Over the past 10 years, the trend toward offshore service providers for software development or IT projects has become an accepted solution for most large corporations. Although these low-cost offshore developers provide some benefits for the company, they also come with challenges; cultural differences, time zone discrepancies and language barriers are just a few. All of these challenges can lead to communication issues that may ultimately hurt the business.
However, from this, a new trend is starting to emerge: service providers working for an affordable rate are now establishing in South America. These new groups of individuals and companies can deliver the same quality work that can be found elsewhere however they offer solutions to some of the shortcomings that offshoring holds.
What is nearshoring and how does it differ from offshore outsourcing?
Traditionally outsourcing or “offshoring” involves contracting IT or developer resources from countries in the Asia/Pacific region, with the most common locations being India, China, and the Philippines.
According to Dictionary.com the term “nearshoring” refers to the practice of moving one’s employees or business activities from a distant country to a country that is closer to home. Nearshoring capitalizes on benefits of proximity, which include time zones, cultural and linguistic similarities, and political factors. When it comes to the United States, this means that companies would turn to countries in Latin America, (such as Panama, Colombia, and Uruguay) that are rapidly becoming new outsourcing hubs for IT and development projects.
Advantages of Nearshoring
Nearshoring has already been a popular option for the last several years in the manufacturing sector.
9 major reasons that are leading to the increase in nearshoring:
- The cost of labor in Asia/Pacific countries is rising; Latin American countries are now competitive in price
- More than 10 years ago companies started using candidates from India and China. However this is rapidly changing, over the past few years the financial attractiveness of this option has become less favorable. According to Wendy Tate, assistant profess or logistics at University of Tennessee, “Chinese wages are now climbing at 15 to 20 percent per year… thanks to a supply-and-demand imbalance of skilled laborers in manufacturing regions, global pressure to upgrade Chinese labor practices and wages, and increased employee demands for better pay and conditions.”
- Time zone compatibility
- A large concern of those who use offshore talent is that their team is 10-14 time zones away. The logistics of scheduling conference calls is challenging. When workers are in different time zones the offshore members of the team are left to do tasks overnight for managers to examine the next morning. Then if there are problems, the manager has to wait sometimes half a day to get the updates done. In addition to this, unnatural working hours can be a problem for employees. It takes a toll on them and affects their quality of work. However in contrast, the Latin American countries fall in the same time zones as the United States, which allows for real-time conversations, normal work hours and a higher quality of deliverables.
- Available Talent
- A large selling point of offshoring to India, China and the Philippines is the high quality of education in those countries. However, because outsourcing in Latin America is just being discovered by the United States there is a very large pool of highly skilled, college-educated resources available. Universities in countries such as Columbia and Panama are well-respected in the educational community, hundreds of students from the United States travel there yearly as foreign exchange students. In addition to this, a large number of professionals in Latin America have attended universities in the United States and understand our market needs.
- Technology Infrastructure
- In 2011, Latin America and Eastern Europe surpassed India in the growth of outsourcing facilities (Source: www.nearshore.com). This is consistent with investment that have been made to improve the technology infrastructure over the past few years in Latin American countries. Fast internet connections, construction of new data centers, and improved telecommunications facilities are all helping to make the connection to US-based companies as seamless as possible.
- Language/Cultural similarities
- When dealing with countries like China there can be a large communication issue when English is not their native language or not as commonly spoken. However with most nearshoring countries providers are highly proficient in English (or the language of their client), even if it is not their official language. This can be a great advantage when communication is primarily via phone and email.
- There can also be cultural difference that can impact the work that the client does, in India there are completely different holidays then there are in the United States. Nearshoring greatly reduces these types of problems based on the fact that there is better communication and coordination between countries that have similar cultural backgrounds.
- Intellectual property protection
- In many Asian countries, the incidences of IP theft and counterfeiting are widespread. However many Latin American nations have signed Free Trade Agreements with the USA, which should guarantee IP rights to foreign companies.
- Political risk and security
- Geopolitical risk is a factor that should be strongly considered when evaluating outsourcing options. Does the country have a history of nationalizing privately-held business owned by foreign corporations? Can the government close down an operation that they consider to be contradictory to their philosophy? It is crucial to evaluate the political situation of the county where a service provider maintains staff.
- Trade regulations and compliance
- In October 2011, the U.S. Congress approved trade agreements with Panama and Colombia that have created the largest opportunity for exporters in decades. This has also increased the chances of doing business with these countries. In addition to this, Panama agreed to become a full participant in the WTO Information Technology Agreement.
- Low staff turnover
- According to the Associated Chambers of Commerce and Industry of India, in 2010 the IT and BPO attrition rates in India reached a startling 55%. Companies are reluctant to enter long-term projects with an offshore team, knowing that over half of the original team will be gone within one year. However this situation has not been seen in Latin American countries; the family-oriented culture of these countries along with being in the same time zones as the US makes it less likely for them to leave a position.
The benefits of nearshoring are quite clear: low costs, compatible time zones, lower staff turnover, business-friendly climate, and better protection of your intellectual property. If you are looking to outsource IT or software development, you no longer need to look halfway around the world.
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