Outsourcing Global Services Location Index 2009


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Outsourcing Global Services Location Index 2009

  1. 1. The Shifting Geography of Offshoring The 2009 A.T. Kearney Global Services Location IndexTM
  2. 2. A s the world continues to experience economic turmoil, the off- shoring industry is not immune—especially as the industry’s most important client, financial services, struggles to stay afloat. Findings in the 2009 A.T. Kearney Global Services Location IndexTM reflect this unstable recessionary environment. While some established out- sourcing hubs are fading—nine countries dropped nine or more positions in the Index—new rising stars are changing the outsourcing landscape. The top three countries in the 2009 Global grouped into three categories: financial attractive- Services Location IndexTM (GSLI) remain the ness, people skills and availability, and business same—India, China and Malaysia—but the environment (see Appendix: About the Study on world’s volatile economic environment is reflected page 18). in the rest of the rankings. Not long ago Central This paper presents an overview of the 2009 and Eastern Europe emerged as one of the premier findings in the GSLI, highlights the major global hubs for offshoring, catering primarily to strengths and weaknesses of each region, and Western European clients. This year, however, the offers recommendations for choosing the right established leaders, including Poland, the Czech locations around the globe to locate services during Republic and Hungary, have fallen as increasing these turbulent times. Regardless of the economic costs erode their competitiveness. Meanwhile, conditions, making decisions that maximize the countries in low-cost regions such as Southeast Asia overarching benefits of offshoring is vital for and the Middle East make significant gains on this success both in the short and long term. year’s list, as the IT-enabled services industry grows and export figures improve (see figure 1 on page 2). Changes in the Offshoring Landscape The GSLI, first established in 2004, analyzes The offshoring industry has matured over the past and ranks the top 50 countries worldwide as the decade. IDC, an IT market intelligence company, best destinations for providing outsourcing activ- reports that outsourced offshoring alone has gener- ities, including IT services and support, contact ated $30 billion in revenues and has grown by 25 centers, and back-office support. Each country’s percent over the past two years. This does not take score is composed of a weighted combination of into account captive centers in low-cost locations relative scores on 43 measurements, which are operated by companies from developed countries. A.T. Kearney | THE SHIFTING GEOGRAPHY OF OFFSHORING 1
  3. 3. Figure 1 The 2009 A.T. Kearney Global Services Location IndexTM Financial People skills Business Rank Country attractiveness and availability environment Total score 1 India 3.13 2.48 1.30 6.91 2 China 2.59 2.33 1.37 6.29 3 Malaysia 2.76 1.24 1.97 5.98 4 Thailand 3.05 1.30 1.41 5.77 5 Indonesia 3.23 1.47 0.99 5.69 6 Egypt 3.07 1.20 1.37 5.64 7 Philippines 3.19 1.17 1.24 5.60 8 Chile 2.41 1.20 1.89 5.50 9 Jordan 2.99 0.91 1.59 5.49 10 Vietnam 3.21 1.02 1.24 5.47 11 Mexico 2.48 1.50 1.45 5.43 12 Brazil 2.18 1.83 1.37 5.39 13 Bulgaria 2.83 0.89 1.62 5.34 14 United States 0.47 2.71 2.15 5.33 15 Ghana 3.26 0.70 1.36 5.32 16 Sri Lanka 3.13 0.95 1.17 5.25 17 Tunisia 2.86 0.91 1.45 5.22 18 Estonia 2.06 0.93 2.20 5.19 19 Romania 2.63 0.91 1.58 5.12 20 Pakistan 3.12 1.08 0.91 5.11 21 Lithuania 2.31 0.81 1.99 5.11 22 Latvia 2.28 0.86 1.96 5.10 23 Costa Rica 2.67 0.89 1.50 5.07 24 Jamaica 2.77 0.79 1.49 5.06 25 Mauritius 2.32 0.95 1.77 5.04 26 Senegal 3.06 0.88 1.08 5.03 27 Argentina 2.47 1.34 1.21 5.02 28 Canada 0.54 2.10 2.38 5.02 29 United Arab Emirates 2.10 0.84 2.04 4.98 30 Morocco 2.62 0.93 1.42 4.97 31 United Kingdom 0.43 2.13 2.39 4.94 32 Czech Republic 1.74 1.14 2.07 4.94 33 Russia 2.39 1.45 1.08 4.92 34 Germany 0.42 2.10 2.40 4.91 35 Singapore 0.72 1.55 2.62 4.90 36 Uruguay 2.46 1.00 1.43 4.89 37 Hungary 1.95 1.01 1.92 4.88 38 Poland 1.82 1.22 1.73 4.77 39 South Africa 2.28 1.02 1.44 4.74 40 Slovakia 2.05 0.94 1.75 4.73 41 France 0.40 2.03 2.29 4.72 42 Ukraine 2.63 0.97 0.99 4.58 43 Panama 2.48 0.70 1.40 4.58 44 Turkey 2.01 1.23 1.29 4.54 45 Spain 0.57 1.90 2.00 4.47 46 New Zealand 1.12 1.18 2.15 4.45 47 Australia 0.42 1.62 2.22 4.26 48 Ireland 0.27 1.56 2.26 4.09 49 Israel 0.85 1.39 1.78 4.02 50 Portugal 1.00 1.00 1.97 3.98 Note: The weight distribution for the three categories is 40:30:30. Financial attractiveness is rated on a scale of 0 to 4, and the categories for people and skills availability, and business environment are on a scale of 0 to 3. Source: A.T. Kearney 2 THE SHIFTING GEOGRAPHY OF OFFSHORING | A.T. Kearney
  4. 4. India is still the largest provider of offshore million. That agreement included a provision that services, with the Philippines a distant second. Infosys would provide Philips with BPO services Together the two countries account for 50 per- for the next seven years. cent of the world’s business process outsourcing While cost remains a major factor in decisions (BPO) market. While the strong position of these about where to outsource, the quality of the labor two countries appears unthreatened for the time pool is gaining importance. With this in mind being, the competition is heating up, as Europe governments around the world are investing in steps more prominently into the picture. North the human capital demanded by the offshoring American companies, which still account for industry. University curricula are being updated, 70 percent of offshore outsourcing spending, were the first to send ser- vices offshore. However, European companies are catching up as their spending on offshoring has risen Regardless of the economic faster than their counterparts in North America. This shift on the conditions, making decisions demand side affects the overall industry footprint, resulting in more that maximize the overarch- interest in European near-shore loca- ing benefits of offshoring is tions where English is not the domi- nant language, including locations vital for success both in the in Central and Eastern Europe, and the Middle East and North Africa. short and long term. Another major trend is a move away from captive centers toward more outsourcing providers. As many captive centers failed to contain costs efficiently, more companies are opting to buy the postgraduation courses are being offered, and services they need from outsourcing providers. private educational institutions are offering train- For example, after many false starts, Citibank ing in key vocational skills. Companies are view- finally sold its Indian captive operations to Indian ing the labor market more through a global lens, outsourcing provider Tata Consultancy Services and in many cases offshoring decisions, especially (TCS) in October 2008. The deal included in higher, value-added functions, are being driven 12,000 employees and an agreement that TCS by talent shortages at home as much as by cost- will provide the services that Citigroup produced cutting. Companies with a focus on research and in its captive centers. The sale made TCS the development (R&D) are increasing their global second-largest outsourcing company in India and footprint to seek fresh talent in new markets, as Citigroup its largest client. Similarly, Philips sold their home locations cannot supply the needed three of its offshore BPO centers, which employ a talent. In this year’s Index, an experienced labor total of 1,300 people, to Infosys in 2007 for $250 force is key to success (see figure 2 on page 4). A.T. Kearney | THE SHIFTING GEOGRAPHY OF OFFSHORING 3
  5. 5. Figure 2 Companies want a quality workforce People skills and availability scores United States (tier 2) 3.94 2.00 1.20 1.50 0.39 9.03 India 3.91 2.00 1.30 1.05 8.26 China 3.58 2.00 1.20 0.98 7.76 United Kingdom (tier 2) 3.58 0.49 1.25 1.50 0.25 7.08 Canada 3.39 0.28 1.32 1.50 0.50 6.99 Germany (tier 2) 3.61 0.53 1.26 1.21 0.37 6.99 France (tier 2) 3.55 0.48 1.23 1.10 0.41 6.77 Spain 3.52 0.36 1.19 1.10 6.33 Brazil 2.55 1.39 0.96 1.08 6.11 Australia 2.39 1.30 1.50 5.40 Ireland 2.40 1.27 1.50 5.21 Singapore 2.20 1.36 1.25 0.32 5.17 Mexico 1.64 0.77 1.02 1.06 0.50 4.99 Indonesia 0.63 1.46 0.98 0.98 0.85 4.89 Russia 1.09 1.53 1.16 1.05 4.82 Israel 1.75 1.11 1.18 0.53 4.63 Argentina 1.83 0.42 0.96 1.18 4.48 Thailand 1.13 0.58 1.05 0.90 0.70 4.35 Malaysia 1.58 1.11 1.08 4.15 Turkey 0.75 0.61 1.08 0.96 0.71 4.11 Poland 0.93 0.41 1.25 1.08 0.40 4.07 Chile 1.30 1.08 1.10 0.36 3.98 Egypt 1.18 0.67 0.94 1.00 3.98 New Zealand 0.59 1.31 1.50 0.49 3.93 Philippines 1.14 0.71 0.83 1.10 3.90 Czech Republic 0.84 1.26 1.11 0.50 3.79 Pakistan 0.91 0.84 0.78 1.09 3.61 Vietnam 0.48 0.56 0.98 0.88 0.51 3.41 South Africa 0.76 0.31 0.55 1.19 0.59 3.40 Hungary 0.84 1.23 1.10 3.36 Portugal 0.75 1.18 1.19 3.35 Uruguay 0.47 1.06 1.18 0.61 3.34 Ukraine 0.54 0.52 1.11 1.05 3.22 Sri Lanka 0.43 1.00 1.04 0.58 3.18 Mauritius 0.42 1.05 1.18 0.50 3.16 Slovakia 0.46 1.21 1.11 0.31 3.13 Estonia 0.36 1.29 1.20 0.23 3.10 Morocco 0.53 1.00 0.90 0.47 3.09 Relevant experience Jordan 0.31 1.01 0.89 0.79 3.05 Tunisia 0.37 0.94 0.96 0.66 3.02 Size and availability of labor force Romania 0.65 1.02 1.16 3.02 Education Costa Rica 0.54 1.03 1.16 2.98 Bulgaria 0.46 1.04 1.10 0.30 2.96 Language capabilities Senegal 0.32 1.13 0.75 0.68 2.93 Attrition risk Latvia 0.40 1.21 1.09 2.86 United Arab Emirates 0.59 1.15 0.73 0.29 2.80 Lithuania 0.39 1.20 1.06 2.69 Jamaica 0.28 0.73 1.50 2.64 Panama 0.31 0.75 1.04 0.22 2.34 Note: Values below 0.20 not shown due to space constraints. Ghana 0.28 0.72 0.98 0.24 2.32 Source: A.T. Kearney The Impact of the Economic Crisis NASSCOM has revised down its industry growth Although past figures indicate healthy growth in figures for 2009. The value of new offshoring the offshoring sector, like all other sectors it is deals signed worldwide during the three-month being hit by the economic crisis. The full effects of period between October 2008 and January 2009, the crisis remain far from known, but early signs as reported by research service Datamonitor, suggest that offshoring growth has already slowed. declined by 38 percent compared to the same For example, the Indian software association period the previous year. Compensation has been 4 THE SHIFTING GEOGRAPHY OF OFFSHORING | A.T. Kearney
  6. 6. frozen among several outsourcing providers in supply chains for most financial services compa- India and attrition rates have dropped in half nies. The process of removing offshoring from the compared to the previous year—sure signs that equation would be very costly, not taking into the industry is slowing down. account the longer-term loss of savings due to A major factor driving this decline is the increased labor costs. prominence of the financial services industry in New moves offshore have declined consider- offshoring. Forty percent of the activities in Indian ably, but the percentage of companies with staff in service centers are driven by banks, and the melt- offshore locations may rise as companies lay off down of the banking sector worldwide thus hurts staff in onshore locations due to the recession. the offshoring sector disproportionally. Banks There are two reasons for this: cost and efficiency. worldwide have shed 5 percent of their entire It makes sense to look at high-cost areas first when workforce during the financial crisis—a quarter- seeking to contain costs. A prime example is IBM, million people; in the United States, it’s 8 percent. which in March announced 5,000 job cuts in the As the most important customer segment tries to United States, while simultaneously transferring fit into smaller shoes, offshoring providers will many of the affected functions to India. The other certainly suffer. reason is efficiency. Offshore centers have in most A different crisis-related issue could come cases been set up in the past decade and are run- from the various government bailout packages in ning on well-developed and standardized proce- many countries. Not only have they made banks dures. Onshore organizations, on the other hand, dependent on government, but these bailouts have decades of history and may not be fully have led to public resentment, as taxpayers’ money aligned with operational requirements; thus, they is spent on restoring balance sheets. Much as may not be as efficient as offshore centers. Once corporate jets and Wall Street bonuses became the economy turns and companies start to grow a hot political issue in the United States, moving again, it is likely that the percentage of staff off- offshore to cut costs could become politically shore versus onshore will remain constant. We are controversial. Whether or not offshoring is good witnessing a more global workforce as a result of corporate strategy, or if it benefits the national the crisis. economy, will be less relevant than the news head- lines. Lawmakers have already inserted provisions The Findings: Familiar Names at the Top in some bailout packages that attempt to limit While there is great volatility in the Index, the top expansion of offshoring operations for banks three countries — India, China and Malaysia — receiving government support. have remained the same since the inception of Nonetheless, we do not expect the offshoring the Index in 2004. While we often see an inverse trend to reverse anytime soon, not even in the correlation between costs on one hand, and busi- financial sector. Although there will likely be a ness environment, and people skills and availabil- slowdown in the number of new moves offshore, ity on the other, these three countries are regular the “onshoring” of current offshore operations in outliers, in that they have better scores for the banking is still rare. Any such attempts will run areas of people skills and availability, and business counter to efforts to keep the banks afloat. environment than their cost structure suggests Offshore operations are an integral part of the (see figure 3 on page 6). A.T. Kearney | THE SHIFTING GEOGRAPHY OF OFFSHORING 5
  7. 7. The compensation and other cost data used United States — are the real winners in the Index to build the Index reflect the situation in 2008 rankings since 2007, as they have become more when the U.S. dollar was weak in relation to other competitive against virtually all other countries. global currencies (reaching $1.60 to the euro at It is important to remember, however, that its lowest point). The Index uses the dollar to currencies are volatile. In the first few months of measure costs, and compensation data is bench- 2009, the dollar is strengthening — to roughly marked to U.S. wage levels, so the dollar’s weak- $1.35 to the euro as of mid-May. The stronger ness affects the rankings. This had little effect on dollar will benefit some countries and hurt others, the attractiveness of low-cost locations, where but the main conclusions of our survey still hold, compensation costs still remain between a fifth regardless of the changing exchange rates. and a tenth of U.S. compensation cost levels. Generally speaking, many middle-income However, medium-income countries experienced countries are suffering because they are converg- an accelerated drop in their relative competitive- ing toward the same cost levels as high-income ness due to the exchange-rate shifts, since their countries, especially in professions that are part of compensation costs are only about half of the a global service market. The classic response to American equivalent. Countries whose currency rising costs is to increase productivity and value, is tied to the dollar — along with, of course, the and improve the business environment, including Figure 3 India, China and Malaysia are the outliers in financial attractiveness 2.5 United United States Kingdom Germany Canada France Average of people skills and availability, Singapore 2.0 Australia Spain Ireland India China and business environment New Zealand Israel Brazil Czech Republic Estonia Chile Malaysia Mexico 1.5 Portugal Poland UAE Argentina Hungary Lithuania Thailand Slovakia Latvia Mauritius Bulgaria Russia Romania Jordan Egypt Turkey South Indonesia Africa Uruguay Tunisia Philippines Panama Morocco Jamaica Vietnam Costa Senegal Ghana 1.0 Ukraine Rica Sri Lanka Pakistan 0.5 0.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Financial attractiveness Source: A.T. Kearney 6 THE SHIFTING GEOGRAPHY OF OFFSHORING | A.T. Kearney
  8. 8. Figure 4 Traditional cost leaders stay the same Financial attractiveness scores Ghana 7.12 0.36 0.67 8.15 Indonesia 6.99 0.56 0.54 8.08 Vietnam 7.14 0.42 0.46 8.02 Philippines 6.94 0.72 0.33 7.98 Sri Lanka 6.91 0.57 0.34 7.82 India 7.01 0.37 0.44 7.81 Pakistan 6.76 0.41 0.63 7.80 Egypt 6.57 0.75 0.35 7.68 Senegal 7.01 0.32 0.33 7.66 Thailand 6.59 0.63 0.41 7.63 Jordan 6.38 0.55 0.55 7.47 Tunisia 6.22 0.57 0.37 7.16 Bulgaria 6.13 0.57 0.38 7.08 Jamaica 6.17 0.25 0.49 6.92 Malaysia 5.79 0.62 0.49 6.90 Costa Rica 5.77 0.41 0.50 6.67 Romania 5.60 0.48 0.51 6.58 Ukraine 5.59 0.55 0.43 6.57 Morocco 5.79 0.40 0.36 6.55 China 5.79 0.50 6.47 Mexico 5.37 0.38 0.46 6.20 Panama 5.47 0.30 0.42 6.19 Argentina 5.47 0.44 0.26 6.17 Uruguay 5.39 0.41 0.36 6.15 Chile 5.11 0.29 0.63 6.03 Russia 5.15 0.50 0.33 5.99 Mauritius 4.97 0.39 0.44 5.81 Lithuania 4.92 0.49 0.37 5.78 South Africa 4.49 0.52 0.70 5.71 Latvia 4.83 0.44 0.43 5.69 Brazil 5.00 0.26 5.45 United Arab Emirates 4.09 0.53 0.64 5.25 Estonia 4.20 0.53 0.44 5.16 Slovakia 4.38 0.36 0.38 5.13 Turkey 4.13 0.42 0.48 5.03 Hungary 4.07 0.44 0.36 4.87 Poland 3.72 0.49 0.34 4.54 Czech Republic 3.66 0.36 0.33 4.34 Compensation costs New Zealand 1.52 0.52 0.76 2.80 Portugal 1.81 0.25 0.44 2.50 Infrastructure costs Israel 1.40 0.33 0.41 2.14 Tax and regulatory costs Singapore 0.99 0.21 0.61 1.81 Spain 0.74 0.29 0.40 1.43 Canada 0.68 0.62 1.34 United States (tier 2) 0.57 0.59 1.16 United Kingdom (tier 2) 0.26 0.77 1.07 Australia 0.42 0.62 1.05 Germany (tier 2) 0.56 0.48 1.04 France (tier 2) 0.60 0.39 1.00 Note: Values below 0.20 not shown due to space constraints. Ireland 0.55 0.69 Source: A.T. Kearney infrastructure and intellectual property rights leg- India: Continued Growth islation. This helps increase competitiveness. India remains the leader in the Index, which we Despite rising costs in these middle-income coun- expect will continue for the foreseeable future. In tries, there is still room to take advantage of labor just one decade India has transformed and rein- arbitrage, as our analysis still reveals a clear divide vented the outsourcing industry several times between developed economies and emerging mar- over, staying ahead of all trends. India started as kets in terms of cost (see figure 4). a low-cost location that provided routine tasks for A.T. Kearney | THE SHIFTING GEOGRAPHY OF OFFSHORING 7
  9. 9. American IT companies, and it still retains a com- spokes reaching out to increasingly diverse loca- petitive advantage in this area. At the same time, tions. For example, TCS operates global delivery it has moved up the value chain. Today, virtually centers in Argentina, Brazil, China, Hungary, any offshoring service can be performed in India, Mexico, Singapore, the United States and and new areas are constantly being invented. Uruguay, in addition to its multiple centers in These services include routine data entry, finance India. This trend benefits not only India, but and accounting, customer-facing functions, and it also creates opportunities for the new host higher-end outsourcing such as knowledge man- countries. When Indian outsourcing vendors agement and legal processes. Infosys or Wipro set up shop in a new coun- try, they tend to expand more aggressively than most Western multinational corpo- rations, and they also bring While cost remains a major fac- with them the expertise to tor in decisions about where to train large numbers of new staff quickly, which gives outsource, the quality of the labor the local labor pool an imme- diate boost. pool is gaining importance. India’s outsourcing indus- try has been shaken by an accounting scandal at Satyam, coupled with safety issues stemming from the 2008 In addition, Indian outsourcing companies attacks in Mumbai (see sidebar: Is India are beginning to expand across the world, with Vulnerable?). Yet, India will likely remain the the largest companies becoming significant play- unmistakable leader for years to come. ers in the United States and Europe. Their own offshore footprint is also rapidly expanding to East Asia: Climbing Up in the Rankings dozens of other countries, which from the per- China shares many characteristics with India. spective of many other countries, makes India Both countries have a large, well-educated work- a country that is impossible to compete with force with significant labor cost arbitrage oppor- head-on. The good news, however, is that India tunities compared to the United States or Japan. has in many ways ceased to be a competitor and However, China still lags far behind India in has become an enabler for industry growth in industry size. A lack of language capabilities, con- other countries. As India-based outsourcing com- cerns around intellectual property protection and panies spread across the world, the country is an economy geared toward manufacturing are an important player in expanding and pushing keeping China from developing into a global off- offshoring to new frontiers. The expansion has shoring behemoth such as India. For now, China turned Bangalore, Hyderabad and Gurgaon into is an important player in the Asia-Pacific offshor- hubs of the global offshoring universe, with more ing industry, notably with Japanese companies as 8 THE SHIFTING GEOGRAPHY OF OFFSHORING | A.T. Kearney
  10. 10. its major customers. This may change, however, as Several more Southeast Asian countries figure the Chinese government recognizes an opportu- prominently in the top of the Index, occupying nity and is launching an ambitious plan to sup- the 3rd, 4th, 5th, 7th and 10th spots. For the port and grow the offshoring industry. China may fourth year in a row, Malaysia is ranked 3rd in be able to capitalize on new concerns regarding the Index. Its strong performance reveals good security in India following the Mumbai terrorist fundamentals — a safe business environment and attacks and the Satyam accounting scandal. high-quality human capital at an affordable price, Is India Vulnerable? There is no debate around India’s been a fact of life in India for a long such scandals from happening again. leading position in offshoring, yet, time, the attacks in Mumbai in In addition, there have been recent events have highlighted that November 2008 drove home the risks recent examples of companies aban- even India is vulnerable. Currency of operating in India, especially for doning India, returning customer movements, terrorism and a major Western companies. Western interests service functions to domestic loca- corporate scandal have made some were deliberately attacked, raising tions. The world’s largest airline, executives uneasy with India. fears that corporate interests could be Delta Airlines, announced in April Currency movements. Start- next on the target list. Though the 2009 that it would close its contact ing in late 2006, the rupee began overall risk may or may not have centers in India and return these strengthening against the dollar, changed in India, the perception and functions to the United States in an trading at 37 rupees per dollar in risk equation in the minds of execu- effort to improve customer service. 2007 as opposed to 47 rupees in tives has changed. Continued cross- Similar centers in Jamaica and South 2006. The across-the-board cost border tension with Pakistan has not Africa are not affected by the decision. increase of almost 30 percent, in helped. The search for alternative Delta competitor United Airlines dollar terms, created much concern locations to complement the Indian announced in February 2009 the and questions about the sustainabil- centers has accelerated and there is an relocation of its customer-facing ity of the Indian offshoring industry. opportunity for countries with lower functions from India to Chicago and Starting in 2008 the trend reversed exposure to terrorism, such as China, Hawaii. In a similar move, Dell is when the rupee returned to normal to capture market share. now offering a premium technical- levels—a trend reinforced by the eco- Corporate scandals. Adding to support subscription, which guaran- nomic crisis as investors flee to safer the worries, the confidence in India tees American customers they can currencies and the rupee trades at took a hit following the unveiling talk to customer service representa- record lows. Although this is good of a large-scale accounting fraud at tives in the United States as opposed news for the Indian offshoring indus- Satyam. Much like the Enron de- to India. try, the currency developments in bacle shook confidence in corporate Still, India remains indispens- 2007 show how fast a cost advantage America, the Satyam scandal has put ible in offshoring and no country can erode. India will remain cost- the spotlight on Indian corporate or combination of countries can competitive for U.S. companies, but governance practices. Given the reli- replace it — at least not yet. None- its advantage may come under attack ance on Indian outsourcing partners, theless, these events illustrate India’s from cheaper locations. India will have to reestablish trust in vulnerabilities and the challenges to Terrorism. While terrorism has its regulatory environment to prevent staying on top. A.T. Kearney | THE SHIFTING GEOGRAPHY OF OFFSHORING 9
  11. 11. Figure 5 Singapore leads in business environment Business environment scores Singapore 5.17 1.94 0.97 0.66 8.75 Germany (tier 2) 4.75 1.94 0.48 0.83 8.00 United Kingdom (tier 2) 4.67 1.80 0.69 0.81 7.96 Canada 4.71 1.78 0.84 0.61 7.94 France (tier 2) 4.53 1.94 0.56 0.60 7.64 Ireland 4.64 1.34 0.95 0.59 7.53 Australia 4.87 1.39 0.41 0.74 7.40 Estonia 4.23 1.71 0.86 0.53 7.32 United States (tier 2) 4.35 1.60 0.39 0.83 7.17 New Zealand 4.60 1.26 0.66 0.64 7.15 Czech Republic 3.70 1.63 0.92 0.64 6.89 United Arab Emirates 3.77 1.45 0.97 0.59 6.78 Spain 3.88 1.54 0.55 0.70 6.66 Lithuania 3.95 1.55 0.70 0.43 6.64 Portugal 3.89 1.50 0.64 0.53 6.57 Malaysia 3.95 1.40 0.70 0.53 6.57 Latvia 3.88 1.38 0.88 0.40 6.53 Hungary 3.70 1.47 0.61 0.63 6.40 Chile 4.21 1.62 0.41 6.30 Israel 3.24 1.32 0.83 0.53 5.92 Mauritius 3.58 1.17 0.72 0.42 5.90 Slovakia 3.63 1.56 0.46 5.82 Poland 3.48 1.13 0.70 0.46 5.78 Bulgaria 3.18 1.32 0.53 0.36 5.40 Jordan 2.62 1.29 0.94 0.44 5.29 Romania 3.24 1.20 0.44 0.38 5.26 Costa Rica 3.31 1.00 0.33 0.38 5.02 Jamaica 2.68 1.45 0.55 0.31 4.98 Mexico 3.19 0.95 0.31 0.39 4.84 Tunisia 2.66 1.30 0.47 0.40 4.83 South Africa 3.27 0.92 0.58 4.79 Uruguay 2.72 1.22 0.47 0.36 4.77 Morocco 2.33 1.40 0.67 0.33 4.73 Thailand 2.97 1.25 0.36 4.71 Panama 2.80 1.36 0.37 4.68 Egypt 2.73 1.18 0.28 0.39 4.58 Brazil 3.01 1.13 0.43 4.58 China 2.90 1.12 0.54 4.56 Country risk Ghana 2.60 0.90 0.78 0.27 4.55 India 2.76 0.92 0.58 4.35 Country infrastructure Turkey 2.78 1.13 0.40 4.31 Cultural exposure Vietnam 2.62 1.00 0.28 4.13 Philippines 1.97 0.97 0.80 0.39 4.12 Security of intellectual property Argentina 2.54 1.19 0.28 4.04 Sri Lanka 1.97 1.09 0.52 0.31 3.89 Senegal 2.03 0.97 0.30 0.32 3.61 Russia 2.21 1.00 0.31 3.59 Indonesia 2.16 0.86 0.29 3.31 Ukraine 1.84 0.94 0.25 0.27 3.30 Note: Values below 0.20 not shown due to space constraints. Pakistan 1.57 0.83 0.36 0.29 3.05 Source: A.T. Kearney and strong government support. The Philippines but it is now increasingly moving into IT and is the second-largest offshoring destination in the nonvoice BPO services. world, capturing around 15 percent of the global Sri Lanka and Pakistan both climb the ranks market, and its leading position is reflected in this year, assisted by low costs in a world with its 7th position in the Index. It has been home otherwise rising costs. While Pakistan is held back to many contact centers, especially those geared by the continued political instability and country toward the U.S. market, for the past 10 years, risk (it ranks as the riskiest country in the Index), 10 THE SHIFTING GEOGRAPHY OF OFFSHORING | A.T. Kearney
  12. 12. Sri Lanka has started to take off as an offshor- Thailand and Indonesia could be in a position to ing destination, steadily expanding since HSBC compete for business that is currently going to established a base there in 2005. The risks associ- the Philippines. ated with a civil war and relatively weak English- Vietnam is a country to watch as it climbs speaking capabilities (as compared with India) are the rankings nine spots into 10th place. This still obstacles for Sri Lanka. However, its advan- change reflects an increasingly busy offshoring tages—including its proximity to India and a industry, especially focused on IT. Japanese com- supply of chartered accountants trained on the panies have outsourced IT services work to same accounting standards used in the United Vietnam for several years. Japan’s preferences for Kingdom—allow the country to function as a Vietnamese IT providers prompted Russia’s backup to Indian centers. Luxoft, an IT outsourcer, to open a center in Ho Thailand and Indonesia share many simi- Chi Minh City, with the explicit purpose of tar- lar characteristics with the Philippines but the geting the Japanese outsourcing market. Singapore English skills in the Philippines account for the has the best business environment score in the dramatic difference in industry size. However, Index, well ahead of second-place Germany (see as part of the takeover of Philips’ captive off- figure 5). It is home to business continuity and shoring operations, Infosys gained a foothold in disaster recovery sites for IBM and Hewlett- Thailand, hailing the move as the addition of Packard, among other companies. “another low-cost location that is not plagued with attrition and wage hyperinflation.” Given Central and Eastern Europe: A Sharp Drop the strong fundamentals of these countries, it is Among the most dramatic changes in this year’s our view that the offshoring industry in Thai- Index is the decline in rankings of the established land and Indonesia could offer companies a large Central and Eastern European (CEE) countries pool of largely untapped talent at a low cost. that were global leaders just a few years ago. The Regional Offshoring on the Rise While offshoring is often understood supplied skilled migrant labor to in the Gulf markets, supplying much as a phenomenon in which compa- the countries in the Gulf region for of the development work from their nies in developed countries outsource decades. As improved telecommuni- home offices. work to low-cost countries, the global cations allows for remote delivery, Mauritius is a service exporter to offshoring landscape is far more com- some of these skilled laborers can Europe. Now, several local Mauritius plex than that. Just as it makes sense deliver their services without leaving companies that provide BPO services for advanced economies in North their home country. Saudi software to France have opened up their own America and Europe to trade business companies, including Saudisoft, offshore centers in nearby Madagas- services with lower-cost countries, it Harf and Sakhr, and Kuwaiti ITS, car. By doing so, these companies also makes sense for low-cost coun- established their IT development augment their service offerings by tries to offshore to each other. centers in Cairo. Local Egyptian sys- hiring French-speaking workers at In the Middle East, Egypt has tems integrators sell more services significantly lower costs. A.T. Kearney | THE SHIFTING GEOGRAPHY OF OFFSHORING 11
  13. 13. Figure 6 Changes in Index rankings (2007 to 2009) 1 India 0 26 Senegal 13 2 China 0 27 Argentina –4 3 Malaysia 0 28 Canada 7 4 Thailand 0 29 United Arab Emirates –9 5 Indonesia 1 30 Morocco 6 6 Egypt 7 31 United Kingdom 11 7 Philippines 1 32 Czech Republic –16 8 Chile –1 33 Russia 4 9 Jordan 5 34 Germany 6 10 Vietnam 9 35 Singapore –24 11 Mexico –1 36 Uruguay –14 12 Brazil –7 37 Hungary –13 13 Bulgaria –4 38 Poland –20 14 United States 7 39 South Africa –8 15 Ghana 12 40 Slovakia –28 16 Sri Lanka 13 41 France 7 17 Tunisia 9 42 Ukraine 5 18 Estonia –3 43 Panama –2 19 Romania 14 44 Turkey 5 20 Pakistan 10 45 Spain –2 21 Lithuania 7 46 New Zealand –2 22 Latvia –5 47 Australia –2 23 Costa Rica 11 48 Ireland 2 24 Jamaica 8 49 Israel –11 25 Mauritius 0 50 Portugal –4 Source: A.T. Kearney Czech Republic was 4th in the 2004 Index and with a lower cost profile than most other member now ranks 32nd. Hungary, Slovakia and Poland states, they are the new offshoring stars in Europe. experienced similar falls in their rankings (see Bulgaria provides a great example for creating figure 6). The main reasons for the falls are rapid niche capabilities — for example, when Outsource increases in costs, driven partly by currency appre- Partners International established a BPO center to ciation against the dollar and wage inflation, cater to the global shipping industry, they selected which hampers these countries’ competitiveness the Bulgarian port city of Varna, where they could in lower-end BPO activities. The glimmer of good find the relevant expertise. In Romania, Swedish news is that the price increase has been less dra- telecom company Ericsson established a global matic for customers that operate in euros—the delivery center, exclusively employing engineers. majority of the CEE customer base. At the same time, the Baltic countries are also The winners in Europe are Bulgaria and emerging as alternatives to the Central European Romania, which continue to stay comfortably in countries. Lithuania made great advances in the the upper half of the Index, at 13th and 19th, Index this year and now ranks 21st. It specializes respectively. Members of the European Union but in contact centers serving the European market, 12 THE SHIFTING GEOGRAPHY OF OFFSHORING | A.T. Kearney
  14. 14. providing services in English, German, Russian, Figure 7 Polish and the Scandinavian languages. Today Middle East and North Africa gain popularity 3,000 people are employed in the sector. Russia has lost some of its attractiveness due to the 6 Egypt increasingly volatile political environment and rapidly escalating costs, particularly in Moscow 9 9 Jordan and St. Petersburg. 12 13 13 Bulgaria 14 15 Middle East and North Africa: 16 17 Tunisia Hot Destinations 18 18 Estonia 19 Romania The Middle East and North Africa (MENA) region is emerging as a hot offshoring destination 24 for the world. Home to large, well-educated pop- 26 ulations, with low costs and proximity to Europe, the area has the potential to redraw the offshor- 30 Morocco ing map and in the process bring much-needed 32 Czech Republic 33 opportunities (see figure 7). 36 In 2004, the only Middle Eastern countries 37 Hungary 38 Poland considered in the Index were Israel and Turkey— 40 Slovakia now, five more MENA countries make the list. 2007 2009 rank rank Egypt, which debuted in the 2005 Index at 12th Middle East and North Africa place, is now 6th. American IT giants IBM and Central and Eastern Europe challengers Source: EDS have had operations in Egypt for some time, Established Central and Eastern Europe A.T. Kearney but now Wipro and Infosys are aggressively expanding into Cairo, taking advantage of the availability of low-cost, qualified people. Egypt is Dubai Internet City is further facilitating the IT also a service provider for companies in other industry. In North Africa, Tunisia and Morocco, Middle Eastern countries (see sidebar: Regional ranking 17th and 30th, respectively, have long Outsourcing on the Rise on page 11). Jordan, at 9th been destinations for French offshoring services. place, is another top performer, as it has solid Morocco is the clear leader in French language off- capabilities in IT and is home to numerous shoring, with approximately half the francophone successful outsourcing companies that compete market. The country has 25,000 jobs in the sector. internationally. It also has one of the region’s most The government is a strong backer of the industry favorable business environments. The currencies and has invested heavily in the sector to support of Jordan and Egypt are closely linked to the sustained growth. Dell, the U.S.-based computer dollar, and their competitiveness is strengthened maker, is providing services to its French custom- by a weak dollar. ers from a contact center in Casablanca, and The United Arab Emirates (29th place) is a Spanish Telefónica has a near-shore center in the major regional hub for IT services and headquar- north of Morocco, just a short distance from Spain ters functions, and the government-sponsored across the Strait of Gibraltar. A.T. Kearney | THE SHIFTING GEOGRAPHY OF OFFSHORING 13
  15. 15. Sub-Saharan Africa: Growing Markets in the Index. Its political stability and favorable Despite the smallest labor force in the Index, the business environment are key differentiators, and island nation of Mauritius ranks favorably at it is in the process of joining the Organisation 25th overall thanks to strong people skills and for Economic Co-operation and Development a favorable business environment. Located east of (OECD), a symbolic entry into the club of Madagascar, Mauritius has created a favorable advanced economies. Its main strengths are in business climate. According to the World Bank’s the high-value-added area, which has boosted IT Doing Business report, it is the 24th most services companies such as Oracle and TCS, and attractive business environ- ment globally. HR outsourcing company Ceridian has several hundred positions serving the francophone market in the Countries whose currency is CyberTower, the government- sponsored technology park. tied to the weakening dollar — Accenture and Infosys also use along with, of course, the United Mauritius for their global delivery functions. States —are the real winners in South Africa is the largest offshore destination in Africa the Index rankings, as they have by far, operating a successful contact center cluster in Cape become more competitive against Town along with several R&D operations around its aero- virtually all other countries. space hub in Pretoria. This year, South Africa dropped to 39th place in the rankings after it lost points in all three categories; the dete- knowledge process outsourcing (KPO) activities rioration in infrastructure was the most striking in IT and biotech. For example, KPO provider drop among individual metrics. In Ghana, 50 Evalueserve serves U.S. banks with investment companies are members in the national IT asso- research and financial analytics out of the coastal ciation GASSCOM, including U.S.-based IT city of Valparaiso. services company ACS, which employs 1,800 In Brazil, the software organization Brasscom people in Ghana. is promoting the country’s strong domestic base of IT companies to overseas clients. Brazil is still show- Latin America and the Caribbean: ing strong performance in the Index at the number Capitalizing on Proximity 12 spot and it will continue to be an important The top three countries in Latin America, Chile, player in the offshore space. Red tape continues to Brazil and Mexico, are still doing well. This year, be a concern, particularly the services and export Chile is the Latin American leader, ranking 8th taxes that inhibit growth for the offshore industry. 14 THE SHIFTING GEOGRAPHY OF OFFSHORING | A.T. Kearney
  16. 16. Mexico, holding steady in 11th place, is sector in Montevideo and the availability of increasingly viewed by American companies as trained professionals. a complement to Indian operations. The deval- Jamaica is an offshoring leader in the uation of the peso has helped to hold up the Caribbean due largely to its English-speaking ranking, even while companies are wary of the population, government incentives for the indus- security situation. Similar to the American manu- try and proximity to clients in the United States. facturing industry, the services sector considers The country now has more than 15,000 outsourc- Mexico’s proximity and accessibility an advan- ing employees. Its 24th place ranking indicates tage. Mexico’s size also allows multiple cities to the increasing popularity of the Caribbean islands be offshoring hubs, giving the labor market as offshore destinations. One spot ahead of greater depth than in countries relying only on Jamaica is Costa Rica, an established player that one national center. Its large labor pool is devel- is still adding new investors, including online oping English language skills, not to mention retailer Amazon, which opened a contact center in its ability to serve the growing U.S. Hispanic Heredia in 2008. Several other Latin American consumer market. countries that are not yet in the Index are also Argentina, at 27th place, has enjoyed a favor- developing attractive offshoring markets (see side- able cost environment since the devaluation of the bar: New Players on the Offshore Field). peso in 2001, but inflation is slowly eroding its competitiveness, which means the country will Developed Countries: More Onshoring? have to rely on higher-end functions to compete Since the onset of offshoring, there has been con- with other locations. Uruguay, in 36th place, siderable debate about its impact on importing occupies a niche in the financial services out- countries. Many believe that offshoring is a race to sourcing market thanks to the strong banking the bottom, with employment and wage levels in New Players on the Offshore Field While the same 50 countries from sector has been identified as a focus Indian IT company investments. the 2007 Index are in this year’s area in the government’s future Indian software association NASS- Index, we are keeping an eye on new growth initiative. COM’s decision to hold an executive countries entering the offshoring Several Caribbean islands are meeting in the kingdom in late 2008 playing field, and we expect some of hoping to become niche players; the was an early public relations success. them to enter future rankings. For Dominican Republic and Barbados In Kenya, KenCall is leading a example, there has been considerable already have centers up and running. nascent industry with clients in both activity in Latin America, where In South Asia, Bangladesh is creating the United States and the United countries such as Guatemala and El the necessary framework to accom- Kingdom. Other African countries Salvador are starting to focus on modate the offshoring industry. can also emerge as successful candi- attracting U.S. near-shore dollars. In More surprisingly, Bhutan, which dates in this space in the future. South America, Colombia is attract- until recently was closed to the ing offshoring investments, and the world, is actively planning to capture A.T. Kearney | THE SHIFTING GEOGRAPHY OF OFFSHORING 15
  17. 17. developed countries suffering, especially in occu- For the third year in a row, we are including pations exposed to international competition. in the Index tier-2 locations in France, Germany, The current economic crisis will no doubt create the United Kingdom and the United States. These more concerns. countries have set up operations in lower-cost However, research indicates that developed locations to perform domestic remote delivery countries and their companies have gained from functions. The cities used to represent tier-2 loca- offshoring. New research also indicates that pro- tions are based on regional cost data: Marseilles in fessionals in developed countries have not seen France; Leipzig in Germany; Belfast in the United their positions deteriorate as a result of offshor- Kingdom; and San Antonio in the United States. The United States dramatically improves its ranking in this year’s Index thanks to the weakening dollar. Fourteenth overall, the United States In just one decade India has is also the leader in the people skills and availability category, not surpris- transformed and reinvented ingly given its large and educated labor force working in the world’s the outsourcing industry sev- largest ITO and BPO industry sector. Although the dollar has regained eral times over, staying ahead strength in 2009, there is increased of all trends. interest in onshoring in the United States, as the economic crisis has ren- dered offshoring politically sensitive and, at the same time, rising unem- ployment rates increase the number of ing. A study by Bradford Jensen and Lori Kletzer available workers. U.S. tier-3 locations are becom- at the Institute for International Economics ing a new option for voice and nonvoice BPO reveals that both employment and wages in trad- services, as the costs in the U.S. hinterlands are able services occupations have not only increased lower than they are in the major cities. Regional between 1996 and 2006 — but also increased development agencies in U.S. states are catching faster than wages in nontradable service occupa- on to this trend and marketing their regions as “at tions.2 While specific offshoring moves may have home” offshore destinations. an impact on individuals, there is a good case The United Kingdom, Germany and France that the globalization of trade in services has have all risen slightly in the rankings (31st, 34th been on the whole positive for professionals in and 41st, respectively), due more to other countries both exporting and importing countries. This is falling in the ranks than their own improvements. worth keeping in mind as calls for protectionism However, crisis-related political considerations and grow stronger. the availability of qualified labor may create an 2 Jensen, Bradford & Lori Kletzer, “Fear” and Offshoring: The Scope and Potential Impact of Imports and Exports of Services, Peterson Institute for International Economics Policy Brief, January 2008. 16 THE SHIFTING GEOGRAPHY OF OFFSHORING | A.T. Kearney
  18. 18. onshoring movement in Europe similar to that of shake up the current offshoring geography as the United States, or at least delay further moves countries deal with the volatility with varying from domestic to offshore locations. degrees of success. Over the longer term, the crisis might actually trigger the further globaliza- Rapidly Changing Offshoring Environments tion of services. The geography of offshoring is changing fast. The volatility in the wake of the crisis and geo- Countries that were safe bets a few years ago and political risk mean that risk management will take still attract large investments in the industry may on a new importance to protect supply chains from already have peaked and be in decline as future interruption. The offshoring landscape will reveal destinations. Relatively unknown locations today new opportunities as countries develop new com- may be important destinations tomorrow. The petitive advantages. Companies on the lookout for number of countries competing for the offshor- new sources of talent should perform thorough ing business steadily expands and the different location assessments so as not to miss under-the- niche markets that countries serve multiply. radar locations in a broad range of countries. Location decisions are not as straightforward as Even as the world enters a new era of risk, the they used to be. opportunities are larger than ever. As the global In addition, the economic crisis is creating labor pool becomes more accessible, and the further volatility as it reshapes the offshoring number of countries courting investors grows, landscape. In the short term, the recent decline in the rewards will go to those companies first to growth will continue, and the crisis will likely identify them. Authors Norbert Jorek is a partner in the New York office and the head of A.T. Kearney’s Global Business Policy Council. He can be reached at norbert.jorek@atkearney.com. Johan Gott is a consultant in the Washington, D.C., office. He can be reached at johan.gott@atkearney.com. Michelle Battat is a consultant in the Washington, D.C., office. She can be reached at michelle.battat@atkearney.com. A.T. Kearney | THE SHIFTING GEOGRAPHY OF OFFSHORING 17
  19. 19. Appendix: About the Study The 50 countries included in this year’s Global Services Location Index were selected on the basis of corporate input, current remote services activity, and government initiatives to promote the sector. They were evaluated against 43 measurements across three major categories: financial attractiveness, people skills and availability, and business environment (see figure). The metrics used to evaluate location attractiveness were determined from responses to A.T. Kearney and other industry surveys, and knowledge obtained in client engagements over the past five years. The relative weights of each metric are based on their importance to the location decision, again derived from client experience and industry surveys. Because cost advantage is typically the primary driver behind location decisions, financial factors constitute 40 percent of the total weight in the Index. The two remaining categories — people skills and availability, and business environment — each constitute 30 percent of the total weight. Index metrics Category Subcategories Metrics Financial attractiveness Compensation costs • Average wages (40%) • Median compensation costs for relevant positions (call-center representatives, BPO analysts, IT programmers and local operations managers) Infrastructure costs • Rental costs • Commercial electricity rates • International telecom costs • Travel to major customer destinations (New York, London and Tokyo) Tax and regulatory costs • Relative tax burden • Corruption perception • Currency appreciation or depreciation People skills and Remote services sector • Size of existing IT and BPO sectors availability experience and quality • Contact center and IT center quality certifications (30%) ratings • Quality ratings of management schools and IT training Labor force availability • Total workforce • University-educated workforce • Workforce flexibility Education and language • Scores on standardized education and language tests Attrition risk • Relative IT and BPO sector growth and unemployment rates Business environment Country environment • Investor and analyst ratings of overall business and political environment (30%) • A.T. Kearney Foreign Direct Investment Confidence IndexTM • Security risk • Regulatory burden and employment rigidity • Government support for the information and communications technology (ICT) sector Infrastructure • Overall infrastructure quality • Quality of telecom, Internet and electricity infrastructure Cultural exposure • Personal interaction score from A.T. Kearney Globalization IndexTM Security of intellectual • Investor ratings of IP protection and ICT laws property (IP) • Software piracy rates • Information security certifications Source: A.T. Kearney 18 THE SHIFTING GEOGRAPHY OF OFFSHORING | A.T. Kearney
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