Due to constant advances, outsourcing allows companies to reach out to better talent. This approach comprises, for instance, the improvements that remote work provides. The main difference between these processes often relates to physical distances. Nearshoring locations are usually closer to the business's origin. Meanwhile, outsourcing involves relocating to farther areas. Yet, its relationship with business costs it's not always proportional. We'll address them and their relation with the Software Development and IT field. Knowing its differences and strengths can benefit your business strategy. Let's go!
The Difference Between Value vs. Cost in Business
Before we unfold outsourcing aspects, we need to discuss two concepts. These are the definitions of cost and value. In a commercial transaction, buyers and sellers exchange products for services or vice-versa. Exchanges include not only physical items but also the labor force. In this context, the cost is the monetary agreement between parties. Yet, the value ties to qualitative edges. The value is the extra worth that comes with the cost.
The cost of a product is the total amount of its inputs' expenses. Further, it includes anything needed for the good's production. In summary, its definition implies the financial bet to achieve future benefits. Yet, businesses have to ponder both fixed and variable costs. In this scenario, fixed costs are independent of volume. Further, they lie more on time than on quantity produced by an enterprise. In contrast, variable costs depend on volume changes. Some examples include raw materials and production supplies. Variable costs are subject to modifications according to business goals.
On the other hand, value describes the benefits obtained from the product or service. It's the final user who decides the worth of these benefits. Further, value links to the product's marketplace. While each firm presents its value, it's company-specific and varies on competitors. For instance, the value encompasses functionality, reliability, and appearance.
Unlike costs, value is more unmeasurable. Not only because of the differences between final users and their specific preferences. Its subjectivity includes variations on your company, market, and competitors. Let's say you're working on a mobile app that allows students to organize study topics before a test. It's possible that, after test season, your app will lose some utility or usage. Yet, this doesn't mean it has lost its value. In essence, the value is the worth users perceive from the final product in a specific period.
These concepts go hand in hand when evaluating any business operation. Thus, knowing its definition is essential to achieving success. And, as we've seen, value and cost exceed buyers and sellers. These ideas also include final users or customers. That's because, in the end, users define a product's worthiness.
To understand its different combinations, there are some aspects to consider. The list goes from businesses' financial situation to the expected measurable results. For example, a Fortune 500 venture will have different goals than a small business. In consequence, both will adopt different approaches to outsourcing. We’ll look at those strategies below.
What is Outsourcing?
Outsourcing relies on hiring external suppliers. Moreover, these suppliers focus on the execution of specific activities. Many may wonder, "What do you mean by outsourcing?" There are different elements to answer this question. First of all, outsourcing provides flexibility. Also, it highlights business processes with higher priority. And last but not least, it allows savings within companies. The outsourcing of services focuses on achieving a good leveling and strategic position. Within a demanding market and environment, it flexibly reduces costs.
What is an Outsourcing Strategy?
It's necessary to avoid the exercise of outsourcing arbitrarily. While outsourcing tasks can save money, it does not make sense without a business purpose. That’s why analyzing the final goals is recommended when considering outsourcing. These misleading practices can lead to, for example, inaccurate agreements or incomplete contracts.
Because of this, it's essential to establish good commercial associations. These agreements need great rigor to avoid misunderstandings that can lead to failure. In this context, ensuring a mutual understanding of what, how, and why work relationships will be relevant. Furthermore, mutual obligations must always be well-documented.
Many companies outsource their operations. Big names like Google, Facebook, Nike, and Coca-Cola are among those. These outsourcing services often involve IT providers, app dev teams, and analytical consultants. Yet, in companies that offer physical products, outsourcing encompasses manufacturing and retailing.
The transfer of business processes to companies in a nearby country, where both parties expect to benefit from one or more of the following dimensions of proximity: geographic, temporal (time zone), cultural, linguistic, economic, political, or historical linkages. Nearshoring is a derivative of the business term offshoring. In contrast, nearshoring means that the business has shifted work to a lower-cost organization but within its region, broadly defined.
Pros of Outsourcing
Outsourcing's benefits are one of the most asked questions within this topic. Knowing its perks allows one to understand its relevance in Software Development. Some extras include:
● Cost Reduction. Outsourcing moves part of enterprises’ cost risks to specialized external providers. That’s the case with significant investments in infrastructure or technology. In consequence, businesses can put more emphasis and resources on other edges.
● Flexibility Increase. Companies adopting outsourcing strategies get more flexibility in recruiting policies. Industries have fluctuating demands, and it can be challenging to meet those. In this context, external contractors can cope with seasonal and cyclical demands.
● Diversity and Innovation. Not only is outsourcing beneficial to cultural diversity. Further, it allows bringing worldwide talents to the table. Not only does this apply to the tech market globalization. Also, it lets companies recruit professionals specialized in diverse tech stacks. As a result, ventures can achieve high-quality results for specific projects.
Cons of Outsourcing
Yet, outsourcing can also bring disadvantages. Among its weaknesses, there can be:
● Belonging Sentiment. In some cases, outsourced employees respond to agencies instead of final businesses. In other words, they’re far from the venture’s headquarters. As a consequence, outsourced members often lack loyalty to companies.
● Work Instability. Within the IT field, team morale is something to consider. Often, contracts have project deadlines in mind. This type of work can make external consultants disheartened about their future. As a result, this instability can lead to quality loss or even turnovers.
● Communications & Control. It’s essential to notice that communications can suffer lapses with outsourcing. And, the longer the outsourced response takes, the more services get affected. In this scenario, communication issues can hinder business efficiency. Yet, you also must be ready to delegate some control. Third-party services can mean some aspects of your business get under someone else’s wing. Thus, you must ensure that secondary business partners handle the same company standards.
Outsourcing strategies can be vital for businesses. Yet, these have some focus points.
● Human Effort. Information Technology (IT) has always been relevant to business processes. Further, it's central to expanding human interactions. Human effort and capacities are vital to channel success stories. While these processes can be complex, they're not impossible. Nearshoring allows the merging of specialized work teams. Moreover, it ensures effective, quick, and less expensive projects. Yet, the aforementioned cultural affinity comes relevant as well. This familiarity allows for more robust and reliable teams.
● Shared Processes. Software companies often work hand in hand with foreign providers. Because of this, both must get all pertinent certifications to guarantee competitiveness. To achieve these standards, many companies invest in employee training. It's essential to have prior training to count on the three fundamentals of nearshoring. These are Culture, Cost, and Proximity.
● Security Focus. When talking about security, it not only refers to data but also to the safety of the members of work teams. While data can be safe by putting it in the cloud, physical capital cannot. Because of this, work teams must be in secure physical territories. Moreover, specialists should previously check external conditions.
● Proximity Advantages. Companies or team members with geographical proximity tend to have better communication processes. Further, time zone proximity allows for more collaborative relationships. As a result, managing a generalized cultural affinity is a great advantage. Not only does it optimizes work styles, but it also channels culturally-friendly relationships.
What is Nearshoring?
The concept of nearshoring begins with proximity. Here, both parties pursue benefits based on specific closeness dimensions. These, among others, can be geographic, temporal, cultural, or linguistic. Its second point relates to costs. While within its regions, businesses bet on external lower-cost organizations.
Business processes and techs have diversified throughout the world. These processes bring an intertwining between different companies. With nearshoring, time zone distances are dramatically reduced. As a result, nearshoring comes to light, allowing greater efficiency at a low cost. Taking the case of the US shows a significant advantage concerning LATAM.
The US has territorial and temporal proximity to South America. Further, in most cases, the time zone differences are slight. In fact, from the US west coast to east South America, the maximum time-zone difference is around five hours. And that's without considering daylight savings. This proximity allows for creating direct relationships with suppliers. It's notorious that the tech quality of both LATAM and the US has improved. Also, the US government has a massive internet in developing the IT field. Yet, it's necessary to highlight the role of currency exchanges and living costs. According to the IDC, govs of LATAM and the US have been allocating investments to promote its tech areas. Countries like Mexico, El Salvador, and Guatemala offer developed capabilities in CRM-BPO.
Currently, more American companies are focusing on protecting their intellectual property. This strategy is relevant in light of potential international conflicts. In this context, companies tend to want their production points closer to their territories and audiences. That is, they want to play it safe. Among the US ventures using nearshoring are Whirlpool, Boeing, and Toyota.
Having a quality nearshoring team allows you to merge a good work experience. Moreover, it will enable both to establish commitment sentiment. At the end of the day, nearshoring is an excellent resource. It offers cost reduction, cultural affinity, and territorial proximity.
Nearshoring can be a clever solution for Software Development ventures. That's because, nowadays, human connection is a highly-demanded strength in the market. All nearshoring services provide a geographical and cultural affinity approach. Besides reducing costs, it consolidates high-quality solutions and creates solid relationships. To generate value associations, it's essential to know the benefits of this technique.
● Closer Contact. Through nearshoring, it's possible to make quick and efficient decisions. The control system is more optimal considering time differences and management.
● Market Knowledge. With cultural affinity, knowledge of local markets is much better. At the same time, it makes it possible to create an offer that is more in tune with changes in existing demand.
● Business Ethics. Neighboring countries often share the same labor and commercial regulations. With this advantage, it is easier to avoid penalties.
What is Offshoring?
The practice of outsourcing operations overseas receives the name offshoring. Often, companies from industrialized countries hire providers from less-developed countries. Moreover, this approach has several reasons, depending on the business field. Among these are lower labor costs, regulations, and favorable tax conditions.
Within the IT field, this procedure is relatively standard. Not only because labor costs tend to be lower in less developed countries. Also, it allows companies to provide competitive salaries. In this scenario, "competitive" concerns living costs in different cities. The final intention is to reduce the business' expenses.
Nearshoring vs. Offshoring
Both terms have similarities when hiring an external workforce for specific tasks. Offshoring may be the best choice if a business has an organized product plan from start to finish. That's because, with a designed plan, contact between parties can be more consistent. If you need 24/7 support, hiring people with opposite work hours sounds logical. With this, your website could have people replying to users' concerns anytime. As a result, you could achieve higher loyalty and user engagement rates.
Yet, every coin has two sides: noticing different perspectives is necessary. Often, wide cultural diversity can cause a mismatch between client and provider. Moreover, this significant (over 5 hours) time zone difference can be a headache in the long term. You might find yourself attending calls at late night hours to get aligned with your team. This exhaustion can lead the client management team to burnout or resignation.
That's when the difference between cost and value takes relevance. Every business is different, yet these are aspects you need to consider. At first, you may find yourself comfortable with delegating work overseas. Yet, if it has more cons than pros, it can become counterintuitive in the long term.
We cannot mark a perfect strategy among the mentioned terms. Defining a one-right answer option in this world full of possibilities would be a mistake. Companies base their decisions on cost convenience, territorial proximity, and cultural affinity. It's no secret that outsourcing allows companies greater possibilities and cost savings. Also, at the expense, more times than not, quality. If edges like culture affinity are crucial, nearshoring can be a more suitable option. We hope this article clarifies these concepts!