Organizations have found the relevance of offshoring to meet the needs of the market and expansion. That being said, many businesses are still wondering if it is worth the effort, given the required significant investment.
This blog will explain the meanings of insource/outsource, onshore/offshore, and explore the advantages/disadvantages of a different team scaling strategies to help you determine the most appropriate one for your company.
Modern Problems Require Modern Solutions
As technology advances rapidly, it has also completely changed the way we conduct business. Innovative start-ups are emerging at unprecedented speeds to meet the ever-rising demand and expectations of customers. Thus, competition is harsher than ever, forcing firms to quickly adapt and grow.
Coupled with the global supply chain’s unpredictable nature, businesses found themselves stuck in a constant race to optimize everything to the extreme. This is particularly true for tech startups and IT companies, where software development cycles are notoriously long and expensive.
With globalization, this raises the question of whether operating within your home country is still effective enough? If not, then how do we approach offshore/onshore insourcing/outsourcing as team scaling strategies?
Definition: Onshore/Offshore and Insource/Outsource
Insourcing is the process of completing specific tasks within the organization, as compared to Outsourcing, which is the process of hiring a company or individuals outside the organization to complete the same tasks.
Onshore refers to a company operating within their home country, whereas Offshore refers to a company’s operations outside their home country. This is more of a geographical differentiation.
Onshore: High Control + High Costs
The onshore insourcing strategy, commonly known as the “in-house” way, is how most companies start off. Under this model, tech companies directly recruit the right talent accordingly to their standards and needs. Since members are recruited locally, face-to-face interviews and meetings are conducted easily without any language/cultural barriers.
The company maintains a high level of control over the deliverables. Members are aligned in goals and are able to come together to solve problems quickly and efficiently. For tech companies, being able to connect and communicate easily is crucial for efficient software development.
In case of lacking internal/specialized resources or not enough approved headcounts, the company may choose to implement onshore outsourcing, which engages local contractors/consultants on a project/short-term basis to augment their in-house team. This is a more costly solution, but a useful quick fix in the short term.
Onshore (insourced or outsourced) operations, however, tend to be costly for the majority of startups and SMEs in developed countries due to high salary costs. Onshoring also limits the labor supply to the local talent pool, resulting in months to find the right candidate or having to pay even higher salaries to attract them onboard. Given such disadvantages, it is logical for firms to explore offshore strategies.
Offshore Outsourcing: Lower Control + Lower Costs
Offshore outsourcing has been a common strategy of tech businesses for years now. According to Statista, outsourcing is a popular method for firms to access skills that are not available in-house, while cutting down the cost associated with software development and free up resources. Depending on talent availability, offshore outsourcing is also popular for firms that want to optimize their cost and labor utility.
It is a cost-effective method that provides opportunities for fast-scaling companies to expand without being hindered like onshoring. Firms are able to produce products/services at much lower costs compared to using their in-house team. Among those offshore outsourcing destinations, Vietnam is considered one of the best options due to its low labor wages, which allows cost arbitrage to happen.
On the downside, entrusting external parties means giving up control over the process and results as you are dependent on your service provider to fulfill it, at their terms. If your service provider stops their support, you are also at risk of facing business disruption. For such reasons, We advise to NEVER outsource your core IT capabilities – it only makes sense for non-IT companies to outsource their IT projects to a trustworthy third-party.
Additionally, service vendors are frequently being evaluated on how competitive their prices are, as outsourcing is usually done for the purpose of saving costs. Thus, they tend to look for the “least-effort solution” so they can quote a lower price to win your contract. This can result in potentially disastrous long-term consequences where your IT project becomes barely functional with poor scalability.
This means future updates will require a total teardown of past works or event re-development from scratch. As a result, the customer’s change requests are often charged with sky-high fees (hidden costs) by the service provider.
Therefore, if scalability and flexibility are your top priorities in software development, then the outsourcing strategy (regardless onshore or offshore) is not the best option and should be considered carefully before adoption.
Offshore Insourcing: The Preferred Option
To avoid the disadvantages of outsourcing yet still retain the benefits of offshoring, tech startups and IT companies are turning to offshore insourcing to take advantage of a more diverse talent pool and lower operating cost. The offshore team is still part of their company, thus, the level of control and commitment is higher compared to outsourcing.
In fact, Vietnam is gaining recognition as a popular offshore destination for its low operation cost and high-quality tech talents. Mathematics and computer science are considered important courses in the Vietnamese education system. As a result, their tech talents possess quality skills and great mindsets. Coupled with the low hiring cost, it is understandable why many tech startups and IT companies want to set up their offshore operations in Vietnam.
However, this strategy requires firms to overcome the cultural and language barriers as employees have to actively communicate and work with other teams in another country. It is advised for employees on both sides to have frequent work trips between the two countries so that they can discover the cultural difference to work effectively.
In short, always conduct detailed research and ask for advice from offshore experts before executing your offshore insourcing expansion plan.
There Is No “One Size Fits All”
Since every company is unique in their own ways, what works for others may not be suitable for you. Depending on the structure, situation, and goals of businesses, one strategy is probably better suited than the others. With this article shedding more light on definitions and comparisons between “insourcing vs outsourcing” and “Onshore vs Offshore”, we hope that companies can make better decisions for their business needs.
That being said, you can also combine different onshoring, offshoring, and outsourcing strategies to maximize benefits rather than relying heavily on a sole strategy. For example, by having some aspect of offshoring such as recruitment and HR management outsourced to trusted third-party service providers, businesses will have a much easier time to expand their offshore insource operations.
This is where Tech JDI comes in. Tech JDI specializes in helping fast-scaling tech startups and IT companies venture into new markets. We understand our markets and in turn, help you to understand them better, and take care of administrative functions such as talent recruitment, human resource, office setup, fundraising, and company incorporation so that you don’t have to. We are able to mitigate your expansion risks.
In our next article, we will be analyzing which team scaling strategy is better for your current stage of growth—please watch out for it!
If you are planning on offshoring and need advice and support to grow your global presence safely and quickly, do get in touch with us today for a free business consultation.