The tide turns as offshore comes onshore

‘Nearshoring’ gains foothold as foreign markets become more expensive

John Rafuse remembers getting access to a computer for the first time in Grade 5 and playing Asteroids later as a teenager. At 40, he considers himself the “oldest of the digital generation.”

Today, as executive vice-president of HeavyLifters Network, a Victoria-based technology and business consulting firm, he uses that cultural context to explain why many of his North American clients are moving away from offshoring.

The trend toward nearshoring — or onshoring, as it’s also called — is a result of many things, including cultural differences, he says.

“The reality is India’s only been in the game since the 1990s. The Internet was illegal in the 1990s,” he says. “Most of the people only learned it from university onwards. They only have, at max, 10 years’ experience. We’ve got guys that are 25 years plus.”

While his clients are often simply looking to cut back on travel, work in a closer time zone or operate in a country that speaks similar English, he says many of them nearshore because they’re disappointed with the service overseas.

“I had a client come to me last year. They were dealing with a group in Russia with a new type of technology. Though the company in Russia totally got the website part of it, the core technology they completely failed at,” he says. “They just didn’t have the experience.”

Other firms complain the skilled talent in places such as India and China has been used up or the emergence of a middle class in these countries has driven up the cost of doing business overseas.

Stephen Michaud, general manager of Luxoft Canada, an IT outsourcing service, helps companies to nearshore operations. Many North American firms are retrieving overseas work and bringing it to Canada because there’s political security here, less stringent immigration laws than in the United States and a lower cost of living, he says.

“They’re looking for high skilled, fast turnaround and even potentially an on-site, nearshore partner,” he says. “Our greatest benefit being nearshore and in Canada is we’re here, we’re available at the same time, in the same language and essentially the same culture as our clients.”

It’s rare for an experienced company not to outsource anymore, he says. However, many fail when they take that work offshore. That’s because they misjudge the potential problems of communicating with people in another culture on the other side of the world, says Michaud.

“We see a lot of companies that have done outsourcing poorly and lost a lot of time, productivity and money,” he says. “Pretty much the number one cause is lack of communication and shooting for lowest cost.”

Until recently, the Canadian dollar and lower cost of living in Canada provided an attractive incentive to U.S. firms looking to nearshore. Last year, Microsoft made big news when it expanded its Canadian operations with the creation of a software development arm in Vancouver. Several others have followed suit, as did many Canadian firms that had been outsourcing in Asia and eastern Europe.

Mark Gibson is a New York-based business consultant to many of these firms and teaches project management at New York University. Many of the commonly-held beliefs about the overseas labour pool being inferior, or shrinking, are unfounded, he says.

“A lot of these problems that people find with these higher functions are more cultural than capability,” he says. “People in India can do the work. Sometimes they don’t do it as well as bringing it onshore but the customer has this perception — and I stress perception — of them not doing it as well.”

Many of the companies that first tapped into cheap labour supplies, particularly in Asia, are the authors of their own misfortune, says Gibson. They contributed to the growth of the middle class, which then led to higher expectations from workers who can now hop from job to job, harming productivity, he says.

“Get everything you possibly can and stick it into India as quickly as you can,” he says. “That’s exactly what happened. A gold rush mentality.”

Many of those firms are now pulling back and nearshoring to North America — but this time they’re being more clever about it. The trend toward nearshoring has peaked and many companies are now choosing to “co-shore” instead, leaving the “nuts and bolts” outsourcing offshore and bringing the higher functioning work nearshore, says Gibson.

“My view is that some things were inappropriately offshored in the first place and as a consequence that spiral started. Now they’ve actually inappropriately onshored,” he says. “It’s much better to get it ‘right-shored.’ It’s really better to get the answer correct.”

It’s one thing to outsource a transactional job, such as payroll, where language isn’t as much of a factor. It’s quite another to go overseas to find a recruiter. That’s because they don’t know the geography or culture well enough and will arrange an interview with someone in New York for a position that’s actually in Minnesota, he says.

Rafuse of HeavyLifters Network says while there’s still money to be made outsourcing overseas, he cautions the trade-offs may not be there.

“The question should be ‘How much is it worth to us to get it right the first time?’” he says. “When they try to cheap out on the technology, I’ve picked up the pieces many times.”

Danielle Harder is a Whitby, Ont.-based freelance writer.

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