Archive for the ‘Benefits of nearshoring’ Category

Jesper Bagger, Project Director at Berlingske Media, shares his company’s outsourcing experiences at the ITB Conference “Off-Shore – How easy can it be?”

Berlingske, the oldest Danish media house with a 262-years history, moved a substantial part of its software development to Kiev, Ukraine, in 2010. The key factor driving a corporate decision to outsource nearshore was the search for savings. In Ukraine, an IT developer costs about half of the Danish one and the price difference between the Danish and Ukrainian IT consultants is even greater. (more…)

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Ukraine’s exports of computer software will reach 1 billion USD in 2010, the country’s Vice Prime Minister Serhiy Tyhypko announced today. Ukraine is the world’s fifth biggest IT services exporter and this figure is doubling every year, making IT the fastest growing export-oriented sector of the country. (more…)

Central and Eastern European Outsourcing Association (CEEOA) has just pre-released its “Central and Eastern Europe IT Outsourcing Review 2010” aimed to improve business viabilities and the services delivery capabilities of CEE service providers through strengthening knowledge and business management competencies to increase overall skill levels to attract more prospects. CEEOA surveyed more than 300 IT players in 16 CEE countries, which makes more than 6% of the region’s market players. (more…)

The report made by the global management consulting organization A.T
Kearney Global Services Location Index, in which the agency analyzed
and ranked top 50 outsourcing destinations worldwide has brought some
surprises in terms of location delivery preferences for provision of IT
outsourcing services. While American and Asian clusters experienced no
significant changes during last year with all traditional leaders,
India, China and Malaysia retain their top positions, the biggest IT
outsourcing spender in 2009 namely European continent experienced
noticeable rearrangements in terms of location delivery preferences.

The
results of A.T Kearney analysis indicated that leading nearshoring
destinations in CEE region including Poland, the Czech Republic and
Hungary have fallen significantly in location ranking because of
increasing operating costs and wage inflation. While new regional
leaders, in terms of financial attractiveness, people skills and
business environment came to the scene.

The report data
suggest that the best score in Central and Esatern European region
earned recent EU entrants Romania and Bulgaria, while Russia and
Ukraine were scored well on cost grounds. The criteria the agency cited
were “salaries, infrastructure, taxes and financial attractiveness”.

Although,
the data from another research conducted by Deutsche Bank Research
indicated that many of German, Swiss and Austrian vendors still
outsource their IT activities to Poland, Czech, Slovak Republic and
Hungary, the overall shift towards Eastern neighbors becomes
increasingly evident. The first wave of popular nearshoring trend that
was commonly associated with Central European states has begun to
decline. With a lapse of time membership in EU minimized the cost
advantage as countries experienced rise in labor wages and development
costs.

Both, Romania and Bulgaria joined EU just in 2007 and
represent fast-developing markets with IT industry growth stronger than
average in the region. This trend is likely to continue as countries
offer large talent pool, good quality services and competitive rates.
However, in the long run the EU membership could minimize price
advantage that countries offer today. According to Natasha Starkell,
CEO of Goal Europe, the higher wages will push outsourcing further
east.

Source: Levi9 Global Sourcing

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.

So, you have a bright and innovative idea and want to turn it into a successful and profitable venture? But you have to make a long way prior to putting it on plate, especially here, in Western Europe, where taxes are high, labor rules are rigid and financial support is very scarce.  You also know you’ll need to build up a positive image and track record from scratch, which will certainly involve a lot of time consuming and expensive advertising and marketing efforts. And, of course, you’ll have to establish a strong web presence, as no business is possible without e-business in the 21st century.  If you really want to skim the cream off your business idea in the future, be ready to invest a lot in development and maintenance of a state-of-the-art IT function today. Even though e-business generally reduces market entry barriers, you still have to wait long for return on investment due to necessity of winning client confidence first. In short, if you have a great idea, but a small capital to put into it, you’re nearly doomed to end up as one of many ‘promising’ early stage companies, with no revenues and increasing operating losses.

But don’t worry – ultimately, there’s solution to every problem! You should seek external sources of financing your business. Venture Angels are a good option to consider, as they help “promising” companies like yours to grow into successful businesses. However, according to the latest Dow Jones venture statistics, despite the fact that in Q3 2009 VCs’ investments in Western Europe increased by 23% from Q2, the investors are still very selective in whom to support. VCs normally invest in company’s infrastructure and balance sheet until it becomes sufficient in size and credibility. In essence, VC purchases a stake in your idea, nurtures it for some time, gains profits and exits, leaving you on your own. In essence, venture money is not long-term money. But today, in the post-crisis times, venture capitalists agree to stretch their funding over a longer period of time, as incoming revenues are very hard to forecast. To be eligible to the stretched venture-backed funding, you must find a cost effective, yet convincing solution. In addition, you need faster time to market to ‘leapfrog’ the competitors and begin to cash in on your product/service as early as possible, while it’s still unique and fresh. In short, your solution should be dynamic, scalable, flexible and cost effective. To push start-ups to find such a solution, many Venture Angels encourage them to try to take advantage of reduced IT development costs, which is often associated with offshore outsourcing. The Dow Jones statistics further reveals that start-up companies, opting to use IT outsourcing, are to a significant degree outnumbered by those who do not rely on this strategy. And that is true, you may say, as start-up growth companies have:

  • no clear roadmap,
  • immature software development setup,
  • not as good a chance of attracting qualified IT talent as the large multinationals do,
  • scarce managerial bandwidth,
  • difficulty of cross-cultural communication, and
  • fear of losing intellectual property

As a start-up growth and VC-backed company, you typically believe that:

  • outsourcing is for large companies only,
  • outsourcing requires a lot of people to be involved in the project,
  • outsourcing requires a very well defined IT function,
  • although offshore software engineers cost a third as cheaper as the domestic ones, they are only half as productive, so the game is not worth the candle

As a result, you reject the idea of outsourcing and limit yourself to the scarce resources and IT specialists left inland by the bigger competitors. But you’re totally wrong! There’s a cost effective, yet convincing solution – to locate your IT development nearshore!

As a start-up business, you critically need to have control over each spent penny. That is why traditional models of IT outsourcing that may fit big and well-established companies do not work well with the early stage and VC-backed ones. For instance, a big company can afford to tell its Indian vendor that it wants to move its billing system from Cobol server to Oracle’s Sun server, pay additional $2 million and wait without taking a beating for 6 to 8 months to have the work done. You do not have such a privilege and cannot waste your time and money, if you want to ‘keep the head above water’.

Instead of enjoying ‘slim pickings’ at the domestic market and in order to use your VC’s money in a most efficient and optimal way, why not consider looking out for some innovative IT outsourcing services providers in Central and Eastern Europe (CEE) and leveraging your IT excellence with their help? Unlike traditional and process-packaged offshore outsourcing suppliers, who are used to the idea of being the winners of the global outsourcing market and, thus, focus on increasing the clients’ number rather than improving the service level, the CEE software companies are more energetic and enthusiastic about attracting new clients and retaining the old ones. Therefore, they’re very inventive in achieving an unsurpassed mix of technology innovation, cost effectiveness and top quality. With some CEE providers you’ll be able to insource your own IT development team nearshore, which will allow you to keep the knowledge in-house and have full strategic management of your IT project and each team member, while your outsourcing partner will be taking care of your HR, administrative and legal issues. As a result, you’ll be able to:

  • save 40-70% of product development costs (e.g., full-time equivalent (FTE) of London-based IT team-member costs around 6,000/month, while, say, in Ukraine it is only nearly €1,500/month)
  • build a world-class team of IT developers for less money and free of administrative hassle
  • get instant IT consultancy and start-up support
  • receive just one invoice per month for the entire team (and you do not deal with the complexities of tax legislation, employee insurance, social security payments and other overheads related to setting up own IT operations in low-cost neighbor countries etc)
  • have an Agile or SCRUM development methodology, which is flexible and adaptable to your rapid requirements’ changes
  • dedicate 100% of time to your core business competences and product’s promotion
  • significantly accelerate time to market
  • get access to as qualified IT talent as in your homeland
  • provide your Venture Angel with a cost effective R&D solution to allow stretching the funding over a longer period of time

Doesn’t it sound like a great incentive for start-up businesses whose key strategy is to gain a competitive advantage and to quickly bring product to the market?  Why not admit it – when you have top tier investors standing over your shoulder and pushing you to be more effective, doesn’t nearshore outsourcing seem to be the most effective option for growing your idea into a successful and profitable business?