Companies looking for savings but worried about the
risks and cultural barriers involved in offshore outsourcing could
benefit from nearshoring. Danny Bradbury investigates the pros and
cons
If your company balks at the cost of outsourcing its IT to a UK
provider but is nervous about the risks associated with offshore
projects, the outsourcing industry has a third way: nearshoring.
Nearshoring involves outsourcing work to companies with the
economic benefits of an offshore location, but a closer cultural,
linguistic and geographic fit with the user organisation.
Operations in Bangalore may offer thousands of workers to handle
straightforward business processes and software development tasks
with a relatively low level of business impact, but when it comes
to providing services that have a greater effect on the business
and its customers, companies need suppliers with a certain cultural
affinity.
For example, a C++ subroutine developed by an outsourcing
supplier can be tested by a company's software team before being
folded into a live application, creating a clear delineation
between the outsourced service and its use.
However, business processes with a strong customer focus or
regulations-driven reporting element are tied so intrinsically to
the business that it is harder to draw a solid line between them
and the rest of the operation. This changes the requirements for
suppliers.
Tony Virdi, partner at outsourcing advisory firm Atos
Consulting, discusses nearshoring and offshoring in the context of
vertical and horizontal expertise. Horizontal functions require
generic back-office skills, such as processing transactions or
basic applications maintenance. Vertical skills are more linked to
the idiosyncrasies of the business.
"The offshore centres rarely provide vertical expertise," says
Virdi. "I would say the nearshore players provide vertical
expertise in general better than the offshore ones."
Duncan Aitchison is international managing director of TPI,
which advises companies on outsourcing issues. He evaluates the
level of customer interaction within an outsourcing contract to
help define whether it should be offshore or nearshore.
Aitchison has seen companies locate call centres in India that
work well, but it depends on the company's profile. "If you are a
UK company using India as a basis for a call centre, it is
perfectly acceptable," he says. But then, it is relatively easy to
find English speakers in India. "If you are a German company, you
are likely to do it in the Czech Republic or Poland and take the
transactional stuff further out."
Linguistic skills are an obvious driver for nearshore contracts,
but not all considerations are as clear cut, says Ian Marriott,
vice-president of research at analyst firm Gartner. There are
"softer" elements to consider, such as the cultural affinity
between outsourcing customer and supplier. "It is more difficult to
convert these into objective measurements, but they could still add
to overall productivity," he says. "If we can communicate more
effectively, productivity could increase."
Companies will find cost reduction less of an advantage when
working in nearshore operations, says Virdi. Project costs are
still much lower than in the UK, but it may be difficult for
nearshoring operations to match the very low labour costs that can
be found in areas such as India and China. The trade-off between
cost and the sophistication of the services available is clear.
However, Marriott points out that costs in some of the main
markets for offshore work is rising steadily. "Because of the level
of inward investment, the whole cost base is increasing," he says.
"That can make nearshore contracts more attractive, because the
differential between nearshore and offshore today will be squeezed
over the next few years."
However, this can happen in some of the more developed nearshore
locations too, so companies must be careful. Ireland is a good
example. A high level of investment sent property and labour rates
rising, making it a less attractive nearshore proposition.
Consequently, companies should focus on more than just price in
the long term. They should concentrate on other benefits of
nearshore operations, such as lowering the overall risk of an
existing offshore project, gaining access to pockets of skills, and
achieving 24x7 support, Marriott says.
Nevertheless, cost savings can be made. For example, Robin
Wilkins, e-commerce programme manager at information management
supplier Williams Lea, says using a nearshoring supplier saved him
as much as 50% of the project costs for his computerised purchasing
system.
Williams Lea used outsourcing supplier Crimson Wing to provide
nearshore development services at its location in Malta. The
region, with its highly educated labour base and English speaking
community, was a better cultural fit for Wilkins' project. "In
India, day rates are cheaper but you can end up spending more
because you have difficulties getting across what you want done, or
maybe it has to be specified in greater detail than you might have
done with onshore or other resources," he says.
Definitions vary as to what qualifies as a nearshore location.
Aitchison 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? Virdi puts it at
anywhere within three and a half hours' flying time, meaning most
European destinations qualify.
"We can get to Budapest in three hours, but we cannot get to
Mumbai in less than eight," he says. This represents a significant
overhead when putting people on the ground at the outsourcing
location, which is something most companies should do. "It is
easier travel, more flights and easier time zones."
In truth, nearshoring locations 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. In the middle are areas such as the new
entrant states to the European Union - for example, Poland and the
Czech Republic. Finally, at the close end of the spectrum - almost
onshore but not quite - sit places such as Ireland and the Scottish
isles.
Choosing between these areas can be difficult, but Atos Origin
customer Symbol Technologies, which was looking for a central
European site to manage its financial reporting, finally settled
for the Czech Republic. The company already maintained a small
office on the Austrian/Czech border and decided that it could be
expanded.
"There are two universities with good technology and language
skills," says Andrew Macdonald, regional director of shared
services finance at Symbol. "So not only could we sufficiently get
associates and staff with the right language skills, but it was
also one where the cost environment was quite low."
Symbol chose not to outsource the whole operation - Atos Origin
helped it to develop some of the technology used at the centre -
but it set up a nearshore shared service centre instead. The centre
is run by Symbol, reporting into head office in the US, but serving
the European market to standardise financial reporting, making it
easier to comply with the US Sarbanes-Oxley financial
legislation.
This is part of a growing trend, says Marriott. "The offshore
delivery model is an appropriate one for insourcing just as it is
for outsourcing, so there are many companies conducting work in
other countries as part of their own operations," he says.
Using the nearshoring model without outsourcing your operations
gives you tighter control over critical business processes while
yielding the benefits of a nearshoring practice. As these shared
service centres develop, companies can gain enough confidence to
outsource the operation at a later date. Similarly, such centres
can be set up with the aid of a third party to help cope with
working in an unfamiliar location, then transferred to the
customer's control at a later date in what is known as a
build-operate-transfer model.
Clearly, nearshoring offers the ability to maintain a high level
of control while mitigating the cost of doing business. The range
of different models that can be attached to a nearshoring operation
brings flexibility to companies who want to streamline their
operations without incurring too much risk.
Malta proves an Ideal solution
TEXT: Karl Harris, head of e-services at computer distributor
Ideal Hardware, saved between 50% and 60% of his project costs by
working with Crimson Wing, a nearshoring company with an office in
Malta.
Ideal Hardware wanted to offer a web application to help
customers manage software licences online. Harris says, "We could
have gone offshore, but culturally there is a big difference
between India and here. It is easier to go to the Maltese and
explain yourself to them. And another advantage is that Malta is
just one hour ahead of us, and three hours away on a plane, so it
is more aligned to Europe. Time zones are a big factor."
Even though Malta is much closer than traditional offshore
outsourcing locations, it is still some hours away. Harris used
several techniques to help manage the project. Installing a
Sharepoint groupware server helped him to collaborate across time
zones, providing facilities such as document check-in and checkout.
Conference calls and video conferencing were also useful, he says,
as was having an onshore representative from the outsourcing
supplier. Like many offshore companies, Crimson Wing maintains an
onshore office, so staff can deal with emergencies and take a role
in customer-intensive activities.
Harris gave Crimson Wing trusted access to his company network,
isolating some machines in the IT department from the rest of his
infrastructure. This enabled the development team to upload test
code for evaluation by the Ideal Hardware quality assurance
team.
The close geographic location works both ways, says Harris. Not
only does it make it easier for his representatives to get in touch
with the Maltese development team, but it also makes it easier to
get developers on the ground in the UK when necessary. "If they
have a big implementation to do, typically they fly over, stay in
the Travel Lodge down the road and work the whole weekend," he
says.
Taking the high road to lower costs
Enterprise Management Consulting, founded in 1995, offers
nearshoring from its Linux Centre in the Western Isles of
Scotland.
Managing director Malcolm McSween says he originally chose the
location for lifestyle purposes. "It was a case of looking at where
you could go for software development, and the answer was anywhere,
but the lifestyle was excellent up here," he says.
Generally, people migrate to the islands for lifestyle reasons,
meaning that residents tend to stay there longer. He argues that
this reduces his employee turnover, helping to pass lower costs on
to his clients. "We will do work for half the price here that we
could do in London," he says.
The company will slash a day rate of £750 in London to £400 when
conducting work from the Scottish Centre.
Enterprise Management Consulting also maintains a London office,
enabling it to arrange for specialists to meet with clients on the
mainland and thrash out complex architecture issues before taking
the main body of the work to the Western Isles for completion.