Nearshoring Vs Offshoring: Which One Should You Consider?
Scaling your business can be intimidating, but you have several simple options. Two of which, Nearshoring and Offshoring, can allow you to succeed at speeds that were previously impossible. One of the most convenient benefits is that you don’t have to source, screen, and hire candidates all by yourself.
What is Nearshoring?
Nearshoring is basically hiring a firm in a nearby country, for example, the United States and Canada, to complete work for you, which you have been hired to complete.
This process is also sometimes referred to as sub-contracting with trade partners.
Businesses who participate in trade under NAFTA (North American Free Trade Agreement) are generally considered to be nearshoring their efforts.
Canada, Mexico, and the US all work together to supply the world with irreplaceable technology, smart partnership services, raw materials, and other industrial outputs.
Latin American countries such as Colombia and other important players in the region also enjoy the benefits of free trade agreements with NAFTA countries.
The Benefits of Nearshoring
The benefits of nearshoring are several. You can expect costs to be lower than they are in your home market, and you’ll be in similar time zones which makes meetings much easier, for example.
Nearshoring involves countries that are easy to visit, have similar time zones and pose a low language barrier. Colombia and other Latin American countries are also part of international trade agreements, so you can expect the other parties to be familiar with many of the legal constraints in a particular deal.
Beyond the cost benefits and legal perks of nearshoring, it’s far easier to establish company culture fits when everyone speaks the same language and has some understanding of any general cultural differences.
What is Offshoring?
Offshoring is relocating services, development or manufacturing processes to another country, commonly very far away. One of the biggest benefits of offshoring is cost saving. Ultimately, countless companies have successfully offshored to minimize costs and assisted in industrializing other countries as a result.
One key example in offshoring is Apple, which procures its supplies from China, among other countries. They’ve built a massively successful global brand with ultra-low-cost Chinese production, while also more than 100,000 members of the global economy.
Benefits of Offshoring
With lower costs comes reduced risk and entry into intelligent business operations. Not only can R&D be accomplished for less, but logistics, support, engineering, and mass production stages of business are also both more efficient thanks to offshoring. The only exception to this would be when a business relies on a nationally-exclusive third-party with specific manufacturing techniques that are otherwise irreplaceable.
Staffing is generally easier and more controlled through offshoring. The company at hand carries out hiring, training, and staff management processes. This can allow quality concerns to be put to rest. In many parts of the world, work quality and learning are held in high regard.
The final and perhaps largest benefit of offshoring is flexibility. If you’re working with larger operating margins, it is much easier to adapt to the market and capitalize on opportunities as they arise. Benefits to offshoring aren’t limited to dividends, they are perhaps, most valuable in the Net Present Value of a company’s current operating capital.
How Offshoring Effectively Reduces Costs
Offshoring saves on labor costs because individuals in other markets are willing to work for different amounts of money in other currencies, which may have a favorable exchange rate into their national currency—which is based on the strength of international foreign exchange (ForEx) markets.
Other key areas of benefit include:
- Contractors (1099s) are cheaper than employees
- Medical/vision insurance plans/premiums not required
- Cheaper healthcare in non-US countries - In some places, $9/hour can cover an employee with full benefits.
- No salary requirements/minimum wage
- Supply chain shortening
China and other countries produce massive amounts of raw materials. Sometimes, companies would be paying to import these raw materials, to ship them to their home market, and for other intermediary steps, such as import/export agencies and import/export taxes. When companies produce goods in a location that has the required raw materials, they can usually save money on additional fees like:
- Import/export taxation changes from shipping errors
- Shipping compliance providers (who commonly don’t warranty the correctness of their work.)
Why Offshoring Expands Your Business
It’s important to remember the Net Present Value (the difference between the present value of cash inflows and the present value of cash outflows over a period of time) of your operating budget.
Sure, you can front the additional $9,400 per hour to hire a factory of 1,000 Americans to crank out a year of (~8,100 linear hours) production time. But why do you want to frontload that $80 million in labor?
($12.5/hr - $3.10/hr) * 1000 workers * (8760 hours per year * 92.5% plant uptime)
The $80 million saved upfront can be used to acquire new plant locations, invest in R&D, hire more domestic employees for higher-sensitivity tasks, or any number of other options to create profit and grow the global economy.
As an added benefit, employees often gain substantial opportunities to grow as people, develop stronger leadership capabilities, and new understandings of production methods that can yield operational efficiency gains down the line.
What Is The Difference Between Offshoring And Outsourcing?
Offshoring means that production methods, skilled laborers, or other “business assets” will be transferred overseas and staying there for an extended period of time so that factories or other production facilities will be created in foreign countries. It also covers hiring pre-skilled agencies in foreign countries to handle tasks like manufacturing, customer service, and technical support.
Outsourcing can occur with domestic companies as well as foreign businesses. Outsourcing simply means that a company is hiring another company to do their grunt work, the more blue-collar tasks, such as sales, manufacturing or IT services. While many companies used to own data centers, many now outsource their core infrastructure to save millions per year in fixed and maintenance costs.
Top Offshoring/Nearshoring Priorities
End to End Collaborative Governance
Your offshoring or nearshoring organization needs to help you to implement a holistic approach to managing the scope of work by adopting a partnership attitude. An important priority in the relationship between companies is process excellence.
Change Management/ Transformation of the retained business.
Your potential partner should be able to manage and enable your organization to perform effectively through the effects of change and/or in a new environment and beyond.
Domain Expertise and Analytics
The provider you call upon needs to expertly handle domain and analytics insights to deliver higher levels of value, part of which is the ability to use deep industry knowledge and the ability to analyze data about functions and processes being outsourced.
Technology as a Business Enabler
Make sure your partner is able to leverage tech to drive innovation. The future belongs to intelligent business operations with technology as the architect.
Value Beyond Cost
Reducing your costs is a highly important factor when deciding to offshore/nearshore. However, the benefits beyond cost reduction don’t necessarily outweigh the value added by a partner who is focused on your success.
Can Nearshoring/Offshoring Help You Provide More Support To Your Staff?
You can provide virtually unlimited support to your staff with nearshoring/offshoring. There may be some ramp-up time required with getting started if specialized training is needed.
Wise business owners know that 80 percent of results come from 20 percent of their efforts. Offshoring--specifically well-managed offshoring--saves hours of time switching tasks, handling hiring and interviewing, and even training new employees.
Offshoring is sometimes more “popular” in the manufacturing and production industries because of the considerable savings in labor costs.
Nearshoring, on the other hand, might be the best option for modern companies looking for innovative customer service/support/success, sales training/support, and other customer and sales-related services that are best suited for a BPO that shares your language, time zone, culture, and passion for excellence.