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New-wave offshorers present exotic new risks

Asian tigers can bite

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A need to drive down costs is forcing many multinationals to look at emerging Asian offshore locations such as Indonesia and Vietnam, but IP security and privacy concerns continue to hold them back, according to a new report.

Gartner’s Leading Locations for Offshore Services in Asia/Pacific 2014 report, paints a mixed picture.

On the one hand, the emerging economies of Indonesia, Bangladesh and Vietnam and others are said to have “excellent cost advantages”.

This is increasingly appealing to MNCs looking to balance “on-going cost pressures in Europe” by moving from mid-range countries like Malaysia and the Philippines.

However, Gartner warned the following:

This advantage needs to be balanced against low ratings for language, government support, the labour pool and infrastructure. It is also important to consider their immature legal business environment that offers little protection for foreign investors.

Indonesia, Thailand, Sri Lanka, Bangladesh and Vietnam fared particularly badly in the “Data/IP Security and Privacy” category, with all rated “poor”. Even the more mature China, India, Malaysia and the Philippines only rated “fair”.

This, as well as competition from Latin America and Eastern Europe, and an increasing trend towards protectionism by some Western countries like the US, could put a dent in Asia's offshore growth, said the report.

However, there were more positives.

Despite the competition from emerging locations, the more mature Philippines and Malaysia remain decent choices for “higher-end IT infrastructure, help desk, application and business process services”, said Gartner.

Moreover, they are likely to continue benefiting from being used as nearshore back office locations for MNCs headquartered in Hong Kong, Singapore and elsewhere in the region, as well as from Japan’s reluctance to invest in China.

China’s IP security and privacy rating is improving, the analyst said, and the country is now the number one challenger to India in terms of scale.

Despite cost pressures for both of late, they combined to account for over 48 per cent of global nearshore outsourcing and 45 per cent of offshore in 2012, according to Gartner.

Unsurprisingly the advice from Gartner on which location is the best fit for your company comes down to a hefty dose of due diligence, taking in factors such as hiring, training, legal, security, and attrition.

It added:

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.

One word of caution El Reg would give on such reports, however, is that circumstances in said locations can change rapidly in between the study being written and published.

Thailand, for example, was highlighted as the only major location to show a positive improvement in ratings.

The reason given was because of "significant reductions in political instability and demonstrations that occurred over the past two years". We suggest that current round of unrest that has seen the nation left without a functioning Parliament for months shows the situation has changed rather a lot since the report went to press. ®

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