Four Frameworks

Global Services surveyed the consulting and academic landscape to assess different approaches to choosing global service delivery destinations. We chose four frameworks for selecting the right outsourcing/offshoring location, created by McKinsey Global Institute, Everest Research Institute, EquaTerra in conjunction with the University of Michigan and Tholons. There are undoubtedly others, but these should serve to lay out the basic principles.

Note that these frameworks can be costly to implement. Companies will need to assemble a site-selection team, spend time researching and visiting sites and possibly hire a consulting firm. Although the frameworks presented here differ slightly, they have as a common vision, a need for understanding the industry and business processes under consideration and for matching the available labor of a location to the company’s needs.

McKinsey Global Institute. Think of this as a kind of intellectual cookbook. First, draw up a long list of possible locations, taking into account high-level reasons for going offshore (e.g., cost reduction, new sources of revenue, access to pools of talent) as well as reasons against moving offshore (time-zone differences, political instability). The goal is to come up with a list of about eight candidate cities in three to five countries.

GLOBAL SERVICES HAS CHOSEN FOUR FRAMEWORKS FOR SELECTING THE RIGHT OUTSOURCING/OFFSHORING LOCATION, CREATED BY MCKINSEY GLOBAL INSTITUTE, EVEREST RESEARCH INSTITUTE, THOLONS AND EQUATERRA IN CONJUNCTION WITH THE UNIVERSITY OF MICHIGAN.

MCKINSEY RECOMMENDS DRAWING UP A LONG LIST OF POSSIBLE LOCATIONS, TAKING INTO ACCOUNT HIGH-LEVEL REASONS FOR GOING OFFSHORE AS WELL AS REASONS AGAINST MOVING OFFSHORE.

Next, define the decision criteria. Companies typically use six key factors to describe their ideal offshore location: Overall operating costs, availability of skills, access to overseas markets, risk of doing business, business and living conditions and infrastructure. Each of these is broken down into components. For example, a city’s infrastructure includes telecommunications and power and quality of roads and railways.

Then consider the collection of data on each potential location. Some data, such as labor costs for the skills the company requires, will be quantitative, while others, such as perception of risk, will be qualitative. In assessing risk, companies should look in published information sources, such as the Economist Intelligence Unit’s industrial relations rating, the World Competitiveness Yearbook’s personal security and private property index, and the United Nations’ Disaster Risk Index table.

Some data, such as the size of the domestic market, will be constant throughout a country, but others will vary across cities, such as local cost of labor, telecommunications, power, real estate and taxes. Each city should be given a score on, say, a one to five scale, for each factor.

After rating the potential cities, a company should focus on its internal requirements, assigning weights to all criteria so that the final score reflects their relative importance. A European bank keen on entering new, larger markets might assign its highest weightings to the potential size of the domestic market, while a U.S. financial institution looking for a location for a captive IT center might assign higher weightings to cost, infrastructure and security.

The next step is to multiply the scores by their weightings and average the weighted scores to arrive at an overall score for each location. The site-selection team then identifies the two or three cities that may qualify as the best location.

The final test for the short-listed cities is whether the local talent supply is sustainable. Companies must estimate future supply and demand for young professionals and middle managers. Using data from local colleges and HR executives who know the city, companies can estimate how many people will graduate from high schools over the next five years with the required skills, what fraction are likely to fit into a multinational environment, and whether it can fill gaps with graduates from other cities in the country. Plans of other companies to build or extend offshore centers will provide a glimpse into future demand. Examining recent movements in wage levels and turnover will show whether the local labor supply is already tight. Armed with this information, companies can make informed decisions about how long current wage levels are likely to remain constant.