Offshore Locations: Are They the Right Decision?
1 May, 2004
By: Philip CohenPart 1: Offshore Locations: Are They the Right Decision?
Offshore outsourcing is a topic as hot as it comes in the services segment of the market. With U.S. elections only months away, and with both the presidential candidates promising to protect its nation’ jobs (and similar political promises in the United Kingdom, France and other countries “losing” service jobs) the question arises whether the current trend of moving service jobs offshore will continue to accelerate.
This article is not about politics but, assuming the continued growth of the outsourcing trend, looks at:
• The factors that determine the markets in which the outsourced jobs will be established.
• Key variables that determine the choice of location.
• How potential offshore locations should best market themselves for success.
Clearly, what the industry is now experiencing is a major shift of job opportunities from the well-to-do first-world countries to less developed, low-cost countries. This article describes and reflects this trend as presented to a meeting of the United Nation’s Conference on Trade and Development (UNCTAD) , with a goal of providing guidelines for you in your location decisions.
The Big Shift
It took more than 200 years, from the invention of the Spinning Jenny in the 18th century until the latter half of the 1900’s, before industrialization shifted manufacturing processes from wealthier western nations to low-cost countries that could produce the same goods at a lower price, without sacrificing quality. Today almost everyone buys clothing and household products made in distant countries without even thinking about it.
In the services industry, (call centers included) the big shift away from developed nations to underdeveloped countries is now underway -- and the transition will not take two centuries to complete. It’s no secret that services suppliers have started to scan the world to see where their high quality services can be produced at lower cost.
Whether the interest in India, China, Philippines, the Caribbean among others will continue may be a heated political debate – but if market forces are allowed free rein, it is evident that service jobs will continue to move abroad. Regardless of where you personally stand on the issue, the following are important factors that companies (investors) must consider if they are to achieve success when locating abroad. For some, the internal strife and job loss to the stateside community in which their center is currently located (or will potentially be located) will be too great. For others, the benefits of producing a same quality product at a lower price will outweigh other factors. Either way, understanding the realities of site selection issues abroad is critical in the decision making process.
Hard Factors
There are many hard factors (facts) that determine where a business will relocate before any site selection decisions is made. These include:
• Telecommunications. A prerequisite for any service operation is a modern, robust telecommunications infrastructure. It must have plenty of bandwidth and disaster recovery capabilities, fully able to transport both voice and large volumes of data traffic. The cost of using the telecom’s network must also be acceptable –with the surge of IP-telephony (the use of the Internet to carry pictures, text, data and voice telephony) - there is likely to be a major new pricing structure for telephony, as operators lose out on their older price per minute call structure.
While the cost of telecommunications is important it is not overriding. The major cost of all services production is the human element. If the labor costs are low enough, the company seeking a new site may be able to afford to pay more for their telecommunications. India is a good example of a place where the infrastructure is basically sub-standard and expensive, but where the workforce is so inexpensive that it is profitable to build a technical infrastructure from scratch.
• Labor/human resources. In high income nations labor accounts for 60-70% of the total cost of many service organizations. For an offshore destination to appear attractive it must prove it has a sufficient supply of labor for the incoming center. It must also allow for the fact that the investor, if successful, will most likely want to expand and cannot have its expansion inhibited by a lack of suitable employees. Further, the economic development group must provide facts on the number of people available with secondary and/or tertiary education who also have IT-proficiency. If servicing multiple countries, there must be quantified evidence of the availability of staff to handle relevant languages.
The cost of labor is more than the wage, and accurate information regarding the cost the widely variant and unexpected additional costs must be considered as well. Some of these might include:
• Pensions, sickness benefits, meals, transportation and other costs.
• Holiday (including vacation) time off – how much is expected and whether it is it paid or unpaid.
• Hours worked - how much time off are employees entitled to, and how many hours a week/month/year is an employee expected to work.
• Cost estimates - have they been translated from one currency to another, and what is the volatility of the currency market (which can create chaos with the best cost calculations).
Pull Quote: The difficulty of recruiting management staff is often severely underestimated!
An additional factor that many employers should understand is the degree of unionization in the work place. Further, when considering labor issues the potential center considering the offshore investment should look at he availability and conditions for service staff; whether there is a source and supply of first and second line management and; what level of experience managers have and what level of remuneration they expect.
These issues can be problematic in locations that are just beginning to attract service industry organizations – they may have to show willingness to provide work and residence permits for management personnel for a considerable time, until this expertise has been acquired with domestic resources. The difficulty of recruiting management staff is often severely underestimated!
• Energy. Developed nations take it for granted that when the light switch is flipped or the power button is pressed, the electricity will flow, and lights and machines will turn on. This is not the case in all countries. And while, this seems like a showstopper – it need not be. If the potential investor knows that there may be power cuts, then they simply include the cost of back-up generators in their budget – which may still be very favorable compared to an onshore solution. The cost of energy is important too.
• Office space. What office is available? What does it cost (be sure to check the rate of currency conversion)? Is it already wired and ducted for phone and IT? Is there proper air-conditioning and heating; and is this included in the monthly cost? Should it be bought or rented? How long a lease is required? What parking space is available? What is the area like at night? Is it safe for late shift workers going to and from the building? What is the accessibility by bus or other public transportation? These are some of the questions that should be asked along the way.
• Transportation for Center Executives and Customers. It’s important to consider the transportation infrastructure for site visitors once located. What are the transportation facilities to the country and its cities? Are flights direct – if not how many stopovers are necessary? Which airlines operate? What do they cost? How frequent are flights? How far is the city location from the airport to the proposed site – and what transportation is needed to make the trip? In what condition are the roads and traffic? Are rental cars available? Is there a hotel of acceptable standard? If the transportation facilities and hotel are going to be problematic then management and clients are not going to enjoy the experience of visiting the offshore location. This means visits may be less frequent and shorter than if the transportation and facilities are pleasant. Is this acceptable?
• Other amenities. Apart from the business facilities specifically – office space, transportation and hotels - what can visitors do in the evening or at weekends? Are there available activities available such as fishing, diving, golf, or pleasant restaurants? Visiting clients or staff from headquarters may need to spend time over a weekend at the offshore site, and it is important that their experience is an enjoyable one. Do not forget to check into this aspect of the decision.
• Government awareness/willingness. It’s always preferable when the potential location has a government aware of the call center industry, and is willing to support potential operations, as it presupposes an understanding of the needs of the industry. Governments that have demonstrated their desire to attract business have established a single point of contact to help decision-makers with all their questions and issues. These governments that have been demonstrably more successful in attracting business than other countries.
• Taxes/grants/subsidies. Very tangible proof of the government’s willingness to attract investors is their package of financial incentives. Potential offshore call centers need to know the benefits that are available and the conditions under which they work. Many times the benefits are negotiable (more negotiable with the principals than the consultants). However, they are also difficult to quantify with any degree of accuracy until some time after the investor has moved in – they should only be seen as an indication of what may be expected. As KPMG, note very succinctly in its report “A comparison of business costs in North America, Europe and Japan” -
“There is no defensible basis for assuming in advance whether any jurisdiction will be more or less willing than another jurisdiction to provide discretionary financial incentives. There is generally no before-the-fact-basis for estimating accurately the value of incentives any jurisdiction will ultimately provide, without entering into negotiations over a specific investment proposal.”
In my research on behalf of clients I have sometimes met with government agencies where they apologize for the lack of specific government incentives – but where the economics of a proposed investment are so good anyway that there is no need for additional benefits. But, do not be fooled– you must look at the overall picture.
• Telecomunications carrier. The general issues of telecommunications were addressed earlier in this piece. Remember to note that if the location can demonstrate that it has a major telecommunications carrier, or even several, who understand the call center business it will be advantageous to you.
• Political stability. Any incoming investor will ask for reassurances that if there is a shift in the political majority they will still be able to enjoy the market conditions that existed when they chose their location. Obvioulsy a country that has a history of political instability, and even violence, will have greater difficulty attracting investors.
• Time zones. Potential call centers may be interested in using time zones as part of their investment strategy. India, for example, can claim to be able to service U.S. customers in India’s daytime hours, but this is while most U.S. citizens sleep; the Caribbean can argue differently - because they are on similar time zones as the United States, they are in a perfect position to serve a U.S. customer base during the U.S. time, when people need service. Time zones cannot be changed – but investors will include in their decision the impact of time zones on their proposed outsourcing venture.
• Other factors. In addition to all the items above there are other factors that will be weighed into the decision, though they are perhaps of less importance. Weather conditions – what is the (historical) likelihood of an operation being closed down by a hurricane or by heavy rains (and how do local businesses handle this sort of situation?)? Cultural compatibility – do the people in the potential outsource location understand the mindset and the way people think and talk when they make/take calls at the service operation? References – are there any people who already have experience of the location, who can give some “inside” on what it is really like? Keep in mind - too many references are not necessarily a good thing – there may be too many competitors already there, making it hard to recruit and retain staff. Similarly, lack of references might well mean that the investor is moving into an uncharted market and can therefore determine the conditions that will prevail.
Soft factors
Soft factors are the perceptions of a location’s viability, which and must be evaluated in tandum with the hard factors.
• Cost effectiveness. Cost reduction is the driving force in the offshore explosion – but just as important is the question of whether lower costs will lead to greater efficiencies. The cheapest alternative may not always be the most cost effective – a more expensive location may offer better overall value. In the light of political moves in some places not to outsource public business to organizations who have moved offshore and thus deprived the local market of labor opportunities, the best solution may be not to go offshore at all in order to capture more public business.
In the call center segment staff turnover is a constant problem, and some who have moved to locations with a large available workforce are discovering that competition for the same workforce is growing. This churn is turning the whole economic budget on its head – and the consequent cost of continuous recruitment/training and lack of experienced staff is making investors question the ultimate cost effectiveness of going offshore.
Additionally, the cost of airline tickets to and from the offshore location may have a serious impact on the operation’s cost effectiveness.
• Quality. Ultimately the call center business is about serving customers – and it the perceived level of service is as critical a factor as cost effectiveness. Do the agents speak a language that customers understand? (A good test is to talk to your taxi driver. Determine if the language intelligible. Now, you cannot make a definitive judgement based on this conversation, but if the communication is problematic, it may hint about language barriers, even though others may speak far better, and many can improve with elocution training.). You have to judge if the quality of service that agents perceive to be good correspond with what your customers will find acceptable?
• Scalability. There must be facilities and people available for the potential investor to be able to grow their business. How large are the available labor pool and office space? What is the telecommunications capacity available? How large can the operation grow before it will have problems with having outgrown the proposed location?
To Succeed
For many countries the conditions for hosting a call center are in place – in marketing terms – i.e. there is a marketable product in place. What is lacking is a marketing organization that can ensure that prospects are made aware of the location potential. What should you expect and or demand?
• A country/regional presentation must be available based on the facts indicated above, a presentation that can be shown to prospects at trade fairs or as a result of inquiries
• An inward investment organization must be established that can handle inquiries and expressions of interest competently and quickly. This assumes that any natural interface between a prospective investor and the country concerned – an embassy, a consulate, a high commission, a tourist office, a chamber of commerce, etc. - must know how to handle and respond to inquiries efficiently. Generally telephone calls should be answered quickly and letter/ fax/e-mail inquiries handled within 48 hours. The agency must also to follow up on every request for information, and staff must be competent to handle it (i.e. if it is a question about call centers they must be familiar with this industry). Unfortunately, many countries’ agencies are very undisciplined in this area.
• A marketing strategy should be available. This means that the country must both determine which companies and segments of the market it wishes to attract, and plan advertising, trade fairs, conference presentations and other marketing activities to ensure that awareness and interest are generated, providing leads and prospects that can be followed up. A quick test is, if a budget is devoted to the marketing activity, then one probably exists. If the country is not doing this, getting information regarding the decision might be difficult.
Pitfalls
There are obviously many pitfalls – but one of the most common in the belief that it is a fairly quick process to relocate offshore. Nothing could be more erroneous!
Look for a country that has at minimum of a three year perspective – it must recognize that it takes time to put together the marketing presentation and strategy, to bring the inward investment agency up to speed, to make prospects aware of what a country has to offer, to generate inquiries that can be followed up... and so on. Few countries see success in less than three years (India, which is currently so in favor, first started its activities in 1998 – but it was not until 2001 that business really started moving there). So if you’re looking at a country just developing the call center offshore opportunities make sure they have a three-year horizon if planning. It must have marketing, a long-term discipline, and the sales (short-term activity that closes the deal). Of course this is not to say that countries without a three year history are not good prospects – it simply says that you may have to do more of the legwork on your own, until the country is up to speed.
At a minimum, you should make sure that your inquiry is handled efficiently so that you can determine what information is needed and conduct a thorough investigation on your own to determine the suitability for this location decision.
Service Sector Shifts
Some of the experts predict that:
- By 2015 some 3.3 million US service jobs will have been relocated to low income countries (Forrester).
- International Business Process Outsourcing (BPO), which amounted to $72 billion in 2001 will have increased by 11% p.a. to 1.2 trillion by 2006 (IDC)
- By 2008 India will have some 300.000 call center jobs, a tenfold increase from 30,000 in 2001 (“India IT Strategies" by McKinsey/National Association of Software and Services Companies, [NASSCOM] – 2000).
Part 2: Grab Your Atlas!
Dalian, Pune and Port Louis. These are just three of the hot new centers for offshore outsourcing operations.
In an effort to keep abreast of “where in the world” companies should consider for their third-party locations, a proprietary outsourcing database (ODB) of more than 350 outsourcing companies in more than 50 countries has been prepared by Driva Solutions. It’s a useful tool since there’s a lot of consolidation happening and new companies are jumping onto the bandwagon every week. Here’s how a tool like this works:
• It helps determine “what is outsource-able?” It addresses more than just “simple applications” or “email”, but which types of contacts (ideally those not requiring escalation to your principal centers) in which customer segments.
• It lays in place options to answer “where in the world?” to go, or where to go next. It helps consider alternatives for multiple-language support, back-up plans, expansion realities several years down the line for labor availability and infrastructure, as well as evaluate how earlier efforts worked.
• It help detail “how on Earth?” companies will make this work, including contingency/seasonal plans, remote quality/customer satisfaction programs and relationship management processes.
Clearly where to go, has become an exciting vista.
U.S.-based firms started relying on third parties across the country in larger cities such as Dallas (less there now) and Phoenix (still growing), migrating to smaller locations such as Las Vegas (not so small anymore, and growing) and Fargo (too small); later, they moved some operations into Canada and other so-called “near shore” spots in the Caribbean (all growing to some extent). But then they discovered the huge untapped labor market in India, and 95 companies later, that market continues to mushroom.
Depending upon language needs, other countries and cities are springing up—Tunisia and even Lebanon for French, Cape Town and Bratislava for German, Costa Rica and Argentina for Spanish, to name a few. But with English driving most business requirements, the offshore market still shows heady growth across these countries:
• India, including newer “wired” and connected cities such as Chennai
• New Zealand: still largely underdeveloped
• The Philippines: showing new legs
• South Africa: various cities are poised to boom; we toured the country in April 2004 and will revisit it this fall.
It’s a big world out there - be sure to grab your atlas!
Note: Dalian is in former Manchuria and is attracting IT outsourcing and contact center work in Chinese, Japanese and Korean. Pune is on the west coast of India. Port Louis is the capital of Mauritius, offering bilingual English/French contact center outsourcing.
