Nearshore Outsourcing 101:What It Means to North American Organizations

WHAT IS NEAR-SHORE OUTSOURCING? Near-shore outsourcing is a form of outsourcingthat involves the transfer of business or ITprocesses and development work to companies in neighboring or nearby countries within similar time zones.

North American companies look to Mexico as well as other South American nations in Central and South America like Argentina or Brazil.

10 years ago India had 70% of the world's outsourcing market. Today its share is 44%.

Traditional offshoring initiatives experience added costs related to complexity and coordination of services.

Productivity loss due to time zone or inconvenient, infrequent, delayed communication

Detailed requirements / documentation

A large selling point of offshoring to India, China and the Philippines is the high quality of education in those countries.

According to the 2014 A.T. Kearney Global Services Location Index, Latin America has four countries in the top 20: Mexico (4), Brazil (8), Chile (13), Uruguay (36).

Of all survey respondents, 26% indicated that cultural barriers with their offshore providers were a problem.

Anything that prevents good communication is an issue, but cultural design differences often pose an even bigger problem.

Spanish is the second language in the US, spoken as a first or second language by an estimated 45 million Hispanics. US clients are frequently more comfortable on the phone with a Hispanic accent than an Indian accent.

However many Latin American nations have signed Free Trade Agreements with the USA, which guarantee IP rights to foreign companies. The National Crime Prevention Council has issued warnings concerning China and India for piracy of intellectual property.

In many Asian countries, the incidences of IP theft and counterfeiting are widespread.

MEXICO

BRAZIL

20%

0%

60%

40%

100%

2004 2014

80%

ARGENTINA

NEARSHORE VS OFFSHORE

TOTAL COST OF OWNERSHIP (TCO) AND HIDDEN COSTS

AVAILABLE TALENT

“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.”

- Wendy Tate, Associate Professor logistics at University of Tennessee

“We factor an additional 30% into our costs to India for travel and other soft costs. Going to Mexico works out cheaper.”

- U.S. Buyer, HFS Research

Travel expenses

Infrastructure limitations: Communication systems

Highattrition

Higher risk of loss of IP

Slow / Politicized immigration process

Offshore talent is often 10-15 time zones away. The logistics of scheduling conference calls is extremely challenging.

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.

TIME ZONE COMPATABILITY

Tasks completed overnight by someone in Mumbai are reviewed the following morning.

If there are problems, the manager has to wait half a day to get the updates done.

10PM

5PM7:30PM

19hrs Flying Time

CULTURAL BARRIERS

INTELLECTUAL PROPERTY PROTECTION

“You can’t just let things run remotely. You need to manage the resources and monitor the work locally. And that’s a problem in India.”

- Program Manager, US, HFS Research

RISK CONSIDERATIONS - INFORMATION PRIVACY

The varyingnature of privacy requirements across geographies puts added stress on the global sourcing model.

Multiple national/sector laws plus state/provincial laws

Some Countries with National Laws/Sector Laws

EU Directive Implemented in Every Country

Few national laws

Multiple National/ Sector Laws

Widely Varied

Why? ARE NORTH AMERICAN ORGANIZATIONSINCREASINGLY RELYING ONCENTRAL & SOUTH AMERICAAS A POOL FOR NEARSHORE OUTSOURCING?

Universities in countries including Argentina and Mexico are well-respected in the educational community. Brazil has the most Java programmers in the world and the second-most mainframe (COBOL) programmers.

Large numbers of professionals in Latin America have attended universities in the United States and understand our market needs.

However, there is a very large pool of highly skilled, college-educated resources available in Latin America.

OFFSHORE TEAM

26%

According to the Associated Chambers of Commerce and Industry of India, in 2010 the IT

and BPO attrition rates in India reached a startling

STAFF TURNOVER 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.

FACTOR NEARSHORE OFFSHORE

Frequent Communication

High Interaction

Business Practice Familiarity

Cultural Differences

Project Management Coordination

Implementation Speed

Control of Operations

High

High

Major

Minor

Ideal

High

High

Limited

Limited

Moderated

Major

Limited

Moderated

Moderated

10AM

9AM

11AM

55%

In China and India, the high number of holidays decreases productivity and frequently extends to project timelines. TOO MANY HOLIDAYS?

36

INDIA has 77 National or

Regional Holidays per year

The UNITED STATES has 10 National and on average 1 state holiday per state

per year.

MEXICO has 20 National or Civic

Holidays

ARGENTINA has 23 National or

Non-Working Holidays

CHINA has 36 Special, National or Local Holidays per

year

772310+1 20

However this situation has not been seen in Latin American countries; the family-oriented culture of these countries keeps many close to home and minimizes turnover rates.

There are numerous incentives for hiring Latin American talent.GOVERNMENT INCENTIVES

Argentina has a large pool of graduates in its major cities—Buenos Aires, Rosario and Cordoba—and low labor costs following the devaluation of the peso in 2002. Argentina’s government has prioritized the software industry and offers special benefits to IT and software companies including reduced tax rates.

Incentives Include:

Tax exemption of 60 percent of the total amount of income tax

Fiscal stability for 10 years as from 2004

Reduction of employer contributions up to 70 percent

No restrictions on foreign currency wire transfers for imports of goods and services

Other benefits derived from the recognition of software as an industrial activity

With its political stability, talent pool and reliable telecommunications infrastructure, Brazil is a highly connected nearshoring hub.

Incentives Include:

Reduction in social security contributions up to 50 percent

PIS/Cofins tax exemption for products purchased for export

Spending on staff training and development, and research and development can be

Deducted against income tax

Tax exemption on the import of software development materials

Tax deductibility on technology transfers, licenses and royalties

Employing the ‘Maquiladora’ concept, which Mexico successfully used to attract foreign investment in its manufacturing industry, the government is trying to apply the same incentives in the global services area.

Mexico’s Outsourcing industry has developed in the last 10 years leveraging the country’s proximity to the U.S., the NAFTA free trade agreement and its large pool of bilingual workers.

Mexico’s Software development program (Programa para el Desarrollo de la Industria del Software, or PROSOFT) is promoting Mexico to IT clients as a world-class nearshore alternative by offering cash grants of up to 50 percent of the total investment and tax credits of up to 30 percent of R&D expenses.

Argentina Brazil Mexico

VENICE CONSULTING GROUPFor More Information | 855.202.0824 | info@veniceconsulting.com

http://www.businessweek.com/articles/2012-03-15/outsourcing-a-passage-out-of-india

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