Hidden Costs of IT Outsourcing

This article from CIO magazine in 2003 rightly warns about the hidden costs of IT outsourcing seen at that time. That article states that "no one saves 80 percent by shipping IT work to India or any other country. Few can say they save even half that", and that "it takes years of effort and a huge up-front investment."

Hidden or less well known costs are:

• The Cost of Selecting a Vendor
• The Cost of Transition
• The Cost of Layoffs
• The Cultural Cost
• The Cost of Ramping Up
• The Cost of Managing an Offshore Contract

In the end it says the bottom line is this: Expect to pay an additional 6 percent to 10 percent on managing your offshore contract.

While this article mentions a new TCO -- the total cost of offshoring, we prefer to refer to the TCE or Total Cost of Engagement so that the benefits of nearshoring to Mexico can be seen as a different and sometimes better option.

Speed forward to 2010 and it is likely that companies outsourcing will mitigate some of these costs and risks and focus on TCE with nearby nearshore providers, rather than going to the far east to save an additional $5-10 hr.

There are plenty of success stories in IT outsourcing to Mexico, you just have to know where to look. Here is one for SaaS, and another for integration and maintenance.

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-“.

Nearshore Development in Mexico

NEARSHORING IN MEXICO

Nearshore is growing rapidly in importance as many are seeking to reduce the risks associated with the offshore model.

Mexico has become one of the most important centers for nearshoring, providing political stability, a defined framework (giving legal and IP Protection), and assuring investor-friendly policies (NAFTA). All these make Mexico an attractive and safe place to outsource software development and testing.

Partnering with Mexican nearshore providers brings many advantages. The same time zone between US and Mexican companies allows the real time collaboration, increasing the productivity and effectiveness of the work delivered. Nearshore application development is cheaper than onshore or remote domestic delivery. There is virtually no language barrier as many Mexicans speak English. Its geographical proximity to the US allows for the reduction of total expenditure in phone communications and air travel. See articles on Total Cost of Engagement.

The nearshore model is being recognized by Indian Companies trying to mitigate the challenges of Asian offshore development. One of the most representative cases is Tata Consultancy Services (TCS), who opened offices in Mexico City in 2003. In 2007 they announced the opening of centers in Guadalajara and later in Querétaro. Recently, they declared the expansion of operations in Querétaro, creating at least 150 new jobs between 2009 and 2012 as part of their strategy to make Mexico the center of their operations for North America, South America and part of Europe.

This clearly shows how valuable Mexico geographical location is and also that is a talent pool to find skillful workforce.