Offshore Outsourcing in IT
The IT labor landscape in the United States is a trailblazer with regard to talent and skill, but that’s not the whole picture. American IT experts are in short supply and increasingly expensive as the years go by, with experienced staff commanding six-figure salaries. However, IT offshore outsourcing and nearshore outsourcing are both valuable ways to work around these limitations. By tapping international development talent, you open up the possibility of saving on labor costs and economizing your in-house talent.
What is Offshore Outsourcing?
While people often use offshoring and outsourcing synonymously, this isn’t strictly correct. Currently, the majority of outsourcing does take place in offshore destinations, but onshore and nearshore outsourcing also exist. The distinction is in the specific definitions of each of the terms.
Outsourcing is simply a matter of hiring an external organization to handle a project or part of a project on behalf of your business. Agencies and development teams in the United States and other highly developed countries often outsource projects to one another, and the term for this is onshore outsourcing. Countries with lower wages and greater proximity, such as Latin America, are destinations for nearshore outsourcing, while traditional titans of outsourcing are typically offshore nations such as India.
Offshoring is specifically the process of moving operations, outsourcing projects or otherwise drawing labor resources from a set of offshore nations. The factors that denote an offshore destination include drastically lower wages, highly different cultures, and large geographical distances. India, China and Vietnam are three of the biggest destinations for offshore outsourcing in IT. Generally, companies offshore entire projects, but you can also attempt to use offshore talent to supplement your own labor pool.
Benefits of Offshore Outsourcing in IT
Dramatic Cost Reduction and Good Quality
The greatest historical advantage of offshore outsourcing in IT has always been savings on labor. In the early days of offshoring, wages were extremely low and quality was often suspect. However, the quality of offshore IT talent has risen dramatically, and offshore teams are reliable in the quality of their output. Wages have also risen considerably, but they remain far lower than in wealthy nations.
Access to a Vast Labor Pool
Typical offshore outsourcing destinations have extremely dense populations with rapidly growing middle classes. These educated classes often flock to industries that allow them to compete in wealthy markets, such as IT and software development. Since the pool of skilled IT experts in the United States and other wealthy nations isn’t growing fast enough, this supply of additional labor is extremely valuable for these firms.
Offshore outsourcing in IT is a popular choice for firms across the United States, but it also has built-in limitations. When attempting to outsource your IT work to offshore destinations, there are a handful of complicating factors to consider.
Potential Drawbacks to Offshore Outsourcing
Disadvantages to offshore outsourcing fall into three general categories. First, there are the problems that make it unsuitable for modern, agile software development processes. Second, there’s the problem of the atmosphere in the country, such as rising wages and lack of IP protection.
Cultural and Geographical Obstacles
Effective IT work hinges on communication and coordination, as IT firms have developed processes and techniques that are more streamlined than ever before. With offshore outsourcing, this runs into a few problems. First, there’s the problem of culture.
In Western IT culture, it’s important that everyone is willing to criticize those above them on the hierarchy. In offshore countries, this may be an act of great disrespect that workers will not commit. If they attempt to convey that problems exist, it’s likely they’ll do so in a subtle way that may go unnoticed. Furthermore, time zones can be as far as 12 hours apart. With such constraints in place, it may be difficult or impossible for offshore outsourcing to provide the dynamism and flexibility that marks onshore IT services.
Rising Wages and Poor Security
Countries that offshore their work often find trade secrets or other information compromised. In recent years, businesses that operate in offshore locations often lose proprietary information and struggle to enforce their rights to it due to weaker IT laws. The loss of intellectual property can pose many problems for a business, but it also serves to undermine the cost-efficiency that is the chief advantage of offshoring. For that matter, offshore nations are locations of rapid development and wage growth. In 2018, wages in India’s IT sector grew by an astonishing five percent! In the long-term, offshoring may continue to lose its low-cost edge.
Offshore Outsourcing vs Nearshore Outsourcing for Software Development
The ability to cut costs by employing the growing skilled labor pools of developing nations has driven a massive shift towards offshore outsourcing. Companies chose to outsource many different functions from manufacturing to accounting to IT (specifically software development).
Software development offshore outsourcing boomed at the beginning of the 21st century in India, a nation that remains a major player in global software development offshore outsourcing. However, offshore outsourcing, for software development, is no longer the goose that lays the golden egg. The challenges of offshore outsourcing operations have driven many companies back to domestic or nearshore outsourcing operations. That said, nearshore software development outsourcing allows for domestic efficiency at dramatically reduced labor costs.
Solve Offshore Outsourcing Woes with Nearshore Software Development Outsourcing
While offshore outsourcing promises to drastically reduce costs such as labor, it also comes with expenses of its own. Potentially complex legal requirements are just a few of these factors, which include distance and linguistic barriers. When the offshore outsourcing boom first occurred, labor costs were so low that the disadvantages seemed marginal. Since then, the developing nations that play home to offshore outsourcing operations have seen explosive economic growth.
One important example is India. India is one of the most popular offshore outsourcing destinations for software development and IT, and it routinely posts close to 10 percent annual GDP growth. In recent years, real inflation-adjusted wages in India have consistently grown by approximately 5 percent annually. Rising wages erode the only real advantage of offshore outsourcing, while the disadvantages are inherent and permanent.
The disadvantages of offshore outsourcing software-oriented projects may not be immediately apparent. Many wouldn’t imagine that distance is an obstacle for software development, for instance. However, differences in culture, language and time zones each bring their own challenges to outsourcing operational efficiency.
Acknowledging and respecting different cultural practices is, of course, par for the course when it comes to any modern business outsourcing. That said, it can be difficult to grapple with what two different cultures consider respectful. A Western manager who makes a mistake can count on his employees correcting him, while employees from many Asian cultures would not do so out of respect. This is only one example of the ways that benign differences that both parties hold in good faith can become challenging when doing offshore outsourcing.
Language and time zone differences both serve to make an organization move more slowly when offshore outsourcing is used. In the former case, translators quickly become a bottleneck for communication. In the increasingly fast-paced world of agile software development, this can represent an intolerable loss of efficiency. Time zones produce much the same problem, as software developers and their higher-ups will generally have little overlap in their working hours. Some offshore outsourcing projects may not find this to be a severe hindrance, but larger or more ambitious projects can suffer for it.
Nearshore Software Development Outsourcing Advantages
Nearshoring outsourcing is the process of moving operations to countries that in greater proximity to your HQ in terms of time zones, language and culture. Nearshoring destinations typically enjoy high English proficiency and possess a growing pool of young, skilled laborers. Additionally, centuries of close economic ties and cultural exchange with the US and Europe also result in much smaller cultural barriers.
While these developing nations are seeing high economic growth, youths see a lack of opportunity in their home countries. As a result, skilled laborers tend to emigrate in high numbers. It’s likely that if you hire domestic software development services, that many immigrants from nearshoring outsourcing destinations will be among those software developers.
By choosing nearshore software development outsourcing you can enjoy the same high caliber of work and similar operational efficiency. Additionally, the disparity in wages and cost of living allows for your business to save dramatically even if you afford your developers with an excellent quality of life. Being able to save money while offering high wages and attracting the best, most motivated workers is a valuable nearshoring outsourcing advantage.
Learn More About IT and Software Development Outsourcing with Sonatafy
Offshore outsourcing has its place in the IT industry, but that’s not where Sonatafy specializes. Rather, Sonatafy offers a range of services that aim to leverage the nearshore IT talent just across the border in Mexico and Latin America. While wages are higher than in offshore locations, greater cultural proximity and shared time zones serve to offset these costs and power dynamic collaboration. If you’re interested in the potential for outsourcing to serve your firm, get in touch with us to learn more.
What is offshore outsourcing example?
Offshore outsourcing is the process of relocating your current in country jobs to countries with lower labor costs, like India or the Philippines. The process of offshore outsourcing involves setting up remote staff in the offshore country where lower cost resources will perform the work or job functions that used to be done in house.
Here are some examples of offshore outsourcing for software development:
- WhatsApp outsourced its software development services offshore right before WhatsApp launched in 2009. The company offshored its software development to Eastern Europe. The offshore resources took care of fundamental app development and maintenance while their in-house software developers concentrated on customer related tasks.
- GitHub outsourced offshore when they decided that Us based resources were too expensive for them to hire full time.
- Slack outsourced its logo and UI / UX to make them look and feel different to an outsourced agency.
- Alibaba faced a situation where they were lacking availability of professional software engineers and they decided to outsource software development.
- Infor outsourced software developers to allow for workforce diversity and widen the pool of talent whenever possible.
What is offshoring vs outsourcing?
Outsourcing occurs when an organization contracts specific processes to another party who specializes in that work. Outsourcing can be done in the same country, neighboring countries (i.e. nearshoring) of offshore.
Offshoring is when a businesses sends in house jobs overseas to another country, typically one with cheaper labor.
What is an advantage of offshore outsourcing?
Benefits of offshore outsourcing include lower labor costs, alternate tax and regulatory benefits, access to skilled resources and global competitiveness.
Cost savings are the main driver for companies to adopt offshoring, outsourcing, or a combination of the two in order to stay competitive.
What is the difference between the shore and offshore outsourcing?
Businesses can outsource their operations to onshore, nearshore or offshore providers in order to gain access to skilled talent and realize cost savings. Sometimes onshore or nearshore or referred to as “the shore.”
What has most contributed to offshore outsourcing?
Some of the main factors contributing to offshore outsourcing include cost reductions up to 80%, increase in productivity and allowing a company to offload tasks that were not part of the core business.
What challenges are faced in offshore outsourcing?
Some of the main challenges faced in offshore outsourcing include the following:
- Time Zone differences as many offshore outsourcing companies operate within an 8 to 12-hour time difference from their clients. This leads to many late-night shifts for the client so that they can have time overlap to collaborate with their offshore resources.
- Communication and Cultural issues can cause problems as there are various levels of English proficiency which could lead to misunderstandings. Culture differences can also lead to restricted feedback and alignment challenges in solving complex business and IT issues.
- Geopolitical concerns such as a government shutdown, military action or change in trade agreements can cause issues for offshore outsourcing.