There is More Than One Cost at Stake When It Comes to IT Outsourcing

Since the dawn of the outsourcing era, the need for organizations to leverage a global knowledge base and access fresh talent pools has resulted in an IT outsourcing boom across many countries. 

The benefits of lower operational and labor costs propelled the trend of outsourcing further. Consequently, organizational decision-makers today are increasingly prioritizing lower labor expenditure while building an optimized, enterprise-wide sourcing strategy.

However, as the global outsourcing market expands, companies need to evaluate whether cost-cutting or labor arbitrage should still be the primary yardstick for measuring the success of outsourcing operations. According to the Deloitte Global Outsourcing Survey 2018, while 57% of enterprises outsource to cut costs, a close 57% leveraged outsourcing as a core business function enabler and 28% to access fresh intellectual capital.

Clearly, there needs to be a shift from mere cost-driven outsourcing to a multi-dimensional value proposition for outsourcing IT operations.

Arie Lewin, Director of the Center For International Business Education & Research, says, “For most locations, labor arbitrage dissipates over three years. If you are only counting on labor arbitrage you will be disappointed.”

The need for organizational agility, amid currency fluctuations and infrastructure failures, is felt more by companies today than a lack of labor arbitrage. It isn’t just ‘what’ to outsource that the business leaders should think about but also ‘where’ and ‘how’. With the ever-changing global political environment, companies looking for IT outsourcing vendors need to be strategic while picking a location and choosing a partner. 

To put it simply, today’s outsourcing paradigm demands a consulting partner who can continually evaluate the geographical advantages of various delivery centers and make the corresponding adjustments to processes and operations. 

That said, it’s important for enterprises to understand the new drivers that impact their outsourcing strategy.

The Need To Go Agile

A mature outsourcer should have the organizational flexibility to quickly adapt innovative business models to any given domain or industry sector.

With seamless collaboration and faster product development cycles at its heart, the Agile model has continued gaining popularity among enterprises worldwide. Agile goes beyond the traditional outsourcing model of delegation and execution - it functions as an interdisciplinary methodology where both the client and the vendor work closely and adapt dynamically to changing project requirements. Teams work in parallel, either virtually or physically, leveraging constant communication and collaboration to clear bottlenecks and drive innovation.

In fact, seamless integration of an agile model between the company and the vendor is a key marker of the strategic value of global outsourcing. Agile can be adopted by the company in three distinctive ways, ranging from teams that can be located in the same region to those that can be effective in a distributed arrangement between the vendor and the company location: 

• When regulatory concerns require a particular project to be executed in a specific region to either expand or gain access to new market areas, taking the point of production or operations closer to the end-users is advisable. The European Union’s adoption of GDPR is a key example. This shift forced many enterprises operating within Europe to shift toward a nearshoring strategy that capitalized on the availability of GDPR-compliant outsourcing vendors within the continent. 
• When the company needs its developers to understand the underlying business processes for their product, the PO and project members are located together as one team. The rest of the developers work as another interconnected team at the vendor’s location, ideally close to the company location for frequent collaboration - a key tenet of the Agile model.  
  
• When the company needs the platform and the execution team to work collaboratively on a project and the PO and the rest of the team members need to be communicating constantly among themselves. In this case, resources should be at a location with limited time zone differences to ensure seamless conversation that doesn’t grind to a halt when one team clocks out of the workday. For example, many North American companies are reshoring sensitive and time-bound operations to Mexico and Brazil, where closer time zones enable quicker, more agile development cycles.
  

Such collaborative global sourcing strategies, where teams across enterprises use similar agile practices and share common work trends, gives rise to a ‘one team’ culture. However, to function as one team and to reap the benefits of an agile model, companies must choose vendors who can eliminate the risks that threaten this framework.

Time zone Alignment

Business leaders keen to adopt a distributed agile model to scale their IT outsourcing processes should opt for minimum difference across time zones. As an agile model requires maximum collaboration between the company and the vendor team, time difference across continents hampers steady, sustainable communication.

For instance, a leading U.S. bank that has outsourced its IT services to Mexico, doesn’t require any overlap across time zones to connect with the developers. While people on the West Coast clock in at 9 AM, the workday in Mexico City starts at 11 AM. This time frame works best with the agile mentality as it requires teams to be ‘on their toes’ and in constant communication.

One of the fundamental principles of an agile model is access to quick feedback and improvisation. This helps developers code, test, improvise, and release within a shorter time frame. A huge geographical distance means more time is spent on written knowledge transfers and process refinement, unless people are working around-the-clock in rotating shifts.

Cost to the company

It goes without saying that hiring people to work at odd hours comes at a cost. 

It isn’t only the time difference that becomes a challenge but also collaborating between the POs and the developers across continents increases the overall expense. While video conferencing, instant messaging, document-sharing, and remote scrum meetings all help, nothing works better than face-to-face interactions. To manage agile projects and new technological processes, the POs visit the developers frequently at vendor locations and vice-versa. 

If the vendor is conveniently located then the company can easily optimize travel expenses and also fund frequent collaboration initiatives.

How do we ensure agility in outsourcing strategies?

Nearshoring enables companies to have their business processes closer to home at a cost-effective location. They can benefit from the proximity of geographies and time zones, while driving more effective collaboration via cultural, linguistic, economic and political linkages.

To ensure maximum agility in outsourcing strategies, Wipro has established multiple delivery centers in Mexico’s Silicon Valley - the city of Guadalajara. The availability of skilled talent in Latin America and a wage arbitrage opportunity of about 30% when compared with the U.S. and Western Europe, makes it an ideal location.

The proximity of Wipro’s Guadalajara location to the U.S. and an incredibly well-established airline network gives it a significant edge. This means that it is more than feasible for business leaders to fly to Mexico to attend meetings, collaborate with developers, provide feedback, finalize projects, and snack on a taco or two - all in a day’s work!