5 Hidden Costs of Offshore & Nearshore Development

by Chris Kadel on November 27, 2020

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When an organization needs to modernize quickly, offshore development continues to be an appealing option for IT leaders. And for good reason. It can take anywhere from 6 to 24 months to recruit a new team or bring an existing team up to speed on new technologies and patterns, while an outsourced project can get up and running in under a month. Plus, with the median salary for US-based developers over $100,000, labor seems significantly cheaper when looking at offshore and nearshore options in Asia, Eastern Europe, or Latin America. 

There are hidden costs, however, that come with both offshore and nearshore development. Below, we’ll explain why those factors add up to onshore being the better option for your most critical projects, and propose that a hybrid approach to your overall IT needs will keep your board of directors, internal team, and bottom line all happy. 

The Obvious Costs of Offshoring

First, let’s look at some of the “hidden” inefficiencies and costs of offshore development that almost every CIO and CTO knows to look out for by now:

  1. Low code quality – Plenty of organizations have publicly bemoaned the code quality of offshore developers. Some have even come to the tail end of a project only to find that critical bugs make their app incompatible with widely used devices. 
  2. Communication challenges – Language barriers between internal and offshore teams can go far beyond basic miscommunication to the lack of a shared vocabulary and shared vision for your project. 
  3. Time zone-related issues – With time differences of 13 hours for Asia and 7 hours for Eastern Europe, inefficiencies abound and internal team members can get increasingly worn out and frustrated working with offshore teams. 

The global IT services outsourcing market has attempted to solve for some of these problems. Most offshore agreements now come with quality guarantees in the form of an acceptance testing period and software warranty. For communication issues, some governments have invested heavily to educate their populations in “Global Business English”, and Education First publishes an annual summary of English proficiency ratings by country that can help guide IT leaders toward the safest bets. 

For time-related troubles, nearshoring has been gaining ground in recent years as a solution that brings you a cost-efficient contract team in the same time zone. According to the World Bank, Mexico is now the third-largest exporter of IT services in the world, and its IT outsourcing industry is growing about 10 to 15 percent annually. Still, no single country or updated approach to offshoring has provided the silver bullet that addresses all three of the issues listed above. 

Less-Expected Offshore/Nearshore Costs to Look Out For

In addition, there are some less obvious costs of offshoring that can be much tougher to plan for. 

  1. Significant management requirements – To ensure a truly successful offshore integration, you’ll find you need to dedicate two or three members of your team toward managing the vendor. These include a Product Owner, a Technical Lead, and in some cases a ScrumMaster. Be sure to account for their salaries, and the cost of taking them off other priorities for the duration of the project, when estimating your true costs. 
  2. Geopolitical instability – Recent events like the Sri Lankan Easter Sunday terrorist attacks and the ongoing US-China trade dispute have made it clear: global politics are unpredictable. Agreements with certain countries can lead to significant delivery disruptions, and may even raise concerns at the investor or board level of your organization.

As Gartner Research VP Jim Longwood puts it, “how the trade talks progress may hinder China’s ability to deliver IT services. Concerns include potential disruption to or cessation of services, increased tax added to export labor rates and reduced quality of service due to ‘patriotic’ backlashes by local staff. However, instability is not limited to the U.S./China situation. All organizations should review their offshoring and nearshoring arrangements.”

Of course, these costs and considerations don’t mean you shouldn’t outsource any of your IT needs. They do mean you should be thoughtful about what you outsource, and to where. More and more Forbes Global 2000 companies are outsourcing their tech needs to multiple specialists, instead of outsourcing everything to a single IT vendor. If you’re at a large organization with a lot of maintenance and support-related needs, you might consider offshoring to a vendor or two.

When it comes to business-critical modernization projects or new custom software, however, onshore will be best for your product, your internal team, and your organization’s executive leadership. Onshore partners cost more upfront, but they integrate with a company for the duration of a project, provide a level of collaboration needed to solve complex problems, and don’t come with all of offshore’s expensive surprises further down the line. 

Some of the most successful CIOs and CTOs we’ve worked with at Polaris embrace this by following a hybrid outsourcing model. They seek high-quality, onshore partners for digital transformations and new products that are central to their organization’s value proposition or competitive advantage. Then, to save costs on the maintenance of software products and less critical initiatives from there, these IT leaders do their research or work with their onshore partner to find an offshore/nearshore vendor they can trust for the long-term.

Topics: nearshore, software development, offshore