IT-BPO outsourcing phenomenon caught the imagination of the industry at the turn of this century. The Y2K phenomenon gave necessary impetus to the hibernating outsourcing industry. In the initial phase, availability of skilled workforce and cost arbitrage were the primary drivers of outsourcing industry. Asia Pacific region, which offered both, took the first movers advantage and emerged as the leading offshoring supplier. Since then, IT outsourcing has become an essential part of every corporate strategy. With experience, the corporate outsourcing strategies of businesses have matured to look beyond mere cost arbitrage. Shift in priorities in outsourcing strategies and exponential growth of outsourcing market has allowed newer offshoring clusters to evolve and flourish.

 
Emergence of new offshoring destinations, each offering distinct combination of advantages and risks, has given the customer a variety of options to pick from. Though cost arbitrage is a common advantage among all the outsourcing clusters, but parameters such as sustainability and scalability of business, quality of work force, cultural and linguistic affinity, etc. have become differentiating factors.

We can categorize the outsourcing clusters into three major categories – a) Asia Pacific (ASPAC), b) South America and c) Central and East Europe (CEE)

Cluster 1: Asia Pacific
Asia Pacific (ASPAC) is the most dynamic and fastest growing outsourcing cluster. The rise of Asia Pacific as an outsourcing destination was led by success stories of India, followed by China. Over the last few years, other Asian locations such as Australia, Malaysia, Sri Lanka, Vietnam and Philippines have gained spotlight on global IT-BPO map.
The main parameters of influencing Asia Pacific as a choice of outsourcing destination:

Low Costs: Most of the Asian outsourcing destination’s offer 20 percent to 50 percent cost saving on labor over America and Europe. Availability of vast skilled labor force at lower cost gives Asia a massive advantage. Though wages have increased in India due to inflation, yet they are considerably lower than that in Unites States of America and Europe.

Language Skills: India, Philippines and Malaysia have leveraged large English speaking population to attract key US and European markets. Asia Pacific markets – Japan, Taiwan and Korea find China, Malaysia and Vietnam lucrative for regional language skills and cultural affinity. The region has struggled to capture Non-English European market due to absence of Spanish, French and German speaking work force.

Large number of service providers: The large number of indigenous service providers offer wide choice for buyers looking to outsource to Asia Pacific countries. It also makes the region very cost-competitive.
Experience and Maturity: Rich experience in outsourcing industry has given India the delivery maturity of offering end-to-end solutions. It gives them edge over their counterparts. Malaysia and Philippines have emerged as strong outsourcing destinations because of the availability of workforce with niche skills, whereas China based suppliers are also growing rapidly

Cluster 2: South America

Though South America has less than 10 percent share in global outsourcing market, yet the region shows promise. With better economic stability, the “near shore” advantage of South America has become more compelling for the United States of America. Brazil, Mexico and Chile reaped the benefits of the first mover advantage and business maturity. Newer destinations such as Argentina, Uruguay and Costa Rica are becoming viable options due to attractive cost and maturing business sector.

Main parameters influencing South America as a choice of outsourcing destination:

Near shore and Time zone alignment: South American nations have the unique advantage of proximity to the biggest hub of outsourcing supply end – USA. Near-shore operation offers advantages of time-zone alignment, faster implementation and better control over operations.  

Language skills: Spanish language requirements in the U.S. and the growing English language capability of the labor pool in the region are key to the region’s competitiveness. Mexico, Argentina and Costa Rica are capitalizing on their sizeable pool of English speakers by offering bilingual services.

Cultural affinity with the U.S.: USA and Latin America share a number of cultural similarities. These aspects of cultural affinity assist the U.S. and European companies to retain a similar corporate culture in captive centers and facilitate business with outsourcers.

Cost Attractiveness: Latin America has a significant cost advantage over Europe and U.S. Chile and Mexico are relatively more expensive locations as compared to Costa Rica and Argentina, however these regions can still provide a cost-competitive alternative as compared to the U.S. and Europe.

Cluster 3: Central and Eastern Europe (CEE)

Preference of West European companies to near-shoring and cultural and linguistic similarities has made Central and Eastern Europe a viable outsourcing destination. Bulgaria, Hungary, Poland and Russia are all set to compete with Asian and South American counterparts for the West European outsourcing market. 

Main parameters influencing CEE as a choice of outsourcing destination:
Language skills and cultural affinity: Language skills are important, and are often used as a selling point by the near-shore destinations in the CEE, especially to Western European countries like Germany and France.

Wage differential: In the new EU states labor costs are nearly 20 percent of those in Germany and France.  Wages in countries like Romania are one-tenth of those of their European counterparts. The wage differential, even though it is considerable today, is narrowing as wage growth in the region is rising.

EU regulation: Since most of outsourcing destinations including Hungary and Poland, have joined EU, European customers find East European outsourcing destination more regulated then their Asian counterparts. It shifts some of the regulatory responsibilities towards the vendors. Schengen visa and adoption of Euro as a common currency has also played its part in strengthening CEE cluster.

Standard of Education: Most CEE countries have superior educational systems that are almost at par with the EU-15. A study by MGI claims that 50 percent of graduates (engineers, mathematicians, statisticians and physicists) from the Czech Republic, Hungary or Poland are suited to working for international service providers.

Emergence of new clusters has resulted into increase in length and breadth of outsourcing. The inhibitions and reservations against IT-BPO outsourcing that existed, due to different priorities of customers, have been diluted considerably by emergence of new destinations. Outsourcing has been embraced by more customers across geographies. With availability of diverse technical and professional skills, the breadth of work being outsourced has extended from “voice based” services to insurance underwriting. At the same time, new clusters have made the outsourcing market extremely competitive. Suppliers need to continuously evolve and innovate to attract customers. For instance, despite inflation and increase in wages and real estate prices, India is still the most preferred destination because of maturity of industry in India and support extended by the government and promotional agencies.