By: Michael Santamaria

There’s little doubt that Business Process Outsourcing is here to stay; the lure of “easy” cost savings is just too powerful for companies to resist. But the truth of the matter is that implementing a successful outsourcing project is hard work and realizing those “easy” savings is by no means a foregone conclusion. While data on outsourcing failure is hard to come by, the Aberdeen Group has reported that 21% of outsourcing projects fail to meet stakeholder expectations, and Gartner puts the outsourcing failure rate as high as 30%. Although neither study defines what constitutes a “failure,” the bottom line is a large percent of projects end with unhappy clients.

When an outsourcing project fails, it’s easy to blame the vendor. But having experienced the situation from both sides of the table, I would suggest that more often than not, the purchasing company lays the groundwork for the poor performance. The onus is on the purchasing company to do an adequate due diligence and to manage the project. Can you really blame the vendor when they were put in the position to fail from the beginning? Ultimately, no one wins the “blame game,” you are better off doing the project right the first time around.

To avoid being one of the Gartner statistics, there are four considerations that need to be part of your outsourcing initiative, 1) set an outsourcing strategy, 2) choose the vendor that best fits that strategy, 3) own the transition, and 4) create the structure to manage the relationship.

Strategize Wisely

Setting your outsourcing strategy is the all-important first step. To a certain degree, outsourcing strategies can be classified as either tactical or transformational. The tactical model is designed to take advantage of labor arbitrage and often employs what is referred to as a “lift and shift” approach. Work is lifted from your company and shifted to one in a lower cost area. Vendors of lift and shift models typically use existing processes and work in your existing systems, requiring little change on the part of your company. Essentially, the location of the worker changes, but the work itself does not.

On the other hand, a transformational model almost always involves a software implementation, which leverages optimized workflows. Under a transformational model, your company replaces existing processes and technology with the vendor’s processes and technology. As such, an IT project is embedded within the implementation. Clearly, implementing a transformational model is more involved than lift and shift, but it yields some notable advantages.

So, how do you decide which approach is best for your company? While there are no pat answers, I have found that companies often shy away from “yet another IT project” and end up following the tactical path, which is a mistake. My advice is to start assuming the transformation/software dependent solutions. Many of these solutions are very sophisticated, their processes and technologies successfully encapsulating industry best practices, and they have a large installed base so you can take comfort knowing that most of the bugs have been worked out. In addition, most solutions have a relatively streamlined and formalized client onboarding process, mitigating many concerns about implementing the solutions. In some cases, of course, there are no transformational options that fit your needs, forcing you to go the tactical route. This approach is workable, as each model has its benefits.

Figure 1 below breaks down the strengths and weaknesses of each.

Choosing the Right Vendor

The next step in implementing a successful outsourcing project is choosing the right vendor. If your company’s strategy employs the transformational approach, the process of choosing a vendor will be driven by the software solution, actually making selection easier. Comparison of tactical vendors is more difficult, because, for the most part, you will be comparing intangibles.

Regardless as to the approach, it is necessary to spend adequate time on due diligence checking all references, asking the hard questions, and arranging to visit reference sites in order to observe the process in action. Observing the process in person provides a better understanding of the processes, handoffs, potential issues related to team integration, and challenges communicating across distance. A vendor demonstration cannot compare to an onsite visit. A trip to one or two reference sites will prove to be money well spent.

Once vendor selection is complete, the planning stage begins in earnest. Generally, vendors will provide the overall implementation work plan. That said, since this is ultimately your project, you have the responsibility of owning it! Your company should remain integrally involved in the transition, which means dedicating the appropriate staff, assigning a sponsor, and holding senior leadership governance and gate reviews. It is also necessary to spend time developing a comprehensive risk mitigation plan. Your company needs contingency plans to address potential obstacles, including negative employee-client reaction to temporary performance dips, the PR response if contacted by the local press, transition plans for the local staff, and most importantly, plans to deal with unforeseen departures.

Regardless of severance packages or retention bonuses, once job eliminations are made public, employees begin searching for new opportunities. Needless to say, their departures don’t always align with your company’s staffing needs. Recently, I had the opportunity to experience this issue first hand, when my client on a six-month outsourcing project announced to me that we needed to go live in one week, three months early, because they no longer had the staff in the department to process the work. It goes without saying that the next few weeks were not exactly smooth.

Manage the Vendor

The last factor to consider for your outsourcing project is post-implementation vendor management. Unfortunately, this step tends to go overlooked until problems arise. Communication is one of the most vital elements in making an outsourcing relationship work. I recommend you plan to over communicate at the beginning of the project. The communication plan should include daily supervisor calls, monthly management reviews, and a quarterly sponsor meeting. Over time, if this proves cumbersome, you can dial it back. At the beginning, though, plan to over-communicate.

The daily calls should occur at the supervisor level, last no more than 10 minutes, and address yesterday’s challenges and today’s expected volume. I try to keep the daily calls informal to help forge a relationship between the team’s supervisor groups. Monthly management meetings should focus on the service level agreement (SLA) and performance metrics. It is critical to agree on what will be measured, how it will be measured, and what performance levels are acceptable before going live. In my experience, failure to exercise rigor in this step is where many outsourcing initiatives go wrong. Finally, the sponsor meeting should be a review of monthly trends and discussion of performance issues.

For these meetings, it is important that sponsors treat the two teams as unified and hold them jointly accountable. When issues inevitably arise and a “blame game” begins, sponsors need to be able to cut through the noise and force the teams to work together towards a solution. After all, one team cannot be successful if the other fails.

Outsourcing is not easy. But if you start with a sound strategy, leverage the right vendor, and are prepared to manage the project and relationship you can achieve significant savings. Let’s face it, those savings are hard to ignore.

Michael Santamaria is a director at ScottMadden. His consulting experience spans a number of areas including business process outsourcing, process redesign, organization design, operations improvement, and project management. Prior to joining ScottMadden, Michael ran operations for a business process outsourcer, consulted for Clarkston Potomac Group and Emerson Consulting, and held several positions with General Electric. Michael received an M.B.A. from Case Western Reserve University, Weatherhead School of Management and his undergraduate degree from Washington and Jefferson College. He is a certified GE Six Sigma Master Black Belt.

By Michael Blankman

In my recent article, we concluded that the most important aspect of managing remotely is building a strong and trusting relationship. Creating a partnership that doesn’t rely solely on the contract for the outsourcer to get performance security. The partnership is critical because once operations are outsourced, real influence over daily management will and should be limited, or why outsource at all? The partnership needs to be based on respecting each other’s expertise, ensuring roles and responsibilities are clearly defined and that the underlying business model justifying the decision to outsource is protected.

Managing the ongoing performance (real time, daily, weekly, etc.) is the second most important area on which to focus. Performance management is conceptually aligned with the concept of trust, but verify.

Customer service expectations that are critical to the outsourcer can seem at odds with the operational efficiencies targeted by the vendor.

Recapping what we have covered to date:

• The toughest decision, which is to outsource has been made.
• A general observation is that businesses aren’t unique and that it is important to let go and to fit into their operating model.
• The outsourcer has created a small but influential and agile group of subject matter experts to be the primary interface with the vendor; the vendor has assigned dedicated account management.
• Depending on the size of the business, it is important to accept that the overall number of support and management staff dedicated to a program may be small.

Customer Satisfaction / Quality Management

The vendor and the outsourcer may have service and quality goals, which seem contradictory. Putting a process in place is the moment of truth between the supplier and the vendor. That is why it is critical during due diligence process that the vendor’s commitment to quality is understood that they are not providing lip service or view quality as a necessary evil. A vendor’s true commitment is easy to recognize by understanding what local processes they have in place and if they are followed consistently.

A good way to see if customer service and quality are truly integrated into the management process is to ask the staff their opinion and to find out from them what reward and recognition programs are in place. Everybody in every function, whether or not they are writing code or answering calls, wants an opportunity to be recognized. Integration and consistency, although seemingly obvious, are critical. It is interesting to see how many initiatives are the “flavor of the day” and dwindle in importance, replaced by new programs that also dwindle in importance. For example, consider when the last employee of the month was awarded.

Additionally, during contract negotiations change of control protection is critical. It is very easy for a change in ownership and management philosophy to alter customer service dynamics. This is as important as protecting the financial model contractually.

Qualitative versus Quantitative

Many of the relevant statistics will be relatively easy to track and done systematically.

In call centers, vendors will focus more on agent performance and outsourcers more on qualitative data that will enable them to understand the underlying reasons for a call and to apply that data to specific customers, where appropriate. In the call monitoring process, vendors will target a statistical sample by agent to quantify performance versus call type and client specific metrics favored by the outsourcer. Important also is the ability to disposition calls correctly. Vendors often bristle at free form wrap and want to rely on system driven algorithms to deliver MIS. Attention needs to be paid to the integrity of this process or the data derived will not be useful.

Call Monitoring: Call monitoring is the best process for both parties to really understand quality and make improvements. It is also labor intensive but can be done efficiently.

The Program

• Call monitoring has to be a dedicated function on both sides: don’t engage with a vendor unless it is already a part of their quality process.
• There needs to be agreement on what metrics are tracked during monitoring and the vendor should try to accommodate the outsourcer’s needs, especially where regulatory attention must be paid. Some expansion to the vendor’s current process will most likely have to take place.
• Whatever the final process looks like the outsourcer will always have to monitor additional calls. There are nuances to the businesses and clients that the vendor will never understand completely. To avoid undue bias and potential line of business conflicts, call monitoring at the vendor should reside as part of an independent quality group. This is not an attempt to create layers – the assumption is that the vendor already has this group in place for their own monitoring and other quality initiatives.

A multi-tiered process should be established. For example:

• Both quality teams should monitor calls together according to a formalized schedule for calibration purposes. Ultimately the vendor will monitor the majority of the calls therefore both sides need to be in synch.
• Calls need to be monitored separately as well with the results distributed and reviewed by all parties.
• Underlying clients, where possible, should be included in some of the monitoring sessions (relationship management should also be involved so the vendor hears the voice of the client).
• Utilization of third party remote monitoring organizations as an independent counterbalance should also be considered.
• An underutilized and sometimes poorly managed tool is mystery shopping. Mystery shopping is a tool to gage your own service and an opportunity to compare the metrics and best practices of your competitors. The outsourcer can accomplish mystery shopping internally by calling both competitors and the vendor or by hiring an independent firm.

Anytime multiple sites or vendors can be utilized, the ability to competitively benchmark and drive improvements is enhanced. To emphasize, quality and reward programs need to be consistent and tightly managed with tangible goals.

Michael Blankman, a global outsourcing senior advisor, can be reached at: michaelblankman@aol.com

By Dan Berthiaume

When selecting a location for BPO service delivery, there are some standard metrics most BPO buyers use to determine the best location. However, “standard” does not always mean “right.” Just as in so many other areas of business, sometimes the common wisdom in the BPO realm is outdated, distorted or just plain wrong. Following is a brief review – compiled from several different expert sources- of some popular myths:

1. Rankings are helpful to understand relative attractiveness of locations. 
Despite heavy reliance on various “official” rankings of BPO locations, it is prudent to digest these reports with a heavy grain of salt.  Factors such as an incrasingly large number of competing rankings, a lack of correlation between rankings and actual end outcomes, score differences that are not meaningful enough to denote relative attractiveness, and the inability of generic rankings to take company-specific considerations into account limit the usefulness of rankings.

Furthermore – as long-time followers of Nearshore Americas can recall – there are firms pretending to do analysis of markets, but when confronted to produce evidence of their findings, they are nowhere to be found. The classic example of this is the 2009 “Black Book” of Outsourcing’s unfair attack on Bogota, performed by the owners of “Black Book” which was later acquired by DataMonitor/ Ovum. The ‘authors’ never engaged with us when we requested they provide evidence of Bogota being the ‘riskiest place on earth’ to do outsourcing. (Ovum CEO’s actually wrote a letter to us about this topic – published here.)

2. Size = scalability.
While the “size of an overall talent pool is often assumed to indicate scalability,  in reality, scalability is driven by multiple factors including quality of talent, competition, and companies’ unique requirements. The size of what appears to be an available talent pool  can be significantly reduced by issues such as lack of quality of quality and propensity and competition, resulting in a much smaller net talent pool. In addition, Everest Group – among others – cautions that statistics on available talent pools of qualified college graduates can often be misleading, and that local college graduates are not always part of the available talent pool.

3. Wage increase directly leads to an increase in overall people costs.
Using the typical wages paid to ITO workers in India during the past few years as an example, Everest Group demonstrates that although wage inflation of 10-12% for senior programmers and 12-15% for junior programmers has often been reported, in actuality wages for these employees have actually risen 3-8%, with a net 4-6% impact on overall people costs. Everest Group attributes the disparity to lower levels of total inflation in salary bands than individual changes due to promotions and growth, as well as cost controls allowed by high rates of attrition among junior programmers.

Everest Group says high-cost locations can supplement a BPO portfolio by fulfilling unique needs, such as niche skills, customer proximity, and time zone overlap

4. Locations experiencing tight labor conditions are always unattractive.
Large cities in popular BPO locations often experience labor pool tightness due to competition for workers. However, Everest Group advises that BPO buyers can often supplement a “tight” labor pool in an urban BPO location with workers from adjoining areas, as well as the possible “additional” talent pool represented by employable high school graduates, part-time workers, and experienced professionals with similar skills from other industries. BPO buyers will need to implement the proper hiring and training models to implement and scale hiring of workers from the additional talent pool.

5. High-cost and low-cost locations are in competition with each other.
BPO buyers often assume they must select either a low-cost or a high-cost location, with an obvious bias toward the cheaper destination. In actuality, Everest Group says high-cost locations can supplement a BPO portfolio by fulfilling unique needs, such as niche skills, customer proximity, and time zone overlap. BPO buyers should also assess delivery risks, including stability and predictability and business continuity, as well as consider direct financial metrics such as labor arbitrage, operational costs and taxes and incentives.

(Editorial note: Much of our research for this report resulted from a webinar, the “5 Common Myths of Location Selection,” produced by Everest Group).

By Robert L. Scheier

Service level agreements (SLAs) are the heart and soul of many outsourcing contracts. They define what the provider must deliver and their penalties for failure, in anything from application uptime to the time required to solve a customer’s problem on a help line.

But at least as currently defined, SLAs often fall short of detecting (and, more importantly, correcting) problems quickly. That was the message at the recent SIG Spring Summit from Senior Corporate Counsel Richard English of Ingram Micro and Shaalu Mehra of Sheppard Mullin Richter & Hampton, who helps the electronic distributor negotiate outsourcing deals.

SLAs fall down, said Mehra, because they don’t change with the customer’s requirements, aren’t defined precisely enough, and often aren’t structured to do a root-cause analysis of the root problem behind multiple failures.

“I love SLAs,” Mehra said in a session on “Best Practices for Ensuring Quality of Service in Multinational Outsourcing Engagements.” However, he continued, they are limited because they are just one “data point” measuring a provider’s performance.

While SLAs are the subject of intense negotiations at the start of engagement, he says, they may not be based on the right metrics to measure the effectiveness of the outsourced service for the customer. In addition, he said, SLAs “can be undermined by even minor changes” to the processes or systems they measure, and are often not updated often enough.

Another factor that limits their usefulness is “single incident limitation, (which makes) root cause analysis subject to an agreement of the parties,” said Mehra. Understanding and correcting the reasons for past failures can also be hindered by what English called a “statute of limitations” requested by vendors on how long a customer can ask for a service credit after a failure.

Both strongly suggested using a common approach to SLAs and other terms with all outsourcing providers, regardless of their location. “While that company may be India-based, and might be doing work for us in Asia, or might be doing work for us in Latin America…we don’t care,” said English. “We’re going to build in one global SLA.”

Two areas where the pair said specialized SLAs might make sense were to measure English language fluency and attrition. While Mehra agreed that “fluency” is subjective, he said it could be measured through a sampling of calls or surveys of whichever end users were being served.

Mehra said such SLAs often measure attrition on a rolling 12-month basis, and is an area where definitions (such as whether promotions, reductions in force or departures for personal reasons count as attrition) are often the cause of hard bargaining. “However reasonable the vendor’s concerns may sound, at some point, we have to draw a line” about where and how the customer will be protected from excessive turnover, he said.

In addition to SLAs, Mehra recommended regular payments based on the achievement of milestones, as well as periodic payments with provisions for holdbacks as a penalty to the provider for failures in delivery.

By Filipe Pacheco

Neoris started as a true Latin American outsourcing company, as a spin-off company of Cemex, one of the biggest businesses from Mexico’s infrastructure industry. Although that beginning occurred very far away from Brazil, a little over a decade after the company started its operation in Brazil, it increasingly focuses its global strategy in the country as one of their biggest opportunities for growth in the world – especially when considering SAP services.

Such attention helps to explain the recent visit of Claudio Muruzabal, global CEO of Neoris, to the SAP Forum recently hosted in São Paulo. In an exclusive interview, he reaffirmed how important the event and the Brazilian market itself is for the company. Neoris is a certified SAP Global Partner, and 80% of the operations in Brazilian are SAP-related somehow – such as SAP ERP, Portal Business Intelligence, CRM, and manufacturing integration and intelligence, or MII.

Global Growth Expected

His expectations regarding growth for the country are clear, “In the past few years, the domestic IT market has grown considerably, and more and more the companies are seeking automization. Many of them have grown at a very fast pace, but their management process have not developed the same way.”

Even though 90% of the operations hosted within Brazil today deliver services to domestic clients, Murazabal reinforces that the goal is to grow abroad and expand services also to Brazilian clients that are aggressively internationalizing their operations – such as Vale, one of the biggest iron ore producers in the world; and Votorantim, from the infrastructure sector. “The growth of the country has paved the way for the growth of such companies,” he says.

Network of Global Centers

One segment outlined by him as especially interesting when it comes to IT services in Brazil is agribusiness – “the development of it here is impressive. Companies related to meat production, fruits, sugar, cocoa, ethanol, and many others, all require different attention and services,” he says. Among other areas cited by Muruzabal as interesting are manufacturing (an area in which Neoris already has massive presence, especially through its services provided to Usiminas), healthcare and oil & gas.

At the end of 2011 Neoris inaugurated a new global center in Barueri, located a few miles from São Paulo. The new facility employs about 150 people, but has capacity for about 250 (in Brazil, the company has about 600 workers overall), and will deliver services to local and foreign clients. From Barueri, the local Neoris team will work in constant contact with the company’s four other global centers in Rosario (Argentina), Monterrey (Mexico), Madrid (Spain), and Budapest (Hungary). Clients of Neoris Brazil include McDonald’s, Nestlé, Santander, Bradesco, Lanxes, Claro, and Souza Cruz, among others. The president of the local operations of the company in the country is Frederico Vilar.

Bilingualism Still an Issue

When it comes to difficulties of the Brazilian market, Neoris’ CEO repeats what most executives from outside the country know very well: the lack of qualified bilingual workforce. He considers it one of the main problems of companies that are arriving here from abroad, and for those who intend to provide services for clients abroad. He compares the internal situation to that in Mexico, where, according to him, it is easier to recognize the public efforts done to fight that problem.

By Luke Bujarski

Distinguishing between domestic and export driven business is becoming increasingly important to vendors operating in LatAm. How are Brazilian banks outsourcing their back office? Why is Mexico’s manufacturing industry rebounding and what technology solutions are producers looking for? Is Colombia’s telecoms market the next big opportunity? Likewise, multinational enterprises will be looking for those service providers best suited to support their specific industry, as they invest in these oft complex markets.

The Latin America outsourcing model poses a new dynamic relative to India where exports still comprise 80 percent of total sales. Across LatAm exports are more to the tune of 30 percent. In a recent interview with our sister affiliate Global Delivery Report, TCS revealed that 70 percent of their Latin American presence (nine thousand heads) focuses purely on domestic consumption. As Brazil, Mexico, Colombia, and Peru blaze forward economically, we surmise that in-region deals will eat up an even bigger portion of that pie. Furthermore, while Mexican exports continue to grow rapidly, so too is its domestic outsourcing market.

Data Source: Mexico’s Ministry of the Economy

The Discussion Will Shift Toward In-Country Sourcing

As Latin American economies pick up steam and push labor markets to their limits, the Nearshore model will be put to the test. We already see this happening in Brazil and in Chile where increasing labor costs are making it less practical to export services. Multinational vendors are shifting certain BPO projects from location to location, transferring operations from high cost to low cost countries, from Chile to Guatemala, from Brazil to Argentina, from Mexico to Colombia.

As this game of ‘hot potato’ plays out, the global sourcing conversation will likely shift in different directions as it relates to domestic markets: How can we service Portuguese clients out of Colombia? Should Mexico’s public sector be a priority for us? How will the Colombia-US Free Trade Agreement impact local demand? Are we ‘vertical’ enough to break into Mexico’s manufacturing sector?

David Shpilberg of CPM Braxis touched on the ‘domestic’ issue, during an interview at Nearshore Nexus last week, when reflecting on the relevance of the US market to Brazil-based vendors – in light of the huge in-country workload. He responded by saying that “it has become difficult to distinguish between what is local and what is global.” Outsourcing mega deals involve numerous end-user and service provider locations across countries and continents. “To be a global player, you must show clients that you can manage nearshore contracts.” Keith Jones from advisory firm Pace Harmon also confirmed that “when entering into uncharted markets, multinationals [enterprises] want service providers that have experience working on projects in the United States.”

So as enterprises move in, Nearshore contracts can play as the ‘hook’ that catches more work on Brazil’s domestic front.

Mexican Manufacturing Will Drive more IT/BPO Deals

Vertical expertise could also be a game-changer for LatAm domestic markets. Jimit Arora of Everest Group sees the “verticalization” of IT application development and maintenance (ADM) as a major paradigm shift in today’s global services marketplace. “Clients are reassured when vendors can speak their language whether it’s financial services, hospitality, manufacturing, or health care.”

Mexico is the largest trading partner with the United States second only to China. 2010 was a record year for goods exports totaling $230 billion US dollars 

Accenture is credited as the pioneer of the ‘vertical’ approach, but most outsourcers now market their offerings based on specific vertical expertise. Nearshore Americas surveyed the top IT services vendors operating in Mexico and identified the following verticals to keep a close eye on:

Data Source: Nearshore Americas supplier survey

Manufacturing in Mexico is a good example of how vertical know-how could help IT/BPO outsourcers grow their domestic business. According to the Offshore Group, rising costs in China are a boon to Mexican manufacturing. The sector suffered in the late 1980s as producers packed up and began moving production overseas, but the last five years have seen a rebirth of even more advanced manufacturing, particularly in aerospace. In 2004 aerospace companies operating in Mexico exported a total of $146 million US dollars worth of products; that number rose to $3.5 billion US dollars by 2010. Of particular interest to the big outsourcers might be the multinational packaged goods and automotive clients (see chart).

 Data Source: Instituto Nacional de Estatistica y Geografia

Mexico is the largest trading partner with the United States second only to China. 2010 was a record year for goods exports totaling $230 billion US dollars (US Census Data). Indian product exports to the US barely scratched $30 billion US dollars in 2011. Nissan’s recent decision to locate a $2 billion US dollar facility in Aguascalientes gave the industry an additional boost as well as a recent survey by the IMF, showing that Mexico’s rapid economic recovery (as the US rebounds) shows strong fundamentals particularly in manufacturing.

Verticals and Co-Location – The Way Forward?

As multinationals bring manufacturing back to Mexico, vertical expertise will be a ‘hook’ for both IT and BPO contracts. Homegrown technology services providers like Neoris – Latin America’s only SAP Global Partner – will likely see a bright future in that vertical. These homegrown players are expanding their sales force in the United States undoubtedly pitching global goods manufacturers – among others. BPO providers with proven expertise in manufacturing could also see a bright future. “Co-location is always beneficial because it removes another layer of complexity,” explained Keith Jones of Pace Harmon. “If you’re manufacturing in Mexico, does it make sense to send your back office to India?”

By Robert L. Scheier

A recent study out of Duke University shows that American companies still prefer India, China and the Philippines to the Latin American Nearshore for IT infrastructure and application development and maintenance (ADM). The percentage of finance and accounting work done in Latin America rose from 10 percent in 2009 to 16 percent in 2011, with application development and maintenance (ADM) work rising from seven to 12 percent in the same period, according to the International Offshoring Research Network Project at Duke’s Fuqua School of Business.

And yet, the researchers found, the percent of ADM work done in Asia rose from 66 percent in 2009 to 70 percent in 2011. Among the reason for the preference for Asia (especially India), they say, are customer familiarity, the maturity of the IT and BPO industry. And China, which some predict may outpace India as the largest outsourcing provider in the world by 2020, already has 10 percent of America’s outsourcing business, the study found.

Another factor, as reported on Alsbridge’s Outsourcing Center, is that relocating to the nearshore or even back to the US is not free of cost or complications. It requires planning, management effort, possible disruption to operations (and other) transition costs, says Arie Lewin, a professor of strategy and director of Duke’s Center for International Business Education and Research.

Lewin also points out that the decision to outsource, and where to outsource, is being driven over time more by strategic concerns such as the need for innovation, or to move into a fast-growing developing market, than by cost savings alone. While it’s little surprise that India continues to be the home of choice for mature, well-understood disciplines such as application development and maintenance, Latin America can carve out specialties for itself in newer areas such as the development of mobile or social applications.

There’s no doubt, as we recently saw at the Sourcing Interest Group’s spring summit, that growth and innovation are key customer concerns as the global economy recovers. For customers looking to “transform” their organizations, the greatest concerns might not be where to outsource, but what specific skills and expertise a partner (wherever they are located) can provide.

The onus is thus on Nearshore governments to provide the appropriate training to their populations and to keep providing hopefully smart incentives to foreign as well as local start-ups. Just as important, Nearshore based service providers must keep moving up the value chain and differentiating themselves from their hungry Asian competitors. The current differentiators of location, language and cultural affinity will only go so far before the Nearshore must distinguish itself with value-added skills in area such as agile development, software testing or multimedia.

This article originally appeared on our sister site Global Delivery Report

By Heather Littlejohns

Companies seeking to locate new outsourced or shared services centers to offshore or near shore locations typically focus their exploration on factors such as price, local government support and incentives, cultural affinity with the target market, unemployment rates, labor pool, language skills, etc. But are companies really taking the necessary time to explore, assess and discuss their own points of differentiation as they are perceived by the local population?

Beyond providing a basic salary, what contribution can the business make to the lives of the people who will be employed? These cultural considerations should be an important component of the due diligence process as they are crucial to the long-term sustainability of the business. Unfortunately, they are too often overlooked.

Act “Corporate,” Think “Local”

The most effective way to select a successful and sustainable market, community and location to facilitate an operation is to spend time on the ground with local community leaders and prospective employees, using the language skill with which you expect services to be delivered. In a sense, this is a grassroots and tourist approach to the region, building on a foundation of previously completed market analysis, research and the corporation’s strategic vision.

Before investing in a destination, many basic requirements “on the ground” should be fully identified. These are easily gained through market analysis and research and by speaking directly with economic and government groups within the country/region of choice. The following check list can serve as a starting point:

• Local government investment and support

• Technology and infrastructure

• Education

• Safety and security

• Tourism

• Like industry success

• Transportation

• Labor pool

• Education level and graduation rates

• Language skill–English bilingualism

• Skills learned (preferred)

• Customer service orientation

• Affinity to Western culture

• Employable population–demographics

To truly test the likelihood of success, spend time on the ground in the community. Ask questions, document observations and understand the community from which you will hire and where you will be a corporate citizen:

• Understand how education works in the destination. Is it public or private? Is it mandatory? What is the local government’s degree of engagement in the education system? How do people get to school? Is there an emphasis on learning English/other language?

• Assess the rates of school attendance.

• Visit a school, university or community college. Build relationships.

• Determine who are the economic and community development supporters and funders in the community. When do they meet? Who are the members? Do they live in the community in which they serve?

• Attend a meeting of these community development supporters. Take notes and make observations about interactions and behaviors such as tone and pitch in conversation; gender based interactions; non-verbal communication such as eye contact and handshaking. These observations will help you adapt your body language and mannerisms to put people at ease when interacting with the local population.

• Discover the cultural customs of the local community including holidays, events and religious ceremonies. This knowledge will help when managing your new workforce.

• Understand the demographics of the region. What is the average employable age and are they male or female? What is the current make-up of the population interested in the BPO industry? Are they well-educated males or single mothers? Are they second income earners or primary breadwinners?

• Investigate local restaurants, shopping facilities and tourist hot spots. Eat at local favorite restaurants. Attend a local customary event, read the tourist brochures and spend time in the recommended areas. This will tell you what the local people are proud of within their country. Knowing exactly what gives a person pride can also act as a motivational tool. This can allow you to better identify with the needs of the people that the corporation will employ. It will allow the opportunity to learn, understand and place value on what is important to the team.

• Learn how local services are facilitated and distributed. Are these services valued and utilized? How does the role of the family contribute?

• Research health care, child care, transportation, etc. This will help provide a more comprehensive view of total costs. It will also help you “design the differentiators” that I referred to earlier to strengthen your value proposition as a “glocal” employer, and can help you in “positioning” your corporate philosophy to your future employees.

Integrate Cultural Components with Business Goals

By integrating the “softer”, cultural components of the destination you are reviewing with that of your strategic business objectives and long term priorities, your answers to questions like those below will become far more informed and accurate.

• Is a local staffing agency required to help launch the business?

• Does it make sense to place the business in the duty free zone or is an urban, centralized location more feasible?

• What type of community participation and recruiting event will need to be held?

• What aspects of the corporation should be advertised? What are the value added benefits for employees that will matter most? What are your differentiators as they relate to the community?

On the surface these concepts are relatively simple, logical and one would assume being facilitated, however, this is not the case in many situations. Cross-cultural communication and a grassroots approach is not often practiced for a wide variety of reasons. These include the assumption that knowing the statistical facts about unemployment rates and government incentives is enough to be successful, aggressive timelines, low price points driving a quick transition, lack of regional expertise within the organization or simply an attitude that cultural considerations are an “after thought.”

To truly minimize new geo risk, not only should the selection team conduct the formal process, but drive the due diligence from a grassroots perspective and through a cultural prism. Once this knowledge and, more importantly, experiences are gained, the transition or execution team should act as the “cultural interpreter” for the enterprise. This is crucial to see a new operation through to success.

Heather Littlejohns, Director-Operations at Aditya Birla Minacs and also an independent consultant, is responsible for strategic Country and Site Leadership and Client Relationship Management. She also serves as Partner & Contract Liaison, Implementation & Launch Project Sponsor and Government Point of Contact. Heather brings 16 years of rich and varied experience in directing, developing and implementing effective near shore and offshore BPO global service delivery solutions. Heather.Littlejohns-Brown@minacs.adityabirla.com

By Jon Tonti

Of the 8.2 million business services jobs held domestically at the beginning of 2002 in some 4,700 companies based in North America and Europe only 4.5 million will remain in their domestic markets by 2016 according to a study by The Hackett Group, a management consulting firm. The same study finds that the amount of business services work moving offshore will “level off significantly” during the next few years due to changes in the conditions of offshore drivers.

The Hackett study concentrates on the business services jobs related to finance, procurement, human resources, and IT that have been moving out of developed economies for well over a decade. Historical and predictive data shows that the number of jobs created in those four categories between 2002 and 2016 is offset by productivity improvements resulting in no net gain; the net loss of business services jobs appears to be the amount of work moved offshore.

Loss of IT Jobs to Increase 

Of business services jobs IT will see the highest job loss rate of 54% between 2002 and 2016 compared to that of 42%, 36%, and 33% for Finance, Procurement, and HR respectively. Despite what may seem to be a tough hit to domestic IT business services jobs provided by companies with over US$ 1 billion in revenue in North America and Europe, the IT sector continues to grow and small and medium sized technology companies often do not offshore with similar intensity.

The creative destruction of productivity improvements and movement of commodity processes from domestic business units to Global Business Services centers (Captive or Outsourced) reduce the costs of business processing services that are not only transactional in nature but also knowledge-centric. This trend permits Hackett Advisors to state that “the likelihood that the HR, IT, finance and procurement organizations of corporate America and Europe will become contributors to job creation is extremely low.”

Economies of scale allowing companies based in North America and Europe to take advantage of high skilled offshore resources are evolving naturally

Service Centers Diversify

Driving this continued migration of business services jobs is the transformation of one dimensional service centers for routine business services into multifunction Global Business Services centers capable of delivering knowledge-centric services. The FTE (full-time equivalent) job base that is now based out of Global Business Services centers, instead of domestically in North America or Europe, is staggering in both transactional and knowledge-centric realms. Captive GBS far outstrips Outsourced GBS with an average 42% of the knowledge-centric FTE job base residing in Captive GBS organizations while only 10% of knowledge-centric FTE is concentrated in Outsourced GBS. Captive GBS again trumps Outsourced GBS with regard to transactional FTE job base; an average of 50% of transactional FTE job base for business services resides in Captive GBS while a mere 15% on average for Outsourced GBS.

Another reason companies are continuing to displace business services jobs from traditional domestic markets is that the increased use of the GBS model complements the predictable globalization of any large company’s operations. As supply chains, target consumer markets, strategy, etc. have to be reoriented in a global context that redefines the value chain, business services to serve that value chain must also adapt. Business services are adapting and transforming what were once shared services operations only taking advantage of economies of scale into GBS organizations enabling economies of scope and economies of skill as well.

Business Services to Level Off 

Expanding the scope of a GBS’s portfolio of services to include other commodity like services is a natural progression of the GBS model. Likewise, economies of scale allowing companies based in North America and Europe to take advantage of high skilled offshore resources are evolving naturally. Service offerings of offshore BPO/IT providers and Captive GBS organizations are more mature than ever. This truth presents itself in the context of the standardization and digitization of work and workflow making work less origin dependent. Now that intellectual talent is not constrained by its geography, why is it that the Hackett Group posits business services offshoring will “level off significantly during the next few years?”

First Hackett asserts that the number of business services jobs going offshore is rapidly declining because the majority of tradable jobs that can be offshored already have been moved offshore. Also mentioned is that economic growth in North America and Europe is creating less suitable jobs for offshoring while productivity improvements continue to eliminate jobs of the offshorable variety. Not mentioned were the obvious rising wages in traditionally low cost countries which is diminishing opportunities for labor-arbitrage and making the close-shore model in second-tier US and European cities more viable. Hackett goes on to comment that in ten years’ time “demand by Western companies for traditional offshore capacity will have largely dried up.”

If the Hackett Group is talking about the most basic business services jobs which have already been outsourced or are set to be eliminated by productivity improvements, then the assessment that business services offshoring will continue to slow and indeed level off is correct. However, traditional offshore capacity has already matured to the point where basic knowledge-centric services are commonplace and foreign R&D operations have become necessary to support any large company’s global operations. What were once simple shared services centers are now GBS organizations poised to evolve into headquarters for important knowledge-centric activities.

The mass offshoring of low level business services jobs is reaching a saturation point, but the steady trickle of knowledge-centric jobs moving offshore continues. Despite that, it is not a zero sum game in which developed economies lose jobs to lower cost countries never to be seen again. Global companies born in what are considered low cost countries are increasing their presence in developed countries and may be the new forces generating the offshore jobs of the future. This trend will be accompanied by a shift in BPO says Mark Hillary author of “Who Moved My Job?” and CEO of IT Decisions, a Brazilian tech research firm based in São Paulo. “Large companies not of Western origin doing business in the US and Europe will need local staff in those markets for their customer sensitive BPO operations.”

By Robert L. Scheier

As the global economy improves, customers are looking to outsourcers to not only save money, but to drive growth, improve quality and drive innovation.

Those were among the key themes from two days prowling the corridors and break-outs at the Sourcing Interest Group (SIG) spring summit. Speaker after speaker, whether the topic was procurement, category management or macroeconomic trends, described how their employers are trying to use outsourcers not “just” to save money but to make a more strategic contribution.

Beyond Short-Term Savings

The need to drive strategic, ongoing business benefits runs throughout the top concerns presented during a summary of the executive roundtable. They include:

Revenue enhancement: The need to drive more sales, and higher profit sales. Outsourcers and other service providers can help by suggesting new products, services or delivery channels and then helping to create them.

Cloud and what comes after: Understanding the various flavors of the cloud, the true nature of the risks and benefits, and how to use it effectively is confusing for most organizations. It can also be a great opportunity for outsourcing providers, especially those who can tailor their regional advantages (such as in Latin America) to the requirements of the cloud. Execs at SIG also want partners who can help them understand the Next Big Thing after the cloud.

More automation: Also known as the “relentless elimination of non-value added activities.” Automating ongoing processes is a great way to deliver “sustainable” savings over time, versus one-time cost savings that can fade as business requirements and outsourcing requirements change.

Managing complexity: As customers use more different outsourcers for more different functions, the environment gets more complex and harder to manage. This is an area where an outsourcer with the best practices for managing “portfolios” of applications, services and relationships can deliver the most value to customers.

Close interaction with the business: This also comes under the heading of “alignment.” It means really understanding the most strategic, long-term needs of the entire business, rather than the short-term, tactical needs of individual departments. Achieving this alignment requires both the outside partner and the internal purchaser to have the attention and respect of senior management.

Outcome-based contract: Rather than pay outsourcers per full-time equivalent (FTE) or per transaction (both of which incent the provider to do more work, even if it’s not useful) many customers hope to pay vendors based on their ability to deliver business results. This is still a hoped for, rather than a usual, state of affairs. It requires changes in both thinking and processes, which speaks to the next area of concern:

Organizational readiness: There was a lot of talk at SIG about the need for customers to change their own behavior to accept new and better practices from their outsourcers. This means not only developing ways to measure the benefits of innovation, but changing incentives so internal departments don’t act like “junkyard dogs” protecting their own turf and keeping out new, better processes from a partner.

What all these concerns have in common is they reflect the need to move beyond short-term cost savings (especially those where the savings fade over time or drives up costs elsewhere in the organization) to newer, fundamentally better processes that drive value over time. That’s what some leading customers say they want – now comes the hard work of implementation.

This article originally appeared on our sister publication Global Delivery Report