Trends and Predictions: The Strategic Advantage of Nearshore Outsourcing in 2023
Nearshore outsourcing represents the positives of both offshore and onshore outsourcing but with fewer associated drawbacks, allowing for more agile project builds. In recent years, businesses have increasingly been opting for nearshore outsourcing due to these strategic advantages.
As we enter 2023, this trend shows signs of acceleration. Driven primarily by cost-savings, more US companies – particularly those located along the Pacific Coast or Southern States – will turn to nearshore outsourcing as a supplement to their in-house teams.
While decision-makers are still concerned about perceived risks and bureaucratic barriers, their necessity in finding more sustainable development options is likely to overcome these hesitations.
At Asymm, we predict that once companies overcome the original hurdles, tech decision-makers will discover a range of benefits in nearshore outsourcing beyond cost-savings that will lead to stronger, more flexible teams.
Software development challenges in 2023
Talent availability and cost
From the perspective of a CTO, the ability to scale up or down a team is vital when building a product, reacting to dynamic user trends and bringing the product to market as quickly as possible. This, in turn, places strain on human resource managers who need to source quality developers against the clock and do so within budget criteria.
Furthermore, startups this year have seen widespread funding cuts as capital markets for early and mid stage startups have waned alongside our bear equities market and rising interest rates. Pressure has mounted for tech companies to create efficiencies, lower headcount, and ultimately find economical solutions for high quality talent. With companies like Apple, Facebook, and other tech giants slowing down their hiring plans for years ahead, one might think U.S. technology salaries would decrease correspondingly. But as we saw during the great resignation in the last year, more often than not, employees in the U.S. are the decision makers and unlikely to take salary cuts.
In this context, forming teams of onshore US professionals is becoming increasingly challenging as operational costs and the time involved present substantial barriers. CIOs claimed that increasing technology costs and IT skills shortages were their two biggest challenges in 2022.
Companies face higher operational costs in the US as the average cost of a developer can range from $100-150 per hour. This reality has contributed to a reported 99% of senior technology and HR leaders recognizing the importance of outsourcing or building remote teams, with 75% even reporting an increase in productivity.
Operational costs will rise further as the impact of inflation is felt and geopolitical unrest threatens projects being delivered on time.
Time involved in staffing
Glassdoor reports that it takes 35 days on average to hire a software engineer, although the length varies by title. The quickest tech job to higher for is web designer, at an average of 12.3 days. This is without factoring in the issue of turnover. The US Bureau of Labor Statistics reports that the turnover rate for a software developer is 57.3%, with 25% in 2020 representing voluntary turnover.
Strategic advantages of nearshore outsourcing
The challenges in building robust and cost-effective software teams is leading many companies to turn to nearshore outsourcing in the coming year. Nearshore outsourcing is when a company accesses the talent and resources of a nearby location, benefiting from lower operational costs and synchronous collaboration.
Reduced labor costs
The lower costs associated with nearshore outsourcing represent the largest strategic advantage. Compared with the $100-150 price tag per hour in the US, software engineers based in Mexico have average hourly rates of $50-60 an hour, depending on skill set, seniority, and other determining factors.
Opportunities for collaboration
Offshore outsourcing is a viable alternative to nearshore, particularly as the labor-cost benefits are similar. However, the distance involved with offshore outsourcing makes collaboration difficult as time zones are often unfavorable.
Recent statistics show that over 50% of all workers in the US believe their jobs to be reliant on collaboration and 17% are more satisfied when there is a strong emphasis on collaboration. With nearshore outsourcing, there is generally no or very little difference in time zones, making collaboration comparatively much easier than its offshore counterpart.
Access to specialist talent
The access to specialist talent depends largely on where the client organization is located. In a US context, particularly in California, the most common nearshore country is Mexico. There has been strong emphasis on STEM subjects in recent decades and the country ranks in the top 10 for producing STEM graduates globally. This amounts to a total of 130,000 engineers graduating every year, which businesses in California can draw on.
Risks, considerations, and barriers to entry
Despite the substantial cost savings, many business leaders are still reluctant to embrace nearshore outsourcing due to a number of perceived risks and barriers to entry.
Intellectual Property Risks
One key consideration is the risk to a company’s Intellectual Property. Depending on where a company is located, this can be a significant consideration and it’s important to create strong agreements, NDAs, and other best practices in regards to IP that create comfortability with nearshoring software development. Companies nearshoring to Mexico can rest more easily as the country operates under the same Intellectual Property guidance and regulations as the United States. While this doesn’t entirely eliminate all risk, it brings it in line with onshore levels, and by utilizing a nearshore partner based in California, companies can protect their IP with a partner that understands this significance.
Language skills represent a perceived barrier to nearshore outsourcing, rather than an actual one when looking at the US context. While there is a historically low level of English in the country, there have been concerted efforts to improve it. According to a 2016 report, nearly 24 million people study English in Mexico and there are many national programs to boost professional language skills.
Furthermore, Spanish is the second most spoken language in the United States, and is the country with the largest population of Spanish speakers outside of Mexico itself. In a professional context, between growing levels of English among Mexican nationals and the ubiquity of Spanish in the United States, there are rarely language barriers that threaten a project’s success, especially when dealing with senior software engineers and other technology related personnel.
Tax and compliance
Mexico has stringent tax obligations for both the employer and employee. While employees must pay around 20-30% of their personal income, companies are responsible for a further employer's tax of approximately 38.5% of an employee’s salary.
However, before being eligible to employ Mexican workers, US businesses must first register with the National Registry of Foreign Investment within 40 days of business activity or formal registration. The company will also need to acquire a business tax ID from the Federal Taxpayers Registry and register as an employer in the Mexican Social Security.
The entire process of starting an autonomous company in Mexico takes months, if not more, for new businesses to create an entity that’s in compliance. And then once a company has established its Mexican domestic entity, maintaining it in terms of tax, accounting, legal, HR, and other necessary departments and operations takes expertise and resources. These back office challenges represent a genuine bureaucratic barrier for accessing full-time technology talent legally and properly.
Quality issues of a finished software product are another perceived risk as leaders and project stakeholders typically have less control over the build process in an outsourcing relationship. With nearshore outsourcing and nearshore staff augmentation, client-side stakeholders and technical personnel are directly involved in product management and product success, frequently meeting and monitoring team progress and quality through checks, balances, and processes that drive quality outcomes.
According to a PA Consulting report, around 54% of companies reported no change in service quality while a third reported an improvement when compared to their onshore baseline. Mexico in particular is regarded for the quality of its developers, with a substantial talent pool and strong work ethics among employees.
Asymm’s Predictions for Nearshore Outsourcing in 2023
As experienced partners in nearshore outsourcing, at Asymm we work directly with US businesses and Mexican talent to provide superior quality software teams and projects.
Beyond the trends and statistics, our unique position provides us with insights into the future of nearshore outsourcing. Here are our predictions for what’s in store for 2023.
Diversify or fail
Recent geopolitical developments are further complicating an already difficult landscape for software development. Companies with software outsourcing roots in countries such as Ukraine, Poland, Belarus, and other countries involved or adjacent to the war in Ukraine are actively diversifying away from the region as the War on Ukraine persists with little to no end in sight. Companies with large labor pools in these countries are growing increasingly worried that further escalation could pause business and even force professionals to join combat efforts. While outsourcing, nearshore or otherwise, has been an attractive option for businesses in previous years, we’re reaching a critical juncture, where salaries, geopolitical diversification, and other economic pressures are pushing for Latam expansion and concentration
We predict that outsourcing will move from representing competitive advantage to being a strategic necessity for any US business undertaking a serious development project or with ongoing development needs. This especially applies to companies that are currently outsourcing software development to countries in Eastern Europe.
In this context, nearshore outsourcing stands out as the most viable solution, representing the benefits of offshore outsourcing with fewer associated geopolitical, economic, and labor interruption risks.
Team augmentation – not replacement
While nearshore outsourcing will become more present in US companies, we don’t expect the nearshore teams to replace homegrown talent entirely. Despite the increased costs associated with US developers, having a local team that acts as a project anchor is still hugely of value to businesses.
For this reason, we expect teams to be augmented by outsourced talent, rather than replaced entirely, with local developers leading projects, developing products, and facilitating and managing communication with augmented teams.
Limited hybrid models will emerge
Proximity is a substantial advantage of nearshore outsourcing when compared to its offshore counterpart and presents the option for a unique business model.
While remote work will remain dominant for any outsourced project, nearshore outsourcing provides the option for a limited hybrid approach. In a US context, with Mexico only a few hours away by plane, key stakeholders can visit the country on a semi-regular basis. Companies based in the U.S. that are emerging out of COVID-19 with back-to-office plans have the option of creating nearshore development offices in Mexico that are off site if they want to facilitate cross-team collaboration and in-person operations.
For ongoing long-term projects, this represents a distinct competitive advantage and we are seeing an increasing number of businesses incorporate this hybrid model. In our experience, face-to-face contact, even on an infrequent basis, leads to more cohesive teams.
At Asymm, we specialize in facilitating operations between US technology companies and Mexico’s talent pool. When working with us, we orchestrate the administrative, legal, operational, and compliance responsibilities that are required for the nearshore software development market. We work directly with you to identify your needs and source the talent to bring your project to life.
If you are interested in embracing the power of nearshore outsourcing in 2023, schedule a call with us to learn more.