Publication: Chimo Canada
Risks in Outsourcing
Richard Mills CFA, Chairman
India and Philippines are the subject of long-standing travel warnings from
various embassies. Some say India is on the verge of nuclear war with
Pakistan. In Philippines, terrorist bomb threats are all too common. Is it
any wonder that Gartner Group cites
security as a “key concern in outsourcing?”
If one only
looks at the screaming headlines, then it is difficult to understand why so
many intelligent people are building outsourcing operations in these
apparently “unsafe” countries. But if we speak with the people actually
leading the operations in Asia, we get quite a different perception of the
Standring is the Manila-based General Manager of the IT outsourcing facility
for Safeway, the huge American supermarket chain. He feels that while there
are security risks in Philippines, they are not much different from those
“of any big city in the world.” He believes that with “proper security
measures” there is little to worry about. It seems to me that this same
advice would be appropriate for anyone visiting New York or Washington for
the first time.
Shaun Paterson is VP of Operations for the large outsourcing facility of
Thomson Financial, the Canadian global financial information powerhouse. He
takes a similar view. Shaun feels the streets of Manila are “safer than
those of London,” England (his home country) — he says female friends
visiting from Britain feel the same way. As someone with many years of
Philippines experience in IT and Business Process Outsourcing, Shaun feels
qualified to say that security risks are at most trivial.
all experienced managers I have spoken to make similar assessments. Some
have said that the risk of personal injury is higher while driving a car to
the airport for an overseas trip than it is being in the overseas country.
One American manager made the point that he can’t understand why there
aren’t travel warnings for the US since there is clearly a greater proven
risk of terrorist attacks there. It seems to him that there have never been
comparable terrorist attacks in either India or Philippines.
That all sounds good but Business Process Outsourcing is still a new concept
to many people. Managers wishing to pursue outsourcing programs must spend a
lot of time justifying their plans to skeptical department managers who face
the loss of their staff. Security risk is always flaunted as a “key
concern” in any outsourcing project – What happens if a bomb destroys
our facility and kills our people? Will our senior staff be kidnapped?
Aren’t these countries very corrupt? On and on.
Another approach to explaining away the issue of Country Risk is to go back
in time to an earlier generation of offshore outsourcing. Let’s talk about
Intel, Philips, Toshiba and Texas Instruments are a few examples of
electronics companies that have operated billion dollar facilities for
decades in Philippines. Last year was Intel’s 30th year anniversary in the
country. During that period, the company has seen a tedious parade of armed
insurrections, volcanic eruptions, electricity black-outs and corruption
scandals. Through all of it, they have continued supplying their critical
components to the global supply chain without notable interruption.
Semiconductor people consider themselves the “old-hands” of outsourcing
and sometimes express derision at the sudden attention given to the
“newkids” of the concept, namely Business Process Outsourcing. The
old-hands don’t understand why there is so much worry about spending $5M
to setup a call center when for most of them this is “peanuts” — many
have annual maintenance budgets that are larger than that.
A semiconductor facility, they say, requires large buildings to be custom
built, power and water supplies to be upgraded, training technical staff can
take years, and so on. A BPO operation, by comparison, has a lot less to
For these reasons, semiconductor managers sometimes refer to call centers as
“outsourcing-lite” or “outsourcing-on-a-diet.” Jokes aside though,
they are also full of advice and information for the younger generation of
old-hands say there are really 2 kinds of Country Risk to think about –
one good and one bad. Country Risk that involves the threat of violence
against employees or a complete breakdown of law and order (as what happens
in war) is generally felt to be bad. It is reasonable to say that Haiti and
Bosnia are not currently realistic destinations for outsourcing operations
for this reason. It is also reasonable to say that Philippines and
India are realistic destinations since various generations of outsourcers
have had successful long-term experience. Some say India is the higher risk
of the 2 since it faces possible war with Pakistan – they’ve already
fought 2 wars together and this time they both have nuclear weapons. But,
this hasn’t stopped India from becoming the King of Outsourcing, has it?
Country Risk that affects currency values, on the other hand, can often be
good for business. The head of one major semiconductor firm said it like
this, “If the value of the local currency drops by 15%, then many of my
costs also drop by 15%, and I know it sounds bad but this is good for my
With this in mind, countries like Philippines and India (less so) should be
good long-term destinations for outsourcing. The Philippine peso has dropped
by 40% to the US dollar over just the past 5 years while the Indian rupee
has not fallen to the same degree. So, does this make India a less
attractive long term outsourcing option? The answer is not completely clear.
But what is completely clear is that Security Risk is not much concern to
the people with experience leading outsourcing facilities in either India or
Philippines. Most leaders feel the issue is over-blown almost to the point
of ridiculousness. This view goes for both the current and especially the
previous generations of outsourcing managers.
the article above
PDF format by clicking below.
& Management Consulting:
Associates provides its Executive Search & Management
Consulting services throughout the Asia Pacific region. We are
proactive and well known in our sectors of focus. Regional
Managers use us to help bridge the gap between local environments and
the world-class requirements of multinational corporations.