Pay the price of a low price, or why nearshoring is replacing typical offshoring
Many people ask themselves if price should be the most important factor in the process of selecting an IT service provider. Is the cheapest option always the best one? It might be true, but there are some conditions. In this article, you will learn why many companies have ditched outsourcing for nearshoring.
From deep roots to modern outsourcing
In the 19th century the idea that some parts of operations could be outsourced was planted in the heads of the first visionaries. The spread of the telegraph and railroads encouraged firms to serve larger markets. These technological advancements made it possible to serve customers in very distant countries.
In the 20th century the process speeded up and an American company named Automatic Data Processing (ADP) started to offer its business services. The idea was very simple: clients provided ADP with empty payrolls, and the company took care of the calculations and prepared paychecks. This simple idea evolved into what we now call outsourcing because companies could always find new resources and better suppliers outside the firm.
Modern models of outsourcing emerged in the late 1980s and 1990s with the profound leap in internet technology and software . For the past 30 years firms have been focusing on their core business and contracting out everything else to specialists. From the beginning, outsourcing was associated mainly with India. Even now almost half of all Fortune 500 companies choose to outsource software development to Indian outsourcing firms. Wise educational policies on the part of the Indian state led to the development of a highly qualified workforce. However, the most significant competitive advantage had a purely economic basis: thanks to lower wages the same tasks could be performed much cheaper than in Western Europe or the United States. Even though Indian workers may not be as productive as their Western counterparts, it was still worth it. The story would have ended at this point if some challenges had not emerged.
Trouble with outsourcing: red-eye flights, a need for better specifications and difficulties in everyday communication
Imagine a company headquartered in Berlin that has outsourced its IT operation to India. Gurgaon, a city in the Indian state of Haryana, is one of the most plausible locations for their remote workers. This deal works really well: local people have work, and our hypothetical company can just calculate profits. This ideal picture can become distorted, however, if anything unexpected happens: a flood, internal system error, or a security flaw discovered a minute ago. Usually, such events require someone to meet the IT provider and discuss the rescue plan. Travel to Gurgaon from Berlin takes at least 14 hours – not to mention the inconvenience of plane changes and time differences. Even if a face-to-face meeting is not absolutely necessary, it can be difficult to work with people who have just been woken up in the middle of the night – indeed, it may even mean that critical problems are not fixed right away. Conversely, having a provider closer to our hypothetical location – for example in Poland or the Czech Republic (1.5 hours by plane) can help lower the overall risk of an existing offshore project.
Even in a less pessimistic scenario, some problems can occur. Let us return to the German company and suppose that it has not experienced any difficulties, but just needs to examine the current status of the project or just make a minor modification. According to Ian Marriott, Vice-President of Research at analyst firm Gartner, “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”.
Marriott also emphasises that 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…. If we can communicate more effectively, productivity could increase.”
Nearshoring and emerging markets
These issues inspired dynamic companies to think of other outsourcing destinations. Some experts note that moving across a close country border without crossing an ocean is a good way to define a nearshore contract. Nearshoring is a model under which services are rendered by suppliers from the neighbouring region – in the case of Western Europe, this would mean, especially, Eastern and Central Europe. Under this model, problems characteristic of offshore outsourcing either do not occur at all or can be eradicated very successfully. Employment costs are still considerably lower than in the UK, France, Germany, or Switzerland (not to mention the USA). Although the wages are higher than in Asia, the value of services is still in favour of nearshoring. Additionally, countries which are members of the European Union operate under a uniform set of data protection regulations, so the security risk is much lower.
Companies that have chosen Central Europe can benefit from the knowledge of some of the best programmers and IT specialists in the world. For instance, one recent rankings survey shows clearly that the skills of the developers in Central Europe are better than skills of specialists from traditional outsourcing destinations. The average score across all HackerRank challenges put India in 31st place, just above Mexico, ranked 33th. Brazil was ranked 38th, and Pakistan occupied the last (50th) place. In the same ranking, Poland was 3rd, Czech Republic 9th and Bulgaria 12th.
Are you looking for the cheapest offer or a really great deal?
Traditional outsourcing can be compared to the purchase of a simple, entry-level laptop. While it is sufficient for most everyday office tasks, it may encounter some problems with more complex processes: the battery may die, some components may become unavailable, or even unexpected errors may occur. The equivalent for outsourcing to Central Europe is a solid machine designed especially for business. It is durable, has s strong performance, and is reasonably priced. Obviously, it is still cheaper than top models, but it should be just enough for everyday office work. The budget option is obviously cheaper but the second one is more reliable. You pay only a small premium to be on the safe side. For instance, Comarch outsourcing gives customers access to thirteen data centres located all around the world. With our roots in Krakow, Poland we offer our partners reasonably priced high-quality services. For years, our philosophy has been nearshoring, not offshoring.
About the Author
Pawel Szymanski, Business Solution Manager, Comarch