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Nearshoring? I thought it was called offshoring? |
Authors: Bart Roseboom, Pradyot Patil, Purvesh Baghele, Sander Østvik
This is the third and final post in a series of blog posts about nearshoring in the context of globally distributed software engineering. If you haven’t read our first and second posts, we suggest that you do so before reading this one. Until now in our blog posts we discussed the benefits of nearshoring, key success and failure factors for nearshoring and case studies related to nearshoring. In this blog we discuss the future of nearshoring.
If you would like to quickly jump to a topic within this blog post, you can do so here:
- Human Capital shortage will drive Nearshoring
- Increasing Automation
- Quality Control and Security
- Geographical Proximity and Need of Increased Integration into Organisation
Image credit: EFTA
In the last two-decade nearshoring has caught up some speed world-wide, especially in Europe. Regions like Central and Eastern Europe regions have been popular candidates for nearshoring for Western Europe [1]. Another example is Mexico, where operations from the USA are being increasingly nearshored. The nearshoring approach does not necessarily provide the biggest cost-savings but is associated with lower risks and more control over product. A study [2] of nearshoring activities by Scandinavian countries in Lithuania shows that nearshoring is no longer driven only by cost minimisation, but more by access to strategic assets, markets, and Intellectual Property Rights (IPR) related factors.
Drawbacks of offshoring to distant countries also makes nearshoring a better option. Impediments such as different time zones, cultural habits and work ethics are some of the drawbacks. Further, we discuss some global trends that could lead to the emergence of nearshoring as a new standard for the IT industry.
Currently, the IT industry is booming in Central and Eastern Europe thanks to offshoring by Western European firms with the advantages of shared EU institutional settings, which include the legal and regulatory environment, full protection of intellectual property rights, and data protection legislation [3]. One of the main factors behind the delocalization of the IT sector is not related to cost benefits, but primarily to human capital shortages in origin countries, and to expanding markets in the host countries.
In Central and Eastern Europe, there is flexible human capital with a very high level of competence. For example, one such region in Central Europe is the South of Italy, a potential destination for nearshoring [4] because of its relative lower wages (about 30% less than of those of Northern Italy), the availability of a skilled workforce (about 22,000 graduates in technical domains every year) and number of technical firms (about 20,000 ICT firms) [3].
Automation using AI and ML is on rise now more than ever, which leads to less manual labour in production. Software development has also changed over the years due to intervention of automation: from coding to testing to deployment. Automation in software development leads to less requirement of workforce in development. However, it leads to increase in monitoring and support activities. Nearshoring approach provides more over-lapping work hours which suits the purpose of monitoring and support.
Moreover, developing AI and ML based software needs workforce with expertise such as Data Scientists and Engineers. With more and more organisations gathering data and hunting for data scientists, acute shortage of highly skilled data scientists [5] is a persisting barrier and is going to be one of the major problems in future. This barrier further fuels the impetus for organisation to outsource AI/ML development. However, with AI being used to solve customer problems, organisations require data scientists to grasp company specific environment and all its nuances in order develop a product fit for the customer use case. For the above purpose nearshoring approach fits perfectly; more overlapping work hours, less difference in culture and work ethics makes it easy to collaborate.
Image credit: betanews
Due to rising need of rapid adaptation to customer demands, stricter quality controls and intellectual property protection; IT services and software development companies might look forward to nearshoring their activities [3].
However, one of the mains risks of nearshoring is security. This can not only include data security, but also the security of the employees and the offices. While data security can be maintained in the cloud, putting employees at risk can present its own set of problems. If the office is in a dangerous location (for example some Latin American cities), or the team members are at risk, it will surely affect the quality of work [6].
The geographical location of your software outsourcing team can have a massive impact on results. We have discussed issues like intercultural communication and time differences which can have a significantly negative impact on software developers’ outcomes [7]. For this reason, in future as more and more regions offer attractive IT outsourcing options, the more companies will be likely to look closer to home. Shorter distance would mean it’s much easier to hold in-person meetings with your software development outsourcing team.
Being geographically close is not only convenient for executives, but it also means that travel costs can be reduced dramatically. For example, it takes an average of 25 hours to travel from the U.S. to an offshore location in India or Asia [8].
In Globally Distributed Software Engineering (GDSE) it is important that everyone works with same standards and in the same kind of environment. Hence, in future software development will have to be integrated into the organization as if they were an internal team. This applies to every aspect of the relationship, from instituting similar DevOps processes to building a relationship as if they worked in the same office [8].
Innovation stems from creativity, and the latter is amplified by trust. It's difficult for a team to be innovative and creative if they don't understand the person and organization they are working with. There is very low motivation to attempt any form of innovation if the organization contracting their services doesn't show interest in them. Furthermore, treating software outsourcing team as part of organization will result in applying the same standards, checks, and processes as done internally in the organisation. This is especially important and useful when it comes to security, which is becoming a serious concern.
In general, offshoring has been proven to be excellent management tool when done correctly for improving cost, productivity, and quality. However, with changes in economic factors across the globe, organisations need to reconfirm their strategy. Moreover, there are many emerging attractive nearshore locations for USA and Western Europe, which will have increasing role to play in future of nearshoring. We do not suggest that far shoring will disappear as a viable strategy; however, nearshoring helps in overcoming some of the drawbacks of far shoring discussed in this blog. Rather, a consideration of nearshore support/delivery should be part of any outsourcing decisions and increasingly, we believe, organizations must diversify their portfolio of nearshore and offshore operations in order to minimise economic, operational, geopolitical and cultural risk, while optimising competencies and costs. Organizations need find flexible balance between far shore, nearshore and onsite delivery, suggesting combination of far shoring and nearshoring a better alternative than just far shoring or nearshoring.
We discussed several factors which will likely drive the trend of nearshoring in near future. The future looks quite bright for software development nearshoring as the market will continue to grow and some companies start to think about reshoring (then settle for nearshoring). After all, nearshoring enables companies to be economical and take advantage of highly skilled talent that they might not otherwise be able to access. And since talent shortages are only going to get worse, it looks like software development outsourcing teams are going to become increasingly valuable.
That concludes our series of blog posts about nearshoring in the context of Globally Distributed Software Engineering. We hope you have enjoyed the series and learned something new that you can take with you!
[1] Micek, G., DziaŁek, J., & Górecki, J. (2011). The discourse and realities of offshore business services to Kraków. European Planning Studies, 19(9), 1651–1668. link
[2] Slepniov, Dmitrij & Brazinskas, Sigitas & Waehrens, Brian. (2013). Nearshoring practices: An exploratory study of Scandinavian manufacturers and Lithuanian vendor firms. Baltic Journal of Management. 8. 10.1108/17465261311291632, link
[3] Benedetta Piatanesi and Josep‐Maria Arauzo‐Carod. (2019) . Backshoring and nearshoring: An overview link
[4] NetConsulting. (2014). Il nearshoring made in Italy. Opportunità e vantaggi. link
[5] Jen DuBois. Is There a Data Scientist Shortage in 2019? link
[6] Allan Seeman. Why is Nearshoring a Smart Alternative for Software Development? link
[7] Khan, Arif & Keung, Jacky & Hussain, Shahid & Bennin, Kwabena. (2015). Effects of Geographical, Socio-cultural and Temporal Distances on Communication in Global Software Development during Requirements Change Management: A Pilot Study. ENASE 2015 - Proceedings of the 10th International Conference on Evaluation of Novel Approaches to Software Engineering. link.
[8] PSL Corp. IT Outsourcing: A Look at What the Future Holds. link