After years of increased activity, the image of pioneers paving the way has clearly faded. While sending a call center to India may no longer be the risky proposition it once was, many decision-makers feel increasingly bewildered by the range of choices before them. What functions can safely be performed in remote locations? Which countries offer the best combination of skills, costs and attractive business conditions? How important is proximity to customers and to corporate leadership? What about language differences? Cultural barriers? Transaction costs?
Again, thanks to the ongoing media focus, executives are increasingly aware of the risks associated with offshoring. Are the cost savings really sustainable? Are wage inflation and attrition in the most popular locations undermining the potential advantages? Is it possible to maintain required levels of security and customer service quality in remote foreign locations? And in a year dominated by news of tsunamis, floods, hurricanes, wars and pandemics, how can executives ensure continuity of critical business functions?
To help decision-makers answer these questions, A.T. Kearney developed the Global Services Location Index TM (GSLI). The Index evaluates 40 countries as potential locations for the most common remote services, including IT services and support, contact centers, back-office support. Each country’s score is comprised of a weighted combination of relative scores on 40 individual metrics, which are grouped into three categories: financial attractiveness, people skills and availability, and business environment (see Appendix: About the Study).
In developing this year’s Index, however, we realized that as the global marketplace evolves, the Index must keep pace. As a result, we made several changes to this year’s study. Perhaps the most obvious update is that we changed its name from the Offshore Location Attractiveness Index to the Global Services Location Index. We did this because it is no longer a question of offshore versus onshore, or here versus there. Indeed, there is no longer a “there.” Instead, there is one global labor market—and it’s time for executives to reconsider their corporate maps.
This paper provides an overview of the Index findings and highlights the major strengths and weaknesses of the most interesting locations in each region. We conclude with brief recommendations on the strategic approach needed to tap into the vast opportunities that the global marketplace offers.
The Findings
Once again, India and China topped the Index (see figure 1). Although India held onto its lead, wage inflation and the emergence of lower-cost countries decreased its overall margin against other countries. Improved infrastructure and relevant people skills boosted China’s attractiveness as a low-cost option for serving Asian markets.
A regional snapshot shows that Southeast Asian countries offer a diverse mix of costs, skills and environment, and continue to perform well, occupying four of the top six spots in the Index. The range of Central and Eastern European countries offering low-cost locations for European markets continued to push eastward, with Bulgaria, Slovakia and Romania all appearing for the first time. Several Latin American countries, led by Chile and Brazil, continue to perform well, but are being squeezed by new contenders elsewhere in the world. Finally, the Middle East and Africa offer interesting new options, as countries including Egypt, Jordan, the United Arab Emirates and Ghana perform well.
Lower-cost locations in developed markets show a wide range of performance. All offer a good combination of relevant experience and business environment. Large skill bases and flexible operating environments translated into high Index scores for U.S. and Canadian cities. Conversely, smaller skill bases and relatively higher costs kept Index scores lower for cities in Western Europe, Australia and New Zealand.
A regional snapshot shows that Southeast Asian countries offer a diverse mix of costs, skills and environment, and continue to perform well, occupying four of the top six spots in the Index. The range of Central and Eastern European countries offering low-cost locations for European markets continued to push eastward, with Bulgaria, Slovakia and Romania all appearing for the first time. Several Latin American countries, led by Chile and Brazil, continue to perform well, but are being squeezed by new contenders elsewhere in the world. Finally, the Middle East and Africa offer interesting new options, as countries including Egypt, Jordan, the United Arab Emirates and Ghana perform well.
Lower-cost locations in developed markets show a wide range of performance. All offer a good combination of relevant experience and business environment. Large skill bases and flexible operating environments translated into high Index scores for U.S. and Canadian cities. Conversely, smaller skill bases and relatively higher costs kept Index scores lower for cities in Western Europe, Australia and New Zealand.
An in-depth look at each of these major findings follows.
India and China: Complementary Countries
With their huge populations, increasingly strong educational output and low labor costs, India and China are clearly top of mind as remote services locations. However, they occupy different positions in the global services supply market. India has been developing this sector for almost 20 years and offers a complete range of services, from IT and contact centers to back-office processes, R&D and analytics. The concept of China as a services location has only evolved in the past five years, and the scale of its sector is tiny by comparison. But China is playing to its strengths: It emphasizes niches, such as contact centers and back-office processing, which cater to fast-growing East Asian markets, and R&D, which supports its huge manufacturing base. Despite relatively weaker English skills, China is increasingly selected as a complement to India for global services provision, mainly in less English-dependent IT and basic back-office processes. In fact, many Indian vendors are establishing centers in China to tap into its complementary skill-base and offer their customers a risk-diversified platform.
A closer look reveals the strengths and weakness of these two Index leaders.
India. India continues to be the Index’s undisputed leader, combining low costs with a vast pool of talented workers whose breadth and depth of experience improves with each year. From its humble start in the 1980s, India has gradually moved from providing simple code remediation and data entry to offering sophisticated IT solutions and IT-enabled business process management. Increasingly, local vendors and global multinationals are locating high-end research and analytics, content and design, and product development activities in India. Today, it is difficult to find functions that India cannot provide.
Still, India faces a number of obstacles. An unwieldy bureaucracy, a heavy regulatory system and poor infrastructure dampen the country’s attractiveness. Ironically, the very success of the Indian remote services sector is weakening its leadership position. The increasing demand for trained professionals in cities such as Bangalore, Mumbai and New Delhi is pushing wages up by 10 to 20 percent per year. The boom has also raised turnover rates, which in turn increases recruiting and training costs.
India’s success has also attracted intense scrutiny from rivals and the world’s media. High turnover rates and rapid growth have increased the risk of security violations and fraud. Several highly publicized fraud cases have prompted the leading industry association, NASSCOM, to launch a national register for workers in the services export sector and instigate more rigorous background checks on new employees. 1
Saturation, congestion and inflation in the large cities is nudging the Indian market toward geographically untapped markets. Already, tier-two cities such as Chennai, Hyderabad and Pune show signs of stress, so companies are eyeing tier-three cities including Ahmadabad, Kolkata and Jaipur, which offer lower costs and less competition for resources.
These issues combined with the increased attractiveness of other low-cost contenders has slightly diminished India’s lead in this year’s Index. Nevertheless, the gap between India and China is still larger than the gap between the next 10 countries combined. The large and increasingly skilled, but low-cost, labor pool will continue to be India’s greatest asset and will ensure its leadership for years to come. In addition, with increasing attention focused on the sector, the country’s political and business leaders are pushing hard to improve the business environment and infrastructure to support continued growth.
China. In contrast to India’s array of offerings, China is still nascent but is developing strengths in a few select areas. Most of China’s service centers cater to domestic or regional customers that require geographic proximity and local language capabilities. Its vast internal market, along with the Chinese-speaking customer markets in Hong Kong, Taiwan and Southeast Asia, as well as pockets of workers who speak Japanese and Korean, make China the natural choice for service hubs to support the fast-growing markets of East Asia.
Although China remains primarily a regional hub, new capabilities are quickly transforming the country into a global service provider. As local and international demand grows, service centers are moving up the value chain from low-end processing and programming functions to advanced IT applications and financial services. Knowledge of English is also spreading fast. Some schools in China are teaching mathematics and science courses in English, and IT colleges include English-language training in their curricula. Spurred on by India’s success and by the prospects of the 2008 Beijing Olympics, national and regional governments have launched ambitious programs to improve language and IT skills. To address a shortage of management talent, Chinese companies are recruiting experienced managers from countries such as Singapore, the Philippines and India.
Weaknesses remain, however. While intellectual property (IP) protection will continue to improve with World Trade Organization accession, companies continue to report that enforcement is not as stringent as it could be. Longer-term economic and political stability remain a concern. Companies are caught between rapidly rising costs and turnover rates in the major coastal centers around Shanghai, Beijing and Guangdong, and inland cities such as Chengdu and Xian, where costs are lower, but talent with relevant experience is scarce.
Generally, companies are not expanding operations in China to replace existing operations, but to complement activities performed elsewhere. For example, India’s offshore leader, Infosys, is offering Chinese-language instruction to its Indian employees and is building up its China operations in anticipation of surging demand. Infosys plans to expand from 250 IT programmers to 6,000 over the next five years, centered on two campuses in Shanghai and nearby Hangzhou. Similarly, HSBC has a large operation in China, alongside major centers in India and Brazil, with 3,000 people in Shanghai and Guangzhou providing back-office processing (such as account maintenance) for the company’s operations in Europe, Canada and Hong Kong. Clearly, China’s global services sector is taking off.
Southeast Asia
From the small, highly specialized market of Singapore to low-cost Vietnam, the Southeast Asia region spans the extremes. Singapore, Malaysia, the Philippines and Thailand are all in the top 10 of the Index, and Indonesia and Vietnam are emerging as potential low-cost contenders (see figure 2).
Singapore. Although Singapore has high wage levels, it has built a reputation as a secure location for sensitive high-end activities, with an emphasis on business continuity, IP protection and data privacy. In fact, Singapore tops the business environment component of the Index (see figure 3) . Its excellent infrastructure, high-quality workforce and global integration have long made Singapore the country of choice for many multinationals with Asia-Pacific operating hubs. Singapore is also the world’s most globalized country according to the A.T. Kearney/Foreign Policy Globalization Index. And because it offers a prime market for high-end services that require reliability and advanced skills, Singapore is popular among financial institutions as a complement to global operations in London and New York . The time difference enables continuous 24-hour operation in an international network of offices.
In addition, Singapore helped launch the world’s first industry standard for Business Continuity and Disaster Recovery, which outlines certification requirements that service centers must meet. The U.S.-Singapore Free Trade Agreement, which strengthens IPR enforcement (among other things) gave an additional boost to Singapore’s business environment for foreign investors.
Malaysia. At number three in the Index for the second consecutive year, Malaysia enjoys much the same educational and governmental heritage as India, albeit on a smaller scale and at higher cost. Because it does not have the cost structure or scale to compete at the low end, Malaysia is establishing itself as a major global hub for high value-added shared services, focusing on the finance, logistics and energy sectors. From manufacturing-related R&D centers in Penang, to financial service centers operated by companies such as HSBC and Prudential along the Multimedia Super Corridor, the country is already attracting major investments.
Alongside continued investment in world-class infrastructures in the Cyberjaya high-tech city, the government is offering attractive incentives for corporations choosing to locate in Malaysia, and launching innovative policies to open up the labor pool and deepen English-language and technical skills. Schools already teach science and mathematics courses in English, and the government has launched public and private partnerships to further improve English skills throughout the population.
In both Singapore and Malaysia, authorities are taking steps to increase the relatively small pool of skilled professionals by increasing the capacity of technical schools and universities and making it easier to recruit foreign professionals to work in service centers.
The Philippines. Despite political instability and infrastructure weaknesses, the Philippines continues to benefit from the global exposure and the English language skills of its workforce. The country tops the financial attractiveness component of the Index (see figure 4) . Low costs, a well-educated population, English and traditional ties to the United States (including the accent) give the country an edge, particularly among American companies. The Philippines excels in providing high-quality call centers to North America . And the prevalence of American financial certifications, such as Series 6 and 7, makes the Philippines attractive to financial services companies.
The country boasts a strong base of local and global outsourcing vendors, and the list of companies that operate captive service centers includes Citibank, P&G, Shell, Alitalia, Barnes & Noble and NEC. Even the International Red Cross operates a processing center in the Philippines. As in India, however, the Philippines’ success is raising concerns over wage inflation and attrition. This is particularly worrisome because the vast majority of the sector is concentrated in the Manila region.
Thailand. Although Thailand has yet to replicate the Philippines’ success, it has a competitive cost structure, a solid education system and a business-friendly environment—all the requirements to become a serious competitor. Weak English skills and a relatively minor IT-focus have limited the growth of the sector, but the government is actively addressing these shortcomings.
Vietnam. Vietnam is an emerging offshore contender. It has a cost advantage, even over traditional low-cost destinations of China and India. Japanese companies in particular are offshoring IT work to Vietnam. Constrained by a relatively weak business environment and shallow talent pool, Vietnam will likely replace India as a low-cost supplier of low-end processing work as India focuses on more advanced services.
Indonesia. Although Indonesia has one of the most favorable cost structures in the Index, it ranks close to the bottom in terms of business environment. Political and economic instability in the wake of the Asian financial crisis coincided with the global offshoring boom and prevented Indonesia from becoming a major player. Weaknesses in the business environment, quality of education and language skills continue to raise concerns. Nevertheless, Indonesia is the third-highest new entrant in this year’s Index, benefiting from competitive wages, rent and electricity costs, a relatively low tax burden and a large workforce. Low costs, a large population (third only to China and India) and increased political and economic stability may yet make Indonesia an interesting option in the future.
Central and Eastern Europe
Central and Eastern Europe continue to be preferred destinations for European companies seeking alternative locations for their IT and BPO services. Although costs are higher than for many Asian locations, Central and Eastern European countries offer a well-educated labor force, strong language skills and, importantly, proximity to Western European customers. The major cities are a mere two-hour flight from London or Paris and are virtually next door to Germany and Austria. Gradual accession into the European Union (EU) and implementation of EU law ensure a stable and predictable political climate that makes investments more secure.
In fact, according to data from the United Nations Conference on Trade and Development (UNCTAD), more than 20 percent of all offshore projects of European firms in recent years have gone to Central and Eastern Europe. Information technology is strong in the region, as is the skill base and information and communications infrastructure. Government incentives for foreign investments also help draw in business.
However, as the most advanced Central European countries catch up to their Western neighbors, the cost advantage is beginning to erode. The same economic forces that moved functions to Prague and Budapest are now driving companies to consider secondary cities such as Romania and Bulgaria. The Czech Republic, Hungary and Poland all dropped slightly in this year’s Index, largely because of the rise of other contenders and because of increasing wages and other costs (see figure 5).
The Czech Republic. The Czech Republic remains the most attractive offshore destination in the region (see figure 6). It offers competitive compensation costs within the IT sector relative to its regional competitors, a highly skilled labor force and reliable infrastructure. High property prices in Prague are encouraging a shift to less expensive cities such as Brno or Plzen. Siemens, Honeywell and IBM have started operations in the Czech Technology Park in Brno. The Czech Republic also continues to be a major hub for call centers in Europe, with more than 300 centers serving international clients. Estimates suggest this number will double by 2007.
Hungary. Proximity to European markets benefits Hungary, as do high education levels and language skills, and political and economic stability. Indian offshore vendors Tata and Satyam recently joined global veterans GE and EDS in establishing their Central European hubs in Hungary.
Poland. Relatively slower reforms and higher wages have lowered Poland’s ranking in the Index. On the positive side, it has a sizeable labor force and more urban centers that can support large-scale operations, more so than many other countries in the region. Poland has attracted major R&D and engineering centers to the Krakow region, and European finance and accounting centers to various regions.
Slovakia, Bulgaria and Romania. As costs rise in Poland, Hungary and the Czech Republic, lower-cost alternatives such as Slovakia, Bulgaria and Romania are becoming increasingly attractive, offering a highly-skilled labor force with technical skills. With EU accession completed or imminent, the business environment in all three countries is improving rapidly. Yet the benefits of EU membership will likely reduce their cost advantage, leading companies to look even further East to Russia, Ukraine and the other former Soviet countries.
Russia. Russia offers a challenging business environment given the uncertainty surrounding future policy toward foreign investors. However, with excellent technical universities, a world-class aerospace and defense industry, and the third largest concentration of scientists per capita, Russia offers unique capabilities in highly specialized engineering and applied sciences. Still, a deteriorating local industrial base offers few opportunities for top talent and creates an excess supply for foreign investors in the IT and engineering industries.
Latin America
With the exception of Chile, all Latin American countries in the Index slipped slightly in this year’s rankings, mainly due to several new contenders in Eastern Europe and the Mediterranean region. Nevertheless, Latin American countries remain attractive for providing near-shore services to the North American market and the Spanish-speaking markets in the United States and Spain. As governments recognize the growing importance of this sector, we expect to see significant improvements in the skill base, infrastructure and regulatory environment.
Most Latin American countries enjoy wages somewhat higher than in key competing locations such as India, China and the Philippines. To gain an edge, they must demonstrate superior skills or infrastructure quality. Yet, Latin American countries consistently score toward the bottom in international standardized tests of educational quality. Addressing weaknesses in the broader education system, in infrastructure and in the regulatory environment will be the key to success.
Chile. Despite its relatively small population and high wages, Chile ranks top in the business environment category due to low risk, a stable political environment and high quality infrastructure. Although the available labor force is limited, the country scores better on international education tests than its neighbors. The government is also seeking to boost skill levels through increased spending on education, on-the-job training programs, and special initiatives to expand English-language skills. Privatization and a strong regulatory environment have created a competitive telecommunications market with an advanced telecommunications infrastructure. Companies from GE to Grupo Santander have established high-end shared services in Chile’s regional IT parks.
Brazil and Mexico. Brazil and Mexico have large IT and business services sectors that generally surpass those of India and China in scale and sophistication. However, because of the plentiful opportunities in their home markets, companies and governments in both countries have, until recently, focused little attention on export opportunities.
For the third consecutive year, Brazil ranks among the top 10 most attractive locations in the Index. With a large population and strong technical skills, particularly in the IT, engineering and pharmaceutical sectors, Brazil continues to score well in the people and skills availability category. Rising graduation rates and company quality certification rates will further bolster these ratings. Already, large numbers of multinationals, from IBM to HSBC and Nestlé, have established major global IT and shared services centers there.
Mexico, like Brazil, offers a large population and a well-developed domestic market. It also benefits from its proximity and favorable access to the U.S. market. However, both countries remain challenged by the continuing weakness of their broader education systems, poor infrastructures and the rigidity of their labor regulations.
Costa Rica. Despite its small size, Costa Rica has enjoyed considerable success as a location for call centers and shared services centers that serve the U.S. market. Procter & Gamble, HP, IBM and Western Union have established operations there. However, the capacity of the Costa Rican work force is limited, and the country’s attractiveness is dragged down by the poor quality and high cost of telecommunications. The Central American Free Trade Agreement (CAFTA) may boost this sector.
Panama. Panama is seeking to build on its relative stability and reputation as a financial center. It is using some of its former U.S. military facilities to become another location for shared services centers serving the U.S. market. Dell, for example, is running a 1,000-seat call center on the grounds of a former U.S. Air Force base. Yet low rental costs and wages are partially offset by high telecom and energy costs and relatively rigid labor laws.
Jamaica. Jamaica and the other English-speaking islands of the Caribbean have also been enjoying increasing success as contact center locations that serve U.S. and U.K. markets. A significant drawback has been the islands’ aging telecom and electricity infrastructures, but plans for additional fiber-optic connections to North America are in the works and multinational utility companies are investing in the power network.
Middle East and Africa
Countries in the Middle East are newcomers to the offshoring industry, but they have many attributes that make them attractive locations for shared services. In many ways, parts of the Middle East are similar to India in the early 1990s: They feature low compensation costs, highly educated technical workers, and historical exposure to English and other European languages. They also benefit from similar time zones and proximity to Western Europe. Governments are trying to strengthen their position by improving their telecom infrastructures, creating high-tech industry parks, and updating education systems to better meet the needs of the knowledge economy. While security and stability concerns may be too much for some, many global companies—Alcatel, CISCO, Dell, GE, IBM and Microsoft—have already established call centers, IT and BPO operations in Egypt, Jordan, Morocco and Tunisia.
The North African nations stress their unique combination of European language skills, technical proficiency and low wages. Egypt, in particular, has the largest population in the region and is building on its technical expertise and cultural role. Morocco and Tunisia are drawing on their French and Spanish language capabilities. Jordan offers an inexpensive and high-quality infrastructure and a favorable tax regime. Although the size of Jordan’s labor force is limited, the government is investing $600 million to develop human resources. Egypt and Jordan are strategically positioned between Europe and Asia and boast high-volume fiber-optic connections to both regions. Jordan’s bilateral trade agreement with the United States and preparations to join the WTO have also spurred legislative reforms.
Authorities in Dubai (and to some extent, the other Emirates and neighboring Gulf States) are promoting the region as a low-risk alternative to India. It offers all the advantages of a workforce imported from South Asia along with a solid infrastructure and attractive tax and regulatory regimes. Dubai has established the Dubai Outsourcing Zone, and the Emirates offers a 100 percent tax exemption and 100 percent repatriation of profits for companies located there. The Dubai Internet City already hosts companies including Microsoft, Oracle, HP, IBM and Dell.
Although Israel is a relatively high-cost country, it is focusing on becoming the choice location for higher-end R&D, as well as multilingual support centers, drawing on the strengths of its education system and the diversity of its population.
Two countries—Turkey and South Africa—performed surprisingly poorly in the Index, despite their emerging success as offshore destinations. Both countries have succeeded in attracting a number of service centers, including Siemens’ operations center in Turkey and Lufthansa’s call center in South Africa. Their low Index scores are because their costs are high relative to other emerging markets and are not offset by correspondingly higher education levels or business environment ratings.
While constrained by investor perceptions and a weak infrastructure and business environment, Ghana and a handful of other countries in sub-Saharan Africa are promoting their countries as low-cost locations for remote services. ACS, the U.S. business process outsourcing firm, operates a large service center in Ghana.
The Developed World
Because of all the media hype, it can seem that the concept of providing IT and other support services from remote locations is a new phenomenon. In reality, companies have been relocating support activities to lower-cost locations within their own countries or in other mature countries for more than 20 years. To this day, Canada and Ireland export more IT and other business services than India or any of the other emerging offshore locations. The United Kingdom operates the world’s largest trade surplus in business and IT services, and the United States exports more business and IT services than any other country, offsetting more than 10 percent of the total U.S. deficit in manufactured goods.
Even with all the alternatives, lower-cost regions in developed countries continue to attract significant “remote services” operations. Indeed, as companies undertake a more thorough evaluation of the functions that could be delivered remotely, they are finding more functions to move. But they do not want to relocate to far-off countries, be it for linguistic, cultural or security reasons. As a result, more companies are evaluating the range of options in their own markets and in neighboring countries.
Canada. Canada’s geographic and cultural proximity to the United States helped it rank 9th in this year’s Index. Canada is an attractive near-shore location for U.S. companies and offers cost arbitrage, similar time zones and regulatory environment. The Canadian IT industry employs 500,000 people, mainly in Ontario and Quebec. Remote locations in the Atlantic and prairie provinces are gaining favor for their lower compensation and real estate costs. In addition, local governments offer tax incentives to attract companies to areas with high unemployment. Nova Scotia has seen the call-center industry blossom, as have cities such as Edmonton and Calgary. The main threat to the Canadian offshoring industry is the exchange rate risk: Whenever the Canadian dollar appreciates against the U.S. dollar, cost savings can quickly evaporate.
United States. From call centers in the “accent-neutral” plains to revitalization efforts in inner cities and IT and financial centers in the Sunbelt, the United States continues to be
a preferred location for many remote services activities (see figure 7). Many functions are moving to areas where traditional manufacturing and resource-based industries have declined—where the labor supply is abundant and relatively affordable. Others have taken onshoring a step further by adopting “homeshoring.” This is when employees connect to company networks but work from their homes, responding to customer needs, transcribing medical notes or performing other administrative tasks. This virtual service center approach reduces real estate and other fixed costs
Applying the weightings used in the Index, U.S. second-tier cities (such as San Antonio, Texas) actually rank 11th in this year’s Index, ahead of well-known offshore locations such
as Mexico, Poland and Ireland. This is due to a high-quality skill base, strong infrastructure and positive business environment. The United States also tops the people and skills availability component of the Index (see figure 8). And for functions that require certain domain knowledge, accent or cultural familiarity, U.S. regions will remain a top choice. Of course, when cost savings are more important, the United States, like other developed countries, will fall in the rankings.
Ireland. Much like Canada, Ireland has long been a preferred location, particularly for U.S. firms seeking strong skills at relatively low-cost to support operations in North America and Western Europe. Ireland exports almost double the value of IT and business services of India or any other emerging market. Although Ireland is somewhat a victim of its own success, as rapidly rising wages and a small population result in a poor ranking in the Index, it will undoubtedly remain a major center for higher value-added services.
Great Britain. Drawing from Ireland’s success, many British regions have begun to promote their locations as ideal for IT and other support services. Although London is one of the most expensive cities in the world, Northern Ireland, Scotland, Wales and the English regions offer much lower costs, an educated workforce and a strong business environment. Belfast, with the lowest wages of any major city in the United Kingdom, is a prime location for call centers. India-based HCL Technologies operates contact centers in Belfast and Armagh, and is adding 600 seats. In 2005, Citigroup opened its newest IT center in Belfast to complement existing sites in India, China and Chile.
Germany and France. Low-cost regions in Germany and France are promoting their cities as alternatives to emerging locations in Eastern Europe and Francophone North Africa. In Germany, Leipzig and other cities in the eastern Länder, with lower costs and high unemployment, are preferred destinations. In France, regions around Lille in the North and Marseilles in the South offer similar benefits. Telecom Italia, DHL, Compass Group, Société Générale and BNP Paribas have all chosen to take advantage of the relatively lower costs that Marseilles offers. Still, high wages, augmented by large employer contributions and rigid labor regulations, tend to diminish the competitiveness of these regions.
Spain and Portugal. Spain and Portugal can be good near-shore alternatives for European companies or companies with European operations. With technically skilled labor forces, they provide an alternative to developing countries for more risk-averse companies. DuPont recently relocated certain financial activities to its services center in Asturias, Spain. IBM has a business transformation outsourcing center in Portugal to serve Portugal, France, Spain and United Kingdom in their respective languages.
Australia and New Zealand. Further afield, Australia and New Zealand tend to offer slightly lower costs than their counterparts in North America and Western Europe. They also feature highly developed infrastructures and education systems. Interestingly, in addition to Australia’s strengths in IT, financial services and R&D, cities such as Brisbane have become hubs for multilingual call centers that serve the East Asian market, and draw on the diverse Asian immigrant population. Despite the limited domestic market, a highly skilled labor force, sophisticated telecom infrastructure, and a safe business environment allow New Zealand to foster specialized niche markets such as the health software market. In fact, the island is the major software supplier to U.K. dental clinics.
A Systematic Approach to Global Location Selection
Regardless of their rankings, every country profiled in this year’s Index has been chosen by one company or another as a preferred location for delivery of remote services. Whether low cost or low risk, large or small, each offers some combination of attributes that may make it the right location for a specific subset of functions or activities. At the same time, concerns over attrition, wage inflation, fraud and labor shortages, particularly in the most popular locations, illustrate that no location is perfect. In the same locations where some have prospered, others have been disappointed. Most often this is because of a failure to recognize the amount of time and resources required—to prepare and transition existing processes, to find and develop new skill sources, and to train and fully integrate new professionals into the broader corporate culture.
As the full implications of the shift to a truly global labor market become clear, companies need to apply a much more systematic approach to understanding their total needs, selecting the right mix of supply locations and properly planning and executing the transition. Rather than selecting a popular location and then identifying activities to move there, leaders must first assess their needs and then define a long-term plan for optimizing their global footprint to meet them.
We recommend a five-step process to identify the right mix of locations for any business and fully benefit from the opportunities offered by the new global labor pool (see figure 9).
1. Assess internal demand. Too many executives start by asking the question, “where can we go?” Or worse, “I have heard there are great opportunities in country X. What can we do there?” Before deciding on a new location, executives must fully understand the characteristics and requirements of the functions that could be moved.
For a preselected subset of functions, for example, this means knowing the skill profile of the major job categories, the extent of language fluency and cultural familiarity required, the service level expectations, and specific regulatory or certification requirements, among other things.
Ideally, we recommend taking a bottom-up inventory of all current functions to understand the range of functions that could be performed remotely, independent of the ultimate location choices. Assessing the skills and critical importance of a function may ensure proper location selection, but may still overlook potential synergies, scale advantages and future demands that may reinforce the business case for relocation. A global, forward-looking inventory of all functions worldwide (whether performed in-house or by vendors) will reveal a much larger range of opportunities for new skills or lower costs. Even for those functions considered unsuitable for offshoring to foreign countries, relocating to lower-cost regions within major customer-facing markets may help tap into significant opportunities.
Having identified the full set of functions eligible for remote delivery, executives should develop an initial estimate of potential life-cycle cost savings to ensure that they will justify a potentially costly investment.
A thorough demand assessment, unconstrained by current norms, will also make clear what activities need to be performed in-house, versus those that could be provided by third-party vendors—an important distinction that may also have bearing on future location choices. It is also important to consider key aspects of corporate culture, such as risk and investment appetite. A company that prefers to be a pioneer may be willing to invest time and resources developing the workforce in “virgin” locations, with the ultimate aim of being the dominant employer in that market. Others may prefer locations where their competitors are already established and they can hire ready-trained and experienced people.
2. Shortlist supply markets. The next step is to evaluate a large set of supply market candidates. The sample should be large enough to allow for the increasingly complex set of options and the different requirements for each function.
This Index analyzes 40 supply markets by running a model that uses consistent and objective criteria to rank the most attractive countries. It is generic in the sense that it considers an average between three common work functions and it applies a typical blend of weightings between cost, skill availability and business environment. It provides an overview of the most attractive countries for services in general. However, a customized analysis will help determine the attractiveness of locations for a particular job function and for the specific risk profile of individual companies. Each function should be analyzed independently. Some functions may need a high-school diploma and basic English reading skills; others may require highly specialized quality certifications or fluency in foreign languages. Specific metrics and weightings will also be appropriate for different jobs. Analyzing the sample of locations against each function will narrow the candidates to a manageable handful.
Executives should also look at the possibility of putting different functions in one place to achieve the benefits of economies of scale and management oversight. For example, best-practice companies are choosing three or more diversified locations worldwide to colocate multiple functions. This helps to diffuse risk and accommodate the wide range of functional needs
3. Dive deeper. While a quantitative analysis reduces the number of candidate locations to a manageable number, qualitative analysis ensures that the top locations truly fit with the company’s specific requirements and cultural profile. Future labor supply and wage projections, the local vendor landscape, infrastructure constraints, specific local government incentives and the experiences of other firms are all key elements to gain a thorough understanding of the pros and cons of each location. This due diligence process should always include visits to candidate cities to examine the conditions first-hand.
4. Plan intensively. Having selected the ideal location or mix of locations, intensive planning is then required to manage the relocation of each specific function. In their eagerness to catch up to the pioneers, many companies rushed to send off activities, without fully recognizing the demand on management time, the challenges of training and integration, and the anxiety for employees and customers. Much is written about best practices in offshoring, which always include the following:
• Senior management leadership and a dedicated, empowered and accountable management team that is cross-functional and cross-geography
• A realistic business case that lays out expected investments and benefits
• An exhaustive implementation plan that specifies activities, responsibilities, milestones, targets and risk-mitigation strategies
• Adequate lead-time
• Intensive, forthright communication to all affected stakeholder groups
• Early identification and cultivation of stake holders in the new location, including government officials, institutes, infrastructure and service providers
• Identify and manage regulatory requirements
• Clear metrics and milestones for tracking progress and adjusting course as necessary
5. Execute methodically. Effective implementation is the key to securing the expected benefits. This is partly a question of following through on the plans and stakeholder management precautions defined during the planning stage. It is also a question of a slow and incremental approach. Inevitably, despite the evaluation and planning, unexpected challenges will arise. Companies should have adequate time and resources to fully train and integrate new staff. Executives may also need to make adjustments as on-the-ground realities become apparent.
Each function should be moved incrementally. Once each activity is stable and the benefits are clear, companies should move forward, continuously moving toward the long-term optimal footprint.
Moving Forward
Deciding where to locate operations is a complex task.
A.T. Kearney’s Global Services Location Index can be a useful starting point in determining which countries are best equipped to help companies meet their specific needs.
As the range of options continues to expand, companies will benefit from an ever-wider variety of locations with diverse profiles and capabilities. At the same time, it becomes both harder and more important to make an informed decision on location options. The opportunities to leverage new talent pools to improve business performance have never been greater, but to secure the full benefits, a systematic approach is required.
The good news is that the growing competition among countries, regions and cities is encouraging many to take a hard look at their education systems, infrastructures and other fundamental drivers of competitiveness. This ultimately raises productivity and prosperity in all locations. It also means that companies are all the more likely to find the ideal solution for each of their functional needs, somewhere in the world.
Appendix: About the Study
The 40 countries included in this year’s Global Services Location Index were selected on the basis of corporate input, current remote services activity, and government initiatives to promote the sector. Clients asked us to assess several additional locations beyond the 40 countries evaluated, from the Caribbean to Africa to the Pacific. As internationally consistent and verifiable data on these locations becomes available, we hope to continue expanding the Index coverage in future years.
The 40 countries that emerged as finalists were then evaluated against 40 measurements across three major categories: financial attractiveness, people and skills availability, and business environment (see Index Metrics). The metrics used to evaluate location attractiveness were determined from responses to A.T. Kearney and other industry surveys, and knowledge obtained in client engagements over the past five years. In response to client questions over the past 12 months, we added the following two metrics to this year’s Index:
Information security: There is increasing concern over information security in remote locations due to isolated, but high-profile cases of data-privacy violations and fraud. Therefore, we measured the number of service centers in each country that have received the new ISO/IEC 27001 certification for Information Security Management.
Labor flexibility: To assess the relative quality of labor regulations and labor relations across countries, we have also included the World Bank’s composite metric of Employment Rigidity in the Index.
The relative weightings of each metric are based on their importance to the location decision, again derived from client experience and industry surveys. Because cost advantage is typically the primary driver behind location decisions, financial factors constitute 40 percent of the total weight in the published Index. The two remaining categories—people and skills availability, and business environment—each constitute 30 percent of the total weight. Compensation estimates used in the Index are based on data provided by Mercer Human Resource Consulting’s Global Pay Summary.
Speaking the language
The Index takes a close look at language. As the concept of remote business services spreads, demand for service capabilities in multiple languages is increasing. Unfortunately, a single Index cannot capture the relative quality of each location for providing services in multiple languages. For example, the list of countries with the ability to serve Japanese or Korean customers will be very different from those that can serve French- or Spanish-speaking customers. The Index therefore measures relative quality of English-language capabilities, as this is the primary language for remote business services. This metric accounts for less than 5 percent of the total Index weighting, and if removed, only results in marginal changes in the overall rankings. (The Index also assumes 100 percent proficiency in the relevant language in onshore locations in the core customer markets—the United States, United Kingdom, Germany and France.)
Clearly, when evaluating locations for language-dependent functions, companies should develop customized indices that include detailed measures of relevant language availability and quality.
Comparing Year to Year
We are often asked to compare and evaluate scores in the Index from one year to the next. For example, if a country’s score in a category rises or falls by 10 percent, is this an indication of a 10 percent rise in wages or a 10 percent expansion in the pool of graduates? Direct mathematical conclusions should not be drawn, because the inclusion of new metrics (reflecting new corporate concerns) has altered the weightings slightly, and the introduction of new countries also alters the low-end and high-end anchor point on each metric (all scores are relative). Nevertheless, movements in scores on specific metrics are indicative of underlying trends. For example, several new low-cost countries have reduced the relative cost advantage of India and other existing players; and significant increases in graduation rates or company certifications have increased people skills and quality scores in China and other locations.
Predicting the Future
The Index also peers into the future. How much will wages rise? How will the labor supply change over time? Will the business environment deteriorate? While specific projections of future costs and supply conditions are always hazardous, the Index endeavors to capture future trajectories by including a number of metrics that account for underlying conditions in the market.
For example, the labor cost component of the Index includes average wages in the economy as a whole. This provides an indicator of overall wage-pressures in the economy, independent of current supply and demand anomalies that may be temporarily inflating or depressing wages for specific positions. Rather than comparing reported tax incentives across countries (which are subject to frequent change and regional variation and often open to negotiation), the Index measures the overall tax burden in each country. This provides a better measure of the likely eventual tax burden, once introductory tax holidays expire.
Similarly, rather than measuring reported attrition rates at current operations (which vary considerably by employer and are prone to under-reporting), the Index assesses underlying “attrition risk” in each country based on growth in the IT/BPO sector and the unemployment rate. Growth in the IT/BPO sector tends to increase poaching among companies and the unemployment rate tends to dampen attrition. Future labor supply and quality is also assessed by evaluating the size of the youth bracket about to enter the labor force over the next five to 10 years, current university enrollment, and the results of educational tests at the high-school level.
Adapting to a Changing Environment
This year’s Index not only confirms the findings from previous years but also highlights how much more complex and sophisticated corporate strategies must be to respond to the changing global market. There is a common theme that can be summed up in one word: More. More choices, more risks and more strategies.
More choices. Some low-cost locations, such as China and India, stand out on the global services map, but executives are looking past these countries and exploring a broader range of non-traditional locations. To reflect this growing interest, we expanded this year’s list of countries from 25 to 40, thus underscoring the growing number of cities, states and countries that are jockeying to become preferred locations.
Many executives are also interested in low-cost on-shore locations and want to know how second-tier cities and regions within their country compare with emerging offshore locations. So, for the first time in our Index, we included low-cost locations within the four countries that consume most of the world’s business services—the United States, the United Kingdom, Germany and France. We then selected a representative city with a population of more than 1 million and that has the lowest average wages in the country. We chose San Antonio in the United States, Belfast in the United Kingdom, Marseilles in France, and Leipzig in Germany.
While large emerging markets may continue to dominate, several alternate locations may offer better solutions, depending on a company’s specific geographic, linguistic and functional needs. Companies must stay alert to all options, particularly as pressure on wages and attrition continues to rise in the most popular offshore locations.
More risks. As the scale of operations in remote locations has increased, so too has awareness about the inherent risks. Isolated, but high-profile cases of identity theft and fraud have raised concerns about information security. A string of catastrophic natural disasters has reinforced the need for effective business continuity planning across multiple locations.
In response to these concerns, we included new metrics in this year’s Index to assess each country’s relative levels of data security procedures and labor market practices. Companies must consider an ever-wider range of factors as they define the optimal locations for each function within their portfolio.
More strategies. There is no one-size-fits-all solution in choosing the right location for providing remote business services. After the initial hype, many companies have been opportunistic, rushing to select vendors or establish captive centers in the best-known locations—and then request individual business units to find appropriate functions to put in these centers. In these cases, there is generally limited internal enthusiasm and planning, inadequate training and integration, and odd agglomerations of sub-scale functions. The overall results, not surprisingly, are often disappointing.
Based on this year’s Index findings of the changing environment, companies must be armed with a more systematic offshore approach. Best practice companies take an objective and forward-looking inventory of all functions to identify those that could be delivered remotely, independent of the ultimate location. They then identify the specific characteristics and projected demand for each function, and choose a mix of locations with the scale and long-term prognosis to meet those demands. Once the long-term footprint is defined, then the process of slowly expanding to the new locations begins.
Note: In the wake of Hurricane Katrina, the Mumbai floods and the Asian Tsunami, there has also been increased interest in the level of disaster-preparedness across locations. A new international standard measuring service providers’ Business Continuity and Disaster Recovery readiness has recently been launched. At the time of publication, statistically significant numbers of centers had not yet completed this certification process, but it is expected to be included in future editions of the Index.
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