There are several outsourcing models that can be applied to both core and non-core businesses alike when facing challenges in defining the most suitable strategy for going forward. In general, these models are clustered in areas such as:
- Pricing
- Engagement
- Topology
- Delivery
- Transformation
Business is all about making the right decision. The one that can elevate your company’s abilities and generate notable gains. If you are looking to scale up your organization, but for various reasons (budget, logistics, etc.) you are not too keen on the idea of expanding in-house, one word is the answer – Outsourcing. Actually, there are few industry buzzwords that require highly analytical approaches and correlate to your decision of going forward. They are also derived from your preferred outsourcing model – Onshoring, Nearshoring, Offshoring, or Bestshoring (a.k.a Rightshoring).
The difference?
Onshoring/Local
Onshoring (local sourcing) stands for the procurement of services in typically domestic environment of a company that outsources its operations locally.
Global Offshoring
It takes place when you relocate work (global sourcing), the production of products and/or services to a different country globally. The most favored locations at the moment are India, the Philippines, China, etc.
Nearshoring (Domestic)
There are regions in so-called high-cost countries where a certain company is located which also offer conditions such as lower wages or preferential state benefits. In Germany, for example, these areas are located on the Polish/Czech border, while in the USA there is a distinction between A-B-C states and districts. State benefits also exist in Scotland, for example.
Nearshoring Eastern Europe
It is quite undeniable that when it comes to the costs and availability of labor, nearshore software development Europe cannot compete with such an established outsourcing center as India or China. But in recent years, more and more companies which want to place their IT services abroad, especially from economically developed European countries like Switzerland or England, are paying attention to European nearshoring countries such as Poland, Bulgaria or Romania. These arrangements improve collaborations between customer centers and their colleagues while removing complicating factors such as temporary differences. For example, nearshoring Bulgaria is obviously cheaper and credible because of the European location.
Nearshoring South Europe
According to the Global Sourcing Association (GSA), the SEE region has become an attractive location for nearshore outsourcing, thanks to the low cost of qualified staff and a large number of well-educated, bilingual, qualified IT professionals. Other advantages include high-quality control, better inventory control, no visa requirements and the ability for better procurement and logistics to easily communicate with partners. The overall value of the market in South Europe is $12,484 million, with an expected CAGR (compound annual growth rate) of 3.3% until 2021. The biggest market is currently Italy ($6,257 million), closely followed by Spain ($5,181 million). Portugal grows at a CAGR of 3.6%.
Best-shoring
Bestshoring (a.k.a. rightshoring) is the process of identifying the best location to move manufacturing, IT, or business processes of a company. The decision is best to be based on quantifiable criteria which are intended to take subjective and political input out of the decision cycle. It also avoids speculation and seeks to look through all details, therefore it’s highly regarded by industry experts. Many companies hire external consulting firms to make these decisions (e.g. Titan Advisory is a proven partner for such decision making or for executing certain request for proposals).
How-to for a successful Best-Shoring?
Delivery Model Design
Basically, after or simultaneously with answering the question of the delivery location, the distinction has to be made between three central models (Delivery Team, Staff Augmentation, Software Outsourcing). At this moment, it’s important to select the right approach that suits your own demands. Key performance indicators, success factors, and bottle necks are also identified and developed during this design process. Outcomes from this particular phase will form the requirements for the upcoming tender.
Request for Proposal
In order to obtain the best pricing based on the desired delivery model, as well as to gain additional benefits and insights, a tender is recommended. Put your outsourcing project out to tender and base it on durations of (a) project duration (b) 3, 5, or 7 years. For outsourcing engagements, due diligence is recommended as a part of the tender.
Transition
Transition time for new deals is usually around 6 months, while it can be up to 18 months for hand-over activities from existing to new suppliers, or back in-house. It all depends on the level of complexity of the outsourcing. A care should also be taken to ensure that there are transition SLA’s with consequences up to the steady-state phase of the contract. Many suppliers want to avoid responsibility through long transition periods. The milestones and success factors for the transition should be clearly defined. Also, before the transition starts, all contract documents should be drafted and signed. Due to time limitations, this is often postponed to later phases. Experience shows that this is the right thing to do, so do not postpone and make sure you have all documents in the necessary quality and level of detail.
The importance of a Local Twin (Sparing)
Local Twin, how does it look like?
A Local Twin is a delivery approach that’s always based on 2 people. It’s supplemented by the account manager who manages the relationship and the commercials of the contractual relationship locally, at the high-cost location of the client. The twins are the delivery managers at the high-cost location and the best shore location, respectively. If there are multiple Best Shore locations, the Twins become triplets or quadruplets, etc.
Why is it so important?
The close coordination between roles is key to successful delivery and can be expected by the client. In any outsourcing relationship, communication is a crucial success factor. These managers require significant experience, as they need to drive the engagement. The costs for these delivery and account management functions are to be provided free of charge by the supplier to the supplier.
Most important contractual Shoring Terms
Transition Investments
The additional efforts to implement required operations, especially at the beginning of a business relationship, are usually to be provided by the supplier without extra costs for the client. These expenses should be amortized by the supplier over approx. 2 years, after which no extra costs should arise for the client in the event of premature termination. Good investments for the transition and beyond are 2-4% of the deal value. The more of these are unconditional and upfront, the better.
Attrition and handover cost benefits
When it comes to switching, clear rules should be laid down for outsourcing contracts. For example, there should be penalties if attrition exceeds 10%, suppliers should bear the handover and parallel run costs of at least 2 weeks per leaver, and it should be clearly defined what qualification the replacer must have (usually a higher qualification than at the beginning of the outsourcing business relationship). As far as the issue of Hanover at the end of the contract term is concerned, a ‘symbolic’ daily rate should be agreed for this per supporter (for associated extra efforts). Furthermore, a ‘daily quota’ need to be included in the contract at the beginning, which is provided free of charge by the outsourcing partner (similar to the transition at the beginning of the contractual relationship). Everything is underpinned with KPIs and penalties. The end of the contractual relationship has an important part to play. Of course, the software supplier is often forgotten here, so it is recommendable that any terms with them should be fixed. The software manufacturer(s) are often very closely linked to the outsourcing partner and are often forgotten.
Performance-related bonus-malus regulations
As a rule, bonus regulations need to be waived or the agreed amount should be reduced by the bonus. The bonus itself represents the 100% payout. If such bonuses are applicable, their amount is to be up to 10% of the contract value. Malus regulations, on the other hand, must be formulated in a much more differentiated manner. Especially for low- and non-performance cases. The mapping of the associated service levels and their prioritization in case of recurrence are not easy to negotiate in contracts. Therefore, the design phase before tendering is particularly important for such topics. It’s always recommendable to send a ‘Head of Terms’ sheet with the tender. This allows these key terms to be defined at an early stage.
Free of charge services (local twin, reporting, regular visits etc.)
As mentioned, these free service components are very important for a successful business relationship. There is no question that these services must also be brought in again for a contract extension. It can be done in the form of a ‘renewed price reduction’ (since there’s nothing more to amortize) or in the form of benefits. However, it is important to specify this at the beginning of the tendering process. Otherwise, the dependency increases after the supplier has been nominated and it is almost impossible to renegotiate these terms and implement them in the deal.
Definition of onsite rates (for work at a supplier site and landed rates for work at client site)
Certain care should also be taken to ensure that there is an “ideally free” contingent of travel and on-site visits by the supplier for its key resources in the deal package. Otherwise, the supplier will always want to charge these costs to the client. It’s also recommended that interim chargeable days are agreed with a fixed uplift flat rate (in currency or as a % of the besthore rate). This means that even for a 3-month suburban assignment, for example, you still pay less than the onshore rate.
Risk sharing in Best-shore delivery (and taking over responsibility from the supplier, also commercially)
It should be ensured that the responsibility for delivery and the commercial consequences in the event of additional expenses are mostly borne by the supplier. These clauses in particular are often difficult to negotiate and to anchor in the contracts, especially at the beginning of the business relationship. They are difficult or impossible to integrate at a later stage.
What did we learn about Covid-19 and work from home?
Delivery Model is more successful than ever
Covid-19 outbreak has shown us one thing for sure – remote work is possible sustainably and in the long term. From my point of view, this has led to the fact that outsourcing models are clearly justified and lab arbitrage is indispensable for a successful (IT) business.
Just do it!
Bestshoring will be in demand because it brings competitiveness
Current studies show that companies usually operate not only with one IT partner, but up to 3-5 partners in the portfolio. Geo-diversification and bestshoring is a perfect model for this. Take your partners’ suggestions into account. After all, they should be responsible for it in the end.
Choosing the right shoring initiative can be tough, whether you’re a business beginner or a pro. Like pretty much everything in business, such a decision requires research, planning, testing, and feedback. Fortunately, there’s plenty of tried and tested methodology.
Want to discuss best shoring initiatives? I would be happy to discuss these topics further.
Just contact me.
