For Software Development Outsourcing, Should You Go Onshore, Offshore, or Nearshore?
It’s time to face the truth: your business has outgrown the systems that used to support its functions. When your business took its first steps, an Excel workbook was all you needed to keep track of contracts, orders, suppliers, and employees. Now the business has grown — and it’s still growing. The total net worth is increasing, and the number of clients is increasing with it. But so are the problems. Your business information is always incomplete and fragmented, and you have no way to look at the big picture without spending two hours putting the pieces together. Information slips through your fingers, and it becomes harder for you to track cash flows and meet important decisions. And customers are starting to notice.
You understand that, if you want your business to continue to grow — and flourish — you’ll need to implement a custom ERP or other management application. Sure, there are plenty of “off-the-shelf” products on the market, but you need a solution that takes into account the specifics of your industry and, more importantly, your company. Your system administrator who works in the company says that he is unable to create such an application on his own and recommends hiring a development team rather than trying to staff up and complete the project in-house. You have found a number of companies that are ready to take on this project, but almost all of them are abroad. But can you trust them? What should you look for in the process of choosing a team? And how do you sift through the jargon and terminology to choose the overseas vendor that’s right for you?
Fortunately, we’re here to help.
Defining Terminology: Offshore, Onshore, and Nearshore Software Development
In general, these words have nothing to do with beaches or shores. Instead, they define the business approaches under which software development is conducted. The main variable in these models is where the team you hire for the project is located, and each has its pros and cons.
There is a fourth approach, by which a company hires full-time employees to develop and maintain a new system. You can read about that in our recent blog post, but we won’t discuss it here, as this approach is inadvisable for most small and medium-sized businesses (and many large ones). Instead, we’ll focus on the more profitable approach of outsourcing in all of its variations.
Onshore outsourcing refers to hiring a development team in the same country, and it is the simplest and most convenient approach. For example, if you do business in the United States, hiring a team from your own or any other US state would be considered “onshore outsourcing.” The advantages of this approach are obvious: you can meet the team and discuss things face-to-face, you work in the same time zone, and you can always keep in touch. Usually there are no language barriers or cultural differences between onshore teams and their clients.
But there is one very big disadvantage: the cost of services. This is the most expensive of the approaches, and it is cost prohibitive for many organizations.
An offshore team, on the other hand, is located in a foreign country, and most often one with a completely different cultural code and language. Offshore outsourcing usually offers the lowest prices because the cost of living is much lower in the country where the developers are located, so they can accomplish the same work for far less money. For example, a single developer’s hourly rate in the United States can be $150 or more, but in Southeast Asia, a developer of the same caliber would charge only around $25 per hour.
With the lower price tag, however, come higher risks as, between the time differences and the language barriers, it’s often difficult to guarantee that work a client has paid for will be done on time or according to the specified plan. While there are certainly high-quality offshore developers who are ready and able to solve any organization’s system issues, you never know what you're going to get. In the end, the project management responsibilities and efforts required to reduce risk may outweigh the cost savings.
A trade-off or compromise between these two models is the nearshore outsourcing model. In fact, this model is just like offshore outsourcing, with the key difference being that the development team is located in a country that is close by and that upholds the same or similar cultural codes, traditions, and values. For example, a German plant in Dortmund is unlikely to experience any problems when working with a Polish development team. Even a hospital in the United States hiring a team from Europe, should have a relatively smooth experience.
A special variation of nearshore outsourcing provides an even happier compromise: the development team is abroad, but the vendor has a representative office in the same country as the client. In this case, all financial and legal transactions take place onshore, according to the rules and regulations of that country, giving the customer much more legal protection than if he worked with an office on the other side of the world. But because the developers, themselves, are offshore, the client can still take advantage of significantly lower prices than onshore vendors can offer.
Which Model Is Best for Your Organization?
In the long term, outsourcing applications development has proven to be very rewarding for many startups and businesses across the globe. In a connected, digital world, it is quite simple to reap the benefits of a dedicated team that works to their full potential — no matter where they’re located.
As far as which outsourcing model to choose, the most important takeaway is that you have the opportunity to make a choice based on your organization’s unique situation and preferences. If your organization is risk intolerant and flush with cash, the onshore approach may be a good option; if you’re confident you can mitigate quality and legal risks and overcome language barriers, and you need to save as much money as possible, offshore could work for you. However, for many companies that need to strike a balance between the two ends of the spectrum, nearshore outsourcing provides the “goldilocks” alternative: it’s just right.