downloadCountries in Asia Pacific offer cost-competitive, typically stable and scalable locations for offshore IT and business process services, but Latin American and Eastern European countries now compete more aggressively for offshore deals, according to new research from Gartner, Inc. Analysts said currency fluctuations and rising delivery costs are also an issue for Asia.

In its latest assessment of nine Asia Pacific countries as potential offshore service locations, Gartner says India is the clear global leader by revenue, while China is the most serious challenger by scale. Bangladesh, Indonesia and Vietnam are continuing to gain regional traction for offshore service delivery, while more mature countries, such as Malaysia and the Philippines, are refocusing on their core capabilities of higher-end IT infrastructure, help desk, application and business process services.

With an average of 19 percent of total planned applications spending for 2014 being directed offshore globally, sourcing managers are taking a keen interest in which offshore locations their services are delivered from, according to Gartner research vice president Jim Longwood.

“Although the use of Asian countries for offshore or nearshore services has not yet peaked, we are seeing some distinct changes in demand and supply patterns in the region,” Mr. Longwood said.

“Ongoing cost pressures in Europe are driving some multinational corporations to consider moving their offshore services from mid-cost countries like Malaysia to lower-cost locations in Asia, Eastern Europe and Latin America. Some Western countries are becoming more protectionist, which is also having a negative impact on demand for offshore services from Asia Pacific.”

Cost increases — either due to currency exchange and/or increases in cost for local resources and infrastructure — are affecting the ability of India and China to be as cost-competitive as they have been. However, service providers are also taking advantage of market changes to revise their business strategies, according to Gartner.

“With demand slowing in Europe and North America, we have seen a range of Indian providers expanding their regional Asian presence and leveraging their nearshore capabilities,” said Mr. Longwood. “As a result, they are growing their presence in more mature markets like Singapore and Malaysia, and are now challenging the traditional MNC application service providers in these markets.”

According to the report, there has also been some market consolidation, with an increase in vendor alliances, mergers and acquisitions with offshore providers in Asia Pacific as they seek growth and scale.

Enforcement of laws for data/IP security, privacy and legal maturity continue to be an adoption barrier for using emerging low-cost countries, despite country governments improving related policies and regulations. All nine countries were rated either ‘poor’ or ‘fair’ on the data/IP security and privacy criterion.

Gartner recommends that organizations conduct thorough due diligence on the overall costs of delivery, addressing risks like ongoing hiring, training, legal processes, IP, security and privacy, as well as attrition. Although some less mature emerging Asian offshore locations appear attractive from a cost perspective, a range of burdensome “soft costs” could quickly erode initial cost savings.

Many Japanese enterprises perceive increased risk in using China as a nearshore option and are looking at other options. For example, there is increased interest in Malaysia and Myanmar, and some are investigating a type of “rural sourcing” for onshore locations like Hokkaido, Okinawa and Kyushu.

Emerging economies like Indonesia, Bangladesh, Sri Lanka and Vietnam continue to have excellent cost advantages. This advantage needs to be balanced against low ratings for language, government support, the labor pool and infrastructure. It is also important to consider their immature legal business environment that offers limited protection for foreign investors. The quality of resources is also becoming a point of concern in low-cost destinations.

Historically, cost attractiveness, quality of service and scalability have been key drivers for using Asia as an offshore outsourcing destination. However, in the last few years, growing concern about high inflation, attrition and quality lapses in offshore and nearshore locations has been driving CIOs to consider alternatives such as low-cost onshore sourcing and sometimes crowd sourcing.

Despite these trends, India and China are still among the most popular destinations for offshore services. Over 48 percent and 45 percent of clients surveyed in 2012 were using these countries for nearshore or offshore outsourcing respectively.

Gartner has conducted analyses of 30 countries and published documents on the 15 leading offshore countries from across the globe to assess their capabilities and potential as offshore service locations, to help sourcing managers and service providers choose the best offshore locations for meeting their requirements for captive or outsourced IT and business process services.

This year’s Asia Pacific report includes the emerging IT economies of Bangladesh, Indonesia, Sri Lanka, Thailand and Vietnam, along with the more mature offshore locations of China, India, Malaysia and the Philippines. Developed countries such as Australia, Hong Kong, New Zealand, Singapore, South Korea and Taiwan are not included but should still be considered important nearshore location options.

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