Nearshoring: The Case for South America, Part 1

INTRODUCTION

Over the past several years, the software development industry has seen a dramatic shift in business operations from traditional offshore destinations (e.g. India and China) to Nearshore locations in Latin America and Eastern Europe. While the nearshore business model offers a number of clear advantages over traditional offshoring, the industry is young and still evolving and evidence suggests that not all nearshore location-countries are created equal. Due to their high levels of personal security, cultural proximity, and time zone alignment, we predict that the countries of central and southern South America, including Chile, Argentina, Paraguay and Brazil, will be fastest growing centers of nearshoring, relative to their neighbors in Central America.

THE BENEFITS OF NEARSHORING

The word “nearshoring” is derived from the business term offshoring, the process of moving business operations (narrowed here to software development) to a foreign country to reduce costs. Nearshoring is differentiated from offshoring primarily in terms of geography. Nearshore countries are located bordering, near or in the same time zone as client countries, whereas offshore countries are typically overseas or many time zones removed.

While nearshore countries typically have marginally higher labor costs than their offshore counterparts (i.e. India), their physical and temporal proximity results in a myriad of cost-saving benefits. First and foremost, nearshore companies share approximately the same business hours with their clients. Physical proximity allows for easier travel for clients and managers. Nearshore providers are also closer to their clients culturally and linguistically. These benefits improve communication channels, and consequently make for faster problem-fixes and a higher quality finished product. Speed and quality translate into real dollar savings versus offshore competitors.

THE MODEL’S SHORTCOMINGS

The nearshore model, however, is not yet perfect. Overall, nearshore companies are less mature than offshore companies, who boast thousands of English-speaking employees, many levels of certification and decades of experience. As the guide, Nearshoring to Latin America, puts it, “If you need 200 English-speaking resources to manage your global Oracle environment, India is still probably your best bet.”

Nearshoring to Latin America identifies at least one other major drawback to the nearshoring model, personal security. Many Latin American locations have a reputation for being dangerous places to work and live. In some cases, these fears are substantiated, as many Latin American countries have statistically higher criminal activity, and drug and gang violence.

Homicide rate, defined as the number of homicides per 100,000 citizens, is a commonly used benchmark for violent crime. According to the United Nations Office on Drugs and Crime (UNODC), South America has a homicide rate of 22.6 and Central America (including Mexico) has a rate of 26.5. Compare these rates with that of the United States (4.7), India (3.5) or China (1.0), and it stands to reason that client companies should think hard before partnering with any nearshore providers to which they might consider sending staff.

A superficial assessment of data such as this, however, misses a key point: the nearshore realm is incredibly diverse from country to country, even city to city.

THE IMPACTS OF REGIONAL & NATIONAL DIVERSITY

Within the regional groups of Central and South America, homicide rates vary wildly. Certain countries have extremely high homicide rates. In Central America, these countries include Mexico (21.5), El Salvador (41.2), Belize (44.7), Guatemala (39.9) and Honduras (a staggering 90.4), and, in South America, Brazil (25.2), Colombia (30.8) and Venezuela (53.7).

In contrast to these grim statistics, there are several countries in South America that have exceedingly low homicide rates, near that or below the rate of the United States, namely Argentina (5.5), Chile (3.1) and Paraguay (7.9). Located in the central and southern region of South America, these countries and their neighbors, such as Uruguay, Bolivia and Peru, have comparatively low violent crime rates (around 10.0). They are stable democracies that do not suffer from same risk to personal security as other nearshore locations.

THE FUTURE AND GROWTH OF NEARSHORING

But what do these statistics mean for the future of the nearshoring industry? Based on current regional trends, we expect that personal security and regional stability will continue to be imperative to clients when they are selecting their nearshore partners.

First, violent crime is heavily correlated with political and social instability, and therefore a threat to productivity. Secondly, if businesses are faced with the decision of sending their managers and/or representatives on a marginally longer commute (we estimate an average of 3.5 hours between “near” and “far” nearshore destinations) or to an unsafe destination (with a murder rate at least five times higher than that of the United States), we would expect them to choose the former every time.

In a recent interview with Nearshore Americas, Rodrigo Slelatt, a partner with offshoring/nearshoring consulting firm AT Kearney, listed Buenos Aires, Argentina, Curitiba, (southern) Brazil and Santiago, Chile as three of the top four nearshoring destinations. Cities in this central and southern South American region enjoy the greatest benefits of the nearshore model, time zone alignment and cultural fluency, while avoiding arguably its most egregious shortcoming, personal risk. Another study, conducted by nearshore consultancy ThinkSolutions, put Argentina, Chile, and Brazil as three of the top five Nearshore destinations.

Based on this body of evidence, we anticipate that the central and southern South American countries will become increasingly attractive to offshoring clients and enjoy the greatest growth within the decade.

CONCLUSION

The nearshore environment is incredibly diverse, even between cities in the same country. Despite a plague of recent violence, Mexico has cities and states that continue to be safe, prosperous and progressive, as does another Central American country, Costa Rica. However, as an international region, no group of countries stands out in the nearshore industry as South America’s central and southern countries.

It was for this reason that DevSpark, a nearshore software development company, located its delivery centers in Buenos Aires, Argentina. Buenos Aires province offers the full benefits of a workforce that is highly educated, cost competitive, fluent in Western languages and culture, and operating in the time zone of our North American clients, while enjoying the security of one of the safest countries in the Western Hemisphere.

For a complete list of references and citations, please visit the original report posted on the DevSpark blog.