Business Process Outsourcing can be defined as contract-based transferring of services to third-party service provider and when the service providers are from different countries then it is called outsourcing or offshoring (ALPESH B. PATEL, 2005). Generally, companies outsource the services or functions which are labor intensive and does required to have the core-competent workforce for example call centers or logistics services, financial service, banking services, accounts payable and accounts receivable, customer support. The services or the functions that companies outsource can be broadly classified into two categories horizontal and vertical. Horizontal services cover a wide range of services and it is more common in back office process, for example, finance and accounting, Customer care, HR, R&D. Vertical services are specialized services and specific to industry for example financial services, insurance, healthcare (ALPESH B. PATEL, 2005).
2.2 Key Factors affecting outsourcing decision
There are several factors that affect outsourcing decision (Figure 1) in a country. Most important factors that affect outsourcing decision is cost reduction and a need to focus on core operations to improve core-competency (ALPESH B. PATEL, 2005). Deloitte’s 2016 Global Outsourcing Survey reviled that 59% of their responders believe that outsourcing is a cost-cutting tool and 57% sees outsourcing enable them to focus on their core business (Deloitte, 2016).
2.2.1 Cost Reduction
The main driver that makes cost reduction possible are the availability of low wages workforce, the economy of scale and continuous improvement in the process. The cost reduction can also be realized by the paying for the services, not for the setting up the infrastructure. For example, if a company set up a facility in their own country, it will be the fixed cost and that will have depreciation into it. But if they outsource service, it will be variable cost as they will not have to pay the setup cost. They will only for the service they use (ALPESH B. PATEL, 2005).
2.2.2 Improvement in Core-Competency
To hold ground in the competitive market and meet the standards like Six Sigma, Compatibility Maturity Model(CMM) companies needs to focus more on their core product. As outsourcing frees up management time as well as capital which can be invested to improve core competency (ALPESH B. PATEL, 2005).
Figure 1:Main drivers of outsourcing
2.3 Impact of Outsourcing- from the different perspective
2.3.1 Impact on Social Economic growth- from Developing country’s perspective
From the very inception of Outsourcing, there has been a widespread academically and political debate on the impact of outsourcing on the economy of developing countries and developed country who outsource. The impact of outsourcing can be seen from two perspectives, from the developed country and the developing country. Although there is considerable disagreement about the benefits and cost saving for developed countries, there seems to be an agreement that outsourcing has a positive impact on developing countries (Majluf, 2007). A study conducted by Wang Tingting shows that the Outsourcing is positively related to productivity, trade, employment and innovation in China (Tingting, 2014). Outsourcing has a major role in employment creation in developing countries and alleviating the large population from the poverty. Since 1980, China has managed to pull out 680 million people from extreme-poverty because of outsourcing (Gunther, 2014). National Association of Software and Services Companies (NASSCOM) has estimated that Indian IT-BPM sector (Business process management) will have CAGR of 17% with respect to 2001. It is expected that IT-BPM sector will have revenue of 350bn USD in 2025 and that will create 650,0000-700,0000 direct employment (NASSCOM, 17). According to a report publish by UNCTAD (United nation conference of trade and development) service sector accounts 60% of world output and 44% of world employment (secretariat, 2013). These numbers prove that outsourcing has a huge potential to improve the socio-economic condition of developing country.
2.3.2 Impact on productivity- from a company perspective
Outsourcing can have a positive effect on the productivity of the companies who outsourced the service. As companies outsource their non-core activities to specialized service providers, it helps them to improve their productivity. Evidence from Irish manufacturing firm suggests that in outsourcing of non-core activities can enhance the firm’s productivity (McCann, 2008).
2.3.3 Impact on skill development/Human resource development- Employees prospective
Outsourcing provides an opportunity to the workforce of developing country to enhance their skill set. To be competitive developing countries focus more on learning new skills that are required/may require. Research evidence says that FDI has a significant impact on HDI (Human Development Index) in Nigeria (Korhan K. Gökmeno?lu, 2018)
2.4 Parameters to select the locations for outsourcing
While selecting a country or city for outsourcing there are several parameters that should be considered. They are cost, talent pool, Culture and language, technology infrastructure, geopolitical risks production and legal maturity (Malhotra, 2010). Cost included labor cost, infrastructure cost and talent pool include labor market size, workforce suitable for the type of services to be outsourced. Values of these parameters vary with location and are affected by economic events like the financial crisis, change in geopolitical scenario, changes in worlds development indicators like FDI inflow, change in labor market efficiency and some local situation like Spanish real estate bubble, Arab spring. Therefore, below research question can be raised
2.5 Research Question-
Research question of this paper is –
1. What are the current values of location selection parameters labor cost, infrastructure cost, labor market size, availability of talent pool?
2. what are the factors that affect location selection parameters in specific.
3. Location selection methodology
3.1 Countries selection
For selecting the countries, average GDP rate is the primary criteria. List of countries has been taken from the existing database and segregated based the continents. After that, the average GDP of each continent has been calculated and the countries whose GDP is either equal or more than average has been selected. After that other KPIs like Forecast GDP, Ease of Doing Business Index (Jayasuriya, JANUARY 2011), Corruption Perception Index (Hossain, 2016), Combined credit rating from Moody’s, Fitch and S&P (Peilin Cai, February 2016), Corporate income tax rate (OECD, 2008), IP Security Index (Hindman, 2006), Global Innovation Index, and Exchange rate (Goldberg, 2006). Then based on these KPIs, a score (1 for poor and 4 for best) has been given and then the corresponding ranking. After selection of the countries, cities selection has taken place. Based on the above-discussed criteria below countries have been selected. Below is the explanation of selection process of countries from the existing database.