While outsourcing and offshoring are still major drivers in the global economy, more and more companies look for other forms of “shoring”. Especially in the Information Technology industry, outsourcing has been known and loved for years. But of course, there are many forms of ‘shoring’ that CIOs have to consider. Each of these is part of a broader outsourcing model, with nearshoring being one such model that offers strategic advantages for IT operations.
Outsourcing is an effect of the changing landscape of technologies and pressure on the companies is to deliver more, quicker and cheaper. At a certain point, every company has to decide whether it should build an in-house team or outsource the processes and hire an external company. When IT processes become present in every aspect of the company’s activities, decision makers must consider multiple factors – not just cost savings. IT has never been as easy business – with demand for skilled developers growing much more rapidly than their number. According to report by European Commission, ICT is creating about 120,000 new jobs each year. However, due to differences in demands and skills, and despite high unemployment Europe could face a shortage of up to 900,000 skilled ICT workers by 2020.
US companies are increasingly adopting nearshoring as a supply chain strategy, especially for manufacturing and business operations, to improve efficiency and reduce risk. Latin America, including Mexico and other Latin American countries, is becoming a key region for nearshoring, particularly for IT services, software development, and manufacturing. Countries like Mexico and Canada are popular nearshoring destinations for IT services and software development due to their skilled labor, strong tech ecosystems, and proximity to the US. Model allows companies to tap into a global pool of highly skilled workers in nearby countries, enhancing business operations and supporting growth. When comparing nearshoring vs traditional offshoring, nearshoring is often seen as a response to the challenges of offshoring, offering cost benefits while improving communication, control, and supply chain resilience due to geographical proximity.
Nearshore outsourcing – reducing the barriers
Nearshoring means outsourcing business processes to companies which can offer less expensive resources, located in a close proximate region. Often, it is even a neighboring country. Proximity to neighboring countries provides significant advantages in terms of collaboration, supply chain efficiency, and risk reduction. Nearshoring typically involves relocating operations to a nearby country, which allows organizations to benefit from shorter travel times, overlapping time zones, and easier communication. Minimizing time differences and language barriers leads to improved communication and more efficient business processes. Choosing the right nearshore locations is crucial for optimizing supply chains and ensuring quality control. This approach is a form of finding new and appropriate resources which can support cost reduction and/or development in the organizations. The advantages of nearshoring include logistical benefits such as faster shipping, shorter supply chains, and operational scalability. Nearshoring reduces the impact of long distances, leading to faster shipping, lower transportation costs, and fewer disruptions. Additionally, working with partners in nearby regions often means there are fewer cultural barriers, thanks to cultural similarities and greater cultural alignment, which streamlines collaboration and reduces misunderstandings. Geographical proximity allows for improved communication and real-time collaboration between teams.
A company whose country of origin is in Western Europe, also referred to as the home country, can be interested in gaining access to new resources which might help to achieve its goals more effectively. Therefore, it looks for experienced company near the country of its operations to support such needs. For example, West European companies very often outsource given processes to Polish or Czech companies.
How to get started?
As noted, Nearshoring is a type of Outsourcing and although brings additional value, it is also a complex process. Business Process Outsourcing (BPO) is a suitable service for nearshoring due to access to specialized support services and a skilled workforce, especially in countries with strong education systems and growing tech sectors. Nearshoring can be applied to business process outsourcing, such as customer service, bookkeeping, and data entry, allowing companies to improve efficiency and reduce costs by leveraging nearby countries. Too often, Outsourcing is perceived as an easy way to immediately cut the costs and help organizations benefit from it in a short run. Such an approach, however, may not bring the expected advantages to your business.
Since decision on using Nearshoring could be perceived as strategic for your organization, it is important to develop a clear nearshoring strategy to ensure you select the right nearshore partner, build strong relationships with your nearshore team, and achieve operational benefits. Choosing the right nearshore partner is crucial for accessing specialized talent, ensuring compliance, and enabling scalable, cost-effective staffing solutions. You need to make sure you and other stakeholders have full understanding of what this is and ensure the best partners are chosen for supporting the change.
What makes a “good” labor costs savings choice?
Nearshoring is a strategy with proven footprint to many companies worldwide. Probably, one of the first aspects coming to people’s mind while hearing “Outsourcing”, “Nearshoring” might be cost cutting. Obviously, this is one of the biggest incentives for modern organizations in order to maximize their business efficiency, but it’s important to remember that it is more than to find the cheapest foreign partners and transfer part of your business/responsibilities to them. Manufacturing operations are frequently nearshored to take advantage of lower labor costs and simpler logistics. Nearshoring provides cost savings by utilizing lower labor costs in nearby countries without the hidden expenses associated with offshoring. Manufacturing costs and labor costs play a crucial role in these decisions, and adopting cost-effective strategies is essential for maintaining competitiveness. The USMCA trade agreement has strengthened trade relationships between the US and Mexico, increasing Mexico's participation in US imports and making nearshoring manufacturing more attractive. Additionally, the trade war between the US and China has influenced many companies to shift nearshoring manufacturing to Mexico to avoid tariffs and supply chain disruptions. Real-world examples include Boeing conducting significant nearshoring manufacturing in Mexico through its supplier Safran, which provides 95% of the wiring for Boeing's 787 Dreamliner aircraft; Whirlpool nearshoring a significant portion of its operations to Mexico in 1987, with the majority of appliances built there sold in the US and Canada; and Toyota nearshoring a manufacturing facility in Thailand in 1996, leading to the establishment of two additional plants in the country. However, challenges of nearshoring include higher labor costs, potential shortages of specialized labor, and limited local infrastructure. Sudden tariff hikes can also impact the cost-effectiveness of nearshoring, sometimes negating anticipated savings.
These days modern organizations operate in a high-paced environment boosted by rapid changes which require close proximity to each part of the business to ensure effective decision-making process. IT services – so often outsourced – are usually in the middle of it all. Having said that, what one needs is a reliable and experienced business partners who can support the company in achieving their goals effectively. Thus, apart from pure cost cutting focus you may appreciate in Nearshoring access to broad pool of new resources like quality workforce that includes highly-skilled IT professionals ready to support your rapid development within same or almost similar time zone. Having your extended teams within the same time zone can also benefit by ensuring insignificant differences between cultures. You should make sure that your business partner puts adequate emphasize on understanding your business culture and needs. On the other hand, there is also great responsibility on your side, as you should openly share with them your company’s values, action plan and feedback on the business decisions, as these would be one of the most important drivers for successful projects. Having already your partners and teams abroad, but still close to the core business can ensure better responsiveness to changes and new requirements. With a time, the relation and communication should develop, while the uncertainty should decrease. Therefore, you may count on boosting the efficiency expressed not only in lower costs, but also in better quality of the results.
Find your perfect match in a nearby country
There is no other way but to embrace the market transformation and get the most out of it. Sometimes, as is also the case for established market leaders, it means regaining the competitive advantage. Today, many companies are challenged by different causes. It might be technology, cost reduction, migration, local market characteristics or something totally different. Nearshoring offers very good solution to some of them. While considering any decision of whether an organisation should open to Nearshoring, it is also necessary to find the proper partner that will consult your organisation and its stakeholders about the proper solution to maximize benefits and reduce the risk of failure. As it is about the process of building mutual understanding and empathy between parties, Nearshoring does require a partnership approach, in order to bring considerable benefits.
We, at NATEK, are ready to help you with your decisions and provide you with proper solutions combining the quality and cost effectives.
Written with NATEK Country Manager Ryszard Jakubczak. For any inquiries, feel free to contact NATEK.
