Types of Outsourcing: Local, Nearshore and Offshore Software Development (2024)

The article was updated on December 12, 2023.

In this new era of globalization, outsourcing is a gamechanger for businesses to amplify competitiveness. Subcontracting software development and IT services has become attractive as companies increasingly look to bring down costs and gain efficiencies.

Projections indicate that revenue in the software development outsourcing will reach $460.1 billion in 2023. It is also anticipated that revenue will experience an average annual growth rate of over 11% between 2023 and 2028, resulting in a market size of $777.7 billion by 2028.

This consistent double-digit growth reflects both the increasing IT outsourcing market and the rising value of the services to governments and companies. This trend is expected to strengthen considerably throughout the next five years, which will further drive performance and growth in the IT outsourcing industry.

In today’s global economy, you can pick between several outsourcing models: onshore, nearshore, or offshore, or adopt a hybrid model. After considering the pros and cons of each type, you can determine the optimal blend of resources to drive maximum value for your organization.

In the article, we will anatomize the strengths and weaknesses of each outsourcing option and share our observations of which models are most beneficial for businesses in terms of optimizing resources – human, finance, and time.

Current state of IT outsourcing market in 2023

While cost reduction was traditionally the primary driver of hiring outside teams, companies today contract out to gain access to skills and expertise, ensure scalability, increase flexibility, and direct attention to strategic activities.

The USA has the highest rate of subcontracted jobs worldwide, with approximately 68% of outsourcing companies assigning services externally. Meanwhile, around 48% of organizations in the UK outsource some duties due to a lack of available talent. Skill shortages are a primary consideration for many entities, resulting in the transferring of responsibilities to outside providers. Both nations demonstrate significant utilization of outboard labor to address internal demands.

Over the next several years, the IT outsourcing sector will undoubtedly hold further evolution. The increasing adoption of technologies like artificial intelligence and others will largely fuel this growth.

Why do people outsource software development?

In order to find a perfect outsourcing company that is right for you, we need to concentrate on the main reasons for outsourcing. So why do people outsource software development in the first place?

Of course, the list can easily be long-winded, but the following are the most probable answers you will get if you ask anyone with outsourcing experience:

• A highly skilled staff is needed, but the cost of hiring one may be too great;
• Temporary assistance is needed at the moment;
• The budget is not sufficient for the maintenance of the office team;
• Developing a new product or something high tech to streamline the business is needed, but momentarily lack the expertise.

Read also: Benefits of Outsourcing Mobile Application Development over In-house Development

Types of outsourcing

The most logical classification of outsourcing companies is based on location. Why is that so? You will find out a little bit later in this article. For now we would like to clarify the three main types of outsourcing:

• Local outsourcing (choosing a company in your own country);
• Offshore outsourcing (finding a team somewhere in Asia, for example, in India);
• Nearshore outsourcing (a company in a country that is not far from yours, like in Eastern Europe, if you are located in Western Europe).

Pros & Cons of outsourcing IT onshore

The Local outsourcing model refers to assigning work to companies inland (it is also sometimes called onshore or domestic outsourcing.) As shown in the table above, this approach offers several appealing advantages:

• No cultural barriers. Working with local companies abolishes cultural peculiarities in communication and business practices. There is less risk of misinterpreting requests.
• Easier collaboration. You can meet in person and build closer working relationships. This facilitates a better grasping of requirements and faster problem-solving.
• Time zone alignment. Local partners share your time zone. This allows for synchronous communication during regular business hours and quick processing times.

While benefits of onshore outsourcing may reduce certain risks, it has its flaws. They can seriously influence your decision about cooperation with local companies.

Disadvantages of onshore outsourcing are

• Limited access to tech competencies. The domestic talent market is not bottomless and sometimes the specializations you seek can only be found abroad.
• Onshore outsourcing cost. It’s often the most expensive option due to higher labor and operating costs in developed economies.

For some types of work, the steep prices of onshore outsourcing outweigh the perks. However, when close collaboration and convenience are priorities, and budgets are less constrained, the pros of keeping work local can be compelling.

Offshore software outsourcing: Advantages and disadvantages

What is offshore outsourcing? It refers to contracting out companies in foreign countries, often in Asia (primarily in India), to minimize expenses.

Administrative and labor expenditures are often relatively low in Asian countries, making them probably the main advantage of offshore outsourcing. These substantial savings enable companies to lower prices while increasing profits.However, externalizing some processes also introduces risks and difficulties.

The key disadvantages of offshore outsourcing are

• Barriers to effective communication. With teams belonging to different cultural backgrounds and located in distant time zones, it may take days to get answers to questions or resolve issues that could be addressed in hours with local or nearshore crews. Cultural gaps and language divides often hamper productivity and decision making.
• Higher risks for cybersafety and data protection. When outsourcing a software development project offshore, sensitive company data and personal information are more vulnerable to cyberthreats or data breaches. Many offshore vendors lack robust data protection controls and monitoring systems found in developed nations.
• Hidden costs to ensure quality. If not properly vetted, offshore partners happen to lack the necessary skills, experience, or work ethic to yield satisfactory outcomes. Companies must invest time in vetting potential partners to address these risks of outsourcing software development. Ongoing management and monitoring are also required, which may necessitate hiring dedicated PMs and paying for extra oversight.

Plus, frequent status calls, detailed written communication, and regular quality reviews are necessary to keep offshore teams on track. When problems arise, companies cannot directly observe or intervene to quickly resolve them. Significant rework may already be required when issues are detected, eliminating any offshore outsourcing advantages.

By assigning critical functions overseas, companies lose some control and flexibility. Offshore outsourcing software development may be difficult to pivot quickly if the business needs to change. If outsourcing relationships end, transitioning services back onshore or to new providers could be complex.

Why nearshore outsourcing hits the sweet spot

IT nearshore outsourcing provides an appealing combination of domestic and offshore benefits. When you contract out software development to a nearshore provider, you gain proximity and cultural alignment and curtail costs.

The nearshore outsourcing advantages abound:

• Geography. The partner location is nearby, often sharing a border with your home country. This vicinity provides the opportunity for in-person visits and collaboration. Face-to-face interactions help build rapport, trust, and understanding.
• Overlapping business hours (or a significant portion of the day). This facilitates nearshore development partnership through phone, email, and video calling.
• Little to no communication impediments. Nearshore software developers often share a native or professionally fluent language. Cultural values and workplace norms also tend to be more closely aligned.
• Budget economies. While this type may not provide the same slash outlay level as offshoring, rates are still much lower than onshore options. Economies of scale still apply, as hiring nearshore software developers ensures access to a large database of expert profiles.

For many companies, this model represents an ideal balance of gains at an affordable cost. With the right nearshore team, you win access to diverse skill sets and can scale software engineering capabilities, accelerate development, and drive innovation – all without costing you a fortune or struggling with a remote team halfway around the world.

Hybrid model: Blending local and remote outsourcing

With this type, choosing between nearshore and offshore outsourcing is optimized. A hybrid model allows domestic and international resources to be leveraged and coordinated. In-house teams locally perform key management and oversight, while supplementary tasks are delegated to qualified partners elsewhere globally.

This approach facilitates an optimized team configuration and daily management control while taking advantage of capable nearshore (or offshore) support as needed.

Day-to-day operations remain under the organization’s supervision even if specific duties are assigned to provider teams in other nations. Resources from multiple countries are incorporated into an integrated structure led by the organization’s domestic operations.

By mixing advantages of nearshore outsourcing, onshore, and offshore ones provides a robust, balanced strategy that controls costs and ensures business steadiness.

Final words: Choosing your outsourcing model

Assessing your priorities and doing your homework on potential suppliers can help you figure out which outsourcing model is the best strategic move for your company. Based on our experience, the ideal approach will balance costs with quality standards and convenience.

Eastern Peak offers full-service product development solutions through dedicated engineering teams. With us, clients maintain complete autonomy over recruitment by directly interviewing candidates from our extensive network of engineers.

We apply tried-and-tested remote collaboration practices to facilitate seamless interaction between clients and their dedicated engineering staff. With hundreds of technical professionals currently engaged across our development centers, Eastern Peak has the capacity to configure teams of any size or technical specialty, ranging from small pilot groups to large-scale enterprise solutions.

Contact us to arrange a consultation on how Eastern Peak can empower your organization through custom-built engineering teams tailored to your growth trajectory.

Frequently Asked Questions

Read also:

• Outsourcing for Startups: Key Reasons and Pitfalls to Avoid
• The Extended Team Model: How to Make it Work
• DevOps as a Service: Why Startups Consider DevOps Outsourcing
• The Role of a CTO in a Startup and How to Find One