etc.).
• Potential for cost savings.
• Cultural similarities between the source and destination countries.
• Time differences between the source and destination countries.

The pros and cons of nearshore outsourcing

Nearshore outsourcing has its pluses and minuses.

Pros

• Closer geographical proximity. Since the destination country is likely to be in a similar time zone, travel and communications between the outsourcing firm and its partner can be easier. In contrast, for companies that utilize offshore outsourcing, the time zone differences can be hard to manage when meetings are needed or a quick turnaround is required.
• Better oversight and control. Nearshore partners are geographically closer, which allows for more coordinated communications, schedules and even travel.
• Cost savings. Nearshoring can be more cost effective depending on the location and the type of job, although this is not always the case. For example, nearshore software development is a far more specialized skill and, therefore, labor costs may not be as inexpensive as, say, a call center.
• Larger talent pool. Nearshoring enables businesses to expand access to various high-quality service providers and outsourcing partners.

Cons

• Language barriers. While not always true, there are some cases where language barriers and cultural differences can make it difficult for organizations to maintain a nimble working relationship with an outsourced partner. Nearshore vendors are not completely immune to this problem. This is especially true in Europe and Asia where linguistic differences exist even among neighboring countries. That said, there are also many neighboring countries that exhibit cultural and linguistic similarities. The key to nearshoring success is to find a partner in a linguistically and culturally similar country.
• Not as large of a talent pool as offshore outsourcing. While nearshore outsourcing provides a larger talent pool than onshore outsourcing, particularly for certain job types, it does limit the talent pool that an organization can tap into. In contrast, offshore outsourcing offers a larger talent pool and therefore more options to select a skilled partner.
• Less convenience. In some cases, it's not as convenient for teams in different locations to work together. For example, in software development outsourcing -- during a deployment where rapid response and troubleshooting are required -- it may not be feasible for two people in different locations to work together and provide a quality software product. However, organizations can often resolve these types of IT service issues with predetermined, rotating on-call schedules.

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