Why Outsource Software Development Part II

As we continue our three-part analysis of Outsourcing in the IT industry, we need to take a look at why companies hit roadblocks. Software Outsourcing is a profitable endeavor, but it doesn’t mean that there aren’t some risks that can affect the unwary. The following challenges can be mitigated by choosing the right partners and looking for the correct factors, however. 

Particularly, we decided to focus on the basis of Nearshore Outsourcing, given that many companies have begun to outsource their IT departments to Latin America. While part one focused on choosing the right model, here we’ll look at some common roadblocks affecting businesses looking at the IT industry in this region.

Current Challenges

Reversals of fortune are commonplace in any type of business, and outsourcing is no exception. Failures and missed opportunities in the IT industry abound as well, and this is due to some of nearshoring’s inherent challenges. By analyzing some of the common pitfalls organizations face, we can assess whether or not companies are making a sound investment in the long term. 

Despite cultural similarities, the Latam region is still not a US location. The infrastructure, technological prowess, and cultural expectations are not going to be an exact 1X1 replica of its domestic counterpart. When considering the potential risks one might encounter within the region, we can expect the following:

1. Regional Differences - Government policies, economic risks.
2. Structural Differences - Management of expectations, industrial policies, Contract obligations
3. New Investment Options - Technological advancements, automation
4. Data Breaches - Security, Data management

We can now analyze each of these factors. The first two factors look at macro-impacts and micro-impacts on policy-making, showing how they affect everyday workflow. The second half analyzes competitiveness and risk factors, and how their presence allows for doubt to encroach on the nearshoring business, leading organizations away from further partnerships.

Regional Challenges

Regulatory actions ensued by the government are as old as time, but they affect outsourcing and nearshoring activities in a very particular manner. If there’s one thing that’s absolutely certain about outsourcing, it's that it’s a very uncertain market. Trying to predict movements and trying to analyze them takes a lot of effort - which explains why sometimes governments tend to have a very unusual response cycle to any kind of activity within the IT industry.

Unemployment rates, for example, are heavily influenced by structural factors such as outsourcing. The US in particular has had a long-running battle against China, trying to catch up with their higher demand and industrialization. While something like this usually is good for the outsourcing industry - as long-running recessions lead businesses seeking to adopt cost-saving measures - governments might instead opt for automation processes and tariffs in order to combat a fading domestic workforce.

As such, a common factor that might prove a challenge, in the long run, would be Latin America’s regional difficulties. Governments have a long history of instability and economic upheaval - which in turn lead to changes in policies and end up creating more issues to circumvent from both sides of the outsourcing initiative. Adding to this, Latin America keeps growing as a region, this would in turn lead to more regulation from a North American government trying to protect its interests.

If enough government roadblocks start to accrue - insourcing programs, automation investments, import restrictions - they will erode the appeal of reduced costs provided by outsourcing. It’s imperative to remember that these types of governmental actions don’t always yield positive results either: Returning domestic jobs have a history of becoming much more demanding, given the rise of technological literacy. In the end, executives looking to boost their talent need to assess whether they’re in a position to hire local labor, or invest in foreign talent.

Structural Differences

Managing the infrastructure differences between local and overseas operations brings to light a whole list of improvement opportunities. Understanding that the Latam region will have different output capacities, available personnel, and budgetary expectations is key. In short, expectations should be adapted to the uniqueness of the environment - which is what historically has been the norm when outsourcing to other continents like Asia.

Lack of quality control is a common factor. As companies race each other to tap into a region with rising industrialization levels, it’s common to find that many industries cut corners in order to find the cheapest labor. While this may seem a good idea, it can also lead to a loss of qualified products if certain measures - QA testing, for instance - are not taken. Considering how developing countries are also beginning to understand the intricacies of the software trade, abusing the outsourcing model can also lead to an overabundance of underpaid workers that will eventually demand higher salaries.

Structural differences also directly impact other areas of note, like the ecological aspect. Many countries in Latin America have lowered environmental regulations. Working in these areas without considering the lowered bar for ecological responsibility - or downright abusing it to deal with fewer regulations - can lead to real consequences, including higher trends of ecological deregulation in other sectors.

While many countries have the potential to become digital hubs and centers for innovation, hidden risk factors such as contract enforcement are prevalent. Organizations like Accelerance, for example, have previously noted the levels of contract enforcement countries within the region have, with some of them reaching only 50% at best. It’s important for executives to deal with companies that are more well-suited for long-term partnerships and contracts.

Since contract negotiations and structures are varied, the interested parties will have different opinions regarding enforcement policy. It’s necessary for domestic organizations to develop the necessary frameworks and strategies in order to create credible and enforceable business arrangements.

New Investment Options

Related to the regional government policies, the US is also focusing its attention on other investment opportunities aside from outsourcing and the IT industry. The rising need for labor-saving technology, such as Artificial Intelligence, means that more people are willing to invest in cost-reducing strategies. Even if it leads to higher unemployment levels, US companies are looking at automation platforms with renewed interest. 

With closer proximity to research data and falling energy costs, many companies are automating their internal processes and restructuring their base model for output. Taking these trends and adding fears of RPA takes away outsourcing opportunities. The London School of Economics, for instance, suggests that an inherent advantage of automation is that it doesn’t merely focus on cost reduction, but that it offers outcome-based models, along with quantitative results.

With rising wages in Asia, it’s to be expected that people will overlook the other advantages offered by nearshoring. Sticking to automation has its own set of disadvantages: industry leaders need to invest in the type of model that fits based on their needs.

Data Breaches

As nearshoring practices become long-term projects, the increasing risk of data breaches deepens. This encapsulates all of the above factors, as bigger supply chains and regional difficulties lead to mismanagement of data, corporate oversight, and information fraud. 

Research shows that misalignment between outsourcing drivers and contractual and managerial aspects often leads to a lack of success and extensive information theft. Governance as a whole directly impacts these issues, as a lack of contract enforcement may result in corporate oversight. Regional policies in turn affect the type of corporate culture per country, making things difficult for prospecting executives.

Another underlying factor that directly influences security is loyalty as a whole. Limited company growth is a constant in many outsourcing and nearshoring operations, which can lead to dissatisfaction regarding internal working conditions. On the other hand, client loyalty is affected by security breaches, as large-scale fraud scandals demoralize investment options and prospects alike. These situations have been remedied in the past with bigger screening departments, researching viable candidates, and enforcing higher security standards.

So, Why do We Outsource?

We consider that nearshoring operations, due to the large-scale effect they can have, present a number of hidden risks that most executives in the IT industry overlook. We also consider that these risks - whether they’re a macroeconomic factor or a person-to-person issue - can be properly assessed and remedied with the right protocols. As long as investors treat outsourcing and nearshoring as a project rather than simply a cost-cutting operation, they’ll be able to reap the numerous benefits described above, such as the cultural ties and the rising industries in the region - which will in turn reduce the impact of the inherent challenges this side of the IT industry possesses.

Since Outsourcing presents a wealth of opportunities, and also is a pivotal point for the technological revolution, ignoring it is not a viable option. In part III of this series, we’ll look at the common considerations companies look at before engaging in such projects. 

We have worked with Tech companies for over 20 years, positively impacting them and helping them reach their long-term goals. If you need more information, contact us and let us help you become a part of this technological revolution.