Feb 4, 2022, Consulting

Onshore, Offshore and Nearshore – types of outsourcing

John Oxley Business Consultant
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Embracing the work-from-anywhere mindset, Peter, a 28 year old Pole, lives on a chicken farm in a small village in southern Poland, and remotely organises and updates software for a large firm in the UK. Twice annually, he travels to headquarters to meet the CIO face-to-face and discuss future plans and objectives. With a minimal time difference, he can do the necessary farm duties before the UK company starts in the morning, then makes himself available for any problems that might occur until the firm closes at the end of the day. Language isn’t a problem as Peter is fluent in English. No commuting, a good salary, and beautiful surroundings. The company is happy, as their costs are considerably lower than having an on-site software maintenance team. It’s a perfect arrangement.

On the other hand, before online banking, when large banks outsourced their Call Centres to India a few years back, there were misunderstandings, communication problems and a general failure of the public to accept it. I recall my mother being shocked and a little unnerved when the call centre person gave her a breakdown of the upcoming weather in her little part of the UK. It wasn’t exactly peaches and cream.

Here, we are talking about the outsourcing of software development, what it means, how to avoid pitfalls, and which option suits different situations. Culture, language, distance, and time differences all pay a part. Here we go.

What is software development outsourcing?

A Law firm’s CEO walks into the IT department, and announces that he would like a mobile app that measures oil temperature, fuel consumption and battery discharge on his beloved 1937 Mercedes Benz 540K, and he wants it yesterday. The team leader nods, gulps and starts to panic, until a junior member of the team pipes up that he has a friend, a vintage car enthusiast, who also writes code. Bingo, outsourcing begins.

While it is great to have an IT team, it can never be presumed that everyone knows everything. Each member may have a speciality, and the team can solve most problems with the software they commonly use, but when there is a need for a unique package, outsourcing becomes the champion. With access to worldwide (or even just down the road) talent and skill sets, quick turnarounds, and shared project risks, the unique package loses its mystery and starts to become a reality.

There are some drawbacks, including a certain loss of control, clear communication and security issues, and perhaps a Non Disclosure Agreement necessary. But overall the pros outweigh the cons.

Onshore software development

Onshore software development often means leveraging a local talent pool, which can streamline project management and ensure the quality of the delivered software. When using a team in your home country, the alignment with local norms and business practices not only mitigates a lot of potential miscommunications but also reinforces the efficiency of the development process. Speaking the same language eliminates barriers, and the absence of cultural differences facilitates smoother interactions and more productive collaboration. Moreover, face-to-face meetings can be organized with ease, further enhancing communication and allowing for agile responses to any project changes or challenges.

In terms of staffing, when you engage onshore developers or software engineers, you are more likely to receive the expertise you pay for. For instance, if you are paying for a senior developer, the chances are high that you will get a seasoned professional, rather than a junior developer being overseen by a senior. This direct access to experienced professionals can be crucial for complex software development projects requiring sophisticated solutions and robust knowledge.

However, the primary drawback of onshore software development is cost. Onshore outsourcing within the same country usually means that the rates will reflect the local cost of living, which is often higher compared to other regions. This can make onshore software development a more expensive option, although the benefits of local expertise, easier logistics, and fewer communication hurdles often justify the higher expenses. These developers are typically well-versed in the latest technologies and frameworks, contributing to a robust development environment that adheres to high standards of quality and regulatory compliance.

Offshore software development

Offshore software development, also known as distance cooperation, involves collaborating with a team located in a different time zone, often several hours apart. This approach is particularly useful when specific skills required for a project are not available within a company. By engaging an offshore development team, businesses can access a diverse talent pool of software engineers without the need to hire short-term developers, thus eliminating the costs and time associated with onboarding new employees.

The process of offshore software development allows work to commence immediately once an agreement is reached, continuing seamlessly until the delivery of the product, service, or feature. Cost efficiency is a significant advantage of this model, with potential savings of up to 60% on development expenses, particularly in regions like Asia. However, challenges such as language barriers, cultural differences in work ethics, and disparate time zones can arise. These issues may impact project management, necessitating robust strategies to ensure alignment with company time and business needs.

Moreover, while the differences in time zones can pose scheduling challenges, they can also be strategically advantageous. For instance, when managed effectively, teams from the same country can operate in tandem across different shifts, allowing continuous progress on projects around the clock. This setup not only optimizes productivity but also aligns with the business’s needs to maintain momentum despite varying workdays and public holidays across regions. Thus, offshore software development, when integrated with thoughtful project management strategies, can enhance a company’s ability to meet its goals efficiently and cost-effectively.

Nearshore software development

Outsourcing to a team on the same continent, for example, UK to Poland, gives benefits such as miniscule time differences, face-to-face visits which are usually less than 2 hours travelling time, and cheaper running costs due to differences in Cost of Living and Currency Exchange. It is the ‘in-between’ version of outsourcing, and seems to be very attractive to most Western companies, especially in Europe. The downside is that it is difficult to find someone suitable at short notice, and a customer may have to settle for a lower class of team.

Comparison of prices, legalities, and taxes

 Onshore software developmentOffshore software developmentNearshore software development
PriceHighLowMedium to High
LegalitiesSameDifferentSimilar
TaxesSameDifferentDifferent

Price

Depending on a country’s economy, salaries differ all over the world. Labour costs are certainly cheaper in East European countries, and considerably lower in Asia. A rough guideline would be 100% in the home country, 60-80% in a Nearshore country, and 30-50% in an Offshore country.

Legalities

Each has their own legal system, and it is a mind-boggling area to investigate. However, if a company outsources to either Offshore or Nearshore, the team in that country will be responsible for all necessary paperwork, including salary, payroll tax, insurance and other benefits. The only part that the originator needs to do is get the invoice (which obviously involves prior negotiation) and pay it.

Taxes

Outsourcing, like everything else in life, has tax implications. Customers need to be well advised and prepared for negotiations with a service provider, taking into account the benefits and detriments. The customer needs to understand the tax variations of outsourcing versus retaining in-house, as certain taxes might not apply. Several countries have introduced tax initiatives for outsourcing, which may be advantageous, but might be restrictive. Finally, it should be decided who will be responsible for any tax after the product is completed, e.g. VAT, Sales Tax, Excise and Customs tax.

Conclusion: Enhancing Software Development Through Strategic Outsourcing and Team Integration

Development team augmentation will tune up software development by using tech experts regardless of location. All responsibility for hiring, onboarding, training and managing goes to the service provider. With the rise in Cloud computing (the market size is expected to be $480 billion in 2022), outsourcing will mean reduced maintenance costs, advanced data recovery in case of loss or corruption, and stable, continuous releases. Outsourcing, whichever method is chosen, will streamline operations and optimise business goals. Finding the best match for requirements is paramount. Treating a service provider like part of the team will benefit the arrangement. Cost, although important, should not be the leading factor. A low priced service provider might provide low service (that’s a bit of a mouthful!). 

There are numerous service providers globally, but it is important to remember that weekly demonstrations, daily reports and a good level of English are all vital components in making an outsourcing contract work for the customer.

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