Offshore Location Update
Dallas, Texas 12/12/2007 10:05 PM GMT (FINDITT)
Although India is still far ahead of its nearest competitors in terms of volume of outsourcing business, China, Philippines and Eastern Europe are making fast progress to capture market share from India. Philippines and Eastern Europe score ahead of India and China on many counts and are forcing Indian outsourcing companies to modify their strategy to remain competitive.
There are a number of considerations in terms of identifying a particular country as a favorable spot for outsourcing. Apart from the very obvious cost related advantages, some of the other considerations include: availability of skilled manpower, competitiveness of suppliers/service providers, cultural compatibility and language proficiency, government support, educational system, infrastructure and intellectual property protection. The report evaluates each of these nations on various parameters related to outsourcing. Here is a brief highlight of each of these outsourcing locations and an overview of differences among them.
India:
Early-mover advantage in the outsourcing industry and critical mass has made India the most attractive global location for companies looking at outsourcing. The global leadership achieved by India is not only being achieved by its large availability of skilled labor, especially in the IT industry, but by a strong set of other favorable factors as well, including its strong educational system, cultural compatibility in terms of large English speaking population, huge incentives from the government to promote outsourcing and relatively lower infrastructure and telecom costs.
Further, the outsourcing boom has attracted thousands of service providers in the industry and scalability as well as volume is not an issue In the IT and BPO space, India is far ahead of its immediate competitors. The current economic scenario is also a strong supportive factor in the growth of Indian economy. The country boasts one of the highest GDP growth rates in the world and its buoyant capital markets has attracted huge foreign investments in the country.
One of the major drawbacks of India has been its poor infrastructure. However, the increasing interest of foreign investors to participate in infrastructure development in India has resulted in huge foreign direct investment inflow in this sector.
India’s leadership position is being given strong competition by Eastern Europe, Latin America and other Asian players like Philippines. The sharp appreciation of the Rupee against the US dollar is also a concern. Another factor going against India is the increasing preference of US and European companies to engage in nearshoring rather than offshoring. New players like countries in Latin America are posing stiff challenges to Indian companies, who are now themselves forced to set up offshoring centers there. . The rising cost of wages, expected shortage of skilled labor in the future and near saturation levels in tier one cities are factors to consider when choosing India.
China:
China has a significant advantage over India in terms of labor cost, booming economic growth and huge inflow of foreign investment in the country.
China is fast emerging as a outsourcing powerhouse in the information technology space. China has a reverse brain-drain situation and a fast-growing IT talent pool. China’s efforts in becoming a future IT outsourcing powerhouse are also supported by government officials, many of whom are forging partnerships with multinationals to train IT engineers.
One of the biggest problems for China is the cultural and language barrier. The lack of English proficiency and significant cultural differences with the Western World acts as a big deterrent for China. Further, the communist government and tight political control also poses difficulties for China to succeed. Also, even though China has a large pool of IT workers, the quality of IT talent pool is still a question.
The Chinese government has realized the potential of outsourcing and is taking steps to capitalize on this opportunity and to overcome roadblocks, Major emphasis is been given to English learning by the Chinese government to prepare the country’s IT graduates for outsourcing jobs.
Another interesting trend is that Indian companies like Infosys and Wipro have started software development centers in China to take advantage of low cost labor rates.
The Philippines:
In recent years, the Philippines has become one of the most preferred offshore destination for call center outsourcing, specializing in customer support services. Like Indians, Filipinos also have a high level of English proficiency and strong customer orientation.
The Philippines has a Western-influenced culture because it was an American colony for 50 years, thus distinguishing iself from other offshore destinations. Although Asian in orientation, Filipinos watch American TV and are thus able to communicate effectively in American English which provides a distinct competitive advantage. The Philippines has a literacy rate of almost 95 percent and has a large pool of information technology professionals.
Another interesting fact to note is that the recent boom in the outsourcing industry of the Philippines has not been fueled only by traditional low-value-added call centers, but by higher-end outsourcing such as legal services, Web design, medical transcription, software development, animation, and shared services as well. Even though call centers still dominate the sector, the Philippines has started capitalizing on its creative design talent pool, its large pool of lawyers, and its professionals in accounting and finance.
The Business Process Association of Philippines estimates that outsourcing in the Philippines could be an $11 billion industry, employing 900,000 people by the end of 2010.
Eastern Europe:
Eastern Europe is emerging as a favorite offshoring destination, especially among European nations. The nations in Western Europe are favoring near shore destinations such as countries in Eastern Europe rather than traditional outsourcing hubs like India. Nearshore call-centre operations are appealing to Western European firms because of the growing availability of multilingual speakers and improved political stability.
Eastern European nations score over traditional outsourcing nations over several counts, such as low risk profile for factors such as reliable infrastructure, cultural and geographical proximity to Europe, as well as language capabilities like German and French that are not found in countries like India and China.
Eastern European nations boast of numerous mid-size cities where little or no offshoring work is being done currently, but possess large talent pools and low labor costs that can be capitalized. Numerous cities in Poland, Hungary and Czech Republic, etc are emerging as new destinations for outsourcing.
Further, the region offers low wage levels, comparable to India, with slow wage inflation looking likely to keep the region economically competitive for at least 15 years.
See Chart.
As we can observe in the comparison chart, India scores ahead of China, the Philippines and Eastern Europe in terms of availability of skilled labor, especially in the IT outsourcing arena. Although China has a sizable population and huge labor pool, the availability of talented and skilled labor pool as compared to India is still a question.
The educational system of all these nations is of high standards. India and Eastern Europe possess very strong educational system. Even Philippines has a literacy rate of almost 95 percent and China is not too far behind in terms of producing a high number of graduates.
One the English proficiency front, India and the Philippines, being British and American Colonies respectively, score ahead of Eastern European nations and China. However, it is to be noted that Eastern European nations score ahead of their Asian counterparts due to their proficiency in Western European languages.
On the cost advantage front, India and China provide strong cost advantage. The Philippines is not far behind in terms of cost advantage. Eastern European nations are competitive in terms of cost yet, as compared to India and China.
Eastern Europe certainly scores ahead of rest of the three in terms of providing a reliable infrastructure. Though infrastructure growth is taking place in China and India, it is still far behind Eastern European nations. The Philippines has the poorest infrastructure among these nations.
There is not much to choose in terms of government support among all these nations. Although India’s leadership position can certainly be defined in terms of the strong government backing plus the admirable efforts of NASSCOM, governments of other nations like China, the Philippines and Eastern Europe have also started realizing the tremendous potential and business opportunity in outsourcing.
India is certainly known for its high quality work in outsourcing. Philippines has also emerged as a high quality destination, even better than India in areas like Customer Service and Call Centers. China’s quality in IT outsourcing is still an issue. Eastern European countries also score high on quality.
In term of cultural compatibility, India and the Philippines score high in terms of their compatibility to American culture. Eastern Europe scores high in terms of its compatibility to European culture. China is behind among these nations in terms of language and cultural compatibility.
The business environment, including the political scenario, is most favorable in Eastern European nations that are least risky in this parameter. India and China take the second spot while the Philippines score the lowest in this regard. India is certainly better than China because it boasts of a supportive government that thinks like the Western world, unlike the communist leaders of China that have been traditionally conservative.
To conclude, although India’s leadership position is intact in the offshoring industry, China, Philippines and Eastern European nations are fast catching up.
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