Growth 'phenomenon' in offshore services keeps India in lead

With its strong IT labor pool and government support, India continues to dominate the offshore services scene in the Asia-Pacific region, according to a new Gartner report.

The report, published in February but released Thursday, identified China as the most prominent challenger to India's top position because of its huge potential. A number of emerging countries such as Vietnam, the Philippines and Malaysia, which have attractive cost structures, also show promise, said Gartner.

"India continues to lead in this market because we won't see another Asia-Pacific country displaying the same growth phenomenon as it has," said Jacqueline Heng, Gartner's research director for business process services, in a phone interview. "This is down to factors such as its predominant English-speaking base, strong government support and political stability."

Australia, New Zealand, Singapore, Thailand and Indonesia made up the rest of the top 10 offshoring locations selected by Gartner. For the study, the research firm assessed the capabilities and potential of 30 countries based on 10 categories, including language proficiency, government support and availability of skilled labor pool.

While India continues to grow in terms of revenues from the export of IT services, the Gartner report noted that its relative share of the worldwide market has declined marginally. This is because other countries are investing heavily in an effort to gain more market share, while enterprises are also engaging in "derisking strategies"--spreading out their outsourcing activities in a portfolio of countries besides India, according to the study.

China is one of these countries looking to usurp India's position by investing heavily in its infrastructure, and this has resulted in a "very good" rating, or 4 out of a scale of 5, Gartner said. The report too pointed out the Chinese government had thrown their support behind promoting the country as a possible offshore services location, while low cost remains an attractive pull factor.

Language barriers, however, are holding back China, with the report stating countries such as the Philippines which has a stronger base of English-speaking natives, are generating more revenue than its Chinese counterpart. Heng also cited Malaysia as a potential country that could flourish in the offshore services sector, given its language abilities.

"There is a good English speaking base there, and I can see them going beyond the niche areas that the Philippines is servicing at the moment. While Malaysia were slow starters compared to the Philippines, their ramp up has been quick," the analyst said.

Gartner noted in the report that mature markets such as Australia, New Zealand and Singapore present "limited cost-benefits" but this could be offset by pull factors such as strong infrastructure, experienced labor force and a less risky environment to do business in.

In terms of labor experience, the study showed that IT professionals in India have spent three to five years in the industry while those in China had only two to three years. By contrast, the talent pools in Australia and New Zealand typically have 15 to 20 years' experience, and this is a vital resource when it comes to project and program management, said Gartner.

To maximize the individual strengths of the different markets, Gartner suggests companies should consider a "dual strategy" of locating corporate functions in the more mature markets while outsourcing their transactional back-office functions to lower-cost locations nearby.

Research firm XMG Global forecasted last year the global outsourcing market will hit US$373 billion in total revenues by end 2009, with India and China as the main revenue generators.