Nearshoring by Dutch (and other European) companies: attention points

This post is based on the answers I gave on questions from the Dutch IT website Computable on nearshoring. They have a couple of expert groups and one of them is on outsourcing and I provide comments so now and than on topics related to outsourcing. You can find the expert site here (Dutch) and my profile here. As nearshoring is a relevant topic for many continental European companies hereby the questions and answers in English.

Question 1: What are the most important considerations and attention points for Dutch (client)organisations to decide for nearshoring?
Answer 1: Nearshoring of activities introduces a number of extra risks on top of the generic/inherent risks associated with outsourcing. These additional attention points are among others:

• the difference in language and culture,
• other laws and regulations (e.g. tax and privacy laws),
• political stability (e.g. North Africa/Jordan, Ukraine, Balkan countries),
• redundant employees (when nearshoring they are not always transferred to the 3rd party),
• and the increased difficulty to control a 3rd party when increasing the distance.

Question 2: Nearshoring is, like any other type of outsourcing, not always going as originally envisioned. What are the typical pitfalls of a nearshore project?
Answer 2: Nearshoring can fail to deliver the expected benefits due to the same reasons that affect ‘traditional’ local/onsite outsourcing engagements:

• too high expectations of the client,
• too many promises from the supplier,
• lack of detail of the requirements, and
• unexpected costs due to insufficient mutual due diligence.

For nearshoring are a couple of additional elements applicable, including:

• higher cost for transferring knowledge and work processes to people who are used to another culture/language/work ethics,
• lost of in-dept expertise because local employees are made redundant,
• more expensive governance and audit costs due to distance/culture/language/work ethics,
• faster than expected rising of labour cost due to faster economic development/ shortage of skilled resources.

Question 3: Are there certain advantages of nearshoring in contrast to outsourcing within The Netherlands or to offshore locations?
Answer 3: The advantages of nearshoring over delivery by a pure local 3rd party are mainly lower labour costs, reducing the human cost factor of the service/product. Secondairy advantages can be access to language or other skills/knowledge which are not widely available in the local market, plus in some cases tax benefits if nearshoring results in opening a new delivery centre.

Compared to offshoring are the benefits of nearshoring more cultural fit and less timezones to cross (even though both are that relevant anymore these days, but just something to be aware off), and nearshore destinations within the European Union provide a more uniform tax and regulatory framework (but there is still a lot to wish for in this area). This is especially important if handling/storing/accessing privacy sensitive information (e.g. personal) is in scope of the service provisioning. The last point is more expensive communication lines (network bandwidth) and higher probability of a network incident (examples here and here)

Question 4: Which Central- or East European or North African country would you recommend and why?
Answer 4: There is no easy answer to this question as it depends largely on the type of service. For some services (e.g. managing databases with client information) is it better to choose a nearshore location in Europe (offshore is also possible, but requires a more expensive solution to ensure confidentiality of the data) as there is European privacy legislation which allows for transportation of personal data within the EU, but puts a lot of restrictions on access by other countries (with the exception of access by the U.S. it seems). In that case is Poland a valid option.
For software development is Egypt a country which can be seriously considered as it is developing itself into a serious alternative for IT related services. This view is supported by Wipro and TCS, two mature Indian suppliers, which have chosen Egypt as a delivery destination (Wipro already having some 100 seats there, while TCS is planning for some 400 seats).