Offshoring for

Long-Term Advantage
The 2007 A.T. Kearney Global Services Location IndexTM
M
oving operations to low-cost countries offers a variety of
advantages — from reduced wages for qualified workers
to historically lower costs for businesses. The question is,
are these advantages short-lived? Already, for some locations, the
increasingly heated competition for talented and skilled workers has
resulted in a rise in wages and attrition rates.

Findings in the 2007 A.T. Kearney Global Services weighted combination of relative scores on 43
Location Index™ reveal that the relative cost measurements, which are grouped into three
advantage of the leading offshore destinations has categories: financial attractiveness, people and
declined almost universally. Nearly every country skills availability, and business environment (see
in the Index, even those that fell in the rankings, Appendix: About the Study). The two newest
improved their absolute scores, thus confirm- measures on the Index analyze the compensation
ing that competition among low-cost countries costs and relative experience of business process
is intensifying. Increasingly, simply maintaining outsourcing (BPO) analysts in offshore locations,
current performance levels is no longer sufficient in addition to contact center agents and IT pro-
for countries that want to attract (and retain) the fessionals; the latter two were also included in
fast-growing remote services business. In addition, past iterations of the Index.
this year’s findings suggest that while the wage Ten new countries have also been added to
advantage of offshore locations will continue for this year’s Index, reflecting the growing number
20 or more years, this advantage will diminish as of countries competing to become viable remote
demand for skilled workers increases in offshore services locations, and companies’ interest in
locations around the globe. finding offshore locations outside the established
Now in its fourth year, the Global Services destinations. The new countries are: Ukraine
Location Index, or GSLI, analyzes and ranks the and the three Baltic states in Eastern Europe;
top 50 locations worldwide that provide the most Sri Lanka and Pakistan in South Asia; Uruguay
common remote functions, including IT services in Latin America; and Morocco, Senegal and
and support, contact centers and back-office Mauritius, further expanding the Index’s coverage
support. Each country’s score is composed of a of francophone locations.

A.T. Kearney | offshoring for long-term advantage 1

 Figure 1
A.T. Kearney Global Services Location Index, 2007

Financial People and skills Business

Rank Country attractiveness availability environment Total score
1 India 3.22 2.34 1.44 7.00
2 China 2.93 2.25 1.38 6.56
3 Malaysia 2.84 1.26 2.02 6.12
4 Thailand 3.19 1.21 1.62 6.02
5 Brazil 2.64 1.78 1.47 5.89
6 Indonesia 3.29 1.47 1.06 5.82
7 Chile 2.65 1.18 1.93 5.76
8 Philippines 3.26 1.23 1.26 5.75
9 Bulgaria 3.16 1.04 1.56 5.75
10 Mexico 2.63 1.49 1.61 5.73
11 Singapore 1.65 1.51 2.53 5.68
12 Slovakia 2.79 1.04 1.79 5.62
13 Egypt 3.22 1.14 1.25 5.61
14 Jordan 3.09 0.98 1.54 5.60
15 Estonia 2.44 0.96 2.20 5.60
16 Czech Republic 2.43 1.10 2.05 5.57
17 Latvia 2.64 0.91 2.00 5.56
18 Poland 2.59 1.17 1.79 5.54
19 Vietnam 3.33 0.99 1.22 5.54
20 United Arab Emirates 2.73 0.86 1.92 5.51
21 United States (tier two) 0.48 2.74 2.29 5.51
22 Uruguay 2.95 0.98 1.54 5.47
23 Argentina 2.91 1.30 1.26 5.47
24 Hungary 2.54 0.95 1.98 5.47
25 Mauritius 2.84 1.04 1.56 5.44
26 Tunisia 3.03 0.90 1.50 5.43
27 Ghana 3.27 0.90 1.25 5.42
28 Lithuania 2.60 0.83 1.98 5.42
29 Sri Lanka 3.18 0.96 1.22 5.36
30 Pakistan 3.23 1.00 1.11 5.34
31 South Africa 2.52 1.18 1.60 5.30
32 Jamaica 2.83 0.96 1.49 5.29
33 Romania 2.88 0.87 1.53 5.28
34 Costa Rica 3.00 0.86 1.36 5.22
35 Canada 0.77 2.09 2.30 5.16
36 Morocco 2.92 0.90 1.33 5.14
37 Russia 2.61 1.38 1.16 5.14
38 Israel 1.97 1.27 1.86 5.10
39 Senegal 3.19 0.82 1.05 5.06
40 Germany (tier two) 0.46 2.19 2.40 5.05
41 Panama 2.88 0.75 1.40 5.02
42 United Kingdom (tier two) 0.50 2.16 2.35 5.01
43 Spain 1.18 1.71 2.06 4.95
44 New Zealand 1.53 1.12 2.25 4.91
45 Australia 0.89 1.69 2.31 4.89
46 Portugal 1.59 1.14 2.11 4.84
47 Ukraine 2.76 0.98 1.09 4.83
48 France (tier two) 0.45 2.07 2.27 4.79
49 Turkey 2.06 1.31 1.41 4.78
50 Ireland 0.40 1.54 2.29 4.18

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 and
skills availability, and business environment are on a scale of 0 to 3.
Source: A.T. Kearney

2 offshoring for long-term advantage | A.T. Kearney

 This paper presents an overview of the Index investment and the regulatory environment —
findings. It highlights the major strengths and not in attempts to control wages. Indeed, fail-
weaknesses of the most interesting locations in ure to improve the skills of the work force and
each region, and offers recommendations for the business environment will likely translate
strategically choosing global locations — deci- to a loss of competitiveness in the fast-moving
sions that maximize the long-term benefits of remote services business.
offshoring while offsetting rising wages and other India and China continue to lead the Index
developments. by a wide margin (see figure 1). Their declines

Summary of the Findings

Findings in this year’s GSLI suggest
the wage-cost advantage of offshore
locations will last for at least another Companies succeed in their
20 years. Although wages for services
such as IT, business processes and
offshore strategies by thinking
contact centers have started to rise
in offshore locations, these countries
holistically, and focusing on
will continue to provide competi- a global delivery model rather
tive costs under the most aggressive
projections of real wage inflation in than offshoring per se.
emerging markets.
The labor-cost changes are due
to downward pressure on wages in
certain sectors in developed coun-
tries—a situation reinforced by the U.S. dollar’s in cost advantage are offset by improved, more
depreciation against many currencies. At the available talent and enhanced business envi-
same time, key emerging markets in Southeast ronments. Southeast Asian countries reinforce
Asia, Latin America and Eastern Europe are their positions as the primary alternates to India
becoming more attractive in terms of talent, and China, with all six major ASEAN markets
industry experience, quality certifications and (Indonesia, Malaysia, the Philippines, Singapore,
regulatory environment. Thailand and Vietnam) now ranking among the
What is most striking about this year’s find- top 20 locations. Latin America performs well in
ings is how the relative cost advantage of the this year’s Index, with all five major contenders
leading offshore destinations declined almost (Argentina, Brazil, Chile, Mexico and Uruguay)
universally, while scores for people skills and rising in the rankings. This likely reflects new
business environment rose significantly. These policies to promote service exports in many of
findings send a message to policy-makers in both these countries.
developed and developing countries: The key to On other fronts, newer contenders in Central
maintaining and enhancing long-term competi- and Eastern Europe are outshining more estab-
tiveness lies in skills development, infrastructure lished locations, as Bulgaria, Slovakia and the

A.T. Kearney | offshoring for long-term advantage 3

 Figure 2
Comparing the 40 countries included in both the 2005 and 2007 Index

Index scores 2005 Index scores 2007

India 3.5 2.1 1.3 India 3.2 2.3 1.4
China 3.2 1.8 1.2 China 2.9 2.3 1.4
Malaysia 3.0 1.1 2.0 Malaysia 2.8 1.3 2.0
Philippines 3.6 1.2 1.0 Thailand 3.2 1.2 1.6
Singapore 1.6 1.4 2.7 Brazil 2.6 1.8 1.5
Thailand 3.3 0.9 1.5 Indonesia 3.3 1.5 1.1
Czech Republic 2.6 1.1 1.9 Chile 2.7 1.2 1.9
Chile 1.0 2.7 1.0 1.9 Philippines 3.3 1.2 1.3
Canada 1.1 2.0 2.4 Bulgaria 3.2 1.0 1.6
Brazil 2.9 1.4 1.2 Mexico 2.6 1.5 1.6
United States 0.5 2.7 2.2 Singapore 1.7 1.5 2.5
Egypt 3.5 1.0 1.0 Slovakia 2.8 1.0 1.8
Indonesia 3.5 1.0 0.9 Egypt 3.2 1.1 1.3
Jordan 3.0 0.9 1.4 Jordan 3.1 1.0 1.5
Bulgaria 3.3 0.9 1.1 Czech Republic 2.4 1.1 2.1
Slovakia 2.7 1.0 1.6 Poland 2.6 1.2 1.8
Mexico 2.9 1.2 1.2 Vietnam 3.3 1.0 1.2
Poland 2.7 1.1 1.4 U.A.E. 2.7 0.9 1.9
Hungary 2.6 0.9 1.6 United States 0.5 2.7 2.3
U.A.E. 2.7 0.6 1.9 Argentina 2.9 1.3 1.3
Costa Rica 3.0 0.8 1.3 Hungary 2.5 1.0 2.0
Ghana 3.6 0.6 0.9 Tunisia 3.0 0.9 1.5
Argentina 3.1 0.9 1.0 Ghana 3.3 0.9 1.3
Romania 3.0 0.9 1.0 South Africa 2.5 1.2 1.6
Jamaica 2.9 1.0 1.1 Jamaica 2.8 1.0 1.5
Vietnam 3.5 0.7 0.8 Romania 2.9 0.9 1.5
Russia 2.8 1.3 0.9 Costa Rica 3.0 0.9 1.4
United Kingdom 0.5 2.1 2.4 Canada 0.8 2.1 2.3
Australia 1.0 1.7 2.3 Russia 2.6 1.4 1.2
Tunisia 3.0 0.7 1.2 Israel 2.0 1.3 1.9
Germany 0.5 2.1 2.2 Germany 0.5 2.2 2.4
South Africa 2.8 0.8 1.2 Panama 2.9 0.8 1.4
Israel 1.9 1.2 1.7 United Kingdom 0.5 2.2 2.4
New Zealand 1.3 1.2 2.3 Spain 1.2 1.7 2.1
France 0.4 2.2 2.0 New Zealand 1.5 1.1 2.3
Panama 2.9 0.7 1.1 Australia 0.9 1.7 2.3
Portugal 1.6 0.9 1.8 Portugal 1.6 1.1 2.1
Spain 1.0 1.5 1.7 France 0.5 2.1 2.3
Ireland 0.4 1.4 2.2 Turkey 2.1 1.3 1.4
Turkey 2.1 0.9 0.9 Ireland 0.4 1.5 2.3

Financial attractiveness No movement

People and skills availability Rise
Business environment Fall Source: A.T. Kearney

4 offshoring for long-term advantage | A.T. Kearney

Baltic states move ahead while the Czech Republic, slightly shrinking, lead over China, confirm-
Hungary and Poland either slip or remain ing what industry surveys and visiting executives
unchanged in the rankings. The Middle East and repeatedly find — for all the concern about over-
Africa continue to rise, with Egypt, Jordan, the heating, wage inflation and service levels, India
United Arab Emirates (UAE), Tunisia, Ghana, still offers an unbeatable mix of low costs, deep
South Africa, Israel and Turkey all maintaining technical and language skills, mature vendors and
or improving their positions. And while most supportive government policies. In both India
“on-shore” or “near-shore” locations in developed and China, double-digit growth rates have fueled
countries improved their absolute scores, almost wage inflation, with average compensation costs
all fell in the rankings, as emerging markets for sample functions rising by around 30 percent
improved their scores (in people skills and busi- in China and 20 percent in India. But these cost
ness environment) at a faster rate (see figure 2). escalations have been matched by corresponding
A more detailed look at the GSLI’s major increases in skill supply and quality indicators.
findings follows. India maintains a strong lead in terms of
language skills and vendor maturity. This spring,
Asia: Still on Top Citigroup Inc. announced it would move as many
India and China continue to dominate the Index as 8,000 positions to India, particularly in equity
(see figure 3). India maintains its wide, albeit research, investment banking and back-office

Figure 3
India and China dominate the region, but other countries are reinforcing their positions

India 3.2 2.3 1.3 (#) indicates overall

Index ranking
China 2.9 2.3 1.4

Malaysia 2.8 1.3 2.0

Index ranking
Thailand 3.2 1.2 1.6 China (2)
1–10
Indonesia 3.3 1.5 1.1 11–20
21–30
Philippines 3.3 1.2 1.3
Pakistan India (1)
(30)
Singapore 1.7 1.5 2.5
Vietnam
Vietnam 3.3 1.0 1.2 (19) Philippines
Thailand
(4) (8)
Sri Lanka 3.2 1.0 1.2 Singapore
Sri Lanka (11)
Malaysia (3)
Pakistan 3.2 1.0 1.1 (29)

Financial attractiveness
People and skills availability Indonesia (6)
Business environment Source: A.T. Kearney

A.T. Kearney | offshoring for long-term advantage 5

 transaction-related activities. This is in addition to Southeast Asian nations continue to do
its 12,000 employees in the BPO division there. well in the Index, with Malaysia, Thailand, the
In-country shifts of resources away from expen- Philippines, Indonesia and Singapore occupying
sive and overburdened tier-one cities to tier-two five of the top 12 spots and Vietnam entering the
and tier-three cities, with their higher quality of top 20. Somewhat surprisingly, both Singapore
life and lower costs, can also be credited in part and the Philippines dropped several places in this
for the country’s continued competitiveness. year’s rankings. Singapore maintains its score from
China has been catching up to India in last year, but has been overtaken by larger, lower-
several areas. The country has increased university cost countries, namely Thailand and Indonesia,
enrollment by more than 25 percent, and almost now competing to become established as ser-
doubled the number of firms with Capability vice centers in the same way that Singapore did
20 years ago. In the Philippines, growth
in the sector and currency apprecia-
tion have driven up wages in U.S. dollar
terms by as much as 30 percent, reduc-
This spring, Citigroup Inc. ing relative cost advantage. Nevertheless,
announced it would move the Philippines remains one of the lowest
wage locations in the Index and now
as many as 8,000 positions offers the lowest telecom costs of any
country in the Index.
to India, particularly in equity Back-office outsourcing has become
a strongpoint for the Philippines, where
research, investment banking contact centers have been its traditional
competitive advantage. Back-office com-
and back-office activities. panies there provide services including
finance and accounting, human resource
management, payroll, logistics and pub-
lishing. With more than 60 providers
Maturity Model Integration (CMMI) and Inter- employing approximately 25,000 people, these
national Organization for Standardization (ISO) companies are able to attract global outsourcing
quality certifications. Chinese companies have leaders such as Convergys Corporation, which
committed to higher standards by earning these plans to open a new contact center in Cebu City
certifications, thus achieving a higher level of in the near future.
performance and competitiveness. Indeed, earlier Malaysia, Thailand, Indonesia and Vietnam
this year, divisions of Neusoft Group Ltd., which have also seen significant declines in telecom
offers IT outsourcing and BPO services, became costs, while slower growth rates have moderated
ISO 27001 certified, which makes Neusoft the wage inflation. At the same time, all six ASEAN
first of its kind to obtain such certification for countries have significantly improved quality indi-
both software outsourcing and BPO operations cators, increasing the number of CMMI certi-
in China. fied firms in the region from 100 in 2005 to more

6 offshoring for long-term advantage | A.T. Kearney

than 150 in 2006 and the number of ISO 27001 Pakistan is trying to enter the offshor-
certified firms from zero in 2005 to 45 in 2006. ing marketplace largely through contact centers
Despite rising in this year’s Index, Thailand and and back-office services. Companies have set up
Indonesia will likely remain challenged by lesser approximately 100 contact centers in the country
English language capabilities and concerns over in the past three years. In addition to telemarket-
their economic and political stability. ing, Pakistani workers provide payroll, accounting
Sri Lanka and Pakistan enter the Index for and human resources work.
the first time at 29 and 30, respectively. Both
countries offer many of the advantages of India, Latin America and the Caribbean:
with similar labor costs, widespread use of Bearing Fruit
English, strong education systems and increas- Latin American countries are collectively the big-
ingly open and well-regulated business envi- gest gainers in this year’s Index, with Brazil, Chile
ronments. However, both countries have only and Mexico rising to numbers five, seven and 10,
recently entered the offshore services sector and respectively (see figure 4). Spurred on by India’s
lack India’s breadth and depth of experience. success, governments in the region have begun
Both countries are also disadvantaged by their to recognize the potential of the export services
relatively smaller population base and obvious sector, particularly in the context of providing
concerns over internal security. near-shore support to North America and Iberia.

Figure 4
Latin American nations are the biggest gainers in this year’s Index

Brazil 2.6 1.8 1.5 Mexico (10) (#) indicates overall

Index ranking
Chile 2.7 1.2 1.9
Jamaica (32)
Mexico 2.6 1.5 1.6
Costa Rica (34)
Panama (41)
Uruguay 3.0 1.0 1.5

Argentina 2.9 1.3 1.3

Index ranking Brazil
Jamaica 1–10 (5)
2.8 1.0 1.5
11–20
Costa Rica 3.0 0.9 1.4 21–30
31–40
Panama 2.9 0.8 1.4 Chile (7)
41–50 Uruguay (22)

Argentina (23)
Financial attractiveness
People and skills availability
Business environment Source: A.T. Kearney

A.T. Kearney | offshoring for long-term advantage 7

 Despite currency appreciation, strong sector for the IT, engineering, finance and accounting
growth and corresponding wage inflation (aggra- sectors, announced in March that it had opened
vated by high non-wage labor costs imposed by a global recruiting center in Costa Rica. This
the government), Brazil has begun to leverage the subsidiary of iGATE Corporation, a global IT
strengths of its rapidly expanding university enroll- and BPO provider, said that it would have a staff
ment, quality certifications and indigenous IT of more than 100 within the next two years.
sector. Offshoring sources continue to grow their Jamaica holds more or less steady as the lead-
businesses with major multinational corporations ing contender in the English-speaking Caribbean,
by offering BPO, SAP and other data services. while Panama is beginning to catch up with neigh-
Mexican IT company Softtek expects to support boring Costa Rica. Similar to Uruguay, Panama
U.S. firms’ SAP deployments through companies enjoys a strong financial services sector and has
that it is acquiring in the Brazilian cities of Rio actively promoted its location as a banking center
de Janeiro, São Paulo and Porto Alegre. in Central America and the Caribbean.
While less spectacular than Brazil’s own
trajectory, Chile, Mexico and Argentina have Central and Eastern Europe:
seen significant sector growth (and corresponding New Contenders Climb the Rankings
wage inflation) and some increases in graduation The trend from last year continues as the estab-
rates and company certifications. Chile contin- lished service providers in the region—the Czech
ues to offer the best business environment and tax Republic, Hungary and Poland — lose ground
structure in the region, while Mexico leverages while emerging locations move up the rankings
its proximity to the United States and Argentina (see figure 5). Bulgaria replaces the Czech Republic
offers relatively lower costs. as the only country from the region in the top 10.
Uruguay makes a strong first appearance in Both Bulgaria and Romania see big jumps in their
the Index at 22, benefiting from relatively com- business environment scores as a result of reforms
petitive labor costs and a positive business environ- carried out to qualify for European Union mem-
ment, albeit disadvantaged by its small population. bership, a process that was successfully concluded
Uruguay enjoys a strong financial services sector, January 1, 2007. Despite a larger population base,
including a rich talent pool due to the country’s Romania’s relatively higher average wages put it
banking industry. Costa Rica is the traditional among the middle of the pack at 33. However,
leader in the Central American region and main- Romania’s Ministry of Economy and Commerce
tains its absolute score, but falls in the rankings announced a strategy last autumn to help build
as larger regional players enter the competition. the nation’s IT sector through international pro-
Weaker infrastructure and a decline in the per- motions of the country’s 3,000 IT companies and
ceived quality of the business environment remain funds for further developing its IT infrastructure,
problematic. On the other hand, plentiful IT pro- among other initiatives.
fessionals, favorable government policies for invest- Slovakia continues to do well, edging out
ment and relative economic, social and political the neighboring Czech Republic to reach 12.
stability help make Costa Rica an IT investment The Baltic states, Estonia, Latvia and Lithuania,
hot spot in the region. RPOworldwide, a provider jump into the Index with ranks of 15, 17 and
of offshore recruiting process outsourcing services 28, respectively. Albeit small in size, all three

8 offshoring for long-term advantage | A.T. Kearney

countries combine a business environment sim- ness, so they slip in the rankings despite maintain-
ilar to that of most developed countries with ing or improving their absolute scores. Among the
a superior cost structure. Estonia today is what big three Central European countries, only Poland
Ireland used to be 10 to 15 years ago, a rela- manages to maintain its position, thanks to lower
tively low-cost European location with largely wage inflation and infrastructure costs. Large tier-
untapped talent and a pro-business policy envi- two cities outside the main cities of Warsaw and
ronment. Their well-educated population has a Krakow also reinforce Poland’s advantage. Despite
strong focus on science, and wage costs here are competitive wages, large populations and strong
still considerably lower than Western European technical skills, very weak business environment
levels. Skype, the peer-to-peer Internet telephony scores (only Pakistan, Senegal and Indonesia fare
network owned by eBay, located a portion of its worse) leave Russia and newcomer Ukraine low in
applications work in Estonia to take advantage of the rankings at 37 and 47.
the country’s strong IT skills and low labor costs.
Continued improvement in the business Middle East and Africa: A Growing Cadre
environment in the Czech Republic and Hungary Contrary to the perceived challenges in both
cannot offset deterioration in cost competitive- regions, Middle Eastern and African countries

Figure 5
New contenders in Central and Eastern Europe outshine more established locations

Bulgaria 3.2 1.0 1.6

Slovakia 2.8 1.0 1.8

Estonia 2.4 1.0 2.2 Estonia (15)

Latvia (17) Russia (37)
Czech Republic 2.4 1.1 2.1
Lithuania (28)
Latvia 2.6 0.9 2.0 Czech Poland
Republic (16) (18)
Poland 2.6 1.2 1.8 Ukraine (47)
Slovakia (12)
Hungary 2.5 1.0 2.0

Lithuania 2.6 0.8 2.0 Hungary (24) Romania (33)

Bulgaria (9)
Romania 2.9 0.9 1.5

Russia 2.6 1.4 1.2

Index ranking (#) indicates overall
1–10
Index ranking
Ukraine 2.8 1.0 1.1
11–20
Financial attractiveness 21–30
People and skills availability 31–40
Business environment 41–50 Source: A.T. Kearney

A.T. Kearney | offshoring for long-term advantage 9

 are increasing their visibility as remote services manufacturer Valeo, for example, recently opened
locations. Egypt, Jordan and the UAE maintain an application development center in Cairo.
roughly the same positions in the top 20, reflect- Indian outsourcing vendors Satyam and Wipro
ing the increasing number of U.S., European are continuing their worldwide expansion by
and Asian companies choosing these locations setting up centers in Egypt.
as centers for regional or global support activi- The rise of Mauritius, Tunisia, Morocco and
ties (see figure 6). Dubai is particularly active as Senegal reflects growing interest in locations with
an offshore hub, given its liberal tax, investment the ability to serve francophone markets. Stronger
and residency laws. In fact, oil services giant business environments in Mauritius and Tunisia
Halliburton will relocate its corporate head- contend with lower costs and larger populations
quarters from Houston, Texas to Dubai in the in Morocco and Senegal. Ghana maintains its
first move of its kind by an American company. position as a low-cost English language location
Egypt has the largest talent base of any country in Africa, while South Africa, Israel and Turkey
in the Middle East, and is home to an increas- all see their rankings improve, largely as a result of
ing number of outsourcing centers operated by enhancements in policy environment and infra-
multinationals. French automotive components structure quality. Major U.K. telecommunications

Figure 6
More companies are choosing to offshore in the Middle East and Africa

Egypt 3.2 1.1 1.3 Tunisia (26) Turkey (48)

Morocco
Jordan 3.1 1.0 1.5
(36) Israel (38)
United Arab 2.7 0.9 1.9 Egypt Jordan
Emirates (14)
(13)
Ghana 3.3 0.9 1.3 U.A.E. (20)
Senegal
Mauritius 2.8 1.0 1.6 (39)

Tunisia 3.0 0.9 1.5

South Africa 2.5 1.2 1.6 Ghana (27)

Israel 2.0 1.3 1.9

(#) indicates overall Mauritius (25)
Morocco 2.9 0.9 1.3 Index ranking

Senegal 3.2 0.8 1.1

Index ranking
Turkey 2.1 1.3 1.4 1–10
11–20
Financial attractiveness 21–30
South Africa (31)
People and skills availability 31–40
Business environment 41–50 Source: A.T. Kearney

10 offshoring for long-term advantage | A.T. Kearney

firm TalkTalk plans to set up two contact centers new entrants (see figure 7). Once again, the United
in South Africa, the biggest foreign investment States scored significantly better than any of the
the country has yet seen for this industry. South European on-shore options, thanks mainly to its
Africa is expected to have 940 contact centers larger population size and industry depth. For
by 2008, nearly double the 490 such facilities it Canada and Australia, currency appreciation and
had in 2003. the subsequent wage inflation in U.S. dollar terms
eroded their cost advantages and hurt their rank-
Developed Economies: ings. The essential wisdom: Developed countries,
Slipping in the Rankings just as emerging markets, must continue to move
On-shore and near-shore locations in developed up the value chain to remain competitive.
countries all slipped in this year’s rankings. The
United States, the United Kingdom, Germany, Focus on Performance Not Savings
France, Spain, Portugal, New Zealand and Ireland A recent A.T. Kearney study finds that while off-
all maintained or improved their scores, but have shoring is often viewed as a way to reduce costs,
been overtaken by less-developed countries and the most successful companies focus less on saving

Figure 7
Developed nations should focus on moving up the value chain

United States 0.5 2.7 2.3

Canada 0.8 2.1 2.3

Canada
(35)
Germany 0.5 2.2 2.4

United Kingdom 0.5 2.2 2.4 United States (#) indicates

(21) overall Index
ranking
Spain 1.2 1.7 2.1

Index ranking United

New Zealand 1.5 1.1 2.3 Kingdom
1–10 (42)
Germany
Australia 0.9 1.7 2.3 11–20 (40)
Ireland (50)
21–30
France 0.5 2.1 2.3 31–40 France
41–50 (48)
Portugal 1.6 1.1 2.1
Portugal (46) Spain
(43)
Ireland 0.4 1.5 2.3
Australia
(45) New
Financial attractiveness Zealand
(44)
People and skills availability
Business environment Source: A.T. Kearney

A.T. Kearney | offshoring for long-term advantage 11

 money and more on improving operational per- succeed in their longer-term offshore strategies
formance.1 The study, which follows the prog- do two things that others don’t: They think holis-
ress of 42 leading blue-chip companies in various tically, and they base their strategies on building
stages of offshoring, found that companies that a global delivery model rather than offshoring
improved on three or more operational perfor- per se. In other words, when planning for the
mance measures saved 44 percent on average, future, top companies make decisions based on
while companies that improved on two or fewer their entire enterprise rather than simply choosing
measures saved only 30 percent on average. the next offshore destination. They determine
which activities could be
relocated during the next
decade, and design a foot-
Estonia today is similar to Ireland print today that takes into
account the needs of tomor-
10 to 15 years ago, a relatively row. The decision is often a
balancing act. For example,
low-cost European location with establishing a single mega
center is not advisable since
largely untapped talent and a the risks—business disruption
or a shortage of skilled work-
pro-business environment. ers — are often too great. A
plethora of centers is also
not the answer, as manage-
ment costs and coordination
The link between operational performance challenges soon become too large and offset any
and savings becomes evident when comparing advantages. Also, incrementally adding centers
answers from the best and poorest performers. For as the number of offshore functions grows is
example, when asked what they consider the most not advisable. Such a strategy risks creating a
important factors in offshoring success, executives string of locations that were the right choice
at the poorest-performing companies said savings at a certain point in time but, when taken
(at an average 50 percent). Only 34 percent of together, are not necessarily the optimal mix of
executives at the best-performing companies gave locations for the future.
the same answer. What’s more, the poorest per- What do offshore leaders do differently?
formers focused primarily on building capacity The leaders design a global footprint with a
and flexibility, while the best performers primarily number of centers around the world. For larger
focused on improving their organizational capa- companies, we recommend a “cluster” foot-
bilities, service levels, capacity and flexibility. print with operations located in different regions
What do these findings mean for compa- (see figure 8). The aim is to have a major func-
nies’ offshore location decisions? Companies that tion in one primary location supported by one

1
For the complete study findings, see Execution Is Everything: The Keys to Offshore Success at www.atkearney.com.

12 offshoring for long-term advantage | A.T. Kearney

or more secondary locations. The global foot- tion, the second- or third-best location could still
print model requires choosing locations based work if it can support a wider range of functions
on their ability to handle multiple tasks well and or allow for regional coverage.
with enough flexibility to ensure business conti- Designing a global footprint begins with a
nuity and to address changing needs. By stagger- universe of locations. The number of candidate
ing functions in multiple locations, companies locations is then narrowed down by filtering for
can make cost and benefit trade-offs and adjust risk tolerance, scale requirements, availability of
the functional mix over time as costs and avail- key skills and cost profile, among other consid-
ability of people vary. erations. Each function has its own requirements
When designing the global footprint, func- and by adjusting the filters depending on the skills
tional needs are assessed according to sensitivity profile and risk sensitivity, a short list of candi-
to business continuity and skills. For instance, date countries will emerge. By using qualitative
centers for low-end business transactions may be analysis, the short list of countries is consolidated
pure cost plays, while those for higher-end activi- into a final list of countries capable of supporting
ties will depend on the quality and availability of several functions.
the work force. Similarly, certain functions will be These locations should realize the best econ-
sensitive to service disruptions so should not be omies of scale and be limited to a manageable
placed in high risk areas. Language needs, time number. Because each center specializes in sev-
zones, cultures and regional coverage should also eral functions, it limits the number of centers
be factors in the decision. While one country needed and allows one center to pick up the slack
might be the ideal location for a particular func- if another center goes offline. Importantly, this

Figure 8
Long term, a footprint with a manageable number of clusters is ideal

Primary Illustrative
• European voice
• European IT
Primary and BPO
1 • French voice 4 Secondary
Primary • IT
Secondary 6
• HQ functions Primary
• English voice • European IT
and BPO • Chinese voice
• KPO
3 5 Secondary
Secondary
Primary • English voice
• IT
• IT • KPO
• BPO
• BPO • BPO
• Spanish voice
Secondary
Primary • BPO
• Spanish
2 voice
Secondary
• IT
Source: A.T. Kearney KPO = knowledge process outsourcing; BPO = business process outsourcing

A.T. Kearney | offshoring for long-term advantage 13

 model is flexible so tasks and functions can flow panies go into offshore locales for the cost
between centers over time as cost and talent situa- savings, there are longer-term implications that
tions change. This way, the global delivery model must factor into the decision. The best com-
insulates companies from change and delivers the panies — those that survive and thrive in their
right mix of costs and skills. offshore environments — create a diversified off-
shore strategy that is globally coherent and stress
Patience and Thoroughness Win in the End tolerant. In other words, it can withstand a
Sending functions or business processes to an decade or more of cost and wage increases and
offshore destination can be a complex, frus- other changes. Top companies ponder their
trating and time consuming venture. The first offshore strategies, making decisions from the
year promises little-to-no savings due to high uppermost levels of the company. In the end,
transition costs, and subsequent years can be their reward is an optimal global footprint —
harrowing when the offshore promise, whatever one that helps the company achieve and sustain
it was, fails to materialize. While most com- its long-term success.

Author

Johan Gott is a consultant in the Washington, D.C. office and can be reached at johan.gott@atkearney.com.

14 offshoring for long-term advantage | A.T. Kearney

Appendix: About the Study
The 50 countries included in this year’s Global Services Location Index were selected on the basis
of corporate input, current remote services activity and government initiatives to promote the sector.
As internationally consistent and verifiable data on these locations becomes available, we hope to
continue expanding the Index coverage in future years.

The 50 finalists were then evaluated against 43 measurements across three major categories: financial
attractiveness, people and skills availability, and business environment (see figure). The metrics used to
evaluate location attractiveness were determined from responses to A.T. Kearney and other industry
surveys, and knowledge obtained in client engagements during the past five years. In response to client
questions, we added the availability and relevant experience of BPO analysts to this year’s Index to
complement metrics covering IT outsourcing and contact center operations.

The relative weightings of each metric are based on their importance to the location decision, again
derived from client experience and industry surveys. Because cost advantage is typically the primary
driver behind location decisions, financial factors constitute 40 percent of the total weight in the
published Index. The two remaining categories — people and skills availability, and business environ-
ment—each constitute 30 percent of the total weight.

Index metrics
Category Sub-categories Metrics
Financial attractiveness Compensation costs • Average wages
(40%) • Median compensation costs for relevant positions (call-center
representatives, BPO analysts, IT programmers and local operations managers)

Infrastructure costs • Rental costs

• Commercial electricity rates
• International telecom costs
• Travel to major customer destinations

Tax and regulatory costs • Relative tax burden

• Corruption perception
• Currency appreciation or depreciation

People and skills Remote services sector • Size of existing IT and BPO sectors
availability experience and quality • Contact center and IT center quality certifications
(30%) ratings • Quality ratings of management schools and IT training

Labor force availability • Total work force

• University-educated work force
• Work force flexibility

Education and language • Scores on standardized education and language tests

Attrition risk • Relative IT and BPO sector growth and unemployment rates

Business environment Country environment • Investor and analyst ratings of overall business and political environment
(30%) • A.T. Kearney Foreign Direct Investment Confidence IndexTM
• Security risk
• Regulatory burden and employment rigidity
• Government support for the information and communications technology (ICT) sector

Infrastructure • Overall infrastructure quality

• Quality of telecom, Internet, and electricity infrastructure

Cultural exposure • Personal interaction score from A.T. Kearney Globalization IndexTM

Security of intellectual • Investor ratings of IP protection and ICT laws

property (IP) • Software piracy rates
• Information security certifications

Source: A.T. Kearney

A.T. Kearney | offshoring for long-term advantage 15

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