Top benefits of Nearshoring - Hungary as a possible tech hub?

Interest in nearshoring for software development is increasing due to its ability to deliver results on time, within budget, and in an efficient collaboration. Let’s have a look at how it works - with Hungary in focus - and more about its benefits.

What are we talking about when it comes to IT outsourcing?

The original name for outsourcing comes from the Anglo-Saxon term “Outside Resource Using,” which meant the concentration of resources outside the enterprise to solve or perform tasks. It was only later that it was distilled into the words “out” and “source” and gained its current meaning: the outsourcing of activities previously performed within a corporate framework to external companies. A company relying on outsourcing only pays for the services that are actually provided while gaining high-quality resources, which significantly reduces all types of costs. 

Types of outsourcing

Outsourcing can have several goals: for example, relieving employees working in a certain field, more cost-effective, more stable or even more professional operation, a stronger focus on the core business. One of the most common types of professional outsourcing is IT outsourcing which refers to the practice of hiring resources outside of a company to handle certain IT functions. This one - especially nearshore IT outsourcing - is a big and rapidly growing industry. In the IT sector, it can also be a relevant aspect that outsourcing provides access to new technologies, ideas, opportunities and capacities that the company would not otherwise have. IT outsourcing is a so-called “umbrella term” that covers the full range of IT services, from the development of a simple application program to the leasing of an entire computer department.

What would be the best choice for your company? 

Offshoring and nearshoring both refer to the action of relocating an operational or supporting process to another country, but as it was mentioned above, the exact location of the service provider – its distance to your company – is the key of differentiating. Companies should take this option not as a constraint but as an opportunity. 

Offshoring refers to the relocation of business processes to foreign countries to support current business operations.  Actually, it is a subset of outsourcing, where a company outsources certain services to a third party located in a different country, typically to take advantage of lower labor costs. The service provider can even be extremely far from the HQ of the customer. 

Its popularity is mainly because it allows companies to take advantage of the specific characteristics of foreign countries, such as lower factor costs, well-trained workers and excellent expertise in the sub-sectors as well. This type of outsourcing grew in popularity before nearshoring ever did. Sometimes it is used as a strategic method to enter new markets and exploit talent that is not available domestically. However, there are also examples of some trying to overcome the regulations in force in their own country that prohibit certain activities. Different languages and time zones can be a problem - yet most companies choose offshoring when opting for outsourcing, as developers working in typical offshore destinations work at much lower hourly rates. And language barriers can be easily avoided by using English.

Nearshoring - or as it's often called - professional nearshore outsourcing is when various business processes are relocated to foreign, lower-wage countries that are closer in distance and time zone than more traditional offshore locations. Fewer companies know about this type and even fewer choose it, despite that it has more advantages than it seems at first. Nearshore outsourcing means that the provider company is located in a country neighboring or very close to the company ordering the service. In the case of the USA, the popular countries are Mexico and the countries of the Central and South American region. In Europe, more and more Western companies are turning to Eastern European development teams with various projects at places such as Ukraine, Hungary or Poland.

Nearshoring clearly allows for a high level of control while reducing the cost of running a business. 

The different models provide flexibility for companies that want to streamline their operations without taking too much risk. Nearshoring can be defined in relation to onshore and offshore outsourcing. Actually, it is somewhere halfway between the two types: working with an outsourced service provider in the same country as the customer organization or using an outsourcing location that is significantly further away. In a European context, India or Sri Lanka, for example, would be definitely offshore outsourcing targets, while Ukraine, Poland, Hungary or Bulgaria would be nearshore alternatives for any Western European country.

TOP 5 benefits of nearshoring software development

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• 1. It can cut the costs of any kind of IT projects: 

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Cutting any kind of costs is a key factor in reducing the overall expenses of a business and keeping up with the intensifying competition. Nearshoring (nearshore outsourcing) may help a company finding the balance between cost efficiency and quality. For companies who turn to outsourcing usually the most important factor is money. Who wouldn't want to save a significant amount of money in the business industry? Nearshoring offers a wide range of partners who are not only able to find solutions to the arising problems but they also provide them cost-effectively and on time. Geographic proximity also means that both travel and communication are easier and less expensive resulting in a greater degree of control. Nearshoring can significantly cut down the number of working hours resources required to meet deadlines, reducing the whole cost of each project. 

Are you suspicious of lower rates? Some companies associate good price with lower quality. In the case of nearshoring, you don’t have to be afraid of that because CEE countries all offer better prices and the common or similar cultural background provides a sense of reliability. Plus, life, in general, is cheaper in these countries which means the money of an outsourcing company has a bigger value. So, any company can choose nearshoring without having to be worried about the quality. Outsourcing can also lower system development costs compared to in-house development.

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• 2. Enables access to qualified developers:

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Nearshoring gives you access to real expert knowledge of the best market professionals of a given technology in no time. Why wouldn’t you avoid communication mishaps if you can? Successful companies tend to concentrate only on their core competencies and leave the rest to professionals with another kind of know-how. A company can hire the top IT talents who can solve even the most daring challenges. Outsourcing can completely liberate a company from having to worry about bad quality work. 

Eastern European countries put great emphasis on higher-level education, including IT professionals as well. Hungary has emerged as a top supplier of highly competitive IT staff, making it an ideal target for nearshore outsourcing in Europe. This kind of profession is getting more and more attention and respect, so institutions put a lot of money and effort into courses related to IT in Hungary too. This resulted in more people choosing this track as a career. When an IT outsourcing partnership is working as it should be, the quality standard can be expected to be even higher, thanks to the broader experience of specialists working on the projects.

• 3. Enhances workforce: 

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Nearshoring IT projects allows you to dedicate resources to your most important activities. By outsourcing services, in-house employees can concentrate on core products — which can help a company grow by elevating the work ethic of the employees and boosting workforce efficiency. The most popular nearshoring countries in Europe have a very strong work ethic so choosing one of them as a service provider can not only save a significant amount of money, but it can also provide numerous advantages to make everyday work and communication with developers much easier. A good relationship helps to establish trust and increase the commitment of both parties, which increases the possibility of overall success. In other words, an existing mutual interest between the two parties can help increase reliance and resolve conflicts easier, which is affecting project outcomes. And by choosing outsourcing, a company can also help the growing labor shortage in most parts of Europe.

• 4. A new look at an old problem: 

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For a business, it is essential to act in time if the in-house development team struggles to find a functioning solution. The only way then is to find that particular solution somewhere outside. A nearshore partner does that exactly: they use their innovation and experience as a fresh point of view which can help a company solve the problems they have long been struggling with. Hiring an entity outside the organization can bring a new look at old problems, providing innovative solutions, and addressing unforeseen complications efficiently and on time. This means trading unnecessary corporate sluggishness, always recurring errors, and slowness for the focus on agility, speed, and quality. The dynamics of today’s markets require organizations to have ever-increasing ability to adapt.

• 5. Makes a company competitive: 

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In today’s business, only one thing is certain: the need for a firm commitment to keep up with the times. The tendency that new, digital entrants to the market challenge and destabilize large, traditional, and well-established players are becoming the norm. In the constantly changing world of technology, nearshoring allows for quick response and resolution. The different models offered by the "outsourcing club" provide flexibility for companies aiming for streamlining their operations without taking too much risk. In the long run, a company can only benefit from a close relationship with a software company or team. It is no surprise that in-house employees usually get more creative, open to new ideas, and most importantly a cooperation like this can refresh their all-time passion for technology. Greater competition from offshore product and service providers can act as a real stimulus for local providers to improve productivity and higher levels of innovation. It’s a win-win situation for sure!

Summary 

By choosing a neighboring country to outsource your software development project to, you can avoid a lot of inconveniences and pitfalls. IT professionals in most countries come with deep knowledge and fluent English, so all of them are able to understand international requests. Besides speaking the same language, having a common cultural background is more important than one would think. Most Eastern European countries have a similar culture to the countries in Western Europe. 

Physical proximity can ensure a higher level of understanding of the culture, everyday life, and current events of the country in which the outsourcing company is. Not to mention that nearshore outsourcing offers a developer or support team working in the same time zone. This can be a crucial element in case of deadlines and possible emergency tasks. Big projects involve multiple steps and require both sides to communicate about all details along the way. If the customer is working in the same time zone as the developer team that means working hours also match roughly. If a personal meeting is needed, the development team is only a few-hour-long flight away, which makes travel costs much lower too. Besides that: there is probably no need for special documents or visas to visit.

What about Hungary as a possible nearshoring destination? 

Reduced labor costs and growing labor shortages in most parts of Europe led CEE countries to become highly popular targets for outsourcing. Western countries need to find an outsourcing location that makes the most sense for their business at a possibly lower cost. Hungary has one of the highest shares of outsourcing in IT Services in the Eastern European region. Both the economic activity and the population are strongly concentrated in Hungary’s central region – around the capital, Budapest to be precise. Budapest provides approximately one-third of the employed workforce and the capital's region has attracted two-thirds of foreign direct investments in the last decade - dozens of companies have chosen to offshore – or rather nearshore their activities to Hungary.

The education system in Hungary provides talented professionals with comprehensive and reliable knowledge. The achievements Hungary has made in the field of IT development and innovations are outstanding, not only compared to its neighboring countries but globally as well. Launching a business takes about a week in Hungary.  Software development is one of the most vibrant industries in the country, generating almost 10% of Hungary’s annual GDP. Citizens of EU countries do not need a visa to experience all that Hungary has to offer. However, non-EU citizens need to apply for a work permit to take up employment in Hungary. 

Foreign companies dominate the Hungarian IT sector – 60-70% of the revenue from the tech industry is produced by businesses managed from abroad. These companies' main offices are predominantly located in the US, UK, and Germany. It is notable that foreign-owned companies are highly productive and provide their employees with a salary larger than locally controlled businesses. 

 In Hungary, the telecommunications industry generated revenue worth over 4.6 billion U.S. dollars as of 2020, and by 2024 this figure is expected to increase to 4. 7 billion U.S. dollars. The market has a great potential for further expansion, as long as the investment rates keep increasing. The Hungarian economy grew by almost 5% in both 2018 and 2019, and for 2020 - before the effects of the pandemic have been realized economically - renewed growth of 3-4% had been forecasted. The cost of office spaces and services in Hungary is average in the Central European region. Since 2017 the corporate tax rates are 9%. Its amount is based on the net income companies obtain while exercising their business activity, normally during one business year.

If you plan on relocating to Hungary, you’re bound to feel a huge difference in living costs. The cost of living in Hungary compared to the UK is rather low. In fact, the price of living in Budapest puts it on the 170th place of Mercer’s Cost of living rankings.

Forrás: DAXX

In Hungary, more than 80,000 people are engaged in the IT sector. In addition, there are many Research & Development centers of different international companies in Hungary, including some real giants like Microsoft, Siemens, Ericsson, Nokia, TATA, and many others. That makes a significant contribution to the development of the IT industry in the country. Hungarian software outsourcing companies value their specialists highly, therefore they’re most likely to pay more than $40/hour to a developer. This average hourly rate of IT specialists in Hungary is rather high compared to other Eastern European countries. In Ukraine for example, the net income is significantly lower because of high tax rates.

Download our Budapest Nearshoring ebook to get know why it's worth outsourcing your softwaredevelopment team to a Hungarian nearshoring partner: