Outsourcing market forecasting

According to several new studies, some outsourcing destinations in Central and Eastern Europe are having problems when they have to compete with new destinations in Africa, the Middle East and Southeast Asia. The simple reason: Rising costs of doing business.

Particularly vulnerable to rising costs are countries like the CzechRepublic, Hungary, and Poland where their currency appreciation against the dollar are rising fast. Many European countries are now shifting their businesses to Romania, Bulgaria, Estonia, Lithuania, and Latvia where these countries' software developers are also fluent in English and several other European languages but their costs are much cheaper. However, even these locations may soon feel the heat of competition from countries in the Middle East, North Africa, where large and relatively well educated populations, European language skills, and close proximity to Europe may soon cause another shift in Europe's outsourcing business.

Among these new countries, Egypt has had the most dramatic rise as an outsourcing destination. Other relatively new destinations on the outsourcing map include Jordan, Tunisia, Morocco, Ghana and even tiny Mauritius as they all adopted favorable business environments from their governments with zero taxes, easy import and export, and free trade zones for foreign investments that are expected to be a future boom for more industries. Most of these countries also have tradition European education systems with the influences of France, UK and Germany so their software developers also speak these European languages very well.

Meanwhile, Latin America and the Caribbean are continuing to capitalize on their close proximity to the USA to bringing in more business. Chile, Brazil, and Mexico have maintained their leadership positions while Costa Rica, Jamaica, Argentina, and Uruguay all offer attractive alternative choices for outsourcing. However, like anything else with globalization, many may soon face competition from emerging lower cost locations as more and more countries now are adopting outsourcing as the new economic drivers. From the investment point of view, software works are something easy to move because it does NOT require a lot of investments with no manufacturing, factories, or machine equipments so when a better destinations are identified, customers can shift their business relatively quickly.

Today, destinations in Asia continued to grow steadily and will dominate most of the top destinations. Countries such as India, China, Malaysia, Thailand, Indonesia, Vietnam and the Philippines are the main destinations. Of course, India and China will probably dominate the top due to the fast growing economies and business advantages. India's strengths are in the English speaking skilled workforce and the experiences in outsourcing business but its weaknesses are poorly build infrastructures, and very high employee turnover. China has much better infrastructure and strong government supports but its weaknesses are limited English speaking software developers and significant weaknesses in project and middle level management. Malaysia and Thailand are fairly strong in government supports but have limited number of skilled software workers due to its archaic education systems. For many years, both countries have been focuses mostly in electronics and manufactures rather than software.

Currently, the U.S market is experiencing some changes due to its recession so many companies are very careful financially. European countries also have to deal with high unemployment among its workers (and not to mention the political considerations) making things difficult to predict for 2010. However, as the economies improve companies will have to compete quickly and one of the key aspects would be finding new ways to cut costs and increase profits. Many suggest that by the end of 2010 and 2011 would be a big boom for outsourcing business.

What does all of this mean? Clearly the global economic crisis is rapidly reshuffling the outsourcing business. Locations that were attractive just a few years ago are losing their ability to compete while new locations are rising fast. If anything, these studies clearly serves as a warning to slow-moving countries as the opportunity door are closing fast and with so many countries adapting the outsourcing model for economic growth, competition will be tough. The best way to compete is to stay ahead of the competitors by improve the education system with the best skilled workforce, the best infrastructure and the best cost of doing business. If they miss this new golden opportunity, there may NOT be another in a long time.

Sources

  • Blogs of Prof. John Vu, Carnegie Mellon University

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