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How to Cut Software Development Costs with Nearshoring: A Comprehensive Guide

How to Cut Software Development Costs with Nearshoring: A Comprehensive Guide

Trying to keep your competitive edge and manage costs? Investing in custom software can propel your business forward. However, the price of software development is rising, and many companies are feeling it. From sky-high developer salaries to attractive benefits and hip offices, the costs of luring top talent can add up quickly. 

That’s why many firms are turning to nearshoring to reduce development costs without sacrificing quality. A viable strategy for balancing innovation and budget, nearshore software development is popular for a reason.

Even so, understanding exactly how nearshoring might affect your bottom line can be tricky. We’ll show you how to calculate savings and more in this comprehensive guide to cutting software development costs with nearshoring. 

Direct Cost Savings in Nearshore Development

Any time you’re making a big financial decision, it’s helpful to start with the direct cost implications of each choice. That is, get clear about the price in dollars of choosing one option or the other. With software development, choosing nearshore development offers clear direct cost savings in several key categories. 

Developer Salaries

High demand and the cost of living have boosted U.S. developer salaries. According to the compensation transparency site levels.fyi, the median annual U.S. software engineer salary totals $177,000. And, the top 10 percent of developers in the U.S. rake in upwards of $335,000 per year. That pay range is simply not feasible for many employers. 

By contrast, developer salaries in Latin American countries remain much lower, on average. Affordable developer salaries, proximity to the U.S., a wealth of developer talent, and cultural compatibility also set this region apart as an ideal nearshore destination

Depending on the role, nearshoring can reduce direct costs associated with developer salaries by as much as 80 percent in some cases. When you multiply that salary difference by an entire team of developers, the potential savings are even more compelling. 

Reduced Overhead

Beyond salaries, an in-house development team comes with several overhead costs. Office space, equipment, and the associated costs of each are just a few examples. When you hire a nearshore development team, you don’t have to worry about overhead costs like these.

The national average monthly lease price listings for office space was reported to be $37.83 per square foot in February 2024. Experts suggest allocating about 100 to 200 square feet of space per employee. So, for a development team of ten people, that’s about $74,000 in annual savings. Actual direct cost savings vary based on the market and the team. 

Nearshoring also eliminates the need to invest in equipment. The exact cost savings depend, of course, on the type of firm and software development. Generally speaking, however, equipment costs can include anything from chairs and mousepads to software licenses and hardware. 

If you already have an in-house software team and are considering switching to nearshore software development instead, try this simple exercise. First, calculate your spending on annual developer salary cost, including bonuses and benefits for total compensation. Next, determine the total rent cost attributed to your development team. Finally, tally up any per-developer overhead costs. Include equipment costs, payroll processing fees, support staff, or other employee perks—like free lunches. The total should give you a clear idea of the overhead costs you stand to save by nearshoring.

Nearshore Development Indirect Cost Savings

Direct costs are only part of the picture. To truly understand the benefits of nearshoring, you’ll need to consider indirect cost savings, too. Nearshoring can mean faster time to market, reduced hiring and training costs, and improved productivity. 

Faster Time to Market

As opposed to other outsourcing methods, nearshoring has several efficiency advantages. Because nearshore software development teams are located in the same or similar time zones, significant communication lags should never become an issue. Offshore teams, by contrast, often have 10+ hour time differences, meaning U.S. and offshore developer teams have no overlapping work hours. In this arrangement, communication can quickly become a project bottleneck.

At the same time, nearshoring also means access to larger talent pools. Particularly in Latin America, skilled developers are much easier to find than in the U.S. where labor shortages make top talent scarce and expensive. More developer access can mean faster project completion. Nearshore teams can easily scale up on projects where more developers mean getting to the finish line soon. 

Of course, a speedier project timeline isn’t just nice to have; it also translates into real dollars. Being the first to market is a competitive advantage because it offers the opportunity to build a strong foothold with users before others do. Launching sooner also means generating revenue (and recouping your investment) faster. 

Reduced Hiring and Training Costs

Nearshore partnerships can also save costs related to onboarding. According to data from Bamboo HR, employee hiring and training costs typically range from $7,500 to $28,000 per employee. That range doesn’t include “soft costs” like lost productivity which could bring the total figure even higher. 

Unlike hiring and training your own employees, nearshore developers will be ready to go from the start of the project. While the team will likely need some time to get up to speed on project parameters, you won’t have to worry about true onboarding and related costs. 

Improved Efficiency and Productivity

Working with a nearshore team can also improve efficiency across the board. Often, in-house teams have more demands and multiple projects to juggle at once. If you choose to hire a dedicated nearshore development team, your project will be the top priority. This level of focus reduces mistakes and speeds up the project overall. 

Unlike offshore teams, a nearshore development team is synced around the same or similar work hours. That limits the probability of rework due to miscommunication. Any adjustments can be conveyed and addressed promptly. If the team has questions, a nearshore team can reasonably get answers and proceed with work all within the same work day.

Creating a Transparent Cost Structure for Nearshore Development

While nearshoring enables firms to cut software costs overall, there are, of course, still costs to consider. After all, software development isn’t free. To appreciate the impact of nearshore software development on your business, it’s important to understand the possible fee structures and costs you might encounter. 

Decide on an Engagement Model

A nearshore development team can look different, depending on the duration and level of support needed. The associated cost will vary based on the type of engagement. 

In some cases, a staff augmentation model makes the most sense. As the name suggests, this model increases the bandwidth and capabilities of an existing software development team via the nearshore partner. 

A dedicated team, by contrast, consists of a few key roles, such as a project manager, one or more software engineers, and a UX designer. In this engagement structure, the dedicated team could be working on one project or several, depending on the need. The team might effectively serve as a nearshore extension of a company. 

Likewise, a project-based engagement might consist of one or more nearshored developer roles. Centered around a single project or goal, this engagement type is more limited in scope and duration. 

Understanding which approach is right for you will be helpful as you consider nearshoring partners. Be upfront with prospects about what you’re looking for so you can compare apples to apples on the cost of each firm. 

Addressing "Hidden” Costs

It’s important to recognize that nearshoring can present some “hidden” costs beyond the total listed on the contract. For example, one benefit of choosing a nearshore team is proximity. Having a geographically nearby team presents the opportunity to travel for in-person collaboration and team-building. Travel costs likely won’t be a line item in your contract, but they’re something to consider if you plan to meet up face-to-face. 

In some cases, you’ll need to factor in the cost of project management. For larger projects, it may make sense to appoint a specific person on your domestically-located team to oversee the progress of the nearshore team and serve as a liaison between the two. Even if not, consider the cost implications of coordinating with the nearshore team. Any time spent reviewing, approving, and contributing to software development projects technically takes away from other revenue-generating business activities. 

Calculating Your Cost Savings Potential

You don’t need to close your eyes and jump to choose a nearshore software development partner. With the items above as your variables, plug in your actual numbers to calculate your true cost savings potential. Use the worksheet below to compare nearshoring to your current development costs. 

Nearshore vs. In-house Software Development Cost Comparison Tool* 

*(Click for Live Google Sheet)

Cost Current Development Structure Nearshore Software Development Instructions
Annual Labor Costs $ $  
Developer Salaries $ $  
Onboarding $ $  
Training & Continuing Ed $ $  
Annual Overhead Costs $ $  
Office Space $ $  
Benefits $ $  
Support Staff $ $  
Hardware $ $  
Software $ $  
Other Equipment $ $  
Project-Related Travel $ $  
Other Annual Costs $ $  
Total Annual Software Development-Related Costs $0.00 $0.00 ← Sum up all costs
Total Annual Cost Savings of Nearshoring $0.00 - ← Subtract nearshore costs from current costs

 

While this worksheet doesn’t include hard-to-quantify metrics, like time to market, project management, and efficiency, it still provides a helpful picture of most costs associated with either path. If you’re able to assign figures to these indirect cost savings, feel free to add them to the equation. 

Nearshore Software Development Savings Beyond Salary 

Remember that a nearshore team provides more cost savings beyond developer salaries. Indirect cost savings, related to efficiency, training, and time to market, have true financial implications. In the long term, the indirect cost savings can be the difference between a company that sinks and one that swims. When considering nearshoring, think beyond this year’s balance sheet and zoom out to the bigger picture. Which strategy will position you for success in five years? 10 years? For many companies, the answer is nearshore software development. 

Real-World Examples and Case Studies

Nearshore software development is more than an abstract idea. It’s a path many companies throughout the world and across industries have chosen—often with great results. Here are a few examples of ways companies might consider applying the nearshore software development method successfully. 

Success Stories

There are all sorts of ways businesses have used nearshore software development, below are some examples of how industries have used nearshoring to achieve their custom software needs.

  • Healthcare system building a patient management system to improve patient experience and health outcomes 
  • Large manufacturing firm streamlining inventory tracking with an agile enterprise application 
  • Mid-sized fintech startup seeking a customer portal with enhanced security measures 
  • Multinational clothing retailer building a customer portal to manage rewards and loyalty 
  • Transportation and logistics company seeking an enterprise software solution with real-time tracking of people, vehicles, and goods 

Quantifiable Results 

For many firms, nearshore software development has consistently offered a measurable benefit to the bottom line. These can include: 

  • Significant cost reduction, upwards of 20% in some cases; 
  • Improved time to market, by weeks or months; 
  • Higher quality-to-cost ratios 

For companies that could otherwise not afford to develop custom software, nearshoring can be revolutionary. The affordability and high quality of nearshore software development compared to other alternatives makes it a compelling business decision. 

Ready to Explore Nearshoring? Get Started Today 

In summary, nearshore software development reduces development costs, both directly and indirectly. When considering the complete picture, including both the concrete and harder-to-measure benefits of nearshoring, it’s not hard to understand why everything from Fortune 500 firms to small startups has adopted the approach. 

The companies that stand to gain the most from nearshore software development have high current software costs and/or need to boost bandwidth without breaking the bank. Well-defined projects with a beginning and end are among the best suited to nearshoring. 

To explore nearshoring further, schedule a consultation. Our skilled team can help you estimate your potential cost savings, outline options that meet your specific needs, or build a custom nearshore software development team. 

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