By Mark Crawford

Canada is rapidly becoming the favorite "nearshore" location for North American firms that appreciate its proximity and want a familiar business climate.

Outsourcing is a key strategy for companies interested in reducing their costs, boosting production, and streamlining overall business operations. The bottom line, of course, is saving money while increasing shareholder value — through incorporating best practices and making operations more efficient. By letting an outsourcing provider worry about functions like IT and administration, a business can focus more energy on its core strengths.
     According to Gartner, an IT research and consulting firm, the North American IT outsourcing market will grow from $93 billion in 2000 to nearly $160 billion in 2005. A decade ago, most North American outsourcing went offshore to places like India or the Philippines. But over the last five years, Canada, as a "nearshore" opportunity, has quickly moved to the forefront as a major player.

The Canadian Advantage
For American businesses, the question is, why go offshore to another continent when you can go nearshore to Canada? Two of the biggest attractions are Canada's stability and its cultural similarity to the United States.
"Culture has a tremendous impact on IT outsourcing, especially in production," says Eugene Kublanov, vice president of corporate development for neoIT, a California-based outsourcing consulting firm. "Canada's language and cultural similarities to the U.S. are huge positives for attracting outsourcing."
     "U.S. buyers are more willing to consider outsourcing to Canada than to any other country," adds Jason Bremner, the senior analyst for outsourcing services for IDC Canada. "Our research shows that almost 90 percent of American executives would consider purchasing IT services from resources based in Canada. The reasons are centered around the notion of ’cultural proximity,' more so than geographic proximity. U.S. buyers see Canada as a very stable, English-speaking country that really understands how business works in the U.S."
     Another big advantage is that Canada is America's number-one trading partner. "With their long history of trading together, doing business between the two countries is a very smooth process," says John Harris, vice president with RIS, a Canadian outsourcing supplier. "It's another reflection of the economic and political stability that Canada provides."

Proximity
In the past, traditional offshore countries have been India, Israel, and the Philippines. Those locations are fine for manufacturing or enhancement, but when high levels of client interaction are required, proximity is essential. Canada operates in the same time zones as the United States and offers 24/7 availability. It's easier for executives to travel to nearshore outsourcing centers in Canada than to off-continent locations. In offshore arrangements, companies are sometimes forced to transfer their own project managers or IT specialists to far-flung operations because of cultural or language barriers — which means unexpected extra costs.

Work Force
Canada has one of the most highly educated work forces in the world. The labor force is replenished every year by nearly 145,000 new graduates, more than 30,000 of whom have IT degrees or certification. The 2000 Global Competitiveness Report ranked Canada first in the world for developing knowledge workers; the fact that they possess the same high-level skill sets that U.S. industries require is another positive factor.
     "Having a pool of qualified workers is critical to long-term success," Kublanov says. "Companies don't want to invest in setting up an operation, only to find supply constraints down the road. Canada has high-quality resources, which are critical for any outsourcing operation to be successful." And speaking of quality, many outsourcing suppliers in Canada are ISO-certified or have Software Engineering Institute Capability Maturity Model (CMM) certification — another testament to stability.

Business Costs
KPMG ranks Canada as the most cost-effective place in the G-7 to do business. Average business costs are 14.5 percent less than in the United States — and that figure doesn't include additional savings that can be realized through outsourcing.
     "We can reduce a company's costs by 10–20 percent by simply improving their process," Harris says. "And that's without any change in their work force or trimming their personnel."
     The exchange rate is currently about 25 percent, though experts expect it to move back to its historic 30–40 percent range. Salaries are about the same across the border. "Usually if you have an employee making, say, $100,000 in the U.S., that person's counterpart in Canada would make the same amount in Canadian dollars," Harris notes. "It's not adjusted for the exchange rate." Lower turnover rates in Canada translate into an additional 10 percent savings on labor costs.
     Electricity and natural gas rates average about 35 percent lower in Canada than in the United States, according to KPMG (2002). "Canada is also rated second in the G-7 for landline penetration and first for cable," Kublanov adds. "The fiberoptic linkage with Europe comes in at Nova Scotia, which creates some fantastic bandwidth."
     Based on business costs, business environment, and the highly skilled labor market, A.T. Kearney ranks Canada as the second-best location in the world for offshore or nearshore outsourcing.
     Another little-considered advantage of Canada is repatriation. "If you're a U.S. company outsourcing to Canada and decide to bring those operations back in, it's a lot easier to disengage operations from Canada than, say, India or the Philippines," Kublanov says.

Business Law
If a problem ever arises over intellectual property, it's a great asset if the outsourcing country follows the same initiatives that protect intellectual property in the home country.
     "Canada and the U.S. have the same intellectual property laws, so the risk of losing your proprietary information is extremely low in Canada," Kublanov says. "We had a Silicon Valley technology company that established a captive offshore operation in India — to their horror, the core team left and joined a competitor, taking the company's intellectual property with them. The legal battle is ongoing, but the client is headed for bankruptcy."

A Who's Who
Hundreds of companies across the spectrum of industries outsource to Canada, from BP Amoco, Allmerica Financial, and Siemens, to Compaq, Pitney Bowes, and Toyota. World-class outsourcing suppliers include CGI Group, RIS, Electronic Data Systems Canada, IBM Canada, OAO Technology Solutions, Accenture Canada, Unisys Canada, and Keane Canada.
     "Canada is considered a very safe nearshore alternative," Kublanov says. "It's a good location for businesses that are ready to expand outsourcing to companies outside of the U.S., but are not yet ready to fully manage a more traditional offshore location like India."
     Canadian companies outsourcing in Canada include Laurentian Bank of Canada, Canadian Tire Company, RBC Financial Group, ALD Automotive, AXA Canada, and Bell Canada.
     Creel Solutions is an IT services provider based in Halifax. "Halifax has been an ideal location for us in providing nearshore outsourcing services," says president Jamieson McNeil. "We have benefited from a highly educated and available work force, a vast digital network, and flights that are less than two hours from New York, Washington, and Boston. These factors, along with a lower cost of doing business, enable us to provide the best level of service at a cost that is often 25–40 percent less than other outsourcing alternatives."

Outsourced Sectors
What gets outsourced in Canada? There is a growing demand for software development, back-office processes, application development, application maintenance, e-business, call centers, high-end multimedia and voice, online financial services, and tech support outsourcing. Some sectors, such as IT applications support, are expecting hypergrowth from 2004 to 2008. "Over the last five years, [the outsource provider] RIS has averaged 22 percent annual growth and we expect it to just get bigger," Harris says.

IT Applications
RIS estimates that IT applications in Canada represent a $700 million market. U.S. firms are rapidly taking notice of Canadian suppliers — more than 20 percent of the IT services revenues generated in Canada come from U.S. customers.
     "In IT there is a big difference between enhancement work and development work," Harris says. "Enhancement work can be done in places like India. But in development work and application work, it is very important to be close to the end user — you have to be available when a problem arises. That's why Canada is the perfect nearshore location for IT development work with U.S. firms."
     Application development and application maintenance are outsourced to Canada by hundreds of companies, including AT&T, Family Insurance Solutions, Air Canada, Pitney Bowes, Toyota, Fireman's Fund, and Shell.

E-Business
In research by the META Group that ranked 47 industrial countries according to their e-commerce potential, Canada placed in the top five because of its rapidly growing e-business industry and its high-speed, state-of-the-art Internet infrastructure. This allows Canada to provide consistent and timely support, especially to revenue-critical e-business activities. E-business needs are outsourced to Canada by Borland, CBC, Sun Life Financial, and other major companies. E-business suppliers include Pyxis Technologies, CGI, Kelsar, 724 Solutions, and ZeddComm.

Business Process Outsourcers (BPOs)
BPOs take care of office administration loads, including payroll, accounting, and other financial duties. BPOs in Canada utilize the country's excellent infrastructure and highly trained work force. BP Amoco, Delphi Automotive Systems, Koenig & Bauer AG, and Bank of Canada are some of the companies using BPOs in Canada.
     "About 40 percent of our clients are looking for business processing or back-office operations," Kublanov says. "The demand for BPOs is ready to explode. One reason for this is that with the latest technologies, BPOs can be more functional by being able to make more routing and processing decisions."

Call Centers
About 14,000 call centers are located in Canada — more than half are in Ontario. The call-center industry is growing at a phenomenal 20 percent annual rate. Research by the Aberdeen Group shows that American companies would rather outsource their call centers to Canada than any other offshore location. Canadian workers are highly trained and often multilingual. Call-center employee turnover rates in Canada are about 35 percent lower than in the United States. IBM, American Express, Epson, eBay, and Swiss International Airlines all have call centers in Canada.



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