SOFTWARE NEARSHORING TO CANADA: STILL HOT OR NOT?

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1 SOFTWARE NEARSHORING TO CANADA: STILL HOT OR NOT? How to remain a cost-competitive outsourcing venue in the aggressively growing offshoring market By Oxagile media communications department, April, Summary Canada s position as a well-established IT outsourcing destination for US technology companies is hardly to be disputed the country has been and remains an attractive nearshoring venue. But the growth of Canada s outsourcing reputation is rather slack if compared to India, China and other offshore competitors. Similar legal framework, compatibility of culture and business practices and same time zone as the USA has always been obvious advantages of Canada. But they can not be alone competitive differentiators when cost effectiveness (as one of the initial triggers for companies taking on a nearshore or offshore project) might be at risk. The impending equality between USD and CAD rates and the global trend towards software development outsourcing to offshore hotspots (which offer cheaper labor rates and a larger pool of qualified workforce) bring up a question of Canada s cost competiveness. To win competition and retain the status of the hot outsourcing location for the North American business world, Canadian companies should act globally and leverage offshore cost-effective resources to reduce their inhouse development costs, fill gaps in skill sets and get access to new markets. This article provides a brief description of the issues that may stem the successful tide of Canada in the IT outsourcing industry and decrease its position as the winning nearshore destination. Taking Belarus and its software outsourcing providers as an example, this paper also gives considerations of how offshoring of software development activities can help Canadian IT companies become more cost effective in response to the global offshoring trend. Core Challenges CAD revaluation and price competition For US-based firms Canada has always been a less risky and more familiar place to outsource software development services. The benefits that Canada provides comparing to other outsourcing or offshoring locations are many: similar time zones, ease of travel and greater control due to geographical closeness and cultural proximity, lower real estate prices, good infrastructure. But these and other advantages make nearshoring of development processes a truly profitable solution when they are balanced by such an important decision criterion as a labor cost advantage, the most important business cost factor in an organization s selection of a new location, as cited in the KMPG study 1. Jobs, measured in Canadian dollars, usually pay a bit less than similar jobs in the U.S. In years past, Canada enjoyed the labor cost 1 Source: Competitive Alternatives: KPMG s Guide to International Business Costs, 2006 edition.

2 advantage over the U.S. due to CAD to USD favorable exchange rate. In 2003, the price advantage could be about 30% or so depending on the exchange rate. Based on the 2006 KMPG study, that year Canada had an overall cost advantage of more than 5% relative to the US. If the CAD were to appreciate by approximately 13% relative to the USD this would bring the two currencies close to par and would place Canada at a break-even position in terms of overall business costs 2, stated in the research (the exchange rates used in the 2006 study were as follows: CAD (USD 0,852). And what do we see now? The CAD has appreciated in value (1 USD = CAD according to currency rates as of November 30, 2007 & 1 USD = CAD as of April 24, 2008) and during the last year its fluctuations have clearly shown (Figure 1) that the Canadian dollar is no more a significant cost advantageous option to persuade US companies to choose Canadian software development firms as outsourcing services providers. Figure 1 Insufficient pool of qualified IT developers The revaluation of the Canadian dollar is not the only challenge that Canadian software development firms face. The country can t compete on numbers of technical graduates with many leading offshore rivals. Even more, in the past years there have been a decrease in a number of engineering graduates from Canadian universities (years 2003 and 2004 showed a registered decline of 7.5 % in university enrolments in computer and information sciences, as stated in the PricewaterhouseCoopers (PwC) study 3 ). Some other risk factors that can make Canadian IT talent harder to find are the country s aging population and the overall attitude to software engineering as a profitable occupation (some sources indicate that nowadays the image of engineering is not as strongly developed among teens as it once was). All this set us thinking if Canada can serve as a suitable option for those companies who want to scale their operations. Poor use of offshoring and an overall hesitation to cooperate with distant software outsourcing providers 2 Source: Competitive Alternatives: KPMG s Guide to International Business Costs, 2006 edition. 3 Source: A Fine Balance: The Buying and Selling of Canada, PricewaterhouseCoopers LLP study, 2005 edition.

3 Due to a set of economic, structural and cultural reasons Canada is behind in the use of offshoring in comparison with the USA or some Western European countries 4 Canadian business leaders still can t come to unanimity of opinions if offshoring more helps or hurts Canada. Both pros and cons make sense and are hard to dispute. What can t be called in question is that poor involvement in the global software outsourcing environment does have an impact on Canada. More and more Canadian IT jobs are migrating to lower cost economies. But with proper use of offshoring, these job losses can be reduced and made up by greater profits and more efficiency in delivery of IT services to North America. Capitalizing on offshoring opportunities from Belarus Being itself an exporter of outsourcing services, Canadian IT industry knows well what outsourcing is all about: cost benefits, improvement of innovation capacity and an opportunity to free up domestic resources for high critical tasks. So isn t it high time to get the right mix of these benefits and take up offshoring as a strategic competitive initiative? As part of this initiative, Canadian companies should identify where they can perform their software development activities most cost-effectively. The leadership of India in the offshore market is hardly to be challenged. But this country seems to have become the victim of its own success: growing staff turnover rates and decreasing quality level of output. In this sense, Eastern Europe, as a safer place and a closer fit than India or China, is a very suitable offshore location where Belarus is a candidate not to be overlooked. With its great potential in the IT outsourcing market, Belarus can serve as a perfect example to show what offshoring opportunities Canadian businesses may enjoy transferring some of their development processes to this successfully rising outsourcing destination. What benefits can Belarus offer from the outsourcing point of view? Real cost savings: price is always an initial consideration in any offshore initiative. Belarusian service providers offer reasonably low rates for software developers as low as not to compromise on quality in no way. Typically, the rates of Belarusian software houses are about seven times lower than those of the U.S. or Western Europe. An average rate for a senior software developer is USD/h. And when the difference in wages and rates is substantial, the reduction of in-house development costs is significant (up to 50%) and the savings become real. Access to a substantial pool of IT talent: availability of qualified resources goes on par with the price criterion. Belarus can provide access to a significant number of professionals with vast programming experience and strong mathematics background. The country has more than 55 Universities, more than graduates come to the market each year (with more than 2,000 highly qualified IT specialists). 4 Source: A Fine Balance: The Buying and Selling of Canada, PricewaterhouseCoopers LLP study, 2005 edition.

4 Workforce stability: low attrition rate brings the stability of the relationship. For instance, an average Belarusian software provider keeps partnerships stable with its personnel turnover rate of about 10%. Faster time to market and quicker response to end-customers demands: the right set of software development processes (RUP, MSF, DSDM, AUP, XP), adherence to industry standards (ISO , CMMI) and vast experience of working with international clients guarantee the optimal combination of speed, quality and flexibility. Conclusion: taking the best of two worlds The continued rise of the Canadian dollar, deficiency in number of qualified engineers as well as underestimation of the global offshore outsourcing climate make Canadian software development companies less attractive to US buyers of low cost IT services. But all this should encourage Canada to more aggressively look for more cost-effective sources to successfully compete in the division of knowledge work. Eastern Europe offers Canada a huge pool of educated talent at low rates and with advanced technical skills. If combined with core nearshoring benefits like close cultural fit, similar work ethic and geographical proximity to the U.S. all these benefits put Canada in a very advantageous position and make more agile in the outsourcing market place. When the market for offshoring is growing globally at a fast pace and remaining competitive is the driving factor behind the use of offshore resources, Canadian IT sector should be more open to offshore outsourcing and gain maximum advantages of it to maintain its status of the attractive nearshoring location for its largest market, the USA.

5 About the author Oxagile is an Eastern European provider of software development services, operating within the frames of a leading Belarusian IT holding (established in 1994). The company focuses on delivering custom software development and dedicated IT team staffing services for customers from Canada and the USA. Oxagile works in adherence to ISO /CMMI standards and takes the process best practices, following its mission to create quality software that ideally meets individual requirements of each client and enables them reach their goals as effectively as possible. For comments, feedback or questions feel free to contact at contact@oxagile.com References 1. Competitive Alternatives: KPMG s Guide to International Business Costs, 2006 edition. 2. A Fine Balance: The Buying and Selling of Canada, PricewaterhouseCoopers research paper 3. ITAC (Information Technology Association of Canada) Annual Review 4. The Contenders: What Canadian Firms Need to Do to Stake Their Claim in the Lucrative Software R&D Outsourcing Market, ITAC paper prepared by Macadamian Inc. 5. Canada: safe, secure and near-shore, Computerworld article, 6. Oxagile corporate website,