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Nearshoring? I thought it was called offshoring? |
Authors: Bart Roseboom, Pradyot Patil, Purvesh Baghele, Sander Østvik
This is the second post in a series of three blog posts about nearshoring in the context of globally distributed software engineering. The previous post gave an introduction to the concept of nearshoring, compared it to the more traditional offshoring, and further explained how nearshoring can be beneficial in terms of minimizing cultural distances. If you haven’t read it yet, or just want to recap your memory, you can read it here. This post will showcase some of the success factors of nearshoring, along with some factors that can potentially turn into failure factors if they are not taken into consideration. Furthermore we are presenting a case study of Softtek, a Mexico-based IT company that has really found success through the use of nearshoring.
If you would like to quickly jump to a topic within this blog post, you can do so here:
Image credits: NEA
The main success factor of nearshoring is the fact that the outsourcing vendors are located geographically closer to the outsourcing client when compared to offshoring. This is due to the several positive effects that occur from minimizing the distance, as the book 'The Software Industry: Economic principles, strategies, perspectives.' explains[1]. We will now go into detail on some of these impactful effects.
To fully reap the rewards from nearshoring it is important to choose a location that is in the same or similar timezone as the rest of the company. When compared to offshoring, this similarity in timezones ensures that progress is not halted, as one team does not need to wait for another isolated team to continue the progress 12 hours later. Instead, as the window of when real-time communication like video- and telephone-calls are possible increases, it allows for finding solutions in real-time and enables the remotely deployed virtual teams to continuously collaborate throughout the workday.
While similarities in time zones increase the velocity of decision making and coming up with solutions, it can also have a positive effect on the level of trust within the teams, as the first blogpost in this series showed. Through shortening the distances and differences in time zones, the language- and cultural barriers get minimized. This leads to several factors that in turn helps increase the level of trust between the members of a team[2].
The same study stresses that face-to-face meetings are considered irreplaceable when it comes to develop and repair trust in virtual teams[2]. This is one more point in which nearshoring has the upper hand against offshoring, as another benefit that comes from having the outsourced location closely located to the main organization is that travel becomes cheaper and less time-consuming. This allows for more frequent in person face-to-face meetings, whether it is the manager of the outsourcing client that visits the vendor, or if it is geographically distributed members of the same team travelling to work co-located for a while, increasing their bonds.
While the previous three factors have been explained in a way that sheds light on the impact they provide on working distributed, it is also possible to look at them from a more business-minded point of view. By nearshoring, you expand your business organization to not just be located in one place, which allows you to potentially be closer to some of your customers. If a company is serving customers located in the nearshoring vendors’ region, the vendor can be responsible for the communication with the customer. This allows for the time zone-, cultural- and language-differences to be minimized between the company and the customer. In turn, the barrier to spending time onsite and conducting face-to-face meetings with the customer is lowered, and this is a crucial component to a project’s success[1].
Image credits: GO EU
The following factors are not directly success factors, but rather factors that should be kept in mind when selecting a location and vendor for nearshoring, as if they are not paid attention to could turn into failure factors.
As the article A Brief History of Outsourcing mentions, one of the driving factors for outsourcing since the 1990s is based on cost-saving measures. This is why a lot of work has been outsourced to Asia, where the hourly wages are significantly lower than in many of the western countries. However putting this distance into the business processes of software development leads to a negative impact on communication, coordination and control[3]. If cost reduction is either the driving force or at least a desired effect(which it in most cases is) then effort should be put into studying the potential costs you will face when outsourcing to a specific vendor. The salaries being paid determines how much the vendor will charge for its services. Another thing that should be taken into consideration is potential hidden costs. As this paper [4] reveals, sometimes costs related to searching, transitioning to and from, and the ongoing management that is involved in outsourcing to a vendor can halve or even cancel out all the potential savings you would get from outsourcing. This holds true for both nearshoring and farshoring. In order to lower these costs, thorough analyses of potential vendors should be conducted to find out which ones are the best candidates for your need. This ties in with the next factor, which revolves around the infrastructure at a given vendor.
Another reason for wanting to outsource besides reducing costs is the need for accessing skills and knowledge that you currently do not possess in the organization. One example could be that an organization finds out that they would have liked to have employees with more experience within a certain topic, but instead of going through a long process of recruiting and training, they chose to outsource in order to acquire this knowledge. Another case could be that a company quickly wants to capitalise on a new market opportunity, but lack the resources to do so. In both of these examples we see the importance of the outsourcing vendor having the right talent amongst their ranks. This can be further applied to all cases of nearshoring, where it is important to beforehand make sure that the vendor possesses the correct talent for accomplishing the tasks you will assign them. The same can be said for the infrastructure within the vendor, where studies have pointed out that an appropriate infrastructure within a vendor is the most influential factor when selecting a vendor, along with cost-saving[5]. Are the client and vendor a perfect match for each other, or does at least one of them need to change the way they operate in order for cooperation to properly function? Any incompatibilities in either tools or work methods will lead to unwanted hidden costs as the previous factor also emphasised.
Something that might not be the first thing to spring to mind as an important factor in outsourcing work, is the potential differences within the laws present in the outsourceable countries. This is however stated to be one of the big barriers when selecting an outsourcing vendor[6]. With it being such a big barrier, it is really important that you make sure that you know all about the laws set in the country you would like to outsource your work to, in order to prevent potential fines or even intellectual property theft. Now that we have seen some of the key success and failure factors, we will take a look at an example of a company that has successfully implemented nearshoring.
Image credits: GoodFon
Softtek is a Mexico-based IT company founded in 1982. The company offers application software development, testing, security and support, business process outsourcing, and IT infrastructure management. Softtek is headquartered at Monterrey, Mexico but has operations in North America, Latin America, Europe and Asia. Softtek was indeed the company that trademarked the term “nearshoring” referring to their outsourced operations in close proximity.
In the beginning, Softtek was a small IT company that served clients in Mexico. It only had access to a limited market and could not go beyond its country’s boundaries due to import-export restrictions in North American countries. But in 1994, North American Free Trade Agreement (NAFTA) was signed by North American countries, creating a trilateral trade bloc in North America. Due to this, in 1997 Softtek gained access to US markets and implemented their nearshore model.
In the nearshore markets, Softtek was focusing on filling the gaps left by companies from offshore destinations like India. Offshoring, although a cheaper option, has its own caveats. These include language and communication barriers, cultural differences, difficulty in maintaining quality of the software, and time management. In a business where there isn’t much interaction with the client, offshoring makes sense. But when the business requires constant communication between the team and client then nearshoring makes more sense and this is where Softtek found its “sweet spot”. Geographic proximity and similar time zones offered convenience for the company and its clients to work simultaneously. This also enabled them to have more face to face interactions further improving their efficiency in working on complex projects. Moreover, Softtek also had the cultural advantage. Nearshore locations generally offer closer cultural affinity than offshore locations. People in nearshore locations like Mexico, USA,and Latin America tend to understand each other’s lifestyle, customs, and working style more clearly than the people in offshore locations like the USA and India.
Softtek identified the potential of nearshoring and established itself as a prominent IT company that deals with clients in nearshore locations. Softtek has since done various acquisitions which include GE’s Global Development Center in Mexico (another nearshore player in Mexico) and China based I.T United. With several Fortune 500 companies as its clients, 15,000 associates and 30 offices across North America, Latin America, Europe, and Asia, the nearshore approach did really work for Softtek.
Building on the foundation made in our first post, this post has further explored the success factors that come as a result when choosing to do nearshoring instead of offshoring. Smaller differences in time zones, more frequent face-to-face meetings and being closer to the customer are all factors that lead to better coordination and trust within software teams and that can benefit the success rate of projects in the long run. On the other hand, there also exists some pitfalls that can negatively impact an organization if they are not handled with care. Doing a proper study of outsourcing vendors and the country they are located in is important, especially regarding costs, infrastructure and laws and regulations. As we saw, Softtek is a company that has succeeded in doing so, and they have had a great amount of success as a result of their nearshoring approach.
However, the fun is not over yet, and there is still one post remaining in our series. The third and final post will focus on the future of nearshoring through looking at the current situation and trends in the GDSE and outsourcing landscape.
[1] Buxmann, P., Diefenbach, H., & Hess, T. (2012). The software industry: Economic principles, strategies, perspectives. Springer Science & Business Media.
[2] Moe, N.B. and Šmite, D. (2008), Understanding a lack of trust in Global Software Teams: a multiple‐case study. Softw. Process: Improve. Pract., 13: 217-231. doi:10.1002/spip.378
[3] Erran Carmel and Ritu Agarwal. 2001. Tactical Approaches for Alleviating Distance in Global Software Development. IEEE Softw. 18, 2 (March 2001), 22–29. DOI:https://doi.org/10.1109/52.914734
[4] Barthelemy, J.: The hidden cost of IT outsourcing. Sloan Management Review 42(3), 60–69 (2001)
[5] Khan, Siffat Ullah & Niazi, Mahmood & Ahmad, Rashid. (2010). Critical Success Factors for Offshore Software Development Outsourcing Vendors: An Empirical Study. 6156. 146-160. 10.1007/978-3-642-13792-1_13.
[6] Siffat Ullah Khan, Mahmood Niazi, Rashid Ahmad, Barriers in the selection of offshore software development outsourcing vendors: An exploratory study using a systematic literature review, Information and Software Technology, Volume 53, Issue 7, 2011, Pages 693-706, ISSN 0950-5849, https://doi.org/10.1016/j.infsof.2010.08.003. (http://www.sciencedirect.com/science/article/pii/S0950584910001527)