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.

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