Outsourcing 101: A Game Plan for First-Time Outsourcers - Part 4

6/1/16 4:48 PM / by Eric Liebross

Eric Liebross

In Part 3 of our series, we answered the first key question, “What Functions Should I Consider Outsourcing?”  In Part 4, we are going to answer the next key question:

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“Which Location Should I Outsource To”?

Once you have made the decision to utilize outsourcing in your business, the next big question is, “Where?”  The term “offshore” is commonly used to describe services provided in another country where labor costs are lower than in the United States.  However, the diversity in service delivery locations is as geographically dispersed, as, well, the world.

An annual study published by the consulting and advisory firm, Tholon’s (www.tholons.com) ranks the top 100 outsourcing destinations in the world.   As indicated by Tholon’s, today’s outsourcing market has reached across the globe, and services are being provided in locations ranging from Asia (with leading locations that include India, the Philippines, China and Vietnam), Eastern and Western Europe (with Ireland, Poland, the Czech Republic and Hungary as leading locations), Africa (South Africa, Ghana, Morocco  and Egypt the leading locations), Latin America (Costa Rica, Brazil, Chile  and Argentina).

There are many other countries within these regions that provide various types of outsourcing services, and even the Caribbean (Puerto Rico, Jamaica, and the Dominican Republic) and North America (Toronto, Canada, San Antonio Texas, St. Louis, Missouri) are well represented in the service delivery sector, according to Tholon’s.

Many organizations have seen that time zone issues have resulted in higher costs in some of the Asia markets, as increasingly competitive employment situations are requiring service providers in those countries to pay a premium for people to work the overnight shifts that align with US working hours.

Wage comparisons between Asia and Latin America show that the Asia markets are still lower cost, but the gap is closing.  Latin America countries can be considerably more expensive, in some cases 20-30% higher.  Latin America still represents significant labor arbitrage compared to US costs, ranging from 30-50%, but Asia is still the lowest cost outsourcing region compared to US labor cost.  You can anticipate labor cost savings ranging from 40-70% in these markets, depending on the function.

Other factors affecting labor costs in these markets are more unique to each region.  In Latin America, there are many countries that have very strict labor regulations relating to such diverse factors as working hours, severance, maternity leave, vacation days and other required benefits such as the mandatory 13th month salary (“Aguinaldo”) in many Latin American countries.

Conversely, high demand in the Asia markets has resulted in significant wage inflation, ranging from 15-30% per year.

In addition to labor cost, proximity and time zone, there are many other factors to consider when looking at outsourcing to a non-domestic location, including:

  • Available labor pool and attrition rates
  • Available professional and/or technical skill sets
  • Language skills
  • Cultural compatibility
  • Power and Telecommunications infrastructure
  • Political stability
  • Economic stability
  • Regulatory requirements
  • Risks to intellectual property

The final decision on where to outsource should involve an assessment of many factors.  If the primary driver is cost savings, Asia will present the strongest business case.  If you are willing to trade some savings for the proximity and time zone benefits, then for US based companies, Latin America presents a great option.  Economics and geography are always going to be the top factors in answering the location question.

Please “tune in” to Part 5 of this 5 part series to learn more about “The Gameplan for First Time Outsourcers."

 

Eric Liebross

Written by

Eric Liebross

Eric Liebross leads Auxis’ Back Office Optimization practice, helping organizations design and implement innovative operating models, processes and technologies to achieve optimal performance within Finance, Customer Service and HR Operations. Eric’s areas of expertise include Shared Services Strategy, Nearshore Outsourcing and RPA.