Tag: location optimization

Increasing Globalization of Global Services: Next Global Sourcing Frontier – Africa? | Sherpas in Blue Shirts

The mandate of Everest Group’s Location Optimization practice is to assist clients with data, insights, and advice on which global sourcing practitioners can rely to make their most critical decisions related to global locations. As we go about conducting our day to day business, three questions underpin the discussions with global sourcing practitioners nine out of 10 times.

What are the key locations for global services delivery?

Which regions are attracting attention and interest to meet the next wave of global services requirements?

How do the key global services stakeholders (buyers and service providers) perceive the next frontier(s) for global sourcing?

In order to build awareness on the trends we are observing across the global locations space at the highest level, we will attempt to provide the answers to these three questions.

First, let’s look at the key regions for global services delivery today. Exhibit 1 depicts our Market Vista Locations Maturity Heatmap, which tracks and compares the level of market activity across global locations. Asia remains the dominant location of the global services installed base by a large margin. This should come as no surprise as the global sourcing story has been pioneered and successfully played out in Asia – India provided the proof of concept for building industrial scale in global services, and the Philippines has rapidly adopted this successful model and opportunity to become a world leader in customer service. The success seen by India and the Philippines has encouraged other locations in Asia to concoct their individual recipes for succeeding in the attractive global services space. For example, China has emerged as a credible option for sourcing R&D and engineering services (read more in Everest Group’s “What is the True Maturity of China’s Offshore Services Market?”) while Malaysia is making concerted efforts to carve out a niche in the shared services space.

Exhibit 1 – Market Vista Locations Maturity Heatmap

Market Vista Locations Maturity Heatmap

Central and Eastern Europe (CEE) and Latin America are the next set of regions beyond Asia in terms of installed base of global delivery. These regions experienced waves of expansion, especially as companies strive to put in place a global portfolio of delivery locations for purposes, such as risk diversification, leveraging technical/language skill sets, 24×7 coverage, regional support, etc. There are more than 10 locations in both these regions with credible evidence of global services activity. Poland (in CEE) and Brazil (in Latin America) are the two large locations that have built credible scale in global services delivery and are recognized as mature locations on our Market Vista Location Maturity Heatmap. Poland has carved out a niche as a nearshore location for servicing Europe in non-voice business processing and IT, while Brazil is recognized for IT talent and an attractive domestic market, in addition to its proximity as a nearshore location for global services. (Read more about Brazil in Everest Group’s “Perspectives on the Maturity of Brazil’s Offshore Services Market.”)

Africa is a relatively new entrant in the global services locations landscape and has three or four locations with nascent global services activity. It presents specific and, at times, niche propositions and opportunities. And its value proposition is now being slowly understood by global investors.

Next, and before we discuss Africa in greater detail, let’s look at the set of locations attracting interest from buyers and service providers to meet the next wave of global services expansion. Exhibit 2 is based on Everest Group’s comprehensive survey of key global services stakeholders and compares regions that buyers and service providers are planning to leverage for setting up new centers. (Read the Everest Group Location Insights detailing buyers’ and service providers’ location-related plans and perceptions).

Exhibit 2: Location Expansion Plans of Buyers and Service Providers

Location Expansion Plans for Buyers and Service Providers

As is clear, Asia figures prominently in the plans of buyers and service providers for setting up new centers. Asia continues to attract interest from buyers and service providers, despite the high installed base of current activity. The Asian locations witnessing sustained interest include India, the Philippines, China, and Malaysia.

The survey results also give a big “thumbs-up” to Latin America. This is corroborated by recent market activity trends that show the region is experiencing activity in establishment of both captives and supplier delivery centers. Key countries that are witnessing increased interest include Brazil, Argentina, Chile, and Mexico.

Let’s go now to one of the most interesting findings from the survey – Africa! Indeed, as many as 20 percent of all respondents from the service provider segment indicated plans to add new countries in Africa to their global delivery portfolio. South Africa seems to be especially popular with service providers, with 10 percent of all respondents disclosing plans to set up a center there. Egypt also figures into the list of leading choices for locating a new delivery center.

So what are the reasons behind this emergence of Africa countries as the next frontier of global locations, especially for service providers?

  1. They provide a capable (although nascent) low-cost alternative to CEE locations
  2. They offer scalable language skills and cultural affinity with the developed world. South Africa and Morocco have strong cultural similarity with the United Kingdom and France, respectively. Egypt offers the opportunity to cater to the lucrative Middle East market.
  3. A foothold in the African region gives service providers the ability to serve domestic African markets, e.g., South Africa for sub-Saharan regions, and Egypt and Morocco for North African markets. Business from local firms and especially MNCs operating in the region present a lucrative opportunity for service providers looking for the next set of clients

In addition to the above value propositions offered by African locations, we can contextualize the motivations for location portfolio expansion from both the buyer and service provider standpoints. Buyers set up captive centers or influence service providers to provide support from new locations primarily to complement their current global locations portfolio in terms of access to specific talent pools for language skills, time zone proximity, to support international business expansion, etc. At the same time, buyers are also sensitive to the complexities associated with a wider geography footprint and, hence, are looking to find the optimum balance of value capture and risk mitigation from global services programs.

On the other hand, Tier 1 service providers usually have a wider frame of reference due to their servicing of multiple clients, and hence are typically more globalized than buyers. In addition, service providers are more open to moving into hitherto unexplored territories due to incessant cost pressures and the need for differentiation. Most of the Tier 1 service providers are already well penetrated in all the major global services theatres and are now looking to explore the African continent.

Although it remains to be seen how much of this enthusiasm will ultimately get converted to any action, the sheer level of interest itself should excite countries in the African continent – South Africa, Egypt, Morocco, and Mauritius – to develop the global services capabilities in their individual countries, sharpen the articulation of their value proposition and differentiation theme, and craft effective marketing strategies to attract global investors.

Philippines’ Expanding Role in the Global Services Supply Chain | Sherpas in Blue Shirts

Recently I was in Manila for the Contact Center Association of Philippines (CCAP) annual industry event, which also marked the CCAP’s 10-year anniversary. There was a great deal of enthusiasm about Philippines having reached an important milestone of becoming the world’s leading voice BPO destination. Prominent industry and political speakers emphasized the fact that Philippines had achieved this distinction on the back of a vibrant ecosystem, a natural affinity toward the services and customers in play, and the significant attention the industry is enjoying relative to the political and economic quarters. One of the eminent presenters summarized the upbeat mood by stating that Filipinos had demonstrated that it is possible to be nice and still win!

The celebrations were well-deserved. The Philippines IT/BPO industry has grown at a healthy clip of ~30 percent annually over the past five years to reach ~US$9 billion in revenues, and is a significant contributor to the country’s GDP, direct and indirect employment, and foreign exchange earnings. Additionally, the industry has catalyzed growth of multiple next-wave cities in the provinces, attracting local talent, entrepreneurs, and governments to participate in the overall economic upswing. Multiple factors, including availability of a robust English-speaking talent pool, relatively neutral accent, cultural similarity with the United States, and a competitive cost environment have contributed to this success.

Yet, one must question whether this success is sustainable and what lies ahead for the industry in the years to come. The global services phenomenon has certainly spawned a new generation of competing destinations beyond India and Philippines. While locations such as China derive strength from regional and domestic market scale and capabilities, countries in Africa are witnessing a significant government-backed push to target the relatively lesser tapped UK and European markets. Other countries such as those in Eastern Europe and Central/Latin America are establishing themselves as the preferred nearshore destinations for Europe and North America, respectively. While it is important for Philippines to protect and enhance its position in the existing strongholds, the competition will be more apparent in the comparatively new markets such as the UK, continental Europe, and Asia Pacific, and in service segments such as non-voice and industry-specific BPO services.

So what must Philippines do to ensure continued growth and success in the emerging global services landscape? Investments in talent capacity and quality are required to meet the industry’s projected entry-level workforce requirements, as are development of specific domain expertise and a steady pool of management/ leadership. The industry’s expansion into next-wave cities needs to be strengthened through adequate physical/social infrastructure development and local government stewardship. Finally, the industry’s stated agenda of further diversification into newer markets and service lines must be supported through renewed and targeted marketing and communication initiatives.

The Philippines IT/BPO industry has set itself an ambitious 20 percent annual growth target over the next five years. Achieving this will require Philippines to proactively shape its destiny and profile, recognizing evolving customer expectations and competitor capabilities. Will there be any surprises?

Anticipating the Unexpected: Implications of the Egypt and Tunisia Crises on Global Sourcing | Sherpas in Blue Shirts

After spending most of Sunday evening watching the ongoing Egyptian crisis unfold on TV, our mailboxes were flooded with analyst perspectives and journalist queries on the impact it will have on Egypt’s information and communications technology (ICT) industry. While the recent turn of events is likely to hamper the brisk progress Egypt and Tunisia were making in global services, it may be too early to predict the impact on the future state of these outsourcing/offshoring destinations. As market participants in these countries try to weather the storm, and the concerned global sourcing community looks on, global investors and IT-BPO sector countries and industry organizations stand to learn important lessons from this situation.

Tunisia and, particularly, Egypt are among the emerging offshore services delivery locations that have in recent years significantly invested in growing their IT-BPO industries as they recognized this sector as a key driver of economic growth. Both countries have achieved considerable offshore scale (more than 8,000 in Tunisia, and 20,000+ in Egypt), and both have successfully attracted marquee companies including Vodafone, Stream, Teleperformance, Wipro, and Microsoft, to source services from these locations to fulfill language skills, cultural affinity, cost savings and geographic proximity needs. And until the last two weeks, both countries were considered relatively stable locations demonstrating rapid progress in embracing reforms and FDI inflows (endorsed by UNCTAD, and World Bank/IFC.)

This all raises two critical questions: did location decision makers misread the developments in these countries, or fall short in anticipating these scenarios? To some extent, as such incidents are unprecedented and almost impossible to predict, they would not result in a “no-go” decision in a location selection exercise. At the same time, this is not the first instance of a partial disruption or complete shutdown of offshore support operations in a country. Episodes in the recent past (e.g., the typhoons in the Philippines, the military coup in Thailand, the earthquakes in Chile, the Mumbai attacks, and the swine flu pandemic in Mexico) have unquestionably affected operations in global delivery locations. Thus, it is important to “anticipate the unexpected” in location selection decisions by planning ahead, and putting in place investments and robust blueprints to manage such risks. In well-prepared organizations, these types of events trigger implementation of well-crafted disaster recovery/business continuity plans.  For example, Infosys has a disaster recovery site in Mauritius where business critical processes can be swiftly migrated, and critical resources enabled to travel at immediate notice via a blanket visa agreement with the Mauritian government.

Amidst the crises in Egypt and Tunisia, single location sourcing buyers are undoubtedly hurting more than users of global delivery networks-based models, as global delivery portfolios built on a ‘plus one’ principle ensure redundancy. In building a global sourcing portfolio, a role-based delivery network designed to meet aggregate demand, and scenario-based work placement to fulfill business needs, provides flexibility and ensures talent sustainability while optimizing costs and minimizing risks. For example, most leading global financial services companies have a headcount cap in each location, and route overflows to alternative sites in their portfolio.

Such moments of crisis also provide an opportunity to revisit the frameworks governing location selection decisions. Mature users of global services approach location selection as a risk-reward tradeoff on a relative basis. And as potential investors assess locations across parameters of talent pool, cost structures and structural risks, this episode underscores the importance of adopting a risk-adjusted view to cost savings approach, and allocating higher weights to geo-political and macro-economic risk. For example, while Egypt offers 70 percent cost savings on support services compared to Tier-2 locations in the U.K. and the U.S., in a situation in which country stability indicators are no longer favorable, the risk-weighted cost savings are less attractive.

These are clearly trying times for IT-BPO investment promotion agencies and country/industry associations in these countries. Due to the Internet blackout in Egypt, their ability to communicate with the external world has been hampered. While the immediate objective is to sustain engagement with existing investors, and extend support to help them cope with the situation at hand, it is important to keep channels of communication open with potential investors and key influencers to ensure accurate information dissemination. The underlying theme here is the need for a disaster management and communication plan for country/industry organizations. Once the situation stabilizes, these countries will need to engage in a public relations initiative to restore confidence within the international global sourcing community. A country rebranding exercise may also be necessary, if investor perceptions about Egypt and Tunisia change dramatically.

While there’s no denying these events impact the investment/stability ratings of these countries in the immediate-term, the political and macro-economic developments will need to be closely monitored with a longer-term view. Things to watch out for include endorsement of political leadership from both internal and international quarters, recast country ratings/indicators from the likes of World Bank and WEF, country administration reiterating its commitment to the services industry (specifically the ICT sector), ability to maintain investment-friendly policies (e.g., tax breaks, incentives, foreign investment practices), and the collective response of global IT-BPO companies operating in these countries.

As close watchers and proponents of global services, we remain cautiously optimistic about the prospects of the IT-BPO sectors in Egypt and Tunisia. Only time will tell how the situation pans out, and how the global sourcing community responds to the now imminent damage control exercise expected from the country/industry associations. The learning for the location decision maker from this crisis is more pronounced: Anticipate the Unexpected.

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