There are a number of ways nowadays in which companies can outsource their projects or business processes to other companies. In this article, we will explain the differences between outsourcing, nearshoring, offshoring, and remote team models in order to help you make the right decision between them.
At some point, many companies will find out that their current team is too small or not experienced enough to handle an increased amount of work or be able to complete a new project (like building a mobile app) successfully. What can they do about it? In the past, the obvious choice was to grow their team by hiring someone in-house. To find someone that would fit their needs, companies had to create and post job advertisements or ask recruiting agencies for help. They would have to look through multiple portfolios and resumes, interview several candidates, and finally hire those who best meet the requirements.
Nowadays though, hiring someone in-house is easier said than done. Not only are the costs of hiring someone to work in your company becoming increasingly high (especially when it comes to expected salaries and benefits), but the limitations of in-house hiring are getting troublesome as well. Companies can only pick from candidates living in the same town as or nearby to them, or are willing to move. What if you can’t find any developers with the skills and experience needed in your region, or they are far too expensive for your budget? You could either prolong the hiring process until you find someone who does meet your expectations (which could take months, if not longer), or just hire the closest match you have at that moment.
Now though, you have one more option that can be a game-changer for your business - to outsource your project to third-party companies, either in your region or from much farther afield.
In 2019, one-third of small businesses were already outsourcing some of their business processes, and another 52% planned to do so. By 2020, more than 80% of logistics leaders planned to increase their outsourcing budget by more than 5%. The biggest reason for the massive increase in popularity of outsourcing is that it can significantly help in reducing costs - 59% of businesses use outsourcing to reduce their expenses, since moving some of their tasks to other countries is often a much cheaper alternative to hiring someone in-house. For example, companies can save 30% on operating costs by outsourcing their IT departments.
But that’s not all - a lack of in-house specialists can also be solved by outsourcing those activities to companies that are specialized in a given area. For the hiring businesses, that’s both a much faster way to find the experts they need and can also practically guarantee that the project is completed faster and with better results than when done in-house.
The thing is, outsourcing is a pretty broad term nowadays. If you browse the web for ways to outsource a project or some of your business processes, there’s a high chance that you’ll come across terms like “offshoring” and “nearshoring”, or articles praising the use of remote teams. But what do these terms mean? What are the pros and cons of each option? And which should you choose for your business? Look no further - in this article, we’ll explain the differences between each model and compare their pros and cons.
What is outsourcing?
The definition of outsourcing is simple - you, as a company, hand over one or more projects or tasks to a third-party company that specializes in the relevant area. For example, if you want to create a new web app for your business, but you don’t have enough skilled developers in your company for this task, you can outsource the development process to a software house.
The biggest (and most commonly mentioned) benefit of outsourcing a project or department are heavily reduced costs. Not only will you pay only for the amount of work done (rather than regularly paying a salary for an in-house worker), but you can also hire a company from a different region to your own that pays lower hourly wages.
Outsourcing also gives a great deal of flexibility - with the in-house model, when you need to add a new worker to your current team (because of an unexpected problem or new project requirements), you would need to start the recruitment process all over again. This often takes far too much time and increases the costs of the project as well. By outsourcing, you can quickly modify your team depending on your needs and requirements, without spending time on hiring and training new employees.
And in a global market, businesses aren’t constrained by geographical restrictions - they can partner with companies from their own city or country, or they can collaborate with companies from other countries or even continents. Depending on the distance between the companies, outsourcing can be divided into two subcategories, nearshoring and offshoring. There is also another option, which is hiring a remote team. Let’s highlight the primary differences between all three possibilities.
What is offshoring?
One type of outsourcing is offshoring, which is when a department (or sometimes even the whole business) is moved to an entirely different country or continent, often in a completely opposite time zone - for example, if a UK company decides to move their IT department to India. This move might seem drastic, but it actually has many benefits. Most importantly, the costs of production, research, and wages might be much lower in other countries than in your own region.
Another huge advantage of offshoring is that you are not restricted by any geographical borders when searching for outsourcing partners, so you have access to an enormous pool of talent from all over the world. This makes finding the specialist you need much easier, even if you are looking for a particular niche expert.
But this huge amount of opportunities also comes with several challenges and risks, the biggest of which is the communication barrier. To ensure smooth and efficient work, you need to confirm whether you can communicate in your native language (which might be hard to find) or English with a given company. Some other things that might get in the way of efficient work are different cultures, work habits, and time zones. While on the one hand, it might be convenient to have an uninterrupted workflow thanks to varied time zones, efficient communication when there’s a 6-8 hours difference will require working out what method of contact, and when to make it, will work for both of you.
Controlling the quality of their work might be troublesome as well, especially if you need to visit the partner’s office frequently. Travelling between different countries might be both costly and time-consuming, which severely limits how often you can visit the offshoring company.
If moving your business to a faraway region is not an option for you, how about moving somewhere closer? Compared to offshoring, where companies can move their departments or processes to a completely different continent, nearshoring is when companies outsource to regions closer to them geographically and culturally - usually in the same or a similar time zone.
Let’s say you have a UK-based company. In the offshoring model, you might consider moving part of your business to India, Brazil, or China. With nearshoring, you would rather pick a company from Europe. While the labour costs might be higher than in the offshoring model, your company could still save a good chunk of their budget while avoiding several problems that can result from partnering with a company based in a vastly different country.
Most importantly, communication is usually much more comfortable and smoother in the nearshoring model. Not only might there be barely any cultural differences (except for regional holidays, etc.), but the time zone will be the same or similar. Scheduling meetings or reaching out in case of urgent issues will therefore be much easier, as both you and the partner company work at similar hours. This will also improve communication between team members, since they can reach out to one another whenever they need, without working out what time it is elsewhere. Travelling for face-to-face meetings in the nearshoring model will also be much less expensive and troublesome, so you can visit the outsourcing company more frequently.
The biggest problem with nearshoring though is that you will have much fewer partners to choose from. Since the area to which you can outsource is limited, finding a company that precisely fits your needs might be more challenging. Because of this, you also need to be prepared for slightly higher costs of outsourcing to nearby countries.
Remote teams are a bit different from the two models above, even if they are often associated with nearshoring or offshoring. They are more of an alternative staffing method to the two outsourcing models. Between 2005 and 2017, there was a 159% increase in remote work thanks to technological advancements and also simply being regarded as a “nice thing to have.” But because of the ongoing pandemic, the amount of companies allowing remote work has only been growing - and so has the number of companies and employees who have noticed the numerous benefits of remote working, such as saving time and money on commuting). By 2022, the amount of remote work is expected to increase by 77%, mainly because of its convenience. A remote team as an in-house team that works from home is therefore another option.
But there’s also a “remote team” as a separate team that works closely with you on a specific business project or several tasks, despite being a part of another company. The main difference between this and previous outsourcing models is that the remote team doesn’t work on their own, but instead they are in close contact with the outsourcing company.
Putting this in the form of an example, a UK company might hire a remote development team to help them build a mobile app for their business. While they could be in a completely different location to the UK company, they will be in daily contact and the team will only work on this one specific project. The outsourcing company, therefore, stays informed about every stage in the development process, and also knows about any issues or challenges that occur. This way, the outsourcing company has far higher control over the project than they had if they outsourced it in a typical way. They know exactly who is working on the project, for what each person is responsible, and how the development process is going.
As a result, work on a project will go much faster and smoother thanks to regular contact between the remote team and the outsourcing company improving the productivity of both and also building trust between them. While this way of outsourcing does answer some concerns that companies thinking about outsourcing might have (mainly worries about a lack of control over the project or task and the security of their data), there’s still the risk that the partners might have a difficult time working together at first because of different working styles or hours. Also, if it’s important to meet face-to-face with the people you will be working with, then a remote team might not be the best option, as you might not have the opportunity to meet them personally (especially if they work in a different country).
Whichever model of outsourcing you pick, there are many things you have to consider and it won’t come without risks or challenges. The offshoring model gives you the lowest price with the highest pool of talents to pick from, but also the least amount of control due to regular communication potentially being difficult. With nearshoring, you will have a lower number of companies to pick from and slightly higher costs, but since they will work at the same or similar hours to you then regular communication and collaboration is made much easier and smoother - which means higher productivity as well.
Remote teams, meanwhile, can give you the biggest amount of control over a project and are the most flexible option too, but you might need to spend time together on adjusting your work schedules and processes. What’s more, any differences might get in the way of successfully finishing a project. If you still have doubts or questions about which option would be the best for you, how about reaching out to us? We’d be happy to help you choose the best option.