This year has seen India, China, Russia and Brazil continue to dominate the offshore location agenda, but it has also marked the rise of new outsourcing destinations, such as Egypt, as credible alternatives.

However, key questions remain as the industry heads into 2009, principally the effect that the credit crunch will have on offshore providers, and the extent to which the instability of a region may affect a company’s choice of outsourcing destination.

A recent report from analyst firm Gartner looked at the credentials of 72 countries as offshore locations, and listed the top 30 destinations in 2008.

Evaluation factors included language skills, cost, political and economic environment, cultural compatibility, global and legal maturity, and data and intellectual property security and privacy.

Gartner’s Top 30 list by region was as follows: (Americas) Argentina, Brazil, Canada, Chile, Costa Rica, Mexico and Panama; (Asia/Pacific) Australia, China, India, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, Thailand and Vietnam; and (Europe, Middle East and Africa) the Czech Republic, Egypt, Hungary, Ireland, Israel, Morocco, Poland, Romania, Russia, Slovakia, South Africa, Spain and Ukraine.

Gartner reported that Ukraine was the only country in EMEA to achieve a rating below ‘good’ in terms of cultural compatibility. But this may soon be challenged, according to a new industry group launched this year to promote outsourcing providers in Eastern Europe.

The Central and Eastern European Outsourcing Association (CEEOA) intends to pool resources from associated bodies based in the Baltics, Ukraine, Hungary, Bulgaria and Romania, in an effort to increase the volume and quality of service delivery in particular states.

The CEEOA claimed that it will work within the region to improve factors such as “international trade practice” and “modern business management competencies” .

Gartner’s 2008 advancing offshoring destinations, meanwhile, included Egypt, Morocco, Panama and Thailand. These were all newcomers to the Top 30, and displaced Northern Ireland, Sri Lanka, Turkey and Uruguay from their 2007 positions.

Gartner analyst Ian Marriott explained that Morocco made it to the list because French speaking countries have increased the proportion of work carried offshore and have been keen to avoid language barriers. Thailand’s raised position was due mainly to cost factors, while Egypt and Panama were deemed to have near-shore benefits.

But Egypt’s recognition as an up-and-coming outsourcing hotspot is also due to the promotional efforts of its Information Technology Industry Development Agency (ITIDA) which announced an ambitious target to increase the country’s share of the global outsourcing market to revenues of over $1bn by 2010.

This work has been helped in the UK by a persistent public relations team at Hill & Knowlton, the same agency that promotes India’s representative association for software and services companies, Nasscom.

Hill & Knowlton has also promoted Cairo’s strengths to businesses, and has contributed to an increase in media reports on the benefits of Egypt as an outsourcing destination, including its multilingual capabilities and the presence of many leading global service providers, including HP, IBM, Wipro and Satyam.

The promotional effort has clearly paid off: Egypt’s growing popularity as a location for outsourcing services has been recognised by advisory firm Tholons in its latest global study, in which Cairo occupied the seventh position in the top 10 emerging outsourcing cities in the world.

Egypt was also named Outsourcing Destination of the Year at the National Outsourcing Association 2008 awards, and in December ITIDA signed an agreement that will see Intel motherboards assembled in Egypt before being exported to Africa.

The risk factor

A new survey of 448 outsourcing users by Black Book Research rated Egypt as the world’s 10th safest outsourcing destination in 2008. The country was preceded by Singapore, Ireland, Chile, Poland, Canada, the Czech Republic, Hungary, Mexico and China.

When it came to the most dangerous outsourcing locations, the survey listed Israel, India and Brazil as the top three. And the survey was conducted a month before the Mumbai bombings.

This led Black Book researchers Doug Brown and Scott Wilson to conclude in a report that India’s “precarious position and placement in the world is no longer only prophesy”.

Rajeev Sawhey, European president of leading Indian outsourcing provider HCL, claimed to be less aware of the supposed risk India posed as an offshore destination, suggesting that it is unlikely that the country’s outsourcing business will suffer from the terrorist incident.

“Business tends to bounce back after such events,” he said, pointing to the aftermath of the Delhi bombings, and the terrorist attacks in the US and the UK.

Adding weight to this argument is a new push by the UK government to promote Palestinian economic development by encouraging UK companies to offshore their services to the country. Some see this as a sign that the risk factor may not affect a firm’s offshore location decision any more than language and cost.

However, the Black Book group and Gartner agree that the risks associated with some outsourcing destinations will continue to have an influence on business decisions to outsource, particularly in times of uncertainty.

“Having the right balance between lower cost and higher risks, and lower risks and higher costs, will be critical in times of recession,” said Gartner’s Marriott.

The credit crunch

The extent to which risk affects a decision to outsource services to a given location is difficult to determine, and the picture is no clearer when it comes to the credit crunch.

Gartner pointed out that a number of countries have taken advantage of the low-cost outsourcing opportunities in countries such as Mexico, Poland and Vietnam, while a report from outsourcing firm TPI highlighted a slowdown in outsourcing in the last half of 2008.

These trends suggest that the recession is taking a different toll on the outsourcing market than had been expected. When news of an economic downturn first broke, outsourcing contracts were predicted to increase as firms sought to cut costs through automating IT processes and shipping large IT projects to cheaper destinations.

TPI’s third-quarter index for 2008 showed that only 128 contracts were signed in the period, amounting to a total of ?11.5bn (£10.8bn) and representing the weakest quarter for total outsourcing contract value in the past six years.

Only one ‘mega deal’ (defined as worth ?800m or more) was signed in the past quarter, compared to more than ?7bn in each of the past three quarters.

But even though businesses are obviously stalling when it comes to signing outsourcing contracts, many offshore providers argue that they have been relatively unaffected. Tata Consultancy Services, HCL and Satyam still report that recruitment processes remain unchanged.

Yet India’s Nasscom recently lowered its growth rate target for the IT industry from 30 per cent to 21-23 per cent, suggesting that the credit crunch has slowed India’s offshore market.

And while US sourcing and advisory firm Equaterra still projects growth in the outsourcing market as businesses look primarily to cut costs, the firm argues that this will be at a slower pace.

Equaterra has advised outsourcing buyers and sellers to take action to protect their businesses from currency fluctuations, which can have a negative impact on local currencies by creating instability in cost structures and profit margins.

“The seesawing value of the dollar will make calculating the true costs of offshoring more complicated, challenging buyers and service providers to plan longer-term pricing, cost and profitability levels,” said the Equaterra report.

The report also predicted that outsourcing buyers will shift away from project-based contract labour, in favour of longer-term and more formalised outsourcing relationships.

“By committing to longer-term and larger-scale deals, buyers can get better pricing from service providers, better levels of service and lock-in longer term cost savings strategies,” the report said.