Offshoring vs. Nearshoring vs. Outsourcing

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December 20, 2022

Offshoring vs. Nearshoring vs. Outsourcing

IT Outsourcing

IT outsourcing vs. offshoring and nearshoring: Differences in comparison

The pandemic has made the sore points of many business models obvious and shown where IT infrastructure and digital skills are lacking. Companies need to find new ways to increase their own IT resilience and make IT strategies more resistant to external influences. In addition to classic demands for efficiency increases and more agility, the expansion of digital business processes and IT security structures is the focus of corporate decisions. IT outsourcing and offshoring are sensible strategies for successfully countering the shortage of skilled workers. Besides gaining additional capacity, outsourcing offers many other advantages.

What is IT outsourcing?

Outsourcing refers to the transfer of services that were previously provided in-house to an IT service partner. The goals include benefiting from up-to-date expertise, reducing personnel costs, lowering the stress level of the company’s own employees and increasing productivity. IT outsourcing enables companies to focus on their core competencies and thus strengthen their competitive position.

What are the different types of IT outsourcing?

  • Business Process Outsourcing (BPO)

BPO involves the outsourcing of complete corporate functions, such as IT recruiting or the IT department. The strategic decision to outsource these areas to highly specialized service providers is aimed at achieving outsourcing goals – such as increased efficiency, greater cost-effectiveness and quality improvements.

  • Outtasking

If only individual tasks are outsourced – such as the development of special software, the design and programming of a website and an online store, and employee training – this is referred to as outtasking.

  • Outservicing

Analogous to outtasking, outservicing involves the outsourcing of complete services in accordance with the paradigm of a service-oriented architecture (SOA).

  • Cloud computing

Cloud computing increases the competitiveness and flexibility of companies by having external providers provide servers and storage and take care of IT security issues. Great advantages are offered by the ability to scale quickly and adapt IT resources in response to additional or reduced demand.

  • Managed services

External IT service providers assume responsibility for parts of a company’s IT infrastructure. In the case of cloud computing, this includes protecting the network from cyber attacks, regularly creating backups, performing all necessary updates, and maintaining databases.

  • Application service providing

Application Service Providing, also known as Software as a Service (SaaS), refers to the use of certain software products on the basis of a license model. Outsourcing is carried out in that both the software and the IT infrastructure are provided by an external IT service provider and access is provided online.

What is meant by offshoring?

The term offshoring is subject to change. In the past, offshoring was understood to mean production sites abroad that belonged exclusively to a parent company, but today it also includes external service providers. Strictly speaking, however, offshore locations belong to the company itself.

Differences between nearshoring, farshoring and onshoring

Companies that cooperate with IT specialists at external locations in the realization of IT projects and relocate IT processes can choose between different offshoring variants:

      1. Nearshoring

Nearshoring is the outsourcing of IT tasks to nearby foreign countries. Typical countries for IT outsourcing within Europe are Spain, Italy, Romania, Bulgaria and Poland.

      1. Farshoring

Asian countries – above all India – are typical destinations for IT outsourcing due to favorable costs and the availability of a large pool of highly qualified talents.

      1. Onshoring

Onshoring involves relocation to a favorable domestic location, partly with the aim of attracting cross-border workers from Poland and the Czech Republic.

Goals of outsourcing and offshoring: Closing the skilled worker gap

Whereas in the past the goal of outsourcing and offshoring was primarily to generate cost savings and thus gain an advantage over the competition, the current priority is to successfully manage the shortage of IT specialists. Collaborating with external service providers and outsourcing or offshoring parts of IT to locations abroad enables companies to recruit IT specialists where a pool of talents is available and labor costs are low compared to the domestic market.

Collaboration with remote teams

The formation of virtual teams in the implementation of IT projects is part of everyday work in many start-ups, medium-sized companies and corporations. Collaboration with highly specialized, external IT experts creates the best conditions for rapid project progress. Agile project management methods – such as Scrum and Kanban – enable a high degree of flexibility and efficiency by discussing requirements, ideas and problems within the teams and working out solutions together. Structured processes and good communication are essential building blocks for successful collaboration. In addition, IT coordinators ensure your remote teams are working optimally and efficiently.

Outsourcing vs. nearshoring vs. offshoring

IT outsourcing involves less planning and coordination effort for companies. IT service providers can be selected specifically according to their specialization in order to minimize the risks associated with long project durations and failure due to a lack of expertise. Calculable project costs as well as low personnel and further qualification costs in the own company ensure predictable budgets through IT outsourcing. Nearshoring, on the other hand, enables companies to build up reliable capacities on a permanent basis, to exploit synergy effects, to avoid having to transfer company secrets off-site, and to retain highly qualified IT employees for a long period of time at lower personnel and infrastructure costs in the European target country.

Conclusion – for which companies does IT outsourcing make sense?

Outsourcing makes sense for companies that have a clear IT strategy and need additional resources in the short and medium term to achieve their goals. Offshoring is designed for a longer time horizon.