Outclassed?

Only a handful of years ago, South Africa had high hopes for its business process outsourcing and offshoring potential. Being a relatively developed English-speaking country with a favourable exchange rate, South Africa looked set to rake in lucrative offshoring contracts from abroad. But these dreams are fading as we face growing competition from around the world.

The Department of Trade and Industry (DTI) said the government had identified business process outsourcing and offshoring (BPO&O) as an important factor in stimulating economic growth. So much so that the government`s Accelerated and Shared Growth Initiative for South Africa (AsgiSA) had identified it as an immediate high-priority sector. The DTI described BPO&O, and cited as an example the call centre sub-sector, which it said has been growing at about 8% per annum over the past four years, and currently employs about 54 000 call centre agents.

The department went on to crow: "South Africa is seen to offer a balance of high quality and low costs as a destination for offshoring business processes. As an example, one could typically expect annual cost savings of approximately 50% in US$ terms in running a 1 000-seat call centre when compared to a near shore location such as Ireland, while increases in resolution on first call rates are almost 30% higher than a major industry player such as India."

South Africa`s success in the BPO&O arena seemed assured. But then the recession struck. Other countries started offering similar services for less. While the local BPO&O market is seeing growth, so are those of SA`s competitors.

FIERCE COMPETITION

Frost & Sullivan ICT analyst Mpho Moyo says India and the Philippines are now the dominant players in the global offshore market. However, even India is feeling the threat of competition. "India has steadily lost global market share due to the emergence of competing offshore destinations such as China and the Philippines," says Moyo.

She notes that the Filipino government and industry bodies have mapped their industry initiatives to those in India, providing the country with a competitive edge. Emerging offshore markets like China, Eastern Europe and South Africa have experienced significant growth levels, she says.

"China has the largest population in the world and high economic growth levels. Its distinct advantage in the BPO space is that it has a well-developed manufacturing sector and IT industry. In addition to this, its manufacturing and services industries are less constrained by geographic distance and might provide chances for cities in China to emerge as new BPO hubs. Traditional outsourcing destinations like Canada and Ireland have experienced lower growth levels, due to the emergence of lower-cost alternatives," Moyo explains.

Moyo says India is expected to remain SA`s biggest BPO&O competitor for the foreseeable future. Brazil is a key challenger in South America. Malaysia is also emerging as a challenger. In sub-Saharan Africa, there is growing interest in Egypt.

Adrian Schofield" rel=tag>Adrian Schofield, manager of the Applied Research Unit at the Joburg Centre for Software Engineering, says South African software developers and contact centres are facing increasing competition in an increasingly globalised marketplace.

"The recession exacerbated the pressure on clients to seek the best value solutions, wherever they may be located. More and more of the developing economies know that they must export these type of services if they are to achieve the critical mass needed to support their own requirements."

"Increasingly, countries like Mexico and Brazil are moving up the ladder of recognised offshore destinations. We have not particularly noticed a threat from Eastern Europe, but there is no doubt that they are conveniently located to penetrate the European and Middle Eastern markets," Schofield says.

Sipho Zungu, CEO of Business Processing enabling SA (BPeSA) Western Cape, adds that India`s offshoring success can be attributed mainly to the country`s low costs and the easy availability of relevant high-level technical skills there. Mexico and South America benefit from their proximity to the US market, and Eastern Europe benefits from its proximity to the Western European market.

Ian Marriott, research VP at Gartner UK, says South Africa has consistently been among the world`s top 30 offshoring destinations as tracked by Gartner during the past three years. These ratings are based on factors like cost, skills, education system, infrastructure, level of government support for industry, language skills, political and economic environment, cultural compatibility with the buying market, and a country`s level of global legal maturity.

HURDLES IN SA

While SA may rank among the top 30, it is not one of the lower cost options. In Africa, Egypt`s pricing is more competitive. However, Marriott notes that cost isn`t everything. South Africa has in its favour factors like a mature skills base and good language and cultural compatibility with major markets.

Rising electricity and labour costs may make the country even less desirable as a cost-effective outsource partner in future, say other industry players. Eskom`s planned price hikes, for example, will be a significant hurdle in the way of SA`s future competitiveness.

Zungu says the power price hikes will have a major impact on the contact centre industry. "BPO operations, especially call centres, require a large amount of electrical output to operate, running things like computers, cooling systems, multiple back-up systems, call centre equipment, etc. The proposed Eskom price hike will have a major impact on this industry (even more so for the small operators)," he warns.

Skills shortages and the high cost of labour are two other factors causing SA`s BPO&O prices to rise.

Zungu says: "From a contact centre perspective, the major challenges for us are labour costs and telecoms costs.

"It is said that over 82 countries are already selling themselves as a good offshoring destination and all are saying the same thing, which means competition is high. Buyers are always looking for cheaper locations. If one destination is cheaper, nothing stops them from pulling out and going there!"

On the question of outsourced work such as Web development and software development, Zungu feels SA still lags behind when compared to the likes of India or Eastern Europe.

"So what do we need to do? We need to position ourselves as a centre of excellence at least in one area. Mature clients are not only focusing on cost, but on the talent pool as well ie, quality and readiness to deploy in industry," Zungu says.

He feels a bigger skills pool would help make SA more competitive. "Key for SA is a proper ICT intervention programme to make learners at, say grade 10 level, see the BPO sector as another career option," he says.

Moyo says traditional value propositions like time zones and cultural affinity are becoming less important criteria in choosing offshore ICT partners. Now, she says, key selection criteria include:

            The availability of skilled personnel with specialist knowledge;

            The level of industry incentives within the destination country;

            The degree of maturity of the local industry;

            Proven reliability and reference customers;

            Operating costs;

            Telecommunications costs;

            Labour costs;

            Certification of staff and companies within the ICT industry;

            The degree of technological maturity;

            Connectivity; and

            Security (Certification).

Moyo says SA is currently not a significant BPO player at a global level for several reasons. "One reason is that the vast majority of skills initiatives for BPO in South Africa are mainly focused on the development of low-end call centre skills," she says. "Although the SETAs have training initiatives in place for the development of higher-end skills, only a small proportion of these skills is being absorbed into the BPO sector.

"At present, call centres offer the greatest opportunity for South Africa as they constitute approximately 70% of SA`s BPO market. However, SA needs to up-skill its current talent pool to provide high-end call centre services. Another consideration is the cost of labour of call centre agents, which is comparatively higher than other low-cost destinations like India and the Philippines," she says.

Moyo notes: "The identification of niche areas for industry focus has been a large part of the success that was enjoyed by India and the Philippines. For example, India has identified IT outsourcing as a niche area. Consequently, India`s education initiatives and industry incentives have been focused on growing the IT skills base as well as a specialised work force. In addition, the industry incentives are highly attractive to offshore investors. Some of the incentives include tax breaks and favourable ownership structure. South Africa needs to identify a niche area to be developed within its BPO industry and have a structured approach to the development of the current skills base."

Marriott agrees that South Africa`s offshoring market could make itself more strategically appealing by identifying and driving skills development in high skill areas, such as program development, design and architecture and application development.

REGAINING THE EDGE

All is not lost, however. South Africa`s BPO&O market is growing, and more can be done to make it competitive. Skills development, tax breaks and a specialised focus may help boost SA as a BPO&O partner.

Schofield notes: "South African rates are not cheap. We can argue that they are competitive, in terms of offering good value, but that is bound up in the country`s overall image as a source of expertise and quality output. "We do speak the right language (for business), we are in a convenient time zone, and many of our professionals are multi-skilled, enabling them to perform a broader role in application development. We have many examples of innovative solutions built here, but we do too little to publicise them and enhance our reputation," he says.

Moyo adds that SA has world-class telecommunications infrastructure and state-of-the-art technology, with the landing of the Seacom, Eassy and West Africa Cable System expected to significantly reduce telecommunications costs. It also has a credible ICT skills base, although there is room for growth through targeted development initiatives.

Also in its favour are the facts that SA is the economic hub of Africa and is an attractive entry point into the rest of Africa.

But she agrees with Schofield - SA needs more marketing. "South Africa`s BPO capabilities should be communicated through a unified national marketing message," she says.