Nearshore Study. What defines the nearshore zone?

Join the LinkedIn Discussion on this Topic.

---

The aim of this paper is to analyze the changes occurred in IT outsourcing industry,

point out to the current and future trends and clarify belonging criteria of the co-called nearshore zone.

Quote from the study

"However, not only has the number of known nearshore sites have grown significantly over the last years, but the amount of advertising and promotion on behalf of country developers has skyrocketed.

From exotic to socially downtrodden areas, business dealmakers from around the globe compete for a slice of the billions dollar nearshore pie."

Contents

• Shift in Delivery Preferences
• Popular Trend
• What defines the nearshore zone

Shift in Delivery Preferences

Nearshoring, often referred as Nearshore Outsourcing took a wild ride during last years. The global political, economical, social and security changes during last years have a substantial impact on outsourcing industry at the international level.

The realities of an unsafe world have fully overrun into outsourcing decisions. The challenging component of outsourcing governance has shifted to mitigating downstream risk by determining the best location choice for their organizational processes.

As the savings gap between India and other world locations sunk to less than ten percent the value proposition is now more tempered more by potential threats. Increased focus on vulnerability management as well as geographical proximity has made for a shift in delivery preferences towards nearshore and sameshore options.

The survey made by Black Book Research in 2009 indicates that Central and Eastern Europe along with Latin America are viewed as significantly less dangerous outsourcing locations for US and EU respectively that all major hubs of India and being marked as the top destinations for operating with lowest downstream risks in 2009-2010. According to research having centers nearshore and sameshore will be a major client priority during next years.

Nearshoring - The Growing Trend

This shift in delivery preferences allowed many destinations under the so-called

Nearshoring umbrella to profit from their geographical advantages in their specific
clusters based in North America, Europe and Asia.

However, not only has the number of known nearshore sites have grown significantly over the last years, but the amount of advertising and promotion on behalf of country developers has skyrocketed.

From exotic to socially downtrodden areas, business dealmakers from around the globe compete for a slice of the billions dollar nearshore pie.

While there are some proven nearshoring destinations such as Canada, Central and
Eastern Europe and Latin America that according to analysts represent a viable
alternative to offshore options for US and West European countries there are many
other locations that seems to follow the trend and claim to be nearshore locations as
well. So, what criteria can be used to define location as a nearshore?


What defines the nearshore zone?

Definitions vary as to what qualifies as a nearshore location. Duncan Aitchison
international managing director of TPI, does not get hung up on semantics, but claims that moving across a close country border without crossing an ocean is a good way to define a nearshore contract. But how close?

Tony Virdi, partner at outsourcing advisory firm Atos Consulting puts it at anywhere
within three and a half hours' flying time, meaning Canada, most European and Latin America destinations qualify. However, flight from New York to Mexico takes more than 5 hours, should it still be considered as a Nearshore?

In truth, nearshoring locations should sit along a spectrum of potential outsourcing sites. At one end sit the far offshore locations such as India and China, separated by both cultural and geographic distances while from other side will be onshore locations such as Ireland and some US cities.

Geographical factor however is not only one determining "nearshority" as there are
many other important aspects such as linguistic and cultural ties, common history,
similarity of education, directness of communication and visa relations.

All this factors should be carefully considered in order to determine the best location fit for an organization prior to start a comprehensive assessment of locations infrastructure, intellectual property and business protection, laws, regulations and labor potential.

“Agile and Nearshore - The Formula to Successful Software Development”

"It's time for software professionals to stop sitting on the fence where agile is concerned.

Forrester Report 2009

This is the quote from our new research “Agile and Nearshore - The Formula to Successful Software Development”, which is officially available here

We would like to draw a special attention to this work, as the aim of it is to give a broad overview of the Agile development methodologies, their practical appliance and successful combination with nearshore IT service delivery models.

The study analyzes the history of Agile development, discusses the main changes occurred in commercial software development sector over last years and presents a real-world case-studies of successful implementation of Agile methodologies in conjunction with Nearshore delivery approaches.

The study features successful implementations of Agile methodologies for software product companies “Borland”, large ICT multinationals “British Telecom” and professional ITO service providers “Levi9 Global Sourcing”. Especially the last one, as the company successfully crafted these two elements of successful software development into one robust approach!

Want to know more about the formula and real-world case-studies check out our report!

Coming soon......

IT Outsourcing Market in Central and Eastern Europe: Trends, Figures, Predictions

Nearshore Blog analyses main trends surrounding IT Outsourcing market in CEE region

Contents

Introduction

About CEE Review

Trends Confirmed!

• Trend 1. Shortage of IT specialists in developed economies
• Trend 2. Growing IT workforce - Romania and Ukraine leaders
• Trend 3. CEE IT Outsourcing Market Growth 4
• Trend 4. More market players despite crisis 4
• Trend 5. The EU - US outsourcing spending race will continue
• Trend 6. Nearshoring strengthen its positions at global aren
• Summary

Introduction

The Nearshore Blog in conjunction with Levi9 Global Sourcing are pleased to present an analysis of “the Central and Eastern European IT Outsourcing Review 2010” annual research conducted by CEEOA with the aim to study main trends, figures and predictions and update the perspective on the potential of the CEE region for provision of nearshore IT outsourcing for the Western European countries and for offshore IT outsourcing for the US market.

The CEE IT Outsourcing Review is the research work that became one of the most demanded analytical source about the state of IT outsourcing market in CEE region within such a short period of time celebrates its third edition this year.

Being an information partner to CEEOA traditionally the Nearshore Blog team conducts its overview of the research and provides the perspective on the main trends and predictions surrounding IT outsourcing market in CEE region.

From this partnership it became a good tradition to exchange the views and predictions for the time to come and we are pleased to say that historically our views are in line, therefore our work represents a complementing rather than debating character.

This year the study appeared exactly the same way, so we’re pleased to present our overview of “Central and Eastern IT Outsourcing Review 2010”.

About CEE Review

Central and Eastern European Outsourcing Association (CEEOA), an information partner of the Nearshore Blog has been conducted the research project “CEE IT Outsourcing Review” annually since 2007. The previous issues of the report have been accessed by more than 15,000 people annually and were referred by industry research heavyweights. KPMG referenced the report in its “Exploring Global Frontiers” study.

This year “CEE IT Outsourcing Review 2010” represents a unique combination of proven research methodology, meaningful expert view and representative online surveying. By encompassing 246 companies operating in outsourcing service market from 16 countries alongside with 25 representatives of national outsourcing associations and impressive panel of leading industry experts the study provides a comprehensive yet accurate overview of the state of IT outsourcing industry in the CEE region.

Trends Confirmed

Being an information partner to CEEOA, the Nearshore Blog team was particularly pleased to learn that many of the predictions and trends we indicated previously on Blog’s pages are in line with the study data and leading industry’s experts forecasts.

Several independent experts and outsourcing activists kindly responded to the survey questions and provided their insights with regards to major trends and currents in IT outsourcing industry worldwide and in the CEE region specifically. Among the expert panel there are:

Phil Fersht, Founder and CEO of Horses for Sources outsourcing advisory firm,
Christoph Prieler: Offshoring Executive, Managemen Consultant, University lecturer
Magdalena Szarafin - Chairman of IFRS Practice Committee at German CPA Society
Boris Kontsevoi - Founder and President of Intetics Co.

Trend 1. Shortage of IT specialists in developed economies

The publication of the “CEE IT Outsourcing Review 2010” coincided with the series of studies “Nearshore as a solution to EU labor shortage” conducted by Nearshore blog this month. Similarly to our predictions the study “CEE IT Outsourcing Review 2010” together with the expert panel paid a great deal of attention to the growing shortage of IT specialists in the developed economies which might develop into a dangerous brake on post-recession recovery and innovation in developing economies.

One of the study experts Franco Dal Molin indicated:

In a number of West European economies there is – despite the crisis – still a significant shortage of skilled IT specialists. Finding developers and hiring them fast enough becomes often more crucial than just lowering costs. Finally, in times of uncertainty and volatility, outsourcing is looked at as an ideal way to become more flexible and/or scalable.

The survey trends summary reflected that increase in skilled specialists shortage is among TOP 10 region’s main trends with 32 per cent of survey respondents indicated it as the major trend.


Trend 2. Growing IT workforce - Romania and Ukraine leaders

From other side the study indicates a continuing increase in the number of employed specialists
working in the Central and Eastern European IT services market throughout 2009. The higher education that formed the base of educational systems in former Soviet Union countries experiences a further improvement of their already strong focus on fundamental engineering education.

This is one of the most important factors contributing to the preparation of qualified specialists in the industry. The presence of strong science schools and further education system conversion, fueled the rapid increase in the number of companies providing IT outsourcing and software development services in the CEE region.

In 2009, the number of IT specialists employed in companies providing IT outsourcing and software development services in the CEE region reached 95,000. Romania and Ukraine led in growth in the number of IT specialists with 12.33 and 9.51 per cent growth.

Trend 3. CEE IT Outsourcing Market Growth

The most prevalent trend in 2009 was the increase in the volume of IT outsourcing services
provided. The volume of work exported in 2009 indicated a noticeable growth in comparison to
the findings of the ‘CEE IT Outsourcing Review 2008’.

The general volume of IT outsourcing and custom software development services exported from
the CEE region reached USD $4 billion in 2009. The largest growth took place in Romania and
Ukraine. These two leaders invariably show high rates of market growth and leave other countries far behind in terms of the volume of IT outsourcing services exported. Hungary, Poland, Belarus, Czech Republic and Bulgaria close out the list of leaders.

Outsourcing services providers are quite optimistic about their development prospects for 2010. Respondents from all countries forecast 10%-30% growth depending on specific circumstances at work within each individual country.

According to the forecasts of those surveyed, the volume of IT outsourcing and custom software development services exported from the CEE region will reach about USD $5 billion in 2010.

Trend 4. More market players despite crisis

Rather interesting trend might be observed from the study statistics on the number of companies within the region. As reasonably one might have thought about decrease in the number of companies throughout economic meltdown the actual figures are quite opposite.

Not only no significant bankruptcies, closures or IT outsourcing company failures were reported during 2008-2009, in fact 20% of responding companies were established during that period. These were mainly small-sized companies established in times of negligible redundancy at the
end of 2008 through the beginning of 2009. Many of these companies also were the result of
business restructuring when service companies shifted to independent organizations.


Trend 5. The EU - US outsourcing spending race will continue

Last year TPI’s sweeping report marked that Europe outran US in terms of IT outsorcing spending. The report indicated that EU businesses signed a record number of IT outsourcing contracts in 2009 and beat US in terms of Total Contract Value (TCV). By the end of the third quarter of 2009, G2000 companies headquartered in Europe were spending more on outsourcing deals overall than G2000 firms with headquarters in the US and Canada.

The study surveyed the expert panel on the further dynamics in this competition. While most experts agree on the difference in economic cycles between EU and US being the main driving force in this competition, some respondents indicated the gap in IT and telecom between US and EU which can be a motive for European companies to spend more to make up the distance missing.

In a further perspective experts associated dynamic with the size of economies. Since USA and Canadian economies is just about 7% bigger than EU economy, the outsourcing spending of both regions, especially long-term, to smooth out saturation effects, should be about the same.

Trend 6. Nearshoring strengthen its positions at global arena

The Key Conclusions chapter within the study signals that software development and IT outsourcing services provider industry in Central and Eastern Europe successfully overcame all of the challenges of the recession of 2008 and resumed its previous trajectory of growth.

The main drivers behind this dynamic experts named the numbers of long-term contracts and big clients who transferred their projects on software development to their CEE outsourcing partners.

The expert panel came to agreement that such a trend closely associates with the growing notion about outsourcing as a people’s business where geographical, cultural and language proximity are of importance for buyers. Sourcing buyers survey shows that customers from Western Europe are likely to make business with partners from Central and Eastern Europe as their locations are available within 2-3 hours, their business partners speak their languages. They are high-qualified тв the prices are still lower than those in Western Europe.

The panel indicated a growing significance of nearshoring at the global outsourcing arena. As new stratums of businesses, especially mid-size businesses, are coming to outsourcing market, they feel more comfortable to work with nearshore providers.

Additionally, similar time zones and physical proximity promote more efficient operations. A noteworthy and interesting side effect of this is acquisition of Latin American and East European providers by Indian companies.

Summary

In 2009, the software development and IT outsourcing services provider industry in Central and Eastern Europe successfully overcame all of the challenges of the recession of 2008 and resumed its previous trajectory of growth.

The industry used the recession time to reorganize internal business processes within companies, to optimize costs, and to further develop more qualified operational business management processes

Such rapid recovery by the industry, and resumption of its previous growth rates, are testament to the strength and solid prospects of the business model used by Eastern European outsourcing companies in their strategic development.

According to the forecasts of those surveyed, the volume of IT outsourcing and custom software
development services exported from the CEE region will reach about USD $5 billion in 2010.

The material prepared by Nearshore Blog in conjunction with Levi9 Global Sourcing based on informational sources of CEEOA (http://ceeoa.org).

Levi9 Company Profile might be found on the pages of the study within the Partners Section. The study can be accessed on (http://itonews.eu)

Keeping up with Nearshore expansion - regional sub-groups to our group in LinkedIn

Dear Readers,


As we've been written in our previous posts "it's time to Nearshore", it's time to explore the unique opportunities provided by the optimal outsourcing model which has become the result of years of researching and practicing by businesses and practitioners from around the globe.

Although Nearshoring has been mainly associated with the European continent we saw an astronomical emergence of the practice on the lands of Western Hemisphere. Where escalating uncertainties and regional threats of the main offshore destination combined with increased focus on vulnerability management and demand to keep data close have changed delivery preferences of US businesses towards nearshore and sameshore options.

Nowadays, Nearshoring is a main outsourcing buzzword in Latin America, the region considered to be the main nearshoring destination for US. Recently the region held a prestige ranking contest "The Nearshore Americas Power 50" naming the most influential Nearshore figures from 16 countries from Americas region.

All this confirms the expansion of the Nearshoring across the world borders which, we personally think is rather reasonable :)

That said, we'd like to introduce the regions sub-groups in our sister LinkedIn group "Nearshore Professionals". You're very welcome to join!

BPO in Europe - offshore or nearshore?

Recent article by Alsbridge's BPO and shared services advisory practice in Sourcingmag.com discusses the opportunities of the development of Global BPO service market in Europe. Many experts see continental Europe as a next major business process outsourcing (BPO) growth area. But the question is - will Europe open its doors to leading Indian offshore providers, or will keep its short-sighted nearshore precedency.

One of they key aspects in determining the possible directions of BPO market movement in Europe is to look at the development of the sister ITO market which has been showing a clear signs towards homecoming for last decade. The panacea of outsourcing to nations such as India and China has proven illusory for many European companies. Latest reports confirms that long-distance offshoring does take its toll on the control of projects and erode program management and communication.

The lowering satisfaction levels combined with terrorist attacks, corruption scandals and rising attrition levels in India contributed to the shift in outsourcing delivery preferences towards nearshore and sameshore options. The survey being made by Black Book Research in 2009 confirmed this shift naming Central and Eastern Europe and Latin America top destinations for operating with lowest downstream risks for Western Europe and US respectively.


What is the relationship between ITO and BPO.

Although there are many differences between ITO and BPO, some relations are overt. The main objective of ITO is to improve IT infrastructure and reduce the cost of IT systems while BPO goes beyond that improving the performance, efficiency and productivity of a business. Nevertheless, most of the key core processes of a business require IT support whether its logistics management or financial management or customer care, all those processes will have a strong IT infrastructure to them.

That said both ITO and BPO come as a one strategic decision for the C-suite. The top management should co-ordinate IT strategy with the BPO strategy coherently. With this intimacy between two most European companies will be making sourcing decisions and determining best location choice based on their previous experiences and main drivers.


Current state of things

Global BPO is rather old hat in the UK and it remains Europe’s largest BPO market with Switzerland, Netherlands and Nordic countries showing high activity in these areas.

The largest European economies among which Germany and France show some signs of reluctance towards BPO though. That reluctance is explained by experts as a difference of world view - while cold-blooded Anglo-Saxons would outsource their grandmothers if they could, those conservative and consensus-driven Europeans prefer to keep the back offices close to home.

Many BPO suppliers - even a leading French supplier selling to French customers - complain of a crushing lack of interest in their outsourcing wares. It seems concerns about BPO's incompatibility with Europe have real currency at a local level, and as a result many local French, German or Italian organisations instinctively baulk at the prospect of externalisation. But the likes of Philips, Axa or American Express have proven that the barriers can be overcome.

They have experience with shared services and have accumulated the skills to know how to deploy them; they know that complex European language requirements can be handled well by low-cost east European locations.

In short they know that BPO works, and that there are only imagined barriers to it working well in Europe. More and more companies are finding that they can get it right, lowering operating costs and improving back-office quality and compliance as a result.

The question will global BPO works in Europe or it repeats failure of ITO.

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.

Conclusion

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.

ISV's Lunch Seminar in Amsterdam - The Art of Software Dev

On June 16, Levi9 Global Sourcing in conjunction with the University of Utrecht, Microsoft Corp and Exact Software is hosting an IT industry specific lunch seminar.

The seminar will be held in Amsterdam, and will gather under one roof some of leading IT professionals and scholars from the Netherlands. Among keyspeakers there are such distinguished panelist as Prof. Dr. Sjaak Brinkkemper, Professor of Organization and Information Utrecht University with specialization in software products and Roland Janssen, Manager ISV Partner Group, Microsoft, Gerard Hurkmans, sales manager Levi9 and Aard ’t Hart, Director of Research & Innovation, Exact Software

The seminar is oriented on Independent Software Vendors (ISV's) and will attract executives and senior level professionals of leading tech companies in the Netherlands. The event will provide unique opportunities for ISV's to delve into the process of nearshore outsourcing and get real recommendations and advices for the effective adoption of the practice within corporate strategy.

Moreover, panel and knowledge exchange sessions will be held to raise the standard of management knowledge in this field. Session will kick off at 11:30 a.m. and will be followed by coffee reception at 1.45 p.m.

To register for seminar please click here.

Why Near shore - the mitigation of business risks

During last years we have seen in practice that the nearshore outsourcing model provided a viable alternative between the desire to optimize application development and maintenance costs from one side and to reduce uncertainties and downstream risks of sending those activities to offshore providers from another. Geographical and cultural proximity, no time-zone difference, linguistic and scholar affinity and availability of strong IT skills inherent to nearshore locations allowed to develop intimate business relationships that translated into better communication and project management. While proximity and no visa hassles made it easier for project management to be more present in the project. As a result companies engaged in nearshore outsourcing model in many cases saw increased project management efficiency, better quality of output and less extra work.

From other side escalating uncertainties in traditional offshore locations, increasing costs and attrition levels combined with increased focus on vulnerability management and safety of corporate data have irreversibly changed customer delivery preferences to nearshore and sameshore options allowing those geographically closed destinations to profit from nearshoring advantages in their specific clusters based around clients in North America, Europe and Asia. According to recent surveys of global corporate executives, the top locations to operate with lowest downstream risks in 2009 were Central and Eastern Europe as well as Latin America, which are significant nearshoring destinations for US and West European customers respectively.

According to Black Box Research report uncertainties in offshore locations continue to escalate thereby strengthening focus on vulnerability management. Having service centers Nearshore and Sameshore will be a major client priority in outsourcing for next several years as clients will prefer to keep their data, process resources and account closer to where the business actually is.

India verliest glans

Naarmate de kosten van het werk in India toeneemt en de waarde van de dollar daalt, wordt het steeds minder interessant om werk uit te besteden in India.
BusinessWeek wijst er op dat het Mexicaanse Softtek, leverancier van it-diensten, vorig jaar 30 nieuwe klanten wist bij te schrijven, waarvan de meeste outsourcingscontracten met Indiase bedrijven hadden voor delen van hun IT. India raakt een beetje uit de gratie door een groot verloop onder het personeel en de lastige communicatie. Voor Amerikaanse bedrijven komt daar ook nog eens de alsmaar dalende dollar bij, die ten opzichte van de Indiase roepie in de afgelopen vijf jaar 16 procent minder waard is geworden. Daarnaast is het onroerend goed duurder geworden en worden er hogere belastingen verwacht. Was in het verleden in India nog een winst te boeken van 40 tot 50 procent, nu dreigt dat te slinken naar 10 tot 20 procent. Dat zijn trends waardoor bedrijven geneigd zijn het dichter bij huis te zoeken, in ieder geval in een nabije tijdzone. Voor bedrijven in de VS worden daarmee de Latijns-Amerikaanse landen interessanter, zoals Mexico en Argentinië.

Shell discovers nearshoring (Dutch)

Offshoring smeert ict-motor Shell
Shell schrapt een deel van zijn ict-activiteiten en besteedt een ander deel uit aan Oost-Europa. Deze stap is onderdeel van een jarenlange offshoring-trend binnen het concern.

Nearshore-landen domineren in programmeerwedstrijd

Bij een programmeerwedstrijd voor studententeams van de Association for Computing Machinery veroverden Oost-Europese universiteiten vijf van de tien topposities.
bron ag