Nearshoring refers to an outsourcing strategy in which companies outsource certain business processes or services to locations in geographically close countries or bring them back to Europe from offshoring activities (reshoring). In contrast to offshoring, where relocation often takes place to distant countries such as China and India, nearshoring aims to combine the advantages of lower costs and a skilled labour base with proximity to the domestic market and to reduce the risk of unstable and long supply chains.

First and foremost is cost efficiency. Nearshoring enables companies to benefit from lower labour and operating costs in nearshore countries without having to compromise on high quality standards.

When talking about costs, however, it is important to consider which components of the company’s own value creation are to be processed via nearshoring concepts, to what extent and over what periods of time. Long-term, large-volume orders generate a different decision-making horizon than short-term, small-scale and diverse topics.

Immediately after the cost aspect comes access to qualified and motivated skilled labour. In many nearshore countries, there is a large pool of well-trained, technically skilled specialists, which is supported by an intact and efficient university landscape. This is fuelled by an intact, high-performance higher education landscape flanked by state support measures in the field of education. This is particularly important in areas such as IT and software development, where a shortage of skilled labour is a recurring problem in the DACH countries.

The nearshore locations also offer the advantage of short time differences and close proximity, which facilitates communication and coordination between the teams. This is particularly important for agile working methods and projects that require close collaboration.

Another reliable reason is cultural and linguistic similarities with the clients. Nearshore locations have many cultural and often also linguistic similarities with the DACH countries, which facilitates collaboration and reduces misunderstandings.

Risk minimisation should not be underestimated for companies. The proximity to the locations means that risks that are usually associated with offshoring, such as political instability, cultural differences and, last but not least, long and recently increasingly uncertain transport routes, can be minimised.

Companies can react quickly to changes in their business environment and flexibly adjust their capacities as required. This is particularly true for production-related and production-intensive areas, but also applies to agile software development teams.

In addition, the proximity and more direct control over nearshore operations means that companies can ensure the quality of their products and services better and more reliably.

It is often underestimated that nearshoring can also be a strategy to open up new markets. By establishing a presence in a nearshore country, companies can become better known, serve local markets more easily and build new customer relationships. This aspect is added value.

Overall, nearshoring represents a viable option for many companies in Western Europe to increase their competitiveness by cutting costs, tapping into new markets, gaining access to talent and at the same time ensuring the high quality and efficiency of their value-adding business activities.

Once the decision has been made to implement nearshoring as a stabilising measure, managers and development strategists in Germany, Austria and Switzerland are faced with a decisive decision. They need to find the optimum nearshoring strategy.

They are faced with the choice of either setting up their own foreign subsidiary or establishing a partnership with a local company that fits in with the defined nearshoring strategy and their own corporate culture.

Each of these paths harbours its own opportunities and challenges, the careful consideration of which will be decisive for success. In the following, we will examine these two options in detail.

Advantages

First and foremost, the two topics of control options and the high degree of integration within the company should be mentioned here. Having your own branch makes it possible to directly implement and maintain corporate values and standards, as well as the corporate identity that is important for the brand image. Defined processes and procedures, standardised hardware and software that are used company-wide for operational processes can be scaled relatively easily.

Another advantage is the team consistency and thus the direct feeling of belonging. Permanent employees can develop a high degree of loyalty and enable the company to offer long-term development opportunities

Disadvantages

The high costs and risks arising from country-specific legal and local characteristics should not be underestimated. Setting up your own branch requires significant investment and time and harbours risks, especially if you are unfamiliar with local market conditions.

High administrative costs and comprehensive responsibility for all operational aspects as well as for country-specific labour and tax law issues.

The set-up and implementation ties up resources that could possibly be utilised more effectively and in a value-adding manner elsewhere.

Re- and nearshoring is a trend. As a result, many companies are setting up sites in popular nearshoring locations and have to compete for talented employees. As a result, increased staff turnover tends to be a major challenge.

Advantages

Local companies bring decisive market knowledge and established networks with them. The most important advantage to be mentioned in this context is access to personal connections to the relevant sources of skilled labour. These sources primarily include the local university landscape and the corporate complex that is already active locally.

Collaborating with a local company that fits in perfectly with your own company profile provides flexibility and scalability. Especially when it comes to flexibly supplementing your own team with external experts to handle short-term, small-volume and technologically diverse projects, working with local partners can be a great advantage. Expanding expertise and resources at competitive costs are the keywords that are relevant here.

This ability to breathe applies in both directions of economic development. With an external partner, companies are adaptable to changing market conditions.

In contrast to their own branch, companies also have to make a significantly lower initial investment. This option is less capital-intensive and therefore generally less risky.

Disadvantages

The dependence on external partners can lead to challenges that can be hidden in the area of cost control and procedural processes.

Possible differences in work culture and language can cause problems and create communication barriers.

Many of these challenges can be overcome through careful partner selection and, of course, skillful contract design and constant communication. Clear agreements on control, communication and quality standards are crucial here.

Are you planning to work with a competent nearshoring partner in software development or are you thinking about it?

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