A Whole New Offshore World

With the economy sailing into headwinds, CFOs will be scrutinizing their company's G&A structure closely in the coming months, and many will be taking another look at the cost-containment benefits that services globalization provides. Businesses that want to achieve rapid hard-dollar savings should put business process outsourcing (BPO) opportunities at the top of their agenda, according to The Hackett Group.

Finance chiefs who haven't checked out the offshore BPO scene in a while may be in for a surprise. The sector is evolving at a rapid clip. Providers have added scale through consolidation and broadened their offerings. India is still dominant, but it's no longer the only play. More companies are seeing the advantage of taking at least some eggs out of the India basket and developing a portfolio approach to their outsourcing strategy that enables them to benefit from a broader range of time zones.

Many companies first dipped their toes in the offshore pool by setting up captive subsidiaries in Asia, particularly India. But that strategy is losing its appeal as companies grow more comfortable with remote service delivery and the quality of providers' offerings, says Dinesh Goel, director with consulting firm Technology Partners International Inc.

"As late as 2004 there were hardly any credible third-party service providers in the offshore market, especially in the BPO space, in terms of the scale and depth of offering that they could take to their customers," says Goel. "Until that time most large corporations wanting to leverage the cost advantages of a geography like India, even for simplest of tasks like rule-based transaction processing, had to go and set up captive operations. But if you look at it now, the market has evolved so quickly that today you have a number of players who have more than 10,000 people. And they have a broad set of service offerings."

Companies that own captives in India should seriously consider selling them, Goel adds. "We're seeing significant interest from investors, including private equity players, because this sector is seen as a high-growth potential sector, and it's still at the nascent stage," he reports. Third-party providers are also in the mood to buy, and they're not short of funds. But the time window for a successful sale might be quite narrow, perhaps 12 to 18 months, he adds. "Over time the interest of buyers will go down, and so the attractiveness of the multiples at which you can monetize will go down."

The geography of the offshore services market is changing just as fast as the players. Latin America is emerging as a strong contender, and activity in this market has been hypercharged, with regional providers like Mexico-based Softtek and Neoris emerging to challenge U.S.-based giants such as EDS and IBM. India-based outsourcers, for example Infosys and TCS, are moving into this zone, too. Genpact, which started life as a GE captive offshore processing center and was later bought by private equity players, has opened centers in Juarez and Caborca in Mexico.

IBM, Accenture, and Tata Consultancy Services have all opened service delivery centers in Brazil, and many providers are eying locations further south in Argentina and Chile. But Mexico remains the hub of the nearshore services sector, in part because of its low geopolitical risk; it's one of only two countries in Latin America that merits investment grade ratings from the major international rating agencies, according to Gartner Inc. Another big bonus is the North American Free Trade Agreement (NAFTA), which provides significant protection to U.S. companies' intellectual property in Mexico.

The time zone proximity of the Americas is key, says Jeff Johnson, U.S. managing director with Neoris. For years, Indian service providers sold customers on the possibility of performing work during the U.S. workforce's off-hours. But it didn't always work out that way, notes Johnson, based on his experiences in a previous job. "Indian programmers and analysts are very precise," he notes, "and what we found is that we would send a specification over via e-mail or instant messenger, for example, and if they reached an impasse because they didn't understand something they stopped working." Many U.S. companies that use Indian service centers are facing the same problem and trying to cope with it by running overlapping shifts, he adds.

India will likely remain the dominant offshore destination for years to come, but increasingly U.S. companies will see it as just one node in a network of delivery options. "You're seeing more and more CFOs taking a portfolio approach to their suppliers," says Johnson. "They're saying, 'We're getting something out of India, we've done a project out of China, we've taken our A/R or customer service to Puerto Rico -- now we're going to look at even more sources.'