In the current globalized economy, businesses are actively seeking ways to optimize their operations and cut costs while still delivering quality services. One strategy that has gained traction in recent years is nearshoring.
According to the Inter-American Development Bank (IDB), nearshoring can potentially add approximately $78 billion annually to the export of goods and services in Latin America and the Caribbean. This could result in significant quick wins, particularly in industries such as autos, textiles, pharmaceuticals, and renewable energy.
Given nearshoring’s impact on global value chains, you may ask, “What is nearshoring, and how can I benefit from it?” In this blog article, we offer an in-depth explanation of nearshoring, how it differs from offshoring, and the advantages it can provide for small and medium-sized enterprises (SMEs).
What is Nearshoring in Business Process Outsourcing and How Does It Work?
Nearshoring in business process outsourcing (BPO) refers to the practice of outsourcing business processes to a company located in a nearby country, typically within the same region or continent. For example, a company based in the United States may choose to nearshore its customer service operations to a company in Mexico or Colombia.
The process of nearshoring typically involves identifying a suitable vendor or partner company in the target country or region, negotiating contracts and service level agreements, and setting up communication and collaboration channels to ensure effective coordination and quality control.
The outsourcing vendor company may provide a range of BPO services, such as customer service, back-office processing, data entry, IT support, or software development, depending on the client company’s needs.
So you may ask, “What company is most likely to use nearshoring?” Companies that are most likely to use nearshoring are looking to reduce staffing costs while maintaining quality and control over their work. These could include companies in industries such as manufacturing, technology, and customer service.
Nearshoring and Offshoring: What are Their Key Differences?
Businesses often use two strategies: nearshoring and offshoring, to move their operations to another country for cost reduction or to access a specialized skill not present within their organizations. Although these approaches share similarities, they have distinct differences.
As mentioned earlier, “nearshoring” refers to relocating business operations to a country that is close in terms of geography, such as within the same region or time zone. On the other hand, offshoring involves relocating business processes to a distant country, often to take advantage of lower labor costs. For example, a company based in the United States may decide to offshore its operations to the Philippines, where labor costs are notably lower.
What are the Benefits of Nearshoring for SMEs?
Nearshoring has become an increasingly popular option for SMEs looking to outsource their business processes. In this section, we’ll explore some of the key advantages of nearshoring for SMEs:
1. Save on Costs
SMEs can cut down their costs related to salaries and wages of employees by moving to a neighboring country where labor costs are lower. You can even use a moving costs calculator to help you with your arrangements.
Furthermore, relocating to a nearby country with lower taxes can also help SMEs save money on tax payments. Taxes can have a significant impact on a business’s profits, and moving to a neighboring country with lower tax rates can be an advantageous move.
2. Gain Access to a Large Pool of Talent
Nearshoring advantages can also include having access to a larger pool of skilled professionals. This strategy can be beneficial as the nearby country may have a similar educational system and language to the home country, making it easier for SMEs to find and recruit qualified workers. This is especially valuable for SMEs with difficulty finding skilled workers in their home countries.
Nearshoring can help SMEs overcome the talent shortage by expanding their search for skilled workers beyond their home countries. This allows SMEs to access a broader range of talent and increase their chances of finding the right candidate for the job. Moreover, by recruiting skilled professionals from nearby countries, SMEs can benefit from these experts’ knowledge and experience.
3. Improve Operational Flexibility
Nearshoring can provide SMEs with greater flexibility in their production and distribution processes. Working with partners in nearby countries allows SMEs to adapt to changes in demand and quickly respond to market trends. This flexibility can help SMEs remain competitive and adjust to changing market conditions.
The increased operational flexibility can give SMEs a competitive advantage in the marketplace. By responding quickly to changes in demand, SMEs can adjust their production processes to meet customer needs and stay ahead of their competitors. Most importantly, by improving their distribution processes, SMEs can enhance their customer service and satisfaction, leading to increased customer loyalty and repeat business.
4. Establish Close Collaboration
Through nearshoring, SMEs can work more closely with their partners, exchange ideas, and share expertise easily. This collaboration can lead to more innovative and high-quality products and services. Additionally, the proximity of SMEs to their partners can facilitate face-to-face communication, which can help to build trust and strengthen relationships.
Establishing closer working relationships with partners is among nearshoring benefits every SME must know. It can lead to more efficient processes, improved product quality, and faster turnaround times. In addition, SMEs can benefit from their partners’ expertise and knowledge, helping them expand their capabilities and offer new products and services.
5. Enhance Service Quality
Nearshoring enables SMEs to work with partners that have similar quality standards and regulations as their home countries. This can help to ensure that their products and services meet the same quality expectations as those in their home countries. Additionally, by working closely with their partners, SMEs can monitor quality more closely and make improvements more quickly.
Improving the quality of their products and services can provide several benefits for SMEs. It can help them enhance their quality reputation, increase customer satisfaction, and gain a competitive advantage. Additionally, by ensuring that their products and services meet the same standards as those in their home countries, SMEs can avoid negative consequences such as legal issues or damage to their reputation.
What are the Signs that You Should Consider Nearshoring as a Strategy?
Nearshoring can be a valuable strategy for companies looking to scale their operations quickly while still maintaining quality control. However, not every company may benefit from nearshoring, and it’s important to know when it makes sense to use this strategy. In this section, we’ll dive deep into some of the signs that a company should consider nearshoring as a strategy:
- High labor costs: If a company struggles to maintain profitability due to high labor costs, nearshoring can be an effective way to reduce those costs.
- Lack of specialized talent: If a company needs access to specialized talent that isn’t available in their home country, nearshoring can provide access to that talent without the need to build an entirely new team from scratch.
- Language barriers: If a company is working with a foreign partner that speaks a different language, nearshoring to a country with a common language can help overcome language barriers and improve communication.
- Cultural differences: If a company is experiencing cultural differences that are impacting their work with foreign partners, relocating operations to a country with a similar culture can help improve understanding and collaboration.
- Time zone differences: If a company is working with partners in a significantly different time zone, nearshoring to a country with a similar time zone can help to reduce communication delays and improve productivity.
- Geopolitical instability: If a company is operating in a region with geopolitical instability, nearshoring to a nearby, more stable country can help to mitigate risk and ensure business continuity.
Start Your Nearshoring Journey with the Right Partner
Are you looking to improve your business operations while keeping costs low? Then, consider starting your nearshoring journey with Booth & Partners.
With nearshoring, we can help you find highly skilled specialists in countries with a lower cost of living. This translates to a more cost-effective measure for your company than if you opt to hire in-house staff with recurring monthly benefits.
Our employer of record (EOR) model also enables us to handle everything from your recruitment and onboarding to training, compliance, taxes, benefits, payroll, and more. This allows you to focus on what matters most for your business while we take care of the rest.
At Booth & Partners, we pride ourselves on providing reliable managed services that help businesses scale up without breaking the bank. We can guide you through the nearshoring process and allocate you the right experts who can commit to your long-term success.