The world's top offshoring locations

India's still number one, but China's catching up, according to an A T Kearney study.

Those who have been following the controversy over "offshoring" US service jobs to low-cost markets like India now have new developments to consider: the takeover by US business giants "� IBM and Citigroup "� of two major providers of business process outsourcing (BPO) services in India.

On April 7, IBM bought Daksh e-services, the country's third largest back-office services firm based in Gurgaon, near New Delhi, for between $150 million and $200 million.

Five days later, Citigroup consolidated its ownership of e-Serve International, a Mumbai-based company. Citigroup agreed to pay $126 million for 56 per cent of e-Serve from the latter's promoters; it already owned the other 44 per cent through a subsidiary.

More such changes are on the way, say experts at Wharton and AT Kearney, a management consulting firm headquartered in Chicago.

"At this point, the BPO industry is fragmented, and you will see a consolidation in India with 10 to 12 major players emerging in the next two or three years," says Stefan Spohr, vice president of A T Kearney's financial institutions practice in New York City.

"IBM is acquiring a delivery capability in BPO in India that it has been trying to build organically. It now appears that the company has decided it would be faster to acquire these capabilities than to build them in-house."

Ravi Aron, a professor of information and operations management at Wharton, who has been researching BPO trends for more than two years, offers a different view.

He believes that while US companies might acquire Indian BPO providers, many of them are moving towards a hybrid model rather than operating captive offshore centres.

"GE, even though it had its own captive centre in India, worked with Indian companies like Satyam," he says.

According to Aron, the reason why such hybrid arrangements between US and Indian companies will prevail is that captive centres and third-party BPO service providers have different strengths: captive centres are generally better at delivering quality, and BPO providers "� which operate as profit centres "� are better at lowering costs.

IBM's and Citigroup's moves also seem to validate a new Kearney study, released March 30, ranking various offshore locations for back-office work.

India emerges on top "by a wide margin" among the 25 countries in Kearney's "Offshore Location Attractiveness Index," which employs 39 criteria to rank the locations.

China is ranked second, followed by Malaysia and the Czech Republic. The study was led by Spohr, Andrea Bierce, also a vice president in Kearney's financial institutions' practice, and Paul Laudicina, vice president and managing director of the firm's Global Business Policy Council in Washington, D.C., which spearheaded the study.

Kearney's 2004 index is not comparable with its 2003 rankings, because the parameters and methodology vary significantly. Even so, it is illuminating to see how the pecking order has changed.

Last year's rankings had India leading a group of 11 countries: Canada, Brazil, Mexico, Philippines, Hungary, Ireland, Czech Republic, Australia, Russia and at the very end of that list, China. This year's rankings are in the following order: India, China, Malaysia, Czech Republic, Singapore, Philippines, Brazil, Canada, Chile, Poland, Hungary, and New Zealand.

Spohr says the new study is the most detailed that Kearney has undertaken on BPO trends.

"Our study doesn't rely primarily on the experience or opinion of experts as in a lot of other studies, but more on objective criteria," he says.

"That is why we have results like Malaysia coming in at third place. Countries like Malaysia, Singapore and Chile are often not mentioned in other such studies."

The 39 criteria are organised under three broad categories with varying weights: cost (40 per cent), people skills and availability (30 per cent) and business environment (30 per cent). Each category is further divided into sub-groups.

The "cost" category has three: total compensation of employees; the cost of infrastructure; and tax and regulatory costs. The "people skills and availability" category has four sub-groups: overall experience and skills in IT and telecommunications; availability of labour and the size of a country's work force; educational levels of the workforce, including language skills and test scores; and the attrition rate in the country's BPO industry.

The "business environment" category covers a country's economic and political environment, its infrastructure in telecommunications and IT, cultural adaptability and the security of intellectual property.

The study underscores the fact that countries to which white collar jobs are being offshored offer a range of attractions besides low-cost labour, creating a complex decision-making process for companies selecting offshore locations.

Countries such as India and China, with large populations, offer an abundance of educated workers. But at the other end of the spectrum, "small, highly developed economies like Singapore, New Zealand and Ireland offer excellent infrastructure, education systems and business-friendly low-risk environments," the study says.

Aron has a different perspective on these locations. "I don't know if I'd go with Malaysia at No. 3, and Singapore has been put too low at No. 5," he says.

Aron says that labour arbitrage is attractive for call centre operations. In addition, he notes that it holds great appeal for high-end work such as sell-side equity research (buyers, institutional or individual, use outsourced research selectively), bond pricing, supply chain coordination and direct procurement for large industries (the entire process from purchasing enquiries through order placement and tracking to order fulfillment).

If Aron suggests that Singapore should get higher billing, Bierce in fact feels that some industry watchers may be surprised at it getting the fifth place, because it is seen as a more expensive place to do business with its relatively higher wage levels.

"But because Singapore's infrastructure is so strong and its business environment is so favourable, it fared very, very well."

Aron finds Singapore is more competitive than India or Malaysia when it comes to high-end requirements. He points to Singapore's superior telecommunications and IT infrastructure, transparent financial markets, clean legal regime, and the availability of a strong pool of middle and senior management personnel.

"Singapore also has tremendous risk mitigation management and containing expertise," he says. All of these can substantially offset Singapore's higher wage levels, he feels.

Singapore's strengths have deeply impressed the Kearney team. It says that while Singapore may not be seen as a low-cost offshore location, it possesses "excellent education and infrastructure, high ratings for economic and political stability, intellectual property protection and aggressive government promotion of the IT and services sectors."

These attributes, the study says, continue to reinforce Singapore's position as a favourite location for regional service functions. Aron agrees wholeheartedly, and says Singapore will increasingly emerge as a regional managerial hub for regulatory and accounting compliance, geostrategic risk, auditing and business continuity practices.

The Kearney study offers some interesting insights into the competitiveness between the two biggest players, India and China. China may trail India in BPO experience and qualifications, but its cost advantages and large educated labour pool are big strengths.

China also is emerging as a growing offshore destination for Japanese and Korean companies, and it attracts US and other multinationals "because of the talented work force," the study says. It notes that since China joined the World Trade Organisation in November 2001, Western companies have established more than 130 R& D facilities there.

India too has worked on its competitive strengths. "India has extended a significant lead through its continuing cost advantages and its increasing market maturity," says Spohr.

"It has attracted the lion's share of offshore migration activity to date without any impact on cost levels."

Spohr clarifies that while wage levels in India have gone up some 10 per cent to 15 per cent year-over-year during the past three years, there are countervailing trends.

He points to dramatic reductions in telecommunications costs "that have helped Indian operations maintain or even improve cost levels."

In addition, favourable tax rates and increasingly competitive infrastructure costs have helped India maintain its overall cost advantage. Also, many outsourcing vendors in India are moving to other parts of the country such as B and C class towns, as existing labour markets get saturated. "India has that advantage too," says Spohr. "It has a lot of untapped regions."

Both China and India score poorly for political and economic risk and weak infrastructure, the study says.

"China scores particularly poorly in areas of intellectual property piracy ad bureaucratic red tape," it says, adding, "China clearly needs to improve the English language skills of its work force if it wishes to challenge India."

Malaysia is a surprise at No. 3 in the Kearney index. Its population of 22 million people does not allow it to compete with India and China's scale advantages, but there are other factors that work in its favour, the study says.

"Low costs, particularly for infrastructure, the most attractive business environment among emerging markets, and high levels of global integration helped Malaysia reach the number three spot in this year's index."

Malaysia's government is also promoting the IT and services sector. All that, the authors say, will make Malaysia "one of the strongest competitors to India's BPO dominance in the next five years."

Reprinted with permission from Knowledge@Wharton (http://knowledge.wharton.upenn.edu), the online journal of research and business analysis of the Wharton School of the University of Pennsylvania)