Outsourcing has proven to be an effective model for companies looking to save on overhead and labor costs while improving efficiency. It is a model that can be scaled while still giving companies the option to adjust their resource distribution as necessary. Outsourcing can also improve productivity and give businesses the chance to focus on their core products and competencies. Increasingly, companies view outsourcing providers as innovation centers; according to Deloitte’s 2016 global outsourcing survey, 35 percent of respondents are focused on measuring the value of innovation in their outsourcing partnerships. Most companies choose to outsource in one of two ways: nearshoring and offshoring.
As U.S. firms are becoming increasingly concerned about protecting their intellectual property, ‘nearshoring’—or bringing production closer to the point of use—becomes attractive as the risk of having important intellectual capital stolen is decreased. Having the capability to manufacture close to where customers are located can also increase customer responsiveness and decrease turnaround times, making the supply chain more predictable.Rita Gunther McGrath
Nearshoring happens when an organization decides to transfer work to companies that are less expensive and geographically closer. Using this model allows businesses to move their operations to a closer, more cost-effective location. This close proximity allows for fewer time zone differences, cultural discrepancies, and a greater level of control in decision-making processes. Many U.S. companies choose to nearshore work to Canada, Mexico, and other Latin American countries.
Offshoring refers to partnering with a company that is located in a country far enough away that they operate in a completely different economic environment and time zone. The offshoring company will likely have many cultural and language differences as well.
Nearshoring vs. Offshoring
Offshoring is outsourcing that takes place across national borders, usually in a company that is farther away and production is much less expensive. According to Udemy, 53 percent of manufacturing companies offshore to other countries. In 2013, offshore outsourcing was a $100 billion global industry; it is expected increase 8-12 percent through the year 2018.
Offshoring is usually much cheaper than working with companies in local markets or nearby countries. This is because their economic situation allows them to set lower hourly rates and is the main reason outsourcing became a favorable option, to begin with. However, there are many trade-offs with offshoring.
The remoteness of an offshoring company often makes travel difficult and can impede the overall efficiency of the work being done. And maintaining regular contact across different time zones can be challenging as well. And large cultural differences and language barriers can stand in the way of healthy working relationships.
However, according to this article in the Wall Street Journal, nearshoring is beginning to replace offshoring as U.S. companies become increasingly concerned with protecting their intellectual property. And closer physical proximity to customers leads to higher customer responsiveness and quicker turnaround time.
The Benefits of Nearshoring
A study from Info-Tech Research Group showed that many companies outsource to get access to specialized skills and produce products more quickly. Other reasons companies outsource is if businesses need to act quickly on a market opportunity but don’t have the in-house talent to proceed.
Nearshoring is becoming a popular choice as many companies begin to favor the close geographical proximity. Nearshoring allows companies to bypass language barriers and cultural learning curves and reduce travel expenses.
Nearshoring provides many benefits, such as cutting expenses and guaranteeing better controls that will lead to higher quality products. It also offers access to more skilled workers and lower labor costs which improve both quality control and customer service.
This article is IT Today does a great job of outlining some of the benefits of nearshoring:
- Fewer time zone differences allow virtual teams more ease in making decisions and there is an improved time-to-market schedule. This leads to a workforce that is more stable and productive.
- Outsourced employees can easily experience burnout if they are frequently working overnight. Nearshoring gives the option to possibly eliminate night shifts altogether, improving both the quality and employee retention.
- The location of both the original company and the nearshoring location allow the option for in-person meetings.
- Intellectual property is safer and less likely to be stolen in a nearshoring location.
- Nearshoring allows companies to stay close to their client base.
Drawbacks Associated with Nearshoring
As with anything, there are challenges associated with nearshoring. Nearshoring does tend to be more expensive than offshoring and it takes time to find a nearshoring partner that is reliable and understands the specifics of your business processes. These challenges can be overcome by working with a knowledgeable logistics partner. And although there will be fewer language barriers there can still be cultural differences that need to be considered such as the length of work days and holidays.
There are many benefits to nearshore outsourcing, but it is important to keep in mind the challenges that come along with it and work carefully with your logistics partners to create a smooth transition. Here are some things you will want to consider:
- What are the costs associated with disrupting operations and transportation?
- What delays could you come up against?
- What new laws and regulations will you have to navigate?
- What cultural differences could you encounter?
- Will the new site be able to meet your production standards?
The choice of what outsourcing model you should settle on will depend on the goals your company is hoping to achieve. If keeping costs as low as possible and just getting the job done is your primary concern then offshoring is probably the best choice for you. Just be prepared for possible trade-offs such as problems with communication, less control over the entire process, and possible delays in production.
If you are looking for a partnership that will be within reach at all times, a reliable nearshore vendor is probably your best bet. Nearshoring can benefit many companies if it is a process that is well thought out and initiated wisely. It allows businesses to take on more work because they get a better deal on some of the more tedious work while allowing important projects to remain in-house. And nearshoring almost always bring a higher quality of work than what you would find by choosing to offshore.
If you decide to nearshore outsource, always research the country’s laws and the company’s employee training procedures. And ensure that the nearshore company has rigorous intellectual property safety procedures in place.
Photo by Dean Hochman