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Cost Savings Shrink for Offshore Outposts

Asian countries continue to dominate the A.T. Kearney rankings, but countries in Latin America improved this year and the index sees a rise in the number of African nations.

March 27, 2007

The cost advantages of outsourcing overseas are beginning to narrow as wages for workers providing office services such as IT and call centers in China, India and other popular outsourcing locations rise at an annual rate of 20 percent to 40 percent.

Nonetheless, those savings are expected to last another 20 years, just at smaller rates, according to the annual outsourcing survey by A.T. Kearney, a management consulting firm in Chicago.

One reason is that the countries showing accelerated growth in wages are also showing an improvement in the quality of their workforce. And some other costs, most notably in telecommunications, have actually declined.

“Skills are rising sharply in these countries,” says Martin Walker, senior director of the Global Business Policy Council, the A.T. Kearney unit that sponsored the survey. “The ongoing reason for the attractiveness of these places won’t be costs; it will be the increasing skills of their labor force.”

Walker says companies making outsourcing decisions have to balance concerns about cost and quality.

“You’re not going to go for the lowest-priced market if that’s going to result in really burdensome extra costs in terms of customer dissatisfaction or extra management time,” he says.

One indication of the improving skills of workers is the double-digit increases in university enrollment reported by China, Brazil and Egypt, Walker says.

“We’re also seeing these emerging economies making a real effort to get quality endorsements” like ISO 27001, a certification related to information security management, he says.

A.T. Kearney’s annual survey ranks 50 countries according to 40 different statistics that measure the cost of doing business in each country, the quality of its workers and its business environment.

The survey showed that last year, wage costs for office services jobs rose about 20 percent in India, 30 percent in China and the Philippines, and as much as 40 percent in Eastern Europe. A.T. Kearney’s data on compensation rates is in U.S. dollars, and Walker says the dollar’s weakness was a “significant factor” in the wage increases reported for certain countries, including India and China.

Unless currencies reverse course, that weakness could have a proportionate effect on the bottom lines of companies that report their financial results in U.S. dollars.

Johan Gott, manager of research for the A.T. Kearney index, says the calculation of the duration of outsourcing’s cost advantages involves other costs besides wages. The survey cites declines of 25 percent or more in telecommunications costs in some countries.

C. Steven Crosby, a senior managing director at PricewaterhouseCoopers, says companies involved in outsourcing “are very concerned about wage inflation.” But he argues that the key issue is not cost but “the global war for talent.”

“Sourcing and offshoring is no longer about trying to get it cheaper; it’s about getting really good people no matter where you can find them,” Crosby says.

Asian countries continue to dominate the A.T. Kearney rankings: India is first, China is second, and six other Asian countries are among the top 10.

But Walker notes that Latin American countries improved in the rankings this year and the index has an increasing number of African countries.

Filed by Susan Kelly of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.