Labor Cost Advantages of "Offshore"<br>Locations Decline in 2006

The wage cost advantage of offshore locations for office services is set to last for another 20 years, says the latest annual survey by global management consulting firm A.T. Kearney. Even though wages in offshore locations for services, such as IT, business processes and call centers, have started to rise, they will remain cheaper for the foreseeable future under the most aggressive projections of wage inflation and currency appreciation in developing countries. The labor cost changes are partly the result of accelerating wages and currency appreciation in offshore hot-spots, as well as downward pressure on wages in impacted sectors in developed countries. At the same time, key emerging markets have continued to improve their attractiveness in terms of access to talent, industry experience, quality certifications and their regulatory environment. "What is most striking about the results of this year's Global Services Location Index is how the relative cost advantage of the leading offshore destinations declined almost universally, while their scores for people skills and business environment rose significantly," said Paul Laudicina, managing officer and chairman of A.T. Kearney. "These findings reinforce the message that corporations making global location decisions should focus less on short-term cost considerations, and more on long-term projections of talent supply and operating conditions." The findings also send a message to policy-makers in both developed and developing countries: The key to maintaining and enhancing long-term competitiveness lies in skills development, infrastructure investment and the regulatory environment. Virtually every country in the Index, even those that fell in the rankings, improved their absolute score in the last year - confirming that competition is intensifying, and simply maintaining current performance levels is no longer sufficient to attract and retain the world's fast-growing remote services business. Now in its fourth year of publication, A.T. Kearney's Global Services Location Index comprises more than 40 metrics comparing the financial attractiveness, people skills and business environment of 50 countries worldwide. The latest Index is based on full year data for the year 2006. Reflecting the growing number of countries competing to establish themselves as remote services locations, ten new countries have been added to this year's Index - the three Baltic States and Ukraine in Eastern Europe, Sri Lanka and Pakistan in South Asia, Uruguay in Latin America, and Morocco, Senegal, and Mauritius, further expanding the Index's coverage of francophone locations. The complete results of this year's Index are provided below. Highlights from this year's Index include: - India and China continue to lead the Index by a wide margin, with declines in cost advantage offset by further improvements in talent supply and business environment. - South East Asian countries reinforce their position as the primary alternates to India and China, with all six major ASEAN markets (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) now ranked among the top 20 locations. - Reflecting new policy initiatives to promote service exports in many countries, Latin America performs well, with all five major contenders (Argentina, Brazil, Chile, Mexico and Uruguay) rising in the rankings. - As projected in previous years, newer contenders in Central and Eastern Europe are increasingly outshining more established players, as Bulgaria, Slovakia and the Baltic States move ahead, while Poland maintains its ranking and the Czech Republic and Hungary slip in the rankings. - The Middle East and Africa continue to rise in visibility, with Egypt, Jordan, the United Arab Emirates, Tunisia, Ghana, South Africa, Israel and Turkey all maintaining or improving their position, while Mauritius, Morocco and Senegal debut in the rankings - While most "on-shore" or "near-shore" locations in developed countries improved their absolute scores, almost all fell in the rankings, as emerging markets improved their people skills and environment scores at a faster rate. "While total compensation costs for sample positions like IT programmers or call center representatives rose by 5-10% in most developed countries, average wages for similar positions in India, China, the Philippines and parts of Eastern Europe and Latin America grew anywhere from 20% to 40%," said Martin Walker, senior director the Global Business Policy Council, the A.T. Kearney sponsor of the research. "At the same time, we have seen telecom costs in many emerging markets drop by 25% or more, as competition and volumes in the telecom market increase. Similarly, we saw double-digit growth in university enrollment in countries like China, Brazil and Egypt, and the number of firms with quality endorsements like Carnegie Mellon's CMMI certification and the ISO 27001 data-security certification almost doubled in several emerging markets." As focus on the sector increases, the quality of data also improves. "Some of the movement in this year's Index seems to be the result of more extensive research being conducted in key emerging markets and hence more accurate data becoming available - on factors like export revenues, compensation costs, effective tax rates and telecom pricing," commented Johan Gott, manager of research for the Global Services Location Index. Implications for global location decisions "The clear message from the 2006 Global Services Location Index is that short-term cost advantage should not be the primary driver of location decisions," concluded Laudicina. "Currency appreciation and demand growth in key locations will gradually erode their cost advantage. At the same time, continued improvements in infrastructure and policy-making in emerging markets will slowly erode the business-environment competitive advantage of developed countries. The key differentiator in the future will be the talent base and future projections of skilled labor supply will be imperative for companies making long-term location decisions." "For policy-makers too, education and training are the key: investing to expand the quantity and quality of tertiary education, designing training and certification programs in collaboration with industry players, attracting skilled workers from outside the country, opening labor markets within the country - all will be key to ensure a supply of skilled labor that is responsive to ever-changing global needs," said Walker. For more detailed information, read the 2007 Global Services Location Index: Regional Highlights.