Nearshoring – A surge of destinations and benefits

In these hard financial times, more and more organisations are looking at far-flung destinations such as India, China and the Philippines to take advantage of lower infrastructure costs along with lower wages.

Although the initial savings that can be made through offshoring are palpable, what is less obvious are the hidden costs, management problems, instability and miscommunication between the client and supplier, which can result due to a misalignment of expectations during the service delivery.

Apollo Research analyses coverage of outsourcing in a large sample of UK media, including print, online news sites and blogs. The latest July and September research in the September Apollo report for the NOA shows that nearshoring attracted 83.4% of positive comment in September – this is more positive comment than other outsourcing sub-themes such as offshoring, multishoring, onshoring and insourcing. Nearshoring also attracted 0% negative comment while offshoring attracted 16.2%, due to concerns over security and risk, and only 10.6% positive comment.

Nearshoring is fast becoming a significant option within the industry. An option which is seen as being more skill specific (in terms of vertical expertise) and practical for companies with a mixture of complex, high-end projects. Organisations are realising that there is a value in keeping outsourced work close to where the business generally is. As well as outsourcing models, many captive operations are also being implemented in nearshore lower cost locations.

Many established offshore providers are also setting up nearshore centres to remain attractive and competitive to the UK market. While India is still doing great in the offshore stakes, Indian companies have also been looking to extend the offshore opportunity to include nearshore strategies and are building up sites in many European countries.

This year Intelenet Global Services, a leading global third party BPO whose headquarters are in India, launched its first centre in mainland Europe and chose its facility in Krakow to enhance nearshore presence.

Choosing between nearshore destinations can be difficult. Businesses should invest in conducting their research and looking at a country’s expertise in line with their own requirements. Many European countries are fast becoming experts in specific sectors.

Eastern Central European countries such as Poland, the Czech Republic, Ukraine, Slovakia and Hungary are becoming increasingly popular as nearshore destinations. These nations have been working hard to gain a slice of the market and offer businesses a ready supply of high-quality, low cost labour.

Growth in Poland in particular has surged. Last year Poland was the only member of the European Union which did not fall into recession during the financial crisis with 1.6% growth. Its total exports also climbed 21.23% to $135 billion.
Luxoft, a Russian provider of application and product development services, has also recently opened a new development centre in Krakow, Poland.
Dmitry Loshinin, president and CEO of Luxoft, said: “The opening of the Development Centre in Poland is a key part of our strategy to develop a global network of offices, all of which have the culture of engineering excellence, innovation and rock solid execution that our customers have come to expect from us.”

Malta is also rapidly becoming one of the many nearshoring destinations for companies aiming to cut costs by bringing their technology and business processes closer to home. Big names such as HSBC, Crimsonwing and Lufthansa Technick are already taking advantage of its world-class ICT infrastructure, SmartCity media park, bilingual workforce and various tax benefits.

Portugal has just started to promote itself as a nearshore outsourcing location, due to its highly skilled IT labour force and competitive cost to value environment.

Commenting on his nearshore experience, David Walsh, CEO at the international IT solutions company Crimsonwing, said: “We have been fortunate enough to experience extremely low attrition rates, which has helped us to offer clients a great deal of continuity on projects. Crucially, the Malta centre has also allowed us to negotiate some of the typical offshore barriers, such as travel time, culture and language differences, all of which have helped us to compete in this competitive global marketplace.”

Nearshoring can offer clients the advantage of outsourcing to a country whose cultural values and practices are more similar than offshoring destinations. This can be reflected through legislation, institutions, standards and trade practices. It is obviously difficult to convert cultural affinity into objective measurements however it is generally agreed upon that effective communication increases productivity.

Europe offers businesses many significant benefits due to the EU membership and geographical location. Business outsourcing to Europe is guaranteed and protected by EU intellectual property rights and data protection laws. This is encouraging businesses to nearshore as sensitive, proprietary information is protected when transferred as part of an outsourcing agreement.

Nearshore destinations offer small time zone differences, which allow for a quick turnaround of projects among other similar benefits. For projects where online and regular telephone interaction is a must, this is a key advantage.

The geographical closeness between parties ultimately allows for cost savings often making nearshore destinations a lot more cost efficient in the long term.

Costs are also saved on long haul flights, which can allow for an increase in project management and the reduction of time zone issues eliminates the need for extra work. Visas are not needed, training is less expensive and shipping is less costly and very simple. As a result of all of this, over time the real hourly rate difference between offshoring and nearshoring is a lot less than one would expect.

Kerry Hallard, Communications Director, NOA, said: “There is huge growth potential in nearshoring as the range of different models can bring much needed flexibility to a project however there are also some challenges ahead.

“Nearshore destinations need to try and offer an alternative option to the various benefits of offshoring, namely cost, by offering a service which is not only cost-effective in the long-term but one which also has the unique selling point of offering a variety of different sector specialists.”

By focusing on expert service areas, as well as promoting geographical, cultural and long-term cost savings, nearshoring will continue to grow and become a viable and attractive alternative in the sourcing industry.


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