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.
Matt Jackson, Managing Director, JLL (Spring 2011)

Offshoring remains attractive for companies seeking to reduce costs, access talent, or improve global delivery capabilities. In the coming years, more companies will seek to deploy business processes offshore. As competition in these locations mounts, the offshore landscape will evolve in terms of geographic options and complexity.

Evolution of Global Activities
Early in the evolution of offshoring, companies sought a select few global locations that achieved low cost with acceptable risk. Over time, as companies realized success in supporting business activities from distant locations, they began to consider offshoring higher-value and complex business processes. Today, organizations consider even their most sophisticated activities for deployment to markets around the world.

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Offshore Maturity: Concept and Location
Offshore maturity refers to the evolution of business activities in a given market from the initial investment phase to a state of maturity. When a business process is first introduced in a new offshore location, it is considered a pioneer activity, meaning there are relatively few comparable offshore activities in the market. But over time, as the number of companies deploying similar activities in the market grows, a trained and skilled labor force emerges. In certain instances, rapid expansion of like activities results in an oversubscription of the labor force that supports the activities, resulting in a saturated labor environment where demand for talent exceeds supply.

Labor conditions are a primary indicator of an offshore location's maturity at any stage. Since certain business activities require more than one labor profile, a single location may represent multiple phases of maturity. For example, in a given market, the labor supply no longer meets the demand for qualified call center employees; it is considered saturated. Yet the same market has only two companies supporting local engineering activities. That market is considered pioneering.

Expanding Global Options
As business activities reach saturation in legacy offshore locations, access to the right labor becomes more challenging. In response to these deteriorating labor conditions, companies have explored broader location options for investment, which governments have promoted. But as the list of emerging options grows, companies must note that the value propositions and labor profiles vary significantly among locations - especially depending on the activities being considered for deployment.

Aligning Business Requirements with Location
As available location options multiply, businesses must align their activities targeted for offshore deployment with the locale's ability to support those activities. The alignment between labor needs and market capabilities often determines "what" is supported "where." But determining where to deploy operations is easier said than done: The list of possible locations is lengthy and the qualitative nature of variables requires extensive research for even an initial high-level evaluation. Some critical considerations include cost, ability to source the right talent at the needed scale, quality of acquired talent, ability to retain new talent, labor regulations and their impact on operational flexibility, and the effect of collective bargaining on operations.

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.

From a geographic perspective, we predict that:
• North Africa will see increased investment for call center, shared services, and engineering activities.
• East Africa will see initial investment from BPO companies, then large multinationals with a growing presence in Africa.
• Indonesia will see increased investment in back office operations as the economy continues to grow and companies seek alternatives to India, the Philippines, and Malaysia for English language speakers in Asia.
• Business process outsourcers will hire students in Central America rather than graduates to avoid post-graduation compensation premiums and maintain cost competiveness with Asia. Additionally, BPOs will continue to seek out reduced market risk options in Central America, although it will require a cost premium.
• In Central and Eastern Europe, decreasing populations coupled with growing demand for talent will result in increased solicitation of secondary and tertiary regional markets.
• In South America, except those already considered for investment, few new location candidates will emerge as viable options with the exception of Colombia, which will likely experience increased solicitation levels.

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The offshore landscape will continue to shift as investment conditions in legacy and emerging locations evolve. The fluidity of investment conditions and the speed at which locations cycle through maturity will require watchful monitoring to understand the implications of these trends and to realign the value horizon for a given location. The global marketplace's follow-the-herd mentality will force companies to create strategies to remain competitive in select locations. Opportunity and risk must be more proactively monitored to remain a step ahead of the market and competitors. Embracing offshore opportunities will ultimately improve operating margins and operating platform efficiencies.

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