Outsourcing has proven to be a great business model for reducing operating costs and boosting profit margins, whilst maintaining a high quality of customer service. The model is usually scalable and can allow companies in any market to adjust resource allocation as business conditions change. In an effort to maximise profits and minimise expenses, many companies opt for out-of-country outsourcing divided into two categories – nearshoring and offshoring.
Nearshore vs Offshoring – Which is Right for You?
Both terms imply export of production or functions, nonetheless they are fundamentally different. In both cases, however, a business may choose to use the services of an outsourcing provider or undertake the process itself. Which type of outsourcing works best, depends on the organisation’s goals, business process, and risk management strategy.
Nearshoring means that an organisation has transferred work to another organisation within its own region. For UK organisations, Europe is a nearshoring region and companies prefer to outsource within its boundaries mainly because of its data protection laws. When choosing this model, businesses move operations or functions to a “close” but more cost-effective location, with small time- zone differences and fewer cultural discrepancies. Proximity allows for less expensive travel, a greater degree of control and timely decision-making in critical situations. Nearshoring countries are often bound by similar financial and legal constraints that provide social and economic stability within a region.
Offshoring, on the other hand, is the relocation by a company of a business process to a more distant location. Generally speaking, wages in such locations are lower and the overall production cost may be significantly decreased. China, India and the Philippines are the quintessential examples of off-shoring destinations for ‘Western’ companies. If, however, the outsourcing service is not a manual production process, but a customer-related service, the disadvantages of offshoring should be considered. Different time zones, distance, cultural differences, and language barriers, can all impact the work process significantly.
The benefits for organisations who wish to outsource are great. The ability to focus on core competencies, the reallocation of resources to innovation and growth, reduced operation and managerial risk, no additional infrastructure investments and improved overall competitiveness. So, when choosing between nearshoring and offshoring, one should be focused on the benefits, but also be aware that offshoring may pose more risks than nearshoring, and those should be carefully considered.