The traditional benefits of IT outsourcing to nearshore locations have included geographic proximity, time zone alignment, cultural affinity and shared language. The one area these adjacent providers have not been able to compete with their offshore counterparts on has been price.
But that could change as robotic process automation (RPA) takes hold. The automation itself will begin to chip away at the offshore competitive advantage of labor arbitrage. But more importantly, argues Marcos Jimenez, CEO of Softtek North America, it will highlight areas in which nearshore providers excel: proximity, agility, and flexibility. A nearly 20-year veteran of the Mexico-headquartered company, Jimenez has doubled the profitability of Softtek’s U.S. and Canadian business since taking it over in 2011.
CIO.com talked to Jimenez about the potential impact of RPA on the global IT and business process outsourcing market, new demands from customers for outcome-based engagements, the role of digital labor management in the future of IT services, and best practices for RPA success.
CIO.com: Traditionally, what have been the key criteria for customers choosing between offshore and nearshore models?
Marcos Jimenez, CEO, Softtek North America: One traditional advantage of nearshore has been flexibility in accommodating requests outside the specific parameters of contractual obligations and statements of work. Let’s say, for example, that a customer asks a member of an application development coding team to collaborate in real time to meet a deadline. It’s typically easier for a nearshore provider to accommodate that request because we are working concurrently with clients and matching their work schedule—including the same holidays. Under the offshore model, meanwhile, the most experienced people work on different time schedules, since senior people in countries like India typically don’t want to work night shifts.
So, when a U.S.-based client has an urgent request they need to either rely on a less experienced person or they need to wait. So under the offshore model, it’s more difficult to go outside the lines of defined roles and processes. And that’s a problem as today’s fast-paced digital world demands agility.
There’s also the obvious geographic advantage of proximity. For U.S.-based customers who have to regularly visit service provider operations, traveling to Mexico vs. Mumbai becomes a lot more convenient and productive.
In terms of staffing, the dramatic growth of offshoring has over the years contributed to high turnover rates, as staff constantly seek new opportunities. Nearshore providers tend to have lower turnover and more stability.
All of that said, by virtue of their ability to effectively leverage labor arbitrage, offshoring has clearly had the advantage when it comes to price. In that arena, the nearshore model has historically not been able to compete. And, of course, for many customers in many situations, price is the key factor in making a sourcing decision.
CIO.com: How have you seen that dynamic begin to shift?
Jimenez: At Softtek, we’ve been able to leverage RPA and other types of automation to shrink the traditional price gap between offshore and nearshore.
In the last year, we’re also seeing more interest in nearshore based on our managed services offerings, with fixed price annual cost rather than just labor arbitrage and rate per full time equivalent (FTE). Our clients are asking us for year-over-year annual cost or efficiency improvements with a strong focus on automation.
CIO.com: Can you share an example of what might have tipped the scales in favor of the nearshore approach for one of your customers?
Jimenez: Many of our customers are looking to agile development methodologies to drive innovation quickly and in a cost-effective manner. Agile requires close collaboration between different teams. So you can have a U.S.-based team at a client site working with remote teams in Monterrey and Latin America, which makes collaboration easier. If the teams are in the U.S., India and Europe, that works well for the “follow the sun” model where you have teams handing off development work at the end of each day, but it tends to be less effective for agile.
One specific example is a major U.S. airline customer of ours. After working for more than 10 years with large Indian providers, this customer consolidated all of their application services with Softtek. The airline had more than 500 FTEs in a labor arbitrage model and faced significant challenges accelerating response time and innovation. In addition to offering a competitive price, Softtek transformed the application management model from labor arbitrage to SLA-based, digitized governance, and lean sigma to drive innovation and continuous improvement.
CIO.com: It’s clear how automation could erode the labor cost advantage of offshore providers. But how about the role of IT service provider in helping customers implement RPA internally?
Jimenez: The provider’s role is to work with the customer to assess the automation opportunity, define the processes and functions that will be automated, and implement the automation software. The actual software can be either a third party’s, such as Blue Prism or IPsoft, or a home-grown solution. The provider also typically oversees the transition and change process and then manages the new environment on an ongoing basis.
The extent of the provider’s involvement can vary depending on the situation. In some cases, the tool developer will be directly involved in the implementation, while in others the tool will be licensed to the service provider. Indeed, as the market matures, the major automation tool providers are figuring out how they want to position themselves in terms of doing implementation work vs. simply licensing. That will certainly play a role in the competitive landscape going forward.
CIO.com: What threats and opportunities does RPA pose for offshore and nearshore providers?
Jimenez: At a high level the threats and opportunities are the same for offshore and nearshore providers. The basic threat is that RPA undermines established models of service delivery, while the basic opportunity lies in delivering more value to customers more efficiently.
For large offshore providers, the most pressing immediate threat is the cannibalization of their labor arbitrage-based BPO businesses. This threat will continue to extend to their IT services business. There’s also the issue of how to redefine their business models. There are lots of headlines about the large India heritage providers scaling back on hiring and how, rather than adding 10,000 new people, they are looking at cutting staff or redeploying large numbers of staff.
There is a big opportunity here for second tier traditional offshore providers—as well as for nearshore players—to challenge the tier one with a more advanced portfolio of services that relies significantly on automation.