Change has been the best descriptive word for the outsourcing industry in 2009, and this year, Tholons has encompassed the world’s Top 100 Outsourcing cities - twice the number of previous Lists. The expansion of the list has created an avenue for a more concise understanding of industry movements – across 49 countries from 10 defined regions.

Economic Crisis: Boon or Bane?

Industry experts noted that the outsourcing activities from 2009 to this year have become sluggish. Countries tried their best to prove resiliency in the crisis and opted for strategies that could mitigate the effects. Indeed, some of the countries that had been resilient experienced smaller GDP growth, below expected growth targets; on the other hand, countries which were greatly affected by the global recession posted negative growth, which often deterred their development as service delivery locations.

Likewise, the repercussions of the global economic crisis postponed many large outsourcing deals across geographies, while forcing service buyers and providers alike to stretch operational budgets.  The mantra of ‘doing more for less’ was never more relevant to the service providers as it was this past year. The effects of the downturn also spurred apprehension among clients in renewing outsourcing contracts.  This cautionary stance was felt by most if not all horizontal and vertical segments of the industry.

On a positive note, many have viewed these challenges as opportunities, treating the economic downturn simply as a transitionary (or even evolutionary) phase for the industry. There is now a greater call for delivering complex services than maintaining cost advantages, which leads to a more widespread transformation of outsourcing models to fit the requirements of an ever-changing buyer market. Further, there is a stronger focus on business transformations among service providers, which will foster enhanced customer satisfaction. In the end, stronger buyer-provider relationship will be seen.

The 2010 List of Top 100 Outsourcing Cities is a deliberate attempt to encapsulate such trends in this new era of services globalization. Thus, the  List is not only a reflection of the current competitiveness (and stature) of cities in the global outsourcing landscape, it provides insight to the future potential of locations in addressing emerging trends and demands in services globalization. 

Methodology and Scope of Study

The report is the result of a combination of proven methodologies. First, Tholons conducted surveys and interviews with Tier I & II service providers and buyers to determine trends in delivery and consumption of outsourced services in specific destinations as well as market and labor sizes, identify the expansion strategies of Tier I & II service providers. Further, secondary research was done in support of primary means. Country economic information were gathered from historical data from governments, trade bodies, and global institutions, while government publicly released data were used to present country macroeconomic data, while market assumptions and analyses were grounded by data such as annual reports, industry bulletins, and trade publications. In generating the rankings in the report, a combination of qualitative and quantitative analyses was employed, developed and refined by senior consultants, taking into account numerous variables in providing the rankings and evaluating the impact of non-numerical data on the assessment of outsourcing locations.

Tholons has introduced the concept of Point of Scale Resistance (POSR) in analyzing service delivery locations, which assists in identifying what a location can/cannot or should not do, in terms of  service delivery capabilities.

Location Assessment Framework

The recent events in the global economy certainly highlighted the importance of more accurately assessing a location and the corresponding outsourced services that can be potentially delivered. The Tholons Location Assessment Framework covers six broad categories with fifteen subcategories, with each category and subcategory having their own respective weight:

The combination of these parameters results in a specific correlation of the cities to their respective service niche. For example, considerations in the workforce extend from scalability to employability of workforce. Cities with an abundance of Spanish-proficient speakers will have a greater value proposition for catering voice-based BPO services to the US Hispanic market. Likewise, cities with high percentage of engineering graduates may be better equipped to venture into the ESO space.

Cost still plays a significant factor in locating. Coupled with the capacity to deliver specialized services, low cost cities can have a definitive advantage in attracting investors or service providers. Along with this, developed and supportive ITeS infrastructure is needed in order to fulfill the requirements of the industry. In order to support the growing ITeS industry, Kuala Lumpur for example, has shown concerted effort in improving infrastructure, which contributes to its overall attractiveness as an outsourcing destination.

Factors such as Risk Profile and the Quality of Life in the cities are also included to assess the viability of the location. Political violence and social unrest may greatly affect the conduciveness of business operations in the city. One recent example is the increasing crime rate in Mexico, which has definitively affected the decisions of service providers in locating and expanding in the country.

The Framework also considers various regional dynamics which also have a direct influence on the positioning of the cities in the global outsourcing space. Latin America is reputed for its nearshore advantages to the US; on the other hand Eastern Europe is known for its cultural affinity and geographic proximity to the Western European client market.

City Movements: Losers and Gainers

The top gainers this year were mostly Tier I destinations – Colombo, Kuala Lumpur, Singapore, Brasilia, and Montevideo. A clear factor for the movement is attributed to the global effects of the economic crisis. With most economies recovering and rebuilding their competencies, service providers have been more keen on strategically placing their investments in (safer) Tier I cities and in locations with established service delivery capabilities. For instance, the city of Colombo moved up 5 places this year, in recognition of its capabilities in FAO, producing accountants that meet UK standards and the significant improvement in perceived risk in the country by the client nations. The city of Kuala Lumpur moved up 4 places highlighting the city’s robust and continuously developing infrastructure and maturity of service delivery capabilities for high-value ITO and FAO.

On the other hand, the major drops were seen in Tier II locations: Nizhny Novgorod, Thiruvananthapuram, Cordoba, Chandigarh, Belfast, Accra, and Jaipur. One possible reason is the inability of Tier II locations to improve on service delivery maturity, in relation to its Tier I competitors in their respective countries. The two-odd factors can be attributed to this: quality of scalable labor pool and infrastructure concerns.

Many Tier II locations likewise have struggled to develop labor pools, or to at least reach the same labor pool quality of Tier I locations. Many have also experienced labor migrations of their highly-skilled resources, and as induced by rising unemployment rates. Challenges pertaining to employability have also been an occurring problem in many Tier II cities – especially when considering English proficiency and technical skills. For example, the city of Jaipur in India has lost some of its appeal as a destination of choice due to the perception of low employability of its technical and managerial talent pool. In contrast, and in St. Petersburg in Russia, the high technical graduate output is one of the major contributing factors which moved its ranking up, albeit having high labor costs.

Weak infrastructure support also remains a deterrent for service providers wanting to locate in Tier II cities. For instance, India’s ITeS-related infrastructure is nearing peak capacities, which makes it less efficient in fulfilling the requirements of the industry. This is noticeable among Tier-I locations in India and is further observed among Tier II locations.

The downturn has proven the importance of location assessment for investigating the service delivery maturities of outsourcing destinations. Factors for locating may not entirely rest on the cost advantages but on the quality and complexity of services being delivered. Service providers have been keen in evaluating the best-fit city which will deliver their processes.

Thus, the challenge now lies for the emerging countries to increase their overall competitiveness to gain traction in the outsourcing landscape. This will require more effective and creative initiatives that will better position  countries in the market and highlight their inherent service delivery advantages.

City-centric Approach – The Continuation of the Paradigm Shift

City-level analysis has always been the best approach in identifying corresponding service delivery strengths. As compared to country-wide analysis, a city-centric approach allows a more granular investigation of the inherent capabilities of and the opportunities for each potential city.

City-centric assessments also receive greater traction from large service providers, as cities can better decouple themselves from the broad or oftentimes ‘generic proposition’ of the country. Cebu City for example has high potential to become a global KPO player but the city’s image is often overshadowed by the Philippines’ voice-based BPO reputation.

For Tier II cities, decoupling will become an increasingly necessary process, especially among emerging cities with very specific skill set propositions. Decoupling from the country image will entail an efficient highlighting of the local value propositions and a more focused marketing and promotions strategy.

The underlying premise for decoupling still lies on the coordination among key stakeholders in the particular location.  More responsive decision and implementation will be required as the city-centric approach is significantly smaller compared to country-level approach. Successful concerted effort will also be a crucial factor in identifying and building the outsourcing industry in the city.

The revamp of the global economy marks the emergence of key trends in outsourcing – a paradigm shift encompassing the types of services and the geographies of ideal locations. In the near-term, we should experience a more granular approach to location assessment - focusing on cities rather than countries and as a city-centric approach fosters better identification of specific niche services.

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