Location Risk Monitoring

Q3 2016, Supply Wisdom Monitor: Country Risk Index

Written by Swathi Sarma

Q3 2016 Supply Wisdom Monitor: Country Risk Index covers global outsourcing markets and ranks key locations based on the Composite Risk score, a comprehensive measure of important risk criteria. Ten major outsourcing markets have been analysed in this index using the Supply WisdomSM framework, covering categories such as Geo-Political, Financial, Scalability, Legal, Business, Infrastructure, Macro-Economic, and Quality of Life.

Q3 2016 Highlights:

  1. China and India continued to rank #1 and #2 on the index respectively, driven by their well-established IT-BPM markets, maturity of vendors as well as significant cost advantage and availability of talent pool.
  2. The Philippines witnessed the biggest change in its risk ranking, moving from #3 to #7 owing to the political turbulence created by the new Rodrigo Duterte administration, which had a far-reaching impact on the peso as well as investor sentiment.
  3.  Vietnam ranks #6, climbing 1 spot from the previous quarter. As a key emerging IT-BPM hub in the Asia-Pacific region, progressive measures taken by its government to increase ICT activity in the country and attract investors offer a positive outlook in the medium to long-term.

Click on any country for more information.

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Rank Country Overall Risk Score
Q2 2016 Q3 2016
0 4.59 4.56

As a key global sourcing market, China’s IT-BPM growth has been fueled by its strengths in human capital, technology capability, and cost arbitrage. However, the country has also faced criticism for its unfriendly business atmosphere, particularly towards foreign firms. Nevertheless, the sourcing industry continues to get government support as seen from a number of initiatives for improving the technological environment. High pollution levels, natural disaster risk, and cybercrime are among the key challenges.

Macro-Economic Risk witnessed a decline as the Chinese economy indicated signs of stability towards Q3 2016 and stock market performance was higher compared to the quarter before.
The drop in Geo-Political Risk was due to the lower Social/Security Risk during the third quarter. However, the country faces high Natural Disaster Risk due to the Pacific Typhoon Season.
Business Risk decreased owing to the numerous measures implemented by the government to eliminate regulatory hurdles, improve access to credit, and streamline procedures for faster approval of new enterprises.
0 4.72 4.73

India remains the go-to market for IT-BPM services with high provider/process maturity and a large talent pool. However, rising salaries, social unrest, and cybercrime have emerged as key challenges over the years. To improve the country’s business competitiveness and create a positive investor climate, the current administration has implemented several reforms for eradicating excessive bureaucracy while improving transparency and efficiency.

Business Risk declined as a direct result of the government’s concerted efforts and various business reforms that have improved India’s business competitiveness.
Geo-Political Risk increased due to heightened tensions with Pakistan, increased threat perception from terror, and several large scale protests in key IT-BPM hubs, which posed a risk to business continuity.
↓ The marginal decline in Scalability Risk was driven by the higher revenue growth recorded by the country’s BPO sector towards mid-Q3 2016.
+1 5.07 4.98

Hungary is one of the main hubs for shared services in Central and Eastern Europe, with several IT companies relocating their R&D centers there owing to cost effectiveness and talent availability. Primary industries serviced include BFSI, Public Sector, and Manufacturing. While multinationals dominate the technology industry, a smaller share of Hungarian firms offer niche tech services. The IT industry continues to attract investments with Hungarian Government’s continual efforts to improve the business environment.

The decline in Geo-Political Risk can be attributed to the drop in Social/Security and Natural Disaster risks.
Macro-Economic Risk decreased owing to improvement in budget surplus this quarter.
Increase in Financial Risk was driven by high real-estate prices as demand outweighed supply.
+1 5.15 5.08

A positive business atmosphere, technological capability, favorable tax regime, and good English-speaking workforce are among Ireland’s strengths that attract IT-BPM businesses. The country’s software sector in particular, witnessed a large increase in foreign investments as well as talent pool during 2015. However, repercussions of the Brexit are expected to weigh in on the Irish economy in the mid to long-term.

Macro-Economic Risk declined owing to a relatively stable currency, better stock market performance than Q2 2016, and a GDP expansion fueled largely by increased spending from corporations on R&D.
The rise in Financial Risk was primarily driven by higher office space rents with demand outstripping supply.
Business Risk increased owing to changes in documentation requirements for taxation as well as trading across borders.
+1 5.17 5.14

In recent years, Mexico’s IT-BPM sector has increasingly gained relevance among firms looking to leverage the nearshore advantage, boasting the presence of many major players like IBM, Accenture, and TCS. As a key nearshore hub in LatAm, Mexico has distinct advantages of cultural compatibility with major buy-side markets like the U.S, a multilingual labor pool, and cost arbitrage. However, widespread corruption, regulatory challenges, and high crime are key concerns for enterprises operating in the country.

Geo-Political Risk decreased due to decline in Political and Natural Disaster risks. However, Social/Security Risk remained high due to several protests and demonstrations.
The change in Macro-Economic Risk was driven by increased fiscal deficit during Q3 2016 and lower stock market performance compared to the quarter before.
Business Risk increased due to higher number of procedures in activities such as starting a business, dealing with construction permits, and registering property. The country slid from #38 to #47 in the Doing Business 2017 rankings.
+1 5.25 5.23

Favored by growing exports and a rapidly expanding ICT sector, Vietnam’s software industry has recorded increased revenues in recent years. Furthermore, its nearshore position with respect to sourcing services to Japan and South Korea offers a positive outlook for its IT Services market. The Vietnamese Government is providing a vast array of incentives and taking various measures to improve the business environment. However, shortage of skilled talent is a persistent issue.

Business Risk declined owing to improvement in areas like investor protection, tax payments, and trading across borders.
Geo-Political Risk declined mainly due to the drop in Social/Security Risk. However, Natural Disaster Risk witnessed an increase during the quarter.
Macro-Economic Risk increased due to weaker stock market performance as well as decline in fiscal balance in Q3 2016.
-4 5.02 5.24

The Philippines, already a highly attractive market for BPM services, recently unveiled it 2017-2022 Roadmap which aims at increasing market share of non-voice components and high-value activities such as Analytics, Artificial Intelligence etc. Key challenges for investors include the current political turmoil, infrastructural issues in CBDs, and heightened crime levels (especially towards foreigners). To alleviate some of the pressure on existing infrastructure in the NCR, the government is promoting decentralized growth in “Next-wave Cities”.

The increase in Geo-Political Risk was driven by high Natural Disaster Risk and overall political uncertainty since the new president took oath in June 2016.
The rise in Macro-Economic Risk was due to higher fluctuation of the Philippine Peso and lower stock market performance compared to Q2 2016.
Business Risk declined with improved ease of doing business in the Philippines; reforms implemented by the government made dealing with construction permits and paying taxes easier.
0 5.40 5.33

Despite Macro-Economic and Geo-Political challenges, Colombia’s appeal as a nearshore sourcing destination remains strong. Apart from being a strategic location, presence of a large Spanish-speaking workforce and overall cost arbitrage play a key role in attracting enterprises to the country. The services portfolio over the years has expanded to cover Application Development & Maintenance, Finance & Accounting, etc. Key scalability challenges for firms include limited multilingual capability and availability of STEM graduates.

Macro-Economic Risk witnessed an increase as the Colombian economy underperformed against market expectations in the second quarter, along with mounting fiscal and trade deficit.
The increase in Colombia’s Geo-Political Risk was primarily driven by the jump in Natural Disaster Risk during Q3 2016.
Business Risk decreased owing to improvements in the country’s credit coverage and fewer procedures to start a business.
0 5.47 5.39

As a favored destination for hosting IT-BPM operations that can serve clients globally, Brazil’s strategic advantage in the Americas has been key to the sourcing sector’s growth in the country. Its weak currency has further increased the cost advantage associated with sourced operations. With a possibility of improvements in the country’s economic climate owing to fiscal interventions, Brazil stands to gain from the growing nearshore trend.

The decline in Brazil’s Macro-Economic Risk can be attributed to the improving currency stability, better stock market performance, and lower risk associated with foreign trade and payments.
Led by lower Political and Natural Disaster Risk compared to the previous quarter, Brazil’s Geo-Political Risk dropped during Q3 2016.
Quality of Life
Climbing cost of amenities such as internet and restricted supply in the residential real-estate market led to an increase in Brazil’s Quality of Life Risk.
0 5.49 5.44

Poland’s sourcing sector continues to gain market share owing to the country’s strategic access to Western Europe, a talented workforce, and low operational costs. Krakow and Warsaw have the maximum number of sourcing companies in Poland owing to their robust commercial and telecom infrastructure. However, large scale expansions can be a challenge due to Poland’s small industry size and a limited workforce with niche IT-SMAC skills.

Macro-Economic Risk witnessed a decline owing to lower forex rate fluctuations during Q3 2016.
The drop in Business Risk is due to new business reforms by the Polish administration to improve ease of doing business.
Scalability Risk reduced owing to the upwardly revised growth outlook for the country’s ITO industry.

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