1 EXPANDING ACROSS BORDERS: SOURCING VS OUTSOURCING
2 Section 1 Introduction: Contextualizing Global Business In an increasingly connected world, the need to expand operations beyond local borders, to compete with larger organizations and to diversify offerings is significant. Competition is growing exponentially as businesses target global, connected customers who demand an anywhere, any time approach to service. As the world starts to recover from the global economic crisis and navigates through new obstacles to business and economic prosperity, such as increasing wage inequality and geopolitical instability, companies need to remain competitive and ensure that they have the resilience, adaptability and tools needed to address these issues. According to the World Economic Forum s Global Competitiveness Report , competitiveness is defined as the set of institutions, policies and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the level of prosperity that can be earned by an economy. This definition can be adapted to apply to individual companies as well. The key words in this environment are efficiency, flexibility, adaptability and innovation. Businesses need to invest in processes that offer them these features. Defining Sourcing, Outsourcing and More Before we get into the specifics, it is important to define and contextualize the terminology used in this white paper. While most businesses are familiar with the term outsourcing, and more specifically offshoring, there are a host of different terms that refer to different but related concepts in the field. For the purposes of this white paper, outsourcing refers to the use of an external service provider for the provision of a particular business service e.g. IT, HR, call center provision. Offshoring is outsourcing in a lower cost geographical areas removed from the main business operation. So a company using a service provider in India to operate and manage its customer contact center is offshoring that contact center.
3 Sourcing is a much broader term, referring to a strategy that seeks to source the right expertise for a particular function or project. Within a sourcing model, some aspects might be outsourced in the traditional sense, while others might be serviced in-house. Unique to Mexico, the shelter model, a type of sourcing model, allows businesses to retain full control of their new operations while still benefiting from some of the advantages of outsourcing through the assistance of a service provider. The model means that companies do not have to invest in physical infrastructure and are assisted in recruiting talent and ongoing operational support. The hybrid nature of the model allows for companies to minimize the weaknesses of both outsourcing and in-sourcing (servicing functions or projects in-house) and capitalize on the benefits of both. It differs from a captive model, in that there is support from a service provider. Captives also tend to be more expensive than sourcing or outsourcing models. The nature of the hybrid sourcing model may differ from company to company. For the purposes of this white paper, the term sourcing model will refer to Mexico s shelter model. The trouble with outsourcing: Unpacking the weaknesses of the outsourcing model Over the past two decades interest in outsourcing business functions, from human resources, procurement and recruitment to IT, security and finance, has been on the rise, driven primarily by the potential cost-savings and access to skilled talent that such a model promises. According to Gartner, by 2016, 70% of CIOs expect to change their mix of sourcing providers to get more business value and innovation from new partner relationships. Technological and service model changes are also driving outsourcing. A 2014 Deloitte global survey on outsourcing found that 69% of respondents cited cloud computing as making them more likely to outsource, while 66% named business process as a service as a driver of outsourcing. Outsourcing, offshoring, nearshoring, rightshoring the terms have proliferated as the industry has grown and the result can be a confusing range of options, none of which meet the needs of all clients.
4 At their heart, most of these terms arise from the concept of outsourcing, where functions are given to an external provider to manage in conjunction with the client. Outsourcing as a traditional model has been highly effective, but it is not without its challenges. Increasingly clients are demanding value creation beyond the usual labor arbitrage cost saving that has been the mainstay of outsourced models. Low labor costs are not sustainable in increasingly saturated markets India, El Salvador and Costa Rica, for example, have seen increasing wages as a result of demand in the contact center sector. Tower Watson predicts that the tech sector will see wage increases of 10.7% in 2015, up from 10.5% the previous year because of the increasing demand for IT and IT related services from the other economies. With decreasing labor cost advantages, customers are looking to other measures of value from their outsourcing partners. In addition to increasing labor costs, there are other issues. Surviving in competitive environments requires innovative approaches to problems and outsourced models often lack the flexibility and sense of autonomy required to encourage such innovation. A 2012 Forrester Forrsights Services survey, found that 87% of IT executives and technology decision-makers said innovation would affect their company s spending in But it also shows that innovation is still a challenge in existing outsourcing relationships. Fostering an innovative culture in a company is difficult; doing so in an outsourced partnership is even trickier. This is symptomatic of a more significant problem, that of the lack of a shared culture. Each business unique culture affords it a competitive edge. Consider the Apple or Google approach and how the culture of each organization worked to create the opportunities the companies now enjoy. According to a report in Forbes magazine, Cultural intelligence means being intelligent enough to create a workplace culture that gives positive direction for your organization and its people. In fact, a strong workplace culture makes it easier for an organization to stay focused, define its goals, and deliver on those goals.
5 A vendor does not share that culture and clients are starting to realize that this can cause its own problems. Business processes located offshore are hampered by issues of communication and response times. An offshore vendor may be located in a different time zone, or employees may struggle to understand the language or relate to the culture. The result is confusion, misunderstandings and often delays. In addition, there is the issue of control. In an outsourced relationship, despite contracts and guidelines, there is often a tension between the client and the vendor in terms of where control of a process or project lies. Problems of integration are also inherent in many outsourced relationships, with external providers struggling to seamlessly join processes with existing internal procedures. Concerns about these issues have resulted in a number of high profile companies resorting to in-sourcing, the process of moving previously outsourced functions back to the internal company team. General Motors, AstraZeneca and JPay all adopted strategies that saw them moving outsourced functioned back into the company. A 2013 Deloitte survey pointed to the increase in insourcing across the sector. While outsourcing still provides advantages, the significant challenges of such traditional partnerships are increasingly in the spotlight and there is a need to rethink the strategies used to access those benefits.
6 Section 2 While outsourcing might offer a range of benefits, it is clear that there are challenges too. Sourcing, on the other hand, can address a number of these issues while also offering some of the benefits of an outsourced model. These next sections examine the benefits of a sourcing model that addresses the core issues of outsourcing: size, control, culture and talent. From small to Fortune 500: How a sourcing model can help you look like a Fortune 500 company The global, connected economy has meant that small and mediumsized companies are needing to compete with huge multinationals, without the same access to resources and infrastructure that those larger companies have. In an article in the Wall Street Journal in 2014, one small business owner indicated that the most difficult parts of expanding operations internationally were getting staff up overseas and communication with that new office. These are just two of the many problems that smaller companies face when expanding internationally. In a sourcing model, however, those disadvantages are minimized and it is possible for a small company to look and feel like a Fortune 500. How? By giving you access to the facilities, resources and talent you need to grow your business or realize your project goals all without losing control of the process. In the case of Intugo, for example, the company acts as a connector offering world-class facilities and a network of proven talent in a range of industries, including BPO, tech support, graphic design, and software development, as well as support during the entire process. The support systems in place mean that the client can focus on the core of their operation, whether technical support or software development, while still accessing human resources, facilities and infrastructure support. This means that a small company can expand into Mexico quickly, with few delays, and offer a robust customer experience that has the appearance and functionality of a much larger company. Intugo s accelerator program allows companies to get their businesses up and running in Mexico with very few resources within 30 to 45 days at an affordable cost. Unlike traditional outsourcing, such a model offers a branch-office extension of company operations into Mexico with packaged support, real estate and talent services.
7 Tapping into Talent: How a sourcing model allows you to tap into Mexico s world-class talent across a range of skills Mexico is well-known for its talent across a range of sectors, from contact center to software development, film graphics and broader IT services. In fact, Gartner estimated that the IT market in Mexico is worth US$64 billion and will grow by three percent per annum until Investment in the country, both foreign and domestic, is increasing, with companies like Oracle, choosing Mexico for two of its international delivery centers, and Microsoft, IBM and HP have significant presence in the country. Mexico has a number of core locations that offer a wealth of IT talent and an environment that fosters innovation. In fact, Guadalajara has been described as the Silicon Valley of Mexico. The attrition rates in the IT industry in Mexico are very low, at about 5%. According to the National Institute of Statistics and Geography (INEGI) and the National Association of Universities and Higher Education Institutions (ANUIES), over 745,000 students representing 30% of the country s total university population were enrolled in engineering and technology courses and these in turn yield some 115,000 graduates every year. With strong cultural affinity to the US and good levels of English, combined with first-class IT skills in a range of areas, Mexico s talent pool has been an attractive incentive for foreign companies looking to invest. Spanish language fluency also means that Mexico s talent can service the growing Hispanic market in North America. While the skills of Mexican talent cannot be denied, tapping into that resource as a foreign company or new business can be daunting. A sourcing model offers a comprehensive, robust and tailored labor recruitment process, which puts the company in the driver s seat of the process while still offering local insight into the talent pool. Intugo s model is flexible, in such a way that gives complete control to the company on who is managing the operation. This allows companies, for example, to choose to have existing employees staff the operations in Mexico as expats, to recruit new labor in Mexico with managers from existing operations, or to manage employees remotely, depending on their needs.
8 Client specifications are applied to the recruitment process, meaning that if a particular skill such as Python or English language fluency is required, only candidates with that skill are interviewed. Employee engagement and accountability towards an outsourced project has constantly been pronounced at lower levels when contrasted with an operation where employees actually belong to the operation. We are living in a talent economy, where companies are striving towards more efficient talent management aiming at talent retention, talent development and value creation. An operation that manages to include these drivers in their operating culture will have a competitive advantage reflecting efficiency and innovation; an outsourced operation is unlikely to achieve this. Taking back control: How a sourcing model can eradicate vendor management issues and ensure that you are in control of your operation Control is a complex issue. When a company takes on a vendor for a specific role, the goal is to simply processes so that the core business is central and the client can focus on it. However, the outsourced function is still an important part of the business and determining who controls that function and how it is controlled can be tricky. The Intugo Way A recent report in Forbes magazine discussed how outsourcing resulted in one entrepreneur losing control of his business. Although the business was not IT-related, the story points to the broader issue of control and outsourcing that applies to all sectors. A sourcing model, on the other hand, means that clients retain control of the nearshore operation, running it as part of their core business and retaining control of intellectual property, for example.
9 In an environment in which data security is increasingly a core business threat large US companies like Target, Sony and more recently AshleyMadison have suffered greatly as a result of data losses control is vital. A 2013 Trustwave study found that of 450 suspected data breach cases analyzed, 63% involved an IT outsourcing provider. A model that creates an internal talent pool in the new location is thus more attractive as it allows companies to retain control of their intellectual property and data, while still expanding and tapping into the necessary skill sets. Of course, this does not mean that data breaches will not occur, but it does lower risk and ensure that the crucial areas of data remain in company control. Control is not just about security, however. It allows companies to benefit from their shared company culture, approach to innovation and team environment in ways that outsourced partnerships cannot. Consistent culture: How a sourcing model ensures that you benefit from your own business culture Culture is an often-overlooked but extremely important aspect of business success. Company culture reflect in everything from the office décor to customer experience, product innovation and employee satisfaction. It is about how we do things around here, and it implies that those who are part of the company culture understand and live the company values and work together to achieve company goals. The importance of a strong shared culture has been evidenced in a number of studies, and points to greater ability to attract and retain employees, better reputational brand and ultimately more productive employees. An outsourced vendor does not share that company culture, however much they may espouse similar values. Culture is lived and internalized through experience, and outside vendors cannot hope to achieve that easily. In a sourcing model, however, the culture of the extended operation is your company culture, because the operation is yours. This means that the recruitment process for new employees selects on the basis not only of skills and experience, but also in terms of cultural fit, a vital component in career success and business happiness. This translates then into a Mexican operation that is truly part of the business and understands exactly what management and customers want because the cultural environment is clear and defined.
10 Conclusion The global business environment has highlighted the need for companies to expand operations in strategic ways that leverage the benefits of outsourcing, while still addressing the challenges such partnerships present. A sourcing model offers many of the advantages of outsourcing: access to skilled labor in niche areas, expansion into new markets, decreased costs in terms of talents. It also mitigates some of the risk associated with outsourcing, by ensuring that the company/ client retains control of the operation, its intellectual property and its data, expands the shared company culture to that new operation, and ensures skill and cultural fit of employees in the new location. The model, therefore, allows small to medium-sized companies to expand in a manner similar to that of Fortune 500 companies, with lower cost and robust customer experience in line with company values. If you are interested in exploring the possibilities of such a model in Mexico, please contact: Larry Carlson Marketing Manager Business Development (520) Arturo Rodríguez VP of Business Development Co-founder