Rating the Up-and-Coming Offshore Outsourcing Hotspots

Offshore/outsourcing firms in Malaysia, Indonesia, the Philippines, and Thailand might lack the resources of Indian heavyweights such as Tata or WiPro, but they aren't sitting still.

India and China continue to be the biggest (and most established) names in offshore outsourcing according to new research from market-watcher Gartner Inc. Both countries increasingly have plenty of competition, however.

A new Gartner report paints a picture of thriving outsourcing ecosystems in several Asia-Pacific locales -- such as Malaysia, Indonesia, the Philippines, Thailand, and Vietnam.

The new offshore firms currently lack the resources, infrastructure, and reach of established heavyweights such as Tata or WiPro, but the upstarts aren't sitting still. Moreover, like their Indian and Chinese rivals, many are getting boosts from their national governments. The upshot, according to Gartner, is that most Asia-Pacific outsourcers (with the exceptions of Indonesia and Vietnam) are able to offer good to excellent infrastructure services.

"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, in a statement. "Some of these countries have invested considerably and leveraged increased demand for lower-cost services. The global financial crisis forced many organizations to place a greater emphasis on cost optimization."

The Gartner report, 10 Leading Locations for Offshore Services in Asia Pacific and Japan for 2010, lists India as the top offshore destination, with China as (a still distant) number two. Elsewhere, however, things are considerably more competitive: everyone, Gartner says, has an angle.

Australia, New Zealand, and Singapore, for example, compete (and differentiate) based both on the comparative maturity of their outsourcing services and on the relative stability or intelligibility of their outsourcing practices: all three countries earned high marks for political and economic stability, as well as for language skills. Upstart entrants, on the other hand, largely compete on cost.

Vietnam, for example, leverages rock-bottom pricing to offset its deficiencies in other areas. It fared particularly poorly on the data and intellectual property and security and privacy measures, according to Gartner.

On the other hand, the analyst firm notes, Malaysia, Thailand, the Philippines, and Indonesia have been able to achieve a kind of happy medium between low-cost and adequate service. All four countries position themselves as low-cost alternatives -- albeit with fewer bona fides (e.g., resources, experience, or reputation) -- to established (but in some cases more costly) options elsewhere in the Asia-Pacific region. All four countries turned in Top-10 finishes in Gartner's latest offshore outsourcing tally.

The efforts of both outsourcing upstarts and established contenders (a grouping that includes China, Australia, New Zealand, and Singapore) appear to be bearing fruit, according to Gartner. For example, even though India's outsourcing industry continues to grow, the sub-continent's share of the overall outsourcing pie is steadily shrinking. What's more, Indian outsourcers are now grappling with many of the same issues -- including wage inflation, turnover, or financial inconsistencies -- that bedevil established services firms in first-world locales.

Outsourcing upstarts are also thinking tactically, Gartner notes. "In view of India's dominance, many countries trying to tap into this market are reassessing their strategy and looking at niche markets [such as call centers], logistics, and other back-office functions where they might have a physical proximity advantage over mature countries like Australia, Hong Kong, and Singapore," Longwood said.

Indonesia, which this year displaced Pakistan in Gartner's Asia-Pacific Top 10, improved its standing by concentrating on what it does best -- in its case, mining and manufacturing. Its internal stability didn't hurt it, either.

"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," Longwood explained.

Gartner said outsources are especially wary of political or economic instability. In this respect, offshore destinations such as Thailand, Vietnam, and the Philippines are viewed as less stable than other locales.

"While low cost is an important factor, the political and economic environment remains a concern for many companies when moving business to offshore locations," a Gartner statement pointed out.