Distance has always been a major factor that decided the level of engagement between any two business entities since time immemorial. In the olden days when communication was limited and prone to disruptions, businesses had no other way than to operate within the borders of their own countries. But globalization has enabled businesses to hire companies thousands of miles away from them to produce quality goods and services at a much cheaper price. American and European companies outsourced their business processes to developing countries in the East where the cost of labor was cheap and the quality of the resources was high. This business arrangement has been challenged in recent years due to various factors. In the past 20+ years, IT industries in developing countries like India have matured enough to become the dominant sector in their respective economies. However, the rising income levels, cultural differences and other factors have convinced outsourcers to consider countries like Vietnam and Philippines as better alternates. These options aren’t viable either since much like their Asian counterparts, they too are offshore destinations. The demand for quality software is linked to achieving the business goals and obtaining a higher market share. However, offshoring presents a lot of obstacles for companies trying to emerge as leaders in brutal market conditions. As a result, a better alternate for this business arrangement is Nearshoring which makes things a lot better for both the parties. Nearshoring has been proven to save money, time, and efforts for software product companies and produce long-lasting partnerships that have the potential to revolutionize industries. Let us compare both these arrangements to find the better option for you.
Offshoring vs Nearshoring
Generally speaking, companies outsource software projects to third-party firms keeping in mind the obvious benefits – risk sharing with the partner, availability of talented resources, and most importantly the prospect of cutting costs and efforts. But these are just the tip of the iceberg. Outsourcing can be either offshoring or nearshoring and they both differ tremendously when it comes to outcomes. The disadvantages of offshore contracts far outweigh their advantages. While offshoring has certain advantages like less costs and time zone benefits, they have a few obvious disadvantages:
- Highly prone to communication problems
- Hidden costs like travel expenses due to long distances
- Cultural differences and language barriers
- Different time zones
Nearshore arrangements aren’t without their problems either. Higher costs than offshoring and cultural affinity are the issues generally associated with it. Nearshoring has proven to be cost efficient and cultural affinity is a negligible problem compared to the benefits that nearshoring contracts bring in. Let us look at the benefits of nearshoring business processes and long-term nearshore engagements.
Benefits in Nearshoring
In the mid-90s, an Indian expatriate in the United States named James Ram set up Indusa, a software firm in Jamaica as an outsourcing destination for clients from the American mainland. He had earlier found that outsourcing to India wasn’t popular among his clients and they wanted to do business somewhere “nearer”. Jamaica, which is just 3 hours away from the US mainland meant cheaper flight trips and the island had good telecommunications infrastructure. After developing the local skills base with the help of the government and a few Indians, the firm went on to become a successful nearshoring destination for US businesses.
Similarly, Poland is positioned perfectly for European companies to outsource due to its excellent location, well developed infrastructure, and cheap flights. Poland is now a leading destination for European outsourcers who want the convenience of an onshore model with the benefits of an offshore model. Interaction between nearshore partners would be effortless since they both are usually in the same time zone. Outsourcers can save a lot of money on flight tickets and finding suitable time for meetings would be easy. Face-to-face interactions would become extremely common due to close proximity and outsourcers would have ready access to highly qualified resources whenever they needed. Close proximity would also mean better engagement and flexibility in operations.
Time-to-market of a product depends on the software developer’s ability to manage the project efficiently. Since nearshore partnerships are flexible and allow better engagement, you can develop the product and deliver it conveniently at your desired time of the year. An abundance of resources will be helpful whenever the project demands additional work to be done and you can support and scale systems effortlessly. Nearshore vendors who are highly developed and matured in all major technologies have a well-built structure that enables them to initiate projects immediately despite lacking proper human resources. Market leaders with a competent human resources department have the ability to hire quickly to suit the project demands. Nevertheless, nearshore partnerships are flexible and allow better engagement, product development and delivery are generally effortless. The quality expectations are fulfilled invariably as the clients and the nearshore teams can communicate their ideas to each other efficiently.
Minimum cultural and language barriers
Countries like Poland and Ukraine where the software R&D market grew four times faster than global trends have similar customs and attitudes to their neighbors. Poland ranks 3rd in the “Countries with best developers” list and there is a strong software development culture prevailing in the region. The values and attitudes of employees decide the relationship with their partners and hence they decide the outcome of the projects. Software development requires a lot of innovation, which stems from certain values and attitudes. For example, some Eastern cultures frown upon ideas from subordinates, while Western cultures encourage them in order to foster innovation. Nearshore partners are more likely to have similar values and attitudes compared to offshore partners. People with similar values and attitudes understand cultural nuances and this will reflect in their productivity.
Similar cultures also tend to have similar accents and understand each other well. English being the most popular language has many accents and not all of them are comprehensible to everyone. For example Indian accent is difficult for Americans to comprehend, while Filipino accent is not. This is due to the influence of American culture on Philippines. Neighboring countries influence each other and as a result have similar accents and it will come in handy during outsourcing.
The need to outsource usually arises from the desire to cut costs, solve capacity issues and focus on core business activities. Companies that aim to do well in their respective markets have to be careful while choosing partners. While offshoring has been the traditional model for outsourcers, nearshoring has proven itself to be more efficient and resourceful. It has all the conveniences of onshore models while enjoying the benefits of offshore models. Globalization has resulted in economic integration and strong local connections. Outsourcers would benefit more from nearshore partnerships than they would from an offshore arrangement.