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Outsourcing hubs: China, India, Eastern Europe

As supply chains become increasingly complex, companies in the UK and US are turning to other regions to outsource a host of operations. The benefits o...

Freddie Pierce
|Apr 30|magazine11 min read

As supply chains become increasingly complex, companies in the UK and US are turning to other regions to outsource a host of operations. The benefits of outsourcing are manifold but, needless to say, increased efficiency and lower costs are the main reasons for turning to this method of conducting business. As a result of the need to outsource, several regions are showing signs of significant growth and are becoming outsourcing hot spots.

China and India are perhaps the two largest emerging markets, and predictably so. However, Eastern Europe is also proving a hot spot, with countries like Poland demonstrating the capability to become an outsourcing hub.

Author of A.T. Kearney’s Assessment of Excellence in Procurement, John Blascovich, anticipated several years ago, when the study was published, that these regions would see increased demand. “The number of companies sourcing from China, Eastern Europe and India has increased significantly in the last five years and will continue to rise in the future,” he wrote in 2005. He predicted that by 2009, 72 percent of companies would be sourcing from China, rising from less than 30 percent a decade earlier.

Interestingly, a recent study by Gartner has revealed that both India and China are the largest countries in offshore outsourcing. What the report also reveals that was not predicted, perhaps even just a few years ago, is that several other countries in the Asia Pacific region are strengthening their positions. While India is top of the 10 Leading Locations for Offshore Services in Asia Pacific and Japan for 2010, Malaysia, the Philippines and Vietnam are likely to become competition. Meanwhile, Indonesia has entered the top 10 for the first time.

“Some of these countries have invested considerably and leveraged increased demand for lower cost services,” explains Jim Longwood, research vice president, Gartner. “The global financial crisis forced many organizations to place a greater emphasis on cost optimization.”

Of course, the recession played a large part in the rising popularity of India, China and Eastern Europe as outsourcing focal points. As companies looked to cut costs in order to survive, outsourcing became a necessary solution. Labor costs in particular are much lower in countries like India and Poland. Consequently, large organizations are choosing to locate their contact and call centers overseas. US companies have embraced the trend, locating call centers in India and the Philippines. “Wages for labor in countries like India and the Philippines, which have large workforces, can be 80 percent to 90 percent lower than [those] of U.S. labor,” says Datamonitor analyst Daniel Hong. While wages are considerably lower, the workforce is more highly qualified than the equivalent workers in the US and UK. Certainly, this adds to the attraction.

Everest reported in March that the global procurement outsourcing (PO) market grew rapidly in 2009, with new contract signings and extensions up 30 and 90 percent respectively. It now expects the market to grow more than 20 percent this year and reach an annual contract value of nearly $1.3 billion.

However, several studies have also shown that there can be disadvantages and unknown risks associated with this emerging trend in outsourcing. Companies should be aware that labor costs might be considerably less, but the cost of telecommunications and IT can be much higher in India, for example, than in the US or Europe. In fact, nearshore outsourcing can be more cost effective. Datamonitor has reported that labor in Mexico can be 50 percent cheaper than in North America, while Canada’s wages are 30 percent lower. In addition, both countries already have much more cost efficient telecommunications and IT systems in place.

So the state of the current outsourcing market has proved earlier predictions correct. India, China and Eastern Europe may be outsourcing hot spots, but they look likely to face stiff competition from the Asia Pacific region. Meanwhile, as both North America and Europe emerge from the global economic downturn, this could have an impact on the popularity of offshore outsourcing. Could nearshore outsourcing experience significant growth as a result? Either way, China and India will remain outsourcing hubs, as long as the cost of labor stays low while both countries’ technological resources improve.