Wherever a company decides to locate a shared service centre (SSC), information technology offshoring (ITO) or business process outsourcing (BPO) operation, more often than not the decision is based on money.

“Cost is the primary factor,” says Bob Cecil, managing director of Equa Terra, a multinational outsourcing and insourcing advisory firm. Although the industry is undergoing a natural pull back and demographic realignment, Mr Cecil warns that this is only a short-term trend: “The industry is experiencing an increase in work activity, but is seeing a decrease in its overall rate of growth. It has everything to do with supply and demand.”


India has been the favoured recipient for business in the SSC outsourcing industry. DTZ Research India reports that the IT and IT-enabled services (IT/ITES) industry is the main driver for commercial real estate demand across India, particularly in New Delhi and Bangalore. The industry has grown at a 36% compound annual rate over the past decade, and is expected to account for more than 7% of India’s gross domestic product and 30% of foreign exchange inflows by 2008, creating more than two million jobs. In 2005 alone, the IT/ITES sector absorbed about 9.1 million square metres of space across India.

Slowdown in India

The sector will continue to grow, but research firm Forrester indicates that India is facing a slowdown, particularly in tier-one locations, such as New Delhi and Bangalore. It pegs high attrition rates, rising staffing costs, increased competition and continuing pressures on margins as the reason. Forrester predicts the sector growth rate will slow to about 30% next year from about 35% currently and that growth will occur in tier-two cities, such as Chandigarh, Indore, Kochi and Kolkata, thanks to their cost and infrastructure advantages.

“There is pressure on skilled resources in India, especially in major centres,” says Cliff Justice, Equa Terra globalisation practice leader. “Companies try to move transactional activities into lower cost areas so that those resources are not impacted by the wage inflation taking place.”

Some critics attribute recent cases of fraud as a reason for some of India’s slowdown. But Mr Justice warns: “These are isolated, and it is critical not to paint the whole industry with a broad brush.”

One case involved a sophisticated scheme of leaking data at HSBC’s India centre. It was a blow to the generally held position that captive BPO and IT centres are safer than those run by third parties. But Mr Justice points out that third-party vendors’ employee due-diligence and security practices are typically better than those of the captives because vendors try their best to win the confidence of clients and prospects.

Another factor working against India is that its tax advantage disappears in 2009. Consequently, primarily cost factors are driving companies to set up operations in China, Vietnam, the Philippines, Malaysia and Cambodia. “China and the Philippines are typically the first areas for tier-two development,” says Mr Cecil.

Rising Asian locations

A study by AT Kearney points to China becoming especially attractive for multinationals that want to serve the country’s growing domestic market. The Gartner Group estimates China’s ITO business will grow by 44% annually, potentially becoming a $2.5bn industry by 2008. The reason is that China offers the same attraction as India or the Philippines for sending IT and business processes offshore: educated and ample cheap labour.

Sri Lanka has been identified as a good location because it is at the same stage that India was at eight years ago, with good language skills available at low costs. BPO providers WNS, Quatrro and Office Tiger have a centre each in Sri Lanka.

Other rising locations include Malaysia and Vietnam, particularly for near-shoring. In 2004, Vsource, which provides customised global BPO services to clients worldwide, became the first company in Malaysia to achieve COPC-2000r Standard Certification, a world-class benchmark of productivity, efficiency and cost-effectiveness. India’s Wipro BPO is planning to start a new centre in Vietnam. Similarly, ICICI OneSource has announced plans to explore China and Vietnam.

European trend

Whereas locations in Asia are excellent for finding talented and cost-effective staff and infrastructure, eastern Europe has developed into a hot spot for multi-lingual capabilities and cost benefits. Poland, the Czech Republic, Slovakia and Hungary are picking up business. Central European nations that have joined the EU benefit from the strict EU data privacy rules that make it hard to outsource those services out of Europe.

“The rules are broad and generally do not allow identifying data to people,” says Deborah Kops, head of programmes, planning and development at New York and Brussels-headquarter Shared Services and Business Process Outsourcing Association. And, whereas India offers basic transaction services, eastern Europe provides more sophisticated functions in market research and calculations, she says.

Romania has been so successful that it has been dubbed “the India of Europe”. Call centre solutions provider EasyCall is headquartered in Bucharest. It was founded in 2002 with a comprehensive team of specialists serving customers throughout the country.

“These are firms that are looking up their value chain at processes that are more complicated,” says Ms Kops. “I recently had a conversation with a major financial services company that was looking for mathematicians in Hungary because its methods of training responded appropriately to that of Hungary’s.”

With the press giving so much attention to the wave of offshoring that has been occurring, there are reports of a trend toward reverse offshoring. Mr Cecil, however, considers these to be isolated instances. “We see cases like Dell bringing some of the work back to North America,” he states. “But this is an exception, not the rule.”

Outsourcers of services are becoming more savvy about their offshore requirements, such as business continuity planning, and are building this into future centres.

Benefits of caution

Mr Cecil predicts that in the short term, the build-out of new centres will probably slow down offshore as outsourcers become more cautious about moving to new locales with new centres. Long term, outsourcers will find there is both economic and operational diversity with more sites to choose between. This means they will be able to shift work to different countries if wages increase in one country. Operationally they will benefit from better business continuity with multiple country sites in case of political or natural disruption.

Ms Kop observes: “One of the things we see is companies in the SSC industry looking very carefully at a region before making a leap. Their moves are very calculated.”

But expansion announcements are not expected just yet from countries such as Ghana and Pakistan that say they want to get into the SSC game. “Companies will watch closely who is going where and are well aware of competition,” says Ms Kop. Of course, when GE first went to India, that was considered daring.