Offshoring vs outsourcing is a dilemma that emerges before many companies that seek to optimize their development. Ironically, people often confuse these two terms, more so when it comes to software outsourcing and offshoring. For the sake of clarity, let’s take a closer look at the two models.
In this post, we will explore the key differences between offshoring and outsourcing. We will also cover a couple closely related terms like nearshoring and dedicated teams. Without further ado, read on.
Offshoring your services and production — what is it all about?
In a broad sense, offshoring essentially boils down to the relocation of a company’s business processes to a remote geographical location. In the context of software production, offshoring mostly means moving development, QA, R&D, or other operations abroad.
A typical reason to offshore is expenses reduction. Namely, hiring remote developers from Eastern Europe or South America can be up to 50% more cost-effective as compared to US-based developers. In some cases, offshoring to India or China might prove an even cheaper option.
The term can imply an internal process where a company offshores its own resources without hiring third-party providers of offshoring services. More often than not, however, offshoring involves hiring or partnering with a third-party company that will help you establish remote infrastructure in a new location.
Advantages of offshoring:
- Cost reduction. Costs for software production vary drastically across geographical locations. For this reason, having a remote or a geographically distributed team of developers is often cheaper than building your product locally.
- Global talent supply. Tapping into a global pool of programmers improves your chances of finding the best specialist.
- Round-the-clock operations due to different time zones. Distributing your operations across time zones is a way to ensure 24-hour customer support for a product. Developers and QA teams working in different time zones is another example when geographically distributed teams can prove useful.
Disadvantages of offshoring:
- Communication and culture barriers. It may take a while for people to start cooperating efficiently if they belong to different cultures. Naturally, this is becoming less of an issue nowadays as the world is gradually becoming a smaller and more connected place.
- Limited time for coordination activities. The flip side of having teams located in different time zones is having less time for Scrum meetings and other forms of teamwork coordination. For this reason, it is desirable to have at least half the work day overlapping for teams involved in the same project.
- The need to address taxes and legal matters in a foreign country. As a rule, providers handle this, but your company might still need to do a general research of local laws and tax system.
Nearshoring — a smarter way to offshore services and product development
Nearshoring is a practice of offshoring to a country that is not as remote as an offshore location. For instance, a country located in Western Europe can nearshore its business processes to Easter Europe rather than offshoring it to India.
Choosing nearshoring over offshoring helps companies reduce the time gap between offices, winning you more time for communication and coordination activities. This can be crucial for distributed development teams that need to coordinate their daily work during scrum meetings. Besides, a closer location typically means fewer cultural differences, which may contribute to streamlined cooperation.
On the other hand, nearshoring may be a more expensive option compared to offshoring. Still, “more expensive” doesn’t have to mean “less cost-effective”. As a rule, the advantages of nearshoring outweigh the slightly higher price.
IT outsourcing solutions in a nutshell
In essence, outsourcing comes down to hiring another company to handle some of your business processes. In many ways, outsourcing overlaps with offshoring or nearshoring — especially if we’re talking about software outsourcing and offshoring. But here’s the key difference: even though the term ‘outsourcing’ often implies hiring someone from a different country, it’s not a must.
Theoretically, one company can outsource some of its operations to another company located in the same region. When it comes to software development, though, we’re typically talking about outsourcing to another (often low-cost) location. The services offered by the providers of IT outsourcing solutions include one of the two major options:
- Turnkey development (the outsourcing company develops a project for you based on upfront requirements).
- Team extension (remote developers handling part of your production tasks).
- Readymade infrastructure. Providers of IT outsourcing solutions often operate as dev centers with well-equipped offices and administration staff.
- Developer motivation is the responsibility of the dev shop. It’s mostly your provider’s responsibility to make sure their developers are happy and productive. Good outsourcing companies invest into professional education, wellness, and team-building activities to motivate programmers.
- Legal, tax, and HR-related matters are being handled for you. As a rule, outsourcing companies hire a staff of professionals to take ownership of these matters.
- Risk of hidden costs. It is, in fact, crucial that you give your contract a thorough study before you sign any contracts. For instance, will you have to pay for a substitute in case of a force majeure? Your contract needs to cover low-probability situations of this kind.
- Limited control. If we’re talking about software development outsourcing, the developers working on your project are, technically, employees of a different company. Because of this, conflict of interests may arouse in some cases.
- Business risks. No internal employees who can understand and maintain the software built by the outsourcer.
Remote Dedicated teams: blurring the line between in-house and remote developers
The dedicated teams model is a type of outsourcing that aims to streamline remote software development for the client. The model revolves around 100% developer engagement, with remote programmers working exclusively on your project.
Dedicated teams are custom-built on demand. In a dedicated team, developers report directly to client’s managers and work as part of the client’s product team. They work from a dedicated room or office and are encouraged to dig deeper into the company’s vision. In this model, developer demonstrate greater commitment as compared to outsiders.
Bottom line: difference between offshoring and outsourcing in simple words
To sum up, the key difference between offshoring and outsourcing can be reduced to two points:
- Offshoring is always about moving production to an out-of-country location. It may or may not imply hiring other companies to handle your business processes.
- Outsourcing is always about hiring another company to handle some of your business processes. It may or may not imply moving production to an out-of-country location.
Sure, the line between the two terms is a blurry one, and the two models overlap in many ways. For instance, having some other company establish an offshore or nearshore office for you is, technically, outsourcing. Besides, working with providers of IT outsourcing services typically implies offshoring or nearshoring your production.