The benefits of outsourcing can range from dramatic cost savings to allowing companies to focus on core competencies. What are the differences between offshore and onshore outsourcing? Which type is best for your company?

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Is a room of Indian developers the first thing that comes to mind when someone mentions software outsourcing?

Offshore outsourcing is what most people think of when they hear outsourcing. Outsourcing means using outside resources to perform activities traditionally handled by internal staff. The outsourcing partner manages the entire operation and does all the work. If the partner resides in an offshore location like India then it’s offshoring.

The benefits of outsourcing can range from dramatic cost savings to allowing companies to focus on core competencies. What are the differences between offshore and onshore outsourcing? Which type is best for your company?

Offshore Outsourcing

Benefit: Cost

The main benefit of offshore outsourcing is usually cheaper labour which means lower costs. But another reason why a company might outsource is to enter the market where the partner resides.

The allure of cheap labour might sound enticing, but is it too good to be true?

Drawback: Hidden Costs

Offshore projects have a higher tendency to sneak in costs that eat away your savings.

The transition period is one of the most expensive stages in an offshore effort. Most people underestimate the costs to hand off a project to another party. It’s not as easy as just handing some specs and start saving money. In order for your project to stand a chance, your employees will need to work together with your outsourcing team. Transferring knowledge as well as ironing out cultural differences takes time. During this time, it costs your company double.

Drawback: Low productivity

Low Productivity is another factor affecting your potential savings. It’s not as easy as replacing someone from your own country with an offshore worker.  This makes the project take more time to complete. Projects that are common sense for a local worker may be foreign concepts to the offshore one. These and other communication issues may cause the project to slow to a halt. To complete the project you may need a lot more meetings and face-to-face interactions.

It can be challenging to outsource projects that need knowledge of your business operations. These challenges could increase manifold when the outsourcing partner resides in a different country.

Drawback: Low Quality

The main concerned with offshore outsourcing has always been the quality of the work. Most of the time, the costs saved don’t justify having a poor built product that is a headache to maintain.

Drawback: Currency Fluctuations

Currency fluctuations might make offshoring less appealing as well. Depending on the value of their currency, the total savings might not be as good as expected.

Onshore Outsourcing

Why would anybody do domestic outsourcing? One reason is to get a proven software development process so you can focus on your own core competency.

Drawback: Cost

The main drawback for onshore outsourcing is cost. These vendors have to pay the same kind of salaries that you do. The engagement has to create significant value to overcome the cost advantages of offshoring. Can domestic partners mitigate costs through improved productivity, reduced errors or increased revenue?

Benefit: Quality Product

One of the main advantages to onshore outsourcing is the difference in their development approach. Unlike in offshoring, there is a great deal of communication between the client and the vendor. The onshore staff will be more likely to push back on requests and suggest alternatives. They will also provide valuable advice and feedback. As a result, they can be instrumental in developing a quality product.

In comparison, offshore outsourcing tends to not have this back and forth dialog. Instead, the norm is to develop as told without offering any feedback. Regardless of whether it makes sense or not! As a result, many iterations are needed which increase project costs and delay delivery.

Benefit: Project Management

Although the costs to hire an onshore company may be greater, you will likely save on project management. Onshore projects need far less management due to their experience and internal processes.

Benefit: Grants / Tax Credits

Programs exist in some countries like Canada that help cut large parts of the cost of developing technology. This allows companies to counter the low labour costs that offshore companies use as their main selling point.

Benefit: Proximity

Working close to your outsourcing partner allows to schedule in-person meetings as required. Also due to the relative distance, meetings can occur during reasonable times. The overlap of working similar schedules helps maximize productivity. Especially for software projects that need a lot of back and forth. While not essential, these can become critical if a project begins to veer off-course.