Offshoring vs Nearshoring vs Onshoring for Tech Companies

For tech companies, the differences between offshoring, nearshoring, and onshoring isn’t just semantics; it represents a critical component of your competitive strategy, particularly when it comes to engineering.

In this guide, I’ll walk you through the definition and key attributes of each staffing strategy, as well as some examples of locations worth considering for on-and-off-shore talent sourcing.

Although the US will be primarily used in examples, I’ll provide some examples relevant for Europe and Australia as well.

Offshoring Definition

Going offshore means you’re seeking a development partner outside the country where your company is incorporated or based. Offshoring usually refers to the lowest-cost locations, which tend to be far outside US time zones, such as India or the Philippines. It’s often referred to as “BPO”, meaning Business Process Outsourcing.

Offshoring has been around for decades, particularly with corporate processes like enterprise-level call center facilities. Companies like Comcast have been notorious for moving customer support offshore since the 90s, when it became technologically feasible to do so thanks to the internet.

More recently, offshoring became wildly popular with smaller tech startups and “lifestyle businesses,” thanks in large part to books like Tim Ferris’s “Four Hour Work Week” which promoted the use of virtual assistants in low-cost labor markets like India.

Pros of offshoring:

• Cost of talent. The biggest reason tech companies go offshore for staff augmentation is that it’s substantially cheaper. Educated and experienced developers in these locations can be hired on contract for just a few dollars an hour — compared to tens or hundreds of dollars an hour in the US.
• Access to talent. When the US market runs out of qualified candidates, offshore locations with strong education pipelines for talent can be a big draw for the tech industry.

Cons of offshoring:

• Communication issues. Poor overlap between time zones and cultural barriers mean that
• High-volume vendors. Locations known for affordable labor like India have many ultra-low-cost vendors who look for uneducated clients and bid unrealistically low rates. Once on the hook, you can wind up with a broken app, legal liability, or worse.

Nearshoring Definition

Nearshoring is a subset of offshoring. Specifically, it refers to partnerships with developers who, while outside the country of origin, are within about three time zones (as a rule of thumb).

Nearshoring has become particularly popular for tech company structures that rely heavily on team augmentation, since the time zone overlap works well for all-day communications and agile methodologies like scrum that require frequent in-person communication.

Nearshoring is also popular because the rising cost of talent in offshore locations is increasingly diminishing the advantages of operating in those locations. Still, nearshoring high-cost processes like IT and development can be a huge advantage and allow companies to drop their development costs by half or more.

Pros of nearshoring:

• Time zone. Nearshoring enables a better alignment of schedules
• Cultural familiarity. Countries in the same time zone tend to have fewer cultural barriers.
• Highly educated talent. Nearshore developers are sometimes a better option than onshore in training as well as cost. For example, Uruguay requires six years of college education for software developers. The US, meanwhile, relies heavily on “boot camps” and other accelerated on-ramps to the engineering career path.

Cons of nearshoring:

• Higher cost. The cost of nearshoring, while substantially cheaper than onshore rates, is generally more expensive than sourcing talent onshore.
• Diminishing returns. Given the cost of some nearshore locations, it may make more sense to simply hire and train talent in-house.

Onshoring Definition

The term “onshoring” describes the practice of moving a business process from overseas to within the company’s home country.

For example, a US tech company closing a customer support call center in India and opening a customer support call center in Virginia would be “onshoring” their customer support.

The term is also sometimes used to describe sourcing talent or vendors within the country for the types of work that generally go offshore, such as data collection or chat support.

Onshoring is usually chosen as a strategy for sourcing talent or vendors in order to escape tax or legal implications of operating outside the US.

In recent years, onshoring has also become a trend due to rising labor costs in offshore locations, combined with the need to compete more aggressively with other companies — both of which make on-site teams more attractive.

Pros of Onshoring:

• Legal simplicity. Dealing with US entities facilitates easier negotiations and signing of contracts as pertaining to liabilities, deliverables, etc.
• Cultural familiarity. US major metropolitan centers like New York, Los Angeles, and San Francisco, and even smaller tech hubs like Seattle and Boston won’t impose any significant cultural or linguistic barrier or time zone offset.
• Reasonable rates outside major metros. Midwestern states like Michigan and Illinois, as well as southern states like Tennessee and Nashville, are more affordable than major US cities while maintaining the same basic benefits of an offshore location.

Cons of Onshoring:

• Competition for engineering talent. Engineering talent in the US is expensive, and the education pipeline isn’t robust enough to keep up with demand for talent.
• Bootcamp education norms. Education standards for developers are not as strict in the US, meaning a developer with only a bootcamp education can command senior-level rates with only a few years of experience on the job.

Nearshoring Examples for Tech Companies in the USA, EU, and Australia

Nearshore Examples for US tech companies:

• Brazil
• Argentina
• Uruguay

Nearshore Examples for European tech companies:

• Poland
• Ukraine

Nearshore options for Australian tech companies:

• New Zealand
• Philippines

Offshoring Options for US Tech Companies

• India has a decent pool of tech talent, but their engineering education pipeline does not produce the same consistency of quality in developers. If you stumble across a good one, you’ll have saved a considerable sum of money.
• Pakistan has a similar profile as the above, including a very offset time zone, but holds greater risk. Many US development agencies field software rescue mission inquiries from this part of the world.

However, the US has a couple more options which would be considered nearshore for the EU/AUS. This means the following countries tend to bring a mid-level price range as well as more reliable quality than the above, but communications may be somewhat out of sync. Once more, those countries are:

• Poland
• Ukraine
• Philippines
• New Zealand

Summary: Nearshore Strategies Are the Best Value for Technical Processes

Consider how much you’re willing to spend as well as what you need to accomplish. If you’re engaging a vendor for staff augmentation, ease of communication is essential to avoid misalignment between in-house and outsourced team members.

In this scenario, it is more preferable to choose an onshore or nearshore vendor. If you find the right nearshore country, it can actually produce products that are of a superior quality and a fraction of the cost of onshore options.

If you’re seeking full-service, custom software development done entirely by the vendor, with limited involvement by you as the client, the decision is more of a balance between onshore, nearshore and offshore, depending on how you value cost, quality, cultural understanding, and ease of communication.

Once again, I find nearshore development teams to be the ‘Goldilocks’ option where it has ease of communication and cultural familiarity of onshore partners while avoiding the hit-or-miss quality of offshore partners.

In addition, nearshoring is more cost-effective than onshoring, although the comparison is sometimes 1:1 on price if you’re looking at second-tier US cities and higher-cost nearshore cities.