Is Nearshoring Offering a Brand New Direction to Outsourcing?

Nearshoring Definition

When a company outsources service activities to a nearby foreign country, this is often referred to as nearshoring. Interestingly the term “nearshoring” is said to have derived its original inspiration from the fishing industry where “nearshore” refers to “the region of the sea relatively close to a shore.” Today, nearshoring is a widely popular term used in the global outsourcing industry, and more organizations are seen to be moving towards nearshore outsourcing.

What Is Nearshoring vs Offshoring?

Businesses interested in outsourcing have several options: an outsourcing partner can be located within the same country, in a nearby country or in a distant country. Offshoring involves relocating a business process to a more distant location whereas nearshoring represents outsourcing to another organization within its own region or neighboring countries.

Nearshoring providers are typically located within the same time zone or in close geographical proximity to the client company (or both) — the usual perception (not always true) is that nearshoring reduces the risk and complexity of offshoring.

“Just in Time” manufacturing and delivery requirements can create a unique appeal for nearshoring due to closer locations among partners. However, when companies are outsourcing services, location is frequently less important.

Nearshoring Benefits

Three of the main drivers for nearshore outsourcing are better communication, working relationships and project management. In a 2013 IDC survey, 27 percent of logistics executives reported relying on nearshoring to improve customer service efforts — 55 percent noted a desire for more control over intellectual property and quality.

For companies based in the U.S., nearshoring often involves outsourcing to Mexico or Canada. Both of these countries have skilled IT professionals and excellent IT infrastructure along with costs that are typically less than in the United States.

The European Nearshoring Examples

Nearshoring within the European Union is appealing for many companies because of EU laws that protect data security and intellectual property rights. Primary outsourcing beneficiaries of this trend are central and eastern European countries such as Ukraine, the Czech Republic, Hungary and Slovakia — nearshoring to Poland has recently expanded and it is currently the largest market for outsourcing in Eastern Europe.

Disadvantages of Nearshore Outsourcing

As with any business strategy, it is essential for companies to review the potential nearshoring disadvantages before investing heavily in this outsourcing approach:

• Nearshoring is frequently more expensive compared to offshoring to a more distant country.
• Nearshoring destinations such as Mexico have been subject to significant political instability in recent years.
• Time-zone differences are often a major advantage of distant offshoring, and this benefit is eliminated with nearshoring.
• The “best outsourcing providers” are frequently not located in nearby countries.

For example, India continues to be a dominant offshore outsourcing provider for offshoring on a global basis. However, a focus on nearshoring will often exclude the selection of outsourcing to India from distant locations such as the United States.

The Future of Nearshore Delivery Model

While nearshoring has potential, it is often not the most cost-effective outsourcing strategy. Overall, nearshoring is still in an early stage compared to more distant versions of offshoring. The main reasons for considering nearshoring frequently involve “fewer risks and uncertainties” in comparison to selection of a more distant outsourcing partner. However, these “talking points” for nearshoring are not always achieved on a consistent basis. Outsourcing in general has an established track record of success — however, it is still too early to be sure how nearshoring will stack up in the long run.

What Will Work Best for Your Company?

Ultimately the best outsourcing decision for each company will depend on what factors are most important — reducing costs, meeting tight schedules, overcoming labor shortages and improving quality are among typical goals when outsourcing is considered by most businesses. If those are important goals for your company, think about whether nearshoring will provide competitive advantages that compare favorably with more traditional offshoring to outsourcing providers such as Back Office Pro. The most effective choice of a long-term outsourcing partner often depends more on the experience and ability to “exceed customer expectations” than the nearby or distant location of the provider.

Do you have recent experiences with nearshoring? Please share your views with a comment below and by using the social media icons.

– BackOfficePro