The difference between Nearshore, Offshore and Onshore software development
Updated August 19, 2019
"Do what you do best, and outsource the rest" - Peter Drucker
Outsourcing software development to a domestic or foreign third-party contractor or vendor has become the go-to strategy for companies in the United States looking to stay competitive in their market. The main reasons why companies choose to outsource include:
- Minimizing labor costs, the #1 inhibitor to technology growth
- Domestic talent shortage
- US immigration policies make recruiting tech talent difficult
- Gaining access to specific skills the company lacks or can’t afford to hire in-house
- Increasing production capacity during busy periods
- Having the flexibility to grow and shrink their team on demand
- Being able to focus on core business activities
There are three main outsourcing models to choose from: onshore, offshore and nearshore. In this article you’ll learn how these models will apply differently according to the geographic distance from the company doing the hiring, and we’ll break down the differences between each of them. We’ll also outline the risks and benefits of each one, and suggest some priorities to keep in mind which will help your decision process.
Defining onshore, offshore and nearshore: How geographic location affects naming conventions
As we mentioned above, the three names for the models will apply differently depending on the distance and time zone difference from the company doing the hiring:
- Onshore involves hiring a vendor from your own country
- Nearshore involves hiring a vendor which is geographically close to you, and no more than four time zones away
- Offshore involves hiring a vendor which is geographically far from you, and more than four time zones away
Let’s see two examples to illustrate the role played by location:
- If a company located in Spain (Western Europe) hired a vendor from Ukraine (Eastern Europe), that would be considered nearshore, as they are only one time zone away from each other. However, if that same company in Spain hired a vendor from Asia or the Americas, that would be considered offshore, as they are more than four time zones apart. Onshore would involve the Spanish company hiring a vendor from the same country, Spain.
- In the same fashion, if a company in the USA hired a vendor from Latin America, that would be considered nearshore, and hiring a vendor from Europe or Asia would be categorized as offshoring. Onshoring would involve working with a US vendor.
As we move forward with our guide, all our examples will be framed from the US point of reference.
Differences between onshore, offshore and nearshore
Now that we have a clearer picture of what each of the models entails, let’s dive into each of them in more detail to analyze their risks and benefits, and see how they stack up against one another.
Onshore Software Development
The onshore outsourcing model involves partnering with other companies in your own country. This is the case for many US-based software development companies that are most comfortable handing their projects or specific tasks to other firms in their local industry network.
By definition, this model is the closest to you geographically, and we can safely assume it would be the ideal scenario for US firms in need of outsourcing some of their work. Having the same time zone, culture, language and skill levels at your disposal is hard to match as a value proposition. The possibility of having your contractor come to work in your office location is another big plus.
That being said, the big downside of the onshore model is cost, considering that onshore hourly rates below the $75-125 range are rare. Talent shortage in the US will also make your search longer, more difficult and expensive. So if your goal is to maximize your budget, you’ll likely struggle to find vendors in your home country that can compete with offshore and nearshore rates.
Offshore Software Development
Offshore outsourcing is the most widely known of the three models, and it’s probably what most of us initially associate the term outsourcing with. Countries from abroad like Poland, Romania and Ukraine in Europe, and India, China and the Philippines in Asia are some of the most common offshoring destinations from the US market.
The offshore developer workforce has some exceptional talent to offer, and its hourly rates are the lowest among the three models, the range for offshore being $25-50. On the other hand, this market can get pretty noisy given its size, and as a result it takes time to find quality companies.
The main disadvantage of the offshore model when applied by US companies is time zone difference, which makes communication within Agile software development teams a lot more difficult. Flawless organization in this regard will be key in order to avoid project delays and unforeseen costs.
Nearshore Software Development
Nearshore outsourcing involves partnering with companies within similar time zones. When applied to North America, this mainly involves working with countries from Latin America, which has evolved to become a top outsourcing destination for the US market.
The appeal of this model is that it provides you with the combined benefits of onshore and offshore outsourcing:
- Hourly rates in Latin America range from $40-75, meaning you can still maximize your budget while tapping into top talent
- Time zone difference is low, ranging from 1-4 hours away depending on the country, which will make agile communication and team overlap much more efficient than the offshore model
- Travel costs will also be lower when onsite visits are necessary
- High cultural alignment and English language fluency
Bringing it all together: Which outsourcing model suits your specific needs?
As we’ve seen so far, each of the three models has its pros and cons. To choose the right outsourcing model for your specific needs, focus on establishing your priorities:
- Price: If your main goal is getting the lowest rates available, offshore might be the ideal model for you, as long as your project requires minimal communication between teams.
- Quality: Are you looking for expert developers? If you can afford onshore rates, this model will provide you with the best skilled talent. Offshore and nearshore boutique shops, which tend to specialize in specific technologies, are your next best option.
- Communication: Can your onsite and remote teams perform well within distant time zones, or is team overlap a must? In the latter scenario, offshore should probably be discarded.
- Team Size: How big will your team need to be? Which models does your budget allow for in this regard?
- Length of Engagement: Will this be a one-time engagement or are you looking for a long-term partner to go back to? How will all the above considerations affect each scenario?
The right outsourcing partner can help your business grow while reducing risks and be more efficient in your delivery. We hope this guide has provided some clarity on the different models you can choose from. And if you’re looking for a nearshore partner, feel free to get in touch to meet our team and discuss your business goals.