Editor’s note: Ed Thomas is business process outsourcing (BPO) analyst for international analysis firm Datamonitor.

LONDON – Sri Lanka’s budding offshore industry has inevitably been overshadowed by its larger Indian neighbor, which has been the world’s leading sourcing hub for the last decade. However, the market situation is now more favorable, as vendors are increasingly looking to offer services from multiple locations, often using India as a central hub while also delivering services from satellite facilities in Eastern Europe, Latin America and Asia.

Sri Lanka shares many of the attributes that make India such an attractive location for outsourcing work. These include a low-cost of labor, a plentiful pool of educated and English-speaking workers, high literacy levels, and a legal system that is based on a Western model.

Sri Lanka has clearly learnt much from India’s success; even the name of its newly formed trade association, Slasscom, is clearly modeled on India’s own, highly successful Nasscom. However, it is not simply trying to imitate the success of its larger counterpart. Whereas a broad range of both IT and BPO services can be delivered from facilities in India, Sri Lanka has opted to focus on just a few domain areas, including finance and accounting BPO, and knowledge process outsourcing.

The decision to adopt a narrow focus on areas such as finance and accounting is a sensible one. Sri Lanka, with a population of around 20 million people, cannot hope to match the all-round capabilities of India (which has a population of well over one billion) but it does have a significant labor pool of qualified accountants waiting to be tapped. According to figures from the Information and Communication Technology Agency (ICTA) of Sri Lanka, approximately 50,000 Sri Lankans qualify as accountants each year.

Despite these positive qualities, there is much work to be done before Sri Lanka can be considered a major outsourcing location. Competition among nations has never been stronger, with locations in China, Mexico, the Philippines and the Czech Republic, to name but a few, proving themselves capable of delivering high-quality low-cost services.

As well as competition from other nations, Sri Lanka must contend with a number of other challenges that could retard growth. The first relates to infrastructure; telecom costs in the country are high when compared with the rest of South-East Asia, which can reduce the country’s cost advantage over its local rivals. Furthermore, its IT and BPO industry is currently heavily centered on the Colombo metropolitan region and there are question marks over the ability of second tier cities to support this kind of work.

There are also serious concerns about the security situation in Sri Lanka. A sporadic civil war has been fought in the country since the early 1980s, with about 70,000 people estimated to have been killed in the conflict. Of course, Sri Lanka is not the only country in the region where security is a concern, yet the ongoing violence is an issue that cannot be ignored, and it will undoubtedly defer some foreign investors.

To help allay these and other investor concerns, Sri Lanka needs to attract a number of high-profile outsourcing vendors. Currently, significant players with facilities in the country include WNS and RR Donnelley. If Slasscom were able to attract other major players, such as Accenture or ACS, it would provide a significant boost to the country’s growth.

About the author: Ed Thomas is an analyst with the Technology Business Process Outsourcing team at Datamonitor which looks at outsourcing trends in areas such as human resources, finance and accounting and procurement, as well as providing in-depth analysis of global delivery models. Ed has researched and written reports that cover a range of IT outsourcing, consulting and BPO trends, including merger and acquisition activity, contract awards and results analysis. He has also produced in-depth company profiles on around 100 of the largest vendors in the IT services space.