Nearshoring in Europe – The IBA Group Webinar

IBA Group
Mark Kobayashi-Hillary

IBA Group recently hosted a webinar on nearshoring in Europe with me and the team from ‘Outsource’ magazine. You can listen to the entire webinar recording here.

This blog is a text version of my own talk during the webinar. I edited the talk as I was speaking during the webinar because we were a little short of time – it was better to talk less and spend more time on the Q&A – so here is the full version of what I prepared to say during my own presentation:

On this webinar today we are going to talk about nearshoring.

Nearshoring and offshoring and rightshoring are all phrases used quite interchangeably in this industry and many of these phrases were invented by analysts – who then sell you the research that allows you to understand the terminology.

So, I’d like to keep things fairly simple. I’m also aware that if you are on this webinar then you probably have a good idea what we are talking about and you will be more interested in the polls and Q&A than the introductions.

There is no strict definition on how close nearshoring needs to be so this is not an exact science, but a good rule of thumb is whether it is possible to visit your supplier and get home all in one day.

Now this does apply to European clients interested in working with suppliers in central and Eastern Europe so it’s probably the best definition to work with. The Americans consider Mexico to be a nearshoring destination, but you try going from Boston to Monterrey and back in a day.

As I said, none of these definitions are an exact science.

When IBA asked me to join in with this session today I looked back at some of my books and writing on outsourcing to see how often I had mentioned nearshoring. In my 2004 ‘Outsourcing to India’ book I couldn’t find a single reference to nearshoring and even the 2007 book I wrote for the British Computer Society didn’t feature it as a distinct type of offshore outsourcing.

But when I looked at my Talking Outsourcing book, which is really just a summary of all the best bits I wrote for Computing magazine between 2006 and 2009, it is mentioned several times and identified as an important trend – the way ahead.

Nearshoring was clearly an accepted business strategy during the past decade, but it has only evolved into a practice that is separate from offshore outsourcing more generally in the past five years – the post financial crash period of time.

We should not forget how far outsourcing has come in the past decade. It’s now a standard, accepted strategy for businesses in any industrial sector and to reject the opportunities of working with an expert partner is now seen as highly unusual.

Look at the IT market globally. There are so many more platforms for IT systems to run on today, from wi-fi enabled televisions to the apps on your phone. None of this existed a decade ago when we were all talking about parceling up IT development projects and sending them off to India.

Look at a classic business process outsourcing task like customer service. A decade ago this would have meant paying for agents in a call centre and possibly including some email support in the contract. Now customers expect information immediately available before they make a purchase, they want information when in the middle of a purchase and they want to be able to contact you after a purchase – for support or complaints. And all of this communication can take place on email, phone, chat, Twitter, Facebook, or any other social network you care to name.

In both the IT and BPO markets there is far more complexity today in terms of platforms that can be used and how services need to be delivered.

This reinforces the classic reasons for working with a partner rather than trying to do everything in-house:

• You can contract for a service or project knowing that the partner you choose has the skills needed to deliver – you don’t need to search for those skills and then keep them fresh.
• Your partner will have experience of delivering similar projects to other companies. This expertise is extremely valuable when the market is changing so fast.
• The total cost of getting this expert resource should be less than the price of doing it yourself, when considering all the complexities in delivering tech projects today.

When we talk about offshore outsourcing, we always get back to the cost argument. However, I think the argument that you can always save a bundle of cash when outsourcing belongs back in the early part of the last decade.

If you want to find a high quality partner with experience and expertise in the service you need and you want them to deliver successfully without failure then that will not be cheap. It will probably be slightly cheaper to use a partner than to build the capabilities internally, but you can go to market immediately with a partner, you can hand a lot of the project risk to your partner, you can pay as parts of the project are delivered.

There is a big difference between the cost of a project and the value of that project and I’m sure this is a topic that will be mentioned today.

As we see offshore outsourcing now settle into its status as a regular part of management strategy, nearshoring in Europe is becoming an important trend and is worth exploring further – and there are a few reasons for this:

The Euro crisis has stabilized. The situation in the Euro zone is far from rosy, but this is mainly due to a lack of economic growth and the pain of austerity in southern Europe. Nobody is talking about Grexit today.

The EU is expanding. There has been no change to the expansion strategy and the more nations included in the club – there are now 28 – the easier it is for cross-border transactions and labour movement to take place.

The low cost offshoring model is over. Companies want their suppliers to be physically closer, similar in management culture, and reliable.

Last year the business magazine Forbes predicted the end of IT and BPO offshoring to India within 8 years – so that leaves another 7 years left to run.

I wouldn’t believe that all offshoring to India is about to die out as Forbes predict, but the market has entirely changed from what we knew a decade ago.

Do you remember executives rubbing their hands together when they looked at the cost of IT in India? They would double the size of the team to get over the issues of slower delivery from such a remote location.

But costs have increased. It’s no longer a cost reducing strategy to just offshore everything to India.

This is applicable in many markets today. I recently met the Brazil CEO for a major Indian IT service provider and he told me that it’s cheaper for them to hire technical experts in the USA than in Brazil. They are building out their team in South America not to take work from the USA, they want to bid for business in South America and they know that the clients want a great team with experience – and they want that team close by.

The IT market is also changing compared to those days when a big project could be specified and then sent off to a development team. Agile development is far more popular today, teams want to release code weekly or every few days – not every 6 months. The IT teams need a client that is close and involved and rapid development lends itself much more to a nearshored business model.

I think that we also need to include a couple of further points in our discussion:

. app development is entirely different to traditional IT development. Immediate global shop window and nobody cares where it was developed. Angry Birds is from Finland. Ustream is from Hungary.

. markets like odesk are allowing small teams to be built then broken apart so small IT projects can be delivered using a virtual team – no need to outsource at all.

But nevertheless, in the corporate world and manager that needs an IT project to be delivered today is unlikely to be exploring an option where the partner is on the other side of the world. Even where a company that originated in India or China is concerned, they will be offering more local delivery from Eastern Europe. Nearshoring is clearly one of the most important strategies today if you want your offshore outsourcing programme to succeed.

Eastern Europe is becoming a tech hub

IBA Group
Mark Kobayashi-Hillary

Several business magazines and journals have been focused on growth in Central and Eastern Europe over the past few months. The main angle of the observations is that the CEE region has moved far beyond the traditional role as a lower cost alternative to undertaking technology work in Western Europe and is now fostering a hub of talent that should be sought after by the world.

There are now a number of successful startup companies from the region that are dominating their own niche. Ustream from Hungary is a great example. People all over the world are using the Ustream app to live stream events direct from their phone to the Internet without ever questioning where the app came from.

And even in the more traditional IT service sector, the talent available is some of the best in the world. The CEE region regularly ranks at the top of the world for educational achievements in maths, science, and technology. In the 2013 Google Code Jam competition, 16 or the 24 finalists were from Eastern Europe.

The IT service sector is already strong and mature and the startup sector is growing. All the major European accelerators are now regularly visiting the CEE region and looking for companies to invest in. This growth in the innovative startup sector will only make the wider IT community stronger as the CEE region becomes a place that people want to include on their CV. Have you explored some of the opportunities available from companies working in the CEE region yet?

What Are the Secrets to IT Outsourcing Success?

IBA Group
Mark Kobayashi-Hillary

A recent article in the TechTarget publication, Microscope, explores the secrets to creating a successful IT outsourcing relationship. Many managers have experience of outsourcing these days – it’s no longer the secret it once was, but are the secrets to success still the same as they used to be?

The Microscope feature focuses on these three attributes as the most important:
– Partnership; work towards a partnership as two companies working together, not behaving like a powerful client paying a service provider.
– Flexibility; reach an agreement and write your SLA, but don’t reach for the contract every time something unusual happens – be flexible enough to help each other.
– Ability to change; your business will change over time, so work towards a long relationship that might be very different to where you started.

These are three great pointers, like maxims for getting outsourcing right. The industry has moved on a long way from the old days of screwing down suppliers to very tough conditions and not allowing them to make a profit, but there is a key point not mentioned in the feature.

Location of supplier remains important. There are some great IT suppliers all over the world, but if you need to work closely with your supplier and you want the ability to meet with them regularly then it would be best to not have that part of the team a 12-hour flight away.

If you are trying to create a genuine sense of partnership, rather than just a client/supplier relationship then nearshoring still works far better than remote offshoring. People are people and people want to see the people they are doing business with – in person.

Rightshoring Decision-Making Process

On October 4, 2013, Professional Outsourcing published a video interview with Sergei Levteev, IBA Group Chairman. In the interview entitled Rightshoring Decision-Making Process, Levteev shared his perspective of rightshoring.

PO: Hello, Sergei. Could you introduce yourself please and your title and role at IBA?
SL: I’m Sergei Levteev. My position in the company is Chairman of the Supervisory Board. It is clear that I’m responsible for all strategic questions in our company, namely finance, investment, and marketing policy.
PO: Could you tell us a little bit about the services that IBA provides?
SL: We are an IT company and our main direction is to provide outsourcing for different projects in different countries. And these are various services: from programming development to support of these programs, migration, and consulting. This is our main activity.
PO: Ok. What is IBA expertise in outsourcing?
SL: First of all, it is necessary to say that IBA was a pioneer of this business in Eastern Europe and now we fulfill projects on five continents in more than 40 countries already. The size of these projects that we are doing starts from a few people and is up to thousands of men/months. And duration is also sometimes quite big: from a few weeks up to a few years. We are covering by our services various platforms. During these years, we have really created partner relations with our major customers.
PO: We are here to discuss rightshoring. What’s IBA definition of righshoring and why is it important for organizations?
SL: In my point of view, mainly you should make a choice between different destinations. In the past, outsourcing was practically equal to Indians. Now, more and more understanding is coming that companies from Eastern Europe where we are present and have our main development centers can fulfill these tasks, probably with a bigger advantage for the customer. Also, it is necessary to add that different expertise and a high level of this expertise is present in Eastern Europe just now. And it is one of the advantages of this direction when you are looking for rightsourcing.
PO: How should an organization approach the idea of rightshoring if they’re looking to outsource?
SL: First of all, to look for references about an organization with whom you are in contact. IT outsourcing is not so easy, it is not so easy to describe what’s necessary to do. There should be some level of trust and this trust is coming from the reference of organizations that already have experience of working with such company. Second point is that it’s necessary to find the right expertise. You know, it’s not possible to cover all expertise that is present in information technology. Some companies specialize in one direction, some are active in another. And it is the right expertise that should be found in various proposals. Once again, I would like to add that some level of common understanding should be found between an outsourcing company and a company which is looking for outsourcing. It means that the same words, the same descriptions should be understood absolutely similarly. This is very important.
PO: So, it’s quite a complex decision–making process then. It’s not just deciding on cost or vertical expertise or a region, is that right?
SL: Sure. Of course, cost is very important because we are on the market and should be competitive. But it’s also necessary to understand what is behind this cost. And very important here is the reference that a service provider can present to the outsourcers. Also, it’s very important to understand that nobody can provide a full range of services and every company has some specialization. It’s necessary to find the right service provider who had expertise for years in a particular technology.
PO: Finally what are the pitfalls around right shoring — what should organisations avoid?
SL: First of all, outsourcers should understand that relations with a service provider will be different than with their own staff, especially when it is an offshoring service, which is the most economical type of outsourcing. An outsourcer feels that it will be absolutely similar, if he has no experience so far. It will be necessary to create such relations from the beginning. Second point is the necessity to pay attention to the items which are not written in the contract. For example, attrition rate of the service provider. We’re proud that in our case we have one of the lowest attrition rates among IT service providers. It’s also an important point that it is necessary to create common understanding for the terminology, for any words you are putting in the contract or any agreement. Sometimes outsourcers and service providers understand the same words differently. I think these are three major points in this case.
PO: Thank you, Sergei.

IBA Group Holds an Event in London to Celebrate the 20th Birthday

IBA Group
Mark Kobayashi-Hillary

Last week, IBA celebrated their twentieth birthday with a fantastic event in London. I was invited to host a part of the evening where some great insights into outsourcing in the years ahead were shared by a range of experts.

The venue for the event was the Wellington Arch. An incredible building in central London that I have travelled past for years and never knew that the public could go inside. From outside it looks just like an enormous statue, but there is a hidden door leading to a network of rooms.

Sergei Levteev, the IBA Group chairman introduced the evening by talking about the foundation of the company twenty years ago. Martyn Hart, the chairman of the National Outsourcing Association (NOA) then talked about the NOA twenty years ago, when outsourcing was a new word – most companies were still talking about Facilities Management.

Then there was the competition between expert commentators. Each expert was asked to deliver a five-minute talk on how they see outsourcing changing over the next twenty years. The audience had voting cards and could choose their favourite, so the audience was listening intently and ready to choose their winner.

You can click on YouTube here to see the four talks for yourself.

The four speakers competing in the event were:

  • Martyn Hart, Chairman of the National Outsourcing Association
  • John Garratt, Editor of IT Europa
  • Derek Parlour, Head of Commercial at National Rail Enquiries
  • Colin Beveridge, industry analyst at Better Practice.

And who won? The audience on the evening chose Derek. His friendly and casual start to the talk led to some great insights into the way suppliers and clients will need to interact in future and the audience warmed to his theme.

If you watch the videos then why not let us know on Twitter which presentation you enjoyed the most?


Developing your mobile strategy

IBA Group
Mark Kobayashi-Hillary

Developing a mobile strategy can be a complex time for any company. The last thing you want to worry about is issues such as operating system or technology platform, which is where the expertise of a company like IBA can help, but there are some important decisions to make before you even think of building a mobile tool.

The initial strategic decision you need to think about is whether to build a mobile-friendly website or to create an App. There are advantages and disadvantages to each solution and the correct path will depend on the type of service you plan to offer, but to summarise these are the questions you should be thinking about:

• How immediate do you want the tool? Do you think people are prepared to install an app or would they prefer to just find it online on a website without needing to set anything up on their phone?

• Do you need compatibility across all devices? If you build an app it will only work for a single operating system (Android, Windows, Apple IOS) so you need to build several versions to reach all phone users, but a well-designed website can work on any device.

• How often will it need to be upgraded? If you plan on frequent upgrades then it could be problematic to design as an app as you are asking the user to frequently upgrade their phone applications. With a website it would be automatic.

• What is your budget? It’s a lot cheaper to build and maintain a mobile website than a suite of mobile apps for various operating systems.

But apps have their place. When you need the specific power available on a particular type of device then only an app can tap into that system. If you are building a tool that will be used often then an app can be a better interface – think of how you access Facebook on your own phone. And apps can be designed to also work offline – something not at all possible for a website.

This is the first step on a mobile strategy. There are various technological questions to resolve before working on a solution, but if you have not considered how your service will be used then the technology itself cannot be planned or designed.

CEE Getting More Attractive Than India and China

IBA Group
Mark Kobayashi-Hillary

This blog has often explored the relative advantages of working with IT companies in the CEE region. The Central and Eastern European Outsourcing Association summarises the benefits of the region as:

• Considerable budget savings;
• Ability to focus on core competencies;
• Extensive experience of an outsourcing subcontractor;
• Speed increase in projects tasks solutions;
• Reduced capital investments;
• Full-time access both to IT innovations and high-qualified IT experts;
• Internal processes optimization;
• Improved manageability.

That’s a long list of benefits. But what are the downsides of outsourcing today? There are far fewer downsides that there used to be. It’s true that handing tasks to a partner means you need to monitoring them outside your organisation and agreeing on specific measurable targets, but all managers today are used to working with some form of Key Performance Indicators – even for internal measures of success.

Since 2003 the Eastern European IT market has become one of the most promising markets in IT outsourcing, demonstrating dozens of positive examples of companies the decided it would be better to stay in Europe rather than far across the world to India or China.

According to the Tholons report “2012 Top 100 Outsourcing Destinations“, Eastern (and Central) European countries are now around a quarter of the entire list of most attractive places to work with.

China and India are now facing sharp increases in costs just as Europe is remaining a lower place to do business. The future looks bright for those who consider Europe – and the CEE in particular – as a great place to undertake their IT business.

How is outsourcing changing the IT market today?

IBA Group
Mark Kobayashi-Hillary

Outsourcing is changing fast. Cloud computing, the consumerisation of IT, and trends such as BYOD have all changed the way the CIO plans for IT needs and engages with IT partners.

Outsourcing used to be about literally dealing with ‘my mess for less’. A company with an internal business or IT process would hire an expert service provider who just performed the same function – hopefully making it better or cheaper over time.

Now that IT has become so integral to the function of modern companies, the IT suppliers have become trusted delivery partners. The client company simply cannot deliver without the expertise of their IT partner.

But IT can be procured in many ways today. The iPhone has taught consumers that apps can be installed when needed and deleted when they are not. Services like Gmail have taught consumers that very important systems can be web-based – there is no need for expensive locally installed software.

All these lessons are flowing back into the enterprise and changing how companies want to procure technology. But with the supplier community so well entrenched, how is this going to change the outsourcing market?

This Computer Weekly feature explores some of the questions, but one thing is clear, expert suppliers of solutions are still needed. As these changes flow from the consumer market to the enterprise it is likely that companies will need partners to be closer and more reactive than ever – this looks good for suppliers based in Eastern Europe rather than far from their clients.

Eastern Europe to Dominate the IT Outsourcing Market

IBA Group
Mark Kobayashi-Hillary

A recent article in the IT Outsourcing News explores the various reasons it can be worth exploring the Eastern European IT market. Of course, all the usual benefits are listed:

• Considerable budget savings;
• Ability to focus on core competencies;
• Extensive experience of an outsourcing subcontractor;
• Speed increase in projects tasks solutions;

And many more, but I don’t want to just list the general benefits of outsourcing here. What was more interesting in the article was the reference to the analyst and research firm Tholons Company report ‘2012 Top 100 Outsourcing Destinations.’

Eastern European countries (the CEE region) have covered around a quarter of the list of the most attractive countries for Business Process Outsourcing (BPO) destinations from all over the world.

Considering the relatively small size of the CEE region compared to the rest of the world, to see a quarter of the best global BPO destinations in the CEE region does indicate that the region has some special advantages. The Tholons view of the major reasons for this CEE dominance is:

• Relatively low costs since a number of countries are not EU members; the manpower and well-established infrastructure allow customers to reduce their budget without losing service quality.

• Proximity to their permanent clients from Western Europe due to convenient geographical location, visa-free or simplified conditions (depending on a specific country) for EU citizens.

• Convenience in communications and control – almost all CEE representatives are located in the same or very similar time zone with no communicational barrier as English has remained to be an international language in CEE for quite a long period of time.

• Similar set of rules in business making process: ISO standards are adopted as state acts in the majority of CEE countries and are obligatory for some industries.

• A very high educational background as normal.

So don’t just take our word for it that you should be exploring this region. When analysts produce lists of the best places to do BPO and over a quarter of the locations are in CEE it should make the world take notice.

Despite the Economic Difficulties, IT Workers Are in Demand

IBA Group

Mark Kobayashi-Hillary

Karl Flinders of Computer Weekly published some research recently that explored the development of the CEE outsourcing market in some depth.

One of the standout statistics was around the cost of doing IT work in China today, with an average programmer earning about $20,000 a year. This shows that China can no longer be considered a low cost destination for IT outsourcing and of course there are all the associated problems of distance, language, and culture.

But what I found really interesting was the demand for IT workers predicted across Western Europe. Despite the economic difficulties, IT workers are still in demand and the data published in Computer Weekly shows that by 2015 there will be a deficit in many European nations. For instance, the UK will need 55,000 more IT professionals that it will have, Germany will need 75,000 more, and Italy 55,000 more.

With the costs soaring for IT work in Asia, and Western European countries still needing an enormous amount of IT work – and not having enough IT workers – the argument for working with companies based in Eastern Europe is obvious.

When companies with a good reputation and great expertise can be found just a short flight away – close enough for a day trip – it makes sense to explore this option for many more reasons than price alone. As the example of average costs in China demonstrates, IT outsourcing is today about a lot more than low cost offshoring. Europe needs to work together to plug the skilled worker deficit.

The Continued Threat of Outsourcing

IBA Group
Mark Kobayashi-Hillary

HR magazine published a feature earlier this month titled “lower-skilled jobs still threatened by outsourcing to Europe” – the kind of headline that compels a reader to read on, but the story isn’t quite as described.

The feature is extremely confused for a number of reasons. First, the writer is not just talking about low-skilled jobs – he uses the comparison of experienced IT industry workers to contrast different salaries across Europe. Then secondly, he talks about how salaries in Germany, France, Belgium, and Ireland are up to 57% higher than in the UK.

This confuses me. IT professionals on £42,000 per year are not low-skilled workers and if there are many countries in Europe paying higher salaries than the UK then surely those are the places where most skilled workers will go anyway?

And I would question this data. I have a lot of Irish friends and they are almost all figuring out how to leave Ireland. It is impossible to believe that pay and conditions are better there than in the UK.

The most confusing thing is that this is now 2013. Europe expanded to the east in 2004, almost a decade ago. It feels very strange for the media to be talking about how jobs are threatened by outsourcing when Europe itself is a free trade area that encourages businesses to work across borders – with the free movement of people a key part of the union.

I was recently in a bar talking about the continued expansion of the EU to two senior executives from Austria. I asked them how they felt about Bulgaria and Romania joining the union – they immediately responded enthusiastically and suggested that it will make business with these two important markets a lot easier.

This is the complete opposite of the British reaction – where a fear that thousands of people will flood to London from the new EU member states is still the normal reaction. Only the British press appears to be still fearful of the European Union, with this ‘jobs threat’ headline just the latest example I have read.

There are more British people living and working across Europe than Europeans working inside the UK. So why does the media fear this European jobs threat? It seems that many British people are capable of venturing into the world to find where the opportunities exist.

The East is Rising

IBA Group
Mark Kobayashi-Hillary

International analyst firm Gartner recently suggested that IT Outsourcing this year would be worth around 697 billion Euros. That’s an enormous amount of business and IT service companies are all keen to find a way to enjoy taking a percentage of that global spend for themselves.

While countries like India, China, and the Philippines have dominated the international outsourcing market, there are many locations in Central and Eastern Europe that are now snapping at their heels. Serbia, Romania, Albania, and Croatia are all examples of locations where many IT specialists are located and yet their cost is lower than experts with the same skills in Western Europe.

A recent report on the software development and IT outsourcing industry in Ukraine determined that over the last eight years, the volume of software development and IT outsourcing services in Ukraine has grown by a factor ten.

According to the research findings, in 2011 the volume of IT outsourcing and software development services provided in Ukraine reached US$ 1.1 billion and the number of IT specialists working in the industry reached 25,000 people with 20% growth.

But in many cases, many small companies with no international footprint are located in these countries, ready to do business, but unsure how to find clients in the west. It’s no good just being a lower cost if you have no way to develop relationships with potential clients in the west of the continent.

The East may be rising in importance and certainly worth a look if you are considering outsourcing your IT services, but the companies that are based in the CEE region need to build better relationships with the clients in the west. Without this, they will forever be seen as just a lower-cost alternative to local IT experts and that is a long way from the truth.

Tholons Top 100 Features Many CEE Cities

IBA Group
Mark Kobayashi-Hillary

The latest Top 100 Outsourcing destinations research published by international advisory firm Tholons makes for good reading if you want to explore Eastern Europe. No fewer than sixteen different cities in the region are described in a report that covers the entire globe.

Kraków in Poland was described now as an ‘established’ location for offshore outsourcing, with the rest described as emerging, aspiring, or on the radar. Kraków and Dublin were the only European cities in the top ten on the Tholons list – with the other eight all being from Asia.

This is a great result for the CEE region in general. Tholons lists many cities across Asia and Latin America, but to find so many cities of interest to the outsourcing community all clustered together in Eastern Europe does demonstrate that a cluster of expertise is developing.

All the cities listed have the great advantage of being close to potential clients in Western Europe and being close to other great delivery centres in the CEE region. With some locations better at ITO and some better at BPO, it’s encouraging to see so many cities all in one single region.

With experts such as Tholons shining a new spotlight on Eastern Europe, it cannot be long before many other cities in the region start being recognised for their delivery capabilities too.