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A Tale of Two Cities: Leveraging Market Data to Manage Global Sourcing Risk

by Alan Hanson
Feb 2013

It is the best of times. It is the worst of times. For sourcing from fill in the blank . Chances are that whatever global sourcing destination you may nominate to fill in the blank that follows the paraphrased opening lines of Charles Dickens' classic novel it is neither the best, nor the worst of times, but somewhere in between.

Take Bangalore and Mexico City as examples. Bangalore may well be the most recognized offshore global talent hub, particularly for information technology work. With more than 4,600 ITO and BPO companies operating there, including many of the world's leading outsourcing firms, the city played a starring role in another book, Thomas Friedman's The World is Flat . By contrast, Mexico City, some 500 miles from the United States border where much of the world's outsourcing work originates, had only about 1,000 ITO and BPO companies at the end of 2011, and its software exports were less than a one-third that of Bangalore's.

Half a world apart, the two cities would seem to stand in sharp contrast to one another as logical global sourcing destinations. But is it the best of times for outsourcing to either? Or the worst? Probably neither. And there is a significant market data to support that thesis.

Of course any evaluation of a location for the purposes of sourcing needs to look through different lenses. Cities need to be evaluated for the type of Skills , the Cost or Price of those Skills , and the associated local levels of Maturity and Attrition . Beyond labor analysis, Operating Costs , such as Land Acquisition, Rents, Taxes , and Energy factor in, as does the Growth and Inflation rates associated with any of them. Infrastructure and Cyber-Security , Legal and Intellectual Property , Geo-Political , and Macro-Economic Risks should also be evaluated, as well as the opportunities associated with any of these factors.

When one undertakes this type of analysis - on a continuous basis - it soon becomes clear that the relative attractiveness of a particular city seldom may be obvious, and even more seldom may be "Best" or "Worst." Instead, the picture changes - constantly. Neo Group, for example, monitors more than 200 variables associated with each of 100+ global city sourcing destinations, and in any particular quarter nearly 50% of these underlying variables in the model will change. A similar phenomenon occurs across the countries and suppliers we track.

Why it matters

For sourcing executives, shared services operators or those charged with global vendor management, the changes can matter a lot. Initial location selection mindful of the various factors is important, but long term monitoring is even more so. Across a five- or 10-year commitment to a location, numerous awards of additional or changed scope, supplier renegotiations, and other decisions can be impacted by changing environmental circumstances.

Returning to our example of Bangalore and Mexico City we can see the issues. When one compares Bangalore to Mexico City, there are some very obvious and key differences between the two cities. Bangalore has long been a home to many of the world's largest IT services companies with a large number of local graduates carrying technical or engineering degrees. In recent years, many of the same companies have broadened their offerings to include Business Processing and Knowledge Processing (Analytics). That's been feasible because of the excellent Scalability of Bangalore in comparison to Mexico City. The latter rates as less Scalable - and is therefore less attractive to the needs of larger Fortune 500 companies - as a result of its smaller number of annual technical graduates. While other risk categories that plague Mexico City include its reputation with respect to violence, which has left many US companies fearful of sending key work and senior executives to the country.

So the choice is Bangalore all the way then, right? Not so fast. The underlying fundamentals that make it attractive, can also fuel outsized demand - ironically creating risk . So where the depth of the skill pool and cost advantage remains with the Indian city, consider that the demand for skills fuels 14+% local wage inflation compared with 4-5% in Mexico City. Similarly, Bangalore's recent annual attrition rates of 22% (ITO) and 24.5% (BPO) compare unfavorably with Mexico City's approximate 7% rate. In our Global Supply Risk Monitor's standard 10 point risk rating scale, Bangalore's 3.7 Scalability Risk rating is far lower (a good thing considering 10 is worst) than Mexico City's, but the nuances of the picture, and the speed and direction of change bear watching. Similarly, observing that Mexico City's composite risk rating is higher paints only half the picture. On closer, continuous observation, we see where various factors have aligned to make it an increasingly attractive destination for Financial Services companies, among others to set up near-shore company-owned centers.

In our earlier example, by monitoring the local labor pool for wage escalation or attrition rates, a savvy vendor management office (VMO) that makes the early observation that attrition may trend higher, may partner with its local suppliers on meaningful personnel retention programs before higher attrition impacts its local staffing. Monitoring market data can therefore be beneficial to the VMO in preventing higher personnel turnover rates, which in turn can impact both quality and cost effectiveness.

Of course, a proper appreciation of the value of actively monitoring a portfolio of global locations may not be in evaluating two cities from entirely different countries, continents or regions. While Dicken's book was not entitled: A Tale of Two Countries, surely the Geo-Political and other factors pervasive at a Country Level often explain a portion of the risk that a global sourcing program should be mindful about. That's true, but what we have learned from observing data using a similar framework across countries is that Country Risk does only account for a portion of location risk.

In India for example, Scalability or Infrastructure Risk , as examples, can vary meaningfully from one city to another. While the massive blackout that impacted more than 670 million people in 2011 was an episode , the chronic ongoing undersupply of power in such cities as Hyderabad are structural in nature, and give the city a higher degree of measurable riskiness than say Bangalore. For Business Continuity and operations purposes, the implications and planning that should properly flow from risk monitoring, in order to mitigate the risks and seize opportunities is clear. And the hard dollar value in being ahead of the news can be significant.

In Charles Dickens opening passage, he also said: "It was the age of wisdom. It was the age of foolishness." In this age, 2013, it would probably be foolish not to heed the wisdom and insights that can be found in Market Data to better manage a globally-sourced portfolio of services. Dickens himself published his classic in 31 installments over a period of almost two years. It seems safe to say that while Dickens may not have been crunching the numbers back in 1859, in all probability it was neither all good, nor all bad in London or Paris, but somewhere in between.

Sourcing Interests Group has acquired for its buy-side members an annual subscription to GSRM's analytics for Bangalore and Mexico City. To begin receiving this SIG benefit without charge, visit this link. To learn more about Global Supply Risk Monitor visit www.GlobalSupplyRiskMonitor.com .


Alan Hanson
Senior Vice President of Neo Group

Alan Hanson is a Senior Vice President of Neo Group where he has responsibility for the continued development of its Global Supply Risk Management (GSRM) analytics services, which helps clients dynamically monitor and manage their global operations for value. Prior to joining Neo Group, he was in senior leadership positions at CSC and Genpact. He was also a former partner at TPI, where he cofounded the firm’s Global Financial Services practice. Earlier in his career, he spent nearly 14 years in Financial Services and Corporate Business Development roles. He can be reached at alan@neogroup.com.

Please visit www.GlobalSupplyRiskMonitor.com for more details on GSRMSM.

This article originally appeared on "Sourcing Interests Group"    
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