I received a report from Marrable Services all about weighing up whether to offshore to places like India or nearshore to regions such as Eastern Europe. The full report is below after a little backgrounder from me.
Being about I outsourcing this blog inevitable features lots of articles about offshoring to India. And why not? The sub-continent has become the default choice for businesses looking to get their IT delivered at a lower cost. When you mention offshoring India immediately springs to mind. Low cost labour and the use of English in India are the two main advantages and have made companies like Tata Consultancy Services, Infosys and Wipro important partners for big businesses in the UK. There are more advantages than this, such as the large skills pool, but there are also perceived problems.
India is becoming more expensive. It is a fast developing nation with a growing middle class. These people, many of which work for the IT firms, want better living standards and the higher wages needed to get them. This combined with the fact that the Indian economy is growing and requires more workers, means IT professionals move around a lot and as a result labour arbitrage is one of the fears of any CIO offshoring work to India.
There is also a feeling in many camps that the Indian firms only do what they are asked and will not move impr5ovise and innovate. Many people also believe that Indian suppliers are so determined to please that they will say they can do something even if they can't.
The Indian companies are very good at spotting market opportunities and growing business around that. Y2K is a great example. Indian companies stepped in and offer services to support big UK and US businesses that were preparing for Y2K. They have grown meteorically since. These companies are currently trying to reinvent themselves add move to non-linear business models as appose to being reliant on low cost labour at fixed prices. And competition is tough.
I have written quite a bit about the outsourcing options in Eastern Europe. Countries in the former Soviet Union for instance have a good heritage of IT skills and experience and have the advantage of being cheaper than the UK, although not as cheap as India. They are also pretty close to the UK so travel between sites is easier and being in similar time zones makes real time collaboration easy. This for instance has led some to user Eastern European firms for agile software development.
Read the Marrable Services report here.
LOCATION MATTERS - Farshoring vs Nearshoring for IT Services
By Sean Murphy -- Marrable Services
This document aims to set out the major criteria to be taken into account when selecting an IT outsourcing destination, and highlights the pros and cons of various outsource providers with reference to location, size, cultural fit, company culture, and working practices.
Much of what is contained here is based on our experience and the experience of others who are heavily involved in IT outsourcing. The opinions of other Senior Management have been included where individual company guidelines has allowed them to make comment.
The paper also demonstrates how measurement of pre-determined project criteria can give the necessary analytics to measure continuous improvement and if necessary, how to compare one company against another.
The measures used are: utilisation, quality, velocity and customer satisfaction.
Choosing an Outsourcing Destination
"There's a lot more to it than just where are the cheap people?'" Rolf Jester - Gartner Vice President and Analyst
For many years India and Southern Asia have been the foremost outsourcing destinations for companies seeking to cut costs and access a plentiful talent pool. Add to that the advantage of "round the clock" availability, English language skills and a willingness to please, and it is easy to see why India has become the focus of many large companies who have engaged supersized development houses or even set up their own off-shore facilities.
However, just like the Spanish Costas, these destinations are becoming a victim of their own success. Frantic competition for the best resources and consequently a huge labour turnover has led to communication and quality problems. Increasingly, local industries such as retail, insurance and banking are offering more interesting jobs with better career prospects than much of what is on offer in IT and Business Process outsourcing.
Talented staff move around to grab the highest salaries and seek opportunities to work for the big multinationals in the hope that they will be eventually able to transfer overseas. This revolving door is illustrated in the graph below produced by Tata Consulting services and printed in The Economist Jan 2013.
India and the Far East still lead the world for inexpensive, willing workers who can perform programming and other back office tasks to order, and this resource should be viewed as an excellent commodity which can be bought at the most reasonable price. However, companies must factor in a higher management cost, more exacting up front business analysis and not expect much more than an execution of an exact brief. While less talented and experienced workers can complete a task to order, you will often need more of them, for more hours, and have a harder job maintaining quality and hitting delivery deadlines.
Suddenly a willingness to please translates into an unwillingness to admit to problems and delivery issues. A "Yes Sir" culture does not allow for the necessary questioning and push back that must happen within a healthy "peer to peer" relationship and when managing complex and business critical projects.
More and more companies (News International, Bupa, Thomsons OnLine Benefits to name but a few) are finding that they can gain greater flexibility, mitigate risk and keep suppliers on their toes, by outsourcing to several different locations so that they access the right resource for the job in hand. In addition there is a move towards using smaller boutique companies where a hand-picked team gains a deeper understanding of the business and takes a much more personal interest in delivering a quality product.
Quality Vs Quantity - the benefits of nearshoring to Eastern Europe
"Nearshoring" - the business of moving production, research and business processes to countries that are quite cheap and very close, rather than very cheap and far away" Wikipedia 2013.
While Eastern Europe cannot begin to compete on cost or quantity, when ease of management, location and most importantly operational culture are factored in, this destination begins to look like a strong competitor. The next section will look at 5 good reasons to nearshore to Eastern Europe, examining the talent pool, cultural similarities, time zones, low attrition rates and data protection.
1. The Talent Pool
The higher education institutions and comprehensive schools that formed the base of educational systems in former Soviet Union countries were mainly focused on engineering specialties. This legacy, and the presence of strong science schools, has fueled the rapid increase in the number of companies providing IT outsourcing and software development in the CEE region. Educational systems in CEE countries are improving on their already strong focus on fundamental engineering education. In terms of the number of certified IT specialists, Romania is the leader in Europe, and sixth in the world, with density rates per 1,000 inhabitants greater than the US or Russia. There are about 64,000 specialists in the IT sector. Approximately 5,000 of the 30,000 engineers graduating every year in Romania are trained in ICT. Romania has won more Informatics and Math Olympiad medals than any other European nation and is 3rd globally after Russia and China.
The bottom line is this:
The availability of a highly educated workforce means that projects often need less bodies, less management input, and less on-boarding investment.
2. Cultural Similarities
Business culture is much closer to that of America and Western Europe and that isn't just a similar sense of humour and a fondness for a beer on a Friday evening! Eastern Europeans in general, are good at understanding the requirements beyond those set out in the project specification as well as being able to adapt quickly and flexibly to changing business needs. Eastern Europeans will tell you how to do things better and will not be afraid to debate with a client on technical solutions.
They take a more collaborative and less process-driven approach to projects, take ownership of deliverables with a high level of commitment to outcomes and the overall relationship with the client. Their preference will be to collaborate with the client on the project specification in order to ensure the right solution for the business need rather than performing to order. This is important, not just because it improves the working relationship, but also because, over time an Eastern European team will need considerably less management hours from head office.
3. Time Zones
Eastern Europe covers a vast region, but most of the countries within it are just a couple of hours away from the UK in terms of time difference. Locality and time zone offers a distinct advantage when you take into account 6 hours of synergy in working hours during which home and away teams can collaborate, plus face to face meetings when necessary are a "low-cost" flight away.
4. Low Attrition Rates
Contrary to the scaremongering in the press, most Eastern Europeans are family orientated and happy to stay at home as long as they have access to stable well paid employment. When the work on offer is of an appropriate level, the approach is collaborative, and talent is recognized, workers feel a high sense of achievement which results in less movement between organisations.
5. Data Protection
Eastern European countries within the EU are a good choice for work which requires adherence to the Data Protection Act. When personal data processing is involved it is important to choose a destination which has adopted the EU directive 3002/58/.
Romania - Our Destination of Choice
At the end of the day, the decision to locate to one country rather than another will be a subjective one, based on individual experience, the needs of a particular organisation and the skills and services they require. To some extent a contract will be signed with an outsourcing company regardless of nationality: the right cultural fit must be the most important consideration.
Our decision to partner with Qubiz, based in Oradea, was the result of years of experience working with different companies of all shapes and sizes in different destinations both near and far.
In 2012, Marrable Services established a bespoke development house in Cluj Napoca for Thomson's Online Benefits and it is this experience coupled with knowledge gained from consultation with other professionals both in the UK and US that leads us to recommend Romania amongst other CEE destinations. Since then Marrable Services has developed a close working partnership with a Romanian software development house called Qubiz.
The Romanian Advantage
Impressive Language Skills
Although the official language is Romanian, a large part of the population is multilingual. The Eastern European Translators Association classed Romanians as "the best foreign language speakers in Eastern Europe". In Bucharest 75% of those aged under forty speak English as a second language. If an accent is present, it is more often an American one therefore avoiding thick accents hindering comprehension.
A highly Educated Workforce
Romania has a total workforce of 9.35 million with an estimated 64,000 IT specialists, placing it sixth in the world for its number of certified IT specialists. Microsoft has recognized Romania's clear potential to become one of the leaders in information technology, and attribute this to the ability to excel by students, researchers and entrepreneurs in information technology.
Romania has a highly literate population, placed ninth globally. Nine percent of its population is university educated, and science and technology graduates are around 20 percent of total graduates annually. Romania produces around 8,000 computer science and electrical engineering graduates per year, many excelling in advanced research and development.
Access to Talent
Although Romania is growing in popularity as an outsourcing destination it has not reached the saturation point of other territories. This, coupled with the continued emphasis on engineering and technology in the education systems, should maintain a healthy talent pool for the foreseeable future.
Low Attrition Rates
Romanian people are family focused. There is a great climate and outside of the cities, in places such as Cluj Napoca and Oradea, a beautiful environment. For professional workers there is a good standard of living and with a stable workflow being provided by overseas investment in IT outsourcing. Therefore there is no imperative for professional workers to seek economic migration.
Low Cost CEE Destination
Amongst Eastern European destinations, Romania ranks eighth on cost and the most inexpensive country within the EU states, other than Bulgaria.
It is in this area that we think Romania scores most highly. From personal experience we have found Romania service providers often combine high levels of technical proficiency in leading-edge technologies with soft skills - communication, languages, flexibility, that are superior to that typically found in other outsourcing locations.
An intelligent and questioning approach is brought to each project, alongside a desire to innovate and add value.
Excellent Technical Infrastructure and Government Support
The growth of the IT industry is supported by both the IT ministry and the Agency for Foreign Investment (ARIS). The government have adopted a set of measures to develop the IT industry including the consolidation of the national information infrastructure, accelerating the construction of an information society, education, training and nationwide IT projects.
The Global Competitive Index has given Romania a score of 4.2 for economic competitiveness and stability. Similarly, its macroeconomic stability is also average at 4.5, comparable to the Philippines, Hungary, Poland, and India.
And Finally Why Qubiz?
So when we made the decision to expand Marrable Services to include our own software development services we knew that we needed to find a partner company that could fulfill the following criteria:
• Based in Romania, though preferably not in Bucharest
• Medium sized, with the potential for growth
• A one stop shop - the range of skills and experience to deal with any project or enterprise need
• A proven system of project metrics to monitor project performance
• Good range of IT Skills
• Senior Developers with 5 years+ experience
• Consultancy capability
• Technical Architects and Business Analysts on board
• Experienced in a good range of industries and sectors
• Ability to work from Business Need through to End Solution
• Solid infrastructure
• Agile development methods
• One team approach
• High employee retention
• High utilisation rates (90%+)
• Right approach to Knowledge Transfer and Innovation
On meeting Qubiz CEO and owner Marcel Anghel, we were immediately impressed by his acumen and business approach. An affable person, he is a serial entrepreneur, and is now building his 3rd Software Development Company with the emphasis on quality, service and value. He also has interests in property - office and leisure real estate - which means he can quickly expand his operations to accommodate larger projects.
With his latest company Qubiz he has more than 5 years experience in nearshoring for clients from the Netherlands, United Kingdom, Belgium, France and the USA operational in different industries, including: Healthcare, Social Care, Professional Services, Financial Services, Public Services, Education, Leisure and Hospitality, Manufacturing, Media, Logistics and Real Estate. He has wide experience of building and supporting core products.
Qubiz is a company of 60+ people, based in Oradea, with another satellite office in Cluj Napoca, both centres have easy access to a high quality graduate pool. Marcel is very focused on his staff and uses a range of incentives and a clear training and career path to ensure his employee retention, which is currently exceptional at more than 90%.
The company is fully experienced in Agile delivery with SCRUM as de-facto standard in the company.
Project Team Performance - Measurement and Analytics
The delivery of quality services is an important concern, and Qubiz therefore have Project Management and Technical Councils overseeing all operational processes striving for continuous improvement by a system of measurement, analytics, improvements and controls.
Each project is measured on the following factors:
This is a measure of the time each team member spends directly on the project, with an industry average acceptable rate of 80% and a high of 90 - 95%.
Balancing staff time to allow for training, knowledge transfer and mentoring must inevitably take time from project. Qubiz still maintains a 90%+ utilisation rate.
Although software development is complex and not a repetitive process like manufacturing, we believe quality can be measured by the number of bugs per iteration based on severity, priority, impact and amount of re-work. Less than two P1's and less than three P2's per quarter caused by software bugs are within an acceptable range - this is of course debatable depending on the service.
Velocity is a capacity planning tool often used in agile software development. The velocity is calculated by counting the number of units of work completed in a certain interval, the length of which is determined at the start of the project. Velocity can increase as a team gels together and begins to fully understand the project deliverables. This ultimately means that the capacity of the team is increasing. Team velocity is calculated at the beginning and end of each project iteration usually every 2-3 weeks.
Working in an agile environment with small product increments delivered every 2-3 weeks and with such a close working and collaborative relationship customer feedback is continuous.
To ensure long term client satisfaction both with the team and with the outcome of the project, every six months feedback is collected from the employees of the client that were involved in the project. The system measures three metrics: commitment, quality and communication both at team and individual level.
The Proof of the Pudding
Perhaps one of the most important aspects of Qubiz's approach is their willingness to take on smaller projects in order to prove how they can offer better value. Beginning with a smaller project makes sense for all concerned as it gives the client an opportunity to test the supplier, and also the supplier an opportunity to really get to know and understand the business.
In February 2013 Thomsons OnLine Benefits decided to engage with Qubiz engineers to work on their core SaaS product. This decision was partly driven by a larger existing supplier being unwilling to take on a small project. Happy with the way this was progressing they expanded the team working on the core SaaS product to include QA staff and to take on a small team to deliver a project on behalf of the M.O.D. More information on this project and others, including project metrics, can be found in case."Also read this article by Chris Piskorski at Poland based IT services firm PGS Software about outsourcing to Eastern Europe: Close Enough, But Far Enough