Another blow for BPO?

The business process outsourcing (BPO) sector - one of government's targeted growth areas - faces another obstacle as power prices are expected to double by 2012, which could make it a casualty of anticipated cost-cutting measures.

The electricity power hikes will affect every sector of the economy, and companies will again look to trim costs. The National Energy Regulator of SA (Nersa) yesterday said electricity would increase by 24.8% from April, and another 25.1% next year, and 25.9% the year after.

The regulator's hike adds another R85 billion to Eskom's revenue this year, R109 billion next year, and R141 billion the year after, as the parastatal seeks to build more power to prevent the lights from going out in SA.

While electricity costs are not a huge percentage of the cost of running a BPO operation, the industry has been battling for some time to keep its expenses down. Several years ago, it requested cheaper calls rates from Telkom in order to be more competitive, a cry for help that has not been answered.

Local call centres are already under pressure. Yesterday, Blue Label Telecoms joint-CEO Mark Levy said the company had to close some of its centres and rethink the product focus of others. “We really felt the product of the global crisis in that part of the business,” he explained.

Dialogue Group has also been battling for some time, reporting in its last results for the six months to June that it had made a loss of R14.6 million, compared to a R6 million profit the previous year. The company has had to retrench staff and trim costs as the global recession led to lower sales.

Chairman Peter Watt says the electricity hike is unlikely to drive people to use call centres, but could rather have the reverse effect. He explains that electricity costs will be passed onto consumers as call centres will not be able to absorb an increase, no matter how small.

In addition, says Watt, companies will once again be looking at ways to trim costs, and outsourcing to call centres could be an aspect that is cut. “Big companies don't want to see their names in print as retrenching; they would rather retrench from us.”

Four years ago, government launched the Accelerated and Shared Growth Initiative for SA, which was aimed at halving unemployment and poverty by 2014. One of the key focus areas was BPO, which was seen as a way of encouraging investment in SA and creating jobs.

The sector is already in danger of losing out. Frost & Sullivan ICT industry analyst Spiwe Chireka previously said SA is facing increasing competition from other countries - such as Kenya and Nigeria - that are moving aggressively into the BPO sector.

SA has a $960 million annual BPO industry, which is forecast to grow to $1.9 billion by 2015, according to Frost & Sullivan. However, other countries will outpace SA's growth rates. Kenya's BPO market is worth $23 million, and is expected to grow to $89 million in the same period, and Nigeria is at $8.3 million, which is anticipated to shoot up to $114 million.

Chireka said this morning that the sector doesn't consume more power than other normal offices, a viewpoint with which Kaplan Equity Analysts MD Irnest Kaplan concurs. “I don't think call centres are any different to the normal office environment.”

However, Business Process Enabling SA has already said the entire industry is feeling the effects of the credit crunch and even a 10% rise in costs would have a major impact on the sector's success.

The BPO industry organisation stated that while SA offered investors high savings potential, Eskom's anticipated hikes would reduce this. Interim CEO Bulelwa Koyana was not available to comment this morning.

The association has also previously said call centres require a large amount of electrical output to operate. Costs include running computers and other call centre equipment, lighting, cooling systems, 24-hour security protection, multiple backup systems, standby generator and an uninterruptible power supply.

In addition to pushing the price of power up, the electricity hikes will spill over into other sectors of the economy, notes Andr'e Venter, United Association of SA spokesman. “There is simply not one industry in our economy that will not be affected by the increase and Nersa's decision will have a definite negative impact on the economy,” he says.

The South African Chamber of Commerce and Industry's (Sacci's) Peggy Droski, advisor to CEO, says the increase will filter through to the cost of communication. In addition, companies in the BPO sector that run 24-hours-a-day face a double whammy, as normal offices turn off the lights and equipment at home time, she comments.

MTN also expects the power hike to impact its operating costs. “Any increase in input costs will affect MTN, as all the MTN base stations and switching centres across SA are powered by electricity,” points out MTN SA's regulatory GM Graham de Vries.

Sacci expects the power hikes to cost the local economy another 250 000 jobs, on top of the 800 000-odd that were lost last year. Droski says most of these job losses will be in the small and medium enterprise sector, which was hit hard during the recession. “The ones that have survived have survived by sheer grit and guts.”

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