What are the new drivers in information technology and Business Process Outsourcing (BPO).

23rd February 2012

Protectionism could make outsourcing less appealing and less cost-effective for some businesses in some countries. But at the moment, the evolution of the outsourcing industry seems to have other drivers, as FSN writer Lesley Meall discovers.

Of course, depending on your politics and your place in the world you may or may not see protectionism as one of the solutions to the economic woes afflicting your country, your industry, your business, or even yourself; you may or may not be right – either way, you wouldn’t be alone. But the global economic crisis certainly seems to be prompting a more insular stance among many politicians, most noticeably (so far, at least) in countries that are approaching elections.

President Barack Obama is proposing tax changes to encourage companies to maintain US jobs and bring some back from foreign countries, and recently launched an ‘Insourcing Jobs Initiative’; whilst presidential hopefuls Mitt Romney and Newt Gingrich both promise to do even more. French president Nicolas Sarkozy talks of ‘easing the pressures’ caused by imports and ‘cheap foreign labour’; whilst far-right candidate Marine Le Pen advocates even more protectionist policies. It remains to be seen how much of this is just political rhetoric, if any of it becomes economic policy, and whether this impacts on outsourcing decisions and destinations: businesses are already looking for more than reduced costs from their outsourcing engagements.

‘Given market conditions, relying only on low cost and labor arbitrage is no longer a successful strategy,’ says Dr. Charles Aird, global leader of the PwC Shared Services and Outsourcing Advisory Practice. Arie Lewin, professor of strategy and international business and director of the Center for International Business Education and Research’s (CIBER) at Duke University’s Fuqua School of Business, agrees: ‘Service providers must offer more than just cost savings; they must add value to their client’s business processes,’ he says.  When one of the university’s recent research projects looked at emerging drivers for business process outsourcing (BPO) it found the delivery of enhanced agility and flexibility at the tope of the pile.

‘As firms increase the scale and scope of their global sourcing, they are laying the foundation for achieving far-reaching organisational flexibility,’ reports Lewin: ‘They say that with these capabilities, they can redesign processes, enhance efficiencies, improve service quality, enable more effective access to new markets, and promote innovation.’ According to a CIBER and PwC report published towards the end of 2011, businesses are also reconsidering the destinations they use as part of a growing trend towards nearshoring, with many businesses looking closer to home for their foreign BPO and IT outsourcing destinations – though with multinational organisations this doesn’t necessarily mean near to their corporate headquarters.

US businesses are increasingly looking at Latin American countries as nearshore destinations, but those with ambitions in Asia are also looking at China. ‘This decision has to be viewed in the context of global strategy,’ says Amneet Singh, global sourcing VP for the advisory and research firm Everest Group. When it recently looked at why Chinese IT and BPO providers were being engaged by US companies, answers ranged from their ambitions in its domestic market to a need for non-English language skills. ‘US businesses are leveraging outsourcers in China to serve their regional businesses in Japan, or Hong Kong, or Korea, or to support their growing Chinese operations,’ says Singh, and China’s geographic proximity to these places means that it can offer cultural as well as linguistic similarities.

There are around 870,000 Japanese learners in China, and more than two million Koreans living there, which has obvious advantages. According to Stephanie Moore, VP and principal analyst with Forrester Research, cultural affinity is increasingly a factor in the selection of locations and providers of outsourcing engagements. ‘Contextual understanding is very hard to get from a non-native,’ says Moore, who sees this boosting nearshoring, and Obama’s insourcing initiative (as she explains here). But cultural differences are less significant with some IT outsourcing and BPO activities such as payroll and accounts payable, than they are in areas such as customer relationship management and human resource processes.

Research from Everest indicates that around 60 per cent of China’s global IT and BPO sourcing revenues is currently accounted for by services aimed at other parts of Asia. But cultural compatibility isn’t the only factor that makes the Chinese labour pool appealing to multinational outsourcers – with and without ambitions or a business hub in Asia. China is producing around 6 million graduates each year, and more than half of them have studied engineering and management disciplines, thanks to government investment and support. China has also made the English language part of the school education system, and this is starting to filter through, so it will soon have a workforce with business, technology and improved foreign language skills.

In the UK and other parts of Western Europe similar drivers already make nearshore destinations in Eastern Europe popular: cultural familiarity, language skills, compatible time-zones, and the financial backing of governments all help. ‘They really roll-out the red carpet in Budapest, for example, lowering taxes and offering all sorts of incentives to encourage businesses,’ says Honorio Padron, global IT advisory practice leader with the Hackett Group. There are also numerous government-backed initiatives designed to create the right environment and the right workforce to grow national IT and BPO industries in other Eastern European countries including Ukraine, Russia, Romania, Latvia, the Czech Republic and Belarus. 

Belarus once manufactured over half of the computers and computer components in the Soviet Union, but at the moment its IT industry (consisting of approximately 600 companies employing 25,000 people) mainly exports software development services. However in 2011 the Belarusian government approved an ‘IT Country’ program to promote its outsourcing, and information and communication industries through a number of new initiatives. These include a scheme to create, by 2015, 300,000 new software developers and BPO professionals (for data entry, call center and technical support services), by retraining people from other scientific disciplines and professions, including accountancy and law. 

Yet as economic conditions in the euro zone worsen, it may take more than initiatives such as this to lure businesses from the UK and other Western European countries into offshore IT and BPO contracts (nearshore or far), particularly if national sentiment and government legislation discourage it. ‘No company should get a tax break for outsourcing jobs,’ said president Obama during his latest weekly address, adding: ‘It’s time to stop rewarding businesses that ship jobs overseas and start rewarding businesses that create jobs here in America.’ So if you’re thinking about offshoring, you might want to consider this, and the likelihood that governments in Western Europe may soon follow his lead. Protectionism is contagious.