VCG uses a hybrid nearshore outsourcing model to reduce costs of custom application development projects. A hybrid nearshore approach allows for cost reduction but with less risk because we all work in the same timezones.

1. Nearshore Outsourcing 101:
What It Means to North American Organizations
WHAT IS NEAR-SHORE OUTSOURCING?
Near-shore outsourcing is a form of outsourcing
that involves the transfer of business or IT
processes and development work to companies
in neighboring or nearby countries within similar
time zones.
North American companies look to Mexico as well as other
South American nations in Central and South America like
Argentina or Brazil.
10 years ago India had 70% of the world's
outsourcing market. Today its share is 44%.
Traditional offshoring initiatives experience added costs related to
complexity and coordination of services.
Productivity loss due to
time zone or inconvenient,
infrequent, delayed
communication
Detailed requirements /
documentation
A large selling point of offshoring
to India, China and the Philippines
is the high quality of education in
those countries.
According to the 2014 A.T. Kearney Global
Services Location Index, Latin America
has four countries in the top 20:
Mexico (4), Brazil (8), Chile (13),
Uruguay (36).
Of all survey respondents, 26%
indicated that cultural barriers
with their offshore providers
were a problem.
Anything that prevents good communication is an issue, but cultural
design differences often pose an even bigger problem.
Spanish is the second language in the
US, spoken as a first or second
language by an estimated 45 million
Hispanics. US clients are frequently
more comfortable on the phone with
a Hispanic accent than an Indian
accent.
However many Latin American nations have signed Free Trade Agreements with the USA, which guarantee
IP rights to foreign companies. The National Crime Prevention Council has issued warnings concerning China
and India for piracy of intellectual property.
In many Asian countries, the incidences of IP
theft and counterfeiting are widespread.
MEXICO
BRAZIL
20%
0%
60%
40%
100%
2004 2014
80%
ARGENTINA
NEARSHORE VS OFFSHORE
TOTAL COST OF OWNERSHIP (TCO) AND HIDDEN COSTS
AVAILABLE TALENT
“Chinese wages are now
climbing at 15 to 20
percent per year…
thanks to a supply
-and-demand imbalance
of skilled laborers in
manufacturing regions,
global pressure to
upgrade Chinese labor
practices and wages,
and increased employee
demands for better pay
and conditions.”
- Wendy Tate, Associate
Professor logistics at
University of Tennessee
“We factor an additional
30% into our costs to India
for travel and other soft
costs. Going to Mexico
works out cheaper.”
- U.S. Buyer, HFS Research
Travel
expenses
Infrastructure limitations:
Communication systems
High
attrition
Higher risk of
loss of IP
Slow / Politicized
immigration process
Offshore talent is often 10-15 time zones away. The logistics of
scheduling conference calls is extremely challenging.
Latin American countries fall in the same time
zones as the United States, which allows for
real-time conversations, normal work hours and a
higher quality of deliverables.
TIME ZONE COMPATABILITY
Tasks completed overnight by
someone in Mumbai are
reviewed the following
morning.
If there are problems, the
manager has to wait half a
day to get the updates
done.
10PM
5PM
7:30PM
19hrs Flying Time
CULTURAL BARRIERS
INTELLECTUAL PROPERTY PROTECTION
“You can’t just let things run
remotely. You need to manage the
resources and monitor the work
locally. And that’s a problem in
India.”
- Program Manager, US, HFS Research
RISK CONSIDERATIONS - INFORMATION PRIVACY
The varying
nature of privacy
requirements
across geographies
puts added stress
on the global
sourcing model.
Multiple
national/sector
laws plus
state/provincial
laws
Some
Countries with
National
Laws/Sector
Laws
EU Directive
Implemented
in Every
Country
Few national
laws
Multiple
National/
Sector Laws
Widely Varied
Why?
ARE NORTH AMERICAN ORGANIZATIONS
INCREASINGLY RELYING ON
CENTRAL & SOUTH AMERICA
AS A POOL FOR NEARSHORE OUTSOURCING?
Universities in countries including Argentina and
Mexico are well-respected in the educational
community. Brazil has the most Java
programmers in the world and the second-most
mainframe (COBOL) programmers.
Large numbers of professionals in Latin
America have attended universities in
the United States and understand our
market needs.
However, there is a very large pool of highly skilled,
college-educated resources available in Latin America.
OFFSHORE TEAM
26%
According to the Associated Chambers of
Commerce and Industry of India, in 2010 the IT
and BPO attrition rates in India reached a startling
STAFF TURNOVER
Companies are reluctant to enter long-term projects with an offshore team,
knowing that over half of the original team will be gone within one year.
FACTOR NEARSHORE OFFSHORE
Frequent Communication
High Interaction
Business Practice Familiarity
Cultural Differences
Project Management Coordination
Implementation Speed
Control of Operations
High
High
Major
Minor
Ideal
High
High
Limited
Limited
Moderated
Major
Limited
Moderated
Moderated
10AM
9AM
11AM
55%
In China and India, the high number of holidays decreases productivity
and frequently extends to project timelines.
TOO MANY HOLIDAYS?
36
INDIA has 77
National or
Regional Holidays
per year
The UNITED STATES
has 10 National and
on average 1 state
holiday per state
per year.
MEXICO has 20
National or Civic
Holidays
ARGENTINA has 23
National or
Non-Working
Holidays
CHINA has 36
Special, National or
Local Holidays per
year
772310+1 20
However this situation has
not been seen in Latin
American countries; the
family-oriented culture of
these countries keeps many
close to home and minimizes
turnover rates.
There are numerous incentives for hiring Latin American talent.GOVERNMENT INCENTIVES
Argentina has a large pool of
graduates in its major
cities—Buenos Aires, Rosario
and Cordoba—and low labor
costs following the
devaluation of the peso in
2002. Argentina’s
government has prioritized
the software industry and
offers special benefits to IT
and software companies
including reduced tax rates.
Incentives Include:
Tax exemption of 60
percent of the total amount
of income tax
Fiscal stability for 10 years
as from 2004
Reduction of employer
contributions up to 70
percent
No restrictions on foreign
currency wire transfers for
imports of goods and
services
Other benefits derived from
the recognition of software
as an industrial activity
With its political stability,
talent pool and reliable
telecommunications
infrastructure, Brazil is a
highly connected
nearshoring hub.
Incentives Include:
Reduction in social security
contributions up to 50
percent
PIS/Cofins tax exemption
for products purchased for
export
Spending on staff training
and development, and
research and development
can be
Deducted against income
tax
Tax exemption on the
import of software
development materials
Tax deductibility on
technology transfers,
licenses and royalties
Employing the ‘Maquiladora’
concept, which Mexico
successfully used to attract
foreign investment in its
manufacturing industry, the
government is trying to
apply the same incentives in
the global services area.
Mexico’s Outsourcing
industry has developed in the
last 10 years leveraging the
country’s proximity to the
U.S., the NAFTA free trade
agreement and its large pool
of bilingual workers.
Mexico’s Software
development program
(Programa para el Desarrollo
de la Industria del Software,
or PROSOFT) is promoting
Mexico to IT clients as a
world-class nearshore
alternative by offering cash
grants of up to 50 percent of
the total investment and tax
credits of up to 30 percent of
R&D expenses.
Argentina Brazil Mexico
VENICE CONSULTING GROUP
For More Information | 855.202.0824 | info@veniceconsulting.com
http://www.businessweek.com/articles/2012-03-15/outsourcing-a-passage-out-of-india
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