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| Outsourcing to East Africa : Growth Industry or Misguided Ambition? |
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| Tuesday, 09 June 2009 | |
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At the top of the chart for best global get-rich-quick schemes, somewhere behind the Donald Trump and Chinese models and just before South Korea’s 20-year authoritarian industrialisation plan, sits the Indian outsourcing bonanza. In less than two decades, India has grown from rice farmer to undisputed king of the offshore outsourcing industry, estimated to be worth USD110bn globally by 2010. And just as Kenya and Uganda are so fond of invoking the Asian Tiger model in their own industrial visions, so the two countries have also adopted the outsourcing dream as their own: if India can do it, why not East Africa? By Rachel Keeler.
Big Plans The governments in Kenya and Uganda have both invoked detailed plans to support the growth of business process outsourcing (BPO) in their economies:
The overarching argument for both countries is that a large pool of cheap, (relatively) accent-neutral English-speaking labour, along with a strategic time zone and an already thriving business environment, make Kenya and Uganda good candidates for global outsourcing business. Finally, the fibre optic cable set to come online this summer and into full force by the end of the year has been hailed as the opening door to a profitable ICT industry in the region. The big question is whether all this is a realistic ambition in a highly competitive global market place. Reality Check for Kenya Rankings To put Kenya's quest into perspective, it is helpful to consider who the current top-10 ICT countries in the world are: A.T. Kearney's Global Services Location Index for 2009 measures the best worldwide destinations for outsourcing of IT and business services, and it lists the top-10 as follows (in order): India, China, Malaysia, Thailand, Indonesia, Egypt, Philippines, Chile, Jordan and Vietnam. Ghana is number 15, South Africa 39, and while A.T. Kearney has said Kenya is on its list of countries to watch, Kenya has yet to make its top 50. Kenya has been ranked by the Commonwealth Business Council (CBC), which conducted an outsourcing potential study on 15 African countries, released in early 2009. Kenya ranks tenth overall according to the CBC, following countries like Egypt , South Africa , Ghana , Botswana and Namibia . The country's business environment scores are its lowest, with legislative risk and high tax rates holding it back. Bandwidth costs were a major inhibiting factor, even if a bandwidth subsidy, funded by the World Bank, has yielded little progress. But Kenya 's workforce is seen as professional, capable and large. The CBC says good ICT development policies are in place, but most are at the planning stage and there has been slow implementation thus far by government. The ICT Board cites lack of good market research as stymieing its own progress – evidenced by the lack of up to date and usable data on the sector provided by the board itself. Political Risk While potential certainly exists, especially once the fibre optic cable brings bandwidth costs down and speed up, there is one key issue holding Kenya back: political risk and governance problems. The post-election violence of 2008 is still very much on the international business community's mind: “Watching riots and chaos broadcast around the world makes a very tough sell inside the board room,” writes the CBC. Images of the riots linger not the least because the political bickering and inefficiency of Kenya's current grand coalition government is an expression of a practically dysfunctional government, unable of instituting the reforms needed to prevent the tensions from reoccurring in the next elections in 2012. Not much actual work gets done as most members of the expansive coalition government are busy squabbling and positioning themselves for the next elections. However, politically motivated violence is just half of the problem for Kenya . India has its own trouble with bombings, and got its start in the 1990s with virtually no infrastructural support to speak of – but they did it at a time of little competition. Now countries hoping to prosper through the outsourcing business have literally 100 others to compete with. Their governments will have to find a way to make them shine. In Kenya , the grand coalition's political paralysis is accompanied by a sluggish institutional response. Small reminders of this tend to pop up in unfortunate places, e.g. in the CBC's report on Kenya : “There was no response from the agencies in Kenya to our questionnaires and calls.” Ultimately, it's up to the government to live up to its promises: build the promised BPO park, create a business incentive package, support IT education, and make sure dependable telecoms and other infrastructure are in place. If they can do all of that, then there is some hope for the industry: “Once the political issues are addressed,” concludes the CBC, “Kenya could well be one of the world's fastest developing outsourcing destinations due to its large English-speaking population, low costs, and near shore status for European and Middle Eastern companies, putting it on par with its IT services competitors on the continent including South Africa, Mauritius, Egypt, and Ghana.” Johan Gott, one of the authors of this year's Kearney report, agrees that if the government can pull its end together, Kenya could shine bright enough to make it: “I think there's great potential. They have a relatively large English speaking population, and there is already one successful company – you can build on that.” He's talking about KenCall – Kenya's first and largest international call centre that employs 500 people talking to clients in the US and UK, and staffing the customer service lines for Telkom Orange. Other big players are looking at the market now, too: Horizon is setting up an 850-seat centre, with another American investor looking at opening a 1000-seater. The move toward large scale business is important for the success of the industry. While Kenya has about 30 outsourcing firms, with new ones popping up to take advantage of government perks, most of them are too small to operate efficiently or make a positive impact. “Outsourcing is largely a 100 to 200 seat, big deal game,” says ICT Board CEO, Paul Kukubo. Gilda Odera, chair of Kenya 's BPO Society agrees: “When you're too small in the BPO space, you really won't have consistent work, that's just a fact. You have to have economies of scale – 100 seats and above.” In fact, Nick Nesbitt, Kencall's CEO, argues that the existence of many small and often not very professional call centres does not help to market Kenya as a BPO destination to be taken seriously. Odera says once infrastructure concerns are taken care of, more aggressive marketing is necessary to put the country on the outsourcing map and overcome negative perceptions. She wants to see more funding for this through the ICT Board; the board itself says it will be turning to the World Bank for more cash. Gott says the best marketing tool available is proven success, so Kenya is lucky to have KenCall as its well-established poster child. Still, others point to the decision by local giant Safaricom to build its own in-house call centre rather than outsource the service to a Kenyan firm (Verizon has done the same). “We did an international tender and finally came down to two companies – one South African and another Kenyan with Indian partners,” says Safaricom CEO Michael Joseph. “The price together with the uncertainly about the guarantee of quality made us decide to keep it in-house.” Kukubo says just the presence of major service centres in the market, in-house or otherwise, will help grow the industry's human resource base, which should be a stepping stone to later expansion. Uganda Uganda ranks last on the CBC's list, at the bottom of the “yet to be ready” category. Infrastructure is worse than in Kenya , with unpredictable electricity, a landlocked and poorly maintained road and railway network, and the same high connectivity costs. Business environment and people skills also rank low, but just like Kenya , the Ugandan government has promised to launch programmes to fix this. The government has already laid a national cable network to connect to the fibre optic cable coming in through Kenya . The cyber bills are making their way through parliament, albeit slowly, and the Uganda Investment Authority is writing up tax incentives and a private outsourcing association similar to Kenya 's is in the works. Currently the country's largest employer, the Ugandan government may also become Ugandan BPO's best customer. It recently held a seminar for the permanent secretaries of all of its ministries to determine how outsourcing ministry services to local BPO firms can improve efficiency in government while developing the industry. That said, the Ugandan government is still inefficient in much of what it does. And the targeted 20,000 jobs in three years from such a low starting point are unrealistic. Uganda has yet to develop a successful company that it can use for marketing purposes, which will be a difficult hurdle to mount. But if a few of the country's 30 BPO companies are able to expand with government demand, they stand a fighting chance. Some international clients are already taking notice: “In the month of April we had a team from IBM which visited the country to survey the status of the outsourcing industry in the country,” says Abubaker Luwaga, founder of Cayman Consults, one of Uganda 's first back-office outsourcing firms. Also, the recent decline of the Ugandan shilling against the dollar is sure to make services exports more attractive. The CBC says there are only about 2,000 IT professionals in Uganda at the moment, and this – along with infrastructure constraints that the government specifically promised to fix five years ago and has yet to improve – may be the country's biggest barrier to BPO growth. And, of course, the fact that the Uganda Ministry of ICT's website is not working at the moment does not inspire total confidence. Perspectives The geography of the global outsourcing industry is changing, says Gott: “Companies are more and more looking at expanding their range of options – they're looking now at countries that were for whatever reason off the table a few years ago.” The top players remain the same, but there is plenty of room for change below: Europe is commanding more of the demand side and Eastern Europe is looking less appealing as the global crisis sinks in and cost matters more. India is moving its way up the value chain, and outsourcing some of its own low-level outsourcing business to new markets. Africa could be well placed to take advantage of these new opportunities. But Gott says many large corporations are still hesitant about entering the market here – the best opportunity may come from mid-sized companies with established connections in Africa, and those from countries outside of the traditional US/EU geography that have a higher tolerance for risk: i.e. India. “We're starting to see the Indian companies moving not only to Latin America but also to African locations,” Gott says. Indian companies such as Wipro Technologies are in Egypt already, with others looking at Mauritius . India is an important potential customer for East Africa , with its strong cultural and business ties already rooted in the region. Gilda Odera recently returned from India , and says representatives from companies there have visited Kenya , with the intent to set up branches here after the fibre optic cable arrives. Ultimately, the industry is dynamic and fickle. For this reason, aggressive and consistent marketing is probably just as important as getting the cost and quality right. Finding a niche also helps. A study commissioned from McKinsey by the Kenyan ICT Board determined that Kenya 's niche should be in basic voice services for sales and customer care. But that is actually not much of a niche, and luring business away from other low cost English-speaking countries like Ghana in the same time zone as Europe will be tough. Ghana has already installed an ICT park with a full business incentive package, has cheaper labour than South Africa , lower bandwidth costs than East Africa – with more fibre optic cables planned over the next few years for the West African coast – and considerably lower political risk. In the medium term, it is unlikely that Kenya will pull ahead. Many of the obstacles to business are also not necessarily specific to the ICT industry: bad roads, security worries, entrenched corruption, costly and unreliable power etc are the textbook hindrances to most types of business that are being flagged time and time again, yet where progress is achingly slow. A better question, perhaps, is whether there will be enough business to go around. The financial services sector is offshore outsourcing's largest client, so the global crisis has had a substantial effect. Some banks are looking to outsource more to cut costs, but business is down overall and the idea of outsourcing from the US and UK has become more politicised as economic protectionism rises. Still, a recent report by India 's National Association of Software and Service Companies (NASSCOM), found that many big companies are scaling up their outsourcing presence in the country this year, and the biggest problem will be a shortage of qualified labour. This could mean more Indian firms will be willing to outsource their own business to the African market to free up human resources at home. Also on the prospects of outsourcing to Africa : Selorm Adedevoh discussed the prospects for Africa's aspiring outsourcing industry following a presentationat the AITEC East Africa Outsourcing & Contact Center Conference held in Nairobi, Kenya, inNovember 2008: Africa Agenda: Outsourcing to Africa: Dream or Realistic Aspiration? Share this article with others:              Comments (2)
Director, UK National Outsourcing Association
written by Mark Kobayashi-Hillary, June 10, 2009
Nice article Rachel, but you should have also mentioned to the readers that the United Nations has been funding a nascent cross-border African outsourcing association since 2008. It's early days for the body yet, but the focus is on trying to improve the image of Africa for business, and they have got several countries involved - including all the ones you mention here as likely to succeed in BPO. Get in touch with me if you want more information.
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