The COVID-19 pandemic has had a significant impact on US outsourcing decisions. Gartner CFO Survey found that approximately 74% of companies were planning to implement remote working conditions permanently after the pandemic – thereby increasing the potential for nearshoring and offshoring opportunities. Alternatively, COVID-19 also disrupted many supply chains in the US. This has led many corporations – including healthcare and corporate companies – to manufacture products closer to home.
Businesses need to make the right decision when it comes to hiring third-party vendors to oversee product manufacturing, IT services, and finances. Understanding the difference between onshore, nearshore, and offshore outsourcing is the first step in determining the best course of action for a corporation.
Onshore outsourcing occurs when a corporation outsources specialized activities to companies in the same country or region. Onshore opportunities reduce concerns about language barriers, time zones, and cultural differences, and make it easy to establish lines of communication.
The hourly rate for onshore outsourcing is approximately $100 in the US, which is considerably higher than standard prices for nearshore and offshore opportunities. Nonetheless, some US corporations feel it’s more necessary to conduct onshore outsourcing to prevent disruptions to supply chains. For instance, trucker blockades that temporarily shut down key US-Canada border crossings in February 2022 have exposed risks facing some US corporate supply chains and revenues. This has led to rising protectionism as the respective countries intend to keep their profit margins above board.
Nearshore outsourcing occurs when the outsourcing partner is in a neighboring country. For the US, nearshore outsourcing opportunities primarily include Canada, Colombia, and Mexico. Many corporations choose nearshore outsourcing because it’s significantly cheaper than the onshore alternative – with rates typically around $40 per hour – while also reaping the benefits of similar timezones and expanded talent pools.
Kearney’s US Reshoring Index found that, in April 2021, US manufacturing executives believe that nearshoring to Mexico or Canada is more advantageous than reshoring to the US. This is proven by the fact that the value of goods imported from Canada totaled $319.4 billion in 2019. This comes as manufacturing companies try to reduce their dependence on China. North American companies are likely to continue nearshoring to each other as a result of the US-Mexico-Canada free-trade agreement (USMCA) in July 2020. Countries like Colombia offer a proven nearshoring alternative in areas like manufacturing, IT, and skilled labor. Through the US – Colombia free trade agreement, a local buyer won’t pay tariffs on products manufactured in Colombia.
Offshore outsourcing is what happens when a company uses a business or contractor in another country, or even another continent, to complete some of the company’s activities on its behalf. One of the greatest benefits of this is the emphasis on lower costs, as some countries have lower wages than the US. This varies depending on the country you offshore the work to, with manufacturing in companies such as India and China costing significantly less than the equivalent U.S. costs.
Businesses engaged in offshoring some of their manufacturing activities have a significant degree of risk. Geopolitical events have the potential to impact their costs significantly negatively. For example, recent sanctions on regimes like Russia negatively affected companies offshoring some of their operations there. As a result, many US companies have to pivot to find new suppliers fast, at great cost, and risking quality. Offshoring means that supply chains are longer and exposed to potential delays and inconsistent shipments. These delays can be catastrophic for Original Equipment Manufacturers (OEMs). Offshoring offers significant cost savings compared to onshoring.
However, there are considerable risks that companies need to analyze to minimize risks that can hit their bottom line. Nearshoring is an excellent option to mitigate some of these risks. Countries like Colombia, Canada, and Mexico are good options, given their proximity to the US and their high-quality manufacturing capabilities. Also, diversifying your supplier base is advisable so OEMs can reduce their exposure to a single supplier.
Should You Choose Onshore, Nearshore, or Offshore Outsourcing?
The most important aspect of this decision is ensuring business continuity and quality. Choosing an onshore or near-shore supplier is the best alternative if you value quality, safety standards, proximity, and similar cultures. Near-shore suppliers can also provide significant cost savings while maintaining high quality and environmental standards. If your main focus is cost and you don’t mind dealing with completely different time zones and longer lead times, offshore outsourcing might be a good option for you.