On the Eve of Disruption On the Eve of Disruption

Now in its seventh edition, the A.T. Kearney Global Services Location Index tracks the contours of the offshoring landscape in 55 countries across three major categories: financial attractiveness, people skills and availability, and business environment. This year’s report finds a new business model threatening established concepts of offshoring and expanding the market: automation combined with business process as a service (BPaaS) has the potential to be an even more powerful force for disruptive change than automation alone.

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The Changing Face of Offshoring The Changing Face of Offshoring

Hardly a day goes by without a new headline declaring that our jobs are endangered by advancing automation. These dire predictions strike a chord among angst-ridden populations across many of the world’s most developed economies as employment levels and real salaries struggle to return to prerecession levels. Recent hiccups in large emerging markets, which it was hoped would pick up the slack to fuel world economic growth, only further contribute to a muted sense of unease.

And indeed, in our 2014 A.T. Kearney Global Services Location Index™ (GSLI) report A Wealth of Choices: From Anywhere on Earth to No Location at All, we observed that “no-shoring,” better known as automation, represents a third wave of back-office arbitrage that is in rapid development although still in its infancy. This year we highlight that automation combined with business process as a service (BPaaS) has the potential to be an even more powerful force for disruptive change. This paper begins with an overview of these trends and the implications for countries and companies alike.

Now in its seventh edition, the GSLI tracks the contours of the offshoring landscape in 55 countries across three major categories: financial attractiveness, people skills and availability, and business environment. Based on an assessment of 38 metrics, we identify the countries with the strongest underlying fundamentals to potentially deliver information technology (IT), business process outsourcing (BPO), and voice services. We also discuss emerging tier 3 cities and social impact sourcing, and the latter's implications for business and society.

2016 A.T. Kearney Global Services Location Index™ Top 20 2016 A.T. Kearney Global Services Location Index™ Top 20

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India Flag
#1
Offshoring to India remains a highly attractive proposition for many companies, and it is the undisputed industry leader. Consider, for example, that no fewer than five Chinese handset manufacturers have announced plans to establish R&D centers in India, which is expected to become the world’s second largest buyer of handsets.
China Flag
#2
China is closing in on India, thanks to major gains in educational skills and cultural adaptability. Additionally, the renminbi’s recent drop in value against the U.S. dollar should increase the country’s financial attractiveness. Furthermore, China is making progress in improving governance and liberalizing financial markets.
Malaysia Flag
#3
Malaysia holds steady in the ranking, thanks to minor improvements in IP security and compensation costs that give the country a leg up over Brazil. Not leading in any category, Malaysia turns in a solid performance across the board, and that has ensured third place in the Index since its inception.
Brazil Flag
#4
The value of the Brazilian real has slipped from an average exchange rate against the U.S. dollar of 1.95 in 2012 to 2.35 in 2014, reaching 3.50 in August 2015. Largely as a result of that currency devaluation, Brazil has risen four positions in the GSLI, despite a mild decline in its relative scores for IT and BPO experience.
Indonesia Flag
#5
Though not a well-known destination for services offshoring, Indonesia has very strong fundamentals. One of the world’s largest pools of talent, an attractive financial profile and good infrastructure give Indonesia much future potential in this space.
Thailand Flag
#6
Thailand joins its Southeast Asian peers at the top of the index, thanks to a well-educated population, an advantageous financial profile, and sophisticated companies. However, thus far Thailand has not fully taken advantage of the opportunity that the global services industry represents—so the upside remains large.
Philippines Flag
#7
The Philippines is second only to India as a player in the global outsourcing industry, where it began in contact centers and gradually climbed the value chain to now incorporate most functions in BPO and IT. Since the 2014 GSLI, the Philippines has registered gains in its scores in infrastructure, environment, and tax and regulatory costs.
Mexico Flag
#8
Mexico swaps positions with Brazil versus 2014 as a result of small declines in its scores as other countries posted improvements. Mexico has many strengths that make it a favorite nearshoring destination for U.S. companies: a well-developed telecom infrastructure, a large population of ICT and engineering professionals, travel times similar to those of U.S. domestic destinations, and a growing pool of English-speaking talent, thanks to immigration flows with its northern neighbor.
Mexico Flag
#9
With one of the most accommodating business environments in all of Latin America and a strong education system, Chile is a destination for high-end offshore functions such as research centers for global banking clients and R&D centers, as well as more traditional back-office jobs.
Poland Flag
#10
Poland moves into the top 10 this year thanks to a strong improvement in compensation costs, despite slight declines in scores for regulatory costs and for IT and BPO experience. According to Poland’s Association of Business Service Leaders, the country’s business services sector was on track to reach 170,000 employees by the end of 2015.
Vietnam Flag
#11
Vietnam moves up one spot in the index as it creates a strong base of BPO service centers and moves into IT-related functions too—serving as a destination for companies from both Asia Pacific (especially Japan) and Europe. Costs have increased in line with economic growth, but Vietnam’s move up the value chain has been able to compensate for the loss in economic competitiveness.
Bulgaria Flag
#12
A highly cost-competitive location inside the European Union, Bulgaria has been a destination for European nearshoring for many years and is deepening its skills and experience in the industry. It falls out of the top 10 this year due to minor increases in tax and regulatory costs.
Romania Flag
#13
Romania has risen five positions. Labor costs in Romania are lower than in Poland, but the business environment is still trying to catch up. According to the Employers’ Association of the Software and Services Industry in Romania, large international IT vendors currently operate approximately 50 centers, most of them BPO- and IT-related.
Sri Lanka Flag
#14
Sri Lanka is one of the hidden jewels in the offshoring space. Long held back by unrest and internal conflict, it is now fully open for business and boasts a rapidly growing global services sector. Sharing many of the attributes with India on the talent side, it is still a lower-cost option than India and, in many aspects, provides an easier operating environment.
United States Flag
#15
The United States remains well positioned in the index, even though it slips one position. Onshoring of back-office services is an attractive proposition for many American companies that can find talent in relatively competitive tier-2 and tier-3 cities, with a familiar business environment and easy access from a travel point of view. At the higher end of the services spectrum, the United States is one of the most competitive economies in the world.
Egypt Flag
#16
Egypt, despite its very large and highly educated population, continues its slide down the GSLI because of significantly lower scores for the country’s environment. Nonetheless, Egypt remains a popular destination for ICT outsourcing and is poised to recover once political stability is consolidated.
Russia Flag
#17
Russia is faced with two countervailing factors. On the one hand, increasing political and economic risk in face of international conflicts and sanctions. On the other, a depreciating ruble on the back of falling oil prices. The cost reductions from exchange rate movements make the country move up four spots this year.
Latvia Flag
#18
The Baltic countries are niche players given their small labor forces. Software development companies have set up shop in all three countries to take advantage of low-cost, highly skilled talent with close proximity to markets in Western Europe. Latvia has recovered from its postcrisis recession and moved up five spots in this year’s index.
Costa Rica Flag
#19
Costa Rica returns to the top 20 this year thanks to a solid gain in its infrastructure score. This result is perhaps less surprising if one considers that, according to the United Nations, Costa Rica invests a greater percentage of its GDP in economic infrastructure than any other country in Latin America.
Colombia Flag
#20
Colombia leaps 23 spots in the ranking, marking the largest advance of any country in the 2016 GSLI. The reason: solid gains in IT and BPO experience and in country infrastructure, coupled with improvements across the board in financial attractiveness, largely fueled by the depreciation of the peso.
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