Several factors have been threatening the stability of U.S. businesses over the last few months: growing recession fears, IT talent shortage, and rising salary brackets. The topmost priority for CIOs in 2023 is to adjust IT operations to manage for inflation, Info-Tech Research Group’s CIO Priorities 2023 Report found, while IDC predicts the global shortage of developers will worsen, going from 1.4 million in 2021 to 4 million in 2025.
In this environment, nearshoring offers clear talent and cost advantages for companies looking to outsource their IT function. However, before investing in Latin America, those exploring this option need to keep in mind several considerations for selecting the location and making a business case for outsourcing their operations.
What makes nearshoring attractive?
- Greater collaboration opportunities: Latin America’s proximity with United States allows for more frequent face-to-face meetings, easier communication, and more effective collaboration on projects. Additionally, the time zone alignment means that both the nearshoring team and the U.S. team can work on the same schedule, reducing delays and improving efficiency.
- A large and strong workforce: Many nearshore countries, such as Costa Rica and Colombia, have a large and skilled workforce. This workforce is highly educated, with many employees holding advanced degrees and certifications. The availability of a large pool of talent ensures that companies can find skilled workers with the necessary expertise to meet their needs.
- Greater cultural affinity and lower turnover as compared to Asia-based models: Greater cultural affinity helps in establishing better communication and a better understanding of the client’s requirements. This helps to build stronger relationships between companies and employees, resulting in lower turnover rates, higher retention of talent, and a more stable workforce.
- English and bilingual language skills: Besides having a high level of English proficiency, many employees in nearshore countries are bilingual, which can be a significant advantage when working on projects that require multilingual skills.
- Cost savings and efficiencies: Although salaries may be higher in nearshore countries than in some offshore locations, the total cost of nearshoring can be lower when considering factors such as travel costs, communication expenses, and quality control. Auxis estimates one-to-one labor savings of 25-50%, organizational releveling and restructuring savings of 10-20%, and productivity efficiencies of 10-30% from nearshoring. Companies can then reinvest these savings to fund optimization efforts in other parts of the organization.
- Strong infrastructure: Many nearshore countries have invested heavily in their infrastructure, including technology, transportation, and communication systems. This helps to ensure easy communication with nearshore teams as well as workers having access to the tools and resources they need to complete their work efficiently.
In recent times, factors such as the COVID pandemic and the war in Ukraine have also made major nearshoring destinations such as Costa Rica and Mexico more attractive compared to outsourcers located in Eastern Europe and Asia.
Key Considerations for Nearshoring
Auxis – which has provided IT and business process services from top nearshoring Latin American locations for over 25 years – recently hosted a webinar, where we pinpointed some key considerations to keep in mind while building a business case for nearshoring.
- Estimating market salaries and fully loaded costs: It is essential to estimate the market salaries and fully loaded costs of employees in the nearshore location. This includes not only the base salary but also other costs such as benefits, taxes, and other expenses associated with employment in that location.
- Hiring, recruiting and retention costs: This includes costs such as job postings, recruiting fees, relocation expenses, and retention bonuses.
- Training and retraining avoidance costs: Companies can take advantage of the skills and expertise of the nearshore workforce, avoiding the cost and time associated with internally training and retraining.
- Office space, technology, and security support cost savings: Nearshoring also reduces the need for office space, technology, and security support at the client’s location, creating savings. The same can be leveraged at the nearshore location, usually at a fraction of the onshore cost.
- Performance accountability: Nearshoring can help increase performance accountability and expand the client team’s bandwidth by leveraging the skills and expertise of the nearshore team.
- One-time costs: Nearshoring can also involve one-time and other recurring costs, including initial set-up costs, migration fees, legal and regulatory compliance costs, overlap payroll during transition, and infrastructure costs. It is essential for such costs to be factored into the decision-making process when considering nearshoring.
Other external factors, such as changes to the foreign exchange rate, legal and regulatory environment, and political stability should also be factored in. It’s important to keep a window of three or more years to see how your costs are going to be spread out.
Best Practices for a Successful Nearshore Implementation
The webinar, which also featured speakers from the trade promotion organizations of Costa Rica (CINDE) and Colombia (PROCOLOMBIA), also highlighted the best practices for a successful nearshore implementation:
- A strong executive sponsorship and vision before starting: A strong executive sponsorship and vision are critical to the success of any nearshore implementation. The executive team should clearly articulate the goals and objectives of the nearshore strategy and ensure that all stakeholders are aligned around the vision.
- Designing the right model and solution: It is important to invest time in designing the right model and solution for your business, including for identifying the right location, selecting the right partner, and designing the right operating model to achieve your goals.
- Identifying process improvement and automation opportunities early on: Nearshoring provides an opportunity for introducing process improvements and automations that can lead to increased efficiency and cost savings. It is important to identify such opportunities early on and incorporate them into the nearshore strategy.
- Measuring performance regularly: Companies should establish key performance indicators (KPIs) and track them regularly to ensure that nearshore operations are meeting the desired outcomes.
- Contact the trade promotion agency of the nearshoring destination: These government-backed agencies can provide valuable insights and support for companies planning to start operations there, including information on market conditions, legal and regulatory requirements, and other important considerations for doing business in the country.