Sunday, April 01, 2007

Global Services Location Index is (not) Labor Cost Advantage Index?

As I work in supply chain management area, news related to labor costs or outsourcing always interest me. So does "Malaysia ranks 3rd in labor cost advantage index" in recent newspaper.

The more I dug in, though, I feel the title is inaccurate and, potentially, misleading.

Though I read the article in a newspaper, other news websites, like Bernama, NST, and Business Times, are identical.

The study referred to was done by A.T. Kearney, called Global Services Location Index. Its report, "Labor Cost Advantages of "Offshore" Locations Decline in 2006 According to New A.T. Kearney Study", was posted on March 15. The index itself is comprehensive, comprising of 41 measurements in three major categories.
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About The 2007 Global Services Location Index

The A.T. Kearney Global Services Location Index analyzes the top 50 services locations worldwide against 41 measurements in three major categories: cost, people skills and availability, and business environment.

The Index assigns weightings reflecting the drivers of offshoring decisions based on A.T. Kearney research and engagement experience. Because cost advantages have been the primary impetus behind offshoring, financial factors constitute 40 percent of the total Index weight. People skills and availability and business environment each receive a 30 percent weighting.

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Malaysia does rank 3rd in overall - considering the three categories: financial, people, and environment. However, Malaysia ranks 21st in financial attractiveness, 19th in people skills & availability, and 14th in business environment. Vietnam tops the financial attractiveness category. See the data behind the 2007 Global Services Location Index here (pdf). A.T. Kearney also provides regional highlights of the study. Indonesia, by the way, ranks 2nd, 14th, and 49th in the same categories respectively.

Unless I'm totally off, i.e. I'm talking about a totally different study, I think it's pretty fair to say the report is somewhat inaccurate, i.e. there's no such Labor Cost Advantage Index. (I hope my words are politically-correct enough to not get me into trouble.)

One explanation of this, I can recall from one of my previous courses, Managerial Effectiveness, is confirmation bias. So I searched my old class notes (it's Sunday, I can do anything I want, right?) on this topic. Here's what the notes say about confirmation bias: the tendency to gather evidence that is consistent with a prior hypothesis. Some of the reasons are (1) laziness, (2) incomplete search, and/or (3) desire to reach a specific conclusion.
"The human understanding, when any proposition has been once laid down... forces everything else to add fresh support and confirmation... it is the peculiar and perpetual error of the human understanding to be more moved and excited by affirmatives than negatives." - Francis Bacon (1620)
Boooring... enough for the theories.

Another interesting example was when one poll was interpreted in two opposite ways: optimistic and pessimistic. Dave nicely put his views on this. I guess, we really are what we think we are.

So this perhaps can explain why Malaysia’s ministers are blogophobic as Unspun brought up, although in this case it's not only for bloggers, but also other official websites.

Well, I might be simply wrong or be “provocative, politically motivated, inaccurate or just floating rumors for the interests of certain parties.”

On the A.T. Kearney study itself, I'll save it for next week... enough study notes for one Sunday...

Source: A.T. Kearney Global Service Location Index 2007