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Vietnam’s Growing Role in Outsourcing

Some of the biggest names in technology are turning to the Asian country for top-notch game design and software development

When Microsoft's video game unit began looking to offshore some work in 2002, Vietnam was hardly an obvious choice. But after a fact-finding team returned from an Asia-wide tour including stops in India, China, and South Korea, a small outfit named Glass Egg Digital in Ho Chi Minh City was a top contender. After successfully completing a pilot project designing 3-D racing cars used on the Forza Motorsportgame installed in every Xbox console, Glass Egg's relationship with Microsoft (MSFT) has steadily grown.

Today, Glass Egg Digital designs most of the 330 different models in Forza Motorsport 2. Not only do the digital Lamborghinis, Maseratis, and Mercedes look and handle on screen exactly like the real thing, but equally important, they look just as convincing as crumpled wrecks after collisions.

Next up, Microsoft is planning to contract out the considerably more demanding task of creating the tracks and cities through which its cars race. "Today we work on a massive scale [with Glass Egg]," says Nick Dimitrov, senior business manager at Microsoft Game Studios. "We have pretty much put them through the grinder on QA [quality assurance] compliance, and we couldn't be happier."


He's not the only one singing Glass Egg's praises. "They have done some fantastic stuff for us," says Brian Woodhouse, executive producer at Bizarre Creations in Liverpool which outsourced the creation of digital gas masks, telecom towers, and statues that get shot up in a gun-lovers' game called CLUB under development for Sega.

Glass Egg's client roster now includes Electronic Arts (ERTS), Sony Computer Entertainment Europe (SNE), Codemasters, and Atari (ATAR). Founded in 1995 by Vietnamese-American Phil Tran as a 2-D production studio, Digital Glass Egg has seen revenues grow 50% in the past two years. The company declined to give exact numbers but says sales this year will be just under $5 million.

Glass Egg is by no means the only Vietnamese company carving out a niche in software outsourcing. Crosstown rival Alive Interactive, also with a U.S. founder, has excelled in car design, while software developer TMA Solutions, founded by Canadian-Vietnamese Nguyen Huu Le does work for Nortel (NT), Comsys, and Alcatel-Lucent (ALU).


Homegrown Vietnamese companies are gaining momentum too. The country's largest outsourcing outfit is a division of Hanoi-based IT company FPT Corp., which just garnered a $36.5 million investment from private equity firm Texas Pacific and Intel Capital.

Further proof of Vietnam's potential are the ringing endorsements the country has received from some of IT's biggest names. In March, Intel (INTC) Chairman Craig Barrett visited Vietnam to unveil plans for a $600 million chip testing and assembly plant (see, 3/13/06, "Good Morning, Vietnam"). Intel subsequently bumped up the figure to $1 billion.

In April, Bill Gates was greeted like a rock star by some 7,000 students at Hanoi University of Technology where he talked about his vision of IT in Vietnam. Nonetheless, the country faces some big obstacles if it is to become an IT outsourcing hot spot. Internet connections can be painfully slow since there is no fiber-optic broadband network. The staff at Glass Egg often stay up half the night in order to upload and download files.


Another drawback is the lack of fluent English speakers, though clients say this problem is minimal as most communication is via e-mail. Helping balance out these deficiencies are the country's low wages—programmers earn about one-tenth what computer programmers make in the U.S.—a young and highly motivated workforce, and low staff turnover rates of about 5%.

With software and IT exports of just $70 million last year, tiny Vietnam is never going to eclipse India, which logged $17.7 billion in high-tech shipments in 2007. Indeed, for many multinationals looking to outsource this kind of work, the country doesn't even figure on the map.

"One disadvantage of being here is that some people think we work in rice paddies and little grass huts," says Glass Egg Chief Operating Officer Charles Speyer. Nothing could be further from the truth. Glass Egg's 140 employees toil in state-of-the-art facilities just a mile from Ho Chi Minh City's international airport in E-Town, Vietnam's first high-rise dedicated to high-tech clients.


The company's big challenge will be keeping its edge over China. "Ultimately China will beat us on cost," says Steve Reid, a Glass Egg business development manager. "If we want to be in business in five years, we have to move up the value chain." For his company, that means mastering the technically more demanding task of environment design.

Reid says its first attempt, working with Electronic Arts to create an imaginary Middle Eastern background for EA's Battlefield 2 war game was a huge learning experience for both companies. Turning out sleek driving machines is a snap, says Reid, compared to the challenge of portraying rusted tanks, bombed-out mosques, and water-stained walls.

Balfour is Asia Correspondent for BusinessWeek based in Hong Kong.



Why Outsourcing To Vietnam Is A Sound Business Decision

1. Overview

This document lays out the business case for meeting your company software development needs by outsourcing to Vietnam. It first outlines factors to consider in deciding which offshore locations to outsource to. Then it considers those factors one at a time for Vietnam, concluding that the country is a promising offshore location for outsourced software development and for business's€™ other IT needs.

2. Factors to Consider Regarding the Offshore Provider’s Location

In this section, we present a simple and straightforward framework for understanding the advantages and disadvantages of various offshore locations for your outsourced projects and business functions. This list of factors focuses on the most important and relevant factors, without becoming overly complex by listing unimportant minutiae.

The main factors that should be considered are as follows:

Price: Obviously one of the main resources to outsource work is to save money, so naturally you will be interested in the price quoted by the offshore provider. But it is critical to know exactly what that price includes. Costs for labor and overhead are both important components of the total price. Before doing direct comparisons of offshore providers’ labor costs, you should consider how much overhead you will incur in managing the outsourced work.

Labor Force: Who exactly will be working on your project? You should be familiar with these workers’ professional experience, education, and technical expertise. Also, make sure that there are enough workers available to work on your projects, so that your work won’t be slowed by labor bottlenecks. Find out what kind of turnover rate the offshore provider has, because if the turnover rate is high, a lot of time will be wasted on re-training and transferring information to new offshore employees.

Socio-Economic Stability: You can greatly reduce the risk of outsourcing by choosing to work with an offshore provider that is located in a country that has high economic, ethnic/religious, and political stability. If the offshore provider is located in a country with significant instability and conflict, your project may proceed more slowly or come to a complete halt. Also, the unstable situation may present dangers if and when your employees have to travel to the offshore site (Americans are often a target of insurgents overseas). And ultimately, if the country unexpectedly ends up with new leadership, you may find that the business-friendly policies that originally attracted you to the country suddenly change and become hostile to foreign investment.

Economic Stability: Be familiar with the country’s GDP and other economic indicators, and how those indicators have changed over the past several years. Also, consider whether foreign investment is increasing or decreasing and try to understand the underlying factors. What international trade treaties and pacts is the country a part of?

Ethnic/Religious Stability: Know what ethnic and religious groups are present in the country and whether they are tolerant or intolerant of one another. Does the country have a history of ethnic unrest and/or religious conflict?

Political Stability: Understand the local political situation where the offshore provider is located. What kind of government does the country have, and how long has the current regime held power? Does the country have a history of upheaval and uprisings? Know whether rebellions, revolutions, and coups are common. Also consider the stability of neighboring countries and whether they have friendly relations with the country where the offshore provider is located. Read expert analyses of any regional conflicts.

Business Environment: When you outsource IT-related work, you’ll probably be exchanging proprietary information and dealing with intellectual property. You need to know what policies the country has in place to protect your company’s trade secretes and intellectual property rights. Likewise, does the country have appropriate laws regarding economic development, taxes, and the labor force? How well are those laws enforced? All of these issues are very important in fostering a favorable business environment.

Language: You must be able to communicate with the offshore service provider – not only with the top managers, but also with the workers who are involved with your project on a daily basis. How well do they speak and write in English?

Strategic Fit: Many companies ignore questions of strategic fit – much to their chagrin. If the offshore provider doesn’t understand and adapt to your company’s strategic goals and standard business processes, the final deliverable will not be what you are looking for. Have an open discussion with the offshore providers’ managers and try to understand why they’re in business and how your project will be a good fit with their strategic goals.

3. The Benefits of Outsourcing to Vietnam

As stated in the introduction, this section will evaluate Vietnam as an outsourcing destination against each of the factors listed in the preceding section.

Price: In Vietnam, labor costs are 90% less than those in the U.S., which means significant cost savings for your company. Even compared to other outsourcing destinations, Vietnam’s labor costs are attractive. According to an article in “GlobalServices” in August of 2006, Vietnam’s labor cost for outsourcing IT functions and business processes are 30% less than those in India, and also less than those of countries in Eastern Europe. In October of 2006, GlobalServices named Vietnam’s Ho Chi Minh City among the top 50 outsourcing cities in the world, due to its having “one of the lowest production costs,” among other reasons.

Labor Force: The government of Vietnam recognizes and promotes the importance of education and training. According to Vietnam Economic Times, there were more than 200 institutions of higher learning in the country in 2004, and that number had increased by 60% in the preceding six-year period. Today the country has a 96% literacy rate and 80% of the country’s college graduates hold degrees in the sciences (Vietnam Economic Times). This makes Vietnam an exceptional country foroutsourcing technological projects, because the highly educated population has a high level of scientific and technical literacy. The labor force also have much lower turnover and much higher stability than do those of most other countries that are active in outsourcing. Overall, companies in Vietnam has an IT-related turnover rate of less than 5%, whereas in many other countries, such as India, this turnover rate can be 10% or even higher. The aforementioned 2006 GlobalServices article cited Ho Chi Minh’s “significantly low attrition rate” and “strong labor pool” as two other reasons for the city’s inclusion in its list of the top 50 outsourcing cities.

Socio-Economic Stability: Common outsourcing destinations in Asia-Pacific are often plagued by instability. Consider, for example, the 2006 coup in Thailand, the Kashmir conflicts between Pakistan and India, and the Sri Lankan military’s struggles against the Liberation tigers of Tamil Elam. There are many U.S. travel advisories that warn Americans against traveling to these areas, but fortunately Vietnam doesn’t share these countries’ woes. In fact, Vietnam is a very stable country, which creates a hospitable business environment for outsourcing.

Economic Stability: Vietnam’s economy is healthy and growing rapidly, with a GDP that, according to CEIC, grew an average of 7.4% in the six years leading up to 2005. This is the second fastest GDP growth in all of Asia, as published in the New York Times article, Vietnam’s Roaring Economy Is Set for World Stage, on October 25, 2006. FDI (foreign direct investment) was almost US$5 billion in 2005, which makes a favorable comparison with that of other countries that are popular destinations for outsourcing work.

Ethnic/Religious Stability: Because 95% of Vietnam’s population is ethnically Vietnamese and more than 80% of the citizens do not identify themselves with any particular religion, Vietnam is largely free of ethnic/religious conflict. A 2003 UNDP (United Nations Development Programme) study concluded that Vietnam had one of the most secure environments for investment, given the conflicts in Iraq and the surrounding region. Likewise, Vietnam was ranked as the safest among the 14 countries in the Asia-Pacific Region by the Political and Economic Risk Consultancy in Hong Kong (Berth of a Nation in Time, autumn 2002).

Political Stability: The current government has held power since Vietnam’s 1975 reunification, meaning that there have been more than 30 years of political stability in the country. The last major conflict with a neighboring country was almost 30 years ago, in 1978. Two American presidents (Bill Clinton during his presidency and in 2006, and George W. Bush during the APEC summit) have visited the country, and Bush met with several top officials including the president, prime minister, and Communist Party chief, thereby underscoring the country’s political stability.

Business Environment: Vietnam has had a free market since its centrally-planned economy was reformed through “doi moi” twenty years ago. Today, Vietnams’ policies create a warm and welcoming business environment for foreign investment. The country became the World Trade Organization’s 150th member in November of 2006, thanks to a vote of the organization’s General Council. At that time, Pascal Lamy, the Director-General of the WTO said, “Viet Nam has shown how anchoring domestic reforms in the WTO can yield dramatic results. Viet Nam’s economic growth topped 8% last year, foreign direct investment rose steeply to over $6 billion, and exports surged by over 20%. More must surely follow with the new laws, administrative measures, and commitments on goods and services that are in Viet Nam’s membership package.” Vietnam is also taking great strides in protecting intellectual property rights and since 2002 has largely been complying with the guidelines established in the WTO Trade-Related Aspects of Intellectual Property (TRIP). When Vietnam became a WTO member, it agreed to comply with TRIP immediately, without a transitional period. The country is expected to achieve full TRIP compliance soon, thanks to legislation that was passed in 2006. This legislation prompted the U.S. to laud the country for its “extensive revisions and updating of its intellectual property laws.

Language: Unlike many Asian languages, Vietnamese uses the Latin alphabet, just as English does, which makes it relatively easy for Vietnamese speakers to learn English. English is the second most popular language in the country, and the majority of Vietnams’ college graduates have high proficiency in English. Consequently, most IT workers in Vietnam are able to communicate easily with U.S. companies in English when completing outsourcing projects.

4. Who outsources to Vietnam?

Many Japanese companies are choosing to outsource much of their IT work to Vietnam. According to a November 2006 article in GlobalServices, “Vietnam: Capitalizing on the China-Japan,” by the year 2010 as much as 10% of Japan’s software outsourcing may be sent to Vietnam.

Intel is also heavily reliant on Vietnam to meet its outsourcing needs. In October of 2006, Intel Capital, the unit involved in venture capital for the Intel Corporation, announced a $3.5 million investment in FPT, Vietnam’s largest software company, located in Hanoi. Earlier in that same year, the company said that it was going to build a factory for chip assembly and testing with a price tag of $300 million (San Jose Mercury News, “Intel Invests in Vietnam Software Company, October 24, 2006).

Other companies that have chosen to outsource to Vietnam include Nortel Networks, Bayer, Sony, Cisco, and Anheuser Bush (source:, “Outsourcing to Vietnam”).

5. Vietnam Is an Excellent Outsourcing Destination

For all the reasons described above, Vietnam is clearly an excellent choice for meeting any business’ outsourcing needs. Here is a quantitative summary of the advantages of working with offshore providers located in Vietnam.

Price: Vietnam’s labor costs are significantly lower than those of many other companies.

Labor Force: Vietnam’s labor force has a 96% literacy rate and high scientific and technological knowledge.

Socio-Economic Stability

Economic Stability: Vietnam has very high GDP growth, with significant foreign investment and membership in the World Trade Organization.

Ethnic/Religious Stability: There are no ethnic/religious conflicts in Vietnam.

Political Stability: Vietnam’s current government has been in place for more than 30 years and there have been no conflicts with neighboring countries for almost the same amount of time.

Business Environment: Vietnam’s laws and public policies favor business and foreign investment and the country is constantly strengthening its protection and enforcement of intellectual property rights.

Language: Most college graduates in Vietnam are fluent in English, which is the second-most popular language in the country, in large part thanks to Vietnamese’s use of the Latin alphabet.

Collect from


Another Choice in Software Outsourcing Apart From India and China

Vietnam has strong potential because of the population of nearly 90 million people. Despite the fact that revenue of this sector in 2005 just reached $200 million, the constant growth rate of 25%, which is forecasted to be kept through 2010, certainly shows ambition and aspiration for technology development of this country’s government.

Currently, the software industry is one of the most subsidized sectors in Vietnam. It is eligible to enjoy privileges including tax and investment incentives, an exemption from VAT and tariff for imported materials which are directly used for the software production, etc. To illustrate, businesses involved in software production and services are exempt from income tax for 4 years no matter they are local or foreign invested ones. Software products are free from VAT (0%) and export tax.

Almost every Vietnamese software companies are small-sized, just few of them are mid-sized. However, these companies have been successful in attracting a lot of big corporate and government units to outsource their software projects to Vietnam. Some of them are Anheuser Busch, Bayer, BMG, BP, Cisco, Critical Path, Daiwa, Fuji, IBM, Merrill Lynch, Nortel Networks, NTT, the State of Oklahoma and Sony. All have outsourced software project. Etc. They all have outsourced to Vietnam directly or by 3rd parties.

There are 8 dedicated operational software parks in Vietnam. Three of them are located in HCM city and the others are in Hanoi, Haiphong, Da Nang, Hue and Can Tho. The first software park in Vietnam, Saigon Software Park, which was started in 2001 and technically supported by CISCO, is one of the most advanced one. Another prominent name should be mentioned is Quang Trung Software City with an area of over 430,000 square meters and 10 additional hectares available for extension.

According to a recent report by Ministry of Science and Technology, Vietnam has about 3,000 to 4,000 new IT students every year, of which half are software developers. Known for their skills and diligence, Vietnamese IT students emphasize the potential of the future software industry in Vietnam.

As mentioned, Vietnam’s large population shows a developing and potential market. Besides, cheap production costs (Software developers in Vietnam are half the cost of Indian software professionals and have higher retention rates), combined with the government’s support have been making Vietnam the most outstanding competitor in terms of price.

The first ones who recognize this potential and started outsourcing to Vietnam were small and medium sized software companies in the US. Furthermore, Intel has selected Saigon High Tech Park which is located in Ho Chi Minh city as location for their chip production. Vietnam realized that to receive such attention and to build a dedicated core of IT experts, there has been many things to be done to support IT education in Saigon, Hanoi and other cities with potential in IT development. Specifically, the National University of Ho Chi Minh City is currently cooperating with Portland State University in Portland, Oregon in advanced IT training for Master and PhD students, which is an innovative mixed education program based on international education models. Moreover, other famous universities in Hanoi ( Hanoi University of Technology, Vietnam National University Hanoi, Post & Telecommunications Institute if Technology) are also having educational collaboration with well-known universities all over the world.

Vietnamese software companies are still in an early development stage but their potential is already obvious. Furthermore, with the support from government and the advantage of low production costs, Vietnam will soon become a competitor to India and China in terms of software outsourcing, which is a very good news to software investors and software companies in developed countries.

Author: Tom Downie is working for a company that provides IT outsourcing services. If you want to know more about his work, visit the website: to see how he can optimize your business.


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