Offshoring opportunities amid_economic_turbulence-gsli_2011

Offshoring Opportunities
Amid Economic Turbulence
The A.T. Kearney Global Services Location Index™, 2011

T
he current global services landscape is marked by countervailing
trends. On one hand, firms are responding to intensifying cost-
cutting imperatives by moving operations offshore. On the other,
politicians are using global services offshoring as an easy scapegoat for
current economic woes and high unemployment levels in their home
countries, stoking resentment against globalized firms and their foreign
host countries. Although signs of a slowdown in the growth of global
services are evident in this environment, don’t expect offshoring to end.
In fact, the global services industry’s full potential is ready to be tapped.

As we publish the 2011 A.T. Kearney Global In terms of the industry’s broader macro-
Services Location Index™, we find that the economic environment, the world in 2003 was
world of services offshoring has changed dramati- similar to today’s, emerging from an economic
cally since we published the first report in 2003.1 slowdown that had begun two years earlier.
What was then an emerging phenomenon that At the time, the economy soon returned to health.
seemed to have great potential is now a natural Likewise, the hope today is for renewed growth,
element of corporate services supply chains. The but the situation is still fragile. The International
industry has grown significantly and in many Monetary Fund (IMF) projects gross domestic
cases exceeded expectations from the early days. product (GDP) growth of 2.3 percent in the
The part of the value chain that can be performed United States in 2011— hardly the kind of dyna-
offshore has increased in value-add and complex- mism that would propel the global economy. The
ity as we continue to see new types of services IMF’s latest projections for global economic
being handled remotely and across borders. At growth — an estimated 4.8 percent in 2010 and
the same time, the geography of offshore delivery 4.2 percent in 2011— come with the warning
has expanded to include a large number of coun- that “global recovery remains fragile, because
tries specializing in different parts of the service- strong policies to foster internal rebalancing of
production ecosystem. demand from public to private sources and external
1
The first report was named the A.T. Kearney Offshore Location Attractiveness Index.

OFFSHORING OPPORTUNITIES AMID ECONOMIC TURBULENCE | A.T. Kearney 1

Figure 1
The A.T. Kearney Global Services Location IndexTM, 2011

Financial People skills Business
Rank Country attractiveness and availability environment Total score
1 India 3.11 2.76 1.14 7.01
2 China 2.62 2.55 1.31 6.49
3 Malaysia 2.78 1.38 1.83 5.99
4 Egypt 3.10 1.36 1.35 5.81
5 Indonesia 3.24 1.53 1.01 5.78
6 Mexico 2.68 1.60 1.44 5.72
7 Thailand 3.05 1.38 1.29 5.72
8 Vietnam 3.27 1.19 1.24 5.69
9 Philippines 3.18 1.31 1.16 5.65
10 Chile 2.44 1.27 1.82 5.52
11 Estonia 2.31 0.95 2.24 5.51
12 Brazil 2.02 2.07 1.38 5.48
13 Latvia 2.56 0.93 1.96 5.46
14 Lithuania 2.48 0.93 2.02 5.43
15 United Arab Emirates 2.41 0.94 2.05 5.41
16 United Kingdom 0.91 2.26 2.23 5.41
17 Bulgaria 2.82 0.88 1.67 5.37
18 United States 0.45 2.88 2.01 5.35
19 Costa Rica 2.84 0.94 1.56 5.34
20 Russia 2.48 1.79 1.07 5.34
21 Sri Lanka 3.20 0.95 1.11 5.26
22 Jordan 2.97 0.77 1.49 5.23
23 Tunisia 3.05 0.81 1.37 5.23
24 Poland 2.14 1.27 1.81 5.23
25 Romania 2.54 1.03 1.65 5.21
26 Germany 0.76 2.17 2.27 5.20
27 Ghana 3.21 0.69 1.28 5.18
28 Pakistan 3.23 1.16 0.76 5.15
29 Senegal 3.23 0.78 1.11 5.12
30 Argentina 2.45 1.58 1.09 5.12
31 Hungary 2.05 1.24 1.82 5.11
32 Singapore 1.00 1.66 2.40 5.06
33 Jamaica 2.81 0.86 1.34 5.01
34 Panama 2.77 0.72 1.49 4.98
35 Czech Republic 1.81 1.14 2.03 4.98
36 Mauritius 2.41 0.87 1.70 4.98
37 Morocco 2.83 0.87 1.26 4.96
38 Ukraine 2.86 1.07 1.02 4.95
39 Canada 0.56 2.14 2.25 4.95
40 Slovakia 2.33 0.93 1.65 4.91
41 Uruguay 2.42 0.91 1.42 4.75
42 Spain 0.81 2.06 1.88 4.75
43 Colombia 2.34 1.20 1.18 4.72
44 France 0.38 2.12 2.11 4.61
45 South Africa 2.27 0.93 1.37 4.57
46 Australia 0.51 1.80 2.13 4.44
47 Israel 1.45 1.35 1.64 4.44
48 Turkey 1.87 1.29 1.17 4.33
49 Ireland 0.42 1.74 2.08 4.24
50 Portugal 1.21 1.09 1.85 4.15

Note: The weight distribution for the three categories is 40:30:30. Financial attractiveness is rated on a scale of 0 to 4, and the categories for people skills and availability, and
business environment are on a scale of 0 to 3.
Source: A.T. Kearney Global Services Location IndexTM, 2011

2 OFFSHORING OPPORTUNITIES AMID ECONOMIC TURBULENCE | A.T. Kearney

rebalancing from deficit to surplus economies advanced economies); asymmetrical rates of
are not yet in place.”2 The IMF’s recent Global recovery between developed and developing
Financial Stability Report offers a similar caveat: worlds; uncertainty about the capacity of the
“The global financial system is still in a period of United States to engineer a strong economic
significant uncertainty and remains the Achilles’ recovery; persistent questions in Europe about its
heel of the economic recovery.”3 fiscal maneuverability (highlighted by the recur-
Within this shifting macroeconomic environ- rent sovereign debt and banking crises); concerns
ment, the Index continues to track the contours of about persistent economic obstacles in Japan; and
the global outsourcing landscape in 50 countries reservations about the capacity of the G20 coun-
and their potential across three major categories: tries to formulate unified responses to their various
financial attractiveness, people skills and availabil- economic challenges. It is no surprise, therefore,
ity, and business environment. We consider 39 that the IMF finds that “downside risks remain
metrics to identify the top countries for delivering elevated” (see sidebar: A World of Risks on page 4).4
information technology (IT), business process As the economic environment shifts, the
outsourcing (BPO) and voice services (see appen- picture in the global services industry is growing
dix: About the Study on page 19). more complex. Political backlash against offshor-
This paper presents an overview of the 2011 ing and talk of “reshoring”— bringing functions
findings of the Index (see figure 1). We examine and jobs back to home countries—are common-
the results for each region and offer guidance for place, and the economic crisis and high unem-
choosing the right locations around the globe to ployment rates have made such reshoring in tier-2
perform services. In the final analysis, maximizing and tier-3 locations in developed countries more
the benefits of offshoring is vital for success— attractive. Still, huge potential remains for global-
regardless of economic conditions. ized services delivery, as new technologies such as
cloud computing help it continue to evolve rap-
Industry in Transition idly.5 How, then, will the traditional outsourcing
After the 2008 financial crisis hit, we predicted business model change in the future?
an immediate and significant impact for global Offshoring will overcome negative percep-
services outsourcing, considering that financial tions. Economic turmoil renewed the negative
services firms were the biggest customers of ser- perception of offshoring and its perceived impact
vices outsourcing and the United States was the on domestic labor markets in developed countries.
world’s economic center of gravity. Today, we look In the 2009 Index, however, we pointed to evi-
back at an industry that has certainly endured two dence suggesting the contrary—that the sectors
lean years. with the fastest employment growth in developed
The reality is that the global business environ- countries were actually tradable (or “offshoreable”)
ment has been in profound flux for a variety of services.6 In other words, despite growing con-
reasons: contrasting—and conflicting—recovery cerns about job losses, these services still grew in
and post-recovery strategies (especially among developed countries as economies globalized.
2
IMF, World Economic Outlook: Recovery, Risk, and Rebalancing, Washington, D.C.: October 2010.
3
IMF, Global Financial Stability Report: Sovereigns, Funding, and Systemic Liquidity, Washington, D.C.: October 2010.
4
IMF, World Economic Outlook: Recovery, Risk, and Rebalancing, Washington, D.C.: October 2010.
5
See “Software Demand Management” at www.atkearney.com.
6
For more information about the 2009 Index, see “The Shifting Geography of Offshoring” at www.atkearney.com.


A World of Risks
With a global business environment tial differences in how to strike a rate of 6.4 percent, compared to
in flux and economies continually balance between continued stimulus 2.2 percent for developed countries.†
shifting, the picture in the global ser- and belt-tightening to avoid large In short, because they have been
vices industry is growing more com- deficits and longer-term debts. The more resilient in the face of the reces-
plex. The following trends have signif- choices these two countries make sion, emerging economies are catch-
icant implications for the industry: have a major impact on the global ing up more quickly. A sector shift is
Countries are pursuing different services market, as these countries also under way, as developing econo-
fiscal strategies. The differences in are the largest demand centers for mies ramp up their service sectors
how countries are adjusting follow- services outsourcing. in addition to their manufacturing
ing the Great Recession could not Production and consumption base. China, in particular, appears
be more pronounced. Consider, for are shifting. Among other things, set to expand its services sector in
example, the stark contrast between the Great Recession has accelerated the coming decade.
the hard-line fiscal austerity program the shift of global economic produc- Political uncertainty in the
pursued in the United Kingdom tion and consumption from devel- United States. In the aftermath of
and the quantitative easing under oped to developing worlds. The IMF the November 2010 mid-term elec-
way in the United States. The polar- predicts that in 2011, developing tions, the outlook in the United
opposite policies underline substan- countries will grow at an average States for an enduring political con-

In a political climate of high unemployment, strong, traditional IT outsourcing services are
however, these concerns are still intensifying as under threat. These include multi-year contracts
politicians respond to the growing frustrations of based on developing and maintaining custom
their constituents. While reducing global services code and requiring legions of programmers and
trade through legislation and regulation is nearly on-site systems-integration workers. In the new
impossible—especially when dealing with multi- model, outsourcers provide standardized software
national companies—many firms have elected solutions on a per-use basis. Such services require
to keep at least a temporarily low profile on their that outsourcers combine BPO services with
offshoring to avoid risking their reputations. In cloud-based technology, enabling customers to
the long run, however, the cost and talent arbi- outsource entire business processes and only pay
trage benefits for overseas locations are still great for the information they access or use.7
and the underlying business case for offshoring In the past two years, a variety of outsourcers
remains intact. As manufacturing supply chains have worked on acquiring the complete stack of
have permanently left the shores of developed capabilities required to survive the shift and
economies, the same is happening to services create a new business model for the outsourcing
supply chains, and a forced move to reshore them industry. These capabilities include: hardware
would result in significant costs for businesses. and connectivity for hosting and network capabil-
Traditional outsourcing is under threat. ities; standardized software that can be deployed
While the business case for offshoring is still on shared hardware platforms or through cloud
7
See “Building Flexibility into Software Licensing” at www.atkearney.com.


sensus to address the nation’s eco- shoring and its link in the public and elsewhere.†† Demand centers in
nomic challenges seems as remote consciousness to economic hardship Western Europe will consequently
as ever. Nevertheless, the seriousness in the United States. face a challenging road ahead. Com-
of the country’s fiscal worries was Europe’s precarious fiscal panies that have restructured may
underlined recently by the austere situation. The Greek debt debacle emerge stronger and leaner, with a
recommendations of a bipartisan last spring highlighted the precari- favorable attitude toward offshoring.
commission on reducing the national ousness of Europe’s economic out- Debates about international
debt. For firms with global opera- look, and the ensuing debate on exchange-rate policy. The growing
tions, the political climate is particu- fiscal policies demonstrates the wide international debate over exchange-
larly sensitive. A bill introduced in array of opinions across the eurozone. rate policy—and the threat of cur-
the Senate this year sought to bar The Organisation for Economic rency wars—reflects the lack of
companies from receiving tax credits Co-operation and Development a strong, institutionalized, inter-
or deductions if they closed a U.S.- (OECD) predicts an uneven recov- national organizational architec-
based facility in favor of one over- ery in the eurozone, with growth ture that can address the dynamic
seas. Though defeated, the bill’s curtailed because of deficit-reduction nature of the world’s problems.
title — Creating American Jobs and plans and credit-market tensions †
IMF, World Economic Outlook.
Ending Offshoring Act—is a testa- related to the persistent sovereign- ††
OECD Economic Outlook, Paris:
ment to the unpopularity of off- debt concerns in Greece, Ireland 18 November 2010.

computing; new service capabilities; and commer- manufacturing powerhouses — and we can expect
cial strength to move from a long-term contract to see a similar development in services. As with
model to a flexible, “pay-as-you-go” approach. offshoring of manufacturing, the move of services
These are the preliminary steps toward what will jobs will grow less controversial with the passage
end up being a revolution in the BPO and ITO of time. Much as the United States and EU coun-
marketplace.8 tries exchange a wide range of services, trading of
Globalization of services has tremendous services will also grow between developed and
untapped potential. Regardless of changes in the developing countries. In the medium to long
outsourcing industry business model and other term, demographics will reinforce this trend. As
temporary setbacks, we believe the era of global- the developed world ages, it faces a choice between
ization of services production has only just begun. allowing more liberal immigration policies and
The untapped potential is enormous. IT and importing manufactured goods and services.
BPO offshoring are early manifestations of a larger Countries such as India and Egypt, with large,
trend that, in the long run, means that more func- young populations, are well-positioned to take on
tions can and will be located outside the countries a greater role in delivering services to countries
where end-customers reside. with shrinking labor pools.
We have already witnessed a shift in the foot- In the future, therefore, we will see a dramatic
print of manufacturing across the globe to the shift in the relative balance of service production
point at which emerging markets have become among developed and emerging markets.
8
See “Outsourcing (But Not as We Know It)” in Executive Agenda, Vol. XIII, No. 2, 2010, at www.atkearney.com.


Highlights of the 2011 Index Baltic states are a dramatic example — Estonia
The top three countries in the 2011 Index have moves into 11th place and Latvia 13th amid
demonstrated remarkable staying power. Thanks ongoing austerity programs. The United Kingdom
to their deep talent pools and cost advantages, advances from 31st to 16th place due to the
India, China and Malaysia have been first, second pound’s fall in value coupled with slowing wage
and third, respectively, since the inception of the increases. Mexico reaches 6th place and is now
Index. Wage changes and currency shifts from the Latin America’s top location in the Index, thanks
financial crisis, however, have led to major changes to currency depreciation and increased nearshor-
in other rankings within the Index (see sidebar: ing sentiment in the United States. In the Middle
Currency Woes on page 7). East, improving fundamentals allowed Egypt
Formerly lower ranked states with highly to inch forward to 4th, while the United Arab
qualified labor once again became viable options Emirates (UAE), acting as a regional services hub,
amid currency devaluation (see figure 2). The moved from 29th to 15th position, because its

Figure 2
Fallout from the financial crisis shook up the rankings, as once-expensive countries moved up

Change in rankings (2009 to 2011)

1 India 0 26 Germany 8
2 China 0 27 Ghana –12
3 Malaysia 0 28 Pakistan –8
4 Egypt 2 29 Senegal –5
5 Indonesia 0 30 Argentina –5
6 Mexico 5 31 Hungary 6
7 Thailand –3 32 Singapore 3
8 Vietnam 2 33 Jamaica –10
9 Philippines –2 34 Panama 9
10 Chile –2 35 Czech Republic –3
11 Estonia 5 36 Mauritius –6
12 Brazil 0 37 Morocco –8
13 Latvia 14 38 Ukraine 4
14 Lithuania 5 39 Canada –13
15 United Arab Emirates 13 40 Slovakia –2
16 United Kingdom 15 41 Uruguay –5
17 Bulgaria –4 42 Spain 3
18 United States –4 43 Colombia 0
19 Costa Rica 3 44 France –3
20 Russia 13 45 South Africa –5
21 Sri Lanka –4 46 Australia 1
22 Jordan –13 47 Israel 2
23 Tunisia –5 48 Turkey –4
24 Poland 15 49 Ireland –1
25 Romania –4 50 Portugal 0



service sector became more competitive as the the United States accounted for 63 percent of
financial crisis tempered the breakneck speed of global IT offshore outsource spending, down
its growth.9 somewhat from pre-crisis levels of approximately
The following offers a breakdown of the 67 percent.10 At the same time, the United States
Index results by region: presents an interesting supply possibility, as its
North America. The United States is the top tier-2 locations rank 18th in the Index, thanks to
customer market for outsourcing services and its top position in people skills and availability
will remain so for the foreseeable future. In 2010, (see figure 3 on page 8).

Currency Woes
Fluctuating currencies cause vola- This doomsday scenario will renminbi and other emerging market
tility for corporate planners, and hopefully be averted as central banks currencies would appreciate. Offshor-
currency concerns will likely remain and international institutions come ing companies will see a decline in
a central feature of international together to broker solutions among labor arbitrage opportunities in certain
business and policy into the future. major players such as the United countries as this process unfolds.
China is currently under attack for States and China. Kati Suominen of The challenge for corporate plan-
its undervalued currency, which has the German Marshall Fund sees two ners is to look beyond the month-to-
been propped up by $2.5 trillion in other more palatable options going month or even year-to-year currency
reserves. Meanwhile, the United forward: détente and “containment.”† swings so they can stay attuned to
States has angered some countries In détente, countries would look to the long-term trends. A typical plan-
because of its quantitative easing. the IMF to settle disputes and provide ning horizon for establishing offshore
Government interventions solutions for international currency centers is three to five years—often
throughout the world are prompt- troubles. This would be a neat solu- longer. Some of the exchange-rate
ing worries about destructive “cur- tion to current problems, but highly fluctuations we have seen in the past
rency wars.” A full-scale currency unlikely given that policymakers in few years may be merely blips, such as
war would indeed put the brakes many emerging markets still do not the dramatic dip of the British pound.
on the world’s economic growth trust the IMF. In containment, coun- Other currencies are significantly
prospects and would injure the tries would not cooperate at the level more likely to experience longer-term
global offshoring industry. In such described above, instead holding out changes. As developing countries (for
a scenario, economic relations the threat of tariffs and currency example, China and India) experience
between countries could devolve devaluations. The interconnectedness dramatic export-led growth, their
into tit-for-tat duels about curren- of their economies and a fear of currencies will come under long-term
cies — one country erecting tariffs “mutually assured destruction,” how- pressure to appreciate, which has the
to counter the effects of another’s ever, would lead to a certain level of potential to alter the economic calcu-
devaluation. Economic uncertainty good behavior. This system could be lations of corporate planners.
would reign and companies would stable for global firms to navigate— †
Kati Suominen, Globalization at Risk:
find global service supply chains albeit cautiously. The dollar would Challenges to Finance and Trade, Yale
University Press, New Haven, Conn.:
costly and difficult to maintain. likely decline in this era while the October 2010.

9
The rankings were made before the recent political unrest in Egypt and Tunisia began. As a result, the political uncertainty and country risk associated with
both countries have dramatically increased. The situations need to be monitored closely to gauge whether the long-term risk profiles will change.
10
International Data Corporation, Worldwide and U.S. Offshore IT Services 2010-2014 Forecast, May 2010.


Figure 3
The United States leads in people skills and availability

People skills and availability scores
United States (tier 2) 4.37 2.22 1.34 1.67 9.60
India 4.34 2.22 1.39 1.25 9.20
China 3.90 2.22 1.33 1.06 8.51
United Kingdom (tier 2) 3.94 0.55 1.39 1.67 7.55
Germany (tier 2) 3.92 0.58 1.40 1.33 7.23
Canada 3.69 0.31 1.47 1.67 7.14
France (tier 2) 3.93 0.53 1.37 1.22 7.05
Brazil 2.89 1.75 1.07 1.19 6.90
Spain 3.91 0.40 1.32 1.22 6.85
Australia 2.65 1.44 1.67 6.00
Russia 1.82 1.69 1.29 1.18 5.98
Ireland 2.67 1.41 1.67 5.79
Singapore 2.61 1.52 1.38 5.54
Mexico 2.11 0.89 1.14 1.19 5.33
Argentina 2.41 0.48 1.06 1.31 5.26
Indonesia 1.18 1.72 1.09 1.10 5.09
Malaysia 1.91 1.24 1.22 4.60
Thailand 1.77 0.63 1.16 1.03 4.59
Egypt 1.65 0.72 1.04 1.11 4.53
Israel 1.87 1.24 1.31 4.49
Philippines 1.38 0.83 1.94 1.22 4.38
Turkey 1.33 0.72 1.20 1.07 4.31
Poland 1.18 0.46 1.39 1.22 4.25
Chile 1.70 1.20 1.15 4.22
Hungary 1.42 1.37 1.26 4.15
Colombia 1.46 0.41 1.00 1.13 3.99
Vietnam 1.08 0.68 1.22 0.97 3.96
Pakistan 0.71 0.97 0.94 1.22 3.85
Czech Republic 1.04 1.39 1.26 3.79
Portugal 0.90 1.31 1.33 3.63
Ukraine 0.60 0.58 1.24 1.17 3.58
Romania 0.75 1.14 1.29 3.42
Estonia 0.40 1.43 1.33 3.18
Sri Lanka 0.62 1.28 1.13 3.16
United Arab Emirates 0.80 1.42 0.89 3.15
Costa Rica 0.62 1.19 1.29 3.14
Latvia 0.53 1.35 1.21 3.11
Lithuania 0.51 1.34 1.21 3.10
Slovakia 0.48 1.34 1.22 3.10 Relevant experience
South Africa 0.81 0.35 0.58 1.35 3.09 Size and availability of labor force
Uruguay 0.54 1.17 1.29 3.04
Education
Bulgaria 0.51 1.16 1.21 2.94
Mauritius 0.48 1.11 1.31 2.91 Language capabilities
Morocco 0.59 1.03 1.07 2.90
Jamaica 0.30 0.86 1.67 2.85
Tunisia 0.48 1.05 1.07 2.70
Senegal 0.36 1.25 0.90 2.59
Jordan 0.34 1.12 1.06 2.58
Panama 0.42 0.83 1.13 2.41 Note: Values below 0.20 not shown due to space constraints.
Ghana 0.32 0.80 1.06 2.31 Source: A.T. Kearney Global Services Location IndexTM, 2011

Some cause for concern exists, however: U.S. sions or choosing local options, historical trends
anti-outsourcing sentiment is re-emerging, par- suggest that once the economy rebounds, global-
ticularly given the country’s stubbornly high ization will resume.
unemployment rates and rancorous political dis- Still, companies are not automatically assum-
course. While we believe that some companies ing that overseas locations are the answer to their
will likely respond to such a hostile environment service transformation questions. U.S. tier-2 and
in the short term by postponing offshoring deci- tier-3 cities with strong talent pools and low oper-


ating costs are becoming attractive alternatives, in ing nearshoring sentiment, even with the difficult
light of lower domestic wages and greater avail- times related to escalating drug violence in its
ability of human resources during the recession. northern states. The country boasts one of the
Canada (39th) falls in the Index this year. It is highest numbers of Capability Maturity Model
no longer primarily an offshore destination to the Integration (CMMI) certified centers worldwide.11
United States, as its relative cost-competiveness Additionally, as its management schools improve
has eroded. Instead of strong growth in contact in quality, Mexico could carve out an important
centers serving its southern neighbor, Canada is space in the service sector (see sidebar: Mexico: City
today equally important as an integrated part of by City on page 10).
the North American IT supply chain,
much as the two countries’ auto-
motive industries have become inter-
twined over the years with multiple
supplier relationships and assembly
Mexico stands to benefit from
plants on both sides of the border.
Latin America. Latin America’s
increasing nearshoring senti-
proximity to the U.S. consumer mar- ment, even with the difficult
ket serves it well as a services hub.
With a growing Spanish-speaking times related to escalating drug
population in the United States and
English proficiency continuing to violence in its northern states.
grow in Latin America, customer ser-
vice activities will naturally increase.
Latin America, similar to other
regions, presents a kaleidoscope of skill sets. Chile dropped to 10th place from 8th, largely
Brazil excels in IT and is a strong platform loca- because its economic contraction was less severe
tion for software developers and systems integra- than elsewhere, meaning its wages have remained
tors. Mexico is becoming a more prominent BPO relatively stable. The country’s infrastructure score
location, as it supports the United States with also received a slight downgrade because of the
both Spanish and English. Meanwhile, Chile has vulnerabilities exposed during the February 2010
emerged as a niche destination for R&D and ana- earthquake; although by all accounts, Chilean
lytics, while Costa Rica and Argentina continue to authorities’ response to the disaster was com-
grow their offshore services presence despite facing mendable. The recent success in rescuing trapped
some decline in cost-competitiveness. miners has helped fortify the country’s brand.
Mexico (6th) is the highest-ranked Latin Brazil ranks 12th for the second straight year.
American country. Its average wages decreased 18 The country’s standing in global services has been
percent in dollar terms last year, as it was buffeted challenged in recent years by a strengthening cur-
by economic headwinds from the United States. rency. While this demonstrates strong economic
The country now stands to benefit from increas- prospects in a bleak global landscape, it hinders
11
CMMI is a process-improvement program created by the Software Engineering Institute of Carnegie Mellon University.


export growth. The triumph of President Luiz electricity infrastructure. Argentina (30th) falls
Inácio Lula da Silva (whose term in office ended five slots as inflation and rising demands among
on the first day of 2011) in bringing Brazil to the labor leaders for increased wages challenged its
global stage will hopefully linger as his successor, competitive position.
Dilma Rousseff, the country’s first elected female Colombia (43rd) enters the Index after per-
president, defines the new political trajectory. forming particularly well in the people skills and
Costa Rica (19th) moves up three spots, availability category. Colombian Spanish is a neu-
thanks to infrastructure modernization, increased tral accent that allows call centers in Colombia to
international bandwidth and improvements in serve people throughout the Spanish-speaking

Mexico: City by City
The Global Services Location ture for IT services. Mexico City both technical and soft skills by
Index looks at IT/BPO potential also offers a vast range of services 2013. Mexico IT promotes Mexico
at the country level, but in our and Queretaro is a smaller alternative as a nearshore outsourcing location
client work we are asked to develop location that has capitalized on its for U.S. companies. ProSoft offers
a more detailed view of each coun- aerospace industry to grow (see subsidies and tax incentives for com-
try in order to match client needs figure). Across all regions, Mexico panies investing in the IT sector.
to specific locations. We therefore has prioritized the development of The following offers a description
work with clients to customize the the IT/BPO industry through several of some of Mexico’s top destinations:
Index methodology according to initiatives. Mexico First aims to cer- Guadalajara is often referred to
their specific preferences. Once tify 60,000 specialized workers in as “Mexico’s Silicon Valley,” reflect-
a shortlist of countries is deter-
mined using this methodology, we
Figure: Key IT/BPO locations in Mexico
perform deep dives for each location
to understand the internal market
dynamics. This research requires Ciudad Juárez Monterrey
Hub for nearshore City features top
a thorough assessment of such BPO has security technical university
aspects as city-level talent availabil- concerns and homegrown
IT firms
ity, government incentives and
infrastructure. Here we provide
Santiago de
a brief outline of a city assessment Queretaro
for Mexico. We selected this coun- Hermosillo Less expensive
Tier 2 emerging location is an
try instead of several others in the location is aerospace hub
close to the
Index because not only is it a top U.S. West Coast
performer with a large industry, Mexico City
it also presents a range of capabil- Largest city has a
Culiacán Guadalajara BPO focus and a
ities across the country. Tier 2 location Mexico’s “Silicon deep pool of talent
Guadalajara and Monterrey are features contact Valley” is home to HP,
centers and IT IBM and Flextronics
the top locations in Mexico in terms
of talent availability and infrastruc- Note: BPO is business proc
process outsourcing
cess Source


world with relative ease. A major hurdle, however, now all Colombian school children receive English
is the level of English among professionals. As training. In Bogota, the “Talk to the World” cam-
Colombia’s currency appreciates, the government paign provides funding for companies to upgrade
will have to adjust to the fact that it will not be able their employees’ English capabilities.
to compete as a low-cost destination and will have Europe. The financial crisis pummeled many
to look higher on the value chain for advanced ser- economies in Europe, and fiscal woes in Greece,
vices such as architectural rendering and finance. Ireland and elsewhere have raised the specter that
To achieve this shift, several English-improvement the euro could fail. In the process, countries out-
programs have opened in the past few years, and side the eurozone that were once too expensive or

ing its history as a major electronics Though foreign firms have not yet pool, however, is shallower than the
center specializing in software design, been directly targeted, a general others listed above.
semiconductor design, embedded sense of unease is stifling invest- Ciudad Juárez has long been a
software and multimedia. General ment or expansion of operations in hub for nearshore BPO services, cap-
Electric, IBM, Intel, Hitachi, the area. italizing on its proximity to El Paso,
Hewlett-Packard, Siemens, Flextron- Mexico City hosts numerous Texas, just across the Rio Grande,
ics and Solectron have national head- large and small IT firms, domestic to turn large volumes of physical
quarters or major development cen- and foreign, offering voice, BPO documents into data. It is one of the
ters in the city. The region contains and KPO services. The growth of Mexican cities hit worst by drug-
16 ITO and BPO service centers, this sector in Mexico City is a natu- related violence, however, with more
150 software companies and 35 ral byproduct of the city’s economic than 3,000 homicides in 2010 alone.
design houses, but competition is weight and the synergies among the Hermosillo and the surrounding
fierce for the limited talent that broad range of businesses operating area is a tier-2 option just across the
speaks English. there. The city has shown increased border from the United States that in
Monterrey is an IT and BPO focus in recent years on BPO devel- the past has been primarily oriented
center, housing both international opment. The city and its environs toward manufacturing operations,
and domestic firms and home to contain 72 universities with IT but which is emerging as an IT desti-
Mexico’s most successful homegrown programs. nation in close proximity to clients
firms Softtek and Neoris. Softtek Queretaro provides an alternative on the U.S. West Coast.
was started by engineers from petro- location to the country’s established Culiacán is another tier-2 loca-
chemical company Alfa, while Neoris hubs and has gained prominence as tion. Its main focus is IT and contact
was a spin-off of the IT operations an aerospace hub and manufacturing centers. Many of the IT companies
of Mexican multinational cement site for Canadian aerospace and in Culiacán are working in state-sup-
giant CEMEX. Firms in Monterrey defense company Bombardier. The ported IT technology clusters.
have access to some of the country’s Queretaro site offers call-center and Other states, such as Aguascali-
top technical talent through the BPO capabilities; the knowledge entes, Zacatecas and Baja California,
Monterrey Technical Institute. base of the local population is high are also starting to develop strategies
However, Monterrey is experienc- and compensation costs are also less, to promote the IT/BPO sector,
ing an upsurge in drug war violence in part because of the location’s rela- mainly through technological parks
connected to the northern states. tive obscurity. The region’s labor and human capital initiatives.


had experienced long stretches of growth once However, he bundled his somewhat reassuring
again became viable offshoring options. message with a plea to Indian firms that they find
Estonia (11th), Latvia (13th) and Lithuania a way to invest in job growth in the United
(14th) are examples of countries that have climbed Kingdom. Trade relations between the two coun-
in the rankings as a direct consequence of the eco- tries have indeed become quite symbiotic, with
nomic crisis. Strong people skills have allowed jobs in the United Kingdom being created by
these countries to develop small but strong BPO Indian firms and vice versa.
and voice markets. The global financial crisis hit In addition to the United Kingdom, we also
all three (Latvia in particular) harder than most include two other main customer markets for IT/
countries, propelling them into a dire situation BPO services in Europe: Germany and France.
with rapidly expanding current account deficits. We use tier-2 cities (cities in areas of the country
Instead of devaluing their currencies, Latvia, that have a lower relative income level) in these
Lithuania and Estonia pursued what they called countries as a benchmark to compare them to the
“internal devaluation.” Their governments and offshore competition. For the United Kingdom,
private sectors cut wages by an average of 35 per- we use cities in Northeast England, Wales and
cent and slashed expenditures. As a result of these Northern Ireland as benchmarks. For Germany,
painful adjustments, cost levels became more we use Saxony in the former East Germany, and
competitive. Increased cost-competitiveness has for France, the region of Languedoc-Roussillon.
propelled these countries to the higher echelons of In Central and Eastern Europe, Poland is the
the Index and has already yielded new invest- top story, moving up 15 places to 24th after
ments in the IT/BPO sector. U.K.-based Barclays weathering the economic troubles and benefiting
opened an IT center in Vilnius in 2009, and U.S. from improved investor sentiment. Hungary
financial services company Western Union has (31st) and the Czech Republic (35th) also fared
also announced plans to establish a regional ser- slightly better this year because of decreasing wage
vice center in Lithuania. Significant growth is still levels. However, the nearshoring story in Europe
needed, however, to get the Baltic states on the still shows a shift to Bulgaria (17th), Romania
same turf as the more traditional European out- (25th) and the Middle East.
sourcing locations. Portugal (50th), Ireland (49th) and Spain
The United Kingdom rises substantially in (42nd) — which together with Greece (not
the rankings, from 31st in 2009 to 16th in 2011, included in the Index) have been grouped under
driven by steep drops in compensation costs the less-than-flattering acronym PIGS — are all
(14 percent in dollar terms). First and foremost, countries in financial distress and have not seen
however, the United Kingdom is a demand market improvement in the Index this year, as opposed to
for outsourcing. In what is now a rather regular the Baltic states. While some time in coming,
refrain on both sides of the Atlantic, British politi- the crises have just started to appear in these coun-
cians have decried outsourcing in the face of tries. Although austerity measures are being put
mounting unemployment. On a recent visit to forward, they have not yet taken effect. They are
India, however, British Prime Minister David also less likely to be as far-reaching as the extreme
Cameron tried to put to rest the notion that the measures taken by other European governments
United Kingdom would prevent IT outsourcing. (for example, the Latvian government). It should


be noted that currency devaluation is not an in recent years as an ideal offshoring location
option for these countries to increase competitive- for European firms taking advantage of the
ness as they are members of the eurozone. region’s proximity and vast pool of skilled talent.
Middle East and Africa. The region of the Indeed, North Africa has eclipsed several Eastern
Middle East and North Africa has emerged European locations, as demonstrated in this year’s

Industry Activity in the Top 10 Locations
The Global Services Location ITO from being primarily a contact- ing in BPO work. On voice work in
IndexTM ranks countries based on center hub. languages other than Chinese, how-
their attractiveness across IT, BPO For most countries, the outlook is ever, it is almost non-existent, other
and voice work, but all countries more complex, and success is deter- than a cluster of Japanese-language
have specific niches in which they mined by identifying a niche. China contact centers in the country’s
compete. For companies locating is a good example: It ranks second Northeast.
their shared services functions off- in the Index based on its strong off- As countries continue to special-
shore, it is not just a matter of pick- shore fundamentals, but its capabili- ize in offering services, it is impera-
ing the top countries in the Index. ties are mixed in terms of industry tive for buyers of services to under-
Deciding on an offshore location is activity. China is increasingly strong stand these differences when
a complex decision that must con- in the IT area and is rapidly improv- evaluating locations.
sider each country’s mix of capabil-
ities and specific niche in global
Figure: Industry activity in the top 10 countries
competition. To illustrate the differ-
ent profiles, we assessed the Index’s
top 10 locations based on their capa- Country BPO Voice ITO
bilities in IT, BPO and voice, and India
the industry activity in each of these
China
sectors (see figure).
India alone has proven able to Malaysia
compete in all dimensions. It is the
Egypt
preeminent destination and leader
in all fields of offshore services, excel- Indonesia
ling in IT thanks to its elite educa-
Mexico
tional institutions, in BPO because
of a large annual output of qualified Thailand
graduates, and in voice because of
Vietnam
the English capabilities of its pop-
ulation. The Philippines, an early Philippines
entrant into the service sector, is also
Chile
relatively well-rounded. It has had
Note: BPO is business process outsourcing; High industry activity Limited industry activity
more than a decade to hone its capa- ITO is information technology outsourcing
bilities and by now has moved into Source: A.T. Kearney Global Services Location IndexTM, 2011


Index, which features Egypt 4th in the world and There is significant diversity in the ranks of
the leader in the Middle East. The country has these top Asian players. India is the all-around
scored consistently well over time because of standout, able to provide manpower for any
its economical wage rates and large supply of type of offshoring activity. The Philippines’ long-
talent. The Egyptian government has also actively established tradition of providing leading call-
promoted the sector abroad while aggressively center support continues to be strong. China
pushing industry to bring its standards up to provides competitively priced high-end analytics
international levels. However, the recent political and engineering, while Malaysia attracts IT ser-
turmoil in the country could have long-term con- vices offshoring (see sidebar: Industry Activity
sequences for Egypt as a sourcing location. in the Top 10 Locations on page 13). The sectors
in Indonesia, Vietnam and Thailand, how-
ever, are in their relative infancy. These
countries have not yet devoted as much
as they could to promoting information
India, with its first-mover and communications technology, yet they
advantage and deep skill score highly in the Index because of vast
pools of talent and competitive wages
base, still maintains the (see sidebar: What’s Holding Back Thailand
and Indonesia? on page 16). In particular,
lion’s share of the IT Vietnam ranks as the most financially
attractive country for offshoring in the
services market. Index (see figure 4).
India, with its first-mover advantage
and deep skill base, remains the unques-
tioned leader in the Index — a half-point
The UAE is second in the region—15th over- ahead of China and a full point in front of
all—thanks to more competitive compensation Malaysia — and still maintains the lion’s share of
costs, a rise in the quality of its management the IT services market. On top of that, India’s IT
schools and an improvement in literacy scores. services stalwarts are moving up the value chain.
The UAE leads in headquarters functions and Companies such as Infosys and Wipro are pursu-
services, which support many multinational cor- ing their own R&D capabilities and expanding
porations throughout the region. Cost pressures well beyond their traditional vendor roles.
have also declined in the wake of the financial In the early years of offshoring, China was
crisis. Jordan (22nd) and Tunisia (23rd) remain in seen as a less-attractive option because of con-
the top 25. cerns about language capabilities and intellectual
Asia. The top three locations in the Index property security. The economy’s strong manu-
remain India, China and Malaysia. Asia also ranks facturing orientation has also meant that the
highly throughout the rest of the top 10, which service sector has remained largely undevel-
features Indonesia (5th), Thailand (7th), Vietnam oped. Now, as the economy transitions to include
(8th) and the Philippines (9th). more services, the government is supporting the


Figure 4
Vietnam leads in financial attractiveness

Financial attractiveness scores
Vietnam 7.07 0.53 0.57 8.17
Indonesia 6.95 0.59 0.56 8.10
Senegal 6.96 0.60 0.51 8.08
Pakistan 7.08 0.38 0.61 8.08
Ghana 7.10 0.26 0.67 8.03
Sri Lanka 7.12 0.41 0.47 7.99
Philippines 6.87 0.58 0.51 7.96
India 6.86 0.37 0.54 7.76
Egypt 6.53 0.75 0.46 7.74
Tunisia 6.30 0.77 0.57 7.64
Thailand 6.54 0.56 0.51 7.61
Jordan 6.39 0.48 0.55 7.42
Ukraine 6.37 0.42 0.35 7.14
Costa Rica 5.90 0.58 0.62 7.10
Morocco 6.00 0.56 0.51 7.07
Bulgaria 5.89 0.56 0.59 7.05
Jamaica 6.17 0.28 0.57 7.02
Malaysia 5.77 0.56 0.61 6.94
Panama 6.07 0.43 0.42 6.92
Mexico 5.68 0.44 0.58 6.69
China 5.74 0.51 0.31 6.55
Latvia 5.32 0.48 0.62 6.41
Romania 5.23 0.49 0.62 6.35
Lithuania 5.11 0.50 0.59 6.19
Russia 5.16 0.48 0.55 6.19
Argentina 5.31 0.41 0.40 6.12
Chile 5.16 0.75 6.10
Uruguay 4.99 0.38 0.68 6.06
United Arab Emirates 4.77 0.44 0.82 6.04
Mauritius 5.04 0.76 6.01
Colombia 5.03 0.31 0.50 5.84
Slovakia 4.88 0.38 0.56 5.82
Estonia 4.69 0.46 0.63 5.78
South Africa 4.40 0.70 0.57 5.67
Poland 4.29 0.39 0.67 5.35
Hungary 4.11 0.37 0.62 5.11
Brazil 4.40 0.52 5.06
Turkey 3.68 0.36 0.64 4.68
Czech Republic 3.50 0.38 0.65 4.53 Compensation costs
Israel 2.38 0.50 0.74 3.61 Infrastructure costs
Portugal 2.00 0.41 0.63 3.03
Tax and regulatory costs
Singapore 1.41 0.34 0.76 2.51
United Kingdom (tier 2) 1.12 0.37 0.79 2.28
Spain 1.03 0.41 0.59 2.03
Germany (tier 2) 0.80 0.40 0.70 1.89
Canada 0.62 0.76 1.40
Australia 0.53 0.75 1.28
United States (tier 2) 0.54 0.59 1.14
Ireland 0.28 0.76 1.04 Note: Values below 0.20 not shown due to space constraints.
France (tier 2) 0.36 0.59 0.95 Source: A.T. Kearney Global Services Location IndexTM, 2011

BPO sector with unprecedented enthusiasm. China makes its greatest impact, however; its
Improved skills — from language ability to engi- most attractive areas are high-end analytics and
neering — are turning China’s BPO centers into advanced IT, where it is an alternative to Russia
viable options. and Eastern Europe, and BPO, where it can be
China has begun offering specialized skills competitive with India. China is now developing
not only in English, but also Korean, Japanese and R&D capabilities as a necessary adjunct to its
Chinese. Call centers are unlikely to be where manufacturing capabilities, which creates a strong


What’s Holding Back Thailand and Indonesia?
The Global Services Location center in Bangkok, which it had ment, however, has committed
IndexTM measures the underlying acquired from Philips three years to ramping up investments in infra-
fundamentals that make a location earlier. What is holding back these structure in the future and we ex-
an attractive destination for service countries? pect to see improvements soon. In
delivery. However, in some top- Language. Language is a major Thailand, the unstable political situa-
ranked countries in the Index, there impediment. English has not been tion—showcased last spring in front
is no thriving industry — instead, taught historically in Thai or Indo- of the world’s TV cameras when the
there is great potential. Such is the nesian schools and is not used by army clashed with the opposition on
case in Thailand and Indonesia, these countries’ administrations. the streets of Bangkok—is creating
which are among the top 10 in the By comparison, in the Philippines, uncertainty among foreign investors.
Index but are not household names English is widely spoken as a result Hope remains, however, for improve-
in offshoring. These countries have of historic ties to the United States. ments after the upcoming elections.
the fundamentals in place to be While English instruction is part Government support. A lack of
successful service locations — they of curricula today in Thailand and government support has hampered
enjoy large workforces and competi- Indonesia, the quality of instruction the outsourcing sector as govern-
tive cost levels. Yet companies are is often lacking. ments spend their scarce resources
not flocking to Bangkok or Jakarta Business environment. Indonesia on promoting different industries.
to fill their needs — in fact, the suffers from a legacy of neglected With increased promotional efforts
opposite is happening. For exam- infrastructure invest-ments, mani- and removing crucial roadblocks,
ple, Infosys announced in July fested in poor electricity supply and Indonesia and Thailand could repeat
2010 that it was closing its BPO insufficient bandwidth. The govern- the Philippines’ success.

foundation for knowledge process outsourcing, BPO sector and generating $7.2 billion in reve-
also called KPO services. nues in 2009. Call centers make up the majority
The top two countries have even begun link- of the country’s operations, at $5 billion in reve-
ing up to expand their expertise. For example, nues, but growing BPO niches such as services
Indian firms Tata Consulting Services (TCS), catering to the healthcare and pharmaceutical
Infosys and Wipro have all established operations industries help fuel overall growth. Amid fierce
in Chengdu, China. Chengdu’s mayor, who competition from other regional players, the gov-
actively courted the Indian firms, told reporters ernment has launched a plan to build a virtual
that he dismisses language concerns: “As soft- BPO university and extend training in call-center
ware development will be in English for [both] skills to an additional 10,000 students to retain
the domestic market and exports, language its competitive edge. Meanwhile, Singapore is
will not be a problem for companies and their 32nd, as it once again is the global number one
professionals.”12 in the business environment category — but a
The Philippines remains an offshoring behe- small labor force and high costs give it a relatively
moth, employing half a million people in the lower ranking (see figure 5).
12
“Chengdu woos Indian firms to invest in China’s IT hub,” Nearshore Journal, 1 March 2010.


Figure 5
Singapore remains the leader in business environment

Business environment scores
Singapore 4.67 1.64 0.97 0.70 7.99
Germany (tier 2) 4.62 1.64 0.48 0.81 7.56
Canada 4.69 1.34 0.84 0.63 7.51
Estonia 4.48 1.62 0.86 0.51 7.48
United Kingdom (tier 2) 4.31 1.64 0.69 0.80 7.44
Australia 4.78 1.17 0.41 0.76 7.11
France (tier 2) 4.24 1.62 0.56 0.61 7.03
Ireland 4.21 1.16 0.95 0.60 6.92
United Arab Emirates 3.76 1.47 0.97 0.64 6.84
Czech Republic 3.85 1.31 0.92 0.67 6.76
Lithuania 4.17 1.43 0.70 0.43 6.73
United States (tier 2) 4.20 1.29 0.39 0.83 6.71
Latvia 4.17 1.08 0.88 0.40 6.53
Spain 3.77 1.25 0.55 0.69 6.25
Portugal 3.69 1.32 0.64 0.54 6.18
Malaysia 3.67 1.19 0.70 0.53 6.10
Chile 4.33 1.25 0.42 6.06
Hungary 3.62 1.17 0.61 0.66 6.06
Poland 3.81 0.97 0.70 0.55 6.03
Mauritius 3.62 0.93 0.72 0.39 5.65
Bulgaria 3.40 1.27 0.53 0.38 5.58
Slovakia 3.70 1.14 0.50 5.51
Romania 3.34 1.27 0.44 0.44 5.48
Israel 2.89 1.14 0.83 0.61 5.46
Costa Rica 3.47 1.01 0.33 0.39 5.20
Panama 3.30 1.15 0.36 4.97
Jordan 2.48 1.10 0.94 0.45 4.96
Mexico 3.32 0.75 0.31 0.43 4.81
Uruguay 2.84 1.06 0.47 0.37 4.74
Brazil 3.17 0.97 0.47 4.61
South Africa 3.18 0.79 0.58 4.56
Tunisia 2.56 1.14 0.47 0.39 4.55
Egypt 2.88 0.93 0.28 0.41 4.50
Jamaica 2.68 0.92 0.55 0.31 4.46
China 2.95 0.87 0.55 4.38
Thailand 2.73 1.10 0.36 4.31
Ghana 2.59 0.65 0.78 0.26 4.28
Morocco 2.25 0.95 0.67 0.34 4.21
Vietnam 2.62 0.98 0.30 4.13 Country risk
Colombia 2.36 1.03 0.41 3.94 Country infrastructure
Turkey 2.54 0.95 0.41 3.90
Cultural exposure
Philippines 1.97 0.71 0.80 0.38 3.86
India 2.56 0.57 0.59 3.81 Security of intellectual property
Senegal 2.39 0.70 0.30 .032 3.71
Sri Lanka 2.02 0.84 0.52 0.32 3.71
Argentina 2.35 0.96 0.29 3.63
Russia 2.16 0.99 0.34 3.56
Ukraine 2.00 0.90 0.25 0.26 3.41
Indonesia 2.40 0.66 0.32 3.38 Note: Values below 0.20 not shown due to space constraints.
Pakistan 1.34 0.53 0.36 0.29 2.52 Source: A.T. Kearney Global Services Location IndexTM, 2011

Glimmers of Hope lessness continue to roil the global economy. The
The headlines about persistent economic volatil- long-term prospects, however, appear little changed
ity may be here for some time. For the global ser- from our first edition. An increasingly intercon-
vices industry, the short term will remain rocky as nected world and increasing demand mean that
worries about sovereign debt, currencies and job- the global services industry remains on the rise.


Authors
Erik Peterson is managing director of the firm’s Global Business Policy Council. Based
in the Washington, D.C., office, he can be reached at erik.peterson@atkearney.com.
Johan Gott is a manager in the Washington, D.C., office. He can be reached
at johan.gott@atkearney.com.
Samantha King is a consultant in the Washington, D.C., office. She can be reached
at samantha.king@atkearney.com.

The authors wish to acknowledge the contributions of their colleague Rodrigo Slelatt,
principal in the organization and transformation practice, and Nora Patiño, a consultant
in the Mexico City office, in developing this report.


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