In what could be viewed as unfortunate timing, management consultancy A.T. Kearney released its annual Global Services Location Index last week naming Egypt the fourth most attractive location in the world for offshore services outsourcing -- up two spots from its sixth-place ranking in 2010.
"We did our research before the unrest began," explains Johan Gott, manager of the A.T. Kearney's Global Services Location Index. "Emerging markets in general tend to be more risky than developed markets. You had the Mumbai attacks [of 2008] that at the time created uncertainty around India as a offshoring destination. In Thailand, there were the riots around Bangkok last year. These things happen. We don't want to minimize the impact in Egypt. Short term, it's a very serious issue. Long term, it's too soon to tell."
The index, which ranks 50 countries based on financial attractiveness, people skills and availability, and business environment, placed Mexico number six in offshoring attractiveness -- up five spots from last year -- even as narcotics-related violence continues in the country's northern states.
The main reason for Mexico's rise? The country's average wages decreased 18 per cent in dollar terms last year. "They suffered economically as result of global financial crisis," says Samantha King, a consultant in A.T. Kearney's Washington, D.C. office. "Also on the skills side, Mexico has one of the largest number of CMM-I [Capability Maturity Model-Integration] certifications in the world. The government has sponsored the services sector and has done a tremendous job of increasing capabilities."
India Stays at The Top
India, China and Malaysia were ranked number one, two, and three, respectively, as they have been since A.T. Kearney began producing the index in 2003.
And India isn't likely to budge anytime soon. "There's India and then there's everyone else," Gott says. "They have a very strong talent base. Their costs are still low. And most importantly, India has transformed itself from a provider of low-value code factory type work to move higher and higher up the value chain."
China's massive labor pool and low costs take some of the sting out of language issues and security concerns, but the country overall has placed less emphasis on services than it has on manufacturing, says Gott. And Malaysia has developed a niche in multimedia services.
The United States, 18th overall, came in first specifically for people skills and availability yet again, but faces some challenges to that HR dominance, according to Gott. "America creates some of the best talent in the world -- the top 10 to 20 per cent are world-class. The problem is that broader base of talent," Gott says. "The American education system is hard pressed to produce evenly high quality and those spikes and troughs create some difficulty."
Canada, Jordan and Jamaica Slip
Hard times led to some big gains for a number of countries on the list. The United Kingdom, Poland, Latvia, Russia and the United Arab Emirates moved up the most on this year's list but may slip again in coming years. "I'd be careful in terms of looking at these as necessarily permanent shifts. Some of them are due to pretty large currency movements or how the financial crisis hit these countries," Gott says. "If and when we exit the crisis, we're going to see [their] wage levels moving up."
Because cost cutting is usually the primary driver for offshoring, financial factors constitute 40 per cent of the total weight of A.T. Kearney's country rankings, with people skills and availability and business environment constituting just 30 per cent each. But managers of the index have no plans to change those weightings to factor in geopolitical risks (which fall under the business environment category) more heavily.
"We're comfortable with 40-30-30 ratio," says Gott. "If you ask our clients, they'll tell you they want a location that's very safe, very low cost and has the best people in world. We try to strike that balance so that we can dispassionately differentiate between countries without the kind biases that appear in the media."
The index, Gott cautions, should be viewed as a starting point for offshoring location decisions. "It's a good way to short-list some countries, but you have to take that extra step and do your own qualitative research," he says.
A.T. Kearney Index of Most Attractive Countries for Offshore Outsourcing 2011 (Last year's rankings are shown in parentheses.)
1. India (1)
2. China (2)
3. Malaysia (3)
4. Egypt (6 )
5. Indonesia (5)
6. Mexico (11)
7. Thailand (4)
8. Vietnam (10)
9. Philippines (7)
10. Chile (8)
11. Estonia (18)
12. Brazil (12)
13. Latvia (22)
14. Lithuania (21)
15. United Arab Emirates (29)
16. United Kingdom (31)
17. Bulgaria (13)
18. United States (14)
19. Costa Rica (23)
20. Russia (33)
21. Sri Lanka (16)
22. Jordon (9)
23. Tunisia (17)
24. Poland (38)
25. Romania (19)
Source: A.T. Kearney's 2011 Global Services Location Index