India + One
Why China Should Be Your "Plus One" for IT Services

Although India remains the top destination for IT outsourcing, recent events such as the terrorist attacks in Mumbai and the Satyam fraud scandal have added to other longer running issues such as wage inflation and dollar devaluation. This has sent many executives looking for other countries to add to their vendor portfolio. Beyond being too reliant on one provider in one geographic local for mission critical functions, executives now have a growing list of countries to choose from to help mitigate this risk and provide similar cost savings to Indian vendors.

This section will compare five popular alternative geographic locations for IT services work on various criteria important for location selection. The following chart summarizes our findings.

Comparison of Five Popular Alternative Geographic Locations.

1. China's Government Supports a Growing IT Services Industry

Although many of the possible "Plus One" locations have governments that are interested in promoting IT services, no other India alternative can match the level of investment China has put into growing its IT services industry. According to KPMG Research, "with a total funding anticipated to be in excess of USD 1 billion," China's "Thousand-Hundred-Ten Project" has a "heavy emphasis on providing training and development" and is focused on "services outsourcing jobs." Some of the programs and initiatives in the other India alternatives are described below.

  • Vietnam's government is starting to play a more active role in promoting offshore IT services with programs like the "Vietnam Software Industry Development to 2010" plan, which is part of its master plan for the IT industry
  • Brazil's non-governmental organization Brasscom, the Brazilian Association of Software and Service Export Companies has taken a more active role in "advising government policy decisions" and has gained a seat on Brazil's Economic Development Council. However, there are no large investment programs geared toward developing its IT services industry.
  • According to Gartner Research, although Russia is putting resources toward growing its IT services industry with the "Electronic Russia 2002-2010" program and is developing eight "technoparks" by 2012, "it is competing against other locations that are putting more effort into this area."
  • Mexico's participation in NAFTA is the most significant initiative affecting its IT services industry. Other efforts are fragmented as they are at the local or regional level and are focused on attracting American companies into Mexico to create jobs versus helping Mexican suppliers market their services.

2. Cost Savings Similar Short-Term, but China's Population Helps Fight Future Cost Creep

Although geographic risk mitigation may be one of the reasons companies are looking for destinations outside of India, cost always plays a dominant factor when outsourcing IT. Currently, most of the India alternatives in this paper have a similar potential for cost savings as firms in India. However, many choose China because of their past experience with double digit wage increases in destinations such as India and Ireland. "China offers a competitive cost structure" compared to many other low-cost destinations for outsourcing and has the long term benefit of a large labor pool to keep costs down.

According to Gartner Research:

  • Vietnam may offer the lowest priced labor for IT outsourcing, but is limited by its lack of Class A facilities and its need for telecommunications redundancy.
  • Russia's cost savings may be similar to other "Plus One" locations, but vendors have already begun moving services outside of Russia to circumvent a highly fragmented labor market caused by limited labor mobility across regions.
  • Mexico's labor costs are competitive, but higher than other possible "Plus One" locations because of the influence of the US market on prices in general.
  • Brazil "still offers competitive services costs" even though the Brazilian real has been steadily appreciating against the U.S. dollar; however companies may have to hire employees as individual contractors to circumvent the high tax on employees.

3. China's Number of Technical Graduates Highlights its Potential to Scale

As the world's most populace nation, China is the only country that can match India in terms of sheer population of individuals with IT skills. As an indicator, of China's roughly 4.95 million annual graduates, approximately 400,000 to 500,000 graduated with a degree in an IT or software related field5. To compare, according to Gartner Research:

  • "About 1.3 million Russians have degrees in computer science or engineering, yet only 70,000 work in IT-related jobs."
  • "Wide–ranging estimates exist of the number of IT workers in Vietnam. VINASA (Vietnam Software Association) estimates about 35,000 professional as employed in software development, 21,000 in the digital-content based industry, and more than 100,000 in telecommunications."
  • "According to PROSOFT (Program for the Development of the Software Industry), Mexico's IT workforce has surpassed 400,000, another 65,000 enter the market each year and significant initiatives are under way to accelerate the pace of growth."
  • "Brazil has more than 250,000 IT Professionals in a population of more than 190 million. Every year, approximately 23,000 new IT graduates enter the industry."

4. China, Brazil and Mexico Rank Highly on Infrastructure

If an "India Plus One" strategy is part of a long term vendor strategy to mitigate risk, then the long term potential of China's local and regional markets for companies can be a major part of that play. While factors such as the global recession may calm the growth seen in the past five years, China will still see "extensive foreign direct investment and trade surplus" that shows a continued confidence that the Chinese market place will continue to develop. In fact, China's GDP is larger than all the other alternative locations combined and it is the only country that is predicted to grow above 5% for the next few years.

GDP Comparison

Source: Economist Intelligence Unit Country Reports, March 2009

5. Language Skills is a Challenge in All Potential India Alternates

One of the challenges of finding a "Plus One" to India is finding a vendor in a location that can recruit and train people with the requisite skills in English. All of the following India alternatives have a growing population of English speakers, but each country has its own set of challenges. The key is to look at English language acquisition from a long term perspective. Which countries are investing in the English skills necessary to service English speaking countries?

According to Gartner Research:

  • China's "government has moved forward with a multiyear investment of more than $10 billion in English-language education" to build up the current level of English skills that is seen as impeding the IT outsourcing industry. In a 2008 poll of more than 100 Gartner clients, "more than 90% had native English-speaking personnel to front-end their service engagement" in China.
  • "Most college-educated Brazilians can understand written English, but the majority of them are not comfortable conversing in English."
  • "A substantial number of professional and business executives in Mexico understand written and spoken English. However, as the IT industry develops, more must be done to meet the demand for English-speaking professionals."
  • In Vietnam, "English is increasingly favored as a second language," "but most vendors and captive centers still need to provide English or Japanese language training to ensure ‘client ready' employees."
  • Although "Russia is a multilingual nation, and schools have a clear focus on improving English skills," its need to "address a deficit in other key European languages" and the obstacle of the Cyrillic alphabet in learning written English may cause its language resources to be spread thin.

6. China's Low Violent Crime and Terrorist Activity Stands out among Alternate Locations

Compared with other India alternatives, China's low level of violent crime and terrorist activity should be considered for companies looking to mitigate the risks of using Indian vendors. Although there are some separatist issues in its non-commercial, western provinces, regional Chinese cities such as Hangzhou and Changsha are known to share a similar level of safety as Shanghai and Beijing, the site of the 2008 Summer Olympics.In comparison to China, Vietnam is the only other IT destination that receives positive marks. It is fairly stable and besides small crimes like pick pocketing, its cities and technology areas are deemed safe from violent crime and threat of terrorism.

Frequent news reports and common perceptions of the relative risk of other India alternatives are as follows:

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