Why Offshoring is better than Nearshoring for product companies and start-ups in the technology sector?

The right team can win you a battle in most cases. Therefore, hiring the right people at the right time and for the right cost is of utmost importance for product SMEs and tech startups.

The global tech shortage is severe, with 40 million unfilled jobs in 2020. This figure is expected to rise to over 85 million by the end of the decade. If companies do not implement alternative solutions, soon, this could result in €7.1 trillion in unrealized revenue.

In order to mitigate this, many product companies, and IT startups opt to have their offices in offshore or nearshore locations for their product development.

Offshoring and Nearshoring – What do they mean?

Offshoring implies that a company transfers specific tasks or projects to a team in some other country with a motto to lower costs. The most common offshore locations include countries like India, China, and Ukraine.

Nearshoring refers to the delegation of tasks and projects by companies to teams located in a nearby country, or at least on the same continent. For instance, a company in the USA might transfer some of its tasks to a team located in Mexico.

Offshoring as well as Nearshoring provide almost similar benefits to companies with some exceptions. Both are cost-effective solutions that have been used by IT companies and startups for several years with proven results. These strategies have assisted IT companies in lowering costs while maintaining productivity. And they’re not going anywhere anytime soon.

Benefits of Offshoring

According to a report by McKinsey, Offshoring services can help companies save 45-55% in the overall cost base. But what makes Offshoring more popular than all the other available options? Listed below are some of its benefits:

1. Low labor cost
2. Access to skilled labor
3. Faster turnaround time as generally the offshore teams work 24/7 for your business
4. More savings on operational cost
5. No more worrying about the recruitment process, social benefits, or training of employees
6. Tax benefits by working in countries that provide tax holidays and other financial benefits to companies.

One of the best examples of companies benefiting from Offshoring is CitiGroup. The company has been Offshoring its projects to countries like India, and the Philippines since the 1990s. In 2014, it even slashed 11000 jobs at its headquarters and took them offshore, and this move saved the company $1.1 billion a year.

Limitations and risks associated with Nearshoring

Now that we have seen the benefits of offshoring, let’s focus on some of the limitations of Nearshoring

1. More expensive than offshoring
2. Because companies are looking to hire teams in neighboring countries, the talent pool gets restricted
3. While some companies claim Nearshoring is better due to few cultural differences and similar holidays, there still exist a lot of holidays that are country-specific and which are not shared holidays.
4. The time difference between the base location and the nearshore location might not be significant and thereby can increase your operational downtime or round-the-clock services.

How Offshoring is better?

Some key pointer that make Offshoring a better solution than Nearshoring:

• The operational cost of Nearshoring is more expensive than Offshoring
• Some of the common tasks that product companies tend to Offshore or Nearshore are administrative activities, HR functions, R&D, data entry, and accounting services. For these tasks, Offshoring seems to be a more ideal choice as it gives you access to a large pool of qualified workers who provide you with quality delivery while charging half of what Nearshoring teams would

To sum up, Offshoring and Nearshoring are both excellent methods with their own set of advantages. However, offshoring is a better choice for Startups and product companies due to the shortage of qualified professionals and budget restrictions.