Back office outsourcing to India and Eastern Europe has been a staple of corporate strategy for years. Moving finance, HR or IT processes offshore has up to now involved a simple calculation –source the work from ‘nearshore’ cities like Prague, Krakow or Bucharest; or from ‘farshore’ India to get the very lowest prices. But this cosy duopoly is under threat. From Russia to South Arica, a huge swathe of ‘midshore’ locations are vying for attention as credible offshore alternatives. Are these a distraction or do they offer credible alternatives to the status quo?
Mapping the world
Taking stock of the offshore landscape is quite a task. Almost every country of any size in Africa, the Middle East or central Asia has public ambitions to seize IT and business process outsourcing (BPO) market share. Russia, Turkey, Jordan, Egypt, Tunisia, Ghana, the United Arab Emirates, Uganda, South Africa – these are just some of the countries that are positioning themselves as credible outsourcing locations. Even Rwanda and the Palestinian territories have published strategies on their IT and BPO capabilities.
For example, Egypt is one of the key emerging midshore players, with a large, well educated and multilingual skills base, and 22,000 offshore-focused ITO and BPO jobs. Global activities include a 500-seat global application support centre for Oracle; an 1800-seat Vodafone call centre serving the Middle East, the UK, Australia and New Zealand; and a Microsoft Research Centre. Egypt was awarded ‘Offshoring Destination of the Year’ 2010 by the European Outsourcing Association. Similarly South Africa has a growing profile in global services, with 9,000 offshore-focused BPO jobs (and 35,000 domestic BPO jobs), and is host to outsourcers such as IBM, Genpact and Teleperformance. Virgin, Shell and Lufthansa operate captive shared service facilities in South Africa.
However, for most midshore locations, the future vision may be bold, but the reality is a work in progress. Apart from the largest economies - which have built offshore credibility on the back of domestic demand – most locations have very little in the way of offshore outsourcing or captive service centres at present. Few locations have developed the critical mass of skills and language ability (a young, educated, cosmopolitan city of 1 million is a good start), or the infrastructure and low costs that it takes to stand out on the world stage. Many locations may never generate global appeal -- and even for the larger players such as Egypt, Russia and South Africa, the competitive landscape looks harsh. What does the future look like?
Recipe for success
Success for any global sourcing location depends on persuading investors of the specific advantages of their unique offering. But at the very least every midshore location will need to show it can ‘be cheaper than Eastern Europe’, and ‘offer capabilities you can’t easily find in India’. There are of course analytical nuances to be observed, but if it fails either test, the work will be better located in Europe or India.
South Africa is a case in point. Fatgiyah Bardien of South Africa’s Business Trust states that it is "10-20% less expensive than offshore delivery locations in Eastern Europe, such as Poland, Czech Republic and Romania". And although it is 50-60% costlier than India, it offers lower inflation, strong language skills (including English, German and Dutch), and the convenience of the same time zone as Europe. Russia offers a similar blend of lower prices than most European locations, combined with high-quality skills in areas such as software development and engineering.
In a way, the rise of the midshore locations seems to be the logical next step in a long line of offshoring ‘migrations’. Only 15 years ago, relocating work to cities within Western Europe such as Dublin, Brighton or Barcelona was commonplace. But as costs in West have increased, they were eclipsed in popularity first by central European cities such as Prague and Budapest, and latterly by Eastern European locations in Bulgaria and Romania. As this process of development and saturation continues, progressing beyond Europe’s eastern and southern borders is the next obvious step
The elephant and the dragon
But there are two very large external factors that may yet stop the rise of midshore locations. Firstly, what will become of the ‘elephant in the room’? India remains by a considerable way the market leader for offshore outsourcing and captive service centres. Both for ITO and BPO work it absorbs over half of new projects, particularly those that are English-language focused. And despite rumours of overheating, in reality India continues to unlock millions of new potential software engineers and processing clerks in tier 2 and tier 3 locations.
But although predicting the future with precision is not possible, the ranges of India’s dominance can be sketched out. One the one hand it is clear that India will never be able to monopolise a global offshoring market in which customer needs are so varied -- just try to staff a large Dutch-speaking service centre in Bangalore. But the converse is a possibility: India’s infrastructure, already choked by growth, could act as a powerful drag on its future market share. In this scenario, midshore locations might get a clearer run at flexing their muscles on the global stage.
However, there is also a dragon in the room. Back in the December 2006 edition of FDI, I set out the long term potential for China to gain significant offshore market share. Yet with the exception of high end R&D, China is still basically a regional player in global services, serving expensive countries such as Japan and South Korea out of centres like Dalian and Shanghai. Very few European or global businesses have significant back office operations in China, and where they do, they are almost all focused on regional, Asia-Pac operations.
But although China has yet to take on a significant global role in the services sector, the Chinese government is investing in infrastructure and language skills, and both local and foreign companies are preparing for significant ITO and BPO growth in the coming years. As in so many other areas of business, a rampant China may yet become a global player. In terms of Chinese offshoring, the sensible question seems to be ‘when’ and not ‘if’.
Get real, get focused
In this increasingly crowded marketplace the key to success will depend on being both realistic and targeted. Firstly, aspiring locations should set realistic goals in terms of their global prospects, and focus first on developing domestic demand, then regional opportunities, before expecting to make inroads to the global market. In addition, in an ever more mature and specialised offshore marketplace, no location can provide the breadth and depth of skills to be all things to all investors. So midshore locations should focus their efforts on building their brand and capabilities in narrowly defined specialisms, such as collections, system testing, legal process outsourcing, actuarial support or animation – rather than on all encompassing campaigns into ITO or BPO. If midshore locations find the right balance and nimbly exploit the a few global niches, in time then they may yet get a seat – alongside the dragon and the elephant -- at offshoring’s top table.
Paul Morrison is head of BPO and shared services at Alsbridge