Off-shoring – more than a real estate decision

In an effort to drive down costs in recent years, businesses have climbed onto the outsourcing treadmill – until there was very little left. But company captains seek­ing to achieve competitive advantage, want more. The next step in attempting to dramat­ically reduce costs is off-shoring.

Off-shoring can best be described as the relocating of business functions – be these manufacturing, administrative processes or support services – to another country loca­tion for cost advantage. Most recently, off-shoring trends have been call-centres (now called contact centres), back-office process­ing, as well as research and development functions.

The financial logic in off-shoring is the same as the economic principles of the di­vision of labour. If workers use their skills more cost-effectively than others, and are supported by cheaper infrastructure, then there is comparative advantage by providing goods and services at a lower cost. However, the decision-making process to support this financial logic can be extremely complex and is driven by far greater forces than the availability of cheap labour, real estate and support services.

Business cases for off-shoring current op­erations, as with outsourcing to a third party, are usually a trade-off between eliminating non-strategic core skills and recurrent cost savings. But there is a fundamental differ­ence between outsourcing and off-shoring. The reasons to off-shore include reducing the cost of current operations while maintaining the skills and knowledge in the company. In contrast, the reasons to outsource include reducing the cost of current operations and to manage them through a third party con­tract based on service level agreements. In this case, all skills and knowledge are lost to the company. To add to the confusion, it is possible to outsource to an off-shore service provider!

In off-shoring decisions, it is essential that the three primary service groupings of corporate infrastructure – human resourc­es, real estate and information technology – work together.

The business assessment is usually based on three categories of decision-making cri­teria:

• The overall business infrastructure and environment within the country frame­work
• The availability of appropriate people and skills
• The financial and cost analysis.

Each of these categories has a range of sub-sections that form the basis of the deci­sion criteria.

Country and business environment

Start by considering the bigger picture. The country environment and related risks are the macro-environment for business. This includes the political regime, the strength of the currency (usually indicated by foreign direct investment), the extent of bureaucracy and the entrenched government support. Lack of transparency and undue bureaucra­cy can be a significant business hurdle, often not fully costed.

The legal frameworks covering real es­tate tenure, intellectual property protection (and levels of software piracy), labour laws and simply how the courts work, indicates whether or not this location will work. Not understanding legal requirements and limi­tations will lead to future costs by imped­ing fast set-up through the loss of revenue or cost reductions being postponed.

The extent and maturity of infrastructure is paramount. Reliable and good quality electricity and basic support infrastructure cannot be assumed. Off-shoring usually de­mands excellent information technology and communications support. Internet access, data networks, telephone lines including cost structures, quality and reliability as well as redundancy options need to be assessed. Particular consideration of advanced equip­ment used, supply timeframe and support stock, availability of suitably skilled support from vendors and the presence of interna­tional service providers, cannot be ignored. The local technology industry maturity is therefore critical in the decision-making.

Part of the country environment assess­ment is all about the cultural adaptability of the workforce at all levels, including man­agement. This includes the ability of the workforce to assimilate different cultures and affinities, including personal interaction capabilities. Think of the call-centre opera­tives – and your customers’ response to be­ing serviced remotely.

This whole assessment translates into the general context of the overall business environment and its maturity. Can business be reasonably conducted within the location selected?

People and skills available

Availability of a skilled labour force is ar­guably the most critical component of the off-shore decision. Without the proper work­force at the right price, why bother?

Issues to be researched include total workforce characteristics, skills and experi­ence, trained and university-educated work­force, local education standards, quality ranking of management and IT training. Un­employment rates for local skills can be used as a barometer. Requisite language skills are a key consideration. Human resource management is also critical in the decision process to ensure that labour laws and other bureaucratic issues are reviewed before at­tempting to hire locally.

Available talent assessments should in­clude future skills needs as well as manage­rial talent. Expatriate management is usually required in setting up as well. Proper expatri­ate processes must be in place to keep man­agement engaged in the business despite the challenges of living, albeit temporarily, in a different country. English speaking loca­tions have an obvious advantage as there are distinct human resource and business envi­ronment advantages. Concern for employee safety, both local and expatriate, is also an issue to be considered and will impact the off-shoring decision.

Financial and cost analysis and advantages

The largest component of cost advantage usually relates to salary, wages and entitle­ments. Ensure accurate workforce planning is completed during the decision-making stage and prior to implementation so that total costs are properly forecast. The future must not be ignored – costs should include potential employee attrition and turnover costs for the life-cycle of the business in­vestment.

Infrastructure costs are a key component of the financial analysis. Analysis ought to cover the full range of costs including real estate rental, occupancy and operating costs; utility costs such as electricity and telecom­munications, as well as travelling and trans­port costs to and from suppliers and custom­ers. These costs may be recurrent in nature or items of capital expenditure invested in setting up the operations.

Government incentives vary but form a large part of the business case. These may include capital incentives, favourable tax treatments including depreciation allowanc­es, tax holidays and other accelerated write-offs. The negative side of government costs are aspects such as costs of corruption and delays due to unnecessary bureaucracy.

Relocation business cases need to be costed correctly and should consider the im­pacts of all aspects of doing business, par­ticularly future costs related to, for example, potential legislative changes. The misalign­ment of potential savings will obviously impact financial performance. This will, in turn, impact the expectations of sharehold­ers and future off-shoring opportunities.

Off-shoring is here to stay

As long as there is access to global pools of cheap skilled labour and technological advances continue to enhance communica­tions, in whatever format, off-shoring will provide competitive advantage and is here to stay.

Corporate real estate executives will need to become accustomed to global travel and learn to quickly assimilate different real es­tate market nuances in support of corporate decision-making. Their input is also likely to be far more broad-reaching than pure real estate issues.

But rather than merely treating off-shor­ing as an opportunity to cut labour, real es­tate and infrastructure costs, this is a great opportunity to re-think and re-design busi­ness processes. These re-designed business processes will ultimately be the decision drivers for off-shoring