Offshoring, Risks, Offshore

[HROA Essentials] Offshoring: What you do and don't need to worry about

Interview with Ben Trowbridge, Managing Partner for Alsbridge, about risks and changes in offshoring.

Q: What are the greatest risks to offshoring as a strategy?

BT: Users of offshore services that are provided via a shared services center or an outsourced provider should carefully consider the impact of currency revaluation and country/political risk along with taxes and tariffs. Each of these areas can have a dramatic effect on the success of your offshore endeavor.

1. Currency revaluation - The US Dollar (USD) and the British Pound (GBP) have historically been strong against the currencies of most target offshore locations with the Chinese having an inherently fixed exchange rate for many years. Recently this trend has begun to change in a number of key potential locations due to the changes in currency policy and the continued expansion and adoption Euro in central/eastern Europe. Many western governments seem to have an interest in the eventual devaluation of the currencies against target offshore courtiers, and seem to be pressuring the Chinese (with some success) to allow their currency to float more freely against the US Dollar and Euro.

12-month currency revaluation trends of the USD vs. the currency of key offshore locations: 

 
 
If the devaluation of the USD and potentially the GBP continues, there will be some upward movement in the offshore service providers' pricing driven by currency exchange rates. Eventually a tipping point will be reached, and the price of services will be impacted. Many outsourcing contracts do not anticipate this risk (let alone account for it), which may end up placing the relationship in jeopardy.

2. Country / Political Risk - Single country service provision through a captive shared services center or 3rd party outsourcing is inherently at risk to any environmental or external shock. The risk is the same whether your large-scale operations are located onshore or offshore (see Hurricane Katrina and BBC/CNN news reports). The issues are a lack of diversification in the locations from which your services are provided and the requirement for a business continuity plan that is country or geography independent. The cost of this type of business continuity capability needs to be considered and included in a prudent plan.

3. Taxes and Tariffs - There is some concern that the Indian and Filipino governments will end the special tax incentives. The jury is still out on this one, and we will just have to wait and see. In the interim, this issue needs to be considered and accounted for in the formation of any offshore relationship to outsource or create a captive shared services center. Additionally, there is some residual fear that US authorities will create a tax similar to the historical Texas state tax scheme that could inadvertently create a real or perceived obstacle to cost effective offshoring.

 
Q: Which offshore risks have been exaggerated?

BT: Neither wage inflation nor labor availability are any real cause for concern, so long as you move into an area that meets a rather simple, but well defined set of criteria (please forgive the wry humor).

a. Neither Microsoft or GE occupy the floor directly beneath you with one of their older captive centers
b. There is no expat school within convenient distance, which most likely means there is minimum competition for your target labor pool.
c. You located in a low cost zone city large enough to host an American NFL football or UK Premier League team (there are only roughly 600-800 in India alone)

But seriously, so long as there is a good local university system producing reasonable numbers of talented college and tech school graduates, neither wage inflation nor labor availability is a serious barrier to offshoring. The combination of high birth rates (and/or large population size) with an English speaking, educated work force should continue to produce a wealth of low cost staff for SSC and outsourcing support requirements.

Global Birth Rates as a driver for offshore labor costs:

One last point -- it is always important to give serious consideration to every available low cost location that suits your needs; India is not the only offshore alternative.

Q: How is the offshore market changing?

BT: Clients are accessing the plentiful labor pools directly skipping the outsourced providers. The great silent wave of shared services has increased while some of the key Western European and US Headquartered outsourcing providers continue to refuse to effectively execute a real offshore strategy to provide low cost services. Our current estimate would be that 3 out of 4 jobs moving offshore go straight to a captive shared services center or bypass the major providers in favor of a niche Indian provider. Late in the game, a few of the major providers seem to be implementing the changes they’ve been talking about for years. We’ll see if it’s enough to stem the shared services tide.
 
By Ben Trowbridge, Managing Partner
Alsbridge, North America