When you start getting interested in the software development process you quickly realize that many IT businesses delegate projects to third parties, very often in order to save money and hand in the task to experts with a specific know-how. When researching a place to outsource, there are three main types of IT outsourcing to consider: onshore, nearshore and offshore. In this article, we delve into what these terms mean and explain the advantages and disadvantages.
Onshore software development
When you decide to choose an outsourcing option that is the closest to where you are originally based then you onshore software developers. It usually means working with companies that are located in your home country. For example, if your company is based in Warsaw, onshoring would mean hiring a team in Cracow. The most prominent advantages of this type of development are that you and the team of specialists come from the same culture, speak the same language and in case of a face-to-face meeting you don’t have to spend a lot of time on travelling. What is more, the law or tax regulations are the same for everyone, so it is easier to conclude contracts, settle accounts, pay taxes, meet quality requirements or maintain intellectual property rights.
However, onshoring is usually very costly, especially when compared to the two other software development methods. For example, using data from PayScale, a Danish programmer earns an average of €60,000 per year. In turn, a Polish programmer earns an average of €22,000 per year. According to data collected by us as a recruitment and outsourcing agency, this amount fluctuates around €40,000. The above example shows that for a Danish company, nearshoring may turn out to be more cost-effective than onshoring, and the savings may amount to €20,000.
Nearshore software development
Nearshore software development companies are those which are located in countries with similar time zones or ones with minimal differences. It is the ‘in-between choice’ among the onshoring and offshoring. This happens for example when your company is based in Denmark, but your team of developers is located in Poland. Many companies in Eastern Europe have developed their IT services, enabling European clients to gain a competitive advantage. Based on The State of Central & East Europe IT Outsourcing and Offshoring Report 2022, Poland, the Czech Republic, Belarus and Ukraine are the most popular countries offering IT outsourcing services in this model.
This solution is considered as a win-win situation for many. It comes from the fact that you can still save costs, but don’t have to worry about working in different time zones. The possibility for onsite visits is quite big, as the flight usually takes 1-2 hours and the airline tickets are relatively cheap. This solution allows the company to work closely with the nearshoring team in real-time, as well as to oversee all aspects of the project development process. However, the language and cultural differences might still slightly occur. Nearshoring also gives you access to a much larger and more diverse pool of IT experts than if you hire them in-country (onshore).
Offshore software development
In a nutshell, offshore software development means hiring a team from abroad to do the work remotely. The biggest benefits of that solution include quality, cost, and time efficiency.
It might happen that the specialists that you need have better knowledge in other countries then the one that you company is located in. For example, the choice of such collaboration can be based on the ranking created by Hackerrank, which scored 50 countries based on which one of them has the best developers.
ⓒRitika Trikha / HackerRank
If you are wondering why Poland is in the 3rd place and you are interested in outsourcing Polish developers, make sure to read the blog post “Reasons why you should choose Poland for outsourcing IT”!
Time efficiency? Yes, you read it correctly. You might be wondering: how come, if the teams are located in different parts of the world and there is a major time zone difference? Well, you can speed up the development process when the two teams work individually on their assigned tasks and have it all planned well. However, the communication becomes challenging when you want to schedule meetings, your teams have different work ethics, or when you can’t fully understand each other e.g. due to language barriers.
In 2007, when outsourcing began to develop more intensively, as many as 66% of surveyed clients in the PWC Global Outsourcing Survey 2007 indicated a clear preference for nearshore outsourcing compared to offshore. However, this type of software development becomes increasingly popular, as the technology for developers working remotely is getting more advanced and each day there is a bigger need for using high-quality, more complex softwares. Additionally, the COVID-19 pandemic has shown many of us that physical interaction is not necessary to work effectively, which encouraged companies to try out offshoring services.
What do the costs depend on?
The costs vary depending on the location of the outsourcing partner, e.g in Eastern Europe the average hourly rate is $35-40 (€29-33); in Central, Western and Northern Europe this number is close to $50-$60 (€41-49); in Asia it often amounts $25-$30 (€21-25).
Another important factor is the technical and industry expertise. It is commonly known that senior developers earn more than junior ones – according to our report: “Prepare for the IT recruitment process in 2022”, the maximum monthly earnings of a senior developer in Poland might be 5 times bigger than the one of a junior. So depending on the type of specialist that you need, the costs of the overall project will differ. Moreover, companies that have a great record of successful projects through the years, very often require higher rates for their services.
Thirdly, the length of the project matters. In general, the lasting engagements with bigger teams will always come with an increase in overall cost but can provide greater value in the long term. However, sometimes it happens that in exchange for stable relationships, software development companies are willing to offer better rates to clients who need more of their services for a long period of time.
Outsourcing software development has proven to be very profitable for many startups and companies worldwide. According to Deloitte’s Global Outsourcing Survey from 2016, 78% of organizations feel positive about their IT outsourcing relationship. What is more, based on Business Process Outsourcing Market Size Report in 2021 the size of the global outsourcing services market reached $245.91 billion and is constantly growing. It is estimated that in 2021-2028, the cumulative annual growth rate (CAGR) will be 8.5%, so the global market size will then be as high as $435.89 billion. Taking Poland into account, according to the report prepared by the Polish HR Forum, the value of the activities of the member companies themselves as part of the outsourcing services provided in 2020 amounted to PLN 902 million.
To summarize, whether you choose onshoring, nearshoring, or offshoring depends on your needs as a company and the nature of the project itself, but overall, outsourcing allows you to be more flexible. You no longer need to burden yourself with looking for and training new in-house employees when you can have a devoted outsourcing team working to their full potential remotely. If you are still hesitating to choose the right model, please contact us. We will advise you on the best option for your business.