Deciding on the geographic destination for any outsourcing project could be both the most critical and most difficult decision in the whole project. If your decision to outsource in the first place has been almost solely based on cost reduction considerations, then your location destination decision is likely to be also almost entirely influenced by pricing issues – but this could result in you making a series of costly and almost irreparable mistakes. The damage you do through wrongly identifying the most appropriate location might far outweigh any benefits accruing from the transition.
Therefore, it is imperative that you balance other considerations against a simple price-to-price comparison. The following issues should be weighed against any simple cost comparisons:
- Geopolitical risk factors: How stable is the country you are looking at transitioning into? This analysis should look beyond mere potential political instability and its potential impact and consider such critical issues as infrastructure capacity, quality of education and healthcare and the possibility of future political sanctions.
- Tax incentives: Many governments offer generous tax breaks for overseas entities to set up operations in specific locations within their country. Be very careful about being seduced by these types of incentives. Incentives are rarely given in areas which offer the best solution to your needs. Look at why tax breaks are being given – it’s usually because local businesses don’t want to be there.
- Access to talent: This is obviously critical but not always easy to quantify. A large pool of available labour does not necessarily equate to a large pool of suitably qualified employees. The more your peers move into a particular country, the tighter the access to talent might become. Following your competitors or clients could create more problems than it solves.
- Time zones: Do not underestimate the difficulties that can be created by working across multiple time zones. The obvious problem is that somebody needs to be working at an inconvenient time for them. This can cause major motivational and attrition-based problems over time. Not many good quality employees want to spend their entire working life being inconvenienced.
- Cultural factors: When you outsource to a new country you take on the complexities of working cross-culturally. This very often results in inefficiencies and misunderstandings. You cannot expect the outsourced team to understand the home teams approach and business expectations through osmosis (and vice versa.) If you chose to outsource to a completely different part of the world with a completely different culture you have to address these cultural issues through training and secondments.
- Currency issues: How stable has the currency of the outsource destination country been over the past decade or so? Currency volatility can be a boon when it swings your way but can completely destroy any cost arbitrage if it goes the wrong way. You can of course hedge but do you really want to take the risk with a critical element of your corporate infrastructure?
- Legal issues: This is obviously a major consideration and becomes increasingly so as compliance and risk policies become ever tighter in the home country. Outsourcing usually involves high volumes of data transfer and data protection is currently at the top of the list of priorities for most countries.
This list is not exhaustive but gives a flavour of the type of considerations you need to factor into any outsourcing location decision. Look way beyond comparative pricing calculations – it just isn’t that simple.
We would love to have the opportunity to discuss these issues in far greater detail.
Latest version updated 16th November 2017