There are many reasons for companies to do outsourcing. Outsourcing is a process to delegate a company’s business process to third parties. This has become very crucial for companies as it has direct impact on a company’s top and bottom lines. Reducing production cost, operational cost; and improving product quality mean better profits. This issue has been becoming key factor to define if enterprises are run successfully. Among Asian countries, Vietnam is an attractive outsourcing destination for Finnish companies/ international companies thanks to its many advantages in the area.
Why do companies seek outsourcing?
According to Andrew Kokes, Vice President, Sitel Global Product Marketing and Management in one research paper, “companies that outsource can reduce the rate of their annual selling, general & administrative expenses by 3.5 percent within the first year of an engagement”. There are many reasons, but we can point out here some main reasons that companies can consider before planning their outsourcing strategy.
- Reducing production and operating costs: Lower labor taxes, energy costs, operational cost lead to production cost reduction. 80% of the companies named cost-cutting as the main reason why they do outsourcing (Gartner).
- Improving quality to products and service innovation: For example, by outsourcing, the efficiency for time-consuming functions can be enhanced because the services/ products are taken care by specialized and efficient providers.
- Improving company focus: Companies can have more time, energy and human resources to focus on their core business competencies. This allows companies to devote more resources to what they do well, which can improve efficiency and increase its competitiveness.
- New market entry mode: Many companies chose outsourcing as a means to gain access to new markets. In the book Global Marketing (Ilan Alon et. all), contract manufacturing (outsourcing) is one of intermediate modes that companies can use to enter international markets.
- Sharing risks with a partner company: This contract-based market entry mode is non-equity agreement. There is no investment in risky capital. As such, the risks are shared with the partner company.
Top global outsourcing nations
India and China rank top in the list of top outsourcing countries according to the Global Services Location Index, released by A.T. Kearney. India and China are key players in the global outsourcing industry.
(Source: A.T. Kearney)
Thailand rank the sixth in the list thanks to its low costs and high returns. However, Thailand has unstable politics. The country lacks workers who are innovative, intelligent, and cohesive to whatever project gets thrown at them. Vietnam has risen one position and held number 11 in the ranking. In his open dialogue chief executive officers of global leading information-technology (IT) groups on the sidelines of the annual meeting of the World Economic Forum (WEF) in Davos, Switzerland, on January 19, 2017. Vietnam Prime Minister Nguyen Xuan Phuc said: “Vietnam targets to enter the top 10 suppliers of software outsourcing and digital content in the world with around one million workers in the field of information and technology, stressing that information-technology is booming in Vietnam, especially in the fields of industry, agriculture, transport, healthcare and education”.
Why is Vietnam potential outsourcing destination for Finnish companies?
There are many good reasons for companies to choose Vietnam as their outsourcing destination, especially in IT area. Some key reasons can be listed as follows;
Young population: 65 percent of the country’s population aged below 35 years.
Source: CIA World Factbook.
Growing pool of IT-savvy workers
Following the report 2015 prepared by http://vnito.org, Vietnam has more than 100,000 software developers and 75,000 digital content specialists currently in the IT workforce, which promises a deep talent pool for international tech companies. Besides, annually over 40,000 new IT students graduate from IT-related programs. It can be seen that the IT workforce is growing very fast in this country.
Low labour cost
As can be seen from this figure, Hanoi and Da Nang, the two big cities of Vietnam, have quite lower wage levels compared to those of other cities in Asia. Companies looking for outsourcing to reduce cost. As a result, low labour cost plays an important factor in companies’ outsourcing strategy.
Government support and political stability
The Vietnamese government is strongly committed to developing its tech industry. Policies have been issued to promote the industry including special enterprise zones, tax breaks and grants for tech companies. Infrastructure investments such as new software parks and improved ICT connectivity have been also taken care of.
Vietnam will host the APEC Summit in 2017 following the theme “Creating new driving force for a common future. Vietnam has signed tens of free trade agreements, including FTA with the European Union. Vietnam has continuously reformed its policy of trade liberalisation and customs, especially the application of e-customs. Vietnam also have online service to grant e-visa to foreign tourists, which enable easier procedures for foreigners to come to Vietnam.
Increasing English speaking population
English capability used to be a big hindrance for Vietnam to join the outsourcing nations. However, the English speaking population has been increasing more and more. English is seen an effective tool for work, so young Vietnamese people have been investing time in learning English. There are also many international schools and universities taught in English in Vietnam. In addition, there are more and more Vietnamese students study abroad, and then return to their countries to work.
What are the potential areas for Finnish companies?
IT is seen the biggest potential outsourcing industry in Vietnam. Examples of companies that have outsource in Vietnam include LG, Samsung, Sony, Cisco, etc. Frazzetto, Harvey Nash’s chief digital officer in his discussion with cio.com about the benefits and drawbacks of outsourcing IT work in Vietnam, said: “We recently heard that Apple plans to open an R&D facility in Vietnam. Microsoft and IBM are there as well. All the big players are setting up their own facilities. If the companies that are the gold standard in technical competency are setting up house in Vietnam, that says a lot about the technical talent Vietnam is offering.”
According to other experts, BPO (Business Process Outsourcing) is also very potential, even more potential than IT sector. Some of the top BPO firms in Vietnam are: Harvey Nash (founded in 2000, over 2000 employees), SPI Global (since 2002, approximately 600 employees), Digi-Texx (founded in 2003, over 500 employees), TPL (founded in 2004 with approximately 700 employees), Swiss Post Solution/GHP Far East (founded in 2004, approximately 1200 employees.), Officience (founded in 2005, with nearly 500 employees).
Nortel Network (telecommunication), Bayer (health care and agriculture) also have outsourcing facilities in Vietnam. Atlas (architecture, engineering and construction) has its production center in Hochiminh city; and so on.
As a promising destination of outsourcing, Vietnam is a perfect choice for Finnish companies looking for a technological advance with low cost and many other advantages. Vietnam will be “Silicon valley in Eastern hemisphere in the near future” as many have predicted.
Looking for outsourcing partners in Vietnam? We have contacts of many business partners who wish to be outsourcing partners of Finnish companies in various industries including IT, agriculture and food processing, rubbers and plastic, biomass products, textiles and clothing, crafts, furniture, fishery, electrical engineering, etc. Please contact us.