Insights, indeed

Michael Alan Hamlin

Posted on November 8, 2006

NeoIT report provides little that is new other than flawed analysis

NeoIT, a U.S.-based consulting firm whose expertise lies in assisting firms that wish to outsource business processes, released its latest report on place competitiveness last week. Titled “Global City Competitiveness,” the report concludes that seven Indian cities, led by Delhi NCR, are the most attractive destinations for investors in business process outsourcing (BPO) services. They are followed by Ho Chi Minh City, Manila, and Shanghai, in that order, rounding out the top-ten BPO sites in the world.

A read of the report, which was published in Offshore Insights, a monthly newsletter published by NeoIT, immediately provides two impressions. First, it largely consists of basic conclusions about investment decision-making that have been drawn by others previously, so there is little, if anything, new of substance. Second, the research methodology that drove the research on which the report’s competitive analysis is based is seriously flawed. More to the point, it is surprisingly, and dismayingly, sloppy.

Why dismaying? For the Philippines the report is dismaying because its conclusions and lukewarm appraisal of the Phililppines have been widely reported, for one thing. It is also dismaying that the report’s conclusions have largely gone unchallenged, suggesting by virtual default that the Philippines is in fact substantially less competitive as an attractive BPO investment site than many potential investors have begun to believe.

NeoIT’s analysts frame their analysis with their finding that “key determinants of location choice can be split into two categories:” Generic (or basic) factors; and, Enterprise-specific factors. Generic factors are human capital, costs, infrastructure, environment, and risks. Each of these factors is assigned a weight, with human capital by far the heavyweight, at 40 percent. Costs and environment receive 20 percent each, and infrastructure and risks, 10 percent each.

Enterprise-specific factors include language compatibility, physical proximity, socio-economic affinity, and sector-specific expertise availability. NeoIT does not provide weights for these factors. Instead, its analysts evaluated each city against its “peer group,” ranking them from one (lagging) to five (among the best). The weighted generic factors are also subjected to the same categorization.

The generic factors provided in the NeoIT report are unremarkable in the context of similar studies, so there is no argument with respect to their essential validity. However, the assigned weights are a different matter. Take infrastructure, for example, which receives a weight of just 10 percent although offshore outsourcing wouldn’t exist without enabling infrastructure. Since the Philippines’ telecom infrastructure, in the view of industry executives, is perceived as world-class and India’s, while much improved, is not by comparison, the low assigned weight should work in India’s favor. Even so, the report actually ranks Delhi NCR infrastructure three, and Manila, two.

NeoIT’s enterprise-specific factor ratings are even more curious. For example, Manila ranks just three (moderately placed in peer group) in voice services while Delhi NCR ranks five, the highest (Among the best in peer group.). Both research and anecdotal evidence strongly suggests that the Philippines ranks as high, perhaps higher, than India in voice services. In fact, this is one of the principal factors driving investment by Indian BPO firms in the Philippines.

There are other issues involving the enterprise-specific factors too numerous to address individually, some laughable. For example, a caption in the report says that Manila is “also great for back office processing activities,” but the report assigns Manila only a mid-level ranking of three in back-office activity. Manila’s capability in both healthcare and high tech is ranked just two (not a competitive advantage in peer group), yet both are considered competitive sectors by industry executives in the Philippines, as well as by their clients.

But the comparison of Manila and Delhi NCR is the most glaring flaw in the report. Manila is shown as a city of 1.7 million residents, while Delhi NCR is shown as a city of 15 million. The report obviously refers to the city of Manila, not the Manila NCR, which has a population of approximately 12 million. Worse, very little of the Philippines’ BPO capability is located in Manila; instead, it is scattered throughout Manila NCR. A valid comparison of competitiveness must evaluate Manila NCR against Delhi NCR, not Manila versus Delhi NCR. This is a classic case of an apples-to-oranges analysis, flawed from conception.

It is also noteworthy that NeoIT’s analysts acknowledge that large players such as Dell and Genpact are venturing out of tier-one, mature BPO locations while arguing that such cities are still the most attractive sites for investment elsewhere in the report. If these investors are venturing outside mature locations, and they are, that suggests eroding competitiveness of the tier-one BPO locations NeoIT asserts are the most competitive cities in the world for BPO investment.

Dell and Genpact are not just venturing outside tier-one India cities to tier-two India cities. They are also becoming large investors in the Philippines, setting up multiple locations, suggesting that Manila NCR is a competitive BPO site when compared to India’s tier-one and tier-two cities by investors. But Manila NCR hasn’t been compared to those cities in the NeoIT study. That’s just an observation, not an insight. But at least it’s correct.

No Comments

Leave a response