From ‘Where Next’ to ‘Best-Fit Portfolio’

The maturation of the offshore market – in terms of service provider capabilities, viable delivery locations, and buyer sophistication – is driving up the number of buyers with …

The maturation of the offshore market – in terms of service provider capabilities, viable delivery locations, and buyer sophistication – is driving up the number of buyers with multi-location and multi-geography footprints. In fact, per a late 2010 Everest Group survey, one in three buyers plan to expand in at least one more offshore geography. As a result, buyers are increasingly focusing efforts on improving the effectiveness of their service delivery location investments.

Footprint versus portfolio

In order to achieve this objective, buyers must begin thinking about locations as a “portfolio” rather than a “footprint” – a critical distinction. A footprint represents the collection of service delivery locations, each of which is commonly characterized by scale, captive and service provider mix, types of services supported, etc. A portfolio is fundamentally different, and extends beyond footprint to articulate:

  • How to support current and future requirements (scale, scope of services, captive-to-third party mix)
  • How to balance cost and risk (ensuring continued cost benefit, mitigating concentration risk)
  • How to plan and manage investments (roles for each location, capacity planning)

Just as a portfolio of financial investments provides the ability to change allocations in response to stock market dynamics, a location portfolio provides the ability to respond to changes in global location dynamics.

 

Why Build a Portfolio?

The underlying dynamics driving this requisite shift in thinking from footprint to portfolio are not new or surprising. As the scale and scope of offshoring adoption expands within organizations, the needs are evolving and becoming more complex. For example, businesses that have already offshored transactional processes are now pushing to offshore more complex activities. And accessing niche talent pools for technical, industry or language specializations is becoming increasingly important.

Buyers that expanded aggressively in India and Philippines (the most common offshoring locations) are now facing concentration risk concerns, which in turn is prompting focus on how to diversify the location mix and provide adequate redundancy.

Further, increasing needs to provide in-country or in-geography support, driven by regulatory, compliance or business requirements, are pushing organizations toward an amplified consideration of near-shore service delivery locations. Overlaying all of the above factors is the fundamental global services question: how can buyers ensure adequate room for growth while maintaining a sustainable cost at acceptable risk levels?

 

Critical Design Points

Per our experience working with organizations on portfolio issues, there are three critical design points that influence the shape of the portfolio.

 

What is the demand profile? – Understanding the nature of demand that requires support is a frequently missed, yet critical step. Demand must be profiled in terms of scale, skills, languages, geographies, etc. Most importantly, this profiling must be conducted for both current and expected future demand. Finally, the profiling must be overlaid with broader business objectives and initiatives, such as planned acquisitions or to-be-entered new business geographies.

 

What footprint is required? – The demand profile helps to assess the shape of the location footprint by mapping scale, skill, and geography requirements with capabilities available in different locations. This mapping is typically anchored around existing locations, and helps to identify gaps between demand and capabilities within existing locations. This gap often suggests new investments required, whether in new or existing locations.

What are the roles for each location? – An individual location may be a hub (large aggregate scale), spoke (small aggregate scale), or Center of Excellence (spike in a specific service area). However, the three are not mutually exclusive. For example, India may be a hub in aggregate, but a spoke for voice services and a Center of Excellence (COE) for analytics. Similarly, Philippines may be a hub for voice services and a spoke for finance and accounting (F&A). Defining hub, spoke, and COE at an aggregate level helps buyers prioritize investments such as management talent, breadth of capabilities, and aggregate capacity.

These three design points assist in development of a comprehensive articulation of the best-fit location portfolio for an organization’s unique requirements. An important final step is stress testing the location portfolio against likely future scenarios such as:

  • What if demand for offshore services doubles in the next three years?
  • What if currency dynamics in the top two locations are unfavorable?
  • What if attrition and talent retention becomes an issue in the top two locations?

These tests, along with other possible and worst case scenarios, help determine the resiliency provided by the portfolio, and identify dynamics that must be monitored, sometimes with unexpected insights. For a financial services company, for example, we found that success in implementing the portfolio was significantly dependent upon two business units’ commitment to meeting the scale targets they had set. Any softening of growth there would cause a significant investment in a captive in Southeast Asia to become unattractive.

Sign up for our Nearshore Americas newsletter:

Effects on service providers

 

This emerging shift is already starting to impact how buyers think and consequently, will have trickle down effects for service providers. Service providers will need to ensure that they are integrated into the portfolios of their core clients – via their own delivery centers and via those of other key suppliers for the client. Equally importantly, this shift has implications for countries that need to more clearly articulate the role that the country can play in a global services portfolio.

Anand Ramesh is Research Director for Global Sourcing at Everest Group and a member of the 2010 Nearshore Americas Power Rankings.

Tags