Introduction

So you have made the investment decision to build a new website expand an existing site or build new software. Assuming you plan to outsource, the next question is should I get a local firm or expand the search horizon to offshore or nearshore locations.

This article strives to lay out the pros and cons, benefits and risks in keeping a project onshore, or going offshore or nearshore location. Our focus is on helping startups, and small and medium business (SMB) navigate these questions.

Key Definitions

Onshore - Use of providers in ones home country or region, typically a high skill, high cost country (e.g. United States, United Kingdom, etc.)

Nearshore – Use of providers in a different country or region, but with similar time zones, culture and/or language skills (e.g. Canada for the United States)

Offshore – Use of providers in more distant locations with different time zones, culture and language skills (e.g. India, China, Philippines, etc.)

Pros and Cons, Benefits & Risks

Cost Savings

Startups and SMB cite a number of reasons for going offshore, but typically one of the top reasons is cost. Direct labor costs in offshore locations such as India can be as little as 20% of what you find in higher cost onshore locations. All of this savings does not fall to the bottom line because other costs can be higher (e.g. management, travel, etc.), but well managed offshore initiatives can have cost savings of 50-70%.

There can be trade-offs to get these savings so some US companies explore nearshore options such as Canada or Latin America. Nearshoring can provide some of the cost savings of offshoring with out some of the Offshore trade-offs (i.e. closer cultural norms, similar time zones, and easier travel). However, with the recent decline of the dollar through the middle of 2008, cost savings some nearshore locations such as Canada have been largely eroded.

Speed & Schedule

The speed with which different companies can execute is mostly dependent on the project and vendor executing the work, but location can play a role. The key schedule dimensions that differ between onshore and offshore locations are resource availability and requirements definition.

All things being equal, offshore firms typically can have more resources on “the bench” (not engaged with another client and ready to start a new project) than onshore firms. Onshore firms are under extreme cost pressures and can not afford to have personnel sitting idle waiting for the next project. Commonly onshore firms need to wait for resources to complete projects before they can start a new one. Offshore firms, with their lower direct labor costs, have some flexibility to add resources in advance of a project and thus start more quickly.

On the flipside, onshore firms can require less time for the first phase of a project (requirements collection and definition). There is a better chance of communicating requirements in person and the language and cultural barriers are low. Requirements can be collected and defined by offshore firms, but language and cultural barriers can require a longer, more in depth effort.

Expertise and Quality

Highly qualified vendors can be found onshore, nearshore and offshore. However, all things equal, offshore locations have additional risks that can impact quality (e.g. language, cultural differences). Those risks must be managed carefully to get results equivalent to a similar onshore firms.

Assuming the buyer of offshore services has the capability to manage offshore quality risks, then the primary driver of quality is provider driven, not driven by the onshore/offshore decision. Providers in Asia and Eastern Europe, with the required specialization and quality controls, can easily exceed the performance of less qualified onshore providers.

Execution Risk

All technology and outsourcing projects have execution risks. Execution risk can grow when projects are moved to nearshore or offshore locations. However, most of the additional project risk can be mitigated via a risk management plan and some additional management effort. Some risk factors will remain out of your control (e.g. political risk, infrastructure risk, etc.) but in most cases project risk profiles can be brought down to acceptable levels close to similar onshore efforts.

Conclusion

In conclusion, the decision to execute a project offshore can be a complex one and there is no one size fits all answer. The decision is dependent on a number of unique project factors and objectives. One however, can get to an answer by considering the factors discussed above and how they fit into the overall project profile and objectives.