Is Nearshoring Replacing Outsourcing?
Category : Outsourcing
In today’s world, where the pressure to perform better and more successfully, especially financially, there are several aspects that employers try to exploit in order to reduce their costs, thus boosting the profit margin.
One of the terms that has been part of business operations throughout the world for many years now is definitely “outsourcing”, i.e. the act of hiring an external company to perform a part of you work. Skilled and educated labor force, but much cheaper, can be found in many countries throughout the world. All those countries have something in common: less developed economies and more difficult financial situations. There are also instances where companies from another part of the same country are outsourced, but those are not such common situations.
Advantages and disadvantages of outsourcing
Obvious advantages include being able to employ highly-skilled workers, with very little or no need for additional training, and pay them much less than you would pay local staff. Such outsourced workers usually have better-than-average salaries in their countries and are less likely to pursue other options, thus reducing staff turnover.
On the other hand, there are quite a few problems that outsourcing can bring. To begin with, an outsourced company can come from a totally different culture and their work ethic may not necessarily be the same as the one in the region where the hiring company operates. Next, there might be language barriers too difficult to overcome. Finally, the difference in time-zones can also affect the work significantly.
What has been done to rectify potential problems?
While the basic idea and the rationale behind outsourcing have remained the same, it is the element of location that has seen major changes. Depending on how far (literally) a company has gone in their effort to outsource, we can differentiate three types of outsourcing:
Offshoring – outsourcing done in distant locations. Business processes are relocated to another, cheaper country. The terms may refer to either establishing a subsidiary abroad or outsourcing activities of a company,
Nearshoring – contracting a part of a company’s work to a foreign country in the same region. Those are often neighboring countries, with similar financial and legal systems.
Onshoring – relocation of business processes to another location within the national borders, where the costs would be lower.
Depending on the type of activity, one of these outsourcing types is used. If no direct contact with customers is necessary (e.g. software coding), activities can be offshored. However, those requiring deep domain or cultural knowledge or direct contact with customers should probably be onshored. The practice that has become particularly popular recently is nearshoring. It’s used when there are no or little cultural differences, but the same quality of work can be performed at a lower price.
Bringing the work closer to home
Many experts agree that the situation has changed enough to rethink outsourcing manufacturing, for example. Greater inflation and wage expectations in parts of the world where outsourcing was extremely popular, such as China, are a serious blow to the cost advantage.
Also, as more and more companies are becoming concerned about how to protect their intellectual rights, they’re trying to bring the production process closer to home, i.e. to the point of use. They are nearshoring.
Another advantage of manufacturing closer to your clients’ locations is that you’re able to respond to their requests faster, decrease turnaround times and have a much more efficient and cheaper supply chain. Finally, with the cost gap significantly narrowed between Asia and Eastern Europe, for example, many companies from Western Europe are turning to their neighbours. Some of those countries of interest are already within the European Union, making it much easier and safer for companies from the Western Europe and the States to make business arrangements.
It is clear that nearshoring offers some great advantages over traditional outsourcing, particularly in terms of having a similar culture and work ethic, while physical proximity is also a factor that facilitates easier streamlining of operations. Naturally, how much a company can benefit from nearshoring depends on many factors, primarily the type of activity it performs and the ability to find a right partner nearby.