3 Types of IT Outsourcing: What Is Better for Your Business

3 Types of IT Outsourcing: What Is Better for Your Business

Yuliya Datsyuk

If you are reading this blog, you are likely interested in outsourcing services or hiring outsourced staff or a remote development team. If you have a question like "What is outsourcing?", "What types of outsourcing do exist?", "What is the difference between onshoring, offshoring, and nearshoring" and "What type of IT outsourcing is best suited for your business?" - this article is for you.

Table of contents:

Three types of outsourcing: why to outsource?

     Onshore

     Offshore

     Nearshore

How to choose between different types of IT outsourcing?

Final Thoughts

In the life cycle of every successful company is a moment when the management understands that there is  aneed to hire additional outsource staff. It means that the company becomes sizable. It is another step to become an enterprise. With time, every company starts more projects and activities, and they become more and more diverse. Firstly, some people in a team can manage additional tasks. Then managemen must fill a gap hiring new people. But it is crucial not to lose focus  on core business and instead of expanding staff it is the right time to consider different types of outsourcing. For example, leading organizations use outsourcing to drive transformational change and improve business results. But before looking for IT outsourcing, check different types of outsourcing models. In this article, we offer you to learn about three types of outsourcing.

Three types of outsourcing: why to outsource?

First, let us set the simple meaning of 3 types of outsourcing: 

  1. Onshore 
  2. Nearshore
  3. Offshore 

Onshore means that your partner, who will be hired to deliver work, is located in the same country. Offshoring is somehow the opposite. It means that your potential partner is based in a different region or continent. Last but not least is nearshoring. Nearshore means that your contractor will be located in a neighboring country or region.

Among the benefits of outsourcing, respondents of market researches remark such benefits as:

✅ Cost Cutting Tool 59%

✅ Enables Focus on Core Business 57%

✅ Solves Capacity Issues 47%

✅ Enhances Service Quality 31%

✅ Critical to Business Needs 28% 

✅ Access to Intellectual Capital 28%

✅ Manages Business Environments 17% 

✅ Drives Broader Transformational Change 17%

Last year, the global market of IT outsourcing services reached $92.5 billion. So if talking about information technology outsource, there are good reasons to hire a remote development team. Working with an external company means that your business pays for software development and services only. You do not have such expenses as sick leaves, hardware, rent, software, recruiting and training, etc. In our previous article, you may read why hiring a software development company often is much easier online and worldwide than in your city. A little spoiler: a modern approach to communication and management can grant the highest level of cooperation with your outsourcing partner.

To calculate your Cost per Hiring, you may add external costs and internal expenses and divide it into total numbers of hires in the period. When the company is going to hire a remote development team, it saves on costs of the hiring process. So, when there is something to outsource - outsource! Now it is time to find out more about types of outsourcing in IT. If you are about to start a new project, please, notice that types of outsourcing for startups are the same as those for any IT company.

Onshore

Onshore means that your organization does business with another company or, for example, a remote development team in the same country. You are in a similar market circumstances; you pay taxes in the same way; you have common holidays and traditions; you share the same culture and can easily understand each other; both your companies are in the same or close timezone. The main issue about onshore companies is they conduct commerce and transactions within the country.

Companies onshore when they have a lack of experience in some areas, or they need to hire a remote development team fast. Onshoring companies are closer geographically. As they are located in your country, your teams speak the same language, and you both "know how it works." On the other hand, it is longer to start and set up the project with an onshore enterprise than with its offshore or nearshore counterparts.

Offshore

The main reason why companies offshore are that the cost of services may be much cheaper compared to offered by domestic companies. The offshore technology companies are located in regions that are far from your country. Often, these companies are established in specific jurisdictions that offer preferential tax treatment, lower costs, and privacy. Among plusses is also the ability of offshore companies to adapt to different foreign companies and management types. Still, the research of what offshore country to choose can be time-consuming. Every region of the world has its unique specialty, and sometimes it is hard to understand which will be best in your situation.

Typically, the US businesses are looking for offshoring companies in Latin America, India, and Eastern Europe. For example, Clutch honors the top 1000 service providers for 2020 in the Exclusive 1000 List. And 63 Ukrainian companies are among them. It is 6.3% of all companies.

Nearshore

Nearshore or mid-shore companies have become very popular. The reason is that they combine the advantages of both previous approaches. Basically, it means that the quality will be high, but spent costs will be fewer due to average living rates. Also, tax rules are supportive of these companies. 

Nearshoring means that you will outsource your project to companies located in neighboring countries. For such countries as the United Kingdom, the best option for nearshoring is Eastern Europe. There are a lot of cheaper services, provided with skilled remote development teams you could hire. There also are a lot of English-speaking specialists. The time differences and distance are small. Both regions have a similar cultural and historical context. There is a trend of nearshoring growth. DesignRush identified the top nearshore companies in 2020.

How to choose between different types of IT outsourcing?

First, you have to understand, do you really need to outsource. Prepare the simple table with four squares. In the first two squares, you may put the pros and cons of outsourcing.  In the last two squares - the pros and cons of not working with outsourcing companies.

If you think it is time to outsource, you have to choose the country or the region for future collaboration. It is commonly known that the best destination for manufacturing outsourcing is China. But what about software development?

Let us imagine your company is based in the UK. Which requirements will have the management of your company to a future business partner?

  1. Location. It influences the communication process, travel costs and time, and cultural differences. Obviously, if you are in the UK, the best choice between various types of outsourcing will be Eastern Europe.
  2. Skills. Looking for a nearshore company for UK-based business, you will find out that according to HackerRank, 6 out of 15 countries that have top skilled developers are in Eastern Europe. Among them are Bulgaria, the Czech Republic, Poland, Hungary, and Ukraine. For example, Ukraine takes 1st place in the world for the number of C++ and Unity3D software developers. Also, this country has the 2nd place in JavaScript, Magento, and Scala. Ukraine has a 3rd in Ruby, PHP, Python, .NET, and Symfony developers. Moreover, European development teams are the most proficient in English.
  3. Costs. In the United States, software developers made a median salary of $103,620 in 2018. And the average salary of a software developer in the USA is $106,816 in 2020. If a senior web developer in the US gets 107,000, the same specialist in India will get $19,800. In Western Europe, salaries are not so high as in America, but higher than in India, Malaysia, and the Philippines. For example, in Germany - $71,540 In Ireland - $61,159. In Spain - $52,697. In the UK - 59,072.

At the same time, in Eastern Europe, a software specialist earns around $42,000, depending on the country.

Final Thoughts

Now, when you know a little bit more about what types of outsourcing are, we would like to resume the main thoughts. There are three types of outsourcing: onshore, nearshore, and offshore. All of them have some advantages and disadvantages. The difference is between locations, skills of developers, costs, etc. All this also depends on the living rate and education rates.

It is probably not the only option to hire an onshore (or in-house) provider. Your business can find a cheaper software developer company with a high level of quality. You only need to do a little research. You also can use the information provided in this article. Or if you have any additional questions, please, contact us at any time.

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