Onshore, offshore or nearshore, outsourcing is a complex business and requires careful consideration of the pros and cons. It becomes even trickier if a business has already invested in an offshore operation and then decides to move a bit closer to home, adopting a nearshore model. In such a situation, understanding what constitutes best practice in an emerging sphere is vital.
As an emerging phenomenon, statistics on the transition from offshore to nearshore are scarce, but experts agree that it is happening. James Berkeley, managing director of Ellice Consulting, cited the example of the insurance sector. He estimates that 60 percent of insurance functions moved to offshore will be inshored or nearshored in the next three to five years. According to Berkeley, CIGNA, BUPA, Allianz and Aetna are four international health insurers who are undergoing moves to nearshore or inshore operations.
The reason for this, he said, is speed and quality of response. “In the insurance sector customers, [both] corporate and retail, are demanding claims settlement and two dimensional interaction with someone living in their time zone. They want a rapid resolution. For many carriers, managing virtual teams is frankly proving too difficult for most managers, Berkeley said. He stressed that consistency, the key attribute of their brand, is overly challenged by a small pool of local leaders and employees with the skills and volition to deliver the quality of services demanded, and the interface with technology, where legacy IT systems pervade, remains highly problematic the further you go from home. The answer, then, is nearshoring or onshoring.
Key Markets Require a Local Presence to Service Demand
Spreadshirt, an e-commerce platform that recently opened a facility in Brazil, chose nearshoring over offshoring for reasons of customer service. Mark Venezia, Senior VP of Sales North America said: “The key to retaining [buyers and sellers] and keeping them engaged is to offer great service; we need to get products to consumers fast, everywhere. This requires reliable supply chain, shipping, and transactions in multiple currencies and languages. Key markets require a local presence to service demand; we deliberately site production facilities in important markets to stay competitive.”
Venezia explained that moving to Brazil made sense. Brazil is the gateway to the Latin American market, the fifth largest country in the world with over 100 million online users, he said. “Nearly a third shop online and Brazil ranks first for apparel and accessory sales in Latin America with a projected growth rate of 15 per cent,” Venezia emphasized. “Consumers in Brazil could conceivably place orders on our platform and be serviced by our US [or German or Polish] production facilities but we decided to partner with a regional leader to keep the local connection and culture strong and deliver rapidly.”
Jeff Augustin, Managing Director – Outsourcing Advisory at global consultancy firm Alsbridge, cited the example of General Motors that has been somewhat open that they are taking some IT back in house. “Some of that will be onshoring, but there will likely still be a global delivery model in place there,” he said.
Another driver for such transitions, he noted, is location for the right cost structure. “If the selected location does not have the right cost structure the client will lose the efficiency gained in offshoring in the first place,” he said.
Such a transition, though, is not one to be taken lightly and requires a solid understanding not only of the opportunities but all the challenges involved and the ways that best practice can mitigate those obstacles and risks. Augustin said that the primary challenge in such a transition is what he calls “transition risk”.
There is a need for knowledge transfer back to the client organization or new provider, he said. “Just as it was when it was sent offshore and the techniques to thwart the risk are the same as used then; however, automation is eliminating labor in some areas and this helps mitigate the transition risk.” It is imperative then that knowledge transfer becomes a core priority during the transition.
Berkeley explained that with each identified challenge it is important to have a preventative and a contingent measure in place to ensure that the transition is successful.
Berkeley used these examples to explain
- Challenge: disruption to the quality and speed of customer service; Preventative measure: educate the customer in advance; Contingent measures: Leaders in the business are seen to be visible in front of the customer, admitting the error, articulating the improvement and being honest
- Challenge: Cyber security in the transition to a nearshore operation; Preventative measure: Consideration given to the relative risk and reward presented by moving data; not all clients are of equal value, the same holds true for their data; Contingent measure: Back-up plans are in place to minimize repeat attacks, effectively communicate with the client and minimize risks presented by third party vendors and so on
- Challenge: Market assumption proven incorrect. For example, quality of talent available locally is underwhelming and operating costs dramatically exceed expectations; Preventative measure: Educate key constituents — customers, peers, employees, shareholders, regulators, business partners – that the move will not be entirely smooth sailing, there will be speed bumps, and they can expect midcourse corrections; Contingent measure: Have plans in place to fully inshore functions that are highly important to the client relationship
By identifying potential challenges and then devising preventative and contingent measures, the company can minimize risk and hopefully prevent surprises.
He added that choice of location influences best practice because the client wants the fastest, highest quality “permanent” resolution of an issue or the transfer of knowledge. Location, he said, is a means to that end. “The choice of location for example, a US health insurer, who determines that a claims settlement office in Manitoba rather than Bangalore provides the optimum balance of minimizing overhead and maximizing customer service and client retention, must be able to establish that in that location there is a sizeable pool of high quality, educated English-speaking talent with the skills and volition to deliver the brand promise,” said Berkeley.
Venezia advised that once the metrics are in for market size, potential, and so on, companies need to pay very close attention to details like taxes, import and export fees, and other operational factors that can be thorny to unravel if you do not understand the nuances upfront.
He added that the best approach is “to research everything, have a clear timetable and budget in place, and combine corporate expertise with regional or local talent.”
Venezia went on to say that combining strong global resources like technology and products with a local boots on the ground approach is the best method for a smooth transition or ramp up. “We were able to site and locate and open a new production facility in the US in 2012 in Henderson, NV in less than eight weeks. We use the same process to locate any new facility whether this is opening a brand new entity or acquiring an existing company,” he said.
Best practice for Augustin means careful project planning, shadowing and knowledge transfer. For Berkeley, it is all about leadership. “All roads lead to a lack of accountability and poor leadership skills, when these moves don’t work. If you don’t have or cannot quickly acquire the appropriate leadership talent, these exercises are doomed to failure,” he said.
This article was originally published by our sister publication Global Delivery Report