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With the rise of digital technologies, nearshore IT service providers’ traditional strengths acquire special importance. Mid-sized Latin American service providers, such as Globant and Softtek, and Eastern European providers, such as Ciklum, Luxoft and Epam Systems, have experienced a growth trajectory unique to suppliers in this category.
Mid-sized nearshore providers focus on high-value service lines with low price sensitivity, experienced product engineering resources and programmes central to the client’s revenue streams and/or brand perception. They do not compete on cost and scale.
Without strong application maintenance and support practices, however, most mid-sized nearshore IT services providers lack a deep understanding of legacy environments and how to transform them as part of end-to-end digital transformation initiatives.
Many clients that traditionally hired design specialists and had development-only engagements with nearshore technology providers are now reconsidering their strategies. They often cite “coordination issues” and say “design firms don’t get what’s technically feasible” as reasons to hire nearshore suppliers for both design and development.
The stronger mid-sized nearshore providers are those that combine what nearshore providers have traditionally been good at – digital customer experience (CX) – with competencies in digital operational excellence technologies such as business process management (BPM) and robotic process automation.
Lacking scale, and at a distinct cost disadvantage compared with the India-centric service behemoths, these IT service providers have engineered a value proposition predicated on high-value services, bringing together technical depth, business thought leadership, and physical and cultural proximity.
According to research from Forrester, in most offshore suppliers, agile practitioners are still a minority in the development workforce. However, nearshore providers are more likely to have cross-trained developers and less likely to have tool-specific silos – some are already talking about full-stack developers.
Look for digital excellence
Digital transformation initiatives entail stringing together digital customer experience and digital operational excellence programmes. IT service providers can help by assembling relevant capabilities into a cohesive theme through consulting and knowledge of business models and practices specific to the industry sector in question. In addition, most digital transformation projects require extensive legacy modernisation.
While nearshore providers bring together strong digital CX capabilities and some digital operational excellence competencies, most do not have strong legacy modernisation practices. When assessing nearshore providers, CIOs should ensure the providers’ digital operational excellence platform capabilities are credible. Nearshore providers’ practices around digital operational excellence technologies, such as BPM, are smaller than those of their offshore peers. For example, the largest nearshore providers have hundreds of developers certified in Appian, Pegasystems and systems from IBM and Oracle, while offshore providers have close to 1,000. Nearshore BPM reference cases tend to be closer to the customer lifecycle and less about internal process efficiency. Their robotic process automation practices are much less developed and do not compare well with those of offshore providers.
Nearshore success stories here include Epam Systems’ implementation of Pegasystems at a Canadian bank to better match banking products with clients, and a rules management system to build an international hotel chain’s loyalty management system.
Consider legacy modernisation capabilities
Forrester recommends that CIOs consider the provider’s legacy modernisation capabilities. Nearshore IT service providers have historically not had large application maintenance and support practices, and their essential legacy modernisation competencies, such as application portfolio analysis and rationalisation, are not well developed.
In addition, many nearshore providers have no practice around enterprise resource planning (ERP) applications, the modernisation of which often underpins digital transformation programmes.
Lastly, nearshore providers tend to lag behind on software as a service (SaaS), which is increasingly used for the migration of legacy apps. This does not stem from an aversion to the cloud paradigm, but from their limited presence in the business applications domain.
When is mid-sized too small?
Forrester urges CIOs to remain cautious when looking at mid-sized providers, since projects requiring scale will still prove to be a challenge.
A supplier taking on large-scale, end-to-end digital transformation requires strength in numbers.
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In conversations with reference clients of a range of nearshore IT service providers, Forrester rarely found an engagement involving more than 100 resources. Several said that in the event of the need to scale rapidly beyond 100 employees, they would have to look beyond the mid-sized nearshore suppliers.
As one mid-sized nearshore IT service provider acknowledged, while comparing his primary country of delivery with India: “Whether it’s design, consulting or software, you have to remember the 1:10 population ratio.”
It is also worth taking into account that most mid-sized nearshore providers have a distinct consulting organisation and a contingent of hundreds of full-time consultants. However, for industry sector knowledge and the ability to surface new ideas, the typical nearshore IT service provider does not rely primarily on business consultants, but technology personnel who have acquired industry experience through long stints at a particular client or in a given industry.
Business consulting rarely came up in reference calls – clients spoke highly of the suppliers’ knowledge of the sector and industry processes, but they had account managers, business analysts and developers in mind, not consultants.
Most clients Forrester spoke with engage both nearshore and offshore providers, are aware of the distinct competencies and trade-offs the two groups entail, and have a stated or implicit policy of matching each type with one particular kind of requirement. In the words of the CTO of a well-known media company: “The firm I look to for managed services, network operations or legacy – anything you might fit into an ITIL (Information Technology Infrastructure Library) framework – is not the firm I look to for agile, product management and analysis. I look to a different kind of provider.”
Overall, Forrester’s clients indicate that mid-sized nearshore IT services providers’ distinct value propositions align well with their digital CX needs. Mid-sized nearshore providers offer strong design skills, digital customer experience platform capabilities, software product engineering, innovation and thought leadership, agile development practices and maintenance of front-end applications.
This article is based on an extract of the Forrester report, “Evaluate mid-sized nearshore service providers for your business technology”. Somak Roy is a senior analyst at Forrester.