Why Monitoring Location Risk is Imperative to Businesses?
Written by Sudeep Chakraborty
With uncertainty being the only certainty, the decision to pick an appropriate location is becoming even tougher. Whether it is the Brexit in the European Union, China’s aging population, natural disasters in Asian Countries or bureaucratic inefficiencies in Egypt and Hungary, all indicate towards a single fact that there are certain risks associated with each and every location.
What are these risks associated with any location?
The risks associated with any location can be widely classified into following categories:
- Economic Risk: Brazil’s service sector returned to contraction in October 2017 due to economic uncertainties. Where a promising economy can be a boosting factor for investments, a glooming economy can be a serious challenge. The economic woe can be a result of financial deficit, high inflation or deflation, deprecating currency, etc.
- Geo-Political Risk: This can be considered as the utmost risk factor as mostly it is unpredictable and uncontrollable. Factors such as political uncertainty, terrorist attacks, social unrest, ethnic tension, natural disasters, etc. influence the Geo-Political Risk. It would be a terrible thing to turn a blind eye to this risk category.
- Financial Risk: The primary reason for outsourcing has always been cost saving. Cost is more dependent on the location than the supplier. Power cost, fuel price, office rent, average salary growth, taxation, etc. are some of the factors that influence the operating costs making any location appealing or undesirable. Any sudden change in such factors has the potential to disturb the otherwise smooth business operations. Recently, the tax reform policy of Philippines caused uncertainty in its BPO sector.
- Infrastructure Risk: This risk comes into picture from the location’s infrastructure conditions such as quality of power supply, transportation, office space availability, technology readiness and factors such as government support towards their development and presence of Special Economic Zones / Free Trade Zones / Software Parks.
- Legal Framework Risk: China’s new cybersecurity law restricts outflow of data from the country; Poland’s labor law is very restricting and doesn’t let employers check criminal records of candidates and employees. Hence, legal and security landscapes such as data protection laws, labor laws, anti-bribery laws, anti-money laundering laws, etc. becomes important for business operations.
- Doing-Business Risk: Whether it is the ease of doing business in any location or the regulatory and statutory requirements in that particular location, both play a vital role when it comes to day to day operations as well as any future expansion plans. Without a suitable business environment, it is not possible to achieve the desired goal even with a capable supplier.
- Expansion/Growth Risk: The attractiveness of a location also depends on the opportunity it provides for growth and expansion. Demographic challenge such as aging population, lack of good education system, inappropriate talent pool, market maturity level etc. are some of the factors which can either play a supportive role or become a bottleneck.
- Living Standard Risk: Factors such as cultural compatibility, climate, safety, cost of living, etc. influences the quality of life for any location. These factors when unfriendly make it difficult for expats and other employees to work in that location and fail in attracting suitable talent to that particular location.
How location risk correlates with supplier risk?
All these risks related to locations make it highly evident that not only a proficient supplier, but also the location of the supplier is equally important to achieve success in outsourcing. A well-established supplier can also falter due to political or economic downturn; or a natural disaster such as flood or earthquake can disrupt the supplier’s entire operation. According to Forbes, one of the top trends shaping businesses in 2017 is ‘Geopolitic Disruption’. It is vital for companies to understand where these location risks are occurring and how they could impact their business. Likewise, a flourishing and attractive location is of no use without a capable supplier. Hence, both location risk and supplier risk goes hand in hand and needs to be given equal weightage for a successful outsourcing partnership.
Why is it important to monitor locations?
Risks associated with a location can’t be directly controlled by the companies or suppliers and can’t be predicted accurately. However, unknown risks can also be foreseen and managed with the help of critical thinking and foresight coupled with the right set of skills, procedures, and tools. Real-time monitoring of risks associated with location is one such tool which ensures continuity of business operations and helps in taking effective measures right on time when there is any unfavorable situation. It helps in developing effective business continuity plans based on the foresight gained from continuous monitoring of the location. In certain cases, it also helps in taking preemptive measures to mitigate or minimize the damages resulting from location risk. Thus, the best way to manage location risk is to continuously monitor them to develop foresight and take proactive measures.
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