07 Sep 11 Rightshoring_An effective sourcing strategy
Buyers of outsourcing services need solutions that help them compete in an increasingly complex environment. To optimize operational margins, buyers procure services from the most efficient source, the right location and in the right proportion. Rightsourcing is the usage and optimal mix of 1. Multi location (multi-shore, offshore, near-shore) and, 2. Multi engagement (captive, shared services, third party vendors) strategies. In this article, we discuss rightshoring, which involves creation of a plan that maps the best location or ‘shore’ for business services.
Buyers of outsourcing face complexities of a technologically advanced global environment, and find that one solution does not fit all. In the present business scenario, service delivery and procurement entail a mix of destination, vendors and ownership models. Consequently, mature buyers utilize what is known as a ‘rightsourcing strategy’ that benefits from judicious evaluation of what works best in terms of time, efficiency and price. The nature of engagement between a buyer and service provider may vary – third party, shared services or captive service procurement.
There are two broad themes that are considered for effective delivery of services in an outsourcing engagement:
- Service delivery location or destination
- Ownership models – internal or external ,i.e. third party
It is also important to note that the application of these strategies needs the right mix of vendors, i.e service buyers can chose from single, or multiple vendors – and if using a multi vendor model, choose the right mix of vendors. The most critical of these factors, is however, choosing the right destination to outsource – because factors like cost of labor, cost of operations, availability of skills, quality of service, and time to market are affected by the choice of location. Location strategies, in turn depend on various attributes such as risk management, skill sets, regulations and costs among others which change with onshore, nearshore and offshore. We will take a closer look at each of these models as a possible option for rightshoring.
The onshore model – external but local
In onshore engagements, the procurement of services is from local vendors, based in the same country as the buyer of outsourcing. The rationale is that this engagement makes it easier for buyers of outsourcing to interact and communicate with vendors, and there is a high degree of cohesion in cultural sensitivities. Sometimes, regulatory restrictions mandate that records must remain within the same geographies, thus ensuring that all or certain elements in an engagement remain locally outsourced, but not offshored. This model is characterized by typically higher pricing, lower volume transactions and a higher focus on quality. Real time services are easy to provide given the same time zone.
For companies that need to outsource but are apprehensive about offshoring, this has emerged as a viable option to cut costs, and gain access to more resources. Many service providers have recognized the need for onshore delivery. They have initiated a change in their location strategy and offer a mix of onshore and offshore delivery to reassure their clients. This also enables local hiring, which in turn adds to their skill sets and addresses any political concerns that may exist. An optimum mix can ensure a balance between the costs and other parameters such as skills and quality.
The nearshore model – Regional proximity
Nearshore engagements involve offshoring, but to geographically closer regions. The technical differentiator for a nearshore location (compared to an offshore location) is that it is no more than two time zones away from the buyer’s location. This means that a buyer looking to outsource and located, for example in the UK or any EU region country, chooses to partner with firms from Ukraine, Hungary, Poland, Portugal, or Romania. The benefits include similarity in culture and lower costs. Knowledge of local language is another advantage that most offshore destinations cannot offer.
For US based outsourcing buyers, Guatemala, Peru, Chile and Dominican Republic in South America are emerging as newer nearshore destinations, compared to the more popular Brazil and Argentina. The cost of labor in these countries is significantly lower than that in more developed regions, yet the linguistic and cultural benefits stay similar.
Some of the nearshore destinations, especially those that are emerging, have a long way to go to match up to the specialized skill and scalability advantages of established offshore locations like India or Philippines (in IT, accounts and healthcare for example). Nevertheless, nearshore is an important aspect of an outsourcing provider’s strategy. Global companies like GM, P&G, Exxon, and IBM have set up large nearshore operations in Latin America. IT providers Convergys and TCS have established centers in Canada. ACS provides ITO and BPO services from a delivery centre in Jamaica.
Offshore continues to deliver
Traditionally, offshoring became popular with the emergence of ‘robust’ destinations. India, Philippines, Brazil, and Poland along with a few others are the first generation outsourcing nations. These destinations were characterized by low labor and operating costs and buyers benefited from the availability of skilled English speaking resources. While some traditional benefits such as low costs are eroding, Offshoring has continued since service providers have grown over the years to offer other benefits such as improved quality and turn around time, more resources, risk management, and technology-enhanced services. They have only added to their offerings and expertise and have managed to bring into focus nearshoring and onshoring. The benefits and challenges of offshoring have been discussed at length at every possible forum.
The multi shoring mix – Making the best of the both worlds
As the outsourcing market matures, more and more buyers are discovering that it is not enough to choose locations in one region exclusively, based on a single, possibly temporary benefit. Instead, success depends on building a comprehensive portfolio of onshore, offshore and nearshore operations. This strategy involves long term analysis and using a multishore engagement model. It is best suited to those buyers who want an optimal mix of price, quality and delivery (time). This strategy allows for a high degree of flexibility that blends in well with the business model of certain companies or even some industries. Take the airline industry for example. Rightsourcing allows for operations to be conducted from a cost effective offshore location, while a number of nearshore and onshore centers can be used as point of sales.
Sourcing from multiple shores is especially advantageous to those companies who have a global delivery model, e.g. airlines, global digital media companies. Yahoo, for example has embraced a clear multisourcing strategy. It has phased out its own online shopping services and outsourced to online shopping site PriceGrabber effective 2010. It also optimizes delivery through multiple shared service centers for different functions, such as in India and the Middle East. This model is characterized by retaining key functions onshore, allowing for best fit of global sourcing and delivery and optimizing technological solutions.
Capgemini uses a rightshoring (Rightshore®) approach that includes onshore, nearshore and offshore strategy to procure talent and deliver outsourcing services. Capgemini has had operations in Latin America for many years and its BPO segment in Chile, Argentina and Brazil has “taken off” in the last few years. Chile offers incentives and favorable business environment but the main benefit to Capgemini is through increased productivity rather than lower labor costs. Guatemala is key to Capgemini’s outsourcing operations in the region because labor is less expensive and more people speak English than in Chile. The varied benefits that these destinations offer have made it possible and imperative for companies such as Capgemini to have centers in various countries and regions. Latin America is the hub of Capgemini’s English language proficiency services, but it taps its talent pool based in India is to deliver key IT and accountancy services to its clients, making offshoring an important of its strategy.
Success lies in marrying strategy with execution
To make the most of their right sourcing strategies, companies need to achieve effective management of their organization. This includes clear vision or strategies to adapt to the change brought about by sourcing, effective management of vendors and the right sourced environment, and well thought through business plans for using and optimizing resources.
Some success factors that have helped companies in achieving this are:
- Strategic direction and financing
- Efficient hiring strategies
- Robust onsite and offshore presence
- Strong infrastructure and uniform organizational culture
- Global delivery model for IT execution
Multi-vendor environments and a mix of in-house services were once simply results of unplanned evolution in a business. Now, right-sourcing is a planned strategy which requires careful thought and implementation. Shared services, pro-active management of vendors and using best of breed solutions are all part of the mix and buyers need to think through both the overall outsourcing strategy and the proportion in which rightsourcing strategies and multiple engagements are used. Going forward, to stay competitive, buyers of outsourcing services will have to innovate and get their ‘outsourced’ mix right as well as employ a defined rightshoring strategy. Besides benefiting buyers, rightsourcing strategies also bode well for providers of outsourcing services.