What makes a country an attractive outsourcing destination, asks Catherine Griffiths. There are more opportunities beyond the traditional four BRIC countries, but government stability and political continuity are central to building on initial investments

Smart Village in Egypt: governments need to
support the development of outsourcing by
providing the right infrastructure

More specifically, why are countries once often associated only with war or chronic under-development suddenly offering state-of-the-art facilities and skills for outsourcing and offshoring, as well as becoming significant players with global aspirations?

The growth of offshoring and outsourcing has been widely acknowledged as a 21st century global phenomenon.

A key finding of the report is that the major trend towards non-BRIC locations is being driven primarily by regional rather than global customers, with nearshoring and the establishment of captives — that is, wholly owned facilities of overseas companies for software development, back office data processing or call centre operations — becoming notable market developments.

This is likely to increase even in recessionary times as the convenience, cost, cultural fit, skills, language accessibility and niche market compatibilities become more sought after and more widely known.

Developing attractiveness is still a highly competitive process, however it is strongly linked to a government’s determination to provide a strong lead, and to support its own populations’ ingenuity, creativity and skills base while making it accessible to overseas operations. Given the market potential, this is pushing at an open door both now and, on the current basis, for some time to come.

The report looked at 14 non-BRIC countries — Belarus, Bulgaria, Costa Rica, the Czech Republic, Mexico, Morocco, the Philippines, Poland, Romania, Slovakia, Tunisia, Venezuela and Vietnam with a special focus on Egypt.

Firstly, the unit analysed what constitutes attractiveness and assessed many factors directed to six main focus areas which are: costs, skills, quality of infrastructure, business and living environment, risk and market potential.

Based on these criteria, the 14 non-BRIC countries were compared and the findings set against a discussion of wider global trends driving the outsourcing and offshoring decisions of Western companies.

In addition, the research drew upon the trends from its longitudinal case database of 1,000-plus global sourcing IT, BPO and offshoring studies from 1993 to 2009.

Attract more business

So what are the findings and how can these be applied to attract more business in the future?

In order to be attractive commercially, a country has, of course, to offer a beneficial cost base: that is central to all arguments about further investment. Countries targeting new contracts address this head-on by providing favourable fiscal and tax bases as well as low labour costs.

In all successful cases the lead has come from governments which control, market and deliver a major strategy providing attractive incentives. This sets the tone, structure and wider business environment for business. Policies must be directed both internally and externally, offering different incentives to match the global market requirements and local offering of skills, infrastructure and services.

The emphasis on internal support is directed to nurturing their start-ups and controlling overheads through subsidies, while managing or writing off the cost impacts of wider improvements such as infrastructure or telecommunications installations. Incentives are being offered externally by providing significant cost reduction packages for companies moving to the country and wanting to employ locals.

An example of this is in Egypt, where the government has designated “free zone” areas for home-based local companies which are exporting, so that the company does not pay certain taxes on exportable goods or services. This establishes a dynamic atmosphere which incentivises locals to develop export capacity.

International companies are attracted to set up new bases by being offered less regulation, quicker permissions on work visas or commercial deals, if they move to the newly constructed Smart Villages which are built on the edge of cities such as Cairo and Alexandria.

These Smart Villages have essentially been built on greenfield sites where new communications can be supplied, overcoming the inherent problems of laying cables in older cities.

International training

They have proved popular with many companies such as Microsoft, Orange, Vodafone and IBM where each has been able to establish its own branded footprint in the country and bring in their internationally approved training programmes.

Some of these and other companies are now collaborating with the universities to strengthen or customise certain courses or training skills and help to create relevant degree courses. For Egypt this strategic policy is working as the number of new companies establishing offices there is increasing.

All the countries studied placed a high level of importance on producing well qualified graduates. In some, this has led to an explosion in skills capability linked in many cases to multilingual ability. Egypt has the benefit of scale and consistency in this area as their education programme now provides about 330,000 students a year, with about 30,000 engineers and technically qualified graduates, many speaking two or three languages.

Not all countries are producing good graduates, but the real sign of a mature market will be those countries that convert growing labour pools into skilled staff and register high retention rates for senior staff, which is often a problem – even in BRIC countries.

Corporate retention has not been a major problem in Egypt so far, but there are signs of it changing as the opportunities expand both within Egypt and now increasingly the Middle East. In summary, a reliable and continuous supply of good graduates with linguist capability is helping to drive the outsourcing and offshoring market.

Stability and security

Securing the stability and security of a country and its residents is a major function of government. This is a major factor for being considered an attractive venue for outsourcing.

The stability and consistency of the wider environment which includes law enforcement is increasingly key to attracting companies which want to focus on such issues as patent protection and recognition of intellectual property rights as well as the physical safety and comfort of their employees. The unpredictability of inflation is less easy but is necessary to stabilise.

Government stability and political continuity are also considered central to building on initial overseas investments.

The fourth factor of establishing a country’s attractiveness is the state of the infrastructure. For many countries it is a common and ongoing challenge, particularly when building across older cities. Many cities are experiencing this tension between old and new building programmes.

As companies explore a more diversified and global strategy, they are looking at a multi-sourcing supply chain which includes nearshoring and offshoring.

Countries can benefit from this because of the attractive time differences for Europe and US as well as the Middle East. In software development particularly, the ease with which multi-team work can be completed in the same time zones is particularly attractive.

Effective infrastructure

As part of its ongoing investment in telecommunications, the Egyptian government is laying further international communication cables so that it has sufficient backup should any single point of access fail. As this effective infrastructure continues to be rolled out across the country, the intermittent problems of downtime or low speed are disappearing.

The speed with which this can be achieved is still causing a sense of frustration, as the pent up demand is outstripping the supply. Government support for and involvement in long-term infrastructure improvements are among key indicators of location attractiveness.

Offshoring and outsourcing are inherently risky, and will cover issues such as security, disruption, regulation risk, inflation and protection of intellectual property as well as personal safety and security.

Before investing or establishing a new outsourcing contract or setting up a new captive any company will undertake a risk profile of the option countries and assess this against their own objectives.

They will also consider how to spread their risk so that no single country holds all their valuable data and expertise.

Least safe destinations

In recent years the view of Egypt as a safe, law abiding country has improved in contrast to others where such cities as Rio de Janeiro, Sao Paulo and Mumbai have been listed as amongst the least safe outsourcing destinations, in Doug Brown and Scott Wilson’s Black Book of Outsourcing 2008.

The perception still exists that Egypt is open to regular attacks — despite not experiencing a terrorist attack since 2006.

Egypt scored highest for market potential in the non-BRIC report. It is positioned geographically to work with Europe, the US and the Middle East and is within favourable zone spectrums to make working across national boundaries easier.

While the competition for clients between non-BRIC countries is increasing as more of them offer language and basic call centre support facilities, some are seeking to expand their markets, by raising their level of expertise and establishing niche capabilities.

In addition, Egypt and other countries are positioning themselves to benefit from the relationships they have with BRIC countries and are focusing on the nearshore opportunities.

Catherine Griffiths is co-founder of the Outsourcing Unit at the London School of Economics. Beyond BRIC: Offshoring in non-BRIC countries: Egypt — a new growth market, by Leslie Willcocks, Catherine Griffiths and Julia Kotlarsky, is an LSE Report, 2009