Off-shore, Near-Shore, No-shore

So you are considering to outsource some of your activities, what should you choose, near-shore, off-shore or not to outsource at all? Many things have to be considered, and over the years, I have used a model, where I valuate a number of different parameters in the decision process.

Let me start with the easy one – No-shore

If cost isn’t a problem and if you have easy access to resources my recommendation is not to do anything, because after all, a multi location setup will always be more complicated than a single location, even within the same country and city.

Considering, that most companies doesn’t have the luxury of ignoring the costs and doesn’t have easy access to resources, my recommendation is to look at the potential of using  outsourcing.

So, what should you choose near-shore or off-shore?

Often, you can get a lower price and easy access to resources with off-shore, but then you may have challenges with time and cultural differences, so what should you choose?

Over the years I have used a model where I valuate a number of parameters:


  • How easy is it to get the required skills
  • How important is the recruitment and on-boarding time

Often, it will be easier to get skilled resources in an off-shore setup. In India, as an example, it is estimated that as many as 1.5 million engineers graduate each year, making the feed into the industry unique. It is today estimated, that more than 5 million engineers are employed within the IT industry.

Best choice – Off-shore


  • What is the attrition rate

While we often hear that it is difficult to retain employees, in both off-shore and near-shore markets, my finding is that these markets aren’t any different from most home markets. What is often a mistake, is that we compare a setup with a young average rate with our home market, with a higher average employee age. My studies, has shown that if we compare the same age group, we had a higher churn in Denmark than the setup we had in India in the same age group.

In sourcing, change of job is equal to salary increase. In off-shore markets an increase of 30% isn’t uncommon, where in near-shore markets the increase is lower and as such also the churn rate.

Best choice – Near-shore


  • How important are the skills at time of recruitment

It is important to valuate how important it is that the skills exists or if it is something that can be taught. Countries have different education systems, and ways of teaching, and what is often the best choice is to choose a country which is similar to your system, as we have a tendency to believe that “ours is better”

Best choice – Near-shore


  • How willing is the organization to adopt new cultures and methods

Most sourcing setups are today failing, due to lack of accept of the cultural differences. Companies expect organizations abroad to act as a copy of the home organization, and don’t accept that leadership style is different, employees may require more guidance and orders and local laws may be different. Remember your way of doing the business may not be the best way. (for more details see one of my other blogs on the topic)

With near-shore, you have a bigger chance that the way of working and cultural behavior is closer to what you are used to, so it may be an important aspect in your decision

Best choice – Near-shore


  • How important is price versus some of the other factors such as culture, time difference etc.

While off-shore may be cheaper, compared to Denmark 30%, this parameter should be valuated compared to some of the other parameters, such as time difference and performance. It should be considered that while the price is low, the performance, due to many factors, may also be lower, so don’t just compare 1:1

Best choice – Off-shore


  •  How important is it to get a 1:1 performance, vs performance measured by invested USD

In many near-shore setup you will see a performance closer to, or even higher, than what you have at home, while in off-shore you are often impacted by factors such as time-difference, culture etc., and may have less performance per individual head. What needs to be considered is if performance should be measured in number of heads or by invested USD, but also if your aim is to have a slim organization with the highest possible performance per head or to have the highest performance by invested USD

Best choice – Near-shore


  • What kind of overhead is required

Having a multi location setup, also requires additional overhead and management, cross border status meetings etc. Studies shows, that overhead in off-shore markets is higher than in near-shore, which may also be based on the fact that cost per employee is less and as such process optimization isn’t as important, in off-shore markets.

Best choice – Near shore


  • How easy is it to access the location

While you can always get the lowest cost at remote sites, you may want to consider travel time and mean of access to the location. In India, Bangalore is at least 30% more expensive than some of the more remote locations, but it is also a place where you can have direct flights and you can have people seconded or visiting

Best choice – Near-shore


  •  What is the risk of political instability

While the African continent is one of the fastest growing within sourcing, many companies are still hesitant due to the perception of political instability and security. After the issues in Ukraine, many companies moved their sourcing to other countries, due to uncertainty, though the main sourcing cities weren’t impacted at all.

Best choice – Equal and dependent on specific market


  • Does your home country have a taxation agreement with the sourcing country
  • What are the risk of Permanent Establishment and double taxation
  • What are the regulation around IP rights
  • What is the level of corruption

Many companies often forget to look at these parameters, which is a big mistake as it can be very costly and fatal for your IP rights. It is important to consider if revenue created based on local production is taxable locally, but also that many countries have defined certain tax benefits for sourcing setups. Another important aspect is how you will deal with corruption, not only from a cost perspective, but also from an ethical perspective and can you succeed at all if you don’t follow the local “methods”

Best choice – Further evaluation required


  • What is the level of a common language (English)

Where most companies will require English as a common language, the level of English within the home company and the sourcing country differs. India, today has a huge benefit compared to other off-shore setups, as English is a common language spoken within the country. Overall, my feeling is that it will be easier finding English, or even Scandinavian, speaking people in near-shore markets

Best choice – Near-shore


  • How close a cooperation is required and how will the time-difference impact

If a close cooperation is required a large time-difference may impact negatively. In the other hand it may be a benefit to have locations outside your own, at this will expand the service hours for your company, and maybe even the use of “Follow the sun” concept. If it is for joint development, projects and back-office a smaller time-difference will be the most effective.

Best choice – Near-shore


While there may not be an easy answer to where and what to source, I normally provide the following recommendation

  • Give a value to each parameter above and how important this is for your decision
  • Let the accumulated value be a driver in your decision, or at least entry for further analysis
  • If you want to start with a small setup, choose a near-shore setup, as it will be easier have less overhead and disturbance on your production
  • If you are aiming at a large setup, cost and access to resources may be important factors and the overhead will be less separated per employee and some of the negative aspects may be absorbed by extra employees.
  • If the setup is less than 2-3.000 choose a local vendor and use an augmented/service delivery model and only for larger setups consider a captive model
  • Remember if you are a small company, you may also be a small customer, so consider the importance of your business for the vendor and choose the best suited, the one where you are important for them



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