Competition grows for global offshoring

India and China will be the main winners from an increase in offshoring but Eastern Europe is also set to benefit, according to a report.

India and China will be the main winners from an increase in offshoring but Eastern Europe is also set to benefit, according to CEO Briefing, a report published this week by the Economist Intelligence Unit.

The report, which includes a new ranking of 60 global offshoring environments and a survey of 500 senior executives, concludes that companies will redistribute more service functions to Asia and Eastern Europe over the next three years. Only a few developed markets emerge as attractive offshoring locations, with Canada leading the way among OECD countries.

The impact of offshoring (the relocation as a company's service functions abroad) continues to grow, with 57 percent of executives in the survey citing outsourcing and offshoring as critical forces reshaping the global marketplace (up from 51 percent last year). The survey, which captured the views of CEOs and other senior executives on a range of management issues, shows companies are now offshoring a wide range of service functions including IT, payroll, finance and accounting, logistics and manufacturing, as well as customer services.

Global ranking of top locations for offshoring

1. Score 7.76 - India
2. Score 7.34 - China
3. Score 7.26 - Czech Republic
4. Score 7.25 - Singapore
5. Score 7.24 - Poland
6. Score 7.23 - Canada
7. Score 7.19 - Hong Kong
8. Score 7.17 - Hungary
9. Score 7.17 - Philippines
10. Score 7.16 - Thailand
11. Score 7.13 - Malaysia
12. Score 7.12 - Slovakia
13. Score 7.09 - Bulgaria
14. Score 7.08 - Romania
15. Score 7.08 - Chile
20. Score 6.91 - USA
29. Score 6.60 - UK

Source: Economist Intelligence Unit, 2005

The Economist Intelligence Unit's ranking model measures the attractiveness of 60 countries as destinations for offshoring, scoring each country on nine criteria commonly used by companies when deciding where to offshore. Countries were scored on labor costs, labor skills, labor regulation, proximity to major sources of investment, political and security risk, macroeconomic stability, regulatory environment, tax regime, and infrastructure. The key findings were as follows:

• Asia increases its offshoring dominance. The ranking shows India to be by far the most attractive offshoring destination, owing to a large number of English-speaking graduates, very low labor costs and its developed legal system. China comes second owing to its cheap and plentiful labor supply and fast-improving infrastructure, but lags behind India because of its relative lack of English skills, cultural barriers and a weak legal system. Overall, Asian companies dominate the rankings, occupying 6 of the top 10 locations.

• Eastern Europe will also benefit. Although Eastern Europe currently attracts only a small number of offshoring projects, the ranking indicates that the region will become a major offshoring centre in the future. The Czech Republic leads the way, taking third place behind India and China because of its relatively low-cost skilled labor force, an attractive regulatory environment, as well as close proximity and cultural ties to Western Europe.

• Canada is the most attractive developed country. Canada comes 6th in the rankings, making it the only OECD country in the top 15. Canada features a highly attractive business environment (it tops our separate Business Environment Rankings as a destination for foreign direct investment), but also has relatively low labor costs for a developed country. Canada benefits from close proximity to the US, while its highly skilled work force and excellent infrastructure make it particularly attractive for knowledge-intensive activities.

"India and China are already the leading destinations for offshoring, and have the potential to win an even bigger share of offshoring projects if they address remaining weaknesses in their business environments," says Daniel Franklin, Editorial Director of the Economist Intelligence Unit.

"With outsourcing and offshoring becoming critical forces for business, it is important that businesses look internally both at their motivation for offshoring and their ability to manage such a function. Offshoring cannot fix broken processes but in fact may only serve to exacerbate the problems, irrespective of the location chosen," says Andrew Briggs, Dimension Data's head of contact centers business.

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