Imagine a company that took advantage of the whole world’s labour pool. Engineers from Russia and ex-Soviet countries could offer expertise fostered by years of government investment in scientific research; Filipinos, with their easy manner and excellent language skills, could answer customer service enquiries from the US and UK; Moroccans could handle French clients. Israeli graduates could tackle complex technical and mathematical applications; eastern Europeans could handle human resources processing; Indians could manage the accounts.

Manufacturing companies have been doing it for years, sourcing different parts from all four corners of the globe to be assembled in the lowest cost location. Now service-based organisations are coming round to the idea of a wholly global workforce.


Alex Blues, partner at management consultants PA Consulting, says: “What is happening with offshoring is 20 years behind the manufacturing industry. We’re moving towards an increased commoditisation, where possible, of what is required and taking a broad geographical approach to where IT or business process outsourcing [BPO] is sourced from.”


The recession is not expected to hamper this trend. Companies may cut back on big IT projects — which still represent the majority of outsourcing work — but that will be more than offset by those forced into cost-cutting measures, such as outsourcing non-core activities. Professor Leslie Willcocks of the London School of Economics (LSE) expects the IT outsourcing market to grow by between 6% and 9% a year to 2012, while business process outsourcing will grow by up to 15% a year.


Some 20 years ago, India emerged as the key offshore location and it maintains a dominant position. The global outsourcing market for IT and business services exceeded $55bn (€42bn) in 2008, with India exporting some $40bn (€30bn) worth, according to the LSE. Still the country has some serious problems. Its transport infrastructure is stretched to breaking point and staff turnover is high and rising; Indian companies are struggling to rebuild trust after the €1bn fraud at Indian IT outsourcer Satyam; and costs are beginning to rise as the outsourcing market overheats.


Brazil, Russia and China are lumped with India to form the BRIC economies expected to change the world order, but in outsourcing, Willcocks says Russia and Brazil have failed to deliver on their potential, while China faces major language and cultural barriers.


All this paves the way for non-BRIC countries to muscle in on the lucrative market. By 2009, there were more than 120 alternative offshore locations offering IT and business process services, from Venezuela to Poland.


Willcocks says: “There is this constant search for lower costs and skill pools — the war on the bottom line and the war for talent — and a constant search for secure locations. There will always be questions about risk profile, environment, infrastructure.” He describes it as a global game of craps. “You spread the risks across several locations because you want continuity of service.”


Of these emerging outsourcing markets, commentators highlight Vietnam for its rock-bottom costs; Poland is noted for having a favourable environment for long-term business commitment; and Bulgaria, the Czech Republic and Slovakia are reported to have excellent telecoms and IT infrastructure.


“All these emerging locations will look to compete against one another so their attractiveness will go up. There will be a constant dynamism in that so people will switch around,” says Willcocks.


Still, he expects India to stay ahead of the pack for a good 20 years. “What will happen is that India itself will offshore to non-BRIC countries. Clients will expect Indian suppliers to have offshoring capability or actually start looking themselves in order to spread out over a portfolio of countries.”


As the map of the world is redrawn yet again many old alliances are reforming. Matthew Vallance, president of global business process outsourcing company Firstsource Solutions, says: “These things tend to take an ex-colonial path. For France, north Africa is a viable location because there are large numbers of French speakers there for historical reasons.”


Morocco last year rose into the top 30 offshoring locations, as judged by research analysts Gartner. Willcocks notes in his report on offshoring in non-BRIC countries that labour costs in Morocco are about half the costs of white-collar employees in its major market of France. Tunisia is cheaper again, with operation costs some 20% lower than Morocco.


These so-called nearshore locations have a number of advantages over India, including language skills, cultural compatibility, the time zone, and travel time.


There are also some activities better suited to take place close to home. Blues of PA Consulting says: “Finance and accounting represents a large part of BPO growth at the moment where there is a need to get information. Then people are tending to look at nearshore until they’ve got it well commoditised. Applications maintenance, on the other hand, is a good example where you can proceduralise what you’re doing; where distance and the need to communicate regularly isn’t as key.”


Scale also plays its part. Blues says companies looking to outsource applications development for just 150 staff would look to Russia, Bulgaria or Poland before India, for ease of access and even lower costs. Mumbai’s popularity means property prices have ballooned in the past decade. Those looking to outsource 1,000 staff, however, would be very constrained in their choice, as India is one of the few markets with that kind of scale.


In fact, most companies are now opting for a pick ’n’ mix approach, known as best or multi-sourcing. This was initially a marketing exercise by Western service providers, such as IBM and Accenture, to differentiate themselves from Indian outsourcers Wipro, Tata Consultancy Services (TCS), et al. With growing demand for geographical diversity, the industry has now converged upon the same global model.


One of the best examples of the bestsourcing model is the five-year contract between TCS and Dutch bank ABN Amro, starting in 2005. This occupies some 1,800 TCS staff across four continents, managing more than 1,000 applications. 


Tata took some of the work to Luxembourg for its regulatory regime, as ABN’s private banking business has strict data privacy conditions. It farmed out a large portion to its centre in Hungary, which has over 600 staff and can provide services in over 16 languages. Tata says the country was chosen for its proximity to client locations in Europe and as a risk mitigation strategy to back up work being done at other centres. India was used as the primary offshore destination for its deep banking domain skills and software experts. Sao Paulo in Brazil was used to cater to the Latin American business, where Portuguese and Spanish language skills and an understanding of local business conditions was critical.


In other sectors, Firstsource set up operations in Northern Ireland three years ago for a UK telecoms company, which wanted any work with the need for speaking or voice recordings to be done locally. 


The model becomes even more complex in the pharmaceutical sector, where large players are increasingly outsourcing research and development activities as well as back-office work. Pfizer, Merck, Schering-Plough and Roche have all enlisted Wuxi PharmaTech, one of Asia’s largest contract research organisations for R&D services.


UK-based Astrazeneca recently decided to outsource development of the active pharmaceutical ingredients that make its drugs work, much of which is expected to go to India and China; the company’s IT infrastructure is managed by IBM under a seven-year, $1.7bn (€1.3bn) contract, covering 45 countries.


Willcocks looks forward to a time when chief executives will tap the whole world’s labour pool when building a workforce: “We’ll have a different global division of labour. I don’t think you’ll be drawing on local labour for a lot of things you want done. The activity is going to be much more globally dispersed.”


However, all these exciting trends come with one big warning sticker contained in a major new report by PA Consulting. Outsourcing — What Lies Beneath suggests that it is far too easy to concoct a compelling business case for multisourcing, only to find later that all the savings are blown apart by the cost of integrating different service providers. Head of PA’s sourcing division Jonathan Cooper-Bagnall warns: “Multisourcing can end up costing more than you could ever believe.” The report also notes that a third of corporations don’t know how much it costs them to manage their existing outsourcing relationships, and that very few have a realistic grasp on the spiralling risk that multisourcing can entail. 


The globalised world may have become 
a candy shop full of pick ’n’ mix, but beware the potential teeth-rotting risk that lies beyond the immediate case for cutting costs.

GLOBAL BESTSOURCING

Brazil IT, banking and finance


For: São Paulo is already financial centre of South America; convenient for outsourcing from US


Against: São Paulo and Rio de Janeiro suffer from high levels of crime and poor infrastructure


Argentina
 IT, telecoms engineering


For: Educated, skilled, cheap workforce; time zone similarities to US; established telecoms


Against: A history of economic instability


Mexico & Venezuela 
IT, business processing


For: Proximity to US; outsourcing centres for Spanish-speaking countries; skilled workforce


Against: High levels of software piracy; Venezuela perhaps politcally unappealing; Mexico not as cheap as other Latin American countries


South Africa
 Call centres, telecommunications


For: Similar time zone to much of Europe; high-quality call centre staff


Against: A telecom monopoly means higher costs; well-documented high levels of violent crime


Egypt 
IT, call centres


For: Technology graduates; attractive tax regime; proximity to southern Europe; political/ cultural bridge between Europe, Africa and Middle East


Against: Poor infrastructure, patchy rural connectivity; perceived threat of terrorism


Morocco & Tunisia 
IT, call centres


For: Cultural/geographic proximity to Europe; cheap labour; tax exemptions for IT services


Against: Poor infrastructure, limited to high-tech parks; Morocco wages on the rise


Central and eastern Europe
 HR, finance, accounting, high-tech industry, innovation


For: Tax policies to attract FDI; existing EU states or proximity to the EU; highly skilled


Against: Costs growing more quickly than Asia; skilled labour may have migrated elsewhere in EU


Russia IT, engineering


For: Highly skilled; excellent infrastructure in major cities; high-tech capability


Against: Increasingly expensive costs of living and wages; cultural barriers, wariness of the West


Israel 
High-tech and mathematical apps


For: Native English speakers; cultural affinity to West; highly educated workforce


Against: Wages higher than in Asia; ongoing problems with neighbouring Palestine


China
 Business processing, IT, R&D


For: Cheap, large workforce; established outsourcing infrastructure


Against: Language and cultural barriers; political difference to West 


India 
Call centres, IT, legal processing, finance, accounting, R&D


For: Established outsourcing destination, now able to undertake higher value operations; cheap and flexible workforce


Against: Increasing wage pressures; recent high-profile fraud cases


Vietnam
 Call centres, IT, telecoms, 


For: Wages low compared India; high number of IT graduates; young workforce; tax incentives


Against: Possible language barriers


The Philippines Call centres, finance, IT


For: English widespread; high literacy rate; low wage costs; flexible workforce; IT/fiscal incentives; good telecommunications


Against: Wages may rise as it grows more popular