Global Workforce Report on Emerging Markets The Backshoring Myth
Despite media hype about the recession driving jobs back to the U.S., the business case for outsourcing to the emerging markets remains overwhelming.
Offshore outsourcing growth slowed briefly during the recession but came roaring back in the second quarter of 2009, with every indicator pointing to heady growth rates ahead.
Real earnings in the U.S. have plunged 2 percent over the past year, but that has not altered the fundamental cost equation that drives offshore outsourcing to emerging-market locations. Sitel, a Nashville, Tennessee-based global business process outsourcing provider, reports double-digit growth in the work it handles in the Philippines, where its contact center clients see cost savings of 40 percent or more compared with work done in the United States.
“The talk about backshoring is a lot of rhetoric,” says Andrew Kokes, Sitel’s vice president for the Americas. Sitel opened a new contact center in Pasig City in June, its sixth location in the Philippines. The company employs 60,000 workers in 27 countries, including 11,000 in the Philippines, 4,000 in India and 9,000—including many bilingual agents—in six Latin American nations.
Sitel’s Latin American contact centers offer cost savings of 30 percent or more over U.S. contact centers. In 2008, Sitel opened two centers in Nicaragua, where its 1,400 agents have university degrees and 75 percent have lived in the United States.
Across all of its emerging-market locations, the company can staff its contact centers with college graduates who view their jobs as career opportunities and not temporary positions. Attrition in the company’s emerging-market locations is equal to or lower than attrition at its U.S. centers.
Rumors about backshoring find support in reports that wage inflation in the emerging markets and wage deflation in the U.S. have upended the labor cost equation that supports offshoring. But sophisticated outsourcing providers have successfully offset wage inflation by raising the skill levels of the offshore workforce and achieving cost efficiencies in workforce management. Arbitrage is intact.The wage equation
Neo Advisory reports that India’s market share for English-language contact center outsourcing is 35 percent, followed by the Philippines at 17 percent and Latin America at 10 percent. Latin America is the fastest-growing region in the world for call centers, according to Datamonitor. Sitel established centers in Colombia more than a decade ago and then expanded to Brazil, Panama, Mexico, Chile and Nicaragua.
Wage inflation in most Latin American nations is running 4 to 6 percent, but with contact center base pay averaging $4 to $6 per hour, providers can still offer substantial cost savings for their U.S. clients. Comparable contact center base pay in U.S. Tier II cities, such as San Antonio, and among home-based agents ranges from $10 to $12 per hour. Sitel and other offshore providers can maintain cost efficiencies with modifications in workforce deployment.
“In the U.S., if a client is billed $27 an hour for contact center work, two-thirds of that is direct labor costs, including supervisory and agent labor, and one-third is facilities and technology costs,” Kokes explains. “Offshore, that’s flipped. One-third of the total cost is labor, but we face higher fees for facilities, telecom and networks. The way to drive savings offshore is to get better value from the facility, which means improving seat utilization, or the number of shifts you can run.”
Sitel closely monitors the gap between wages in the emerging markets and the United States.
“We’ve modeled this, and under steady-state conditions, it will take decades to reach parity,” Kokes says. “You can plan for wage inflation, and it’s still more cost-effective to take wage inflation in the offshore market. Wage inflation is uncontrollable, but I would rather pay 10 percent wage inflation on wages of $4 to $5 per hour offshore than 3 percent wage inflation on wages of $10 to $12 per hour in the U.S.”
The percentage of U.S. corporate back-office jobs outsourced to offshore locations will rise to 25 percent in 2010 for the IT function, up from 15 percent in 2008, according to the Hackett Group. For finance positions, the percentage outsourced offshore will hit 22 percent in 2010, up from 11 percent in 2008, and for human resources and procurement, the percentage will hit 15 percent in 2010, up from 10 percent in 2008.
Hackett’s research indicates that U.S. companies are increasingly pursuing the cost savings available from offshoring jobs to the emerging markets.
“The numbers are still very compelling,” says Michel Janssen, Hackett’s chief research officer. “Arbitrage still has a long way to go. Wage inflation has cooled in India recently, and suppliers are moving up the value chain. “The real wild card is not offshore wage costs or currency fluctuations, but real U.S. wages at the entry level,” Janssen says. “Once offshore costs hit 70 cents on the dollar, companies may begin to rethink offshoring. Right now, offshore costs average 35 cents on the dollar, so there’s still another 35 cents to go. Arbitrage will be there, so it’s more a question of the types of work and the skills match.”
In India, where wage inflation is approaching 10 percent, providers are offsetting higher labor costs by globalizing their platforms to match services and skills.
“They are taking a portfolio approach that is absolutely successful,” Janssen says.
When the recent appreciation of the rupee and higher wages threatened to put Indian providers in a less competitive position, the more sophisticated providers made critical improvements to offset the impact of wage increases in their pricing for clients, according to Gartner research.
McKinsey’s October 2009 report on offshore outsourcing notes that a new group of Indian IT service providers is developing broader and deeper pools of talent and using progressive techniques to manage and retain these workers. These companies have the highest rankings for overall client satisfaction. Despite reports that rampant turnover threatens performance at outsourcing firms in India, Sitel’s attrition rate there is comparable to its U.S. rates, and clients achieve cost savings of 40 percent or more by outsourcing to India.Shifting geographies
A useful tool for tracking the relative standing of labor costs and talent pools is A.T. Kearney’s Global Services Location Index, which ranks the most attractive destinations for business process outsourcing, including IT services and contact centers. The index ranks the top 50 countries worldwide based on a weighted combination of 43 measurements grouped into three categories: financial attractiveness, people and skills availability, and business environment.
“Eighty percent of the financial attractiveness score is based on labor costs,” notes Johan Gott, project manager for the index.
In the 2009 index, India, China and Malaysia retained the top three spots they have occupied since the inaugural index in 2004. The U.S., which is evaluated on the basis of Tier II cities, rose to No. 14 on the list, largely because of the declining dollar.
“The only event that could push the United States up to a top position would be the total collapse of the dollar,” Gott notes. “The recession has not changed the business case for offshore outsourcing to emerging markets, but the labor supply and costs are shifting between regions and new competitors are emerging.”
A fundamental shift in the index has taken place as once-strong Central European countries yielded ground to countries in Asia, the Middle East and North Africa. Egypt, Jordan and Vietnam all moved into the top 10 for the first time in 2009.
“The Czech Republic, Poland and Hungary have not been able to increase quality, but their costs increased, and that’s why they slipped in the index,” Gott says. “Companies that would have considered Central and Eastern Europe are now looking at the Middle East and North Africa, which are close to Europe and investing in skills. The investment in human capital is absolutely the most important factor in improving competitiveness in the offshore market.”
The report shows Egypt moved up to sixth in the 2009 rankings. “Egypt is like India was 10 or 15 year ago, with many of the same attributes—a large labor pool, the same emphasis on education, low costs and underemployment among engineers,” Gott notes.
Ghana also jumped in the rankings.
“Ghana is a story of high potential not yet fully realized,” Gott says. “It is very stable, with low costs, low wage inflation, a lot of underemployment and an education system that turns out lower-end BPO workers.” At Sitel, Kokes believes that offshoring may prevail even if emerging-market costs pass the 70-percent-of-parity threshold that Hackett cites.
“It’s a perception issue,” Kokes says. “If the mind-set remains the same, with the perception that there is some sort of sacrifice involved in offshoring, the 70 percent number could be right. But if BPO goes the way of manufacturing and offshoring becomes the norm, the threshold will be much higher.”
Deep political and economic changes in the past year have prompted U.S. companies to re-examine their domestic and offshore strategies, Kokes says, but the significant cost savings offered by offshoring remain indisputable.
“Companies have been trying to look at their domestic strategy, but the huge reality of the offshore advantage keeps staring back at them,” he notes.
Workforce Management, December 14, 2009, p. 25-28 -- Subscribe Now!