IT Outsourcing Goes Rural

by Max Staines of Compass Management Consulting

Rural sourcing, where U.S.-based service providers establish delivery centers in low-cost regions outside of major metropolitan areas, is gaining increasing interest and attention in the marketplace.

Potential benefits of rural sourcing can include competitive pricing, fewer time-zone and cultural constraints, and, in many cases, lower transition costs. Moreover, for U.S.-based client organizations, particularly those in the public sector, the political appeal of “keeping jobs at home” can be essential.

This is not to suggest that the rural model is poised to compete toe-to-toe against the major Indian providers, much less displace traditional models of offshoring. However, for many client organizations, rural sourcing is emerging as a potential arrow in the quiver of a comprehensive global multi-sourcing strategy.

Labor arbitrage

As with any sourcing model, the cornerstone of the rural approach is ready access to skilled labor at relatively low cost. Analyses conducted by TPI (Compass and TPI are owned by the same parent company, ISG, Inc.) have found that the wage rates paid by rural sourcing suppliers can be 20 percent to 40 percent lower than those found in major metropolitan areas.

According to TPI, rural-based service centers can also leverage existing infrastructure to achieve economies through a service delivery “factory” framework of common best practice processes (ITIL and CMM), tools, training, operating models, and knowledge management disciplines. In addition, rural sourcing centers are well positioned to provide custom application development and testing services.

But, the level of investment by rural firms is often less than the MNCs, so activities that are asset or investment intensive, such as remote infrastructure support, may not be not good candidates for rural outsourcing, according to TPI.

Staffing

Rural outsourcers draw technical talent from university towns in Arkansas, Michigan, Nebraska, New Mexico, North Dakota, and elsewhere, offering career opportunities and a lower cost of living. Quality of life considerations such as climate, recreational activities, and quality schools are becoming increasingly important competitive differentiators in hiring strategies. In many cases, rural providers target college grads with local roots who are interested in staying in their home town if viable career opportunities exist.

For underemployed residents of economically depressed areas, rural centers provide an attractive entry-level option. Compass recently analyzed an outsourced Help Desk operation based in a prairie state that served a number of national clients. The service provider established a career path, whereby entry-level agents from the local community worked on smaller accounts doing first-level contacts, and then progressed to more prestigious accounts and more value-added work. The provider’s major client — a major global retailer — was considered a true partner, and provided long-term opportunities to a number of agents.

Local touch

Discussions of rural sourcing have often focused on political attitudes towards global offshoring. Indeed, attitudes about the national origin of service providers can have an impact on the effectiveness of service delivery.

For example, in conducting a survey of a major global retailer, Compass found that help desk users actively avoided dealing with agents in a Mexican operation in order to speak to an agent based in the Midwest. While the most common complaint against the Mexican agents was difficulty in communicating because of accents and “cultural” differences, users also expressed a view that the desk in Mexico “didn’t understand the urgency of our needs and issues.”

In other instances, Compass has observed that users will try to solve problems on their own or seek a colleague’s assistance rather than work with an offshore provider and deal with “someone who doesn’t speak English.” Compass has strong evidence showing that high levels of “end-user effort,” whereby users avoid the help desk and try to fix their own problems, can be a significant drain on productivity.

Whether complaints about language ability or cultural differences are legitimate or not isn’t the point. The fact that these attitudes can be shown to have a marked impact on operational performance cannot be ignored.

The competitive treadmill

Perhaps the biggest shortcoming of the rural model is scalability. Even the largest state universities in states like Arkansas, Kansas, Iowa, and Oklahoma can’t produce the level of talent emerging from the technical academies of Bangalore and Beijing. TPI has observed that rural providers also tend to lag in the area of process maturity, relative to the large offshore providers. TPI and Compass have documented the negative impact that lack of process discipline can have on an outsourcing relationship.

Over time, of course, the rural model will be subjected to the inexorable economic pressures of the sourcing marketplace. That’s already evident, as India is itself adopting a “rural sourcing” approach: recent media reports have described offshore providers such as Wipro establishing service centers in remote Indian villages as a way to, among other things, counter rising wage rates in Bangalore.

Moreover, U.S.-based rural providers will face competition from Tier One domestic players as well as India heritage providers who are expanding their U.S. operations and hiring more locals.

Assessing the rural option

Assessing the viability of a rural sourcing approach requires an apples-to-apples comparison against alternatives — whether domestic, offshore, or internally managed. In addition to labor arbitrage, factors such as different management and training requirements, impact of different time zones, and savings associated with less travel, must be considered. And whatever sourcing model is adopted, a focus on continuous improvement and optimization of operations through adoption of leading practices and process management models is essential.

To ensure a meaningful comparison, service level agreements (SLA) and productivity measures included in the total cost of outsourcing (TCO) assessment should be the same for a rural outsourcer and a traditional or offshore outsourcer. Blended rates should account for the percentage of work completed offsite, which is likely to be higher in a rural model than in a traditional offshore setting.

Market presence

So where does the rural model fit in today’s sourcing landscape? Monty Hamilton, CEO of Rural Sourcing (RSI), says the rural model opens up the benefits of effective outsourced delivery to midrange organizations that have heretofore lacked the scale and requirements to engage the major players. Such clients, he says, are attracted less by economies of scale as by “economies of skill.”

Ultimately, a best-of-both worlds approach may emerge. A senior sourcing executive at a New York-based media firm, who works with two major India heritage players and is somewhat skeptical of the rural model, told us recently that partnerships between a global provider and a rural operation could potentially leverage the scale and skills of the former, along with the local market knowledge and workforce connections of the latter.

While much of the buzz around rural sourcing has been driven by political considerations; specifically, by the perceived “Buy American” appeal of the model as an alternative to globalization, ultimately, the success of the rural model will be determined by its competitive viability and, more importantly, by how that model is managed.

Max Staines is president of North America for Compass Management Consulting.

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