According to Ian Marriott, research vice president at Gartner, whilst offshore external service providers (ESPs) have advantages in economies of scale and specific areas of expertise, they do not have a magic solution for immediately correcting flawed outsourcing processes. As a result, Marriott recommends that businesses first master offshore ESP management if they are to develop a successful offshore ESP relationship.

The cost of labour is, and will remain, a major factor in the choice of country destination. But Gartner advises businesses to also understand and evaluate the costs-versus-risk equation. "Any contract with ESPs brings a certain set of risks that need to be managed so that a successful relationship develops," Marriott says.

"When using offshore service providers, these common risks become more prominent, and some uncommon risks appear. Although infrastructure, process, project management and security risks are normal in any ESP relationship, human capital consistency, socio-political bias or legal jurisdiction are not typically included in the due diligence process for vendor selection. Organisations must understand the various types of risks when using global software teams or offshore outsourcing, and assess each through a more rigorous due diligence of the short listed offshore firm," he adds.

Interest in nearshore options for IT services and BPO is strong, particularly in Western Europe, largely due to language requirements, Gartner said. For Europe, Ireland, Northern Ireland and Spain are mature locations. Eastern Europe is attracting offshore investment whilst parts of Africa are also positioned for growth. For the US, Canada and Mexico are the most likely near- shore options.

In the wider marketplace, the tremendous hype around offshore BPO, coupled with India's apparent success and the mistaken belief that all BPO elements can be delivered remotely, has led to many English-speaking countries scrambling to join the offshoring trend. "Offshore BPO relationships are long term, compared with application service projects," Marriott explains.

He cautions, "Although some of these countries seem promising on paper, Gartner advises companies to be extremely cautious during evaluation, paying special attention to the historical track record of these nations; specifically low sociopolitical turbulence, physical and cyber security, and enforcement of intellectual property (IP) and patent law."

Gartner has identified the countries best known for their IT-related activities (such as software development, outsourcing and IT-enabled services), as well as some of the emerging countries. Leading countries have more resources, infrastructure and offshore focus than their emerging counterparts. Such resources signify the level and availability of skilled IT talent, workforce, investment funds and revenue.

Global Sourcing Status

Source: Gartner (September 2005)

According to Gartner, India is currently the only clear leader. It has the majority of essential resources and sufficiently robust infrastructures to deliver IT products and services successfully. Other countries, including China, Brazil and the Czech Republic, are making inroads, but they currently lack some of the attributes to qualify as leaders.

Emerging countries have limited offshore IT revenue. They do not yet have sufficient resources and infrastructure to execute on a profitable level, nor do they have robust strategies to penetrate the international market. Early entrants are noted for their preliminary activities to launch an offshore IT industry.

Marriott says that not all countries are able to offer all types of services, or the scale or international business experience to meet the needs of a buyer organisation. "Some Eastern European countries, particularly ones that are now in the European Union, are attracting attention," he said. "However, the choice of local providers is limited. This may change, as these countries become more mature members of the international business community. In the meantime, multinational and leading Indian providers are establishing a presence there, mainly as nearshore locations for Western Europe."

As part of the country evaluation, Gartner recommends that qualitative indicators are also considered and advises organisations selecting offshore vendors to carefully choose the country with which they want to do business based on such factors as:

In terms of size and number of IT professionals, Gartner counsels that currently only China comes close to India in potential. However, as nascent market offshore capabilities increase, analysts predict that a long-term sourcing strategy may extend to several other countries.