Nearshoring refers to outsourcing work to nearby countries, where the work day with clients broadly overlaps, business cultures are similar or well-understood, language barriers are minimal, travel time/costs are relatively low, and trade agreements are beneficial. In the business of software development outsourcing, nearshoring in the Americas has been spoken of as the “next big thing” for more than a decade. So, the question is, over the past decade, has nearshoring lived up to the hype? Are clients really benefitting from leveraging the touted advantages of nearshore service vendors?
Does Nearshore Live Up to the Hype? It Depends
When nearshoring began to be discussed in articles by analysts, one of the leading positive factors was said to be the relative cost of skilled resources in a fully-loaded project cost analysis. While it is true that there are always cheaper resources somewhere on a simple hourly cost basis, the total cost of engagement (TCE) for resources located in geographically distant areas of the world, could easily end up costing more than nearshore or in some cases, even local resources. This part of nearshore value is still a valid argument today, although it must be said that the rise of the cost of living and wages in top nearshoring countries like Mexico, Brazil, Costa Rica, and Argentina have lowered and in some skill categories, restricted that advantage. Although the recent changes in the cost of oil have hit the GDP of many countries in Latin America, tech sectors have continued strong growth, which has put pressure on the cost of available resources. In fact, contributing to this strong growth has been the influx of global outsourcing firms adding staff in centers in the region. Analysts have predicted the compound annual growth rate of outsourced IT services in Latin America to be between 8 to 11% through 2019. This matches the global predictions for growth in outsourcing globally, said to be around 10%, with the United States as the largest buyer of outsourcing services globally at 66%.
So, on the basis of growth and sales, there is evidence that nearshoring is a successful strategy broadly. Backing up the assessment is the ranking of Mexico as the 4th in the world among outsourcing locations and the most attractive in Latin America by far. Among the advantages that pushed Mexico to that position, Johan Gott, senior manager at A.T. Kearney cites, “The nature of work has changed from being very transactional and labor-arbitrage focused to becoming more of a collaborative partnership between colleagues in different countries.” This move to a collaborative work environment is fostered by the basic advantages of nearshore relationships between teams.
So, if you are looking for a simple hourly cost advantage, it must be said that nearshoring is not likely to be a winning proposition. But, if your project requires direct collaboration and interaction between members of a development team, as is the case increasingly, nearshoring is being accepted widely as the solution.
What is Driving Nearshoring?
There are several new factors driving nearshore services to the front of outsourcing for software development:
- The continued acceptance of agile as the standard methodology in the field and the growth of understanding that agile can only be successful in a highly collaborative environment and with a bias to the continuous improvement of software assets over their lifecycle.
- The improvement in the quality and size of the skills pool in Latin America in comparison to the Asian-Pacific region. Although in total value, the Asian-Pacific region still leads in outsourcing contracts, much of the work is basic and not considered to be high value and strategic. Where strategic projects are involved, nearshore providers are increasingly preferred.
- The growth of DevOps and the flattening of the silos within the deployment pipeline of software within organizations using continuous release strategies is reaching into outsourcing relationships and increasing the need for highly collaborative, cross-functional teams. Resources with the skills only exist in countries with strong pools of experienced providers and can only be effectively tapped in nearshore partnerships with dedicated teams.
The perception of lowered expectations for new graduates in STEM fields (science, technology, engineering & math) relative to the need in the US. The actual number of jobs and resources needed in different areas are debated, but in many industries, the facts are real enough to drive organizations to start building nearshore partnerships and capabilities to fill their needs. Although sourcing generally has tended to shorter cycles, as software development practices mature, the value of successful outsourcing relationships is increasing, and nearshore has been moving along with that trend.
- Security and geopolitical risk – As risks in the global scene continue to multiply, closer, better-understood situations are considered more positively. Although many in the US have read stories in the media about problems in Mexico and other Latin American countries, their prominence has decreased in relation to media reports from other regions and comfort has grown because of increasing tourism and understanding throughout the Americas. Long-standing trade agreements like NAFTA and the increasing trust shown by global manufacturing and supply chains in Latam have also contributed greatly.
- In countries like Mexico, the investment in education, infrastructure and business have provided an atmosphere of maturity that makes it easier to find partners and do business in the region. Travel is relatively quick and painless in comparison to the more than 20 hours each way it can take to reach a provider in Asia and visa requirements are relatively low for business travelers. Language and cultural barriers have been lessened by globalization and many universities require English proficiency for graduation. These areas and others have made outsourcing in the region an easier choice.
Not All Vendors, Not All Projects
So, it would appear that nearshoring is indeed living up to its promise – it is growing and becoming more accepted every day. But it should be said, nearshore is not a panacea. If your vendor is new to the field or does not offer all the services and skill levels you need, you may not be able to get the results others have found. Some vendors focus on certain fields or types of offerings – you will need to check that their focus matches yours. If you are just looking for a low cost on an hourly basis, it a nearshore vendor not be the best choice. If your project is fairly simple and small, there may be better ways to pursue it, although that is often the way buyers try out a vendor before launching into a larger relationship. And, be ready to take advantage of one of the benefits of nearshore – you should travel to their development center and see their operation if at all possible. Seeing the team, how they operate, where they work, and their environment can go a long ways to clearing up misconceptions and putting the relationship on a positive path.
Nearshoring for software development is well beyond where it was ten years ago when it was still considered a fairly new and somewhat risky offering in the industry. Virtually all the global outsourcing industry leaders have centers and staff in Latin America and offer a wide range of services. The types of offerings go from very broadly serving all IT outsourcing needs to very specific mobile app developers or Internet of Things (LoT) builders. Many vendors have offices in both the US and their home countries, so you can be assured that their business practices match global standards and expectations.
If you have a project that you think could benefit from a nearshore approach, Scio is ready to help. We have offices in Austin, Texas and our development center is in Morelia, Mexico. We have over 14 years of experience in enterprise level nearshore outsourcing, using agile practices, for our clients in North America. Please contact us for more information.
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