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.
This was first published in June 2005