Outsourcing, Nearshoring, and Offshoring Explained

Onshoring vs Nearshoring vs Outsourcing

Finding qualified IT experts has become difficult – hiring them permanently even more so. Increased demand is facing a shortage of skilled workers. Companies have long since recognized that outsourcing work can ideally be significantly faster, more efficient and even cheaper. Giving projects to external teams doesn’t automatically mean handing it off to distant countries – but it no longer rules it out. In general, it is a drastic step for many companies and is certainly fraught with suspicion at first.  

However, the constant drive for digitization usually leaves no choice, unless internal options already exist.  

Staffing projects with external forces in companies is no longer a rarity. According to the press portal, 54% of IT experts are already located outside the company. And this trend is rising sharply. According to a study by it-daily.net, 20% of companies are expected to outsource their IT departments in their entirety by 2023. This trend is particularly noticeable among companies whose core competencies are not in the IT sector. Hiring experts only for occasional projects is financially unattractive.  

So, confidence in outsourcing is on the rise. But what exactly is outsourcing? And what is the difference between offshoring and nearshoring?  

What Is Outsourcing?

The term “outsourcing” comes from the merger of “outside”, “resource” and “using”, summarized: To use resources from outside. 
Companies outsource projects and areas of responsibility to third-party companies.  
Outsourcing is used to save internal costs for personnel, equipment and working space. 

Outsourcing is only a generic term and is usually associated with the outsourcing of work from one’s own company. Under the generic term there are other definitions, which differ in distance. A distinction is made between nearshoring and offshoring.  

What Are Reason for Outsourcing?

Reasons for Outsoursing ENG

The saving of costs in companies high in the course. Lower costs abroad are therefore the most important reason for outsourcing. This is followed by increased flexibility through outsourcing. Companies hand over responsibility and can thus flexibly assign various projects to their contractors abroad. Also interesting: access to technology is important for 15% of companies. This is likely to be especially true for companies whose core business lies outside IT. Another 15% value the ability to adapt quickly to changes in the global market. The effort required to update technology quickly is becoming too costly for many companies, not to mention the delay in production when employees must be trained to learn the new technology.   

Possibilities of Outsourcing

  • Lower wages abroad
    Costs for IT experts are significantly higher in Western Europe. A developer charges between €50 and €200. Offshore, the contribution is often only a quarter. The cost of outsourcing is also usually much lower than building an internal unit. 

     

  • Concentration on the core business 
    Especially for companies outside the IT sector, outsourcing helps to focus on day-to-day business.  

     

  • Flexibility
    Both the working hours and the forces involved are easy to scale. Depending on the requirements of the project, the team can be enlarged or reduced. A dissolution of the team is also uncomplicated. 

     

  • Large talent pool
    From a quantitative point of view alone, it is logical to look around globally for personnel. But foreign countries also have something to offer in terms of quality. While the shortage of skilled workers is increasing in Germany, strong training in the STEM sector has been taking place in Eastern Europe for several years.  

Risks of Outsourcing

  • Communication problems / Language and cultural barriers 
    Over thousands of kilometers, an exchange is logically more difficult than an internal meeting. – even if video calls are now fully integrated into the communication structure. Language barriers or time differences of several hours can greatly delay projects. 

     

  • Uncertainties with confidential data and company internals 
    When an external team is brought in, it dives deep into the company’s internal processes and often works with sensitive data. Trust is needed to ensure that internal information such as customer data or information about the company does not get out to the public. 

 

  • Lack of proximity to company processes
    Speaking of company processes: Until an external team is trained, it costs time and resources – even if there may be no technical difficulties.  

 

  • Legal and tax differences depending on the country
    Other countries, other laws. Getting to grips with the tax laws and working regulations of the respective country means additional work. Mistakes happen quickly and can lead to problems in the respective country.  

What Is Offshoring?

In general, offshoring describes the relocation of production or projects to geographically distant countries. From Germany, for example, this would be the entire non-European market. In the IT sector, Asian countries such as India or the Philippines in particular have become a popular destination for offshoring. This in turn resulted from significantly lower local wages. Many companies recognized the opportunities. Demand increased as a result, and supply grew accordingly.  

Companies can now find well-qualified experts in the IT sector there. Good English skills and a high work ethic are additional attractive factors.  

Offshoring Examples

Ford Motor Company (FMC) 
The car manufacturer has relocated its IT companies to India. Various IT services are offered from there. All e-commerce and customer support is also organized and managed from there.  

IBM 
The tech giant from the USA operates the subsidiary IBM India Private Limited in India with around 130,000 employees. It primarily serves international customers and provides support in matters relating to software development and the organization of clouds.  

Critics often criticize the long distance as an obstacle to fast and uncomplicated cooperation.  

What Is Nearshoring?

When companies from Germany want more direct contact with similar time zones, the choice often falls on Eastern Europe. So if the countries are in the closer vicinity, up to three hours by plane, then we speak of nearshoring. Despite the same continental affiliation, costs in Eastern Europe are usually significantly lower and therefore attractive. For German companies, this would be countries such as Poland, Romania or Ukraine.  Even if the price is probably higher than in the Asian region, proximity to the partner is decisive for many.  

Face-to-face meetings are usually possible with few border crossings, and geographic proximity usually helps in communication. A nice side effect is lower travel costs. Saved costs don’t want to be spent again on expensive travel. However, with the increased introduction of video calls as a means of communication, distances have become more irrelevant. Nevertheless, it is certainly helpful to accompany processes in real time and without major time zone differences.  

The continental connection increases the sense for “regional” trends and thus promotes creativity in the cooperation. This is a further development of the often clearly separated work packages that are put together with offshoring companies.  

According to it-fachmagazin.de, a rethink is taking place in the banking industry in particular. The financial institutions are now directing their outsourcing focus to the surrounding European countries and are thus taking advantage of the “know-how from neighboring European countries. The expertise for processes in the EU is certainly an advantage here.  

ElevateX Logo

Want to stay up-to-date?
Receive the latest insights for free.

Current Outsourcing Trends

Cost Reduction

Many industry leaders have previously stated that cost reduction is an added benefit to goals such as increasing flexibility or improving service quality. The number of companies prioritizing cost reduction has increased dramatically in this year’s survey, and in the face of a pandemic-driven global recession, this outsourcing trend will only intensify. 

Cloud Computing and Robotic Process Automation (RPA)

Cloud and RPA technologies are becoming an increasingly important part of most new outsourcing plans and transactions, which is no surprise. As they become more established and familiar, they are less revolutionary than they were two years ago and are practically inventory in all transitions. Companies are anticipating the next big technology catalyst that will drive their business forward. 

Maximum Flexibility

It is important to be flexible. Permanently changing business conditions, stricter visa restrictions and higher demands from customers are forcing service providers to be more adaptable. As companies learn to operate in a world where speed, quality, flexibility and affordability are more important than geographic location, outsourcing as a whole will increase. To stay ahead, service providers must rethink the way they deliver efficient remote services, develop plug-and-play solutions that enable rapid integration, and sign contracts that allow them to adapt to changing business objectives. 

Tips for Successful Outsourcing

Clear Expectations

The most common issue facing companies is what services to outsource and which contractor is best suited for the job. Make it clear what you want the employee to accomplish as part of the project. Also, be mindful of the contractor’s limitations, as they may not be able to solve all of your company’s problems, but only a specific business process. The more detailed, the more likely your partner will help you and add value to the business. 

Cheap Is Not Always Good

When it comes to outsourcing, many people make the mistake of hiring only the person with the lowest price. You’re likely to get a wide range of quotes from people all over the world with varying levels of experience. Outsourcing is an important factor, but quality should always come first.  

Communication Is Key

Your work is not done after successful outsourcing. Precise and detailed instructions should flow between the company and the team on how and what needs to be done. Deadlines may be necessary for larger projects. 

During the work, it is advisable to also support the freelancer by giving clear feedback on his work. When making changes, you should be as specific as possible. Depending on the length of the collaboration, you can even meet sometimes to improve the (interpersonal) relationship. But team building can also be done remotely. We already have an extra article on this.   

Hire Freelancers

Outsourcing entire departments directly is a big step. Starting small and staffing projects is a good idea. When executing a project that has a deadline or scaling departments internally quickly, freelancers who bring their experience and knowledge to internal teams can be exciting. 

Freelancers are self-employed and carry out orders from companies. Their work is always contractually agreed – usually through a service contract on an hourly basis – and relates to a specific period of time. In contrast to outsourcing, where entire departments can be taken over, freelancers are responsible for special projects or dedicated subtasks.  

Freelancers are almost always very well qualified and experienced specialists in their field. Only in exceptional cases do IT people start freelancing directly after university or training. The vast majority first gathers a wealth of experience in salaried employment before taking the step into self-employment. 

All information about working with freelancers can be found here.   

Conclusion

Covid-19 is not the only reason why companies are willing to cut costs. Outsourcing is an effective means of doing so. Individual projects or even entire departments are outsourced abroad. Depending on the distance, this is referred to as nearshoring or offshoring.  

The truth is that there is no such thing as a one-size-fits-all approach to outsourcing. Both offer advantages and disadvantages, and which one is better for you depends on a variety of factors such as budget, location, business goals and the nature of the project. 

Offshoring is often great for short or one-time initiatives, as well as operations that require less supervision. It’s also ideal for companies with tight staffing budgets or those that want a 24-hour production cycle. On the other hand, companies that want to build strong, long-term relationships and produce more sophisticated products tend to outsource operations closer to home. 

However, the trend seems to be moving more and more toward nearshoring. The advantages such as simplified communication, language and tax advantages, and an understanding of the respective continental structures speak in favor of nearshoring. In the EU, there are some countries with well-trained experts, especially in Eastern Europe. They are somewhat more expensive than in Asia, but bring well-known advantages that companies appreciate.  

Freelancers are also an increasingly popular way to overcome the shortage of IT specialists in Germany. While outsourcing is associated with a high effort and legal framework, hiring freelancers works quite simple. At ElevateX we clarify all framework conditions for you and offer fast and reliable solutions.  

Here you can send us a free request. 

Read the latest stories.

Never miss an update from us. 
Follow us on LinkedIn or subscribe.

Explore More

What Does Employer Branding Mean?

An Easy Explainer: What Does Employer Branding Mean?

Even if the shortage of skilled workers is probably not quite as serious as feared not so long ago, IT experts are in high demand and in many cases can choose their employer. Companies are therefore increasingly obliged to make potential employees an attractive offer. This is by no means limited to salary. In this article, you can find out what benefits a modern company should offer employees.

Read More »
Was macht ein Payroll Service

What Does a Payroll Service Do?

Payroll Services or Payroll Providers take care of the wage or salary accounting of the employees. They focus on legal aspects and ensure that every employee receives the payroll on time and on a regular basis.
Learn more about payroll-services and why freelancers can help in this story.

Read More »
How to do good onboarding

How to Do a Good Onboarding

The Onboarding is an important part of every good working relationship. In this story, we share exclusive tips and our own experiences on how to do a good onboarding. Additionally, we show, how freelancers can help at it.

Read More »
What Does A Relocation Service Do

What Does a Relocation Service Do?

In the course of globalization, the number of so-called relocation services or relocation agencies has also grown strongly in Germany. They help companies attract international talent by facilitating the move of future employees to the company’s country.
An alternative that many companies don’t recognize are freelancers. Read more on the topic why and how freelancers can help.

Read More »
What Are dApps

Beginner’s Guide: What Are dApps?

Not only the internet itself can be decentralized. Also, when it comes to applications for computers or mobile phones, those can also base on the blockchain technology. Such decentralized apps, or dApps, offer new possibilities and advantages.

Read More »
Hiring Freelancers Remotely

5 Practical Tips to Hire (Freelancers) Remotely

Since the start of the COVID-19 pandemic, the classic job interview has been increasingly replaced by remote solutions due to contact restrictions. According to a study by the German Association of Personnel Managers (BPM) and the job portal StepStone, online interviews had doubled within 8 weeks at the beginning of 2020. In 2022, employee searches via the Internet will play a greater role than ever before. Especially in freelancer recruiting, a lot takes place remotely. We have 5 tips for you for a successful conclusion.

Read More »

Join The ElevateX Community
For Free.