India, China and Malaysia retained their top three positions in AT Kearney's annual ranking for the most attractive locations for offshoring IT, business processes and call centres.
As a region, Southeast Asia is the biggest winner in this year's index. Malaysia maintains its third position Singapore stays at fifth, the Philippines rises from sixth to fourth, Thailand jumps from 13th to sixth, and Indonesia leaps into the Index at 13th.
In Malaysia and Singapore, government promotion policies continue to pay off. Thailand enjoys the biggest rise in this year's Index.
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 centres in China with CMM or CMMI certifications (an industry standard for rating the process-quality of IT development centres) showed the largest increase of any country in the Index, jumping from 108 in 2004 to more than 277 in 2005.
Some eastern European countries slipped this year with the Czech Republic dropping from fourth to seventh position largely because of the rise of Asean countries.
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.
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 further east in their search for high-skill, low-cost solutions.
Latin America presents a similar story. While Chile improved its ranking by one position, rising from ninth to eighth, Brazil, Mexico, Costa Rica and Argentina all dropped in the rankings because of the rise of other countries.
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.
Research manager of this year's index Johan Gott said parts of the Middle East are similar to India in the early 1990s.
He said there are very low compensation costs, a segment of highly educated technical workers, and historical exposure to English and other European languages.
While many multinationals are concerned about stability, companies like Alcatel, Dell, GE, IBM and Microsoft have already established call centre, IT and BPO operations in markets like Tunisia, Morocco and Egypt.
Dubai and neighbouring gulf states continue to push the region as a low risk alternative to India offering all the advantages of a workforce imported from South Asia as well as unbeatable tax incentives and regulatory regimes.
Israel is promoting itself as an ideal location for upper-end R&D, as well as multilingual support centres, 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 that performed surprisingly badly this year are Turkey and South Africa. Both countries have succeeded in attracting significant offshore investments (such as Siemens' large operations centre in Turkey, and a large Lufthansa call centre 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.
AT Kearney's Global Business Policy Council director Simon Bell said despite higher costs the US continues to score very well in the index.
Bell said this is due to the breadth and depth of its skill-base, strong infrastructure and generally positive business environment.
The UK regions 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.
The clearest message from the 2005 Global Services Location Index is the ever-increasing complexity of the location-decision calculus.
Fortune 500 companies are faced with an ever-more complex menu of opportunities and risks.
AT Kearney director Paul Laudicina said that 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 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."
The 2005 Global Services Location Index:
21. Costa Ri
ca 22. Ghana
32. South Africa
34. New Zealand