Offshoring’s Best Bets

India still reigns supreme as the premier offshoring location, but finance chiefs have a growing number of options.
Kate O'SullivanMay 21, 2009

India’s offshore service providers have had a tough year. With 40% of their business coming from the battered financial services sector, a devastating terrorist attack on their home soil, and a local company brought down by scandal, the once-booming business process outsourcing sector is facing challenges that might have seemed inconceivable just a few years ago, when the industry’s biggest issues were employee turnover and wage inflation. Now, attrition is down and some providers have even enacted wage freezes.

But according to A.T. Kearney’s annual Global Services Location Index, which ranks 50 offshoring locations according to a composite of 43 measures of financial attractiveness, skills availability, and business environment, India has retained the top spot in the lengthy list of global options. China ranks second, followed by Malaysia.

While the top three locations in the survey haven’t changed in the past year-and have held those slots since the debut of the index in 2004-further down the list there is a shift away from Eastern Europe, which suffered last year as the euro rose against the dollar, and towards the Middle East and Africa. Egypt and Jordan both cracked this year’s top 10. The United States climbed seven spots to 14th on the index, as the weaker dollar drew clients that might otherwise have looked overseas.

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India’s dominance as the top offshore location, while still significant, is somewhat less certain than it has been in years past. “The key issue is perception of risk,” says Norbert Jorek, a partner with A.T. Kearney. “Clients in the U.S. are re-evaluating the risk [of being too concentrated with a single provider or in a single country] and are looking at other alternatives as a backup option.”

As a part of their heightened awareness of risk, U.S. companies are conducting more due diligence as they consider offshore locations. “I think companies are getting more sophisticated about location selection,” says Johan Gott, who manages the index project at A.T. Kearney. “It used to be a no-brainer that you would just go to India, but now with the supply of options, companies are working hard to find the special talents and capabilities they need in different locations.” A U.S. company serving a Spanish-speaking client base, for example, today might look for a call center provider in Chile (#8 on the index this year). 

The maturing of the offshoring industry gives companies more choice of service providers even within India, says Jorek. And new countries are entering the business regularly, increasing competition in the crowded field. “The next time we do the index, you’ll probably see new countries popping up,” he says.

According to the index, the top five most attractive offshoring destinations, in descending order, are India, China, Malaysia, Thailand, and Indonesia. Completing the top 10 are Egypt, Philippines, Chile, Jordan, and Vietnam.

The bottom five least attractive offshoring destinations of the top 50, again in descending order, are New Zealand, Australia, Ireland, Israel, and Portugal.