Over the past few years, many far-flung corners of the world have successfully positioned themselves as destinations for offshore and outsourced business processes and services. But recent political unrest should prompt buyers to think carefully about the associated risks, suggests FSN writer Lesley Meall.
There have always been parts of the world where doing business is risky, and some commercial entities exist to profit from this. But the increasing globalisation of business means that all sorts of organisations are developing commercial relationships in parts of the world where they will face unfamiliar and unpredictable risks.
War and political unrest are the most obvious, but regions that are prone to natural disasters should also give pause for thought to those who are planning to offshore or outsource business processes or services. Recently, the Tsunami in Japan and violence in north Africa and the Middle East have highlighted just how quickly, and dramatically, things can change in some parts of the world; previous country-wide disruptions have included a military coup and riots in Thailand, a swine flu outbreak in Mexico, earthquakes in Chile, terrorist attacks in India, and typhoons in the Philippines.
Many organisations that survived these crises have invested resources in managing such risks, and have well-crafted disaster recovery and business continuity plans in place, but as this is not universally the case, rigorous due diligence should be part of the decision-making process for any organisation looking at emerging destinations. ‘Whatever your approach to offshore services, you must understand the offshore location landscape,’ suggests senior Gartner analyst Marriott. Otherwise you will struggle to assess (or achieve) the best balance for your particular organisation, between lower costs and higher risks, and lower risks and higher costs.
For many organisations considering many regions the risks will not be insignificant. In December 2010, when Gartner released its latest global research on the top 30 outsourcing destinations, it warned buyers against allowing the apparent benefits of some new locatoins to outweight the relative immaturity of either the regions or the services they offer. In retrospect, this could seem spookily prescient, if only because the Gartner’s most recent annual assessment of global outsourcing destinations focussed on emerging destinations. But as Marriot explains: ‘We chose locations that are still maturing and developing, domestically and internationally, and as the pace of change is slower in developed countries, the top 30 countries are exclusively emerging nations.’
So, what did Gartner find? Well, that would be telling wouldn’t it; if you want the details you will (quite understandably) have to pay for them; something you can learn more about here. But Marriot is happy to point out a few potential problem areas, such as: data security and IP protection (which leave a little to be desired in Vietnam), and the fact that many immature destinations are rather niche. ‘Some may be appropriate only for specific processes or operations,’ says Marriot. Poland, for example, is strong on business processes, the Czech Republic is good for application services, and Egypt has distinguished itself as a call centre destination – though recent developments there highlight the need for enhanced due diligence in some regions.
‘The political unrest points to lessons for clients of offshore outsourcing and for those responsible for the Egyptian economy in the next few years,’ comments Leslie Wilcocks, professor of technology work and globalisation at the London School of Economics, despite the fact that when the LSE looked at emerging offshore destinations in 2009,the resulting report positioned Egypt as the new ‘go to’ location. A cynic might see this as inevitable, as the LSE report was commissioned by the Information Technology Industry Development Agency (ITIDA) of Egypt, but until the recent political unrest, the facts in the country’s favour had also been noted by A T Kearney, Gartner and other analysts – Egypt has even picked up a few awards.
Being able to boast an estimated 330,000 graduates a year across multiple disciplines, with about 31,000 of them specialising in technology, science or engineering, has played in Egypt’s favour; likewise its ability to offer an educated local workforce that can speak English and other European languages with no foreign accent. Which helps to explain why analysts have been touting the strengths of the region, and why it has become popular with companies from Western Europe and North America. Behemoths that have located technical support operations, contact centres or call centres in Egypt include Alcatel, Microsoft, Oracle and Vodafone – though the recent upheaval may have modified their perspectives somewhat.
Take Vodafone. It opened a contact centre in the Egyptian capital Cairo in 2007, to service a growing customer base in New Zealand (NZ), but during the recent disturbances, it decided to close it (if only temporarily): all of its NZ staff were evacuated from the country and the 180 Egyption staff were told to stay at home. ‘The first concern was the well-being of our staff,’ says Vodafone director of service Kelly Moore, hence the evacuation and repatriation. Vodafone was able to pick up the slack by ramping up its services in NZ. ‘Essentially, a new contact centre was up and running there within three days,’ says Moore.
Some organisations that were working with local (rather than international) operators were not this fortunate. Now, as Ovum lead analyst Peter Ryan observes: ‘Many service providers, as well as clients, are re-evaluating whether Egypt is still the right location for deployments,’ and it remains to be seen if Egypt can recover its credentials, after a change in government. It is impossible to predict the direction the country or its new rulers will take now that Hosni Mubarak has stepped down as president – or gauge the impact this could potentially have on individual national and international providers. ‘There was always a question about the succession plan and post-Mubarak,’ comments Wilcocks.
Although Egypt is just one of many emerging destinations for offshoring and outsourcing, the political unrest there – and the fallout from it – can provide important lessons for any business that is contemplating a new destination (or reassessing its position in an existing one). ‘Ideally organisations should have a global sourcing strategy that reflects the risk they are exposed to,’ says Marriot, because emerging markets are less stable and more unpredictable than developed ones. ‘An offshore location should be part of a larger portfolio of locations and options in order to mitigate risk,’ adds Wilcocks, ‘and business continuity planning is absolutely key.’
Buyers who are already engaged with an offshore service provider, will probably want to review their contracts and arrangements to include geopolitical risk, in light of recent developments, to ensure that appropriate security is in place. Marriot also recomends talking to government representatives and industry associations to glean as much information about a potential outsourcing destination as possible before making a decision. Buyers and potential buyers of offshore outsourcing services may also want to look a little more closely at the contracts they have in place, or are considering, and get their legal advisers to pay particular attention to so called ‘Force Majeure’ clauses.
According to the international law firm SNR Denton, although there is no definition of ‘Force Majeure’ (or major event) in Egyptian law, the concept is contained in article 165 of the Egyptian Civil Code. This states that: ‘In the absence of a provision of the law or an agreement to the contrary, a person is not liable to make reparation, if he proves that the damage resulted from a cause beyond his control, such as unforeseen circumstances, Force Majeure, the fault of the victim or of a third party.’ Whilst the legal position on Force Majeure varies between countries, it’s a common feature in contracts – which is yet another reason for factoring the unfamiliar and unpredictable into the risk profile of any potential offshore or outsourcing destination.
