In line with this week’s theme of geographical diversification as a strategy for managing risk, I thought I’d highlight a recent article by David Shpilberg, Vice Chairman of Brazilian IT services firm CPM Braxis. He mentions some of the points I made a few days ago about diversifying not just to balance risk, but also to capitalize on the benefits of a multi-sourcing model (example: driving better pricing, or avoiding vendor lock-in). He puts risk into the following four categories – Time zone differential; Cultural mismatch; Skills mismatch; and Potential for miscommunication.
We’ve already talked a little here about the impact of time zones and culture on the outsourcing industry. For the IT and software development industry however, the biggest argument for diversification is the skills gap in various locations. Each provider in every location has particular strengths and competitive advantages, and so “the manager should identify the demonstrated skills of each provider and direct projects to different providers based on the project’s need for those particular skills”, says Shpilberg.
The US companies that are seeing the most outsourcing success are the ones that have adopted a similar approach – sending the heavy lifting/number crunching work that requires minimal interaction to locations in India or China; performing the higher value added functions like R&D and agile development closer in skilled IT locations like Chile, Mexico or Colombia; and finally keeping core competencies or the ‘special sauce’ either in-house or onshore through rural sourcing. That’s only one example of an outsourcing portfolio distribution suggested to me in the past – there are many others which have been successful. The point is the importance of leveraging different skill sets in different locations.
IT vendors in turn, are aware that sourcing decisions are being made with this global perspective in mind, and each firm is aggressively building presence in foreign locations. For instance we just heard of Brazil’s Stefanini IT Solutions acquiring TechTeam Global in the US; Indian player TechMahindra is now expanding into Latin America; and Capgemini took a controlling stake in Shpilberg’s own CPM Braxis two months ago.
Potential for miscommunication
Miscommunication in a sourcing relationship is not always a language issue. As this article notes, “many far shore providers speak excellent English yet fail to communicate effectively. They may, for example, delay reporting that a project has slipped behind schedule in the hope that they will somehow bring it back on schedule”. In the software development lifecycle, surprises like this can completely derail a business. Select which functions require the most collaboration between your development team and the outsourcing partner, and keep those not more than a few hours plane ride away.
Well balanced IT sourcing
What I think is interesting throughout this article is Shpilberg’s focus on balance – between near shore and far shore outsourcing providers. That seems obvious to us in theory but when it comes to practice, too many companies especially in the IT sector focus on which geographic region to outsource to (Asia, Europe, Southeast Asia, Latin America), and then try to diversify within the countries in that region. Shpilberg instead emphasizes picking a country from each of those regions to form a fully diversified IT service provider portfolio. Of course, he recommends Brazil as the nearshore sourcing option. I’d say a nearshore option is necessary as part of your sourcing portfolio, but which country that should be depends entirely on what function you’re looking to outsource. More on this in upcoming posts....