This is the second of a three part blog series on information technology outsourcing (ITO).
When deciding where to place my child as I went back to work, I thought I had decided on hiring an in-home nanny. But then I spoke with a friend who had done exactly that and she shared a very good point that I had not considered (that is, with nanny and child at home all day the house chores & clutter multiplied and the family ended up spending many evenings and weekends cleaning house). Contrast with dropping off a child in the morning then arriving in the afternoon to a clean home, as you left it. Hmmm, that really made me stop and think; and ultimately saved me from making the wrong choice. We were able to find a much better situation that aligned with our family needs.
No, this post is not a lesson in child care, but rather making informed decisions that will best suit your company goals and culture. In it I will share many of the advantages and risks associated with each of: offshore, nearshore and onshore ITO.
Quick. What are the top three reasons why you would offshore your IT projects? Do yours match up with the top three reasons from our recent survey? Identified as:
- Lower staff-related costs
- Company does not have sufficient headcount for the IT project
- Increase productivity / time to market
Certainly, there is great attraction to offshore providers’ lower engineering bill rates. In an offshore model, projects with aggressive deadlines can benefit from “follow the sun” development cycles where code moves around the globe according to the start of each country’s work day. Also, highly defined and well-documented projects which require little back-and-forth collaboration can be optimized with an overseas provider.
Not too shabby.
However, nearshore offers some advantages over offshore, specifically in terms of better communication than with offshore due to similar time zones and closer cultural compatibility. Travel costs are also reduced when working with a nearshore provider. And as with offshore, nearshore wages can remain advantageously low.
So why isn’t every business moving to an offshore or nearshore model?
And interestingly, why are many businesses reversing their offshore decision and bringing the work back onshore?
Honestly, contracting with offshore ITO does not fit the needs of every firm nor IT project.
Here are some important advantages of onshoring you may consider when making your sourcing decisions:
- Higher quality – skills and availability of resources in the US is unmatched, according to AT Kearney’s Global Services Location Index
- Smaller effective team sizes, due to cultural, language and time zone similarities
- Stronger team collaboration and integration minimizes communication problems and improves the product development process
- Significantly lower management fees
- Data / IP security
- Lower travel costs
For innovative projects, or initiatives that are loosely defined or not well-documented, firms find that partnering with an onshore ITO provider is the more effective choice. If frequent, real-time communication is important to the success of the project, then onshore efficiency and meeting milestones may well make up for misinterpreted requirements, missed milestones and project rework that might accompany lower bill rates overseas.
I’ve mentioned some risks of offshoring already. Some of the most obvious and challenging include cultural, language, and time zone differences. Other offshoring risks include: loss of employee morale, larger than necessary team size, wage inflation may erode projected financial gains, high turnover in offshore firms continues to be a challenge, and of course poor quality (not always due to technical skill, but possibly due to inherent communication challenges previously discussed).
Nearshore providers offer some advantages over offshore ITO, yet share some of the same risks, if sometimes to a lesser degree. When outsourcing from the US to Canada, for instance, language barriers may be non-existent, but there are still different holiday schedules and cultural nuances that will need to be accounted for. For most US nearshore destinations in Latin America, English is not the primary language, so communication can be strained.
Onshore risks exist primarily with a firm that has highly defined, well-documented IT projects that require little creativity or innovation. With such a project, it is possible to over spend for onshore services. However, the assurance that the project will be done locally (to specification, on time and within the designated budget) may supersede other potential advantages of sending work offshore.
Once again, consider your objectives and get as much information as you can before making your sourcing decisions. Also refer to our white paper for assistance: Location, Location, Location! Best Practices for Selecting Onshore, Nearshore or Offshore Technology Services
Leave a comment to share with our readers what advantages and risks you have encountered with offshore, nearshore or onshore ITO providers.