Gartner Identifies Top 10 Locations For Offshore Services In APAC

India and China remain the undisputed leaders for offshore IT and business process outsourcing services in the Asia Pacific region, however, a number of countries are making considerable investments in this area and positioning themselves as credible alternatives, according to Gartner’s latest research.

For the report ‘10 Leading Locations for Offshore Services in Asia Pacific and Japan for 2010’, Gartner analysed the capabilities and potential of various countries as offshore services locations in the region.

“Countries such as Malaysia, the Philippines and Vietnam have continued to strengthen their position against leading alternatives, while Indonesia has entered the top 10 for the first time,” said Jim Longwood, Research Vice President at Gartner. “Some of these countries have invested considerably and leveraged increased demand for lower-cost services. The global financial crisis forced many organisations to place a greater emphasis on cost optimisation.”

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The 10 leading countries in Asia Pacific included the undisputed leader in offshore services India, with China remaining the greatest challenger in terms of potential scale. The other countries include a mix of mature environments that offer limited cost benefits (Australia, New Zealand and Singapore) and emerging countries with a variety of challenges, but attractive costs (Malaysia, Indonesia, the Philippines, Thailand and Vietnam).

During the last 12 months, there has been significant activity in many countries to consolidate or grow their positions as leading locations for offshore services, according to Gartner. Although India continues to grow in terms of IT services being exported, its relative share of the overall worldwide total has declined as a result. India is also starting to face some challenges including wage inflation, local attrition rates, geopolitical issues and financial irregularities, which are opening opportunities for other countries that are also improving their capabilities to target local service demands of more-mature regional Asian clients.

“In view of India’s dominance, many countries trying to tap into this market are reassessing their strategy and looking at niche markets like call centres, logistics and other back-office functions where they might have a physical proximity advantage over mature countries like Australia, Hong Kong and Singapore,” said Longwood.

Indonesia was a new entrant into the top 10 list this year due to its expanding business environment targeting both offshore IT and business services, its large labour pool and its well-established industry base in mining and manufacturing involving prominent multinational companies. Pakistan dropped off the top 10 list.

“This was largely due to Indonesia’s noticeable progress in addressing offshore opportunities rather than Pakistan’s drop in performance, but political instability was also an issue here,” said Longwood.

The global financial crisis and US currency fluctuations still remain a challenge for offshore vendors and clients. While the Asia Pacific region is experiencing a lesser impact from the global financial crisis, varying currency exchange rates against the US dollar have affected the attractiveness of some countries in the region. Countries like Australia, whose currency rebounded strongly, should see an increase in domestic demand for offshore services and a marginal decrease in its attractiveness for niche services.

“As organisations increasingly look at global delivery as a means to reduce cost, they will need to focus on important areas such as security, data and IP protection and compliance,” said Longwood. “However, the link between lower risk and higher cost holds true.”

Infrastructure is the only area where most countries ranged from good to excellent, with Vietnam and Indonesia the only exceptions. Most locations were considered good to very good for language and cultural compatibility whilst China, Indonesia, Thailand and Vietnam weren’t rated as strongly.

In addition to the top 10, four other countries were also strongly considered: Pakistan, Sri Lanka, Bangladesh and North Korea. All of these countries have started to establish attractive environments for companies looking for low-cost countries or that have external service providers located in these countries that are beginning to sell services beyond the domestic market.