Nearshore Replaces Offshore Software Development

The traditional decision in outsourcing has been whether to outsource at all or keep it internal. However, the most important decision that companies face today is whether to use offshoring or nearshoring. A primary factor organizations typically consider is the return on investment (ROI), which is basically quality of services they expect to receive against the cost of those services. Software engineering outsourcing often provides the best ROI for clients in the United States, although this factor is highly dependent upon the outsourcer’s country. Outsourcing software engineering provides the best ROI for clients in the United States, although this factor is highly dependent upon the developer’s country, which is why nearshore often provide better ROI and foster better partnerships.

Overview

Offshoring describes the practice of a client outsourcing work to a provider located on a different continent. For U.S. clients, the most common offshoring countries have been India and China. However, software engineering outsourcing poses many challenges due to significant differences in time zone, language, and culture. These obstacles almost invariably increase production costs, thus reducing the ROI of the outsourced project.

Nearshoring refers to the use of outsourcers located on the same continent as the client, typically Latin American countries in the case of U.S. clients. This form of outsourcing often allows clients to avoid some of the barriers commonly associated with offshoring. Furthermore, the close geographical proximity allows developers and project managers in nearshore outsourcing software development to build stronger relationships and communicate more effectively. Nearshore Outsourcing or Nearshoring is therefore a more efficient process that also results in a better product.

Trends

U.S. companies have traditionally outsourced jobs with low wages and responsibility. However, that trend has been changing since the late 1990s as more businesses reevaluate their outsourcing strategies. This shift is primarily due to the closing talent gap between software developers in Latin American countries and those in Asian countries. While the number of outsourced low-level jobs in the U.S. continues to increase, the number of high-level jobs that are being outsourced is also growing.

For example, ClusterInteQsoft reports that the global offshoring industry grew by 20 to 30 percent, which represents an increase of $350 to $400 billion. The information technology (IT) outsourcing budgets of U.S. companies also increased by about 23 percent. Two-thirds of U.S. businesses outsource at least some of their application development, while one-third of these companies increased their outsourced work.

Advantages

Nearshoring software development can provide clients with many advantages over offshoring. The Mass Technology Leadership Council classifies these advantages into the following categories:

  • relationship building
  • flexibility
  • communication
  • talent

Strong relationships increase the cooperation between the stakeholders in a project, which often improves the development time and quality of the end product. Relationship building generally becomes easier as the geographic distance between client and provider decreases. The frequency of onsite visits increases, resulting in more face-to-face time between team members.

The flexibility of a software development project also increases when the team members work in close proximity. Similar time zones mean that team members are working at the same time, allowing them to adapt quickly to changes in requirements. This advantage is particularly useful in software development, where sudden requirement changes are common.

A software development project is highly dependent upon communication between stakeholders, such as project managers and developers, which is often impaired by language barriers between these two groups. However, nearshore developers are more likely to be fluent in English.

The ability to employ the best software developers routinely provides clients with a competitive edge over their rivals. Many Latin American countries are currently working to increase their number of software professionals.

Mexico

Inbound Logistics reports that Mexico’s economy has undergone a dramatic shift during the last few decades, from agriculture to manufacturing and services. It has also become one of the world’s most open economies, due to a series of economic, political, and technological changes. These reforms have included an unprecedented growth in foreign investments, due to Mexico’s 12 free trade agreements with 44 countries. These changes have resulted in an annual growth rate of 10 to 15 percent in Mexico’s outsourcing industry, which was worth about $13 billion in 2013. Its economy is now the 10th largest in the world by purchasing power parity and the 14th largest by Gross Domestic Product (GDP).

Mexico’s infrastructure improvements are also making it more attractive as a nearshoring country, especially the growing number of industrial parks and utilities. The Mexican government announced the implementation of its National Infrastructure Program, which will invest $42 billion into transportation. Almost 17 billion dollars of this total will be used to improve railway infrastructure, including intermodal terminals.

Other incentives for nearshoring with software developers in Mexico include the fact that the U.S. and Mexico are members of the North American Free Trade Agreement (NAFTA), which also includes Canada. This agreement creates a trading block that provides several sources of cost savings for its members. NAFTA reduces transportation costs by waiving tariffs for manufactured products. It also allows operations with a high fixed cost and low profit margin to be transferred to Mexico more easily. Finally, NAFTA enables businesses to use capabilities that are unavailable in-house more easily.

The existing outsourcing market makes Mexico an attractive option for clients in the U.S., especially when combined with other factors, such as its improving infrastructure, skilled workforce, and low labor costs. Many established software developers are also available in Mexico that understand its regulations regarding outsourcing.

Viewpoints

Nearshore Americas has produced a documentary entitled “Mexico’s Rising States of Innovation” that explores the high-tech industry in Mexico. It includes interviews with the executives at many of these companies, including Animactiva, Boxel Technologies, Dextra Technologies, Sonata Services, and Teleperformance. This documentary illustrates the ways in which technology is changing the lives of Mexicans in tech friendly regions, such as Aguascalientes, Baja California, and Mérida.

Andres Reyes, Managing Director of Boxel Studios, says, “We are high-end, top-of-the-line IT professionals taking advantage of economies of scale.” He adds that the cost of living is much lower in Mexico due to the fact that a dollar is worth almost 18 pesos. Daniel Chavez, CEO of Dextra Technologies, reports, “The services that we provide … need to be there on time, and our communication has to be through telecom.” He adds that this level of robustness is available in Aguascalientes.”

“If a government is more efficient with our software, then they can do better work and provide better services to the citizens,” according to Ivan Espadas, CEO of Blue Ocean Technologies. He also says that Mexico will be a better country when its citizens enjoy a better quality of life. Jorge Arroyo, co-founder of Arkus Nexus, adds, “One of the things that definitely we bring to the table as a country is the ability to have more of an autonomous operation.” He elaborated that greater autonomy includes less oversight and handholding, resulting in the assumption of greater accountability.

About Tiempo Development

Tiempo’s nearshore business model has become hugely successful because we have been able to leverage the talent Mexico is fostering, making software development easier and more affordable. Our Mexico software development teams engineer powerful technologies that align with the goals and strategies of our customers for both their internal and public-facing development initiatives using our product lifecyle management framework called Tiempo Quality System or TQS. This proven combination of resources, process, technology knowledge, industry expertise, and strong leadership provides our customers with cost-effective solutions delivered quickly from a pool of highly successful Mexican STEM graduates and experienced engineers. Our technical focus includes Microsoft infrastructure and security such as .NET and MSSQL; Java, LAMP and mobile application development. Find out more about outsourcing software development by contacting Tiempo today.