From the beginnings of the Nearshore industry more than twenty years ago, the debate about whether it is better to buy, build or partner in Nearshore markets has raged. Context, meaning the size of the company, the core services it provides and the length of time it needs services are all aspects that must have their say in the conversation. But at its core, the question to buy, build or partner is the question of scale, both in terms of staff and competencies, and growth.
In the last year, the Nearshore world has seen a surge in companies taking decisive action to buy a solution to its problem. As reported on by Nearshore Americas, M&A activity rose sharply the pandemic caused cracks and fissures to show in some organizations and in certain sectors. Companies wanted to acquire knowledge, technology and geographical diversification in the wake of the disruptive – and industry-changing – Covid-19 impact.
“The landscape is extremely fragmented and it’s ripe for investment, whether it’s larger companies looking to extend their footprint more quickly or leveraging their combined scale to drive synergies,” Shirley Hung, vice president of Everest Group, said at the time.
Anurag Kumar, managing director of the Nearshore region at Improving, and former CEO and co-founder of iTexico, is a self-described “product of outsourcing” who arrived to the US as a software developer for Tata Consultancy Services in the early 80s. As Kumar told Nearshore Americas in a recent interview, the outsourcing world has seen constant evolution over the last four decades, and when Kumar originally expanded into Mexico where talent “was really good, cost was competitive, and there was this attraction of the time zone proximity” convincing clients of the viability was still a problem. Now, however, the Nearshore is matured and more inviting than ever, it’s clear to the veteran IT professional that some fundamentals remain the same. And some questions continue to be asked.
There is a matrix of concerns and interests that a company must navigate in order to decipher the question of buy/build/partner. And this means, simply, that the answer will be different depending on each unique case.
“Context is highly relevant,” said Jonathan Washburn, an outsourcing adviser and angel investor, who has held various CIO and CEO positions in outsourcing companies across the last 20 years.
“Companies are really searching for gold, and the gold in our industry is talent, the human aspect. This cannot be grown easily and it takes time, so companies have to go out and find it.” — Anurag Kumar
“If a company is seeking a long-term solution then a ‘builder-buy’ approach would always be my preferred option. For me, the partner option has always been stricken with turnover and alignment problems, but it can work for companies looking for short-term options or do not know the duration of their investment. In the past, I’ve often partnered for six months to a year to get things off the ground, but eventually switched to build or buy. Most companies want people that are fully invested in the company and fully invested in its product, and that’s often more than a partner can offer,” he added.
Partnering, however, does offer obvious benefits. Delegation, the reduction of resource waste and immediate access to experienced professionals who’ve done exactly what you require are all obvious examples. Nearshore proximity offers time and culture advantages that offshoring cannot provide, and partnering can provide stability – particularly important during periods of disruption. Yet the partnering comes at a price. Whether that price is worth paying, is up to each company to decide.
“Companies are really searching for gold, and the gold in our industry is talent, the human aspect. This cannot be grown easily and it takes time, so companies have to go out and find it,” said Kumar.
Building a service center or a Nearshore team takes time. The business must be established in the country, and then the process to build a team within a new culture must begin. It’s a process that has been successfully executed in Latin America, Eastern Europe and parts of Asia many times over. But still, the time lag remains. For companies that need rapid response and quick delivery, and for those companies large enough to be able to, the buy option offers ready-made, read-to-go experience and skills. In the wake of two years of business disruption, this has been a popular option.
“Large companies bought smaller companies and used them as a foundation to scale. Eventually, quality targets to buy started decreasing, but as demand continues to increase, companies have returned to the building mode,” said Kumar.
“There’s going to be a shift in the building approach. It will shift to global-remote first in a way that will open up growing up organically. The shop doesn’t need to be bought anymore – it’s spread out all over the place.” — Jonathan Washburn
In today’s economy, companies that may not have previously been able to afford the buy option may be able to consider it, should their needs be long-tern, Washburn suggests.
“Cash is cheap right now and there is tons of capital available, though multiples are creeping up to where they probably shouldn’t be. But I think cash availability is as big a factor as anything in this debate,” he explained.
“Buying is a time trade-off. If a company is looking to get scale and English is a priority, then in a lot of countries in Latin America, they should buy. It’s the only way they’ll get cheap scale quickly in this competitive labor market,” he added.
The advent of mass remote work has changed the approach to building a delivery center, especially in the IT services sector, Washburn believes. With people no longer needing to meet together, and employees clearly indicating that they do not want the avoidable stresses of office life like the commute, the future for building teams is no longer regional, he said.
“There’s going to be a shift in the building approach,” said Washburn. “It will shift to global-remote first in a way that will open up growing up organically. The shop doesn’t need to be bought anymore – it’s spread out all over the place.”
For service companies, building remains a strong option, says Kumar.
“Build is slower and since the needs are based on the clients, and scaling can be uneven. But the chances are that the existing service company has built operations before so the processes and operations team may already be there. Regardless, it still takes investment and time,” he said.
The Impact of the Knowledge Gap
Among the many external factors that will impact the decision-making process of companies looking to expand their tech knowledge and delivery capabilities is the tech talent shortage. A huge problem that is likely to persist for a decade or more, it is just another issue that companies will have to grapple with when deciding where place their investment capital.
Kumar believes the talent drought will be “very disruptive” for companies.
“The demand of digital innovation has exploded, remote working has opened new opportunities to employees globally, and we seem to have lost a few years of new talent either due to dropping out of school, limited number of internship opportunities, recent stimulus funds or the simple family impact of Covid-19. The availability of talent is not enough to meet demand, costs are going up, there is unpredictability in the world, and competition for that talent is fierce,” he said.