The Offshore Services Value Chain: Upgrading Trajectories in Developing Countries

Abstract

This article analyses the offshore services industry using the global value chain approach. This industry has grown at a rapid pace over the last decade, driven principally by the search of businesses to reduce costs by unbundling and offshoring corporate services. This paper explores how developing nations have seized these growth opportunities. While developed countries consume the vast majority of global services, demand from developing economies and new end markets is beginning to grow. Supply is dominated by India, which in 2009 had 45% of the global market share for offshore services. Indian firms occupy most value chain segments and they have expanded in the South to serve both domestic and export markets. Although the quality and quantity of human capital remains the key factor in the location of offshore services, formal education is being supplemented by demand-driven training and compliance with required international professional certifications and performance standards.

Full text

206
Int. J. Technological Learning, Innovation and Development, Vol. 4, Nos. 1/2/3, 2011
Copyright © 2011 Inderscience Enterprises Ltd.
The offshore services value chain:
upgrading trajectories in developing countries
Karina Fernandez-Stark
Center on Globalization, Governance & Competitiveness,
Duke University, 2024 W. Main St., Durham, NC 27705, USA
E-mail: karina.stark@duke.edu
Penny Bamber
Almirante Byrd 2094, Providencia,
Santiago, Chile
E-mail: penny.bamber@duke.edu
Gary Gereffi*
Department of Sociology, Duke University,
Durham, NC 27708-0088, USA
E-mail: ggere@soc.duke.edu
*Corresponding author
Abstract: This article analyses the offshore services industry using the global
value chain approach. This industry has grown at a rapid pace over the last
decade, driven principally by the search of businesses to reduce costs by
unbundling and offshoring corporate services. This paper explores how
developing nations have seized these growth opportunities. While developed
countries consume the vast majority of global services, demand from
developing economies and new end markets is beginning to grow. Supply is
dominated by India, which in 2009 had 45% of the global market share for
offshore services. Indian firms occupy most value chain segments and they
have expanded in the South to serve both domestic and export markets.
Although the quality and quantity of human capital remains the key factor in
the location of offshore services, formal education is being supplemented
by demand-driven training and compliance with required international
professional certifications and performance standards.
Keywords: global services; outsourcing; knowledge economy; information
technology; IT; business process outsourcing; BPO; knowledge process
outsourcing; KPO.
Reference to this paper should be made as follows: Fernandez-Stark, K.,
Bamber, P. and Gereffi, G. (2011) ‘The offshore services value chain:
upgrading trajectories in developing countries’, Int. J. Technological Learning,
Innovation and Development, Vol. 4, Nos. 1/2/3, pp.206–234.

The offshore services value chain 207
Biographical notes: Karina Fernandez-Stark is a Senior Research Analyst of
the Center on Globalization, Governance & Competitiveness at Duke
University where she has led several research projects related to economic
development and competitiveness. She is a Chilean who holds a BA in
Journalism and Political Science from the Universidad Gabriela Mistral in
Santiago, Chile and an MA in International Development Policy from Duke
University. Prior to joining CGGC, she spent several years working as a
Journalist in Chile and volunteering in different NGOs in the USA. She has
published several research reports and articles on industrial upgrading, and
social and economic development including a chapter about offshore services
in the book, Global Value Chains in a Post-crisis World: A Development
Perspective (The World Bank, 2010). Her research focus is on economic
development in Latin America and workforce education.
Penny Bamber is a Research Associate with the Center on Globalization,
Governance & Competitiveness at Duke University. She holds a BA in
International Relations from the University of Pennsylvania and a Masters in
Public Policy (ABT) from the University of Chile. She also holds a Diploma in
Public Policy from the Harris School at the University of Chicago. She has
been a member of the CGGC research team since the beginning of 2009,
working independently and remotely from Chile, where her research focus has
been on economic development and competitiveness in Latin America,
workforce development and the offshore services industry. Prior to joining the
Duke team, she worked at the Wharton School of Business with a focus on
leadership development and has facilitated programmes in Tanzania, Ecuador
and the Caribbean.
Gary Gereffi is Professor of Sociology and Director of the Center
on Globalization, Governance and Competitiveness at Duke University
(http://www.cggc.duke.edu/). He received his PhD in Sociology from
Yale University. His books include: Manufacturing Miracles: Paths of
Industrialization in Latin America and East Asia (1990); Commodity Chains
and Global Capitalism (1994); Free Trade and Uneven Development: The
North American Apparel Industry after NAFTA (2002); The New Offshoring of
Jobs and Global Development (2006) and Global Value Chains in a Postcrisis
World: A Development Perspective (2010). His research interests deal with
economic and social upgrading, value chain governance and trends in
contemporary global industries.
1 Introduction
Structural changes in the world economy during the past decade have facilitated the
global outsourcing of the internal business activities of multinational corporations
(MNCs), thereby creating the offshore services industry, a new and rapidly growing
sector in developing countries [Gereffi and Fernandez-Stark, (2010b), p.1]. Information
technology (IT) now allows for quick and easy information transfer. Companies looking
to improve their efficiency levels in the global economy, reduce costs and increase
flexibility (Lopez et al., 2008) unbundled their corporate functions, such as human
resource management, customer support, accounting and finance, and procurement
operations, and ‘offshored’ these activities (Gospel and Sako, 2008; Sako, 2006). This
reduced the burden of support activities and allowed firms to focus on their core business.

208 K. Fernandez-Stark et al.
MNCs began by offshoring basic service activities to India in the early 1990s, but
now, at the end of the first decade of the 21st century, increasingly sophisticated services
are performed for these firms by operations centres in a growing number of developing
countries. These firms were attracted to establishing offshore services in developing
countries by key competitive advantages, particularly low human resource costs,
technological skills, and language proficiency (AT Kearney, 2007). Time zones and
geographical and cultural proximity to major markets also played key roles in location
selection [ECLAC, (2008), Chapter 2]. In recent years, core activities have begun to
move offshore as well, and many firms now look for new talent in developing countries
in order to drive product development, research and development (R&D) and other
knowledge-intensive activities. As more of these sophisticated jobs are performed abroad,
the supply of scientific, engineering, and analytical talent offered by developing countries
is becoming significant (Couto et al., 2007). The increasing participation of developing
countries in this new industry highlights the growing capabilities of the South, not only at
the production level but also in creating the knowledge behind the products. The offshore
services sector in 2010 accounted for US$252 billion in revenues1 and employed over
4 million people globally, most of whom are in developing countries.2
India is the market leader and dominates most of the value chain segments. However,
other developing countries are providing a variety of offshore services. As they upgrade
to higher-value activities, low-income countries are joining the industry at lower points of
the chain. This dynamic opens up a chance for new nations to enter the value chain, thus
offering an opportunity to drive sustainable growth through the expansion of the
knowledge economy. In addition to providing employment in good jobs and creating
international linkages with the global markets, this industry has begun to foster domestic
innovation and industrial development. In particular, large developing country providers
are now seeing a fast growing demand for their services in markets of the South as local
firms recognise the benefits of outsourcing to drive their growth. This expansion of
demand to new regions, combined with the industry’s raison d’etre to lower costs,
highlights the resiliency of the industry in the face of economic crises. Indeed, the
2008–2009 economic crisis did little to slow the industry or reverse its growth trajectory
(Borchert and Mattoo, 2009; Gereffi and Fernandez-Stark, 2010b).
The evolution of the market and the structural changes that have helped to drive it
suggest this shift of offshore service work to the developing world will be permanent.
Despite significant political opposition to the advancement of the industry in developed
countries, well documented by Mankiw and Swagel (2006), the industry gained
momentum at the outset of the 21st century, with compound annual growth rates of
24.2% between 2005 and 2007 prior to the economic crisis of 2008 (OECD, 2008). As
more firms in the developing world adopt outsourcing and offshoring of services and add
to this global growth, these structural changes will be consolidated. Faced with less
competition from large global providers, this expansion of domestic demand provides
smaller firms in developing countries with further opportunities to enter, and possibly
upgrade through, the value chain.
In order to capture the gains of this evolving market, many developing countries have
been pursuing workforce development strategies to encourage upgrading. Analysis of the
rapid development of India’s industry, in spite of a poor business environment and weak
education system (Athreye and Hobday, 2010), revealed the importance of investing in
human capital to drive growth (Wadhwa et al., 2008). Highly focused private sector

The offshore services value chain 209
investments in skill development have been particularly important in the shift of India
and other developing countries into higher value service provision.
This paper uses the global value chain (GVC) framework to analyse major changes in
the global supply of services and to identify diverse upgrading trajectories among
developing countries. By mapping the various types of offshore service activities and the
firms that participate in different industry segments, the GVC approach encompasses
both micro- and macro-level examinations of the dynamic processes at work in
globalization (Gereffi, 1994, 1999; Gereffi and Kaplinsky, 2001; Humphrey and Schmitz,
2002; Kaplinsky, 2000). A particular concern in this paper is how the diversification of
end markets for global services offers new opportunities for upgrading by developing
economies.
The organisation of the paper is as follows. The first section provides an overview
of the offshore services value chain, emphasising the structure and dynamics of a
service-sector chain based on human capital. Second, the market size and the role of lead
firms in the industry are examined in the context of the changing patterns of global
supply and demand of offshore services both in the developed and developing world. The
third section discusses the potential contributions of the industry in engaging developing
countries in the rapidly advancing knowledge economy. The fourth and final section
applies the GVC upgrading perspective to industry growth, with a specific focus on how
workforce development initiatives contribute to the movement of developing countries
into higher value segments of the value chain.
2 Offshore services: a GVC approach
The offshore services industry has evolved continuously since its inception, making
efforts at categorisation challenging. Despite these complexities, a fairly comprehensive,
yet flexible, classification of the industry has emerged employing the GVC framework
(Gereffi and Fernandez-Stark, 2010a), which uses firm-level analysis to determine the
different stages of production of a good or service and the value of each component
(Gereffi and Kaplinsky, 2001). For manufacturing and extractive industries based on
goods, value-added is determined by the difference between the cost of the inputs and
outputs at each stage of the chain. In the case of the offshore services industry, measuring
value is complicated by the lack of reliable company-level data and trade statistics for
services (Sturgeon and Gereffi, 2009). The rapid evolution of the industry has impeded
previous attempts to categorize it, complicating the measurement of the offshore services
themselves [ECLAC, (2008), Chapter II; UNCTAD, (2009), Chapter III].
To partially address this problem, the value of different services in the offshore
services value chain can be related to skill levels and work experience, that is to say, the
human capital inputs of offshore services. Human capital is a key determinant of value
creation and success in service exports from developing countries. Saez and Goswami
(2010) find positive and significant correlation between human capital and service
exports after controlling for institutional variables and electronic infrastructure. In
addition, research by Nyahoho (2010) on the importance of factor intensity as a
determinant of trade also finds that human capital is clearly related to exports of
information services, while Shingal (2010) finds that human capital is one of three key
variables that have the biggest impact on bilateral service trade.

210 K. Fernandez-Stark et al.
We have developed a classification of the offshore services value chain, which is
presented in Figure 1.3 The first categorisation refers to three broad types of offshore
services that can be provided across all industries (general business services): information
technology outsourcing (ITO), business process outsourcing (BPO), and knowledge
process outsourcing (KPO). The second categorisation refers to services that are industry
specific. Firms providing general business services tend to be process-oriented, while
those in the vertical chains must have industry-specific expertise and their services may
have limited applicability in other industries. For general business services, all activities
are related to supporting generic business functions, such as network management,
application integration, payroll, call centres, accounting, and human resources. In
addition, they include higher-value services, such as market intelligence, business
analytics, and legal services (referred to as KPO in this paper). Within these services,
ITO contains a full spectrum of low- middle- and high-value activities of the offshore
services chain; BPO activities are in the low and middle segments, while KPO activities
are in the highest-value segment of the chain.4
Figure 1 The offshore services industry GVC (see online version for colours)
Infrastructure
Software
NetworkManagement
Applicat ionsMana geme nt
Applicat ionsDevelopment
Applicat ionsIntegration
Desktopmana gement
CRM
(Customer 
Relationship
Management)
HRM
(HumanReso urce 
Management)
ERM
(Enterprise
Resour ce
Management)
Marketing&
Sales
Finance&
Accounting
Procurement,
Logisticsand
SupplyChain
Manag ement
Training
Payroll
Recrui ting Contact
Centers/Call
Centers
Talent
Manag ement
Content/
Document
Manag ement
ITO
Informa tion Technology Outsourc ing
BPO
Business Pr ocess Outsou rcing
KPO
Knowled ge Process Outso urcing
General Business Activiti es
Industry Specific
Activities a- b
Banking,Financial
Services and
Insurance(BFSI)
Ex.Investmentresearch,
privateequityresearch,and
riskmanagementanalysi s
Tele comm unica tion s
Ex.IPtransformation,
Interoperabilitytestingand
DSPandmultimedia
Manufacturing
Ex.IndustrialEngine ering
andsourcingandvendor
management
Retail
eComerceandPlanning,
merchandisinganddemand
intelligence
Health/ Pharma
Ex.R&D,clinicaltrials,
medicaltranscript
Others
Travel&
Transportation
Revenue management
system s,customerloyalty
solut ion s
Business Consulting
Business Analytics
MarketInte lligence
LegalServices
Energy
Ex.Ene rgyTrad ingand Risk
Manage me nt,andDigital
oilfiel dsolu tions
ERP
(EnterpriseResourcePlanning ):
manufacturing/operations,supplychainmanagement,
financials&projectmanagemen t
InfrastructureManag ement
ITConsulting
SoftwareR&D
Value Added
LOW
HIGH
Notes: aIndustry specific: Each industry has its own value chain. Within each of these
chains, there are associated services that can be offshored. This diagram captures
the industries with the highest demand for offshore services.
bThis graphical depiction of industry specific services does not imply value levels.
Each industry may include ITO, BPO and advanced activities.
Source: Gereffi and Fernandez-Stark (2010a)
The value of different services in the chain is related to the level of preparation of the
workforce required to provide the services at each stage (Gereffi and Fernandez-Stark,
2010a). In addition to encompassing technical abilities acquired through an employee’s
formal education and experience, preparation includes other important aspects such as

The offshore services value chain 211
language capabilities, interpersonal or soft skills such as leadership, teamwork and
innovation, and global certifications earned through specialised training. This means that
employees in activities located in the lower part of the value chain diagram have less
preparation, particularly with respect to specialised skills, while the employees in the
upper section of the value chain have greater skills and more years of experience and
therefore command higher wages (see Table 1).
The ITO segment illustrates these differences: low value IT services include network
and infrastructure management provided by computer technicians (1–2 years of
post-secondary education); software development such as creating database applications
is undertaken by computer engineering graduates (3–4 years, Bachelor’s degree,
specialised certifications in software platforms such as Cisco, Microsoft and Oracle);
while software R&D to be applied in new technologies requires employees with either
higher levels of education, years of experience such as post-graduate (Masters and PhD)
degrees or with significant specialised training. Positions in R&D also typically rely on
highly innovative individuals.
Table 1 Employment, revenue and salary information, selected segments of the offshore
services industry in a middle-income country, 2008
Segment Activities
Most
populous
position
within
segment
Average education
level for employees
Average
revenue
per
employeea
(US$)
Median
salary per
employeea
BPO Call centres Call centre
agents and
technicians
High
school/bachelors
degree
$19,720 $17,280
IT
infrastructure
Computer
technician
High
school/technical
institute
$20,704 $16,932
Software
development
Programmers Bachelors/masters
degree
$36,788 $28,065
ITO
IT consulting Systems
analysts
Bachelors/masters
degree
$55,956 $45,455
KPO Business and
financial
services
Financial
analyst
Bachelors degree
in Business
Administration
$127,081 $47,150
Vertical
activities
Engineering
services
Engineer Bachelors degree $103,844 $53,514
Note: aThis information is drawn from a confidential study published by Mercer (2008)
for a specific country in Latin America.
Source: Fernandez-Stark et al. (2010b); IDC Latin America (2009);
Meller and Brunner (2009); Mercer (2008); Wadhwa et al. (2008)
3 Market size and lead firms in the offshore services value chain
Generally, countries do not collect detailed data on service exports. There are a relatively
small number of trade classification codes to accurately identify service activities and
companies have little incentive to disclose this information (Sturgeon and Gereffi, 2009),

212 K. Fernandez-Stark et al.
while globally consensus has yet to be reached on how to collect data that correspond to
appropriate definitions of services. In addition to this dearth of available and reliable
data, the different methodologies adopted to quantify the size of the offshore services
industry have resulted in widely varying estimates from disparate sources. Nonetheless,
several attempts at measuring the size of the industry have been made.
The estimates of the offshore services market size range from US$117.5 billion to
US$281.3 billion. Figure 2 illustrates the three most reliable available estimates.
According to OECD (2008) estimates, the size of the offshore services market will reach
$252 billion in 2010. The OECD stresses, however, that growth rates will be different in
each segment of the offshore services GVC. The OECD study, published before the
economic crisis began in early 2008, projected that the global demand for BPO services,
especially those related to call centres, along with those in financial services, was
expected to triple between 2005 and 2010, and IT services were expected to continue
growing at a similar pace. The demand for other high-value service activities was
expected to reach $31 billion by 2010. This growth translates into a compound annual
growth rate for the KPO segment of 58% between 2005 and 2010, much more than the
expected growth rates for the demand of the BPO (25%) and ITO (26%) segments. While
new estimates of the size of the industry for 2010 are not yet available, the significant
decline in revenues for a number of the leading firms in the industry during the economic
crisis (October 2008 to September 2009) suggests that the projected size of global
offshoring for 2010 in Figure 2, published pre-crisis, overestimates the actual size of the
market (Gereffi and Fernandez-Stark, 2010b).
Both demand and supply have diversified geographically during the past three years.
Global demand for offshore services is led by developed countries, especially the USA
(Gereffi and Fernandez-Stark, 2010b), although it is increasingly being supported by an
expansion of demand from developing countries.
During the recent economic crisis two effects were observed with respect to
developed nation clients: the ‘demand effect’ that resulted from a contraction of demand
for services from existing customers as business slowed around the world, leading annual
growth rates in offshore services to decrease significantly; and secondly, a simultaneous
but counteracting ‘substitution effect’, which involved the substitution of lower-price
services conducted abroad for the higher-price services originally carried out inside
companies in developed economies. The ‘substitution effect’ mitigated the negative
impact of demand contraction as new clients in these markets began to adopt offshoring
practices in order to lower costs and improve efficiencies (Wadhwa, 2008). The result
was that while demand for offshore services from developed countries dipped in response
to the crisis (Borchert and Mattoo, 2009), net growth remained positive and by the end of
2010, the industry was showing signs of recovery (Gereffi and Fernandez-Stark, 2010b).
In addition to the demand led by developed countries, growth in offshore services has
been buoyed by new sources of demand in the South, especially from Brazil, Russia,
India and China (BRIC countries) (IDC, 2010). These four countries together accounted
for 38% of demand in IT services from developing nations in 2009 (Gartner, 2010b). In
India, domestic demand has already begun to demonstrate compound annual growth rates
(CAGRs) that are higher than those in the export sector and domestic demand is expected
to continue growing faster than foreign demand. As shown in Table 2, the CAGR of the
domestic market is expected to be 18.4% for the years 2007–2012, while the export
market shows CAGR of 15.4% in the same period (NASSCOM, 2009b). The domestic
Indian market is consuming a growing amount of generic services, thereby creating

The offshore services value chain 213
opportunities not only for the dominant Indian providers but also for small and medium
third-party providers to supply these services.
Figure 2 Estimates of the offshore services market size
2005 2006 2007 2008 2009 2010
OECD 81.4 100.8 125.6 157.4 198.6 252.4
NASSCOM 44.25 59 78.3 101 117.5
BCG 46.6 65 92 132.2 191.8 281.3
0
50
100
150
200
250
300
US$billion
Notes: Activities included: three industry segments (ITO, BPO, and KPO), along with
more specialised, higher value-added service activities, such as engineering
services and R&D. The size estimates in Figure 2 differ in the activities they
include. Generally, the high-value services segment is the most difficult to
quantify; thus, it may be underrepresented here since some relevant activities may
not be included.
Source: Authors based on Boston Consulting Group (2007), NASSCOM
(2009a) and OECD (2008)
Table 2 Size of the Indian outsourcing market, 2007–2012
2007 2008 2009 2010 2011 2012
Domestic 90,014 110,177 133,100 158,053 182,991 209,698
Export 156,594 186,142 218,107 250,087 467,657 529,976
Total 246,608 296,319 351,207 408,140 650,648 739,674
Note: In Crore (10,000,000 Indian Rupees)
Source: NASSCOM (2009b)
Brazil’s IT market5 had a CAGR of 11% in 2010 (Hermelin, 2010) and is growing even
faster than India’s market, already accounting for 10% of Brazil’s GDP (Gartner, 2010a).
Domestic IT and BPO services alone grew by almost 13% from US$17.2 billion in 2007
to US$19.4 billion in 2008 (BRASSCOM, 2008). In China, while the outsourcing market
is still considered to be in its infancy, accounting for a fraction of the US market, it is
quickly evolving [KPMG, (2009), p.12]. The size of Chinese outsourcing is estimated to
have doubled between 2006 and 2010, reaching $US20.6 billion. Revenue from the
domestic market for one of China’s leading offshore services firms, VanceInfo, grew
from 11.7% in 2007 to 21.5% in 2008. The market, however, continues to be undermined

214 K. Fernandez-Stark et al.
by a lack of understanding of the industry: “many Chinese companies, from state-owned
enterprises to large privately held outfits, remain unsure about which business processes
should be outsourced or do not fully recognize what efficiency gains can be achieved”
[KPMG, (2009), p.17]. As the growing Chinese offshoring operations begin to educate
local businesses about the benefits of outsourcing, this market is likely to see significant
growth.
Rapid economic growth rates in these and other emerging markets have led domestic
businesses to increase IT spending to help them support the challenges of fast-paced
growth, manage customer support, facilitate supply chain management, and optimise
their business processes. In addition, government spending is expected to drive growth in
demand from developing nations as public institutions modernise to keep pace with
economic growth. While these offshore services in the South are typically less
sophisticated than the ones demanded by developed countries, this may change in the
future when potential client firms located in developing countries engage more deeply in
higher functions such are design, product development, and R&D. This demand
expansion from the South for offshore services is thus gradually creating a new emerging
market, although it is still small – the BRIC nations accounted for slightly less than 10%
of the global IT market in 2009 (IDC, 2010). The expansion of offshore services into
these emerging markets is likely to impact both upgrading opportunities and the
governance structure of this GVC.
On the supply side, the 2008 crisis put increased downward pressure on prices,
speeding up the search for lower-cost locations (Gereffi and Fernandez-Stark, 2010b;
Lewin et al., 2009). At the same time, it highlighted the need for providers to diversify
their client base to include more geographic locations. Supply has continued to spread
geographically across the world, with a growing number of developing countries
consolidating their entry into the industry (see Figure 3). While supply has been
dominated by India, which in 2009 accounted for 45% of the global market share for
offshore services (NASSCOM Newsline, 2009), new destinations have emerged in the
Asia Pacific region (Magtibay-Ramos et al., 2008) and Latin America (Gereffi et al.,
2009), and more recently Africa too is being considered a potential offshore service
destination (Radwan and Strychacz, 2010). Developing country governments have begun
to incorporate attractive incentive packages, including free trade zones, training
subsidies, and tax concessions, to encourage firms to set up operations in their countries.
Despite the diversification of supply across the globe, the companies providing these
services have become increasingly consolidated as the industry has matured (Gereffi and
Fernandez-Stark, 2010b). The industry is organised in three major groups of lead firms:
first, captive or shared services centres; second, third-party providers from developed
countries; and finally, third-party providers from India. The first group of firms refers to
MNCs that established ‘captive centres’ in developing countries in the early 1990s, as
they offshored their business activities abroad in order to find lower-cost and
appropriately skilled workers. Captive centres, also named shared service centres,
allowed these MNCs to keep service operations in-house opening subsidiaries in
developing countries. However, in the late 1990s many MNCs decided to sell these
operations to third-party providers to further reduce costs. In this process, a great deal of
knowledge transfer occurred and developing countries benefited significantly from this
new type of corporate reorganisation (Sako, 2006). The decline of these captive centres
gave way to the division of the market into two groups of large firms that dominate the
supply of offshore services.

The offshore services value chain 215
Figure 3 The global supply and demand for offshore services
POLAND
POLAND
CZECH REPUBLIC
CZECH REPUBLIC
HUNGARY
HUNGARY
ROMANIA
ROMANIA
BULGARIA
BULGARIA
A. R.
A. R.
EGYPT
EGYPT
CHINA
CHINA
MALAYSIA
MALAYSIA
SOUTH
SOUTH
AFRICA
AFRICA
BRAZIL
BRAZIL
MEXICO
MEXICO
ARGENTINA
ARGENTINA
CHILE
CHILE
MOROCCO
MOROCCO
PANAMA
PANAMA
COSTA RICA
COSTA RICA
SINGAPORE
SINGAPORE
PHILIPPINES
PHILIPPINES
EL SALVADOR
EL SALVADOR
POLAND
CZECH REPUBLIC
HUNGARY
ROMANIA
BULGARIA
A. R.
EGYPT
CHINA
MALAYSIA
INDIA
SOUTH
AFRICA
BRAZIL
PANAMA SINGAPORE
PHILIPPINES
COSTA RICA
EL SALVADOR
MEXICO
ARGENTINA
CHILE
MOROCCO
IBRD 37909
JULY 2010
Mature location (>50 centers)
Emerging location (15−50 centers)
Nascent location (5−15 centers)
No major activity (0−5 centers)
Demand for offshore services
Note: The demand for offshore services is primarily from developed countries, although
recently demand for offshore services has begun to emerge and expand from the
South.
Source: Center on Globalization, Governance & Competitiveness (CGGC),
Duke University, based on data from Everest (2009) and
Datamonitor, 2009.
The second type of lead firms is well-established third-party providers from developed
countries that began exporting services in the 1990s. These firms entered the industry by
using their subsidiaries in developing countries as platforms for service exports. These
include third-party providers such as IBM, Accenture, EDS (now HP enterprises), and
Capgemini. The large global service providers operating in the offshore industry are
principally dedicated to serving large MNCs and governments. These firms established
services platforms first in India, then in Central and Eastern Europe, and later in Latin
America. In 2007, Accenture employed more people in India than anywhere else in the
world. By 2006, IBM had 60,000 employees in India, and Capgemini employees there
had reached 12,000 (Dossani and Kenney, 2007).
The last set of lead firms is Indian third-party providers that emerged in the service
sector in the late 1990s and includes Tata Consultancy Services, Infosys and Wipro,
among others. These firms emerged despite an unpredictable business environment in
India, and their growth has led to significant changes within Indian institutions (Athreye
and Hobday, 2010). They established a sophisticated system to leverage global time
zones around the world called the Global Delivery System (GDS), whereby they maintain
headquarters in India, delivery centres in developing countries, and customer support
offices in developed countries (early to mid-2000s). This system ensures uninterrupted
services for clients. These firms have established delivery centres in developing
countries, supported by generous government incentives that aim to position their
countries as export service platforms to the world. In doing so, Indian firms have also
successfully gained access to unexploited domestic and regional markets in the South.
Today, they use the GDS to serve both local and export markets, allowing them to
geographically diversify their revenue streams. Indian firms have grown at significantly

216 K. Fernandez-Stark et al.
higher rates than firms from the developed world, despite the fact that both firm types
have leveraged India’s low costs in their offshore service operations.
Table 3 provides an overview of leading Indian offshore service providers in
Latin America. Indian firms have expanded aggressively into Latin America and
opened numerous delivery centres between 2000 and 2010, especially in the region’s
largest economies, Brazil, Mexico, and Argentina (Gereffi et al., 2009; Laughlin and
Camino, 2010). TCS’s Chilean delivery centre is the firm’s largest outside of India,
accounting for 13% of the company’s non-Indian labour force (The Times of India,
2010).
Table 3 Top Indian offshore service providers in Latin America (FY 2009–2010)
Company Countries Year of
entry
Number of
employees,
Latin America
Number of
employees, total
Revenues,
total (USD
millions)
Argentina 2005
Brazil 2003
Chile 2003
Colombia 2006
Ecuador 2007
Mexico 2003
Tata Consulting
Services (TCS)
Uruguay 2002
7,000 160,429 $6,327
Brazil 2006 Wipro
Mexico 2007
850 108,071 $5,826
Infosys Mexico 2008 330 113,796 $5,826
Cognizant Argentina 2008 250 95,600 $3,279
HCL Technologies Brazil 2009 150 70,218 $2,704
Mahindra- Satyam Brazil 2007 100 50,570 $1,240
Source: Based on information from diverse sources: online databases such as
OneSource, Hoovers and DataMonitor; company annual reports;
telephone interviews; media information; newspapers; and press
releases.
The significant market power of these lead firms in the offshore services value chain has
made it difficult for local companies to compete in developing countries. With the
exception of those countries with large MNCs, which have established local service
providers to meet the needs of sizeable domestic markets, local firms have not been
able to compete with international providers for major contracts. To lessen risk
and facilitate service provision, big buyers prefer to source from well-established firms
with solid global reputations. The large global providers can leverage the same
workforce, with economies of scale and organisational learning, to provide services at
lower costs and with lower risk to the client than local firms (Laughlin and Camino,
2010).
The new demand emerging from clients in the South, however, is providing
opportunities for smaller suppliers to enter the value chain. Four categories of

The offshore services value chain 217
suppliers are meeting this demand: the first is Indian third-party providers located in
the South (particularly notable in Latin America); the second includes providers
from the South serving demand in other countries in the South; the third category
consists of domestic companies; and the fourth, although to a lesser extent due to
the limited size of the contracts, large global third-party provider firms from
developed countries. This growing demand offers business opportunities for
third-party providers in categories two and three, located in the South, to enter
the outsourcing service industry that would otherwise be unable to compete for
large contracts with the global and Indian providers (KPMG, 2009; Wadhwa,
2010).
In particular, some of the larger, non-Indian Southern firms have been able to
leverage comparative advantages of price, time zones and expertise to provide services
regionally, a new market that is expanding rapidly. Sonda, Chile’s largest IT services
firm, is the key example of regional consolidation. The company employs 8,000 workers
across Latin America with revenues of US$671 millions in 2008. The company has
strategically focused on expanding only within the region, establishing operations in
Argentina, Brazil, Colombia, Costa Rica, Ecuador, Mexico, Peru and Uruguay. The
company uses its numerous regional operations to provide a range of offshore services
from low value-added to very sophisticated services. In addition to a wide variety of
private sector clients, including Brazilian MNCs such as Embraer and Petrobas, it has
also provided the central government procurement systems to Chile, Panama and
Colombia (Peña, 2009).
In this complicated network of business-to-business activities, multiple governance
structures within the offshore services GVC are beginning to emerge. Governance
structure refers to the global organisation of the industry, paying close attention to the
coordination and key drivers among different actors of the GVC. Gereffi et al. (2005)
identified five governance categories: markets, modular, relational, captive and
hierarchy.6 Table 4 illustrates how governance structures differ at different stages of the
offshore services value chain.
Figure 4 links the various types of governance structures identified in Gereffi et al.
(2005) to the offshore services value chain. In lower value stages of the chain,
the ‘market’ governance structure tends to predominate (see Figure 4). When buyers
within the offshore services value chain simply expect access to low-cost labour,
the interaction between the buyer and supplier is limited. Suppliers in this case
provide services according to the customer’s specifications. The supplier is expected
to provide the required competencies to fulfil the service obligations. This is seen
with the commoditisation of several services, including call centres, low value
IT services, and finance and accounting (Couto et al., 2007). These routine services
are non-complex and can be easily codified, standardised and transferred. Buyers
select their services from multiple providers principally based on cost. Increased
complexity in transactions, such as the expansion into higher value BPO services
such as human resource management, requires more interaction and coordination
between the client and the supplier and the governance structure becomes more
‘modular’. Service providers in this case operate in a similar manner to the
global contract manufacturers in production chains (see articles by Sturgeon and
co-authors on the automobile and electronics value chains in this special
issue of IJTLID), where they are contracted to provide comprehensive ‘blocks’ of
services.

218 K. Fernandez-Stark et al.
Table 4 Types of governance structures in the offshore services value chain (see online
version for colours)
Governance
type
Complexity of
transactions
Ability to codify
transactions
Capabilities
in the
supply-base
Degree of explicit
coordination and
power asymmetry
Offshore services
value chain
segment
Example
Market
Low
High
High
Low value added
BPO
Third-party providers call centres in Central
America. For example, Sitel in Nicaragua
Modular
High
High
High
High value added
BPO
BPO services such as accounting and payroll
carried out by Infosys BPO in India.
Relational
High
Low
High
KPO, high value
added ITO and
high value added
services in industry
specific activities
R&D services for pharmaceutical MNC,
Roche, by TCS in India
Captive
High
High
Low
IT and BPO
operations sold
recently to third
party providers
The acquisition of Unilever BPO operations
by Capgemini in Chile
Hierarchy
High
Low
Low
Low
High
‘Captive centres’ in
IT and BPO
A large number of MNCs that opened captive
centres in East and Central Europe and as
well as in Latin America. Captive Centers in
Costa Rica include: Astra Zeneca SS, British
American Tobacco, Chiquita Brands, Citi
Business Services, DHL, Intel, Oracle and
Procter & Gamble GBS.
Source: Authors’ interpretation, based on Gereffi et al. (2005)

The offshore services value chain 219
Figure 4 Multiple governance structures within the offshore services value chain (see online
version for colours)
Note: To see full version of GVC background diagram, see Figure 1.
As the client firm begins to demand higher value services from the supplier, and a greater
degree of interaction is required between the two parties, a ‘relational’ governance
structure emerges (see Figure 4). Using data gathered by surveys carried out by the Duke
Offshore Research Network (Couto et al., 2007; Lewin and Cuoto, 2007) and by the
National Academy of Sciences in 2005 that examine the offshoring of R&D and
innovation practices of more than 200 large MNCs, the following characteristics for these
high value services can be determined. These knowledge services are unique,
non-repetitive and complex in nature, and there is a high degree of coordination between
the two parties (Thursby and Thursby, 2006). The buyer is driven primarily by the search
for talent, expertise and access to local know-how. In R&D services, client firms rely on
their local R&D partners’ competencies in serving the local markets to collaborate on the
development of new products for those markets. For high value services, such as new
product development, the relationship between client and supplier is fundamentally based
on trust, particularly as many of the developing countries where the services are being
carried out have poor intellectual property protection and weak contract enforcement. In
many cases, challenges related to this weak intellectual property protection have led to
MNCs maintaining their offshored R&D operations in-house, or through joint ventures
(in these instances, the preferred governance structure is either hierarchical (in-house
R&D) or captive (joint-ventures) rather than relational.
However, as each of these segments of the industry emerged, the relationships
governing the segment have also evolved. When the industry was initially established, a
‘hierarchical’ governance structure was prominent; captive centres operated by MNCs
opened in developing countries taking advantage of the changes brought about by the IT
revolution. Capabilities in host countries were low and the concept of conducting services
in one country to be consumed in another was highly novel. There was a great deal of
oversight of the foreign service centres by companies in the developed world and a high
degree of knowledge transfer. This gave way to a ‘captive’ governance structure as these
foreign subsidiaries increased their competency levels and were slowly spun off or sold

220 K. Fernandez-Stark et al.
to global third-party providers or Indian firms, although the majority of the control was
held by the MNCs as principal buyers. These providers were ‘learning’ how to operate
across time zones and borders, and their principal clients influenced their processes
significantly. More recently, developing countries have acquired certain expertise and
more activities are being codified, leading to a ‘modular’ governance structure in high
value added BPO activities in which the complexity of the transactions are high, while at
the same time a ‘market’ governance type has been created with the commoditisation of
low value added BPO activities such are call centres. Finally, as more sophisticated
services are demanded, a shift from ‘hierarchical’ and/or ‘captive’ to ‘relational’
governance is occurring as firms move from in-house/joint venture operations to fully
outsourced service provision in which there are complex interactions and mutual
dependence between buyers and seller.
The above analysis is based on the dominant market structure, with service provision
occurring in developing countries for developed country buyers. As demand continues to
expand in the South, new governance relationships may emerge. Early analysis suggests
that large, experienced providers from the South are able to provide local companies with
world-class solutions, shifting towards a supplier-driven chain. On the other hand,
smaller providers looking to create innovative solutions for domestic clients, particularly
with respect to social and local issues (Wadhwa, 2010), are developing more
collaborative relationships characteristic of relational value chains.
4 Developing countries in the knowledge economy
In production or manufacturing-based economies, key sources of competitive advantages
can be identified as large pools of unskilled labour and an abundance of raw materials.
With an ample supply of both, many developing countries have become essential parts of
global production chains. This is clearly illustrated by the strong African suppliers in
agriculture and horticultural chains (Dolan and Humphrey, 2004), China’s role as the
world’s assembly plant (Dicken, 2007), and Vietnam’s rise in the apparel industry
(Gereffi and Frederick, 2010; Thoburn et al., 2005; Thomsen, 2007). However, in the
knowledge economy, information, innovation, education and expertise are the key
sources of competitiveness (OECD, 1996). Several developing country governments see
the offshore services industry as a great opportunity to develop their economies, drawn
by key positive impacts the sector affords the local economy: employment creation in
higher skilled and better compensated jobs, linkages with global markets and learning
opportunities, and enhanced resilience to economic downturns.
First, the direct and indirect employment effects generated by the offshore services
industry are significant. While still in its nascent stages, in many developing nations
offshore services have been the fastest-growing industry in recent years, creating a host
of new jobs. In India, offshore service employment shows growth rates of close to 25%
annually. In 2004, the industry employed 0.8 million and in 2009 employment reached
2.3 million (NASSCOM, 2009a). It has been estimated that up to 161 million jobs can be
performed remotely (McKinsey Global Institute, 2009). Yet, global employment in
offshore services had only reached 4.1 million by 2008, indicating that the vast majority
of its potential remains untapped.
In Figure 5, the shaded bars represent the adoption of offshore practices in the years
2003 (darker) and 2008 (lighter). In just five years (2003–2008), this industry has

The offshore services value chain 221
demonstrated rapid growth. However, the dotted bar presents the vast opportunities that
still exist to offshore activities across different industries. The graph also highlights the
emergence of new segments in the GVC, including industry-specific offshoring in retail
banking and the health care industry (McKinsey Global Institute, 2009). Furthermore,
while resulting in an increase in direct employment, it is estimated that an additional four
indirect jobs are created for every offshore services job that is established (ECLAC,
2008; NASSCOM, 2009a). Offshore services employment is also regarded as better than
many production jobs. They are typically better paid, the hires come from groups that
often experience high unemployment rates (youth and women), they can be
geographically dispersed within a country, brain drain is reduced by providing
employment opportunities at home, and they establish a culture based on learning and
continuous development (ECLAC, 2008). This industry hires mostly workers with
tertiary education. Lately, enrolment in tertiary education in developing countries has
seen an increase. A growing number of people from low socioeconomic levels are thus
increasingly able to access employment in this sector. In Chile, 70% to 80% of students
enrolled in one of the country’s largest IT technical institutes, DuocUC, were the first
generation to enter higher education (Barriga, 2009).
Figure 5 Actual and potential adoption of offshore practices
Auto
Health care
Insurance
IT services
Pharma
Retail
Retail
banking
Packaged
software
3,084
3,373
59,501
65,560
12,193
11,723
6,278
6,888
1,731
1,989
147,461
155,961
13,017
12,659
595
390
2003
global employment
theoretical maximum global resourcing potential
2008
4
4
21
20
38
371
700
10
28
42
93
302
37
105
1
21
Notes: Actual adoption of offshoring assesses the current and projected level of
offshoring to low-wage countries within a sector. Theoretical maximum global
resourcing potential describes the percentage of a sector or function that may be
performed remotely.
Source: McKinsey Global Institute (2009)

222 K. Fernandez-Stark et al.
A second benefit is the establishment of international linkages with global markets that
drive learning and technological growth in developing countries (Morrison et al., 2008).
Entry into the offshore services value chain facilitates the development of sophisticated
products and services that the local market cannot yet appreciate. Athreye and Hobday
(2010) argue that technology products in particular often face adverse demand in
developing countries because the relatively low income of consumers and firms favours
goods and services with low prices rather than those of higher quality. Demand for
IT-enabled services within the domestic markets in India, for example, initially trailed
that of its export market. However, this trend has now been reversed with a growing
number of domestic companies adopting similar outsourcing strategies as developed
economies to help support growth (NASSCOM, 2009b). Thus, engaging with clients in
the developed world helps to increase the level of sophistication of exports. In turn,
increased sophistication of the exports of these developing countries is considered an
important determinant of their future growth prospects (Hausmann et al., 2007).
Recent evidence suggests that the offshore services industry has a contra-cyclical
nature. The economic crisis of 2008 highlighted the weaknesses of economies
based on commodities and manufacturing (Borchert and Mattoo, 2009). However, the
offshore services industry continued to grow in these periods owing to its principal
purpose to lower costs and thus improve competitiveness for its clients (Gereffi and
Fernandez-Stark, 2010b). This may provide improved economic stability in developing
countries.
5 Upgrading trajectories in the offshore services industry
The emerging pattern of geographic diversification of the offshore services industry
described in this article has revealed country-level economic upgrading not dissimilar to
that which has occurred in production-based value chains. Upgrading in this context
refers to “a process of improving the ability of a firm or an economy to move to a more
profitable and/or technologically sophisticated and skill-intensive economic niche”
[Gereffi, (1999), p.51]. Upgrading occurs when multiple firms or key lead firms within a
country begin to provide higher value added services. In the case of the offshore services
industry, this upgrading has been driven in the private sector on the demand side by
clients seeking more advanced services, as well as on the supply side by entrepreneurs
and large firms alike looking to exploit new, innovative opportunities within the industry
(Athreye and Hobday, 2010; Wadhwa, 2010). The public sector’s principal role to date in
upgrading has been supportive, mainly providing incentives for entry into the value chain
and subsequent workforce development. The following discussion of upgrading in the
offshore services industry is based on the analysis of ten developing country case studies
of a cross section of nations that have entered or attempted to enter the industry since its
inception (Fernandez-Stark et al., 2010b). These include Barbados, Chile, Costa Rica,
Czech Republic, Guatemala, Honduras, India, Ireland, the Philippines and South Africa.
There is consensus among researchers and industry experts alike that the principal
factor underlying the location of service centres in offshore services is both the quantity
and quality of the available human capital. As the key factor of production, human capital
and a country’s ability to develop its workforce are central to its ability to upgrade
(Fernandez-Stark et al., 2010c).7 However, education systems in many countries, and in
developing countries in particular, remain limited and inflexible in the face of changing

The offshore services value chain 223
demand of the labour market (World Bank, 2000), and frequent mismatches are seen
between formal education programs and skills required by the labour market (Handel,
2003). In particular, emphasis is placed on theoretical and technical knowledge, and the
growing importance of the interpersonal skills and global understanding required for
success in the workplace is underestimated. In those industries where software and
technology play a central role, technical expertise is constantly changing and must be
continuously updated, making ‘soft’ skills such as adaptability, creativity and life-long
learning vital to ongoing success (Gallivan et al., 2004). In offshore services, knowledge
in languages, cultural intelligence, teamwork abilities and a global perspective are also
paramount (Fernandez-Stark et al., 2010c). Thus, the skills required for industry
upgrading are most often attained through focused workforce development initiatives.
These initiatives are designed to meet the needs of MNCs that expect quality standards
similar to those in developed countries (Fernandez-Stark et al., 2010b).
Important differences in the quantity of labour required through each stage of the
value chain are particularly relevant a country’s upgrading potential. Analysis of firms in
the countries studied shows that the lower levels of the value chain require a significantly
larger number of employees than higher levels. Firms such as India’s Infosys have
approximately 50,000 employees in their basic business service operations. Competitive
advantage in lower levels of the value chain is focused on abundant labour with basic
preparation that requires efficient training to produce adequate numbers of employees.
Athreye and Hobday (2010, p.39) credit this for India’s success, noting the industry
exploited its initial advantage in low-cost human capital by fashioning business models
that leveraged this strength.
When moving up the value chain, however, the need for quantity is surpassed by the
demand for quality, and the industry requires fewer, but more highly qualified personnel.
The competitive advantage for higher ends of the value chain including ‘high value
knowledge services’ are derived, as Porter argues, from a small number of highly skilled
persons or ‘talent’ (Porter, 1990). A growing literature on the offshoring of innovation
and research development confirms that the search for talent is the key decision-making
factor in location selection (Lewin and Cuoto, 2007; Thursby and Thursby, 2006).
We find distinct workforce development strategies for the diverse upgrading
trajectories in the industry. Certain activities, particularly in the BPO segment, only
require short-term training; in other cases formal education and globally recognised
certifications are mandatory to move to higher value–added activities, particularly in
R&D stages. Nonetheless, a general pattern of engaging the workforce has emerged.
Formal education through the country’s established education system is complemented
by specific training to fill the knowledge gap between education systems in developing
countries and high quality standards required to serve the global market. Demand-driven
training has been the most effective way to impart specific skills needed by the offshore
services companies. This type of training has provided a rapid and efficient solution in
filling the skills gap.
Within the GVC framework, upgrading can be classified in four different ways:
process upgrading, which transforms inputs into outputs more efficiently by reorganising
the production system or introducing superior technology; product upgrading, or moving
into more sophisticated product lines; functional upgrading, which entails acquiring new
functions (or abandoning existing functions) to increase the overall skill content of the
activities; and chain or inter-sectoral upgrading where firms move into new productive
activities (Humphrey and Schmitz, 2002). Adapting this scheme to our case evidence,

224 K. Fernandez-Stark et al.
five principal upgrading trajectories can be identified from the ten country case studies:
Entry into the value chain; upgrading within the BPO segment; offering broad spectrum
services; the expansion of IT firms into KPO services; and the specialisation of firms
in vertical industries.8 These five upgrading trajectories are presented in Figure 6 and
discussed in further detail below.
Figure 6 Examples of upgrading trajectories in the offshore services value chain (see online
version for colours)
Type Diagram Description
Entry into the value chain
ITO
BPO
KPO
GeneralBusinessActivities Industr y
Specific
Activities
Value Added
• Common way to enter the offshore
services value chain is through the
establishment of call centre operations.
• Opportunity for low-income countries to
enter into the knowledge economy.
Recent examples of countries entering the
value chain through call centres include El
Salvador (Dell, Sykes and Teleperformance),
Nicaragua (Sitel), Panama (HP and
Caterpillar) and Guatemala (Exxon Mobil,
ACS and 24/7 Customer) (Gereffi et al.,
2009).
Upgrading within the BPO segment
(functional upgrading)
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
• Companies expand their BPO services
within the segment.
• Improving and expanding call centres
operations or specialisation in certain
areas.
South Africa has been an important
destination for BPO services currently
employing around 87,000 people and
growing at 33% per year. South Africa is
actively working in expanding their BPO
activities (Everest Group and Letsema
Consulting, 2008; Sykes, 2010).
Broad spectrum services
(functional upgrading)
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
• Companies positioned in the ITO and
KPO segments may opt to provide a more
comprehensive range of activities and
include BPO services.
• Acquisitions of smaller BPO firms and/or
creating a new business unit within the
company.
India has seen a number of firms in the IT
and consulting (KPO) segment expands to the
BPO sector. This is true for both big
domestic firms like Infosys, Wipro and also
foreign firms located in India like IBM and
Accenture among others.
Note: *To see the full version of GVC background diagram, see Figure 1.
Source: CGGC, Duke University

The offshore services value chain 225
Figure 6 Examples of upgrading trajectories in the offshore services value chain (continued)
(see online version for colours)
Type Diagram Description
Upgrading from ITO to KPO
functions
(functional upgrading)
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
• IT service firms include KPO activities in
their portfolio.
• IT companies engage customers to find
solutions for unsolved business problems.
For example, between 2002 and 2005, Indian
firms Infosys, Wipro, TCS and WNS
amongst others developed and launched
business consulting services practices.
Industry Specialisation
(intersectoral upgrading)
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
• Companies offering some ITO, BPO and
KPO services for a wide range of
industries start specialising and focus on
key industries to develop expertise.
The Czech Republic, which entered into the
offshore services industry through the
establishment of BPO shared services
activities, has quickly upgraded into R&D
segments of vertical industries, particularly in
the automotive, aerospace and IT areas
(Business and Innovation Center- Brno,
2009).
Note: *To see the full version of GVC background diagram, see Figure 1.
Source: CGGC, Duke University
Trajectory 1: Entry into the value chain. This has been achieved by developing countries
principally through the provision of call centre services, a BPO activity. The Dominican
Republic, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua and the Philippines
have entered the offshore services industry by providing call/contact centre services. This
segment draws on previously marginalised labour markets, in particular youth and female
labour pools, hiring a large number of young workers with high school diplomas and in
some cases basic tertiary education. Hiring practices in the segment do not discriminate
between educational or technical disciplines, facilitating access to a deeper labour pool in
this smaller labour market. These operations rely on scalability in order to drive
profitability, suggesting that these are best suited for developing countries with large
populations.
The success of the Philippines in the call centre industry to become a strong
competitor with India is mostly attributed to its large, English speaking youth population.
Work in call centres in the Philippines is highly respected within the Filipino community
and, while the industry has access to some of the lowest costs in the industry, call centre
agents earn a good salary by Filipino standards. Training programmes are short and
typically carried out by the private sector. “On the job training is very important in these
establishments. Most newly hired agents are involved in a period of mentoring during
which more experienced workers will sit next to them and listen in on their calls in order
to give feedback” [Sieben et al., (2009), p.554]. In some cases, such as the Philippines,
the government has provided this training or it provides incentives to encourage training,

226 K. Fernandez-Stark et al.
as in Chile. In Guatemala, inter-institutional alliances were created to promote call centre
skills training. Intecap, a technical training institution funded through a 1% levy on
salaries, has been central to these initiatives (ECLAC, 2009).
A limited number of countries with slightly higher income levels including Chile and
Ireland demonstrate a mixed approach with simultaneous entry into the ITO and BPO
segments, while India is the only low-income country to have entered the value chain
directly through ITO services. Entry into the value chain through the IT segment is more
complex for developing countries due to the challenges of providing services for
customers they do not know without a domestic market to drive growth. These services
require basic levels of computer literacy generally absent in low-income countries, and
the limited labour pool with pre-existing knowledge of computers in low-income
countries may not consider offshoring as an attractive career alternative. Despite these
challenges, many governments from low-income countries have supported and
encouraged the development of the IT services industry, but they have yet to enter the
global IT chain. India appears to be the exception. The country has a large labour pool to
support the IT services operations, with over 300,000 three- and four-year engineering,
computer science and IT services graduates per year (NASSCOM, 2006). India is at the
leading edge of offshore services. India’s first mover advantage, combined with its
significant competitive advantage in IT personnel, has made it difficult for other
countries to enter the global industry and compete effectively with the depth, vendor
maturity, cost structure and scalability of the Indian firms.
Trajectory 2: Upgrading within the BPO segment. This encompasses the shift from basic
services (call centres) to the provision of higher value added services within BPO, a
common trend for countries entering the GVC through the BPO segment. This upgrading
is seen in firms in the small countries of the Caribbean that have entered offshore services
through the BPO segment as well as in South Africa and the Philippines. In the Caribbean
region, offshore service firms have entered these countries principally to provide call
centre services in Spanish (incoming and outgoing) for the Hispanic market in the USA,
but they have rapidly offered additional services as well. Firms first expanded their
services to include English-speaking agents (product upgrading), while some companies
in an effort to meet global requirements for data protection, sought certification in ISO
data security standards (process upgrading). Following this, a number of firms moved
into providing more back-office BPO services, such as finance, accounting and payroll
(functional upgrading).
The learning curve associated with overcoming the challenges of exporting services
during the introduction of call centre operations can be quickly leveraged to both improve
upon current services and upgrade into higher value services. Higher value BPO activities
rely on similar repetitive functions as call centres, although as a whole, they draw on a
slightly more educated labour force. Limited direct interaction between clients and agents
facilitates growth of these functions as they do not depend on language fluency, in turn
allowing access to a broad base of potential employees. Training in BPO functions is
predominantly carried out by the private sector and on the job, with employees receiving
training and support from a team leader. In some cases, such as in South Africa and
Chile, the government has provided financial support for training for both direct jobs and
middle management in the BPO segment.
Trajectory 3: Broad spectrum services. This trajectory describes functional upgrading to
offer all services in the ITO, BPO and KPO segments. Maintaining the provision of low

The offshore services value chain 227
value services while at the same time providing high valued services requires a large but
versatile low-cost labour supply. In small countries, inflationary pressure on wages due to
a limited but skilled workforce encourages countries to upgrade into higher value
services, or lose their competitiveness in the industry to other lower cost countries. On
the other hand, a large country with a significant proportion of the population earning low
salaries can successfully upgrade into higher value services and at the same time remain
competitive in basic services. To date, only India has been able to achieve this degree of
upgrading, providing at once sophisticated KPO services in legal and business
intelligence and low value call centre operations. As the first mover and leader of the
industry, the evolution of offshoring in India is atypical. BPO services emerged only after
the ITO segment had developed its strength in India. It has been argued that the
emergence of the BPO services sector in India, at that time, was the result of the
dominance of the large IT firms (Athreye and Hobday, 2010). Indian entrepreneurs who
were looking to take advantage of the advances in IT and leverage India’s significant
competitive advantage in labour were unable to compete directly with these large firms,
and thus they created the BPO market. Indeed, Indian start-ups continue to create and
exploit new niche segments within the offshore services market, and most recently have
begun to focus on building sophisticated R&D solutions for the developing world
(Wadhwa, 2010).
Trajectory 4: Upgrading from ITO to KPO. The shift of ITO providers into KPO
activities is driven by a need to engage customers to find solutions for “unsolved business
problems rather than incomplete programming tasks” [William F. Achtmeyer Center for
Global Leadership, (2008), p.3]. IT firms leverage their successful global approach to the
technology industry by becoming players in the business-consulting field. This upgrading
trajectory has been observed in India, Chile, Ireland, and Israel, and it has been facilitated
by the recruitment of personnel with higher education qualifications. Firms hire a large
number of MBA graduates and workers with business experience and sharp analytical
skills. Legal process outsourcing (LPO) requires qualified lawyers. It is estimated that by
2010, LPO will employ 40,000 professionals globally (Sako, 2009). These lawyers
undergo similar training as in the USA.
Trajectory 5: Industry specialisation (intersectoral upgrading). Companies offering some
ITO, BPO and KPO services for a wide range of industries often specialise and focus on
key industries in which to develop expertise. This trajectory is closely correlated with
leading productive industries in the host country. Companies hire area experts to sustain
their competitive advantage in specific niche areas, drawing on available pools of highly
qualified human capital. Countries that have followed this trajectory include the Czech
Republic, Chile, Israel and South Africa. The Czech Republic entered the offshore
services industry through the establishment of BPO shared services activities but quickly
upgraded into R&D segments of vertical industries, particularly in the automotive,
aerospace and IT areas (Business and Innovation Center – Brno, 2009). Inflationary
pressure, caused by the high demand for labour from a small workforce, quickly forced
the country to change its offshoring approach to focus on higher value activities. In Chile,
the export of engineering services related to mining are the third largest service export
sector (Fernandez-Stark et al., 2010a). Israel has targeted high value security offshoring,
particularly in cyber security, while in South Africa, services are increasingly focused on
the financial services sector drawing on the country’s position as the financial capital of
Africa.

228 K. Fernandez-Stark et al.
Figure 7 Offshore services upgrading: India, Philippines and Chile (see online version
for colours)
India
1990s2010Early2000sMidtoLate2000s
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
Philippines
Early2000s Mid2000s Late2000s
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
Chile
20002008 20072010 2010
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
ITO
BPO
KPO
GeneralBusinessActivities In
d
ustry
Specific
Activities
Value Added
ITO
BPO
KPO
GeneralBusinessActivities Industry
Specific
Activities
Value Added
Note: To see the full version of GVC background diagram, see Figure 1
Source: Authors
The above analysis of these trajectories indicates that upgrading in the offshore services
industry is non-linear and can move in different directions and multiple shifts could take
place simultaneously. Figure 7 compares the trajectories followed by India, Chile and the
Philippines, highlighting the differences in upgrading processes across countries with
different characteristics.
The expansion of demand to include client firms in developing countries is likely to
have an important impact on the upgrading processes of providers. Indian firms in
particular have been looking towards domestic markets to drive upgrading. Consulting
firm Ernst & Young notes that in their home markets “[these firms] get to handle larger
projects that offer opportunities to move up the value chain, which are difficult to come
by in the developed markets. This helps Indian IT firms develop capabilities that can be

The offshore services value chain 229
leveraged in other emerging markets like Brazil and newer markets like Africa” (Global
Services, 2009).
In addition, upgrading in offshore services provides opportunities to other
low-income countries to enter into this value chain. Early market entrants rapidly
specialised in service areas in which they have a competitive advantage. As they
upgraded to higher-value activities, new countries joined the industry at lower points in
the value chain. This dynamic thus opens up opportunities for new countries to enter this
chain and to continue to find high-value activities within it. Chile’s shift into higher value
services, for example, has made way for Peru and Colombia to enter the value chain. Due
to the resulting upward pressure on wages, call centre operations previously based in
Chile have begun to be relocated to other Latin countries (El Mercurio, 2010). This has
also been seen to occur within countries, such as in India and the Philippines, when Tier 1
cities moved into higher value services, Tier 2 and Tier 3 cities, as well as many rural
villages (India Knowledge@ Wharton, 2010) began to enter the industry in call centres in
particular. This shift provides emerging economies with an opportunity to drive
sustainable growth through the expansion of the knowledge economy and to reduce their
traditional dependence on manufacturing and natural resource industries.
6 Conclusions
The offshore services industry is a new and rapidly growing sector that has important
implications for the growth of developing countries and their integration into the
knowledge economy. The industry was initially driven by the unbundling of MNC
business activities and the offshoring of low value added activities in the search to reduce
costs by sourcing cheap labour. However, the level of sophistication of services being
offshored has increased substantially over time, and today even core business activities
such as R&D are being carried out by firms in the developing world.
Demand for these offshore services has principally been driven by firms in the
developed world. More recently, developing economies have begun to demand these
services, creating a new market. Several Indian service providers have taken advantage of
this expansion of the South by locating their operation centres in developing countries.
This allows them to not only use those nations as a platform to export services, but also to
serve their growing domestic markets. Since demand from the South is currently focused
on more generic and basic services, this also provides an opportunity to domestic service
providers that cannot compete for global contracts leading to increased regional trade.
As the industry has evolved, upgrading to new or higher value services has taken
place in various developing countries, offering new opportunities to enter this industry
and provide lower value services. The global expansion of the sector has accelerated and
a clear majority of developing countries are actively attracting service providers that will
use their countries as export platforms. The offshore services industry has offered
important economic and social benefits for emerging nations, including access to new
markets, more and better employment, and secure income during global economic
downturns.
Different upgrading paths have been identified. Overall, upgrading trajectories have
been driven by workforce development in which different initiatives and institutions have
been engaged to improve the skills of the workers according to global standards. Due to
the global nature of the industry, specific skill gaps need to be addressed, such as

230 K. Fernandez-Stark et al.
language and intercultural awareness, as well as a number of soft skills that are
fundamental to interact successfully and understand the needs of global clients. In the
effort to upgrade the industry’s workforce, several actors have been involved, including
the private sector, the government and tertiary education institutions.
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Notes
1 See Figure 2 for data and a discussion on the size of the market.
2 Employment information accounts only for offshore work and it does not include domestic
activities.
3 This classification was developed based on a series of interviews of leading firms in the
industry in India and in Chile carried out between 2007 and 2009, compiling comprehensive
employee, service, and client information, and complemented by secondary sources, including
industry reports and ten country case studies.
4 This industry has continued to grow and evolve rapidly and while the GVC presented in this
article incorporates all activities conducted within this industry to date, each of the individual
segments (ITO, BPO and KPO) can be considered as a separate value chain.
5 This figure includes both software and services as well as hardware sales. In 2008, hardware
accounted for approximately 55% of IT spending in Brazil (BRASSCOM, 2008). While this
figure is a significant proportion of spending, it does indicate the growing prevalence of
information technology in the country, which will ultimately lead to an increase in spending
on IT services.
6 For a detail explanation about governance structures see Gereffi et al. (2005).
7 Competitive advantages in language and cultural similarities and time zones are important for
initial entry into the value chain, yet these factors remain constant and can be leveraged in all
stages. Thus, these do not account for major shifts in ongoing upgrading or downgrading
trajectories.
8 Process upgrading is also identified, however, due to marginal returns to economic
development from this type of upgrading in offshore services, it is not discussed in detail in
this paper.