Along with the promise of IT cost reductions and the potential for increased efficiency made possible through outsourcing also comes the need to understand risks such as geopolitical stability and scalability when sending critical operations overseas. Deciding where to outsource today is about more than just labor arbitrage.
While traditional players such as India and the Philippines remain strong destinations for IT and business process outsourcing (BPO), several other offshore regions are catching up as viable options for a number of business functions. Countries in Latin America, Asia, Europe and Africa continue to develop their national capabilities as technology and business process outsourcing providers, while global vendors continue searching for opportunities to establish service centers worldwide.
In addition to traditional factors such as language, education and connectivity, there is more that a financial institution should consider before outsourcing to a different country, according to Sriram Prakash, a senior manager with Deloitte U.K. "The three top criteria for selecting a location are cost, availability of skills and scalability," asserts Prakash, who says India still has the advantage in terms of scalability. "This is in contrast to if you asked the same question five years ago," when much of the emphasis was still on language proficiency and education, as well as cost.
It also is important to consider political stability, adds David Rutchik, partner with Pace Harmon, a San Francisco- and Washington, D.C.-based outsourcing advisory firm. "Another [consideration] is basically respect for the rule of law," he notes.
"It sounds amorphous, but it's a big deal," Rutchik continues. "That's what's held back places like China where intellectual property is not as respected - privacy rules, enough transparency, ... personal customer information rules."
Another consideration might be time zones. While customer-facing operations such as call centers can be operated 24/7 and are not dependent on time of day, Rutchik explains, when it comes to things like application development, it can be beneficial to have a core team working roughly the same hours as offshore partners.
While a number of factors determine a good fit for financial institutions, ultimately decisions about where to locate outsourcing and BPO operations come down to results, says Sudipta Mitra, head of business process outsourcing for Wayne, Pa.-based technology and software provider SunGard. "That's primarily location independent," Mitra says. "A lot of financial services providers are getting to that stage where they are looking at outcomes rather than the whole process of outsourcing."
Depending on the desired outcome, though, various regions can offer unique opportunities for IT outsourcing and business process outsourcing operations, as we examine in the pages that follow. And selecting the right outsourcing destination can go a long way toward determining an engagement's success. >>
1. Continental Asia
India remains a dominant player in IT outsourcing and BPO. It has the population, education, scalability and stability required by many companies' IT operations, Deloitte's Prakash says.
But, "Although India is hugely dominant still, for the first time there was a slight dip in growth and cost savings," Prakash notes. "That's attributed partly to attrition and other locations that are fighting for a bigger share." Since the 2008 Mumbai terrorist attacks, there also is a shift for financial services firms to locate more operations in tier two cities, such as Jaipur and Chennai, or in Kolkota, which is a tier one city that was slower to develop than Mumbai and Bangalore, Prakash adds.
Like India, China has a large workforce and offers the type of scalability that smaller countries simply can't equal. While China and Taiwan are known for manufacturing, they can be a source of IT outsourcing as well, according to SunGard's Mitra.
"Obviously the China market is a huge draw," Mitra says. "Market penetration should not be ignored either. Going to a separate market, sometimes it's easier done if a provider goes into that market [first]."
With China, however, language challenges and intellectual property issues, for example, can stand in the way, Pace Harmon's Rutchik stresses. "We have done projects where some of the offshoring has been done out of places like Shanghai that are modernizing more quickly," he comments. "I don't know if it'll ever catch up to the country's manufacturing, partly because that's so far ahead."
2. Southeast Asia
Among the top benefits of doing business in Southeast Asia is the local population's general skill with the English language, says Kalpesh Master, SunGard managing partner, global delivery. "Philippines, for example, has been very successful for call center duties because of English-speaking capabilities," he says, comparing the country to India, which continues to grow more rapidly in areas that are technically sophisticated.
Pace Harmon's Rutchik agrees, pointing out that the Philippines and Malaysia are leading growth in the region. Because of the Philippines' past as a Spanish colony, he notes, a high number of employees have some skill with Spanish as well as English.
Meanwhile, Malaysia is expanding beyond mere call center work. "We are seeing places like Malaysia move out of the contact center space and start becoming a place with more technical capability," Rutchik adds.
Another reason for the region's success as an outsourcing provider is the general understanding of U.S. culture and the ability for some employees to mirror the accent, says Deloitte's Prakash, who predicts that Malaysia in particular could grow rapidly in the coming years. "Close to Malaysia, Singapore is fast becoming the hub for capital market space," he adds. "A lot of major capital markets firms have relocated their IT and BPO to Singapore."
Prakash cautions that a potential disadvantage for outsourcing in the Southeast Asian countries is their geographic size and the limited flexibility to scale operations as a result.
3. Latin America
Some opportunities for offshoring in the Western hemisphere exist in Central America and South America, in countries such as Costa Rica, Guatemala, Brazil, Argentina and Chile. Because of time zones aligned with North America, doing business with South American countries means there is not a large shift in working hours for overseas operations, SunGard's Master observes.
"Looking at the trend in the South American market as well as the eastern European market, we are looking at those destinations from a delivery location perspective," he says.
"Time zones certainly can be relevant, but it really depends on what they're offshoring," adds Pace Harmon's Rutchik. "Things that are customer-facing - that are 24/7, like a call center - time zones are not important because they are going to staff it appropriately. With things like application development, it's good to have a core team and offshoring partner working more or less in the same hours. That's made places like Latin America and South America attractive. The other is language ability - especially to be able to speak Spanish."
Rutchik says general geopolitical stability in South America and Latin America is another advantage, with the exclusion of Mexico, which has had more security issues than many countries in the region.
While Brazil doesn't have the technological prowess of a country such as India, SunGard's Mitra says, it is an option for manufacturing and product testing. "China and Brazil have very complementary skills in that sense," he says.
According to Pace Harmon's Rutchik, however, Brazil presents a challenge because of its strong currency and language barriers.
4. Eastern Europe
For European banks and financial institutions, as well as some North American-based companies, Eastern Europe presents an option for outsourcing that is advantageous in proximity, education and language proficiency. Favorable governments also make doing business in those countries somewhat easier, Deloitte's Prakash says.
Eastern European governments increasingly are promoting the region as an option for outsourcing to its neighboring countries to the west, he notes. "They give tax breaks," he adds. "In a way, that's how the Indian IT industry flourished."
Adds Prakash, "It's the next best bet in terms of hot spots - for one, purely from a supply and demand equation; but it's also about which of the governments are most favorable [to outsourcing providers]."
For European businesses especially, language plays a part in choosing Eastern European outsourcing operations, Pace Harmon's Rutchik observes. "You can find enough French speakers in Eastern Europe where there's good arbitrage, plus it's closer to home," he explains.
Deloitte's Prakash cautions, however, that exchange rates can fluctuate within Eastern Europe, which can hurt the cost advantages of outsourcing to the region.
Another region that's grown recently as an IT outsourcing and BPO destination is Africa. South Africa, in particular, has been promoting itself more recently and gained attention from hosting the 2010 World Cup. "South Africa from a technical perspective is the furthest ahead, and there is more and more South African offshoring being done," Rutchik says.
Some countries in northern Africa are an option as well. "Northern Africa continues to play a big role," SunGard's Mitra says, pointing to Ghana, Kenya and Tunisia as up-and-coming outsourcing destinations.
While cost can be favorable in Africa, there is less infrastructure and some additional political instability within its nations that are slowing growth of outsourcing capabilities, Deloitte's Prakash says. "Ghana is relatively stable, and some U.S. companies have gone there," he adds.
But outsourcing to Africa is not occurring on the same scale, he contends. "Africa is potential, but it's not [there] in the near future."
Further, Prakash acknowledges, he is aware of some U.S. banks that have pulled out of South Africa because of security concerns.