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Understanding the Offshoring Model

Understanding the Offshoring Model

Understanding the Offshoring Model

By Alex Rodov, Managing Partner, QA Consultants

 

IT off shoring has been the go-to business model for many U.S.based companies, but are the jobs in offshore countries really done with high quality, reliable customer support or cost efficiency? Is the labor arbitrage really that much lower than what can be found in North America? The answer is no longer a simple yes.

Gartner recently reported that the competitive advantage of off-shoring has already been declining and will continue to decrease because of the rise of virtual talent, smart machine technologies and digital skills needed in the US. Additionally; Gartner sees a rise in the demand for onshore resources. It is time for American businesses to rethink the offshore model and start looking for nearshore options that can deliver quality work, skilled talent and better customer experience.

Why Reshore or Repatriate?

The time has never been better for businesses to re-evaluate their strategy of offshoring IT projects. From a cost-differential perspective, it makes sense for U.S. companies to reshore, especially to Canada, where the Canadian dollar has dropped to a record-breaking low; roughly 25 percent below the U.S. dollar. This presents an opportunity for nearshore providers to compete on price as well as proximity, value, communication and culture – against offshore providers. Over the years, labor costs in popular offshore countries like India and China have seen an increase, with an expected rise of 10.3 percent for the average wage in India this year. Higher labor costs in foreign countries indicate that U.S. companies will need to factor these increases into their budgets and business plans.

In addition to value, the growing complexity in compliance requirements and data privacy concerns can make offshoring more difficult. Can we be certain the data being sent between networks in India or China and the US is secure? We probably can’t. The Ponemon Institute, for instance, reported in 2014 that 67 percent of IT practitioners experienced loss or theft of company data over the past two years. Data and information sent between the countries is susceptible to unwanted eyes and threat factors, making offshore less appealing than it once was 10 or even five years ago.

From a proximity standpoint, it’s difficult to rely on real-time responses and collaboration if the work is being done in India. The time difference makes it extremely challenging to properly manage needs and expectations on a day-to-day basis, let alone in an emergency. Companies simply will not get the same level of customer service if projects are sent offshore. Historically this has been an acceptable “cost” of doing business offshore for the sheer financial difference those markets gave companies, but with the dramatic decrease in the Canadian dollar, cost is no longer the factor. Companies can now achieve onshore – with the same time zone – response at offshore rates.

There is also the culture cost. Nearshore workers in Canada have no language barrier or cultural gap when they communicate with customers in the US. Nearshore providers more likely have the skills and cultural backgrounds needed for optimal IT service delivery, quality of work and production. Additionally, they have a more significant attachment and understanding of the businesses they are working in and supporting.

Looking Ahead

The promise of bargain labor rates and quick-turn, quality projects by off shoring is not the shiny, fitting business model it once was. As companies begin to reassess their business methods and needs, they should consider a number of factors, including the ascending labor costs in offshore locations, security concerns, customer service implications and risks, and hidden costs that are likely caused by time zone differences, delays and workforce inefficiencies.

 

Quote: Higher labor costs in foreign countries indicate that U.S. companies will need to factor these increases into their budgets and business plans

 

The promise of bargain labor rates and quick-turn, quality projects by off shoring is not the shiny, fitting business model it once was