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Leonardo Mattiazzi (Brazil) - The Truth about Nearshore Outsourcing

Last month I participated in a conference geared toward Brazilian competitiveness in the IT outsourcing market. It was a good event, with representatives of the industry, IT executives from the U.S. and other countries, industry analysts and respectful media companies such as The Economist all in attendance. In one particular presentation, a person in the audience requested the mic and said (paraphrasing): "This is all well and good, but I can't see a substantial difference between Brazil and other countries such as India and China."

You may not believe it, but for Brazilian companies that have long attempted to raise awareness for the country's growing status on the IT world stage, this is terrific news. All things being equal, there are a number of reasons to do business with Brazil, as outlined in this recent ZDNet blog post by Tom Foremski. So, assuming that traveling nine hours rather than 20 is almost always preferable, and a one to three hour jetlag is always better than a nine plus hour jetlag, let's examine a couple of the most common concerns U.S IT executives have when considering working with a software development outsourcer based in Brazil - as opposed to India or elsewhere:

Concern: Price

Clearly one of the biggest concerns for companies choosing to outsource their software development projects to India is price, as the company's services are generally perceived to be less costly than those of nearshore vendors. However, some quick calculations demonstrate that when determining total cost of a project, this can be far from the case.

I'll let you make your own exact calculations on this, but I'll also make some very reasonable (indeed, conservative) assumptions. Let's say that the onsite:offshore ratio of your vendor from India is 25% (in fact, this number is close to 30% in most cases. If you do business there, feel free to use your own number). This means that for every four people offshore, you need one on-site for communication and management purposes. Let's say the number for a vendor in Brazil is 10% (as a matter of fact, in Ci&T‘s experience the average is 7%).

Now, let's say that the nearshore hourly rate (Brazil) is 30% more expensive than the offshore rate (India). Again, this number can be lower, but we are trying to be as conservative as possible. And let's say that the on-site rate is the same for vendors from both countries, and equal to 2.5 times the nearshore (Brazil) rate. Now do the math for the blended rate (onsite + offshore/nearshore, weighing according to the onsite:offshore ratio). You'll find that with these numbers just presented, the blended rate with the vendor from India is going to be 4.5% higher than the blended rate for the vendor based in Brazil. Tweak the numbers and you'll still see that the difference is, at best, negligible. And that's just the blended rate, with no consideration about productivity taken into consideration.

It's clear that common perceptions about price fly out the window when the hard numbers are actually calculated. But what about companies' other chief concern regarding working with a vendor from Brazil - communication?

Concern: Communication

It's true that you don't find as many people that speak English in Brazil as you find in India - due, of course, to the colonization history of these countries. But if you're dealing with a company that exports services to the U.S., you will be talking with those that have an education level sufficient for business communication in English. Now, what happens with those developers that are in the Far East and speak proficient English? Do you happen to actually speak with them? The answer is likely "not really," because there are at least nine hours of time-zone difference, which means no overlap in business hours. You may speak with them occasionally, at an odd time of the day for someone on the line. But to compensate for that difficulty you need to write detailed requirements documents that will be handed off to the offshore team. The 25% of the team that is on-site will make sure they gather and write down those requirements. So here you have part of your team (your vendor and your employees) spending part of their time writing and reading documents. Shouldn't that affect the productivity calculation? That's a question for later.

Let's see what happens with the nearshore vendor. There's a favorable overlap of business hours (as many as seven hours in the east coast), so it's easy to pick up the phone at pretty much any time and speak to the team. So, instead of detailed requirements written in a thick document that only serve as an annoyance for the team that needs to read them, you can have direct communication with those that will actually implement the requirements. Instead of "contracts" (the requirements docs), you can focus on "collaboration." And instead of writing, reading, and signing off ("process"), the team can focus its energy on truly understanding, through direct questions, what you're trying to accomplish ("individuals and interactions"), and in actually developing the software. If there is a language barrier, it can be identified and solved right on the spot.

Now, we have just calculated the blended rate above. The total cost is a function of the blended rate and productivity, among other things. If you're used to the detailed requirements docs as described here, think about the amount of time you, your team and your offshore partner spend in writing, reading, and revising them. Now, think how productivity would be affected if instead you could minimize that time and focus energies in really developing the software in short cycles and getting quick feedback, not from documents, but from real software running. That's why nearshore is so much more suitable for agile development than offshore.

You already have your own business case for experimenting with nearshore development.

Leonardo Mattiazzi is Vice President of International Business for Ci&T (www.ciandt.com), a global IT services company headquartered in King of Prussia, Penn., and Campinas, Brazil.

 

 

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