Few business strategies attract as much debate as sending business functions to a new location. But if making a direct foreign investment may no longer be the risky proposition it once was, many decision-makers feel increasingly bewildered by the range of choices before them.

The questions are legion: 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?

Then there are the risks associated with off-shoring. 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? How can continuity of critical business functions be ensured ?

To help decision-makers answer these questions, A.T. Kearney developed the Global Services location index (GSli). The index evaluates 40 countries as potential locations for the most common remote services, which are grouped into three categories: financial attractiveness, people skills and IT availability, and business environment.

A regional snapshot shows that Southeast Asian countries offer a diverse mix of costs, skills and environment, and continue to perform well. 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.

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 IT its sector is tiny by comparison.

India

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.

China

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). 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 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.

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. 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. 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.

Malaysia

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.

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. Low costs, a well-educated population, English and traditional ties to the United States give the country an edge, particularly among American companies. 

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.

Vietnam

Vietnam is an emerging off-shore contender. It has a cost advantage, even over traditional low-cost destinations of China and India. Japanese companies in particular are off shoring 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.

Central and Eastern Europe

Central and Eastern Europe continue to be preferred destinations for European companies seeking alternative locations for their 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.

Gradual accession into the European Union and implementation of EU law ensure a stable and predictable political climate that makes investments more secure. According to data from the United Nations Conference on Trade and Development, more than 20 percent of all offshore projects of European firms in recent years have gone to central and eastern Europe.

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 countries such as Romania and Bulgaria.

Czech Republic

The Czech republic remains the most attractive offshore destination in the region. It offers competitive compensation costs within the IT sector relative to regional competitors, a highly skilled labor force and reliable infrastructure. Siemens, Honeywell and IBM have started operations in the Czech Technology Park in Brno.

Poland

Relatively slower reforms and higher wages have lowered Poland’s ranking. 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. 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.

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.

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.

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. Already, large numbers of multinationals 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 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. However, the capacity of the Costa Rican workforce is limited, and the country’s attractiveness is dragged down by the poor quality and high cost of telecommunications.

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.  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 serving U.S. and UK 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 off-shoring 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.  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. wt