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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