The Outsourcing Upstarts

Parts of Eastern Europe, Africa, and the Middle East are vying to become new offshoring hubs—and nudging aside established players

by Rachael King

In 2000, when employment-screening service provider HireRight was looking for a low-cost locale for software development, the Irvine (Calif.) company turned to an unlikely destination: Estonia. The Baltic nation hasn't traditionally been thought of as a hotbed of tech talent, but it presented HireRight with a pool of well-educated, tech-savvy workers; a modern telecommunications infrastructure; and costs that were 2.5 to 3 times lower than they'd find in the U.S. "It's very easy to do business in Estonia. We didn't have any roadblocks at all," says Stefano Malnati, vice-president for engineering at HireRight.

The secret's out. Estonia has become a target of several other companies hoping to take operations offshore at the right price. Internet calling company Skype has set up shop in Estonia's capital city, Tallinn, home to the largest office of the eBay (EBAY) subsidiary. Estonia has become such an attractive destination that this year it made its debut at No. 15 on A.T. Kearney's list of the top 50 global offshore outsourcing locations, beating out more established countries such as Russia, Argentina, and Canada.

Very Competitive Market

Estonia is just one of many countries learning from the example set by India, which remains the top outsourcing destination on A.T. Kearney's list, and the country is eager to carve out a piece of the bulging market for offshore outsourcing services. The global market for shared services and outsourcing is expected to grow to $1.43 trillion by the end of 2009, from $930 billion in 2006, according to a report released this month by consultancy Frost & Sullivan. Globally, companies spent about $233 billion on IT outsourcing in 2006.

Offshoring upstarts are making so many inroads, in fact, that by 2012, they'll significantly dilute India's dominance, says consultancy Gartner (IT). The consulting firm says that by 2010 about 30% of Fortune 500 enterprises will outsource to three or more countries, from less than 10% today. "So many governments have realized what an opportunity this is and there's a lot of effort being spent in promoting their countries to the market," says Johan Gott, manager of A.T. Kearney's Global Services Location Index.

The jockeying has become so intense, and the field so wide, that the big challenge facing many new entrants isn't just getting established as an offshoring hub but hanging onto that distinction. Since 2005, when A.T. Kearney last compiled its list, it has added 10 new countries, including Latvia, Uruguay, Mauritius, Lithuania, Sri Lanka, Pakistan, Morocco, Senegal, and Ukraine. Four of those countries ranked in the top 25 in the 2007 list, released in March.

Lowering the Bottom Line

Becoming and remaining an attractive outsourcing location depends on a number of factors, including language and education skills and the reliability of a nation's telecommunications infrastructure. At the heart of most outsourcing deals, though, is lower cost. So when A.T. Kearney puts together its list, it gives a 40% weighting to the financial attractiveness of a country, taking into account the cost of wages, infrastructure, and taxes. Vietnam and Pakistan, for instance, are even more financially attractive than India, according to A.T. Kearney. Conversely, high costs are the primary reason that countries including Ireland, the U.S., and Canada are slipping in the rankings.

In fact, the recent appreciation of certain foreign currencies in relation to the U.S. dollar has begun to affect corporate decisions to outsource or set up their own operations in certain countries. U.S. companies have long outsourced work to Canada, where they've enjoyed a similar business environment along with a 20% reduction in labor costs because of the exchange rate. But the appreciation of the Canadian dollar has wiped out most of those savings and some U.S. companies are wondering why they should go to Canada if they can get the same thing locally without having to cross a border, says A.T. Kearney's Gott.