Why nearshoring is gaining popularity
2 December 2018
Lower costs, high level of competence and quality of work. Nearshoring is becoming more and more popular and countries such as Poland, Czech Republic or Romania are becoming European IT outsourcing centres. Why is the trend moving from far-away outsourcing in India and Africa, to nearshoring in eastern Europe?
According to Deloitte Global outsourcing survey, 74 percent of companies from the IT sector are already outsourcing and 87 percent of responders are planning to outsource. What’s more, IT is the most commonly outsourced function in 2018.
In 2017, according to KPMG analysis, 727 IT outsourcing contracts worth $137.2 billion were signed worldwide. In terms of value, approximately 84.2 percent of deals (both IT and business processing) originated from the United States, followed by the United Kingdom (5.2 percent). Spain and Australia were two other important outsourcing markets.
India, China, Malaysia, Indonesia and Brazil open the A.T. Kearney Global Services Location Index. Vietnam, Philippines, Thailand, Chile and Colombia are also on the top 10 outsourcing locations list. As for European countries we can find Poland (12th place), Bulgaria (15.), Czech Republic (16.), Germany (17.), Romania (18.), and United Kingdom (19.). Belarus, Czech Republic, Poland, Hungary, Romania and Ukraine are also the best outsourcing destinations in Eastern Europe according to Ignite.
Outsourcing to distant, often exotic countries became popular with the growth of new technologies, driven by the low cost of services. Outsourcing enables companies to handle more work without having to hire more people, for instance, during periods of peak demand for their services. However, many companies are no longer satisfied with the results of outsourcing and that’s why nearshoring is growing in popularity.
Nearshoring is a term which describes outsourcing to the countries located near the country where the outsourcing company operates, often sharing a border with it. It combines the advantages of outsourcing and onshoring (hiring company from the same country). For instance for companies from the United States, a popular nearshoring destination is Mexico whereas Eastern European countries have become a service base for European countries.
Let’s take a closer look at 4 areas that are strategic to outsourcing and find out, which outsourcing model is most efficient.
1. Costs of service. If the lowest price is the priority, offshoring will probably be the best option. However, before deciding to locate part of your business in Asia or Africa, you need to consider other expenses you may have to bear. It is worth choosing a country which is well connected with yours and which, if necessary, can be reached quickly and at a relatively low cost. Otherwise you may have to pay for a last minute flight to the other continent. Placing your business in a nearby country will enable you to establish a relationship with your supplier. Face to face meetings are the best option not only when it comes to solving problems, but also in terms of building mutual trust. Short distance also gives you a chance to better identify the market and service provider before signing a contract. A mistake in this area may mean financial losses higher than the cost of hiring a more expensive company from your own country. Market intelligence will also make it possible to find out what conditions people providing services to you work in. It is a matter of costs – after all, the image of our company has a high value.
2. Quality of work. Employees’ education and knowledge is not too crucial when you outsource simple, automatic activities. However, if the tasks to be outsourced require expert knowledge, the level of education and quality of work in the country of destination are crucial. This is the case with outsourcing IT services, which is why countries such as Poland with many renowned engineering universities are becoming more and more popular. And again – Eastern European specialists may be more expensive than Indian ones, but it is compensated by fewer mistakes and misunderstandings at work.
3. Communication with the service provider. Don’t think of it as a soft skill. In terms of remote work, communication is the key to success. You have to be sure that the tasks you have commissioned have been understood properly. Also when it comes to language. It is very hard to cooperate with people with poor English or a strong accent. In case of misunderstanding, you may lose many hours of work – both yours and those of your employees. Secondly, while working with employees from distant countries, you need to take cultural differences into consideration. They may affect, for example, the tools used at work or the schedule of days off. And an unexpected break in work may make it impossible to meet deadlines and, hinder progress and innovation. In addition, think about time zones. Even if your provider is willing to talk in the middle of the night, is it the best way of doing business? And are you able to react any time of the day when something urgent and unexpected happens? If not, the decision-making process will be longer and efficiency will decrease. Such a problem does not exist when you decide to choose nearshoring.
4. Legal formalities. Be sure to check the law of the country you want to outsource to. Even when you pay taxes and wages elsewhere it may affect your business. Find out where disputes over vendor errors get resolved and check what your liability insurance covers in case something goes wrong. Make sure that your data and business secrets are safe (cooperation with the EU countries will be a great comfort for European entrepreneurs). Think about the political situation in the country you want to be associated with. Does the law change frequently? How is foreign capital perceived? Go for stable, growing economies. And last, but not least – think also about employees’ rights. If you have a feeling that you cannot gain such information, maybe this particular country shouldn’t be taken into consideration.
As Sweden lacks 70 000 IT professionals according to IT-företagen, more and more Swedish companies are researching how they can use nearshoring to help them solve the talent shortage. In the next article we will compare the Eastern European countries in terms of nearshoring capabilities to help you decide which country is best for you.