The Nearshoring Trend: Why Businesses Are Choosing to Keep Software Development Closer to Home
Sep 22, 2023 |
A complex mix of geopolitical, economic and environmental factors hasn’t reduced appetite for software outsourcing, but is seeing businesses choose to work with partners closer to home.
In his best-selling book The World is Flat, Pulitzer Prize-winning writer Thomas Friedman explained how the flattening of the world at the dawn of the 21st century as a result of globalization changed the global supply chain forever.
It was integral to the evolution of software and IT services outsourcing, which prior to 2000 largely involved sending projects to India. Trade and regulatory liberalization, and new technology enabling more effective collaboration with remote colleagues and partners, saw North American companies approach other parts of the world with growing confidence.
Nearly 20 years on from publication of The World is Flat, globalization is still the force that shapes our daily lives. But the world isn’t quite as flat as it once was. A few bumps in the path have appeared and given many companies reason to reconsider their outsourcing arrangements.
The drivers for outsourcing remain the same - substantially lower costs, better access to talent and expertise, and exposure to other markets, cultures and ideas.
But five key factors have driven an uptick in interest in nearshore software outsourcing destinations in Central and South America. They include:
The Covid Hangover The pandemic was a wake-up call for everyone with extended supply chains and key development functions based in far-flung locations. We will see another pandemic eventually and it may be more deadly than the last. The sort of lockdowns and border closures we experienced from 2020 - 2022 have spurred many companies to ensure at least some of their outsourced software development is in a nearshore location in nation’s North America has strong trade relationships with.
The War in Ukraine Now well into its second year, the war disrupted software development not only in Ukraine, but in sanctions-hit Russia and Belarus. It cooled the appetite to send outsourcing work to surrounding countries like Poland, Hungary, and Slovakia. Safer shores have been sought with the real threat of the war spilling out into Eastern Europe.
Extreme Weather Every summer is getting hotter, the weather is becoming wilder. No part of the world is immune from the impacts of climate change, with cities grinding to a halt due to massive flooding, forest fires, or heatwaves, an increasingly real prospect. Nearshore destinations have had their fair share of climate events too but offer a good balance of proximity and risk reduction.
China’s Instability The red giant’s stuttering economy is bad news for the world in general as it dampens demand across the board. But with China’s vast housing market teetering on the edge of collapse, the picture could deteriorate rapidly. The knock-on effects on capital markets and financing could hit businesses everywhere. Yet another reason to keep important development functions close.
Geopolitical Tensions The world is splitting into two spheres of influence, with the US and its NATO partners and anglo allies in one camp, and China dominating the other group, with Russia, Iran, African nations banding together. India, now the most populous nation in the world, has a foot in both camps. President Biden has doubled down on his predecessor’s moves to limit China’s access to advanced technology, spending billions to reshore semiconductor manufacturing and bolstering relationships with neighbors in the Americas. It all makes nearshoring an obvious option amid growing tension between the world’s superpowers.
At Accelerance we’ve experienced heightened interest in nearshore destinations since the pandemic, with the war in Ukraine spurring more enquiries and in some cases, relocation of outsourcing work from Europe to Latin America.
It’s worth recapping what nearshoring is, and the benefits it offers businesses seeking to keep software outsourcing geographically close.
Nearshoring vs offshoring
Nearshoring is a business practice in the world of outsourcing where a company contracts out software and IT development or business processes or a service provider, third-party company located in a nearby or geographically close country or region.
This is in contrast to offshoring, where the outsourcing is done by a service provider in a distant or offshore location, often on a different continent.
Consider anything over six hours east or west of your location as offshore. Distance and time zone differences are important considerations. Even if you are in the same timezone, if in-person collaboration is required, consider how long it takes you to travel to your development partner. It's a long way from Toronto to Buenos Aires, or from London to Cape Town, even though you can achieve a full day working overlap due to having similar timezones.
For geographically dispersed development partners, which are increasingly common, some workers may be offshore, others nearshore.
Proximity: Nearshoring involves outsourcing to countries or regions that are in close geographical proximity to the client's location. The goal is to reduce the physical distance and time zone differences between the client and the service provider. For example, a company in the United States may nearshore some of its operations to countries in Latin America, such as Mexico or Costa Rica.
Cultural Affinity: Nearshoring often involves working with countries that share cultural similarities, including language, business practices, and even time zones. This can lead to better communication and collaboration between the client and the service provider.
Cost Savings: While nearshoring may not always offer the same level of cost savings as offshoring to lower-wage countries, it can still provide cost advantages compared to keeping operations entirely in-house. Labor and operational costs in nearshore locations are typically lower than in high-cost regions.
Reduced Risks: Nearshoring can help mitigate certain risks associated with offshoring, such as language barriers, regulatory differences, and political instability. The physical proximity can make it easier for companies to monitor and manage their outsourced development and operations.
Time-to-Market: Nearshoring can be particularly beneficial for companies that require faster time-to-market for their products or services. Being in a similar time zone allows for real-time collaboration and quicker response times.
Quality and Expertise: Nearshore destinations often have a well-educated and skilled workforce, making it possible to find qualified professionals for various tasks and services. Latin American countries have focused heavily on STEM subjects over the last decade and have a young, skilled workforce as a result.
Our Latin America guide
Overall, nearshoring is seen as a strategic approach to outsourcing that balances cost savings with proximity, cultural alignment, and reduced operational risks, making it an attractive option for many businesses.
Check out the Accelerance 2022 Latin America Software Outsourcing Guide, the most comprehensive analysis of outsourcing destinations and developer rates across the region. Choosing the ideal nearshore location depends on various factors, including the nature of the work, language requirements, and cost considerations.
Accelerance has a comprehensive network of respected partners in Latin America. Get in touchto find out how we can help you find a partner in the region to help advance your software development goals.
As Chief Customer Success Officer, Rich oversees Accelerance marketing and sales operations globally with a focus on helping customers make the best decisions for choosing a software development team and working together. Prior to joining Accelerance, Rich has worked in management consulting, IT advisory and outsourcing for over 25 years with Ernst & Young, Deloitte, Logica, Computer Sciences Corp. and Tech Mahindra.
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