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When considering outsourcing for system or software development, one option that often comes up is nearshore development.
In nearshore development, companies located in regional cities with lower labor costs are contracted for development work. As a result, it is frequently used as a cost-cutting strategy.
Another commonly used method, similar to nearshore development, is offshore development. Offshore development involves outsourcing system development to overseas contractors.
Both are popular outsourcing approaches, but do you know the specific differences between them? Understanding the characteristics of nearshore and offshore development can help you utilize them effectively and achieve cost-efficient system development.
This article focuses on nearshore development. We will explain how it differs from offshore development, as well as their respective advantages and disadvantages.
We've also summarized the key points to consider when choosing between nearshore and offshore development. We hope this article provides useful insights for planning your outsourcing strategy.
Akira Shimazoe
CEO of Solashi Japan LLC. Engaged in the development and operation of internal systems at Suntory. Founded Yper Inc., serving as CTO and CPO, contributing to product launch and growth.
What is Nearshore Development?
Nearshore development refers to outsourcing system/software development or post-development operations and maintenance to development companies located in regional areas.
Nearshore literally means “nearby shores or coastlines.”
In nearshore development, work is outsourced to development companies in regional city centers where labor and office rental costs are lower than in metropolitan areas.
Specifically, regions like Tohoku, Kyushu, and Okinawa are common. Therefore, compared to requesting development from companies in urban areas such as Tokyo, Osaka, or Yokohama, costs are easier to reduce.
Differences from Offshore Development
Offshore development refers to outsourcing system/software development to overseas development companies or engineers.
For example, contracting development to countries like Vietnam or Thailand, where labor costs are lower, can help reduce expenses.
Both nearshore and offshore development are used with the goal of reducing costs. Recently, due to the shortage of IT personnel, these approaches are also being adopted to secure resources.
With offshore development, however, language and cultural differences create a communication barrier.
If your company lacks personnel fluent in the local language, you’ll need to decide in advance how to communicate effectively with overseas engineers.
On the other hand, some overseas companies have adopted cutting-edge technologies like AI and blockchain ahead of Japan. By outsourcing development to such companies, it's possible to create differentiated services that stand out from competitors.
Related Article: What is Offshore Development? Basic Knowledge, Benefits, and How to Avoid Failure
Why Nearshore Development is Gaining Attention
One reason nearshore development has been gaining attention in recent years is that the cost-saving benefits of offshore development are becoming harder to obtain.
According to the “Offshore Development White Paper” (2023 Edition), the average cost savings from offshore development compared to domestic development was 21.5%. This represents a decrease of about 7% from the 2022 survey. The gap between domestic and offshore development costs is narrowing.
Reference: Offshore Development White Paper (2023 Edition) │ Techno Digital Co., Ltd.
This is largely due to the rising labor costs for overseas engineers. In countries like China and India, which are popular offshore development destinations, labor costs have been steadily increasing. Additionally, 2023 saw a significant depreciation of the yen.
Although exchange rate fluctuations may be temporary, the cost-saving advantages of offshore development are diminishing. As a result, nearshore development, which is easier to manage domestically, is gaining more interest.
Moreover, due to rising labor costs and geopolitical risks, financial institutions in Japan are beginning to reduce their reliance on offshore development in countries like China, which have traditionally been major outsourcing destinations.
Three Benefits of Nearshore Development
The main benefits of nearshore development can be summarized into the following three points:
- Lower development costs
- Smoother communication
- Risk diversification
Let’s take a closer look at each of these points.
1. Lower Development Costs
When outsourcing to major development companies located in metropolitan areas, the higher labor costs for engineers tend to drive up overall costs.
Furthermore, due to high land prices, office rents, and cost of living, companies incur substantial fixed and variable expenses to operate in urban areas.
These various expenses are significantly lower in regional cities compared to metropolitan areas like Tokyo and Osaka. It is said that the unit cost of engineers working in regional areas is about 20% lower than that of engineers working in Tokyo.
Personnel costs account for a large portion of development costs. By outsourcing system development and maintenance operations to regional companies where labor costs are lower, cost reductions can be expected.
2. Smooth Communication
Compared to offshore development, nearshore development within Japan does not have language barriers or time differences.
Without worrying about time, you can enjoy smooth communication in Japanese. There's also no need for translation or additional explanation tailored to foreign engineers.
Even if there are changes in system specifications, you can immediately get in touch and respond quickly. As a result, you can expect to avoid delays in delivery and schedules in advance.
Additionally, with online communication tools like Zoom and Slack, you can quickly communicate without needing to travel to rural areas.
3. Helps Distribute Risk
Japan is a country where natural disasters frequently occur. Urban areas lack forests and fields, and office districts are covered with concrete.
Typhoons, heavy rain, heavy snow, and earthquakes can cause significant damage to infrastructure such as electricity, gas, water, and communication facilities.
If a major power outage occurs due to an earthquake, it could lead to service outages, decreased revenue, and inconvenience to users, causing a wide range of negative effects.
By utilizing nearshore development, you can outsource development work to regional companies, helping to distribute disaster risk.
For example, by selecting areas with fewer past natural disasters, you can minimize the damage or impact when the client company's services are halted.
Disadvantages of Nearshore Development
It’s important to understand the disadvantages of nearshore development as well. The following are the three main disadvantages commonly cited:
- Difficult to secure highly skilled engineers
- Lower cost savings compared to offshore development
- Challenging to select a suitable company
1. Difficult to Secure Highly Skilled Engineers
One disadvantage of nearshore development is the difficulty in securing highly skilled engineers.
Because regional areas have smaller populations than metropolitan areas, there are fewer engineers available. There may be insufficient engineering resources for development.
The main concern is technical expertise. Since cutting-edge and large-scale projects are often handled by urban development firms, there may be differences in experience and skills among engineers and programmers.
As a result, you may find it difficult to secure engineers or programmers with the necessary skills and knowledge to develop your desired system.
2. Lower Cost Savings Compared to Offshore Development
Nearshore development offers a certain degree of cost savings.
It is less expensive than outsourcing to urban development companies. However, the cost-saving effect is smaller compared to offshore development.
Despite rising labor costs and a weakening yen, offshore development is still more cost-effective in the current climate.
For instance, let’s compare the monthly unit cost (man-month rate) of Japanese and Vietnamese engineers. A man-month rate is the cost incurred for one IT engineer to work for a month.
The man-month rate for Vietnamese programmers is 402,200 yen, while senior engineers cost 491,300 yen.
Reference: Offshore Development White Paper (2023 Edition) │ Offshore Development.com
The man-month rate for Japanese system engineers is generally around 600,000 to 800,000 yen even for junior-level SEs.
Even when utilizing nearshore development, you cannot expect the same level of cost savings as with Vietnam-based offshore development.
Related article: What Are the Unit Costs in Vietnam Offshore Development? IT Salary Trends and Latest Insights
3. Difficult to Select the Right Company
Choosing the right company to outsource to is another drawback of nearshore development.
Popular regional companies as nearshore outsourcing destinations may already be booked with projects from other clients.
Many regional development firms operate with small, elite teams. Even if you find a good company, scheduling conflicts may prevent collaboration.
When considering nearshore development, it is recommended to prepare multiple candidates from different regions and companies in advance, anticipating that the selection process may not go smoothly.
3 Key Advantages of Offshore Development
Let’s also take a look at the advantages and disadvantages of offshore development. Here are the main three advantages of offshore development:
- Significant cost savings can be expected
- Can solve the shortage of engineers
- Can shorten delivery time
1. Significant cost savings can be expected
Offshore development offers significantly greater cost savings compared to nearshore development in Japan.
The largest portion of system or software development costs is typically labor costs.
Countries like Vietnam, the Philippines, and India—popular offshore outsourcing destinations—have lower labor costs than Japan, making it easier to reduce development expenses.
For detailed cost information by country, please refer to: Offshore Development Costs｜Unit Price Market by Country and Cost Reduction Methods
2. Can solve the shortage of engineers
In Japan, the shortage of IT talent has become a serious issue.
According to a 2022 IPA survey, over 85% of IT companies reported feeling a shortage of IT personnel.
You may be among those struggling with the issue of "not having enough skilled engineers to handle the system you want to develop."
By utilizing offshore development, you can outsource development tasks to skilled overseas personnel, which helps address or ease the shortage of engineers.
As a result, you can expect your projects to progress more smoothly.
Related article: Why Is There a Shortage of IT Engineers? Causes, Countermeasures, and Successful Examples
3. Can shorten delivery time
One of the advantages of offshore development with lower labor costs is the ability to secure abundant resources.
With more personnel assigned to a project, development can be carried out more efficiently, leading to shorter delivery times.
Modern system development requires speed in order to respond to market changes and customer needs quickly. The ability to develop swiftly through offshore development is a major advantage.
At our offshore development company in Vietnam, Solashi Co., Ltd, we also carry out fast-paced development.
We constantly pursue the latest technologies and actively propose services, frameworks, and libraries that improve development efficiency. This enables us to respond to your needs quickly and advance your development projects with agility.
If you're interested in offshore development, feel free to contact us.
Japanese PMs Handle Communication
Looking for an Offshore Development Company
For such individuals, we recommend Solashi’s Vietnam offshore development
3 Disadvantages of Offshore Development
Here are three disadvantages of offshore development.
- High communication costs
- Difficult quality control
- Geopolitical risks
1. High Communication Costs
In offshore development, most foreign engineers cannot communicate in Japanese, which makes communication more difficult.
Subtle nuances such as key implementation points and precautions can be hard to convey, leading to increased communication costs.
To avoid misunderstandings, it’s important to hold frequent meetings and actively use chat tools for close communication.
Related article: 5 Causes and Solutions for Communication Challenges in Offshore Development
2. Difficult Quality Control
One downside of offshore development is that due to the physical distance between Japan and the outsourcing country, quality control tends to be neglected.
Besides communication challenges, the difficulty of quality control is higher compared to domestic development.
If quality control is neglected, it can lead to poor system quality, rework, increased costs, and delivery delays.
3. Geopolitical Risks
Depending on the offshore outsourcing country, there are geopolitical risks.
Geopolitical risks refer to political or military tensions in a specific region that may create economic uncertainty in that area or in related countries.
Additionally, due to historical issues, anti-Japanese movements may escalate, increasing the risk of protests within the outsourcing country.
If something happens in the outsourcing country, there is a risk that development work may not proceed smoothly or may even be forced to halt. In some cases, government instructions may make business operations impossible.
When choosing an offshore development company, it's important to select a pro-Japanese and politically stable country such as Vietnam or Singapore.
Related article: 8 Reasons Why Vietnam is the Best Choice for Offshore Development & How to Choose a Reliable Company - Solashi
Nearshore or Offshore Development: Which Should You Choose?
Based on the pros and cons of nearshore and offshore development discussed above, which should you choose when outsourcing system development?
Here are three key points to consider when choosing between nearshore and offshore development.
Choose Nearshore for Easier Communication
If smooth communication is a priority, nearshore development is recommended.
Nearshore development allows communication in Japanese, making it easier to convey system requirements accurately and in detail. For large and complex projects, development can proceed more smoothly when using the same language.
With offshore development, language barriers can cause misalignments in expectations or the final product.
To mitigate these risks, it's important to assign a project manager or bridge SE who can communicate between the client and the local engineers.
If there are no suitable personnel to manage the team or ensure quality control, nearshore development may proceed more smoothly.
Choose Offshore to Reduce Development Costs
If minimizing development costs is your priority, offshore development is recommended.
As previously mentioned, offshore development involves outsourcing to countries with even lower labor costs than Japan’s rural areas, offering greater cost savings.
Many offshore countries have companies with a large pool of skilled engineers. This allows you to secure rare talent at a lower cost and still achieve high-quality development with a strong team.
If you're choosing offshore development to save on costs, it's recommended to carefully select the overseas company to work with.
Request quotes from multiple companies and compare their costs, number and level of available engineers, and team structure before making a decision.
Choose Offshore to Mitigate Domestic Disaster Risks
If you’re concerned about disaster risks in Japan, offshore development is a recommended option.
While nearshore development helps distribute disaster risk within Japan, outsourcing to a country with fewer natural disasters further reduces risk.
If you're concerned about service interruptions caused by earthquakes, consider using offshore development.
However, disaster risk varies by country. Be sure to check the disaster and geopolitical risks of the outsourcing country beforehand.
Related article: What Are the Risks in System Development? Causes and Risk Management Explained
Looking for a Nearshore Development Company? Contact Solashi
This article introduced the differences, advantages, and disadvantages of nearshore and offshore development.
Based on the pros and cons of each, consider what kind of system development company is best suited to your needs.
If you are more interested in offshore development compared to nearshore, feel free to reach out to "Solashi Co., Ltd".
Our company provides hands-on support and IT implementation consulting services.
Our engineers are mainly recruited from top universities such as Hanoi University of Science and Technology, Vietnam National University, and Foreign Trade University. We secure excellent engineering resources and can deliver high-quality development.
In addition, several Japanese project managers with experience in launching businesses and startups are on staff. We support your project from the planning stage. If you're unsure which company to choose, don't hesitate to consult with "Solashi Co., Ltd".
Akira Shimazoe
Representative of Solashi Japan LLC. Born in April 1989 in Fukuoka Prefecture. Graduated from the Graduate School of Information and Mathematical Sciences at Osaka Prefecture University. Joined Suntory System Technology Co., Ltd., an IT subsidiary of Suntory Holdings, in 2014. Broadly responsible for the development, operation, and implementation of vending machine delivery management, efficiency improvements, and sales management systems. Founded Yper Inc. in 2017, serving as CTO and CPO. Contributed to the launch and growth of the app-linked delivery bag "OKIPPA." Selected for Toyo Keizai's prestigious "Amazing Venture 100" and Forbes' "Forbes 30 Under 30 Asia 2019."
