Nearshoring, onshoring, offshoring and outsourcing explained - HeadChannel UK

Nearshoring transfers business operations to a nearby country to gain cost efficiency and convenience. It differs from onshoring (outsourcing within the same country), offshoring (relocating to a distant, lower-cost country) and the broader concept of outsourcing (contracting out business functions to external providers).

UK companies increasingly turn to nearshoring to optimise their global footprint. The overall UK IT services market, a key sector for nearshoring, is projected to reach USD 146.60 billion by 2029, growing at a 6.84% compound annual rate from 2024 to 2029. Pandemic-driven remote work has fueled demand for IT infrastructure and digital development services.

Several factors drive UK nearshoring adoption:

1. Brexit has led companies to re-evaluate supply chains and seek alternatives closer to home to mitigate trade barriers and logistical complexities. Increased border checks and customs procedures make sourcing from the EU more challenging. Nearshoring enables partnerships with suppliers in neighboring countries, reducing transportation times and streamlining logistics.

2. The pandemic exposed vulnerabilities in global supply chains, leading businesses to prioritise resilience and flexibility through nearshoring. Rising labour costs in traditional offshoring destinations like China have made nearshoring more cost-competitive.

3. Recent economic shocks and disruptions have highlighted the length and complexity of global supply chains. Factors like rising Asian labour and transport costs, geopolitical risks, and a focus on sustainability and social impact add to the complexity and cost for manufacturers. Industries requiring customisation or short lead times, like fashion, particularly benefit from nearshoring.

Technology enables nearshoring

Digital technologies play a crucial role in facilitating nearshoring initiatives. Digitisation in manufacturing streamlines production, improves efficiency, and enhances collaboration with nearshore partners. Cloud computing, advanced analytics, and automation tools support nearshoring through seamless data sharing, real-time communication, and remote monitoring.

Nearshoring spans industries

Nearshoring has seen significant adoption in manufacturing, technology and services across the UK:

• In manufacturing, nearshoring reduces reliance on foreign imports and shortens supply chains, enhancing agility and responsiveness.
• The technology sector leverages nearshoring to access skilled IT professionals in nearby countries, addressing talent shortages and accelerating digital transformation. Remote work has further fueled demand for IT nearshoring to establish robust, flexible infrastructure.
• Services like customer support, finance and accounting are increasingly nearshored to optimise costs and improve quality.

IT support is the most frequently outsourced function, with 70% of B2B decision-makers reporting their companies outsource some IT support. 62% of companies outsourcing software development turn to Eastern European countries. Other commonly nearshored functions include marketing, accounting and logistics.

Ideal nearshoring locations for the UK

Central and Eastern Europe have emerged as popular nearshoring destinations for UK companies due to lower costs compared to Western Europe, a highly skilled workforce (particularly in IT and engineering), cultural similarities, and geographic proximity. Top destinations include Poland, Portugal and the Czech Republic, which offer lower labour costs, skilled talent, and favourable business environments.

Availability of skilled workers critically influences nearshoring location choice, as labour shortages have caused significant supply chain disruptions. UK companies seek technical skills in IT and engineering, language proficiency, customer service expertise, and project management capabilities to address gaps in the domestic workforce. Skill shortages pose a major challenge for UK employers struggling to find candidates with the necessary qualifications.

Political stability is another key factor impacting business continuity and supply chain resilience. A stable geopolitical system provides a predictable, secure environment that fosters investor confidence, protects assets, and enables long-term planning.

Benefits of nearshoring

Nearshoring offers the potential to improve cost-efficiency, productivity and quality. Leveraging lower labour costs can reduce operational expenses without compromising quality. Access to skilled talent and improved operational efficiency can increase productivity. Closer proximity facilitates better communication, collaboration, tighter quality control and faster turnaround.

Nearshoring can also contribute to sustainability goals by reducing transportation distances and emissions. UK companies are increasingly eager to boost risk management, product control, sustainability credentials, and staffing through nearshoring, according to anecdotal evidence.

Challenges and considerations

While nearshoring offers significant benefits, potential challenges must be acknowledged and mitigated:

• Nearshoring may involve higher costs than traditional offshoring destinations, though still lower than domestic operations.
• Data transfers to and from nearshore software providers can present complexities requiring careful planning.
• Geopolitical risks, as highlighted by the Russia-Ukraine war, must be thoroughly assessed.

The UK government has launched initiatives like the Freeport program to incentivise domestic and nearshore investment through customs and tax benefits. These efforts aim to boost economic growth and job creation.

Keys to successful nearshoring

Effective nearshoring requires careful planning and execution, including:

• Thorough cost-benefit analysis and due diligence in selecting partners
• Assessing skill availability and cultural compatibility
• Understanding legal and regulatory frameworks
• Establishing clear communication, collaboration and governance mechanisms
• Fostering cultural sensitivity and awareness
• Continuously monitoring, improving and adapting the nearshoring strategy

A 2021 survey by Kearney found 92% of US manufacturing executives were considering reshoring or nearshoring some operations, reflecting the growing trend of localising supply chains.

Conclusion

Nearshoring offers a compelling opportunity for UK companies to enhance competitiveness in a rapidly evolving global landscape. By carefully evaluating the factors outlined here and adopting best practices, businesses can effectively leverage nearshoring to achieve cost savings, improve productivity, and access skilled talent.

As sustainability, technology adoption, and geopolitical factors increasingly shape the future of nearshoring, UK business leaders must stay informed and adapt their strategies. By embracing innovation and proactively managing risks, companies can position themselves for continued success in the dynamic nearshoring landscape.

Is your business considering nearshoring to optimise costs, build resilience and access global talent? Contact us to learn how we can support you on this journey.