Rethinking the model for offshoring services
BPO providers often rely on a limited number of geographic locations, exposing themselves to unnecessary risk. They can mitigate these risks in the same way that financial managers do—by diversifying their holdings.
SEPTEMBER 2009 • Matthias Daub, Barnik Maitra, and Tor Mesøy
Source: Business Technology Office
In This Article
- Exhibit 1: One Paris-based company offshored high–end IT services work across several locations, seeking to minimize exposure to geographic, currency, and labor issues.
- Sidebar: An enhanced menu of location choices
- Exhibit 2: Nontraditional offshoring locations offer trade-offs between cost and risk.
- Exhibit 3: Companies that leverage the full breadth of the talent pool improve the performance of their offshoring centers.
- Exhibit 4: Companies must search for new locations and set up new centers proactively, before the performance of existing centers deteriorates.
- Exhibit 5: One provider sought to create a next-generation global delivery model by allocating work dynamically.
The outsourcing and offshoring industry is at a turning point. What began as a small-scale sector dedicated to application development, accounting, and payroll has become, as of 2008, an $80 billion global industry, addressing a range of business processes and technology services. As the IT services and BPO industry matures, however, challenges are emerging.
Our research finds that more that 70 percent of offshore delivery centers, including both wholly owned captive operations as well as vendors, narrow their global operations to just three locations, often situated in only two countries (most frequently India, China or the Philippines). This reliance on a limited number of geographic regions—historically driven by the availability of highly skilled, low-cost labor in these areas—is exposing providers to a variety of location-specific risks. These include abrupt currency and wage fluctuations, intense competition for employees, and regulatory limits. While a narrow geographic concentration may result in lower labor costs at the outset, the overall risks are higher, according to our research. The same is true on a microlevel: our data show that when a delivery center in a large Indian city grows beyond 3,000 employees, costs spiral and performance begins to deteriorate.