Globalisation and turbulence in the world economy are increasingly forcing organisations to re-examine where and how they do business. And recent business activity suggests this is having a big impact on their decisions to outsource.
While more organisations are choosing to outsource their finance, human resources and procurement functions, industry insiders are reporting a shift in decisions relating to offshoring customer services, including call centres.
Responding to feedback
“Many companies have clawed back some of their business process outsourcing [BPO] operations in this area because their customers have complained that they could not understand the people in offshore call centres,” says Ilkka Korkiakoski, vice-president for strategy and transformation at IT services company Tieto.
However, locations that have traditionally had a strong presence in this sector, such as South Africa and India, remain bullish thanks to recent deals struck with international businesses. For example, online retail giant Amazon opened a customer service centre in the South African city of Cape Town in the final quarter of 2010, while earlier this year, UK-based bank Barclays announced it was outsourcing a range of back-office and call-centre roles to India.
But these locations are facing strong competition from every continent and in every time zone.
According to South Africa-based industry association Business Process Enabling South Africa Western Cape, the country has supported 10,000 offshore-related jobs over the past decade. By 2015, this is expected to rise to 40,000. It says this expansion will be driven by a new scheme from the country's department of trade and industry, which will slash operational costs. Currently, the average annual cost per full-time employee for a UK company outsourcing to South Africa is £15,000 ($24,200) to £17,000. Once the new incentives kick in later this year, this will drop to £11,500 to £13,500, enabling the country to compete more aggressively with other offshoring destinations.
A new trend?
One of the latest trends turns the standard outsourcing model on its head, as companies from emerging economies choose to outsource to G-20 nations. Earlier this year, the UAE’s Etihad Airways announced that, from 2012, it would be operating a contact centre in Manchester in the UK. The centre will employ up to 160 people and complement the airline’s existing contact centres in Abu Dhabi, India and Australia.
“Our contact centres handle about 2.5 million calls each year, and we expect more than half of these calls to originate from non-Arabic speaking markets by 2012,” says James Hogan, chief executive officer at Etihad Airways. “We looked closely at a range of potential locations in the UK and Europe. Manchester offered everything we needed, and had the added attraction of having strong, well-established business links with Abu Dhabi.”
Public vs private sectors
In the private sector, financial services firms, telcos and utility companies have been some of the most active users of BPO and shared services. Public sector organisations are also showing a greater interest in shared services. “Up to now, BPO has been outsourced to a limited extent – especially when compared with IT outsourcing – by the public sector,” says independent outsourcing consultant Dr Bharat Vagadia. “But given the austerity measures, many local authorities are considering BPO seriously, although offshoring of BPO or shared services is probably a step too far.”
Jerry Luftman, executive director and distinguished professor at the Stevens Institute of Technology in New Jersey, reveals some interesting findings in an annual trends survey sponsored by the Society for Information Management. “When we asked CIOs what kept them awake at night, business productivity and cost reduction was the number one concern in the US, Latin America and Europe, says Mr Luftman. “But in Asia and Australia it was very low down on CIOs’ worry lists. This is because in these regions they weren’t hit as hard by the recession. Their perception is very different from the rest of the world.”
Responses to the recession have also had an effect on outsourcing. While many organisations are looking to cut costs, they also want to be flexible so they can deal with fluctuations in demand. In addition, they need access to specialist skills and the latest technology as well as standardisation.
Outsourcing is also no longer the preserve of major corporations. “More small and medium-sized enterprises are focused on onshore or nearshore-based activities,” says Mr Korkiakoski. “For EU businesses, this may mean Latvia, Romania or the Czech Republic, giving cost advantages while remaining inside the EU.”
With so many public and private sector organisations examining how they can cut costs, improve processes and drive flexibility, major – and not so major – cities are signing up to become outsourcing hubs. A 2009 KPMG report identified 31 emerging BPO hotspots in direct competition with the traditional powerhouses of Bangalore, Chennai and Shanghai, which are reaching saturation point.
The locations include 10 in the Americas, 10 in Asia-Pacific and 11 in Europe, the Middle East and Africa, and feature the likes of Winnipeg, Belfast and Brisbane, as well as lesser-known spots such as Querétaro (Mexico), Davao City (Philippines) and Cluj-Napoca (Romania).
According to IBM’s 2010 annual Global Locations Trends report, it is the Philippines that now leads the world as the top destination for business support functions such as shared services and BPO, taking over from India. China is continuing its ascent as a services destination, while Sri Lanka has also positioned itself as a viable alternative to India in southern Asia.
The report also reveals that while South Africa and Egypt have attracted increasing services investment, a number of other countries are emerging as the new preferred destinations. These are notably in Latin America, where Costa Rica and Colombia are now both among the world’s top 10 recipient countries. Remarkably, Fiji ranks highly, but this is down to one large services centre.
Location, location, location
Although there are many locations to choose from, Mr Luftman says he would base his decision on the quality of the supplier’s service rather than where it was located. He explains: “I’d pick them based on due diligence and whether I was confident that they were going to provide the service that I require. Also, if you go to a major international outsource supplier, how do you know if you’re hiring people in nearshore or farshore locations?”
Mr Vagadia adds: “What is becoming more evident is the rise of a global delivery model, which takes advantage of labour arbitrage and reduces country-specific risk. However, in most cases the usual destinations still dominate when it comes to large-scale corporate BPO or shared services deals. There are many destinations trying to position themselves as outsourcing hubs, but unfortunately in most cases the only unique selling point is labour arbitrage, which is not enough.”