As smaller Nearshore outsourcers experience explosive growth, sometimes taking major contracts away from incumbents, the big players are challenged to change how they do business. However, the old guard’s culture may not be equipped to embrace the radical new practices that are turning the industry on its head.
“Today, software outsourcing is using the same business model that first emerged in the 1960s and 1970s,” says Lonnie McRorey, the CEO and Co-Founder of Framework Science and HyreRocket.com. “Their business is making money off of individuals, but a lot of the time they over-promise and under-deliver.”
Prioritizing Clients and Labor
It’s not news that labor arbitrage is central to the Nearshore value proposition. However, as emerging companies bring more talent to the marketplace, the discussion is shifting to include business practices that are designed to prioritize client and labor concerns – as opposed to the interests of the provider.
“Software outsourcers see themselves as factories,” says McRorey. “They’re just executing code, copying and pasting from other outsourcing models – it’s the only way they know how to deliver services. But clients want a provider that understands, and that assumes some leadership in order to solve the business objective.”
One of the more radical approaches that McRorey has brought to Framework Science and HyreRocket.com is transparency. This represents a significant – perhaps even revolutionary – shift in business practices.
“The incumbents think that if they’re transparent, someone will have something on them – and they’ll lose,” says McRorey.
“No one else in the market is functioning with our level of transparency,” says McRorey. “All of our clients can see our costs, even for onboarding training. We provide visibility into salaries, taxes, all the benefits. With such transparency, that means we have to be ethical, and live up to everything we say. This approach completely aligns with the needs of both the client and the talent.”
It is also timely for Mexico, where corporate corruption is under the spotlight. According to the Mexican news outlet Milenio, companies used by Monterrey-headquartered Softtek, which was founded by the charismatic Blanca Treviño – a member of the Mexican Business Council – are being investigated by the Mexican government, allegedly for money laundering and tax fraud.
However, in a recent article in El Financiero, the author makes clear that, according to government sources, there was no active lawsuit on the part of the government, or an investigation specific to tax evasion. That said, other companies allegedly caught in the web include Adidas, Mattel, Bachoco and Procter & Gamble.
“The incumbents think that if they’re transparent, someone will have something on them – and they’ll lose,” says McRorey. “However, I believe that there will soon be a ‘Good Company’ index in Latin America. Executives will be asking themselves: ‘Am I running a good company? Is my talent prospering?’”
This sounds like a reasonable and much-needed proposition – particularly if the ‘Good Company’ index isn’t simply a pay-to-play, public relations exercise. Last year, Alejandro Armenta, a Mexican Senator who co-authored Mexico’s anti-corruption bill, told Bloomberg that the Mexican treasury was down 400 billion pesos, with approximately 8,000 shell companies falsifying up to 9 million tax receipts.
“It’s not just Mexico,” says McRorey. “Argentina is also bad – in fact, private sector corruption is a problem across Latin America. Nobody wants to be accountable. In our industry, people are making a ton of money in an unregulated industry.”
Change is Afoot
Providers also tend to treat talent as disposable, which puts them at a distinct disadvantage when hiring against tech firms.
“A lot of the outsourcing work is project-based,” says McRorey. “As soon as it dries up, the engineers are let go.”
Smaller, more nimble start-ups are finding ways to steal business away from the big players by offering mid-and senior-level engineers more input on the software architecture. Critically, they are also offering better job continuity.
“Many of these companies spend a lot on the aesthetics – a fun park, t-shirts, a laptop – to make an engineer feel welcome,” says McRorey. “But then, three months later, that same engineer is cussing out the company on Glassdoor because there’s no support. Companies should be spending that money to hire the right person for the right project, as opposed to promoting a fake culture.”
The lesson for incumbents is that change is afoot. US clients, wary of corruption, want vendors to provide greater visibility into their financials, payroll, HR best practices, benefits, insurance and vendor profit, as well as taxes – all as part of a total cost of ownership (TCO) calculator.
Clearly, to win in this market requires more than doubling down on best practices. In fact, it could mean completely changing some core approaches, among them:
Transparency in All Areas.
If your competitor is providing both its clients and its employees with visibility into its business, it will have a distinct competitive advantage. Vendor transparency on talent, costs, skills and performance is rare in the industry, even among the most successful incumbents. Typically, the provider has been a black hole of sorts: the client doesn’t know what the engineers are being paid; and the engineers know nothing of the financial details of the contract.
Now, that may be about to change. US-based clients are wary of corruption, and a company that’s willing to show them the inner workings of their business – including how much they pay their employees, their tax burden, and margins – will earn much-needed trust. As it stands, some BPOs and ITOs in Latin America and the Caribbean have been accused of avoiding paying taxes, effectively as a standard business practice. If that’s the case, how will these companies be able to pivot, and to compete with a market that’s demanding more transparency?
Hiring as an operational process.
Many talented software engineers are wary of outsourcers, and for good reason. The best recruiters work for big, stable technology companies like IBM and Microsoft. Outsourcers have a reputation for wanting to get people on the stack as fast as possible. In order to succeed, outsourcers need to follow an operational process that supports labor continuity, and that is integrated with processes, while also being fast and accurate. Ideally, hiring becomes both a unique business process and a value add. Companies that are relying on spreadsheets, SharePoint, or even third-party vendor management platforms, are not investing in competitive differentiators.
Put the client in the driver’s seat.
The client, given complete visibility, should be able to determine who’s hired to work on a project. Training and team-building, which take time and commitment, are not the client’s responsibility.
De-commodify the message.
Vendors need to distinguish themselves with a unique message – and business practices that back up that message. A mission statement should represent a real culture, with real value that distinguishes the company from the competition. For example, Framework Science refers to itself as a “Philanthropic US/Mexico bi-national Nearshore software engineering excellence center.”
Automate the values.
If you are willing to embrace transparency, and a value-system that prioritizes the client and the employees, then automated systems should be built that deliver processes in support of these values.
Test and evaluate.
Some providers put engineers on teams without proving to the client that the person is qualified for the job. Simply stating qualifications is not good enough – everything needs to be backed up with test results.