Today’s guest post is from Diego De La Garza, Senior Project Manager at Source Once Management Services, LLC, and Source One’s expert on sourcing in Latin America.
In Part I, we noted that efficient migration to low-cost countries has become a necessary, competitive trait because ignoring low-cost country sourcing within the corporate agenda is now a risk in itself. However, low-cost country sourcing has become so intricate that it carries significant risks if improperly managed. We already discussed that risk mitigation must begin with proactive and diligent research on risk potential before setting a comprehensive strategy for the migration process and discussed the quality concern and noted that where there is expertise in a well established industry, quality will generally not be an issue. But this is just one risk area.
As far as other risk areas, geography is a critical component that is ignored more frequently than it is acknowledged when selecting a low-cost location. Geography plays a dual role when managing risk. First, geographical risk can be assessed based on the proneness of one location to experience a natural disaster and its ability to recover. Secondly, geography should be assessed on the location’s accessibility to reach end markets quickly. Logistics and infrastructure play a key role here, but a strategic location is a competitive advantage that will nurture mobility.
Low-cost countries will also have different laws, rules, and regulations that permeate their business culture. Some countries will have strong intellectual property (IP) protection schemes but they may not enforce or penalize infringement. Others won’t have any at all, which in many cases has motivated corporations to exit low-cost locations. IP transgression may have huge repercussions to a company, especially if prosecution in a foreign country is favorable. Corporations must ensure that robust confidentiality agreements, contractual terms and conditions, and enforceable jurisdictions are in place with all entities that are engaged from the beginning.
Financial regulations, taxing structures and commercial activity compile an extensive bundle that may pose both risks and advantages. The best way to capitalize on tax breaks, financial incentives and even logistics benefits is by understanding the trading regulations and agreements low-cost countries have in place and how can they be leveraged advantageously. From subsidies, to temporary-tax-free importations, most low-cost countries today have mechanisms to incentivize investment. It will also be critical to understand which regulations can negatively impact the operation or may affect the Total Cost of doing business. Some good examples of this are anti-dumping laws and penalties that are applied to specific commodities and products, which will vary in time and form constantly.
Political and social instability are stigmas that often become associated with low-cost countries. In many cases this image is misunderstood or exaggerated by the media. The reality is that focused social issues may transcend the commercial barrier when unwarranted fear is passed onto potential investors. Social unrest is unpredictable and can easily scare away opportunities, but in many cases, specific industry sectors may be protected from it and may even be thriving in spite of it. The best way to manage something like this is to understand how the macroeconomic landscape behaves as a whole from the very beginning.
Some companies have shown interest in approaching migration on a “testing the waters” type of approach to mitigate risk, which may entail transitioning only a small portion of their volume to a low-cost country, or running pilots to ensure a safe migration. While this conservative strategy is common and could be effective, is not necessarily the most beneficial. “Testing the waters” may actually be very expensive in the short-term and may not provide the full benefits of a well-run migration strategy; in some cases it may even be considered somewhat “risky” since companies may incur in dead costs, expose competitive strategies and not leverage the full potential of the local network.
Strategic sourcing best practices are a key element on risk mitigation, as many of them include the evaluation of multiple dimensions of the offshoring and migration process. They also help understand suppliers and establish collaborative links with them and other local entities that can help define a clear picture of the local market, the networks and uncover the opportunities that may have not even been considered in the first place.
With all this in mind, low(est) cost should not be considered as the only metric on which to base a migration decision. Finding an ideal low-cost country with low risk will depend on its sustainability potential. In some cases the lowest cost may also come with higher risk, and so a well-balanced strategy that demonstrates long-term value is the best formula to keep both costs and risks down. A balanced combination can only be drawn through leveraging accurate data and expert advice on each of the risks areas of cost migration.