Despite the recession, or perhaps because of it, outsourcing remains big business.  I recently read that more than half of UK companies still regularly outsource business critical applications.  However, if we are to believe the papers, outsourcing is in decline: the value of outsourcing deals is falling, contracts are being renegotiated in an effort to cut costs and we are in the middle of a supplier price war! 

Whether or not this is true, it certainly isn’t the whole picture, or at least not from where I am standing. It seems to me that certain types of outsourcing are performing better than others.  For example niche services like software development and bookkeeping still seem to be growing. I believe we are actually seeing two phenomena that will continue whatever the economic climate, because they make sound business sense in a globalised world. First, different regions are emerging as off-shore centres of excellence for particular requirements. For example, Eastern Europe for programming skills or the Philippines for call centres. Second, nearshoring is becoming more popular.

The first phenomenon has been predicted for a long time and we have seen it many times before in other industries. The second and its causes are, in my view, more interesting.
A decade ago the primary objective of outsourcing was to improve costs, hence the success of traditional offshoring centres. Today, priorities have changed:  while saving money remains important especially in today’s business climate, it is being caught by the requirement for outsourcing to actively support the business and contribute to the achievement of higher-end strategic goals. I see this on a daily basis from my customers – cost reduction is no longer enough to swing an outsourcing decision. Many customers these days are asking about long term relationships, skills, security and quality as much as they are asking about pricing.

In addition, some of the advantages of offshoring further afield are slowly eroding. The costs of software development in Brazil (for North American organisations) and Eastern Europe (for European ones) are now on a par with Far Eastern destinations. Some perceived disadvantages of farshoring are seen as increasing: security in some destinations has become a greater concern. As the managing director of a UK company I met recently said: “Although a terrorist attack is unlikely, I’d rather offshore to somewhere safer, if it meets all my other criteria.”

At the same time, some of the advantages of nearshoring destinations, particularly in Eastern Europe are creeping up the value scale.  For example, countries in the European Union (EU) adhere to EU Intellectual Property law. A short time difference means ease of management and many problems can even be resolved within a single working day. Most nearshoring destinations like Ireland, Poland and Russia offer extremely good higher education systems and therefore can provide a highly-skilled work force: here in Poland we have a higher percentage of school leavers going on to study at university that in Britain.  Furthermore most nearshoring destinations currently offer a low average churn rate. Surely these factors are all contributing to a rise in demand of nearshoring services.

I also think it is important to remember that some near-shoring destinations are deliberately not geared up to offer large-scale, fast-ramp up operations. Instead, some are choosing to offer more niche, bespoke services, trading on quality as their differentiator. If organisations are shifting away from outsourcing from larger contracts to multi-sourcing then this approach will sit very well with them.

Multisourcing is not short-term “quick-fix” outsourcing. Because it involves managing multiple parties it is a more long-term strategy and companies taking it up are looking to develop lasting relationships with suppliers who can really become an extension of their core in-house team. This sort of relationship involves more face time, high-quality niche skills, two-way consultancy and often dedicated teams at the outsourcer. These are all attributes that today’s nearshoring destinations excel at.

At the beginning of the year I read that 2009 would be the year of nearshoring. This is now looking more likely than ever.  Most of the companies I have met in the last twelve months have either decided to go straight to nearshoring without trying farshoring or are switching from further afield to nearshoring. It appears that a growing number of UK companies looking to outsource IT services in particular, consider just the UK itself, Ireland, Poland, Russia and the Ukraine.

While nearshoring may not be right for all organisations, when it is part of a thoroughly planned sourcing strategy it can deliver impressive bottom-line results with little effort from the company outsourcing the project. The ever increasing number of companies outsourcing to nearshore destinations is a clear testament to this.

by Jaroslaw Czaja, Chief Executive of Future Processing