A guide to offshoring back-office operations

Abstract

For research companies considering offshoring some of their operations, the author offers an in-depth look at the many issues and factors to consider, including the host country’s cultural practices, technology and infrastructure, and business and government environments.

Searching for undiscovered jewels

Editor’s note: Karl Feld is vice president of Johnston, Zabor, McManus Inc., a Durham, N.C., research firm.

Research firms and companies from other verticals have been offshoring their back-office operations for many years now, especially call center work. The combination of inexpensive English-speaking labor, well-developed technical infrastructure and a wealth of subcontractors looking to service the growing outsourced call center industry have made India and the Philippines convenient and competitive locations of choice.

Yet there are other undiscovered offshoring location jewels amongst the 100+ countries of the world with native English-speaking populations. Peoples of many of these countries continue to view back-office employment, including call center positions, as career opportunities at favorable wages. Their governments and telecommunications companies are prepared to bend over backwards to make an enterprise work and work profitably. Research firms just need to know how to look for them.

In most cases, these countries are undiscovered because they don’t have subcontractors offering up prepackaged solutions. As a result, research firms also need the business acumen and capital to recognize and exploit a good opportunity.

Building a subsidiary, joint venture or new firm in another country is a daunting proposition for many smaller U.S. companies. However, it is not as overwhelming as it might seem at first blush. Most of the technical and financial expertise required for country and site selection is identical to that for opening a similar facility domestically. It is the non-technical and management considerations that require a slightly different perspective and a high degree of anthropological savvy.

Six categories

There are six key categories to keep in mind when selecting an offshore site for your business operation. These categories apply to virtually any business, whether in the research industry or otherwise. They are:

normative labor and cultural practices;
technology and infrastructure;
business environment;
government and legal infrastructure;
pre-existing host country network; and
time zone.

Each of these categories has a number of important factors considered below.

Normative labor and cultural practices

Perhaps the most important and often least well-examined element of starting an overseas operation is a thorough review of a prospective country’s culture as it impacts labor. Employees are the heart of any business. This is especially the case for back-office functions. For an overseas operation to succeed it must understand and accommodate local labor practices in its business model from the design stages.

Naturally, the standard items examined at home should be reviewed when considering an overseas location. These include benefits, shift length, vacation, labor pool size, etc. The things to look for beyond these standards include degree of unionization and labor-based political activity. Also important is a close examination of the culturally unique relationship between wage rates and education, work behaviors and accents. For respondent- or customer-facing work, accent can be especially important and can impact assessments of labor pool size and unit cost calculations.

It is important to carefully explore the cultural norms around behaviors related to the tasks to be performed as well. Gender or class relationships to the work impact labor pool size and productivity. Some subjects are considered taboo for discussion or involvement in many cultures and might hamper your production capabilities if not carefully considered in advance. For the call center business, normative telephone behavior for people in this culture may impact labor and productivity, especially discussing sensitive subjects.

Then there are issues of transportation. How do people in the appropriate income and class level get to work? Your location selection must accommodate for normative travel or you should be prepared to provide options. Second and third shifts may require special arrangements for both travel and to overcome cultural practices, especially across genders. Weather can be a significant travel factor as well, especially in countries where the practice is to shut down in heavy rains, etc.

A close examination of the hidden labor costs is required. There may be normative perks not required by law that the labor pool will demand. A careful look at informal compensation practices in this context is particularly important.

Finally, for telephone work there is also the relationship between the accent of the interviewing pool and the social norms of target respondents. Though there is little documented research on the subject, most call center operations people will attest to the positive and negative impact of various accents on cooperation rates in various respondent populations, increasing or decreasing study costs. Satisficing on the part of particular populations in response to different accents may also occur, calling into question reliability of the data collected. As a result, the impact of accent on the work to be executed must also be considered.

Technology and infrastructure

Technology is the linchpin of most of today’s research back-office functions. Many of the factors to consider in this category are just like those at home, including cost and redundancy of connectivity, reliability of power supply, multiplicity of vendors for all services, vendor service response time and sophistication, and lease and rental rates for equipment and office space of sufficient quality.

The unique and notable categories which will be completely different include the costs for connectivity service and redundancies. Experience has demonstrated that the labor versus connectivity equation is reversed in Third World locales, with the unit production cost of connectivity exceeding that for labor. This makes connectivity one of if not the most important cost factor in choosing a location. In many instances host governments have monopolies over connectivity utilities which can make service, price and redundancy problematic.

Office technologies are similar. Explore whether purchasing and servicing locally supplied equipment would be more cost effective than shipping U.S. materials to the host site. That answer isn’t always clear-cut and can be confounded by issues of government tax legislation, electric current standards and service turnaround times and sophistication.

Business environment

Examining the business environment of another country requires a careful look at a variety of elements beyond the standard factors considered in a domestic location. Of course a review of the number and business models of competing firms in the local job market, an examination of local transportation infrastructure and crime, and a review of success of other similar firms in the location go without saying.

Political stability and tension is an important factor to consider if the country has a national or site-specific history of unrest. It is important to consider this element in the context of the location being examined. Often the violence reported in U.S. news is localized and doesn’t reflect the state of the entire country. Sometimes it does. U.S. Consular services will often not make this distinction when providing guidance. Catastrophic occurrences are also a consideration. Putting a 365/24/7 facility in a hurricane, earthquake or typhoon zone may be a mistake.

Banking systems, insurance standards, inflation and exchange rates are also areas for consideration. While offshore businesses can provide favorable cost differentials, it is important to see how much of that difference is a result of the exchange rate. Exchange rates as well as host country inflation can also erode cost savings depending on the structure of the business chosen and how revenue is handled. Local insurance and banking standards may not provide sufficient protection or may be overly burdensome. In some cases subsidiaries or target country firms may be required to hold profits in local currencies.

Some overseas locations provide unique opportunities for financial support as well. Often tax incentives are available to foreign investors from host governments. In some cases our own government or third parties provide support, seed money or in-country services in kind to help new businesses get started. Conversely, some locations and governments officially and legally constrain foreign businesses once established. Some allow for full remittance of profits and repatriation of capital while others do not. Some allow for foreign majority ownership and some do not. In some locations corruption and bribery in the commercial sector is the standard in doing business. These are other factors to examine in advance.

Government and legal infrastructure

Some of the best business opportunities lie in countries with the worst-designed or most restrictive government and legal infrastructure. U.S. firms need to closely examine local practices and decide what is tolerable and what is not. This category is one rife with unique things to consider.

Accounting standards vary across the globe. The target country may have accounting standards and requirements which significantly differ from our own and will impact company accounting. Understanding the costs and benefits of compliance is important.

Data privacy laws are similar. Since most research back-office activities manipulate personal data an understanding of these laws (or lack of them) and related treaties with other countries is crucial to location selection. Some are too restrictive to make research or other personal data driven operations feasible. Others don’t provide enough protection to make clients confident.

A thorough review of the legal system and its practicability is also wise. Insurance coverage maybe available, but how hard is it to enforce a claim? An examination of the degree to which government corruption pervades the legal system is important as well. For example, a government that controls the telephone company and the court system may or may not spell disaster for resolving service disputes in a timely fashion. A court system controlled by organized labor could prevent prosecution of employees and thus circumvent workplace discipline.

Perhaps most important is taxation. Many host governments will waive or bend taxation rules for foreign investors. Others have social systems and taxation requirements which erase the profitability of the overseas move or restrict foreign ownership to a minority constraining profit-taking.

In many countries semi-formal government bribery is a standard form of doing business. By all means understand this hidden cost in the target country and decide what is acceptable and what is not.

Preexisting host country network

Having a network of native, reliable and business-savvy contacts in the target country can make the entire process of start-up more efficient. The savings in time, hidden costs due to cultural missteps and eliminating the need to support a large, in-country start-up team can be significant. In-country, joint venture partners can serve this function.

The U.S. Foreign Commercial Service (USFCS) and many host governments provide formal services designed to provide exactly this type of support, either free of charge or for a small fee. While these services tend to have “canned” programs for businesses from a particular industry, U.S. firms who take control of agenda setting can get a high return out of utilizing these services and shave months off implementation timelines. The host country services also tend to be highly politicized, so it is important to understand the interrelationships of government officials, political leaders and business interests when using these services as they may color the information received.

Time zone

Often overlooked but extremely important is the difference in time zones. Depending on the back-office function to be outsourced, time zone may be only a minor consideration or it may have a significant impact on cost and service delivery. Labor which must work second and third shift or weekends because of time differentials may require additional pay and company benefits, driving up costs. Connectivity charges may vary depending on time of day used in the host country. Conversely, it may be possible to achieve savings by using first-shift overseas labor for work traditionally requiring second- and third-shift time slots domestically country. If locating in Asia is an option, businesses can take advantage of the international dateline as well and have work completed “yesterday” though it is actually done same-day. This sounds a bit confusing, but it can actually be done.

All of these factors can be subordinated as shown here.

Normative labor and cultural practices

Work habits/behavioral norms
Culture-task fit (sensitive subjects/gender issues)
Vacation and absenteeism norms
Night/weekend work habits
Level of education associated with acceptable English skills
Labor pool size in location
Wage rate for target labor pool
Unionization/political activism
Labor legislation(benefits, shift length, vacations/holidays/sick leave)
Normative employer behaviors

Technology and infrastructure

Rental/lease rates in location
Quality of available facilities at location
Availability and reliability of local supply and repair contractors
Cost of local supply and repair contractors
Reliability and redundancy of power supply
Cost of redundant power supply
Reliability and redundancy of long distance telephone service
Compatibility of equipment with domestic standards
Cost of telecommunications/data service
Historical average response time of telecommunications/data carrier to service calls
Number of telecommunications/ data carriers
Government versus commercial ownership of telecommunications/ data carriers
Bandwidth and type of Internet/ data infrastructure
Reliability and redundancy of Internet/data infrastructure

Business environment

Number and size of firms competing for labor in location
Short-term historical growth of business competing for pool in location
Reliability and nature of employee transportation in location
Political stability and tension in location
Historical short-term rate of catastrophic occurrence in location
Historical crime rates in location
Rates and nature of non-government corruption in location
Protection/security of banking system
Insurance standards and availability
Historical long-term exchange rate fluctuation
Historical short- and long-term inflation rates

Government and legal infrastructure

Data privacy legislation
Government corruption in business
Insurance standards and enforcement
Accounting standards
Levels of business taxation
Practices restrictive to private business
Special legal and tax status for foreign-owned business
Realized degree of legal protection
Legal resources for prosecution of employees/contractors
Restrictions on private/foreign ownership of property
U.S. government support programs (benefits and restrictions)
Degree of embassy/USFCS support (benefits and restrictions)
Host government or local government involvement (benefits and restrictions)
Degree of host or local government involvement (benefits/restrictions)
Third-party support programs/ investment (benefits/restrictions)
Degree of third-party involvement (benefits/restrictions)

Pre-existing host country network

Time zone

Reasoned approach

This can seem a little overwhelming. The key to successfully navigating the various issues is to use a reasoned and methodological approach to narrowing options. If used as a sieve, the various categories and factors can be quite effective in taking many choices and narrowing them down to a few, highly refined options which can be explored with in-country visits. In-country visits should only be made when options for a final decision have been selected, making the in-country visit investment the penultimate action to a go/no-go decision. The six categories are used as sequential layers of the sieve ordered by their significance to the business operation(s) being considered for the location. In addition, a top layer is added to the sieve comprised of only those two or three factors deemed most important to driving the business decision to offshore. For example, a survey research call center selection model might rate labor cost and accent along with telecommunications expenses most highly, with other factors following. So in this case a sieve design as shown here might be most appropriate.

Undiscovered jewels

The key to finding undiscovered jewels is to put enough of the right raw material into the sieve in the first place. Many of the most unlikely places show up as viable, competitive options undiscovered by the competition when included in a sweeping review of locations with native-English speakers. With 100+ countries to choose from, there are numerous locations with untapped potential.

To highlight the extent of the opportunities, it is important to keep in mind that offshore locations, just like domestic locations, should be considered at the city, county or other appropriate labor pool level. Many countries have subpopulations of native English speakers, although the national language may not be English. Many excellent locations are eliminated at various stages of the process if consideration is made only at the national level or limited to the capital city. Dig deeper. While this adds the complexity of considering multiple locations within each country, the undiscovered opportunities are there waiting to be uncovered by firms rigorous enough to do more than superficially scratch a country’s surface.