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September 13th, 2005
Map: The Global Future of Outsourcing

While India remains the most popular location for corporations looking to offshore services, the phenomenon is a global one. India’s booming economy has led to rising wages, and as the country struggles to find a way to distribute the benefits of growth to its still-poor population, it is finding it difficult to graduate enough skilled professionals to fill the positions the international outsourcing industry demands. In response, an increasing number of countries are attempting to capture a share of the global market, investing in infrastructure and education and courting U.S. and European firms with tax incentives and favorable business zoning regulations.

The data below presents information about ten leading outsourcing destinations, including India and its major competitors; these countries rank highest in 2004’s A.T. Kearney Offshoring Location Attractiveness Index, a survey of the most desirable locations, based on a variety of economic factors, for international businesses looking to outsource services ranging from call centers to software engineering.

Canada is popular with United States firms interested in near-shore offshoring, despite its high salaries — an average programmer’s salary is $28,174 per year. Overall, as the U.S. film and television has long realized — the Canadian business environment is somewhat like the U.S., though with lower real estate prices, and lower salaries as compared to average American salaries and taking into account the favorable exchange rate. NAFTA provides for a free trade market in IT services. The Canadian government grants favorable tax treatment for software development and maintenance companies.

With a total population of 32.8 million and a labor force of 17.4 million, it’s estimated that Canada has 150,000 call-center workers and between 15,000-20,000 skilled IT workers. Major outsourcing centers for international companies include Halifax, Montreal, Toronto, and Vancouver. The growth of Canadian outsourcing, however, may be limited, as it is constrained due to a declining birthrate and a shortage of IT university graduates. The shortage of skilled workers may force companies to seek workers and locations in other countries.

The Czech Republic has become a popular destination for European companies seeking the economic advantages of outsourcing while remaining in a “near-shore” environment culturally. The Czech Republic is the meeting place of several Central European cultures, and a recent study found that 70% of Czechs are able to speak a foreign language such as English or German, making the country attractive to multinational corporations like Accenture and DHL. Prague, the nation’s capital, is not only a familiar old European city, but office space is a bargain compared with urban centers like London or Paris, where rents can average as much 4-5 times those found in Prague.

While the Czech Republic is trying to capture a larger share of the global IT market, it may also find itself in a position to attract more manufacturing contracts. After reporting a pretax loss of $26 million this past year, the Danish toy company Lego recently speculated that the Czech Republic might be a prime candidate for the relocation of its production facilities.

Poland is attractive to European and international firms because of cultural similarity and its educated workforce like the Czech Republic, but it’s known for having a somewhat difficult business environment, relatively underdeveloped infrastructure, and a lack of intellectual property security. The Polish government is dedicated to improving their foreign investment climate in order to attract more multinational companies. The Polish Agency for Information and Foreign Investment (PAIZ) is focused on high-tech, export-oriented industries such as application development and application maintenance and PAIZ has identified BPO as one of four critical export industries.

There are about 20 large offshore centers in Krakow, including centers serving IBM, GE, and Motorola, along with British- and German-based firms. Poland’s offshoring industry significantly contributed to its 2004 GDP growth of 5.3%. Although there is good intellectual capital, there is poor English proficiency and low wages. A programmer earns an average of $4,800-$8,000 per year. Those who speak English and have the potential to leave Poland for better wages do. Poland’s success in the offshoring industry is contingent on whether companies and the government can entice qualified workers to stay in Poland.

Brazil is known as the outsourcing leader in South America. With a population of 186.1 million and a labor force of 89 million, as well as a high literacy rate of 86.1 percent, the country is very attractive to international firms. In 2005, exports of goods and services, which make up for about 25% of the economy, were up 13 percent from a year earlier.

Brazil’s services focus mainly on application development and application maintenance. Located in Rio de Janeiro and Sao Paulo, companies such as GE Engine Services, Goodyear, and Xerox take advantage of Brazil’s cost advantages, large workforce with business process outsourcing (BPO) experience, and infrastructure. The minimum salary for an IT programmer is $1,308 per year. Until recently, IT activity in Brazil was limited to that being done by large, multinational companies. Now, however, local companies are beginning to develop their own IT services capability, and the industry as a whole is looking to expand its software development capabilities, though overall education levels and English language skills remain a barrier to further growth.

Chile, a country of 16 million with a labor force of 6.2 million, is a newcomer to the global outsourcing community. Due to low English proficiency, Chile’s growing industry is a sign of the growing interest in Spanish-speaking offshore services. Chile’s government has established a registry to identify and certify English speakers for the labor market. Out of more than 25,000 applicants, 15,000 qualified for the registry. With a 2004 GDP of $169.1 billion, foreign direct investment contributed $1.5 billion.

Santiago is one of the least expensive cities in the world, though wages are somewhat higher than in other Latin American locations — the minimum wage for a programmer is $1,781 per year. Due to a good digital network, satellite services, and fiber optics, numerous companies, such as Citigroup and Unilever, have established facilities that focus on software development, financial shared services, and financial services software. More than 35 multinational companies operate call centers, primarily offering Spanish-language services.

India is the world leader in outsourcing with $17.2 billion a year flowing into its software and business services sectors from abroad. Several factors combine to make India an appealing destination for companies looking to farm out their technology or business process outsourcing (BPO) needs. India’s labor force is second in size only to China’s, and the country’s educational system injects about two million graduates into the workforce every year, many of whom speak English or possess strong technical skills. Low wages in India can also mean big savings for employers: the average salary for a software programmer in India is about $7,000 USD a year — compared with more than $60,000 in the U.S.

Though the National Association of Software and Services Companies of India (NASSCOM) has predicted that India’s software and services exports will balloon to $60 billion by 2008, some observers question whether India will maintain its status as market leader in important areas like the BPO industry. A recent report by the U.S.-based market research firm Gartner, Inc. warns that a shrinking labor pool and rising wages could erase as much as 45 percent of India’s BPO market share by 2007. India’s supply of qualified workers is not large enough to fill all of the planned BPO jobs. Compounded with the fact that Indian BPO workers are commanding increasingly higher wages, companies have begun offshoring to countries where the costs are lower.

China has risen to become a powerful force in the global marketplace over the past few decades. Much of China’s economic strength has been built upon its large manufacturing sector, particularly in consumer electronics, which is estimated to generate $67 billion in sales for China in 2005. Like India, China’s low wages, skilled labor pool, and pro-business environment have made it an attractive destination for many companies seeking to outsource services. Some economists have projected that China’s expanding IT outsourcing industry — expected to double to $5 billion in 2005 — will pose a significant threat to India’s dominance in offshore technology operations. But China faces several hurdles in its bid to become a major destination for foreign technology and business services, including overcoming cultural and language barriers, improving its record on human rights, and enforcing intellectual property laws within its boundaries.

Singapore has one of the highest per capita income levels in the world and would seem an unlikely choice for offshore industries. Average annual salary for a programmer is $33,504 USD, but many other advantages mean businesses can overlook the high salaries. Singapore has excellent education and infrastructure — it is the most wired country in the world — as well as economic and political stability. In 2004, foreign direct investment generated $5.8 billion.

To compete with lower-cost locations, Singapore has made intellectual property security its main concern, and the country offers the highest standards of protection. It also offers significant tax incentives to businesses. Singapore has also begun targeting high-value industries such as remote robotics management, healthcare, and genetic diagnostics.

Malaysia is a rising star in the realm of global business outsourcing, especially in the competitive information technology market. International Data Corp. (IDC) has estimated that Malaysia’s local IT outsourcing market will expand by 27% annually over the next five years, becoming a $350 million USD industry by 2008. To help spur this expansion, Malaysia has been offering foreign corporations the benefits of government tax breaks in certain areas such as its Multimedia Super Corridor (MSC), a zone that extends south from Kuala Lumpur and encompasses the “intelligent” cities of Cyberjaya and Putrajaya. Today the MSC is host to 900 multinational, foreign-owned, and Malaysian high tech companies including Motorola, Ericsson, IBM, and BMW.

The Philippines quickly becoming one of the major global outsourcing contenders — has created economic zones designed to entice businesses to move to the Philippines. Within these zones, the government offers incentives such as income tax holidays and duty-free imports. In addition, a majority of the population speaks English (English is the primary language for instruction in public schools), and Philippine universities graduate about 15,000 technology students annually. The country has a relatively high unemployment rate of 11.8 percent, but the government hopes that the growing BPO industry will create new jobs.

Call centers first emerged on the Philippine business scene in 2000, with 100 centers (serving Companies such as America Online, Citibank, Barnes & Noble, and Proctor and Gamble) employing 40,000 people by the end of 2004. In 2004, the call center industry contributed $390 million towards the country’s $430.6 billion GDP, a contribution expected to increase to $3 billion by 2009.

Most call centers are now located either in Manila or Cebu, but due to rising wages as the pool of qualified applicants grows, companies are moving to smaller cities where the number of university graduates is high, but wiling to work for fewer wages.

Sources: A.T. Kearney Offshoring Location Attractiveness Index 2005, CIA WORLD FACTBOOK, CIO Magazine, THE ECONOMIST Intelligence Unit, The Heritage Foundation/WALL STREET JOURNAL INDEX OF ECONOMIC FREEDOM, Asian Development Bank, DOW JONES NEWS, Bloomberg, PriceWaterhouseCooper, THE WARSAW VOICE, Philippine National Statisical Coordination Board, Information Technology Association of Canada, Singapore Infocom Technology Federation.

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