The index, by country

The Index has grown from covering 25 countries in 2004 to 55 countries in 2017, indicating just how global the industry has become. While most locations have experienced movements in the rankings over the years as competition has become more intense and as economies have developed, it is striking that the three countries at the top have held the same positions since we started measuring the attractiveness of locations for offshoring. In addition, we see a significant strengthening of Latin American locations this year that have steadily built stronger labor forces and improved their business environments. Colombia and Peru are both fast movers, while the big three—Brazil, Mexico, and Chile—maintain strong positions. Central Eastern Europe is a strong region where many of the top players are now converging, with Poland, Bulgaria, the Czech Republic, and Romania only a few spots from each other. Africa fails to advance with no country in the top 30; operating costs on the continent are relatively high and yet the talent pools remain shallow.

India (1) continues to lead the Index. As the undisputed industry leader, India offers a depth and breadth of English-speaking skilled labor that no other low-cost countries can match. In this year’s Index, India’s lead over the country ranked second, China, widened. In 2016, India’s lead was already significant, at 0.47; in 2017, this lead has increased to 0.76. India’s cost advantage against the United States is growing thanks to the strong US dollar, and the performance of Indian students on standardized tests is improving.

There are currently 200 multinational corporations operating in India and 1.1 million employees in BPO. At this stage, 500 companies are offering outsourcing services in 35 languages to companies in more than 66 countries. Hyderabad has risen recently to new levels of prominence and is home today to Facebook, Microsoft, and Qualcomm. News sources indicate that Apple, Amazon, Uber, and Google are all setting up their second-largest development centers outside the US in the city.

Automation, however, has already started to take its toll on Indian BPO operations. Infosys recently implemented intelligent software to take over the roles of 11,000 employees, offering no details on the possibility of retraining employees or future layoffs to come. Wipro, too, released approximately 12,000 workers, between July 2016 and March 2017. These layoffs represent a 6 percent reduction in force of the two companies’ combined workforces. In addition to the threat of automation, India faces competition for its BPO work from smaller countries that offer lower cost, niche strengths, or higher quality that outweighs any cost disadvantage.

China (2) holds steady in the ranking, although the nation fell further behind India this year due to a decrease in its business environment score. In 2016, Apple opened R&D centers in Shenzhen and Beijing. VXI Capital, a BPO firm with significant operations in China and Central America, was acquired by US private equity company The Carlyle Group in 2016, testifying to the increasing interest in the Chinese BPO market from international players.

Malaysia (3) maintains the third-place ranking it has occupied since the start of the Index in 2004. It is advancing in the people skills and availability category, but its retreat in metrics such as those included in World Bank’s Doing Business report is troubling. The country is increasingly becoming the preferred destination for gaming and animation services, and BPO providers have been expanding operations to take advantage of growth in the Asia Pacific region. Since the beginning of 2016, Cognizant opened a new center to expand operations in Cyberjaya and Kuala Lumpur, and Luxoft was granted Multimedia Super Corridor status, which enabled it to receive special incentives to open an IT delivery center, including fast tracking for expat relocations, tax incentives, and operational support. During the same period, Genpact, which is already working with GSK in the area, expanded its finance and accounting, sourcing, procurement, analytics, and digital operations in Kuala Lumpur, with the goal of providing services in Southeast Asian languages. Aegis, Essar Group’s BPO arm, is investing $4-5 million and planning a third center in Malaysia that will provide 600 jobs (increasing the total at all three centers to 5,000) in the next two years, and Roche has committed $26.3 million over two years to create more than 260 high-skilled jobs in Kuala Lumpur.

Indonesia (4) swaps positions with Brazil in this year’s Index, moving up from fifth place last year. The potential of Indonesia in this industry remains largely unfulfilled, due to language barriers, low industry experience, and a difficult business environment. However, there are signs of industry growth, including the June 2017 announcement that Korean electronics conglomerate Samsung signed a five-year, $130 million BPO contract with Indonesian Aditya.

Brazil (5) moves down the ranks slightly, largely due to a decreased business environment score. Brazil is beginning to create policies that are more amenable to the domestic outsourcing industry, including a new law passed in March 2017 that allows companies to outsource both primary and support activities and extends the maximum length of temporary work contracts from three months to nine months. This legislation could spur investment in the sector as companies outsource locally at first. Google has opened an R&D and analytics center in Belo Horizonte and plans to double the current headcount of 100 at the center in the near future. Since the beginning of 2016, German GFT has opened a technology development center to support the local Latin American market and a digital innovation center in São Paulo. In addition, SKYY Digital Media Group has opened a digital solutions center to cater to the Latin American market.

Vietnam (6) moves into the top 10 this year from 11th place in the 2016 GSLI. This upward movement reflects the country’s growing popularity for BPO centers. The country’s BPO industry reached $2 billion in 2015 and has grown at a rate between 20 and 25 percent annually for the past decade. This growth is due, in part, to the low cost of labor in Vietnam, which is half of that in India and China’s tier 1 cities. Furthermore, a significant percentage of the predominantly young Vietnamese population is fluent in English. As Japan is the Vietnamese BPO industry’s primary client, continued growth in this area will depend, in part, on the strength of the Japanese economy. Since 2016, Augen Software Group has opened a technology development center to service enterprise clients in Vietnam and other Southeast Asian countries. In addition, Kiwi Technology Center, described as a hub for New Zealand tech companies investing and doing business in Vietnam and ASEAN, opened a technology development center.

The Philippines (7), an industry leader, holds steady in the ranking. The country is gaining ground in high-value fields such as engineering and legal BPO, which is a necessity if the Philippines is to weather the oncoming job losses triggered by automation. The Philippines remains dominant in voice work; it was the location for 16 of the top 20 offshore call center projects in 2016. Accenture recently opened a third delivery center in the Philippines, and two firms, including Visa, opened centers as well. The industry slowed somewhat in 2017 as a result of the political situation. While the World Bank estimates that BPO revenues could grow to more than $50 billion and provide 2.6 million more jobs (both double today’s totals), our analysis is significantly less optimistic.

Thailand (8) falls two positions in this year’s Index but as noted in past editions of the Index, has largely failed to develop the IT-enabled global services industry, focusing instead on its significant tourism industry and a growing manufacturing sector.

Chile (9) maintains its position. Given cost pressures in Santiago, companies are increasingly looking to second-tier cities in Chile, such as Valparaiso, Concepcion, and Valdivia, in order to limit salaries and turnover. Companies may enjoy a 10 percent arbitrage in tier 2 cities and significantly lower attrition rates. US niche BPO company CGS opened a 240-person center in Valparaiso in March 2017, and the company plans to expand to 400 if it performs as expected. Indian Tata Consulting Services (TCS) has 1,300 employees in three offices nationwide, now including one office in Valparaiso. Since the beginning of 2016, Atento has built a new contact center to serve Spanish telco Movistar, and two of the top 20 nearshoring deals in 2016 were located in Chile.

Colombia (10) saw significant upward movement in the rankings this year, moving up 10 positions to 10th place. The negative perception of security in Colombia is slowly diminishing, and the falling value of its currency will likely increase its popularity. Between 2011 and 2015, Colombia won 12 percent of new BPO and shared services centers in Latin America and the Caribbean. And Colombia was home to one of the largest nearshoring developments in 2016 when Luxembourg BPO giant Atento created 2,000 jobs in Bogotá.

Sri Lanka (11) moved up three places in the ranking this year, thanks to gains in all three categories. Labor costs in the country can be as much as 30 percent lower than other outsourcing destinations, and tax holidays extend between five and 12 years. More than 300 IT and BPO companies operate in Sri Lanka, primarily small to medium-size companies and a few global corporations. The industry employs 80,000 people, and the workforce is growing at 20 percent year over year. At the beginning of 2016, MillenniumIT, a subsidiary of London Stock Exchange Group (LSEG), opened an IT delivery center. The industry sought to achieve $1 billion in export revenue for 2016, and it is well on its way, having reached $900 million.

Poland (12) moved slightly down the ranking this year from 10th place in the 2016 Index. The drop is associated with a decrease in political environment scores, and in turn increased country risk. Still we have witnessed expansion of operations by companies such as Accenture, Credit Suisse, Goldman Sachs, Zurich Insurance, and Cathay Pacific Airways. Competition for Polish labor is no longer just with other centers in the country—BPOs are now increasingly competing with companies in other European Union countries. Amazon, for example, has been actively recruiting top Polish talent to its locations in other European countries. Despite challenges on the labor supply side, Poland has significant depth of talent, unmatched in Central Eastern Europe and further expanded through the emergence of tier 3 locations such as Kielce, Rzeszow, Bialystok, Lublin, Zielona Gora, and Bydgoszcz.

Mexico (13) fell out of the top 10 this year from eighth place last year. Since the beginning of 2016, Deloitte has opened a technology development center, Monterrey-based Global Telesourcing had a 520-person expansion, and seven other companies announced expansions or new operations in the country. Global software companies such as Microsoft, Oracle, IBM, HP, Adobe, VMware, and SAP have IT operations in the country, and six of the seven highest-ranked outsourced services companies (according to the International Association of Outsourcing Professionals) have a presence in Mexico: Accenture, CBRE, Cushman & Wakefield, ISS, Jones Lang LaSalle, and Teleperformance. Tijuana is a growing destination, capitalizing on its proximity to Silicon Valley.

Egypt (14) advances two places from last year. The government decision to allow the Egyptian pound to float against the dollar and subsequent depreciation gave Egypt’s competitiveness a boost. The country graduates approximately 500,000 students per year, with 10 percent in IT-related fields and other fields related to BPO, representing one of the largest qualified labor forces outside of India. Chinese Huawei opened a support and training facility to support 29 countries in the Middle East and Africa in the past 18 months, highlighting an emerging trend in which Chinese companies are seeking offshore destinations to support global expansion.

Bulgaria (15) fell three positions in the GSLI. Since the beginning of 2016, Coca-Cola Hellenic Bottling has invested $1.1 million to expand a shared services center, US rideshare company Uber expanded operations with the goal of doubling the number of IT professionals in its Sofia engineering center, and Silicon Valley-based Service Source opened a revenue-as-a-service facility, hiring an additional 140 employees to add to the 60 they already have in Sofia.

Czech Republic (16) leaps 10 spots in the ranking, thanks to improvements in its people skills and availability and financial attractiveness scores. The country has 65,000 people employed in its business services sector, which is projected to grow to 100,000 by 2020. Companies anticipate 17 percent employment growth, with 85 percent of business service centers reporting expectations to grow in the next two years.

The country is home to more than 180 service centers, with nearly half of these centers in Prague. The sector brings in $3 billion in annual revenue, representing 1.5 percent of Czech GDP. More than three-quarters of the centers have finance and accounting in scope, and more than half have customer operations and human resources. Finance and accounting represents 32 percent of employees, followed by customer operations (21 percent) and IT services and human resources (12 percent each).

Germany (17) moves up five positions in the GSLI to become the top onshore destination in this year’s Index. The move is largely driven by currency movements as the US dollar has strengthened against the euro. For the purposes of measuring the German score, we are assessing the cost profile of the lowest-cost region, namely Saxony in the former East Germany.

Romania (18) falls five positions in the Index, despite the fact that GoPro added 100 hires in Bucharest and three other companies opened or expanded operations in the EU member state. Romania’s outsourcing sector employs more than 100,000 people, and the top three sectors are banking, insurance, and financial services; technology and telecoms; and industrial and consumer goods. It is a popular nearshoring location due to strong IT and finance and accounting skills, as well as the wide range of foreign languages spoken.

The United Kingdom (19) joins the top 20 this year, up from the 25th position in last year’s Index. While there is increased uncertainty after the Brexit vote, the same uncertainty has led to a plunging exchange rate for the pound, improving cost competitiveness. As with other onshore markets, the GSLI assesses a prominent tier 2 location as this is the logical alternative to offshore markets. In the case of the United Kingdom, we use Belfast and Northern Ireland as our benchmark.

Peru (20) leaps 27 spots in the ranking, the largest jump of any country in the 2017 GSLI. This improvement is due, in part, to improved source data for the compensation costs in Peru, which global HR firms present as a significant cost advantage. The ITO, BPO, and KPO sectors now include more than 300 companies and 45,000 workers. However, the country needs an additional 10,000 programmers to meet demand in the IT sector. In fact, many employers in Peru report difficulty filling jobs.

Looking ahead

The 2017 Kearney GSLI confirms that the industry leaders, India and the Philippines, continue to perform well and offer companies strong options for offshore services. Our analysis of the impact of automation on these countries and others in the next five years, however, suggests greater cause for concern. While both India and the Philippines will be hit hard by automation, the effect on the two countries will be different. India stands to lose a substantial number of BPO jobs, but its more highly educated population ensures greater opportunities to focus on KPO or other higher-level tasks as the offshoring industry moves up the value chain. The Philippines’ concentration in the less easily automated customer service function protects it in the short term, but the country has fewer options in the long term. Counterintuitively, higher-cost onshore countries such as the United States will, overall, lose a smaller proportion of jobs due to the higher percentage of jobs these countries regain through reshoring.

As we concluded in the 2014 GSLI report, countries in the low-value-add niche will see their opportunities erode as those with a strategy to advance aggressively along the value chain and to capitalize on the potential of jobs that manage automation do better. But the limited number of technology management positions available relative to the number of jobs lost will inevitably mean displacement of low-skilled workers.