The first wave of offshore outsourcing, triggered in part by the need for vast numbers of programmers to fix the Millennium bug, dramatically changed both the economic fortunes and Western perceptions of India.

The country’s IT outsourcing industry has played a pivotal role in its ongoing transition from a Third World country to an economic powerhouse. China, the only nation capable of providing human resources on the same scale as India, has followed suit.

Now both software and business process outsourcing form part of the government’s plan for the next phase of Chinese economic development. It is hardly surprising, then, that a great number of countries looked on with interest.

The global IT and business services outsourcing industry (offshore or otherwise) totalled $55 billion in 2008 and, according to the LSE Outsourcing Unit, is expected to grow by 20% each year for the next five years.

Today, hardly a week passes without another nation staking its claim to part of that market. For global organisations, this is good news. The cost benefits of outsourcing to far-flung destinations proved irresistible for many, but it still entailed significant risks; the risk, for example, of political and economic circumstances undermining the cost differential.

An increase in the number of viable destinations allows them to mitigate that risk. HSBC is the world’s largest captive offshore operator. It employs around 38,000 people in service centres all around the globe, both to take advantage of skills where they are available and to ensure the resilience of services.

“We are duty bound to ensure that some of our services are up and running within two hours of an interruption, so we couldn’t locate them in one place,” says Ian Coleman, head of strategy for HSBC’s group service delivery arm.

Not unusually, the bank has a team of analysts whose sole job is to monitor and assess potential outsourcing destinations. As the number of options grows, the team can balance requirements with risks more accurately.

“Our location strategy is becoming more sophisticated because there are more players and more factors to consider,” says Coleman.

But as mentioned, few countries can provide the sort of scale that makes India and China so cost effective. According to Clive Longbottom, service director for business processes facilitation for analyst company Quocirca, for smaller countries to play a profitable part in the global outsourcing industry, they must find a niche. “If all businesses are looking for is cheap labour, then that is all they will get,” he explains. “What they need is someone who can do something better than they can.”

However, even having a niche is not enough to build a viable offshore outsourcing industry. As the LSE Outsourcing Unit’s list of considerations when offshoring (see box) shows, there are a number of qualities that a country must demonstrate to attract global businesses.

And as the three examples of countries with potential as IT outsourcers presented here show, the path to achieving all these qualities is paved with obstacles political, economic, legal and reputational in nature.

Not only do the offshore outsourcing stories of Egypt, Sri Lanka and Ukraine show in microcosm the challenges in building such an industry, they also reveal how global trends shape the IT sector, and vice versa.