Vietnam's Outsourcing Challenges


Vietnam is a rising star in outsourcing, as I wrote in April, citing an investment by Russia's Luxoft and Bill Gates' interest in the country as signs of its ascendance. IBM last month also announced it's opening a cloud computing center in Hanoi.


Yet Vietnam fared poorly in Gartner's list of 30 outsourcing destinations, which rates countries on 10 criteria, including language skills, government support, labor pool, infrastructure, educational system, cost, political and economic environment and cultural compatibility. Cost was the only area in which the country earned a rating better than "fair" on Gartner's five-point scale of poor, fair, good, very good and excellent.


The truth likely lies somewhere in between, based on presentations given at the recent Outsourcing Vietnam Seminar. According to a Manufacturing Business Technology story about the event, Vietnam has some 150 companies involved in outsourced software projects. The average workforce is 100-150 programmers, although some bigger companies employ up to 1,000 workers. The country's outsourcing revenues grew from about $20 million in 2002 to $180 million in 2007, according to the Vietnam National Institute of Software and Digital Content Industry.


Yet the country is already beginning to face some of the same problems as more mature outsourcing destinations like India. One example: salary inflation. Pham Thien Nghe, general secretary of HCM City Computer Association, estimates a software engineer earning about $313 a month can generate a turnover of about $625 a month. If taxes and other expenses are included, his employer would make no gain.


Because most Vietnamese software companies employ less than 500 workers, it's tough for them to earn business from huge multinationals like Microsoft, says Phi Anh Tuan, director of the HCM City Branch of the CMC group.


A Luxoft official also mentions that his company faced fairly significant hurdles in establishing operations in Vietnam because the process was overly complicated. The article doesn't elaborate, but I wonder if this is because of Vietnam's Communist government. Like China, it has been instituting market reforms, but its efforts seem far less well organized than China's.