Offshoring closer to home

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.

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.”

Mobil Travel Guide now has its hotel reservations business handled by a call center in New Brunswick, which is operated by Virtual-Agent Services in Chicago.

By going to Canada, Mobil Travel Guide found a highly stable workforce compared with call centers in the U.S., where turnover is typically higher, Mercurio says. In addition, it didn’t have to deal with time zone issues, language barriers and cultural differences, which IDC says are the three biggest hurdles facing companies using offshore service providers.

“The advantage is not just about being able to speak the language,” Mercurio says. “It’s about being able to relate to the culture, and it’s about being able to understand the dialect and what words mean… Also, they’re in the same relative time zone, which means they’re not working at three in the morning during our prime time.”

Those factors and geographical proximity are particularly important when critical IT projects are at stake, analysts say.

Nova Scotia Business was formed about three years ago to promote that province, just hours from IT hubs in New York and Boston, as a prime alternative for companies eager for lower-cost IT talent, but wary of heading overseas.

“We have 2,200 IT grads a year and the largest computer science school in Canada,” says Stephen Lund, CEO of Nova Scotia Business.

While about 90% of the outsourced work in Nova Scotia was call-center-related about three years ago, Lund says about 80% now is more IT-focused.

Wayne Gudbranson, president and CEO at IT research and consulting firm Branham Group in Ontario, agrees that demand for nearshore providers in Canada is growing.

“More companies are looking at Canada for a variety of reasons,” he says. “There are components of an outsourcing job that are conducive to utilizing Indian capabilities, but when it gets to a project that requires more regular project management and something that requires a product that’s being delivered in close geographic proximity, in that case Canada — and Nova Scotia, specifically — are heavily considered.”

End users also are starting to look for low-cost outsourcing options even closer to home. Rural Sourcing is setting up operations in rural areas in the U.S. such as Jonesboro, Ark., and Greenville, N.C., to provide outsourced IT support at a fraction of the cost of traditional domestic outsourcers.

The company, which plans to open 50 offices across the country, says it can cut outsourcing costs by as much as 50% compared with domestic IT service providers.

“The response has been incredible,” says Kathy Brittain White, a former IT executive who launched Rural Sourcing in 2004. “We’ve already had face-to-face meetings with 20 of the top 200 companies.”

The company offers application development, Internet development and database development services. Brittain White says clients also are looking for support for traditional legacy skills such as COBOL programming.

“We’re not doing that at the moment, but we may very soon,” she says. “When we do we’ll look at the pool of talent that has been outsourced in America, the 45- to 55-year-olds that were doing COBOL and mainframe, a lot of that has gone offshore, and there is a pool of very talented people that is available.”

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Copyright © 2005 IDG Communications, Inc.