Most companies already deploy x-shoring models

The Covid-19 pandemic has significantly affected companies around the world. Supply chains are under severe pressure, whereas knowledge workers seem to perform quite well under the given circumstances. Companies have shown that it is no longer necessary for all employees to be under one roof.

While “home offices” have boosted the possibility of a decentralized workplace, the concept of diversifying operations across multiple locations continues to mark the way for businesses as it has over the last decades. Hence, most of today’s conglomerates deploy nearshoring and offshoring centers around the world. Bringing these two developments together, namely home offices and x-shoring, will imply what for x-shoring initiatives in the future?

Navigating through the x-shoring maze

First, let us clear up the x-shoring-jungle. There can be various combinations of “shoring” and “sourcing” strategies depending on the location of business ownership and premises. Here is how to navigate through the sourcing and shoring maze:

Figure 1: 2006, Outsourcing and Offshoring in the 21st Century: A Socio-economic Perspective by Harbhajan Kehal and Varinder Singh.

The main driver for putting nearshoring and offshoring strategies into practice was to reduce costs. Organizations were looking for ways to lower operating expenses and overhead. At this juncture, nearshoring was often preferred over offshoring for convenience reasons, like language and cultural affinity. Similar time zones also make it easier to synchronize meetings and adjust work time schedules. The proximity advantage with short flight durations enables teams to visit each other more often, too. And finally, nearshoring usually means fewer regulatory requirements.

Companies should rethink the purpose question on what they want to achieve with their nearshoring centers

As just stated, one of the main targets for any nearshoring initiative was reducing costs. Shifting non-core activities into countries with cheaper labor costs helped big corporations fulfill their savings targets – but as we all remember from university days, the race to the bottom has its end.

Labor costs in typical nearshoring countries such as Hungary, Poland, or Romania are rising faster than the European average.

In Eastern Europe, real wages (nominal wages adjusted for inflation) increase between 3% and 5% per year, whereas Western Europe’s average wage growth is around 1.5%. Although the current pandemic might temporarily slow down this trend, the cost opportunity is continuously declining. That leaves nearshoring activities with the question, “What now?” Is it reasonable to continue the race to the bottom with further outsourcing to even more cost-effective countries? Or is it rather advisable to rethink the initial nearshoring purpose and add other measurement criteria to the partner entities than just cost ratios?

Of course, there is no black and white answer. Picking even cheaper locations for the delivery of services for big corporations is still happening. We see companies reducing their capacities in countries such as the Czech Republic and shifting tasks from there to India, even with all the complications and regulatory constraints. However, we think this should not be the focus for companies today. We strongly believe that companies should reset the purpose question on what they want to achieve with their nearshoring centers. Our conviction is that we need to remove the discount-tag from nearshoring centers and set their benefits in a broader perspective.

Local businesses need business partners and not delivery centers

Historically, nearshoring centers were run by maintaining cost ratios, steering the workforce with micromanagement, and tracking singular process KPIs, ultimately leading to a Service Level Agreement (SLA) compliance ratio. However, working long enough in an environment usually means we not only get better at working in the system but also better at working the system itself. In the past, nearshoring centers focused on the reported quality – before the actual work quality. Therefore, to get a handhold on the quality, process managers added new KPIs, leading to a micromanaging circle. Still, in the end, nearshoring centers adjusted to fulfill the quantitative targets – but no business process can be explained entirely in numbers, especially if it is customer-facing.

On top of this suboptimal setting, agile projects and organizations appeared. Internal drive instead of external targets, incremental work towards the desired output instead of milestone results, adjustable input dependent on daily capacity –a nightmare for all SLA cockpits. Company-wide goal setting and planning shift to shorter periods: goal setting is converted to objectives and key results (OKRs), while companies’ annual plans are translated into weekly throughput.

Consequently, the requirements towards nearshoring centers alter. 

Instead of delivery centers with precise forecasts, local businesses need business partners who understand local pressures and demands and make the right calls independently. Nearshoring centers should not be cheap delivery centers but centers of expertise. Employees must bring their knowledge and leadership skills and not only a price benefit. There has to be partnership and trust, but all SLA and KPI management instill a clear sense of superiority/inferiority in the system. The big agile wave (or even triggering this wave) brings a technological development in software moving towards a team/partnership mindset. Microsoft Teams postings or Slack chats replace e-mail broadcasting, personal videoconferences for phone conferences, and classical ticketing-systems are rethought.

 With today’s challenges and opportunities, it is apparent that classical nearshoring management needs to be reevaluated and undergo significant change to further contribute to a firm’s success.

Five elements that will help you build a high-performing nearshoring center

The traditional nearshoring model came about primarily to cut costs, i.e., reduce operating expenses and overhead. Its operating model often steers the nearshoring team with micromanagement and tracking singular process KPIs, which leads to a focus on the reported quality of specific processes rather than the work quality itself.

As the advantages of the traditional nearshoring model no longer apply to the same extent as they used to, coupled with the technological developments that came with the agile wave, the model needs to be reevaluated.

Here are a few aspects we consider of the utmost importance when thinking about reshaping and enhancing the nearshoring model to make it future-ready.

Define new output-related SLAs

To achieve better work quality, we must redefine the concept of service level agreements (SLA) and their tracking. Meeting SLAs does not necessarily mean delivering quality, but rather delivering a service in a certain amount of time while frequently disregarding its quality. When building up a new team, the focus should not be on process-related SLAs anymore but rather on defining new output-related SLAs. Instead of monitoring and reporting each interim step, focus solely on the relevant output, which, of course, has to be achieved in a predefined time or by a specific date. If the focus shifts from process to output, the service can still be delivered on time while meeting qualitative standards. The nearshoring team is responsible for achieving the defined results and finding and developing solutions that work best for them for any encountered problems. By providing more autonomy to the new team and making use of the employees’ skills, the team will, in the end, achieve better results.

Simplify to the minimum

By focusing on output-related SLAs, we can automatically significantly reduce the quantity of SLAs in place and simplify monitoring and reporting activities. Moreover, we should also simplify the remaining SLAs themselves, reducing complexity for the new team and leaving more valuable time for performing tasks and improving the process. Nearshoring centers’ teams are usually formed by professionals who master the processes they handle and can organize themselves to meet the required standards without being micromanaged. Without the pressure of a high quantity of SLAs, the nearshoring teams can work on continuous process improvement and identify innovative ideas.

Create regional response clusters

How can we enable even more proficient and effective handling of either customer problems or technical issues and make sure that each case is handled with a suitable individual solution?
Customer problems or technical issues may arise due to regional-specific incidents that require regional solutions rather than a “one-size-fits-all” approach. Therefore, we should create regional response clusters. Dedicated employees for each geographic area have deep knowledge about regional-specific characteristics and common incidents and can serve their customers better. As a result, technical problems due to a local fire can be dealt with much more effectively by local customer support who is aware of the situation and has been briefed by local engineers rather than just submitting a general ticket.

56%

For instance, when a telecommunications provider in the US introduced its regional customer support, customer satisfaction increased significantly, resulting in a 56% increase in the Net Promoter Score.

And although the current global pandemic makes collaborative working more complicated, in a post-COVID-19 world, regional teams that can work together in finding suitable solutions are much better suited to tackle regional problems.

Create end-to-end responsibility

The overall key to achieving the desired increases in efficiency when performing nearshoring activities is to create end-to-end responsibility for the employees executing the defined tasks. In fact, the new employees should not only be hired to process tickets and also be responsible for managing the entire process. Due to the traditional nearshoring model, teams from nearshoring centers sometimes avoid taking responsibility for the end-to-end process, as they feel they cannot steer the others accordingly. However, by empowering them to take responsibility for the end-to-end process, they find new ways for solving upcoming problems and improving the entire process. Employees can then have a feeling of performing a value-adding service that contributes to the firm’s success and overhead management is reduced.

Create a framework of mutual trust, appreciation and commitment

By following the steps above, we can create a framework of mutual trust, appreciation, and commitment powered by mixed teams located in various locations. Rather than frequently monitoring activities based on predefined KPIs and applying time-consuming management methods, we should incorporate the nearshoring team as an independent and responsible partner deeply committed to the firms’ agenda by putting value-added services into their hands. Despite cultural differences, different working styles, or various locations, given the advantages of working in an agile environment, it is now easier to nurture a partnership mindset where the relationship between teams is based on trust and appreciation.

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