Global trade has enabled countries to expand their markets for sourcing various goods and services at a lower cost.
It has also allowed several companies to opt for business strategies such as nearshoring to boost their growth. Nearshoring involves shifting your business operations to a nearby country.
In this article, we’ll talk about nearshoring and how it’s different from business processes like outsourcing, offshoring, and onshoring. We’ll then cover how to choose the right nearshore locations and highlight popular destinations in Latin America and Eastern Europe.
This article covers:
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- What is Nearshoring?
- How to Choose the Right Nearshoring Location
- Key Benefits and Challenges of Nearshoring
Let’s dive in.
What is nearshoring?
In nearshoring, a company transfers all or a part of its operations to a nearby country.
Nearshoring applies to business processes like supply chain management, user interface design, etc.
You can acquire these services from an outsourcing company located in a neighboring country that usually shares a border with your country.
For example – a company situated in North America can choose to nearshore a part of its manufacturing operation to a company based in Latin America.
And Western European companies can outsource their operations to a nearby country like Poland, Ukraine, etc., located in Eastern Europe.
Nearshoring vs. outsourcing vs. offshoring vs. onshoring
Many business owners often use terms like nearshoring, outsourcing, offshoring, and onshoring interchangeably.
While these terms may sound similar, they’re quite different from each other. Let’s take a quick look:
1. Outsourcing
The outsourcing model involves hiring a third party on a contract basis to complete some tasks or the entire project.
You can outsource your operations to freelancers or an entire team that consists of supervisors, development engineers, designers, skilled workers, etc.
While an outsourcing company can help shorten the supply chain, you typically won’t have much control over the operational decisions.
You can outsource to a nearshore, offshore, or even an onshore company. As long as it involves a third party, it’s known as outsourcing — irrespective of the location.
Read more about the outsourcing industry.
2. Offshoring
Traditional offshoring involves moving some of your business processes to an overseas country for its various cost benefits.
It consists of forming a team from the local talent so that all operations are still under your command. You can also opt for offshore outsourcing, where you hire a third-party company in an offshore location. Both approaches are considered offshoring.
The major advantage of offshoring is the relatively lower labor cost in these countries, which allows you to:
- Save on certain expenses such as wages.
- Reinvest the saved money in the business.
- Have funds for acquiring additional services, etc.
However, cultural differences and language barriers may hinder certain services such as customer support, call centers, etc.
Here’s some additional information on offshoring vs. outsourcing.
3. Onshoring
Onshoring, also known as reshoring, involves bringing your offshored services back to your home country.
For example, if you have an offshore manufacturing center in China, onshoring it would mean relocating those operations to the same country as your headquarters.
Onshoring is a great way to ensure high-quality service delivery, lower cost of transport for manufactured goods, and better control over operations. You can also better protect your Intellectual Property (IP).
However, if your company is located in an expensive city, reshoring could further increase your expenses, such as labor cost, office supplies, etc.
How to choose the right nearshoring location
Selecting the right nearshore destination can seem challenging, especially if you’ve never considered any such business strategy in the past.
While the main criteria for selecting the location depends on your business needs, there are some other things that you should consider before you make the decision.
Your nearshore destination should:
- Be in close proximity to your home country.
- Work in similar time zones.
- Have fewer cultural discrepancies than offshore locations.
- Offer multiple services at a cost lower than your home country.
- Have a good cost to quality ratio.
- Provide advanced infrastructure and office facilities.
- Provide high-quality tertiary education in IT and other technical domains.
- Have professionals with excellent English proficiency.
- Retain a large pool of expert professionals.
Based on these considerations, we’ve shortlisted the two best nearshoring countries in Latin America for US-based companies and Eastern Europe for European companies.
Key benefits and challenges of nearshoring
In this article, we’ll describe the benefits and challenges of nearshoring to specific countries.
If you want a more general overview of nearshoring’s pros and cons, check out our article on nearshoring services.
1. Latin America
In recent years, the US and China trade war has resulted in high US tariffs on various products imported from China. This has led many American companies to shift their supply chain to other countries in Asia or even closer home to Latin America.
Certain countries in Latin America are becoming increasingly popular as nearshoring partners among business owners looking to expand their operations.
Let’s look at the benefits and challenges of nearshoring to two major Latin American countries:
i. Mexico
Mexico is located in the southern part of North America and shares a border with the US.
A. Benefits
Here are the key benefits of nearshoring to Mexico:
a. Time zone
Time zone is an essential consideration while selecting any nearshoring partner. If the nearshore outsourcing partner works in a different time zone than your home country, it can hamper real-time communication for both parties.
Mexico operates in similar time zones as the US, and many places also observe similar daylight saving changes.
That’s why Mexican developers can work simultaneously with those in the US. This makes it extremely easy to plan meetings and collaborate on tasks with your nearshore partner.
b. Access
Mexico is a highly accessible country for people traveling from the US to their outsourcing partner company. Various business cities like Mexico City and Guadalajara are well-connected to the US by freeways and multiple direct flights.
A nearshore Latin American country not only saves your travel time but also reduces the travel cost.
c. Language and cultural similarity
Due to globalization and the shared history between the two nations, Mexican people may understand the cultural nuances of the Americans.
Additionally, Mexican IT professionals have a high level of English proficiency. That’s because competency in professional English is a graduation requirement for various technical degree programs.
This similarity helps companies based in Mexico understand the customer requirement and deliver better results.
d. High-quality education
Rising standards of education in Mexico have been making the news lately. The nation has more than 120 universities and technical schools, with many engineering and IT students graduating each year.
These software developers also take part in various forums, conferences, and social groups for continuous learning.
e. Government support
The Mexican federal and state government provides various resources and financing to enhance the IT industry and increase business with western companies.
Some of these initiatives include:
- MexicoIT: educates about the advantages of nearshore outsourcing and IT investment in Mexico and helps connect U.S. and Mexican businesses.
- MexicoFIRST: focuses on growing Mexico’s highly-educated and competitive IT talent pool.
- CONACYT: supports R&D, technology infrastructure investments, and various projects like IT innovation, etc.
B. Challenges
One constant fear about Mexico is its high crime rate.
However, various public and private bodies have increased security around and inside the office buildings. Additionally, various IT outsourcing service providers have strengthened their backup infrastructure to ensure safety and continuity of operations.
Learn more about the benefits and challenges of nearshoring to Mexico.
ii. Colombia
Colombia is located in the northwestern part of South America.
A. Benefits
Here are the advantages of nearshoring to Colombia:
a. Time zone
Colombia has a similar time zone as various cities in the United States.
As the time difference is quite small, scheduling meetings, managing projects, and communicating with a nearshoring team is as easy as doing it with an in-house team.
The shared working hours can minimize any delays and help you complete your project on time.
b. Education
Colombia houses two of the top ten universities in Latin America with more than 2,500 programs that offer IT-related degrees.
As per the Organisation for Economic Co-operation and Development (OECD), the country ranks second in Latin America for completion of a college education by people aged 25-34 years.
Colombia is also turning into a tech-minded nation with its Ministry of Sciences (Minciencias) and Ministerio de Tecnologías de la Información y las Comunicaciones (MinTIC) supporting various technological developments in the country.
c. Currency value
The official currency of Colombia is the Colombian Peso (COP). As of 2021, one USD is equivalent to around 3,706 COP.
This means that your dollar can go a long way for a nearshore partner in Colombia. If you have a startup with limited initial funding, this Latin American country is a good place to get high value for your money.
d. Access
You can easily access Colombia’s major cities like Bogota from the United States in around 4-5 hours. Additionally, you won’t require a Colombian visa if you’re on a business trip of fewer than 90 days.
B. Challenges
One of the significant challenges in nearshoring to Colombia could be the difficulty in setting up and doing business.
Here’s why:
- Acquiring a construction permit may take months.
- You must have a recognized Colombian accountant to register your business.
- Corporation tax at 32%, income tax at 0.5% of the net equity, etc., can burn a hole in your pocket,
2. Eastern Europe
Eastern European countries like Poland, Bulgaria, Ukraine, etc., are becoming increasingly popular as nearshoring destinations for western European countries.
Let’s look at the major benefits and challenges of nearshoring to Poland and Ukraine:
i. Poland
Poland has a very strategic location in eastern Europe. It’s an easily accessible economic center that shares its borders with seven countries and a water body.
A. Benefits
Let’s see why this country is emerging as a popular place for IT nearshoring:
a. Location and accessibility
Poland’s strategic location enables it to work in similar time zones as France, Sweden, Germany, etc.
It’s easily accessible with short flights from these countries. This allows you to visit your outsourced team and have real-time collaboration with them.
Since Poland is a member of the European Union (EU), it complies with the GDPR (General Data Protection Regulation) law and other EU software and trade laws.
b. High-ranking developers
According to a study, Polish developers rank among the top three countries globally.
They specialize in software languages such as Java, Python, C++, and other back-end, front-end, and object-oriented languages.
c. English proficiency
As per the EF English Proficiency Index, Poland has a high English proficiency.
It ranks 14th among the 34 European countries and 16th among the 100 world countries and regions. The developers have English proficiency that gives them a competitive advantage in attracting investors.
d. Good investment potential
The CEOWORLD magazine has analyzed and ranked around 80 countries for their investment potential in 2020. According to this report, Poland ranks third in the world after Singapore and the UK.
The rankings were based on factors like corruption, workforce, investor protection, technological readiness, etc.
B. Challenges
Poland can be an ideal choice for nearshoring your software development projects. However, it can be quite expensive if you have a small business with a limited budget.
According to PayScale, the average annual salary of a Polish developer is significantly higher than that of developers in other countries like Ukraine, Switzerland, etc.
ii. Ukraine
As of 2021, Ukraine has 10+ IT companies featured in the Global Outsourcing 100 list.
We acknowledge that as of this time there is an ongoing conflict in Ukraine.
We stand in solidarity with the people of Ukraine and support the resolution of the conflict. Explore these resources to discover ways you can help.
A. Benefits
Let’s look at the benefits of nearshoring to Ukraine:
a. Geographic proximity and time zone
Ukraine is located in the heart of eastern Europe, easily accessible from major European cities via flights.
The time difference between Ukraine and other European countries is relatively small, making it convenient for remote team collaboration and communication.
b. Skilled talent pool
Ukraine is well known for its superior higher education in technology and mathematics.
Its software development professionals are experts in Java, Python, Ruby, and other programming languages.
c. Cost efficiency
Compared to countries like Poland, Switzerland, etc., Ukrainian IT developers work at a significantly lower cost.
But this doesn’t affect their quality of services, and they’re known for delivering products and services that meet international standards.
d. Ease of doing business
The Ukrainian government strives to enhance the ease of doing business in the country.
Formalities related to outsourcing, such as signing contracts and completing paperwork, are relatively hassle-free than in other countries. Additionally, there aren’t many barriers to doing business, and you can easily find partners that can deliver your projects in a short time.
B. Challenges
One of the significant challenges of nearshoring to Ukraine may be the poor or just moderate English proficiency. This may make it difficult for western companies to communicate with their team or nearshore provider based in Ukraine.
Wrap Up
Various companies now see nearshoring as a viable option to manage their business processes while still saving money. It’s becoming even more popular considering the global supply chain disruptions, travel restrictions, and economic crises due to the Covid 19 pandemic.
Now, hiring a nearshore software development partner may not be as inexpensive as traditional offshoring, but it’s certainly cost-effective considering other benefits.
Use the information we covered here to understand if nearshoring is a suitable option for your business and how to go about it.
Andy is a technology & marketing leader who has delivered award-winning and world-first experiences.