Gartner's 30 Leading Locations for Offshore Services,

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1 Research Publication Date: 13 December 2010 ID Number: G Gartner's 30 Leading Locations for Offshore Services, Ian Marriott Gartner has selected the Top 30 countries for offshore services and rated each one according to 10 criteria. We summarize regional characteristics and list countries that did not qualify for the Top Gartner, Inc. and/or its affiliates. All rights reserved. Gartner is a registered trademark of Gartner, Inc. or its affiliates. This publication may not be reproduced or distributed in any form without Gartner's prior written permission. The information contained in this publication has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information and shall have no liability for errors, omissions or inadequacies in such information. This publication consists of the opinions of Gartner's research organization and should not be construed as statements of fact. The opinions expressed herein are subject to change without notice. Although Gartner research may include a discussion of related legal issues, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner is a public company, and its shareholders may include firms and funds that have financial interests in entities covered in Gartner research. Gartner's Board of Directors may include senior managers of these firms or funds. Gartner research is produced independently by its research organization without input or influence from these firms, funds or their managers. For further information on the independence and integrity of Gartner research, see "Guiding Principles on Independence and Objectivity" on its website,

2 ANALYSIS Many organizations that choose to move IT services to lower-cost countries are daunted by the task of determining which country (or countries) would best host their operations. Gartner has used 10 criteria to analyze how suitable countries are for offshore IT and IT-enabled service work. This report lists our current Top 30 countries for globally sourced activities. Sourcing managers and service providers should use this list of countries and ratings to help determine which locations are right for their organizations. This year the Top 30 countries are exclusively "emerging" nations. As the pace of change is slower in developed countries we have focused on those locations that are still maturing and developing, domestically and internationally. Developed countries such as Australia, Canada, Ireland, Israel, New Zealand, Singapore and Spain are not a part of this year's series of "leading" offshore location reports. However, they should obviously still be considered important in the context of "nearshore" locations whose maturity albeit with somewhat lower cost advantage offers significant benefits for organizations seeking a balanced portfolio of countries from which services are delivered. Gartner continues to analyze these developed countries, and so the comparative ratings in each of our country reports take into account the performance of both emerging and developed locations. For example, none of the Top 30 countries this year score higher than "good" for global and legal maturity, whereas it is reasonable to expect that all developed countries would score either "very good" or "excellent" in this category. Objective and Methodology Gartner has completed its annual analysis of 30 countries to assess their capability and potential as offshore service locations. We have identified 10 categories that we believe are important to consider when looking at a potential location for offshore or "nearshore" IT or business process services. Each category has been rated on a five-point scale from "poor," through "fair," "good," "very good" and "excellent." This provides an at-a-glance view of the current comparative status of that country, although a more detailed level of assessment was used to arrive at this simple categorization. The separate reports on each country are intended to be brief, high-level perspectives. They cite some key data points and give a brief analysis in addition to the Gartner rating for each criterion. They are an assessment of the country's current status. In a number of cases, countries have made investments to improve an area of weakness or enhance current strengths. The benefit of these investments may not yet be visible, in which case it has not been reflected in the rating. For example, investments in English-language education will take some time to have a demonstrable effect. These reports point to a country's suitability for offshore service work, which could be related to applications, business processes or infrastructure. Some adjustments would need to be applied to the ratings (for example, the availability of specific skills in the labor pool) if they were to focus on one specific service line, so this level of granularity is omitted from the reports. Similarly, these reports do not address offshore outsourcing specifically. They can also be used by those seeking an outsourcing arrangement or those wanting to set up a captive center. The aim of the reports was not to rank each country, as each organization will have a different view of which factors are most important for its needs. For the same reason, we have not included an overall rating for each country. However, comparative analysis at a regional and global level was conducted to ensure balance in the assessments. The countries were evaluated based on insights from Gartner analysts, taken from their own experiences in, and knowledge of, these regions. Multiple additional sources were used to provide useful data points to substantiate, or provide a counterpoint to, our assessments. Where Publication Date: 13 December 2010/ID Number: G Page 2 of 11

3 possible, common data points have been gathered from independent organizations to provide a consistent view across these countries (see the Sources section below). The following criteria were used to assess each country. Gartner's 10 Criteria Language We assessed each country's language proficiency and capability alignment with its major target market. The assessment included written and verbal competency in the context of technical and business discussions. While the English-speaking market constitutes the bulk of offshore service demand today, due account was taken of other relevant language skills that would benefit buyers (such as German-language skills in Eastern Europe, or Japanese-language skills in Asia/Pacific). Government Support This measured the degree to which government agencies and ministries actively promote the country as an offshore destination, and how they communicate their country's attributes, establish agencies for development opportunities and advocate local service providers. We also looked at governments' commitments to develop educational systems that would create skilled workers to support the IT industry, and the provision of fiscal and other incentives to promote foreign direct investment or drive the development of local firms' opportunities overseas. Labor Pool Here, we looked at the quality and quantity of the current labor pool and its future scalability. We assessed the skill level in certain disciplines or areas of expertise, including project management skills, software development competency (including design, business analysis and architecture skills), R&D and business process experience. It was also necessary to take into account the numbers of graduates in each country's resource pool today, and project what might happen in the future. In this criterion, we also evaluated each country's work conditions, career opportunities and the modernity of facilities. We considered the labor advocacy, employee benefits and general adherence to maintaining high standards to ensure that the country can provide the labor skills and experience that companies may need. Infrastructure This measured the robustness, quality, stability and pervasiveness of each country's physical infrastructure, including power, telecommunications and satellites, as well as its transportation facilities for roads, rail service, air travel, and ports into and around the country. Educational System We assessed the quality of each country's educational system, the quantity of colleges and universities, and the number of new graduates in IT-related disciplines. Cost This category measured the costs of labor and other compensation, real estate, infrastructure and telecommunications. We evaluated each country's cost-competitiveness primarily by labor rates, relative to the most and least competitive countries. Publication Date: 13 December 2010/ID Number: G Page 3 of 11

4 Political and Economic Environment This assessed the stability of the system of government, levels of corruption, geopolitical risks and security. It also measured the degree to which a country's political system and financial strength create a stable environment today, and in the future, for companies to develop, and for the country to evolve as an offshore location. In addition, we looked at the potential for terrorism or war, the participation or support of trade unions, and financial issues, such as currency volatility and gross domestic product (GDP) growth. Cultural Compatibility We studied whether the cultural attributes of the offshore location make it easy to do business with the major buying locations. This assessment included cultural affinity and adaptability to multicultural approaches to support an international business environment. We also assessed accessibility, including proximity to the major buying locations, ease of travel to that country and time zone differences. Global and Legal Maturity This category assessed the presence of multinational service providers in each country and the propensity of corporations to locate captive centers there. We measured the degree to which the country's legal system is lawful and legitimate by reasonable international standards, including overall legislation, taxation and the existence of intellectual property laws. We assessed the legal system's ability to provide support to foreign entities doing business in that country, including reliable means for contractual redress or prosecution. Data and Intellectual Property Security and Privacy We measured the effectiveness of legislation relating to the protection of intellectual property, data protection and privacy, copyright, trademark and patent laws. We also assessed the enforcement of such legislation, the ethos within the country toward such protection and the maturity of the country's information security industry. Gartner's Top 30 Offshore Locations, 2010 Gartner's Top 30 locations for offshore services, alphabetically by region, are: Americas: Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Panama and Peru. Asia/Pacific: Bangladesh, China, India, Indonesia, Malaysia, the Philippines, Sri Lanka, Thailand and Vietnam. Europe, the Middle East and Africa (EMEA): Bulgaria, the Czech Republic, Egypt, Hungary, Mauritius, Morocco, Poland, Romania, Russia, Slovakia, South Africa, Turkey and Ukraine. Gartner's assessments of these 30 locations can be found in the following reports: "Analysis of Argentina as an Offshore Services Location." "Analysis of Bangladesh as an Offshore Services Location, 2010." "Analysis of Brazil as an Offshore Services Location, 2010." "Analysis of Bulgaria as an Offshore Services Location." "Analysis of Chile as an Offshore Services Location." Publication Date: 13 December 2010/ID Number: G Page 4 of 11

5 "Analysis of China as an Offshore Services Location." "Analysis of Colombia as an Offshore Services Location." "Analysis of Costa Rica as an Offshore Services Location." "Analysis of the Czech Republic as an Offshore Services Location." "Analysis of Egypt as an Offshore Services Location." "Analysis of Hungary as an Offshore Services Location." "Analysis of India as an Offshore Services Location, 2010." "Analysis of Indonesia as an Offshore Services Location." "Analysis of Malaysia as an Offshore Services Location, 2010." "Analysis of Mauritius as an Offshore Services Location" "Analysis of Mexico as an Offshore Services Location." "Analysis of Morocco as an Offshore Services Location." "Analysis of Panama as an Offshore Services Location." "Analysis of Peru as an Offshore Services Location." "Analysis of the Philippines as an Offshore Services Location, 2010." "Analysis of Poland as an Offshore Services Location." "Analysis of Romania as an Offshore Services Location." "Analysis of Russia as an Offshore Services Location." "Analysis of Slovakia as an Offshore Services Location." "Analysis of South Africa as an Offshore Services Location." "Analysis of Sri Lanka as an Offshore Services Location." "Analysis of Thailand as an Offshore Services Location, 2010." "Analysis of Turkey as an Offshore Services Location." "Analysis of Ukraine as an Offshore Services Location." "Analysis of Vietnam as an Offshore Services Location, 2010." The past 12 months have seen considerable efforts from many countries to consolidate or grow their positions as leading locations for offshore services. Emerging nations have placed significant emphasis on IT and business process services providing a vehicle for their economic growth, as many potential trading partners are moving from recession to tentative growth. The result of this is that eight new countries have moved into the Top 30 five for the first time (Bangladesh, Bulgaria, Colombia, Mauritius and Peru), and three re-entrants (Panama, Sri Lanka and Turkey). Reflecting our change of methodology, the seven developed countries have moved out of the Top 30 (Australia, Canada, Ireland, Israel, New Zealand, Singapore and Spain). In addition, Uruguay has also been displaced not because it has been performing worse over the Publication Date: 13 December 2010/ID Number: G Page 5 of 11

6 past year, but because this dynamic market has seen other countries making more noticeable progress. While the top 30 countries demonstrated their prominence in developing or enhancing their suitability as offshore services locations, another 48 countries are also considered potential offshore or nearshore countries (including the developed/mature locations). The emerging nations among the 48 countries have either exhibited initial activities to establish an environment that would be considered attractive for companies considering their own investments in a lower-cost country, or have external service providers located there that are beginning to sell services beyond their domestic market. The developed nations have a mature domestic environment with high ratings for their IT and business process labor pool, strong infrastructure, mature legislation (including effective data/intellectual property security and privacy protection), and often significant investment from multinational service providers. However, they frequently perform poorly on cost comparisons with emerging locations. Of these 48 countries, the leading 11 developed countries considered for offshore services are: Americas: Canada. Asia/Pacific: Australia, New Zealand, Singapore. EMEA: Ireland, Israel, Northern Ireland, Portugal, Scotland, Spain and Wales. The following 37 countries (emerging and developed) with potential were also considered: Americas: Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Jamaica, Nicaragua, Puerto Rico, Uruguay and Venezuela. Asia/Pacific: Pakistan and Taiwan. EMEA: Algeria, Armenia, Bahrain, Belarus, Croatia, Cyprus, Dubai, Estonia, Ghana, Isle of Man, Kenya, Kosovo, Latvia, Lithuania, Macedonia, Madagascar, Malta, Moldova, Nigeria, Saudi Arabia, Senegal, Serbia, Slovenia, Tunisia, Uganda. Regional Summaries Americas This year eight countries from Latin America appeared in the final list of 30, compared with seven from the Americas as a whole in previous years. This indicates the progress being made in this region. These countries are becoming (and, in some cases, already are) an attractive proposition for the largest buying market for offshore services the United States. Colombia and Peru entered the list of leading Latin American countries for the first time this year, and Panama reentered the list. No countries in this region were rated higher than "good" for language. An increasing number of U.S. enterprises now require Spanish language from their providers for communicating with parts of their workforce that speak Spanish as a first language. Although Latin American countries are able to leverage their Spanish language skills in the United States, English language capabilities are still developing. Brazil dropped back to "fair" this year in our comparative analysis of language skills, from "good" last year. Other countries were largely unchanged. Chile, Costa Rica, Mexico and Panama were all rated "good" in this category. In the past, a lack of government support for offshore initiatives has restricted development by countries in the Americas. Currently Mexico and Chile are rated "very good," with Brazil and Costa Rica meriting a "good" rating. Mexico leads the ratings for labor pool with a "very good" Publication Date: 13 December 2010/ID Number: G Page 6 of 11

7 score, and is followed by Brazil and Chile both "good." The region performed creditably in terms of infrastructure, with Brazil and Chile performing best ("very good") and Argentina and Colombia worst ("fair"). In the educational system category, Chile, Mexico and Costa Rica were the highest ranked countries with a rating of "good;" Costa Rica having moved up from a rating of "fair" last year. Panama scored lowest with a "poor" rating. In the key evaluation criterion of cost, Mexico was the only country in the region to score "very good;" all others were rated "good," although for Argentina this was a step down from last year's score of "very good." In the rating for political and economic environment, Brazil was clearly the top performing nation with a rating of "excellent," moving up from "very good" last year. Chile was placed second in the region with a rating of "very good," and Argentina trailed with a rating of "fair." However, notable progress was also made by Costa Rica, moving up from "fair" to "good." Cultural compatibility is a category in which Latin American countries are consistently rated highly. Brazil and Mexico were, this year, joined by Costa Rica in being rated "very good;" all other countries were rated "good." No country exceeded a rating of "good" for global and legal maturity, with Argentina, Colombia and Costa Rica only rated "fair." As observed in other regions, data and intellectual property security and privacy remain a work in progress for many developing countries. Although Mexico is again considered "very good," the other Latin American nations fared less well in our reports. All the other countries were only considered "fair" (Costa Rica dropping back from "good" last year), and Argentina again scored a comparative rating of "poor." Asia/Pacific Nine countries from Asia/Pacific were represented in the 30 leading countries, compared with 10 in previous years. These included the undisputed leader in offshore services India and the greatest challenger in terms of potential scale China. This year Bangladesh enters the list of leading countries for the first time, and Sri Lanka returns to the Top 30 after a two-year absence. The other five countries offer a variety of challenges, but some of the most attractive costs in the world. The Philippines, India and Malaysia were all rated as "very good" for language skills, whereas all other countries were considered no better than "fair;" this may inhibit their growth in offshore services until further progress is made. Government support for promoting their countries as offshore service locations was strong in India ("excellent"), China and Malaysia (both "very good") with notable progress being made by Malaysia in moving up from a rating of "good" last year; Indonesia continues to be considered "poor" for government support. The combination of skills, existing scale and future scalability gave India a labor pool advantage over other countries in the region; Vietnam improved its position in this category, joining China, Malaysia and the Philippines on a rating of "good;" Indonesia managed to improve its comparative rating from "poor" to "fair." China and Malaysia continued to improve their positions and were both rated highly ("very good") for infrastructure, while Bangladesh fared worst with a rating of "poor." China, India, Malaysia and the Philippines again led the rankings for educational system all being rated "good;" the remaining countries were considered "fair." On cost, there was an overall change of leader, with Vietnam moving down to "very good" and Indonesia moving up to "excellent" (the top score across all the countries we analyzed). All other countries in the region were rated "very good" for cost, with the exception of Malaysia, which was rated "good." Overall, the cost dimension for the Asia/Pacific region continues to offer an advantage over the Americas and EMEA. In the remaining categories, the region is noticeably weaker. The political and economic environment remains a concern for many companies when moving work to offshore locations; China's economic strength moved its rating from "good" to "very good" in this year's analysis, but otherwise there was little change. India was the only other country to rate "very good" in this area. Malaysia ranked third in the region with a rating of "good," but all other countries were "fair," apart from Thailand, which remained "poor." In terms of cultural Publication Date: 13 December 2010/ID Number: G Page 7 of 11

8 compatibility, several countries improved their position over the past 12 months. India joined the Philippines in leading the ratings with an improvement from "good" to "very good," while China and Vietnam also improved to join Malaysia and Thailand on a rating of "good." Global and legal maturity is still an area of weakness for the region, with only India and Malaysia reaching a rating of "good;" all other countries rated "fair," including the Philippines, which had been rated "good" in last year's analysis. The final category of data and intellectual property security and privacy also remains a significant issue for the emerging countries in the region, with six of the nine countries (Bangladesh, China, Indonesia, Sri Lanka, Thailand and Vietnam) rated "poor;" India was rated "good," with both Malaysia and the Philippines considered "fair." EMEA The final list of 30 countries included 13 from EMEA. Bulgaria and Mauritius entered the Top 30 for the first time, and Turkey returned to the list after a two year absence. The remaining 10 countries included a mix of European Union (EU) members (Czech Republic, Hungary, Poland, Romania and Slovakia), some European nations that remain outside the EU (Russia and the Ukraine), and three African countries (Egypt, Morocco and South Africa). South Africa fared well for language skills, because of the quality and quantity of English speakers, with a rating of "very good" (although this is down from last year's "excellent"). Other countries were also given credit for the availability of alternative languages that address the needs of an increasing number of continental European buyers. Notably, Morocco has been successfully leveraging its French language skills. Only Bulgaria, Hungary, Russia and the Ukraine were rated lower than "good." Only Egypt achieved a rating higher than "good" for government support, reflecting the amount of focus still needed to create an environment that will support the drive of these nations to become a part of organizations' global delivery models, although South Africa did improve its rating from "fair" to "good." The lowest scoring country was again the Ukraine ("poor"). The labor pool ratings were also indicative of some limitations, either in quality or in the scale of appropriate resources; again, no country achieved a rating higher than "good." Egypt and Romania both improved their rating to "good" in this year's analysis, although South Africa slipped back in comparative terms to "fair" after improving to "good" the previous year. In the assessment of infrastructure, again no country scored higher than "good," and the Ukraine remained "poor." Some progress was made by Poland, moving up to a rating of "good," while Russia slipped back to "fair" from a rating of "good" the previous year. In comparative terms across the Top 30 countries, we observed some deterioration in the scores for educational systems; Russia slipped back this year from "very good" to "good," while Hungary and Romania moved from "good" to "fair." This indicated some growing challenges in the focus and investment by some countries in their educational systems. Last year's leaders on cost attractiveness (Egypt, Slovakia and the Ukraine) all slipped back from ratings of "very good" to "good," while Russia moved back from "good" to "fair," indicating the cost pressures now being exerted by a combination of the economic downturn (including exchange rate fluctuations) and increased demand on somewhat limited resources. There was little change in the ratings in the political and economic environment category. The Czech Republic and Poland ("very good") continue to lead the ratings in this region. Hungary, Romania, Russia and Slovakia have all failed to increase their scores after slipping back last year, as a result of economic challenges. Cultural compatibility remained variable, although only Bulgaria and the Ukraine were rated lower than "good;" Mauritius joined Poland and South Africa with the highest rating of "very good." In recent years, many countries in EMEA have become nearshore centers for traditional service providers and large Indian providers. This is reflected in the global and legal maturity section, where eight of the 13 countries were rated "good" (Egypt making notable improvements here), and no countries scored lower than "fair." Few countries in this region, with the exception of Russia, have a good selection of local service providers actively selling their capabilities outside Publication Date: 13 December 2010/ID Number: G Page 8 of 11

9 their own country. In the final category of data and intellectual property security and privacy, as in the other regions, ratings largely reflected the lack of maturation in these emerging nations. The Czech Republic joined South Africa with the highest rating in this category ("very good"), while the Ukraine had the lowest score ("poor"). Considering Service Providers In this increasingly dynamic global environment, multinational providers will continue to extend their footprint in different geographies, carrying with them their expertise and maturity, while local providers will strive to become offshore providers, searching for opportunities and niches they can explore. Therefore, even though some countries are rated poorly for some categories, clients may find individual providers global and local whose capabilities mitigate some of the risks (for example, in the area of intellectual property protection). Each location greatly influences the characteristics of providers that are present there but, at the provider level, only specific due diligence will identify their ability to transcend shortcomings in a specific geography. Sources Sources used in compiling these reports included: gartner.com. Factiva database. OneSource database. IHS Global Insight. Economist Intelligence Unit. EBSCO. World Bank. World Audit. Transparency International. IMD World Competitiveness Yearbook. U.S. Department of Commerce. ISI Emerging Markets. Multiple government resources. doingbusiness.org. CIA World Factbook. U.S. Department of State. United Nations Educational, Scientific and Cultural Organization (UNESCO). Organisation for Economic Co-operation and Development (OECD). emarketer. Publication Date: 13 December 2010/ID Number: G Page 9 of 11

10 Asian Development Bank (ADB). International Labour Organization (ILO). Federation of International Trade Associations (FITA). Business Software Alliance (BSA). U.S. Agency for International Development. Vision of Humanity. RECOMMENDED READING "Toolkit: How to Select the Right Offshore Service Location for Outsourcing or Captive Services" "Assess Your Offshore Readiness: Use Gartner's Offshore Sourcing Maturity Model" "How to Assess Country Options for Offshore Outsourcing and Captive Centers" "Factors That Influence the Effectiveness and Levels of Offshore Services" "Gartner on Outsourcing, " "Tutorial for Defining Key Offshore Services and Global Delivery Terms" "Tutorial for Navigating Privacy Legislation in Europe" "What Buyers Need to Know About the Changing Global Outsourcing Competitive Landscape" "Six Best Practices for Offshore Outsourcing" Publication Date: 13 December 2010/ID Number: G Page 10 of 11

11 REGIONAL HEADQUARTERS Corporate Headquarters 56 Top Gallant Road Stamford, CT U.S.A European Headquarters Tamesis The Glanty Egham Surrey, TW20 9AW UNITED KINGDOM Asia/Pacific Headquarters Gartner Australasia Pty. Ltd. Level 9, 141 Walker Street North Sydney New South Wales 2060 AUSTRALIA Japan Headquarters Gartner Japan Ltd. Aobadai Hills, 6F 7-7, Aobadai, 4-chome Meguro-ku, Tokyo JAPAN Latin America Headquarters Gartner do Brazil Av. das Nações Unidas, andar World Trade Center São Paulo SP BRAZIL Publication Date: 13 December 2010/ID Number: G Page 11 of 11