After too many false starts, is Africa at last staking its claim in the global market? Cath Everett overviews the continent’s growing competence
While Africa may not be an immediately obvious choice of offshore destination, it is becoming one to watch – particularly for those organisations that are keen not to have all their eggs in a single outsourcing basket. While it is unlikely that the continent will leapfrog the existing dominant markets of India, China and Malaysia any time soon (not least because of their size, maturity and availability of large skilled workforces) it is nonetheless one of the fastest growing locations in the world.
As a result, Alex Blues, head of sourcing for PA Consulting, said he would not be surprised if Africa represented between 10 and 15 per cent of the total outsourcing market in volume terms within the next three years, up from less than five per cent today. His statement is supported by AT Kearney’s Global Services Location Index for 2009, which ranks the most attractive offshore destinations based on financial appeal, the business environment and people skills and availability.
The study found that Central European countries such as Poland and the Czech Republic, which were previously among the premier offshore locations for Western European countries, were now of less interest due to a rapid increase in costs driven both by wage inflation and currency appreciation against the dollar. Low cost territories such as North Africa were forging ahead, however, because of their large well educated populations and proximity to Europe. Egypt, for example, became one of the top ten most attractive locations for the first time ever, ranking sixth compared with thirteenth the previous year. Ghana also moved to 15th place from 27th and Tunisia to 17th from 26th. However, South Africa, currently the biggest African outsourcing market by far, fell to 39th spot from 30th due to both political uncertainty and a strong rand pushing up wages.
But another reason that Africa is starting to grow in appeal, according to Blues, is that organisations are increasingly starting to take a more global view of their outsourcing arrangements. Therefore, in order to spread their risk, they are now looking for secondary locations to supplement large primary destinations such as India. “The Satyam situation brought that very much to the fore,” Blues says. “Many people looked at the risks and moved from offshoring perhaps 75 per cent of services to India to 50 per cent.”
The scandal surrounding Satyam Computer Services, which was described as India’s Enron when it broke early last year, sent shockwaves throughout the outsourcing industry. Ramalinga Raju, the firm’s former boss, wrote a letter to the Indian stock exchange, revealing that that several years of inflated operating profits and $1 billion in fictitious reserves had left gaps in its balance sheet. Satyam was India’s fourth largest software company and had benefited greatly from the country’s offshore boom.
But countries such as Egypt and South Africa have also been actively courting Indian outsourcing providers – along with other investors - too. Like all African countries, they are keen to leapfrog “the industrial revolution and go for the information revolution enabled by wireless and broadband services”, says Blues, but have been shrewd enough to put economic incentives in place to help them gain competitive advantage.
Catherine Griffiths, co-founder of the London School of Economics’ (LSE) Outsourcing Unit, agrees. “Many African countries are looking at how to build sustainable development that pulls them into the 21st century,” she says. “They want to do more than just sell tourism and they want to try to retain their skills base so that their very bright people don’t go overseas but stay in the country to help it develop economically.”
Nonetheless, for those organisations thinking of moving operations to Africa, there are inevitable risks, which need to be carefully assessed. Political stability and security varies from country to country, for example, as does the cost, educational level and sustainability of skills bases. The quality of transport, communications and utilities infrastructure must also be investigated as should levels of legal protection for intellectual property and the like. Careful project management may likewise be required as many markets are substantially less well developed and mature than incumbents such as India.
Moreover, there are also marked societal differences between Saharan African countries and those in the sub-Saharan region and South Africa, with many cultures having been influenced by their previous colonial masters not least in terms of language. This means that it is impossible to look at such a huge continent as a single amorphous mass, making it more meaningful to divide it up into key regions – South Africa, West and East Africa and North Africa. However, what is clear is that, in Africa, new outsourcing forces are emerging – and that must be good news for the whole continent.
South Africa is the continent’s largest and most mature outsourcing market. As much as five years ago, Cape Town – and to a lesser extent Johannesburg and Durban – started becoming somewhat of a centre for call centres particularly in the retail sector, with customers there currently including Asda. The country’s appeal lay in the quality of English language skills available together with the fact that accents were deemed more acceptable than those in other countries by customers in key markets such as the UK. It also helped that the time difference with Europe was no more than two hours compared with, for example, India’s four.
Such benefits have led South Africa to partner with Indian offshore companies by offering front line support on their behalf, while outsourcers in the sub-continent often tend to focus on back office tasks, including second or third line support services.
Graham Pascoe, a partner at PricewaterhouseCoopers, explains: “India is starting to lose favour in some quarters, in particular with call centres. Many things went there in the early days that shouldn’t have, but a reasonable number of activities are now coming back. It’s not that India’s losing favour – it’s just that people are becoming more sophisticated in their approach to sourcing and deciding what they put where.”
Also, some large companies have outsourced operations to South Africa because of the availability of Dutch and German language skills; firms such as the German airline Lufthansa which has migrated some of its ticketing operations to the country. Car manufacturers such as BMW and Mercedes have likewise invested in captive car manufacturing plants there. Other key outsourcing services, however, include back office processing for financial services companies, of which there are many established international players in the country.
But interest in South Africa is starting to wane somewhat due to wage inflation and question marks over the effectiveness of its black empowerment policy. Although still cheaper in labour force terms than Western Europe, salaries tend to be between 20 and 30% higher than India, says Pascoe.
West and East Africa
Two countries to keep an eye on in this region are Kenya and Ghana. Although currently a nascent market, English speaking Kenya to the east is hoping to become one of the top three outsourcing destinations in Africa. As a result, it is currently promoting itself heavily as an offshore location for what are today typically fairly basic business process outsourcing services (BPO). It has also named BPO as one of six key economic planks in its Vision 2030 economic development plan.
By 2012, the government hopes to create 7,500 BPO related jobs, of which 5,000 will be based in specially created parks. KenCall, which was set up five years ago and currently generates about $7 million in revenues, is currently the country’s largest provider of contact centre based services to customers in the UK, US and parts of Europe. These services include agents handling technical support and billing issues to undertaking data entry.
To the west, Ghana is equally ambitious. The country’s Ministry of Communications hired US BPO advisory firm Avasant under a two year contract that started in October last year to gather information about its existing $45 million BPO market. Another important aim was to promote it as a key location for both domestic and offshore services providers targeting the US, Europe and East Asia. However, Ghana’s current customers mainly comprise other West or Central African countries. But its aim is to grow its BPO industry to between $60 and $70 million in the short term and to an ambitious $1 billion in the long term by wooing at least 10 multinational BPO companies from Europe and the US to set up there. It is also keen to encourage local financial services organisations to outsource back office work to such providers.
Although Ghana’s official language is English, it also has a large number of French speakers. The downside, however, is that it currently has a complex business registration system, offers few tax incentives and has limited fibre optics based provision. The World Bank funded e-Ghana project is intended to help boost the country’s communications infrastructure though and also helped to finance the Avasant arrangement.
Egypt is currently Africa’s second largest and fastest growing offshore territory. It has been gradually building up its capabilities in a low key way over the last five years or so and has now established a development arm called the Information Technology Industry Development Agency (ITIDA), which also handles all forms of outsourcing activity. ITIDA acts as a one stop shop for anyone wanting to do business in the country and has set up a series of so called Smart Villages around the capital, Cairo, to get around traditional transport and communications infrastructure problems.
Healthy tax breaks have encouraged many of the large high tech companies, including IBM, Microsoft and Vodafone, to move to such locations as a supplement to other established markets as has the availability of a local highly educated English speaking workforce. But Egypt, like South Africa, has also been courting key Indian offshore providers and currently has a strong presence in helpdesk support. Success here has been helped by the fact that it can offer language skills other than English, including Arabic and Lithuanian. It is also starting to provide local language software customisation services.
LSE’s Griffiths says: “Egypt is a country in transition and has problems that can be a bit unpredictable, but it is a country that can do business with the rest of the world and it’s offering a face to the West that people there can understand.”
Roger Newman, a senior vice president at Indian outsourcer Mahindra Satyam, which has had a presence in the country for more than two years, agrees. “For the future, Egypt is up there, not just as a market to do business in but as part of a global delivery model. It’s financially attractive in terms of tax perks, wages are cheaper than South Africa’s, it has a big population of educated people and first class communications.”
Although Tunisia and Morocco are currently both small markets, they are also starting to gain appeal as captive destinations for French companies who value their available language skills. While less inclined to outsource in a general sense than their Anglo Saxon counterparts, French businesses are now looking for ways to cut costs in the current economic climate – a fact that CapGemini is hoping to exploit through its recently set up presence in Morocco. Other companies are also targeting the Spanish market.
Until recently, Morocco had focused on providing call centre services, but it is now expanding into back office processing activities for financial services, telecoms and IT companies. The country is developing four outsourcing hubs in Fes, Marrakech, Tangier and Casablanca and is also investing in its communications infrastructure. In a similar way, Tunisia is moving its outsource offer into broader disciplines and setting out to capture more than just the call centre market. Among other developments, the country is establishing a media outsource capability – the first for a southern Mediterranean country.
This article is reproduced by kind permission of Outsourcing Magazine.