Connaxis
News
Beyond India and China: Finding the Right Offshoring Location
Chicago, October 6, 2004 – A new offshoring study from Jones Lang LaSalle finds that, as companies expand their locational criteria beyond labor cost reductions, locations such as Sao Paulo and Buenos Aires may compare favorably with current offshoring favorites such as Delhi and Shanghai.
Cities in India and China will remain among the top destinations for offshoring for the foreseeable future, especially when labor costs and/or market characteristics such as population and job growth are the key criteria for choosing locations. However, when the quality of the workforce is a major consideration in addition to low-cost labor, cities like Manila, Sao Paulo, Mexico City and Buenos Aires can be very competitive, the study reveals.
“Reducing labor costs is still the main goal driving offshoring strategies, but for some business processes that are now being offshored, issues such as the quality of the labor force and infrastructure are becoming a bigger part of the equation,” said Bruce Rutherford, International Director, Jones Lang LaSalle. “As criteria for making location decisions expand, companies may find that the best places to locate operations are different than what they had expected.”
The Global Offshoring Index was developed as an objective business tool to assist in the process of comparing cities on a global basis. Part of Jones Lang LaSalle’s World Winning Cities research program, the Global Offshoring Index contains data for over 45 different variables that affect the choice of cities for various offshoring activities. These variables have been grouped into six main sets of drivers – Cost (labor, business, real estate, telecommunications and utilities), Human Capital (labor supply and quality), Business Environment (innovation and competitiveness), Market (growth and population), Infrastructure (physical and telecommunications) and Real Estate (structure and availability).
While cities in Asia, India and the Philippines top the list for cheapest cities for offshoring, cities in Central and Latin America, Central and Eastern Europe and Africa show surprising strength when other factors are taken into account.
“As offshoring continues to evolve from low-level manufacturing to higher-level back-office functions, cost becomes just one of many factors that influence the location decision,” said Rutherford. “We anticipate that corporations will have to spread a much wider net in order to achieve the right combination of factors in selecting an appropriate offshoring location.”
In recognition of the varying needs of corporations looking to offshore, Jones Lang LaSalle created three base scenarios to compare the relative attractiveness of cities for different activities.
Scenario One: Cost Driven
In the cost-driven scenario, a 75% weighting was attributed to cost (labor, real estate, utilities and business costs). The remaining drivers of Human Capital/Labor, Business Environment, Infrastructure, Real Estate and Local Market were allocated a weighting of 5% each.
Due to India’s cost advantage in relation to human capital, Delhi, Chennai and Bangalore claim three top positions under this scenario, Rutherford noted. Increasing pressures on labor and other costs in centers such as Delhi and Bangalore, will lead to the dispersal of offshoring activities to less mature markets within India. Manila–currently the cheapest non-Indian location for offshoring—also show signs of activity spreading out to other locations within the Philippines.
Scenario Two: Quality Driven
Access to a plentiful and suitably qualified workforce is a major driver for higher order BPO activities, such as specialist legal processing, dispute resolution and corporate finance, software development and contact centers dealing with complex or technical issues. Human capital is therefore afforded a higher weighting than cost in the second scenario.
The analysis of human capital focuses on two major issues: size of labor pool and quality of labor. From a labor supply perspective, cities in Latin America and Asia are favorable. Where labor quality is concerned, Manila, Moscow and Budapest rank highly on the aggregate index. An efficient business environment is also important in the location criteria for a quality-driven offshoring firm.
In this scenario, Manila achieved the top ranking based on its access to a large pool of well-qualified English speaking labor. Sao Paulo, Mexico City and Buenos Aires follow closely behind.
“Latin America is getting more attention as an offshoring destination, especially for operations seeking Spanish language or multi-lingual skills,” Rutherford said. “Geographic and time zone proximity to the U.S. and the availability of educated workers also contribute to the appeal of Latin American cities.”
Scenario Three: Market Driven
The desire to take advantage of opportunities in the local marketplace is another major driver for offshoring. As more trading blocks are created globally, there are likely to be more tariff and other advantages to establishing a presence ‘on the inside’. The desire to adapt or apply a global product or service to local market characteristics may also play a role in guiding location decisions.
“Performance of the host economy and the potential growth of the market will be the driving force for market-driven companies. While cost and human capital remain important, the current scale and potential growth of the local marketplace assume a greater weight for these firms and they will seek markets with a large and growing population,” noted Rutherford.
Due to their scale and projected economic growth, Indian and Chinese cities claim the top eight rankings, followed by Sao Paulo and Buenos Aires.
Future Trends
Offshoring is expected to grow rapidly. In the latest Corporate Real Estate Impact Survey issued by Jones Lang LaSalle, just over 30% of the firms that responded have offshored some activities already and this proportion is expected to more than double to 63% over the next three years.
“A major driver of future offshoring activity will be the desire to spread risks by choosing a number of locations. As offshoring matures, we expect to see a polarization of demand into two types of cities. For lower order activities, the main driver will continue to be cost and third-tier Indian cities such as Chandigarh, Kolkata, Jaipur, Cochin and Ahmadabad will become increasingly important. However, companies looking to offshore higher order, less cost-sensitive activities increasingly will turn to non-traditional offshoring locations, including Central and Latin American and Eastern Europe,” said Rutherford.
“Another trend we are likely to witness is the ‘offshoring of the offshored’ as India-based outsource providers establish facilities closer to key markets in the US and Europe,” added Rutherford.
Jones Lang LaSalle Releases Global Offshoring Index
Labels: Creative Outsourcing; Outsource Argentina; Outsourcing Consultants; Dedicated Resources; Web Development; Internet Marketing; Multilingual Support
News
- Beat your local competitors by smart sourcing creative services!
- How do we come out stronger then we went in? Dealing with the upcoming recession!
- Outsourcing of Creative Work is to Argentina what Outsourcing of Programming is to India and Outsourcing of Production is to China.