Nearshoring is not new. Businesses have realized the benefits of nearshoring – from timezone alignment, lower costs, easy collaboration, for many years. As a result, we’ve seen the dramatic growth of the nearshore sector over the past 15 years. Belatrix for instance has had an annual growth rate averaging 35% over the past five years – we’ve become used to the growth rates that the traditional outsourcing sector (particularly in India) saw in the early 2000s. Today in the digital world, it’s the nearshore sector which is eclipsing traditional, offshore outsourcing destinations. What are the factors behind these changing dynamics?
This week we will dive into the benefits of nearshoring in a series of articles. We will explore whether the benefits are the same as they have been in the past, or whether, with the emergence of new digital technologies from artificial intelligence to virtual reality, nearshore’s importance is growing even more.
We’ll be publishing three articles covering:
First, let’s look at how the world of nearshore has changed over the past decade.
Many businesses around the world have a need to simplify their operations and become more efficient. Among the most popular ways to achieve this is to source resources and expertise from outside the walls of the business, which can be through either offshoring or nearshoring. The 1990s and early 2000s was a time of the first generation of outsourcing, with a standard example being a business in Europe or the USA outsourcing projects or even replacing complete departments, with companies in India or the Philippines with motivation being driven overwhelmingly by lowering costs.
Moving forward to the post financial crisis period, priorities and strategies drastically changed for many businesses. Facing a more uncertain business environment, businesses quickly had to become more flexible and the ability to ramp up and ramp down teams as business requirements changed, became critical. While in the immediate aftermath of the crash venture funding dried up, by 2011, the environment had become much more attractive, reflected by companies such as LinkedIn and Groupon announcing their IPOs. This helped drive the next tech boom. But it also became harder and harder to find qualified technology professionals – in locations with a lot of demand, salaries for tech professionals quickly rose. The “war for talent” was alive and well. The demand for highly qualified technology professionals helped drive growth in nearshore services, as executives were attracted by the value proposition of working with partners in a close geographical location.
Fast forward to 2019 and to achieve success in the digital world, businesses know they need to deliver powerful customer experiences powered by software. Deloitte’s 2018 Global Outsourcing Survey found that organizations are looking to service providers to help them continually innovate and that cost reduction is no longer even in the top five drivers for working with partners. As the report states, outsourcing enables organizations to achieve a competitive advantage, because it makes them “more agile, effective, and efficient”.
Creating complex, modern software products requires a diverse range of skills and capabilities. Working with partners enables businesses to fill this critical gap by offering professionals with specific skills and expertise when they are needed in a project. Meanwhile, Agile development is also a core part of the move to nearshoring and one of the key reasons organizations prefer to work with partners that are located close to them. Indeed, we have argued that Agile has become the core methodology with which organizations should be using to drive their digital transformations. In Agile development there are short phases of work, frequent reassessment, and adaptation of plans, all of which is helped by the real-time communication which is enabled by being in the same timezone.
For companies to work together there are major advantages to work with partners in countries with easy access (to minimize travel time when this is needed), countries that are in a similar time zone to maximize time overlap and simplify communication, and that are also culturally aligned. And this is exactly where nearshoring comes in: working with a team in another country, but a country that is as close as possible to your own country.
As the analysts at Forrester Research have pointed out, organizations are looking to external partners to “improve the customer experience, improve product quality, accelerate time-to-market, and transform business processes”. Their survey of 300 US-based IT and business executives found that enterprises are turning to onshore or nearshore providers for their digital transformation projects. A core reason is because executives believe quality is higher among onshore and nearshore providers.
In our next article, we’ll examine the decision making process of CTOs and other senior executives.
April 23 / 2020
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