In this blog, I will discuss the advantages of nearshore vs. offshore outsourcing and when it makes sense to use nearshore. Before I begin, I want to emphasize the positive role that offshore can play in reducing costs and increasing output. There will be times when offshore is the right option. Offshore operations offer access to large numbers of qualified workers that can efficiently handle straightforward business processes and software development tasks. Businesses small and large have repeatedly realized sustained cost reductions by outsourcing various mundane and repeatable tasks. By outsourcing these tasks they can both save money and they can focus their time on critical business activities. It allows key people the opportunity to work on the highest value activities.
Here are some of the top reasons why companies outsource:
- It allows companies to focus on Core Business Functions once non-core activities like administration and back-office are outsourced.
- Reduce overhead.
- Control organization functions that become operationally uncontrollable and/or unsustainable.
- Achieve resource flexibility and capacity management, which allows companies to adjust quickly to market dynamics.
- Free up capital by reducing investments in technology, infrastructure and people that make up the bulk of capital expenditure for back-end processes.
- Invest in more market opportunities, which can enhance returns on investment.
Offshore is a fit when used for systems and tasks with a relatively low levels of business impact and customer interactions. After all, if your company is building an application in a fixed cost, penalty protected manner, do you care where it is developed? You just want the product, built with a standard of quality, and delivered in a certain time frame. It is up to the vendor to determine how to best do this. Typically, offshore is also best utilized when the absolute lowest cost is the deciding factor.
But most outsourcing arrangements do not fit this model. In most offshore projects there is a need for a high degree of collaboration, product management, joint development, and constant communication. This is where a nearshore model can have some very distinct advantages over offshoring.
The conversation between business executives and outsourcers has also begun to change from a discussing how to achieve cost savings to discussions centered on revenue growth and opportunity recognition. It is not enough to just save money, but how is the vendor impacting the services, products and solutions a company provides and how they are helping engage new and existing customers. Is the outsourcing company helping the client learn more, improve the process, and positively impact the end customer? Basically, the conversation is how do you help me grow my market share?
With these dynamics in mind, let’s jump into some of the advantages of nearshore.
Top 10 Reasons for Nearshore Outsourcing:
Both nearshoring and offshoring tasks can provide significant savings, but there are advantages to nearshoring that can work better for many companies These advantages principally revolve around the similar time zones, low turnover, ease of management, better collaboration, and cultural affinity.
But before we discuss the top reasons for nearshoring, lets briefly some that are NOT advantages. Many reasons given for nearshoring are just regurgitation of reasons for outsourcing. Some examples include:
- access to universities and great resources
- technology friendly (or hub of technology geeks)
- a modern infrastructure,
- a great place to work
- world class methodologies
- focus on quality assurance
But is a good QA process really better in Columbia than it would be in India? The truth is that most cities that outsource IT functions have all of the things mentioned above. What big city doesn’t have a university? None of the reasons above are differentiators in deciding whether to use nearshore over outsourcing. After all, who has more qualified IT people than India or China? So just having access resources, infrastructure, universities and a great location is not enough to justify nearshore over offshore. They are good to have, or actually must haves. But they are not differentiators.
But there are legitimate reasons for nearshore, otherwise, all IT would be done in China and India. So why is Google, AT&T, Apple, Oracle, IBM, etc., investing heavily in nearshore? Here are the top 10 advantages that I believe nearshoring offers.
- Similar Time Zone.
- Agile Oriented Development Centers.
- Lower Turnover.
- Cultural Affinity, which delivers higher value output (and consulting).
- Innovation and Intuition.
- English Language Skills.
- More Collaboration, Better Relationships.
- Ease of Management.
- Fraud Prevention, Patent and Copyright Protection.
- Reduced Total Cost of Ownership through faster time to market.
- Similar Time Zone
Is time zone similarity really an advantage? Simply put, the answer for most clients is, yes. Here are some common reasons why being in a similar time zone makes a big difference:
- It allows companies to leverage an Agile methodology without fear you will lose key resources.
- More opportunity for travel and face-to-face interaction.
- Prevents turnover in project/staff leadership caused by unusual working hours.
- Better response times.
- Overall communication improves.
A common issue with traditional outsourcing engagements is that transparency into the team’s ongoing project efforts devolves into a “black box” partnership where clients have little insight into the quality, cost and delivery of their projects. As a result, companies are trying to move their development methodology to a more iterative, Agile approach. While we are not going to cover the advantages of Agile in this blog, if you are interested in that topic, please send me an email and I will send you a document that compares methodologies and lists the benefits of an Agile approach. For blog, it will suffice to say that Agile development requires that the team of developers are in constant communication. The problem with using Agile in a traditional offshore model is that you are now asking the development team to work night shifts. While during the infancy of outsourcing, this wasn’t a problem, it now leads to extraordinary high turnover rates (over 50%). Any consultant in India who is good, does not want to work the night shift and they don’t have to. There are too many options available to them and they jump to another company quickly. Most companies have just stopped trying to put their good consultants on the night shift. They do not want to lose them. So the consultants working the night shift are either both young and new, or they are “C” players. Consultants we would consider to be an “A,” or even “B” player are not just not available for night shifts any longer.
So the biggest advantage to nearshoring is the ability to leverage an Agile methodology. Developers in the US, as well as offshore, can participate in the daily sessions and work during normal business hours. They foster tighter relationships and learn from each other. And rather than getting a C player working the night shift, you are able to get the best and the brightest.
I have been asked about South America being a couple hours ahead. But the truth is that in LATAM working a shift that starts at 10:00 or even noon is often preferable. Dinner is traditionally much later in the day than in the US.
Another benefit of being in a similar time zone is that travel is usually easier and cheaper than in a traditional offshore model. Nearshoring can allow a company’s internal staff and external developers to meet in person more frequently. In the traditional offshore model clients rarely visit the vendor. Usually when they do visit, it is at an executive level. There is usually very little face-time between project managers and offshored staff, which often results in misunderstandings about the direction a project is taking. Nearshore offers the opportunity for project managers to visit their team regularly, and it allows companies to rotate staff easily. In addition, temporary work visas take weeks, rather than months or years to process. All of these make face to face interactions more readily available. That in turn, makes project success more likely.
An additional benefit of a similar time zone is that your onshore project leads, architects and project managers no longer have to hold meetings very early in the morning, or late at night. I am friends with a project manager who had a standing 2:00 A.M daily call. The individual was a very good PM, so I was not surprised when two months later he accepted a job with another company. It is hard to retain top talent while asking them to keep awkward hours. If you can retain them, you will have to pay them well to do so. Having a nearshore option allows these key resources to work standard hours and enjoy their lives. This will certainly lead to higher retention rates.
One of the problems often mentioned with traditional offshore is the lag in response times. Whether a simple fix, update or status, onshore resources have to wait until the next day to get updated. In contrast to offshoring, nearshore development teams that have the ability to communicate with internal staff in real time. This means that easy fixes do not have to wait for an isolated team to take a half day to get an answer or find a solution. By eliminating the time difference problem, nearshoring providers can offer optimum response time SLAs.
But it is not just the project team that benefits from real time communication. Being in the same time zone allows more frequent communication with the executive teams, HR and administrative teams. This promotes an environment of communication and collaboration that is much different from the traditional “Black Box” approach of offshoring.
So being in the same time zone allows organizations ability to use the latest Agile methodologies and techniques, provides access to the best resources, and fosters more seamless collaboration between the two organizations.
- Agile Oriented
What led to the start of the nearshore market in the first place? Much of it was driven by companies who were early adopters of Agile. They were faced with a decision of implementing Agile using C players in India or using “A” players in South America. Because of this the entire nearshore ecosystem adopted Agile from its inception. Today the leading nearshore vendors are also the leaders in Agile methodologies and techniques. So not only does being in the same time zone lend itself to conducting Agile processes, but many of the leading Agile vendors are nearshore vendors. It has been my experience that many of the nearshore vendors can teach/train most US companies on the tools, techniques and processes needed to implement Agile. This indoctrination of Agile throughout their teams and organizational culture is a clear advantage for these companies.
- Lower Turnover
One of the issues that has occurred within the traditional outsourcing model has been the extremely high rates of attrition. We mentioned the fact that consultants in India would not work night shifts or they would leave, but that is just one small contributor to the overall problem. I was reading a white paper that claimed that the turnover in India was as high as 55% in 2013. Whether the rate is over 50% or not, one thing is for sure, competition is high in India and it continues to grow. At a minimum average turnover is well over 25%. Companies are using every recruiting advantage, tool, or trick they can.
Contrast that with nearshore options with attrition rates are less than 10%. So why are turnover rates so much lower? Don’t underestimate the importance of family in the LATAM markets. Family is very important there and organizations that support these family values tend to retain talent for long periods.
AAJ has always had this family culture, whether nearshore or offshore. That is why our consultants have an average duration of over 6 years for offshore and over 10 years for onshore. When I joined AAJ a year ago, I was amazed but the length of tenure for our consultants. Our consultants know each other, they eat, play, and share each other’s lives. This same family culture is important with nearshore options and it creates loyalty and higher retention rates.
Having lower turnover allows nearshore organizations to retain the knowledge, maximize their training investments in nearshore consultants (it is frustrating to invest time and money in training a new resource, then they leave), and fosters communication as onshore teams develop long term relationships with offshore consultants. This allows more stability and consistency in delivery. This is a substantial advantage that nearshore has over traditional offshore models.
- Cultural Affinity
The benefits of having a stronger cultural affinity can be realized in several ways. Nearshore is becoming increasingly popular for companies that need outsourcing for services/applications that have a greater effect on the business and its customers. Business processes with a strong customer focus are intrinsically tied to overall business success. This is where the companies need suppliers with a more cultural affinity. They require a much higher degree of affinity than processes involving repeatable, mundane tasks.
So what are the other advantages of cultural affinity? Higher affinity allows for the nearshore consultant to engage in much higher level consulting activities. The ability to understand the cultural nuisances improves one on one communication tremendously. It helps create personal bonds more quickly. Because of this affinity, a consultant in a nearshore model often has the capability to talk fluently with internal and external customers. A high degree of cultural affinity allows companies to now outsource processes with a customer focus and even customer interaction. Things like workflow automation, where client engagement is high, become possible. Building mission critical apps in nearshore has much less risk than doing so in Asia. Why? Because the amount of communication needed with the business is much higher with mission critical apps. Having the cultural affinity helps in these conversations. So in short, having the cultural affinity allows you to work on higher value projects.
Another interesting dynamic of cultural affinity is that customers tend to have more patience with someone from a nearshore facility vs. outsourced facility. Haven’t we have all done it? We have been transferred into an offshore customer service facility and immediately have a negative reaction as the rep, who is obviously from an offshore location, starts reading their script. But call into the same center and have someone from a LATAM facility answer. We have much more patience and a more natural connection to that person.
Another advantage of having a higher degree of cultural affinity is in understanding regulations and business norms used in standard operating procedures. The regulations that often drive business processes and regulation-driven reporting. The higher degree of regulation, the higher degree of affinity needed. If you take this beyond one process, you can understand why most offshore companies do not provide vertical expertise. Typically nearshore players tend to provide more vertical expertise than the traditional technology based offshore firms do. This is due the nearshore sharing a culturally affinity that allows for a more natural understanding of the vertical regulations and business norms in the US.
- Innovation and Intuition
From the inception of the nearshore industry, innovation was a key factor in why companies were selecting nearshore companies over options in Europe and Asia. Newer technologies, newer methodologies, and R&D labs were the norm. Many companies would rather conduct R&D in LATAM than in Eastern Europe and Asia for the obvious security concerns. Because LATAM was research focused from the beginning, it has fostered an air of creativity and thought leadership that is engrained into the technology culture. I cannot verify this claim, but I read a stat that said 30% of the design work in Silicon Valley is coming from Argentina. Whether the stat is actually true or not is irrelevant, what is relevant is that right now some of the most creative design professionals are coming from LATAM. Their artistic and creative culture is being seen in their designs. Design, creativity and research all lead to innovation. These are three things that LATAM have in volume.
But innovation without intuition is useless. One of the biggest complaints about offshore is the lack of intuition in their work. I believe this is due to the offshore industry protecting itself by compelling clients to have exact requirements. After all, who needs intuition is you have an exact instruction set that must be followed to the tee. So the programmers just code to the specification guide and do not ask questions.
I know a company that turned over specifications with known flaws in them. It was a trial run, a beta project, to select a long term partner. They went to several offshore companies in Europe, LATAM, and India. They wanted to see which vendor would raise their hand and question the mistakes. Sure enough, most of the companies in Ukraine and LATAM questioned the design flaws. The companies in India, of which there were three selected to participate, all failed to question the design. They all just coded the bugs into the application. This is a great example of having intuition and the cultural proclivity to question. It is also an example of the differentiation between LATAM and Asia.
We have seen it with our center in Argentina. Our leads are coming to us with ideas for frameworks, tools, and other ideas we can implement to add value. They are innovative, vibrant, and intelligent. They want to find creative solutions. They have come to us and told us when they thought clients were making mistakes. They suggested new ideas or approaches. There is an environment of innovation and intuition that inspires a can do attitude. This is a real advantage for us and our clients.
- English Language Skills
As with most offshore facilities, the language skills with some consultants are better than with others. This will be the case no matter where you decide to outsource work to. In the past, it really did not matter as much because your onshore PM would work with the PM offshore. Your onshore architect probably worked solely with the offshore architect. But as more companies are going with Agile, the communication skills of all of the developers is becoming more important. You want team communication at all levels and with all resources.
Clearly, in aggregate, nearshore offers a much broader pool of resources with higher English capabilities than in Asia. There are many published reports available that verify this. If you are interested in learning more about these reports and having a world map with English proficiency ratings, please just email me and we will send a copy to you. Most nearshore vendors have accent reduction tutors that work on not just the language skills, but the accent, pronunciation, and colloquialisms common in the English language. Most LATAM schools now teach English as a second language as early as 1st grade. The result is that most consultants working in a center will have a high degree of English language skills before their first job, and they will continue to get training throughout their career with the vendor. So the overall language skills of the team of developers in a LATAM operations are much higher.
- More Collaboration, Stronger Relationships
Nearshore provides for more meaningful collaboration between organizations. Benefits include:
- Consultants work the same shift and can interact real-time.
- It is easier to travel to the offshore center.
- Easier to get work visas to bring consultants onsite.
Developers and project managers can talk to whom they need to, when they need to. Cross functional teams can collaborate in real time, consultants can participate in internal meetings, and interact with business users as necessary. This allows individuals across the organization to forge strong relationships with the nearshore team. The stronger the relationship, the higher probability of success for projects. In the past, interaction between the onshore and offshore teams was limited to team leads and architects. Interaction with the offshore development team was almost non-existent.
But with nearshore, not only is it possible to have communications with any team member at any time, but having face-to-face interactions is also much easier. Studies show that face-to-face meetings with staff help mitigate risks and reduce costs related to project overruns and unhappy users. Face time will help to deliver better results and prevent setbacks such as fixing or rewriting code, revamping business processes, or project failure. More channels of communication are possible and that should lead to better higher project success rates.
One of the biggest advantages for nearshore is the ability to get work visas quickly and rotate staff onsite. Many of you are probably aware of the issues with H1b. Trying to get resource onsite is difficult. Even temporary visas take months. But with NAFTA and other trade agreements with LATAM countries, get work visas takes a couple of weeks. So if you need a resource to be onsite, you can typically get the resource onsite in a week or two. This provides a real advantage.
At AAJ we have seen clients be very successful when who rotate consultants. So let’s say there is a two year contract and a client needs a lead and 5 developers. They bring the team lead over and several of the developers. They leave on person to be onsite for the first 40 to 5 months, then they rotate the next person. This allows every developer to get time at the client, to develop relationships, and to understand the culture of the organization. This approach always has a high success rate. There is an added advantage as well. Because the team knows the client, they can jump to other client projects and deliver the next project. So the investment in time is rewarded with multiple successful engagements.
- Ease of Management
With traditional outsourcing engagements the onshore project manager is usually coordinating with a project manager in the offshore center. The offshore project manager will then direct the team. The onshore project manager has much less visibility into an offshore project than they have with onshore projects.
Not only is project visibility an issue, but newer project management techniques cannot be leveraged because traditional offshoring requires defined, detailed requirements that lend to a waterfall methodology.
With nearshoring, the project manager can talk to every team member to get clarifications in real time. They can schedule as many team reviews as necessary to manage the project and they do not need to wait until the following day to get status updates. Most importantly they can leverage scrum and other project methodologies that assist in an iterative approach. In short, nearshore provides the PM an opportunity to manage the project, not just get updates about the project.
- Fraud Prevention, Patent and Copyright Protection
Stories of patent and copyright theft in Asia are prevalent. While our government tries to enforce international laws and treaties, not much can be done when intellectual property is stolen. To make matters worse, I saw an article in the US News that China is now creating a “CIA” like organization meant to fight terrorism. It further went on to say that China was in the process of enacting a law that made it mandatory for technology companies to give access to their servers to this new organization. I had to reread the article. Talk about a license to steal. I would never do business with, or as, a technology company in China. Not if that law passes. Anything that is on the server of a company in China, is now free game for them to access. I am not sure why there isn’t more of an outrage. But, irrespective of whether the law goes into effect, the threat of theft is real when you decide to outsource to Asia. Not only do you have to worry about the company you work with, but each team member could be planning on taking your Intellectual Property.
Most nearshore countries (especially NAFTA countries) have stricter laws protecting intellectual property rights. They are more likely to work with the US government to enforce trade regulations. Every country is different and has varying levels of cooperation (I probably would not outsource in Venezuela for example), so strict attention should be paid when selecting a country for nearshore outsourcing.
- Lower Total Cost of Ownership (TCO)
All of the points above lead to this final advantage. TCO is actually lower. Rates in a traditional outsourcing engagement in Asia are typically 15% to 20% lower than nearshore. So how is there a lower TCO? The answer is simple. Faster time to market cycles. By increasing output by 20% to 25% nearshore will actually reduce the cost of outsourcing. How can you increase output by 25%? By capitalizing on all the advantages above. An Agile approach teamed with better communication lead to higher quality work and less rework. This leads to getting a final product out quicker. The intuition we mentioned can lead to better quality product that can increase sales or lead to higher client satisfaction. Less turnover will lead to a shared knowledgebase that gets better over time. This will allow the team to produce more output faster. And the ability to provide offshore consulting for high value processes, mission critical applications, and customer facing applications at an affordable cost will lower the overall consulting spend. These processes have traditionally been performed by onshore consultants with high rates. By transferring these processes nearshore the overall total cost of consulting should decrease. So while the rates for nearshore are a little higher, the value and output is higher and the TCO is lower.
So that is my top 10 list for nearshoring. I hope it helps you as you make a decision on what and when to outsource or nearshore. As always, I would like your thoughts, opinions and comments. Please email at tommy [dot] simon [at] aajtech [dot] com if you would like information about anything covered in this blog. Please read my next blog which will be about why AAJ chose Argentina, and Rosario specifically, to build our dedicated global resource center. Until then, I wish you a happy, healthy, safe and prosperous week.