Breakdown: In Tech Outsourcing, Expertise Reigns Supreme

Tech expertise is gaining luster in the eyes of companies interested in outsourcing IT operations to nearshore/offshore territories, changing the dynamics of a market driven for decades by lower labor costs.

The numbers: 60% of companies surveyed by Bain & Co said that they plan to increase R&D outsourcing over the next three years. 

• 73% of respondents cited “specific industry expertise” as the most relevant factor when choosing an outsourcing partner for R&D. 

  • Cost was the second most popular factor (59%), followed by “industry agnostic” (or generalized) tech expertise (58%).

  • Most interest in R&D outsourcing came from the advanced manufacturing and services, automotive and medical devices industries.

• 60% of respondents stated plans to shift work to offshore/nearshore territories over the next three years.

In Deloitte’s latest Global Outsourcing Survey (2022), 76% of respondents said they already outsource IT functions.

• Cybersecurity was the most outsourced IT function (81%), followed by app/software development (79%) and IT infrastructure services (77%).

• 67% of the companies surveyed expressed plans to increase budget for operate services outsourcing models, which are more outcome and innovation oriented. Managed services came second (57%), followed by traditional outsourcing (32%).

What’s happening?: Historically, engineering and R&D-dependent companies have outsourced about 18% of their R&D projects, way below the portion for ITO (46%), according to Bain’s data. For R&D, offshoring/nearshoring has remained “significantly lower” than in IT services, according to the firm. 

Yet, higher demand, the urge for competitive innovation and skill gaps are pushing companies to hunt for brain power and creativity in other territories.

• “The typical cost reduction drivers have been overshadowed by the prioritization of capabilities for outsourcing (especially data and analytics, cybersecurity) […] Organizations are turning to outsourcing to fill gaps, drive value and provide end-to-end solutions as they build a blueprint for the future,” Deloitte pointed out in its latest Global Outsourcing Survey. 

• The most severe skill gaps are found in data engineering and analytics, cybersecurity, IoT and AI/ML, according to Deloitte’s and Bain’s reports.

• Young engineers and students surveyed by Bain cited good pay and benefits, a flexible working schedule and meaningful work as the most relevant factors when choosing jobs.

Changing mindsets: Top players in Latin America’s tech industry are pushing for a shift towards a more sophisticated, expertise-based and product-oriented nearshoring model in an attempt to avoid overdependence on cheap labor.

• “We are working in the comfort of that model. Cost is the driver of the business,” warned Benjamin Huerta, President of Jalisco’s IT cluster, in a previous interview with NSAM.

  • “We are latching on to a staff augmentation strategy, and that’s a super risky position to be in because your good engineers lose their edge; they use their high skills for support activities that don’t require much. Then you lose the capacity to develop your own products and services,” Huerta added. 

• “If we keep competing in the market with a model that prioritizes time, material and bodies, that’s risky,” commented Vladimir Mendoza, SoftServe’s President and Country Manager in Mexico. “As an organization moves towards more sophisticated deliverables, where results, involvement and the generation of ideas matter more, you can justify other kinds of models and pricing.” 

Though India remains the favorite among US and European companies as a tech outsourcing destination, Latin America is gaining popularity.

• Deel –a company that provides global hiring and EOR services– estimates that 3,000 US- based companies used its services to hire Latin American talent during the first quarter of 2023, double the volume from a year prior.

• Colombia topped the most recent Offshore BPO Confidence Index, outmatching India and the Philippines.

NSAM’s Take: While US and European companies are waking up to the quality and expertise that can be found in the Nearshore, lower costs will remain one of the region’s major perks. After all, cost-cutting is still a priority for CIOs and CFOs across the board.

Nearshore tech outsourcers won’t ditch their current business model entirely, but the most entrepreneurial among them will take advantage of the growing interest from foreign companies to build their capacities and make the jump to a more sophisticated portfolio. 

The biggest challenge for Nearshore IT providers will be the availability of highly specilized tech talent. Data, cloud, cybersecurity and AI experts are being swiftly bagged by industry giants, leaving a gap that colleges and vendors are trying to fill as fast as possible.

Under that scenario, companies will have to appeal to the preferences of young engineers. If the surveys are to be believed, they’ll need more than a fat paycheck to get them on board.