Outsourcing, Offshoring or Nearshoring — Which is Best for My Company? These are the differences between outsourcing, offshoring and nearshoring, how they are used as business strategies, and which would be better for your company.
By Pedro A. Barboglio Murra Edited by Micah Zimmerman
Opinions expressed by Entrepreneur contributors are their own.
Large corporations have been using offshoring to gain a competitive advantage by lowering their manufacturing costs since companies like General Electric pioneered the practice in the 1960s. Outsourcing started in the 1950s and became an attractive business strategy in the late 1980s as businesses began focusing more on their core competencies (NCST). Initially, these business strategies were mainly reserved for big corporations. However, as remote work technologies have developed and offshoring has gone from a strategy for lowering manufacturing costs to recruiting talent from around the world, companies of all sizes have turned to offshoring or nearshoring as a business strategy.
The strategy has grown since 2020 due to five main factors:
- global competition and the search for the best talent
- COVID-19 forcing businesses of all sizes to work remotely
- employees voluntarily resigning from their jobs en masse, compelling businesses to find talent abroad
- high inflation rates and fear of a recession prompting businesses to examine strategies for cutting costs and maximizing their budgets
- companies applying these strategies to almost all positions and not only IT.
Related: Your Most Pressing Offshoring Questions, Answered
What are the differences between these concepts?
We must first understand the difference between outsourcing and nearshoring/offshoring. Outsourcing is when one company hires another to be responsible for a complete activity, losing control of the work done; the former pays for deliverables. For example, when a company outsources its designs to a design company, it relinquishes control of the activity, and the hired company takes responsibility for the designs. It will manage the team and deliver the designs.
Nearshoring or offshoring is when a company hires staff abroad through a firm. The company controls the team, which reports directly to the company. The firm oversees legal compliance, payroll and HR — it might also provide office space and other value-added services. Let's say a company wants to retain control of its design team and design activities; instead of outsourcing the work to a design company, it would hire designers from Mexico through a nearshore staffing firm. That firm would be the employee and be in charge of everything related to staffing, but the staff would report directly to the first company, ensuring they share the same culture and values.
Nearshoring/offshoring is sometimes referred to as staff outsourcing because a company is outsourcing everything to do with staffing in a given country to a firm. Another term used for these practices is virtual staffing, where a company hires, for example, virtual designers. However, virtual staffing is a misnomer because the staff would not be virtual; they would report directly to the hiring company and would be an extension of its team in another country.
The difference between nearshoring and offshoring is that, in the former, staff is in a neighboring country rather than an overseas country, as with offshoring.
Related: 10 Strategies for Hiring and Retaining New Employees
Which one is better for my company, outsourcing or nearshoring/offshoring?
Deciding which strategy is better for your company requires first understanding your needs.
From my experience, you should outsource when an activity:
- is not your company's core competency
- does not affect your clients directly
- does not involve support for your clients
- does not strictly have to be controlled by you
- cannot be handled by someone hired in-house, and economies of scale are available (for example, needing designs but not many scenarios would justify hiring a designer via outsourcing, whereas nearshoring/offshoring will be cheaper when you need to hire and manage a designer)
- is one you do not know how and do not want to oversee (for example, outsourcing your accounting and taxes to a CPA firm makes sense when you prefer not to invest time and energy in an accounting and tax department).
You can always use nearshoring or offshoring to cut costs or stretch your budget while getting talent from around the world. For example, if you have the budget to hire one digital designer but require a team, you might be able to hire three digital designers in another country. Based on my experience, I recommend analyzing which positions can be performed remotely by:
- ascertaining if you are having trouble filling a position;
- reviewing for each position how much you would save if you were to nearshore/offshore it; and
- identifying any department, such as customer service, that could be completely nearshored or offshored.
These analyses will guide you in developing a plan for building your remote team through a staffing company.
Related: How to Prepare Your Employees for Outsourced Hires
Should I go nearshore or offshore?
Companies initially recruited from developing countries primarily to save money. They, therefore, turned to counties like India and the Philippines and began offshoring low-level positions.
Companies are now using offshoring and nearshoring to save money and tap into global talent. They are offshoring positions of all levels. Companies are not looking for the cheapest solutions but for workers in the same time zone, countries with cultures similar to that in their country, and firms that share their values. Companies thus often look in neighboring countries, which is why nearshoring has been growing.
Whether nearshoring or offshoring is better depends on what you are looking for. If you are looking only for savings, I recommend offshoring. Offshoring's likely drawbacks are differences in time zones, culture and distance. If you are looking to save but willing to save a little less to have your team in the same time zone as you, in a country with a similar culture, and one flight away from your offices, then nearshoring is the best strategy for you.
