Nearshoring vs Offshoring – Examples, Differences, Pros And Cons

When we hear about globalization, what comes to mind is the ability for products and services to move around the globe seamlessly. One of the most fundamental ways this has transformed business is by enabling the use of nearshoring and offshoring for everything from manufacturing to services like customer support and custom software development. In […]

by Dilyan Dimitrov

March 18, 2024

7 min read

Nearshore vs Offshoring Examples

When we hear about globalization, what comes to mind is the ability for products and services to move around the globe seamlessly. One of the most fundamental ways this has transformed business is by enabling the use of nearshoring and offshoring for everything from manufacturing to services like customer support and custom software development.

In today’s highly competitive business environment, these strategies have transformed how companies operate because, used correctly, they enable businesses to lower costs while maintaining or even increasing quality levels. However, unlocking those benefits requires a firm understanding of nearshoring vs offshoring to understand which can bring the most value to you.

Nearshoring vs Offshoring Basics

Both nearshoring and offshoring are types of outsourcing. This is when a business moves part of its operations overseas to save costs, access skills and talent, or enhance scalability. This could mean hiring a separate company or opening your own office. With both nearshoring and offshoring, this process moves those operations to another country.

Key Differences Between Nearshoring & Offshoring

While both describe moving some element of a businesses’ operations overseas, nearshoring does so in a nearby country. That said, the definition of “nearby” can vary slightly. It often means in the same region, but it can also simply mean nearby in terms of language or culture. 

For example, if an American firm outsources work to Ireland, they’re not in the same region but the closeness of their language and culture would make that nearshoring.

Outsourcing, by contrast, generally moves a particular operation to a more distant country, with the classic example being the large-scale movement of manufacturing to China over recent decades.

So the real difference between nearshoring and offshoring is how distant, however you define it, the country is from where the original business is located.

How Nearshoring & Offshoring Compare on Cost

In most cases, nearshoring is going to cost more than offshoring because the businesses doing it are usually based in wealthier countries. As a result, countries closer to those original locations are usually going to have higher labor costs than farther destinations which may be more appropriate for offshoring.

The Fundamentals of Nearshoring

Now that you have a basic understanding of what nearshoring is, let’s dive a little deeper to understand why you may want to consider it as an option.

Nearshoring Pros

A major reason many businesses are so keen on investing in nearshoring as opposed to offshoring is culture and language. Working with teams who are more fluent in your language and whose working culture is closer to yours carries enormous benefits. This helps avoid misunderstandings, reduces the time and resources needed to build alignment, and generally eases the process of integrating a nearshoring partner into your organization.

Another common, though not universal, benefit is timezones. Nearshoring destinations are usually physically closer to the main business, making it far easier to collaborate owing to the greater number of overlapping work hours. Often this can save days worth of delays merely by increasing the chance communication about issues can happen simultaneously instead of asynchronously.

A related benefit to closer timezones is the ease of travel to nearshoring destinations. While most business is obviously done at a distance, knowing it’s relatively easy and affordable to hop on a plane and visit a nearshoring partner in person can be tremendously helpful. Again this can reduce the time needed to address issues when they arise, translating into significant savings.

The final, and perhaps most significant, benefit is that the right nearshoring partner empowers businesses to be more Agile in how they operate. Nearshoring typically enables businesses to scale up or down far faster than would typically be possible. This advantage enables businesses to respond to market opportunities, pivot where needed, and generally respond faster than would otherwise be possible.

Nearshoring Cons

Despite the benefits mentioned, nearshoring does come with some drawbacks. Despite being easier to closely collaborate compared to offshoring, physical distance still presents problems.

For one, even if they are closer than offshoring destinations, time zones and the time needed to get people to those physical locations may still present challenges. If fast response times are critical for your business, you may need to mitigate these factors by having your nearshoring partner work during your hours or have someone from your team permanently based at that location.

Another potential con to consider is political or economic instability in a nearshoring destination. This recently became a major issue when Ukraine, a popular nearshoring destination for European firms, became a warzone. In other cases, this may simply be a change in economic policy or in political leadership. Still, while these potential problems are worth considering, they remain rare.

Examples of Nearshoring

One common use for nearshoring is manufacturing. In these examples, physical proximity both helps to ensure tighter quality control and reduces the cost of transporting the resulting products to market. Cars are a good example, where Mexico has become a popular destination for building vehicles for the US market because of the combination of lower labor costs and the ease of transporting them to their final destination.

Another common use of nearshoring is for customer support. In these cases, language skills and cultural understanding are the key benefits, as this usually creates a good balance between quality and cost.

However one of the most popular uses of nearshoring is for technical activities like custom software development. Because these products are purely digital, there’s no need to consider the logistical connections between you and the nearshoring destination. The availability of excellent but affordable technical talent has led to a rise in this strategy in recent years.

Popular Nearshoring Locations

Central and Eastern Europe are among the most popular destinations for nearshoring, particularly for countries that combine lower costs of doing business with a membership in the European Union. This helps ensure ease of doing business across borders while also providing strong protection against instability and radical economic changes.

In the western hemisphere, Costa Rica is a popular choice due to the population speaking English. Otherwise, Mexico, Chile, Columbia, and Argentina are major destinations capable of working in the same or similar time zones to North American clients.

Infographic -Nearshoring vs Offshoring - Examples. Differences, Pros And Cons

The Fundamentals of Offshoring

In contrast to nearshoring, offshoring involves working with partners in farther-flung locations with cultures and languages that are farther from those of your core business.

Offshoring Pros

The single most significant pro offered by offshoring is cost. This is what originally drove the popularity of the practice. However, as standards of living have risen in countries like China, many popular offshoring destinations have begun to be competitive on quality in specific areas as well.

But besides simple cost savings, offshoring often offers businesses access to far larger talent pools than would otherwise be available in their home countries. This increases flexibility and scalability when needed.

Lastly, while the greater time zone differences you typically find with offshoring destinations can be a downside, in some cases it can also be a benefit. This is particularly true when it allows you to break work up into shifts or ensure 24-hour availability for tasks like customer support.

Offshoring Cons

Perhaps the single biggest downside of offshoring is the cultural differences that it typically brings. Working closely with people from dramatically different cultural backgrounds presents a host of challenges, from different understandings of concepts and assumptions to simple language barriers.

A related challenge is quality control. The physical and cultural distance offshoring typically brings can make it challenging to closely monitor quality. This is one reason offshoring is so commonly used for products and services where minimizing costs is far more important than maximizing quality. 

Examples of Offshoring

Without a doubt the most common example of offshoring is the large-scale movement of manufacturing from the US to China in the late 20th and early 21st centuries. Other common examples are the relocation of customer support staff to countries like India and The Philippines.

Popular Offshoring Locations

While China and India are the most famous and popular offshoring destinations, recently countries like Vietnam, Malaysia, Indonesia, The Philippines, and Brazil have grown in popularity. 

Important Nearshoring and Offshoring Trends

The biggest single trend in offshoring and nearshoring over the past two decades or so has been the movement of many popular destinations from lower to middle income status. This has, for example, led many manufacturers to initially shift production to China before later moving to lower-cost destinations like Vietnam.

At the same time, many offshoring and nearshoring destinations have gradually improved the quality of services they offer. Years of experience working with clients has honed their ability to deliver exceptionally high quality products and services while also matching the working styles and cultures of these clients.

The Covid-19 pandemic and its accompanying supply chain issues also increased the popularity of nearshoring as it enables simpler networks that are better able to handle shocks. The lesson for many was that the efficiency of these supply chains needs to be balanced with their robustness.

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A reader who loves writing, a marketer who loves tech, a nerd who loves sports. Dilyan, our resident writer, half-jokes that his days are filled with everything you can think of - except free time. He joined our team several years into his copywriting career - and he seems to feel at home here. Because, as he puts it, “there’s always cake at the office”.  If he doesn’t have his nose buried in a book, you can typically find Dilyan writing his latest piece, tinkering with his PC, or off swimming/cycling somewhere.