Friday, November 25, 2005

Philippines moved to 4th as an attractive location for offshoring of service activities

The Philippines, despite continuing political instability and infrastructure weaknesses, continues to benefit from the global exposure and English language skills of its workforce. This is stated A.T. Kearney's Annual Global Services Location Index report where the Philippines jumped from the sixth to fourth position.

While India, China and Southeast Asia continue to dominate A.T. Kearney's annual ranking of the most attractive locations for "offshoring" of service activities such as IT, business processes and call centers, the United States ranks surprisingly well in a new version of the index released last November 22.

For 2005, the global management consulting firm added four lower-cost cities in the United States, United Kingdom, Germany and France to determine how they compare to more traditional offshore locations across the 40 measurements analyzed to create the Global Services Location Index (previously known as the Offshore Location Attractiveness Index). The U.S., represented by San Antonio, ranked 11th out of the 40 countries evaluated.

Additional findings from this year's Index include:

India and China: still dominating
India still leads by a wide margin. The gap between India and the second-ranked country, China, is larger than the gap between the next nine countries combined. Nevertheless, India's lead has shrunk slightly compared to 2004. This is mainly due to a slight reduction in India's financial attractiveness, the result of wage inflation in India and the emergence of new even lower-cost contenders such as Ghana and Vietnam.

China maintains its second place ranking and partially closes the gap with India, thanks largely to continued improvement in its infrastructure quality and the availability of relevant people skills. For example, the number of development centers in China with CMM or CMMI certifications (an industry standard for rating the process-quality of IT development centers) showed the largest increase of any country in the Index, jumping from 108 in 2004 to more than 277 in 2005. For a growing number of Asian and Western multinationals, China remains the best choice for serving their growing operations throughout the East Asia region - the logical location for IT and back-office support and call centers for China itself, but also a low-cost option for servicing established markets in Japan, Korea, Taiwan, Hong Kong and Singapore.

ASEAN: still rising
As a region, Southeast Asia is the biggest winner in this year's Index. Malaysia maintains its 3rd position Singapore stays at 5th, the Philippines rises from 6th to 4th, Thailand jumps from 13th to 6th, and Indonesia leaps into the Index at 13th. Even Vietnam, at 26th in this year's Index, sees its ranking rise from 20th to 16th position among the original 25 countries included in both the 2004 and 2005 Indices.

In Malaysia and Singapore, government promotion policies continue to pay off. Given its high-wage levels, Singapore has deliberately positioned itself as a safe location for sensitive high-end activities, with a particular emphasis on business continuity, IP protection and data privacy. Malaysia has augmented continued investment in world-class infrastructure along the Multimedia Super-Corridor, with further incentives for corporations choosing to locate in Malaysia and additional policies to open up the labor pool and deepen English language and technical skills throughout the population.

Thailand enjoys the biggest rise in this year's Index. This seems to be due largely to improvements in educational outputs, plus some improvements in infrastructure quality and the overall business environment. While still challenged by weak English-language capabilities, Thailand has the potential to emerge as key low-cost challenger to the Philippines in South East Asia.

At 13th, 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 very large workforce. However, weaknesses in the business environment, education quality, and language skills continue to be a concern. While Vietnam ranks low in the Index compared to the other ASEAN participants (due largely to its weak infrastructure and business environment ratings), it is still attracting attention both as an IT-development location for US-based firms and as a low-cost alternate to China for Asian language back-office and call-center operations.

Central and Eastern Europe: ever eastward
Offshore attractiveness in Europe continues to migrate eastward, strong performances by three new entrants in the Index (Bulgaria at 15th, Slovakia at 16th and Romania at 24th) reflect what many on the ground have observed - as costs in the most advanced Central European countries converge toward EU-levels, companies are moving farther East in their search for high-skill, low-cost solutions.

Despite continuing improvements in people skills, infrastructure and business environment, the Czech Republic slipped from 4th to 7th position, largely because of the rise of Thailand and the Philippines, but also because of increasing wages and other costs in the Czech Republic. Poland and Hungary also slipped from 10th and 11th to 18th and 19th, respectively, for similar reasons. Russia actually improved its position among the original 25 countries (from 21st to 17th), but dropped in the overall rankings to 27th, due to rising wages. Moreover, despite improvements, Russia still ranked 39th out of 40 on business environment metrics.

Latin America: improving, but still challenged by new contenders
While Chile improves its ranking by one position, rising from 9th to 8th, Brazil, Mexico, Costa Rica and Argentina all drop in the rankings, largely due to the rise of other countries. Brazil actually maintains the same score as in 2004, but drops from 7th to 10th place, as it is overtaken by Thailand, Chile and Canada. Brazil continues to score well on people skills as graduation and certification rates rise, but its financial attractiveness suffers from the entry into the Index of new lower-cost countries and its business environment continues to be disadvantaged by the relative inflexibility of its labor laws. Mexico and Costa Rica both improve their rankings (from 14th to 11th for Mexico and from 16th to 14th for Costa Rica) and Argentina holds steady at 15th among the original 25 countries, but they all drop in the overall rankings (to 17th, 21st and 23rd respectively), largely because of new Eastern European and Middle Eastern entrants.

Middle East and Africa: the next frontier
Perhaps the biggest surprise in this year's index is the strong performance by several countries in the Middle East and Africa - Egypt jumps into the Index at 12th, Jordan at 14th, the United Arab Emirates at 20th, Ghana at 22nd and Tunisia at 30th.

While security and stability concerns may be too much for some, a large number of global companies (like Alcatel, Dell, GE, IBM and Microsoft) have already established call center, IT and BPO operations in markets like Tunisia, Morocco and Egypt.

Egypt and other North African nations stress their unique combination of European language skills, technical proficiency and low wages, while others in the region are developing alternate value-propositions. Authorities in Dubai (and to some extent, the other Emirates and neighboring gulf states) are pushing the region as a low-risk alternative to India, offering all the advantages of a workforce imported from South Asia, in combination with unbeatable infrastructure and very attractive tax and regulatory regimes. High-cost compared to others in the Index, Israel is promoting itself as an ideal location for upper-end R&D, as well as multilingual support centers, drawing on the strengths of its education system and the diversity of its population originating from all over Europe and the Middle East.

Two countries perform surprisingly poorly in the Index, despite their emerging success as offshore destinations: Turkey and South Africa. Both countries have succeeded in attracting significant offshore investments (such as Siemens' large operations center in Turkey, and a large Lufthansa call center in South Africa), but they perform poorly in the published Index, since their high costs relative to other emerging markets are not offset by correspondingly higher education levels or business environment ratings.

About The 2005 Global Services Location Index

1. India
2. China
3. Malaysia
4. Philippines
5. Singapore
6. Thailand
7. Czech
8. Chile
9. Canada
10. Brazil
11. U.S.*
12. Egypt
13. Indonesia
14. Jordan
15. Bulgaria
16. Slovakia
17. Mexico
18. Poland
19. Hungary
20. UAE
21. Costa Rica
22. Ghana
23. Argentina
24. Romania
25. Jamaica
26. Vietnam
27. Russia
28. U.K.*
29. Australia
30. Tunisia
31. Germany*
32. South Africa
33. Israel
34. New Zealand
35. France*
36. Panama
37. Portugal
38. Spain
39. Ireland
40. Turkey

*Based on lower-cost locations in each country: San Antonio (U.S.), Belfast (UK), Leipzig (Germany) and Marseilles (France).

The A.T. Kearney Global Services Location Index analyzes the top 40 services locations worldwide against 40 measurements in three major categories: cost, people skills and availability, and business environment.

The Index assigns weightings reflecting the drivers of offshoring decisions based on A.T. Kearney research and engagement experience. Because cost advantages have been the primary impetus behind offshoring, financial factors constitute 40 percent of the total index weight. People skills and availability and business environment each receive a 30 percent weighting.

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