Key Issues for 2023: Rise Above Economic Uncertainty and Succeed
As we look toward 2023, economic uncertainty is prime and center. Rising inflation, interest rate hikes, and GDP contraction – matched with low unemployment rates and high talent demand – have left business leaders unsure of what to expect and how to prepare for 2023.
Join Everest Group’s Key Issues 2023 webinar as our experts provide insights into the outlook of the global IT-BP industry and discuss major concerns, expectations, and key trends expected to amplify in 2023.
All the data is based on input from global leaders across enterprises, Global Business Services (GBS), and service providers.
Our speakers will discuss expectations for 2023, including:
The outlook for global services
Top business challenges and priorities
Changes in sourcing spend and service delivery costs
In-demand digital services and next-generation capabilities
The evolving strategy for talent, locations, and the workplace
Explore the 2022 global sourcing market, looking at key developments and overall growth trends for the service provider and GBS markets.
Additionally, we will look at the changes in location strategies adopted by service providers globally and the emerging trends in these locations. We will also discuss the impact of the expected economic slowdown on the market’s overall workforce strategy and offer recommendations to service providers, focusing on which trends to monitor, the importance of sustainable workforce strategy, and the relevance of cost in location decision-making.
What questions will the on-demand webinar answer?
How has the global service market evolved in 2022, and what are key developments across leading global service providers?
How has the location strategy for service providers changed in the past couple of years?
How will the expected macroeconomic slowdown impact the war on talent?
What are some of the key steps service providers should take as they face the economic slowdown?
Who should attend?
Service provider leads
Enterprise | SVM
Global in-house center (GIC) / Shared services center leaders
As the world emerges from the pandemic and looks for new destinations for high-end information technology and business process services, put Latin America on the radar screen for its lower costs, talent availability, language proficiency, and other factors. Learn why this region is an attractive emerging destination for global service delivery, what countries offer the most promise, and the trade-offs and risks.
Latin America has emerged in recent years as a leading nearshore destination for companies in the US and Canada, primarily driven by its unique position of cultural parallels and geographic proximity to the North American market.
This popular delivery destination for IT and BP services has undergone dynamic shifts in the past few years, and its location can be increasingly critical post-pandemic to filling talent gaps and providing a more stable geopolitical climate than destinations in Europe, given the current Ukraine-Russia conflict.
Increased capabilities, aided by digital infrastructure investment, and scaled operations delivery are attracting companies to leading locations such as Mexico, Argentina, Brazil, and Costa Rica. Companies that are reimagining delivery in Latin America and growing operations in the region are differentiating themselves by capitalizing on the region’s attractive proposition.
Other favorable factors such as lower costs compared to North America, increased government support, and rising English proficiency are enabling growth, especially for the contact center industry. While promising, organizations need to be aware of some trade-offs and associated risks for operating in the region.
Trade-offs and risks
Organizations looking to enter the Latin American market should be concerned about market congestion, lack of digital infrastructure, and an unfavorable macroeconomic environment in a few key locations.
Leading cities in the region (e.g., San Jose, Mexico City, Sao Paulo) are experiencing growth in competitive intensity, threatening their cost arbitrage against North America. Moreover, countries like Argentina, despite their large talent pool, are facing major macroeconomic challenges brought forth by the pandemic.
On the other side of the coin, countries such as Jamaica, Uruguay, and Guatemala have low market congestion and are primarily leveraged for transactional BP services but have limited maturity in IT and engineering services. Organizations keen to support complex and judgment-intensive processes will need to make substantial investments in talent development in these markets.
Further Latin American destinations also face some challenges around reliability and digital infrastructure scalability. While investments are continuously being made in this area, certain countries within the region still rank relatively lower on the digital readiness scale. This potentially poses challenges for remote working in the post-COVID era.
Leading Latin American locations for financial attractiveness, talent availability, and operating and business environment
Here’s a quick look at the top four global services delivery locations by largest to smallest market size in Latin America:
Mexico – boasts the largest scale among Latin American locations for global services delivery (both transactional and judgment-intensive processes). Leveraged to support IT-BP service delivery along with next-generation digital services (e.g., Artificial Intelligence, Internet of Things, analytics), the market faces one of the highest competitive intensity in the region, driven by a large player base and strong sector growth
Colombia – primarily a global hub for voice-related services and transactional BPS delivery. Although it has limited maturity for next-generation digital services delivery, it holds the potential for increased IT and non-voice BP services delivery, given its large talent pool
Argentina – a large-scale, multi-functional hub location to support service delivery to the Americas and some European locations. It exhibits relatively high maturity for next-generation digital services, including AI, analytics, cloud, and IoT, delivered from its highly congested Tier 1 cities
Brazil – primarily delivers IT and BP services to Latin American locations. It has a large base supporting domestic demand (within the country) but global service delivery is limited. While it has a highly skilled talent pool supporting complex/niche skills and judgment-intensive IT work (e.g., cloud computing, big data), its more costly base owing to higher salaries and real estate costs affects its attractiveness as a global service delivery destination
Global service delivery destination to watch
Latin America is well placed in its growth journey to emerge as one of the leading nearshore destinations. Industry verticals such as retail, telecommunications, and Financial Services and Insurance (BFSI) continue to drive overall regional demand. Its unique positioning, strong government support, and growing talent pool make the region a destination of choice for some of the world’s biggest brands, including Amazon, PricewaterhouseCoopers, Galileo, and Pinterest, among others.
To learn more about the dynamics in the region, please read our recently published report Reimagining Latin America Delivery in a Post-COVID World, which highlights the relative attractiveness and talent-cost proposition of key Latin American locations to support global services delivery, based on our holistic and multi-faceted assessment across 12 critical parameters.
For more information on Latin America as a global service delivery location, please reach out us: contact us.
We recently partnered with the IT & Business Process Association of the Philippines (IBPAP) for its International Innovation Summit. The conference was a huge success despite prevailing uncertainties, bringing together global experts and leaders from the IT-BPM industry. The sessions were engaging and captured how the IT-BPM sector adapted to the disruptions caused by the pandemic and what lies ahead for the industry.
Here are our key takeaways from the conference.
Success factors for the IT-BPM industry
Organizations’ success will depend on how they capitalize on opportunities arising from the pandemic and how quickly they adapt to the evolving business landscape. In all forms of adversity, there is increased need for reliable leadership that puts people and customers first, and treats profit as an outcome rather than the goal. More than ever, it has become important to co-create with the client and culturally adapt to them.
Reinvent the worker, workplace, and workways
While there’s an immediate and critical need to redesign the worker, workplace, and workways to accommodate the new reality, different organizations are in different places in their comfort and readiness to adjust to the disrupted world. Hence, a single future of work strategy will not be effective for all organizations.
There are, however, some common themes for a successful future of work strategy. It should not be limited to work-from-home (WFH) enablement; it is important to consider the interplay of WFH with other decisions related to work. Organizations need to come up with an integrated approach involving the worker, workplace, and workways to adapt and progress in this dynamic environment.
Accelerate digital transformation and develop the digital workforce
COVID-19 has compelled enterprises to accelerate digitalization. While business transformation is fueled by increased adoption of digital technologies, the success of digital transformation is not rooted in technology.
A successful digital transformation initiative considers multiple factors – fostering a culture of continuous learning and innovation, embracing an agile operating model, creating a well-connected and collaborative workplace to enable higher output, among others.
At the core of accelerated digital transformation remains talent and, hence, the importance of future-proofing the workforce with digital skills. Talent will be the key differentiator, as work will follow where there is readily available skilled talent. The new digital era calls for increased focus on upskilling and reskilling, which can only be possible through a multi-stakeholder coalition of government, industry, and academia.
Rethink business resiliency
Every business and organization is experiencing some degree of pandemic-driven disruption. The crisis has redefined the meaning of Business Continuity Planning (BCP), and organizations need to rethink their BCPs to ensure necessary resilience.
This future resiliency will be characterized by dependability on teams and leaders, creating/fortifying a nerve center that’s enabled and empowered to respond quickly to various situations, enabling organization and delivery structure, and empowering teams on the ground. There’s also an increasing need to become more agile and cooperative with competition and more consultative with clients.
A unified IT-BPM industry forging forward in the Philippines
The Philippines IT-BPM industry has shown resilience amidst the challenges arising from COVID-19. The fact that the industry was allowed to operate even during the Enhanced Community Quarantine – as these services were deemed essential – demonstrates the government’s commitment to the industry.
The Philippines will continue to remain a key destination for services delivery due to cost arbitrage and a steady supply of young and tech-savvy workers. The industry is focusing on enhancing digital capabilities and will focus on upskilling talent – for example, one planned initiative is the National Upskilling and Reskilling program, which intends to upskill one million workers over the next five years.
The country launched the Digital Cities 2025 program to promote countryside development and build IT-BPM sector resiliency. The Philippine telecom providers are working in partnership with the government to mitigate the limitations on the retail telecom infrastructure exposed by the WFH model. And the Philippines will continue to improve its infrastructure to provide a more robust ecosystem for existing and new players.
Overall, the IT-BPM industry in the Philippines is well positioned to deliver services at a large scale due to its large talent supply, strong language proficiency, attractive cost savings, robust ecosystem, and strong government support. The industry also plans to take proactive measures to address some of the challenges exposed by the pandemic. It’ll be interesting to see the developments in one of the leading global locations for IT-BPM services delivery.
While enterprises around the globe began their steady march toward cloud services well before the outbreak of COVID-19, the pandemic has fueled cloud adoption like never before. Following the outbreak, organizations quickly went digital to enable remote working, maintain data security, and ensure operational efficiencies. Globally, first quarter spend on cloud infrastructure services in 2020 increased 39% over the same period last year.
Given the new realities, as firms make long-term cloud investments, it is vital for them to understand the cloud landscape and how various regions and countries fare in comparison to each other as cloud destinations. In this blog, we evaluate and compare the capabilities of different geographies in delivering cloud services.
North America is among the most mature geographies for cloud services delivery. The US and Canada offer excellent infrastructure, a mature cloud ecosystem, high innovation potential, a favorable business environment, and business-friendly rules and regulations. The US is the most mature location in North America, offering a large talent pool and high collaboration prospects due to the presence of multiple technology start-ups, global business services centers, and service providers. However, the cost of operations is significantly high, primarily driven by high labor and real estate costs.
In contrast, most locations in Latin America (LATAM) have less mature cloud markets and ecosystems. While they provide proximity to key source markets in the US and considerable cost savings as compared with established markets (60-80%), they offer low innovation potential, a relatively small talent pool, few government policies to promote cloud computing, and limited breadth and depth of cloud delivery. Mexico is a standout location in LATAM, scoring better than others on parameters such as quality of cloud infrastructure, size of talent pool, and business environment.
Europe provides a good mix of established and emerging locations for cloud services. Countries in Western Europe have a fairly robust infrastructure to support cloud services, with high cybersecurity readiness, sizable talent pools, high complexity of services, and robust digital agendas and cloud policies. England and Germany are the most favorable locations in the region, driven by a comparatively large talent pool accompanied by high innovation potential, excellent cloud and general infrastructure, and high collaboration prospects due to numerous technology start-ups and enterprises. However, high cloud-adoption maturity has markedly driven up operating costs and intensified competition in these markets.
Countries in Central and Eastern Europe (CEE) offer moderate cost savings (in the 50-70% range) over leading source locations in Western Europe. While they offer a favorable cloud ecosystem, talent availability, greater proximity to key source markets, and lower competitive intensity, they score lower on innovation potential, complexity of services offered, and concentration of technology start-ups and players. The Czech Republic is a prominent location for cloud services in the CEE, while Poland and Romania are emerging destinations.
Asia Pacific (APAC)
Most locations in APAC have high to moderate maturity for cloud services delivery due to the size of the talent pool and significant cost savings (as high as 70-80%) over source markets such as the US. For example, India offers low operating costs, coupled with a large talent pool adept in cloud skills and a significant service provider and enterprise presence. However, it scores lower on aspects such as innovation potential, infrastructure, and quality of business environment. Singapore is an established location that offers well-developed infrastructure and high innovation potential but also involves steep operating costs (40-45% cost arbitrage with the US). The Philippines, a popular outsourcing destination, has lower cloud delivery maturity given its low innovation potential and talent availability for cloud services.
Middle East and Africa (MEA)
Israel is an emerging cloud location in the MEA that has achieved high cloud services maturity, but that benefit is accompanied by high operating costs and low cost-savings opportunity (about 10-15%). Other locations in the region have moderate to low opportunity due to small talent pools and lower maturity in terms of cloud services delivery.
Choosing your best-fit cloud services delivery location
Our analysis of locations globally reveals that, while different locations can cater to the increasing cloud demand, there is no single one-size-fits-all destination. Instead, the right choice depends on several considerations and priorities:
If operating cost is not a constraint and the key requirements are proximity to key source markets and a favorable ecosystem, the US, Canada, Germany, England, Singapore, and Israel are suitable locations, depending on the demand geography
If you are looking for moderate cost savings, proximity to source markets, and a favorable ecosystem, with the acceptable trade off of operations in a relatively low maturity market, countries such as Mexico, the Czech Republic, Hungary, Poland, Ireland, Romania, and Spain are attractive targets
However, if cost is driving your decision and proximity to demand geographies is not a priority, India, Malaysia, and China emerge as clear winners
The exhibit below helps clarify and streamline location-related decisions, placing an organization’s key considerations up front and identifying acceptable trade-offs to arrive at the best-fit locations shortlist.
Key considerations for choosing your cloud services delivery location
The global services industry saw a dramatic shift in 2019 across multiple dimensions, described in detail in our Market Vista™ Annual Report, which is based on an assessment of 1,800+ annual outsourcing deals, 550+ new delivery center setups, GIC market activity, trends in digital adoption, and other developments across 30 leading service providers.
Our research identified seven key global services market developments in 2019.
After a significant uptick in 2018, the number of outsourcing deals declined marginally in 2019, primarily driven by a decrease in IT outsourcing. Business Process Outsourcing (BPO) deals grew.
Short-term deals rose as a percentage of overall deals, driven by growth in outsourcing among small companies, an increasing share of digital services-focused deals, and global uncertainty resulting in apprehensions among buyers who are now signing smaller contracts.
Global Business Services (GBS) center setups hit an all-time high, driven largely by an increase in setups by small and mid-sized enterprises. We also saw a lot of activity in R&D/engineering center setups.
The share of digital-focused outsourcing deals far exceeded pure traditional services deals, with strong demand for cloud and automation services. GBS center set-up activity was also driven by digital services with automation, analytics, and IoT being the most dominant.
We saw an increase in onshore delivery center set-ups by both enterprises and service providers. While the Asia Pacific region continues to lead in offshore and nearshore location activity, the Middle East and Africa saw significant activity growth.
Tier-2/3 locations experienced rising activity, as both GBS centers and service providers increasingly explore smaller cities, especially in mature markets.
Offshore-heritage service providers saw higher revenue and employee headcount growth than did global service providers.
Turning our attention from the past to the future, let’s take a look at what these shifts may mean for the global services industry – and your organization – in 2020.
Uncertainty will rule in 2020 driven by environmental changes, geopolitical and macroeconomic concerns, business model disruptions, rapidly emerging technologies, and, most importantly, the impact of COVID-19. This uncertainty will require organizations to be increasingly agile in order to be able to respond quickly to changes. Driving agility will require a comprehensive shift across multiple dimensions, such as organization culture and people strategy, and a deliberate change to operating models.
The economic slowdown caused by COVID-19 disruptions will have multiple implications for the global sourcing industry:
Weakening financial performance resulting in significant cost pressures across organizations. Rapid and radical cost takeout will become a top priority for enterprises.
A new focus on risk, which will force enterprises to reassess their global sourcing strategies and service provider portfolios.
Accelerated technology adoption to unlock the next wave of cost savings and drive resiliency.
An evolving role for GBS to provide higher value-add services to help mitigate the impact of recession. Simultaneously, financial pressures will result in divestitures of GBS centers that operate as a typical service provider.
The global services market outlook remains uncertain across locations, driven by global macroeconomic and geopolitical concerns and the COVID-19-caused slowdown.
The Center of Excellence (CoE) model will grow within GBS centers as they focus intentionally on building depth versus merely expanding breadth of services. Further, CoEs will act as powerful enablers to revise and execute the required shift in the GBS-parent relationship and help blur the boundaries between the parent and GBS.
As organizations increasingly realize the benefits of various strategies such as offshoring, cost optimization, and automation, they will need to boost their focus on workforce productivity. There are multiple levers organizations can pull to enhance workforce productivity, such as optimizing active time, increasing efficiency, and improving effectiveness/quality.
Customer experience is a key priority for both enterprises and service providers, and they plan to invest in technologies and capabilities to improve customer experience, even during the economic downturn.
While the numbers vary depending on the source, there are give or take three billion social media users around the world in 2019. With the associated dramatic increase in manipulative and malicious content, there’s been an explosion in the market for content moderation services.
Based on our interactions with leading global enterprises and service providers, here are the four key trends impacting the content moderation services industry.
1. Demand for content moderation is growing
Given the exponential rise of inappropriate online content like political propaganda, spam, violence, disturbing videos, dangerous hoaxes, and other extreme content, most governments have instituted or begun creating policies to regulate social networking, video, and e-commerce sites. As a result, social media companies are facing mounting legislative pressures to curate all content generated on their platforms.
The following image shows how seriously these companies are taking the issue. And note that these numbers only account for outsourced content moderation services, not internally managed content moderation.
Orange boxes indicate CAGR / Y-o-Y growth over the years
2. Both technology and humans are vital
Technological capabilities – ranging from robotic process automation (RPA) to automate repetitive manual process steps, to AI-assisted decision support tools, to AI-enabled task automation of review steps – have certainly emerged as key levers to help social media companies protect their communities and scale their content management operations. For example, established tech giants including Microsoft and Google, as well as fast-growing start-ups, have been investing in developing scalable AI content solutions that deliver faster business value and safer conditions.
While technology will continue to play a big role, it certainly isn’t the be-all, end-all. The judgement-intensive nature of content moderation work requires the human touch. Indeed, with the increasing complexity of the work and the rising regulatory oversight requirements, the need for human employees as part of the content moderation equation will continue to grow significantly.
3. Content moderators need a multitude of skills
Content moderation is an extremely difficult job, at times monotonous and at others disturbing. As not everyone is cut out for the role, companies need to assess candidates against multiple criteria, including:
Language proficiency, including region-specific slang
Acceptance of ideas that may be contrary to self-held beliefs and personal opinions (e.g., on gender, religion, societal norms, political issues, etc.)
Ability to adhere to global policies
Ability/maturity to review content that is explicit in nature
Exposure to a multi-cultural, diverse society
Exposure to freedom of expression, both online and offline, and a drive to protect it
Ability to understand and accept increasingly stringent regulatory policies.
4. Content moderation services demand a different location strategy
Because all countries have unique cultural, regional, and socio-political nuances, the traditional offshore/nearshore-centric location selection strategies that work for standard IT and business process services won’t work for content moderation work. Companies seeking outsourced content moderation services need to look at regional hubs alongside multiple local centers to succeed. In the short-term, this means working with leading providers with hyper-localized delivery centers and rising local providers in the target countries.
Here’s what we see coming down the pike in the increasingly complex content moderation space.
Short-term investments/quick fixes might take precedence over long-term investments
Until the regulatory landscape stabilizes, companies might need to allocate a disproportionate amount of resources/spend towards compliance initiatives
Regulatory uncertainty and ambiguity will increase demand for specialist/niche forms of talent, including legal professionals and consultants. Today’s content adjudicators will be displaced by forensic investigators with specialized skills in product, market, legal, and regulatory domains
Companies must make talent development activities a priority through a specialized focus on structured talent sourcing and training, and strong emphasis on employee well-being through various wellness initiatives
As AI continues to grow in sophistication, a more defined synergistic relationship between humans and the technology will emerge. AI will be responsible for evaluating massive amounts of multi-dimensional content, and humans will focus on intent and deeper context analysis
The need for a hyper-local delivery model will prompt enterprises to increasingly explore outsourcing as a potential solution to benefit from service providers’ diversified location portfolios.
Use of Service Delivery Automation (SDA) – which refers to various types of technologies that can automate inputs to a process, the process itself, or the outputs from a process – is surging in the global services industry. When scaling beyond proof of concept, organizations are finding it’s important to bring together the SDA skills and knowledge into an automation Center of Excellence (CoE). Doing so enables the business to develop its SDA capabilities and competencies in a controlled and centralized manner, in turn helping ensure maximum success from the SDA initiative.
Through our research into automation Centers of Excellence, we’ve identified several areas in which organizations struggle.
The right Center of Excellence structure
While there are numerous possible structures for a SDA CoE, we’ve found that a pyramid structure is ideal, as it helps bring the CoE governance in-line with its customers. The pyramid should have three distinct layers, each with its unique set of responsibilities and clearly defined line of communication with the client organization. Clarity around roles and responsibilities across different layers in the pyramid is critical, not only to avoid miscommunications and missteps, but also to help maximize operational efficiency.
The Service Delivery Automation skills demand-supply gap
Demand for SDA skills has far outpaced the talent supply. Some are filling the gap by locating the Center of Excellence in locations with mature, trainable talent. Others are partnering with specialist firms, e.g., technology vendors and service providers, to leverage their domain experience and access to skilled talent, collaborating with startups, and seeking talent from technology groups and professional communities.
Multiple leading global companies are also training their existing employees on SDA. They typically engage technology vendors and/or external consultants to conduct extensive training programs for three to six months. Further, they encourage employees to join and participate in professional networks /communities and other events to learn from other SDA professionals’ experiences. This approach not only helps build internal skills for automation and reduces dependency on hiring from external sources, but also provides FTEs impacted by automation with alternative career paths.
Conventional location strategies don’t work
The traditional offshore-centric sourcing model based on labour arbitrage has limited relevance for SDA. Because of SDA’s unique requirements, organizations are investing in a diversified location portfolio for SDA in order to leverage the best propositions of each. For example, mature talent markets such as India offer a relatively larger talent pool, are suitable for a large-scale centre, and can deliver quick ramp-up pace. Onshore and nearshore locations offer greater depth and breadth of skills, enable greater interaction with business stakeholders, and provide accelerated time-to-market. And co-locating the SDA CoE with existing global services/digital technology centres can help the organization benefit from greater collaboration and economies of scale.
With increasing pressure on Global In-house Centers (GICs) for additional value creation, and exhaustion of traditional means, Robotics Process Automation (RPA) – an automation technology that can handle rules-based and repetitive tasks without human intervention – is fast emerging as the key lever to drive productivity.
RPA has the potential to reduce GIC headcount by 25-45 percent, depending upon the process type and extent of deployment. This results in significant cost savings for the GIC, including salaries and benefits for delivery team members replaced by the software bots, and non-people costs such as facilities, technology, and other operating expenses. Typical offshore GICs supporting horizontal functions such as F&A from Tier-1 Indian locations are likely to witness cost savings of 20-25 percent through RPA.
Beyond cost savings, RPA provides improved service delivery in the form of process quality, speed, and scalability, and better ability to manage through improved governance, security, and business continuity.
Development of an RPA solution requires substantially less time than comparable technologies such as Enterprise Application Integration (EAI) and BPM workflow solutions. This, in turn, reduces the time for RPA implementation and value realization, and offers quick return on investment, typically only six to nine months to recover the initial investments. Further, RPA is typically deployed in a phased manner. The relatively short payback period for initial investment in RPA mean subsequent phases can become self-funded from the savings realized from the earlier implementation.
GICs typically consider a minimum of 15 percent cost savings when developing an RPA business case. The savings are dependent on a number of factors, which can be adjusted suitably to build a favorable business case. Highlighted below are the key factors impacting the business case.
Potential extent of automation
Headcount reduction due to RPA varies with the potential extent of automation that can be achieved, which in turn impacts the cost savings. As RPA’s sweet spot is transactional/rules-based processes, there is considerable potential for headcount reduction and cost savings when it is deployed to handle these processes.
Number of FTEs replaced per RPA license
The number of FTEs that can be replaced per robot varies by the process and type of RPA solution. The higher the number of FTEs replaced, the greater the cost savings. Both, the number of FTEs replaced per robot and the cost savings, can be increased by targeting standard transactional processes with significant volume.
Recurring cost of RPA implementation
Recurring costs for RPA – such as licensing, hosting, and monitoring – vary significantly by vendor and type of solution, in turn impacting the cost savings. The lower the recurring costs, the higher the cost savings.
For more drill-down details, please refer to Everest Group’s report, Business Case for Robotic Process Automation (RPA) in Global In-house Centers (GICs). This report assesses the business case for adoption of RPA in offshore GICs, with information on cost savings across individual components and the associated payback period. It also analyzes the impact of change in the above factors on the business case, and the threshold limits for each in order to have a justifiable business case. Further, it includes case studies on GICs that have adopted RPA, along with key learnings and implications.
Given that places such as Oak Ridge, Tennessee, Albany, Georgia, and Jacksonville, Texas have populations below 100,000, with limited presence of colleges and poor connectivity to commercial airports, one would not expect them to contribute significantly to onshore service delivery. However, our analysis of tier-5 and rural locations revealed five interesting facts.
Tier-5 and rural locations are growing and have a sizeable share in the domestic sourcing market
Tier-5 and rural locations account for approximately 20 percent of the total service providers’ delivery centers, and 16 percent of the delivery FTEs in the United States. The Midwest region has the highest share of these delivery centers.
While onshoring in general has been on the rise, the leverage of tier-5 and rural locations has witnessed significant momentum. In the last decade, the number of new delivery center set ups in these locations has increased by ~150 percent, from an average of three centers per year in 2005-2006 to seven centers in 2013-2014.
At the same time, the share of tier-5 and rural locations in new U.S. delivery center set ups has gone up from ~19 percent in 2005-2006 to 25 percent in 2013-2014.
There are 100+ tier-5 and rural cities to choose from
More than a hundred tier-5 and rural locations are currently being leveraged by service providers for onshore service delivery. There are also a number of other potentially viable locales. Given the wide range of options these locations provide, they become an important consideration for players looking to establish a wider U.S. presence.
A large number of contact centers call these locations home
~61 percent of the existing centers in these locations deliver contact center services, as compared to 22 percent for IT services, and 17 percent for business process services. Leading multinational players such as Alorica, Convergys, Sitel, Sykes, Teleperformance, and Teletech leverage these locations for contact center service delivery.
These locations play a meaningful role in the location portfolio for domestic pure-plays
The leverage of tier-5 and rural locations is highest for domestic pure-plays – e.g., CrossUSA, Eagle Creek Software Services, Onshore Outsourcing, and Rural Sourcing Inc. – which have ~37 percent of their delivery centers in these locations. On an overall basis, traditional MNC’s still dominate the market landscape as they have significantly large number of delivery centers in the United States as compared to other players.
The talent pool is sizeable enough to support 1-2 moderate sized delivery centers per location
While talent availability in tier-5 and rural locations is generally lower than in tiers 1 to 4, they still offer a pool capable to support one or two moderate sized delivery centers. The typical delivery center size in these places is ~340 FTEs, as compared to a national average of ~445 FTEs. However, there is evidence of players achieving a scale of above 500 FTEs, especially for contact center services, where high school graduates are utilized.
As onshoring grows in the United States, leverage of tier-5 and rural locations will also grow. Service providers are establishing their presence in these locales due to their lower costs and lesser competitive intensity. Hence, there is a significant opportunity for economic development agencies in these locations to attract potential investors and create employment opportunities.