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    New opportunities in global outsourcing


    International Trade Forum - Issue 2/2010

    With increasing globalization and technological developments that enable business processes independent of location, many countries around the world have become attractive sites for Western companies. While access to cheap labour was previously the dominant motivation, nowadays emerging markets compete more on availability and scalability of skills. The global services market has become highly competitive, and differentiation of service offerings and leverage of inherent advantages, including cultural and language affinities, set the scene for keen competition between offshoring destinations.

    Competitive market

    Beyond BRIC (Brazil, Russian Federation, India and China) Tier 1 sourcing destinations, there are more than 120 developing countries competing for foreign investments, whether in the form of offshore captive centres, delivery centres of world-leading suppliers or through services provided by local suppliers. Among the key emerging markets, i.e. the Middle East and Africa, Central and Eastern Europe (CEE), South America and Asia, some attract more high-value activities, such as research and development (R&D) and knowledge-intensive processes, while others are competing mainly on labour costs, struggling to differentiate.

    By the end of 2009, combined spending on business process outsourcing (BPO) and information technology outsourcing (ITO) accounted for more than US$ 390 billion worldwide, which is slightly less than in 2008, because of the global economic downturn. However, we expect ITO and BPO markets to start growing again from 2010 onwards.1 Focusing on the offshore market, in 2009 the revenues from offshore outsourcing of business and information technology (IT) services exceeded US$ 60 billion, and over the next five years the compound annual growth rate for offshore outsourcing is expected to be about 20%. With rising BPO expenditure worldwide in areas such as human resources, procurement, back-office administration, call centres, legal, finance and accounting, customer-facing operations and asset management, a highly competitive global services market presents opportunities for countries with the right mix of costs, skills and reliable service.

    Emerging sourcing destinations put significant efforts into differentiating themselves from BRIC countries and from Tier 2 and Tier 3 rivals. For example, Egypt is promoting itself as a low-cost destination for call centres that specialize in European languages and offers a large pool of university graduates to Western companies through special industry-university partnerships. Dubai and Singapore present their IT security systems and legal systems to the outsourcing of high-security and business-continuity services. The Philippines, a former colony of the United States of America, stresses its excellent English skills to attract English-speaking call centres. Morocco is trying to attract French-speaking European clients to set up call centres, while Central and South American Spanish-speaking countries hope to establish call centres to provide services to the Hispanic market in the United States.

    Beyond low-cost outsourcing

    While Tier 2 and Tier 3 outsourcing destinations are making headway, in recent years India has gained leadership in ITO and BPO services. Nowadays, many of the global clients (large multinational companies) view India as a centre of excellence for ITO and BPO, and not merely as a low-cost destination. Many United States and European clients initially engaged Indian suppliers of technical services such as programming and platform upgrades (e.g. to help with Y2K, or millennium bug, compliance). However, as these relationships matured, Western clients assigned Indian companies more challenging work, e.g. development and support tasks for critical business applications. Another advantage enjoyed by India is management skills, which most emerging sourcing destinations are unable to offer.

    However, India and, to a lesser extent, China, Brazil and the Russian Federation, are experiencing upward wage pressure, combined with rising, sometimes high, attrition. This war for talent within BRIC countries undercuts their key advantages. For example, many firms from India and China have relocated offshore activities from these countries to more attractive locations. In fact, major Indian suppliers, such as TCS (Tata Consultancy Services) and Infosys, are setting up global delivery centres in China, mainly due to the improving supply of engineering skills and proficiency in English.

    While China is investing heavily in information and communication technologies, it is important to note that so far the main ITO and BPO suppliers in China are either large United States-based suppliers, such as Accenture, Cap Gemini, Dell, Hewlett-Packard and IBM, or large Indian-based suppliers like Genpact, Infosys and TCS. Still, many Chinese suppliers do not want to compete solely in terms of low-level technical skills, but rather over the full range of the service value chain. However, many client organizations are cautious of China's ITO and BPO services because of language and cultural barriers, and fears over losing intellectual property. The Chinese Government and business sectors are addressing these barriers. For example, the Government of China is investing US$ 5 billion in English language training to improve the marketability of Chinese ITO and BPO services.

    Growing diversity of services

    Other developing countries are becoming important players in the IT services market. Many United States clients already use Central American suppliers for Spanish-speaking business processes, such as help-desks, patient scheduling and data entry. Synchronous time zones motivate United States firms to outsource work to Central or South America. Furthermore, access to both skills and scale are two factors that clients consider. Brazil has the advantage of a large population, the creativity of its engineers and government support programmes, while Chile and Uruguay have exploited time zone advantages, back-office proficiencies and government incentives.

    The latest research on captives shows that the CEE region is becoming a popular nearshore captive destination for Western European clients. In particular, countries such as Bulgaria, the Czech Republic and Hungary have attracted large numbers of R&D centres, making them a hub for business innovation and high-value, knowledge-intensive, professional services. Also influential are closer proximity to the supplier, limited time zone differences and lower transaction costs than for Asian compe-titors.

    In sub-Saharan Africa, several countries compete in global ITO and BPO markets. These countries, for example Kenya and South Africa, export IT and business services primarily to United Kingdom-based clients, because of time zone and cultural similarities, English-speaking capabilities and good infrastructure. North Africa already exports IT services to Europe. For example, Moroccan IT suppliers are attractive for clients in France because of the common language, similar time zone and cultural compatibility.

    Selecting a location

    Selecting a location is one of the major challenges that organizations face when making offshoring and outsourcing decisions. A decision to relocate a business function or to set up a new captive facility (for clients) or delivery centre (for suppliers) abroad is based to a great extent on the attractiveness of the sourcing locations. Key factors to consider when selecting an offshoring destination include costs, skills, environment, quality of infrastructure, risks and market potential. Based on our latest research among the largest 263 companies in Europe, skills are considered the most important factor.

    However, in some outsourcing decisions, while the attractiveness of the location is of importance, it is no less important to consider the attractiveness of the suppliers themselves. This is mainly because some suppliers, although they are associated with a particular location (such as TCS with India), have a global presence, which is a factor that a client may appreciate far more than advantages offered by the supplier's home base.


    Key factors


    • Labour costs (average wages for skilled workers and managers)
    • Infrastructure costs (unit costs for telecom networks, Internet access and power and office rent)
    • Corporate taxes (tax breaks and regulations, and other incentives for local investment)


    • Skill pool (the size of the labour pool with required skills). Required skills may include technical and business knowledge, management skills, languages and the ability to learn new concepts and innovate. The scalability of labour resources in the long term (that is, the ability to supply sufficient labour resources to handle growing demand) is a major issue to consider when choosing a sourcing destination. An indication of the scalability of labour resources in a country is the growth in the number of graduates with desired skills that it is able to demonstrate year to year. Countries that offer scalability of labour resources are also more likely to keep wages relatively low due to the constant supply of new graduates.
    • Vendor landscape (the size of the local sector providing IT services and other business functions). For clients looking to outsource IT or business processes, it is imperative to evaluate the vendor's landscape in terms of the general skills-set (or capabilities) and competencies of vendors


    • Governance support (policy on foreign investment, labour laws, bureaucratic and regulatory burden, level of corruption)
    • Business environment (compatibility with prevailing business culture and ethics)
    • Living environment (overall quality of life, prevalence of HIV infection, serious crime per capita)
    • Accessibility (travel time, flight frequency and time difference)

    Quality of infrastructure

    • Telecommunications and IT (that is, network downtime, speed of service restoration and connectivity)
    • Real estate (both the availability and the quality)
    • Transportation (the scale and quality of road and rail networks)
    • Power (the reliability of power supply)

    Risk profile

    • Security issues (that is, risks to personal security and property-related issues such as fraud, crime and terrorism)
    • Disruptive events (including the risk of a labour uprising, political unrest and natural disasters)
    • Regulatory risks (the stability, fairness and efficiency of the legal framework)
    • Macroeconomic risks (such as cost inflation, currency fluctuation and capital freedom)
    • Intellectual property (IP) risk (strength of the data and IP protection regime)

    Market potential

    • Attractiveness of the local market (that is, the current gross domestic product (GDP) and GDP growth rate)
    • Access to nearby markets (both in the host country and in the adjacent region)