The Many Faces of Risk Diversification

As we kick-start this blog about ‘risk diversification’, let’s establish why that particular phrase is so high on every company’s To Do list these days. India has been the dominant destination for offshore services for years and although by 2005 it was losing market share, there was no catalyst for a truly global expansion of clients’ sourcing portfolios. That came in the form of the recession in 2009. Suddenly profit margins were slimmer than ever, especially for call center operations, and companies found they didn’t have as much capital to play with. The inherent costs and risks of having operations halfway around the world caused many firms to pull out and bring outsourced projects back in-house.

But the path outsourcing has taken towards diversification is driven not just by risk mitigation and fear, but also by potential benefits in service delivery and new business generation. I recently read Outsourcing: Expansion by Diversification, a report that Tholons Advisory put out in November 2008 that deals with this topic. Although of course dated, it gives a fantastic breakdown of what is really meant when firms and their CIOs throw around this vague term ‘diversification’. Tholons breaks it down into six aspects:

1)      Delivery Model diversification

2)      Geographical diversification

3)      Sell-Side (Maturity of Services Offered)

4)      Buy-Side (Maturity of Services Outsourced)

5)      Academe, or talent available through fresh graduates

6)      Policies and Regulations (Governments, IPAs and trade groups)

In the coming months I’d like to periodically focus on each of these as critical factors in site selection. But for this week, let’s start the discussion on Geographical diversification.

Location-specific advantages

Simply put, a strategic multi-sourcing model allows firms to balance out the unpredictability of a single delivery location. If events in recent years such as fraud at outsourcing giant Satyam or terrorist attacks in Mumbai have taught us anything, it’s that no destination is risk-free, and having all your eggs in one basket may cost dearly. But Tholons’ report makes it clear that a diversified outsourcing strategy also has a lot to do with benefits to a company. For example, we’ve all heard of the ‘Follow the Sun’ strategy – the idea that a business with centers in different locations can operate around the clock, and maximise efficiency in service delivery.

Cultural fit and compatibility between employees and your client base is also critical in mitigating the risk of customer dissatisfaction. Especially in technical support services, agents with the same language, accent and culture can work much more effectively and independently with clients. Spanish language proficiency to serve the Hispanic population of the US, is partly why Nearshore delivery locations like Mexico and Colombia have become popular in recent years.

Globalized services

There is one point that Tholons has missed however. In our increasingly connected and competitive market, the lines between different geographic locations are increasingly blurred. One example - the entry of large Indian players like TCS, Infosys, Wipro, Mahindra and Patni into the Nearshore space. Outsourcing providers are proving that they’re not limited by country boundaries, and can provide services wherever clients need them. As this movement picks up speed and services become more and more globalized, the decision of which provider to partner with may be more crucial to your risk management strategy, than which geographic location.