What’s the Difference Between Offshoring, Nearshoring and Onshoring?

First things first: Outsourcing is not scary. It is not the business personification of the monster hiding under the bed. It can seem mysterious, though, as few businesses advertise that they have or currently use such a service. When outsourcing is managed appropriately and functions well, it hums and purrs behind the scenes as if an invisible spoke in the enterprise's wheel.

So let's clear the air and put fears to rest for good. What is outsourcing?

Outsourcing

TaskUs defines outsourcing as "a strategic practice and process set that allows a business to focus on core competencies, scale quickly, increase efficiencies, increase competitiveness and reduce costs by using third-party suppliers to perform aspects of its business that typically are performed in-house."

So that's that then? Are we all done here?

Not quite.

At the highest level, we divide outsourcing into three flavors. Think of these as the vanilla, chocolate and strawberry of the outsourcing industry. Each is appealing in their right. Each provides a set of differentiated (and somewhat overlapping) benefits to the organizations that make use of them as a component of a broader strategic initiative.

In 1989, outsourcing - at the time primarily focused on information technology (ITO) - was “only” a $10 billion industry. By 2014, the industry had expanded into multiple subsets of outsourcing (Business Processing Outsourcing, BPO; Knowledge Processing Outsourcing, KPO; manufacturing, etc.) and exploded into a $700 billion behemoth. The industry, in aggregate, is expected to grow 4.8 (compound annual growth) through 2018.

Let's review each of the three types of outsourcing.

Offshoring

Most people - especially, non-business people - consider outsourcing to be synonymous with offshoring. They are not. Recall the example from earlier. If outsourcing is the primary category -  as ice cream would be in the example - offshoring is merely one of its three flavors. If it helps, try to imagine offshore outsourcing as strawberry ice cream.

So what do we mean by "offshore"?

TaskUs defines offshore outsourcing as "a strategic practice in which a business hires a third party supplier to perform work in a nation other than the one in which the hiring business primarily conducts its operations."

As will become apparent in the next section, the primary point of differentiation between offshore outsourcing and the other two forms of outsourcing is location.

For example, if a business is located in the United States and outsources part of its operations to India or the Philippines, it is utilizing an offshore outsourcing strategy. TaskUs offers its partners and prospects several offshore outsourcing sites around the world.

Simple right?

In 2013, offshore outsourcing was a $100 billion global industry. It is expected to grow 8-12% per year through 2018. Frankly, it’s a massive industry that shows no sign of slowing down anytime soon.

What are the benefits of offshoring?

While there are many benefits to offshoring, let’s consider just a couple.

1. Sunrise-to-Sunrise Service - Unless an organization has discovered a new potent form of coffee that allows its employees to work 24/7/365 - and if you have, please get in touch with us immediately! - workers need to sleep. However, our modern global economy never sleeps. Very little frustrates customers more than trying to get support from an organization, only to get a prerecorded message that it’s after hours. With offshore outsourcing, organizations can expand their service footprint to 24 hours per day!

2. Labor Costs - Startups and enterprises that want respect annual budgets and profit and loss projections appreciate the labor cost savings that utilizing an offshore outsourcing strategy provides. Strategically selecting functions to outsource that are not core competencies (i.e. payroll at a clothing company or content moderation at a Silicon Valley tech startup) allow businesses to save its capital investment on a strict focus on what they do best.

Nearshoring

The next type of outsourcing is called nearshoring. Let's continue our analogy from the previous section and consider this the outsourcing industry's chocolate flavor.

TaskUs defines nearshore outsourcing as the "strategic practice where a business hires a third party supplier to perform contracted work in a nation that is geographically (and relatively) near to the hiring company’s home country.”

The easiest way to think about it is this: offshore work happens in a country far from the hiring company's location. Nearshore is in a country that is significantly closer, yet not domestic.

For organizations that want to test outsourcing on a smaller scale before leaning completely in and embracing offshoring, the nearshore option is very appealing!

For example, TaskUs' customers are located primarily in the United States. When these customers seek to include a nearshore option to their outsourcing portfolio, TaskUs can help. Currently, we provide this service through a partnership that provides our partners access to operations in four Latin American countries - Guatemala, El Salvador, Nicaragua and Colombia . This region is "relatively close" to the United States, yet is not domestic.

Nearshore outsourcing offers many benefits including:

  • A lower cost of labor
  • Time zone overlap
  • The ability to scale quickly
  • Lower travel costs
  • Closer cultural compatibility
  • Geographical proximity
  • Political similarities
  • Required languages
  • Provides the ability to test the outsourcing waters
  • High-quality talent
  • Economic similarities
  • Historical linkages

Let’s explore two of these benefits closer:

1. Time Zone Overlap - If you've ever worked on the West Coast of the United States and needed to make a business call to Europe or - gulp! - Australia, you know what a significant challenge it can be to align calendars so that everyone can be ready at the same time. With nearshore outsourcing, the nation where the work takes place in one of the same six time zones that the United States uses. For time-sensitive businesses who prefer to work in domestic time zones primarily, this is a massive advantage!

2. Lower Travel Costs - Related to time zone overlap is the less obvious benefit that business trips to locations in these zones are less expensive than traveling to the other side of the world. The nearshore option aids executives that seek to rein in budgets, yet still require an outsourcing option that will help scale their businesses quickly and grow revenue significantly.

Onshoring

The final type of outsourcing explored here is called onshoring. If offshoring is the strawberry flavor of the outsourcing ice cream and nearshoring is its chocolate, try to imagine onshore as the vanilla option.

Onshore outsourcing is also known as domestic outsourcing. TaskUs' definition for it makes this crystal clear. "Onshore outsourcing is a strategic practice in which a business hires a third party supplier to perform work in the same nation that the hiring business primarily conducts its operations."

Expanding upon our previous example, if one of our customers decides to include nearshore in its strategy, we offer a domestic at our San Antonio, Texas site.

Similarly to nearshore, TaskUs' onshore choice supports time zone overlap and travel cost considerations

At TaskUs, we have a domestic service offering in San Antonio, Texas. This domestic presence enables clients to leverage the incredible talent pools of local universities, convey a strong cultural fit between end-users and employees and deliver white-glove customer experiences.

TaskUs' onshore option has several advantages. Here are two:

1. White Glove Service - San Antonio, Texas has been named the #1 friendliest city in the United States. For customers that are concerned with earning high customer satisfaction (CSAT) scores - and every business should - this onshore choice becomes the perfect option for finding the top empathetic talent in the nation who will care for your customers expertly.

2. Recruitment Considerations - One of the biggest challenges with scaling quickly for any business is how does one then staff and support that growth? With San Antonio and the onshore option this concern is almost non-existent. Its residents have a neutral accent. Both English and Spanish are widely spoken; In fact, 22% of its population is bilingual. From 2000-2013, San Antonio was one of the fastest-growing cities for college graduates and is still the top city within Texas for this attribute. The San Antonio Metro area has the highest growth rate for Millennials in the nation, in no small part to its low cost of living and nightlife.  The point? Businesses that want to utilize a nearshore option for their outsourcing needs will have a relatively easy time locating high-quality talent to provide top-tier customer service.

So there you have it, whether it comes in an offshore, a nearshore or an onshore flavor, outsourcing is a convenient, thoughtful, fiscally responsible and easy-to-understand strategic approach to workforce management.

Some readers will ask, "Could my startup use more than one of the options at the same time?"

Absolutely!

However, combining the strawberry, chocolate and vanilla flavors of outsourcing into a multi-source strategy is a Neapolitan conversation for another time.

References

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2. Rampton, John. "These 25 Successful Startups Were Built With Outsourced Development." Entrepreneur. Entrepreneur Media, Inc., 19 June 2015. Web. 26 Oct. 2016.
3. "Deloitte's 2014 Global Outsourcing and Insourcing Survey." (n.d.): n. pag. Deloitte.com. Deloitte Development, LLC., Dec. 2014. Web. 24 Oct. 2016.
4. Bellais, Ian. "What Is Hybrid Outsourcing & Why Should You Care? | Valor Global." Valor Global. Valor Global, 04 June 2014. Web. 24 Oct. 2016.
5. Levitzki, Ray. "Onshore, Offshore, or Near Shore What Is the Difference?" Onshore, Offshore, or Near Shore What Is the Difference? Etech Global Services, 27 June 2012. Web. 24 Oct. 2016.
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8. Wallingford, Jay. "Onshore or Nearshore IT Outsourcing? When to Use Each or Both | Gorilla Logic." Gorilla Logic. Gorilla Logic, Inc., 27 Oct. 2016. Web. 24 Oct. 2016.
9. Duening, Thomas N., and Rick L. Click. Essentials of Business Process Outsourcing. Hoboken, NJ: John Wiley & Sons, 2005. Print.
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11. Oshri, Ilan, Julia Kotlarsky, and Leslie Willcocks. The Handbook of Global Outsourcing and Offshoring. Basingstoke: Palgrave Macmillan, 2015. Print.

Michael Buenaventura

November 06, 2016