Established Players and New Locations Compete for Offshore Jobs, Increasing Complexity for Companies, New
A.T. Kearney Study Finds
India, China lead top 25 ranking, as new contenders emerge in Asia, Europe and Latin America; high quality and low costs
present challenge to U.S. and other mature markets
NEW YORK (March 30, 2004) — Countries to which white collar jobs are being offshored offer a range of attractions
besides low-cost labor, creating a complex decision-making process for companies selecting offshore locations, according
to a new study, the Offshore Location Attractiveness Index, by global management consulting firm A.T. Kearney.
Countries competing to establish themselves as offshore destinations now offer a broad spectrum of assets.
Large-population countries such as India and China, and to a lesser extent, Russia, Brazil and the Philippines, offer
vast pools of educated workers. 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 that
make them attractive offshoring locations, also.
Highlights of the 2004 Offshore Location Attractiveness Index
India tops the index by a wide margin, ranked first not only for cost advantages, but also for the depth and breadth of
offshoring experience and people skills. While trailing India in language skills and experience, China ranks second,
thanks to a similar combination of low-cost, high-volume skills. Malaysia, Singapore and the Philippines also rank in
the top 10, confirming the strength of Asian economies in the offshore competition. The Czech Republic, Poland, and
Hungary also score highly, reflecting growing interest in offshoring among European companies. Brazil and Chile lead the
pack in Latin America.
Higher-income locations like Canada and New Zealand continue to perform well, thanks to high education levels,
infrastructure quality and business-friendly environments
"Offshoring today is about much more than labor arbitrage," said Andrea Bierce, a vice president in A.T. Kearney's
financial institutions practice in New York and a co-leader of the study. "Companies considering where to locate must
weigh a complex balance of factors having to do with the availability and quality of the workforce and the business
environment. There is no 'one size fits all.'"
Bierce said companies at advanced stages of global sourcing increasingly are pursuing multi-location offshoring
strategies, trying to find the most advantageous mix of benefits and risks from multiple destinations around the world.
A.T. Kearney's 2004 Top 12 Ranking for Offshore Location Attractiveness
1. India
2. China
3. Malaysia
4. Czech Republic
5. Singapore
6. Philippines
7. Brazil
8. Canada
9. Chile
10. Poland
11. Hungary
12. New Zealand
The A.T. Kearney Offshore Location Attractiveness Index analyzed the top 25 offshoring destinations against 39
measurements in three major categories: cost, people skills and availability, and business environment.
The study team assigned weights 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 received a
30 percent weighting.
The complete top 25 ranking is included in the Offshore Location Attractiveness Index white paper.
India and China: Battling Giants
India's pre-eminence as an offshore location is remarkable. While the mix of cost and quality criteria used in the index
results in most countries clustered in a narrow band, India outperforms its nearest competitor by a very wide margin.
"India has extended a significant lead through its continuing cost advantages and its increasing market maturity," said
Stefan Spohr, A.T. Kearney vice president and study co-author. "It has attracted the lion's share of offshore migration
activity to date without any impact on cost levels."
While India's wages are comparable to other low-cost Asian locations, favorable tax rates and increasingly competitive
infrastructure costs help India maintain its overall cost advantage. India's established lead in IT and business process
outsourcing, together with the quality of its IT training and management schools and English language skills, enables
India to capture the top spot in the people skills and availability category.
Although China trails India in BPO experience and qualifications, its cost advantages and large educated labor pool
helped move it to second place. A growing offshore destination for Japanese and Korean companies, China also attracts
U.S. and other multinationals because of its talented workforce. Since China joined the World Trade Organization,
Western companies have established more than 130 R facilities there.
Both China and India score poorly for political and economic risk and weak infrastructure. China scores particularly
poorly in areas of intellectual property piracy and bureaucratic red tape. Most importantly, China clearly needs to
improve the English language skills of its workforce if it wishes to challenge India.
China's national and regional governments are now targeting the IT and BPO sectors, with IT skills and language
training, subsidies for certification, special economic zones and software industry parks. As the supply of
multi-lingual, IT-skilled labor grows, China's low wages will make it an increasingly formidable competitor. China's
East Asian language skills, especially Japanese, are likely to give it an advantage over India.
Malaysia and the Philippines: Emerging Asian Contenders
While sometimes overlooked, Malaysia is a natural choice for offshore services. 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
With only 22 million people, Malaysia will be unable to match India's and China's scale advantages, but effective
government promotion of the IT and services sector will likely make Malaysia one of the strongest competitors to India's
BPO dominance in the next five years.
While smaller in scale, the Philippines offers many of the same attractions as India: widespread English language skills
and a cultural affinity for the U.S., very low costs and promising HR capabilities. The Philippines has more students
enrolled in tertiary education than most European countries; more, in fact than any other country in the Index except
China, India, Russia and Brazil.
The Czech Republic, Poland and Hungary: The Emerging Europeans
As European companies begin to explore offshoring, they look to the East - not to the Far East, but to Eastern Europe,
which offers attractive cost options, cultural similarities, good language skills, strong technical capabilities and
minimal regulatory issues for European firms. For Europe, the fragmentation of languages will require companies to
offshore to a combination of countries, helping to drive the proliferation of new players.
The Czech Republic stands out in this increasingly attractive region, ranking fourth. Competitive infrastructure costs,
a stable business environment and particularly strong education results make it an attractive destination for
multinational corporations. A.T. Kearney anticipates a rising tide of offshore investment in the Czech Republic in the
next few years, and in other Eastern European countries such as Poland and Hungary.
Singapore: Tops for Business Environment
With one of the highest per capita income levels in the world, Singapore hardly leaps to mind as a low-cost offshore
location. However, excellent education and infrastructure, high ratings for economic and political stability,
intellectual property protection and aggressive government promotion of the IT and services sectors continue to
reinforce Singapore's position as a favorite location for regional service functions.
Brazil and Chile: Latin Leaders
Brazil and Chile are the Latin America representatives in the 2004 Index. Cost advantages and a large workforce with
relatively good BPO experience are Brazil's strong points. While generally more costly than other Latin American
locations, Chile offers the best business environment and infrastructure in the region, and the government is
aggressively pursuing offshore opportunities.
Cost Isn't Everything
Strong performances by Singapore, Canada and New Zealand prove that developed countries can be profitable offshore
destinations despite their high cost structure. All of the higher-income countries contending as offshore locations
score high on standardized international assessments of mathematical, scientific and reading literacy.
Two countries that have witnessed some of the highest levels of public concern about offshoring, the U.S. and Germany,
do not perform as well in these same assessments, ranking behind Canada, New Zealand, Australia and Ireland on math,
science and reading literacy. In another study, the U.S. also trailed several other countries, including emerging
markets, in math and science performance - notably Singapore, Hungary, the Czech Republic and Russia.
Although the U.S. and the other "customer markets" for offshore services were not surveyed in this study, the results
make clear that cost is not the only factor impacting companies' offshoring decisions. For example, most developed
countries currently produce far fewer science and technology graduates than their economies demand. Unless these
shortages are addressed, companies have little choice but to source these talents elsewhere.
"As competition among offshore destinations increases and options proliferate, CEOs will need to consider issues ranging
from geopolitical risks to compensation costs to quantity and quality of human resources," said Paul Laudicina,
co-author of the study and A.T. Kearney vice president and managing director of the firm's Global Business Policy
Council. "Quality is rising in importance and those countries offering better productivity, service quality and enhanced
technical skills will gain a competitive edge."
"Countries concerned about exporting jobs should address the factors they can affect on their own shores," Laudicina
said. "There is no silver bullet. But by raising educational standards, investing in research, providing more extensive
training and reinforcing the culture of innovation, countries can remain competitive, gaining the productivity benefits
of offshoring while minimizing and managing the short-term risks."
About the Global Business Policy Council
The Global Business Policy Council is a strategic service of
A.T. Kearney that helps chief executives monitor and capitalize on geopolitical, economic, regulatory, technological and
social change worldwide. Council membership is limited to a select group of corporate leaders and their companies. The
Council's core program includes periodic meetings in strategically important parts of the world, timely analytical
products, regular member briefings, regional events and other services.
About A.T. Kearney
A.T. Kearney (www.atkearney.com) is one of the world's largest management consulting firms. With a global presence that
includes more than 60 offices in 37 countries, spanning major and emerging markets, A.T. Kearney provides strategic,
operational, organizational and technology consulting and executive search services to the world's leading companies.
A.T. Kearney is the high-value management consulting subsidiary of global services leader EDS.