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Business Benefits of Offshoring or Nearshoring.

April 9th, 2013

In these tough financial times, many organizations are expecting far-flung destinations for their business or IT processes to take advantage of lower wages, lower infrastructure costs and lower operational costs.

Outsourcing is one of the best practices proven as a great business model for increasing profit margin, reducing operating costs and maintaining high-quality customer service. The business model is generally scalable and it allows companies in any business market to adjust resource allocation especially during the business conditions change.

In order to increase profits and reduce expenses, many companies choose out-of-country outsourcing, which consists of two major categories such as offshoring and nearshoring.

Offshoring is the process of reducing production costs by relocating business processes, operational processes or supporting processes of a company, from one country to another foreign country.

Recently, offshoring has been primarily allied with the sourcing of administrative or technical services that support both local operations and global operations from outside the home country, through internal or external delivery models.

The main reasons why companies would offshore their IT projects are as follows:

  • Increase in productivity
  • Availability of  manpower pool
  • Rapid turnaround time
  • Low staff-related costs
  • Significant cost advantage
  • Focus on essential business operations
  • Operational flexibility
  • Enter into new market areas

Even though the preliminary stage savings could be made through offshoring are conspicuous, what is less palpable are the hidden costs, problems that occur in management, variation in employment practices and laws, time lag, instability and miscommunication among clients and suppliers, that can result due to a misalignment of expectations when delivering services.

In contrast to offshoring, nearshoring is the process of transferring IP processes or business to other companies in a nearby country, habitually sharing a border with your country, where both the companies expect to benefit from different dimensions of proximity such as cultural, economic, political, linguistic, geographic, time zone, etc.

Most companies prefer the nearshore approach for their business or IT processes because of the following reasons:

  • Similar time zone: As the nearshore destinations have a similar time zone, both the parties will get some key advantages such as work done at the same time, get well-coordinated projects, which leads to more satisfied and steady workforces.
  • Similar language: As both the parties are in the same region, the nearshore provides experts in their client’s language. Therefore, the nearshore providers can able to easily and effectively communicate with their clients via. Telephone or E-mail.
  • Geographic proximity: The Geographical closeness of both the parties allows them to meet in person whenever they require. This helps them to easily solve some difficult issues face to face.
  • Cultural affinity: The cultural affinity of the parties helps them to have better communication as well as coordination. As there is a huge gap between offshoring partners, a lot of problems arise, which will be definitely avoided in nearshoring.
  • High-standards of education: Despite the education standards are not identical, they are more likely to be related to nearby countries. The well-trained nearshore providers will be having an education similar to their clients.
  • Cost-effectiveness: Nearshoring provides organizations the ability to manage a high-level of control on their production costs by enduring the cost of doing business at low-cost.

Nearshoring conquers several constraints of offshoring such as time lags, variation in local employment practices and laws and other oversights to tackle risks, which include intellectual property thievery and fraud. It offers great constancy and security along with cost-effectiveness. The benefits of nearshoring reflect both the country’s trade practices, standards, legislation and institutions.

For many companies, nearshoring represents the perfect combination between operational efficacy and cost-savings, merging the advantages of both outsourcing and on-site activities.

In the sourcing industry, nearshoring is continuing to grow and also becoming a feasible and attractive alternative when compared to offshoring, by focusing on proficient service areas as well as encouraging cultural, geographical and long-term cost savings.

In recent days, nearshoring has become a great marketing differentiator for the nations and providers who want to make themselves apart from other sourcing centers in Asia, particularly the dominant, India.

Even, already established offshore providers are now setting up nearshore centers to remain competitive in the UK market. Still, India is doing a great job in the offshore stakes. Indian companies are also looking forward to extend the offshore opportunity that helps them to increase nearshore strategies and also they are building up websites in several European countries.

Both offshoring and nearshoring entail export of production or functions, however both are basically different. A business may choose offshoring or nearhoring to utilize the services of outsourcing provider or to carry out the process itself.

Depends on the goal, business activities and risk management strategy, an organization will choose the type of outsourcing approach, either nearshoring or offshoring. However, the organization should also be aware that offshoring may cause more risks when compared to nearshoring.

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