Nearshore: India Software Inc moves closer for comfort

While India is doing great in the offshore stakes, Indian companies are looking to extend the offshore opportunity to include nearshore strategies and are building up reference sites in countries like Mexico and Canada. Venkatesh Ganesh analyses the increasing significance of this trend as India seeks to become king of the global delivery model

Nearshore outsourcing is the practice of outsourcing work to neighbouring countries. Besides the normal benefits of outsourcing, geographical proximity translates into easier access and communication. Research and advisory group Gartner estimates that while 40 percent of Fortune 500 companies have already utilised the offshore model for software development, 30 percent of the top 2000 global companies would have a strategy encompassing nearshore or offshore solutions by 2005. With recent improvements in communications, tools and processes for managing distributed projects and higher skill levels, besides reduced risks and overheads, nearshore and offshore sourcing of IT projects is more attractive than ever. With adoption rates rapidly increasing, it is clear that global sourcing is here to stay.

In addition to this, with the emergence of low-cost, high-bandwidth telecommunications links, Web-based collaborative tools and standardised business applications, organisations are able to source low-cost application services from all parts of the world.

Nearshore strategy

With India building a reasonable stronghold in the offshore space, the time is ripe for adopting nearshore as a strategy to move up the value chain. Nearshore is one of the fastest growing business models and provides a viable alternative for companies hesitant to move their entire work offshore or for those who are unwilling to bear the high cost of onsite work. This is one of the main factors why companies use nearshore as a migration strategy.

Says N S Bala, vice president, Manufacturing Division, Wipro, “Nearshore is a migration strategy for companies, along with offshore.” Adds Bala, “A company may have an onsite, nearshore and offshore strategy to provide business continuity. It is of paramount importance to maintain business continuity, especially when work is getting outsourced in such a huge way.” A case in point is Cognizant.

R Chandrasekaran says that some clients and prospects prefer a nearshore location for large or mission-critical projects requiring 24x7 responsiveness

Explains R Chandrasekaran, managing director and executive vice-president, Cognizant, “The nearshore strategy is essentially about being faster and more responsive to customer demands, catering to multi-time zone requirements, offering local language capabilities and also addressing business continuity and disaster recovery plans of the organisation. This makes eminent sense, as an organisation’s nearshore strategy is part of a larger strategy of having a global footprint. Besides, having a global footprint enables a company to service its customers on a wider scale.”

At Infosys, a nearshore strategy provides clients the confidence that the software services company’s site is just a few hours on a plane trip as compared to nearly a day for visiting an offshore site. S Gopalakrishnan, deputy managing director, Infosys Technologies, adds, “As part of our business continuity plan (BCP), every project has a contingency plan that aids in seamless transfer to one or more of our locations across the world.”

Says Ajoy Sinha, head-marketing, Blue Star Infotech, “There could be several reasons prompting a nearshore strategy—communication mechanisms supported by documents being the most important factor. Customers who do not have formal systems face difficulties in moving projects offshore, as all necessary project details may not be conveyed completely to offshore teams, resulting in unacceptable project delivery. In such situations, nearby sites can often be visited by customer personnel to fill gaps in communication and for bringing projects back on track.”

It is interesting to note that certain types of projects, such as implementing/customising packaged applications, integrating multiple applications, etc., require frequent interaction with personnel and understanding of requirements while implementing the project. These activities may take up as much as 30-50 percent of total project efforts. Nearshore is a better option in this scenario and could turn out cheaper as well.

Emerging opportunities

According to S Gopalakrishnan, under the global delivery model, a nearshore destination becomes just another location in the global network

Despite the talk of nearshore as a viable alternative for Indian players, only top-tier Indian companies are aggressively taking this route. Tier one players are looking to increase their presence geographically—both organically and inorganically.

For instance, Wipro has eight nearshore locations while TCS has centres in Uruguay, Hungary, China and Australia and is looking at a centre in Chile.

Another case that merits attention is that of a client changing vendors. Explains Bala, “When a client is changing from one vendor to another they could be more comfortable with the transition taking place nearshore. Once the client is confident that the vendor has reached a stable stage and can fulfil service level agreements (SLAs) they might not mind moving work offshore.”

An interesting emerging opportunity for nearshore markets is in the hosting of mission-critical applications. Says Chandrasekaran, “We find that some of our clients and prospects do prefer a nearshore location in large or mission-critical projects requiring 24x7 responsiveness to customer demands.”

Factor this in

Even though cost is cited as one of the major driving factors for nearshore outsourcing, there are other factors that come into play. Compared to offshore, nearshore facilities cost three times as much as offshore. “For example, salaries in Canada cost $25,000-$50,000 as compared to $10,000 in India,” says Bala.

Certainly, one of the foremost benefits of taking services offshore is increased access to cost-effective labour. The most attractive nearshore locales are educated, urban and highly developed, yet exhibit significant underemployment—thus wages average 30-70 percent less than domestic wages from outsourcing countries.

Other issues that are of paramount importance include efficient infrastructure, a stable political environment, cultural compatibility, geographic proximity, security of intellectual property (IP), etc. This alternative provides companies with all of the expected benefits of traditional offshore outsourcing and leverages world-class technical talent, infrastructure and telecommunications, thereby providing better synergies. A well-designed strategy strikes the right balance between delivery requirements, risk, cost and desired benefits.

Challenges galore

A nearshore service strategy is a delicate balancing act. Leveraging offshore and nearshore resources brings new capabilities, but it may also expose an organisation to a variety of potential hazards. Explains Chandrasekaran, “It is challenging to set up nearshore development centres in new locations. That is the reason why Cognizant has gone in for acquisitions to build nearshore development centres in the US and Europe.” Cognizant has a nearshore presence in Limerick (Ireland), Amsterdam (Netherlands) and Phoenix (Arizona, US), and has announced plans to enter China soon.

This strategy is clear in the company’s acquisition of Infopulse—a financial services firm in the Netherlands. The acquisition is part of Cognizant’s strategy to better serve customers in the Benelux region, strengthen its domain capabilities in the financial services vertical and acquire Dutch language capabilities. As seen from the above case, Europe—particularly Central and Eastern Europe—can be looked upon as prospective nearshore destination.

Says Avinash Vasishta, co-founder and managing partner, NeoIT, “Nearly 40 percent of offshore work would go to central Europe and Indian companies can look to partner with European companies to grab a share of this pie.”

The roadmap

Indian software companies seem to have realised that nearshoring is no simple strategy and going by the experiences of majors like Wipro and Cognizant, there is a concerted effort to build a calculated transition over time to near and offshore support.

An ideal situation for Indian companies would be a mix of offshore and nearshore. Gartner India vice president and research director, Partha Iyengar has an interesting take on the nearshore strategy. He is of the view that merely relying on offshore services as a business model can be a dicey proposition. It is his strong belief that having a nearshore presence enables companies to provide a proof-of-concept to customers. Besides, as is often the case in outsourcing engagements, an end-user with a successful current or prior relationship with an outsourcing vendor is likely to award new projects to the same vendor.

Ultimately, all this forms a part of the global delivery model, which Indian companies confess is their mantra

for the future. Concurs Gopalakrishnan, “The global delivery model works on the concept of meritocracy of locations and under this model, nearshore destinations become just another location in the entire global network.” With nearshore in combination with offshore services, Indian players could sail towards newer shores to perfect the global delivery model.

Billing patterns
Onshore	$100
Nearshore	$70
Offshore	$30

Offshore inhibitors promote nearshore outsourcing

Source: Gartner

venkatesh@expresscomputeronline.com