Not long ago, if a company wanted to outsource non-core operations — such as contact center or back office processes — India was the locale to choose. End of story.
That was then, though. Over the last few years, markets around the world — as well as the outsourcing industry itself — have evolved dramatically, giving companies a whole new set of considerations as they ponder where, when and how to outsource specific operations.
“Companies that select services from an offshore location nowadays will do so for a variety of reasons,” says Akiba Stern, a partner with New York-based Morgan, Lewis & Bockius, who assists clients with this process.
These include costs and the skill sets of the workforce, as well as the overall operating environment — the legal system of the locale, the government in force, whether the infrastructure is reliable, and plans for its future development.
However, the weight given to each of these factors varies from industry to industry and client to client, Stern tells CRM Buyer. In practical terms, what this means is that two very similar firms could opt to outsource operations in completely different markets.
“India, for instance, is still a great location for business process outsourcing and repetitive tasks in the financial services and human resource area,” he notes, “as well as traditional IT work such as code writing — anything that can be put into a protocol and followed by workers.”
On the other hand, it is well known that the country is not building up its related infrastructure as much as other locales — such as China, to name one example.
“In some cities in India, people are literally choking on the growth. There are not enough roads — not enough bandwidth for some operations,” Stern says.
Other selection criteria are less clear-cut — or rather, less quantifiable than infrastructure development — but nonetheless still resonate strongly with firms, Raj Ganesan, director of corporate performance for the Hackett Group, tells CRM Buyer.
“Look at what is happening in Latin America. There is a greater comfort level with these markets for U.S. companies to outsource operations there now, compared to five years ago,” he says.
As one example, Ganesan points to the insurance industry, which has begun to outsource back office operations to Uruguay. The choice, for those unfamiliar with the market, might seem a bit odd. However, Uruguay has a very strong financial and banking industry — it has often been called “the Switzerland of Latin America.”
Other “soft” reasons to opt for a particular location include a company’s need to deliver 24-7 customer service. Many Chinese firms are locating their contact center operations in the U.S. — acquiring contact centers in many instances — in order to support manufacturing operations in China, notes Ganesan.
“These are much smaller contact operations,” he says, “designed to help customers track a specific item that has been shipped from their factories.”
Previously, such service was not made available, he explains. “But over the last few years, the expectation of service on the part of the buyer has increased — and the costs of interacting with customers at this level have dropped.”
There has also been a wave of acquisitions on the part of Indian outsourcers in the Philippines and in China for the same reason, he adds. “Manufacturers around the world have recognized it is important to provide a front end to their operations.”
Growth by Acquisition
Indeed, mergers and acquisitions in this space are dramatically realigning the services vendors are able to offer, says Frost & Sullivan Industry Analyst Michael DeSalles.
“The larger providers are gobbling up smaller firms to keep up with the demand of their customers,” he tells CRM Buyer. “They want to build out their capacity and maybe acquire a new customer base.”
Many of these acquisitions have been driven by the need of outsourcers to target a particular market or language segment. For instance, companies seeking to market to the U.S. Hispanic community might acquire a contact center in Central America or a city where there is a high percentage of Spanish-speaking natives.
Other acquisitions have been driven by the need to service a new business line that a company has decided to hand over to an outsourcing operation. For example, Hollywood has been outsourcing its animation work on a growing basis, Ganesan says, and companies are scrambling to develop this capability one way or another. BPO centers in India, in particular, have been receiving a lot of this work, he says.
Low Costs Still Count
The cost structure of outsourcing is still of concern, Stern says — and in some scenarios, the traditional low-cost markets remain at the top of many firms’ lists, even if the skill sets involved have changed.
For instance, Mexico was once seen as the low-cost locale for manufacturing products that would eventually be reshipped back to the United States. The maquiladora strategy of outsourcing manufacturing has lost some of its appeal — mainly due to China’s lower cost structure and changing investment laws — but Mexico is still considered low-cost enough for other operations.
For instance, Stern notes that a lot of litigation support — back office operations in which documents are scanned and filed, or otherwise delivered to the necessary storage locations — is now based in Mexico.
“The country is still a top consideration for a process with a high logistics cost,” he says.
Skill Sets Matter
Basing a decision solely on costs, though, can be a mistake. For instance, many firms set up outsourcing operations in Canada when the exchange rate was more favorable, Stern notes. To be sure, some — but not all — of these firms have since moved operations elsewhere.
“If you are going to invest in long-term training, in the building infrastructure and so on, smart firms do not reverse their decisions willy-nilly and automatically jump to the lowest-cost environment when a new development arises,” reasons Stern.
Some firms put a far greater premium on the skills available than the related costs of a locale. Israel is a strong outsourcing center for R&D, Stern observes, with high-tech companies from Microsoft to Motorola having invested there.
“It is the same with Singapore,” he adds. “Sure, there are certain activities you wouldn’t locate in Singapore, but a lot of firms feel comfortable with its operating environment — and that is what they value as they make their decision.”