Why outsourcing to Vietnam?

1. Overview

This document lays out the business case for meeting your company’s software development needs by outsourcing to Vietnam. It first outlines factors to consider in deciding which offshore locations to outsource to. Then it considers those factors one at a time for Vietnam, concluding that the country is a promising offshore location for outsourced software development and for business’ other IT needs.

2. Factors to Consider Regarding the Offshore Provider’s Location

In this section, we present a simple and straightforward framework for understanding the advantages and disadvantages of various offshore locations for your outsourced projects and business functions. This list of factors focuses on the most important and relevant factors, without becoming overly complex by listing unimportant minutiae.

The main factors that should be considered are as follows:
Price: Obviously one of the main resources to outsource work is to save money, so naturally you will be interested in the price quoted by the offshore provider. But it is critical to know exactly what that price includes. Costs for labor and overhead are both important components of the total price. Before doing direct comparisons of offshore providers’ labor costs, you should consider how much overhead you will incur in managing the outsourced work.

Labor Force: Who exactly will be working on your project? You should be familiar with these workers’ professional experience, education, and technical expertise. Also, make sure that there are enough workers available to work on your projects, so that your work won’t be slowed by labor bottlenecks. Find out what kind of turnover rate the offshore provider has, because if the turnover rate is high, a lot of time will be wasted on re-training and transferring information to new offshore employees.

Socio-Economic Stability: You can greatly reduce the risk of outsourcing by choosing to work with an offshore provider that is located in a country that has high economic, ethnic/religious, and political stability. If the offshore provider is located in a country with significant instability and conflict, your project may proceed more slowly or come to a complete halt. Also, the unstable situation may present dangers if and when your employees have to travel to the offshore site (Americans are often a target of insurgents overseas). And ultimately, if the country unexpectedly ends up with new leadership, you may find that the business-friendly policies that originally attracted you to the country suddenly change and become hostile to foreign investment.

Economic Stability: Be familiar with the country’s GDP and other economic indicators, and how those indicators have changed over the past several years. Also, consider whether foreign investment is increasing or decreasing and try to understand the underlying factors. What international trade treaties and pacts is the country a part of?

Ethnic/Religious Stability: Know what ethnic and religious groups are present in the country and whether they are tolerant or intolerant of one another. Does the country have a history of ethnic unrest and/or religious conflict?

Political Stability: Understand the local political situation where the offshore provider is located. What kind of government does the country have, and how long has the current regime held power? Does the country have a history of upheaval and uprisings? Know whether rebellions, revolutions, and coups are common. Also consider the stability of neighboring countries and whether they have friendly relations with the country where the offshore provider is located. Read expert analyses of any regional conflicts.

Business Environment: When you outsource IT-related work, you’ll probably be exchanging proprietary information and dealing with intellectual property. You need to know what policies the country has in place to protect your company’s trade secretes and intellectual property rights. Likewise, does the country have appropriate laws regarding economic development, taxes, and the labor force? How well are those laws enforced? All of these issues are very important in fostering a favorable business environment.

Language: You must be able to communicate with the offshore service provider – not only with the top managers, but also with the workers who are involved with your project on a daily basis. How well do they speak and write in English?

Strategic Fit: Many companies ignore questions of strategic fit – much to their chagrin. If the offshore provider doesn’t understand and adapt to your company’s strategic goals and standard business processes, the final deliverable will not be what you are looking for. Have an open discussion with the offshore providers’ managers and try to understand why they’re in business and how your project will be a good fit with their strategic goals.

3. The Benefits of Outsourcing to Vietnam

As stated in the introduction, this section will evaluate Vietnam as an outsourcing destination against each of the factors listed in the preceding section.

Price: In Vietnam, labor costs are 90% less than those in the U.S., which means significant cost savings for your company. Even compared to other outsourcing destinations, Vietnam’s labor costs are attractive. According to an article in “GlobalServices” in August of 2006, Vietnam’s labor cost for outsourcing IT functions and business processes are 30% less than those in India, and also less than those of countries in Eastern Europe. In October of 2006, GlobalServices named Vietnam’s Ho Chi Minh City among the top 50 outsourcing cities in the world, due to its having “one of the lowest production costs,” among other reasons.

Labor Force: The government of Vietnam recognizes and promotes the importance of education and training. According to Vietnam Economic Times, there were more than 200 institutions of higher learning in the country in 2004, and that number had increased by 60% in the preceding six-year period. Today the country has a 96% literacy rate and 80% of the country’s college graduates hold degrees in the sciences (Vietnam Economic Times). This makes Vietnam an exceptional country for outsourcing technological projects, because the highly educated population has a high level of scientific and technical literacy. The labor force also have much lower turnover and much higher stability than do those of most other countries that are active in outsourcing. Overall, companies in Vietnam has an IT-related turnover rate of less than 5%, whereas in many other countries, such as India, this turnover rate can be 10% or even higher. The aforementioned 2006 GlobalServices article cited Ho Chi Minh’s “significantly low attrition rate” and “strong labor pool” as two other reasons for the city’s inclusion in its list of the top 50 outsourcing cities.

Socio-Economic Stability: Common outsourcing destinations in Asia-Pacific are often plagued by instability. Consider, for example, the 2006 coup in Thailand, the Kashmir conflicts between Pakistan and India, and the Sri Lankan military’s struggles against the Liberation tigers of Tamil Elam. There are many U.S. travel advisories that warn Americans against traveling to these areas, but fortunately Vietnam doesn’t share these countries’ woes. In fact, Vietnam is a very stable country, which creates a hospitable business environment for outsourcing.

Economic Stability: Vietnam’s economy is healthy and growing rapidly, with a GDP that, according to CEIC, grew an average of 7.4% in the six years leading up to 2005. This is the second fastest GDP growth in all of Asia, as published in the New York Times article, Vietnam’s Roaring Economy Is Set for World Stage, on October 25, 2006. FDI (foreign direct investment) was almost US$5 billion in 2005, which makes a favorable comparison with that of other countries that are popular destinations for outsourcing work.

Ethnic/Religious Stability: Because 95% of Vietnam’s population is ethnically Vietnamese and more than 80% of the citizens do not identify themselves with any particular religion, Vietnam is largely free of ethnic/religious conflict. A 2003 UNDP (United Nations Development Programme) study concluded that Vietnam had one of the most secure environments for investment, given the conflicts in Iraq and the surrounding region. Likewise, Vietnam was ranked as the safest among the 14 countries in the Asia-Pacific Region by the Political and Economic Risk Consultancy in Hong Kong (Berth of a Nation in Time, autumn 2002).

Political Stability: The current government has held power since Vietnam’s 1975 reunification, meaning that there have been more than 30 years of political stability in the country. The last major conflict with a neighboring country was almost 30 years ago, in 1978. Two American presidents (Bill Clinton during his presidency and in 2006, and George W. Bush during the APEC summit) have visited the country, and Bush met with several top officials including the president, prime minister, and Communist Party chief, thereby underscoring the country’s political stability.

Business Environment: Vietnam has had a free market since its centrally-planned economy was reformed through “doi moi” twenty years ago. Today, Vietnams’ policies create a warm and welcoming business environment for foreign investment. The country became the World Trade Organization’s 150th member in November of 2006, thanks to a vote of the organization’s General Council. At that time, Pascal Lamy, the Director-General of the WTO said, “Viet Nam has shown how anchoring domestic reforms in the WTO can yield dramatic results. Viet Nam’s economic growth topped 8% last year, foreign direct investment rose steeply to over $6 billion, and exports surged by over 20%. More must surely follow with the new laws, administrative measures, and commitments on goods and services that are in Viet Nam’s membership package.” Vietnam is also taking great strides in protecting intellectual property rights and since 2002 has largely been complying with the guidelines established in the WTO Trade-Related Aspects of Intellectual Property (TRIP). When Vietnam became a WTO member, it agreed to comply with TRIP immediately, without a transitional period. The country is expected to achieve full TRIP compliance soon, thanks to legislation that was passed in 2006. This legislation prompted the U.S. to laud the country for its “extensive revisions and updating of its intellectual property laws.”

Language: Unlike many Asian languages, Vietnamese uses the Latin alphabet, just as English does, which makes it relatively easy for Vietnamese speakers to learn English. English is the second most popular language in the country, and the majority of Vietnams’ college graduates have high proficiency in English. Consequently, most IT workers in Vietnam are able to communicate easily with U.S. companies in English when completing outsourcing projects.

4. Who outsources to Vietnam?

Many Japanese companies are choosing to outsource much of their IT work to Vietnam. According to a November 2006 article in GlobalServices, “Vietnam: Capitalizing on the China-Japan,” by the year 2010 as much as 10% of Japan’s software outsourcing may be sent to Vietnam.