Outsourcing

Thinking of outsourcing your business process operations? Then head for India. That seems to be the collected wisdom from the herds of Western companies looking for cheaper alternatives in recent years. Yet how many managers actually take the time to check out the competition? By Paul Smith, Managing Director of Harvey Nash.

True, just about every developing nation has staked a claim in the great rush to offshore, and any executive attempting to visit them all would need to take a few months out with a round-the-world air ticket and some Rough Guides. Then again you could always brush up on the advice of any number of management consultants and compare and contrast tax rates, graduate numbers and English language skills. The chances are, though, that you would still find yourself stuck on the sub-continent.

Or you could do what we did – trust your instincts. In 2002, enough of our clients were interested in outsourcing for us to seriously contemplate setting up an operation overseas. But where? We could already see that the Indian land grab would eventually result in some of the problems now being experienced – wage inflation, high staff churn and skills shortage.

The latter is a particular problem when undertaking project-based work, because the constant turnover of staff means inevitably that work will be done more slowly as new staff take time to gain familiarity with the work and forge relationships with management and colleagues.

A visit to Bangalore and Hyderabad also showed up other more immediate problems: the terrible infrastructure, poor hygiene and only basic business traveller facilities. Neither was it, even in 2002, quite as cheap as some consultants and Indian officials would have us believe.

Next stop was Manilla, a city apparently awash with experienced IT graduates, cheap as chips and falling over themselves to be hired. Again, the image sold by interested parties failed to live up expectations. The infrastructure beyond the capital was poor, pollution was choking and English language skills were disappointing.

Our third and final destination was Hanoi. What struck us immediately was that the Vietnamese capital had many of the attributes the other two cities lacked. The transport system was excellent, business hotel facilities were good, the streets were clean, and you could drink the water. Moreover, in the Vietnamese government, we found a partner who was as keen as we were to establish operations - and that unstinting support has continued until this day.

Another major plus was the quality of the staff. English is widely spoken, while over three-quarters of students graduating do so in a science-based subject. Sixty per cent of those go on to complete PhDs.

Perhaps most crucially, many of those who fled the country in the Boat People exodus of the 1970s are returning, bringing important Western management, language and IT skills. This has enabled Vietnam to target a wide range of countries outside those that speak English. For example, the country has emerged as a favourite outsourcing target for Japanese companies.

Japan was a large recipient of Vietnamese refugees, a factor reflected in close cultural ties between the two countries and connections between the Hanoi and Tokyo governments. Indeed, the Vietnam Software Association, Vinasa, forecasts that the country will have 10% per cent of the Japanese outsourcing market by 2010, worth some $350m.

Finally, there were the incredibly low costs, which we estimate at around a fifth below those in India. Gartner, the highly-respected IT research firm, says that Vietnamese programmers are among the cheapest in the world, earning half of Indian salaries and a tenth of those paid in Australia. In our experience, it's hard to disagree. It all added up to a very attractive package, and one we are glad to have pursued.

We inhabit state-of-the-art offices in central Hanoi, situated conveniently opposite the city's university science and technology campus. Insurance group Prudential and German tech giant Siemens are our neighbours.

We now employ more than 800 staff, a figure that is rising by 25% a year. Of those, almost three-quarters hold PhDs, with the remainder being mathematics graduates. It's fine to recruit such highly qualified staff - the trick is in keeping them. Our churn in three years is less than 5%. I would like to think that this is purely down to our personnel skills, but have to admit that the Vietnamese business culture plays its part.

But don't just take my word for all this. Gartner produced a report in August 2005, predicting that India could lose as much as 45% of its outsourcing business within five years for the very reasons cited above: high salaries driven by skills shortage, UK customer dissatisfaction with Indian workers' performance, and high staff churn disrupting project-based work.

The beneficiaries of the predicted exodus include not only Vietnam, but also the Philippines, Malaysia and Poland, says Gartner. Its report also predicts the amount of money spent on offshoring to reach $67bn this year .

Inevitably the developments noted have resulted in a boom in the Vietnamese market. Vinasa says the local software market generated $685m of business in 2004, up by a third on 2003. Around 10% came from outsourcing, a rise of half year-on-year.

This is great news for the Vietnamese economy, but is it the harbinger of bad news for potential customers in terms of costs and skills shortages, similar to India? Already, critics have argued that Vietnam lacks IT management depth that has hindered project development work. While this has not been our experience - we generally project manage from the UK - in a competitive offshoring environment, it's the kind of reputation that can mar your chances.

My guess though is that Vietnam has at least another five years as the low-cost destination of choice before, inevitably, costs begin to rise. But, by then, other countries will also have experienced rises.

But back to the beginning. If you are considering outsourcing, then our experience shows that thinking beyond the obvious (i.e India) can bring success. As I tell all our potential customers: visit the other candidate countries before you come to Hanoi. The answer we get afterwards is rarely surprising and it's why we currently have 42 clients against three in 2002.

As the old Vietnamese proverb says: 'A frog living at the bottom of the well thinks that the sky is as small as a cooking pot lid.'

Paul Smith is Managing Director of Harvey Nash, global recruitment specialist and provider of human capital management, outsourcing and consulting services.

Contact: Paul.Smith[at]harveynash.com

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