Which “shore” is right for the SME: onshore, nearshore or offshore?
As technologies converge facilitating the easy transfer of documents and data, and as communications improve to allow the provision of services anytime, anyplace, anywhere; the question has emerged in the world of SME outsourcing: “which is better: onshore, nearshore or offshore?”
What is the difference between the “shores”?
Let me start, for the avoidance of doubt and confusion, with what I think the different “shores” are.
Offshoring is when high-volume, low-complexity tasks are processed in a country with a significantly lower cost base than, for example, the UK: traditionally India, where the service has become more sophisticated, but more recently China, the Philippines, Malaysia and some South American countries.
Similarly nearshoring is still moving tasks overseas, but to a neighbouring country. For Western Europe this is to Eastern Europe, for the United States this is to Canada and Mexico. The cost base of these countries is still lower, but geographical proximity and cultural similarities can create an easier working relationship. The better relationship, culture and communications can result in more complex work being transferred.
Both offshore and nearshore outsourcers provide a systematic, transaction-based service. Onshore, on the other hand, is an entirely different proposition, it is the practice of obtaining business-critical, high-level services from someone not employed by the company but within the same country. Onshore services are not “one size fits all”; they are unique for each company.
But what are the needs of an SME – are they really that different?
Whilst the needs of a quality organisation (large corporation or SME) are similar, the problems they face are quite different. The majority of SMEs turn to outsourcing either through foresight – a business decision to concentrate on core activities – or as a result of a significant problem, which they believe outsourcing might fix. For larger organisations, on the other hand, the need will probably be primarily cost-driven.
The character of the outsourced service is also quite different for these two beasts. Outsourcing for the large company is frequently referred to as BPO (business process outsourcing) and more commonly associated with large volumes of low complexity transactions with an easily defined SLA (service level agreement) and easily measured outcomes. Conversely outsourcing for the SME is about bringing crucial skills into the business with more complexity and a higher value-add to a less predictable, and at times capricious, environment.
There are also differences in the economic model. Larger organisations will accept long-term contracts in return for guaranteed savings. The cost-sensitive SME is still considerably more aspirational and has much shorter time horizons. The SME has no idea if it will be a national, let alone an international business. Perhaps it doesn’t even know what its key products and services will be in five years’ time.
Timescales are another key difference. The large company is reassured with a three-to-six-month implementation plan but the SME needs help now. They need providers that are light of foot and can mobilise the service quickly with the business not dependent on an IT department.
Finally there are technology differences. The larger company can be easily pushed to one of a handful of ERP (enterprise resource planning) packages. But whilst the smaller SME can be migrated relatively easily to another package, for the larger SME, who may have a very specific industry application, or bespoke solution, it isn’t going to be easy moving to one or two best-of-breed solutions.
The future’s looking brighter but not yet clear
If it’s not already complicated enough, significant changes are occurring within the labour market. The movement of labour from one country to another has never been easier. The workforce are astute, and fully aware of their marketability and consequently are ready to ‘jump ship’ to an alternative employer on a whim.
These changes can only mean one thing: an increase in labour costs within the traditional offshore and nearshore territories and consequentially a slow but sure whittling away of the massive cost advantages of these services.
Thus we enter a new and exciting era. There has always been a range of good quality outsourcing services for the early stage and smaller growing SME, and the large companies have been well served by the large BPO outsourcers but really good outsourcing solutions are now available for the first time to the larger SME organisations. These solutions offer a combination of labour arbitrage, advanced technology and business process know-how. The issue for the larger SME is how to put the infrastructure and process in place to facilitate the move to becoming a larger business. And this is hard – hence the prevalence of SMEs over larger companies. These new solutions offer SMEs Business Process Enablement.
Interestingly the large traditional BPO providers are frantically working out how they can put solutions into this space either through acquiring smaller outsourcers or developing more flexible and easier to install tools.
Likewise smaller outsourcers are actively engaging in partnerships and joint ventures with larger BPO providers in order to give them scale and access to technologies and offshore resources.
But there are going to be tears; if this were easy it would have been done by now. The BPO provider does not possess the higher value-add services knowledge or teams with experience of working across multiple clients and the smaller outsourcer does not have the financial engineering and commercial skills to sell a large, long-term contract. The BPO provider is like a tanker sailing in the Indian Ocean (finding it difficult to change course and sailing into a dangerous waters), the SME services provider is like a pirate speedboat (agile, adaptable and audacious). Either one is capable of sinking the other.
Which “shore” is the right one for the SME?
The answer of course is now irrelevant, but if you need one then it’s “mixed shore”.
The SME, small or large, needs a service which balances value, quality and flexibility. The key focus for this solution is not primarily cost saving (although this is an important element) it is about Business Process Enablement – supporting the SME in their journey to becoming a larger organisation.
Initially this will involve an onshore team to solve the burning issues (remembering that this is the initial reason the customer has looked at outsourcing) before gradually migrating to a mixed onshore and offshore solution including the technology platform. The mixed shore solution will involve transferring the bulk of processing to offshore – utilising the benefits of labour arbitrage, but retaining onshore a strong working relationship and higher value-add services; for example in the financial sector this would be activities such as strategic planning, reporting, budgeting, treasury and working capital management.
Is it worth all the hassle? Yes! In the first place it is no longer fashionable to become a huge conglomerate – in the words of Peter Drucker “Do what you do best and outsource the rest”. The model of outsourcing core activities, concentrating on what you are good at has been proven again and again. Secondly in order to grow market share the larger outsourcers have got to engage with tomorrow’s big companies early – while they are still mid-sized. Finally, and perhaps most importantly the days of labour arbitrage are growing increasingly short. The focus will be on Business Process Enablement, value added services, and technology platforms – not a “shore” in sight.
The key issue for the SME is not which “shore”, but which partner. Which partner can provide a broad range of flexible, mixed shore, multi-platform services which will enable their businesses to grow to the next level?
About the Author
Mike O’Connell is the owner of Isosceles Finance Limited, a leading provider of outsourced business accounting and HR solutions for SMEs. He has significant experience working with investors, entrepreneurs and companies of all sizes. This experience highlighted the need that emerging and growing businesses need an effective accounting and HR function just as much as established corporations.
Mike graduated from Imperial College London as a mechanical engineer, qualified as a Chartered Accountant with Ernst and Young in London before becoming CFO at Systems Integrator Pacific Group PLC.