Examining a “before” and “after” of how global companies take decisions about the location from where to source IT and BPO services shows the evolution and maturity of the global sourcing market. Following three perceptible changes can be noticed.

One, before companies talked in terms of countries (“should we source application-development services from India or China”), now they discuss cities (“should we source from Bangalore or Shanghai”).

Two, before they discussed generic availability of talent (“how many students does Manila graduate each year”), now they analyze skill sets specific to the function they want to outsource (“how many U.S. GAAP-trained accountants are there in Manila”).

Three, before they considered only the large, established centers for sourcing (“we have a delivery center in Bangalore”), now they are actively talking about — and getting work done from — tier-2 cities (“we have delivery centers in Bangalore and Coimbatore”). 

As cost advantages of outsourcing operational processes become a given, the challenge in today’s services sourcing landscape is to identify destinations that may be able to provide an equal (if not greater) level of cost effectiveness and operational efficiency than previous or existing locations. As such, the focus for many of the larger and best-of-breed providers has been to scale, expand and distribute their outsourced processes across multiple cities within a country. For example, companies need to identify calculated benefits of expanding to Cebu City in the Philippines, as opposed to simply expanding their already established operations in Manila NCR.

City, Not Country
This one is a no-brainer. Comparing the availability of skills and the cost saving to be had in say Mexico versus Brazil remains superficial. In Mexico alone, costs may vary between Mexico City, Monterrey and Juarez. And so would skills —  while one city may graduate more engineers, another may have more accountants.

Clearly, no two cities of a country would be at the same level of skills maturity or offer the same cost advantage, and deciding whether to source services from one over the other is just a first necessary step. Companies need to spend time delving deeper into the attractiveness of cities. They must consider various elements of cost and not just salaries and the specific skill sets that each city has (See box Cost Matters).

Discussion on countries is important for macro issues, such as political risk, exchange-rate fluctuation and wage inflation, which determine the sustainability of savings.

Functional Capabilities 
Any decision on which city to choose for outsourcing must be specific to the process that the customer company needs to source services for. Simply calculating the number of graduates a particular city has will not help a customer wanting to outsource Finance and Accounting (F&A) processes; the customer will need to know the number of trained accountants the city has. In China, for instance, Shanghai may be better suited for F&A Outsourcing (FAO) than for contact centers.

Moreover, companies will feel confident of outsourcing high-end work such as engineering services, R&D, or ERP implementations to a larger, established city, while for work like application development or HR processes, they may be fine to source from a less experienced city.

Discussions on cities can be further refined by analyzing them as centers of excellence specific to particular IT and/or BPO processes. Companies need to graduate to referring to Hyderabad and Chennai as prime locations for FAO and automotive engineering services respectively, Cebu City as a strong information systems outsourcing location and Buenos Aires as a viable Spanish-based contact-center site.