Nearshoring in the Post Covid-19 World

Gimena Aguerreberry
May 8, 2021

The COVID-19 crisis has fundamentally changed the way we work and how businesses operate. For some companies, the new economic conditions set by the pandemic have disrupted their supply chain and business operations to the point of collapse. Others switched to remote worked and have thrived.

In the pursuit of more efficient operations, many businesses have turned to outsourcing to operate with reduced overhead costs. But with tariffs, travel restrictions, and surging COVID cases still occurring, outsourcing to offshore companies may not seem as viable.

Step in nearshoring.

In the aftermath of the COVID-19 pandemic, nearshoring may be the most efficient solution to a changing global economy. In this post, we'll walk you through some key trends in business activity impacted by COVID-19 and examine why nearshoring has become a more appealing strategic business option for long-term operations.

What Is Nearshoring?

Nearshoring is a means of subcontracting a company's administrative processes to a company in a nearby country — specifically, a neighboring country with similar business practices and a shared time zone.

Nearshoring offers many of the advantages of offshoring with fewer drawbacks. As we share in this post, nearshoring presents itself as an ideal solution for businesses in the post-COVID-19 business landscape. It is especially suited to work within IT services and software development.

Here are the reasons nearshoring is likely to be more prevalent following the COVID-19 crisis.

Working from Home Is Likely to Become a Permanent Fixture

According to a survey of 2000 U.K. businesses by the professional group for human resources staff CIPD, around two-thirds of businesses plan to operate a hybrid model.

The hybrid model has employees spend some of their time working from home and some of it in the office. In the survey, 71% of the businesses said that the productivity of their employees is either no different or improved when they work from home. It makes the work-from-home option appealing to many.

The working from home phenomenon introduces a new dynamic to many firms' business activities. First, they can reduce their real estate footprint — and associated costs — with fewer staff coming into the office.

Second, the boundary between employees and third-party contractors is much smaller. An employee connects and communicates with a contractor in the same way they do a fellow employee.

Third, technical and software-based jobs tend to be most suited to a work-from-home environment.

Working from home may be a reason firms consider nearshoring their IT support and software development arms. Suppose work from home becomes a common practice even after the COVID-19 pandemic is over. In that case, the narrowing difference between the status and nature of employees and contractors means there is a much greater incentive to take on contractors and a lesser one to take on new employees.

In this context, nearshoring provides an opportunity to reduce fixed costs and adapt more quickly. It lets businesses shift resources to address specific needs with ease.

In particular, work in IT services and software development can adapt much better to work from home conditions than other roles, proving to be the easiest lines of work to nearshore.

The Supply Chain Needs Creative Re-Imagining

One of the areas hit hardest by the COVID-19 crisis was the global supply chain. Raw materials in high demand ground to a halt as restrictions occurred on shipping from places like China and South Korea.

The post COVID-19 global economy will require some reimagining. While some analysts are optimistic about the global economy, it is undeniable that companies will need to rethink their supply chains.

Nearshoring means that businesses can still have a supply chain that lets them access more affordable resources while at the same time circumventing the pressures of offshore markets. Nearshore companies are closer and less likely to have travel or shipping restrictions compared to offshore manufacturers.

The Labor Market May Be Less Global

Travel bans and quarantining measures have also made it much harder to recruit overseas, and many employees and company directors have become much less geographically mobile. Business travel has nearly ground to a standstill even as people are getting vaccinated.

As a result, some companies might discover that they don't have access to the same pool of talent in their home market that they found overseas. They could find recruiting for technical or specialized roles more challenging.

The result could be higher costs — both in terms of potential higher salaries for home market employees and higher recruitment costs.

This potential reversal in the globalizing trend of the labor market may be another reason for nearshoring in the post-COVID-19 world. The need to reduce labor costs while seeking the right expertise will make nearshoring a cost-effective solution for recruiting workers with high-demand skills.

Nearshoring is unlikely to completely replace a company's in-house IT service if companies value the know-how and experience of existing employees. However, the flexibility of nearshoring services and the degree of specialization will likely make nearshoring an avenue to explore for companies that want to dip into a broader talent pool.

The Project Economy is Here to Stay

In the gig economy model, workers labor as contractors to complete short, discrete tasks multiple times a day. By contrast, the project economy involves freelance workers contracted by a company to work over a set period to assist them with specific strategic goals. It could include overhauling their internal systems, merging with another business, or opening a new line of business.

The project economy is beneficial for small and medium-sized businesses. These companies may lack the technical expertise to develop a project themselves and the resources to increase their headcount permanently.

The project economy is likely to be another reason why firms consider nearshoring in the post-COVID-19 world. Employers are seeking new streams of work and business development without the associated risks attached to taking on more staff.

Work-as-a-Service

The nature of employment is increasingly moving to a "what we do" rather than a “where we are” model. Employees see their work as involving the specific needs — the number of hours, specific tasks, skillset required — rather than the cluster of experiences usually associated with a job — location of work, start and end time, dress code, meeting rooms, etc.

The modern employee is as concerned about their work and career progression as they are about their own time. Businesses that want top talent need to give employees a reasonable work-life balance and flexibility.

From a business perspective, it's much easier to transition from an employed workforce model to a nearshore model. The nature of the relationship between the workers and employers is much the same in either model.

Nearshore Not Offshore

Although the COVID-19 pandemic has encouraged many firms to consider nearshoring, it remains a better option than offshoring. Here are some of the reasons why:

Time Zones

Nearshoring involves outsourcing to an area with the same or a very similar time zone. As a result, it is much easier to communicate with a third-party software service provider and rectify a problem quickly if a problematic situation emerges.

Geographically Proximate

As its name suggests, nearshoring involves outsourcing to a business in a country with which you share a border, or that is otherwise not far away.

The proximity means that it will still be possible to meet with business partners face-to-face without much difficulty. In contrast, visiting a distant offshore business may prove difficult or impossible during the COVID-19 crisis.

Cultural and Operational Similarities

A country nearer to yours is likely to have fewer cultural or language barriers, meaning it'll be easier to build strong working relationships and a shared business ethic. There are also more likely to be similarities in tax, legal and compliance requirements, making it much easier to adapt to working with nearshore companies.

Lower Costs

Similar to offshoring, nearshoring has the advantage of attracting a lower wage bill than onshore activity.

It is also unlikely to present much of a cost difference compared to offshoring.

The Future Is Nearshoring

As businesses consider their post-COVID-19 outlook, they will discover many of the changes that took place during the pandemic — including working from home, the de-globalizing of the labor market, and the project economy — were not just temporary: they're here to stay for the long-term.

After the COVID-19 pandemic is over, businesses must adapt to these changing circumstances while simultaneously finding ways to stay competitive. Nearshoring allows companies to solve those two problems at the same time.

Nearshoring offers an alternative for companies considering offshoring services like IT and software development. It offers a reduced cost-burden compared to in-house employees, but with less of the operational and reputational risk involved in offshoring.

Contact us if you'd like to find out more about the nearshoring opportunities available for your business.

"Nearshoring in the Post Covid-19 World" by Gimena Aguerreberry is licensed under CC BY SA. Source code examples are licensed under MIT.

Photo by Clément Falize.

Categorized under staff augmentation.

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