Nearshore vs. Offshore vs. Onshore: Decoding Tech Talent Costs

In the relentless battle for tech talent, US companies are facing a significant challenge: there are simply not skilled tech workers to go around. The US tech talent shortage has been amplified by an insufficient number of US-citizen computer science college graduates, and restrictive and limited visas for experienced IT professionals to fill the immediate gaps. Research from the US Bureau of Labor Statistics confirms that the shortage of available talent will grow to 1.2 million by 2026 in the US alone.

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This shortage is pushing up the cost of tech development, leading businesses to consider outsourcing as a cost-effective solution, allowing companies to tap into a worldwide pool of talent. In 2019 alone, International technology outsourcing generated a whopping $66.5 billion. According to a report by Research & Market, the outsourcing market value is expected to reach a total market size of USD 904.948 billion in 2027.

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In this article, Dirox will decode these tech talent costs and provide a comprehensive comparison of the three main outsourcing approaches nearshore vs. offshore vs. onshore.

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What are Onshore, Offshore and Nearshore?

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These three common outsourcing models offer distinct advantages based on proximity, collaboration, and cost.

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Onshore Outsourcing

Onshore outsourcing involves contracting services or projects to a third-party company within the same country. For example, when a Canada-based company outsources IT services from another Canada-based company. This model is often chosen for tasks that require:

• Extensive collaboration
• Shared cultural and language understanding
• Compliance with local regulations.

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While onshore outsourcing minimizes communication barriers and logistical challenges, it is generally more expensive than the other two models due to higher labor costs in the home country.

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Offshore Outsourcing

Offshore outsourcing involves hiring service providers located in distant countries, often with significantly lower labor costs. Imagine a French company outsourcing customer service center services to a team in India for example.

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This model is widely used for cost reduction, especially in industries like IT, customer service, and manufacturing.

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However, it comes with many potential challenges that needs to be effectively managed to ensure success, including:

• Time zone differences
• Cultural barriers
• Communication issues

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Nearshore Outsourcing

Nearshore outsourcing strikes a balance between onshore and offshore models. It involves outsourcing to a neighboring or nearby country, typically within the same or a similar time zone.

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This provides the best of both words because it reduces time zone complications and cultural differences while offering cost savings compared to onshore outsourcing.

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Nearshore outsourcing is especially popular in regions with strong economic ties, such as the U.S. and Latin America or Western Europe and Eastern Europe. For example, you can find a US firm outsourcing business processes to a company in Mexico.

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Key Factors in Choosing an Outsourcing Model

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Identifying Project Needs

There are many different requirements that you must take into account; however, these are the basics that every project manager has to think about when making decisions.

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Technical Requirements

Evaluate the expertise required for your project. This could include software development, data science, AI/ML, or other specialized areas. Each outsourcing model provides a different level of access to skills and resources:

• Onshore: Limited access to niche skills due to local talent pool constraints. This may lead to higher costs and talent shortages for highly specialized roles.
• Nearshore: Moderate access to specialized expertise, with additional benefits of cultural and time zone alignment, which can enhance collaboration.
• Offshore: Access to large, diverse talent pools, especially in tech-centric markets like India, Vietnam, and Eastern Europe. Ideal for projects requiring specific skill sets at competitive rates.

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Time Constraints

Assess the urgency of your project and establish realistic milestones and deadlines. Consider factors such as product launch dates, market demands, and regulatory requirements. Communicating your timeline expectations with potential outsourcing partners helps align expectations and ensures timely delivery

• Onshore: Proximity and shared time zones facilitate seamless communication and faster project turnaround.
• Nearshore: Similar time zones allow for near real-time interaction, making it easier to adapt to changing deadlines.
• Offshore: Time zone differences can introduce delays but can be mitigated with overlapping work hours or strategic scheduling.

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Budget Allocation

Determine the financial resources available for your project, considering both upfront costs and long-term expenses. Evaluate the cost implications of different outsourcing models, including nearshore, offshore, and onshore options. It's essential to strike a balance between cost-effectiveness and quality to achieve optimal outcomes within your budget constraints.

• Onshore: Highest costs due to local wage structures, but fewer risks related to communication and legal compliance.  In the United States, for example, the average hourly rate for a software engineer is approximately $75-125, according to Vairix, making onshore development the most costly outsourcing model. 
• Nearshore: Offers significant cost savings compared to onshore while balancing quality and efficiency. Hourly rates of neighbouring regions, like Latin America, range from $40 to $75, more reasonable than that of North America but still remain fairly high.
• Offshore: Most cost-effective, though potential hidden costs like increased management overheads should be considered. The cost savings associated with offshore development can be substantial, with hourly rates significantly lower than those found in Western markets, around $25-50.

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Scalability and Flexibility

Outsourcing has emerged as a strategic solution to the challenge of building a scalable tech team, by offering flexibility and scalability that can be difficult to achieve with in-house resources alone.

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By leveraging outsourcing, companies can access a worldwide talent pool, quickly scale their teams up or down in response to project demands, and integrate specialized skills that may not be available internally. This approach not only helps in managing costs but also allows businesses to focus on their core competencies while outsourced teams handle specific tasks or projects. 

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Still, selecting the right outsourcing partner who aligns with the project’s characteristics is crucial:

• Onshore: High costs may limit scalability, making it less suitable for startups or rapidly growing businesses. However, it allowed for real-time collaboration.
• Nearshore: Provides scalable solutions with better cultural and communication alignment, making it a middle ground for businesses. This alignment in working hours and cultural similarities can lead to smoother integration with in-house teams and. ultimately, a more cohesive working relationship.
• Offshore: Highly scalable due to abundant talent and lower labor costs, ideal for large or rapidly growing projects. The trade-offs of offshore development include navigating time zone differences and potential cultural barriers. 

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Additionally, ensuring that the outsourced team can get along well with the company's culture and values and seamlessly integrate with the existing team is just as important for success.

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Clear communication and well-defined project scopes are essential to ensure that outsourced teams are effectively contributing to the company's objectives.

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Additionally, it's important to establish trust and foster collaboration between in-house and outsourced team members to create a cohesive and high-performing team environment.

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With the right approach and management practices, outsourcing can transform how companies build and scale their tech teams, positioning them for success in the competitive digital economy.

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Legal and Regulatory Compliance

‍Corporate compliance encompasses both state and federal laws as well as internal policies and procedures. By preventing and identifying rule violations, enforcement of compliance shields your business from penalties and legal action. This is extra important in the landscape of outsourcing when your business is conducted across states or even countries.

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Data Security

The handling and protection of sensitive data vary significantly across outsourcing models:

• Onshore: Ensures maximum compliance with local data protection regulations like GDPR (Europe) or HIPAA (US), reducing risks of breaches.
• Nearshore: Often benefits from regional agreements that align data security laws, making compliance manageable while requiring periodic audits.
• Offshore: Demands heightened scrutiny due to potential differences in regulatory frameworks. Partnering countries may lack stringent data protection laws, requiring businesses to implement advanced encryption, strict access controls, and clear contracts outlining data handling practices.

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Intellectual Property (IP) Considerations

Protecting your IP rights is another important contributor to outsourcing success. Companies should engage legal experts specializing in the chosen outsourcing region to mitigate risks and ensure full compliance.

• Onshore: Provides robust IP protections due to uniform legal standards, making disputes easier to resolve within local jurisdictions.
• Nearshore: Typically low-risk, especially when agreements are governed by regional trade policies that reinforce IP protections.
• Offshore: Carries higher IP risks due to less predictable enforcement in certain countries. Legal agreements must include detailed IP clauses, non-disclosure agreements (NDAs), and jurisdiction specifications to mitigate risks.

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Local Laws and Tax Benefits

Understanding regional laws and incentives can influence cost-efficiency and legal exposure. You can make the right choice of your outsourcing destination based on the local tax policies. 

• Onshore: Usually higher compliance costs due to strict local laws and fewer tax incentives. However, operating within the same legal framework minimizes legal disputes and hidden penalties.
• Nearshore: Regional trade agreements often simplify tax structures and legal processes, offering moderate cost benefits while maintaining regulatory alignment.
• Offshore: Emerging markets often provide lucrative tax incentives or relaxed laws to attract foreign businesses. However, navigating these laws can be complex, requiring expertise in international tax regulations to avoid unexpected penalties or liabilities.

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Additional considerations include employment laws, labor practices, and export controls, all of which may impact project timelines and costs across regions. 

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Comparison of Outsourcing Models

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Onshore Outsourcing

Advantages

• Proximity allows for smoother communication and faster resolution of issues.
• Shared culture and time zones reduce friction in collaboration.
• Lower IP risk due to familiar and aligned legal frameworks.

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Drawbacks:

• Significantly higher costs compared to nearshore and offshore models.
• Limited access to specialized skills, which may hinder innovation or project quality.

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Cost Breakdown: Typical hourly rates range from $100 to $150, making it suitable for high-priority projects where cost is secondary.

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Offshore Outsourcing

Advantages:

• Highly cost-effective, with hourly rates significantly lower than onshore or nearshore options.
• Access to a vast and diverse talent pool in regions like Vietnam, India, and Eastern Europe.
• Ideal for large-scale or long-term projects requiring specific technical expertise.

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Drawbacks:

• Time zone differences may hinder real-time collaboration.
• Potential language and cultural barriers can impact communication and project outcomes.

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Key Regions:

• Vietnam: Hourly rates range from $20 to $40; known for cost efficiency and skilled developers.
• India: Rates of $25 to $50; offers extensive IT expertise and strong English proficiency.

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Nearshore Outsourcing

Advantages:

• Combines cost savings with cultural and time zone alignment, offering smoother collaboration.
• Easier real-time interaction due to geographical proximity.

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Drawbacks:

• Higher hourly rates than offshore outsourcing, though still more affordable than onshore.
• May have fewer specialists compared to offshore regions like India or Vietnam.

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Key Regions:

• Latin America: Rates of $30 to $70; strong ties to U.S. businesses with cultural alignment.
• Eastern Europe: Rates of $30 to $60; offers expertise comparable to offshore markets but with better compatibility for Western Europe.

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Beyond Hourly Rates: Total Cost of Outsourcing Ownership

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While hourly rates are an important metric, they are just one piece of the puzzle. A comprehensive understanding requires dissecting the various cost components:

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Direct Costs: the hourly rates directly linked to the outsourced work.

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Indirect Costs: the hidden factors can significantly impact the overall cost of outsourcing.

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Focusing solely on hourly rates can be misleading and may not reflect the true cost of outsourcing. A holistic view encompassing all associated costs and factors is essential for making informed decisions that will benefit your business in the long term.

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Direct costs

When outsourcing, setup costs can vary widely depending on the location and nature of the service provider. Companies must consider the costs associated with setting up a remote team, including:

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Team Setup: Costs associated with establishing a dedicated outsourced team, including IT infrastructure, communication tools, and necessary software licenses.

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Software Licenses: Specific software required by the outsourced team.

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Maintenance and Upgrades: Ongoing expenses for maintaining and upgrading the infrastructure.

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Additionally, the maintenance of this infrastructure, along with upgrades and support, adds to the total cost.

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Hidden Cost Factors

Hidden costs in outsourcing can often be the most detrimental to the overall success of a project. IT services require attention and resources, which, if not managed properly, can escalate costs unexpectedly. Mitigating these risks involves a thorough vendor assessment, careful contract negotiation, and ongoing performance monitoring. By identifying potential hidden costs early and managing them proactively, businesses can maximize the return on investment from their outsourcing initiatives.

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Some hidden costs that should be taken into account are:

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Vetting Process Costs: Investment of time and resources to find demos, evaluate potential partners, and cover legal fees. This initial phase can be more extensive and expensive than anticipated.

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Transition Expenses: Costs associated with training internal staff, setting up the outsourced team, and potentially maintaining an overlap between in-house and outsourced teams during the transition period, at least in the short term.

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Quality Trade-offs: Extremely low rates may compromise quality. Balance cost savings with the desired outcome.

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Coordination and Oversight: Time and resources dedicated to managing the project, ensuring smooth communication, and mitigating risks. This includes the cost of project managers and supervisors.

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It's important to factor in the expenses related to project managers, team leads, and other supervisory roles that ensure the project stays on track and meets the desired standards.

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These hidden costs serve as a reminder that the total cost must be considered when evaluating offshore outsourcing, especially for IT needs. Thorough due diligence and a comprehensive understanding of all associated costs are imperative before committing to an offshore outsourcing strategy.

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Maximizing Return on Investment (ROI) with Strategic Outsourcing

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Maximizing Return on Investment (ROI) is a top priority for all businesses. Strategic outsourcing emerges as a powerful tool, not only for boosting efficiency but also for gaining a crucial edge over competitors. That explains why over 9 in 10 of the top 2000 global companies had IT outsourcing contracts in 2019.

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Let's explore how strategic outsourcing can be a game-changer, backed by data and actionable insights.

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Faster Project Completion: Time-to-Market Advantage

Speed is king in today's market, making outsourcing a powerful weapon for startups and SMEs. 24% of small businesses polled by Clutch said increased efficiency was their top reason for outsourcing. By offloading mundane tasks like programming, businesses can accelerate project timelines. The owner of Rio Rocket, a graphic design company, reveals that by outsourcing, he could manage 10 to 15 or more projects and still maintain clarity and a fresh state of mind.

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This saved up time translates to a significant time-to-market advantage, allowing businesses to capitalize on emerging opportunities before competitors.

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Access to Specialized Skills: Building a Competitive Tech Edge

Strategic outsourcing grants access to a wider range of specialized skills that may be difficult or expensive to maintain in-house. IT functions of all types are outsourced, with companies using external providers for cybersecurity (81%), app/software development (79%), IT infrastructure services (77%), next-gen tech (78%), data analytics (75%), app support (73%), and helpdesk and user computing (68%).

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This access to unlimited skills empowers companies to integrate cutting-edge technologies and innovative solutions, building a data-driven tech edge that differentiates them from the competition.

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Tax Incentives and Cost Optimization: Leveraging Government Programs

Governments across the globe offer attractive tax breaks and programs specifically designed to encourage outsourcing.

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For example, in the UK, companies that outsource certain departments offshore can benefit from the UK's Research and Development (R&D) Tax Credit program which allows companies to claim up to 33.35% of their qualifying R&D costs as a tax credit. 

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By carefully analyzing and leveraging such programs, businesses are empowered to dive into cost-effective software development, enhancing their ROI.

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Vietnam: The Emerging Destination for Offshore Tech Talent

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Vietnam's fast-growing tech industry presents a compelling solution for the talent gap in the US. With a rapidly expanding pool of skilled professionals and competitive rates, Vietnam is experiencing a remarkable transformation, becoming a favored destination for US businesses seeking offshore development partners. This shift is driven by a combination of factors.

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Firstly, the country's tech sector is thriving, thanks to a young, educated workforce that is both agile and tech-savvy. With a median age of 32 years, Vietnam's population is not only proficient in the latest technologies but also highly adaptable and increasingly proficient in English, which is crucial for seamless communication in offshore partnerships.

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Adding to its appeal, Vietnam's government has been proactive in fostering a favorable environment for the tech industry. According to the law of Vietnam, software products consumed outside of Vietnam are subject to 0% VAT. Investments in STEM education have also paid off, creating a rich pool of technical expertise and a workforce ready to tackle cutting-edge projects. This commitment to education is reflected in the number of IT engineers trained each year, around 400,000.‍

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Economically, Vietnam presents an attractive case for outsourcing. The cost of tech talent in Vietnam is significantly lower than other countries, with 30-40% less expenses than China.

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As the tech industry continues to grow, Vietnam is steadily becoming an ideal place to build a remote development team. With a projected compound annual growth rate (CAGR) of 16.77% through to 2028, the future looks bright for Vietnam's tech sector and for the US businesses that choose to partner with it.

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Real-World Examples: US SME Success Stories in Outsourcing

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Outsourcing has been a pivotal strategy for many US Small and Medium-sized Enterprises (SMEs). Here, we explore several real-life examples of US businesses that have achieved remarkable success through outsourcing.

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Apple Inc. and Foxconn

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Apple Inc., the American tech giant known for its innovative products, has long been associated with Foxconn, a leading electronics contract manufacturer from China. 

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This partnership has allowed Apple to maintain its focus on design and development while Foxconn handles the manufacturing aspect. The collaboration has resulted in efficient production processes and the ability to meet the high demand for Apple products worldwide.  Foxconn manufactures between 60% and 70% of the iPhones sold each year.

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Unilever

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As Unilever Europe expanded across countries and divisions, it encountered operational challenges due to the use of multiple ERP systems. In 2005, the leadership team strategically decided to integrate the various business units across 24 countries into a single ERP system across Europe. To achieve this, they outsourced the development of the ERP system to an external party. As a result, these improvements led to substantial annual savings of €700 million on operational activities. 

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Acer

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Acer, the Taiwan-based PC manufacturer, strategically utilized capability sourcing to become the world’s second-largest PC maker. After spinning off its contract manufacturing operations in 2000, Acer gained a competitive edge. Recognizing its strengths in branding and marketing, Acer outsourced areas where it faced challenges, such as manufacturing. This decision resulted in accelerated sales growth and increased market share. Today, Acer maintains an agile operation with only 6,800 employees, less than a tenth of its largest competitor’s workforce.

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Conclusion: Choosing the Right Model for Your Business

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In conclusion, selecting the appropriate outsourcing model hinges on aligning your business needs with the available options. Considerations such as security, vendor experience, and scalability are pivotal in making an informed decision. By decoding tech talent costs and embracing strategic outsourcing, US SMEs can navigate the challenges of the tech talent shortage landscape while driving innovation and growth.

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Give Dirox a call to learn how our offshoring service can help your business!

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