Organizations are continuously seeking innovative strategies to optimize their operations and maintain a competitive edge. The European IT outsourcing market is witnessing substantial growth, with projections indicating a volume of 186.40 billion USD by 2027. This market encompasses various outsourcing models, including nearshoring, offshoring, and onshoring, each offering unique advantages and challenges:
- Offshoring involves outsourcing to distant locations, capitalizing on lower labor costs but often facing time zone differences and cultural barriers.
- Onshoring keeps operations within the same country, potentially incurring higher labor and operational expenses.
- Nearshoring, positioned between these extremes, strikes a balance, delivering cost efficiencies while mitigating logistical and cultural complexities.
According to a 2020 survey by the Boston Consulting Group, 46% of ITO/BPO budgets are allocated onshore, with nearshore and offshore accounting for 23% and 31%, respectively. The rising popularity of nearshoring can be attributed to its significant cost advantages, especially within the EU.
Why is nearshoring becoming increasingly popular? Mostly because outsourcing in the EU offers substantial savings for companies looking to streamline their IT operations. And this article explains the advantages in detail.
What stands Behind IT Operations Costs?
Keeping costs on a reasonable level is important for profitability and competitiveness in the IT industry. Labor, infrastructure, and overhead expenses are the main components of the financial structure of IT services.
Labor
IT operations often have the largest expense in labor. This includes salaries, benefits, and training costs for IT staff. High labor costs are a big problem in traditional IT outsourcing destinations, like parts of North America and Western Europe. The need for skilled workers in these areas makes salaries higher, which makes projects pricier.
Infrastructure
Infrastructure in IT is the physical and technical infrastructure needed to deliver services. This includes data centers, network systems, and software licenses, as well as the maintenance and upgrades required to keep them operational. Capital expenditures and ongoing maintenance for these systems can make up a large part of an IT budget.
Overhead
The overhead costs associated with IT operations include administrative expenses, facilities management, and compliance with regulatory requirements. It is important to manage these costs effectively, as they can significantly impact the bottom line, particularly in complex projects spanning multiple regulatory environments.
Today’s fiercely competitive business environment makes cost reduction in IT operations more than just a financial strategy; it’s a survival tactic. Companies must reduce wastage and use outsourcing strategies like nearshoring to reduce high labor and operational costs.
Why Nearshoring Wins in the EU?
Nearshoring refers to the practice of outsourcing business processes or services to nearby countries or regions, typically within a similar time zone or geographical proximity. In the context of the European Union, nearshoring involves outsourcing IT services or software development projects to neighboring countries, mostly in Eastern Europe.
Nearshoring within the European Union is a cost-effective way for companies to manage their IT operations. These advantages can greatly reduce expenditures while ensuring high-quality service delivery.
Benefit #1: Labor Cost Advantages
Many EU countries, especially those in Eastern Europe, offer competitive labor costs compared to their Western European counterparts. This discrepancy enables companies to reduce their wage expenses without sacrificing the quality of work.
It is possible to save at least 40% per employee through lower development rates.
Source: Nearshoring to Eastern Europe – 5 Top Locations [2024] (brainhub.eu)
Benefit #2: Access to a large pool of IT talent
Eastern European countries have a strong education system that produces a steady stream of highly skilled IT professionals. Companies can access top-tier expertise at competitive rates by nearshoring within the EU.
There are 1.3 million developers and 6,000 software houses in Eastern Europe.
Source: Nearshoring to Eastern Europe – 5 Top Locations [2024] (brainhub.eu)
In the ranking prepared by Hackerrank, the following countries from Eastern Europe scored in the top 20: Poland (3), Hungary (5), Czech Republic (9), Ukraine (11), Bulgaria (12), Romania (20).
Benefit #3: Lower Travel and Operations Costs
Geographical proximity is a significant advantage of nearshoring. The short distance between the customer and the service provider reduces travel time and expenses, making frequent face-to-face interactions more feasible and affordable. This proximity also reduces the overhead of long-distance engagements.
Benefit #4: Lower language and cultural barriers
Nearshoring minimizes the language and cultural barriers often encountered in offshore outsourcing. Most European countries have a high level of English proficiency, and share similar business cultures and practices, which facilitates smoother communication and collaboration.
Eastern European countries exhibit similar business practices, including regular working hours (9 AM — 5 PM), the requirement of English proficiency, the protection of customers interested in quality assurance, and non-disclosure agreements. This alignment reduces misunderstanding and friction in project management, which leads to more efficient operations and successful outcomes.
Benefit #5: Adhering to EU security standards
The General Data Protection Regulation (GDPR) sets strict requirements for protecting sensitive information. Nearshore service providers demonstrate their commitment to data privacy and protection by adhering to EU security standards. This compliance reduces the risk of data breaches and makes it easier to integrate nearshore operations with clients’ compliance frameworks.
Benefit #6: Comprehensive offer.
Nearshore service providers within the EU offer a comprehensive suite of services, from initial project planning and design to development, testing, and maintenance. Companies get access to specialized expertise across various technology stacks and domains, tailored to meet their specific requirements.
According to ESSA, the most in-demand programming languages are Java, Javascript, SQL, HTML, PHP, C++, C#, and Python. This is another reason to nearshore to Eastern Europe as Java (72%), JavaScript (65.3%), HTML/CSS (55%), SQL (49.3%), and Python (48%) are the most popular technologies there (Source: Brainhub)
Companies can take advantage of these savings by outsourcing their IT functions within the EU, resulting in enhanced effectiveness, reduced expenses, and a heightened competitive edge in the global marketplace.
Nearshoring: What is Coming Up on the Horizon?
The future of nearshoring is full of exciting trends that promise to change the outsourcing landscape and bring added value to organizations across industries.
- One trend is the rise of niche nearshore hubs in traditional hotspots like Eastern Europe. These specialized hubs are gaining traction in industries such as fintech, healthcare IT, and automotive software development.
- The nearshore service providers are expanding their service portfolios to include a broader range of offerings. In addition to traditional software development and IT support, providers are expanding into areas such as cybersecurity, cloud migration, data analytics, and AI solutions.
- In addition, companies are using agile methods and DevOps practices in their nearshore IT projects. Organizations are using agility to accelerate development, improve collaboration, and improve software quality.
In summary, the future of nearshoring is one where organizations can specialize, diversify, and be flexible.
