Integreon

Outsourcing: Thriving at Home and Abroad (Business Week, 4 May 2009) reports that outsourcing is thriving in the current economy. “Companies looking to cut expenses in the face of soft demand are keener than ever to hand off parts of their operations to lower-cost providers.” That is old news; what’s new is the locations those companies are selecting. Political considerations, internal and external customer perception, availability of talent, currency exchange rates, disaster planning, shrinking cost differentials between domestic and offshore locations, relative inflation rates, now drive companies to consider smaller domestic US cities such as Indianapolis and Boise. The drivers have consistently been, as the article touches on, increasingly sophisticated customers taking “a more nuanced approach” to their operations and sourcing strategy. Core processes are kept captive and non-core processes are outsourced (the so called “hybrid captive/outsourced approach”); some non-core processes are outsourced to multiple providers to mitigate risk (the so called “multi-sourcing approach”); and some processes are sourced offshore while others are sourced onshore (the so called “right-shoring approach”).

Obama’s Plan on Corporate Taxes Unnerves the Indian Outsourcing Industry (New York Times, 6 May 2009) reports on how the Obama Administration’s proposal to tax offshore profits is causing consternation in India. The article suggests the impact of the proposals may not be that great, though they are not yet fully understood. As we read the tax proposal, to the extent it has an impact, it would impact the profits of companies operating offshore captives so it might actually drive demand for third party providers of offshore services such as Integreon. What really caught my attention, though, was the speed at which this tax proposal appeared and at which it has the potential to change the sourcing location landscape - much faster than company operations planners can respond.

The lesson we draw from both articles supports the strategy we have long followed; namely, be flexible about location and have a choice of countries and continents. Companies should select location based on factors such as culture, time zones, cost, business continuity, exchange rates, relative inflation rates, skill availability, turnover, and taxes. Because these factors change over time, sometimes quite rapidly, companies must retain flexibility. For example, the Indian Rupee has had dramatic swings in value versus the US Dollar. And, as the Business Week article points out, the economic downturn has suddenly shrunk the cost arbitrage advantage of India over the US (though it is still large).

For these reasons, we now operate delivery centers in India, the Philippines, US, and UK, with more locations likely in the future. We are not dogmatic about the “best” location.

For onshore locations, we have long been enthusiastic about the types of cities Business Week describes. In 2007, we acquired an existing outsourcing business in Fargo, ND.  The location in Fargo was a big factor in our acquisition decision - we recognized that we could hire, and more importantly, retain long-term highly skilled workers there at costs significantly lower than in major US cities.

We have also just opened a delivery center in Bristol, UK.   While Bristol is a major city, costs there are up to 30% lower than in London, so it reflects the same thinking - find the right onshore locations that offer a good mix of skill, cost, and cultural compatability.

To drive home the point that location decisions depend on many factors, consider electronic discovery services.  For our EDD business, we employ specialized employees, operate server farms, and need to take quick delivery of digital media.  For these reasons, we operate delivery centers in “high cost” domestic cities such as New York City and Washington DC.

Global supply chain economics are complex and change rapidly. We encourage those considering outsourcing to think carefully about the right destination(s) for their work and to select a service partner that offers a range of choices, with the location flexibility to accommodate your needs as the evolve. We believe that optimized value chains will operate the right processes, in the right places, with the right people, using the right technology. Each value chain will differ - one size definitely does not fit all.