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India Loses its Charm on Global Outsourcing Landscape

Pratibha Verma    Tuesday, March 30, 2010    From:  Global Services
 

India and China have been topping the charts of Gartner research reports on offshore IT and business process outsourcing services in the Asia Pacific region for a number of years. But now, as a number of countries are making considerable investments in this area, and positioning themselves as credible alternatives, the leaders would now face the real competition.

Although, India continues to grow in terms of IT services being exported, its relative share of the overall worldwide total has declined over a period of two years, according to Gartner reports. The country started to face challenges in 2008 with a number of incidents like geopolitical issues (Mumbai terrorist attacks, Satyam scandal etc.). It is now facing local attrition rates, wage inflation and financial irregularities.

Gartner says, the challenges faced by India are opening opportunities for other countries that are improving their capabilities to target local service demands of more-mature regional Asian clients.

Jim Longwood, Research Vice President at Gartner says, "In view of India's dominance, many countries trying to tap into this market are reassessing their strategy and looking at niche markets like call centers, logistics and other back-office functions where they might have a physical proximity advantage over mature countries like Australia, Hong Kong and Singapore."

Over the last 12 months there has been significant activities in many countries to consolidate or grow their positions as leading locations for offshore services. Countries such as Malaysia, the Philippines and Vietnam have continued to strengthen their position against leading alternatives, while Indonesia has entered the top 10 for the first time. Some of these countries have invested considerably and leveraged increased demand for lower-cost services. "The global financial crisis forced many organizations to place a greater emphasis on cost optimization," says Longwood.

China remaining the greatest challenger in terms of potential scale, other countries include 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, Indonesia, the Philippines, Thailand and Vietnam), according to the report.

In 2008, Australia, New Zealand and Singapore were rated high by Gartner on non-cost, labor market factors and niche services requiring a depth of experienced staff. Whereas, in 2009, they offered limited cost savings, and led the ratings for language, political and economic environment, cultural compatibility, globalization and legal maturity, data and intellectual property, security and privacy.

Indonesia was a new entrant into the top 10 list this year due to its expanding business environment targeting both offshore IT and business services, its large labor pool and its well-established industry base in mining and manufacturing involving prominent multinational companies. Pakistan dropped off the top 10 list.
"This was largely due to Indonesia's noticeable progress in addressing offshore opportunities rather than Pakistan's drop in performance, but political instability was also an issue here," said Longwood.

The global financial crisis and US currency fluctuations still remain a challenge for offshore vendors and clients. While the Asia Pacific region is experiencing a lesser impact from the global financial crisis, varying currency exchange rates against the US dollar have affected the attractiveness of some countries in the region. Countries like Australia, whose currency rebounded strongly, should see an increase in domestic demand for offshore services and a marginal decrease in its attractiveness for niche services.

"As organizations increasingly look at global delivery as a means to reduce cost, they will need to focus on important areas such as security, data and IP protection and compliance," said Longwood. "However, the link between lower risk and higher cost holds true."

Whereas Vietnam was the only country to receive an excellent rating for cost; it received ratings of fair or poor on every other criterion, with data and intellectual property, security and privacy where it performed worst.

Countries such as Thailand, Vietnam, the Philippines and Indonesia all rated less favorably for political and economic environment. While low cost is an important factor, the political and economic environment remains a concern for many companies when moving business to offshore locations.

Infrastructure is the only area where most countries ranged from good to excellent, with Vietnam and Indonesia the only exceptions. Most locations were considered good to very good for language and cultural compatibility whilst China, Indonesia, Thailand and Vietnam weren't rated as strongly.

In addition to the top 10, four other countries were also strongly considered: Pakistan, Sri Lanka, Bangladesh and North Korea. All of these countries have started to establish attractive environments for companies looking for low-cost countries or that have external service providers located in these countries that are beginning to sell services beyond the domestic market.

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