While the accounting scandal shrouding Satyam Computer Services may have dented India's reputation as a global outsourcing hub, Malaysia's growing outsourcing sector is unlikely to reap immediate benefits from the fallout afflicting its competitor.
However, Malaysia could enjoy a long-term benefit if local outsourcing players show increased transparency in their financial reporting and improve corporate governance, according to an IDC analyst.
"As a result of the Satyam scandal, Malaysia-based IT and business process outsourcing (BPOs) service providers will also be expected to show increased transparency in their financial reporting and demonstrate best practices in governance," said Philip Carter, associate research director at IDC Asia-Pacific. "If they can do this, then there will be opportunities for them to take business away from Satyam and others."
"Overall, the impact on service providers based in emerging markets such as India, China and Malaysia, is that they will be expected to show very high levels of corporate probity and viability," Carter said in an e-mail interview with ZDNet Asia.
He noted that Malaysian players should not necessarily compete head-on against their Indian counterparts. Rather, they should focus on providing key alternative capabilities, even complementary, in areas where there is potential for value-add. "For example, in Islamic banking or in the oil and gas vertical," he said.
India's fourth-largest software services exporter, Satyam is battling to pick up the pieces following the shock resignation of its founder Ramalinga Raju, who admitted to falsifying the company's accounts.
Carter noted that Satyam customers have already initiated steps to end their contracts. Satyam last week confirmed U.S. insurer State Farm Insurance had terminated its contract with the company.
"IDC believes that Outsourcing India will emerge from this scandal with its reputation tested, but better for it," said Carter.
"However, in the wake of this scandal, 'offshore 2.0' will be a more sophisticated, granular mix of offshore, nearshore, and onshore delivery. This will cause the India-based vendors to lose some of their competitive advantage, as they tweak their structures to look more like their Western peers," he noted.
'Inappropriate, impossible' as alternative
Even if it wanted to, it would be tough for Malaysia's outsourcing community to compete directly against India.
"Positioning ourselves as an alternative to India is both inappropriate, and impossible," said David Wong, chairman of Outsourcing Malaysia, an association representing local outsourcing service providers. "Neither do we have the scale nor the experience to do so."
"Satyam serves one in every three Fortune 500 companies and per se, these deals are sizeable," Wong told ZDNet Asia in an e-mail. "So do local providers have the ability to address the scale that is already being provided? Will such clients move to our companies?"
However, he noted that Malaysia's status as an outsourcing hub is "not directly incumbent on India's success or otherwise".
"Our ability to enhance exports of higher-value services is purely dependent on Malaysian companies creating value services, and offering what clients seek with their global positioning strategies, especially in accessing growing Asean economies," he explained.
Ultimately, said Anthony Raja Devadoss, consulting director of Kelly Outsourcing & Consulting Group, ensuring high standards of corporate governance and business ethics is crucial in attracting outsourcing business to Malaysia. Kelly Outsourcing is a global outsourcing and consulting services provider.
In this regard, Malaysia's risk mitigation-based business environment, coupled with corporate governance polices, are sound and could propel the country's ambition to be a global outsourcing hub, Devadoss said in an e-mail interview.
"In a recent Mckinsey study, Malaysia's risk mitigation [abilities were] ranked higher than India and China," he said.
He added that local players have the capacity and expertise in handling large outsourcing projects. "Malaysia has become a center for high-end consultancy, knowledge process outsourcing, human resource outsourcing in terms of technology and financial services, contact centers, logistics, oil and gas and human resources," he said.
Industry watchers also opined that U.S. President Barack Obama's call to curb outsourcing and retain jobs in the United States is unlikely to hinder the growth of Asia's outsourcing sector.
IDC's Carter said organizations will still need to be competitive, particularly in light of the current economic slowdown, and taking advantage of global delivery of services is going to be "critical, irrespective of the political climate".
Wong concurred: "While we can understand the need to create and retain jobs in the United States, the outsourcing trends will continue to grow as companies face growing cost pressures.
"Hence, outsourcing deals will continue to grow, but with a caveat--evaluation and management of risks will become increasingly complex," he said. However, Wong noted that U.S. industry players have the ability to position themselves as direct competitors to emerging sourcing destinations.
"So the better question to ask is, 'Will nearshore gain prominence over offshore?' I think yes," he said. "This means Malaysia needs to focus on markets nearer to home, like Japan and Australia, in addition to the traditional buyer markets of the West."
According to Devadoss, said Malaysia's shared services and outsourcing industry is expected to hit US$2 billion in revenue by 2012, growing at twice the rate of its global peers. "Malaysia's outsourcing model is sustainable and will be stronger, if more collaborative partnerships are in place," he added.