As the global economy sputters back to life after one of the worst meltdowns in recent history, the outsourcing industry looks for signs of recovery and new direction. The initial half of 2009 was very challenging for the industry as decision making and contract closures took a nosedive. Both service buyers and providers had to cope with financial uncertainties and operational issues that impeded short-term decisions and long-term strategic initiatives. Most providers had to adapt by consolidating, reducing staff strength or freezing expansion and development plans. With the pickup in demand since last quarter of 2009, providers are now ramping up capacity, albeit under very different market conditions. While booming economies like India and China have renewed their growth trajectory, other regions such as Latin America have also emerged relatively unscathed from the downturn and are seeing impressive GDP growth. In fact in an ironical way, the future shape of global sourcing may be shaped more by the growth in Asia and Latin America than by North America and Europe.
If we look at the recent revenue numbers from the top 20 outsourcing providers and the contracted deals, there is certainly a cause for optimism. The figures indicate a positive outlook for 2010 and beyond. Based on recently released numbers from TPI, the fourth quarter of 2009 saw a very sharp upswing with almost $25 Bn worth of contracts being signed, a huge 47% Quarter-on-Quarter change. The forward looking pipeline of deals also looks very strong. The last three months also saw the best quarterly performance since second Quarter 2008 by major outsourcing vendors, clearly indicating a rebound.
Major providers have begun to expand and reinitiate aggressive hiring, reminiscent of the boom during 2004-2007. Also, this year should see a rise in cross-border Mergers & Acquisitions in the IT/BPO space, as offshore vendors seek to fill service gaps and provide a multi country presence through acquisition of an onshore or nearshore platform. As valuations inch upwards, buyers will seek to scoop up companies before they get out of reach.
New Market Realities
With the market sentiment turning positive, most providers are now positioning themselves to best harness the surge in outsourcing demand. However with a reshaping of the global economy and a change in buying criteria and patterns, it is important for these providers to adapt to the new market realities. While the key drivers for outsourcing remain largely unchanged post crisis, the deal hiatus has caused companies to re-evaluate their priorities, re-allocate resources and in many cases, re-invent their global operations. Cost considerations continue to be the top priority but companies now want to ensure that their outsourcing initiatives deliver additional benefits in terms of better customer retention or new market access or greater operational flexibility.
Companies stung by media driven negative publicity and ensuing customer resistance against offshore labor, have instead started exploring options nearer to home, wherein the proximity and closer cultural affinity lessen the negative perception.
The slowdown gave buyers time to think out of the regular vendor-location matrix and this, coupled with the need for diversification, is opening new doors for providers with Nearshore capabilities. However, in order to make the most of these opportunities it is important to understand the cause of this shift in buyer pattern as well as to understand the steps required to capture these opportunities.
The first key change occurred even before the real impact of the slowdown hit home. Over the last two years, companies increasingly started to rethink location specific strategies as cost benefits, especially of non-specialized, low value, high volume processes at offshore locations like India and the Philippines started eroding. Service providers as well as captive units found it difficult to maintain margins and the economic crisis proved to be a decisive turning point in terms of looking at alternative locations nearer to the market, offering similar benefits at comparable offshore costs. Moreover, customer expectations have evolved from just looking for the lowest cost, to obtaining the best combination of product, price, and experience. As a result, nearshore locations have now begun to seem almost as attractive, if not better, as offshore locations.
Demand for Multi-Location
The second key change was the trend towards increased globalization. With factors like risk-mitigation and client demand for multi-location, multi-lingual service capabilities playing a role, vendors sought out newer locations with Nearshore Caribbean and CALA region becoming the best bet for servicing the US markets. According to Mohandas Pai, Board Member of Infosys, over the past few years almost a million jobs ideally headed for India have been offshored to other locations due to various issues. This makes it clear that vendors now understand that long term sustainability lies in having a hub and spoke delivery model with few established locations providing process maturity and scale while other smaller ones catering to specific niche or nearshoring requirements.
Lessening the Backlash
The third key change catalyzing the nearshore market is the impact of the offshoring “backlash”. Companies stung by media driven negative publicity and ensuing customer resistance against offshore labor, have instead started exploring options nearer to home, wherein the proximity and closer cultural affinity lessen the negative perception. While Canada had been a long time Nearshore “favorite”, the recent currency rate fluctuations have brought the Canadian dollar almost on parity with the US Dollar, thereby reducing the labor arbitrage. This has proven to be a boon for other English capable Nearshore locations such as Jamaica, Dominican Republic, Panama and Costa Rica.
Recent Datamonitor report projects continued growth of 20% in the offshore contact center market with Nearshore markets growing at a faster pace of 26%. Along with the three change catalysts outlined above, the other factor driving the growth in this region is the pro-active support provided by regional governments that have realized the need to develop the outsourcing sector as a counter-balance to shore up their economies. From Chile to Costa Rica and Jamaica to Dominican Republic, governments have been at the forefront, aggressively promoting their countries. The increased focus has clearly raised the visibility and opened up the market for the whole region. In fact six countries from the CALA/Caribbean region are in the top 30 in the 2009 AT Kearney Global Services Location Index.
With other factors like good infrastructure, liberalized telecom, stable salary structures supported by attractive government incentives (in the form of subsidies, tax breaks etc) many of these destinations are becoming as attractive as offshore locations.
While the “new normal” of outsourcing predicates a more diversified and almost tactical approach to finding new locations, there are still several barriers that prevent the nearshore region from realizing its true potential. Firstly there is still a Spanish pre-dominance in the CALA region which has been the natural result of good regional demand as well as needs of the US Hispanic market. However this has prevented many of these countries from developing strong English capabilities and puts some of these regions at a distinct disadvantage compared to other countries that have invested more aggressively in developing a truly bilingual workforce.
Countries such as Guatemala and Colombia hold a lot of potential but lag behind in English adaptability. Another issue constraining growth in this region is the paucity of home grown success stories such as Transactel or eServices (acquired last year by ACS). Most of the seats in the CALA region are owned by multinational outsourcing firms that have found this region to be a fertile ground. However, for maturity of the Nearshore market it is important to have more companies that can scale into global players and be flag bearers for localized innovation and change.
The Wisdom of the Cluster
One of the barriers faced by Nearshore locations has been the relatively smaller size of their employable labor pool. This has resulted in saturation and inflation in some countries while others have struggled to maintain high quality. Companies that have succeeded in this region have been ones that were able to leapfrog the talent crunch in individual locations by expanding their footprint into neighboring countries. This has seen the emergence of a Central American Outsourcing Cluster with access to a captive population of almost $40M. Likewise in the Caribbean, destinations such as Jamaica, Dominican Republic and Barbados have the potential of being developed into a Caribbean Outsourcing Cluster. Such an approach by service providers as well as multinationals seeking dedicated presence will ensure that the region continues to grow at a sustainable pace without running into the constraints of workforce saturation, costs or quality issues.
A Cluster approach also allows companies to diversify risks which could otherwise impede operations in a single location or country during a natural calamity or geo-political upheaval. Finally, Clusters provide the whole region a mix of skills and scalability akin to larger countries such as India and Philippines. Companies can leverage specialized competencies in specific locations to provide a complete suite of services from the region. Hence location selection in the nearshore context should follow the inverted pyramid approach with the whole region being evaluated followed by a drill down to the specific location of first entry. It is also important to have an expansion roadmap with a timeline for subsequent locations within the cluster along with a process scaling plan.
The advent of nearshoring has raised a lot of questions around the viability of offshore destinations. However in the post-recession world, there will be room for everybody. Providers will quickly globalize to capture the nearshore pie and thereby offset any Offshoring pushback. Nearshore vendors will seek partnerships with offshore players to gain from their expertise with process and operational maturity. While the recession had a downside in slowing the offshoring momentum, it is acting as a globalization leveler – allowing overheated regions to rev down to sustainable growth while enabling other prospective locations to play catch up and assume the appropriate slot within the global sourcing matrix.
About the Authors:
Anupam Govil is Founder and CEO of Global Equations, a leading Globalization Advisory firm. Having advised a number of emerging regions and multinationals on their global sourcing strategy, he has a unique perspective on new markets. Anupam has also been an advisor to private and government firms within Asia, Middle East and Central America. He can be reached at email@example.com
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