Location-based IT outsourcing models: Onshore vs Offshore vs Nearshore
The location of your IT partner will pinpoint how two parties work together, including working time, languages, and communication methods. In some indications, it might affect the price due to the differences in living standards and currency value.
Sometimes, a region might be more advanced in specific technical skills and niches than the others. For example, Europe is known for design and UX/UI, while Asia is mostly trusted in writing code.
Depending on the distance, we identify 3 types of location-based IT outsourcing models: nearshore, onshore, and offshore. Each has advantages and downsides, so it’s critical to take them into account.
| Onshore | Offshore | Nearshore | |
|---|---|---|---|
| What is it? | When the vendor is in your region or country. There’s also onsite – when the vendor offers services at your doorstep, working with your team. | When you work with IT companies that are 4 or more time zones away from you. | When the outsourced work is done near to your nation. The time zone shouldn’t exceed 1 to 3 hours. |
| Examples | Your company is in New York, but you work with IT vendor from Boston or Seattle | You are a US company, but work with vendor in London or Vietnam | You are in Poland and work with a team from Germany |
| Pros | No language barriers or cultural differences. The onshore staffs are possibly more accessible; interacting, holding meetings, conducting training, and even working onsite if needed is much easier. Time zones will be the same or very close. You have more control over the remote team and work progress. | Save money on operations and maintenance while increasing production. Maximizing global access to a diversity of qualified IT professionals. Find technology specialists that might be lacking in your country and nearby. Excellent adaptability to scale your team up and down anytime. | Access to more skilled workers. Cultural alignment allows the vendor to integrate into your organization more quickly. Close geographical proximity reduces time zone lag, allowing for timely communication and project coordination throughout conventional business hours. Perfect price-to-quality ratio. |
| Cons | Shortage of experienced specialists or being forced to pay expensive developer rates. High labor rates, although onshore outsourcing saves money in some areas, labor expenses are extremely high when hiring locally. | Cultural differences can cause misunderstandings and delays, reducing productivity and quality. Communication breakdowns. Risks to security and secrecy. Make certain that a foreign country’s legal architecture respects intellectual property rights. | Resources are in short supply. Talent availability in nearby countries may be limited compared to endless outsourcing opportunities. It might be more expensive than offshoring. Prices don’t fluctuate much among neighboring countries. |
| Access to talent pool | Limited | Broad | Expanded |
| Languages & culture differences | None | Feasibly | Small |
| Cost | Based on the average developer salary in your country. Can be quite expensive for US, EU or Canada (expect around $80 to $150/hr) | Vary greatly and there are many options for your budget. | Due to the close distance, price may not change much. For examples, Germany and Poland cost around $50 to $100/ hr, while Vietnam and Thailand cost around $30 to $50/ hr |
| When to use | Some IT operations require access to highly regulated data, necessitating the staff executing those functions be in the same country as the data. If you have a substantial budget and are willing to pay higher in exchange for smooth communication and a high-quality team of specialists. When you want access to on-site collaboration. | When the local tech market can’t satisfy the needs of your project. When your resources are limited, offshoring can be a cost-effective strategy. If online communication and remote support isn’t a big problem for your team. When you’ve already had a team or at least 1 IT specialist in-house to oversee and manage the vendor’s progress. | If you want the highest level of agile. Nearshore can ensure a more seamless communication the offshore. When the local pool can’t match your requirements, but neighboring countries do. When on-site isn’t your priority, you consider it a plus/ back-up plan. |
There’s also a more advanced software outsourcing model called Multishore – where you combine teams across the globe for one project. However, be mindful of the cost and project management between teams. I only recommend this if your project is too complicated (like an enterprise-grade application) and you have someone in-house who can oversee and manage all the teams from afar.
Location can say lots of things, but it’s not everything. IT outsourcing companies also use another model to identify the working style, nature of management, distribution of ownership, cost estimation, and contractual obligation, called relationship-based.
Which we will learn about it down the line!
Key Takeaway
- In terms of cost: Onshore > Nearshore > Offshore
- In terms of talent exposure: Onshore < Nearshore < Offshore
- In terms of communication barriers: Onshore < Nearshore < Offshore
- In terms of flexible: Onshore < Nearshore < Offshore
Best regions for software outsourcing
If you are thinking about location-based, here are our suggestions on where to hire:
| Work Culture | Best known for | Hourly rate | Top Companies | |
|---|---|---|---|---|
| US | Emphasis on innovation and results. They are usually fast-paced and individualistic | Enterprise-grade software development | $100-$150 | Accenture, Cognizant, Fingent |
| Western Europe | Generally, more formal, precise and structured. They also prioritize work-life balance. | Automotive software, IoT, Cloud Computing | $60-$130 | Binary Studio, Atos, SAP SE |
| Eastern Europe | Emphasis on flexibility and adaptability. | Mobile App & Web Development, UX/UI Design | $30-$80 | The Software House, Rocketech |
| Australia | More laid-back and have a sense of work-life balance. They usually have an entrepreneurial spirit. | Web Development, Data Analytics. | $70-$130 | Datacom, Appello |
| Asia | Emphasis on hard work, discipline and community over the individual. Usually known for being cost-effective, strong in mathematics and focus on technical proficiency | Data Science, IT Support, Software Development, Cybersecurity | $15-$50 | Infosys, Capital Numbers, Synodus. |
*Keep in mind that this information is for reference and general overview. The actual dynamic of each company can vary greatly depending on their company culture and core values.
Relationship-based IT outsourcing models
This IT outsourcing model is divided into three types:
- Staff augmentation: when you fill the skill gap of your in-house team or extend your current workforce with one external specialist.
- Project-based model: when you hand over the entire project from start to finish to a vendor and let them be responsible for the delivery.
- Dedicated Team (Managed Team): when you borrow a remote team with various positions for your project and share the responsibility with them.
1. Staff augmentation model
Suppose your IT department is working on CRM software. However, there are too many QA testing backlogs that the present crew can’t handle. Instead of going through a lengthy recruitment process, you hire 2 existing testers from an outsourcing company. At the same time, you can’t guarantee the demand after the project is done, so there’s no point in hiring a full-time worker. This is staff augmentation.
With this IT outsourcing model, you assign tasks to the additional staff and have complete control over your project. The vendor takes care of the contract, employee benefits, and compensation.
How to pay: Pay per hour or workday (full 8 hours)
The Pros and Cons of Staff Augmentation
- Significant cost savings: You don’t need to pay for workplace space, hardware, or employee management costs and touch a dime of the recruitment budget. The cost can be much lower if you opt for nearshoring or offshoring.
- Quick access to diverse talents: You can scale up and down anytime. This also lowers recruitment risk as your outsourcing provider will hire tech talent suited for the project.
- Excellent resources and skill sets: The talent pool is much more comprehensive when you move beyond in-house and onshore. You can quickly fill a void in your team structure and continue a smooth development process. Sometimes, the new add-in comes with new ideas, helping you to innovate and improve your applications.
- Complete control over project development.
On the other hand, the client is responsible for their project and the work of the augmented employee. Usually, a project manager or tech lead will take care of this. He/she also needs to make sure the external can integrate and communicate seamlessly with the in-house team.
When staffing is best to use:
- You need a quick fix to comply with the current high demand and tackle the challenge in hiring.
- You already have an in-house team and want to reinforce them.
- You don’t have the expertise you need.
- Suitable for small projects. You can fasten the process and attain quality with this outsourcing model.
2. Project-based model
You want to build a mobile application, but you don’t have an in-house technical team to do such a job. After laying out all the requirements and project scope, you hand it over to an external development team to build the application.
This is the first and most common IT outsourcing model. Using project-based, you should appoint at least 1 executive as the Project Manager or Product Owner to keep in touch with the outsourced team.
The vendor will take responsibility for product quality and timeline adherence. However, many software outsourcing projects fail because the client completely entrusts the vendor and doesn’t set a quality assurance. Daily or weekly check-ins are still necessary to ensure everything is on track and to be alert of potential failure.
How to pay: Most preferably by Fixed Price. Occasionally by Time & Materials.
- Also read: Comparison between Fixed Price vs T&M
Benefit of using Project-based
- A defined timeline, milestones and outcomes: All this will be agreed upon by both client and vendor before starting the project.
- More access to diverse talents, unlike Staffing where you only hire a specific position.
- More time to focus on other mission-critical projects and high-priority tasks, while the project can sit in backlog with low focus.
- Execution is the vendor’s responsibility. But to make the project a success, defining a clear scope is your task. Thinking of the worst scenario: when the project fails, you decide to bring it to court. Using project-based can be quite advantageous for you; in most cases like this, the vendor compensates the client.
Side-effect of using Project-based
- If you change your mind about something, it may be difficult to adjust the deliverables. As a result, IT outsourcing solutions of this type are far less flexible than others.
- Unclear requirements lead to low-quality applications.
- The risk of losing track of project progress and real quality is high. Mostly what you get is the report from the vendor.
When Project-based IT Outsourcing Model is the Better Option:
- When it’s a side project and not a core product.
- When your in-house development talents are limited.
- Simple projects have well-defined requirements and specific timeframes that are unlikely to alter. A project-based outsourcing firm can complete these duties without your involvement.
- When you require a product to be generated fast and efficiently without the added load of management.
3. Dedicated team (managed team) model
This IT outsourcing model is the perfect blend of the 2 mentioned above. You get a full team of developers for your project (like project-based), but they work with you and your team, all under your management (like staff augmentation).
“Dedicated” means they will work solely on your project as if they have become a part of your development team. Yet, you don’t need to worry about operational and HR management expenses.
For this IT outsourcing model to work, both parties will discuss who does what and how to split the responsibilities. Because of this, the model is more complex than the others. It requires close collaboration and smooth communication between 2 teams:
| The Client | The Vendor |
|---|---|
|
|
| Communicate through project management and chatting tools. For example, your assigned Project Manager/ Product Owner will actively update with the outsourced PM. He/she will also oversee the process between 2 teams and intervene if there’s any issues. | |
How to pay: Time & Materials and Pay per hour.
The pros of using Dedicated team:
As it leverages the best of both worlds, this IT outsourcing model will:
- Give you more control and involvement in the project. Unlike project-based, where you mostly get updates from afar and are not directly involved in the work.
- More cost-effective and flexible in recruiting tech talents. You are not limited to your in-house executives while saving budget on hiring and HR management.
- Scale the team composition up and down without affecting the core in-house team.
- Reduce your own team effort, allowing them to split the commitment between the project and other critical tasks.
- The outsourced team will work with you throughout the product life cycle instead of the execution, like staff augmentation.
Being the child of the 2 above models doesn’t mean the Dedicated team will discard all cons.
This model necessitates involvement from the client side, which is not suitable for all use cases. Additionally, the shared responsibility can complicate the legal agreements if the projects fail. The T&M payment model can also prompt hidden costs since it’s not upfront, like the fixed cost and project-based outsourcing model.
Because of that, this It outsourcing model is best to use when:
- When your team has already been on several development projects (their focus is divided)
- When your in-house team lacks the knowledge and/or competence required to finish the job.
- The project is long-run with unpredictable changes. A dedicated team can offer maximum flexibility to adapt to this tendency.
- When you want to take on the decision-maker and project-manager roles.
- A dedicated team is much better than Project-based and Staffing if you don’t have a clear vision of your final product. Because of this, it’s a cost-effective choice for startup and MVP/ product development. Many startups opt for this strategy to ensure product roadmap and launch on time while expanding their in-house team.
Staffing vs dedicated team vs project-based software outsourcing models
| STAFFING | PROJECT-BASED | MANAGED TEAM | |
|---|---|---|---|
| Scope | Not set | Defined | Estimated |
| Timeline | Defined | Defined | Estimated |
| Control | High | Low | Medium |
| Flexibility | High | Low | High |
| Team Scalability | High | Low | Medium to high |
| Responsibility | Client | Vendor | Shared |
| Client Involvement | High | Low | Medium |
| Client Technical Expertise/Leadership | Required | Optional | Recommended |
| Communication with Outsourced Team | Daily | Occasional | Frequent |
| Overlap with In-House Team | High | None | Some |
| Task Management | Client | Vendor | Vendor |
| Project Management | Client | Vendor | Shared |
Key takeaway
After choosing your location, identifying the partnership model that works best with your scope, budget, and management methodology will help you filter the partner list and negotiate with them. This is why location-based always comes before relationship-based.
Almost every software development company offers staffing, project-based, and dedicated team models. However, with 100+ projects delivered and in progress, we suggest:
- Using Staffing for short-term projects.
- Project-based is best for long-term and defined ones
- Dedicated teams excel in the long-term one with evolving scopes, which startups are really fond of
Question to help you make the decision
Before deciding on a model, ask yourself the following questions:
- What are your primary business objectives or requirements? Identifying the main problem and finding what fits your needs will be more effortless.
- How much leeway do you need, and in what areas? Outsourcing solutions allow varying levels of flexibility in each area.
- Do you have in-house experience in the project’s subject matter? Staff augmentation or a managed team can help if you do, or project-based outsourcing may be a better fit.
- How much time can you commit to the outsourcing relationship?
- How much power do you wish to keep? Consider a managed team if you need significant decision-making control but don’t need daily management.
- What is the priority level of the project? Consider a managed team or staff augmentation option for a high-priority project. A managed team can be an excellent fit for your low-priority project.
How Synodus outsourcing model helps businesses build software
At Synodus, we leverage flexible cooperation strategies to meet the needs of our diverse clients, including:
- Time & Materials payment term for support with small tasks and staff augmentation
- Fixed cost payment for large-scale projects with clear scope
- Dedicated team for agile projects
Not just building a solution based on your requirements; we offer an outsourcing service that aligns with your business approach, delivers on time, on budget, and drives results. Explore our step-by-step process to custom software for our clients!
Using the most extensive stacks and emerging technologies of blockchain, low-code, IoT, and AI, here’s what our partnership can do:
- Rapid Web & Mobile App development
- Comprehensive Bespoke Software Development
- Low Code Development
- Full-cycle Product Development & Technical Consultation
- Blockchain & Fintech Development
- Data Analytics
Having a skilled tech partner with multiple IT Outsourcing model choices like Synodus can be invaluable in navigating this exciting journey. Our clients’ success speaks for itself, with 88% of them ready to recommend Synodus.
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