Nearshoring vs Offshoring

What is the difference between Outsourcing, Offshoring, and Nearshoring?

When we speak to our clients, there is often confusion about the different terms: outsourcing, offshoring, and nearshoring. Similarly, there is often confusion about when to use each term.

Let us explain the nuances between these strategies, their pros and cons, and provide some examples of how our clients use each approach to optimize their business operations.

Definitions

Outsourcing
This refers to the business practice of hiring an external party to perform services or create goods that were traditionally performed in-house by the company’s own employees and staff. Outsourcing is often done to cut costs, access specialized skills, or for efficiency reasons. Outsourcing is not necessarily related to moving activities to another country; it can be done domestically or internationally.

Offshoring
Offshoring is a type of outsourcing where a company moves a portion of its business operations to a different country, typically to a country where labor costs are lower. The goal of offshoring is often to reduce costs. The work could be done by the company’s own employees in the offshore location or by an external party.

Nearshoring
Nearshoring is a type of offshoring where a business transfers its operations or services to a nearby country, often to a country that shares a border or is in the same time zone. The motivation for nearshoring is mainly to lower labor costs while minimizing the challenges associated with different time zones and cultural differences, thus enabling more synchronized communication and collaboration.

Choosing the Right Approach

Outsourcing vs. Offshoring/Nearshoring
A good question to ask upfront is: Do you want to control the activity, or do you just care for the result? Most companies choose to outsource activities that are not part of their core business and can be easily performed by third parties – achieving economies of scale. Examples can be payroll processing, website development, or tasks like office cleaning. Our clients choose offshoring and nearshoring for tasks that offer high potential for cost savings but should be kept in-house. The tasks are then shifted to another country, while our clients stay in control of the task.

Offshoring vs. Nearshoring

The difference between offshoring and nearshoring is the distance between the client country and the shoring country. The distance often correlates with the cost-saving potential. Countries nearby can offer moderate cost-saving potentials, while countries with high cost-saving potentials are often far away. With increased distance, not only does the cost-saving potential increase, but also the complexity of managing the employees there. It is relatively easy to manage employees in a nearshore country. They are in a similar time zone, and traveling between the countries is easy. Managing employees in a country that is far away is more difficult. We recommend our clients consider the team size before deciding between offshoring and nearshoring. We have seen that small teams need closer alignment with headquarters and thus qualify better for nearshoring (we have clients with a single employee in a nearshore country). If a small team is placed in a faraway country, the cost savings achieved by lower salaries are often diminished by the higher complexity of managing the remote team. Therefore, we recommend considering offshoring for larger teams.

Summary

Outsourcing

• “Black box,” no in-house knowledge
• Good for non-core activities
• Example tasks: website development, payroll processing
• High cost-saving potential
• Complexity to manage: low

Offshoring

• Full control – no loss of knowledge
• Suitable for core tasks
• Example tasks: software development
• High cost-saving potential
• Complexity to manage: high
• Recommended for larger teams

Nearshoring

• Full control – no loss of knowledge
• Suitable for core tasks
• Example tasks: software development, call center, engineering
• Medium cost-saving potential
• Complexity to manage: medium
• Suitable for all team sizes (1 person possible)

Using an EOR for Offshoring/Nearshoring as an alternative to Outsourcing

An alternative to outsourcing or nearshoring is to use an Employer of Record provider like FMC Group to build up a team in a country where you do not operate a local legal entity. We call the service Nearshoring/Offshoring by Employee Leasing. The approach is very simple. FMC Group hires employees in the offshore country on behalf of the client. The client takes over the functional management of the employee while we take over the administrative part (paying salary, payroll tax, social security, etc.). For some clients, we take over additional tasks like recruitment, providing office space, purchasing notebooks and mobile phones, etc. This works for all company sizes and many different use cases, as there is no minimum team size – we have clients that start with one employee abroad.