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  While India, China and Southeast Asia continue to dominate A T Kearney's annual ranking of the most attractive locations for "offshoring" of service activities such as IT, business processes and call centers, the United States ranks surprisingly well in a new version of the index.
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For 2005, the global management consulting firm added four lower-cost cities in the United States, United Kingdom, Germany and France to determine how they compare to more traditional offshore locations across the 40 measurements analyzed to create the Global Services Location Index (previously known as the Offshore Location Attractiveness Index). The U.S., represented by San Antonio, ranked 11th out of the 40 countries evaluated.

Additional findings from this year's Index include:
* India remains the best offshore location by a wide margin, although wage inflation and the emergence of lower-cost countries decreased its overall lead.

* Improved infrastructure and relevant people skills have increased the attractiveness of China as a low-cost option for servicing Asian markets.

* Thailand jumped from 13th to 6th in this year's Index and Southeast Asian countries now make up four of the top six locations on the Index.

* Offshore attractiveness in Europe continues to migrate eastward as Bulgaria, Slovakia and Romania all enter the Index for the first time.

* The Middle East and Africa appear to be the next frontier in offshoring as countries such as Egypt, Jordan, United Arab Emirates and Ghana perform well.

Where Developed Countries Rank

"In previous years, clients kept asking us where lower-cost cities and regions in the U.S. and Europe would stand if they were included in the Index," said Simon Bell, director of A.T. Kearney's Global Business Policy Council. "So we collected the necessary data and, as we suspected, the U.S. in particular scored very well in the Index."

Despite higher costs, the U.S. benefits from the breadth and depth of its skill-base, strong infrastructure and generally positive business environment. The U.K. regions (as represented by Belfast) do not perform quite as well (ranked 28th out of 40), but still match or surpass better-known offshore locales like the Republic of Ireland and South Africa. Germany (represented by Leipzig) and France (represented by Marseille) placed 31st and 35th, respectively, largely due to higher costs and weaker business environments, but still rank among the best locations for people skills and infrastructure quality.

"The performance of the four developed countries is not surprising since mature markets still offer by far the best combination of skill levels, relevant experience, infrastructure and business environment," said Paul Laudicina, managing director of the Global Business Policy Council, the A.T. Kearney sponsor of this research. "The standard Index gives cost factors a 40 percent weighting, vs. 30 percent each for People Skills and Business Environment. If cost savings are given a higher weighting, then North American and West European locations drop down the rankings.

"This strength of developed country service sectors, despite all the hyperbole surrounding the offshoring debate, is reflected in their trade balances. It is worth remembering, for example, that the UK operates the world's largest trade surplus in business and IT services, and the U.S. exports a larger volume of business and IT services than any other country, offsetting more than 10 percent of the total U.S. deficit in manufactured goods."

India and China: still dominating

India still leads by a wide margin. The gap between India and the second-ranked country, China, is larger than the gap between the next nine countries combined. Nevertheless, India's lead has shrunk slightly compared to 2004. This is mainly due to a slight reduction in India's financial attractiveness, the result of wage inflation in India and the emergence of new even lower-cost contenders such as Ghana and Vietnam.

China maintains its second place ranking and partially closes the gap with India, thanks largely to continued improvement in its infrastructure quality and the availability of relevant people skills. For example, the number of development centers in China with CMM or CMMI certifications (an industry standard for rating the process-quality of IT development centers) showed the largest increase of any country in the Index, jumping from 108 in 2004 to more than 277 in 2005. For a growing number of Asian and Western multinationals, China remains the best choice for serving their growing operations throughout the East Asia region — the logical location for IT and back-office support and call centers for China itself, but also a low-cost option for servicing established markets in Japan, Korea, Taiwan, Hong Kong and Singapore.

ASEAN: still rising

As a region, Southeast Asia is the biggest winner in this year's Index. Malaysia maintains its 3rd position Singapore stays at 5th, the Philippines rises from 6th to 4th, Thailand jumps from 13th to 6th, and Indonesia leaps into the Index at 13th. Even Vietnam, at 26th in this year's Index, sees its ranking rise from 20th to 16th position among the original 25 countries included in both the 2004 and 2005 Indices.

In Malaysia and Singapore, government promotion policies continue to pay off. Given its high-wage levels, Singapore has deliberately positioned itself as a safe location for sensitive high-end activities, with a particular emphasis on business continuity, IP protection and data privacy. Malaysia has augmented continued investment in world-class infrastructure along the Multimedia Super-Corridor, with further incentives for corporations choosing to locate in Malaysia and additional policies to open up the labor pool and deepen English language and technical skills throughout the population.

The Philippines, despite continuing political instability and infrastructure weaknesses, continues to benefit from the global exposure and English language skills of its workforce. Thailand enjoys the biggest rise in this year's Index. This seems to be due largely to improvements in educational outputs, plus some improvements in infrastructure quality and the overall business environment. While still challenged by weak English-language capabilities, Thailand has the potential to emerge as key low-cost challenger to the Philippines in South East Asia.

At 13th, Indonesia is the third-highest new entrant in this year's Index, benefiting from competitive wages, rent and electricity costs, a relatively low tax burden and a very large workforce. However, weaknesses in the business environment, education quality, and language skills continue to be a concern. While Vietnam ranks low in the Index compared to the other ASEAN participants (due largely to its weak infrastructure and business environment ratings), it is still attracting attention both as an IT-development location for US-based firms and as a low-cost alternate to China for Asian language back-office and call-center operations.

Central and Eastern Europe: ever eastward

Dynamics in Central and Eastern Europe are instructive. While the more established offshore locations included in the previous years' Indices (the Czech Republic, Hungary and Poland) slipped slightly in the rankings, several newer contenders from the region made strong debuts in the Index.

Despite continuing improvements in people skills, infrastructure and business environment, the Czech Republic slipped from 4th to 7th position, largely because of the rise of Thailand and the Philippines, but also because of increasing wages and other costs in the Czech Republic. Poland and Hungary also slipped from 10th and 11th to 18th and 19th, respectively, for similar reasons. Russia actually improved its position among the original 25 countries (from 21st to 17th), but dropped in the overall rankings to 27th, due to rising wages. Moreover, despite improvements, Russia still ranked 39th out of 40 on business environment metrics.

At the same time, strong performances by three new entrants in the Index (Bulgaria at 15th, Slovakia at 16th and Romania at 24th) reflect what many on the ground have observed — as costs in the most advanced Central European countries converge toward EU-levels, companies are moving farther East in their search for high-skill, low-cost solutions.

Latin America: improving, but still challenged by new contenders

Latin America presents a similar story. While Chile improves its ranking by one position, rising from 9th to 8th, Brazil, Mexico, Costa Rica and Argentina all drop in the rankings, largely due to the rise of other countries. Brazil actually maintains the same score as in 2004, but drops from 7th to 10th place, as it is overtaken by Thailand, Chile and Canada. Brazil continues to score well on people skills as graduation and certification rates rise, but its financial attractiveness suffers from the entry into the Index of new lower-cost countries and its business environment continues to be disadvantaged by the relative inflexibility of its labor laws. Mexico and Costa Rica both improve their rankings (from 14th to 11th for Mexico and from 16th to 14th for Costa Rica) and Argentina holds steady at 15th among the original 25 countries, but they all drop in the overall rankings (to 17th, 21st and 23rd respectively), largely because of new Eastern European and Middle Eastern entrants.

Middle East and Africa: the next frontier

Perhaps the biggest surprise in this year's index is the strong performance by several countries in the Middle East and Africa — Egypt jumps into the Index at 12th, Jordan at 14th, the United Arab Emirates at 20th, Ghana at 22nd and Tunisia at 30th.

"At first, executives are surprised by these results, given the negative images associated with these regions, but upon closer inspection, the advantages become apparent," said Johan Gott, manager of research for this year's Index. "In many ways, parts of the Middle East are similar to India in the early 1990s — very low compensation costs, a segment of highly educated technical workers, and historical exposure to English and other European languages."

While security and stability concerns may be too much for some, a large number of global companies (like Alcatel, Dell, GE, IBM and Microsoft) have already established call center, IT and BPO operations in markets like Tunisia, Morocco and Egypt.

Egypt and other North African nations stress their unique combination of European language skills, technical proficiency and low wages, while others in the region are developing alternate value-propositions. Authorities in Dubai (and to some extent, the other Emirates and neighboring gulf states) are pushing the region as a low-risk alternative to India, offering all the advantages of a workforce importe from south asia, in combination with unbeatable infrastructure and very attractive tax and regulatory regimes. high-cost compared to others in the index, israel is promoting itself as an ideal location for upper-end r&d;, as well as multilingual support centers, drawing on the strengths of its education system and the diversity of its population originating from all over Europe and the Middle East.

Two countries perform surprisingly poorly in the Index, despite their emerging success as offshore destinations: Turkey and South Africa. Both countries have succeeded in attracting significant offshore investments (such as Siemens' large operations center in Turkey, and a large Lufthansa call center in South Africa), but they perform poorly in the published Index, since their high costs relative to other emerging markets are not offset by correspondingly higher education levels or business environment ratings.

Implications for global location decisions

"Ultimately, the clearest message from the 2005 Global Services Location Index is the ever-increasing complexity of the location-decision calculus," concluded Paul Laudicina. "As we hear year after year in the FDI Confidence Index (our annual survey of the leaders of the world's top 100 corporations), executives today are faced with an ever-more complex menu of opportunities and risks.

"Over the last three years, the number of countries covered in the Index has jumped from 11 to 25 and now to 40 to reflect the greater complexity of questions that our clients are asking. It is no longer enough simply to spot some low-cost location where basic processes can be performed. Companies need to carefully analyze and segment all of their business functions. Based on the individual language requirements, skill levels, security concerns, regulatory strictures and other criteria specific to each function, they will then find a range of different locations that make sense for different sets of activities."

"For those who have only just begun to recognize the scale of the opportunity, this added complexity may seem a little overwhelming," said Bell. "But the good news is that all this competition is encouraging many countries, regions and cities to take a hard look at their education systems, infrastructure and other fundamental drivers of competitiveness. That ultimately raises productivity and prosperity in all locations. And for companies, it means they are all the more likely to find the ideal solution for each one of their functional needs, somewhere in the world."

The 2005 Global Services Location Index
Rank Country Rank Country
1. India21. Costa Rica
2. China22. Ghana
3. Malaysia23. Argentina
4.Philippines24. Romania
5.Singapore25. Jamaica
6.Thailand26. Vietnam
7.Czech Republic27. Russia
8.Chile28. U.K*
9.Canada29. Australia
10. Brazil30. Tunisia
11. U.S.*31. Germany*
12. Egypt32. South Africa
13. Indonesia33. Israel
14.Jordan34. New Zealand
15.Bulgaria35. France*
16.Slovakia36. Panama
17.Mexico37. Portugal
18.Poland38. Spain
19.Hungary39. Ireland
20. UAE40. Turkey
* Based on lower-cost locations in each country: San Antonio (U.S.), Belfast (UK), Leipzig (Germany) and Marseilles (France).

The A.T. Kearney Global Services Location Index analyzes the top 40 services locations worldwide against 40 measurements in three major categories: cost, people skills and availability, and business environment.

The Index assigns weightings reflecting the drivers of offshoring decisions based on A.T. Kearney research and engagement experience. Because cost advantages have been the primary impetus behind offshoring, financial factors constitute 40 percent of the total index weight. People skills and availability and business environment each receive a 30 percent weighting.
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