Offshore/outsourcing firms in Malaysia, Indonesia, the Philippines, and Thailand might lack the resources of Indian heavyweights such as Tata or WiPro, but they aren't sitting still.
India and China continue to be the biggest (and most established) names in offshore outsourcing according to new research from market-watcher Gartner Inc. Both countries increasingly have plenty of competition, however.
A new Gartner report paints a picture of thriving outsourcing ecosystems in several Asia-Pacific locales -- such as Malaysia, Indonesia, the Philippines, Thailand, and Vietnam.
The new offshore firms currently lack the resources, infrastructure, and reach of established heavyweights such as Tata or WiPro, but the upstarts aren't sitting still. Moreover, like their Indian and Chinese rivals, many are getting boosts from their national governments. The upshot, according to Gartner, is that most Asia-Pacific outsourcers (with the exceptions of Indonesia and Vietnam) are able to offer good to excellent infrastructure 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," said Jim Longwood, research vice president at Gartner, in a statement. "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."
The Gartner report, 10 Leading Locations for Offshore Services in Asia Pacific and Japan for 2010, lists India as the top offshore destination, with China as (a still distant) number two. Elsewhere, however, things are considerably more competitive: everyone, Gartner says, has an angle.
Australia, New Zealand, and Singapore, for example, compete (and differentiate) based both on the comparative maturity of their outsourcing services and on the relative stability or intelligibility of their outsourcing practices: all three countries earned high marks for political and economic stability, as well as for language skills. Upstart entrants, on the other hand, largely compete on cost.
Vietnam, for example, leverages rock-bottom pricing to offset its deficiencies in other areas. It fared particularly poorly on the data and intellectual property and security and privacy measures, according to Gartner.
On the other hand, the analyst firm notes, Malaysia, Thailand, the Philippines, and Indonesia have been able to achieve a kind of happy medium between low-cost and adequate service. All four countries position themselves as low-cost alternatives -- albeit with fewer bona fides (e.g., resources, experience, or reputation) -- to established (but in some cases more costly) options elsewhere in the Asia-Pacific region. All four countries turned in Top-10 finishes in Gartner's latest offshore outsourcing tally.
The efforts of both outsourcing upstarts and established contenders (a grouping that includes China, Australia, New Zealand, and Singapore) appear to be bearing fruit, according to Gartner. For example, even though India's outsourcing industry continues to grow, the sub-continent's share of the overall outsourcing pie is steadily shrinking. What's more, Indian outsourcers are now grappling with many of the same issues -- including wage inflation, turnover, or financial inconsistencies -- that bedevil established services firms in first-world locales.
Outsourcing upstarts are also thinking tactically, Gartner notes. "In view of India's dominance, many countries trying to tap into this market are reassessing their strategy and looking at niche markets [such as 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," Longwood said.
Indonesia, which this year displaced Pakistan in Gartner's Asia-Pacific Top 10, improved its standing by concentrating on what it does best -- in its case, mining and manufacturing. Its internal stability didn't hurt it, either.
"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," Longwood explained.
Gartner said outsources are especially wary of political or economic instability. In this respect, offshore destinations such as Thailand, Vietnam, and the Philippines are viewed as less stable than other locales.
"While low cost is an important factor, the political and economic environment remains a concern for many companies when moving business to offshore locations," a Gartner statement pointed out.
About the Author
Stephen Swoyer is a New York-based freelance journalist who writes about technology
India and China Remain Undisputed Leaders But Considerable Investments in Offshore Services Has Other Countries Strengthening Their Positions
Sydney, Australia, March 25, 2010 — India and China remain the undisputed leaders for offshore IT and business process outsourcing services in the Asia Pacific region, however, a number of countries are making considerable investments in this area and positioning themselves as credible alternatives, according to Gartner’s latest research.
For the report ‘10 Leading Locations for Offshore Services in Asia Pacific and Japan for 2010’, Gartner analysed the capabilities and potential of various countries as offshore services locations in the region. A separate report identifies the top 30 globally.
“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,” said Jim Longwood, research vice president at Gartner. “Some of these countries have invested considerably and leveraged increased demand for lower-cost services. The global financial crisis forced many organisations to place a greater emphasis on cost optimisation.”
The 10 leading countries in Asia Pacific included the undisputed leader in offshore services India, with China remaining the greatest challenger in terms of potential scale. The 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).
During the last 12 months there has been significant activity in many countries to consolidate or grow their positions as leading locations for offshore services, according to Gartner. Although India continues to grow in terms of IT services being exported, its relative share of the overall worldwide total has declined as a result. India is also starting to face some challenges including wage inflation, local attrition rates, geopolitical issues and financial irregularities, which are opening opportunities for other countries that are also improving their capabilities to target local service demands of more-mature regional Asian clients.
“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 centres, logistics and other back-office functions where they might have a physical proximity advantage over mature countries like Australia, Hong Kong and Singapore,” said Mr Longwood.
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 labour 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 Mr 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 organisations 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 Mr Longwood. “However, the link between lower risk and higher cost holds true.”
The mature markets of Australia, Singapore and New Zealand offered limited cost savings, but led the ratings for language, political and economic environment, cultural compatibility, globalisation and legal maturity, data and intellectual property, security and privacy.
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 favourably 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.
Additional information is available in the Gartner report "Gartner's 10 Leading Locations for Offshore Services in the Asia Pacific and Japan Region for 2010” at http://www.gartner.com/resId=1300113
Note to editors:
*The top 10 countries for offshore services were rated according to 10 criteria that will help determine which locations are right for individual organisations. The 10 criteria were: language, government support, labour pool, infrastructure, educational system, cost, political and economic environment, cultural compatibility, globalalisation and legal maturity, and data and intellectual property security and privacy.