Nearshoring Software Development Makes Sense for SMBs

It appears the world is on the cusp of overcoming the worst crisis in recent history. As part of the recovery most companies will seek ways to reduce risks and costs while achieving more with less. For some software companies, outsourcing may be a great opportunity to achieve all objectives.

Most are familiar with the standard alternatives: offsite and offshore. Nearshore has recently been added to the mix. Since offsite is completed in the same country, it’s almost the same cost as onsite.

Then, we have offshore as an option. The difference time zone and the overhead caused for this model make more difficult to manage the resources and the work outsourced. Furthermore, the strains on communication make offshoring less desirable. Over the years software development has moved offshore, but we have also seen it has not worked for everyone.

As I mentioned in the last article, the utopian ideal of the offshore model can only be realized by some large enterprises. So what about small and medium businesses? For them, nearshore could be the solution.

The nearshore model offers an infrastructure that guarantee seamless and virtually uninterrupted communications; a share business culture and a similar time zone (+/- 2 hrs).

Why are nearshore software development advantages so important in the quality of IT services? Clearly, the time and money savings are essential for the success of an outsourced project, but the risks associated with offshoring are reduced through closer proximity, more similar cultures, and a greater overlap of business hours.

Pekka Huttunen, Director of Accenture recently was quoted saying "The primary driver of this shift is not so much labor as it is growing markets and the need to reduce risk by building and buying in multiple locations." He continues, “some companies not only see the economic but also the moral value in keeping software production close – like inshoring or Nearshoring-“.

Failure to Recognize Time Zone Difference as a Challenge in Outsourcing

Every day people post articles about advantages or disadvantages of offshore software development. Companies seeking to outsource could go crazy sorting through the vast information, trying to figure out what is the best option for their business.

It seems even the biggest and best analysts fail to recognize some of the most important factors. A couple of days ago, one research piece called “The Shifting Geography of Offshoring” drew my attention, a study about the Top 50 countries worldwide as the best destinations for providing outsourcing activities, including IT services and support, contact centers, and back-office support.

This study ranked 1st India with 6.91 out of 10 followed by China, while Mexico was placed in the 11st position with 5.43 and Chile in the 8th place with 5.50. The 3 primary categories measured were: Financial Attractiveness, People skills and availability and business environment.


Yet, no where does the study mention the impact of time zone differences on outsourcing, particularly on productivity, which greatly affects total cost. India and China may be excellent outsourcing locations for large companies, but small and medium size companies should be working with teams in the same time zone.

Software development is difficult enough. Don’t make it more complicated by adding a new variable.

So how does India and China arrive 1st and 2nd respectively if time zone affects total cost, productivity and overall cost? When you outsource to an offshore location people needs to stay up late at night to complete the task, wake up early; or work double shifts, or additional management needs to be put in place on the client side, or additional visits are needed to the customer site or the vendor location; all these have a significant impact on productivity and cost.

Working behind schedule can trigger an unimaginable quantity of problems that in a short time may not be important and visible, but in the end will be a headache. When you are dealing with an overseas vendor, the time zone problem will surely arise - the difference between your Asian vendor and you may be twelve hours (and a half) or more. Just imagine that you arrive at the office at the same time when your vendor's employees are going to sleep.

Why are countries such as Chile or Mexico ranking under Asian countries if the nearshore model offers the same advantages as offshore, plus the alternative of having a developer of support team working in the same time zone. Time zone is a critical element in engagements where high collaboration is a must.

The Manpower Myth in the Software Industry

In the beginning, India’s attractiveness as an outsourcing destination was the cheap and vast manpower. Every year thousands of engineer graduate from Indian Universities creating an enormous talent pool.

However, in many cases, they have failed to produce world-class software products. Why? It´s true that many young people graduate with IT degrees in India, but the abundance of IT graduates doesn't guarantee quality work.

India’s booming software industry, which has maintained rapid growth over the last 15 years lacks well-trained and experienced resources which has a greater impact than some companies imagine.

A couple of years ago, for example, Google had some problems finding skilled development resources as many other American companies are also looking for the best software talent.

The company's Founder and Director Kavitark Ram Shriram admitted: “Google, which is considered to have a very low attrition rate even in the high-job-hopping Indian IT space, has found it more challenging to hire certain talent in India as compared to other parts of the world”.

Apple in April of 2006 commenced operations in India, but one month later they ceased activities. Some of the reasons were: India isn't as inexpensive as it used to be, the turnover is high, and the competition for good people is strong. In the end, Apple felt it could do it more efficiently elsewhere.

Today, a large company which wants to recruit people has to have in-house training facilities and extensive training programs. These training programs are expensive and sometimes companies use their experienced manpower for training. That implies a higher cost (expensive airplanes tickets, the long distance, the host, etc.) The trainer can be in more “productive” activities like projects and R&D, instead of teaching.

Perhaps American companies will seek software development outsourcing partners closer to home, such as Canada or Mexico to avoid the headaches of Asian offshoring. At least the training can be much easier and the cost is lower because of the close geographical proximity.