Why Outsourcing to Vietnam is a Sound Business Decision

 instability. Consider, for example, the 2006 coup in
1. OverviewThailand, the Kashmir conflicts between Pakistan and
This document lays out the business case for meetingIndia, and the Sri Lankan military’s struggles against
your company’s software development needs bythe Liberation tigers of Tamil Elam. There are many
outsourcing to Vietnam. It first outlines factors toU.S. travel advisories that warn Americans against
consider in deciding which offshore locations totraveling to these areas, but fortunately Vietnam
outsource to. Then it considers those factors one at adoesn’t share these countries’ woes. In fact,
time for Vietnam, concluding that the country is aVietnam is a very stable country, which creates a
promising offshore location for outsourced softwarehospitable business environment for outsourcing.
development and for business’ other IT needs. 
2. Factors to Consider Regarding the Offshore 
Provider’s Location- Economic Stability: Vietnam’s economy is healthy
In this section, we present a simple and straightforwardand growing rapidly, with a GDP that, according to
framework for understanding the advantages andCEIC, grew an average of 7.4% in the six years
disadvantages of various offshore locations for yourleading up to 2005. This is the second fastest GDP
outsourced projects and business functions. This list ofgrowth in all of Asia, as published in the New York
factors focuses on the most important and relevantTimes article, Vietnam’s Roaring Economy Is Set
factors, without becoming overly complex by listingfor World Stage, on October 25, 2006. FDI (foreign
unimportant minutiae.direct investment) was almost US$5 billion in 2005,
The main factors that should be considered are aswhich makes a favorable comparison with that of
follows:other countries that are popular destinations for
- Price: Obviously one of the main resources tooutsourcing work.
outsource work is to save money, so naturally you will- Ethnic/Religious Stability: Because 95% of
be interested in the price quoted by the offshoreVietnam’s population is ethnically Vietnamese and
provider. But it is critical to know exactly what thatmore than 80% of the citizens do not identify
price includes. Costs for labor and overhead are boththemselves with any particular religion, Vietnam is
important components of the total price. Before doinglargely free of ethnic/religious conflict. A 2003 UNDP
direct comparisons of offshore providers’ labor(United Nations Development Programme) study
costs, you should consider how much overhead youconcluded that Vietnam had one of the most secure
will incur in managing the outsourced work.environments for investment, given the conflicts in Iraq
- Labor Force: Who exactly will be working on yourand the surrounding region. Likewise, Vietnam was
project? You should be familiar with theseranked as the safest among the 14 countries in the
workers’ professional experience, education, andAsia-Pacific Region by the Political and Economic Risk
technical expertise. Also, make sure that there areConsultancy in Hong Kong (Berth of a Nation in Time,
enough workers available to work on your projects, soautumn 2002).
that your work won’t be slowed by labor- Political Stability: The current government has held
bottlenecks. Find out what kind of turnover rate thepower since Vietnam’s 1975 reunification, meaning
offshore provider has, because if the turnover rate isthat there have been more than 30 years of political
high, a lot of time will be wasted on re-training andstability in the country. The last major conflict with a
transferring information to new offshore employees.neighboring country was almost 30 years ago, in 1978.
- Socio-Economic Stability: You can greatly reduce theTwo American presidents (Bill Clinton during his
risk of outsourcing by choosing to work with anpresidency and in 2006, and George W. Bush during
offshore provider that is located in a country that hasthe APEC summit) have visited the country, and Bush
high economic, ethnic/religious, and political stability. If themet with several top officials including the president,
offshore provider is located in a country with significantprime minister, and Communist Party chief, thereby
instability and conflict, your project may proceed moreunderscoring the country’s political stability.
slowly or come to a complete halt. Also, the unstableBusiness Environment: Vietnam has had a free market
situation may present dangers if and when yoursince its centrally-planned economy was reformed
employees have to travel to the offshore sitethrough “doi moi” twenty years ago. Today,
(Americans are often a target of insurgents overseas).Vietnams’ policies create a warm and welcoming
And ultimately, if the country unexpectedly ends upbusiness environment for foreign investment. The
with new leadership, you may find that thecountry became the World Trade Organization’s
business-friendly policies that originally attracted you to150th member in November of 2006, thanks to a vote
the country suddenly change and become hostile toof the organization’s General Council. At that time,
foreign investment.Pascal Lamy, the Director-General of the WTO said,
 “Viet Nam has shown how anchoring domestic
- Economic Stability: Be familiar with the country’sreforms in the WTO can yield dramatic results. Viet
GDP and other economic indicators, and how thoseNam’s economic growth topped 8% last year,
indicators have changed over the past several years.foreign direct investment rose steeply to over $6 billion,
Also, consider whether foreign investment is increasingand exports surged by over 20%. More must surely
or decreasing and try to understand the underlyingfollow with the new laws, administrative measures, and
factors. What international trade treaties and pacts iscommitments on goods and services that are in Viet
the country a part of?Nam’s membership package.” Vietnam is also
- Ethnic/Religious Stability: Know what ethnic andtaking great strides in protecting intellectual property
religious groups are present in the country andrights and since 2002 has largely been complying with
whether they are tolerant or intolerant of one another.the guidelines established in the WTO Trade-Related
Does the country have a history of ethnic unrest andAspects of Intellectual Property (TRIP). When Vietnam
or religious conflict?became a WTO member, it agreed to comply with
- Political Stability: Understand the local political situationTRIP immediately, without a transitional period. The
where the offshore provider is located. What kind ofcountry is expected to achieve full TRIP compliance
government does the country have, and how long hassoon, thanks to legislation that was passed in 2006.
the current regime held power? Does the countryThis legislation prompted the U.S. to laud the country
have a history of upheaval and uprisings? Knowfor its “extensive revisions and updating of its
whether rebellions, revolutions, and coups are common.intellectual property laws.”
Also consider the stability of neighboring countries andLanguage: Unlike many Asian languages, Vietnamese
whether they have friendly relations with the countryuses the Latin alphabet, just as English does, which
where the offshore provider is located. Read expertmakes it relatively easy for Vietnamese speakers to
analyses of any regional conflicts.learn English. English is the second most popular
 language in the country, and the majority of
- Business Environment: When you outsourceVietnams’ college graduates have high proficiency
IT-related work, you’ll probably be exchangingin English. Consequently, most IT workers in Vietnam
proprietary information and dealing with intellectualare able to communicate easily with U.S. companies in
property. You need to know what policies the countryEnglish when completing outsourcing projects.
has in place to protect your company’s trade 
secretes and intellectual property rights. Likewise, does 
the country have appropriate laws regarding economic4. Who outsources to Vietnam?
development, taxes, and the labor force? How wellMany Japanese companies are choosing to outsource
are those laws enforced? All of these issues are verymuch of their IT work to Vietnam. According to a
important in fostering a favorable businessNovember 2006 article in GlobalServices, “Vietnam:
environment.Capitalizing on the China-Japan,” by the year 2010
- Language: You must be able to communicate withas much as 10% of Japan’s software outsourcing
the offshore service provider – not only with themay be sent to Vietnam.
top managers, but also with the workers who areIntel is also heavily reliant on Vietnam to meet its
involved with your project on a daily basis. How welloutsourcing needs. In October of 2006, Intel Capital, the
do they speak and write in English?unit involved in venture capital for the Intel Corporation,
- Strategic Fit: Many companies ignore questions ofannounced a $3.5 million investment in FPT,
strategic fit – much to their chagrin. If the offshoreVietnam’s largest software company, located in
provider doesn’t understand and adapt to yourHanoi. Earlier in that same year, the company said that
company’s strategic goals and standard businessit was going to build a factory for chip assembly and
processes, the final deliverable will not be what youtesting with a price tag of $300 million (San Jose
are looking for. Have an open discussion with theMercury News, “Intel Invests in Vietnam Software
offshore providers’ managers and try toCompany, October 24, 2006).
understand why they’re in business and how yourOther companies that have chosen to outsource to
project will be a good fit with their strategic goals.Vietnam include Nortel Networks, Bayer, Sony, Cisco,
 and Anheuser Bush (source: CIO.com, “Outsourcing
3. The Benefits of Outsourcing to Vietnamto Vietnam”).
As stated in the introduction, this section will evaluate5. Vietnam Is an Excellent Outsourcing Destination
Vietnam as an outsourcing destination against each ofFor all the reasons described above, Vietnam is clearly
the factors listed in the preceding section.an excellent choice for meeting any business’
- Price: In Vietnam, labor costs are 90% less thanoutsourcing needs. Here is a quantitative summary of
those in the U.S., which means significant cost savingsthe advantages of working with offshore providers
for your company. Even compared to otherlocated in Vietnam.
outsourcing destinations, Vietnam’s labor costs are- Price: Vietnam’s labor costs are significantly lower
attractive. According to an article inthan those of many other companies.
“GlobalServices” in August of 2006,- Labor Force: Vietnam’s labor force has a 96%
Vietnam’s labor cost for outsourcing IT functionsliteracy rate and high scientific and technological
and business processes are 30% less than those inknowledge.
India, and also less than those of countries in Eastern- Socio-Economic Stability
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- Economic Stability: Vietnam has very high GDP
of the lowest production costs,” among othergrowth, with significant foreign investment and
reasons.membership in the World Trade Organization.
- Labor Force: The government of Vietnam- Ethnic/Religious Stability: There are no ethnic/religious
recognizes and promotes the importance of educationconflicts in Vietnam.
and training. According to Vietnam Economic Times,- Political Stability: Vietnam’s current government
there were more than 200 institutions of higher learninghas been in place for more than 30 years and there
in the country in 2004, and that number had increasedhave been no conflicts with neighboring countries for
by 60% in the preceding six-year period. Today thealmost the same amount of time.
country has a 96% literacy rate and 80% of theBusiness Environment: Vietnam’s laws and public
country’s college graduates hold degrees in thepolicies favor business and foreign investment and the
sciences (Vietnam Economic Times). This makescountry is constantly strengthening its protection and
Vietnam an exceptional country for outsourcingenforcement of intellectual property rights.
technological projects, because the highly educatedLanguage: Most college graduates in Vietnam are
population has a high level of scientific and technicalfluent in English, which is the second-most popular
literacy. The labor force also have much lowerlanguage in the country, in large part thanks to
turnover and much higher stability than do those ofVietnamese’s use of the Latin alphabet.
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 otherContact:
countries, such as India, this turnover rate can be 10%Ms. Doanh Nguyen: Sales
or even higher. The aforementioned 2006Email: vn
GlobalServices article cited Ho Chi Minh’sSales Representative
“significantly low attrition rate” and “strongInternational Marketing Department
labor pool” as two other reasons for the city’sBlue Ball Co. Ltd.
inclusion in its list of the top 50 outsourcing cities.Thailand
- Socio-Economic Stability: Common outsourcing252/94 Muang Thai - Phatra Complex
destinations in Asia-Pacific are often plagued byTower 2, 17th floor, Ratchadapisek Rd.