IOF 2010 aims to cover a broad spectrum of items to attract a huge audience. It is intended for: CEO, COO, CIO, CFO, Operations Directors, IT Directors, Outsourcing Directors, Procurement or Sourcing Heads, Managing Director, Shared services, VP, Sales Directors, Business Development and Investment promotion agencies.

IOF 2010 is supposed to provide an ideal opportunity for senior executives charged with outsourcing responsibilities to meet major outsourcing supplier organisations from all over the world. IOF will also allow Investment Promotion Agencies(IPAs) to promote the benefits of using their region as a viable sourcing solution to large multinational companies, while promoting their local outsourcing partners.

Deteriorating cost advantages and improved labour quality are driving a dramatic shift in the geography of offshoring according to the latest edition of global management consulting firm AT Kearney’s Global Services Location Index, a ranking of the most attractive offshoring destinations. It’s no suprise that India, China and Malaysia retain the top three places they have occupied. But since 2004 a fundamental shift in the index has taken place as once strong Central and Eastern European countries have lost ground to countries in Asia, the Middle East and North Africa.

I don’t agree with the presented fall of Central and Eastern European countries
Central and Eastern European countries including Poland, the Czech Republic, Hungary and Slovakia that used to be among the high ranking offshoring destinations for Western Europe companies have fallen significantly. AT Kearney states in the report:

“Czech Republic was 4th in the 2004 Index and now ranks 32nd. Hungary, Slovakia and Poland experienced similar falls in their rankings. The main reasons for the falls are rapid increases in costs, driven partly by currency appreciation against the dollar and wage inflation, which hampers these countries’ competiveness in lower-end BPO activities. The glimmer of good news is that the price increase has been less dramatic for customers that operate in euros – the majority of the CEE customer base.”

In my opinion, this is the weak part of this year’s report. In fact the index would be different from a Western European perspective. I am not going to blame AT Kearney for that, because about 70% of the offshore market is US based. Therefore, it is logical that they are more US focused. On the other hand, I want to give a proper picture to European outsourcers. Especially, because offshoring to Eastern European countries can be more attractive to a lot of European outsourcers because of geographical distance, similar time zone, European legislation and similar cultural background.

Currency depreciation changed dramatically by the end of 2008
A second weak point in this year’s report is the currency depraciation remark. Due to the economic downturn by the end of 2008 the currency rates have changed dramatically and this makes that today the index would look completely different. Take Poland, for example.

The value of the US Dollar increased by about 70% towards the Zlottie in several months and the Euro by 40%. In fact, by the end of 2008 Poland became a more attractive offshore destination again from the financial point of view for both US and Western Europe based outsourcers.

Availability and quality of labor becoming more important
While cost remains a major driver in decisions about where to outsource the quality of the labour pool is gaining importance, particularly in higher value-added functions. According to the AT Kearney index Poland is ranking 21st for “People skills and availability scores”, an indicator where e.g. the US is ranking 1st. For “Business environment” Poland ranks 23rd, where countries like Singapore, Germany, UK, Canada, France, Australia, US and New Zealand are leading. These are (apart from Canada) all non offshore destinations.

A different index might be more applicable for Western European outsourcers
Based on the above, I came to conclusion that for Western European outsourcers probably a different index will be more applicable. Based on some rough recalculations and my onw interpretation this could lead to the following ranking of preferred offshore destinations.

Disclaimer and conclusions
The dynamics of global offshoring are clearly shifting as companies re-evaluate the political risks, labor and skill requirements in the context of the global economic crisis. However, in these unstable times it is rather hard to come up with clear indexes. The market is too dynamic to be able to present fixed figures. Central and Eastern Europe remains attractive to Western European countries and in many cases for the US as well.

The analysis and conlusions in this post are my personal interpretation of the AT Kearny Global Services Index ™ with adjustments made based on recent market and economical developments.

Every outsourcer needs to be aware that the best offshoring destination is very much depending on factors at the outsourcer’s side, like readiness of the organisation, experience with outsourcing, quality of the project specifications, needed interaction during the project and size of the project. The above presented list could be used as some reference for a first orientation and it does not intend to be more than that.

For sale: Satyam, India's fallen outsourcing giant

Recently I have noticed an increased activity in my mailbox related to Indian IT providers. About a year ago I started looking for a potential partner for GOYELLO. The offered rates were not that attractive at that time. Over the last few weeks I have received some better offers. But for the price alone we are not going to outsource to India of course.

Although there is a significant decrease in the IT spendings in the US and the UK, India seems to manage the downturn quite well. This is mainly because of contract renewals and the rise of the spendings in the local market. To attract other income sources, most vendors are trying to climb the value chain by offering (business) consultancy services. Nevertheless, most IT vendors are facing the need for cost cutting. Some smaller vendors might not survive, but the main players will still exist if the market is going to improve again.

Although, this is not applicable to every vendor. Satyam,one of the biggest vendors in India announced a tremendous loss in January for the first time since the beginning of the company.

From the second half of 2009 new projects are expected to come from the US thanks to the governmental stimulus packages. Till that moment it is possible to enjoy the more attractive rates.

For further reading: PMR Report – “India – the leading destination for outsourcing IT services”