Krishna Baidya’s Random Musings

Gartner assessed the suitability of APAC countries as offshore locations and identified “10 Leading Locations for Offshore Services in Asia Pacific for 2009.” These included the undisputed leader in offshore services, India, and the greatest challenger in terms of potential scale (China). The rest are a mix of mature environments that offer limited cost-benefits (Australia, New Zealand and Singapore) and emerging countries with a variety of challenges, but attractive costs (Malaysia, Pakistan, Philippines, Thailand, and Vietnam).

Although India continues to grow in top-line revenue levels of IT services being exported, its share of the overall worldwide totals has declined as other countries are investing to gain more market share. Enterprises seek strategies to reduce risk, and India faces challenges. These include wage inflation, local attrition rates, geopolitical issues (including the Mumbai terrorist attacks) and the “Satyam Effect.”

Despite increases in investment, infrastructure remains India’s biggest weakness while strained power capacity and inadequate connectivity remain challenges. Some IT service categories such as application outsourcing have matured and the level of incremental growth is smaller.

What about China?

China is still attracting great interest. But it has challenges to buyer confidence including security, quality and intellectual property issues, relatively low English-language capabilities, and a scarcity of middle managers.

A large portion of the current market is geared to R&D-embedded engineering services, which differ significantly from commercial enterprise buyer requirements. Thus, there is a need to build strong process and quality maturity for delivery of IT services to commercial enterprises.

Marketing skills across the value chain of the outsourcing industry are still immature, which results in a lack of information access and authenticated, verified sources of data for decision-making. Given the immaturity of the market, organizations wishing to set up in China should plan and budget for more substantial levels of project management, change management and governance requirements.

Where else then?

The Philippines generates considerably more offshore revenue than China. The country has a history of providing services to the US and Asian markets. Some IT services have been exported for more than 15 years. It’s now a key outsourcing destination for call centers, finance and accounting.

English continues to be the predominant language in the country and the level of accent neutralization required is relatively low – significantly lower than in India and China. It has a good labor pool that’s scalable at low cost and its overall cost structure is lower than India’s. Wage inflation and attrition ratios are also lower.

When considering the Philippines as an offshore location, companies must be sure to establish adequate risk mitigation measures around intellectual property protection, security and privacy. They should also ensure they are comfortable with specific technology and industry knowledge before signing a deal.

Companies seeking to be pioneers in a large and untapped low-cost destination should investigate Vietnam. Opportunities exist, but rigorous due diligence is required. Salaries of IT and business process professionals are among the lowest in the world. Consequently, Ho Chi Minh City and Hanoi are attracting a good deal of interest from major IT companies. Both IBM and CSC have made substantive investments in setting up global delivery centers in the country.

Companies should think carefully before allowing the cost base to overly influence their choice of Vietnam as an offshore destination. Understand all the risks, including hidden costs, risks related to data security, ease-of-doing-business issues and relatively low-level English-language skills. 

Source: Jim Longwood, Gartner