Everest Research Institute. Everest tracks more than 50 cities across a variety of processes including IT, applications development and maintenance, finance and accounting, call centers and HR. Its framework includes an analysis of both the savings potential of a city and its maturity as a delivery destination.

The savings potential is determined by comparing the direct costs of a prospective location with that of the present location. Direct salaries compose half of the direct costs; the rest is absorbed by management and administration, real estate and telecommunications.

Maturity includes cultural compatibility, government support, infrastructure, labor supply, political stability and access to domestic markets. These factors should be weighted according to process and specific company needs.

Maturity captures the intrinsic capabilities, risks and current activity levels of a location, and is almost completely company-specific. It takes into account a city’s infrastructure and language skills, and the availability of graduates with required skills. The choice of city within a particular country will be closely tied to the business process under consideration. For back-office work, for example, Chennai, India is 15%–20% cheaper to operate in than Bangalore, and it also has a strong supply of graduates and managers.

Attractiveness of a location varies by process. For application development and maintenance, Tier 1 cities might be preferred given their proximity to leading technical schools, but for lower skilled back-office work, Tier 2–3 cities might win because of their lower costs. Wide variations can exist even within a single city. Shanghai, for example, is considerably more attractive for back-office work than call centers, while Prague and Toronto are more attractive for call centers than back-office, and Manila and Bangalore are equally attractive for both call centers and back-office.

EquaTerra/University of Michigan. EquaTerra in conjunction with the University of Michigan’s William Davidson Institute is developing a Location Attractiveness Index for global service delivery of business processes. The framework, which is currently aimed at identifying countries but can easily be extended down to the city level, looks at both the demand side (companies looking for countries in which to locate business processes) and supply side (countries looking to promote economic development). A business process is mapped along two dimensions: Industry and process area. A process, such as finance and accounting, can vary considerably across industries, hence a given location can be more attractive for a specific process across industries or specific processes within an industry.

The framework classifies process areas (call centers, accounting, HR, procurement, medical transcription, knowledge processes such as equity or market research, life science research and legal services) across three industries (financial services, pharmaceuticals and manufacturing).

The classification scheme reflects the need to better pinpoint locations as offshoring expands from broad processes such as IT and call centers to narrowly focused areas defined by company and industry. “As the scope of offshoring increases, there needs to be more detailed information to rank locations based on attractiveness for a specific business process,” says Ajay Sharma, Research Manager, William Davidson Institute.

ATTRACTIVENESS OF A LOCATION VARIES BY PROCESS. FOR APPLICATIONS DEVELOPMENT AND MAINTENANCE, TIER 1 CITIES MIGHT BE PREFERRED. WHEREAS, FOR LOWER SKILLED BACK-OFFICE WORK, TIER 2–3 CITIES WILL BE PREFERRED.

For each industry and process area, the framework gathers data on demand-side attributes from a variety of sources (companies, industry groups, consultants, suppliers, academics) and supply-side attributes from country databases, international organizations such as the World Bank, International Monetary Fund and the CIA Fact Book. Countries currently being tracked are Brazil, China, Czech Republic, India, Morocco, the Philippines and South Africa.

For each country, a Location Attractiveness Index is computed by matching demand-side attributes, weighted by importance to the company, with supply-side attributes through the use of a “ranking engine.”

Tholons. Advisory firm, Tholons’ City Competitive Analysis Framework uses a multiphase methodology for setting up delivery centers for global services. The methodology comprises multiple phases with defined tasks and outcomes: Plan, Identify, Analyze and Select.

During the Plan phase, companies seek to understand their strategic objectives and identify the processes to be serviced from the offshore location. Alternatives are discussed with stakeholders, and an execution plan is developed.

In the Identify phase, detailed research is undertaken to draw up a short-list of cities within the broad parameters defined in the Plan phase. A brief on each city is prepared for review and discussion.

In the Analyze phase, short-listed cities are analyzed by resource availability, business climate, location-specific risks, quality of life, infrastructure and costs. Factors are assigned weights based on the attributes identified in the Plan phase. The output of the Analyze phase is to rank cities on a City Competitiveness Index.

During the Analyze phase, detailed information is collected on six critical factors: Size and quality of workforce (numbers of graduates, quality of educational institutions, workforce at other companies’ locations, workforce mobility), business environment (government initiatives, taxes, unions, legal structures), economics (salary and benefit levels, cost of living, real estate, GDP growth), infrastructure (roads, hotel rooms, power, water supply, telecommunications), risk profile (crime, political stability, natural disasters) and quality of life (affordable housing, health care, schools).

In the Select phase, a detailed landscape is developed of top-ranked cities. Stakeholders are presented with a business case for each city, containing both strengths and weaknesses, and a final destination is selected.

Globalization 2.0

As the types of work being delivered from offshore locations increases, so does the challenge of finding the right location. This next wave of services globalization is challenging companies, governments and service providers to come up with new paradigms for outsourcing. To compete in this new environment, service providers are building delivery centers in multiple regions to make service delivery more customer-focused. Governments are focusing on promoting their countries as offshore destinations by investing in infrastructure and creating economic incentives, and companies are becoming more educated consumers by expanding their knowledge of service-delivery models and geographies. Locations that meet requirements for resource availability, quality, operational flexibility and economics stand to become preferred destinations. “In choosing a city, companies need to focus less on low wages and more on other ways that candidate cities can fulfill their business needs,” says McKinsey’s Farrell.

The first wave of cities in the offshoring boom, including Indian cities such as Bangalore, Delhi, Mumbai, Hyderabad, as well as destinations in Russia and Eastern Europe, are beginning to hit the wall in terms of skilled labor and infrastructure, to the point that other cities and countries must now be factored into the mix. The good news for buyers of services is that there exists a huge and growing pool of low-wage talent waiting to be tapped. Some of them are in lesser-known cities of established offshore countries, such as Zlin in the Czech Republic and Ahmedabad in India. Others are in countries just beginning to emerge as offshore destinations, such as Bulgaria, Chile, Morocco and South Africa.

By gathering data and analyzing critical factors such as cost, skills availability and environment, a company will be in a better position to narrow the field of candidates from dozens to two or three, and then select the city that will best meet its needs. No other global sourcing decision is more vital to the success of a services strategy, than choosing the right destination.