What is nearshoring? And why do nearshoring teams perform better than outsourcing teams?

15th February 2023
Nearshoring vs Outsourcing

Everyone knows what outsourcing means: it’s when you contract an outside company to do work that is usually done in-house, your web development or your accounting, for example. However, although everyone associates outsourcing with call centres in India and South America, outsourcing services could actually be provided from anywhere in the world, including your own country. You could outsource your accountancy to the office next door, if you wanted.

In the last few years though people have started talking about the concept of nearshoring and why it’s so much better than outsourcing. But what is nearshoring? And where is the evidence that it’s better?

The origins of nearshoring

The term nearshoring is actually quite new, no-one really knows who first used it, but, most likely, it was thought up by the Mexican IT solutions firm Softtek in 1997. Basically, it just means: “outsourcing to a location that’s closer to where the service is delivered.” For instance, if you’re in the UK, this could be Spain, Portugal or Eastern Europe. In America, it could be Mexico and Central America.

“If it’s just outsourcing but closer, why does everyone say it’s better?”

It’s argued that nearshoring is better because it reduces geographical, cultural and linguistic differences, therefore, making it easier to work with your external team. 

Is this true? Is working with someone geographically closer to you easier? Probably. 

It’s obviously a lot easier to work with a team that speaks your language as well as works in the same timezone as you, but research shows that it’s the cultural differences that can define how easily a team works together.

Cultural diversity and the effect on collaboration

Whilst it’s generally agreed that the more diverse a team is, the better the results. There is a potential downside to having culturally diverse teams: It can affect how well teams collaborate. Research, from the University of Pennsylvania, shows that it’s much harder to coordinate a culturally diverse team than a homogeneous team. This research was reinforced by a study at Stanford University that highlighted the challenges in collaborating across cultures. In the study, individuals from the USA and India played an online strategy game, in pairs, where cooperation and collaboration were rewarded. Each individual, in the pair, was asked to independently choose from 3 scenarios by guessing what the other player was going to put. If both individuals chose the same answer, they would be rewarded. If they chose different answers, neither person would get anything. The first scenario would see both players rewarded with an equal amount. The second and third scenarios would see unequal rewards given to each player. The American participants tended to choose option one, while significantly more Indian participants chose option two or three, even when they received a lower reward. The authors argued that the strategy used reflected their own cultures. 

While cultural diversity in teams is now generally regarded as a good thing, with research from MIT showing it benefits the bottom line, studies also suggest that management of cross-cultural overseas teams can potentially be more difficult. This could be the reason why many companies are now switching to a nearshoring model because less effort is required to integrate a more culturally similar team.

Nearshoring and psychological safety

Even though it’s probably easier to work with a nearshoring team, it doesn’t necessarily mean that nearshoring is unequivocally better all the time. Research from Google shows that  it’s actually the psychological safety of your team that defines a team’s success, not their cultural similarity. This means that whether a company uses nearshoring or outsourcing is less important than the company’s ability to foster psychological safety within its teams.

However, as Harvard research shows,  it’s easier to build psychological safety in more culturally similar teams, thus explaining why nearshoring is often regarded as “better”.

So, while being geographically closer does not implicitly improve a team’s performance, it does make it easier to improve psychological safety which, in turn, improves performance.

Secret Source is a culturally diverse nearshoring team with over 15 nationalities on staff. We specialise in building psychologically safe and happy IT teams. If you want to read more about Secret Source, and our happiness-first policy, please visit our blog. We regularly write about our experiences building our company where happiness is our number one KPI, and, if you’re curious how far we’d go at Secret Source to keep our team happy, then check out the interview with our founder on The Karmic Capitalist podcast

Secret Source is a culturally diverse nearshoring team with over 15 nationalities on our team. We specialise in building psychologically safe, happy IT teams. If you’re interested in how we’ve built our happiness-first culture as well as how we’re continually challenging ourselves to make a happier company, please follow us on LinkedIn to get regular updates on our progress, and, if you’re curious as to how far we’d go at Secret Source to keep our team happy, check out the interview with our founder on The Karmic Capitalist podcast.