If your company balks at the cost of outsourcing...
... its IT to a UK provider but is nervous about the risks associated with offshore projects, the outsourcing industry has a third way: nearshoring. Nearshoring involves outsourcing work to companies with the economic benefits of an offshore location, but a closer cultural, linguistic and geographic fit with the user organisation.
Operations in Bangalore may offer thousands of workers to handle straightforward business processes and software development tasks with a relatively low level of business impact, but when it comes to providing services that have a greater effect on the business and its customers, companies need suppliers with a certain cultural affinity.
For example, a C++ subroutine developed by an outsourcing supplier can be tested by a company's software team before being folded into a live application, creating a clear delineation between the outsourced service and its use.
However, business processes with a strong customer focus or regulations-driven reporting element are tied so intrinsically to the business that it is harder to draw a solid line between them and the rest of the operation. This changes the requirements for suppliers.
Tony Virdi, partner at outsourcing advisory firm Atos Consulting, discusses nearshoring and offshoring in the context of vertical and horizontal expertise. Horizontal functions require generic back-office skills, such as processing transactions or basic applications maintenance. Vertical skills are more linked to the idiosyncrasies of the business.
"The offshore centres rarely provide vertical expertise," says Virdi. "I would say the nearshore players provide vertical expertise in general better than the offshore ones."
Duncan Aitchison is international managing director of TPI, which advises companies on outsourcing issues. He evaluates the level of customer interaction within an outsourcing contract to help define whether it should be offshore or nearshore.
Aitchison has seen companies locate call centres in India that work well, but it depends on the company's profile. "If you are a UK company using India as a basis for a call centre, it is perfectly acceptable," he says. But then, it is relatively easy to find English speakers in India. "If you are a German company, you are likely to do it in the Czech Republic or Poland and take the transactional stuff further out."
Companies will find cost reduction less of an advantage when working in nearshore operations, says Virdi. Project costs are still much lower than in the UK, but it may be difficult for nearshoring operations to match the very low labour costs that can be found in areas such as India and China. The trade-off between cost and the sophistication of the services available is clear.
However, Marriott points out that costs in some of the main markets for offshore work is rising steadily. "Because of the level of inward investment, the whole cost base is increasing," he says. "That can make nearshore contracts more attractive, because the differential between nearshore and offshore today will be squeezed over the next few years."
However, this can happen in some of the more developed nearshore locations too, so companies must be careful. Ireland is a good example. A high level of investment sent property and labour rates rising, making it a less attractive nearshore proposition.
Consequently, companies should focus on more than just price in the long term. They should concentrate on other benefits of nearshore operations, such as lowering the overall risk of an existing offshore project, gaining access to pockets of skills, and achieving 24x7 support, Marriott says.
Nevertheless, cost savings can be made. For example, Robin Wilkins, e-commerce programme manager at information management supplier Williams Lea, says using a nearshoring supplier saved him as much as 50% of the project costs for his computerised purchasing system.
... its IT to a UK provider but is nervous about the risks associated with offshore projects, the outsourcing industry has a third way: nearshoring. Nearshoring involves outsourcing work to companies with the economic benefits of an offshore location, but a closer cultural, linguistic and geographic fit with the user organisation.
Operations in Bangalore may offer thousands of workers to handle straightforward business processes and software development tasks with a relatively low level of business impact, but when it comes to providing services that have a greater effect on the business and its customers, companies need suppliers with a certain cultural affinity.
For example, a C++ subroutine developed by an outsourcing supplier can be tested by a company's software team before being folded into a live application, creating a clear delineation between the outsourced service and its use.
However, business processes with a strong customer focus or regulations-driven reporting element are tied so intrinsically to the business that it is harder to draw a solid line between them and the rest of the operation. This changes the requirements for suppliers.
Tony Virdi, partner at outsourcing advisory firm Atos Consulting, discusses nearshoring and offshoring in the context of vertical and horizontal expertise. Horizontal functions require generic back-office skills, such as processing transactions or basic applications maintenance. Vertical skills are more linked to the idiosyncrasies of the business.
"The offshore centres rarely provide vertical expertise," says Virdi. "I would say the nearshore players provide vertical expertise in general better than the offshore ones."
Duncan Aitchison is international managing director of TPI, which advises companies on outsourcing issues. He evaluates the level of customer interaction within an outsourcing contract to help define whether it should be offshore or nearshore.
Aitchison has seen companies locate call centres in India that work well, but it depends on the company's profile. "If you are a UK company using India as a basis for a call centre, it is perfectly acceptable," he says. But then, it is relatively easy to find English speakers in India. "If you are a German company, you are likely to do it in the Czech Republic or Poland and take the transactional stuff further out."
Companies will find cost reduction less of an advantage when working in nearshore operations, says Virdi. Project costs are still much lower than in the UK, but it may be difficult for nearshoring operations to match the very low labour costs that can be found in areas such as India and China. The trade-off between cost and the sophistication of the services available is clear.
However, Marriott points out that costs in some of the main markets for offshore work is rising steadily. "Because of the level of inward investment, the whole cost base is increasing," he says. "That can make nearshore contracts more attractive, because the differential between nearshore and offshore today will be squeezed over the next few years."
However, this can happen in some of the more developed nearshore locations too, so companies must be careful. Ireland is a good example. A high level of investment sent property and labour rates rising, making it a less attractive nearshore proposition.
Consequently, companies should focus on more than just price in the long term. They should concentrate on other benefits of nearshore operations, such as lowering the overall risk of an existing offshore project, gaining access to pockets of skills, and achieving 24x7 support, Marriott says.
Nevertheless, cost savings can be made. For example, Robin Wilkins, e-commerce programme manager at information management supplier Williams Lea, says using a nearshoring supplier saved him as much as 50% of the project costs for his computerised purchasing system.
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