The following is the introductory summary of a TTIFC whitepaper that details the major factors that companies consider when selecting a nearshore location for outsourcing or shared services centers. In the weeks to come, we will publish more sections in an ongoing series that will further break down the aspects that go into the nearshore decision-making process.
When companies outsource their work to a foreign country, they usually do so because it is cheaper. That was the driving factor behind US businesses starting to send work to Asia in the 1990s and remains the reason they are now embracing destinations closer to home in Latin America.
Even though the cost of labour is still usually cheaper in India and other Asian countries than it is in Latin America and the Caribbean, the benefits of outsourcing to the nearshore instead of faraway offshore providers have convinced many companies that it’s better to look south than to the east.
The physical proximity of the nearshore is a plus for flight times, not to mention the time-zone benefits that allow for real-time communications and project collaboration in areas like software development. There is also the “cultural affinity” aspect, meaning that those living in Latin America and the Caribbean tend to align more with US cultural norms than their counterparts in Asia.
Still, even when looking to Latin America, the primary draw is price. “The main reason for going nearshore is cost savings,” says Sebastian Menutti, an industry analyst at the San Antonio-based consulting and research firm, Frost & Sullivan.
When you add in all the costs, he says that companies typically save at least 40% — and as much as 100% in certain cases — when they divert their work from the United States to the nearshore, which is generally defined as the back office, customer support, and other service-providing countries throughout Latin America and the Caribbean.
But after the decision is made to use a nearshore provider, for many companies, the precise cost considerations may cease to be the differentiating factor when picking an individual country. Price is always a chief concern, of course. The savings are the very reason to outsource. However, realizing a 10% savings across the board by going to Country A vs. Country B may not be enough if other aspects are lacking.
Ultimately, when it comes to actually selecting a nearshore location, the biggest factors that companies are now looking for are a business-friendly environment and political stability, says Menutti.
Furthermore, he and other analysts stress that the type of work matters. Certain locations have gained a reputation for different capabilities. For some, the strength is customer service or English-language call centers. For other destinations, it is software development, higher-value “knowledge process outsourcing” (KPO), or servicing a specific sector such as banking.
Other aspects are also critically important, including the size of the location’s talent pool, its educational pipeline to produce the workers of tomorrow, and English-language skills within the workforce. Depending on the difficulty of the work, the expected timeline of operations in the country, and the need for voice-based customer services, these and other factors will influence a company’s decision making in different ways.
Given that there are now so many outsourcing models and such a wide range of desired results, it can no longer be said that companies prefer one thing over another. It all depends on the need.
But if there is one thing everyone can agree on, it’s this: with more options than ever, companies are doing much more location hunting than they were even five years ago. And that search needs to be grounded in clear and targeted objectives.
The following categories represent an overview of the top factors that most businesses consider when they are selecting a nearshore destination, and the areas that providers should strive to improve if they want to attract more business.
1. BUSINESS AND POLITICAL CLIMATE
2. TALENT POOL
3. SERVICE SPECIALIZATION
4. ENGLISH PROFICIENCY
5. NATURAL DISASTER RISK
6. CONNECTIVITY AND INFRASTRUCTURE
7. GOVERNMENTAL AGENCIES AND SUPPORT
Stay tuned to Finance TnT in the weeks to come to read the detailed accounts from each individual section.