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The global map of IT outsourcing is growing more sophisticated, with onshore, nearshore and offshore destinations all playing a role

In March 2008, German car manufacturer BMW announced an offshore outsourcing deal that amazed the business world. Macroeconomic conditions, it said, had conspired to force the company to extend its manufacturing operations – in North America.

The announcement seemed to defy the most basic tenet of outsourcing – send work where the labour is cheapest.

But like many global corporations BMW has found that most basic tenet to be an oversimplification.

For even before the credit crunch started to bite, the global economy was in flux: countries which were not so long ago described as ‘developing’ nations are now threatening to dethrone economic superpowers. And the consequent fluctuations in the relative value of world currencies make predicting the long-term cost of high-value outsourcing deals difficult to do.

“A lot of companies who did offshore deals got the labour differential they wanted, but not the quality”

But in addition, multinational organisations today have the benefit of hard-earned experience in global sourcing. Many offshoring contracts are now in their second or even third decade, and their long-term value is only now becoming weighed.

“A lot of companies who did offshore deals got the labour differential they wanted,” explains Chris Moyer, EMEA CTO for IT services company EDS, an HP company. “But many of them didn’t quite get the quality they wanted.”

That has forced the realisation that while the economic advantages of ‘classic’ offshore destinations such as India and China are still too powerful to ignore, the application of a more sophisticated, multilayered global sourcing strategy can improve project success rates and costs.

In this maturing model of outsourcing, so-called ‘nearshore’ or even onshore destinations have a renewed appeal.

A quick glance at the Effective IT survey might suggest that many Information Age readers have come to that conclusion. The strategies for “outsourcing the IT department” and “using offshore development/business process outsourcing (BPO)” were voted the two least effective strategies. And that was a picture that is almost unchanged since last year.

Of course, there might be some element of turkeys being reluctant to vote for Christmas here.  IT professionals taking part in the UK-focused Effective IT survey are not always going to support the removal of their jobs, even when they have seen quality rise and costs fall when other parts of the IT department or business have been moved offshore.

But their voice cannot be ignored. One in five (20.3%), for example, work in organisations where the IT department has been outsourced, with another 7.3% expecting that to happen this year. That is up from the 16.1% and 4.5%, respectively, recorded in the year-earlier survey.

They certainly don’t regard that level of outsourcing as particularly effective. Of the respondents, 34.8% regard it as “effective” (up from 29.3% last year), while the same percentage, said it was not effective for them (compared to 37.9% in the 2008 results).

Cool offshore

It was the same story for using offshore development and BPO services. Over a third (36.4%) have now adopted elements of that approach and another 7% say they will do so this year. The trend is upwards, with the figures showing a 6% rise on last year. But while 51.2% did think it was effective, a surprisingly high 25.6% condemn it as ineffective – the same proportion as last year.

Contradictory as they are, the results point to a much more complex picture for global sourcing.

The historical view of IT sourcing sees two available options: hiring local talent or using low-cost workers in often-faraway lands. The former are close at hand and have native affinity to the home country’s business culture and ability to communicate with the business, but they have typically been expensive. The latter are so cost-effective that it revolutionises the economics of IT service provision, but can be difficult to manage and communicate with.

But a middle way has evolved that combines the best of both worlds: sourcing IT talent from areas that are away from major business centres or in nearby countries. These are areas with both cultural and physical proximity, and such destinations are becoming increasingly significant points on the world map of IT talent and service delivery.

Wages in nearshore locations may still be considerably higher than in offshore places like India or China but the price differential can be offset by the benefit that employees can be expected to stay working on contracts for a long  time and become more familiar with businesses they are serving and their technological requirements.

The low turnover of staff in nearshore operations is an attractive asset for both public and private sector clients, says EDS’s Moyer. “Our clients want to use people that have industry understanding and with whom they can build strong relationships,” he explains. “Long-term engagements are more sustainable in nearshore locations where turnover rates are radically lower.”

“And if you are choosing an outsourcing partner for a number of projects, you want consistency of staff,” Moyer adds.

The quality of the relationship in an IT outsourcing partnership is the essential justification for nearshore destinations. In addition to the longevity of staff engagements, cultural affinity is also beneficial to the working relationship.

As Owen Miles, manager of Logica’s UK applications management division, reports, ease of communication is essential in the day-to-day support and development of business critical systems.  “If you are providing support for a critical system, you need to be able to diagnose an issue quickly, in the first instance,” he explains. “That makes the cultural proximity very important.”

A common complaint among long-term users of offshore IT services is that while suppliers may be able to support a system as it is, they are less able to develop improvements and introduce innovation.

The advantage that nearshore outsourcing organisations have in this regard is again the longevity of their employee engagements. “The most important thing for innovation is industry understanding,” says Moyer. And that is more likely to develop when employees are focused on a particular client for a sustained period than when they are moving frequently between assignments.

But cost is always a factor. In the offshore hubs of India and China, wage inflation has started to erode these regions’ price advantages. In India, the rise in the value of the rupee against other currencies and the fraud scandal that threatens the future of top-five IT services company Satyam have also become factors in the outsourcing agenda. Moreover, the terrorist attack in Mumbai in November last year, focused on two hotels where many visiting IT executives have stayed when overseeing contacts, has not helped the case for unfettered offshoring.

As Gartner analyst Ian Marriott pointed out in 2008, “More sophisticated buyers are seeking a multi-country strategy to minimise risk and align near-shore and offshore delivery centres with their primary time zones.”