Near, Far, Wherever You Are: The Comparative Guide to Outsourcing Models
What is outsourcing?
It’s no secret that the manufacturing industry catalyzed globalism by taking its operations offshores. Ever since, businesses across all sectors have sought to replicate and improve the strategy. Entrepreneurs have sailed into unknown waters, exploring the many paths that promise to create win-win solutions.
But now, decades after these initial expeditions, companies have a plethora of outsourcing models. There exists a nearshore outsourcing model, as well as an offshore and an onshore. In addition, strategies may be organized based on the type of contract (Fixed Price, Time and Materials (T&M), Incentive-based Pricing, Shared Risk-Reward Pricing, etc.), and even the kind of product outsourced (physical vs service) (IT Outsourcing, 2018). More and more, outsourcing is expanding to include more than just manufacturing; companies are leaning to contract third parties in order to perform services, in a process called Business Process Outsourcing (BPO). Yet despite this vast, modern array of categories and types, we’ll use this article to focus on location-based outsourcing models.
Onshore vs Nearshore vs Offshore outsourcing, and it’s easy to get lost in the navigation of such similar-sounding waters. However, there are big differences between each approach, with big impacts upon operations, efficiency, and overall success. Here, we explore these shores– with their similarities and differences, strengths and weaknesses– so that your business never strays off course.
Offshoring: The Classic
Offshoring is by far the oldest and most widely-known outsourcing strategy. Essentially, it moves company operations from a more expensive country (normally in North America or Europe) to a lower-cost country (often in Asia). Consumer goods companies have historically found great success is this economy-effective strategy, as it creates competitive prices without sacrificing huge profit margins (Webb, 2017). However, offshoring often loses in efficiency what it gains in capital: companies span the geographical world, unable to work in the same time zone, and thus losing the key factor of immediate communication (Offshoring, 2018). Even further, harsh critics of offshoring in the manufacturing industry contend that the model fosters worker exploitation, taking advantage of the globe’s most vulnerable populations (Webb, 2017).
Onshoring: The Landlocked
Just as it sounds, onshoring business models stay landlocked. Companies that opt for this strategy do team up with other entities, however, staying within the borders of their own nation. The advantages feature streamlined efficiency and local job opportunities; yet the costs quickly add up, cutting profits considerably (Hamilton, 2018). Further, a lack of international collaboration also limits the creativity and innovation that spark from diversity.
Nearshoring: The Efficient
A Nearshore outsourcing model takes the cost-effective mindset of offshoring, and gets intentional with its geographical and personal talent search. In other words, nearshoring companies seek to hire diverse teams across cultures and even continents, without straying from the same relative time zone. This allows an exponential increase in efficiency from traditional offshoring models, avoiding the 12+ hour loss just to answer a simple question. Further, nearshoring teams tend to be 35 – 50% more productive than those of standard offshoring, a more highly-qualified selection of experts in the field. This strategy is especially key for IT companies, which thrive on efficient communication and qualified talent (Cantor, 2019).
The drawback of nearshoring comes when a company grows so much that its clients span multiple time zones, taking away the key nearshoring advantage of same-time-zone teams (Cantor, 2019). However, smart nearshoring companies avoid this loss by placing most of their hubs in a single time zone, and one strategic office in opposite working hours– catering to companies around the globe, without losing the efficiency benefits of the traditional nearshoring model (Salas, 2020).
Common Outsourcing Mistakes and How to Avoid Them
Lack of Research
The first, very vital step in any type of outsourcing must be good and thorough research. Internally, you must define a clear set of needs and goals. While you may wish to consult outsourcing partners on which IT solutions may best address your needs, you may also approach third-party contractors with exact projects, requirements, and tech stacks to be used. These details will eventually need to be defined, whether internally or collaboratively; but this process always and necessarily begins with an unequivocal understanding of your challenges and future goals.
But, in addition to this ever-important self-reflection, you also must do extensive external research on outsourcing partners and types. A capable partner, experienced and professional in the industry, is key to painlessly navigating the entire collaboration process. Also, though it sounds basic, verify that the contractor’s tech stack aligns with the languages required by the project; and that the contract type fits timing and budget goals.
Some may argue that all project failure stems from poor communication. This is certainly true when it comes to outsourcing, as effective connections are even more important when working with remote teams. Whether conveying project requirements and company culture, or sending updates throughout the project life cycle, any communication breakdown will result in inevitable loss and frustration.
Make sure to, from the beginning and constantly throughout the process:
- Communicate both overall vision and specific needs
- Clarify working processes and party responsibilities
- Give and ask for daily updates and feedback
- Leverage video calls
- Make sure that there are no language barriers
- Set up avenues of real-time communication
Being Too Cheap
Normally, saving costs is great. But it’s never beneficial to cut corners in the budget at the real expense of quality. Plan your budget well, and don’t be afraid to use it to invest in the option that will truly get the long-term results you need. Be wary of simply accepting the cheapest option on the market; remember, you get what you pay for.
Location has everything to do with product success. It determines cost, communication, efficiency, infrastructure, talent, and even security. You want to carefully examine the advantages and disadvantages of each place, and choose what gives you the best combination of qualities, according to your priorities.
While one location may be the least expensive, it may not provide top talent, nor convenience in communication, nor security and reliable infrastructure. On the other hand, a close-to-home location with top talent may blow a budget off the roof.
Ideally, you want to find a location that allows for instant communication, without impossible language barriers, with a reliable tech infrastructure and highly skilled talent– all at a moderate price that allows you the best bang for your buck.
Even though you’ve chosen a top-notch Business Process Outsourcing (BPO) partner, don’t make the mistake of thinking that your involvement in the process stops there. In fact, it is the total responsibility of the investor to manage its team and project. Make sure to have a clear plan of administration and, of course, to precisely communicate that plan from the get-go. Every team has its own form of operation; be transparent with yours to bring your new collaborators on board (Pais, 2019).
Onshore vs Nearshore vs Offshore Outsourcing
So many shores, so little time: each of these streams with its current, which can lead to great waters if well-navigated. However, the best solutions most definitely come with an agile, experienced team that understands the risks and benefits of its approach, and leverages them to the client’s advantage. Any business would be smart to paddle on such a Webcreek, and dock on these nearshores of collaboration.
Cantor, S. (2019). Nearshoring Numbers: Does the strategy really stack up? WebCreek. https://dev.webcreek.com/en/blog/technology/nearshoring-strategy-numbers/
IT Outsourcing Models and Types of Outsourcing Contracts, 16 Oct. 2018, existek.com/blog/it-outsourcing-models-and-types-of-outsourcing-contracts/.
Pais, N. (2019, August 08). 7 Top Outsourcing Mistakes. Retrieved November 20, 2020, from https://www.31west.net/blog/7-top-outsourcing-mistakes/
Salas, O. (2020, January 31). What is the difference between Nearshore vs Offshore vs Onshore? (VIDEO). ITexico. https://www.itexico.com/blog/onshore-offshore-nearshore-what-s-your-best-option