NEARSHORE
VS. OFFSHORE
Why You Should Outsource
In Your Own Hemisphere
CONTENTS
Introduction
2
Why Nearshore is the New
Offshore for Outsourcing your
Software Development
3
How Proximity Impacts your ROI
5
The Costs of Nearshore vs.
Offshore Software Development
8
Where to Look for Nearshore
Outsourcing
12
What to Look for in a Nearshore
Software Development Partner
15
Conclusion
18
INTRODUCTION
Traditionally, the main decision in outsourcing has been whether to outsource at all. However, the most important
decision that software developers face today is whether to use offshoring or nearshoring. The primary factor these
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. While offshore outsourcing
has historically provided the best ROI in software development, the narrowing talent gap between offshore and
nearshore countries often makes nearshoring a better choice.
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 software development to build stronger relationships and communicate more effectively.
Nearshoring is therefore a more efficient process that also results in a better product.
This book was written with those seeking to outsource their software development in mind. It will cover why
nearshoring has recently become a viable option for outsourcing, why the location of your outsourcing matters, the
costs associated with outsourcing, and where and what to look for in a nearshore outsourcing partner. We hope you
find the information in this book valuable as you take your development efforts to the next level.
2
WHY NEARSHORE IS THE
NEW OFFSHORE FOR
OUTSOURCING YOUR
SOFTWARE DEVELOPMENT
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 in 2012, 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 in
2013. Two-thirds of U.S. businesses outsource at least some of
their application development, while one-third of these companies
increased their outsourced work in 2013.
ADVANTAGES
Nearshoring 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 in 2013, which will invest $42 billion into transportation. Almost $17 billion 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.
Outsourced software development allow a company to employ skilled workers at an affordable rate, thus
maximizing the ROI of a software development project. Nearshoring with Tiempo Development may also provide
additional benefits to traditional offshore solutions. Find out more about nearshore software development by
contacting Tiempo today.
Larger organizations
are still more likely to
outsource IT services
overseas, although this
practice is declining due
to challenges with calling
a provider on the other
side of the world.
HOW PROXIMITY
IMPACTS YOUR ROI
Nearshore software development is especially helpful for startups in technical areas that typically struggle to
obtain personnel who can develop their products. The return on investment (ROI) of outsourcing often increases
as the physical distance between client and provider decreases, primarily due to a greater similarity in time zones,
language and culture. However, many other factors can determine the suitability of nearshoring with a particular
country. For example, clients in the U.S. often find that nearshoring in Mexico provides a better ROI than in Canada
due to its higher wages and other domestic issues.
OVERVIEW
Many businesses in the U.S. are improving their ROI by outsourcing their information technology (IT) requirements
closer to home. Other countries in North America have an untapped potential for IT due to the rapid increase
in innovation hubs in safe, accessible locations. For example, ProMexico reports that more than 90,000 students
graduate in Mexico with engineering and technology degrees. The value of Mexico’s outsourced IT services is
rapidly approaching $15 billion per year with no signs of slowing down. Furthermore, the North American Free
Trade Agreement (NAFTA) allows IT services to flow freely between the U.S. and its neighboring countries.
The trend towards software engineering outsourcing has dramatically increased over the last 15 years as
businesses attempt to improve their ROI on IT. These costs are a major expense in many industrial sectors, so
they also represent a significant opportunity for cost savings. Larger organizations are still more likely to outsource
IT services overseas, although this practice is declining due to the challenges involved in calling a provider on the
other side of the world.
Offshoring is creating a struggle in maintaining customer service for the U.S. market as the demand for IT services
increases. This trend has led to many businesses feeling dissatisfied with the level of service provided by offshoring,
thus creating opportunities for nearshoring solutions. These solutions require a dramatically different approach to
deliver the ROI that businesses are now seeking.
5
MEXICO
The geographical proximity between Mexico and the U.S.
provides many advantages for nearshoring. Direct flights
between the major cities in these two countries require no
more than a few hours, allowing for a greater frequency
of face-to-face meetings. Some of these partnerships
involve longer onsite visits, which create greater trust and
camaraderie between clients and providers.
The U.S. and Mexico also have strong cultural ties in
addition to their close proximity. Software developers in
Mexico typically have a close familiarity with American
culture and work ethics. Providers in Mexico are also in
the same time zones as U.S. clients, allowing for a greater
degree of collaboration in real time. Furthermore, the
management teams of some Mexican service providers
are based in U.S. cities, which provide clients with greater
security in contracts.
NAFTA
NAFTA went into effect in 1994, which facilitated capital
investments between the U.S., Mexico and Canada. Wired
Magazine also reports that Mexico currently has at least
44 free-trade agreements, which is more than any other
country. These economic changes are rooted in American
foreign policy and grew through a combination of risktaking and determination. Mexico’s free trade policies
are encouraging startups on a tight budget to look at
outsourcing providers in Mexico, especially Guadalajara.
Additional tech-friendly cities in Mexico include Hermosillo,
Jalisco and Monterrey. These locations allow software
developers to live and work in conditions similar to those of
their America-based counterparts.
However, trade agreements aren’t the sole reason for
Mexico’s value in software engineering outsourcing . The
Mexican government has also enacted various legislation
that will have far-reaching effects in labor and taxation
that favors foreign trade. Furthermore, the National
Entrepreneur’s Institute (INADEM) is leading efforts to bring
business accelerators and incubators into Mexico, resulting
in the investment of hundreds of millions of dollars in
entrepreneurial activity.
The enactment of NAFTA has also minimized travel
restrictions between the U.S., Mexico and Canada, especially
for business professionals. Software developers from
Mexico therefore have relatively few hurdles to clear when
visiting U.S. clients for prolonged periods. NAFTA also
provides outsourcing clients with greater protection of
intellectual property (IP) rights and other forms of sensitive
proprietary information.
6
COMPARISONS
Outsourcing customers in the U.S. have many options when seeking nearshore alternatives to traditional
offshore outsourcers.CIO Magazine reports that ThinkSolutions, an outsourcing consultancy, ranks Mexico as
the best choice of Latin American outsourcing countries. ThinkSolutions partner Tony Mataya says, “It was no
surprise to see Mexico at the top of the list.” He adds that “the cultural influence that comes from sharing a
border with a country simplifies business relations.” Additional reasons for ranking Mexico at the top of this list
include its 2,000 IT businesses and a labor pool of 550,000 IT professionals that’s growing rapidly.
ThinkSolutions ranked Chile as the second most attractive outsourcing country in Latin America for many
reasons. Its outsourcing industry has strong support from both the government and private sector. Chile is
also one of the most politically stable countries in Latin America, according to the Corruptions Perceptions
Index (CPI). This measure of political stability is produced by Transparency International, an agency that
monitors corruption in international development. The primary disadvantage of using outsourcers in Chile is
its distance, which is at least a 10-hour flight from the U.S.
Costa Rica appears third on the ThinkSolutions list, primarily for its proficiency in English and widespread use
of Western business practices. Research also shows that Costa Rica has well-trained software developers.
However, its relatively small labor pool cost Costa Rica some points.
Brazil ranked fifth on the list, an unexpectedly poor showing given its reputation as a source of IT services
and the size of its labor pool. ThinkSolutions consultant Kate Shearer states, “Brazil doesn’t offer what Chile
or Costa Rica does in terms of cost, language skills or work force availability.” She adds that the economic
and political stability of Chile and Costa Rica give them a higher ranking, despite the significantly larger size of
Brazil’s labor pool.
However, Brazil’s earlier success in IT outsourcing is also causing the demand for labor to outstrip the available
supply, especially in IT. The available talent will therefore be more expensive, especially in the larger cities. The
official language of Brazil is Portuguese, so it has relatively fewer workers who are proficient in English and
Spanish. The U.S. also has less influence on its culture, according to Shearer.
We at Tiempo Development combine nearshore software development techniques with agile methodologies
to deliver the business value our customers expect. We also offer bicultural and bilingual software engineers
with a deep of expertise in developing innovative software solutions. Tiempo team members routinely
collaborate in an open environment to accommodate changes in user requirements. Contact us to find out
more about how nearshoring makes outsourcing more simple.
Mexico has been
ranked as the
best choice of
Latin American
outsourcing
countries.
- ThinkSolutions
THE COSTS OF
NEARSHORE VS. OFFSHORE
SOFTWARE DEVELOPMENT
A project requires the project manager to determine the resources that will be needed to complete the project.
This process generally involves a calculation of the total cost of engagement (TCE) of the candidate service
providers, which often includes the client organization’s in-house staff. The project manager knows cost of the
internal staff to a high degree of accuracy, although it’s still necessary to estimate the cost of bringing that staff to
a productive level.
Estimating the budget for an outsourced project is much more challenging due to the large number of variables
that determine the market pricing for such a project. This task often involves a comparison of the TCE for
offshore and nearshore service providers, which must account for other factors besides the hourly cost of each
worker. BCM International considers the items in the following list to be some of the major additional factors
involved in calculating the TCE for a software engineering outsourcing project:
•
•
•
•
•
8
Knowledge transfer
Travel
Management overhead
Attrition
Productivity loss
KNOWLEDGE TRANSFER
A greater dependence on documentation results in a less efficient
transfer of knowledge. It’s generally impractical to ensure that
the members of the outsourced team read and understand all of
the documentation that the client provides them. Even if they use
documentation as a spot reference, they may not read supporting
documentation that places the original documentation in context.
Furthermore, this documentation often isn’t updated to reflect
changes in project requirements.
The solution to these challenges the documentation is to rely on
it as little as possible. This process typically involves improving the
efficiency of communication between in-house and outsourced
team members, often with face-to-face meetings or other forms
of real-time communication. The more people communicate
together, the more likely they are to develop the trust and
understanding needed for an efficient transfer of knowledge.
TRAVEL
The beginning of any software engineering outsourcing project
should include an initial meeting to ensure all of the team members
are on the same page. This meeting should define the scope of the
project and resolve any outstanding operational issues. It should
also start the process of building trust and transferring knowledge
to the outsourced team.
The travel costs primarily depend on whether the outsourced team
will travel to the client or if key members of the client will travel to
the outsourced work site. In addition to the usual travel expenses
such as airfare, meals, hotels and ground transportation, travel
costs may also include the cost of obtaining work visas and lost
productivity due to team members preparing for and recovering
from their trip. Each person that travels typically loses a week on
each side of a business trip.
MANAGEMENT OVERHEAD
Managing an outsourced project typically requires the addition
of intermediaries, which necessarily increases the management
overhead. This cost can be significant even when the base labor
cost is low, due to the need to repeat communications. The
development team will tend to become less responsible for
maintaining communication with the client, and simply rely on the
intermediary to provide the needed information. This situation
does not improve the collaboration, productivity and quality
expected of the agile software development methodology. The
increase in management overhead should therefore be minimized
as much as possible.
The loss of a
team member
requires time to
find a suitable
replacement,
train them in the
technical aspects
of their job and
intergrate them
into the team.
ATTRITION
Attrition becomes a more significant factor in an outsourced project’s TCE as the duration of the project increases,
due to the combination of professional opportunities and life events. The loss of a team member requires time to
find a suitable replacement, train them in the technical aspects of their job and integrate them into the team. These
factors are a normal part of professional and social dynamics, so it’s essential to develop strategies for minimizing
their disruption to the project.
PRODUCTIVITY LOSS
The productivity loss of an outsourced project is highly dependent upon the difference in time zones between the
client and service provider. Differences in language can also increase lost productivity significantly, especially if they
require additional intermediaries to translate and prioritize communications. Furthermore, cultural differences
can incur a loss of productivity when members of the outsourced team are uncomfortable with reporting directly
to someone from another country. All of these factors require additional layers of communication that inevitably
increase friction, and therefore add to the TCE.
10
EXAMPLE
Consider the following example illustrating the differences in the TCE of a U.S.-based solution, an offshore
solution and a nearshore solution. This example assumes that the client is based in California and needs to add
16 engineers to develop a new product, while still providing ongoing support. Senior management decides to
outsource the development of the project since they can’t afford to hire additional engineers in the U.S. The
project manager considers India as the traditional outsourcing option, but also looks at locations closer to home.
The manager is surprised to discover that the TCE for Mexico is less than that of India. Latin Trade reports that
Mexico led Latin America in outsourcing in 2011. A. T. Kearney, a global management consulting firm, attributes
its strong showing to a “decline in wages over the past year, the increased attractiveness of near-shoring and a
well-developed talent pool.” Blanca Treviño, CEO of Sofftek, adds, “We now see companies in Latin America using
services delivered from India or China, or anywhere else in the world. I guess that’s globalization working in every
aspect of the industry.”
OFFSHORE COSTS
The Indian outsourcer that’s the best fit for this project charges $74,880 per year for technical leads and $52,000
per year for engineers. The project manager also identifies additional costs based on previous experience with
outsourcing to India. These include a 40 percent turnover rate and a 25 percent loss of productivity due to the
need to hire four engineers for every three that would be required in the U.S. Additional productivity losses
include 10 business days to replace an engineer and 15 days to train a replacement. These productivity losses
are best-case figures and may be significantly higher in practice.
NEARSHORE COSTS
Assume the project manager in this example finds a nearshore company in Mexico that’s well-qualified and
offers identical rates as the outsourcer in India, which is a reasonable outcome. The additional costs of a
nearshore software development project in Mexico include a five percent turnover rate and ten percent loss
of productivity. It also requires 10 working days to replace an engineer and 15 days to train the replacement.
This comparison assumes the same number of trips to both locations, which result in a much lower travel cost
for Mexico. However, CSO recommends taking advantage of Mexico’s proximity and similar time zones to make
more trips and keep a closer eye on the nearshore software development operation.
The TCE for the offshore solution in India is $2,206,790 and $1,626,542 for the nearshore solution in Mexico,
resulting in a savings of about 26 percent for Mexico. Long-term commitments can significantly increase
this difference, since workers in the U.S. and Mexico can work together through most of the day. Tiempo
Development can reduce the TCE of an outsourcing project and may provide additional advantages over
traditional outsourcing solutions. Find out more about how we can reduce your TCE by contacting us today.
11
WHERE TO LOOK
FOR NEARSHORE
OUTSOURCING
The United States is currently experiencing a significant talent gap in
the science, technology, engineering and mathematics (STEM) fields.
The wage gap between the U.S. and Mexico is even greater, making
Mexico an ideal outsourcing location for U.S. businesses. This gap
is especially wide in the STEM fields, in which Mexican university
graduates earn one-fourth of the salary of their counterparts
in second-tier U.S. cities who don’t even have a college degree.
Furthermore, Mexico is producing STEM graduates at a higher rate
per capita than the U.S., reducing the competition between recruiters.
Mexico is therefore becoming an attractive option for nearshore
software development.
TALENT GAP
The work of STEM leaders is largely responsible for the U.S.’s position
as a global leader. However, the U.S. Department of Education (DOE)
reports that this position is now being threatened because of the
relatively small number of U.S. students who are pursuing an education
in the STEM fields. Only about one-sixth of high school seniors in the
U.S. are interested in a STEM career, and only about half of the college
students who pursue a college major in a STEM field actually end up
working in such a field. Additionally, the pipeline of teachers in STEM
fields is inadequate to support these students.
David Williams, director of organizational development at Quanta
Services, was recently interviewed by Nearshore Americas about the
STEM talent gap in the U.S. Williams, formerly the global manager
of talent acquisition at FMC Technologies, said, “The short answer is
yes, there is a shortage of STEM talent.” He added that many people
would refute his answer if he said “no,” and many businesses would
agree with him if he said “yes.” Williams went on to discuss the more
important question of what to do with the talent that is available. He
also said, “We have to completely retrain [STEM talent] anyway because
of the niche services and disciplines that we require.”
President Barack Obama added $170 million to the 2015 budget
to provide funding for STEM initiatives and increase the number of
teachers and students in these fields. Nevertheless, the talent gap
in the U.S. continues to advance as technological advances create a
greater demand for STEM talent in almost every industry.
A 2012 U.S. Congress Joint Committee report on STEM education
noted that the global economy has increased the requirement for
workers with STEM skills. It also reported this trend applies to fields
that don’t traditionally require STEM talent because of the general
diffusion of technology that’s occurring in all industries. This report also
added that technological innovation improves the position of industries
in the U.S. by driving the growth of exports and high-quality job.
MEXICO’S PERFORMANCE
U.S. Senator Bob Casey, a Democrat from Pennsylvania, reported in a 2012 Joint Committee report, “while the
U.S. produces by far the greatest number of STEM degree recipients among OECD countries (348,484 in 2008),
adjusting for the overall number of degrees and for the population paints a different picture.” This report goes on
to say that in 2008 the United States had 1,472 STEM graduates for every 100,000 employees between the ages
of 25 and 34. In comparison, Mexico had 1,085 STEM graduates per 100,000 employees in this age range in 2008,
which is an average figure, according to the Organisation for Economic Co-operation and Development (OECD).
However, about 25 percent of the bachelor-level graduates in Mexico were in STEM fields in 2008, compared to 15
percent in the United States for that same year.
The Washington Post reported in 2012 that 130,000 engineering and technical students were graduating from
universities and specialized high schools in Mexico every year. This number is greater than the annual number
of STEM graduates in many other countries with larger populations, including Brazil, Canada and Germany. The
Mexican government built 140 institutions of higher learning from 2006 to 2012, with 120 of those dedicated to
STEM fields. Ninety-six other public campuses were also expanded during this period. However, the number of
Mexican engineers only increased from 1.1 million to 1.3 million, primarily due to the limited number of STEM jobs
available in Mexico.
13
STEM SALARIES
Mexico’s Department of Labor and Social Welfare conducted a study in 2013 that showed aviation and marine
transport engineers had the highest starting salaries, at an average of about 191,000 pesos (US$14,370) per
year. Physicists, ecologists and environmental engineers start out at about 187,000 pesos (US$14,068) per
year, while the annual starting salaries for biomedicine graduates are 147,000 pesos (US$11,021) and 141,000
pesos (US$10,584) for math graduates.
In comparison, a 2013 study by the Brookings Institute shows that the starting salaries of non-degreed
STEM workers in second-tier U.S. cities is about four times higher than college graduates in Mexico. For
example, the average starting salary in 2013 of a STEM worker without a degree in Bridgeport, Connecticut
was about $62,092 per year. Equivalent salaries in other second-tier cities were $44,851 for Tulsa, Oklahoma,
and $48,353 for Wichita, Kansas. Another 2013 study from Burning Glass Technologies showed that the
U.S. national average salary was $47,856 per year for non-degreed STEM workers and $66,123 per year for
degreed STEM employees, which is nearly five times the highest starting salary available to STEM graduates in
Mexico.
Geographic location generally affects a STEM professional’s salary in the U.S., although the industrial sector
typically plays a much larger role. However, a cost-of-living raise may increase salary expectations, especially
when moving from a second-tier city to a first-tier city. Similarly, a U.S. employer should be able to offer STEM
graduates in Mexico a competitive salary in addition to paying for a work visa. Furthermore, the wage gap
between the two countries also provides plenty of opportunity for future salary increases.
A 2014 study by Forbes shows that the most lucrative STEM careers in Mexico are in robotics, with starting
salaries averaging about 360,000 pesos (US$27,074) per year. These salaries typically increase to about 1.2
million pesos ($90,247) a year after 20 years in that industry. Software developers start at around 300,000
pesos ($22,562) a year, which increases to about 960,000 pesos ($72,197) per year, plus bonuses, after 15
years. These salaries are high by Mexican standards, although they’re well below that of their counterparts in
the U.S. For example, the Forbes study shows that the average salary for a non-degreed software designer in
San Francisco is greater than that of a software designer in Mexico with a degree and 15 years of experience in
that country.
Software engineering outsourcing talent from Mexico can incur additional costs such as work visas, but so
can recruiting software engineers in the United States. The competition for STEM workers is so fierce in the
United States that employers must routinely offer additional incentives. Adecco, a human resources consulting
company, reports that large high-tech companies frequently provide benefits such as free meals and unlimited
sick days to tempt new hires.
Tiempo Development allows a company to employ highly skilled workers at an affordable rate, thus maximizing
efficiency during a software engineering outsourcing project. Nearshore software development may also
provide additional benefits to the traditional offshore outsourcing model.
Geographic location
generally affects a STEM
professional’s salary in the
U.S., although the industrial
sector typically plays a much
larger role.
WHAT TO LOOK FOR IN A
NEARSHORE SOFTWARE
DEVELOPMENT PARTNER
Traditional software outsourcing, or offshoring, typically involves
using software developers on another continent, while nearshoring
is the practice of outsourcing to countries on the same continent.
Nearshoring is becoming a popular solution because of some of the
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:
•
•
•
•
Experience
Communication
Quality and Productivity
IP Protection
EXPERIENCE
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.
15
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.
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.
COMMUNICATION
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.”
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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-tomarket 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.
IP PROTECTION
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:
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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. Contact us to find out more about our approach to developing software.
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CONCLUSION
From cost to communication to the shrinking talent gap, nearshoring holds a number of considerable advantages
over offshoring for outsourcing software development. Tiempo Development has the experience, skill, and personnel
to help any company looking to outsource their software development efforts.
We offer superior knowledge and communication that will boost your ROI for your development projects. If you are
thinking about making the big decision to outsource all or parts of your development work and have any questions,
contact us today and learn what we can do for you.