The pandemic intensifies trends that were already triggered by climate change, leading to social change that doesn’t stop at the doors of industry. Business trips are limited, and the days of long meetings in poorly ventilated rooms are over. The future belongs to the virtualization of business organization and communication. Against this background, nearshoring of IT services is of particular importance.
Virtual teams instead of concrete and glass
In our work we learned to use Zoom, Teams, and Google Meet efficiently. Project teams have been realigned and primarily work virtually. The office – a huge expense – is losing its importance. This is the same development that the server room saw a long time ago: after many years of businesses investing in their own infrastructure and security, the server room became obsolete, and was replaced by cost-efficient cloud platforms.
Software development in particular is designed by virtual teams who work in their home offices, in cheap co-location spaces, or perhaps (soon again) in a local branch of a large café chain. This trend seems irreversible: the potential savings in real estate costs and the ecological footprint of daily commuting are too great. Political will, economic factors — and perhaps above all, ecologically-driven social change, especially in the western industrial nations — will ensure that these newly acquired working methods and project organizations are retained.
Offshoring on the sidelines
The trend to outsource IT services to low-wage countries in Asia — especially software development — began 10-20 years ago. In the peak times of offshoring, cost reductions by an order of magnitude were definitely possible. However, the situation is a bit different now, in particular because the Indian middle class is on the rise and would like to continue the trend of increasing wages.
Nevertheless, cheaper is always possible! With the newly created offshoring markets in Vietnam and Pakistan, for example, as well as some cheaper offers from India, projects or sub-projects can be handled at what appear to be very attractive daily rates. But one thing must be clear: if the daily rate goes down, the same thing happens with skills and experience. East Asia is in no way different from Western Europe: You get what you pay for.
Experienced buyers know that the daily rate and skills should not be the only criteria when choosing an external partner. Because the stony path of experience is littered with many failed offshore projects, other important criteria have long been known: cultural proximity, clarity in communication, compatibility of time zones, and technical excellence beyond the deadlocked paths of standard technologies. What use are armies of cheap JEE and .NET developers from Asia if your purpose is to get rid of these old technologies in the process of digital transformation? And what use are online meetings when everyone nods in agreement, even though you’re not being fully understood?
It is precisely these disadvantages of offshoring — that are now obvious to IT users — that are forcing the major offshore providers to act. For some months now we have been observing the trend that these large service companies are increasingly exposed to customer pressure, and are attempting to build local European teams. However, we all know that with the current job market for good software developers, this is a hopeless endeavor. We definitely see an important role for small and mid-sized European nearshoring partners to close the corresponding gaps in the ranks of the large service providers in the short and medium term.
The technological and ecological transformation has affected large parts of our European industry. Companies that want to build sustainable future prospects include in their mission statements a software-centric orientation and a digital business Internet model. Just ask the established automobile manufacturers, or the retail sector that has been struggling for decades; they’re all transforming into software companies with embedded services that match their business model. In the case of automobiles this includes the provision of special hardware on four wheels, and in retail, this includes goods logistics with direct, same-day delivery to their customers.
As a consequence of these new business models, the increase of technological “know how,” and thus “insourcing,” is a business-critical need. This is particularly true for software development that has been outsourced in the past. But doesn’t this mean that every external service partner is dispensable? No, not at all, because it’s neither possible nor desirable in the short or long term to completely replace all external partners with your own staff.
The breathing organization
Today it is seriously difficult finding really good software developers and retaining them to the company. However, the digital transformation won’t wait for these personnel to be hired. The transformation has long since begun and doesn’t forgive delays due to a lack of resources.
As another factor, there will also be times when the workload of the tech teams varies greatly. Just like businesses have the flexibility to use server farms that can expand and contract according to demand, what’s needed are solutions that work in the short term, offer the necessary flexibility in the long term, and allow an organization to breathe in a healthy way.
All of these factors bring us to nearshoring, a concept whose strengths perfectly align with these business requirements and address the weaknesses of offshoring. Nearshoring provides solid English-speaking colleagues who share the same cultural background, are in the same time zone, are flexibly available, and possess terrific specialist knowledge. The right nearshoring partner not only expands the team with additional heads and thus a potentially higher development speed, they also complement the in-house project team with additional knowledge and skills that the team doesn’t currently possess. The right nearshoring partner is a mentor to other team members and has an understanding of state-of-the-art technologies and their efficient application in the project context. Thus, 1 plus 1 results in at least 3.
It’s important to note that the cost of nearshoring is very competitive compared to attempting to build your own staff. In the UK and Switzerland, the total costs of a permanently-employed senior Java developer are usually higher than an engineer from a nearshoring partner from the eastern EU (approx. EUR 120,000). Similarly, an in-house German developer is roughly at the same cost level as an external colleague from Poland or Latvia.
In summary, the future of software development belongs to agile teams in which internal and external developers complement each other in a meaningful way.
Does nearshoring mean spatial proximity?
If you recall how we began this document, the question is whether spatial proximity is a criterion now and in the future. Software development teams are often international and already work virtually today, outside of the actual business premises. The method of agile software development supports this project organization very well, and the experienced nearshoring partner of choice integrates seamlessly into such a scenario.
However, one should not ignore other aspects that play an important role in nearshoring:
Very high technical competence — a nearshoring partner should be a technology leader, not a follower. The level of education is top European, with local, well-known universities constantly supplying new talent.
Politically and economically stable region — since the partnership should be designed for many years, the region plays an important role. For this concern, the eastern and north-eastern parts of the EU are ideally suited. For example, if you decided on Belarus or Ukraine years ago, there could be a rude awakening every morning. In comparison, Poland, the Czech Republic, Slovakia, and the Baltic States are safe havens.
Scalability — a suitable nearshoring partner has proven that they have efficient recruiting and functioning networks, and can upscale in one or more projects at the same time, within weeks.
Value for money — of course value plays an important role in any decision. However, this isn’t about the cheapest PHP or Java developers that use legacy technologies, but about an external engineering team that brings real added value to your business, and justifies what may appear to be a higher price compared to offshoring. That being said, daily rates from nearshoring partners should, however, regularly be 20% – 50% below the daily rates of local service providers.
Because a local service provider also communicates in English and dials in remotely via Zoom, the question arises, what benefits can they offer to justify a significantly higher rate?
Large transformation projects represent a jumble of business requirements, technical specifications, legacy systems, visions, and political currents. Even with an agile, virtual project team, the path through a successful transformation can be a tortuous path with many branches. In such a project it is critical to take on-board, experienced pilots. So it doesn’t always matter where you go, but who you go with. And VirtusLab is one of the best partnering options you have.
Our world is global and has started to become more virtual. Nearshoring of IT services is a good solution to manage this transformation when looking to its advantages.
- Often better quality than offshoring
- Engineering staff with high quality education
- Frictionless communication
- A cost-effective investment
- Leading and not just following technology trends
- Ability to mentor your staff in these technology trends