Nearshore - Challenging the Offshore Advantage

10 Nov 2006 12:00 AM | Anonymous

Whilst the trend towards offshoring has led the way in the global outsourcing industry for a number of years, offshoring locations such as India and China are now finally seeing a dent taken out of their global advantage. Whilst in the early years of outsourcing India was the dominant offshoring location for the UK, due to language capabilities, graduate workforce and the wage differential, there is now a significant trend towards nearshoring. In the last few years countries such as Russia and the Czech Republic have joined the fray, launching propositions to the UK market. Distinct advantages such as highly educated workforces and close cultural alignment are cited by organisations sending their processes to these destinations, and offshore destinations are feeling the strain.

Offshore outsourcing emerged initially as the main supplier destination largely due to cost, but also due to the numbers of skilled graduates and the experience gained within the IT sector, with these factors boosting India especially. However, there were a number of high profile offshoring failures amid claims that some UK companies jumped too quickly onto the offshoring bandwagon without adequately assessing the consequences and without considering alternative options.

Nearshore outsourcing is now on the rise, with end users sending processes to locations with a cultural, regulatory and physical proximity to the end user either as part of a global delivery model or as a replacement for the offshored service. Despite being less widely used than India, Central and Eastern Europe was seen in a recent survey by TPI as equally appealing an outsourcing location as India, with both destinations rated attractive by 59 per cent of respondents. The TPI report states that: ‘it appears likely that Central and Eastern Europe will make up ground on India’s lead over the next few years’.

There are undoubtedly advantages and disadvantages of offshore and nearshore models and generally they tend to be aligned to variables such as: the type of process that is being outsourced; the level of complexity of that process; the working culture of the client organisation; whether the process needs to be conducted during the office hours of the client organisation, or outside office hours etc.

One of the key differentiators between offshoring and nearshoring is the difference with management costs. Calculating the cost of offshoring is not as simple as comparing the wage differential between India and the UK. Cost assessments need to take into account the full range of variables that must be considered to confirm the immediate advantages and other benefits that are realised over time. Management costs involved in offshoring are often overlooked – evidently the further away a process is based from the country of origin, the higher the management investment of that process will be. Companies currently analyse cost savings on offshore deployments based on the current differentials with offshore and onshore employment markets alone when actually they need to take other factors into account, such as management time, wage inflation, attrition rates etc.

Certain functions will be more suited to offshoring, such as commoditised functions that require more generic and easily acquired and replaced skill sets. In contrast, more complex functions, such as those that require industry specific knowledge, are more susceptible to security risks and will have significantly different cost and risk profiles to commoditised functions. It is likely that processes of this kind will warrant tighter management control. In this scenario, a nearshore strategy could prove more effective, as it will enable access to the necessary skill sets, plus the mitigation of the risk and management problem as the geographical differences will be less. It will also enable the organisation to realise significant cost savings. When referring to offshore outsourcing’s capabilities, a recent report by KLG on current trends in global sourcing opined that “the savings profile for more complicated functions will have a markedly different profile and in some cases less savings than that offered by nearshore deployment opportunities”.

The offshore advantage held up until recently due to its remarkable advantage in terms of cost. The slow, but steady, erosion of this competitive advantage, including the shift away from cost as the most important reason behind an outsourcing agreement (a recent survey by the National Outsourcing Association found that 83 per cent of respondents saw a healthy relationship, as opposed to cost, as the key differentiator between success and failure in an outsourcing deal) means that offshore suppliers are facing a real challenge within the global outsourcing industry. As well as a healthy relationship, end users are now focusing on the need for regulatory compliance and tight security when entering an outsourcing agreement.

The negative publicity that offshore suppliers have received, particularly within the recent ‘Dispatches’ programme on Channel 4 (about data security breaches in Indian call centres), may or may not be merited. Either way it adds further weight to the increasing number of questions posed to offshore suppliers on a number of key outsourcing issues, including security and regulatory compliance. Whilst offshore outsourcing retains a lead in terms of sheer quantity of contracts in service, the nearshore dimension is adding a new element to the global outsourcing industry that cannot be ignored.

Powered by Wild Apricot Membership Software