Competition is as heated as ever, although India and China continue to occupy the top two spots in the Index, followed at some distance by Malaysia. The Asia-Pacific region immediately comes to mind when talk turns to offshoring, and, not surprisingly, eight of the top 20 countries – and six of the top 10 – are located there. High-scoring countries in Asia-Pacific typically show strong performance along two dimensions: financial attractiveness on the one hand and people skills and availability on the other. Latin America and Eastern Europe both have five countries in the top 20, with the former region showing a spike in people skills and availability and the latter in business environment.
India (1) continues to lead the Index. Offshoring to India remains a highly attractive proposition for many companies, and it is the undisputed industry leader. Consider, for example, that no fewer than five Chinese handset manufacturers have announced plans to establish R&D centers in India, which is expected to become the world's second-largest buyer of handsets. These companies hope to employ the talent of India's engineers to develop products. Huawei, the world's fourth-largest smartphone vendor, set up its first overseas R&D center in Bangalore in 1999, where it currently employs 2700 engineers. And in February, it announced it will invest USD 170 million in a new, eight-hectare (20-acre) campus that can accommodate as many as 5000 engineers.
China (2) is closing in on India, thanks to major gains in educational skills and cultural adaptability. Additionally, the renminbi's recent drop in value against the US dollar should increase the country's financial attractiveness. Furthermore, China is making progress in improving governance and liberalizing financial markets. Given the country's size and the growing number of major multinational players, China is likely to become much more significant in the BPO market as a customer rather than a provider. International companies wishing to compete for their business will need to hire staff proficient in Chinese language skills – an area where regional players such as Indonesia, with a significant ethnic Chinese minority, might have an advantage.
Malaysia (3) holds steady in the ranking, thanks to minor improvements in IP security and compensation costs that give the country a leg up over Brazil. Not leading in any category, Malaysia turns in a solid performance across the board, and that has ensured third place in the Index since its inception. In addition to Kuala Lumpur, where Tech Mahindra is launching a center of excellence for Google Technologies, Malaysia has developed a major offshoring hub just 160 kilometers (100 miles) south of the border with Thailand in Penang, where a new IT and BPO park is being built to house as many as 21,000 new jobs by 2020.
The Philippines (7) is second only to India as a player in the global outsourcing industry, where it began in contact centers and gradually climbed the value chain to now incorporate most functions in BPO and IT.
Tier-3 Cities. India and the Philippines are still top of mind when it comes to offshoring, but the hunt for new talent is now taking companies beyond the capital and major cites to tier-3 locations, such as Surat, Nagpur, and Lucknow in India, and Bacolod and Iloilo City in the Philippines.
One advantage of tier-3 cities is the relative affordability of real estate. For example, facilities in Nagpur and Ahmedabad cost between 25 and 30 percent less than in Kolkata and Delhi. Government initiatives to build infrastructure, provide educational programs in business management, and create special economic zones have played a vital role in promoting these locations as cities of the future.
Another advantage of tier-3 cities is the relative availability of labor, its lower cost, and lower attrition rates. Many of these cities have a highly developed educational infrastructure, ensuring fresh crops of qualified graduates for the foreseeable future.
State and local governments are more attuned to some of the indirect aspects that make a city congenial to international business. For example, many are working to improve international air connections and encourage the construction of world-standard hotel accommodations.
Winners and Losers of Disruption
The combination of automation and standardization changes the game for incumbent BPO providers, which are coming up against a model where standardization and automation displace labor – precisely when most incumbents have built their comparative advantage around efficiently managing large labor forces and optimizing processes. In the end, BPaaS will challenge incumbents to decide if they want to play the role of BPO disruptors or defenders. Those that choose to be disruptors will need to redefine their business models, skillfully managing the cannibalization of existing sales to remain a viable business in the long run. Meanwhile, those that opt to defend the status quo will need to refresh their sources of competitive advantage in an attempt to continue to thrive after the disruptors have done their work.
Another major implication is that in an era when small companies are disrupting the business models of large companies across a number of industries, this shift in the BPO model arms disruptors with another arrow in their quiver: the ability to ensure world-class execution of their back-office processes.
Moreover, host countries that have been relying on BPOs to create hundreds of thousands of jobs may find that their citizens are up against a ruthless new competitor for highly standardized, mature, high-volume business processes. The advent of RPA and BPaaS means policy makers will need to prepare for the end of easy BPO work opportunities, where equipping workers with basic language and literacy skills was sufficient to make them employable to handle routine processes. As standardization and automation come to dominate the simpler processes, offshorers will demand skills of a more analytic nature. As a consequence, countries that have been able to funnel thousands of graduates into BPO centers will find they must adjust their curricula to better prepare the labor force for higher-level tasks. Workplaces, too, will need to evolve to cater to more creative workers who can be tempted by opportunities in attractive alternative professions.
Social Impact Sourcing Lifts up Disadvantaged Communities
Offshoring has been nothing short of transformational for millions of people in India, the Philippines, and many other countries around the world, where it has provided high-quality jobs and economic growth to lower-income economies. But so far, this social transformation – at least from the transnational business perspective – has been a beneficial side effect rather than an intentional consequence of the offshoring movement.
Today, however, companies are beginning to purposefully focus on hiring impact workers to broaden the talent pool. This includes people from disadvantaged groups, such as those from lower-income backgrounds, disadvantaged minorities, and difficult life circumstances.
The Dawn of a New Day
Once the disruptor, the BPO industry now itself faces disruption through the double impact of RPA technology and BPaaS-centered business models. A combination of start-ups and established SaaS players moving into the traditional BPO space is mounting a challenge to the status quo as back-office operations are becoming more efficient amid automation and specialization. The disruption goes beyond companies. Many countries that have relied on the industry for economic development now see the era of easy work coming to an end.
The winners are the countries that have had time to develop sophisticated labor forces that can keep ahead of machines. India and Philippines are good examples. Global innovation hubs driving the disruptive development also stand to benefit. Ultimately, the biggest winners are the end users of back-office services. They will see more efficient solutions reduce the costs and improve the quality of their essential but ultimately non-core activities, allowing them to focus even more on sharpening their competitive advantages.