Current and Future Global Trends in IT outsourcing and Nearshoring
The global IT outsourcing market has been growing exponentially year-on-year for a long time. As explained by Business Wire (1), this market was valued at around $333.7 billion USD back in 2019, but is projected to reach as much as $397.6 billion USD by 2025. In addition, despite offshoring having forged a pathway of being cheaper for the most part, it tends to be tricky to manage and comes with difficulties associated with collaborating with distant foreign countries in these uncertain times. As a result, nearshoring has grown in popularity in recent times, especially in European powerhouses such as Switzerland, Austria, and Germany. Companies are finding that nearshoring their IT projects within the EU not only provides all the various services they need, but also the price-performance ratio can be really attractive. The EU offers a similar legal layout across countries, barrier-free communication, and best of all, everything is geographically close by.
Despite its recent growth in popularity, nearshoring isn’t taking off as much in certain countries. Throughout the world, many view the USA and the UK as being at the pinnacle of technological advancements, which has been a huge driver for them. However, countries such as Germany tend to be viewed differently for several reasons. Firstly, the culture in countries like Germany is often more cautious when it comes to change. They need hard data to make a decision and must analyze trends carefully. In addition, it goes without saying that English is not their first language and despite a high proficiency nationwide, this still provides a barrier that doesn’t exist in a native English-speaking country, such as the USA.
Challenges: Culture & Business
Paweł Herman, Client Engagement Manager at Future Processing, explains that despite some similarities, each country faces varying difficulties when developing their nearshoring capabilities, and they are largely due to the speed at which each country conducts their business. Paweł is currently based in Poland but has a long history of working closely with his US counterparts. He believes that we should view the USA firstly as a vastly diverse array of people, cultures, history, and business ethics which have far-reaching effects on both business and personal lives. Secondly, however, Paweł believes it’s also important to view America as a union with shared laws, rules, and universal business practices across the entire region.
Paweł has discovered through his vast experience of working on IT projects with US-based IT companies that one of the key characteristics of successful collaboration with the Americans is the concept that “time is money”. Speed is one of the most important concepts in American business practices where the philosophy is “fail fast, succeed faster.” This translates into our colleagues across the pond being much more likely to act very fast and to focus on the specifics that directly result in benefits; ultimately making money faster. Promotions and career progression in the USA are most often linked to staff meeting their KPIs. This outlook has been proven to be successful in a 2017 study by McKinsey & Company (2). Their research showed that companies which prioritized their organizational health and performance were rewarded with better financial results.
In contrast to the US culture in business, Germany’s business culture is one of organization and planning, according to Martin Möhle, Head of Sales DACH at Future Processing. Based in Germany himself, Möhle cannot overemphasize the role of perfectionism in everything that they do there across the board. German business, on the whole, does not prioritize speed over quality. This approach is clear in every aspect of business through their highly analytical approach to everything. When selecting new business, German companies tend to be data driven. They carefully prepare detailed plans, which include contingency measures covering everything that could possibly happen. This analysis would even go as far as to study their American counterparts’ businesses so as to understand where they are failing (fast), how they are driving success from such failures, and any potential ways that they could implement the American’s work practices into their own business.
In contrast to the USA, UK businesses tend to focus on partnerships which are genuine, strong, mutually beneficial, and are able to deliver on time. The British are adaptable when it comes to business and as markets change and develop; they are able to move to meet them with quick and efficient adaptations. It goes without saying then that when choosing business partners, the Brits search out those with similar qualities that they value most. British companies like to work with trustworthy companies who are straightforward and easy to work with. They prefer companies who are flexible, creative, and are seeking long-term collaboration.
Global Nearshoring Growth
As shown above, the USA, Germany, and the UK have several differences in how they do business, as well as their nearshoring usage. However, despite these differences, there are also important similarities. Most importantly, the UK, USA, and Germany have all experienced continual growth in recent years, with both the UK (3) and Germany (4) evidencing an average of 7% growth per year, and the USA 7.4% (5). Despite these encouraging numbers, there is one common area that the global technology sector is suffering from: a skill shortage. According to the Digital Leadership Report 2021 (6), “skills shortages remain on the rise” and are currently at record levels. They state that as much as 67% of global tech companies report that they have a skills shortage, and to combat this, they are forced to cross-train their staff to attempt to cover these vacuums.
The Future of Nearshoring
Companies and employees alike have discovered that working from home is a simple, viable, and productive option during the Covid-19 pandemic. The obvious benefits of remote working have been well known to the nearshoring industry for many years, with nearshoring companies driving home the plethora of advantages of their USP vehemently. Because of the ongoing pandemic, employees are now well versed in remote working and this successful model has resulted in employees gaining higher salaries when working remotely. While on the surface this sounds great, it has been a key contributor to the ongoing global skills shortage issue as companies are struggling to hire in-house skilled employees at a reasonable salary. They are forced to offer higher wages and ever more comprehensive employment packages to attract staff in a market which is already suffering. The detriment to companies being that they have lesser skilled staff on higher wages and bigger reward packages, which leaves them with less ability to pull in employees with the skills they really need.
Despite the obvious cultural differences and practices when it comes to business, globally, companies all face the same challenges on the whole. Skills shortages, finding the right nearshore partners to synergize with, and navigating the pandemic being some of the most important. With global trade predicted to increase by 5.4% in 2022 (7), nearshoring will most likely remain a key factor and contributor to the resurgence in global trade as companies look to it to help develop and progress their products into the future.
Resources:
(1) https://www.businesswire.com/news/home/20200810005303/en/Global-IT-Outsourcing-Market-2020-2025—Growing-Demand-for-Efficiency-and-Scalable-IT-Infrastructure—ResearchAndMarkets.com
(2) https://www.mckinsey.com/business-functions/operations/our-insights/creating-a-high-performance-culture
(3) https://www.techuk.org/resource/tech-nation-s-2021-report-shows-a-resilient-uk-tech-sector-despite-brexit-and-the-pandemic.html
(4) https://www2.deloitte.com/de/de/pages/trends/study-german-technology-sector.html
(5) https://www.forrester.com/blogs/forecasting-in-uncertainty-us-tech-market-outlook-improves-to-7-4-growth-in-2021/
(6) https://www.harveynashgroup.com/dlr
(7) https://www.eulerhermes.com/en_global/news-insights/news/global-trade-to-grow-by–5-4–in-2022-despite-supply-chain-disru.html