Having attended a number of Outsourcing and Offshoring
conferences lately, the most frequently asked question we hear is,
"What is the next strategic location?" Someone will offer
"Costa Rica," another chimes in "South Africa."
Stepping back for a moment, it is important to appreciate how
remarkable it is that we can even ask this question. Stunning
advances in telecommunications and technology have enabled all of
us to view the world as our oyster.
We live in a truly interconnected world. Often that
interconnectedness is a good thing. Other times, it is not so good,
and we are grateful for some physical separation.
Legal systems around the world reflect their individual
country's culture. They are each as different as people are
diverse, and every country has the local view: "They can't
possibly do it differently than we do." But in fact
"they" can, and "they" do! It is important to
appreciate these differences before answering the next
location question and investing a significant amount of capital
based upon labor pools, time zones, infrastructure and cost. It is
also important to: (i) understand the functions that your company
is evaluating for a potential relocation; (ii) know in detail how
those functions are currently performed; (iii) have an appreciation
of how important the functions are to the operation of your
company; and (iv) know whether and by whom the functions are
regulated. With this level of understanding, a company can begin to
assess risk in the context of a strategic location in a different
The second part of the evaluation process is to assess the
operating environment in a particular location. The company should
know whether the laws of the country you have selected as a
strategic location are hospitable to the functions that you want to
Due diligence should include a reasonable picture of what it is
like to operate a business on the ground. While it is not possible
to eliminate all risks, it is possible to assess risk before
investing in a new location, and to use procedures and tools to
assist the company in its ongoing risk management obligations once
you are there. Although the world is uncertain and changeable, with
a well-focused effort, a company can reduce the probability of risk
and the possibility of a bad or costly outcome.
Another important consideration for companies in the United States
is the current and aggressive enforcement of the Foreign Corrupt
Practices Act by the Securities and Exchange Commission and the
Department of Justice. When evaluating locations, you add more risk
and cost to your operation when the country has a reputation for
The following list of questions is a useful framework to begin an
evaluation of operating risk in a country.
What is the form of government?
Is the government politically stable?
Is the government transparent or corrupt?
Is there government control over speech?
Is there freedom of association?
Is there a digital community?
What is the legal environment? Are there consistent results on
the same set of facts?
What are the rules that relate to ownership of real estate?
Contract formation? Enforcement of contracts? Hiring and firing of
Where is the financial system on a scale from free market to
What is the tax environment? Are there taxes on the transfers
of technology or intellectual property?
Can the backgrounds of locally hired people be validated?
Is there legal framework for the protection of intellectual
property, and is there an enforcement remedy in the event of a
Are there data protection rules? If data, intellectual property
or money go into a country, can the company get it out?
Is there a consistent infrastructure (electricity, telephones,
etc.) to support operations? Can a plan be made to support
operations in the event of a break in the continuity of business
Are there confidentiality, bank secrecy, state secrecy or
information security rules? Are those rules consistently applied in
ways not inimical to your business or that of your outsourcing
What are the rules concerning the import or export of
technology? The import or export of data via
What are the rules concerning visas and immigration?
Is the local culture consistent with innovation or
There is no one right answer to any of these questions. Although
the company's goal is to achieve the uninterrupted benefits and
expectations of its initial investment analysis, all risk
evaluation is contextual, and the risks need to be balanced against
the goals of the company. In light of all of the risks, the rewards
may make the risks acceptable, particularly when supplemented with
procedures and technologies that mitigate risks. Enterprises with
global operations and enterprises seeking to offshore operations
need to evaluate country risk as part of the overarching enterprise
risk management governance structure at the company.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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