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The Economic And Strategic Factors That Will See Nearshored IT Outsourcers Increase IT Services Market Share
The economic fallout of the Covid-19 pandemic will, it is becoming increasingly clear, hit all but a very few sectors and businesses and nearshored IT outsourcing will not escape the pain. But the new ‘normal’ and changed realities that the world will emerge into will almost certainly be in the sector’s favour over the longer term.
There has been a lot of talk around the threat to globalisation that Covid-19 poses. But while the pandemic and international restrictions on movement brought into place to contain its spread have highlighted vulnerabilities in international, especially ‘just-in-time’, supply chains for physical goods, it has also brought ‘risk competitiveness’ into sharp focus.
One logical outcome to be anticipated is that IT outsourcing, particularly nearshored IT outsourcing, is a service model that stands to benefit.
Nearshored IT outsourcing will not replace inhouse, onshore IT teams and specialists as a result of the Covid-19 pandemic. But, for a number of reasons, it is almost certain to result in remote IT-Specialists-as-a-Service contributing a larger share to the overall IT resources organisations leverage.
A more sophisticated approach to risk competitiveness will combine with fundamental and broad changes to the attitude of companies and other organisations to employees working remotely. That can be expected to significantly strengthen the case for nearshored IT outsourcing, while sweeping away many of the traditional objections to the business model.
Here we take an analytical look at the factors and influences that mean our sector will, once the choppy waters of the next few months have been navigated, find itself in a stronger position than ever in the post Covid-19 pandemic world. For CIO, CTOs and other strategic decision makers, this is why we are convinved your organisation’s future success will be more tightly connected to you building effective, sustainable and win-win relationships with nearshore IT outsourcing services vendors than ever before.
Is The Covid-19 Pandemic A Threat to the Globalisation Nearshore And Offshore IT Outsourcing Is A Product Of?
Nearshored and offshored IT outsourcing is a child of globalisation, “the interdependence of the world’s economies, cultures, and populations, brought about by cross-border trade in goods and services, technology, and flows of investment, people, and information”.
The premise that globalisation is built upon is that the increase in efficiency of different products and services being produced in different countries enriches all of the stakeholders more than a protectionist economic system does. Every good and service is produced or provided from where conditions are best suited to optimal cost/quality ratios. The end result is more efficient use of finite resources, which creates a bigger overall pie.
The proof of the pudding, or economic pie, is in the eating. And it’s no coincidence that the countries which have embraced global trade, along with education and investment, have become the most prosperous. Or that the evolution of globalisation since the early 1990s coincides with more than a billion people rising out of extreme poverty.
The new cycle towards populist and increasingly partisan politics that emerged internationally in recent years had already seen globalisation questioned in a way it hadn’t previously had to contend with. The outbreak of the coronavirus pandemic has seemed to intensify that trend.
Peter Navarro, President Donald Trump’s trade advisor, stated that the pandemic had highlighted that the USA “cannot necessarily depend on other countries, even close allies, to supply us with needed items”.
That statement indicated that the Trump administration views the best response to the coronavirus threat is to pull the economy behind the castle walls and pull up the drawbridge. But that would, as we will see, clearly be a huge strategic mistake. As Robert Armstrong writes for the Financial Times, the Covid-19 pandemic “is a global crisis, not a crisis of globalisation”.
But Armstrong also quickly points out that the coronavirus-inspired backlash against globalisation is so far limited to populist politicians and pundits. Business and consumers still, in the majority, see and want the undoubted benefits of globalisation and are convinced the world is a better, safer place for it.
Armstrong draws a comparison between the economic fallout of coronavirus and the Fukushima earthquake and nuclear disaster of 2011. Both, he reflects, demonstrate the dangers of highly concentrated supply chains – “not international ones”.
Per Hong, a supply chain consultant at Kearney, also quoted in the Financial Times, focuses on how crises “underline the need for companies to design their supply chains around risk competitiveness” and not cost alone. The companies he consults are not, he says, localising supply, but mitigating risk with regional diversification. It is, he reflects “the exact opposite of unwinding the global nature of our supply chains.”
Fukushima had a huge impact on the global microchip supply chain, with many “lower-tier” suppliers clustered in the region worst hit by the earthquake. The aftermath saw many big buyers diversify their risk by shifting some of their outsourcing to Taiwan.
But what they certainly did not do was make the kneejerk mistake of deciding to bring chip production back home. Microchips, the opinion piece explains, are the perfect example of how local specialisation, distributed internationally, leads to much better products than if production was concentrated in one place. The best manufacturing equipment comes out of the Netherlands. The best designs are from the USA. The top foundries located in Taiwan.
IT outsourcing is, of course, a service rather than a physical product with a manufacturing supply chain. But the same basic rules of the advantages globalised specialisation and service supply chains apply.
There is, as we will see, a very convincing argument why the current crises means it makes more sense than ever for companies to place greater emphasis on risk competitiveness. And how, in that context, as well as that of the ‘new normal’ of post-coronavirus pandemic daily and working life, the case for nearshored IT outsourcing is strengthened.
The Office As We Knew It Is No More
If, and when, you return to your office after the worst of the coronavirus pandemic has passed, it will almost certainly be a place very much changed from the one you left sometime in early March 2020. Traditional doors may have been replaced by automatic alternatives to prevent to need for handles to be touched. Elevators upgraded with voice recognition technology so we don’t all need to touch the same buttons – a development that may be viewed with some worry in my native Scotland! ?
https://www.youtube.com/watch?v=sAz_UvnUeuU
Once our actual workplace has been navigated to with the help of new tech designed to minimise physical contact with surfaces, it is also likely look very different to the crowded open-plan offices many of us recently left. Desks will have to be spaced much further apart, with open-plan rooms split up with dividers and plastic screens forming a protective barrier between any desks left facing or adjacent to each other.
Meeting rooms and common areas like kitchen and social spaces will have fewer chairs and documents showing when they were last cleaned and disinfected. Less noticeable changes will be more frequent cleaning schedules, more sophisticated, more sophisticated ventilation systems, furniture featuring fabrics and materials with antimicrobial properties woven into them and potentially regular deep disinfecting cleaning using UV lights taking place at night after everyone has gone home.
Many of us may not return to our former offices at all. Or at least, not in a full time, every day commute, way. Upgrading and managing offices along the lines of what is described above will be both expensive and inconvenient.
Many employers, especially those who have successfully set up systems that has kept work efficiently flowing remotely over the few months previously, may prefer to downsize or opt for more flexible options rather than lock themselves in to long term leases again. Especially when the overhead per person based in an office will probably represent a multiple of what it was pre-coronavirus.
Coworking spaces are also likely to change, with hot desks and communal spaces foregone for more sanitary — and less profitable — private areas. As Vox.com writes:
“The Covid-19 crisis will force swift and permanent changes in both commercial real estate and work culture itself. The office as we know it will never be the same and working from home will be the new normal for many”.
Work From Home Will Become The ‘New Normal’ – Especially For Digital-Centric Roles
The ‘work from home’ trend was already gathering pace before the Covid-19 pandemic struck. Especially in many parts of Europe and especially for roles, like IT and software development professionals, where employers compete for a limited pool of in-demand skills.
Source: chart – Merchant Savvy, data – IWG Global Workplace Survey
Surveys indicate a majority of employees prefer it. Just a handful of interesting stats compiled by HubSpot:
- If they could, 99% of people would choose to work remotely, at least part-time, for the rest of their careers. (Buffer)
- More than half of full-time in-office employees want to work remotely. (Owl Labs)
- 95% of people would encourage their friends or family to work remotely. (Buffer)
- 83% of workers, remote or on-site, say that a remote work opportunity would make them feel happier at their job. (Owl Labs)
- 74% of employees say that a remote work option would make them less likely to leave their company. (Owl Labs)
Employee preference, and technology making remote work more practical, had been the driving factor behind the pre-coronavirus trend towards working from home. That is evidenced by statistics that remote work is more prevalent among those with senior positions within an organisation.
Merchant Savvy’s 2019 survey on remote work statistics revealed that “the highest proportion of remote workers were amongst the Founders/C-Level Execs (55%) and VP Level (48%)”.
The survey concluded “the typical remote employee is educated, intelligent, and motivated. As people move up the corporate ladder, the likelihood they will work remotely increases with their position”.
If a resounding majority of employees would prefer to work, at least part of the time, remotely, and the positions which the highest percentage of employees do so are more senior, the takeaway must be that employers either have greater belief in the ability of those employees to be productive remotely. Or that employees in more senior roles are more successful at negotiating greater flexibility as a feature of their working conditions. The reality is most likely a combination of the two.
This highlights a level of reluctance among employers to offer employees the opportunity to work entirely, mainly or partly work-from-home conditions. It stems from concern that communication, productivity and identifying with the organisation and colleagues can be negatively affected by remote work.
What Has Been Changed By Enforced Work-From-Home Conditions During The Pandemic?
But is that the case? The Covid-19 pandemic has meant anyone who technically can work from home currently is working from home. Before March 2020, only around 4% of the U.S. workforce were working from home at least 50% of the time. A new MIT report shows 34% of Americans who previously commuted to work report that they were working from home by the first week of April due to the coronavirus. That’s the same percentage of people who can work from home, according to a recent University of Chicago publication.
Many are coming to the conclusion that the forced adoption of work-from-home has rapidly shifted the position of both employees and employers over the past several weeks. Kate Lister, president of consultancy Global Workplace Analytics, which is conducting research into work-from-home trends and attidudes
“Once they’ve done it, they’re going to want to continue,” said Kate Lister, president of consulting firm Global Workplace Analytics, which is currently running a study on work-from-home trends and attitudes. Her prediction is that the next couple of years will see a seismic shift from 4% to 30% of people working from home multiple days per week. Employees wanted it anyway and the coronavirus pandemic has shifted employer attitudes and the future cost base of maintaining office facilities.
Steve King of Emergent Research, an SME consultancy, is quoted in Vox as reflecting:
“It had been proven prior to this, but a lot of company management and leaders showed great skepticism. That skepticism will go away because companies recognize that remote work does work.”
The stats, again compiled by HubSpot, back that up:
- 77% of remote employees say they’re more productive when working from home. (CoSo Cloud)
- 76% prefer to avoid their office completely when they need to concentrate on a project. (Atlassian)
- 23% of remote workers say they work longer hours than they would on-site. (CoSo Cloud)
- 53% of remote workers say they’re less likely to take time off than they would be if they worked at their business’s location. (CoSo Cloud)
- 43% of remote employees take three weeks or less of paid vacation per year. (Buffer)
- Those with highly complex jobs that require little interaction with stakeholders are more productive when remote than in an office. (Springer)
None of this means that employees wish to entirely remove themselves from face-to-face contact with colleagues. A study by Fuze covering 6600 employees across 9 countries found that 89% believed they should be allowed work-from-home flexibility. But 79% also said they would prefer to include at least some office time in the mix.
Source: Fuze – Workforce Futures Report
How Can Organisations Maintain Organisational Culture If Workers Are Remote?
The question of how to maintain organisational culture and identity if a majority of employees are working remotely is, after productivity, one of the biggest concerns for employers. It has been repeatedly demonstrated that remote and flexible working can make a huge contribution to employees feeling engaged and valued, and in increasing workplace productivity. But does this translate into identifying with their organisation and colleagues?
The Fuze report’s take on this is:
“The secret to overcoming this concern, is in communicating that culture clearly and openly at every opportunity. Allowing employees to define the culture themselves is no longer enough. Instead, businesses must make a targeted effort to apply their culture, inspiring the right mindset across everything they do”.
“By adopting an ‘employee first’ approach, businesses can make sure that their workforces are provided with tools, training and working styles that suit them. By combining the right mindset with the right technologies, today’s businesses can actually use remote working tools to improve the spread of their cultural values, reaching employees all around the globe”.
Work-as-a-Service (Waas)
One of the most powerful influences on the modern workforce is encapsulated by the term ‘WORK-AS-A-SERVICE’ – WaaS.
‘Work-as-a-service’ is the concept of work as being ‘what we do’ rather than ‘where we are’ and is now an established part of the modern consciousness, driven by millennials and the ‘generation Z’ now following. Shifting employee demand for greater balance between their career and personal life is giving rise to a new way of thinking about work that removes the restrictions of what we are traditionally used to. Fuze describes WaaS as:
“Work no longer has to be bound by set working hours, office walls, or company structures. Work-as-a-Service (WaaS) means workers can switch into- and out-of-work mode at the touch of a button, at the time, and location of their choice — whether it’s to check emails for just 15 minutes, join a video call for an hour, or work outside of the company office”.
“This cultural shift is not about expecting employees to work additional hours, but rather to allow them to work when they are the most effective, avoid the hours when their productivity naturally dips, and give every opportunity to balance personal commitments”.
The Project Economy
We’re also now increasingly living in a ‘project economy’. The project economy is not the same as the much maligned ‘gig economy’. It is about the rapidly increasing need for organisations to employ highly skilled specialists that have the experience to best execute projects with the kind of specific needs it is often very difficult to address by assigning employees on permanent contracts.
The project economy requires revolving skill sets because the projects themselves are time limited. The next project will most likely be best executed by a different mix of professionals.
“Super mobile, super connected – we’re all in a ‘project economy’ now. For the most recent measurable period, all net US employment growth came from the increase in independent workers, whose population jumped more than 50% while the number of traditional jobholders actually declined.
And despite media portrayals these aren’t Uber drivers or Airbnb hosts – they’re strategists, designers, brand consultants, technologists, and specialists of the sort most organizations can’t afford or wouldn’t choose to keep on permanent payroll.
Executives – once alerted to look around their own businesses through this filter – suddenly notice they’re everywhere. The more our project teams include independents, the more every employee’s perceptions change about what a relationship with work can be like, about what we’re entitled to ask of it. Employees start reimagining work at its best—what we work on, who we work with, where we work, and how”.
- Michael Hopkins, Work futurist and founder of The Solo Project, quoted in Workforce Futures
Why Are The Trends Towards Work-From-Home, The Project Economy and WaaS Relevant To The Nearshored IT Outsourcing Sector?
The Covid-19 pandemic seems certain to have exponentially accelerated employer adoption of remote working flexibility. By now it is becoming clear a combination of remote work, the project economy and the WaaS concept the contemporary workforce overwhelmingly favours, adds up to something that sounds remarkably similar to what nearshore and offshore IT outsourcing vendors offer their clients.
The only practical difference would appear to be who is ultimately the direct employer of a particular worker. If they have a traditional employer at all, with many highly skilled independents operating as freelancers and ‘companies of one’.
But many specialists still and will still prefer the security of an employment contract and to effectively outsource the ‘sales and marketing’ that is still essential to maintaining a regular flow of well-matched projects to be worked on. That means working for an outsourcing company or consultancy.
To complete the circle, organisations also have to be more willing to make the choice of using nearshore IT outsourcing companies. That is also a trend that was strongly in place before the Covid-19 pandemic took hold. And one that all the evidence points towards accelerating as a result.
Data published by the National Outsourcing Association in February of this year, before the impact of the pandemic hit, revealed that 70% of companies planned to increase their use of outsourcing. 35% planned to do so significantly. 10% intended to decrease their outsourcing slightly. But nobody planned to decrease the scope of IT services they outsource significantly.
In 2019, the global IT outsourcing sector was, according to Statista, worth $66.52 billion. By 2021, the IT outsourcing market was expected to reach approximately $413.7 billion. Steep growth in global IT outsourcing spending was already forecast pre-coronavirus.
In February, N-iX wrote:
“Indeed, more and more companies will be turning to IT outsourcing. Although cost savings will remain the primary reason why organizations outsourced, customer-centricity and technological excellence will also become just as important. Clients and service providers alike will focus more on outcomes rather than outputs. As a result, IT outsourcing relationships will grow into strategic partnerships”.
Employers Had The Same Concerns About IT Outsourcing As Around A Work-From-Home Culture
Like the trend towards remote and work-from-home flexibility, the trend towards increasing use of nearshore and offshore outsourced IT specialists, consultants and software developers was firmly in place before Covid-19. And the objections of those employers dragging their heels on adoption have historically been almost identical.
Not being physically in the organisation’s office space is often cited as a perceived as a barrier to effective communication, collaboration, team identity and productivity.
Of course, there are certain types of communication that do benefit from face-to-face contact. But the enforced work-from-home environment of the Covid-19 pandemic is demonstrating that many of the fears employers and managers had around remote working conditions are unfounded. Especially if workers do have some face-to-face contact when most appropriate.
There is no reason to suppose, then, that the expected exponential acceleration of work-from-home norms for permanent employees will not also be reflected in the acceleration of IT outsourcing.
Both are supported by largely the same set of factors in their favour – employees prefer it, it has been demonstrated productivity more often increases than decreases, new technology means communication and collaboration can still be effective and the shift towards a Work-as-a-Service mindset.
IT outsourcing has one additional advantage – it is a perfect fit with the ‘project economy’ that is evolving. All of the strategic and business reasons why nearshore IT outsourcing was anyway quickly growing as a trend are still true:
- IT experts experienced across a variety of projects have more experience and are better problem solvers.
- IT outsourcers offer specialist skill sets hard to find, expensive and often not needed outside of a specific project’s requirements.
- Specialists based in locations where the cost of living is lower means costs to the end client, for equivalent skills and experience, are often as low as a third of the expense to hire local peers.
- Teams can be scaled up or down and skillsets dynamically adjusted based on the current needs of projects.
- Lower strategic risk compared to employing highly paid specialists on full-time labour contracts.
- Skill sets of outsourced specialists don’t become ‘out-of-date’ as they often do with inhouse employees on secure, long term contracts.
- Nearshored IT specialists have a good fit in language skills, working and personal culture to those of permanently employed colleagues.
- Nearshored IT specialists normally just a short flight away from being present onsite if and when required.
If an organisation’s permanently employed workers are, in a post-coronavirus world, anyway mainly working remotely, and proving effective and productive while doing so, there seems little reason why decision makers once reluctant to use nearshore IT outsourcing because of the remote element, will not change their minds.
The other strategic advantages listed above already made a strong enough argument for nearshored IT outsourcing. Most of them are valid for offshored outsourcing too.
With the psychological barrier to remote collaboration and working environments largely swept away by the enforced acceleration of that trend brought about by the Covid-19 pandemic, what left remains as a barrier to opting for the other advantages of nearshored IT outsourcing?
I don’t see much of an argument left. The last objection, the fear of remote work, is falling. Which is why, once the world and its economy adjusts to its ‘new normal’, it seems almost certain that the IT outsourcing sector will grow. And grow significantly. Nearshored IT outsourcing will be as much a part of the new normal as work-from-home, work-as-a-service and the project economy.
The combination of all three trends is what IT outsourcing has always been and why so many organisations have already built it into their strategy. Now the rest will simply catch up sooner.
