Offshoring closer to home

By Jennifer Mears, Network World
March 14, 2005 12:05 AM ET

Mobil Travel Guide was looking for cost savings when it decided to outsource its call center operations, but offshoring wasn't an option. The company needed workers with good knowledge of U.S. geography, and that wasn't readily available in India.

Mobil Travel Guide found that expertise in Canada.

"It turns out Canadians do a better job teaching U.S. geography than we do," says Paul Mercurio, former CIO of Mobil Travel Guide in Park Ridge, Ill., who is now chief marketing officer of GuestClick, a Bonita Springs, Fla., firm that provides Web-based software to companies such as Coca-Cola and Best Western.

"If somebody wants a hotel in Oklahoma City, they don't have to go look it up in a database to find out if Oklahoma City is in the United States," he says.

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Increasingly, corporations are looking to the north - and south to Mexico - for lower-cost alternatives to domestic outsourcing. Those areas don't provide the cost savings available in faraway destinations such as India, where wage rates can be as low as one-tenth of what American IT workers earn, but they do provide cost benefits compared with U.S.-based outsourcers.

Consulting firm KPMG last year stated in its Competitive Alternatives report, which compares business costs in North America, Europe and Asia pacific, that a 110-person software firm would have annual costs of less than $8 million in Halifax, Nova Scotia. The costs in Boston and New York topped $10 million and $11 million, respectively.

Those kinds of savings are passed on to companies contracting for software support. So organizations going to Canada could see 15% to 20% cost savings, compared with outsourcing IT domestically, while Mexico offers costs as low as one-third of what a company would spend onshore, says Atul Vashistha, CEO of offshore consulting firm NeoIT .

Domestic service providers recognize the savings. Firms such as Keane and Compuware have set up nearshore locations in Canada. Big players such as CGI, Electronic Data Systems and IBM also have nearshore operations.

Nearshoring, outsourcing work to service providers in neighboring countries, isn't a new idea, but analyst say the concept has attracted more attention in the last year or so because it is seen as less risky - and less politically charged - than sending jobs overseas to places such as India and the Philippines.

Analysts say nearshoring should be part of any corporation's global sourcing strategy, which pushes out projects to domestic outsourcers, offshore providers and nearshore locations according to business demands.

"Nearshore has a role to play for a company in its ongoing outsourcing portfolio. Things that are more risky, things where you want a lot of control are likely to end up in Canada," Vashistha says. "So you may take application support and maintenance offshore, whereas you may take application implementation and keep it onshore. You may take remote network monitoring offshore, but you most likely won't take data centers offshore, though you may take them nearshore to Canada."

The trend of nearshoring is growing, says David Tapper, program manager of IT outsourcing and utility services and global offshore services at IDC.

"I can't tell you how fast because it's all bundled in the concept of offshore," he says, pegging the offshore market for U.S. firms at $6.9 billion today, with a nearly 20% annual growth rate through 2008, when it will be about a $17-billion market. "Customers will go anywhere: Canada, Brazil, Mexico. You name it."