The Evolving Global Landscape. Understanding offshoring risks and opportunities

Transcription

1 The Evolving Global Landscape Understanding offshoring risks and opportunities

2 2 Advance Offshoring remains an attractive option for companies seeking to reduce cost, access talent or improve global delivery capabilities. In the coming decades there will be an increasing number of companies seeking to deploy business processes to offshore locations, and as competition in these locations increases, the offshore landscape will evolve in terms of both geographic options and complexity. Evolution of activities supported globally Early in the evolution of offshoring, companies were seeking a select few global locations that achieved low cost with acceptable risk. Over time, as companies realized success in supporting business activities from distant locations, they started to consider offshoring higher-value, more complex business processes. Today, even the most sophisticated activities in an organization are considered for deployment to many of the world s markets. Offshore maturity concept and location Offshore maturity refers to the evolution of business activities in a given market from the initial investment phase to a state of maturity. When a business process is first introduced into a new offshore location, it is considered a pioneer activity, meaning there are relatively few comparable offshored activities supported in the market. Over time however, as the number of companies deploying similar activities in the market increases, a trained and skilled labor force with relevant competencies emerges. In certain instances, rapid expansion of like activities results in an oversubscription of the labor force that is capable of supporting the activities, thus resulting in a saturated labor environment where demand for talent exceeds supply. Labor conditions tend to be the primary indicator of an offshore location s maturity, whether it is pioneering, emerging, established or saturated. Because certain business activities may require Figure 1 Processes supported offshore R&D Engineering Transaction processing and shared services Inbound and outbound voice Application development maintenance

3 more than one labor profile, a single location may represent more than one phase of maturity. For example, the labor supply in a given market may no longer be able to meet the demand for qualified call center employees, therefore it is considered saturated. Yet the same market might have only one or two companies supporting local engineering activities, and therefore that market would also be considered pioneering. Figure 2 illustrates the concept of offshore maturity. Labor conditions tend to be the primary indicator of an offshore location s maturity, whether it is pioneering, emerging, established or saturated. Figure 2 Offshore maturity concept 4 3 R&D Engineering Share Services Call/Contact center ADM 2 1 TIME 1 Pioneer 2 Emerging 3 Established 4 Saturated Low number of multinational companies offshoring process Nascent labor force Low levels of competition Lower wage escalation Growing number of multinational companies offshoring process Expanding qualified labor force Increasing levels of competition Increasing wage escalation Established presence of multinational companies offshoring process Trained labor force Increased competition Higher employee turnover More choice of employment for employees across experience level Similar characteristics as established but higher levels of subscription for talent (demand) than the market can supply in the business process Indicators of talent shortages including turnover, declining tenure, increased wage pressures, challenges in recruiting, etc.

4 4 Advance Expanding global options As business activities reach saturation in legacy offshore locations, access to the right labor becomes more challenging. In response to these declining labor conditions, companies have explored, and governments have promoted, a broader set of location options for investment. However, as this list of emerging options grows, it is important to note that the value propositions and labor profiles for each location vary significantly especially depending on the activities being considered for deployment. Figure 3 below provides an illustration of some of the more solicited global locations and their process orientation. Figure 3 Sample global landscape With the number of available location options growing exponentially, it has become increasingly important to align the business activities targeted for offshore deployment with the location s ability to support those activities.

5 Aligning business requirements with location With the number of available location options growing exponentially, it has become increasingly important to align the business activities targeted for offshore deployment with the location s ability to support those activities. This alignment between labor needs and market capabilities often determines what is supported where. Determining, however, where to deploy operations is easier said than done, usually because the list of possible locations is extremely long and the qualitative nature of variables requires significant research for even an initial high-level evaluation. Some of the more important considerations include cost, ability to source the right talent in the needed scale, ability to retain talent brought into the organization, labor regulations and impact on the flexibility of operations, the quality of acquired talent, and the impact of collective bargaining on operations. Figure 4 provides an illustration of the business requirements and location alignment concept. Figure 4 Business location alignment concept Cost (5 = Low cost) 5 Regulation (5 = Less regulation) 3 Ability to scale (5 = Many candidates) Company preferences 1 Location conditions 1 Unionization (5 = Low unionization) 3 Ability to sustain (5 = Low turnover) 5 Quality (5 = High quality)

6 6 Advance In an ideal world, an organization would find a location with prevailing labor conditions in complete alignment within company requirements, but this is rarely possibly never the case and trade-offs are inevitable. Therefore, it is important to prioritize labor considerations in the location decision process and to obtain insights that enable a holistic and informed decision. From a more granular perspective, each category of labor considerations requires a detailed review to fully understand the parameters, opportunities and constraints associated with a location. Listed below are the key labor considerations that represent must understand attributes that require assessment prior to investment in a market. Figure 5 Must understand labor considerations Cost considerations Base compensation Shift premiums Months compensation Benefits load Profit share Productivity Hours worked Wage escalations Overtime premiums Bonus Ability to source Talent availability (language, education, experience, process acumen) Time required to ramp Strategies to improve attraction of employees Ability to sustain Competition for talent Reasons for employee turnover Retention strategies Alignment of HR model with market expectations Quality Related experience Formal training Productivity Work ethic Innovative capacity Unionization Requirements for establishment Union structure (independent vs. industry) Restrictiveness / Flexibility Opportunity to Strike (permitted vs. prohibited) Regulation Hours Overtime Holidays Maternity/Paternity leave requirements Dispute resolution process Termination process and timeline

7 Predicting the future It is clear that offshoring business processes will continue for the foreseeable future. The trend will likely be closely tied to the rate of implementation of ERP platforms that enable organizations to manage their global businesses. Understanding the basic principles behind operating margin improvement in the delivery and execution of Selling, General and Administrative (SG&A) processes help us predict global trends. In short, labor costs which vary greatly from location to location will continue to be one of the most significant factors influencing location decisions. With this context, we anticipate the following, overarching trends: Established locations will continue to migrate up the value chain and increasingly companies will deploy more complex business processes in these proven cities. Companies supporting less complex / lower value processes in the same markets may encounter issues related to labor attraction and retention. As a result, there will likely be a shift in focus for new investors to secondary markets. Companies with more sophisticated off- shoring models will continue to seek ways to drive margin improvement. In markets with highly-competitive labor costs, some of these companies will divide activities into smaller units of work to employ a less educated, less expensive labor force when appropriate. Business process outsourcers will likely continue to pioneer new geographies in Asia, Africa and Central and Eastern Europe, and the Middle East. Many high-demand locations will experience increased labor costs as the demand for qualified talent exceeds supply. Locations with multi-lingual capabilities will become more desirable as companies migrate to regional delivery models and strive to support business processes currently embedded within in-country business units in shared service environments. Locations capable of supporting German, French, Dutch and Nordic languages will see increased activity. In an ideal world, an organization would find a location with prevailing labor conditions in complete alignment within company requirements, but this is rarely possibly never the case and trade-offs are inevitable. As many historically low-cost markets become saturated for certain business processes, companies will choose to trade-off higher risk and arduous labor regulations for lower labor costs. Companies will learn to adapt human resource models to challenging labor environments (more difficult labor regulations, union presence, quality issues and/or sustainability issues), as familiarity with emerging markets grows. Less complex business activities supported in established offshore destinations will ultimately need to be complemented with higher-value activities in order to retain a competitive position in a market, or companies may leave for greener pastures.

8 8 Advance From a geographic perspective, we foresee the following trends: North Africa will see increasing investment for Call Center, Shared Services and Engineering activities. East Africa will see initial investment from BPO companies and then large multi-nationals with a growing presence on the African continent. Indonesia will see increased investment in back office operations as the economy continues to grow and companies seek alternatives to India, the Philippines and Malaysia for English language in the Asian theater. Business process outsourcers will hire students in Central America rather than graduates to avoid the post-graduation compensation premiums and maintain cost competiveness with Asia. Additionally, BPO s will continue to seek out lower market risk options in Central America even though it will require a cost premium. In Central and Eastern Europe, decreasing populations coupled with growing demand for talent will result in increased solicitation of secondary and tertiary markets in the region. In South America, except those already being considered for investment, few new location candidates will emerge as viable options with the exception of Colombia, which will likely see increased levels of solicitation. The impact of offshore trends on CRE actions Offshore maturity When selecting locations for less complex business processes, choose geographies that yield a longer value proposition and where there is less competition. Determine where there is an opportunity or possibly a need to introduce more complex or value-added business processes to a location. Anticipate a shorter value-horizon associated with a new location as a result of increased competition and downward pressure on labor conditions. Recognize the need for an increased risk threshold, as the locations that offer low-cost value propositions will continue to transition into less developed countries. Location Alignment Before selecting a location, map business needs to a location s ability to support the proposed activities to ensure alignment. Conduct a robust analysis of candidate locations, targeted around the major labor considerations referenced in Figure 5 (for example, be sure to factor labor salary escalation and currency exchange considerations into the location analysis). Understand trade-offs to be made between the opportunities and risks offered by a candidate location. Upon selection of an offshore location, identify alignment gaps where HR or other infrastructure strategies might be required to adapt or overcome market conditions. Long-Term Strategy Understand the implications of business trends to help shape your offshore strategy, especially in terms of aligning location with business goals and being prepared for the impact of competition. Think beyond your next location move and map out a multi-year strategy informed by your business objectives and the dynamics of the global marketplace. Recognize the growing need for multilingual capabilities in the development of your offshore strategy. This will become increasingly important as multilingual labor increases in solicitation and cost due to the continued offshoring of business activities to support global operations.

9 Conclusion The offshore landscape will continue to shift as investment conditions in legacy and emerging locations evolve. The fluid nature of investment conditions and the speed at which the locations move through the maturity cycle, will require consistent monitoring in order to understand the implications of these trends and to realign the value horizon for a given location. The follow-theherd mentality seen in the global marketplace will dictate that companies create strategies to remain competitive in selected locations. Opportunity and risk will need to be more proactively monitored to remain a step ahead of the market and competitors. Embracing the offshore opportunity will result in improved operating margin and operating platform efficiency. Other Jones Lang LaSalle publications you may also be interested in: Perspectives on cross border location strategy - How to conduct a business climate assessment of emerging markets for manufacturing Perspectives on cross border location strategy - How to conduct a financial assessment of emerging markets for manufacturing Perspectives on location strategy - How to evaluate offshore locations for IT-enabled services Perspectives on occupancy strategy - New rules in optimization & strategy, how frequency of use metrics can improve occupancy plan Perspectives on occupancy strategy - Frequently overlooked opportunities for long-term cost savings: business process bifurcation Visit to view our complete library of publications and research. Matt Jackson Managing Director matt.jackson@am.jll.com Matt Jackson is a Managing Director in the Jones Lang LaSalle Strategic Consulting Group. He has 15 years experience assisting corporations with the global configuration and optimization of corporate operations to achieve revenue, margin and innovation objectives. His specialities include global business platform design, cross border direct investment strategy, manufacturing platform strategy, office platform strategy, SG&A process configuration, structural cost reengineering, work place strategy, location strategy, incentives negotiations and site selection. Shannon Curley Associate, Strategic Consulting Shannon.Curley@am.jll.com Shannon Curley is an Associate in the Jones Lang LaSalle Strategic Consulting Group. Ms. Curley is responsible for assisting companies with global strategy, cross border direct investment, portfolio strategy and occupancy optimization. As a leader in global location strategy, Ms. Curley s project experience spans all world regions with particular expertise on global labor markets. She has conducted in-field due diligence for clients in numerous countries, including Argentina, Brazil, El Salvador, Chile, China, Indonesia, Malaysia, Mexico, Philippines, Singapore, Switzerland, Thailand, Turkey, and the United States.

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