Why Nearshoring Brings Better Value Than Offshoring

Posted: April 19, 2010 in Benefits of nearshoring

Choosing an outsourcing location has always been a question of risk
versus reward. It is obviously much easier to offload corporate IT
function to a local vendor, but it will never provide such significant
financial advantages as outsourcing to an emerging market with lower
costs and taxes. However, the potential risks could be very high
depending on where you outsource your IT. Historically, the companies
have been used to considering Asian locations for satisfaction of their
IT needs. Outsourcing to India, China and other Asian hubs is generally
believed to be cheap and simple. However, the real life practice shows
that it is not necessarily true. Indian or Chinese programming has no
structural integrity, which means that outsourcing tens-of-thousands-

of-dollars
worth software may end up in crashed systems and lost critical data. It
is in part due to excessively low salaries of the Indian/Chinese
software engineers and the lack of incentive to build high-quality
systems with strong architectures. Staff turnover is very high in Asian
locations, sometimes reaching 40% annually, which may have a disastrous
impact on small and mid-sized projects that are most outsourced today.
It is also a norm in countries like India to provide the so-called
“shadow engineers” – non-billable engineers who track the project to
replace the next engineer who leaves. In some cases such shadow
engineers are worth 20-30% of the engineering headcount on a project.
Such practices suggest that Indian providers engage with their clients
through very non-transparent pricing structures, and this fact removes
the cost saving advantage of IT offshore outsourcing.

While being good at services, Asian locations obviously lack a
strong R&D base that is prone to delivering quality and innovation.
The Asian programmers are famous for churning out the code (spaghetti
programming), but it is not enough in today’s IT environment,
which requires creativity and innovation. Moreover, as the practice
shows, the best Asian IT specialists are hired by large high-tech
companies and banking and finance industry, while the average
programmers are left out for the rest of the industries.
Additionally, Indian wages are rising at a rate of 15% in a year,
meaning that India’s cost advantage, which is now 1:3, is likely to
disappear by 2015. So, if you choose to offload your core software
development to India, you need to budget for long-term increased costs,
which will make the entire outsourcing process more expensive than an
in-house development.

Remote geographic location and cultural/mentality differences with
the Western buyers is another factor impacting outsourcing to Asia. In
the realm of Web 2.0 it is essential for the corporate IT function to
be developed under close monitoring from the buyer’s side. Frequent
flights from, say, UK or the United States to India means additional
cost spending, which can be in a way too expensive, especially for
small companies willing to save as much as possible with outsourcing.
Offshoring creates an environment that breeds misunderstanding due to
poor and indirect communication between the buyer and the vendor.
Outsourcing can only be successful if only the buyer and the services
provider are on the same page and the vendor clearly understands the
client’s business goals and needs. Nearshoring is thus a better option
because of geographic and cultural proximity between the buyer and the
provider and easier direct communication.

Another factor that casts shadow on IT offshore outsourcing to
India is copyright fraud. Indian vendors are famous for copying their
client’s code and selling it to their competitors. Overall, India is
not the safest country to work in. All of its major outsourcing centers
such as Kolkata, Bangalore, Mumbai, and Delhi are in the list of 25
riskiest cities to live and work in (Brown & Wilson Black Book of
Outsourcing, 2009).

India may still be good for non-core short-term development of
projects with well-defined specifications and fixed requirements.
However, if you are looking out for a place to go with core
development, nearshore IT outsourcing is the only effective solution. A
lot of Western European and UK companies have already begun to enjoy
the benefits of outsourcing their IT projects to emerging CEE markets.
Countries like Ukraine have much lower IT salaries, are just 1 to 3
hours of flight from any Western European capital and have a powerful
R&D heritage from the Soviet past.

Additionally, nearshore application development may be the only
possible strategic option for the VC-backed companies to save costs, to
have faster time to market and to stretch the investor’s funding for a
longer period of time. As a matter of fact, venture money is not
long-term money. VCs normally invest in company’s infrastructure and
balance sheet until it becomes sufficient in size and credibility. In
essence, VCs purchase a stake in the idea, nurture it for some time and
gain profits. In order to get venture-backed funding, the early stage
business must find a cost effective, yet convincing and scalable
solution. To push start-ups to find such a solution, many VCs encourage
them to try to take advantage of reduced IT development costs often
associated with outsourced development. Going offshore with core
development may be too expensive and thus crashing for an early stage
business. Going nearshore to EU member-states like Poland or Romania
may not be the best solution due to somewhat high prices, but going
nearshore to non-EU countries like Ukraine or Belarus is a right
solution provided that a VC-backed company partners with a right vendor
able to provide timely delivery, agility and innovative engagement
model.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s