Why Outsource when you can Insource?

by Oliver Dowson, CEO, International Corporate Creations

There’s a general belief that offshore outsourcing is only for big companies, and that Shared Service Centres are only for really big companies.  However, that doesn’t need to be true.  Even quite small operations can be viable.  And importantly, the economic benefits will improve overall business profitability from the very first year – and the enhanced quality of service can accelerate growth.

It’s true that outsourcing probably carries more risks than benefits for the smaller company, unless the work being offshored requires a sizeable existing infrastructure, as is often the case with IT.  The most commonly cited risks are variable quality and poor customer perceptions, but the real problem that emerges for most businesses is lack of control – outsourcing creates a reliance on third-party management and increases certain risks such as IP security.

Every business executive hates “people who tell me what they think I want to hear” – and such people are prevalent amongst the owners and managers of offshore outsourcing operations, which makes this a major concern.  As a result, customer companies often get a distorted view of staff turnover and productivity, and can be badly misled about costs and other matters.

So, if you’re committed to outsourcing, or think it’s the best solution for you, it’s essential to keep a close eye.  Use an independent and knowledgeable audit service (we at ICC can advise) and/or carry out frequent, unannounced and detailed visits of your own.

But I believe there is a better solution.  Most outsourcing risks can be eliminated by setting up a wholly-owned or Joint Venture overseas company (turning it into “insourcing”).  This can be practical and economic with initial staffing of as few as 8-10 employees.  Pick the right local manager, and you don’t need to transfer your own management as “expats”.   Essentially, you’re picking another country to move work you might otherwise outsource, or perform work where skills are scarce and expensive in your home country but relatively plentiful abroad in the destination country.

Businesses that switch from outsourcing to “insourcing” overseas, or creation of an offshore Shared Services Centre – will benefit immediately from taking control.  They also reduce costs through eliminating outsourcing BPO supplier margins, that are usually huge, and dramatically improve staff motivation and retention.

Furthermore, such insourcing brings additional benefits.  Since ownership opens the way to employing higher skilled and qualified staff, businesses can migrate work that wouldn’t be considered for outsourcing, so increasing operational cost savings.   By thinking ahead and choosing an appropriately strategic destination, the new overseas company can also form a base for marketing products and services to the country and regional markets, expanding the company’s global business.

Although most executives would agree these advantages, most don’t proceed further, either because they perceive it would be too expensive, too difficult or both.   But it’s not so expensive if you use the right resources.   And it’s not too difficult if you have the right help.

If you’re unconvinced about the costs, take a look at the chart at the top of this article.  They’re actual figures for similar 8-person clerical operations.  I’ll be writing separately about the cost comparisons between the different countries in another article.

It was my experience of starting small operations from scratch in countries such as India, Brazil and China, overcoming the bureaucracy, cultural, management and economic issues in each, and nurturing each of those operations to a large critical mass, that led me to form International Corporate Creations.  Our mission now is to prove to other businesses that they too can expand abroad, successfully, quickly and affordably, starting small with minimum risks.

 

Zimbabwe – taking down the barriers to foreign investment?

by Oliver Dowson, CEO, International Corporate Creations Ltd

Most pundits seem to agree that Africa has been neglected by foreign investors and should now be actively considered.  ICC agrees – but Africa is a big continent with many different countries with huge variations in opportunity.  There are some countries almost everyone would steer clear of, and for most of this century, Zimbabwe has been one of them.  But is that true any longer?

I went to find out in December, and started by meeting Richard Mbaiwa, the CEO of the Zimbabwe Investment Authority, in Harare.  He is very sanguine about the damage done to investment by the indiginisation policy applied since 2007, which has required 51% of business assets to be held by nationals.   It seems that this policy is now under serious review and is now being reinterpreted, with a view to restarting essential foreign investment.   So, for businesses in appropriate sectors, now may well be the right time to look again.  One thing I saw clearly was the huge interest from China (although that’s true of almost the whole continent), and it could therefore be a case of getting in while the door is ajar and opportunities still exist.

Mr Mbaiwa told me that Infrastructure is the priority, specifically electric power for agriculture.  Whilst the distribution network is good and surprisingly complete (I went to places way off the beaten track that had mains power), there is a real shortage of generation, leading to frequent power cuts.  Currently generation depends entirely on coal and hydro from the Kariba dam.   As members of the Southern African Power Pool, they sometimes import from Mozambique, sometimes export to Namibia, but there are shortages every week.   Thinking of the results of the Paris Climate Change summit that happened just before my visit, and my work in the energy management industry, it was pretty obvious that solar energy – photovoltaics – is the way to go.   Mbaiwa told me that they are now open  to new generation by independent power producers (implying 100% ownership), or in partnership with Zimbabwe Power Authority.

Another high focus is on encouraging the local refining of Platinum and Chrome.  Whilst mining globally has had a huge downturn in the last few years, Zimbabwe has precious metals and it wouldn’t take much to move the sector here higher.  The Chinese are particularly interested, as one would expect.    There has been a 4-year export ban on Chrome ore, which was partly lifted in November 2015.  The intention of the ban was to encourage smelting and refining of the metal in Zimbabwe itself, but lack of industrial capacity to do that basically haemorrhaged mining too.   With an 85% unemployment rate, this heavy work is seen as a good way of exploiting labour availability and adding GDP value.

For the same reasons, there is emphasis on seeking investment in Manufacturing.  The major product is clothing, but Mbaiwa admits that the technology and equipment are outdated and told me that no factory is operating above 50% efficiency.

The tourism sector is ripe for investment too.   I did the tourist circuit too, and wDSCN0476as struck by how few visitors from outside Southern Africa there are.   It’s a wonderful destination though, and would be easy to promote if there was good enough infrastructure (one reason why there are not so many visitors).  The government is promoting Victoria Falls as a hub for tourism and conferences, and has already put millions into airport expansion.  As I witnessed, it’s a beautiful and huge new airport with very few flights.  One reason is nowhere to stay – no big conferences can be held as there is a hotel room shortage.

Clearly there are a lot of opportunities, but apart from the need to negotiate ownership with the government, investors will continue to have other concerns.  The Big Question has to be what will happen after Mugabe dies – he is nearly 92.  The stock answer I got from Mbaiwa was, unsurprisingly, that “the political situation is stable and elections are always free and fair, so there will be an orderly succession”.  But the truth is that nobody knows – except that everyone knows that there is a lot of infighting in the ranks of potential successors in Zanu-PF.  I witnessed a lot of pent-up frustration at the economic situation in almost everyone I met – and nobody expects a solution before Mugabe goes (and are far from certain there will be one afterwards).    The other key concern for investors has to be local labour costs.  On the face of it, they are low – but a visit to the supermarket illustrates that it’s not a cheap country by comparison with others in Africa, and I’d guess at significant wage inflation over the next few years.

Nevertheless, I came away certain that some smart and brave businesses are going to swallow hard, choose to overcome these issues and make very successful investments in Zimbabwe.  This is the moment.

 

Mauritius – a tropical paradise for Shared Services & Outsourcing Centres?

Oliver Dowson, CEO of International Corporate Creations, visited Mauritius in October 2015 and met with their Board of Investment to better understand the opportunities for expansion into that country, particularly for Shared Services operations.

Mauritius has emerged as an Information-based economy and is positioned as a regional ICT hub, through investments in infrastructure, intelligence and innovation, coupled with political as well as social stability.

With over 630 ICT-BPO based enterprises and employing over 19,000 IT professionals, the country has one of the richest technology ecosystems in Africa. Mauritius appears to be an attractive location for ICT companies and offers advantages of reduced operations costs, a qualified and bilingual labour force, innovative incentives, training grants of up to 60%, a robust telecoms Infrastructure with rates discounted by 80% and competitive rental rates.   Several leading global companies including Accenture and Ceridian have set up and expanded SSO operations in Mauritius in recent years.  The IT industry has also developed niche capabilities such as the emergence of an embryonic mass in games development and animation technologies.

Companies can be formed very quickly and economically, and the open legal and financial system minimises bureaucracy.

No transfer pricing or minimum profit level rules apply – so my conclusion is that a business set up in Mauritius purely for export of business services, with no local sales, funded entirely by the parent company abroad, could simply trade on the basis of parent remittances to cover costs with the local business trading at break-even.  In any case, tax rates are low at around 15%

Coverage of high speed (>50GB) optic fibre data connections is currently around 60% and anticipated to reach close to 100% within 2 years

Availability of skilled staff is an issue, but does not seem to be a major preoccupation.  The birth rate is low.  Mauritius is trying to position itself as a hub for university education to get more graduates.   Students like living in Mauritius and the Government makes it easy to settle.  Therefore my conclusion is that Mauritius will rely increasingly on migrants in the future to meet business growth needs.

Wage inflation is said to be low, in the range of 3-5%.  Payroll taxes are low, around 10%.  Employees are paid 13 salaries a year.

Normal working hours appear to be 8-5.  Public transport in Mauritius is only by buses – there is an extensive cross-island network, but they stop running around 18.00-18.30h.   I was told that employees think it quite normal to catch 2 or 3 buses in order to go to work and that, unlike India, poor commuting experience is not a common reason for job switching.   Businesses that need staff to work outside normal hours need to provide transport; normally this is by minibus – perhaps 3 or 4 separate routes taking in different parts of the island.

It is not believed that there would be a problem finding employees for shift or unusual hours working in order to accommodate coordination with other time zones, assuming that transport is provided.

The majority of Mauritians work in the services sector (although the definition of services here appears to include the hospitality/tourism industry).  I was told that only about 4-5% work in agriculture and 15% in industry/textiles.

Of course, from all the possible SSO countries, Mauritius is one of the more attractive destinations to visit, especially if you like sun, sea and sand!!  Nonstop flights from the UK are all overnight and take around 11 hours.   Car hire – essential for any business visit – is reasonably priced but the bureaucracy associated with it is quite high.  Cars come with satnav, which is essential, and although the island is small, the time taken to drive between places seems extraordinary.  Almost every 5-star hotel chain is represented with at least one resort hotel, and there is an excellent business hotel in the centre of Port Louis, the capital city.

So if you are looking for a new and attractive base for your global operations, Mauritius could be of interest.   To discuss in more detail, call us at International Corporate Creations on +44 20 7278 9210, or email info@internationalcorporatecreations.com

Welcome to the ICC – International Corporate Creations blog

Our Blog supplements our regular website at www.internationalcorporatecreations.com.  We will be posting a range of items that will be of interest to businesses planning global expansion and those that have existing international operations that they are interested in managing better.

Examples of future content include:

  • Country insights
  • Approaches to exporting goods and services
  • Setting up and managing SSO Shared Services & Outsourcing Operations and GBS Global Business Services
  • Global Marketing opportunities
  • Use of Data Analytics to measure success of international operations

Please keep coming back for new items!  We welcome questions, comments and constructive criticism.