Asia's TOP 10 locations for Offshore IT services Date:   Saturday , October 03, 2009 The impact of the economic downturn is driving companies to consider moving their IT services to lower-cost locations. However, determining which country or countries are best placed to host such operations is a daunting task for many organisations. Gartner has assessed the suitability of countries in the Asia Pacific region as offshore locations and identified '10 Leading Locations for Offshore Services in Asia Pacific for 2009.' These included the undisputed leader in offshore services — India — and the greatest challenger in terms of potential scale — China. The rest are a mix of mature environments that offer limited cost benefits (such as Australia, New Zealand and Singapore) and emerging countries with a variety of challenges, but attractive costs (such as Malaysia, Pakistan, the Philippines, Thailand, and Vietnam). Although India continues to grow in absolute terms (as measured in the top-line revenue levels) of IT services being exported from India, its share of the overall worldwide totals has declined. This is because other countries are investing heavily in an effort to gain more market share. Enterprises are seeking out strategies to reduce risk, and India is starting to face some challenges. These include wage inflation, local attrition rates, geopolitical issues (for example, the Mumbai terrorist attacks) and, most recently, the "Satyam Effect." Despite dramatic increases in investment, infrastructure remains India's biggest weakness – strained power capacity and inadequate local and international connectivity remain challenges. Additionally, some of the IT service categories, such as application outsourcing, have matured and the level of incremental growth is considerably smaller. So what are some of the alternatives in the Asia Pacific region? The Gartner analysis showed that the dynamic nature of the market has seen a number of countries position themselves as credible alternatives. After India, China is emerging as the sourcing destination of greatest interest. However, it still has a number of challenges to establishing buyer confidence: security and intellectual property issues, relatively low English-language capabilities, a scarcity of middle managers and quality issues. A large portion of the current market is geared to R&D embedded engineering services, which have significantly different buyer characteristics from commercial enterprise buyer requirements. Thus, there is a significant requirement for building strong process and quality maturity for the delivery of IT services to commercial enterprises. Marketing skills across the value chain of the outsourcing industry are still very immature, which results in a lack of information access and authenticated, verified sources of data for decision making. Organisations wishing to engage China today should plan and budget for more-substantial levels of project management, change management and governance requirements, given the immaturity of the market. The Philippines generates considerably more offshore revenue than China. The country has a history of providing services to the U.S. and Asian markets. Some IT services have been exported for more than 15 years. It is now a key target destination for call centers, and finance and accounting outsourcing. English continues to be the predominant language in the country and the level of accent neutralisation required is relatively low – significantly lower than in India and China. It has a good labour pool that is scalable at low cost and its overall cost structure is lower than India's. Wage inflation and attrition ratios are also lower. When considering the Philippines as an offshore location, companies must be sure to establish adequate risk mitigation measures around intellectual property protection, security and privacy. They should also ensure they are comfortable with specific technology and industry knowledge before signing a deal. Companies seeking to be pioneers in a large and untapped low-cost destination should investigate Vietnam. A great deal of opportunity exists, but extensive due diligence is required. Salaries of IT and business process professionals are among the lowest in the world. Consequently, Ho Chi Minh City and Hanoi are attracting a good deal of interest from major IT companies. Both IBM and CSC have made substantive investments in setting up global delivery centers in the country. However there are some major challenges, which include a significant lack of awareness of key business practices and operating norms, few known vendors and even fewer captive centres. The amount of reliable information regarding Vietnam is extremely low. The difficulty in opening up or doing business in Vietnam, from a logistical and funding perspective, is, at the very least, a key hurdle. Companies should think carefully before allowing the excellent cost base to overly influence their choice of Vietnam as an offshore destination. Understand all the risks, including hidden costs, risks related to data security, ease-of-doing-business issues and relatively low-level English-language skills. In the current economic climate there are definitely advantages in moving IT services offshore but organisations and vendors considering setting up operations in any of the 10 Asia Pacific countries in the Gartner report should understand that each country in the region is, typically, quite a different market in which to operate, particularly if companies are considering doing local business as well as offshore business. Gartner's assessment was conducted using 10 criteria including language, government support, labour pool, infrastructure, education system, cost, political and economic environment, cultural compatibility, global and legal maturity and data and intellectual property security and privacy. Jim Longwood, Research Vice President, Gartner