Labor pool is often quoted in location-evaluation discussions, but the overall number of graduates is not a sufficient indicator. For an F&A process, for example, the number of graduates is not as important as the availability of accounting skills is.

Some infrastructure-related questions that you will need to ask are: How often does the electricity go out? Are the voice connections reliable? Do the Internet connections move at mach-speed?

Language is important. Do the workers need to speak English, German or Japanese? While India is often the first choice for English-language work, locations like Dalian in China may be the best bet to find Japanese-Language skills.

Cultural fit can be important for work involving interactions with your customers. Manila, Philippines may be a good choice for U.S.-centric work because of its close cultural ties with the U.S.A. Some EU companies feel more comfortable outsourcing to other EU members because of regulatory and cultural issues. This makes Ireland and eastern European nations prime candidates for them.

Moreover, business considerations can swing the decision towards a location. For instance, many companies want to gain a foothold in the key growth market of China, and opening an offshore captive there can sometimes reinforce their commitment to the market.

There are Significant Differences between Cities In a Country

Most location comparisons reported in business literature are conducted at a country level. However, there are significant differences in attractiveness of cities within a given country.

In an analysis conducted for a recent F&A engagement, Everest Group found the Indian cities of Chennai and Kochi more attractive than the established Indian BPO destinations of Bangalore and Delhi (Exhibit 2).

For a customer looking at an F&A center, Everest Group found that given the relatively lower attrition rates and wage rates in Chennai, operating an F&A center there was 15%–20% cheaper than in Bangalore. Moreover, Chennai, a large metro city in South India, has a strong pool of graduates and trained managers. In this case, the processes under consideration were low complexity and, hence, the customer decided to go ahead with Chennai as the final location.

The lesson is to compare at the city, not country level.

The Answer Varies by Process

Companies that have successfully offshored their Applications Development and Maintenance (ADM) work may assume they can simply add a BPO function to their current supplier or to a supplier at their current location. That, however, may not be the right solution.

A customer who needs an ERP application developed, needs the brightest and the best to work on its project. Cost savings are important, but the quality of the work is primary. This customer may even be willing to pay a premium for the work. He needs to go to a city with a highly skilled workforce. So a Tier 1 city would be a good choice.

On the other hand, a customer needing to outsource an F&A function has different needs. Processing transactions don’t necessarily require upgraded skills. Instead, it needs a stable environment. As cost savings are usually the number one consideration, Tier 2 or Tier 3 cities tend to work out better.

Exhibit 3 depicts the attractiveness of five key cities for both F&A and call-center processes. As shown in the exhibit, a location’s attractiveness can change based on the process offshored. In this situation, Toronto, Prague and Shanghai exhibit significant variation along cost and maturity. Manila and Bangalore offer the best combination of cost and maturity for both call center and F&A processes.

Location comparison, hence, needs to be process-specific — there is no generic “right answer.”

Cost Positions are Not Static

Business executives often worry about the sustainability of their offshore savings. Many low-cost countries utilized by global companies as offshore locations are rapidly growing economies, and have high inflation rates. Further, some cities such as Bangalore, India and Prague, Czech Republic are becoming hotbeds of BPO activity. The local market change and the growth of BPO sector are driving wage rates and related costs up, rapidly.

A November 2005 Asia-Pacific salary study by Hewitt found that “many employers are reporting pay increases in 2005, and this trend looks likely to continue in 2006.” The Hewitt study found that India reported the highest average salary increase of 13.9%. The Indian BPO industry received the highest increase across all five groups surveyed, at 17.9% . The study also found that the Philippines recorded an average overall salary increase of 8.2%. China followed on its heels with a gain of 8.1%.

In addition to differential salary increases, other cost factors also change with time. Most important, exchange rates are a key determinant to the potential savings that a customer can leverage. Customers, therefore, need to consider how the attractiveness of different locations will change over time along both cost and maturity dimensions. While no one has a crystal ball, customers need to take a stab at predicting what will happen five or 10 years later, to be able to make a wise decision about where to land now.

Approach to Making a Location Decision

The Everest Research Institute uses a cost-maturity framework to support its location decisions (See box on pg. 54). The key to the success of this framework, or to the success of any similar framework, lies in the comprehensiveness of the approach. Additionally, to be successful the analysis should: