Nearshore - the new offshore?

Realities of unsafe world affected outsourcing industry

Despite the economic crisis and challenges it has brought to global economy, the outsourcing market is expanding to offer both a bigger choice of locations and a wider range of services. These are turbulent times increased importance of operational efficiency and cost reduction, which closely associated with outsourcing nowadays. As the scale of this crisis become clear, most companies introduced cost-cutting measures and approved outsourcing strategies. Many see outsourcing as a road to survival as it allows to mitigate budget and bottom line pressures.

Outsourcing is not, however, appeared to be a panacea as many have tried and failed to make it work, especially where long distances, unfamiliar cultures and intellectual property along with other risks are involved. There was a big rush to go offshore early this decade, particularly to India. But the time and expense traveling to remote locations mainly caused by cultural and language dissimilarities has been noticed.

The global political, economical, social and security changes during past year have a substantial impact on outsourcing industry at international level. After the terrorist events and corruption scandals of 2008 in one of the offshore industry main destinations, the outsourcing decision process as well as risk/reward calculations have irreversibly been changed. The new realities of socially unsafe world have fully overrun into outsourcing decisions. Client's interests are no longer motivated by only English language skills and high numbers of unemployed locals as such criteria do not ensure data safety and business continuity. As every company that outsources is fully exposed to the downstream risks, unless it can establish the threats in the regional location where their operations are hosted.

As the savings gap between India and other world locations sunk to less than ten percent, the value proposition is tempered more by potential threads. From this point, the ability of suppliers to ensure that customers' sensitive data and business processes remain safe with the perspective to location's proximity, intellectual protection and infrastructure capabilities has been considered as an important element of decision making process and included into strategic outsourcing planning. While less inclusive outsourcing location rankings based on cheaper but skilled labor pools and tax incentives considered to be not sufficient to make a qualified destination decision.

Nearshoring - strong trend

Escalating uncertainties of regional threats in offshore locations combined with increased focus on vulnerability management and demand to keep data, process resources and account executives closer to where clients actually based have contributed to the shift in delivery preferences.

The survey being made by Black Book Research indicates that Central and Eastern Europe and Latin America are viewed as significantly less dangerous outsourcing locations that all major hubs of India and being marked as the top destinations for operating with lowest downstream risks in 2009. According to research having centers nearshore and sameshore will be a major client priority during next years.

Compared with offshore outsourcing, there are some other factors of nearshoring allowing to improve outsourcing governance and build productive relationships with providers, including less travel costs, less time zone differences, and closer cultural compatibility. In nerarshoring study conducted by Erran Carmel and Pamela Abbott argue convincingly that distance still matters, and point to customer choosing the nearshore option to gain benefit from one or more of the following constructs of proximity: geographic, temporal, cultural, linguistic, economic, political, and historical linkages.

Canada, Central and Eastern Europe and Latin America, for example, are significant nearshoring destinations for US and West European customers respectively, and some analysts argue that US and West European clients can have lower total costs with nearshoring to Canada and Central and Eastern respectively than with offshoring to India. As proximity between parties provides with lower costs interaction enabling client's management to be more present in the project, cultural closeness also makes easier communication thereby reducing time to reach a conclusion. Time zone aspect eliminates the need in extra work. And as a result of all this the hourly rate difference between nearshore service model and “traditional” farshore model is eliminated and real costs match.


Increased focus on vulnerability management as well as shifting outsourcing delivery preferences to nearshore and sameshore allow nearshoring destinations to profit from nearshoring advantages in their specific clusters based around clients in North America, Western Europe and in a less degree East Asia, differentiating themselves from farshore suppliers on proximity criteria. While traditional offshoring suppliers, particularly Indian leading providers will find the lack of client nearshore and sameshore options as absolute deal breakers and streamline their efforts on advancing to Central and Eastern Europe as well as Latin America to establish data and service centers to reduce downstream risks and diminish concerns of US and European clients.

1 comment:

PetersOpinion said...

I believe cost shouldn't be the main decision making factor when talking about outsourcing. Due to all kind of reasons, in general the cost saving promise is never kept.

The decision to choose either an onshore or offshore provider highly depends upon the "readiness" of the outsourcer. In case the outsourcer has little or no experience with outsourcing he shouldn't consider offshoring. He will need somebody nearby.

The same is applicable if you want to be able to meet with your service provider rather often. In such a case a nearshore provider is the way to go.

The above are just some factors. Of course there are many more.

In my opinion it's not offshore against nearshore. For some outsourcers one will be better than the other. Besides, I believe we will find an increasing amount of hybrid solutions profiting from both worlds.