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Covid-19 Exposes Issues with Outsourcing to India and Will Accelerate Nearshoring to Latin America

6/18/20 5:00 PM / by Raul Vega

Raul Vega

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COVID-19 is forcing organizations to rethink the challenges of migrating back office operations overseas. Pandemic lockdowns spotlighted a critical issue with offshoring to India and other Asian locations: many countries are ill-equipped to handle large numbers of people working from home. 

But with modern telecommunications infrastructure, better living conditions among workers, and the second-highest Internet coverage in Latin America, nearshore operations to Costa Rica are proving to be a much more stable platform for keeping mission-critical services running smoothly in the new COVID-19 reality.

In part 1 of our two-part series on effective outsourcing solutions after COVID-19, we will examine offshore challenges after the pandemic. Stay tuned for the next installment, where we will show why nearshore outsourcing models offer a resilient, high-quality, and cost-effective solution for North American companies. 

Major Western companies suffer issues with outsourcing to India amidst COVID-19

As coronavirus tightened its grip around the world, much of the conversation about business continuity has been hyper-focused on interruptions to physical supply chains. But the pandemic is also disrupting service supply chains in regions poorly prepared to have millions of people working from home virtually overnight. 

Over the past 20 years, many major corporations have become increasingly reliant on mission-critical services delivered by their own internal shared service centers or third-party Business Process Outsourcing (“BPO”) providers in Asian locations, like India and the Philippines. Pandemic lockdowns are blowing a cloud of doubt over the ability of offshore markets to maintain critical support services functioning in the post-coronavirus economy. 

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Whether you are relying on support in IT, finance, or customer care, choosing solutions with resilient models is essential for an exceptional experience in the post-coronavirus world. 

India has raised the biggest concerns, with some companies wondering aloud if low labor costs can outweigh the risk of offshoring work to an overcrowded country with limited health care infrastructure during a global health crisis.

The rickety infrastructure that exists outside corporate parks in many offshore markets is also struggling to accommodate a work from home model. Already, The Wall Street Journal (WSJ) reported major Western companies in industries like airlines, retail, and financial services have suffered inconsistencies and delays in service from offshore BPO providers. NPR reports frustrated customers have been left on hold for hours or encountered recorded messages saying help was currently unavailable at call centers located in offshore markets.

A Bloomberg article published in The Straits Times states that some global banks with offshore operations are “scrutinizing their presence” after coronavirus lockdowns highlighted significant issues with outsourcing to India. The Times quotes a European Banking Authority (EBA) report that asserts offshoring support functions “exposed these banks to operational risks." 

The EBA report continues, "Many such offshore facilities were less prepared to address the COVID-19 operational challenges owing to a lack of opportunities for remote working or reduced availability of staff.”

The Times reports that global finance firms like JPMorgan Chase & Co., Barclays, and Nomura Holdings scrambled to keep offshore operations running amidst pandemic lockdowns. Special exemptions that allowed some call centers with reliable Internet and power to stay open didn’t apply across the board. 

Some banks had to transfer work usually done in India to other countries. Barclays, which maintains about 22% of its workforce in India, struggled to answer calls from customers seeking mortgage relief, The Times reports.

In the aftermath, some firms are “considering moving some Indian roles back home or to regions near their main markets, such as Eastern Europe and Latin America, to address the operational risks,” the article reports.

Offshore challenges and COVID-19: Why India falls short

These new issues pile on to existing Asia offshore challenges. When shared services and back office outsourcing started to gain traction some 20 years ago, the labor arbitrage opportunity associated with Asia-based models fueled their early popularity. 

However, many companies found out the hard way that there’s truth to the old adage: you get what you pay for. Pursuing these bottom-of-the-barrel cost structures came with significant risks, including challenging language barriers, unforeseen cultural differences, and significant time zone differences. This is what fueled the growing trend for nearshoring to Latin America, led by Costa Rica, over the past decade. Organizations still saw the advantages of leveraging offshore talent pools, but wanted a higher value model that was close to home and went beyond labor arbitrage.

At the core of the recent issues in India are poor living conditions in many areas that can make working at home impossible. The average income in India stands at $2,020 a year. Unfortunately, it’s a safe assumption that many Indian back office workers live in a substandard environment, with unreliable electricity or crowded conditions inside their homes that aren’t conducive to high-end transaction processing.

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Many Indian service firms also struggled to quickly provide adequate equipment to enable remote work during the lockdown. Indian  are largely equipped with desktop computers and workers often lack personal laptops. Many service providers scrambled to find enough devices to distribute to thousands of employees amidst global shortages. The New York Times reports that COVID-19 caused laptop exports from China to plummet just as remote work and distance learning spiked demand.

But even if laptops are provided, widespread Internet issues in India present the biggest obstacle to a successful, long-term work from home model. While Indian corporate parks that house international service providers are well-equipped with high-speed Internet, sufficient bandwidths, and redundancies that guarantee reliable power, the situation outside the parks is drastically different. 

Unfortunately, most service provider facilities were built to enable a densely populated, cost-driven model. For that reason, they cannot resume full operations any time soon without increasing the risk of virus spread - and more service interruptions. 

 Only 3% of India is estimated to have home Internet access – a number that’s significantly lower than many other emerging markets. Some sources claim that 28% of Indian homes are connected to the Internet, but that number comes from double-counting multiple connections within the same residence. 

By comparison, more than 80% of Americans can access the Internet at home. 

Spotty service and slow Internet speeds provide another major disadvantage to offshoring to India in the new distributed workforce model. In Moneycontrol, a key Indian financial information source, Indian tech workers complain that the bandwidth of the country’s existing infrastructure cannot handle exploding demand for remote work. Home Internet speeds dropped from 150 Mpbs (megabits per second) to as little as 5 Mbps in some areas, the article reports, greatly impacting productivity.

The world is moving forward with social distancing requirements until a coronavirus vaccine is found. The inability to consistently provide the high-speed connectivity and wide bandwidths that enable reliable work from home stands as a critical weakness of the Indian offshoring model - and a significant risk in the post-coronavirus economy.

Even before COVID-19, nearshoring to Costa Rica was emerging as a preferred shared services and outsourcing destination, attracting more than 170 multinational companies. Organizations from Amazon to DHL to Walmart quickly realized the benefits of doing business in a country with close proximity to the U.S., a westernized culture, robust infrastructure, and a highly educated, bilingual workforce. 

"The inability to consistently provide the high-speed connectivity and wide bandwidths that enable reliable work from home stands as a critical weakness of the Indian offshoring model - and a significant risk in the post-coronavirus economy"

With the “new normal” introduced by COVID-19, the nearshore benefits have become even more apparent. Many of the logistical and technical hurdles that prevents a smooth transition to a distributed workforce model in emerging offshore markets like India have not existed in Costa Rica. In fact, Costa Rica has been recognized by many as one of the global leaders to study on how they have managed the pandemic. 

Stay tuned for the next installment in our two-part series on effective outsourcing solutions after COVID-19. We’ll reveal why nearshore outsourcing models offer a resilient, high-quality, cost-effective, and low-risk solution for American organizations.

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Raul Vega

Written by

Raul Vega

Raul Vega is the CEO at Auxis and an executive consultant focused on helping executive teams modernize their operating models to meet the increasing demands of today’s business environment. Throughout his 30-year career, Raul has worked with over 200 clients across 30+ countries and successfully led business transformation initiatives in multiple industries, including consumer goods, industrial manufacturing, retail, transportation, telecommunications, among others. His clients have ranged from Fortune 100 multi-nationals to private equity backed middle market organizations.