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.

Outsourcing to Mexico - Trends

While outsourcing software development to Mexico (or "nearshoring")has been around for over 30 years, it wasn't until recently that the Mexican government recognized it for a viable industry for building its economy. India proved it could be done but has recently recognized the limitations of outsourcing to India and is making significant investments in software development delivery centers in Mexico. AT Kearney has noted this shift in IT outsourcing to Mexico in one of their latest reports.

This article from silicon.com shares:

Mexican labour is cheaper than American labour. Newly minted Mexican engineers make around $1,200 per month, Flores said - about a third of what young engineers earn in the US. Intel has about 1,000 employees in Mexico, he added. Freescale also has development operations.

Technology also remains a popular subject with students in the country. Mexico has around 400,000 students studying IT-related subjects in universities and technical schools. Roughly 60,000 of them graduate from these programmes annually. The Monterrey Institute of Technology, which used Massachusetts Institute of Technology as its model, remains the country's premier technical university.

The Outsourcing Institute promotes Mexico stating that:

"There is a very large, educated, young population. There are plenty of people available for the work, including skilled technical people," says Raymond Duran, an account executive in the Juarez, Mexico, office of GECIS Americas, an outsourcing vendor that's part of General Electric Co.

As early as 2007, Indian companies began to see the need to shift some of its delivery business to Mexico. Some of those reasons are due to increased wages, increased turnover, decreased productivity, time zone issues, labor shortages, and a need to mitigate political risks.

Mexico, of course, is not necessarily the right outsourcing desitnation for all companies. Research by the McKinsey Global Institute (MGI) finds that "a dearth of IT vendors, a costly infrastructure, and a talent pool with limited suitability for multinational positions are among the factors preventing Mexico from realizing the considerable opportunity created by globalization.

This shouldn't stop the small and medium sized businesses from seeking outsourcing companies in Mexico. It simply means that Mexico is still not ready to handle the scale of business that India and China are able to provide. The benefits are still powerful.

Forrester Research recommends ... “Companies interested in the cost and quality benefits of offshore labor, but which require a closer, less risky solution should strongly consider Mexico as an important nearshore option. Projects with intensive collaboration requirements, internal
domain expertise requirements or a medium to high degree of end-user participation are often more suited to nearshore outsourcing models, since travel between vendor and client is easy and time zones permit real-time collaboration.”

Tata, EDS (now part of HP), Accenture, IBM, Infosys all have development centers in Mexico. These are great partners for the global corporations of significant size, but small and medium size businesses may prefer to work with local outsourcing companies such as Scio, Nearsoft, Softtek (which bought GE's development center), or Hildebrando.

Same time zone: The tip of the iceberg of Nearshore

Although we are gradually emerging from the economical crisis, companies are constantly looking for ways to reduce costs. When I speak of these cuts, is not only related to the financial cost but also the challenges of working with teams that are behind schedule.

When people think of “Outsourcing Software Development” the first thing that comes to mind is India. However, in recent years India has begun losing its competitive advantage compared to other countries. While the cost of labor is not as cheap as it used to be, the current geopolitical climates and the difficulties caused by time zone differences are the main concerns of American executives.

Meanwhile, Latin America is improving its position as an Outsourcing Hub. American companies are starting to look in countries such as Mexico, Brazil, Costa Rica, etc. and happily discovering the importance of working in the same time zone, the excellent quality assurance, and vast knowledge about software development.
Latin America countries, such as Mexico are developing expertise not only in software development but also in cutting-edge methodologies such as Agile and Software-as-a-Service (SaaS) application development.

According to the article “Offshore outsourcing: The Nearshore Advantage begins with Business Hours”, companies outsourcing to Latin America said that the main reason of why they prefer nearshore IT outsourcing is the time convenience.

Mexico has a huge advantage as it’s +/- 2 hrs difference with US makes for easier communication and collaboration.

As many IT executives have found over the years, outsourcing software development to teams across a 12 to 24 hour time difference is extremely difficult and generally results in a massive decrease in productivity. These kinds of projects require constant communications, in a way that problems can be corrected proactive.

Outsourcing software development to a Nearshore location is like having a branch office in other state in a different country, resulting in comfortable communications with people who speak good English and understand your thoughts and needs.