The Case for Nearshore Outsourcing

By Claudio Muruzabal

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There is a common belief that businesses are better off if they turn over all of their non-core competency work to third parties. This idea has driven to the growth of the multi-billion dollar IT outsourcing business. However, an alarming number of failed attempts at a “one-size-fits-all” approach have shaken corporate faith in the traditional outsourcing model.

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The initial concept of outsourcing proved no panacea. As it turned out, well-negotiated deals didn’t generate the expected 25-to-30 percent cost savings. Unexpected situations drove additional cost; many of them coming from geographies, time zones and cultural issues.

The next wave of outsourcing rose in the Far East, driven by the race to comply with Y2K adjustments. This then drove the emergence of software development and application maintenance companies. These new companies, based primarily in India, also promised large cost savings and resulted in the creation of a new industry segment.

Once again, these companies provided nothing new as they essentially made the same promises as earlier domestic outsourcers, but delivered services from thousands of miles away.

Sourcing — With a Twist

The new trend has returned control of core processes to IT leadership. This has resulted in the abolishment of the monolithic, one-vendor fits all outsourcing model of the '90s and has contributed to the emergence of a multi-sourcing strategy where the enterprise contracts with multiple outsourcing vendors for their respective expertise in a given space.

The industry has now realized it is unrealistic to think one can hand over all of one’s challenges to a third party and expect that automatically all of the problems will go away.

As such, over the last 18-to-24 months we have seen a new and refreshing trend in the marketplace where IT leadership is taking ownership of the delivery process; contracting out only those pieces that lend themselves better to third-party services while retaining control of the strategy and overall execution plan.

As the industry moves towards a multi-sourcing model, the bid process has opened up to specialized outsourcers with a focus on infrastructure, telecommunications, business process, call center and software development and maintenance.

IT exec's also started to look for development and support capabilities close to their business centers, creating a network of suppliers in different geographies and with different technical expertise. This approach, now widely known as the global delivery model, opened the door to competition with the established Indian and traditional onshore providers.

Providers in Latin America and Eastern Europe are proving to be as well trained and cost effective as the Indian, Filipino and Chinese providers but offer a closer-to-home delivery mechanism.

The Case for Nearshore

IT services provided from locations in Latin America and Eastern Europe are generally known as "nearshoring" services. A number of providers build software development, maintenance and support capabilities from these locations.

Although it is difficult to argue against the massive availability of talent and low labor costs in India and other locations in the Far East, there are a number of reasons that make nearshoring a more attractive alternative for many large organizations:

Time Zone: Nearshoring offers the alternative of having the developer, support organization and user community working in similar time zones. This is a critical element in most engagements and could be a defining component in those cases where online interaction is a must.

Geographic Proximity: For most outsourcing deals to function properly, you need some measure of face-to-face interaction. This is as true at the project manager level as it is at the power-user level. Being close to your vendor gives your teams a chance to build chemistry, too.

Immigration Advantages: Of course, travel works both ways. A CIO who oversees a project that requires a mix of onshore, nearshore combination and rotational assignments will play host to visiting workers and need to understand the rules governing Visas and any trade agreements.

The good news is, under NAFTA (North American Free Trade Agreement), flexible Visa arrangements allow nearshore professionals to travel to the U.S. from Canada or Mexico to work for extended periods of time.

Intellectual Property Protection: NAFTA also provides for increased protection of intellectual property rights. This is a critical component when sensitive proprietary information needs to cross borders as a result of the nearshore engagement.

Cultural Affinity: There is more to affinity in a working relationship than language. When a country shares an extensive border with another and has a common history spanning more than 300 years, like the U.S. and Mexico, there are culture affinities that are strong. When it comes to building the necessary empathy to collaborate in a complex project, this affinity plays a critical role.

Cost Advantage: All of the previous advantages mentioned lead to an ultimate cost advantage for nearshore services. Proximity leads to more interaction at a lower cost allowing for project management to be more present in the project, and cultural affinity reduces the need to spend many cycles to reach a conclusion.

Time zone proximity eliminates the need to work extra hours. As a result of all this, the apparent hourly rate differential between nearshore service and traditional Far East based service is eliminated and true cost converges.

It is cost advantages that are the ultimate proof-point for any outsourcing program. Nearshore services provide similar cost advantages to those in more far-flung areas of the globe. However, only those organizations that have experienced traditional Far East-based outsourcing know the impact of some of the issues outlined above. In fact, it is actual veterans of these wars that coined the concept of nearshoring being “India without the pain.”

Claudio Muruzábal is CEO of Neoris, a global business and IT consultancy, specializing in nearshore outsourcing, value-added consulting, and emerging technologies.