Leadership Insights: Nearshoring vs. Outsourcing

Transcript

Mike Vizard: Hello, and welcome to the latest edition of the Digital CxO Leadership Insights series videos. I’m your host Mike Vizard. Today we’re with Patrick Ward, VP of marketing for Rootstrap. And we’re talking about nearshoring, which is not necessarily a new concept, but may be becoming more important these days. Patrick, welcome the show.

Patrick Ward: Thanks for having me, Mike. We saw maybe over the last, I don’t know three decades massive amounts of outsourcing and offshoring and all kinds of interesting things were happening. And then the COVID crisis came in; we discovered that all these things that were made halfway around the world were hard to come by and hard to find. And we’re still dealing with that today.

Mike Vizard: So your solution is to maybe change the place where we make these things and how we engage with the whole digital supply chain. Well, so walk us through, what would it take to actually achieve that, given how much time and effort we’ve spent over the last three decades doing the exact opposite?

Patrick Ward: See, the funny thing is, the trend has certainly come into the public consciousness, as you mentioned, through the pandemic, right? It blew the lid off what was a phenomenon where we’re been going to China for manufacturing; we’d been going to India, particularly for IT outsourcing. But the fact of the matter is, behind the scenes, we’ve been working toward solutions, even before the pandemic had happened, because what was even immediately obvious from, you know, the rise of IoT outsourcing to India in the 1980s. And then we saw into the 90s and early 2000s, with the rise of China’s manufacturing is that having all of your trade based on one country or a handful of countries just doesn’t make a lot of sense. And so you look at the manufacturing side; we’d already been diversifying away from that as well. And similarly, in the services space, we’ve also undertaken a similar form. And I think it’s worth noting that while obviously the, you know, the rise of fear about China, what does this mean for our supply chain? No, it still is the third biggest trading partner for the US behind Canada and Mexico. And I think what that speaks to, is really this idea that we’re already trying to make sure that can we build things, export and import with partners that are close to us – closely aligned with us, economically aligned with us, culturally aligned with us? So yes, is there some short term pain here because of some of the reliance on China, of course, but we’re already making many strides towards ensuring that is not the future we’re going to be living in.

Mike Vizard: How much of this is an economic conversation versus a political conversation where basically, we’re having some issues around philosophies with certain folks. And that may be pushing people toward aligning with partners that are in the same kind of mindset, whether or not that happens to be liberal, or totalitarian or whatever that may be.

Patrick Ward: Yeah, you’re absolutely right. I mean, the media angle, if you will, that is happening right at the moment is very much supportive of the political narrative. When we look at the concept of nearshoring. In many ways, yes, you do get the cultural benefits of working with folks that are more closely aligned to you. But realistically, the main reason for even undertaking it was economic. So we look at, for example, why India IT outsourcing started to wane in favor, versus when you look at nearshoring, to company countries like Argentina, Uruguay, Brazil, Colombia, in our immediate sphere of influence. And a big part of that was simply ease of communication, what they realized was, the benefits of outsourcing are still very much present, but you can’t just do it from cost. And that’s what was really the 1980s form – let’s just go to the cheapest place in the world. Let’s just build our products and services there. And we’ll ship them back to the US make a healthy margin. What was immediately obvious in the decades since then, that you can’t just build a product or service in that manner, you still need a level of expertise, and you need effective communication between yourself and your vendors and partners in order to build effective products and services. So that was really the reason why nearshoring has even taken hold in, you know, the late 2000s through the 2010s. And even to now, but the only reason that’s come into the public consciousness is exactly right. What you’re saying that the political angle has, you know, surfaced into the media. But that’s not the driving force, it really was economic and will continue to be economic. Because as much as we can see, these two countries, both China and the US leaders continue to, you know, have their talks and scold each other. That is a political, geopolitical military, shall we say, concern? The economic is what really drives the business decisions here. And that I think, was something that was really present for a lot of companies is that they realized, “Hey, maybe I don’t go and get the absolute bargain basement price, maybe I still get a slightly more affordable price. But I also get a partner that understands me a little better, that has communicated for many generations with the US that understands the US mindset, and therefore is going to be more effective for me long term.”

Mike Vizard: How much does automation drive this, because part of the issue is that a lot of things that we’re making don’t require as much labor as they once did. And as that becomes more of a trend, it becomes easier to nearshore or, for that matter, take everything back onshore.

Patrick Ward: Very much. So in fact, if you look at the automation side of it, that is playing towards the reshoring angle. So there’s sort of two phenomenon here. So the nearshoring angle is usually – it’s especially within the tech sphere is happening, because there just still isn’t enough tech talent here in the United States; like we look at while universities’ coding boot camps have tried to up the ante in terms of the amount of STEM graduates, it’s still not enough compared to the demand from industry. And so naturally, you look at the education pipelines from countries like Argentina, and Uruguay and Brazil, especially, who put a lot of emphasis on STEM education in the early 2000s. And those countries, therefore are reaping the rewards of nearshoring. When you compare it to reshoring. That’s exactly what you’re talking about with automation. This is where it’s being more capital intensive, rather than labor intensive, and therefore, it becomes a case of, okay, where do I build this appropriate factory? Can I get a particular function done through a machine versus a person? Now businesses will still make that assessment, obviously, you know, I would advocate that what we’re seeing is the most effective companies tend to do a bit of a blend of or they augment their workers with appropriate automation that allows them to do higher level activities, they still have a healthy US presence, because there is still a domestic knowledge of the US market that is very valuable to many companies. And then for certain components where they need truly specialized technical knowledge, then you can start pulling in those near shore partners.

Mike Vizard: How important is it for the near shore partners to be in the same timezone? Because one of the issues that you did hear from people over the years is, it’s just hard to work with countries or partners that are 12 hours ahead, 12 hours behind you, either way, in whatever direction you happen to be going. And that results in a lot of downtime, because people are waiting for decisions to be made while you know the clock is ticking.

Patrick Ward: It makes a huge difference. And you would think given that we have the ease of communication across the entire globe, it wouldn’t be that much of an issue. But the funny thing is time zones really do play havoc, like a classic example here for my own company, is that we have a client masterclass based in the Bay Area. And because they are only a handful of hours outside of our Argentina team, then it means that they can attend the 9am technical standard. That is an enormous amount of value where your client and vendor can get on the same call at the same time. And it’s not pushing people out. Now, I’m not saying you can’t take a handful of late night calls, you know, we all do things in the workplace in order to make our companies successful. But if you’re doing that for months on end, and you get out just like a fraction like half a day that really compounds and then suddenly what you’re happening is you’re missing milestones. You’re not building the product that you thought you were building. And that’s really because exactly as you say, the breakdown and communication. It seems like it’s not a lot, but it can really exacerbate the problems. And so that’s where that nearshore benefit of just having a large amount of the working day overlap between your vendor and your client makes a huge difference in your trade.

Mike Vizard: And do you think this ultimately will be because a lot of people think we’re headed towards mass customization? And we’re going to be making things as close to the point of consumption as possible. And we’re going to have tiny little automated factories everywhere. I don’t know if that’s a real or not. But I’ve certainly seen the vision is that we’re ultimately headed in, so we’ll have nearshoring supporting really small instances of manufacturing and services or really small markets, or is that mathematically unfeasible?

Patrick Ward: It’s certainly feasible. And certainly when we look at things like the rise of 3d printing, which is bringing manufacturing down to that smallest scale, I think the, the miss here is not on the materials. And it’s not on the manufacturing capability. It has been to my earlier point about tech talent. And while I see the US education system, attempting to boost this, this is a multi generational thing. I mean, unfortunately, we look at the rankings of the US in terms of mathematics skills, falling quite considerably behind a number of their peers, certainly across Asia and Europe. And so the solution here is to tap into the talent that we have right on our doorstep, specifically in both Mexico and our South American partners, because they have done the hard yards of building a very successful robust technical education, infrastructure. They also have the cultural familiarity, they have the English speaking skills as well, that are able to work with us clients. And so that really is the support mechanism that is going to continue to be needed, by all means the manufacturing will definitely still be able to come to the US. And I would imagine we’d see a continual influx of that over the coming decades. But when you’re thinking about the talent needed to operate solutions, and create those services that are going to continue to be more technical and complex in nature, then you really need those STEM graduates and the US will continue to do its part to try and increase the number, perhaps we might see some more favorable immigration policies that will bring more tech talent to the US shores. But certainly for the coming decades, the easiest and path of least resistance is tapping into those near shore partners.

Mike Vizard: Do we need to do some work on the education side of this thing? Because as far as I can tell, there aren’t enough software engineers in the Midwest, nevermind Argentina or anywhere else.

Patrick Ward: Very much. So the education system was another unfortunate casualty in terms of the pandemic, when we looked at it, it’s really shone a light that the current education system is not set up for the success of both the graduates and emerging into the job market in terms of the jobs that are actually needed. And there have been attempts, like I’ve seen many coding boot camps that have come as an augmentation to those traditional forms of education, a traditional computer science degree, for example. However, the fact still remains, you go through a coding boot camp, you come out, maybe 16-20 weeks later, you have a basic understanding of computer science, you don’t particularly know any useful programming languages for industry. And so there’s still a learning curve. Now you compare that person who gets to call themselves a developer, with a developer that is based in, for example, Argentina, when they come out of their university, they have spent two years with industry, they’ve spent a five year degree that is equivalent to a master’s in it here in the States. And only then does that person call themselves a developer. And so there is still quite a significant gap in the education that is here in the US. Now there’s going to take considerably more investment in order to reach the type of quality and level of technical skills that we’re already seeing in other countries that are our near shore partners. And that’s really the focus is that we can learn a lot from how they created stem educational graduates, have a sufficient quality and a sufficient standard that we could apply those lessons here to as well.

Mike Vizard: Are you at all concerned that by the time we pull that all off that some robot somewhere will have automated some process using all these AI models we talked about every day, or can we all just stay one step ahead of the machine?

Patrick Ward: I’m still very positive on what AI can do for us. I have been in this space and have seen many different waves of AI for the last several decades. I’m still at the belief that it is really good at data computation, it’s really good at helping to synthesize information in a really rapid timescale. But it’s still challenging for AI to come up with something original. And it’s still challenging for it to speak to humans to that fundamental human quality. And I think that’s what we need to continue to focus on is that, if we can see how AI will support us in our jobs, then it will allow us to unlock a lot more of the creative, innovative types of strategic thinking that ultimately, most workers is self admitted that they enjoy most about their jobs. And so I’m hoping that that’s more the conversation that AI plays into this, rather than the robots are coming to get us.

Mike Vizard: All right, folks, you heard it here. It really is a truly global digital economy. That means that there’s more than two countries to focus on. Hey, Patrick, thanks for being on the show.

Patrick Ward: Thanks, Mike.

Mike Vizard: And thank you all for watching the latest episode of the Digital CxO Leadership Insights series. You can find this episode and others on the digitalcxo.com website and we invite you to check them all out. And once again, thanks for spending time.