OFFSHORE OUTSOURCING GUIDE

2006 Global Outsourcing Guide

Risks, rewards, challenges and opportunities, country by country.

BY STEPHANIE OVERBY

In all the discussion about outsourcing, one simple fact sometimes gets lost: Nobody beats the United States when it comes to people with IT skills. Taking into account the size and availability of the labor force, their education, relevant experience, language skills and turnover rates, A.T. Kearney ranked America tops in this area on its 2005 Global Services Location Index.

But labor arbitrage—cutting costs by exploiting the availability of lower-wage workers—remains the name of the game in IT sourcing. CIOs continue to seek savings through offshore outsourcing, and the Everest Research Institute predicts those savings will continue to drive sourcing offshore for the next 30 years. Today, 73 percent of Fortune 2000 companies say offshoring is an important part of their overall growth strategy, according to the 2005 Duke University CIBER/Archstone Consulting study. And Gartner predicts worldwide offshore spending will reach $50 billion next year.

In this, CIO's third global outsourcing guide, we observe how the offshoring world has changed. (View previous guides here.)

The Executive Summary

India remains the leading offshore destination by a wide margin, particularly for U.S. and U.K. companies. "Every year, the risks of moving work to India get lower," says Dean Davison, VP of strategic outsourcing for Nautilus Advisors. "India is increasingly more adept at IP protection, providing resilient infrastructure and managing global relationships effectively." Although Gartner estimates that India currently holds 80 percent to 90 percent of the offshoring market, wage inflation and the increasing maturity of other low-cost areas threaten its future dominance. And as India's star has risen, so have its turnover rates—a growing concern for CIOs. Consequently, Davison expects India's market share to shrink 20 percent by 2010.

Today, less than 10 percent of American companies outsource to more than one country but "most are evaluating multiple locations," says Davison. China, for example. Experts say it could be a powerful rival to India in the next three to five years, even though it currently can't match India's large English-speaking workforce, its level of compliance with international law or its number of IT grads.

Labor and operational costs in Central European countries such as Poland, Hungary and the Czech Republic—attractive outsourcing options for Western European businesses—continue to rise, approaching the level of their customers. So penny-pinching European CIOs are looking deeper into the former Soviet bloc, to countries like Romania, Bulgaria and the Ukraine. Latin American destinations such as Costa Rica, Mexico and Brazil are beginning to attract U.S. back-office and call center work as the need to service Spanish-speaking markets grows. And A.T. Kearney suggests that the Middle East and Africa may be the next frontier for offshore operations—if the politics of the area stabilize.

Although labor costs will continue to be the driving factor behind offshoring, CIOs must internalize the "cost-versus-risk equation," says Ian Marriott, research vice president at Gartner. When going offshore, common risks (infrastructure stability, process maturity, security) become more conspicuous, and uncommon risks (human resource predictability, political stability, rule of law or lack thereof) emerge. Increased competition for the offshore outsourcing dollar promises to raise standards around the globe, but more opportunity equals more risk, and choosing a location is an increasingly complex decision—one we're hoping the "2006 Global Outsourcing Guide" will help you make.

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Incorrect Guidance
Posted: JUL 18, 2006 11:25:13 AM
I have taken many companies offshore. Symantec, Adaptec, Allied-Signal, Flying J, Tibco, are a few of the more well known companies. I find this guide to be guiding people down an incorrect path. In addition to my own "hands-on" experience, if you check the research done by Gartner, Deloitte-Touche, Price-Waterhouse-Coopers and others, you will find that China is a distant third to Russia, who is a distant second to India. It may be in vogue to say that "China is Challenging", but they just do not have the infrastructure, communications ability, applications or process knowledge necessary to support companies in the same manner as an Indian firm.
Dean Lane
CEO
VariTRAK