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The shifting landscape of outsourcing

June 1, 2009

A.T. Kearney has just released its annual Global Services Location Index™ (GSLI) for 2009 and found that some outsourcing stars are already starting to fade, namely those in Central and Eastern Europe, while others, especially those in Africa, the Middle East and South and Southeast Asia, are still on the rise. The reason? Costs are rising.

Particularly vulnerable to rising coasts are the middle income Central and Eastern European countries like the Czech Republic (#32), Hungary (#37) and Poland (#38). This situation is further aggravated by currency appreciation against the dollar (although this is less of an issue for European outsourcing destinations as many of the companies who outsource to these locations are also located in the Euro zone). Nevertheless, rising costs is clearly shifting the the outsourcing landscape in Europe to the Eastern fringes of the continent to countries like Romania (#19) and Bulgaria (#13) that have certain niche capabilities and to the Baltics (Estonia at #18, Lithuania at #21 and Latvia at #22) where residents are fluent in English and several other European languages.

However, even these locations may soon feel the heat of competition from countries in the Middle East, North Africa, and even sub-Sahara Africa where large and relatively well educated populations, European language skills, and close proximity to Europe may soon cause another shift in Europe’s outsourcing landscape. Now at 6th place on the index, Egypt has had the most dramatic rise as an outsourcing destination with companies such as EDS, IBM, Infosys and Wipro having established a growing presence there to serve not only the European markets but also the Middle East as well. Other relatively new faces on the outsourcing map in the region include Jordan (at #9, fast following in the footsteps of Egypt), the United Arab Emirates (at #29, already a major hub for regional headquarters), and Tunisia and Morocco (at #17 and #30, both catering to the French market). Moreover, while South Africa fell in the rankings due to deteriorating infrastructure and other factors, Ghana (#15) and even tiny Mauritius (#25) have created favorable business environments that are expected to be a future boon for their outsourcing industries.

Outsource Change

Meanwhile, Latin America and the Caribbean are continuing to capitalize on their close proximity to the USA. Chile (#8), Brazil (#11) and Mexico (#12) have maintained their leadership positions while Costa Rica (#23), Jamaica (#24), Argentina (#27), and Uruguay (#36) offer attractive alternative or niche choices for outsourcing. However, like their counterparts on the fringes of Eastern Europe, they may soon face competition from several emerging lower cost locations in the Caribbean.

On the other hand, destinations in Southeast and South Asia that are much further from the USA and Europe continued to dominate most of the top slots. These countries included India (#1), China (#2), Malaysia (#3), Thailand (#4), Indonesia (#5), Vietnam (#7) and the Philippines (#10). However, newcomers such as Sri Lanka and Pakistan (at #16 and #20, despite their internal problems) rose in the rankings due to their continued competitive low cost environments.

Furthermore, the USA (#14) experienced a dramatic rise in the rankings. Why? The weak US dollar combined with a large educated population (and not to mention the political considerations) is making onshoring at home more attractive and cost effective. Meanwhile, the UK (#34) Germany (#34), and France (#41) also rose slightly in the rankings due mostly to other countries falling behind but also because of political considerations and the availability of an educated workforce that makes onshoring more attractive.

What does all of this mean? Clearly the global economic crisis is rapidly reshuffling the outsourcing deck. Locations that were attractive just a couple of years ago are losing their ability to compete while new locations are rising fast. If anything, the study clearly serves as a warning to countries like India and the Philippines to NOT rest on their laurels and shows the need for outsourcers to think outside the box and to look for those under-the-radar locations that will give them that much needed competitive edge.


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Comments

2 Responses to “The shifting landscape of outsourcing”

  1. user on June 4th, 2009 11:57 am

    I think Africa and middle-east outsource and BPO vendors will gain market share due to local demand. It will take at least two years for demand to pickup in US and UK.

  2. Jastin on June 5th, 2009 8:55 am

    Hi,
    Nice post. I read the original A.T. Kearney report and this blog explains the reason behind each country’s rise and fall. But it would be nice if this analysis has been in depth.

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