Selecting the right delivery location

2007-10-26 16:43:39 Source :A Morgan Chambers Article

Today, global sourcing is a proven delivery model. In fact, it's a necessit for organisations looking for a cost effective, scalable, and high quality sourcing solution, whether it's outsourced or in-sourced. A key element o the global sourcing solution is selecting the right set of delivery locations.

Why is selecting the right location important?Regardless of whether your services are delivered bya third party or through your own offshore captive service centre, you need to control the process of identifying, evaluating, negotiating and managing the supply of services across all of your delivery locations in order to realise the benefits and mitigate the risks associated with global sourcing.

Costs

There are many offshore/nearshore locations that seem to have a cost advantage over Western European countries.Offshoring to India or China or nearshoring to Eastern Europe can lead to substantial savings. A snapshot of the differences when it comes to labour costs (as shown in figure 1 below)highlights the potential savings that can be easily identified.However , the labour cost differential is just one part of the story- and instead of looking at how things stan today, it is crucial to understand if these cost benefits are sustainable. Many of the key offshore delivery locations are witnessing high wage inflation rates. Wage inflation in India is currently on average 15-20 per cent with Chinese Tier 1 cities witnessing wage growth at 10-15 per cent. So far , offshore providers have been able to offset these wage increases by maintaining the resource pyramid and by driving through operational efficiencies to maintain required margins. However , sustaining billing rates over the next five to seven years is going to be challenging for many of these providers. The question of sustainability of cost savings is critical for customers. Therefore an in-depth analysis of various factors influencing costs is necessary to predict whether these factors would diminish the cost advantage currently offered. Lack of such analysis may compel organisations to choose locations that offer optimum cost savings in the short-term but may prove to be expensive in the long-term. A long-term contract with a provider needs to ensure that the choices made are sustainable for both parties. Moving locations at a later date is also not desirable, as it may disrupt services, including a possible change in the delivery team.

Location and service provider maturity

Another important consideration is the overall maturity of the location for the kind of work being outsourced. Various offshore/nearshore locations are developing a strong spike for specific functions or service areas, due to talent availability, location proximity and other factors.

India, for example, has been a hub of IT ADM work and is also witnessing increased BPO activity, in particular for F&A, call centre, and industry-focused services. However , most of the work, especially BPO, is originating from English-based locations.

China, on the other hand, is constrained by English language capabilities but is countering this by becoming an important service delivery location for South East and Far Eastern clients. Even the domestic booming economy is becoming a significant revenue generator .

The Philippines has also become an important destination for call centre work, owing to availability of English speaking resources with accents similar to the North American customers. While Central and Eastern European locations are becoming an important hub for work originating from Western European countries, especially those requiring language capabilities beyond English. These nearshore locations are also attractive due to cultural alignment with Western European countries and in some cases legal considerations like EU Data Privacy Laws are driving work to these locations.

Selecting the right location is an important consideration as a wrong choice may lead to:

1. Service issues - if there is a lack of required talent o the overall business environment is not conducive in that location.

2. Business case not being met - owing to inflationar pressures, attrition or other factors resulting in cost increases.

3. Lack of scalability- if there are inadequate resources.

4. Legal implications - certain legal provisions in th originating location may prohibit certain processes going offshore.

5. Overall project failure - due to any of the above reasons Evaluating locations becomes all the more important in the case of a captive or in-sourced solution, as buyer organisations cannot leverage a supplier' s delivery locatio experience or portfolio and do not have third-party contractual provisions against the aforementioned risks.This does not imply, however , that location evaluation is unimportant in the case of an outsourced solution. A detailed location analysis can help in ensuring that a suitable and informed decision is being made based on the organisation's current and future requirements, and potentia cultural issues are thoroughly understood. In addition, such analysis can be used as an important tool in price negotiations as it helps benchmark a provider's cost base

What factors should be considered when selecting delivery locations?

Now that we have established that location selection is important, how should the buyer organisation select the right set of locations?

Evaluate cities, not regions or countries First and foremost

it is important to understand that a comparison needs to be undertaken between cities as Tier 1, 2 and smaller cities vary significantly within a country. The answer may be different, for example, when Prague is compared with Delhi or Chandigarh (a Tier 2 Indian city). On cost, a Tier 2 Indian city may have an advantage; however it may lose out on employable talent availability.

Cost advantage and its sustainability

As cost advantage through labour arbitrage is a major reason for adopting near or offshoring, it goes without saying that the quantum of cost benefits between different locations is a major criterion. However , as discussed earlier , another important consideration is sustainability of this advantage. Inflation rates, supplier operating model, other factors impacting cost like employee attrition, and possible ways to tackle these issues need to be explored.

Other factors impacting location attractiveness

Location attractiveness needs to be evaluated considering your specific organisation's situation, for example, wha functions are being offshored, which geographies are you in, what skills do you require, etc. Some of the elements to be considered while ascertaining attractiveness include:

1. Availability of employable resources: It is important to understand the employable population, not just the overall resource pool. For example, though China has a total of 3 million fresh graduates per annum, much higher than the Philippines or even India (2.5 million), the number is much lower if the work requires English-speaking skills. Similarly, a Tier 2 Chinese city may have a large graduate pool; however employability of these resources depending on skill set required needs to be ascertained.

2. Political and business environment: Stability of the political environment, rule of law, government flexibility, labour restrictions, and government's commitment to outsourcing are areas that can have a huge impact on your future offshoring.

3. Infrastructure: Telecom, electricity, roads, airport connectivity, hotel availability are all examples of infrastructure that need to be assessed for suitability, sustainability and cost.

4. Government incentives: Here tax breaks, subsidies, and other incentives for the IT/BPO sector can make a particular region more or less attractive for your organisation.

5. Legal implications: This goes without saying. It is important to understand the implications of any law impacting the feasibility of offshoring in-scope work. 6. Service provider maturity: In the case of an outsourced solution, maturity of the service provider landscape, e.g. revenues from outsourcing, number of providers with relevant scale of operations, employee size, quality orientation, all need to be evaluated.