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The Global Landscape Evolves: Offshoring's Risks and Opportunities

The popularity and proliferation of offshoring will continue to grow as business becomes increasingly globalized. Balance the risks with opportunities for rewards.

Spring 2011
(page 2 of 3)
In an ideal world, an organization would find a location with prevailing labor conditions in complete alignment with company requirements. However, trade-offs are inevitable. So companies must prioritize labor considerations in the location decision process and obtain facts to enable a holistic, informed decision.

Drilled down, each category of labor considerations requires a detailed review to fully understand the parameters, opportunities, and constraints of a location. Figure 1 shows key labor considerations that represent "must understand" attributes requiring assessment before investment in a market.

Predicting the Future
Offshoring will undoubtedly continue for the foreseeable future. The trend will hew closely to the rate of implementation of enterprise resource planning (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 helps predict global trends. Labor costs, which vary greatly among locations, will continue to strongly influence location decisions.

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Within this context, we anticipate the following overarching trends:
• Established locations will continue to migrate up the value chain and companies will increasingly deploy complex business processes in proven cities. Companies supporting less complex or low-value processes in the same markets may encounter labor attraction and retention issues. As a result, new investors will likely shift to secondary markets.

• Companies with more sophisticated shoring models will continue to seek ways to improve margins. 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, Central and Eastern Europe, and the Middle East.

• Many high-demand locations will experience increased labor costs as demand for qualified talent exceeds supply.

• Locations with multilingual 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 fluent in German, French, Dutch, and Nordic languages will experience increased activity.

• As many historically low-cost markets become saturated for certain business processes, companies will choose to trade off higher risks and arduous labor regulations for lower labor costs. Companies will 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 in established offshore destinations will ultimately require higher-value activities to retain a competitive market position, or companies may leave for greener pastures.

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