6 Offshore Outsourcing Hot Spots for 2010

Industry watchers predict an increase in offshore IT outsourcing in the new year. But 2010 is hardly expected to be a banner year for offshoring—better than 2009 but far from historic growth levels.

The headlines in offshore outsourcing in 2010 may focus less on the quantity of work organizations are sending overseas and more on where they’re sending it. Leading companies will begin developing networks of offshore locations for outsourcing: They’ll supplement contracts with vendors in more developed locales like India and the Philippines with new relationships in emerging markets in Latin America, Asia and Africa. Of course, “risk averse buyers will not venture too far afield in 2010,” says Stan Lepeak, managing director of global research for EquaTerra.

Here are six offshore locations liable to loom large in IT services in 2010.

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China. Analysts and industry watchers have nattered for years about the nascent but promising IT services industry in the world’s most populous nation. But issues including lack of English language skills, business immaturity, IP protection concerns, and lack of managerial talent has prevented China from moving ahead as a destination for offshoring in a major way. In 2010, China is likely to garner attention mostly as a near-shore outsourcing center. “Where China can demonstrate its language advantage, it will be the destination of choice for organizations in Japan and other Asian countries,” says EquaTerra’s Shanghai-based consultant Vibhash Ranjan.

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“One of the key factors that will determine whether the growth can continue into the future is if the government encourages structural change in state-owned enterprises (SOEs),” says Melany Williams, partner and managing director of IT service provider consultancy TPI Momentum. “A tipping point will be when the Chinese government encourages the outsourcing of selected functions of the SOEs to local and foreign service providers.” That, says Williams, will be a key indicator that China is entering a new level of outsourcing maturity.

India. India’s dominance as an offshore outsourcing destination will continue, notes EquaTerra’s LePeak. But that may present disadvantages for the Indian providers and their customers. Outsourcing consultancy Everest predicts the country’s IT services providers will experience a growth revival that, late next year, could lead to spikes in wage inflation and attrition. To balance those trends, Everest says that vendors will continue to move work to tier two cities, such as Pune and Chennai.

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In 2009, several Indian vendors went on shopping sprees and will now attempt to sell existing IT services to clients of the companies they’ve acquired. But that will require fundamental changes in their business models—most notably the need to do more local or onshore hiring, which could impact their bottom lines, notes Everest in recent research.

“Look for more geographic expansion by Indian heritage companies such as Infosys, Wipro, Cognizant and TCS into North America and the U.K.,” says Sid Pai, partner and managing director for TPI India. “They are likely to place many more of their delivery employees in these geographies.”

Africa and the Middle East. “South Africa and Egypt are both making concerted efforts to brand their industry,” says Ben Trowbridge, CEO of outsourcing consultancy Alsbridge. The time zones make a good match for European IT outsourcing clients.

Undersea fiber optic cables connecting both East and West Africa with the rest of the world via broadband may help emerging markets like Ghana and Kenya make bids for IT and business process outsourcing (BPO) business, but offshoring maturity will take more time and effort.

“African countries will present better opportunities for outsourcing as their respective infrastructures improve, but they still have a ways to go in the capabilities of local labor pools, infrastructure and needed access to capital,” says David Rutchik, partner with outsourcing consultancy Pace Harmon. “South Africa presents the best option based on resources, language and modernity of infrastructure, but continued energy challenges and safety concerns will keep it from emerging as a credible alternative to established geographies.”

Latin America. Large multinational outsourcers may look south for acquisitions in 2010. “The large ITO and BPO service providers from the U.S., Europe and India will be on the lookout for opportunities to acquire regional Latin America-based service providers and in-house shared services organizations of Latin American companies,” predicts TPI Momentum’s Williams.

Expect service providers to expand organically or via acquisitions in Mexico, Argentina and Brazil specifically, largely to serve local markets, says Bob Cecil, head of EquaTerra’s business and financial process practice. “Perhaps the best sign is that most Indian players are actively starting or growing their presence in Latin America,” says Alsbridge’s Trowbridge.

U.S.-based customers may show more interest in nearshore outsourcing to Costa Rica and Guatemala and perhaps even further afield to Brazil and Argentina, says Pace Harmon’s Rutchik. But “while Brazil continues to build its internal infrastructure and technology capabilities,” Rutchik says, “it also presents challenges because of its strong currency and language barriers.”

Colombia, Panama, Nicaragua and Peru may also see IT services sector development, says Trowbridge.

The Philippines. Long a leading provider of call center and other BPO services, the Philippines will outpace India in its rate of outsourcing growth, says Williams of TPI Momentum. Meanwhile, Malaysia and Singapore will work more aggressively to establish themselves as local IT and BPO service delivery centers.

The United States. It’s not technically an offshore outsourcing destination if you’re based stateside, but some analysts are forecasting increased interest in low-cost U.S. locations for setting up IT and BPO centers in 2010.

“U.S. capabilities are becoming more important, and with a 10-plus percent national unemployment rate, qualified resources are willing to work for lower wages,” says Trowbridge. “This type of outsourcing is likely to happen in smaller towns, such as areas with universities and reasonably-skilled labor pools.”