Nearshoring and offshoring – The ABC
Keeping a number of simple but not always self-evident tips in mind can increase the likelihood of success with your future nearshoring or offshoring project. The CEO of KMD Poland shares his insight.
Interview with Jens Brinksten, CEO of KMD Poland
Jens Brinksten, CEO of KMD Poland, is definitely a man worth listening to: he has over 25 years of experience with sourcing business processes in over sixteen countries. Jens Brinksten has pretty much seen it all. He’s watched businesses succeed with their nearshoring and offshoring projects and reap both financial and operational benefits. But he has also witnessed the opposite. He has first-hand experience of what happens when businesses just aren’t prepared to work in or with foreign cultures.
Best Practice invited Jens Brinksten to share the wisdom he’s distilled from many years of international experience.
Shoring must be a clear strategic decision
What should a company’s check list look like before they start considering nearshoring or offshoring?
“Jumping into a new market and a new country isn’t actually the most important decision. The most important decision precedes that step and is a question of the parent company clarifying precisely what they hope to achieve by locating functions or divisions in another part of the world. That’s the leadership aspect of the issue. There’s also a communication aspect.”
”In many peoples’ ears, all types of outsourcing have a negative ring. They immediately get nervous and want to know what it will mean for their jobs. Because of this, a coming nearshoring or offshoring project is about getting employees to understand that outsourcing functions to other countries is a positive thing for the company, and that it benefits all employees,” explains Jens Brinksten.
“Next, it’s important that the decision has the support of the entire executive team. It’s counterproductive if you have central people in the company mumbling in the corners. Nearshoring or offshoring has to be a strategic decision that has everyone’s support.”
In addition to the importance of communication and strategic management of the process, Jens Brinksten emphasizes that understanding in advance that a lot of groundwork has to be done in your company is crucial to the quality of the work the company wants performed in another country. For example, developing specifications of requirements – in the local language, not your own – so that the foreign employees know what is expected of them.
“A tax system in your country is not necessarily the same as a tax system in Poland. So you can’t expect that employees in other countries will have the same understanding of a task that you have, either. That’s what detailed specifications of requirements and other types of documentation of the task can help ensure,” says Jens Brinksten.
Matching the company’s DNA
After all of these initial considerations and preparations are in place, which can take years, the next step is to determine what country is the best match for your country’s cultural and professional DNA.
“Here a relevant consideration is whether to locate within the EU or outside it. Some clients and some types of services have to be performed within the framework of the EU, so in these cases the decision is obvious. In other cases, you might consider what technology the country in question has a history of working with. For example, India does a lot of mainframe work for which it can be difficult to find suppliers in the EU, while a region like the Baltic is at the forefront of new web technology. There are probably not many people who know this, but Estonia has the highest internet penetration per 1000 inhabitants in the EU and is generally speaking a very IT-ready country,” explains Jens Brinksten.
Other parameters might be travel times to and from your country, the political stability of the destination, infrastructure, access to IT clusters, and much more – and, of course, the question of price.
“When it comes to price, I’d like to hoist a little red flag of warning. Because a lot of companies are often unrealistic when it comes to the relationship between price and quality. They love the idea that they can go to the Far East and get a job done 50% cheaper compared to the local market. But they forget that it takes a long time to fly there and back, that they often have to struggle with visas, and that a lot of time gets spent on communication, lack of domain understanding, business understanding and culture.
Often, time spent on supervision and correcting errors increases so much that the cost of that time exceeds the cheap hourly rates. As a result, the company’s projects turn out to be both more expensive and poorer quality than if the company had started out in a country where hourly rates might be higher but where quality standards are high.
To be honest, I can’t actually think of a single company during my 25 years in business that outsourced to Asia and actually achieved the financial return they had planned on and expected,” asserts Jens Brinksten.
“For example, once I worked with a large Danish public sector institution that outsourced a task to Asia in the hopes of saving 40%. They ended up with total savings of 2% compared to what it would have cost them to have the work performed in Denmark. That’s thought-provoking.”
Send your veterans
When it comes to the Danish employees who are put in charge of opening a new office in a foreign country or managing local foreign employees, Jens Brinksten has gained some valuable experience over
“It’s a good idea to have some experienced people on board – veterans who are also able to work with foreign cultures. I’ve often seen cases of businesses sending their youngest and least experienced people out into to the world.
They tend to be a bit domineering in their way of operating. Either they try to be the ‘big boss’, or they just try to be popular with the employees, without any understanding of how you run a business,” observes Jens Brinksten.
“I’ve also often observed that businesses only want to hire the very best people locally. But here it’s important to be conscious of the fact that the job and the challenge the employee in question is to perform has to match the individual’s qualifications.
There’s no point in hiring a man who might actually belong in Apple’s or Google’s innovative development teams, but who ends up sitting there maintaining an inferior, simple program eight hours a day. He’ll lose interest very quickly and find another job, which is also one of the reasons that Danish companies often have very high employee turnover in their outsourced projects.”
The fire authority can close down a company in Ukraine
Thanks to his many years of experience from so many countries, Jens Brinksten has gained deep insight into foreign cultures and mentalities. For example, he has experienced a few incidents with the Ukrainian and Russian authorities which probably would not occur in Scandinavia.
“In Ukraine and other parts of Eastern Europe it’s well-known that the fire authority can shut down a business if they want to. Back when I was there, I remember that the fire authority contacted us one day, and they claimed that my company had some defects and that we had to pay a certain amount for permission to keep the company open. So I asked to see the relevant legislation, I asked for a description of the defects, I asked for the names of the relevant officials, and finally I requested for everything to be put in writing – and we didn’t hear from them again. I assume they moved on to the next foreign company on the list and kept on going until they found someone willing to pay what they were asking,” says Jens Brinksten.
“I also remember an incident in St Petersburg. One morning, we came into the office and discovered that all of our computers had been stolen. We couldn’t understand how that had happened, because we had a special alarm attached to the computers that alerted the police directly in the event of a break-in. We went down to the police station, and in the back of the room, we saw several computers which unmistakably resembled ours. That made us smile a little. We didn’t talk to the police about it, but we did get our police report so that we could report it to our insurance company. All of our data was backed up, so we didn’t loose anything.”
“In both cases, the point is that you have to keep a level head, use common sense and remember that not everything out there in the wide world works the way it does at home,” concludes Jens Brinksten.
Poland is a perfect match for nearshoring
Jens Brinksten is currently working in Warsaw, Poland as CEO of KMD Poland Sp. z o. o., a subsidiary of KMD A/S in Denmark. Overall, he has a good impression of the country’s culture and labor force.
”Poles drink beer and talk about football just like we do. So breaking the ice with the locals is always easy.
You shouldn’t underestimate the social relationships between people when you’re considering where to hire local labor.”
“What’s more, Poland produces 14,000 to 15,000 new IT graduates every year, so there’s a high level of professional expertise in the country and lots of qualified labour to choose from. Finally, Poland is in fact the best educated country in the OECD measured per 1,000 inhabitants, and the country has seen economic progress for over 20 years in a row. So it’s a country and a population that wants to advance.
The Poles who go to other countries aren’t the well-educated ones. Well-educated Poles stay at home and work to create a good life in their own country. That makes Poland the perfect nearshoring match for Danish companies.”
KMD is one of Denmark’s largest IT and software companies with offices in Copenhagen, Aarhus, Odense and Aalborg. Most of KMD’s business is based on its own software development, and the company develops and supplies IT solutions to municipal, regional and central government public sector institutions as well as private businesses. The KMD group has an annual turnover of approximately EUR 670 million and has about 3,000 employees. KMD Poland Sp. z o.o. is a subsidiary of KMD A/S.