Why Outsourcing to Vietnam is a Sound Business Decision?

1. Overview“strong labor pool” as two other reasons
This document lays out the business case for meetingfor the city’s inclusion in its list of the top 50
your company’s software development needsoutsourcing cities.
by outsourcing to Vietnam. It first outlines factors to- Socio-Economic Stability: Common outsourcing
consider in deciding which offshore locations todestinations in Asia-Pacific are often plagued by
outsource to. Then it considers those factors one at ainstability. Consider, for example, the 2006 coup in
time for Vietnam, concluding that the country is aThailand, the Kashmir conflicts between Pakistan and
promising offshore location for outsourced softwareIndia, and the Sri Lankan military’s struggles
development and for business’ other IT needs.against the Liberation tigers of Tamil Elam. There are
2. Factors to Consider Regarding the Offshoremany U.S. travel advisories that warn Americans
Provider’s Locationagainst traveling to these areas, but fortunately
In this section, we present a simple and straightforwardVietnam doesn’t share these countries’
framework for understanding the advantages andwoes. In fact, Vietnam is a very stable country, which
disadvantages of various offshore locations for yourcreates a hospitable business environment for
outsourced projects and business functions. This list ofoutsourcing.
factors focuses on the most important and relevant- Economic Stability: Vietnam’s economy is
factors, without becoming overly complex by listinghealthy and growing rapidly, with a GDP that, according
unimportant minutiae.to CEIC, grew an average of 7.4% in the six years
The main factors that should be considered are asleading up to 2005. This is the second fastest GDP
follows:growth in all of Asia, as published in the New York
- Price: Obviously one of the main resources toTimes article, Vietnam’s Roaring Economy Is
outsource work is to save money, so naturally you willSet for World Stage, on October 25, 2006. FDI (foreign
be interested in the price quoted by the offshoredirect investment) was almost US$5 billion in 2005,
provider. But it is critical to know exactly what thatwhich makes a favorable comparison with that of
price includes. Costs for labor and overhead are bothother countries that are popular destinations for
important components of the total price. Before doingoutsourcing work.
direct comparisons of offshore providers’ labor- Ethnic/Religious Stability: Because 95% of
costs, you should consider how much overhead youVietnam’s population is ethnically Vietnamese
will incur in managing the outsourced work.and more than 80% of the citizens do not identify
- Labor Force: Who exactly will be working on yourthemselves with any particular religion, Vietnam is
project? You should be familiar with theselargely free of ethnic/religious conflict. A 2003 UNDP
workers’ professional experience, education,(United Nations Development Programme) study
and technical expertise. Also, make sure that there areconcluded that Vietnam had one of the most secure
enough workers available to work on your projects, soenvironments for investment, given the conflicts in Iraq
that your work won’t be slowed by laborand the surrounding region. Likewise, Vietnam was
bottlenecks. Find out what kind of turnover rate theranked as the safest among the 14 countries in the
offshore provider has, because if the turnover rate isAsia-Pacific Region by the Political and Economic Risk
high, a lot of time will be wasted on re-training andConsultancy in Hong Kong (Berth of a Nation in Time,
transferring information to new offshore employees.autumn 2002).
- Socio-Economic Stability: You can greatly reduce the- Political Stability: The current government has held
risk of outsourcing by choosing to work with anpower since Vietnam’s 1975 reunification,
offshore provider that is located in a country that hasmeaning that there have been more than 30 years of
high economic, ethnic/religious, and political stability. If thepolitical stability in the country. The last major conflict
offshore provider is located in a country with significantwith a neighboring country was almost 30 years ago,
instability and conflict, your project may proceed morein 1978. Two American presidents (Bill Clinton during his
slowly or come to a complete halt. Also, the unstablepresidency and in 2006, and George W. Bush during
situation may present dangers if and when yourthe APEC summit) have visited the country, and Bush
employees have to travel to the offshore sitemet with several top officials including the president,
(Americans are often a target of insurgents overseas).prime minister, and Communist Party chief, thereby
And ultimately, if the country unexpectedly ends upunderscoring the country’s political stability.
with new leadership, you may find that the- Business Environment: Vietnam has had a free
business-friendly policies that originally attracted you tomarket since its centrally-planned economy was
the country suddenly change and become hostile toreformed through “doi moi” twenty years
foreign investment.ago. Today, Vietnams’ policies create a warm
- Economic Stability: Be familiar with theand welcoming business environment for foreign
country’s GDP and other economic indicators,investment. The country became the World Trade
and how those indicators have changed over the pastOrganization’s 150th member in November of
several years. Also, consider whether foreign2006, thanks to a vote of the organization’s
investment is increasing or decreasing and try toGeneral Council. At that time, Pascal Lamy, the
understand the underlying factors. What internationalDirector-General of the WTO said, “Viet Nam
trade treaties and pacts is the country a part of?has shown how anchoring domestic reforms in the
- Ethnic/Religious Stability: Know what ethnic andWTO can yield dramatic results. Viet Nam’s
religious groups are present in the country andeconomic growth topped 8% last year, foreign direct
whether they are tolerant or intolerant of one another.investment rose steeply to over $6 billion, and exports
Does the country have a history of ethnic unrest andsurged by over 20%. More must surely follow with the
or religious conflict?new laws, administrative measures, and commitments
- Political Stability: Understand the local political situationon goods and services that are in Viet Nam’s
where the offshore provider is located. What kind ofmembership package.” Vietnam is also taking
government does the country have, and how long hasgreat strides in protecting intellectual property rights
the current regime held power? Does the countryand since 2002 has largely been complying with the
have a history of upheaval and uprisings? Knowguidelines established in the WTO Trade-Related
whether rebellions, revolutions, and coups are common.Aspects of Intellectual Property (TRIP). When Vietnam
Also consider the stability of neighboring countries andbecame a WTO member, it agreed to comply with
whether they have friendly relations with the countryTRIP immediately, without a transitional period. The
where the offshore provider is located. Read expertcountry is expected to achieve full TRIP compliance
analyses of any regional conflicts.soon, thanks to legislation that was passed in 2006.
- Business Environment: When you outsourceThis legislation prompted the U.S. to laud the country
IT-related work, you’ll probably be exchangingfor its “extensive revisions and updating of its
proprietary information and dealing with intellectualintellectual property laws.”
property. You need to know what policies the country- Language: Unlike many Asian languages, Vietnamese
has in place to protect your company’s tradeuses the Latin alphabet, just as English does, which
secretes and intellectual property rights. Likewise, doesmakes it relatively easy for Vietnamese speakers to
the country have appropriate laws regarding economiclearn English. English is the second most popular
development, taxes, and the labor force? How welllanguage in the country, and the majority of
are those laws enforced? All of these issues are veryVietnams’ college graduates have high
important in fostering a favorable businessproficiency in English. Consequently, most IT workers in
environment.Vietnam are able to communicate easily with U.S.
- Language: You must be able to communicate withcompanies in English when completing outsourcing
the offshore service provider – not only with theprojects.
top managers, but also with the workers who are4. Who outsources to Vietnam?
involved with your project on a daily basis. How wellMany Japanese companies are choosing to outsource
do they speak and write in English?much of their IT work to Vietnam. According to a
- Strategic Fit: Many companies ignore questions ofNovember 2006 article in GlobalServices,
strategic fit – much to their chagrin. If the“Vietnam: Capitalizing on the China-Japan,”
offshore provider doesn’t understand and adaptby the year 2010 as much as 10% of Japan’s
to your company’s strategic goals and standardsoftware outsourcing may be sent to Vietnam.
business processes, the final deliverable will not beIntel is also heavily reliant on Vietnam to meet its
what you are looking for. Have an open discussionoutsourcing needs. In October of 2006, Intel Capital, the
with the offshore providers’ managers and tryunit involved in venture capital for the Intel Corporation,
to understand why they’re in business and howannounced a $3.5 million investment in FPT,
your project will be a good fit with their strategic goals.Vietnam’s largest software company, located in
3. The Benefits of Outsourcing to VietnamHanoi. Earlier in that same year, the company said that
As stated in the introduction, this section will evaluateit was going to build a factory for chip assembly and
Vietnam as an outsourcing destination against each oftesting with a price tag of $300 million (San Jose
the factors listed in the preceding section.Mercury News, “Intel Invests in Vietnam
- Price: In Vietnam, labor costs are 90% less thanSoftware Company, October 24, 2006).
those in the U.S., which means significant cost savingsOther companies that have chosen to outsource to
for your company. Even compared to otherVietnam include Nortel Networks, Bayer, Sony, Cisco,
outsourcing destinations, Vietnam’s labor costsand Anheuser Bush (source: CIO.com,
are attractive. According to an article in“Outsourcing to Vietnam”).
“GlobalServices” in August of 2006,5. Vietnam Is an Excellent Outsourcing Destination
Vietnam’s labor cost for outsourcing ITFor all the reasons described above, Vietnam is clearly
functions and business processes are 30% less thanan excellent choice for meeting any business’
those in India, and also less than those of countries inoutsourcing needs. Here is a quantitative summary of
Eastern Europe. In October of 2006, GlobalServicesthe advantages of working with offshore providers
named Vietnam’s Ho Chi Minh City among thelocated in Vietnam.
top 50 outsourcing cities in the world, due to its having- Price: Vietnam’s labor costs are significantly
“one of the lowest production costs,”lower than those of many other companies
among other reasons.- Labor Force: Vietnam’s labor force has a
- Labor Force: The government of Vietnam96% literacy rate and high scientific and technological
recognizes and promotes the importance of educationknowledge.
and training. According to Vietnam Economic Times,- Socio-Economic Stability
there were more than 200 institutions of higher learning- Economic Stability: Vietnam has very high GDP
in the country in 2004, and that number had increasedgrowth, with significant foreign investment and
by 60% in the preceding six-year period. Today themembership in the World Trade Organization.
country has a 96% literacy rate and 80% of the- Ethnic/Religious Stability: There are no ethnic/religious
country’s college graduates hold degrees in theconflicts in Vietnam.
sciences (Vietnam Economic Times). This makes- Political Stability: Vietnam’s current government
Vietnam an exceptional country for outsourcinghas been in place for more than 30 years and there
technological projects, because the highly educatedhave been no conflicts with neighboring countries for
population has a high level of scientific and technicalalmost the same amount of time.
literacy. The labor force also have much lowerBusiness Environment: Vietnam’s laws and
turnover and much higher stability than do those ofpublic policies favor business and foreign investment
most other countries that are active in outsourcing.and the country is constantly strengthening its
Overall, companies in Vietnam has an IT-relatedprotection and enforcement of intellectual property
turnover rate of less than 5%, whereas in many otherrights.
countries, such as India, this turnover rate can be 10%Language: Most college graduates in Vietnam are
or even higher. The aforementioned 2006fluent in English, which is the second-most popular
GlobalServices article cited Ho Chi Minh’slanguage in the country, in large part thanks to
“significantly low attrition rate” andVietnamese’s use of the Latin alphabet.