As Nearshoring Gains Popularity, will the UK be the "Next Big Thing" in Outsourcing?

Think outsourcing. Now think location. You are probably thinking India, China or perhaps Central Eastern Europe. Think again.

I have recently studied the attractiveness of the UK (with M.N. Ravishankar and my PhD student Kayode Ejodame) as part of a UK Trade and Investment project by the Loughborough Centre for Global Sourcing and Services (CGSS). Our study compared 7 locations in Western, Central and Eastern European countries that are considered the ‘usual suspects’ to compete with the UK on outsourcing services. The results of our analysis leave no doubt: IT and business process outsourcing vendors would benefit from having operations in the UK.

You’re probably wondering: How can the UK compete with Central Eastern European countries on outsourcing services? Well, it can, but it does depend on the line of services and the value delivered from the outsourcing engagement.

Let’s start with the facts: The UK economy is the second largest outsourcing consumer market in the world, and a top location for foreign direct investment in Europe. The UK attracts more investments than many other European countries not only because of its fairly attractive corporate tax model, but also because of strong domestic demand that encourages many multinationals, particularly in the service industry (see Table 1 and 2 and Figure 1).

Table 1: FDI across 4 major European economies.

Table 2. Outsourcing revenues in the UK, 2012

Figure 1. Net FDI international investment positions into the UK

The data above may convince a multinational to set up a subsidiary in the UK, but why should an outsourcing vendor consider such an investment?

We considered this question in light of 3 key trends in the outsourcing industry that the Loughborough CGSS identified recently:

The maturity of the outsourcing sector drives client firms to seek impact on business and strategic performance from their vendors; Client firms and vendors deploy complex sourcing models that increase the importance of managerial capabilities against technical and delivery capabilities; As growth through outsourcing is becoming a key strategic driver for client firms, locations with promising entry points to lucrative markets will become more attractive for outsourcing investments.

These trends have made vendors rethink their global presence and pursue a new strategy: to set up operations in strong demand and large-scale countries, where there are opportunities to tap into new markets and where advanced managerial and technical skills are available. Further, as costs in these countries tend to be higher, the domestic client needs to be a sophisticated consumer of outsourcing service who values service quality to the same degree as cost savings (and in some cases, values quality more than cost!). Clearly, the formula for assessing the attractiveness of a country such as the UK for outsourcing services is different to how we’ve assessed the attractiveness of India, simply because the value proposition is different. While the key elements for country attractiveness are still central to this assessment – cost, environment, market attractiveness, infrastructure and risk – the weights given to each factor are not equal. Our analysis of 7 European locations resulted in the following perceptual map that helps vendors understand the comparative attractiveness of the UK as an outsourcing destination:

Figure 2. Outsourcing attractiveness – a perceptual map of a comparative analysis

The perceptual map was developed on the basis of evidence collected from leading vendors with operations in the UK. All the vendors we interviewed have been ramping up operations in the UK and some are looking to add 15% new employees to their UK-based workforce. The new strategy pursued by vendors is also changing the nature of competition from one based purely on cost to a hybrid mode in which advanced skills coupled by premium price is becoming the winning formula (though this can be compensated by large scale).

Here are four examples of leading vendors with operations in the UK:

Konecta: The UK as a Service Mentality Hub Pedro Swanson, the Head of UK Sales & Operations at Konecta UK explained why the company established itself in the UK in simple terms: "We wanted to come to the UK because it is a mature market. The UK is where you want to be, in order to be able to jump into the USA market." Konecta UK, headquartered in Milton Keynes, specializes in business process outsourcing and contact centres. The firm has opened three contact centres in the UK since 2008, and has experienced an impressive growth in the last five years. During this time, its UK workforce grew from 120 to 535 positions, and it plans to grow to 3,500 staff by 2016.

According to Mr Swanson, the quality of service in the UK is among the best in the world, therefore for any firm seeking to establish itself as a leading player in the BPO and contact centre sphere, a UK experience is essential. He explains: "Finding talent in the UK was never a major challenge. It was always possible for us to fill our positions in the contact centres we established in the UK, and retain them, with attrition levels on or below industry standards."

In addition to the strong talent position the UK demonstrates compared with other European countries, the UK has also offered Konecta excellent technological infrastructure for contact centres. When considering future investments in the UK, Mr Swanson concluded: "The UK is and was always about service quality. We are here for the growing clientele base that seeks high-quality service."

Aegis: The UK as a Global Delivery Centre Aegis has been in the UK since 2011. After careful examination of major cities in Western Europe, Aegis chose Manchester as its central European hub. Manchester was selected to lead Aegis European operations because of its superior quality of talent and infrastructure. Manchester is home to four major universities and 17 higher education institutions. The city has offered Aegis a conducive business environment, supported by government incentives.

Khawar Ali, Vice President Europe at Aegis Outsourcing UK, explained the move into the UK: "The UK is the second largest BPO market globally. Our strategy is to develop global footprints and therefore having presence in the UK makes perfect sense."

Eyeing the fast growth of this market in Europe, Aegis has set up a 600-people inbound and outbound call centre that provides a range of contact centre and IT outsourcing services. Mr Ali explained that the way BO services are consumed today has changed: "Today, it is about skills more than anything else. Clients expect vendors to provide the skills, and vendors need to demonstrate that they are capable of providing excellent services using the best skills available. We compete on talent and we offer partnerships by accessing skills. In this regard, the UK is very attractive."

Aegis is planning to open another delivery centre in the UK in order to strengthen its European position.

Infosys: The UK as a Growth Engine Infosys Technologies, one of the largest Indian vendors, has been in the UK since 1996. With two large delivery centres, one in London and one in Swindon, Infosys has developed a stronghold in the UK to offer onshore support to its client-base. Srikanth Iyengar, Infosys’s Global Sales Head and Head of its UK Centre, explained Infosys’s onshore strategy: "It is our strategy to stay close to the client, and as such we always attempt to set up delivery centres onshore. We have chosen London and Swindon mainly because of our clients, as well as the accessibility to skills."

With 11% of the global outsourcing market revenue ($100M BPO and $700M ITO) and as the second largest global market for outsourcing services, the UK has played a major role in Infosys’s growth. More importantly, Mr Iyengar sees the UK as playing a role in Infosys’s future growth: "We see massive investment in outsourcing in the UK as well as an openness by UK-based firms to "leapfrog" the technology. It’s about the maturity of the market."

In the last three years, Infosys has recruited 300 highly skilled employees, topping 3,000 employees across the UK, and it expects to carry on recruiting at a rate of 10% every year.

WebHelp TSC: The UK as a Strategic Transformative Experience Webhelp TSC, formally Hero, has been in the UK since 1994. It has built its customer relationship business over the years and currently employs 6,300 staff over nine sites: six in Scotland and three in the Midlands and South East England. Until 2008, the company operated in the UK as a traditional inbound and outbound call centre business. Changes in the market and growing demand from UK clients to deliver value have challenged Webhelp TSC. CEO David Turner explained: "We needed to respond to changes in the market and reinvent ourselves. It was not easy, but we realized that this experience could put us on a different trajectory, where we deliver true value, beyond cost savings, to our strategic partners. We have decided to seek business solutions, critical for our clients, in the form of multi-channel centres and are even experimenting with business analytics, a rather revolutionary approach in this business."

Critical to the success of Webhelp TSC is the ability to tap into advanced technical and managerial talent that will demonstrate to clients the actual value delivered as a differentiator. In an industry that often competes on costs, this is truly innovative.

UK Attractiveness: SWOT analysis A good way to summarize this exercise is by bringing all the insight gained into a SWOT analysis framework.

Figure 3. SWOT analysis of UK attractiveness

Strengths

Large outsourcing market Mature outsourcing market Advanced sourcing managerial skills Strong service mentality Availability of language skills Low attrition levels for most BPOs Several hubs of outsourcing management and delivery specialization Strong presence of leading outsourcing vendors Strong presence of outsourcing advisory firms Flexible employment laws

Weaknesses

High cost base in big cities Moderate cost base in rural areas Moderate performance of broadband and network infrastructure in certain areas Tough competition at entry point for newcomers Government incentive schemes do not accommodate small–medium size vendors

Opportunities

Fast growing BPO market Stable, yet large ITO market Entry point to attractive markets in the USA and Western Europe Positioned to deliver innovation to client firms by bringing together technical, managerial and customer support capabilities

Threats

Lack of attention by government to sustain interest in the UK through incentives Lack of attention by government to support talent mobility Emerging sourcing models based on utility and commoditization of services Regions emerging as hubs for particular sourcing models e.g., Germany for shared service centres

While there are many appealing reasons to consider the UK as an attractive location for outsourcing, we cannot firmly conclude that it will continue to attract investments from the service industry. Current and future governments will need to pay attention to threats such as lack of talent mobility into rural areas, and the development of competing centers of excellence in Europe (eg, Germany).