Traditional software outsourcing, or offshoring, typically involves using software developers on another continent, while nearshoring is the practice of outsourcing software development to countries on the same continent.
Nearshoring is becoming a popular solution because of some challenges of offshoring, especially its high failure rate. The 2009 CHAOS Report shows that only 32 percent of offshored software projects were completely successful, while 24 percent failed completely. The remaining 44 percent of these software engineering outsourcing projects experienced significant challenges caused by late deliveries, going over budget and reduced functionality.
The average delivery time of the failed projects in this study was more than 180 percent longer than the target time and accounted for more than 41 percent of the IT department’s budget. Furthermore, these projects provided only 70 percent of the required functionality. Nearshoring provides many advantages over traditional offshoring that increase a project’s chances of succeeding. These benefits may be grouped into the following categories:
- Quality and Productivity
- IP Protection
Nearshore service providers must use a mature, disciplined approach to software department if their total cost of engagement (TCE) is to prove competitive with offshoring. Nearshore rates are generally higher than offshore rates, so nearshore providers need to take full advantage of their geographical proximity to the client. For example, the ability to work in the same time zone means that nearshoring typically has a greater operational efficiency than offshoring.
Efficiency also increases as a provider gains more experience with long-term engagements in the form of service level agreements (SLAs). These clients are better able to leverage the advantages of nearshoring by transitioning from engagements based on time and materials to those based on service. This change in the delivery model allows the client to hire software developers more easily, since value can be measured by the results achieved rather than the time spent on the project.
Nearshore providers should also use the latest software development methodologies such as Outsourcing 2.0. CIO describes this methodology as the next stage in software development, which focuses on simplifying the development process and establishing long-term relationships that are mutually beneficial to the provider and client. The traditional method of developing software is commonly known as “waterfall” development, since the project progresses steadily through sequential stages, including conception, initiation, analysis, design, development, testing and maintenance. However, this approach loses its value when the requirements change rapidly, as is often the case with modern software development.
The geographical proximity between client and service provider allows for greater collaboration during the development process. This advantage is a major reason for the recent success of nearshoring as compared to offshoring. Ventoro Institute, a global sourcing research organization, reports that clients often avoid face-to-face meetings with their offshoring partners because of the time and expense required for an international trip.
However, live communication is essential for the success of an IT project. It allows customers and vendors to share knowledge in a sophisticated manner, and identify the best solution for a particular problem. Some of the newest nearshoring companies provide interactive IT teams that work directly with their clients’ employees, thus freeing them from the rigid hierarchy and complex procedures that characterize traditional project management. For example, Felipe Sanchez Romero is an executive for Hildebrando, who is responsible for building the outsourcing firm’s business in the Pacific Northwest. He said in an interview with Puget Sound Business Journal, “We believe nearshore provides the highest productivity when you combine the proximity of Mexico and the time zone.” Romero adds that “Mexicans and Americans are very close, very familiar, very strong business partners. In terms of visas, that is easier for us to fly back and forth.”
Quality and Productivity
The difference in time zones has historically created a significant challenge in developing quality software with offshoring. Developers must often work at night, which necessarily reduces the quality of the end product. Software errors are typically the result of stress, and many programmers for offshore vendors will burn out before the project is complete. A nearshore solution is able to fix bugs more quickly and shorten the time-to-market schedule for both new and established clients.
The high turnover rate of employees is a particularly severe problem for software developers. The 7th Annual Conference on Information Science, Technology & Management noted that the annual turnover for Indian software developers is typically in the range of 30 to 40 percent, much higher than the average turnover in Mexico. This difference in turnover means that nearshore service providers are able to take the time needed to develop a talent pool without fear of losing staff members in the process.
The ability to work directly with clients allows developers to be more responsible for their actions and more responsive to changes in the client’s requirements. It also helps developers understand that their pay and other benefits are directly dependent on the client’s level of satisfaction. In the case of traditional outsourcing, developer incentives are more likely to depend on employees of the service provider, such as IT directors, project managers and team leaders. This difference in fiduciary responsibility improves the productivity and efficiency in the workplace of nearshore service providers.
The protection of intellectual property (IP) is another factor that clients must consider when moving their business operations. IP is a vital part of outsourcing because an organization’s ideas must be protected under law if it is to develop software in another country. U.S. laws provide very strong protection for IP, which is one of the major factors for its success in software development. Mexico also has a respect for IP that’s unmatched by many other popular outsourcing locations, especially IP in the form of patents and trademarks.
In addition to its own laws, Mexico is a member of many multinational agreements that protect IP. For example, the North American Free Trade Agreement (NAFTA) protects many forms of IP such as trademarks, patents, inventions and trade secrets. The U.S. and Canada are also members of NAFTA, which creates a single trading bloc for the entire North American continent.
Mexico is also a member of the Trans-Pacific Partnership (TPP), which it joined in 2008 along with the U.S. The primary purpose of this agreement is to facilitate innovation between participating countries. The TPP renewed its IP provisions in 2013, which provides particularly strong protection for digital innovation and pharmaceutical patents.
Mexico is also a member of the following agreements that protect IP:
- Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks
- Lisbon Agreement for the Protection of Appellations of Origin and Their International Registration
- Paris Convention for the Protection of Industrial Property
- World Intellectual Property Organization
Tiempo Development has 10 years of experience in nearshore software development, which allows us to deliver software on time and on budget. We also use agile software development, which is well-suited for software engineering outsourcing projects with rapidly changing requirements. Tiempo employs skilled software developers at an affordable rate, which helps to minimize our TCE and enhance collaboration with our clients. Find out more about our approach to developing software by contacting us today.