Total Cost of Engagement (TCE)

Undoubtedly, offshore outsourcing has reached a mature level. Countries as India and China have built huge IT hubs, and invested in education for young people to facilitate the acquisition of human resources to meet the growing demand.

The boom of offshoring has been primarily driven by the belief that lower wages decreases the expenditures of the companies. What have frequently been misunderstood have been the hidden costs.

Recent studies have found that despite the low rates per hour that countries like India or China are able to provide, the Total Cost of Engagement (TCE) is higher than outsourcing the same service to a nearshore location. If you compare the cost of labor in India vs. Mexico for example, you will find India is about 10-15% cheaper.

The total cost of engagement (TCE) evaluates the total expenditures of outsourcing projects. In addition to the hourly rates of engineering talent you must consider the cost of additional management overhead, travel costs, the painful cost of staff turnover, and a certain amount of productivity loss due to the distance and degraded communications. Most of these costs are directly related to the separation in time and distance between teams. Below is a detailed explanation of why in the end offshoring typically is more expensive than nearshoring.

1. There is still an important amount of work that needs to be done at the client´s site. No amount of technology can make up for the productivity achieved face to face. Typical offsite leverage for Asian vendors range between 60 -65%, which means 40-35% of the work remains at the client´s site. The percentage of work that can be done offsite when working with a nearshore provider fluctuates around 80%.

2. Overhead. Due to the addition of inexperienced resources halfway around the world and the poor communication that typically occurs, additional resources from the client side are needed to manage the relationship and the work. This creates additional overhead for the client.

3. Proximity. The long distance between the client and the offshore team, make more expensive and difficult the travels between the 2 destinations. Nowadays, close proximity is a key success factor in IT engagements. Close proximity offers an improved cost management, particularly when travel is required, and allows for better supervision and control.

4. Time zone difference. This can be a huge barrier because offshore and onsite teams need to accommodate schedules for call meetings, releases, etc. causing an overtime payment. Sharing requirements documents and communicating entirely by email greatly reduces the likelihood of getting the desired results.

5. Offshore training. Offshore resources need to be trained by onshore teams, so flight tickets, visas, accommodation, etc. become more expensive the offshore model.

6. High attrition. After all the training and learning curve is overcome a the expense of the client, developers return to the development center in India or China and, recognizing their new found skills and value in the marketplace, they seek higher paying jobs, causing a disruption in the project as new, inexperienced resources are added to the team.

As the result of the total sum of these costs plus the man/hour rates is the Total Cost of Engagement (TCE), which certainly is pretty much higher in India or China than Mexico or other LA Countries.

A good calculator for comparing the cost of development between in-house, and nearshore and offshore teams can be found here.

Engagement model calculator

More information supporting nearshore outsourcing can be found here.

Mexico nearshore

Nearshore vs. Offshore Total Cost of Engagement

GSC LOCATION SELECTION APPROACH

As Offshoring Gets Tougher, Nearshoring Alternatives Shine

U.S. Secretary of State, Hillary Clinton visited India this week. Among the topics addressed with the Indian Prime Minister, Manmohan Singh, was a promise to improve cooperation on high-tech trade between the two countries, even though, Clinton didn´t give specifics about how it will be accomplished.

Why weren’t greater details offered? Perhaps because last May, President Obama announced a series of steps aimed at overhauling the U.S. tax code to detect and pursue U.S. tax evaders and go after their offshore tax shelters.

It is clearly known that many companies in U.S. are offshoring information technology services to India, not only to seek out cheaper labor, but also to avoid the taxes that they are bound to pay in their Country.

In the other hand, the U.S. wants to implement a new law that would set a number of restrictions on overseas firms that need H-1B visas to deliver their services. India´s IT Industry is anxious of the solution that U.S. Congress will give.

Less well known are the benefits that a nearshore location, such as Canada or Mexico has to application development. The India-based providers, such as Tata and Infosys recognize the benefits of working in the same time zone. That´s the reason, that Indian companies are moving operations near to U.S. or even in the U.S.

Now, with new tax policies and visa restrictions it looks that India-based firms may have greater difficulty to deliver their IT services. Companies like Infosys Technologies Ltd. (which on March 31 employed 8,900 people in the U.S. with H-1B visas, and 1,400 with L-1 visas, according to U.S. Securities and Exchange Commission filings) has to face this complicated problem. It is estimated that other Indian companies will suffer a huge negative impact as well. It is recognized that some companies are paying less to people with H-B1 visas than what they would have paid to locally hired US employees. Now with the decrease of visas they would need to hire U.S. workers who earn more and require more benefits. The benefits of offshoring could disappear with this new model.

Companies will continue move services offshore, but with the new tax code announcement of U.S. President, it won´t be so easy. Even while the cost of manpower in India rises (find stats and link), the total cost of engagement including taxes will increase the cost of an application software or IT service.

In light of these new restrictions, outsourcing to Latin America, specifically Mexico, looks even more appealing. NAFTA (North American Free Trade Agreement) protect and ensures the safe treaties and relationships between U.S. and Mexico including protection to Intellectual Property and simplifies trade.

Nearshoring to Mexico: ALL INCLUSIVE

For companies who want to outsource application development services, nearshore represents a viable solution, especially for projects that require tight collaboration. The risk associated with outsourcing is lessened with closer proximity as damage control is just 4 hours away on daily flights from major US cities.

If close proximity and some other advantages that I have presented in the last articles, are not enough to think about Mexico as an alternative to outsource software development, then consider their specialization as another benefit. It would be good to mention some companies that provide complete solutions in a nearshore location; Softtek, Scio Consulting and Sigma Tao represent the wide range of Mexican software providers.

Softtek specializes in software development, Business Process Outsourcing (BPO) solutions, SAP and ERP implemention services; with offices across different states of the Mexican Republic. Scio Consulting provides outsourced product development and IT services for ISVs and businesses with a focus on Software-as-a-Services, Web 2.0 and highly interactive user experiences. They operate a development center in Morelia, just 3 hours from Mexico City and a 4 hour direct flight from Chicago, Seattle, or San Francisco. Sigma Tao, with strengths in business applications written on COBOL, SAP implementations and Geographical Information Systems (GIS) is located in Querétaro, just 2 hours from Mexico City.

These companies not only offer the advantages of the nearshoring application development, they also specialize on specific technologies and industries. Quality in delivered products and daily work is part of the Mexican culture so the overhead associated with management is less and therefore, productivity is higher.

So when you think about outsourcing application development, think beyond offshoring options. Just as Diane Burton -an associate professor of management at MIT's Sloan School of Management- said “It's important that the world knows that it's not just China and India… It is truly a more global phenomenon where there are skilled and talented people around the world who are ready, willing and able to do the kind of work that (represents) good jobs”.

Nearshoring software development to Mexico provides you the ability to collaborate easily and effectively, thus not only a source of inexpensive skilled labor, but also a more convenient and productive way of doing business.. The nearshore operations become more like just another office location rather than a separate unit.

Regardless, each company has different needs. Everyone has to look for the best option that suits their needs, satisfies its demands and helps them to achieve their goals. You need to focus on the goals: becoming more competitive while you satisfy to your costumers to succeed.

Outsourcing

Software Development to Mexico: An Alternative to Profitability and Success

The results of the current economic crisis are clear: millions of people are unemployed and companies are going bankrupt or are struggling to make payroll.

Software companies are not the exception. Some software companies are buckling under pressure of the crisis and are failing. Sales are down, expenses are too high, and more importantly, expenses are fixed.

One of the most recent cases was LucidEra a prominent business intelligence SaaS start-up. LucidEra is struggling to stay afloat. They haven´t ceased operations yet, but the rumors of their imminent closure end are gaining attention.

LucidEra’s CEO said they have happy costumers and a good pipeline, so why are they sinking??

One angle to consider is that some SaaS Companies aren’t leveraging their best resources for application development. They haven´t looked for different and better options.

Many may be leveraging offshore vendors in Asia to reduce costs, but the last 5-10 years has seen a fair share of project and offshoring failures. The challenges of working with resources half a world away with a 12-18 hour time difference have taken their toll.

Perhaps they should consider working with SaaS product development experts in a nearshore location? Outsourcing software development to Mexico can be the ticket to reduced costs and reduced stress for building and maintaining their applications in a cost effective and productive way.

We clearly know cash flow and capital are the primary issues, so why don´t they look a little bit ahead and analyze the options that Mexican software providers give them? Undoubtedly, Mexico can be a “safe harbor” for companies that are suffering financial hardship.

The strategic geographical location, similar time zone, but specially the lower cost of labor makes Mexico an interesting place to outsource software development.

Nowadays, companies need to find and chose the best option to cut costs, while they increase the competitiveness.

Mexico: Competing With India

It is well known India has the biggest slice of the IT cake. How did they get it? It´s easy, Indian software providers know how to take advantage of opportunities. Indian companies have joined various groups and Associations to have a strong presence in the IT world. Reunions, congress, etc. everything where they can gather is an excuse to share ideas, tips, and valuable information about the market. This environment enriches their knowledge and strategies to get into the US business.

Indeed the Indian IT service market is formidable. So can Mexican companies can do the same or better? Mexican software providers have everything to become the next IT hub and even more, the nearshore factor makes them an invaluable place to outsource software development. Mexican software providers only need a little push. If they join more associations, just as Indian companies are doing, they can get more benefits. Sharing ideas and becoming closer are some of the keys to take the control in a competitive and demanding technology world. Is not only about capabilities, this is more about creating connections and alliances that support a strong Mexican IT network.

Even though close geographic proximity between Mexico and US is an advantage, it could become a negative point if Mexican providers don´t use IT to gain more ground. While those doing business with Indian software providers are traveling many hours to meet, Mexican companies seem to be throwing away this opportunity. It´s easy for Mexicans to travel, just one hop is necessary to gather with their clients in the US. Inviting clients to Mexico to show them the place of work is a smart action to let them know the cultural similarities and the well understanding that they will have during the relationship.

All this not bad news. Now is a good time to double the efforts and make their services known to achieve greater success. Mexico has all the advantages; it is only a matter of being aggressive. It´s time to work harder to be better every day.