Does Business Environment Affect Outsourcing?

Sure it does! As the outsourcing industry grows in leaps and bounds, several hard truths about what makes a location sell come to the forefront. Experts watching the pace of this growth agree that the key to maintaining and enhancing long term competitiveness lies in skills development, infrastructure investment, and regulatory environment – not in attempts to control wages. As services move up the value chain, a dramatic shift in cost advantages is seen. Both leading offshore service locations, India and China which up till now have attributed their success to people and skills availability at competitive costs, are gradually waking up to the sleeping tabby in their corridors – business environment. Several ongoing surveys to gauge consistent improvements regarding this important parameter indicate similar results. Ease of doing business indicates how favorable the business environment is for operating businesses. For offshore firms which rely on syndicated data to provide them with pointers for choosing lucrative outsourcing locations, a poor review can spell disaster.

The Doing Business 2008 report that used a variety of indicators each carrying the same weight age attempts to understand how favorable the business environment is for the operation of business at a certain location. First place goes to Singapore, which ranked the highest in this study when it came to employing workers, trading across borders, protecting investors, paying taxes, and even closing a business. Both New Zealand and the U.S., ranking second and third respectively, scored low where facilitating business easily was concerned. Reflecting similar findings, the Global Service Location Index 2007, compiled by A.T. Kearney, states that developed countries like the U.S., Ireland, Canada, Germany, France and Singapore offer the best business environments to work in. Countries like India, China and Brazil appear much lower down on both these surveys. This indicates that despite a large talent pool and wage-cost advantages, unless these countries are successful in evolving their business environments, their overall popularity will continue to flounder. However, this is easier said than done. In developing nations that still grapple with basic infrastructure, and social and cultural challenges, it is a prerequisite of the government to nourish their economies with the fruits of increasing productivity experienced over the last decade or so.

It is seen that, despite inflated wage costs, those top ranked in the business environment index continue to be the preferred choice for the extreme high end services, although they do not offer cost advantages. Among these are, of course, the U.S. and Canada, both of which have large populations to fall back on which makes them high up on the people and skills index. However, for most entrepreneurs and individuals who operate with relatively lower budgets, there is a tendency to prefer outsourcing to locations where the wage-cost advantage is more prominent. This trend has worked in the favor of Southeast Asia, Latin America and Africa in the past. But the emerging reality in outsourcing trends clearly reveals a shift towards those locations that can offer a combination of all three: financial attractiveness, talent pool, and favorable business environment. India and China lead in the first two parameters, and stand to gain if they are able to offer the last.

This is because strengthening businesses environments spells stability for an outsourcing firm and is one of the most desirable characteristics that a probable business location can offer.

With services moving up the value chain, there is greater demand for strategic services that inevitably push up costs. If locations leading in cost advantages and talent pool are able to upgrade working conditions with greater investments in high technology, infrastructure and policy reforms, their services could be leveraged to push up profit margins.

Increasingly, services like HR functions and management of suppliers is being outsourced by major firms in the developed world. This wave is an outcome of the fact that many businesses today spill over beyond geographical boundaries, making relationship management in the value chain an important parameter for the success of the business. VA firms that are capable of handling this strategic service stand to gain much if they are able to offer greater ease in doing business.

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Scanning Your External Business Environment

The 2010 IBM Chief Executive Officer Study is generating a lot of chatter in social media channels (hundreds of blog mentions). The comprehensive study covering 33 industries and 60 countries asked CEOs how they are capitalizing on complexity in a more uncertain business climate.

Setting strategic direction in a changing external business environment

The high interest in the study is evidence that leaders are looking harder for strategic solutions for managing in a more volatile business world. Business leaders are more concerned than ever about the external business environment, yet they feel less confident about how to navigate through it. Rigorous external business environment scanning is key to increased competence, and confidence, in finding robust strategic solutions. A typical PEST (political, economic, socio-cultural, technological) analysis, however, seems inadequate in increasingly volatile environments.

We used to scan our environment by asking questions based on informed shifts in market dynamics and changes in PEST factors. Today, we have to consider that the goal post may be moved to another field. Realistically, few CEOS are presuming to have as much understanding and control over the external environment as they had before the 2007 market downturn.

Bolder questions for a more complex external environment

The good news is that analytical tools are evolving to put leaders back in control of their strategic approach to the external business environment. Traditional approaches are likely to come up short. In light of the dramatic restructuring of industries and economies, new questions need to be asked when analyzing the external environment from a short- and longer-term horizon. In the former business climate, a firm’s core competence was expected to endure for a lifetime like a destiny assigned by the mythological Fate Lachesis. Today, the ‘what if’ scenarios must be bolder.
· Will my core competence be commoditized? How soon?
· What’s my next core competence?
· What regions will dominate in my core competence?
· What companies/regions will erode my competitive advantages?
· Will this become an outsourced industry? And by whom?
· What will be the most innovative product/company tomorrow?
· What technologies, not yet conceived of, will out innovate me?
· What is the worst-case scenario in terms of capital market receptivity to my industry? What will be my alternatives?

New business scanning models

In responding to the needs of leaders, it is important to distinguish whether their main concern is the ability to understand the rapidly changing business environment, or the capacity to undertake the appropriate actions to respond to it. Most leaders will argue the former. The evidence shows that leaders are confident that they have the skills and resources to respond to drastic change (this introduces another challenge: over-optimism – watch for an upcoming article on this) and what they really require is a more robustway of scanning their business environment, and keeping up with the changes.

The usefulness of external business environment scanning in strategic planning should not be discounted as outdated. It is likely only your model that is outdated. Studies continue to show that a good external business environment scan has significant positive effect on the strategic course of a firm, and ultimately performance; environment scanning models today must include plausible varying scenarios to be adequate for the current complexity.

For over twenty three years, Stephen has helped businesses, government agencies and non-profits organizations in Asia to learn and apply Strategic Management and Innovation to their organizations to sustain and improve long term performance. He has successfully led and facilitated numerous “live” strategic planning efforts and in-company senior management development programs, for a wide range of organizations including multi-national companies, small-medium enterprises and government agencies.

As an international consultant, Stephen has led public workshops/seminars on key strategic management topics such as strategic thinking and planning, change management, leadership and innovation, in Singapore, Malaysia, Indonesia, India, Dubai, China and the USA. He has trained hundreds of managers in workshops and seminars, with consistently excellent evaluations by the participants, who come from a wide range of industries in both the private and public sectors.

Stephen Lin and colleagues at the Haines centre for Strategic Management has worked closely with clients throughout throughout the economic downturn and new turbulent environment, to conduct robust external environmental scanning, and reposition and fine-tune their strategic approaches to the turbulent environment.

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