The Offshore and Nearshore Outsourcing Outlook · PDF fileThe Offshore and Nearshore...
126
TECHNOLOGY The Offshore and Nearshore Outsourcing Outlook Key locations, outsourcing models and the leading players By Gary Eastwood
Transcript of The Offshore and Nearshore Outsourcing Outlook · PDF fileThe Offshore and Nearshore...
T E C H N O L O G Y
The Offshore and NearshoreOutsourcing OutlookKey locations, outsourcing models and the leadingplayers
By Gary Eastwood
ii
Gary Eastwood
Gary Eastwood is an experienced writer and editor on business and IT issues,
contributing too many of the leading IT publications and magazines that cover the
gamut of IT sectors. As well as holding senior positions on a number of IT trade
publications, he has worked with companies such as Microsoft, IBM, CSC, Oracle and
Intel on a variety of marketing communications projects.
Copyright © 2005 Business Insights Ltd This Management Report is published by Business Insights Ltd. All rights reserved.Reproduction or redistribution of this Management Report in any form for anypurpose is expressly prohibited without the prior consent of Business Insights Ltd. The views expressed in this Management Report are those of the publisher, not ofBusiness Insights. Business Insights Ltd accepts no liability for the accuracy orcompleteness of the information, advice or comment contained in this ManagementReport nor for any actions taken in reliance thereon. While information, advice or comment is believed to be correct at the time ofpublication, no responsibility can be accepted by Business Insights Ltd for itscompleteness or accuracy.
iii
Table of Contents
The Offshore and Nearshore Outsourcing Outlook
Executive summary 10
Offshore and nearshore outsourcing 10 Emerging models in offshore outsourcing 10 The 10 most influential offshore service providers 11 Overview of offshore locations 12 Nearshore locations (for Western Europe) 12 Nearshore locations (for North America) 13 Focus on call center offshore outsourcing 14
Chapter 1 Offshore and nearshore outsourcing 18
Summary 18 Introduction 18 Offshore outsourcing 20 Drivers and inhibitors 20
Key drivers for offshore outsourcing 20 Inhibitors of offshore outsourcing 21
Best practice 24 Offshore outsourcing models 25 Transactional partnering 25 Tactical partnering 26 Strategic partnering – a joint venture 26 Collaborative partnering – Build-Operate-Transfer (BOT) 27 Wholly-owned subsidiary 27 Build or Buy? 27 Buy models 28
Offshore staff augmentation 28 Project outsourcing 28 Offshore dedicated center (ODC) 28 Functional outsourcing 28
When to buy? 29
iv
Offshore resources 29 Value add 29 Performance 29 Cost 29
Build models 30 Do It Yourself (DIY) 30 Build Operate Transfer 30 M&A 30
When to Build? 31 Nearshore outsourcing 32 Drivers and inhibitors to nearshore outsourcing 34
Drivers 34 Risks 34
Chapter 2 Emerging models in offshore outsourcing 36
Summary 36 Introduction 36 Offshore outsourcing models 37 Buy models 37
Offshore staff augmentation 37 Project outsourcing 37 Offshore Dedicated Center (ODC) 37 Functional outsourcing 38 Tactical partnering 38 Strategic partnering – a joint venture 38
Build Models 39 Do It Yourself (DIY) 39 Captive center 39 Build Operate Transfer (BOT) 40 M&A 40 Wholly-owned subsidiary 40
Nearshore outsourcing models 41 Nearshore 41
Western Europe 41 North America 42
Homeshoring 42 Call centers 42 Software development 43
Insourcing 44
v
Chapter 3 The 10 most influential offshore service providers 46
Summary 46 Vendor selection 47
Pick the Country First 47 Recommendation 47 Domain & technical filtering 48
The 10 most influential offshore outsourcing firms 48 IBM Global Services 49 Infosys Technologies 50 Cognizant Technology Solutions 50 Convergys 51 Accenture 51 Tata Consultancy Services 52 Hong Kong and Shanghai Banking (HSBC) 52 Keane 52 General Electric 53 Epam 53
Chapter 4 Overview of offshore locations 56
Summary 56 Introduction 57 Relative levels of risk and cost 57 Locations 59 Argentina 59
Where is the market today? 59 Risks 59 Rewards 59 Conclusion 60
Brazil 60 Where is the market today? 60 Risks 60 Rewards 61 Conclusion 61
Canada 61 Where is the market today? 61 Risks 62 Rewards 62 Conclusions 62
Hungary 63 Where is the market today? 63 Risks 63
vi
Rewards 64 Conclusions 64
India 65 Where is the market today? 65 Risks 65 Rewards 65 Conclusions 66
Jamaica 66 Where is the market today? 66 Risks 66 Rewards 66 Conclusion 67
Mexico 67 What is the market today? 67 Risks 67 Rewards 67 Conclusion 68
Philippines 68 Where is the market today? 68 Risks 68 Rewards 69 Conclusion 69
Poland 69 Where is the market today? 69 Risks 69 Rewards 70 Conclusion 70
South Africa 70 Where is the market today? 70 Risks 71 Rewards 71 Conclusion 71
Chapter 5 Nearshore locations for Western Europe 74
Summary 74 Introduction 75 Central and Eastern Europe 76 Strengths 76 Weaknesses 81 Opportunities 83 Threats 84 North Africa 85 Strengths 86 Weaknesses 87 Opportunities 88
vii
Threats 89
Chapter 6 Nearshore locations for North America 92
Introduction 92 Canada 93 Where is the market today? 93 Risks vs. rewards 93 Central America 95 Mexico 95
Where is the market? 95 Economic assessment 95 Nearshore outsourcing 96 Labor rates 98
Call center activity 99 Conclusions 99 The Caribbean 100 Jamaica 102
Government efforts to attract call center investment 102 Vertical market distribution 102 Labor market 103 Call center functions 104 Conclusions 104
Chapter 7 Focus on call center offshore outsourcing 106
Summary 106 Demand for offshore call centers 107 Specific country requirements 108
US 108 UK 109 France 110 Germany 110 Rest of Europe 112 Asia Pacific 113
Demand for offshore call center outsourcing by vertical 113 Key drivers 115 Cutting costs 115 More demand for multilingual services 117 Barriers to offshore outsourcing 118 The distance issue 118
viii
Less concern for accents and more an issue of cultural affinity 119 Demystifying the threat from global offshore call center outsourcing 120 Action points 122 Refine sales approaches 122 Carve a niche and partner for success 122 Allay customers’ fears 123 Adopt appropriate pricing models 123 Exploit shared voice & data network new business opportunities 124 Index 125
List of Figures Figure 4.1: Relative risks and costs of nearshore and offshore outsourcing markets 57 Figure 5.2: Central and Eastern European nearshore outsourced agent positions, 2003 – 2008 76 Figure 5.3: Percentage of population between 20 – 24 years old in tertiary education, 2003 79 Figure 5.4: Commercial real estate rents – Selected urban centers, Q1 2004 80 Figure 5.5: Selected European unemployment rates: 2003 81 Figure 5.6: North African nearshore outsourced agent positions, 2003 – 2008 85 Figure 6.7: Mexican offshore and domestic outsourced APs, 2003 - 2008 97 Figure 7.8: Vertical offshore outsourced APs available, 2003 114 Figure 7.9: Drivers for offshore outsourcing 115 Figure 7.10: Barriers to offshore call center outsourcing 118 Figure 7.11: Offshore outsourced APs are a threat to onshore outsourced APs 120 Figure 7.12: Offshore outsourced APs as a percentage of total global APs and growth rates, 2002-
2007 121
List of Tables Table 3.1: The 10 most influential offshore outsourcing providers 48 Table 5.2: Selected travel times and prices for a single-day trip from London to selected
outsourcing destinations 77 Table 5.3: Corruption Perception Index: 2003 82 Table 6.4: Price per hour of Canadian outsourced agents, 2004 94 Table 6.5: Mexican call center wages and turnover, compared to Argentina 99 Table 7.6: Main offshore and nearshore outsourcing locations for the major outsourcing customer
markets 108
9
Executive summary
10
Executive summary
Offshore and nearshore outsourcing
The success of the offshore outsourcing model means that there are now over
10,000 vendors in more than 175 countries claiming to offer some form of offshore
outsourcing service.
In terms of IT, the key driver remains largely focused on cost savings.
As the offshore model matures, other considerations such as quality of service and
expertise, as well as knowledge of local markets knowledge, are further advantages
of offshoring.
Nearshoring has become a viable solution for many companies because nearshore
country locations offer the advantage of similar time zones, ease of travel and
potentially greater control due to familiarity or physical and cultural proximity to
the customer.
Emerging models in offshore outsourcing
Long term business strategy and commitment will determine an appropriate
business model for offshore outsourcing, of which there are a number to consider.
US companies are increasingly using locations such as The Philippines as a
nearshore location, in preference to India, for cultural and linguistic reasons.
Central and Eastern Europe is emerging as a key region for nearshore outsourcing,
as West European companies are drawn to its low costs, ample labor pool, and pro-
commerce attitude.
The Build, Operate & Transfer (BOT) model is the lowest risk and can generate
some of the biggest cost savings and performance improvements.
11
Of all the potential options for building an offshore team, ‘Do-IT-Yourself’ is the
most expensive and least successful, with a success rate of less than 35% and
average cost exceeding $5 million.
The 10 most influential offshore service providers
The mantra “Pick the Country First” is perhaps the most widely known and
commonly used method for selecting an offshore vendor.
There is a growing trend in the market where buyers will use specific industry
domain and technical skills as the entry criteria for a tender process.
IBM Global Services has 6,000 people working in India, and has plans to expand
into China. The company only recently made its first acquisition in India in March
2004, paying $160m for India’s third largest BPO provider Daksh eServices, which
employs 6,000 people across five facilities in India and a new location in the
Philippines.
Infosys Technologies, the second largest Indian software services exporter, is
leading the expansion of Indian companies outside their homeland into China,
Eastern Europe, the Americas and Australia.
As one of the world’s largest suppliers of call center management services,
Convergys has pioneered the use of an offshore delivery model in contact center
management services, and is rapidly expanding its presence in India and the
Philippines.
12
Overview of offshore locations
Enterprises from the US and UK will continue to locate centers in India despite
wage inflation, increasing turnover and negative press due to the level of service
from India and offshore outsourcing in general.
The Brazilian call center market offers the most balanced investment opportunity in
Latin America. It is the third largest call center market in the world behind the UK
and US and the most developed in Latin America.
Location is proving to be a determining factor for many US outsourcers as firms
become more cost and time conscious, and Canada is the classic example of the
benefits that nearshore outsourcing can provide.
Currently, Hungary is used primarily for mid-level calling but, as the market
matures, it will be used for increasingly complex services such as higher value
collections, technical support calling and cross- and up-selling.
The biggest attraction of the Philippines over India as an outsourcing location is its
cultural affinity with the US.
South Africa’s cultural affinity with Europe is making it an up and coming offshore
location, particularly in the call center and financial services sectors.
Nearshore locations (for Western Europe)
Western European companies will be prompted to action as more nearshore
alternatives to India, China and South Africa mature.
Eastern Europe call centers are far better placed to provide customer-facing
business process outsourcing (BPO) services – a rapidly growing sector for
outsourcing providers – to many European companies than are the traditional
offshore locations.
13
For many Western companies looking to outsource contact center services, Central
and Eastern Europe is an excellent choice based on its relatively short distance
using air, rail, and road.
In 2004, there were approximately 27,000 outsourced agent positions (APs) in
Central and Eastern Europe.
Throughout Central and Eastern Europe, the rate of multilingualism among younger
people is strong, with English, German, French, Italian, and Nordic tongues spoken
widely. Further European integration is certain to accelerate this trend.
The proportion of call center agent positions dedicated to serving the Western
Europe nearshore market in North Africa will grow through 2008, increasing from
14% in 2003 to 25% by 2008.
Concerns abound within Central and Eastern Europe regarding the tightening
contact center agent market, which could result in higher wages, thus reducing the
advantageous margins that have been a key selling point for the region.
North Africa has effectively penetrated Europe’s French-speaking markets for
contact center outsourcing, and is its governments are now looking to other
countries to which it can offer customer care services. The main targets are the UK
and Spain.
Nearshore locations (for North America)
The main advantages of Canada as an outsourcing location are proximity to the US
and the quality of the Canadian agent.
Outsourcers operating in Canada offer their services as the lower-cost alternative to
the United States for comparable service in a secure business environment.
While Canada is the most expensive offshore/nearshore location in the world, but it
is also the most stable and secure.
14
The Mexican call center market is the second largest in Latin America and is larger
than the Argentine, Chilean and Colombian combined.
Mexico offers substantial growth opportunities for equipment vendors, systems
integrators and domestic outsourcers alike.
Mexican nearshore outsourcing will undergo substantial growth through 2008. By
2008, 23% or roughly 13,000 outsourced seats will be nearshore seats. This is
because Mexico has emerged as the most attractive location from which to serve
the US Hispanic population.
Jamaica’s call center market will continue to grow steadily, reaching 8,000 APs by
2008.
However, Jamaica’s small population places constraints on sustainable growth.
Focus on call center offshore outsourcing
India and the Philippines provided 70% of the world market offshore outsourced
APs in 2002; this will drop to 64% in a growing global offshore market by 2007.
South Africa is seen as a hidden gem of offshore call center outsourcing.
It can take up to 3 or 4 years before a new offshore market establishes a critical
mass of middle-management skill sets.
There is further growth in the offshore market for IP call center, shadow
infrastructure and remote-monitoring technology solutions.
Overall, demand is growing – strongly, but it is also starting to shift eastwards
away from the USA. With this shift come subtle differences in requirements.
Demand for offshore call center outsourcing is growing and shifting east to
countries across Europe and will also grow in the APAC region through 2007.
15
The financial services, technology and telecoms sectors are those most in demand
and best adapted to being outsourced offshore.
Cultural affinity of call center agents is more important than the accents they have.
Real-time monitoring and a supporting shadow infrastructure are needed to allay
clients’ fears about losing control of their customer interactions if they outsource
offshore.
Clients often do not fully understand their desired operating model, so SIs and
OSPs can assist them by undertaking business process reviews with them and
working out the blended solution of in-house and outsourced call centers.
16
17
CHAPTER 1
Offshore and nearshore outsourcing
18
Chapter 1 Offshore and nearshore outsourcing
Summary
The success of the offshore outsourcing model means that there are now over 10,000 vendors in more than 175 countries claiming to offer some form of offshore outsourcing service.
In terms of IT, the key driver remains largely focused on cost savings.
As the offshore model matures, other considerations such as quality of service and expertise, as well as knowledge of local markets knowledge, are further advantages of offshoring.
Nearshoring has become a viable solution for many companies because nearshore country locations offer the advantage of similar time zones, ease of travel and potentially greater control due to familiarity or physical and cultural proximity to the customer.
Introduction
The incredible success of the Indian offshore outsourcing market over the past five
years has proven that regardless of location, IT services providers can sell world-class
services to the biggest companies around the globe. As a result, there has been a boom
in offshore and nearshore outsourcing delivery models.
The offshore outsourcing market has experienced strong growth over recent years,
thanks to the cost advantages it offers. The market really took hold in the late 1990s
when global firms struggled to find enough engineers to staff Internet and Y2K projects
– the only requisite for an offshore vendor then was merely to have people!
19
When the technology market imploded in 2001, the offshore outsourcing market took
the opportunity to recreate itself as a genuine low-cost alternative to onshore resources.
Anticipating a change in the way outsourcing companies were used, offshore
outsourcing firms invested heavily in developing processes and gaining certifications,
so that when the market transitioned away from low resource cost models to a more
sophisticated project delivery model, they were positioned and ready.
As a result, offshore vendors have over recent years made significant progress in
delivering so-called global sourcing solutions using the optimal location for delivery of
each element of a contract. India, in particular, has come to define the term ‘offshore
outsourcing’ over the past decade. The aggressive leadership of several Indian
companies, such as Wipro, Infosys and Tata, has helped the global economy to adopt a
global fulfilment model for many IT functions and proved that the model can work.
As the solution offerings have been extended so too have the sizes of the addressable
market and the vendors in question. Today several of the Indian vendors have market
capitalization on par with most of their onshore competitors and are increasingly able
to benefit from the lessened perception of risk that they were in the past strongly
associated with.
20
Offshore outsourcing
Today, India is far from alone as an offshore outsourcing location. It is estimated that
there are more than 10,000 offshore outsourcing vendors offering some form of
outsourcing in over 175 countries as diverse as The Philippines, Eastern Europe, China,
South Africa, Latin America and The Caribbean.
Drivers and inhibitors
Key drivers for offshore outsourcing
Offshore outsourcing has been primarily driven by application management and, more
recently, contact center outsourcing, but is expanding to include business process
outsourcing (BPO) and customer relationship outsourcing. The market looks set to
continue its rapid growth as services mature and vendors explore opportunities in other
market segments and cost considerations remain key to IT strategy.
In terms of IT, the key driver, as previously mentioned, remains largely focused on cost
savings. During 2001 and 2002, IT budgets were slashed significantly, and the drivers
behind IT strategy made a clear shift away from effectiveness (e.g. revenue building,
IT and business strategy alignment) towards efficiency improvement (cost cutting and
improved cost efficiency of IT projects). This trend remained prevalent in 2003 as
organizations remained chiefly focused on maintaining efficiency, but some level of
balance has now returned as organizations are, once again, planning for the longer term
future.
The upturn in global markets, and improved company performance as a result, now
means that organizations are looking, once again, to offshore (and nearshore)
outsourcing to help drive renewed revenue building and IT / business alignment
strategies, in addition to cutting costs.
21
Another advantage of offshore outsourcing is the access it provides to industry
expertise, such as call center operations or application development, and local market
knowledge in a global economy, which would not otherwise be available to many
organizations – or at least at a reasonable cost. It is also a sign that offshore
outsourcing vendors are maturing, with providers from countries such as India and
Russia now able to compete on a par – and in some cases excel – against traditional
onshore business strategies.
Inhibitors of offshore outsourcing
Political backlash
There has been much political and media discussion in Western Europe and the US in
recent years, regarding the loss of ‘homeshore’ jobs to cheaper, offshore locations. One
notable example, being the apparent suicide of a programmer for Bank of America in
May 2003, who stepped out into the company’s car park, and shot himself having just
been made redundant, to be replaced by cheaper software programmers based offshore
in India.
Kevin Flanagan’s suicide triggered a torrent of bad press for the many US and UK-
based corporations that had been rushing to outsource their operations to countries
where labor and capital costs can be several magnitudes smaller than at home.
It also lit a spark under the anti-offshore movement, particularly in the US, where
Flanagan has become something of a martyr. This resulted in a growing number of
public protests, one of the first of which was held on 1 September 2003 at the BoA
Concord, California campus, where Flanagan died. In January 2004, 20 protestors
braved the New York winter to demonstrate outside an offshore business conference in
Manhattan. Despite the small number, the publicity created forced one speaker to bar
the press from his presentation entitled: “Is offshore outsourcing unpatriotic?”
Bad publicity, and public opinion, has already stopped a significant number of US
offshore deals in their tracks, particularly in the government sector. In November 2003,
public pressure forced Indiana's state government to cancel a $15m (£8m) IT contract
22
with Tata Consulting Services, after officials concluded it was inappropriate to use the
taxpayers’ money to pay foreign workers. This was followed by the New Jersey
department of human services, which for the same reasons relocated work sent to
Mumbai, India under a business process outsourcing contract with Arizona-based
company eFunds. The work is now being carried out from a call center in Camden,
New Jersey.
Indeed, public pressure has pushed the US Government into an increasingly anti-
offshore stance, culminating in George Bush signing a bill restricting, on 23 January
2004, which bans offshore outsourcing by certain Federal agencies.
In the UK the situation has so far been more subdued, but the anti-offshore movement
is gathering pace. Meanwhile, in France, the largest customer for North African
customer care outsourced services, political soundings about sending jobs offshore
have worried investors, who fear reprisals by the French government in retaliation for
sending jobs offshore. There is also concern that the French government may introduce
favourable tax incentives to keep these roles in France, which could affect North
African competitiveness.
The crux of the offshore outsourcing debate is the issue of job losses, and the related
effects on the home, or ‘onshore’, economy. Unfortunately, as with any complex
economic modelling, the truth of the matter is never clear. Indeed, in the US, where the
offshoring market is far more mature than in the UK, several government economic
research departments have admitted that they do not have the right data or resources to
measure and understand the true economic effects of offshoring.
There is a new, and perhaps more powerful reason to reconsider offshore strategies,
outside of the political and social issues, however. And it is to do with the quality of
service provided by offshore outsourcers; an issue that has come to increasing
prominence after a string of US and UK companies have started retracting their
offshore operations. And there is growing evidence that businesses are now beginning
23
to look not only at cost, but also at the broader holistic benefits and risks associated
with offshore outsourcing.
Engagement issues
Difficulty in communicating with the outsourcer is usually cited by organizations that
are considering offshore outsourcing as the most significant barrier or challenge.
Communication with for, example Indian vendors, is only in part a linguistic issue, and
in fact also a logistical and cultural hurdle. However, many offshore providers have
been aware of this challenge for some years, and have been taking steps to overcome it.
Many offshore providers will, depending on the project, now routinely have offices in
Western cities, in which their employees regularly spend months at a time, absorbing
the culture, and language, of Western organizations. Likewise, senior onshore
employees of the company that is outsourcing a project may spend time at the offshore
vendor building relationships, as well as bridges across the culture gap.
Lack of control is another commonly cited concern. Interestingly, this is a more
common issue amongst certain verticals than others, indicating a more conservative
attitude towards outsourcing and a greater historical focus on internal IT development
in some organizations or sectors, such as financial services, compared to others.
Organizations are also apprehensive about a possible lack of understanding of business
requirements on the part of the outsourcer, and that management personnel would need
to spend more time overseeing the vendor relationship. This is something that can be
linked to concerns over communication and the failure of vendors to establish business-
level credibility. Especially as offshore vendors aim to penetrate the business process
outsourcing (BPO) services market, it will become vital to demonstrate increased
business understanding and line of business focus.
The need for offshore outsourcing providers to have local operations within an
organization’s home market is seen as a minor concern amongst a minority of
organizations. But while this model of operation will continue to work in the
24
applications market, it is clear that for BPO services, for example, a closer and more
responsive relationship is required.
Other issues commonly cited include: security, quality of service, onshore employee
concerns, lack of customer support, lack of business driver and better onshore options.
In fact, it will be key for the outsourcing industry to tackle the issues and barriers to
offshore outsourcing over the next couple of years if long term demand is to be
sustained. As strategic IT drivers increasingly shift back towards growth enablement,
the outsourcing imperative will be driven increasingly by fulfilment excellence and
operational efficiency rather than straight cost considerations. Vendors must therefore
create a clear and robust communication structure with an element of onshore service
to match the nature of the services they are looking to provide.
Best practice
Client preparation and execution is one of the main causes of offshore outsourcing
failure. Both the outsourcing organization and the offshore provider need to perform
extensive preparation and planning, including setting high standards of benchmarks in
terms of performance and detail. Every detail should be recorded, reviewed and
planned. As a rule of thumb, the ‘outsourcee’ should be the one pushing this agenda,
rather than leaving it to the vendor.
Another leading cause of failure in offshore outsourcing engagements are problems
relating to the extent and quality of the client-vendor planning sessions prior to
commencing the engagement (21%). Often, offshore outsourcing vendors steamroll the
initial engagement process, trying to get signed contracts as fast as possible, and the
client does not demand clarity in roles, responsibilities, expectations, joint operations,
deliverables, short-term team plans, performance metrics, and so on. If these are not
clarified from the outset, it can lead to misperceptions and differences in expectations
between the two parties.
25
It may also be that the offshore outsourcing route is simply the “wrong answer” for a
specific business problem. This relates back to the commonly made mistake of viewing
outsourcing as a way to “wash your hands” of a particular IT problem or headache. It
may also be that there are better options, and that offshoring does not solve the root
problem.
There is also a significant issue with maintaining the support of the internal team
during an offshore outsourcing engagement. It is a fact offshore strategies are difficult
and will require employees to be active participants willing to help address issues as
the offshore strategy is implemented. Without in-house support successfully adopting
an offshore fulfilment model will be particularly challenging.
Competition between onshore and offshore teams is another problem, with onshore
teams keen to prove that they are still required by the organization. Organizations need
to take an active approach to mitigating this problem in order to avoid a dysfunctional
global team.
Finally, the reason for failure could fall squarely on the shoulders of the offshore
vendor, so choice of vendor and location should be one of the first considerations of
any organization tempted by the offshore outsourcing route.
Offshore outsourcing models
Long term business strategy and commitment will determine an appropriate business
model for offshore outsourcing, of which there are a number to consider:
Transactional partnering
This should be performed to “test the waters” or for isolated outsourcing. The work is
subcontracted on a project-only basis, and there should be low-level commitment to the
relationship from both parties. Essentially, this can be viewed as a “pilot”, but should
never be used as proof that the vendor can handle the work, as it may be that their best
26
people have been assigned to the project, or pilot, in order to secure a longer-term
working relationship and contract.
Tactical partnering
In essence, this reflects an offshore development center, and is major commitment from
both the organization and the offshore provider. The outsourcing enterprise “assures”
work for a dedicated number of resources for at least two to three years, including a
growth plan. The outsourcer would define the type of work it would outsource and the
skill levels that the provider should offer. Providers would supply dedicated facilities, a
dedicated communication link, and a dedicated offshore manager, responsible for
staffing and running the center, as well as training at its own cost and providing basic
infrastructure such as computers, telephone and fax. Both parties would work together
to build the “process manual” that would determine how the work would be done and
how the interfaces would work, and should establish service levels to be monitored
regularly.
Strategic partnering – a joint venture
A joint venture is more strategic in nature, with goals beyond opportunistic
outsourcing. The outsourcer establishes a presence in the geographic area where the
outsourcing work is to be performed. Goals may go beyond outsourcing to include
selling some of its own products or services in the geography. The service provider
may add value to further these interests of the outsourcer.
The outsourcer enterprise contributes to business knowledge whereas the provider
supplies local knowledge and local management skills. Both invest in the infrastructure
in the form of equity and establish common goals to be met. The biggest challenge to a
joint venture relates to the merging of two very different cultures.
27
Collaborative partnering – Build-Operate-Transfer (BOT)
Collaborative partnering takes the offshore development center a step further, whereby
the outsourcing company agrees to acquire the offshore center, its assets and its people
after a pre-determined period of time. The Build, Operate, Transfer (BOT) business
model allows a company to get comfortable with the location, with remote
development and also provides adequate time to structure an enterprise in the remote
location.
Wholly-owned subsidiary
Cadence, Microsoft, Intergraph, Motorola and Texas Instruments are all examples of
companies that have taken the wholly owned subsidiary route. The major challenge
here is knowing the local culture, laws and bureaucracy relating to business and
employment in the offshore location. Local managers should manage legal structuring,
human resources and government liaison; while expatriates or outsourcer managers
might be more suited to technical and operations management in the locale. A wholly
owned subsidiary will ramp up a lot slower and would also take a significant amount of
management time and attention. But once the creases have been ironed out, this has
potential to be the most rewarding structure.
Build or Buy?
Given some of the challenges of offshore outsourcing outlined above, many Western
organizations have preferred to build up their own offshore teams. However, this is a
decision that is frequently made as a knee-jerk, or ill thought out, reaction. This section
outlines some of the arguments “for” and “against” the Build versus Buy debate. First,
there are a number of different models that can be adopted within each camp.
28
Buy models
Offshore staff augmentation
The offshore staff augmentation model functions similar to onshore staff augmentation.
Here, onshore teams provide daily oversight of offshore resources. This model forces a
great deal of communication between onshore and offshore teams and requires a large
overhead in terms of resources and effort required.
Project outsourcing
In this model, the customer identifies a specific project needing completion and
prepares all necessary project-related materials. The customer then retains an offshore
vendor to deliver the project. At the completion of the project, the engagement ends. If
the project is likely to last more than three months, and there is no forecast beyond the
initial project, this is an appropriate model to choose.
Offshore dedicated center (ODC)
In the dedicated center, the vendor assigns a set number of resources to the client for an
ongoing series of projects. In this model, the client is responsible for a fully burdened
resource cost and will be responsible for downtime between projects. The upside to this
model is that for a series of related projects, it is possible to keep the same resources on
each project eliminating ramp-up time and costs. This is suited to projects with a long-
term forecast for a series of related projects.
Functional outsourcing
In this model, the vendor will outsource a complete function or application. While pay
models occasionally are structured on a time and materials basis, most functional
outsourcing engagements heavily leverage a risk-reward model. Also, these
engagements typically encourage the vendor to bring tools, methods, resources and
knowledge to the engagement in order to achieve a greater performing engagement.
With high-caliber offerings now being developed by outsourcing vendors around the
world, this model is now proving to generate the best possible value for customers.
29
When to buy?
Offshore resources
The best and brightest employees in the market want to work with the major local
vendors. Across India, Russia and other offshore hotspots, the top seasoned talent want
to work for the major local outsourcing providers – Wipro, Infosys and Tata in India
spring to mind – not Western multinationals. While it is possible to mitigate this, it is
an expensive, frustrating, and time-consuming process.
Value add
The best of the offshore outsourcing vendors invest millions of dollars every year in
order to develop new methodologies and intellectual property that help provide value
add for their customers. The alternative is to spend a large amount of money and
resources trying to catch up with this local and specialized expertise.
Performance
Offshore engagements that have used offshore vendors reach a positive ROI faster,
have a lower failure rate, generate a better ROI, and have the highest satisfaction rates.
Building an operation using in-house resources is likely to result in twice the cost than
working with a local vendor.
Cost
There is incredible overhead associated with managing remote teams. Offshore vendors
have two advantages: economy of scale – offshore vendors already have an
infrastructure built to facilitate management of various teams around the world and by
utilizing this built-in infrastructure, the cost is shared across all their accounts; catalysts
– offshore vendors have invested a large amount of time and money to solve the remote
team management issue. They are now leaders in this space and can manage remote
teams more cost-effectively than anyone else.
30
Build models
Do It Yourself (DIY)
Here the client develops everything from finding an offshore office, obtaining local
licenses and permits, hiring all employees and managing the daily activities of each
employee once the team is assembled. Of all the potential options, this can be the most
expensive and least successful with a success rate of less than 35% and average cost
exceeding $5 million.
Build Operate Transfer
In the Build-Operate-Transfer model organizations hire a local offshore outsourcing
vendor to completely build the offshore team. Once the offshore facility is up and
successfully running, the customer will then buy out the offshore facility under pre-
defined terms. This model is enjoying increasing success, due to the fact that it can
generate the best results of all the models outlined here. It is an incredibly low risk
model – if at the end of engagement, business needs change, organizations are not
stuck with a long-term offshore obligation. At the same time, depending on how the
contract is structured, organizations can simply hand the vendor the keys and walk
away without future liability. Statistically, this is also lower cost and higher performing
than DIY, as having a “local” firm that specializes in building outsourcing teams can
cut the cost and time required to generate a positive ROI by up to 30%.
M&A
As organizations emerge from the downturn and see a stability return to their financial
results, this is option is becoming more popular. This is a sound approach and buying
or merging with a mature offshore team can provide onshore companies with a fast
method for launching an offshore strategy. This option should be seriously considered
when an organization is in the offshore market to stay.
31
When to Build?
Building an “in-house” offshore strategy does have its advantages in specific situations.
Organizations should consider the following criteria when making the decision:
Do you have experience in both working in the selected country and in building
remote teams? If the answer is “yes”, consider the following criterion;
Honestly assess both the management team and the junior employees applying for
jobs. If it is not the “cream of the crop” for both groups, it may be wiser to follow
the “Buy” route.
Managing teams in multiple locations is a tough task. When building and running
an offshore team, organizations take on a sizable overhead simply trying to keep
multiple sites operational. If you do not have experience managing the activities of
two or more teams in multiple locations, do not attempt to build your offshore team
yourself.
Does building your own offshore team without the support from an offshore vendor
present a more cost compelling story when compared to using a vendor? It is rare
that an onshore firm can build an offshore team at a lower cost than a provider-
assisted option.
32
Nearshore outsourcing
As companies struggle to compete in today’s global economy, offshore outsourcing has
to other countries has emerged as a valid alternative in reducing the cost of business
operations. An increasing number of organizations – various surveys suggest around
one in four businesses – plan to use offshore outsourcing to perform vital business
functions, such as call centers, back-office operations, software development, business
process outsourcing and other strategic business operations, to stay competitive.
In recent years, offshoring has become the mantra for cost reduction. Despite all the
talk about security concerns including political instability, language and culture
barriers, legal difficulties and intellectual property rights protection among others,
companies continue to move large components of their business offshore. Although
offshoring received a lot of scrutiny and criticism in the early stages, it has proven to
be beneficial for companies that have embraced it. However, another cost-reducing
alternative – nearshoring – is also coming to the fore.
With nearshoring, organizations have the benefit of outsourcing operations offsite, but
in a way that is convenient — physically, culturally, managerially and financially — to
the overall business. A nearshore location is, essentially, one that is closer in terms of
geography, culture, time zone and language to an offshore location. So, for example,
US nearshore locations include Canada, Mexico and The Caribbean, while Western
European nearshore regions include Central and Eastern Europe and North Africa.
Other locations might include Cyprus for Israel, or China and India for Japanese
organizations.
Nearshoring has become a viable solution for many companies because nearshore
country locations offer the advantage of similar time zones, ease of travel and
potentially greater control due to familiarity or physical and cultural proximity to the
customer. While offshoring is still a very popular option with companies, organizations
33
that want to hedge their bets and curb the inherent risks of offshoring have an option
closer to home.
One of the main attractions of offshoring is the round-the-clock factor derived from
being in disparate time zones. The flip side of this is there is little to no opportunity for
businesses to work collaboratively with their offshore partner due to the time
difference. But the benefit of proximity, or nearshoring, is more than just working in
the same, or close, time zone. For small projects that require close interaction with the
company and its outsourcing partner, nearshoring more appropriate and less expensive
than the offshoring alternative. Furthermore, the complexity of managing security and
crisis issues is lessened with closer proximity. Another benefit of nearshoring
proximity is the ability to build trusted relationships with decreased risk of linguistic or
cultural misunderstandings. Predictability of service is another major factor in the
growing popularity of nearshoring.
At the same time, nearshore outsourcing can be seen as a complementary option for
offshore outsourcing, whereby organizations might outsource some aspects of business
operations to distant shores, outsourcing others nearer to home – i.e. nearshore –
dependent on the cultural, linguistic and physical requirements of a specific project.
The terms ‘best-shore’ or ‘right-shore’ have been coined to describe the use of a
combination of offshore and nearshore outsourcing in order for an organization to gain
the best possible combination of global sourcing requirements.
Nearshoring combines the best of both worlds offering cost-effective, off-site resource
deployment in relatively close geographical proximity to centers of business, thus
avoiding the logistical and empathic issues associated with, for example, the Indian and
Asian sub-continent.
Recently, there has been a trend to move non-critical back-off functions offshore, while
performing critical projects with nearshore resources due to the lower risks outlined
above. This model has proven to be successful for many companies because it allows
34
them to operate in a similar operating mode to which they have become accustomed to,
as the nearshore operation acts more like another office location than a separate entity.
Drivers and inhibitors to nearshore outsourcing
Drivers
While cost savings may not be as great as offshoring, having a nearshore partner run
essential business operations will nevertheless reduce costs. Of course, travel cost is
one way in which companies save, however, in most cases, the more significant area
for cost savings comes from infrastructure costs. At the same time, time zones are
likely to be much closer aligned than those of offshore locations, making collaboration
between tow locations easier. Of course, on the other hand, this offsets one of the
advantages of offshoring to a distant time zone, which can provide 24-hour business
cover.
Nearshore centers, like offshore facilities, upgrade their technologies in order to better
collaborate with their nearshore partner. There may be some nominal expense on the
part of the company to integrate with the nearshore facility, but the costs are generally
not as great. Furthermore, most nearshore partners tend to come with a more robust
technology offering than offshore partners, thus the need to purchase, enhance or build
is less than what may typically be true with an offshore partner.
Risks
There are far fewer risks of choosing nearshore versus offshore, but each model comes
with its own advantages and disadvantages. Of course, offshoring is cheaper than
onsite – but cost should not be the only criterion on which an outsourcing strategy is
built: Not only inexpensive labor, but also convenience; the ability to collaborate easily
and effectively; and manageable risk. Nearshoring allows businesses to manage
outsourced business operations with minimal risk. This does not mean, however, that
nearshoring is free of risks. Often the best solution is a combined model of onsite,
offshoring and nearshoring.
35
CHAPTER 2
Emerging models in offshore outsourcing
36
Chapter 2 Emerging models in offshore outsourcing
Summary
Long term business strategy and commitment will determine an appropriate business model for offshore outsourcing, of which there are a number to consider.
US companies are increasingly using locations such as The Philippines as a nearshore location, in preference to India, for cultural and linguistic reasons.
Central and Eastern Europe is emerging as a key region for nearshore outsourcing, as West European companies are drawn to its low costs, ample labor pool, and pro-commerce attitude.
The Build, Operate & Transfer (BOT) model is the lowest risk and can generate some of the biggest cost savings and performance improvements.
Of all the potential options for building an offshore team, ‘Do-IT-Yourself’ is the most expensive and least successful, with a success rate of less than 35% and average cost exceeding $5 million.
Introduction
As the offshore market matures, the range of business models increases accordingly.
While plotting out their crucial cost-cutting and value-enhancing measures, companies
often have to strike a balance between onshore and offshore labor – some core tasks
stay onshore, while other jobs, core or otherwise, go overseas. This section will explore
some of the emerging business models for both offshore and nearshore outsourcing.
37
Offshore outsourcing models
Long term business strategy and commitment will determine an appropriate business
model for offshore outsourcing, of which there are a number to consider.
Buy models
Offshore staff augmentation
The offshore staff augmentation model functions similar to onshore staff augmentation.
In this model, an onshore team will provide daily oversight of an offshore resource (or
team of resources). This model forces a great deal of communication between the
onshore and offshore teams and instances of positive ROI are difficult to come by when
factoring in the incredible overhead effort required.
Project outsourcing
In this model, the customer identifies a specific project needing completion and
prepares all necessary project-related materials. The customer then retains an offshore
vendor to deliver the project. At the completion of the project, the engagement ends.
For projects that are likely to last three months or more, or which do not have a
consistent forecast beyond the initial project, this is an appropriate model to choose.
Offshore Dedicated Center (ODC)
In the dedicated center, the vendor assigns a set number of resources to the client for an
ongoing series of projects. In this model, the client is responsible for a fully burdened
resource cost and will be responsible for downtime between projects. The upside to this
model is that if you have a series of related projects, you will keep the same resources
on each project eliminating the ramp time and will not end up paying for additional
team ramp costs. If you have a long-term forecasted need for a specific series of related
projects, it is strongly encouraged you explore an Offshore Dedicated Center model.
38
Functional outsourcing
In this model, the vendor will outsource a complete function or application. While pay
models occasionally are structured on a time and materials basis, most functional
outsourcing engagements heavily leverage a risk-reward model. Also, these
engagements typically encourage the vendor to bring tools, methods, resources and
knowledge to the engagement in order to achieve a greater performing engagement.
With the high-caliber offerings now being developed by outsourcing vendors around
the world, this model is now proving to generate the best possible value for customers.
Tactical partnering
In essence, this reflects an offshore development center, and is major commitment from
both the organization and the offshore provider. The outsourcing enterprise “assures”
work for a dedicated number of resources for at least two to three years, including a
growth plan. The outsourcer would define the type of work it would outsource and the
skill levels that the provider should offer. Providers would supply dedicated facilities, a
dedicated communication link, and a dedicated offshore manager, responsible for
staffing and running the center, as well as training at its own cost and providing basic
infrastructure such as computers, telephone and fax. Both parties would work together
to build the “process manual” that would determine how the work would be done and
how the interfaces would work, and should establish service levels to be monitored
regularly.
Strategic partnering – a joint venture
A joint venture is more strategic in nature, with goals beyond opportunistic
outsourcing. The outsourcer establishes a presence in the geographic area where the
outsourcing work is to be performed. Goals may go beyond outsourcing to include
selling some of its own products or services in the geography. The service provider
may add value to further these interests of the outsourcer.
The outsourcer enterprise contributes to business knowledge whereas the provider
supplies local knowledge and local management skills. Both invest in the infrastructure
39
in the form of equity and establish common goals to be met. The biggest challenge to a
joint venture relates to the merging of two very different cultures.
Build Models
Do It Yourself (DIY)
The Do It Yourself model is what it implies: You, the client, do everything from
finding an offshore office, obtaining all local licenses and permits, hiring all employees
and managing the daily activities of each employee once the team is assembled. Of all
the potential options for building an offshore team, this is proving to be the most
expensive and least successful with a success rate of less than 35% and average cost
exceeding $5 million.
Captive center
This is similar to the DIY model. Many large multinational organizations in the West,
especially those in the financial services industry for example, have been unwilling to
transfer the risk management aspects of offshoring to a local third-party provider, while
still wanting to take advantage of the labor arbitrage advantages of setting up in a
country such as India. If the offshored function is mission critical, either the risks are
considered too great or there is a lack of experience in the local providers for providing
such a service. As a result, many Western firms have set up ‘captive’ centers, whereby
control is maintained by that company, essentially as a subsidiary in a distant location.
While this model has clear advantages around risk management, it is one of the more
costly and time-consuming approaches and, as a result, is only within the grasp of the
largest organizations. There are also numerous examples of Western companies that
have tried this approach either withdrawing from the captive centers or selling them off
as businesses in their own right – for example General Electric’s Indian IT services arm
GECIS.
40
Build Operate Transfer (BOT)
In the Build-Operate-Transfer model the organization looking to offshore hires a local
outsourcing provider to completely build the offshore team. Once the offshore facility
is up and successfully running, the customer will then buy out the offshore facility
under pre-defined terms. Of all the build models, this generates some of the best
results. It is a low risk model. If, at the end of the ramp period of time, the offshoring
company needs change, it will not be stuck with a long-term offshore obligation, such
as a captive center, for example. Depending on how the contract is structured, the
offshoring organization can simply walk away without future liability. Statistically, this
model is also lower cost and higher performing than DIY. Having a firm that
specializes in building outsourcing teams to build an offshore team will cut the cost and
time required to generate a positive ROI by around 30%. This model is covered in
greater detail later in this chapter.
M&A
Becoming more fashionable, firms wanting to build an offshore team are turning to
Mergers and Acquisitions (M&A) strategies. This approach is sound and buying or
merging with a mature offshore team has given several onshore companies a
lightening-fast method for launching an offshore strategy. If organizations are going to
be in the offshore market to stay, the M&A approach is an extremely sound option and
should be seriously considered.
Wholly-owned subsidiary
Cadence, Microsoft, Intergraph, Motorola and Texas Instruments are all examples of
companies that have taken the wholly owned subsidiary route. The major challenge
here is knowing the local culture, laws and bureaucracy relating to business and
employment in the offshore location. Local managers should manage legal structuring,
human resources and government liaison; while expatriates or outsourcer managers
might be more suited to technical and operations management in the locale. A wholly
owned subsidiary will ramp up a lot slower and would also take a significant amount of
41
management time and attention. But once the creases have been ironed out, this has
potential to be the most rewarding structure.
Nearshore outsourcing models
Nearshore
Western Europe
The emergence of credible alternative sourcing locations to India will be key in
developing offshore outsourcing markets. As companies outsource increasingly core
applications and processes, being able to rely on a truly global sourcing framework will
act to hedge location- or event-specific risk.
Western European companies, in particular, will be prompted to action as more
nearshore alternatives to India, China and South Africa mature. For example, Eastern
Europe call centers are far better placed to provide customer-facing business process
outsourcing (BPO) services – a rapidly growing sector for outsourcing providers – to
many European companies than are the traditional offshore locations. Additionally,
such nearshore centers will to some extent be perceived to carry less operational risk
than, for example, centers in many parts of Asia.
In the near future, much of Europe will prefer to use nearshore resources to a far higher
degree than is currently the case, as cultural, language and regulatory barriers to
offshore will continue to prevent a full set of outsourcing services being provided from
any of the mature offshore locations.
Central and Eastern Europe is emerging as a key region for nearshore outsourcing, as
West European companies are drawn to its low costs, ample labor pool, and pro-
commerce attitude. However, drawbacks including varying levels of technology
infrastructure, a reputation for poor work standards and corruption are deterrents for
potential outsourcing investors. This section will outline the current state of nearshore
outsourcing in Central and Eastern Europe, and in North Africa – a key nearshore
42
location for France – and explore the key business issues surrounding the region from
the standpoint of contact center outsourcers.
North America
US companies, meanwhile, are increasingly using locations such as The Philippines as
a nearshore location, in preference to India, for cultural and linguistic reasons. The
Philippines school system is based on that of the US and its inhabitants are subject to
many of the same cultural influences, for example, TV shows. Combined with the
difficulty in understanding the India accent, American customers are more comfortable
with Filipino agents.
At the same time, the US has a burgeoning Hispanic population, so the use of Spanish-
speaking locations such as Mexico and to a lesser extent countries in Latin American
nearshore locations – ‘nearshore’ in relation to the US – is growing rapidly.
Canada offers lower cost, high-quality English-speaking agents to the US market.
Homeshoring
Call centers
While offshoring has recently proved popular with many major companies,
homeshoring provides a viable alternative by transferring jobs to cheaper locales while
simultaneously introducing efficient working practices. Therefore, reasonable salaries
can be paid while overheads are reduced.
Homeshoring, or homesourcing, in certain situations can boost productivity while
cutting costs. The practice also avoids the potential pitfall of sending such work
overseas, with the associated political issues, as well as the difficulties of matching
cultural and linguistic differences between locations, for example the US and India, and
managing risk.
43
For example, a company can transfer its operations out of a high-cost city locale to a
cheaper rural area or move jobs from conventional, physical facilities to lower-cost,
home-based operations.
It is estimated that there are already upwards of 100,000 home-based phone
representatives in the US. The benefit is that, compared to traditional outsourcing or
offshoring, companies utilizing home-based agents can access highly skilled
representatives that are closely attuned to the needs of the local market at a reasonable
cost.
At the same time, using home-based agents removes the need for paying more
expensive full-time agents to man call centers during times of limited call activity, or to
cover unsociable hours.
Challenges include data security risks, with home-based workers requiring the
appropriate levels of access to information, and alienation of home-based employees
from working practices and company culture.
However, homeshoring also gives employers access to home workers who might not
otherwise be available, such as disabled people and those with mobility problems. It
can reduce sickness time and costs, and avoid the impact of unforeseen circumstances
such as rail strikes and telephone outages.
Employers generally have two major concerns over homeshoring: how can they
guarantee cost efficiencies, and how can they ensure quality of work when managers
cannot stand over people to make sure they are being productive.
Software development
It is not just call center, or voice-centric, functions that can be performed from home.
Homeshoring software development, for example, provides access to quality
employees, while avoiding the risks of offshoring and the costs of onshoring.
44
In the US, for example, homeshoring development centers can be located away from
the higher rent, higher labor areas, providing significant cost savings.
Homeshoring providers build and use high speed, high productivity-producing
development technologies that support using lower cost resources around the country.
Again, agents understand the business, culture, and work ethics in that locale. The
model also requires minimal travel, labor, training and project management costs that
are often required in offshoring models.
It is estimated that homeshoring development strategies can deliver savings of between
30% and 60% below onshore development costs, while being cost competitive with
offshore or blended offshore/onshore companies.
Insourcing
‘Insourcing’ can be defined as offshore outsourcing by a foreign organization. In which
case, workers in first-world nations benefit from consultation jobs from other first-
world nations.
Why insource? The need for workers who are intimately familiar with the cultural
nuances of a particular market may drive foreign companies to establish a stronger
handhold on a target country. This would require them to recruit domestic workers who
will be able to further the interests of their business in the local setting.
Another term for insourcing appears to be inshoring, though this term has also gained a
lot of mileage. Some have applied this term to the act of importing foreign workers.
45
CHAPTER 3
The 10 most influential offshore service providers
46
Chapter 3 The 10 most influential offshore service providers
Summary
The mantra “Pick the Country First” is perhaps the most widely known and commonly used method for selecting an offshore vendor.
There is a growing trend in the market where buyers will use specific industry domain and technical skills as the entry criteria for a tender process.
IBM Global Services has 6,000 people working in India, and has plans to expand into China. The company only recently made its first acquisition in India in March 2004, paying $160m for India’s third largest BPO provider Daksh eServices, which employs 6,000 people across five facilities in India and a new location in the Philippines.
Infosys Technologies, the second largest Indian software services exporter, is leading the expansion of Indian companies outside their homeland into China, Eastern Europe, the Americas and Australia.
As one of the world’s largest suppliers of call center management services, Convergys has pioneered the use of an offshore delivery model in contact center management services, and is rapidly expanding its presence in India and the Philippines.
47
Vendor selection
One of the most hotly debated issues with offshore outsourcing is how to find the best
– or most suitable – vendor. There are many conflicting opinions, as outlined below:
Pick the Country First
The mantra “Pick the Country First” is perhaps the most widely known and commonly
used method for selecting an offshore vendor. In this model, the buyer uses some form
of a “scorecard” approach to select the country most appropriate for their purposes.
After selecting the country, the buyer then selects the vendor(s) most likely to be able
to handle their needs out of the top vendors from the selected country. When going
down this route, there are a number of issues to consider:
Does the country’s legal framework adequately protect your IP?;
Some countries offer greater financial exposure;
Some countries are less ‘stable’ then others; and
Some countries have been involved with outsourcing longer than others and this
experience translates into a higher probability for success.
Generally, however, this method results in a less than 50% success rate – although
there are instances where selecting the country(ies) first was a sound option specifically
when there are significant cultural, language or legal issues relating to a project.
Recommendation
Either formally or informally, a relatively large percentage of customers buy on the
advice of their peers and contacts. In this model, a buyer will poll their counterpart in
other business groups (or other companies) and will use the information gathered to
select the vendor. If the buyer merely hires the vendor with the best recommendation,
success rates are low. However, if the buyer uses a strong recommendation from peers
48
as the entry criteria in a tender process and thoroughly investigates each recommended
vendor aggressively, the success rate jumps significantly.
Domain & technical filtering
There is a growing trend in the market where buyers will use specific industry domain
and technical skills as the entry criteria for a tender process. In this model, buyers will
identify the combination of specific industry knowledge with their technical needs and
will search (usually regardless of country) for all appropriate vendors. Of all the
models listed above, this is probably the best method for selecting a vendor.
The 10 most influential offshore outsourcing firms
The offshore industry is still too fragmented, and immature, to enable a definitive list
of the most influential companies. For this reason this list includes not only those
companies that are currently leading the pack, in terms of revenue or global muscle, but
it also considers those that are demonstrating some form of innovation, whether
adopting new offshoring models, or working in new geographic regions (see Table 3.1)
Table 3.1: The 10 most influential offshore outsourcing providers Rank by Company name Country Revenue ($m) Net profit ($m) influence 1 IBM Global Services US 42,600 4,490 (pre-tax) 2 Infosys Technologies India 1,060 270.3 3 Cognizant US 368.2 57.4 4 Convergys US 2,288 171.6 5 Accenture US 11,800 498 6 Tata Consultancy Svcs India 1,040 N/A 7 HSBC Hong Kong 41,072 8,744 8 Keane US 805 29.2 9 General Electric US 134,187 15,002 10 Epam US 17 (Est) N/A
Source: Computerwire Business Insights Ltd
49
IBM Global Services
Despite IBM's mantra that it is a global company and does not do ‘offshore’, the
company’s increasing focus on low-cost locations such as India and China proves that
it is increasing its reliance on the offshore concept. IBM’s great strength is that its
distribution of global sales and development operations give it experience in a global
delivery model, and also enable it to rapidly adopt an offshore model.
IBM currently has 6,000 people working in India, but also has plans to expand into
China. The company made its first acquisition in India in March 2004, paying $160m
for India’s third largest BPO provider Daksh eServices, which employs 6,000 people
across five facilities in India and a new location in the Philippines.
The company provides call center outsourcing services around inbound and outbound
calls, email for customer service and fulfilment, chat services for customer care and
technical support, and back-office support services for transaction processing, which
covers research and analysis, claims processing, payroll, accounts and application
processing for 10 clients including Sprint, Citimortgage and Amazon.com.
Of course, many of IBM's rivals can claim similar abilities. Companies such as EDS,
CSC or Capgemini also have a global focus as well as owning facilities in low-cost
countries such as India and Latin America. But offshore outsourcing is not just about
being in the right location, it is about balancing services across different global regions
to enable quality and efficiency of delivery.
With the swift and overtly seamless integration of PricewaterhouseCoopers over the
past few years, IBM has proven itself capable of managing large cultural and
organizational shifts successfully. To bet against it doing the same with its offshore
strategy would be foolhardy. Combine this with the company's influence simply in IT,
let alone IT services or the offshore industry, and IBM earns a well-deserved first
place.
50
Infosys Technologies
Although the second largest Indian software services exporter, Infosys Technologies is
leading the expansion of Indian companies outside of their homeland into China,
Eastern Europe, the Americas and Australia.
Unlike many other Indian companies, Infosys is not only setting up glorified sales
offices but also making serious commitments to global development. In April 2004, the
company invested $20m to found a new US-based consulting unit called Infosys
Consulting, which will eventually employ 500 US-based workers and has been set up
with US-based employees from rivals including EDS Consulting, Capgemini and
Deloitte.
Its financial performance is nothing to sniff at either. The company grew revenue by
41% to $1.06bn in the year to March 2004, and expects sales to grow another 30%
over 2005.
Considering that the company's revenue was only $121m in 1999, and that its growth
has largely been organic, Infosys is a clear powerhouse in the industry.
Cognizant Technology Solutions
As a US-based company focused solely on delivering IT services from its Indian
operations, Cognizant is perhaps the most interesting offshore services company in the
industry at the moment. Its position as a Western company, with all decision-making
coming out of the US, gives it an edge over foreign firms when bidding for US
contracts. On the other hand its complete commitment to the offshore model gives it a
more competitive cost base than its local rivals.
Cognizant is in fact the industry’s fastest growing company, reporting net income up
66% at $57.4m on revenue that grew 60% to $368.2m for the full year ended December
31, 2003. The company has sustained revenue growth of between 20% and 50% since
1998, and the 2003 results prove that the company is now winning business
significantly faster than its rivals.
51
However, it is still far behind giants such as Wipro, Tata Consultancy Services, and
Infosys, all of which recorded revenues near $1bn. Nevertheless, with a market cap of
around $3bn, it clearly has investors' support.
Convergys
As one of the world's largest suppliers of call center management services, Convergys
has pioneered the use of an offshore delivery model in contact center management
services, and is rapidly expanding its presence in India and the Philippines.
Convergys opened the first US-owned contact center in India in December 2001, and
now plans to have seven centers in India by early 2004. It plans to employ 20,000 staff
in India by the end of 2005. It is also planning to increase its number of centers in the
Philippines from two to three next year.
Moreover, Convergys is an early mover in the human resources outsourcing space, for
which it recently acquired two companies in Singapore, which also give it offices in
Malaysia and Hong Kong.
Accenture
As one of the world’s most successful IT services and business process outsourcing
companies, Accenture has a similar edge as IBM in terms of its global scale and
experience in managing geographically distributed clients and projects.
Accenture’s significant services resources in every geographical area include 10,000
staff in Asia Pacific – a figure which will be doubled by the proposed addition of a
further 10,000 staff added to facilities in India. The size, scale and reach of Accenture,
combined with its increasing influence in the BPO sector means that it cannot be
discounted.
52
Tata Consultancy Services
India’s largest exporter of software and services is certainly a force to be reckoned
with. Employing over 25,000 staff, the Indian giant is planning to float on the Bombay
stock exchange soon, some say later this year. TCS has not yet decided on the issue
size, but it is expected to raise between INR 35bn and INR40bn ($800m-$913m)
through an IPO of about 10% of its equity, according to rumors.
The much-anticipated flotation would value TCS at as much as $9.1bn, making it
India's fourth-most-valuable company by market capitalization. Like its top-tier Indian
rivals, Wipro and Infosys, TCS is also spreading aggressively into other regions,
particularly China.
However, TCS' lead is that it has established itself as the largest, and most widely
known offshore service provider, and this position will only be reinforced by a
flotation.
Hong Kong and Shanghai Banking (HSBC)
The world's second largest bank, HSBC is one of the pioneers of the offshore software
development model among the banking industry, as a result of its historical presence in
the Far East and the Indian subcontinent.
By the end of 2003, HSBC was expecting to employ 8,000 people in India, China and
Malaysia in back-office processing and call center positions. Now the bank is actively
looking to sell services to other banking industry organizations within India and
globally. Given its large presence in Asia, and its experience and local knowledge,
HSBC could wield considerable influence in the offshore industry in the future.
Keane
The strategy of application outsourcing firm Keane reflects a new wave of North
American companies that are developing a mixture of 'nearshore' and offshore locations
to provide lower cost IT services and process outsourcing, with a similar risk profile to
53
those kept onshore. Keane has a nearshore location in Halifax, Canada, which it claims
is the first in the market to achieve SEI CMM Level 5 rating for the quality of its
software and services.
The company combines this with its 400-employee facility in India, which it gained
through the acquisition of SignalTree Solutions for $62m. Although not the biggest out
there, Keane's mixed approach to offshoring will win over cautious clients who are
unwilling to send all of their outsourced operations to the other side of the world.
General Electric
GE is widely recognized as one of the founders of the Indian offshore movement,
setting up operations there in 1997. The company is believed to employ well over
35,000 people across its back office operations in India.
Most significant however is that GE is considering selling off its 14,000 person GE
Capital International Services (GECIS) division, as well as filing for a $500m IPO for
30% of its BPO operation Genworth Financial. Given the company’s pedigree in India,
these will both be operations to watch.
Epam
US-based Epam claims to be the largest central and eastern European offshore services
provider after its recent acquisition of Budapest-based Fathom Technologies, and the
company now has software development centers located in Moscow and Minsk.
Although not as cheap as sourcing work from India, Eastern Europe provides a wealth
of high-level software designers and project management skills lacking in India.
Epam's growth since its founding in 1993 is a testament to the region's future potential
as a high-end offshore base.
54
55
CHAPTER 4
Overview of offshore locations
56
Chapter 4 Overview of offshore locations
Summary
Enterprises from the US and UK will continue to locate centers in India despite wage inflation, increasing turnover and negative press due to the level of service from India and offshore outsourcing in general.
The Brazilian call center market offers the most balanced investment opportunity in Latin America. It is the third largest call center market in the world behind the UK and US and the most developed in Latin America.
Location is proving to be a determining factor for many US outsourcers as firms become more cost and time conscious, and Canada is the classic example of the benefits that nearshore outsourcing can provide.
Currently, Hungary is used primarily for mid-level calling but, as the market matures, it will be used for increasingly complex services such as higher value collections, technical support calling and cross- and up-selling.
The biggest attraction of the Philippines over India as an outsourcing location is its cultural affinity with the US.
South Africa’s cultural affinity with Europe is making it an up and coming offshore location, particularly in the call center and financial services sectors.
57
Introduction
This chapter puts each market that is covered in this report in context by ranking it by
risk, the price paid for and the wage earned by an outsourced inbound voice-based
customer care agent.
Relative levels of risk and cost
Figure 4.1 illustrates the relative cost and risk of each market covered in the report.
The accompanying data for prices and wages can be found in the ‘Risks vs. Cost’
section in each country chapter. Or, the reader may prefer to skip to the final section
in the chapter, where the wages and prices of an inbound voice-based customer care
agent are listed and ranked.
Figure 4.1: Relative risks and costs of nearshore and offshore outsourcing markets
LOW
HIGH
Ris
k
Cost per hourLOW HIGH
MLZAF
ID
CAN
MEXMLHUN
LOW
HIGH
Ris
k
Cost per hourLOW HIGH
MLZAFMLSA
ID
CAN
MEXMLMLHUN
LOW
HIGH
Ris
k
Cost per hourLOW HIGH
MLZAFMLZAF
ID
CAN
MEXMLMLHUN
LOW
HIGH
Ris
k
Cost per hourLOW HIGH
MLZAFMLSA
ID
ARGARGARGARG
CAN
JAMPOLJAMPOLINDINDINDIND
MLBRAMLBRAMLBRAMLBRA
MEXMLMLHUNMLMLHUN
MLPHLMLPHLMLPHLMLPHLPHL POLJAMPOLJAM
LOW
HIGH
Ris
k
Cost per hourLOW HIGH
MLZAF
ID
CAN
MEXMLHUN
LOW
HIGH
Ris
k
Cost per hourLOW HIGH
MLZAFMLSA
ID
CAN
MEXMLMLHUN
LOW
HIGH
Ris
k
Cost per hourLOW HIGH
MLZAFMLZAF
ID
CAN
MEXMLMLHUN
LOW
HIGH
Ris
k
Cost per hourLOW HIGH
MLZAFMLSA
ID
ARGARGARGARGARGARGARGARG
CAN
JAMPOLJAMPOLJAMPOLJAMPOLINDINDINDINDINDINDINDIND
MLBRAMLBRAMLBRAMLBRA
MEXMLMLHUNMLMLHUN
MLPHLMLPHLMLPHLMLPHLPHLMLPHLMLPHLMLPHLMLPHLPHL POLJAMPOLJAM
Source: Business Insights Business Insights
58
Outsourcers with nearshore and offshore locations can offer customizable solutions to
strike the appropriate balance between nearshore and offshore load while weighing
each client’s threshold for offshore risk and cost constraints. For example, if a
financial services institution has a high volume of English-language calling from the
US, naturally, some of it will be of higher value than others. The institution may want
to keep cross- and up-sell opportunities in Canada and the US to ensure the best
service possible. Lower value calls such as account balance inquiries or change of
address will probably be automated using an IVR, but the customer may opt out of the
IVR to speak with a live agent. Since this is a relatively basic call and does not
present a revenue-generating opportunity, the institution may want to route this call to
a low-cost destination such as India or the Philippines and accept the risk inherent
with geographic and cultural distance. Furthermore, the institution may have a high
degree of Spanish-language calling and may choose to route these calls to Mexico and
Argentina to achieve a similar balance. Outsourcers can employ a diverse location
strategy with which to minimize the risks and allay the fears associated with offshore
outsourcing.
Broadly speaking, outsourcing markets can be segmented into two groups of countries
– either offshore or nearshore outsourcing markets. Nearshore and offshore is defined
by the distance from the country of call origin in which the contact center is located.
Offshore: The main attraction to these markets is labor arbitrage. Since labor can
account for as much as 70% of all costs, even marginal savings on wages can translate
into significant savings for call centers with hundreds of agents. Offshore markets
tend to be less secure and present the greatest risks arising from currency fluctuation,
security issues and situations that are brought on by societies with extreme social
problems. Offshore markets include Argentina, Brazil, India, the Philippines and
South Africa.
Nearshore: The main attraction of these markets is their proximity to the country in
which the call originates. Security issues and general risks tend to be less severe and
59
outsourcers and enterprises are prepared to pay a premium for decreased risk.
Nearshore markets are Canada, Hungary, Jamaica, Mexico and Poland.
Locations
Argentina
Where is the market today?
Multinational outsourcers often package Argentina and Mexico as part of a complete
nearshore and offshore strategy for bilingual calling out of the US, with Argentina
used as the low-cost offshore destination for bilingual Spanish and English service.
Argentina is also used as an offshore destination for calling from Spain.
Risks
Unlike South Africa, for example, where social problems and security risks tend to be
the major concern, the constant threat of currency fluctuation presents the most
significant risk in Argentina. Another major uncertainty to take on is corruption,
which continues to affect the business environment.
Another weakness is Argentina’s distance from the US and Europe. A flight from
New York to Buenos Aires takes nine hours, whereas outsourcing to Mexico involves
only a three-hour flight. Many companies do not want to accommodate the risk that is
inherent with moving a call center halfway across the globe and the real or perceived
loss of control that goes along with it.
Rewards
Currently, Argentina is the cheapest offshore destination in the world, putting it
immediately on a par with major offshore call center locations such as India and the
Philippines, and to some extent South Africa. However, it should be understood that
Argentine outsourcers do not compete directly with outsourcers based in India, the
60
Philippines or South Africa because Argentina supports bilingual English-Spanish
calling.
Conclusion
Except for some lower-value technical support calls, such as basic inquiries about
how to update software or install a wireless adaptor, Argentina will not be able to
attract significant amounts of higher-value collections and technical support calling,
primarily because the Spanish accent is considered discordant to native Spanish
speakers in Latin America.
Brazil
Where is the market today?
The Brazilian call center market offers the most balanced investment opportunity in
Latin America. It is the third largest call center market in the world behind the UK
and US and the most developed in Latin America. As such, a quality labor pool of
agents and call center managers is in ready supply. However, Brazilian offshore
outsourcing is underdeveloped and will continue to be so through 2008. Brazilian
outsourcers have not been forced to pursue offshore contracts due to the strength of
the domestic market. Brazilian outsourcers are just beginning to pursue outsourcing
from the US. English is the third language in Brazil, but is increasingly the language
of choice among university students.
Risks
Economic uncertainty is an issue in Brazil but nothing like the degree to which it is in
Argentina. Currency fluctuation is an issue, but not an overriding concern. Like
Argentina, corruption is still affecting the business environment. In a 2002 survey
measuring perceptions of corruption conducted by Transparency International, an
international watchdog, Brazil ranked 54 - lower than Canada, Hungary and South
Africa but higher than Argentina, India, Jamaica, Mexico, the Philippines and Poland.
61
Another weakness is Brazil’s distance from the US and Europe - a flight from New
York to Sao Paulo takes eight hours, whereas outsourcing to Mexico involves only a
three-hour flight. Many companies do not want to accommodate the risk that is
inherent with moving a call center halfway across the globe and the real or perceived
loss of control that goes along with it.
Rewards
Currently, Brazil is one of the cheapest call center markets in the world, which
automatically compares it with the major offshore locations of India and the
Philippines. However, it should be understood that Brazilian outsourcers are
domestically oriented and are only beginning to compete with other Latin American
nations, such as Argentina, for outsourcing. Outsourcers operating in Brazil will begin
to package themselves as the low-cost alternative to higher-cost but lower-risk
alternatives in Jamaica and Canada.
Conclusion
Except for some lower value technical support calls, Brazil will not be able to attract
significant amounts of collections and technical support calling, primarily because
English is a second or third language in Brazil. Therefore, calling will be limited to
voice-based customer care calling, telemarketing and telesales and inbound direct
response calling.
Canada
Where is the market today?
The main advantages of Canada as an outsourcing location are proximity to the US,
and the quality of Canadian agents, which have a very similar profile to those of the
US and possess an acute familiarity with American culture. Currently, Canadian
outsourced agent positions predominantly serve domestic customers. However,
nearshore outsourcing from the US is responsible for the majority of outsourcing
growth and a significant portion of expansion in the Canadian market.
62
Risks
Economic uncertainty, corruption and general security are not issues in Canada.
Another strength is Canada’s proximity to the US. For example, a client based in
Detroit, MI, can visit a call center in London, Ontario, after a two-hour drive rather
than an overnight flight to India or the Philippines.
Rewards
Currently, Canada is the most expensive offshore/nearshore location in the world, but
it is also the most stable and secure. Thus, outsourcers and enterprises alike are
prepared to pay a premium for the economic stability, security and proximity to the
US that Canada affords.
Outsourcers operating in Canada offer their services as the lower-cost alternative to
the US for comparable service in a secure business environment. Canadian agents
tend to have a similar profile to those in the United States and can support a full range
of calls. An inbound voice-based customer care agent in the United States is priced at
$27.00 an hour and paid between $10.00 and $12.00 an hour. A Canadian inbound
voice-based customer care agent in Canada is paid $8.65 and priced at $24.00 per
hour.
However, over the long term, the impact of increased nearshore outsourcing from the
US will be to reduce the availability of skilled customer care labor and increase
overall agent costs.
Conclusions
Location is proving to be a determining factor for many US outsourcers as firms
become more cost and time conscious, and Canada is the classic example of the
benefits that nearshore outsourcing can provide.
63
Hungary
Where is the market today?
Outsourcers use Hungary as a nearshore destination for calling out of Austria, France,
Germany, Switzerland and the UK. The majority of calling is from Germany and the
UK, with portions from Austria, France and Switzerland. Hungarian agents may have
a different profile from those in Western Europe but evidence suggests that the
standard of labor is similar to that in Western Europe. Furthermore, as the market
matures, Hungary will be used as a location for premium calling, just as Canada is
used for calling out of the US.
Risks
The main advantages of Hungary as an outsourcing location are its proximity to
Western Europe, the quality of the Hungarian agent, and the availability of French,
German and English speakers. Also, Hungary joined the EU on May 1, 2004, and this
new-found stability is another major attraction. It should be mentioned that
telemarketing does not exist in Europe as it does in the United States. Some nations
have gone so far as to enact privacy laws to ban outbound sales calls to private
residences.
64
Rewards
A flight from London to New Delhi takes nine hours whereas outsourcing to Budapest
involves only a two-hour flight. Many companies do not want to accommodate the
risk that is inherent with moving a call center halfway across the globe and the real or
perceived loss of control that goes along with it.
Corruption does not appear to be major concern in Hungary. In a survey measuring
perceptions of corruption conducted by Transparency International, an international
watchdog, Hungary ranked 40, only lower than Canada, but higher than Argentina,
India, Jamaica, Mexico, the Philippines and Poland.
Outsourcers and enterprises should understand that entry into the EU will inflate both
wages and outsourcing prices over the next several years.
Currently, Hungary is one of the cheapest nearshore markets in the world, which
immediately compares it with other European nearshore markets, such as Poland and
the Czech Republic. Outsourcers operating in Hungary offer their services as the
lower-cost alternative to the UK, Germany and Austria. An inbound voice agent in the
UK is priced at $30.40 an hour and paid $12.50 an hour, and an agent in Germany is
priced at $26.55 and paid $10.00. In comparison, an inbound voice agent in Hungary
is paid $2.50 an hour and priced at $14.70 per hour.
Conclusions
In comparison to offshore locations where accent is a problem enterprises and
outsourcers can minimize the chances of alienating customers by using Hungary as a
nearshore location. Currently, Hungary is used primarily for mid-level calling but, as
the market matures, it will be used for increasingly complex services such as higher
value collections, technical support calling and cross- and up-selling.
65
India
Where is the market today?
India is the unsurpassed leader in call center outsourcing due to considerable labor
arbitrage. Indian contact center agents are predominantly university graduates and
tend to view call center work as one of the first steps in building a career.
Risks
The largest risk in India is poor customer service due to accent problems and
miscommunication. Furthermore, a flight from London to New Delhi takes nine hours
whereas outsourcing to Poland or Hungary involves only a two-hour flight. Social
problems and security risks are issues in India and outsourcers should be aware of the
extra costs associated with providing 24-hour security. Another uncertainty to take on
is corruption, which continues to affect the business environment. In a survey
measuring perceptions of corruption conducted by Transparency International, an
international watchdog, India ranked 83 only higher than the Philippines and
Argentina.
Oversupply in the Indian market is also a phenomenon that technology vendors,
outsourcers and enterprises cannot deny. At one point, outsourcers dominated the
market but Western multinational corporations began locating captive centers in
India. This has contributed to wage inflation and climbing attrition rates and has
resulted in downward price pressure for an outsourced agent.
Rewards
Currently, India is one of the cheapest offshore destinations in Asia, which
automatically compares it with the Philippines. Whereas an inbound voice agent in
the US is priced at $27.00 an hour and paid $10.00 an hour an Indian inbound voice
agent is paid $1.20 and priced at $13.25 per hour. Clearly, labor arbitrage accounts for
66
a substantial portion of the difference between the price of an outsourced inbound
customer care agent in the US and India.
Conclusions
Enterprises from the US and UK will continue to locate centers in India despite wage
inflation, increasing turnover and negative press due to the level of service from India
and offshore outsourcing in general.
Jamaica
Where is the market today?
The main advantages of Jamaica as an outsourcing location are proximity to the US
and fluent English speakers that are used to performing customer service for
American customers. Jamaican agents predominantly serve English-speaking callers
out of the US for outsourced call centers but there is a small population that works for
captive centers in the Jamaican travel and tourism industry.
Risks
Economic uncertainty and general security are not major issues in Jamaica, although
outsourcers and enterprises should understand that power outages are not rare and a
call center may want to provide a stand-alone power source. However, corruption is
somewhat of an issue.
Rewards
Jamaica is one of the most expensive offshore/nearshore locations in the world, but it
is also one of the most stable and secure, so outsourcers and enterprises alike are
prepared to pay a premium. A major strength is Jamaica’s proximity to the US. A
flight from New York to New Delhi takes fourteen hours whereas outsourcing to
Jamaica involves only a short flight from the US and is a popular vacation destination.
67
Conclusion
Jamaica naturally competes with Canada as a lower cost nearshore outsourcing
location servicing the US. However, outsourcers report that Jamaican agents cannot
support a full range of high value technical support calls like Canadian agents.
Jamaican agents tend to have worked in the hospitality industry and are well suited to
inbound voice-based customer care calls.
Mexico
What is the market today?
The Mexican call center market is the second largest in Latin America and has
emerged as the optimal location for nearshore outsourcing of bilingual Spanish and
English calls from the US. Unemployment is high in Mexico, ensuring a steady
stream of university graduates for call center positions.
Risks
Economic uncertainty is not a major concern for outsourcers and enterprises, since the
Mexican economy is closely tied to that of the US and fluctuations are not as severe
as in the rest of Latin America. General security is an issue, especially in and around
Mexico City, which is consistently ranked as one of the most dangerous cities in the
world. Corruption is an issue but not to the degree it is in some offshore destinations.
Rewards
A major strength is Mexico’s proximity to the US. Location is proving to be a
determining factor for many US outsourcers, as firms become more cost and time
conscious. The preferred location for greenfield call centers in the last few years is
Monterrey which is just south of San Diego, CA. Apart from being a safer location
than Mexico City, a client based in southern California can visit a center in Monterrey
after a short drive. This is the classic benefit of nearshore outsourcing, as is seen in
Canada.
68
Conclusion
Outsourcers operating in Mexico offer their services as the lower-cost alternative to
the US for comparable service in a secure business environment. Mexican call centers
can support a full range of calling from the lowest value customer care issues to some
of the highest value technical support Spanish language calling. The major selling
point for outsourcers in Mexico is service to the US Latino population. US companies
are just now beginning to realize the importance of the market and Latino spending
power may be larger than previously thought because marketing efforts have been
hampered by the inability to serve these customers. However, while “press 2 for
Spanish service” is the main driver of US outsourcing growth in Mexico it should be
noted that a Latin American outsourcer must be able to support bilingual service in
order to survive.
Philippines
Where is the market today?
The main advantages of the Philippines as an outsourcing destination are essentially
those of India – very low wages paid to a large pool of university educated college
graduates with excellent English skills, who view contact center positions as one stop
to building a career.
Risks
Social problems and security risks are issues in the Philippines and outsourcers should
be aware of the extra costs associated with providing 24-hour security. Another
uncertainty to take on is corruption, which continues to affect the business
environment. Another weakness is the Philippines’ distance from the US and Europe.
A flight from New York to Manila takes 14 hours, whereas outsourcing to Canada is a
day trip.
69
Rewards
Currently, the Philippines is one of the cheapest offshore destinations in the world,
which automatically compares it with India and, to some extent, South Africa. As
mentioned earlier, the Philippines is well suited for its ability to handle a wide range
of technical support calls and the full range of calling can be supported. Whereas an
inbound voice agent in the US is priced at $27.00 an hour and paid $10.00 an hour a
Filipino inbound voice agent is paid $1.00 and priced at $13.25 per hour. Currently,
wages are lower in the Philippines than in India ($1.25) because the market is not as
mature.
Conclusion
The biggest attraction of the Philippines over India is its cultural affinity with the US.
The Filipino accent is essentially indiscernible to the American ear, which stems from
the degree of cultural influence that America has had on the Philippines.
Poland
Where is the market today?
Outsourcers predominantly use Poland as a nearshore destination for calling out of
Austria and Germany, but through 2008 there will be a substantial increase in the
amount of nearshore outsourcing from the UK. Furthermore, as the market matures,
Poland will be used as a location for premium calling, just as Canada is used for
calling out of the US.
Risks
Poland joined the EU on May 1, 2004, and this new-found stability is one of its major
attractions. Poland has a core of the highest quality agents in Europe for calling out of
Germany and Austria and, to some extent, the UK. Corruption is an issue in Poland.
In a survey measuring perceptions of corruption conducted by Transparency
70
International, an international watchdog, Poland ranked 64 and was only higher than
Argentina, the Philippines and India.
Rewards
The main attraction of Poland is its proximity to Western Europe and the availability
of high quality but low cost German and English speakers. Currently, Poland is one of
the cheapest nearshore markets in the world, which automatically compares it with
other European nearshore markets such as Hungary. Outsourcers operating in Poland
offer their services as the lower-cost alternative to the Germany and Austria and
compete directly with Hungary. An inbound voice agent in Poland is priced at $14.90
an hour and paid $2.50 an hour and an agent in Germany is priced at $29.69 and paid
$10.00. In comparison, an inbound voice agent in Hungary is paid $2.50 an hour and
priced at $14.70 per hour.
Conclusion
Currently, Poland is used primarily for mid-level calling but as the market matures it
will be used for increasingly complex services, such as higher value collections,
technical support calling and cross- and up-selling. It is recommended that enterprises
and outsourcers use Poland as a nearshore location in order to minimize the chances
of alienating customers.
South Africa
Where is the market today?
South Africa is to the UK what Canada is to the US – a high quality location for
offshore agents paid at a favorable exchange rate. The UK and the US account for the
largest proportion of outsourced business in South Africa. The Netherlands accounts
for the smallest proportion of call center outsourcing but is one of the few locations in
the world from which to outsource Dutch language calls. This is because Afrikaans
speakers can be easily retrained to speak Dutch.
71
Risks
South Africa does have some weaknesses. For example, outsourcers should not
underestimate the costs of providing 24-hour security and a flight from London to
Johannesburg takes 11 hours.
Rewards
South Africa possesses a core of highly qualified agents engaged in value-added
services in financial institutions, technical support centers and cross- and up-selling in
travel and tourism centers. As a result, South African agent costs are slightly lower
than Canadian agent costs but considerably higher than others covered in this report.
It should also be mentioned that the costs of data connectivity are prohibitive
(approximately 10 times higher than India) due to the monopolistic nature of the
South African telecommunications market.
Conclusion
Unsurprisingly, South African agents have an acute familiarity with British culture.
As such, the risk of alienating customers or a miscommunication due to an accent
problem or cultural difference is simply not an issue. Like other nearshore
destinations such as Canada, Poland and Hungary, South Africa is one of the safest
destinations because of the quality of agent.
72
73
CHAPTER 5
Nearshore locations for Western Europe
74
Chapter 5 Nearshore locations for Western Europe
Summary
Western European companies will be prompted to action as more nearshore alternatives to India, China and South Africa mature.
Eastern Europe call centers are far better placed to provide customer-facing business process outsourcing (BPO) services – a rapidly growing sector for outsourcing providers – to many European companies than are the traditional offshore locations.
For many Western companies looking to outsource contact center services, Central and Eastern Europe is an excellent choice based on its relatively short distance using air, rail, and road.
In 2004, there were approximately 27,000 outsourced agent positions (APs) in Central and Eastern Europe.
Throughout Central and Eastern Europe, the rate of multilingualism among younger people is strong, with English, German, French, Italian, and Nordic tongues spoken widely. Further European integration is certain to accelerate this trend.
The proportion of call center agent positions dedicated to serving the Western Europe nearshore market in North Africa will grow through 2008, increasing from 14% in 2003 to 25% by 2008.
Concerns abound within Central and Eastern Europe regarding the tightening contact center agent market, which could result in higher wages, thus reducing the advantageous margins that have been a key selling point for the region.
North Africa has effectively penetrated Europe’s French-speaking markets for contact center outsourcing, and is its governments are now looking to other countries to which it can offer customer care services. The main targets are the UK and Spain.
75
Introduction
The emergence of credible alternative sourcing locations to India will be key in
developing offshore outsourcing markets. As companies outsource increasingly core
applications and processes, being able to rely on a truly global sourcing framework will
act to hedge location- or event-specific risk.
Western European companies, in particular, will be prompted to action as more
nearshore alternatives to India, China and South Africa mature. For example, Eastern
Europe call centers are far better placed to provide customer-facing business process
outsourcing (BPO) services – a rapidly growing sector for outsourcing providers – to
many European companies than are the traditional offshore locations. Additionally,
such nearshore centers will to some extent be perceived to carry less operational risk
than, for example, centers in many parts of Asia.
In the near future, much of Europe will prefer to use nearshore resources to a far higher
degree than is currently the case, as cultural, language and regulatory barriers to
offshore will continue to prevent a full set of outsourcing services being provided from
any of the mature offshore locations.
Central and Eastern Europe is emerging as a key region for nearshore outsourcing, as
West European companies are drawn to its low costs, ample labor pool, and pro-
commerce attitude. However, drawbacks including varying levels of technology
infrastructure, a reputation for poor work standards and corruption are deterrents for
potential outsourcing investors. This section will outline the current state of nearshore
outsourcing in Central and Eastern Europe, and in North Africa – a key nearshore
location for France – and explore the key business issues surrounding the region from
the standpoint of contact center outsourcers.
76
Central and Eastern Europe
It is estimated that the proportion dedicated to serving nearshore customers is roughly
10%, with the total number of APs in 2004 standing at 2,600 (see Figure 5.2). What is
important to note is that the nearshore outsourced APs are projected to outpace overall
outsourced AP expansion, due in large part to Western firms taking advantage of
Central and Eastern Europe’s lower wages and linguistic capabilities.
Figure 5.2: Central and Eastern European nearshore outsourced agent positions, 2003 – 2008
0%
20%
40%
60%
80%
100%
2003 2004 2005 2006 2007 2008
Nearshore outsourced agent positionsTotal outsourced agent positions
0%
20%
40%
60%
80%
100%
2003 2004 2005 2006 2007 2008
Nearshore outsourced agent positionsTotal outsourced agent positions
Source: Business Insights Business Insights
Strengths
Proximity: For many Western companies looking to outsource contact center services,
Central and Eastern Europe is an excellent choice based on its relatively short distance
using air, rail, and road. This is illustrated in Table 5.2, from the standpoint of an
outsourcer who wants to travel from London to a number of different possible
77
nearshore and offshore locations. Clearly, Central and Eastern Europe is much more
efficient not only from time and cost, but also from the standpoint of saving on
accommodation and meals required for overnight trips.
Table 5.2: Selected travel times and prices for a single-day trip from London to selected outsourcing destinations
London to Price (US$) Time (hours) Prague 385 2 Budapest 695 2 Warsaw 338 2 Tallinn 702 3 Johannesburg 1,327 19 Mumbai 1,199 9 Delhi 1,213 14
Source: Business Insights / Expedia Business Insights Ltd
Common commercial culture: Central and Eastern Europe share many products and
services with citizens in the West. As such, contact center agents outsourced to Central
and Eastern Europe have an immediate advantage when dealing with foreign
customers, as opposed to offshored agents who may have little practical experience
with Western goods and services.
Technology advancement: Since the fall of communism in the late 1980s, new
democratic governments in Central and Eastern Europe have invested aggressively in
updating their technology infrastructure. In fact, recent rankings on technology and
networking by The World Economic Forum place several European nearshore
countries well ahead of other popular offshore outsourcing locations. The result is a
workforce that is comfortable using technology applications in both personal and
commercial settings, and adds to the value of potential contact center agents.
Linguistic skills: Throughout Central and Eastern Europe, the rate of multilingualism
among younger people is strong, with English, German, French, Italian, and Nordic
tongues spoken widely (Note: proficiency in specific Western languages depends on
the Central and Eastern European country in question). Further European integration is
78
certain to accelerate this trend. It is also noted that Russian is widely spoken, especially
among older citizens in Central and Eastern Europe.
Relatively low wages: Comparatively, Central and East Europeans earn significantly
less than their West European counterparts. It is estimated that labor costs account for
up to 70% of total contact center expenses, and the ability to save significantly on this
fixed cost is an obvious advantage for outsourcers looking at Eastern Europe.
Solid infrastructure: Contact centers in Central and Eastern Europe are predominantly
located in larger urban centers, meaning that the ability for agents to access their
workplace in an efficient manner is crucial. Qualitative evidence indicates that cities in
this region have reliable and safe transport networks. This is much in contrast to other
outsourcing locations such as Johannesburg, Manila or parts of India, where a timely
and secure work commute can be a challenge at the best of times.
Education levels: Apart from language skills and awareness of Western commercial
culture, agents in Central and Eastern Europe are also competitive due to their very
high levels of education. As indicated in Figure 5.3, several countries in the region
boast higher rates of tertiary education than Western nations. From an industry
standpoint, most contact center outsourcers find that the majority of their operators
have been educated to university level, or at the very least secondary school. This is
compounded by a very high emphasis on technology instruction that is present in
higher education in Central and Eastern Europe, which ensures that agents require little
training in basic applications when they begin work.
79
Figure 5.3: Percentage of population between 20 – 24 years old in tertiary education, 2003
0
10
20
30
40
50
Slovak R
epublic
Irelan
d
Netherl
ands
Hungary
German
y
Czech
Rep
ublic
Poland
Perc
enta
ge o
f pop
ulat
ion
(%)
0
10
20
30
40
50
Slovak R
epublic
Irelan
d
Netherl
ands
Hungary
German
y
Czech
Rep
ublic
Poland
Perc
enta
ge o
f pop
ulat
ion
(%)
Source: Business Insights Business Insights
Real estate availability: As seen in Figure 5.4, outsourcers in Central and Eastern
Europe can benefit from relatively low real estate prices. Specifically, major centers
including Warsaw, Prague, Budapest and Bucharest all have commercial facilities at
rental prices that are drastically cheaper than in larger Western European cities. The
only exception to this is Moscow, where office space is at a premium. It is worth noting
that outsourcers can also reap very low costs using South African centers, where
facilities are extremely inexpensive. However, the value of Central and Eastern Europe,
in terms of safe and reliable infrastructure, as well as close geographic proximity to
Western Europe more than make up for the initial cost savings on leased space.
80
Figure 5.4: Commercial real estate rents – Selected urban centers, Q1 2004
0 100 200 300 400 500 600 700 800 900
Cape Town
Johannesburg
Bucharest
Lyon
Warsaw
Budapest
Bratislava
Prague
Moscow
Frankfurt
Dublin
Manchester
Birmingham
Square meter/annum ($)0 100 200 300 400 500 600 700 800 900
Cape Town
Johannesburg
Bucharest
Lyon
Warsaw
Budapest
Bratislava
Prague
Moscow
Frankfurt
Dublin
Manchester
Birmingham
Square meter/annum ($)
Source: Business Insights Business Insights
Ample labor pool: Unemployment in Central and Eastern Europe is notably higher than
in Western countries (see Figure 5.5). As such, there are more opportunities to recruit
strong agents to work in contact centers. Not only will these employees require less
remuneration that agents in Western European countries, but a higher degree of loyalty
to their employer is nearly certain. Increased savings through lower turnover will also
result.
81
Figure 5.5: Selected European unemployment rates: 2003
0%
5%
10%
15%
20%
Sweden UK
Hungary
Romania
RussiaLatv
iaIta
ly
France
Estonia
Czech
Rep
ublic
Lithuan
ia
German
y
Slovenia
Bulgaria
Slovakia
Poland
Croati
a
Une
mpl
oym
ent r
ate
0%
5%
10%
15%
20%
Sweden UK
Hungary
Romania
RussiaLatv
iaIta
ly
France
Estonia
Czech
Rep
ublic
Lithuan
ia
German
y
Slovenia
Bulgaria
Slovakia
Poland
Croati
a
Une
mpl
oym
ent r
ate
Source: Business Insights Business Insights
Weaknesses
Work quality perception: Central and Eastern Europe contact center nearshore
outsourcing will face immediate difficulty in convincing potential customers that the
regional labor force is committed to quality customer care. This is due to an
unfortunate perception by many in Western countries of workers from the former East
Bloc as being surly and unwilling to provide good quality service. The current media
feeding-frenzy surrounding quality issues with regard to offshored outsourcing is
certain to compound this stereotype.
Varying technological sophistication levels: While the majority of countries in Central
and Eastern Europe have solid technology networks in place, regional variance is a
problem. Several possible nearshore destinations rank well below countries in North
America and Western Europe. As such, outsourcers looking at the European nearshore
may feel limited in their scope of geographic options from the standpoint of
technology.
82
Corruption: Unfortunately, in many European nearshore destinations, government graft
and corrupt among public officials continues to have a very negative effect on the
regional business environment. This is demonstrated in Table 5.3, which ranks
corruption in Central and Eastern Europe, relative to selected Western European
nations. Even more disturbing is that two of the region’s major economies (Poland and
Czech Republic) also posted very low scores. Central and Eastern European
governments will need to invest significant resources in order to overcome this
potential inhibitor.
Table 5.3: Corruption Perception Index: 2003 Country Transparency rankings Finland 1 UK 11 Germany 16 France 23 Slovenia 29 Estonia 33 Hungary 40 Lithuania 41 Czech Republic 54 Slovakia 59= Croatia 59= Poland 64 Romania 83 Russia 86
Source: Business Insights / Transparency International Business Insights Ltd
Concentrated pools of labor: One characteristic of most Central and Eastern European
countries is the concentration of the majority of the population into one or two major
cities. While this can be beneficial in the sense of recruiting cosmopolitan and
multilingual agents that have been university educated, in the long run it results in
higher wage costs, and limits the possibility of migrating contact center services to
smaller ‘second-tier’ cities.
83
Opportunities
Multilingual agent recruitment: Contact center outsourcers can take advantage of
Central and Eastern Europeans’ enhanced linguistic skills. While in the past, second
language skills were predominantly Russian, since 1989 younger citizens have focused
on English, German, and French. Generally, governments and educational institutions
in Central and Eastern Europe have encouraged instruction in these languages,
recognizing their importance in attracting investment from abroad.
EU integration: For several nearshore countries, EU membership means increased
overall business transparency, uniform laws with Western countries in several
commercial areas, and the free flow of labor and capital throughout the region. It will
also result in currency stability as new members now have their local money pegged to
the Euro. As such, fears of mass inflation found in other outsourcing destinations are
practically nil. Outsourcers can also benefit from the few nearshore countries that have
not yet joined the EU, as these markets will be doing their utmost to clean out local
corruption and raise infrastructure standards in order to ensure membership by 2008.
Incentives: Many Central and Eastern European countries still offer incentives to lure
contact centers to their jurisdictions. These generally take the form of tax breaks,
training subsidies, or cash grants in exchange for providing employment for set
numbers of employees over a period of time. Depending on the size of the particular
project, customized incentives may be possible. As well, in many of the smaller and
less-developed countries of the region, incentives can still be found. However, the more
advanced economies in the region have been gradually phasing out incentives in
conjunction with domestic economic growth.
Domestic outsourcing: By establishing a local presence within Central and Eastern
European economies, outsourcers can develop regional commercial networks and
hopefully gain local contact center contracts within these rapidly developing
economies. This will be common in the westernized economies of the Baltics, Poland,
Czech Republic, and Hungary.
84
Consolidation: Another important opportunity for Western contact center outsourcers
relates to new acquisition opportunities in Central and Eastern Europe. There are many
home-grown outsourcers in the region that have been able to land local and foreign
contracts, but which may be limited in long-term growth, due to a lack of investment
capital. As such, given the lower costs associated with the region, as well as the
possibility of increasing domestic market share, this is an opportunity for Western
outsourcers to consider.
Threats
Tightening labor market: Concerns abound within Central and Eastern Europe
regarding the tightening contact center agent market. This is due to two factors. One,
given the integration of several nearshore countries into the EU, younger, multilingual,
and educated citizens have been legally able to move into more prosperous Western
European countries and are beginning to do so. As such, the labor pool of this
particular demographic most suited to contact agent positions will be reduced in the
short-to-medium term. The result will be higher wages, thus reducing the advantageous
margins that have been a key selling point for the region.
Regional instability: While most economic and political systems in Central and Eastern
Europe are stable, there still remain pockets of concern. Specifically, the ongoing terror
issues in Russia, which have been centered in the commercial center of Moscow,
coupled with renewed ethnic fighting in the parts of the former Yugoslavia may
dissuade risk-averse investors. As such, these regions need to be monitored very
carefully, prior to any large-scale cash outlay, regardless of the particular locality’s
cost and demographic benefits.
85
North Africa
As seen in Figure 5.6, the proportion of call center agent positions dedicated to serving
the Western Europe nearshore market in North Africa will grow through 2008,
increasing from 14% in 2003 to 25% by 2008.
Figure 5.6: North African nearshore outsourced agent positions, 2003 – 2008
0%
20%
40%
60%
80%
100%
2003 2004 2005 2006 2007 2008
Age
nt p
ositi
ons
Total outsourced Nearshore outsourced
0%
20%
40%
60%
80%
100%
2003 2004 2005 2006 2007 2008
Age
nt p
ositi
ons
Total outsourced Nearshore outsourced
Source: Business Insights Business Insights
Key factors for using North Africa as a nearshore location include:
Further cost consciousness on the part of European countries to save money on
customer care;
Increased promotion on the part of North African governments to existing and
potentially new national markets;
Greater technical capacity in North Africa, and;
86
Greater regional stability.
However, potential detriments to North Africa include the following:
Lack of Western European local knowledge;
High call prices than in Central and Eastern Europe;
Lack of technical skills required for multichannel agents;
Regional instability.
Strengths
Cultural links: Due to its colonial past, North Africa has maintained strong cultural
links with the French-speaking countries of Europe. As such, much of North African
commercial trade is conducted in the French language, with high rates of fluency found
throughout the region. North African spoken-French is also seen to be closer with that
found in Europe, as opposed to Mauritius, Senegal or Québec. As well, French business
customs have also been widely adopted in North Africa, and are used when dealing
with both domestic and foreign transactions. Finally, North Africans are acutely aware
of French commercial culture. This is because of high rates of North African migration
to France and Belgium; a growth in tourism to North Africa from French-Europe; and,
high levels of trade between the two regions (note that France is the main trading
partner for both Morocco and Tunisia).
Telephony and infrastructure: Both Morocco and Tunisia have up-to-date telephony
networks in place, with Morocco’s considered at a very high standard. As well,
increasing mobile telephony networks and Internet growth ensures the possibility of
multichannel contact center possibilities. From the perspective of transportation, each
country has an adequate public transport network in place.
Urban centers: North Africa has numerous cities in which to locate contact centers,
many of which are in excess of 300,000 people. This will be more closely examined in
the national market discussion.
87
Labor availability: The North African rate of joblessness is in excess of 14%, making
agent recruitment relatively straightforward. As well, education levels in Tunisia and
Morocco are improving steadily, and literacy in both countries is among the highest in
Africa.
Proximity: North Africa is relatively close to Europe, as compared to other French-
speaking outsourcing options, which includes North America, Central Africa and
Mauritius.
Stability: Both Tunisia and Morocco are semi-democratic constitutional monarchies,
and are considered stable.
Competitiveness: North African markets have particular incentives in place in order to
attract contact center investment.
Weaknesses
Lack of local awareness: Despite having a good understanding of French commercial
culture, a lack of agent understanding of local nearshore issues and venues has led to
instances of poor customer care from North Africa. As such, this has limited the types
of roles that outsourcers have been comfortable sending to this region.
Call pricing: The North African telcos are state-owned monopolies, and engage in high
pricing strategies, which erode the margins that outsourcers can offer to clients. It is
clear that further privatization may be necessary in the domain of telecommunications,
if North Africa is to remain a competitive player in nearshore outsourcing.
Agent quality: Similar to local knowledge, North African agent quality has become an
issue for many outsourcers. This has generally revolved around different customer care
mannerisms and the ability to expedite matters in an efficient manner, and has
contributed to some backlash against the region. A lack of multichannel skills among
North African agents has also been noted.
88
Differing labor levels: The strengths in quality of the two sub-segments of North
African labor vary, with Morocco’s workforce perceived to be more advanced than that
of Tunisia. This cleavage has prevented outsourcers from developing pan-regional
training and recruitment strategies, thus increasing business costs.
Opportunities
New nearshore markets: North Africa has effectively penetrated Europe’s French-
speaking markets for contact center outsourcing, and is its governments are now
looking to other countries to which it can offer customer care services. The main
targets are the UK and Spain. From the standpoint of the UK, North Africans are
advancing in their levels of English fluency, because of a growth in travel/tourism and
trade between the two regions. With regard to Spain, as well as being extremely close
geographically, there remain strong historic and cultural links between the Spanish and
North Africans.
Internal opportunities: North African economic development is progressing nicely,
raising average standards of living across the region. This is producing an ongoing
consumer base, which will need to be serviced by customer care professionals. This is
an excellent chance for nearshore outsourcers located in the region to penetrate
domestic markets, profiting from an established local presence and economies of scale.
Incentives: North African jurisdictions have been aggressive in luring foreign
investment, and have incentive schemes in place from which outsourcers can profit.
These will be discussed in more detail during the North African country analysis
section.
89
Threats
Instability: There is concern from existing and potential outsourcing investors in regard
to the threat of political upheaval in North Africa. Not only are fears of Islamic
fundamentalism a deterrent to establishing operations in the region, but mixed signals
to the east are also cause for concern. Nearby Algeria is still recovering from political
turmoil, and worry abounds about the growth of anti-Western sentiment spilling over to
Morocco and Tunisia.
Other markets: Another threat to contact center outsourcing in North Africa comes
from Romania, Hungary, and Bulgaria, all of which are now actively competing for
French outsourced customer care business. Qualitative evidence suggests that agents in
Central and Eastern Europe effectively compete on the basis of spoken accent, and
have a good commercial affinity with French culture and products. As well, many feel
that Central and Eastern Europe are now more politically stable than North Africa, as
well as being equally cost effective. There have also been initial steps by the Ghanaian
government to court contact center outsourcing. As well, a number of contact centers
servicing France are already in operation in Senegal. While a stampede of business to
these markets is unlikely in the near future, erosion to this French-speaking country is a
possibility over the long term.
Outsourcing backlash in France: France is the largest customer for North African
customer care outsourced services. However, political soundings about sending jobs
offshore have worried investors, who may fear reprisals by the French government in
retaliation for sending jobs offshore. There is also concern that the French government
may introduce favorable tax incentives to keep these roles in France, which could
affect North African competitiveness.
Deregulation: North African governments have been slow in privatizing state-owned
telcos, as well as inhibiting the deregulation of long-distance carriers. Despite rhetoric
to the contrary from government officials in the region, a move toward deregulation
appears unlikely in the near future.
90
91
CHAPTER 6
Nearshore locations for North America
92
Chapter 6 Nearshore locations for North America
The main advantages of Canada as an outsourcing location are proximity to the US and the quality of the Canadian agent.
Outsourcers operating in Canada offer their services as the lower-cost alternative to the United States for comparable service in a secure business environment.
While Canada is the most expensive offshore/nearshore location in the world, but it is also the most stable and secure.
The Mexican call center market is the second largest in Latin America and is larger than the Argentine, Chilean and Colombian combined.
Mexico offers substantial growth opportunities for equipment vendors, systems integrators and domestic outsourcers alike.
Mexican nearshore outsourcing will undergo substantial growth through 2008. By 2008, 23% or roughly 13,000 outsourced seats will be nearshore seats. This is because Mexico has emerged as the most attractive location from which to serve the US Hispanic population.
Jamaica’s call center market will continue to grow steadily, reaching 8,000 APs by 2008.
However, Jamaica’s small population places constraints on sustainable growth.
Introduction
Despite the touting of numerous offshore locales (e.g., Mexico, Hungary, Ireland), it is
estimated that around 95% of offshore engagements involve India (offshore) and
Canada (nearshore), and this trend is expected to continue to grow as a blended model
for traditional operational infrastructure outsourcers offering clients lower costs in
resources, failover capabilities, and management of the offshore supplier or
infrastructure.
93
The US market has slightly different needs to its Western European nearshore
counterpart. Of course, location alone dictates that nearshore locations (from the
perspective of the US) are likely to be close in proximity to the US, which immediately
pulls in Canada, Mexico and The Caribbean.
However, there are cultural reasons too. Canadian agents are closely attuned to the
culture, ethics and business practices of the US. However, the US also has a
burgeoning Hispanic population, over one-quarter of the total US population, of which
around 87% are thought to speak Spanish at home. This is well served by Mexican
agents, who in addition are generally fluent in English, making it an excellent lower
cost alternative, especially for Spanish-English bilingual needs, to Canada.
Canada
Where is the market today?
The main advantages of Canada as an outsourcing location are proximity to the US and
the quality of the Canadian agent. Canadian agents have a very similar profile to those
of the United States and possess an acute familiarity with American culture. Currently,
Canadian outsourced agent positions predominantly serve domestic customers.
However, nearshore outsourcing from the US is responsible for the majority of
outsourcing growth and a significant portion of expansion in the Canadian market.
Risks vs. rewards
Economic uncertainty, corruption and general security are not issues in Canada. In a
survey measuring perceptions of corruption conducted by Transparency International,
an international watchdog, Canada ranked 11 or higher than the US and any other
nation discussed in this study.
Another strength is Canada’s proximity to the US. For example, a client based in
Detroit, MI, can visit a call center in London, Ontario, after a two-hour drive rather
than an overnight flight to India or the Philippines. According to Brian Villeneuve with
94
International Investment Services of the Ontario Government, location is proving to be
a determining factor for many US outsourcers as firms become more cost and time
conscious. This is the classic benefit of nearshore outsourcing as is seen in Mexico.
Currently, however, Canada is the most expensive offshore/nearshore location in the
world, but it is also the most stable and secure. Thus, outsourcers and enterprises alike
are prepared to pay a premium for the economic stability, security and proximity to the
United States that Canada affords.
Outsourcers operating in Canada offer their services as the lower-cost alternative to the
United States for comparable service in a secure business environment (see Table 6.4).
Canadian agents tend to have a similar profile to those in the United States and can
support a full range of calls. An inbound voice-based customer care agent in the United
States is priced at $27.00 an hour and paid between $10.00 and $12.00 an hour. A
Canadian inbound voice-based customer care agent in Canada is paid between $8.65
and priced at $24.00 per hour. Over the long term, the impact of increased nearshore
outsourcing from the US will be to reduce the availability of skilled customer care
labor and increase overall agent costs.
Table 6.4: Price per hour of Canadian outsourced agents, 2004 Function Price (US$) Collections (outbound 25.70 Direct response (inbound) 25.30 Telemarketing/ telesales (outbound) 25.70 Voice-based customer care (inbound and outbound) 24.00 Multimedia customer care (inbound and outbound) 24.00 Technical support / helpdesk (inbound) 26.15 Percentage of US price for voice-based customer care agent 87% Per hour wage US$8.65 Percentage of US wage 86%
Source: Business Insights Business Insights Ltd
95
Central America
Outsourcers such as Sitel and Sykes have turned to Panama, El Salvador and Costa
Rica as a low-cost Spanish-language destination. Business Insights estimates that the
Central American agent population will grow from 5,000 to 8,000 APs from 2003 to
2008. Growth will remain at just 10% CAGR because the English-speaking agent
population is saturated and cannot support increased capacity. The nearshore market in
Central America attracts a very similar vertical market distribution, as does Mexico,
due to its proximity to the US and the heavy proportion of nearshore outsourcing out of
the US.
Mexico
Where is the market?
The Mexican call center market is the second largest in Latin America and is larger
than the Argentine, Chilean and Colombian combined. Mexico offers substantial
growth opportunities for equipment vendors, systems integrators and domestic
outsourcers alike. Furthermore, Mexico is an optimal location for nearshore
outsourcing from the US.
Economic assessment
The closeness that Latin America’s largest economy enjoys with the US can sometimes
be a mixed blessing. Mexico is insulated from the economic volatility experienced by
most Latin American economies, but Mexico’s boom in 2001 and sluggish growth
since is a direct result of poor US performance.
Mexico has seen a steady improvement in main economic indicators over the last
several years. Despite a gradually weakening peso, 2003 inflation was low at 4.0%,
down from 5.7% in 2002. Interest rates, steadily decreasing from 31.2% in 1998 to
6.0% in 2003, have also stayed low when compare to those of Argentina and Brazil.
Mexico remains one of the most attractive destinations for foreign direct investment
(FDI). FDI rose nearly 6% to $13.6bn in 2002 whereas Latin American FDI fell by
nearly a quarter.
96
According to the Organization for Economic Cooperation and Development (OECD),
2003 GDP grew 1.3% from 2002. Growth was disappointing and below analyst
estimates for the year, due to US performance. The finance ministry reported that the
economy rebounded 2.0% in Q4 2003 on robust expansion in the US. Most analysts
now consider Mexico to be as much a North American economy as Latin American
because of NAFTA (North American Free Trade Agreement). Trade with the US has
risen from $8 billion to $232 billion in the ten years NAFTA has been in place. Nearly
90% of Mexican exports are consumed by the US.
Nearshore outsourcing
Mexican nearshore outsourcing will undergo substantial growth through 2008.
Nearshore outsourcing accounted for 25%, 6,000, of outsourced APs in 2003. By 2008
23% or roughly 13,000 outsourced seats will be nearshore seats. This is because
Mexico has emerged as the most attractive location from which to serve the US
Hispanic population. With an abundance of English-speaking agents, it is also a
competitive alternative to Canada as a nearshore destination from which to serve US
English-speakers. As a result, outsourcers with a substantial amount of bilingual calling
looking to offer a lower-cost, nearshore destination should use Mexico in a regional
and global outsourcing strategy.
Nearshore outsourcing will grow 16.7% annually through 2008. This compares
favourably with Brazil and Argentina as one of the fastest foreign outsourcing growth
rates in Latin America. By comparison, the Brazilian offshore agent population will
grow 18.0% annually and the Argentine agent population will grow at a CAGR of
29.5%.
The following graph compares the growth of nearshore outsourced APs to domestically
outsourced APs from 2003 to 2008.
97
Figure 6.7: Mexican offshore and domestic outsourced APs, 2003 - 2008
0
5
10
15
20
25
30
35
40
45
50
2003 2004 2005 2006 2007 2008
APs
(000
s)
Offshore APs Domestic APs
0
5
10
15
20
25
30
35
40
45
50
2003 2004 2005 2006 2007 20080
5
10
15
20
25
30
35
40
45
50
2003 2004 2005 2006 2007 2008
APs
(000
s)
Offshore APs Domestic APsOffshore APs Domestic APs
Source: Business Insights Business Insights
A 2004 census bureau report indicated that the US Hispanic population will rise from
36 million today to over 100 million by 2050. This would mean that the Hispanic
population would be the largest minority in the US, comprising nearly a quarter of the
US population. Around 87% of the US Hispanic population speaks Spanish at home,
according to the Direct Marketing Association.
The US Hispanic population exerts considerable economic power and it will only grow.
In a study commissioned by Wells Fargo, Celent Communications Inc. concluded that
Hispanic-Americans’ annual purchasing power will grow from $581 billion to more
than $900 billion by 2007.
A word of caution: service to the US Spanish-speaking population is considered a
major growth opportunity, largely because it has been all but ignored by American
corporations in the past – not because it will become the major revenue generator for
outsourcers operating in Mexico. A census bureau report showed that the average
Hispanic household income is just $11,500 compared to $86,000 for US households.
98
The US Hispanic population possesses significant and growing buying power, but the
opportunity is limited. For this reason, Business Insights stresses the need to beat
competitors to market and build credibility servicing the US Hispanic market before it
is saturated with competitors.
Nearshore outsourcing presents a significant growth opportunity, but it is important not
to overstate its significance. US Hispanic calling into Mexico is and will continue to be
a small portion of the Mexican agent population. It is estimated that nearshore
outsourced APs are only 7.5% of all APs and 25% of outsourced APs. Even with
growth projections, nearshore outsourcing will account for only 7% of the entire
contact center market and 23% of all outsourced APs by 2008.
Outsourcers should be aware of the opportunity while being cognizant of the fact that
nearshore outsourcing will never become the dominant presence in Mexico that it is in,
for example, Argentina.
Furthermore, it is estimated that between 65% and 75% of calls from the US handled in
Mexico are English-speaking calls. By 2008, the percentage will not have substantially
changed. This underscores the importance of bilingual agents for success in the Latin
American outsourcing market.
Labor rates
Mexican labor rates are the highest in Latin America. On average, Spanish-speaking
agents make between $2.00 and $2.50 per hour and bilingual English- and Spanish-
speaking agents make between $3.50 and $4.00 per hour. In comparison, bilingual
agents in Argentina, which has greater linguistic diversity, are paid little over $2.00 an
hour and Spanish-speaking roughly $1.00 an hour.
The following table compares wages in Mexico and Argentina.
99
Table 6.5: Mexican call center wages and turnover, compared to Argentina Hourly wages Mexico Argentina Bilingual (Spanish/English) agent $4.00 $2.50 Spanish-speaking agent $2.50 $1.50 Annual turnover 30-40% 10-15%
Source: Business Insights Business Insights Ltd
The disparity in wages is an inhibitor to development as a viable offshore destination
and explains why large multinational outsourcers such as Teletech, Teleperformance
and Sitel use Mexico as a nearshore destination and reserve Argentina for offshore
clients.
Call center activity
Domestic outsourcing is heavily weighted towards outbound calling, with telesales and
collections comprising the majority. Nearshore outsourcing is predominantly inbound
customer service, customer care, up selling and cross selling, with small but not
insignificant activity in technical support. It should be noted that the discrepancy
between domestic outbound and nearshore inbound calling reflects the predominance
of “press 2 for Spanish” calls and is abnormal for nearshore- or offshore-outsourced
calling.
Conclusions
Nearshore growth potential mixed with sustainable domestic growth positions Mexico
as an attractive destination for nearshore outsourcing and multinational expansion.
Outsourcers employ three strategies for success in Mexico. Mexican-owned outsourced
contact centers tend to be under 100 seats and derive revenue from domestic contracts.
These centers tend to be attractive targets for acquisition by American outsourcers
looking to take advantage of relatively inexpensive, high-quality bilingual labor to
serve existing clients and enter the domestic Mexican market. The Mexican domestic
100
market should not be overlooked as an investment opportunity in itself because of its
size and stability.
American outsourcers tend to acquire Mexican operations and route US-based Spanish
and English calls from existing US contracts and quickly expand capacity to
accommodate the increase in volume. Outsourcers can then leverage the knowledge
gained in Mexico for further entry in Latin America.
Multinational outsourcers follow similar business models on a larger scale.
Teleperformance, Teletech, Sitel and EDS all have centers in Mexico, Argentina and
Brazil. Multinational outsourcers who have had a measure of success in Mexico often
use Mexico as a contained nearshore destination or package Mexico with Argentina as
part of a complete nearshore and offshore strategy. Whereas Mexico and Argentina are
intended to capture near and offshore demand, Brazil, as discussed in chapter 4,
represents a strategy for meeting local Brazilian demand.
The Caribbean
This section analyzes the current state of US nearshoring in the Caribbean. Central
America has been particularly successful in attracting US-based Hispanic calling and
the Caribbean has been a leader in US-based English-language calling. The Caribbean
region shall be defined as Jamaica, the Dominican Republic, Puerto Rico, Trinidad,
Barbados, St Kitts, Grenada, St Lucia, Guyana, Antigua and St Vincent. Particular
attention will be paid to Jamaica since it accounts for nearly half the Caribbean agent
population.
The Caribbean and Central American agent population is a significant portion of the
total Latin American agent population. The Caribbean and Central America house
16,000 APs, which is larger than the entire Colombian, Chilean and Argentine agent
population.
101
Outsourcers such as Sitel and Sykes have turned to Panama, El Salvador and Costa
Rica as a low-cost Spanish-language destination. Business Insights estimates that the
Central American agent population will grow from 5,000 to 8,000 APs from 2003 to
2008. Growth will be at just 10% CAGR because the English-speaking agent
population is saturated and cannot support increased capacity. The nearshore market in
Central America attracts a very similar vertical market distribution, as does Mexico,
due to its proximity to the US and the heavy proportion of nearshore outsourcing out of
the US.
According to the Jamaica Promotions Corporation (JAMPRO), a government agency
that promotes FDI in Jamaica, the Caribbean call center market is comprised of 50 call
centers and 13,000 agents. Jamaica is the single largest market with 5,000 APs. Puerto
Rico, Trinidad and the Dominican Republic account for 6,000 APs and the remaining
2,000 APs in the Caribbean are spread throughout Barbados, St Kitts, Grenada, St
Lucia, Guyana, Antigua and St Vincent.
Over half of call centers and nearly half of all APs in the Caribbean can be found in the
Dominican Republic, Puerto Rico and Trinidad. In the Dominican Republic, there are
seven call centers, with approximately 3,000 APs. Puerto Rico is the third largest
Caribbean agent population with 2,000 APs among six call centers and there are 1,000
APs spread across seven call centers in Trinidad.
Although a small proportion of calls handled in the Caribbean originate in Canada, the
Caribbean has primarily established itself as a low-cost nearshore alternative to Canada
for outsourcing English-language calls originating in the US. Furthermore, there is
some outsourcing of US Spanish-language calling, but it is not a significant portion of
the agent population.
American outsourcers are attracted to the Caribbean by geographic proximity,
comparable time zones, the availability of English speakers and labor arbitrage and
they report overall satisfaction with the quality of labor in the Caribbean.
102
Jamaica
In 2003 there were 5,000 APs in 13 call centers located in Jamaica. The vast majority
of the agent population services English-language calling out of the US, but there is a
small agent population that handles calls from within Jamaica. The agent population is
unlikely to grow to the size of Chile’s or Colombia’s although steady growth will
continue in the near-term. Business Insights expects the total agent population to
number approximately 8,000 by 2008 and grow at a CAGR of 9.7%.
Government efforts to attract call center investment
Jamaica has established incentive zones to attract FDI, which it has named Free Zones
or Single Entity Free Zones. According to JAMPRO, a call center within a Free Zone
or a Single Entity Free Zone (a location outside an established Free Zone but which
receives Free Zone benefits) status is entitled to the following privileges:
tax exemption on profits;
tax exemption on the costs of imported hardware or software;
full repatriation of earnings; and
preferential customs clearance facilities.
Furthermore, if desired, a call center can establish its own telecommunications
infrastructure independent of any provider. Call centers in a Free Zone also qualify for
government-subsidized office space.
Vertical market distribution
Jamaican vertical market distribution is more fragmented than in the rest of Latin
America mainly because nearshore outsourcing is such a high percentage of the agent
population. Furthermore, offshore vertical market distribution of call center agents in
Jamaica is quite similar to India’s, since both markets are heavily dominated by
outsourcing from the US. Business Insight estimates that over 80% of the total agent
population is devoted to financial services, communications, technology, distribution
103
and wholesale and travel and tourism. In comparison, the majority of call center
activity in Latin America is concentrated in financial services, communications and
outsourcing.
Labor market
According to the Jamaican government, an English-speaking agent in Jamaica is paid
$3.50 per hour. Jamaican outsourcers report trouble recruiting bilingual agents. As a
result, Business Insights does not believe that Jamaica will be able to attract contracts
that serve the US Hispanic population. Business Insights recommends that call centers
with a significant amount of Spanish calling seeking a nearshore destination look to
Mexico, Colombia or Central America. However, if calling is primarily English-
language calling then Business Insights recommends that outsourcers look to Jamaica
as a nearshore English-language alternative to Canada.
In addition to providing tax incentives and location assistance, the government offers to
help train call center employees. Single Entity Free Zone status entitles a call center to
a reimbursable training grant of up to J$20,000 ($US331.00 at the time of printing)
administered through the Human Employment and Resource Training Trust (HEART).
HEART offers call center skills as part of its vocational training. The curriculum
includes:
Orientation to the occupation, customer service, developing telephone skills, selling
products and services, basic computer technology and introduction to database
management. Employability skills training courses are offered in language and
communication skills, calculations and computations and general studies.
Business Insights considers relocation assistance, tax incentives and call center agent
training to be an attraction for outsourcers when selecting an offshore or nearshore
destination.
104
Call center functions
Since it is primarily constituted of nearshore outsourcing, call center activity is heavily
outbound telemarketing, telesurvey, debt collection, sales verification and tax and
freight certification. Due to a high rate of technology outsourcing into Jamaica, tech
support and helpdesk also account for a large portion of calls. Financial services and
telecommunications calling is primarily inbound service, complaints handling and
payment authorization calls. Travel and tourism calling is primarily inbound booking
and reservations. Travel and tourism calling comprises the most significant proportion
of calls originating in Jamaica.
Conclusions
Jamaica’s call center market will continue to grow steadily, reaching 8,000 APs by
2008. However, Jamaica’s small population places constraints on sustainable growth.
Outsourcers and end-users should understand that the absence of a substantial bilingual
agent population precludes Jamaica from competing with Latin America for the
majority of international offshore outsourcing contracts. Business Insights recommends
that Jamaica be used by outsourcers looking for a nearshore alternative to Canada for
English-language calls originating in the US and Central America, particularly Panama,
Costa Rica and El Salvador for US Hispanic calling.
105
CHAPTER 7
Focus on call center offshoring
106
Chapter 7 Focus on call center offshore outsourcing
Summary
India and the Philippines provided 70% of the world market offshore outsourced APs in 2002; this will drop to 64% in a growing global offshore market by 2007.
South Africa is seen as a hidden gem of offshore call center outsourcing.
It can take up to 3 or 4 years before a new offshore market establishes a critical mass of middle-management skill sets.
There is further growth in the offshore market for IP call center, shadow infrastructure and remote-monitoring technology solutions.
Overall, demand is growing – strongly, but it is also starting to shift eastwards away from the USA. With this shift come subtle differences in requirements.
Demand for offshore call center outsourcing is growing and shifting East to countries across Europe, and will grow in the APAC region through 2007.
The financial services, technology and telecoms sectors are those most in demand and best adapted to being outsourced offshore.
Cultural affinity of call center agents is more important than the accents they have.
Real-time monitoring and a supporting shadow infrastructure are needed to allay clients’ fears about losing control of their customer interactions if they outsource offshore.
Clients often do not fully understand their desired operating model, so SIs and OSPs can assist them by undertaking business process reviews with them and working out the blended solution of in-house and outsourced call centers.
107
Introduction
This chapter of the report arms the reader with in-depth analysis of the current state and
outlook to 2007 of the supply-side picture of offshore call center outsourcing in the
different geographical regions of the world. In essence, it profiles a number of
countries that represent the most exciting supply bases for offshore call center
outsourcing now and in the future. A number of countries that figure in discussions on
this topic have not been covered, most notably, Ireland, Russia and Slovakia.
Ireland represents an established market in terms of offshore call center outsourcing.
However, it is fast becoming a buyer rather than a seller of outsourcing services. Russia
is too politically and economically unstable as an offshore market today; however, the
domestic market will grow strongly. Slovakia has lost some of its edge to newer
regional rivals that offer more price-competitive markets.
Demand for offshore call centers
The US leads the global market for demand in offshore-outsourced call centers. This
will not change. However, many more countries are starting to appreciate the merits of
outsourcing to another country; indeed, today offshore outsourcing is a boardroom
discussion topic around the world. As was the case with IT outsourcing and business
process outsourcing (BPO), in which the US led the way, demand for offshore call
center outsourcing is growing and moving eastwards.
In India, a market that led the charge to supply the offshore capacity, outsourcing
service providers (OSPs) are now themselves outsourcing to, or partnering with, OSPs
in other (offshore) markets in order to offer their own customers additional capabilities,
such as multilingual operations. Indian OSPs that are trying to grow their businesses by
attracting a greater portfolio of offshore clients are doing so to try and survive the
consolidation and avoid over-capacity in the domestic market. These OSPs are finding
that they need to establish themselves in their target markets (principally the US and
108
the UK) so that they have a real presence closer to their customers, and a hope of being
considered more as serious rivals to the traditional (and now global) OSPs, such as
IBM, EDS, Accenture, and so on.
Specific country requirements
As more countries start to send call center activity offshore, customer decision factors
and demand drivers are evolving. This section presents the specific requirements of the
major global customers of offshore outsourcing.
Table 7.6 lists the primary markets that are used by the leading countries that outsource
call center activity overseas today. This is not an exhaustive list. With one or two
exceptions, the markets listed are profiled in this report, which represents a substantial
compendium of market information.
Table 7.6: Main offshore and nearshore outsourcing locations for the major outsourcing customer markets
Major market Main offshore and nearshore locations US India, Philippines, Canada, Mexico, South Africa, Malaysia UK India, Malaysia, Philippines, South Africa, Australia, other English-speaking Africa France Tunisia, Morocco, French Caribbean, other French-speaking North Africa Germany Czech Republic, Poland, Turkey, other Eastern Europe Spain Mexico, Argentina, Colombia, Chile, Morocco
Source: Computerwire Business Insights Ltd
US
The US outsources a huge amount of call center activity to foreign countries today,
having realized enormous returns on investment (ROI) by moving to a model of labor
arbitrage and also from leveraging economies of scale by sending large call volumes
offshore. The US has a number of age-old relations with many of the countries that
today figure in the list of emerging offshore locations.
109
In an attempt to reduce or at least limit the perceived public pushback regarding talking
to call center agents who have strange accents, a sizeable portion of the call center
activity has been put into markets such as Canada, a nearshore location, or the
Philippines, where the accent is the same and there is greater cultural affinity with
Americans than in India.
Currently the US market is realizing the changing face of its customer demographics
and their evolving requirements. The number of Hispanic call center APs is going to
increase in offshore markets such as Argentina – although Mexico will also benefit
from this move offshore.
Currently in the USA there is much discussion about the national ‘Do Not Call’ list(s).
The impact on offshore outsourcing will be minimal so long as OSPs stay on top of
legislative developments and ensure that their software is synchronized with the list(s)
to avoid approaching people who have signed up to not be solicited.
UK
The UK’s adoption of offshore outsourcing is growing strongly. The issue today is how
OSPs and their clients can balance cost savings and deliver results that the stock
markets expect whilst keeping their customers happy. Customers are at best only
slowly growing used to the idea of talking to an increasing number of call center agents
who have foreign accents and at worst they are truly disgruntled with the situation.
Having said that, the UK has a relatively strong degree of tolerance when it comes to
foreign accents. This stems from the country’s close proximity to the European
continent, which is awash with languages and dialects, and the legacy of the former
British Empire. In the latter case, Britain is home to a sizeable number of people from
former colonies, including India, and the population of the UK today has grown
accustomed to their customs and accents.
An increasing number of Britons are using call centers for high-end service fulfilment
transactions. British uptake of offshore call center outsourcing will grow strongly going
110
forwards, with call centers moving (initially) to India (and later) to South Africa and
Malaysia.
France
France’s use of offshore outsourcing is more mature than that of many other EU
countries. The introduction of France’s legislation limiting the working week to 35
hours (on average) has not had the negative effect on the market for domestic call
centers that might have been expected. The overall growth in domestic usage of call
centers means that today many operations are finding their way to North African
markets, where French is spoken fluently by large parts of the population and wage
rates and the tax burdens are much lower than in France.
There is a cloud that hovers over the market though, regarding workers’ rights
legislation that applies in France and not necessarily in the offshore markets being used
for outsourcing. The discussion centers on whether OSPs use offshore outsourcing as a
means of circumventing this stringent legislation and whether there should be an
obligation on OSPs serving France from overseas markets to ensure that their workers’
rights are on a par with those of their colleagues back in France – this could become an
ethical play for the OSPs.
France will continue to outsource an increasing number of call center APs to the
countries of North Africa, and, to some extent, to the countries of Eastern Europe. The
volumes will remain relatively small by comparison with the English-speaking markets
to the west.
Germany
It is proving very hard to sell the idea of offshore outsourcing to German firms. There
are a number of reasons why these firms see little attraction in outsourcing offshore,
and even bigger obstacles sit in the way, should they try.
First, the major part of the German call center market is dedicated to service and
support activities, between the hours of 8am and 6pm, which normally require a
111
specialized and highly skilled labor pool. This work, it is felt, does not lend itself
readily to being sent offshore.
The next point concerns the fact that the majority of the global market supply of
offshore call centers is English-language-based. If customer-facing staff do not need to
speak English then there is little incentive to move work offshore. Interestingly though,
there is a growing demand for English-language services in the German call center
market.
Some call center activity is in fact being shifted to Eastern European markets from
Germany but only incrementally, and only after first moving the operations to more
cost-effective eastern parts of Germany. Moving a call center from Frankfurt to the
outskirts of Berlin for instance can deliver sizeable cost savings. The additional
attraction with that approach is that confrontation with trade unions can be avoided as
the work is staying within the country.
Be aware though that there are obstacles firms face when they do consider outsourcing
to another country. Many workers in Germany’s call centers are members of workers
councils or trade unions. Germany not only affords workers a high level of protection
but the unions and workers councils wield considerable power. Additionally, labor
laws are such that it is almost impossible to reduce headcount, even if this makes
perfect rational business sense.
Germany also has very strict privacy laws protecting call center agents against being
monitored, which is today a standard part of call center operations. There are two very
good reasons for monitoring call center agents, the first is to ensure a consistent quality
of service and the second, even more importantly, to cover against redress or even
litigation brought by an end-customer. The burden of proof falls on the company with
the call center if a customer takes issue with a matter that has been handled by the call
center. It has become a necessary standard practice in the UK, for instance, to record
calls, especially in the financial services sector, to meet these two requirements.
112
Looking to the future, businesses are coming to appreciate the real savings that can be
made by outsourcing. Despite apprehension amongst business that has undoubtedly
been fuelled by adverse media attention coming out of the UK for example, there are
signs of increased uptake in call center outsourcing to other countries. Financial
services firms are moving towards operating models similar to those in other markets
such as Britain, where back-office processing activities are being undertaken offshore.
The next logical step is to leverage economies of scale and the global economy by
locating call centers offshore too.
Longer-term, as the Eastern European countries grow their operations and client base,
more German firms will move their call center APs to those markets and reduce their
costs further.
Rest of Europe
Several countries throughout the rest of Europe are adapting to a world with offshore
call center operations. Several of the Scandinavian countries have moved entire call
centers to the Baltic States, for instance, and Spain is looking to North Africa as well as
South America for options itself. Moving forwards, this tendency will only increase as
customers’ service and support requirements develop.
In addition, a number of countries in the EU are less likely to use the latest self-service
technologies in their CRM offerings. Consumers who have access to the Internet are
readily able to experience what such technologies can offer them in dealing for instance
with US companies’ eCommerce sites. Some of the newer markets that are supplying
call center outsourcing will have leap-frogged the technology platforms available today
in the EU countries that are home to their clients. Rather than making sizeable
technological investments in the customers’ markets, perhaps OSPs will instead use
some of the more advanced offshore locations to handle low-touch (email) or high-
touch (instant messenger web chat technologies) customer interactions in a portfolio of
blended services and locations.
113
Asia Pacific
The countries of this region are very varied in terms of cultures and languages. The
region offers both offshore call center supply locations and a rich vein of potential
customers for offshore call center outsourcing solutions.
In terms of the countries that are actually outsourcing their call centers to other
countries, Japan and Australia have established a number of relationships across the
region with OSPs and there is some evidence of cross-trade between Malaysia,
Singapore and Thailand. South Korea too is expected to outsource some of its
requirements offshore.
At this time, the amount of offshore outsourcing in APAC is relatively small, but the
region will remain a net contributor to the world market of offshore outsourcing,
largely because of the contributions of India and the Philippines.
Demand for offshore call center outsourcing by vertical
As Figure 7.8 shows, the majority of offshore outsourced APs today are located in
India, which reflects the fact that the English-speaking countries are the biggest
customers of offshore outsourcing. The biggest consumers of offshore outsourcing
today are the USA and the UK, followed by France and Spain, although these two
countries lag a long way behind in terms of volume and overall acceptance of offshore
outsourcing.
114
Figure 7.8: Vertical offshore outsourced APs available, 2003
05
101520253035404550556065
Americas CEE MEA INDIA RoAPAC
APs
(000
s)
Financial services Technology Retail
Entertainment Communications Travel and tourism
Utilities Others
Source: Business Insights Business Insights
Financial services, technology and communications lead the pack pretty much across
the board. The underlying reason why certain industries have moved into offshore
outsourcing with such aplomb reflects the types of call center activities that they tend
to leverage most and how well adapted those activities are to being served from
offshore call centers.
Whereas the travel & tourism or retail sectors are more likely to use call centers for
more complex sales support activities that demand a higher language proficiency, FS
call centers provide a great deal of low-complexity transactional support. The telecoms
and technology industries have readily outsourced helpdesk and support operations –
although they have also come up against some cultural obstacles.
Taking a longer-term view, there is potential for customer self-service technologies
such as advanced IVR solutions and online help forums or advanced email auto-
response systems to reduce the overall volumes of transactions that are handled by
115
(offshore) call centers, but that would require widespread acceptance of self-service
technology, which is not self-evident. The more technology-rich and cheaper customer
contact channels first need to undergo further technological development and to gain a
greater degree of consumer adoption before the call center activity volumes are likely
to be greatly impacted.
Key drivers
The following section is based on research amongst 250 European call center decision
makers in which we asked them about their key drivers for outsourcing and also their
key barriers or concerns (see Figure 7.9).
Figure 7.9: Drivers for offshore outsourcing
0.0
1.0
2.0
3.0
4.0
Cost of labor
Educated/skilledworkforce
Governmentsubsidies
"Follow the sun“call center
Access tomultilingual workforce
0.0
1.0
2.0
3.0
4.0
Cost of labor
Educated/skilledworkforce
Governmentsubsidies
"Follow the sun“call center
Access tomultilingual workforce
Source: Business Insights Business Insights
Cutting costs
Traditionally, the main reason for moving to a business model where call centers are
located in another country has almost entirely been focused on reducing labor costs.
116
No-one denies that call center agents’ wages are the single biggest contributory cost
factor in a call center – estimates suggest that call center wage costs can contribute up
to 60% or even 70% of the total costs involved.
However, this argument has evolved in recent times. In order to prove that money is
actually being saved, there is a need to first understand what in-house operations cost.
It is surprising how few companies really do understand their internal processes to the
degree required if they are considering outsourcing them, and what costs they currently
represent to the organization.
The main driver behind offshore outsourcing today is focused on moving from a capital
expenditure business model to an operational expenditure model. Today, executives are
more risk-averse and in many respects frugal. Mechanisms need to be put in place to
demonstrate ROI. Here again, many businesses recognize the need for this, but fail to
start benchmarking exercises prior to doing process redesign work or outsourcing. This
means that they fail to establish a clear starting point against which things such as cost
savings can be measured.
One very visible way of cutting capital expenditure involves moving to an ‘operational
expenditure’ platform. Rather than committing a lump sum to a black-box project,
expenditure is accrued on a monthly basis, improving the frequency and visibility of
costs. This, in turn, makes departments and cost centers more accountable. The
outsourcing of call centers epitomizes this model. Monthly or annual fees and costs are
agreed up-front with the OSP and can be forecast much more accurately going
forwards. Over the entire life of the project, the outsourcer may not actually save much
money, but it will have been able to report at any given time on the true cost to the
business of running its call center(s) offshore.
Similarly, firms that outsource can leverage economies of scale and leverage OSPs’
infrastructure investments. The OSP builds a business on a dedicated technology
platform and a range of supported processes. As markets evolve, OSPs make further
technology investments to adapt and stay ahead of the game. Such investments do not
benefit companies that keep ownership for infrastructure in-house because they have a
117
finite amount of money to spend, which is normally spent in one lump sum at the start
of a project. Typically, they make a one-time technology capital investment and as new
requirements come along, the existing system is stretched to fit with these new
requirements. By moving to an operational expenditure model and outsourcing, firms
reduce these technology investments and their risk profile by placing the burden of
responsibility for technology platform choice on the shoulders of the OSP.
More demand for multilingual services
Many firms that are in the market for offshore-outsourced services are there precisely
because they need to support multiple languages and these services are well provided
for by OSPs that have operations in various countries.
The age-old argument of how to run multilingual support programs in call centers
continues today. In some respect it will actually intensify as more markets look to
offshore locations for solutions for servicing their customers. The challenge is to
decide whether to locate all the agents in one place and pay higher salaries to attract
multilingual staff, or rather establish a network of call centers in countries where the
native population possesses the requisite language skills.
As local origin OSPs seek to increase their global foothold – some key Indian
companies are trying to do so today – they attempt to attract new business from a
number of different countries. The countries that are more likely to outsource have a
large number with non-English primary language needs. Unless the offshore countries
can offer at least one major, large and truly multicultural city, they will find themselves
at a disadvantage to the nearshore locations that often boast a truly cosmopolitan make-
up or at least sizeable migrant populations, due to their proximity to the market in
question. The Czech Republic, for example, has significant minorities of Slovaks,
Germans, Poles and Romanians, which would render it more attractive as a nearshore
location for call center outsourcing – a more cosmopolitan population could represent a
more attractive draw for companies looking for outsourcing locations, as it can support
several languages from the one location.
118
Barriers to offshore outsourcing
As the call center offshoring industry matures, the barriers are increasingly becoming
more complex (see Figure 7.10).
Figure 7.10: Barriers to offshore call center outsourcing
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
Lack of offshoregovt incentives
Offshore govtinstability
Bad PR
Risk of domesticstrike/staff issues
Cultural barriers
Accent/languageissues
Security risks
Offshore telco QoS
Geographic distance
Loss of control /inability to monitor
Average importance rating (1-4)
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
Lack of offshoregovt incentives
Offshore govtinstability
Bad PR
Risk of domesticstrike/staff issues
Cultural barriers
Accent/languageissues
Security risks
Offshore telco QoS
Geographic distance
Loss of control /inability to monitor
Average importance rating (1-4)
Source: Business Insights Business Insights
The distance issue
The proliferation of nearshore alternatives to the farther-flung offshore locations of
India and the Philippines has much to do with the fact that clients are uncomfortable
with their customer interactions being undertaken on foreign shores. They seem to feel
that ‘out of sight is out of mind’. But as the proliferation of offshore outsourcing grows,
119
OSPs will find it easier to win business by moving business to their nearshore
operations and then later, when ROI is being demonstrated and clients’ quality of
service fears have been assuaged, they will find it easier to migrate the activity further
offshore.
Less concern for accents and more an issue of cultural affinity
When speaking with someone on the telephone, the benefits of face-to-face, non-verbal
communication are lost, which many people believe comprise around 70% of any given
communication between two people. The words used, the verbal intonation and the
accent of the interlocutor take on an even greater importance.
Concern today is shifting away from a deep-seated dissatisfaction with foreign accents
of the call center agents to a concern at their ability to relate to the consumer on a
cultural level. As more countries appear on the world stage as offshore outsourcing
suppliers, the anecdotal evidence of customer dissatisfaction is likely to increase unless
real efforts are made to address this issue.
There has been much media coverage regarding relations between Indian call centers
and their key clients in the USA and the UK. Some complications arise from the fact
that Indians speak more of a ‘British’ English, which leads to misunderstandings.
Different techniques are applied to reduce animosity towards call center agents from
overseas and to try to help them to better relate with the consumer by aligning them on
a cultural level with the markets they are serving. For example, in an attempt to avoid
cultural clashes, some Indian call center agents spend several hours as part of their
training program watching British and American television shows so that they can
better mimic the accents. The agents are able to go a step further though by following
the soap operas that are popular in the countries with which they are dealing; they are
able to not only discuss these latest developments (whilst waiting for the PC to reboot)
but also appreciate some of the cultural mechanisms at play. This enables them to relate
far more meaningfully with the consumer with the aim of establishing a more personal
bond during the call.
120
Demystifying the threat from global offshore call center outsourcing
Despite the outcry in the Western press surrounding the ‘massive’ number of positions
that are being shifted offshore, the doomsday scenario for domestic call centers is a
long way off. A mere 5% of the world’s 4.78m agent positions will be outsourced to an
offshore location by 2007. Figure 7.11 shows that offshore outsourced APs are growing
but, as Figure 7.12 shows, the number of offshore outsourced APs is only going to
reach 5% of the total global number of APs by 2007. The threat that offshore call
centers pose therefore is rather more important to the onshore outsourced call centers
and their agents than to the onshore captive call centers and their agents.
Figure 7.11: Offshore outsourced APs are a threat to onshore outsourced APs
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2002 2003 2004 2005 2006 2007
Out
sour
ced
AP
s (o
ffsho
re v
ersu
s on
shor
e)
Outsourced offshore
Outsourced onshore
Source: Business Insights Business Insights
121
Figure 7.12: Offshore outsourced APs as a percentage of total global APs and growth rates, 2002-2007
0%2%4%6%8%
10%12%14%16%18%20%22%24%
2002 2003 2004 2005 2006 2007
Offs
hore
AP
s as
%ag
e of
tota
l ons
hore
AP
s
Offshore outsourcedAPs as %age ofglobal APs
YoY growth
Source: Business Insights Business Insights
The accusations that offshore call centers are destroying the domestic market for call
centers and stealing vast amounts of domestic market jobs are incorrect. Finally, like
the point made above, a number of the key OSPs in the offshore call center market also
head the list of domestic call center outsource providers. What is more, these OSPs are
often involved in captive operations too. It seems that the OSPs cannot lose!
122
Action points
Refine sales approaches
Moving forward, OSPs from offshore markets need to move away from selling their
country. Rather, they should:
Sell to their clients based on credentials and capabilities, and not on the advantages
of doing business in their country, which is no longer an important factor for
clients;
Go to market in target countries through partnerships with telcos, established SIs or
local origin OSPs that have a ‘Western face’. Western businesses are not good at
trusting people are different from themselves around the negotiating table;
Focus on demonstrating industry expertise and pedigree;
Establish a physical presence in key target markets so that they have people in the
client’s home country who can be approached to discuss matters.
Carve a niche and partner for success
As emerging markets mature, the number of OSPs will consolidate. A number of local
origin OSPs will not have the critical mass needed to take on global OSPs and should
therefore:
Pick one thing they do well and carve a niche market for themselves;
Go to market through partners in target markets;
Pick partners with a very well-recognized brand, for example 24/7 Customer or
ICICI could partner with a well-known telco in the UK;
Ensure the partner has vertically trained sales force personnel who understand
client-specific processes; this is often a skill that is missing amongst new market
OSPs who sell the country or call center experience rather than industry expertise.
123
Allay customers’ fears
Many customers are very sceptical about handing over responsibility for customer-
facing processes to an outsource provider. In order to allay some of the clients’ fears,
SIs and OSPs need to:
Realize that clients will not admit to their anxiety much of the time and use this fact
to cover up their own lack of knowledge about their internal operations;
Ensure the extent of business process outsourcing is clear at the outset;
Create business opportunities by offering to carry out a (free) business process
review – this work could be sub contracted to the domestic partner firm (or SI) for
instance if the OSP does not necessarily have the requisite skills in-house;
Ensure that sales and negotiation teams are staffed with people who have a cultural
affinity with the client and have solid business process re-engineering (BPR)
credentials;
Provide a clear set of referencable case studies. This is often an issue, because
clients that firms might choose to use as references may not want it to be known
that they outsource offshore. A degree of discretion is required.
Adopt appropriate pricing models
It is not actually in the interest of the client to push the price issue too far. This can
jeopardize the delivered quality of service. Instead, solution partners should:
Manage customers’ expectations about pushing too hard on the price, which could
seriously damage the relationship. Price should not be seen as the principal factor
involved.
Adopt the behavior of going to market with transparent pricing models. This
approach is based on the OSP explaining how it arrives at its prices and making it
clear what formulae will be applied to risk and revenue sharing schemes should it
be able to deliver a given level of ROI and cost savings. This approach is winning
hearts and minds;
124
Realize with clients that in the long run prices will rise due to wage inflation
pressures as markets mature and labor availability pressures come into play. Price
rises will further be compounded as the quality of service demands increase and as
more high-value operations are moved to offshore locations.
Exploit shared voice & data network new business opportunities
Many of the OSPs and SIs in the market today who are offering global offshore
outsourcing capabilities will already have established their network infrastructure
accordingly. However:
OSPs from countries such as India are looking to extend their global reach. One of
their primary requirements is a dedicated infrastructure on which to base their
operations. Opportunities await vendors in assisting these firms to further scale
their systems going forward;
A number of the larger SIs and OSPs that do not yet have a dedicated infrastructure
of their own have requirements for leased lines and are also going to be considering
moving to new technology platforms as prices come down and their legacy systems
come to the end of their usable lives.
125
Index
Accenture, 48, 51, 108
BPO, 11, 12, 20, 23, 24, 41, 46, 49, 51, 53, 74, 75, 107
Brazil, 58, 60, 61, 95, 96, 100
Build, Operate, Transfer, 27
Call center, 42, 99, 102, 104
Canada, 12, 13, 32, 42, 53, 56, 58, 59, 60, 61, 62, 63, 64, 67, 68, 69, 70, 71, 92, 93, 94, 96, 101, 103, 104, 108, 109
China, 11, 12, 20, 32, 41, 46, 49, 50, 52, 74, 75
Cognizant Technology Solutions, 50
Convergys, 11, 46, 48, 51
Corruption, 64, 67, 69, 82
Croatia, 82
Czech Republic, 64, 82, 83, 108, 117
Drivers, 20, 34, 115
Eastern Europe, 10, 11, 12, 13, 20, 32, 36, 41, 46, 50, 53, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 86, 108, 110, 111, 112
Epam, 48, 53
France, 22, 42, 63, 75, 82, 86, 89, 108, 110, 113
General Electric, 39, 48, 53
Germany, 63, 64, 69, 70, 82, 108, 110, 111
Homeshoring, 42, 43, 44
Hong Kong and Shanghai Banking (HSBC), 52
Hungary, 12, 56, 59, 60, 63, 64, 65, 70, 71, 82, 83, 89, 92
IBM Global Services, 11, 46, 48, 49
India, 10, 11, 12, 14, 19, 20, 21, 22, 29, 32, 36, 39, 41, 42, 46, 48, 49, 51, 52, 53, 56, 58, 59, 60, 61, 62, 64, 65, 66, 68, 69, 70, 71, 74, 75, 78, 92, 93, 102, 106, 107, 108, 109, 110, 113, 118, 124
Infosys Technologies, 11, 46, 48, 50
Inhibitors, 21, 34
Insourcing, 44
Israel, 32
Jamaica, 14, 59, 60, 61, 64, 66, 67, 92, 100, 101, 102, 103, 104
Keane, 48, 52, 53
Latin America, 12, 14, 20, 42, 49, 56, 60, 61, 67, 68, 92, 95, 96, 98, 100, 102, 104
Mexico, 14, 32, 42, 58, 59, 60, 61, 64, 67, 68, 92, 93, 94, 95, 96, 97, 98, 99, 100, 101, 103, 108, 109
Morocco, 86, 87, 88, 89, 108
Nearshore, 12, 13, 32, 34, 41, 58, 73, 74, 91, 92, 96, 98, 99
North Africa, 13, 22, 32, 41, 74, 75, 85, 86, 87, 88, 89, 108, 110, 112
Offshore, 1, 10, 17, 18, 20, 25, 28, 29, 37, 58, 120, 121
Poland, 59, 60, 64, 65, 69, 70, 71, 82, 83, 108
Proximity, 76, 87
Russia, 21, 29, 82, 84, 107
Software development, 43
South Africa, 12, 14, 20, 41, 56, 58, 59, 60, 69, 70, 71, 74, 75, 79, 106, 108, 110
Spain, 13, 59, 74, 88, 108, 112, 113
126
Spanish, 42, 58, 59, 60, 67, 68, 88, 93, 95, 97, 98, 99, 100, 101, 103
Tata Consultancy Services, 51, 52
The Philippines, 10, 20, 36, 42
Tunisia, 86, 87, 88, 89, 108
UK, 12, 13, 21, 22, 56, 60, 63, 64, 66, 69, 70, 74, 82, 88, 108, 109, 111, 112, 113, 119, 122
US, 10, 12, 13, 14, 21, 22, 32, 36, 42, 43, 44, 48, 50, 51, 53, 56, 58, 59, 60, 61, 62, 63, 65, 66, 67, 68, 69, 70, 77, 92, 93, 94, 95, 96, 97, 98, 100, 101, 102, 103, 104, 107, 108, 109, 112
