Nearshoring is no longer a viable strategy for CIOs looking to maximize value from IT investments. While nearshoring has been viable in the past, as companies and CIOs respond to disruptive changes in the technological world, the location for IT services must be driven by operating model changes that meet an organization’s priorities. Can nearshoring still deliver competitive advantage in the future, or is nearshoring dying?
CIOs today are rebalancing their IT functions in response to disruptive changes in their business model, new technologies and changes in outsourcing landscape. Cloud technologies question traditional location strategy choices; disruptive technology trends require a new breed of IT skills that may not be available offshore or nearshore, and long-standing offshore contracts may no longer be relevant to meet business needs. Viewing the IT function with new large-picture strategies will change not only the structure and skills, but the locations of IT organizations.
When it comes to nearshore locations, global CIOs often raise questions on their viability specifically for IT. Nearshore locations first gained prominence with captive models driven by need for multi-lingual skills and ability to have closer proximity operations. The majority of nearshore services were either voice based/ BPO or IT services for the region. Historically, CIOs also had to play along with broader organization cross-functional delivery model changes and some invested in IT delivery capabilities nearshore.
Last year, the A.T. Kearney Global Services Location Index (GSLI) of top locations for IT outsourcing clearly suggested that IT outsourcing has moved beyond India. China (ranked 2nd on GSLI) and Mexico (ranked 4th on GSLI) are catching up on a global scale. Brazil and Bulgaria are emerging as strong regional players.
Given the trends around rebalancing, the nearshoring opportunity in Central and Latin America is both complex and intriguing.
Nearshoring will continue to grow but at a slower rate.
Nearshore locations in the last decade grew by over 10 percent CAGR. This rate of growth will slow as the global outsourcing market slows down and fewer companies will be able to justify the investment risk with an additional nearshore delivery center. The majority of this growth will be driven from the domestic market. Rise of grey-shoring and growing language skills in India and Southeast Asia – further dilutes the nearshore attractiveness and growth. Recently, a large global retailer implemented operating model changes that encompassed BPO and IT services across 40 countries. Even with significant scale, the benefit of adding additional delivery centers in Latin America did not overweigh the risk. Stability is one the most important pillars while building a long term outsourcing strategy. Continued socioeconomic and political unrest in some emerging Latin American locations will continue to be an impediment to growth.
Nearshoring alternatives for IT are maturing, but not enough for the transformative value CIOs hope to drive for their businesses.
Nearshoring markets will continue to mature and grow. In the 2014 GSLI, Mexico was ranked 4th and rated as a rising star. Mexico offers language skills, strong IT expertise, and both physical proximity and time zone similarity. Brazil also has demonstrated improvements over the years, moving from 12th in GSLI 2012 to 8th in 2014. However; as IT continues to drive more transformative value, the need for emerging skills or proximity trumps the benefits offered by nearshore. As an example, a global $5 billion CPG company with significant business footprint in Latin America needed to redefine their global IT operating model. The CIO decided to scale back on plans to expand their IT footprint in Mexico and Brazil in order to drive a transformative IT program. They chose to leverage a mix of offshore and onshore locations which had better expertise to drive the required transformation.
M&A activity for IT services will remain low – further impeding maturity growth for nearshore IT capabilities.
Over the last decade large global SIs (IBM, Accenture, CapGemini) as well as India-based global providers (TCS, Infosys, Cognizant) acquired multiple small regional companies or captives in nearshore locations like Latin America to expand the delivery footprint and serve local markets. An analysis of major M&A deals in Latin America shows more than 80 percent of deals were driven by BPO services. In addition, many companies have faced unique challenges in delivering IT services in Latin America. For example, a global CPG company divested their captive operations in Argentina to a large global SI. The divesture made perfect sense initially; but, over the last decade inflation and delivery issues have significantly eroded the business case for the SI.
So what does this mean for CIOs? Over the next two to three years, increasing numbers of CIOs will pursue options to rebalance select IT work—as part of a reassessment of a global IT operating model. The challenge, as always, is to ensure that IT capabilities, skills, and delivery models are best aligned to enable business priorities while balancing cost considerations. For many savvy CIOs putting a delivery footprint in nearshore locations like Latin America might never see light of day.
These tectonic changes should serve as a wakeup call for governments and industry associations aiming to promote nearshore locations – there is an urgent need to reassess not just their cost or geographic advantages, but their ability to deliver a long term growth strategy to stay relevant. SIs need to reassess their planned nearshore IT delivery footprint to make them an attractive business partner. If nearshore locations can’t respond, IT rebalancing will be their death knell.