Strategic CIO // IT Strategy
News
9/17/2008
04:30 PM
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Near Shore Or Offshore, Soft Costs Matter

Distinctions blur among outsource options, but fundamentals don't change.

In the past, outsourcing meant sending work offshore--very far offshore. India always made the short list when companies moved to outsource solely to reduce their TCO.

But now, as India's labor costs rise, other countries are making inroads into the outsourcing business. And organizations are weighing the potential for "near-shoring"--sourcing work closer to home, in Canada, Mexico, and other Western hemisphere locations--for reasons besides costs. Near-shore locales offer tighter language, educational, commercial, and cultural alignment; time-zone coordination for work teams and managers; and relative stability of resources.

However, the distinctions between offshore and near shore are gradually blurring. Indian and Asian-based providers are expanding to near-shore locations, particularly Central and South America. As more options come online, CIOs making an outsourcing decision should consider these rules:

• Engage vendors in a competitive process. Leverage their best thinking, and challenge them to propose the optimal solution based on your requirements.

• Quantify costs of labor, infrastructure, travel, and telecommunications.

• Evaluate factors such as vendor attrition, cultural differences, and the impact of time-zone differences.

• Analyze geographic, geopolitical, and geoeconomic data with appropriate discount factors.

• Visit potential offshore and near-shore sites. Too many CIOs make decisions worth hundreds of millions of dollars without setting foot in their vendor's facilities or interviewing their proposed project management team.

• Give stronger consideration to vendors with both offshore and near-shore capabilities.

• Consider a blended shoring approach as a hedge against unstable or unpredictable labor, security, financial, or political factors. Factor transition (offshore to near or vice versa) terms into your contract.

Keep These Factors In Mind
  Offshore Near Shore
Locations India, China, Philippines, Eastern Europe and Asia Canada, Mexico, and Central and South America
Labor rate Least expensive Less costly than U.S./U.K. rates, more expensive than India, Asia
Political risk Varies by country Generally low, with a few exceptions (Venezuela)
Resource pool Hypercompetition for talent leads to higher attrition in India, instability in China, varies in Eastern Europe Typically a more stable workforce, longer-term employees</td>
Infrastructure Varies by country, susceptible to natural and infrastructure events; telecom costs high to/from U.S Typically good but varies, susceptible to natural and infrastructure events (power availability)
Education Large pool of highly qualified technical resources with emphasis on engineering, technology Western-based education system, strong ties and understanding of U.S. commerce; behind India/China in technical resource pool
Time-zone difference 8- to 12-hour difference 3 hours or less
Business culture Still lack of commercial knowledge, scant synergy with U.S. business culture Dominated by large Western cultures, distinctly Hispanic, most companies are driven by Western holiday calendar
Data: Pace Harmon

-- Steve Martin, partner, and Dan McMahon, senior associate, at consulting firm Pace Harmon

Photograph By Getty Images

Return to the main story:
Why We Picked China For IT Outsourcing

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