WHITE PAPER Nearshore 2.

0: Nearshore Goes Global

By Softtek

Over the last two decades we have seen the offshore outsourcing market evolving from offering cost savings to serving as an enabler for business competitiveness, transformation and growth. We have also witnessed how sophisticated buyers are looking for a new generation of global outsourcing services that aim for operational effectiveness, high collaboration, risk mitigation and innovation. Our role at Softtek has been to proactively participate with our clients in this progression and transform the Nearshore model accordingly. This document delineates our vision for the next wave, which we have codenamed Nearshore 2.0. What is Nearshore?
The concept of Nearshore was first coined by Softtek in the late 90s as we began to do work with our first U.S. clients. The concept began to gain ground during 2002-2003 as Softtek and Mexican government began marketing the concept more aggressively. The broad market now identifies Nearshore with primarily Canada and Mexico for the U.S. market. The term has also now evolved to describe any outsourcing location near to its primary market (i.e. Eastern European countries to Western European Countries).

Nearshore .0
The original concept of Nearshore or Nearshore 1.0 as we are defining here basically promoted the following customer benefits:

Proximity and Timezone

Geographic proximity and similar time-zones allowed companies to have increased face-to face interaction allowing more complex types of projects to be done Nearshore. This filled a gap left by distant offshore locations such as India.

Cultural Affinity and Ease of doing Business

Because of proximity, most Nearshore locations have closer cultural affinity to their primary markets than offshore locations. Mexicans for example are very familiar with U.S. lifestyles, customs and styles of communication. In addition, because of NAFTA, Mexico has not only been an important manufacturer and provider of services to the U.S., but is an important market for U.S. businesses. This business exchange has further increased familiarity between the two cultures, helping to minimize communication issues due to cultural differences. In addition, because of NAFTA, visa issues are virtually non-existent as Mexicans can obtain TN visas (renewable 1 year term) easily.

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Cost Savings
Depending on the location, cost savings can be equal to that of offshore locations. For example, Mexico was able to give substantial cost savings to U.S customers that were comparable to cost savings in India because the Total Cost of Engagement was lower. Although Mexican labor rates were 20-30% higher than that of India, contracting costs, due diligence, communication and travel were lower. In addition, a higher percentage of work could go Nearshore than offshore resulting in lower costs. The largest negative of the Nearshore 1.0 market was scale. Not only were there not enough technical resources in a specific region to allow quick ramp ups of large scale but Nearshore market remained local. Even large companies were set up as regional offices, not equipped to pull resources from their own different locations to meet the needs of their U.S clients. In addition, the low number of reputable Nearshore vendors contributed to low mindshare amongst buyers.

Market drivers for Near Shore 2.0 Shift from Monolithic to Networked Structures
Ironclad 10 year outsourcing engagements with a single vendor are in the past as corporations look for more competitive, flexible and agile outsourcing engagements. Trends fueling sourcing globalization, such as increasing influence of BRIC countries, reduction in communication costs and global adoption of models such as CMMi and Six Sigma are changing business dynamics. These factors are influencing companies to create a network of knowledge based services, instead of single regional locations of expertise. The end goal is for these networks to be leveraged on-demand, around the clock on a global basis.

Need for True Risk Diversification

The most likely reason companies are looking towards a multi-country strategy is that companies are feeling the negative sides of India offshoring. Escalating labor costs, attrition and congested infrastructure are motivating companies to look outside of India as part of their offshore strategy. Global companies experienced in offshoring are developing multi-country strategies for offshoring that includes Nearshore, India, China and other parts of the world. We anticipate that other large companies will employ similar multi-country global sourcing strategies in the next 5 years.

Global Sourcing Services are No-longer just for Big Companies

Midsize businesses are also looking to outsource globally as the offshore market has matured. Although they are pressured to move offshore because of cost, some are hesitant because they are aware of difficulty in executing offshore engagements. Lack of experience working in remote teams and internal process change requirements are deterrents to offshore. In addition, they have heard or experienced the horror stories of high Indian attrition rates. For these companies, a Nearshore model offers significant benefits to their offshore counterparts.

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Right-Placing
More corporations are looking into global sourcing for reasons beyond just cost reduction. As a result, they are looking to outsource a particular piece of work to the region best suited to perform that work well at the right cost. For example, a company may look Nearshore instead of offshore for an ERP implementation because it requires a high onsite component. Another company may find the best value from having best-of-breed talent for a particular technology or business process. We have observed that 5 factors influence the decision of where to Right-Place: 1) Degree of interaction required 2) Need to balance geographic risk 3) Skill sets required 4) Scale required 5) Opportunity to enter a new market The following two examples showcase Softteks experience with Right-Placing: 1. A Buy-to-Pay BPO Solution A global corporation was looking for a vendor to perform purchasing activities for direct sourcing at their company. By definition, this process required a significant amount of information going back-and-forth between the vendor and the client. It also required specific language skills and an understanding of various countries idiosyncrasies related to purchasing. This corporation chose Softtek because Softtek could meet these specialized needs for both their European and U.S. offices by using our Nearshore centers in Spain and Mexico. 2. Testing Solution A global financial services corporation needed a global application testing solution. Due to the dynamic nature of its industry, the client needed tightly integrated and stable development & testing teams. They were struggling to achieve this due to time-zone differences and attrition rates in India. Softtek was able to provide the specialized expertise in testing as well as provide more stable resources to this firm.

Follow-the-Sun
As more companies take their products and services global, more business processes and applications need to be supported 24x7 in multiple countries and in multiple languages. Until recently, only large global companies had the option of setting up follow-the-sun models because they required enough scale to employ multiple vendors or they required the ability to set up their own delivery centers in foreign countries. As more mid-size companies expand their services and products globally, there is an increased need to find vendors who can implement follow-the-sun models. As these companies may not have significant scale, finding a single vendor to implement such models will be necessary from a governance and pricing perspective.

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Nearshore 2.0 Defined
Nearshore 2.0 is the evolution of the Near Shore model into a true global delivery model which can provide networked resources, true risk diversification and transformational change while delivering an outstanding customer experience.

Networked Resources vs Point-to-point

Nearshore companies will reorganize their existing regional offices into a true global network of resources, employing resources from any office to meet clients needs. Although this may seem obvious to U.S. customers, especially of global companies, much of the worlds IT companies still operate in a regional/local market fashion. This shift will require major cultural changes within organizations, as they will have to deliver quality service in a consistent manner to different regions of the world.

Expanded Global Locations vs. Regional Focus

The second shift will be to open global locations outside the Nearshore comfort zone. This means expanding not only into their primary markets but opening up delivery centers in parts of the world that offer them access to more skill sets and scale. For example, a company in Brazil may open a delivery center in Eastern Europe to supply Nearshore services to its Western European clients and open a second delivery center in Asia to offer offshore scale to its U.S. clients. This global expansion will mitigate the largest current negative in Nearshore 1.0 companies which is the ability to scale and will provide the foundation for follow-the-sun and right-placing strategies.

Increased Breadth of Services

Nearshore 2.0 companies will offer a wider breadth of services than their Nearshore 1.0 counterparts. IT offerings will expand beyond general programming services to ERP services as well as specialized industry specific skill sets. As the technical skill sets expand, longer term contracts will be drawn with Nearshore providers as they will be able to take on maintenance and support of entire systems which most were previously unable to do. BPO offerings will expand as well. In some locations such as lower cost locations such as Mexico, more general BPO and call center offerings will exist while higher cost locations such as Canada, will focus on specialized niche skills.

Vertical/Solution Oriented vs Horizontal Focused

The most important shift will be from a horizontal to a vertical focus. In order for Nearshore companies to play a significant role in the global outsourcing space, they must shift towards providing business solutions. Although many Nearshore locations have extensive industry specific regional expertise, they have not been good at packaging and marketing this specific experience into industry specific solutions. Nearshore 2.0 companies will make this shift by verticalizing first their offerings and then their organizations over the next few years.

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Transformational Outsourcing vs. Operational Outsourcing
Nearshore 1.0 outsourcing involved transferring an existing function or process to an adjacent or nearby location as-is. The result was that the buyer received similar performance from the service provider than they themselves had achieved, but at a lower cost. Nearshore 2.0 companies will have the ability to make transformational changes to processes by taking on more processes and re-engineering those processes to improve performance. Furthermore, in some cases, the Nearshore 2.0 company will create a new service or process with the client to fulfill a clients changing needs.

Great Customer Experience

No matter how sophisticated a clients IT governance processes may be or what level the vendor has achieved on quality maturity models, in the end, projects are executed by people, not by processes. People still remain the most important factor for success in the long-run of any engagement. A study by GBPA (Global Business Partner Alliance), found that one of the reasons most frequently mentioned by managers on why global engagements failed was the lack of vendor resources ability to develop long-term inter-personal relationship with hiring managers. Successful Nearshore 2.0 companies will emphasize providing outstanding customer experience that goes beyond near benefits. At Softtek we aim to leverage the creative and unique qualities of our people around the world to provide a truly human element to our services.

Summary
Leveraging proximity has only been the beginning of the Nearshore advantage. The issue is that most vendors have not been able to move beyond location to provide real value. Building Nearshore 2.0 capabilities does not happen overnight. It will require dedication by Nearshore providers to evolve to their clients global needs. In the long run, as global players expand their footprint into Nearshore locations and Nearshore players establish global delivery centers, differentiation will come from vertical expertise, quality of service delivery and customer experience.

Copyright Softtek Integration Systems, Inc. 2001-2007. All Rights Reserved. Softtek, the Softtek logo, Near Shore and other Softtek products and services mentioned herein are registered trademarks of Softtek Integration Systems, Inc. in USA, Mexico and several other countries. Nearshore 2.0: Trademark Registration Pending. The information contained in this document represents the current view of Softtek on the issues discussed as of the date of publication. Because Softtek must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Softtek, and Softtek cannot guarantee the accuracy of any information presented after the date of publication. This document is for informational purposes only. SOFTTEK MAKES NO WARRANTIES, EXPRESS OR IMPLIED, IN THIS DOCUMENT.

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