It used to be a relatively simple cost-benefit analysis to determine whether outsourcing various non-essential business processes was wise or not. If you were reducing costs and the new business processes got the job done as well as the older (expensive) processes, then it was pretty much a no-brainer.
Businesses of all sizes operate in a more complex and integrated environment today, and decisions regarding changing operational processes need to be carefully examined from the consideration of all stakeholders. There are not only more factors to consider in making decisions about outsourcing today, businesses also have many more options to choose from in terms of where, as well as what business operations they send out of house.
Onshoring is when you outsource operational functions from your business to another company in your same country or region. Although you can typically reduce labor costs somewhat, and generally enjoy highly skilled labor with minimal language or cultural barriers, but onshoring is typically relatively expensive compared to offshoring or nearshoring.
Advantages of Nearshoring
When you outsource operational functions from your business to another company in a neighboring country or region it is called nearshoring. Nearshore outsourcing is generally less expensive than onshoring, the labor is usually reasonably well skilled, but language can be an issue in some situations. Nearshoring has the added benefit of relative proximity for easier site visits, and often shares the same time zone.
Why Offshoring Could Still Be Your Best Bet
Despite the advantages noted above, for many companies, traditional outsourcing (moving in-house business processes to firms in a foreign country, with labor likely to have a different language and culture) is still their best bet.
The key benefits of the lowest costs, and access to highly skilled labor at a very low price, make offshoring still the smartest option for many enterprises.
Surprisingly, it turns out that in most cases, large offshore outsourcing firms in India, China and elsewhere are the most capable if you have a large project and relatively little time. The speed of execution in larger business process projects relates both to the complexity of the project and the capabilities of the firm handling the project.
Two major factors impacting the speed of execution of a project are the offshoring firm’s availability of resources, and defining requirements clearly.
Offshore firms have greater flexibility in stocking up on manpower and physical resources ahead of time, as well as rolling out the project more quickly than onshore firms in most cases. This is because onshore firms located in countries with expensive labor need to keep costs down by only bringing in talent as a new project ramps up.
On the other hand, onshore outsourcers are generally better at requirements collection and definitions than offshore firms because of shared language and minimal cultural barriers.
Keep in mind, however, that while language and cultural barriers can impact the quality of services, focusing on hiring specialization and careful quality control can mitigate these issues.
While every outsourcing project faces some execution risk, there are greater risks when projects are outsourced to nearshore or offshore locations. That said, these execution risks can be greatly reduced through a thoughtfully designed risk management plan, as well as an effective management plan.
The recent decline in the currency values in countries where major offshore forms are located is providing an even more compelling reason for enterprises of all sizes to consider outsourcing at least some of their business processes. A decline in currency value means that North American and European firms are getting even more “bang for their bucks” (and Euros) in terms of cost savings.
Travel costs also have to be factored into an outsourced workforce decision, especially with long-term outsourcing projects. Projects with onshore and nearshore outsourcers will obviously involve fewer travel costs. However, the drop in many currency values makes the cost for skilled tech talent less than a third than that in major metropolitan areas in the US. Consequently, offshoring is likely to continue to enjoy a renaissance for at least the next few quarters.
There is no “cookie-cutter” formula to determine whether onshoring, nearshoring or offshoring is the right call for your firm. You need to take a close look at your business processes and the associated costs, and then carefully weigh the potential cost savings against both the short- and long-term consequences of worst-case execution risk.