Pros and cons of IT outsourcing in popular Asian countries

The benefits and challenges of IT outsourcing in India, China, the Philippines and Vietnam range from pricing to intellectual property barriers. Learn more here.

IT outsourcing seems poised to make a recovery in the latter half of 2009, and CIOs are looking to get outsourced IT projects back on track. For enterprises interested in starting or increasing their outsourcing activities, what are the latest pros and cons of IT outsourcing in various global locations?

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There are some general guidelines, such as those offered by Frances Karamouzis, a research vice president at Stamford, Conn.-based consultancy Gartner Inc.: "We tell clients to look at the countries, cities and specific government incentives and alignment with the outsourcing industry," she said.

And then there are more country-specific considerations. Here, we discuss some of the pros and cons of IT outsourcing in India, China, the Philippines and Vietnam with Karamouzis and David Rutchik, a partner at Pace Harmon, which offers technology sourcing consulting services and recently published a report on the effects of foreign exchange rates on IT outsourcing deals.


   INDIA

Overview: Gartner calls India "the undisputed leader in offshore services," and with good reason. The country is strong in application development and maintenance, remote infrastructure monitoring, business process outsourcing (BPO) and other non-IT outsourcing areas such as finance, accounting and human resources (HR). The scale and cost of labor make India an attractive location, even as a recent scandal may have taken some of the shine off its reputation.

Pros:

Large labor pool. "Initially, they really had the scale and labor pool going for them, fundamentally driven by a very extensive educational system," Karamouzis said. Schools aimed at math, science and engineering, and vocational school specifically focused on SAP or Microsoft training, mean that employees are "very aligned to the pure demands in the technology marketplace."

Transparency in operations. Indian companies tend to invite their U.S. colleagues to see how they work, opening their books on everything from cost structure to what they pay employees. "It allows American and European clients to get over the trust factor very quickly," Karamouzis said.

Country-wide camaraderie. If a U.S. company decides to build its own offshore captive center in India, "most of the vendors say, 'Let us know if you need help or want to see our facilities,'" Karamouzis said. In their view, "this was business for India Inc., and Indian employment rates went up."

Currency exchange rate. The Indian rupee has devalued about 25% compared with the U.S. dollar over the past several years, Rutchik says. These currency savings can offset inflation and cost-of-living adjustments that otherwise might increase the price of a multi-year IT outsourcing contract.

Cons:

Perception. Some American companies remain wary of offshoring in India in the wake of the financial scandal at Satyam Computer Services Ltd. earlier this year. But Rutchik argues that the Satyam scandal was actually good for Indian offshoring. "It wasn't systemic," he said. "By shining a light on it, governance processes are going to be much greater."

Infrastructure. Despite dramatic investment increases, there is a strained power capacity and inadequate local and international connectivity. Karamouzis said it's not unusual for the lights at an offshoring company in Bangalore to suddenly shut off several times a day, which could affect the speed of your outsourcer's work.

Lack of privacy and security laws. Although improving in this area, India lacks U.S.-style state breach notification requirements and privacy legislation such as the Health Insurance Portability and Accountability Act, so U.S. clients must replicate these requirements contractually, according to "Gartner's 30 Leading Locations for Offshore Services," a report released late last year.


   CHINA

Overview: China's size and low costs of labor relative to India position the country well for IT outsourcing success, but language barriers and intellectual property concerns might be preventing it from being a top-tier offshoring location for U.S. companies.

Pros:

Cost. Salaries for IT employees in China are extremely competitive relative to many other low-cost destinations for offshoring, although expect to pay a premium for English-language capabilities, according to Gartner.

Entry to Chinese market. Placing operations in China can provide a strong foothold for doing business in that country. Karamouzis said she recently spoke to a tire manufacturer looking to offshore in China in part because it wants to align its outsourcing work with product sales there.

Strong infrastructure spending. The country has steadily invested in the development of its telecommunications infrastructure, road, rail services and air travel, so outsourcers in technology parks can meet the needs of their clients and it's easy to get around. In addition, technology parks are located close to airports, according to Gartner.

Cons:

Intellectual property concerns. Copyright protections are not nearly as strong in China as they are in the U.S., leading to bootlegged copies of IT software potentially costing U.S. companies billions of dollars in revenue, Rutchik said. "The laws are there to some degree, but they're not enforced, so companies have been less comfortable having their application development and maintenance conducted there," he said. As such, U.S. companies should put extra efforts into establishing a solid risk management plan.

Language. Although the government is investing in English-language programs, lack of fluency still makes it difficult for U.S. IT shops to work with Chinese IT shops. "That's keeping China from really growing the way it otherwise could," Rutchik said.

Inner-country competition. The view that any IT outsourcing activity in China benefits the country as a whole is not as strong as in India, for example. "In China, when you go to different provinces, they badmouth other locations," Karamouzis said. As such, U.S. companies should not expect the same advice on real estate or operations that they might receive in some other countries.


   THE PHILIPPINES

Overview: The Filipino familiarity with American language and culture is a big plus. The Philippines has been in the IT outsourcing field for a long time and has the infrastructure to support its operations. In addition to call centers, the Philippines offers effective BPO, application development and maintenance and lower-level help desk operations, according to Rutchik. But continued political instability and social unrest make some U.S. companies rethink IT outsourcing there.

Pros:

We tell clients
to look at the countries, cities and specific government incentives and alignment with the outsourcing industry.

Frances Karamouzis
research vice presidentGartner Inc.

Good language skills. English is predominantly spoken in the Philippines, with accents hewing more closely to Americans' than in many other Asian offshoring locations, Karamouzis said.

Cultural compatibility. "Everyone in the Philippines grows up with Nickelodeon and ESPN … so they're very in tune with the culture of the U.S.," Karamouzis said. In addition, according to Gartner the country is "perceived to be relatively liberal with its civil and political rights for its citizens."

Cost. The salaries for IT outsourcing and BPO employees are among the lowest in the world, according to Gartner.

Cons:

Distance. Be prepared for some long red-eye flights if you conduct IT outsourcing business in the Philippines. "It's probably the furthest place you can go back and forth on trips," Karamouzis said.

Crime and terrorism fears. Corruption continues to have an adverse effect on the country's growth, and political instability stemming from social unrest and insurgency remains, according to Gartner. Kidnapping is a concern for some higher-level officials, Karamouzis said. "The minute something happens, no one would want to travel there," she said. "If you open a captive center or have vendors there, it would be very disruptive to the project."


   VIETNAM

Overview:

An emerging location for IT outsourcing, analysts point to low costs but warn about a lack of language comprehension and government support for outsourcing efforts.

Pros:

Cost. The cost of labor is approximately one-third the cost of labor in India, Karamouzis said.

Young, educated talent pool. About two-thirds of the population is under the age of 30, Karamouzis said, adding primary through secondary education "is absolutely top-notch."

Cons:

Lack of vendor selection. There are fewer vendors to choose from, and the only captives that have been successful there are on a very large scale, Karamouzis said. In addition, Gartner finds a "significant lack of awareness of key business practices and operating norms."

Lack of government guidance. "Vietnam doesn't have the kind of concierge service where government organizations help you find real estate, navigate real estate filings and put you in touch with HR organizations and the telecom vendors you need," Karamouzis said. U.S. companies should be prepared to do this legwork themselves.

Next week: The pros and cons of IT outsourcing in Mexico, Brazil and Argentina.

Let us know what you think about the story; email Rachel Lebeaux, Associate Editor, or follow her on Twitter @rlebeaux.

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