IT offshore outsourcing markets, options on the rise, Gartner says

CIOs looking to move IT work offshore in 2011 are on the prowl for the locales that cost the least, even if that means bringing in their own security. At least, that’s the view reflected in Gartner Inc.’s latest version of its list of top 30 countries for IT offshore outsourcing.

Missing from Gartner’s 2011 list are seven developed countries: Australia, Canada, Ireland, Israel, New Zealand, Singapore and Spain. Those veteran locations remain viable choices for companies requiring mature IT outsourcing services or a geographic foothold, according to Gartner, but cost is no longer a selling point.

Displacing the traditional seven are eight emerging nations, where services are cheap and government support is getting better: Bangladesh, Bulgaria, Colombia, Mauritius and Peru, all making their debut in the top 30; and three reentrants — Panama, Sri Lanka and Turkey (see sidebar, Top countries for IT offshoring).

“It’s a reflection that most organizations are looking for countries that offer some cost advantage,” said Ian Marriott, research vice president at the Stamford, Conn.-based consultancy. Nor is it likely the mature countries will be back in the top 30, based on their cost of doing business, he added. “They will have benefits that they can leverage, but they won’t be saying, we’re cheaper than India, China, Brazil and so on.”

Data and intellectual property security, a widespread weakness

The new and less expensive locales for IT offshoring, of course, come with more risk and with stubborn problems. All the new entrants made progress against some of the 10 criteria Gartner uses to assess offshore outsourcing, but they scored poorly in data security and intellectual property protection.

“It does take time to put protections into legislation and to get that legislation through the courts, so privacy and security protections remain a challenge,” Marriott said.

In fact, a lack of progress on security is not found just in the latest additions to its list, such as Bangladesh and Sri Lanka, according to Gartner. China, Thailand and Vietnam also scored a “poor” in that category. “But that doesn’t mean these places don’t have the potential to work effectively. You just have to take into account the weaknesses,” Marriott said.

Large organizations venturing into such locales, “tend to wrap their own corporate standards around the location,” Marriott said. In that way, they “manage security the same in the Ukraine as they do in the U.S.”

Not surprisingly, the newest entrants to the top 30 also came up short by other traditional yardsticks for assessing IT offshoring, compared to their neighbors. For example:

  • Bangladesh was rated the worst on infrastructure in the Asia/Pacific region, whereas China and Malaysia continued to improve, moving from “poor” to “fair.”
  • In the Americas, Panama came in last on the quality of its educational system, compared with Chile, Mexico and Costa Rica (which earned the highest ranking, a “good,” in this category for the region). New entrant Colombia got a “worst” on infrastructure, compared with Brazil and Chile, the area’s top-rated countries for infrastructure.
  • In the Europe, Middle East and Africa (EMEA) region, newcomer Bulgaria has fewer entrepreneurs and less operational scale than its nearest neighbors, but its significant cost advantage over most other countries in Eastern Europe will attract the kind of investment that will spur maturity in other areas, according to Marriott.

A good example of the benefits reaped from starting out inexpensive is Indonesia, Marriott noted. That country entered the top 30 list last year as one of the cheapest labor markets in the Asia/Pacific region. In the year since, its labor pool has improved from “poor” to “fair” as the number of vendors choosing to provide IT services from there has increased.

IT offshoring counterpoint: A top 10 list from TPI

Gartner does not stack-rank its cohort of 30 IT offshoring locations, except to state that India remains the overall leader of the bunch, scoring well across all areas, with China nipping at its heels.

For a top 10 list, CIOs might want to check out TPI Inc., an IT consultancy based in The Woodlands, Texas, whose research division recently came out with its Outsourcing Viability Index. The index looks at 51 countries, both emerging and mature. The group is evaluated across six dimensions including infrastructure; technology adoption; education levels; and financials, a broad category that looks at salaries, cost of living, rental property and tax rates, research director Paul Reynolds said. And yes, Asia/Pacific dominates the top 10.

“If we look at the world in three regions, Asia/Pacific, Americas and EMEA, Asia had five of the top 10 countries, with India coming out as No. 1,” Reynolds said. (See “TPI Inc.’s top 10 countries for IT outsourcing.”)

India, the Philippines and China scored well on sourcing environment and financials, the two categories weighted the most heavily by TPI, as well as on education levels and workforce, Reynolds said. Other trends in the region? TPI is seeing companies that are sourcing IT services in India and increasingly are looking to diversify their service delivery by moving work to China and to the Philippines (a preferred location for voice work). In addition, as the financial situation stabilizes, service providers are hiring more aggressively, and that is driving up wages. “We actually expect a talent war in the Asia/Pacific region for the next several years, as the service providers compete for the best people,” he said.

In Latin America and South America, the TPI index found that established players Mexico, Brazil and Argentina continue to perform well, Reynolds said. TPI recommends keeping an eye on up-and-comers Colombia and Uruguay (the latter not ranked in this year’s index). Both countries are offering strong financial incentives for doing business there. U.S. and Canadian customers remain the region’s chief focus.

Finally, financial pressures are changing the appetite for IT offshoring in Europe, a region that has eschewed offshore markets in favor of local or near-shore workforces. Interest in offshore locations is growing, nevertheless, particularly among Europe’s mature outsourcing providers operating in expensive locations, TPI found. Conversely, some European companies are bringing back the voice work they outsourced to India. “Language skills and, in some cases, service quality are forcing them to bring some of that work back locally, so it has worked both ways,” Reynolds said.

As for up-and-comers in EMEA? TPI recommends keeping an eye on Jordan and the United Arab Emirates, which, along with Egypt (No. 10 on the list), have launched strong campaigns promoting their service delivery capabilities.


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