The consultants at A.T. Kearney who compile a widely followed annual survey of the world’s actual and potential off-shore locations for business-process outsourcing (BPO) expect to make some changes for 2005. The most remarkable of the changes is likely to be a quantum leap in the number of countries vying for this back-office work, which increasingly is being outsourced by U.S., Western European and Japanese companies.

The 2004 survey ranked 25 countries – a list led by BPO pioneer India – based on three broad categories – people skills and availability; business environment, and financial structure – and a variety of sub-categories. As many as 40 countries are being considered for next year’s list, says Janet Pau, policy analyst in Alexandria, Va., for A.T. Kearney’s Global Business Policy Council, a roundtable for corporate chief executives.

The trend is toward “more offshore activity in countries besides India, such as some of the smaller players like the Czech Republic and Malaysia,” Pau notes. Moreover, she adds, there is likely to be a farther eastward push within Eastern Europe, to countries such as Romania and Bulgaria, as work spills over from places such as the Czech Republic and Hungary.

A similar expansion is expected in other regions of the world. Several of the nations the A.T. Kearney experts are currently considering for inclusion in their spring 2005 survey are unlikely to leap to mind when Western executives contemplate potential off-shoring locations. Among these are Morocco, Tunisia, Ghana and Uruguay.

A longer list of contenders will only reflect the rapidly spreading interest around the world in getting a piece of the BPO action. While the amount of back-office work that is currently sent outside their national borders by Western, European and Japanese companies is still a tiny fraction of the total amount of such work that these companies outsource, it can constitute a substantial source of revenue and employment for recipient countries, as India has demonstrated.

“There is massive interest from all corners of the world,” says Simon N. Bell, a director at the Global Business Policy Council and principal author of A.T. Kearney’s Offshore Location Attractiveness Index. Government officials keenly follow, and sometimes challenge, the annual score sheet put out by the council, he adds. “Virtually every investment promotion agency now targets off-shore services.” Bell notes, although “it was not on most radar screens two years ago.”

Ravi Aron, a professor of operations and information management at Wharton who closely follows BPO trends worldwide, estimates that in the four years from 2000 to 2004, India alone has created 260,000 jobs in this sector. The jobs range from call-center work to sophisticated accounting, research and financial services functions. The powerful Indian industry group NASSCOM (National Association of Software and Service Companies), estimated that the country earned $3.5 billion in revenues from such work in 2003-2004.

Nor surprisingly, locations as disparate as Dubai, Mauritius and Sri Lanka are making plans to capture some of this economic upside. Dubai, a component of the United Arab Emirates, is setting up a Dubai Outsourcing Zone where wholly foreign-owned companies can operate tax-free. Dubai is also promoting its efficient transportation infrastructure and westernized lifestyle to potential outsourcers.

Mauritius, already a destination for tourists drawn to its sparkling Indian Ocean beaches, is working on creating a high-tech enclave and touting the multilingual skills of its population. Because of periods of both French and English rule, many of its 1.2 million people are comfortable in both French and English.

In November, Sri Lanka’s Board of Investment was a first-time attendee at a Bangalore IT trade show. Officials of the tiny island nation off the southern tip of India – best known in the West for an intractable civil war just halted by European mediation – came to invite Indian BPO companies to set up some operations in Sri Lanka. The lure: Skilled labor and a cost advantage over India of 10% to 15%.

Singapore’s Strengths

“I think the next big emerging phenomenon is a hub-and-spoke model in globalization of services,” Aron says. Singapore already has become a BPO off-shoring hub whose spokes extend to India, China and the Philippines, and some day could reach out to Sri Lanka and Vietnam, he says. Dubai has the potential to be a Singapore-like hub in the Middle East. It is “stable, forward looking and technological advanced,” he says.

Singapore and India bear a symbiotic relationship, Aron adds. So far as business process off-shoring is concerned, one couldn’t exist without the other. India has depth and breadth of technologically skilled labor, available at a low cost; English language skills that facilitate communications with the developed English-speaking countries; an improving telecommunications infrastructure and extensive IT experience.

Singapore has a far smaller population but it has deeper ties to the West, including a free trade agreement with the U.S., and a highly advanced transportation and internet infrastructure. It also has “squeaky clean markets and judicial systems,” Aron says, adding that frequently, when Indian companies export software, the contracts include clauses that provide for arbitration of disputes in Singapore courts. Singapore also has sophisticated managerial talent attuned to Western standards and provides a standard of living that is more attractive to expatriate Western managers than locations in India.

Add its geographical location, virtually “next door” by air, and Singapore increasingly is serving as the “natural hub for doing long-term strategic control,” Aron says, providing services in such areas as regulatory compliance, auditing, data security, and risk mitigation that overlay nitty-gritty call center and back office work.

Singapore’s Infocomm Development Authority and Economic Development Board “have taken several far-reaching steps in integrating the country with its spokes,” he notes. In internet connectivity, huge, high-speed networks with built-in redundancy connect Singapore to both India and its other major spoke, China.

Temasek Holdings, which acts as investment manager for the Singapore government, has taken a substantial stake in ICICI OneSource, a major Indian BPO company which claims financial-services, retail, telecommunications and utilities companies among the FTSE 100 and Fortune 500 as its clients. “They are constantly linking themselves deeper and deeper with Indian companies,” Aron says of Singapore agencies.

In turn, more than 300 Indian IT-services companies – including giants Satyam Computer Services and Tata Consultancy Services – have located in Singapore, in part to insure themselves against adverse U.S. legislation on trade issues.

“Singapore is a natural shelter because of its free trade agreement with the U.S.,” Aron says. If needed, Indian BPO companies’ computers can route their TCP/IP packets of data to the United States via Singapore. Besides, Singapore’s extraordinary telecom and physical infrastructure also makes it a prime location for business data continuity and disaster recovery operations of Indian and other companies offering BPO services.

BPO in Eastern Europe

While the role of BPO hub by definition will be reserved to a chosen few locations, the spokes are likely to proliferate. “It is as much about labor availability as it is about cost,” A.T. Kearney’s Bell says. Locations such as the Czech Republic, a country with a population of just 10 million, cannot indefinitely ramp up to meet the trained-labor needs of the BPO sector, and some of that work inevitably is beginning to spill over into other parts of Central and Eastern Europe. In part also, Bell says, people are looking at non-Indian locations out of prudence – to diversify country risk and because of “the slight overheating of the Indian market with regard to staff attrition and rising wages.”

Geography also is destiny. The Czech Republic and Hungary serve in near-shore roles for German and French companies; Canada for U.S. companies; South Africa for Western Europe because it is within European time zones; and Dalian in northeastern China plays that role for Japanese and Korean companies.

South Africa has “many of the same assets as India,” Bell says. It has an English language heritage; high quality education; relatively low wages and excellent political and business infrastructure. More than 200 call centers operate in Cape Town alone.

Central and Eastern European countries are “a good near-shore alternative to India,” notes Joseph Franz, manager of the Czech Republic Solution Centre, in Prague, for EDS, which is A.T. Kearney’s parent company. These countries are in the same time zone as the European Union and have a similar culture, “which is helpful for onshore-offshore teamwork and collaboration,” Franz says.

According to a study by EUROSTAT, the European Union’s statistical office, 70% of the Czech population also speaks a foreign language, being especially proficient in English and German. Besides, Franz says, some of the European Union clients are risk-averse, and see their neighbors in Central and Eastern Europe as “a safer, more pragmatic first step in entering into offshore BPO.”

A surprise entry in A.T. Kearney’s 2004 ranking of off-shoring locations was Malaysia, coming in at No. 3, behind China and India, but a couple of spots ahead of another big player, the Philippines. “Until we published the index, very few people were talking about Malaysia. The focus was on India and the Philippines, and to a certain extent China,” Bell says. “We showed that Malaysia has many of the same attributes as India — English language, education system — except size,” he added. The Malaysian government is heavily involved in promoting IT services, Pau says.

But A.T. Kearney’s clients also have expressed interest in such outliers as Vietnam and Turkey, both of which were listed in its 2004 survey. Turkey is on the fringes of Europe and people there speak English and German. Vietnam offers a high level of education and low costs, but must overcome language barriers. There isn’t much BPO activity in either country yet, Bell says.

Latin America, Por Favor

Among other aspiring niche players are locations as disparate as Chile, the Dominican Republic, Costa Rica, Jordan, Jamaica and Fiji.

“Chile has a stable environment and the government there did a nationwide test of English-language capability and 17,000 people qualified,” Bell says. The Costa Rican government is trying to develop local IT companies to serve global clients. The Dominican Republic, along with Puerto Rico, is positioning itself to serve the Spanish-speaking market in the United States. A Jamaican entrepreneur has set up a call center to serve British clients. Jordan was a surprise find, brought to his attention by a colleague, and he is seeking details, Bell says. A New Zealand company with a call center in Fiji brought that country to A.T. Kearney’s attention as a hospitable location that provides good skill levels and attractive costs, Bell says.

Wharton’s Aron says the nature of IT work allows even niche actors to be profitable. Caribbean locations such as Jamaica, Trinidad and Tobago, Barbados and Guyana are low-end call center sites serving U.S. and Canadian markets. Mauritius has attracted Monaco-based Beridium International, which provides back office support for financial services.

India’s Internal Rivalries

The constantly shifting fortunes of BPO hosts are visible within India itself, says Arjun Sethi, who is a principal with A.T. Kearney in New Delhi and leads its technology and transformation practice there. The major metropolitan locations – Bangalore, Chennai, Delhi, Hyderabad and Mumbai – are being challenged by emerging destinations such as Calcutta, Jaipur and Pune.

Indians overall are also “very aware of China,” Sethi says, seeing it both as a challenge and an opportunity. Especially with regard to software application development and maintenance-type IT work, a growing number of Indian organizations, such as Tata Consultancy Systems and Satyam, have set up shop in China, trying to capitalize on the trained labor pool there as well as on a transportation and telecommunications infrastructure that is superior to India’s but not more expensive.

The Indians bring superior project management skills and are hoping to use China not only as a platform for global BPO work but also as a market for such work, Sethi says.

In the ebb and flow of the BPO sector, one country – Ireland – appears to Sethi to be ebbing. Ireland, host to call centers in Dublin, has become saturated and is seeing wage and other cost increases. That may not be the case in Northern Ireland, where India’s HCL Technologies BPO Services recently says it was adding 400 jobs to a call center it operates in Belfast serving European clients. HCL acquired the call center from British Telecom in 2001 and already employs 1,100 people there. An HCL official cited Northern Ireland’s favorable “cost base” as one factor in his company’s decision to expand the call center.

One BPO contender in Europe that is taking direct aim at Ireland is the Czech Republic. CzechInvest, an arm of the Czech Ministry of Industry and Trade, notes that the average salary in shared-service centers in the Czech Republic is less than one-third the salary for comparable positions in Ireland. Overall costs in Prague are less than half of those in Ireland.

Aron sees a “second wave” coming in off-shoring of business processes in which English language fluency will not be a decisive factor. These will be expertise-driven jobs, he says, requiring mainly the ability to analyze and solve complex problems. For example, these workers may be involved in bioinformatics, or risk analytics for insurance, or scenario management in sell-side equity research, and then, Aron says, “someone in the United States can wrap the English language around” their work. Client companies will just have to “unambiguously specify” the work they want done.

Two key beneficiaries of that will be Russia and Brazil, he expects. Both have large populations and a significant number of talented workers with high-end skills in areas such as healthcare, programming and biotechnology available at relatively low wages. “The ability to speak American corporate English is not going to be at a premium,” Aron says.