Offshore outsourcing: A potential gold mine

There`s no doubt offshore outsourcing is a potential gold mine for SA. And success in this business doesn`t appear to take much - the right attitude, gearing up for international customers and, most importantly, a telecommunications infrastructure that competes internationally on functionality and cost.

These issues need addressing before any country can attain promotion to the league of those currently dominating the offshore outsourcing scene, like India and China. There`s a strong body of opinion in the market that SA is in the running - a couple of negatives notwithstanding. It simply needs to do a better job of marketing its offshore capabilities.

Key to uplifting the international profile is credible case studies showing the unique value a South African approach can bring.

Roger Cox, managing VP of the Gartner strategic sourcing practice in EMEA, says a number of factors influence the offshore space. "These are the country`s language to its target audience, the level of government support, the size of the educated labour pool, the level of infrastructure, the level of the basic educational system, cost, political stability - even perceived stability, cultural compatibility with the customer, and the security a client can expect for its data and intellectual property."

Consulting firm AT Kearney`s 2004 Offshore Location Attractiveness Index says the viability of a country as an outsourcing destination is measured according to three matrices, namely its "financial structure", its "people skills and availability" and its "business environment". Financial structure is the most important of the three, since reducing cost is the primary driver behind offshore decisions.

"One of the main reasons behind India`s domination of the market at present, besides its low cost offerings, is the fact that the English language is on offer and that the country is investing heavily in other languages, for example building alliances with Mauritius to target the French market," says Cox. "India also has massive government support and the country has positioned offshore outsourcing in such a manner that jobs offered are some of the best available in the country. In order to leverage cost even further, India is also turning to countries like China."

The AT Kearney survey echoes Cox`s sentiments. "In addition to its much-discussed cost leadership, India also takes a commanding lead in the people category, thanks to two strengths - it offers the deepest experience in business process outsourcing and a large labour force second only to that of China," the report says.

"Every year, the education system graduates two million proficient English speakers with strong technical and quantitative skills," it continues. "India`s top engineering schools, led by the Indian Institute of Technology, are renowned worldwide.

"But India also benefits from its experience - it has been a large-scale offshore destination for more than a decade. Indian service providers have evolved from software coding to business process management, and high-level analytics and consulting. The labour force is familiar not only with the job content, but also with the work ethic, quality and productivity expectations of major global clients."

The report says the National Association of Software and Services Companies of India predicts India`s IT software and services export market will reach US$60 billion by 2008. However, AT Kearney points out that other countries are mounting a challenge to India, and rates their chances.

Where India takes top position in terms of both financial structure and people skills and availability, it is perhaps surprising to find Singapore ranks highest in terms of business environment, with India lagging behind at number 15 - pretty close to SA, which is in 18th position. SA comes 17th in the overall stakes, ranking high in people skills and availability (10th) and faring reasonably well in the financial structure stakes with a 15th position.

One of the main reasons behind India`s domination, besides its low cost offerings, is the fact that the English language is on offer and that the country is investing heavily in other languages.

Roger Cox, managing VP, Gartner strategic sourcing practice in EMEA

Looking at the local market, Cox says government support is lacking, whereas the educational system is good, infrastructure is fair, political stability is more or less the same as in India and the cultural match is fairly good. "The problem comes from the fact that South African companies are less process-driven than companies in other regions. But, on the upside, they are more intuitive and much better at coping with complex niche market offerings - areas that India and China often struggle with since they are focused on providing very general offerings.

"An example of a niche market focus working well is New Zealand, which has built an entire industry focused on delivering complicated services for the media and film markets. These specialised companies have managed to take a great deal of the animation market.

"Potential exists in SA to carve a similar niche for itself. It has a good work ethic, and even though the country has faced enormous difficulties in the past, it has managed to get the job done. From a customer relationship perspective, South Africans have a very interactive manner about them, quite comfortable with checking requirements along the way with their customer on a regular basis," Cox says.

Ian Bayne, business manager for the EDS Africa Solution Centre, agrees that specific focus areas are the way forward. EDS has structured its application development shops into 96 centres around the world. "The cheapest 13 of these 96 centres are termed 'best shore` locations, and SA is one of those locations," Bayne says.

Each best shore solution centre has a specific niche area. "The work EDS canvasses internationally is taken to a central committee and, after consideration, assigned to the centre best equipped to deliver on the client`s requirements," Bayne continues. "Our Indian centre is extremely process-driven and specialises in the technical aspects of a project. SA specialises in the relationship management and management layers of a project.

"Locally, we have what is commonly termed a 'can do` attitude. We have a planning mentality from the perspective that, no matter what, we will find a way to do the job. While SA is not the cheapest best shore location, we are the fourth cheapest EDS centre in the world."

Within EDS, SA deals with the UK and US, acting as a "middle man", and moving the more technical aspects of the project on to India.

"Because we have standard processes, a common scenario would see our New Zealand centre doing the design and business analysis on a project, the South African centre doing the functional specifications and systems analysis on a project, our Brazilian centre doing the coding and the New Zealand centre doing the required testing," Bayne says.

Keith Fairhurst, director of EOH KPMG, says customers need to have realistic expectations of the cost savings they will derive from offshore outsourcing.

"Often cost savings associated with offshore outsourcing are over-rated, especially in the first year of the contract. While there is generally an immediate cost saving in terms of what the company would be paying for skills if it didn`t outsource, building the infrastructure that needs to exist between the customer and the outsourced workforce swallows this in the short-term. When, however, the relationship has had time to mature, the cost savings are both real and substantial," says Fairhurst.

"There`s not too much that has to change in the local market for there to be success in the offshore space," he observes. "We just have to be able to put credible references forward and raise the awareness of what SA has to offer to the western countries."

Clearly, the offshore challenge calls for realistic self-appraisal and action.

AT Kearney, 2004 Offshore Location Attractiveness Index,

Greg Vercellotti, GM of Dimension Data TeamSource, says even though the currency exchange rate does the country no favours, cost is still one of the biggest benefits for outsourcing to SA.

"SA has a good skills base, and high levels of experience with technology, because IT people here have operated in some complex and sophisticated IT environments over their working life. Softer issues like language, cultural fit and time zone can sometimes also make SA more attractive than India," Vercellotti says.

S'andor Nagy, a senior manager at Accenture SA, quotes a recent report from IT services group RCG Information Technology: "When it comes to offshore delivery, about 75% of corporate America`s $275 billion per annum in development projects fail or are late - not for lack of money or technology, but mostly for lack of skilled project managers. For South African organisations looking to replace legacy information systems in the next few years, the question is how to mitigate the risk of failure and ensure project managers know what they absolutely have to get right.

"Accenture`s experience has shown there are a number of areas that typically need special focus to minimise the risk of multi-site, offshore delivery. These are team communication, completeness of requirements and designs, progress management and data connectivity," Nagy says.

From a team communication perspective, Nagy says working with multiple sites limits face-to-face interaction, and can involve working across time zones and communicating with different cultures.

"Risks such as misunderstanding of project requirements and/or status, and a lack of time for 'live` communication come into play. Simple cultural challenges and the importance of local knowledge, like the fact that shaking your head from left to right means 'yes` in India instead of 'no`, must be considered. The importance of open communication at and between all project sites cannot be over-emphasised. A plan for formal, informal and impromptu communication and the use of a consensus-based process that values the individual voice is vital for ensuring that every party is heard and feels understood."

Nagy says there are inherent risks in transferring requirements and designs from one site to another, if the requirements or designs are not fully documented and approved before they are sent.

"There is a potential delivery risk associated with the delay in resolving questions and issues due to ambiguous design specifications. To mitigate the risks associated with incomplete requirements and designs, rigorous transmission point procedures are required. Designs must be documented sufficiently to ensure the solution meets business requirements. These can then be transferred using a thorough transition point process. When requirements are not clearly defined and understood across all sites, these misunderstandings can be difficult to discover early in the process and will cause costly modifications at a late stage of the engagement. Therefore the requirement gathering and conceptual design exercises should be executed on-site, supported by strong processes and formalised sign-offs with the business owners," he says.

On the progress management front, Nagy says: "Depending on the vendor, there may be a risk that communicated progress and actual progress do not correlate. While trust and relationship building are crucial, a first implementation should not be put at risk if there is no previous delivery experience with the vendor. It helps to have mutually defined progress monitoring metrics, and to make regular site visits to ensure the required focus is on your project and not on another client who has more pulling power. It is important to get an early 'look-and-feel` of the product to be delivered. In addition, a pre-check of an alpha-release and extensive, subsequent testing phases will help to mitigate the risk.

"It is also key to remember that when data is shared across multiple sites a fast, reliable connection is necessary. Connectivity set-up may require a long lead time, so begin planning how data will be transmitted between sites early in the planning process," continues Nagy. "The client`s network administration/security organisation must also be engaged. Alternatively, VPN-based solutions with shorter lead times can be considered. In some locations underlying infrastructure like phone and data networks are unstable, so redundancy must be built into the solution."

Nagy adds that offshore delivery should only be entertained if the risks involved are clearly understood and proper mitigation strategies are in place to deal with these complexities.

"Remember, the people who work on a project daily are best positioned to identify risks. Regular risk surveys involving the project team across all sites will not only help to identify all relevant risks, but also create the required awareness and focus to reduce current and emerging risks, and keep development costs down," concludes Nagy.

You cannot be all things to all people. Successful offshore outsourcing partners have a defined market and address that market aggressively.

Ian Bayne, business manager, EDS Africa Solution Centre

Paul Fick, MD of Spescom DataFusion, says world-class technology infrastructure is of critical strategic importance in the global call centre outsource market. "For SA to attract similar business, local outsourcers will have to offer outsource processing services at a reduced cost without compromising on their service levels and stringent technology architecture and infrastructure requirements," comments Fick.

"Local industry is becoming acutely aware of the need to find innovative ways of funding these initiatives. The biggest challenge is to reduce the risk associated with upfront funding of such capital investments without having guaranteed outsource contracts in place. This is clearly a Catch 22 situation, but local outsourcers are realising that if they cannot meet these expectations, they will continue to lose lucrative high value business to India, and will have to settle for smaller and less profitable outsource deals," Fick says.

EDS`s Bayne says all customers are "paranoid" about risk. "Besides costs, it`s probably the most discussed topic.

"It`s important to realise you cannot be all things to all people. Successful offshore outsourcing partners have a defined market they play in and are addressing that market aggressively."

A forgotten fact is that the minister of communications has the ability to legalise voice over IP. Until that happens, Telkom will continue holding the industry to ransom.

Jonathan Hackner, marketing director, Call Centre Nucleus

One minus for SA at the moment is the exchange rate. Unfortunately, the more stability or strength an economy shows, the less competitive it becomes.

The country`s biggest negative factor, however, is its cost of telecommunications. Quite simply, if a project requires an outsource partner to grow beyond current infrastructure, the costs of doing so render the operation uncompetitive.

Jonathan Hackner, marketing director at Call Centre Nucleus, which hosts the offshore technical support line for Samsung`s German, French and British operations, believes the South African offshore outsourcing market has moved out of its honeymoon phase.

"Despite the fact that reality has hit with the economy strengthening, there is still plenty of willingness from the government to get offshore outsourcing rolling, since there are many options from a job creation perspective," observes Hackner. "The Department of Trade and Industry (DTI) recently announced a R200 million incentive programme to bring offshore contact centres into SA. How exactly local contact centres are able to access those funds is unclear right now, since the guidelines are still in the process of being drawn up and the DTI wants to ensure taxpayers` money is being protected and distributed correctly."

Hackner concurs that the biggest inhibitor in the local market is telecoms costs.

"A forgotten fact is that the minister of communications has the ability to legalise voice over IP. Until that happens, Telkom will continue holding the industry to ransom. While it is easy enough to push this legislation through, the downside is that it can have massive implications. From a positive side, it could seriously leapfrog the market and create jobs."

Hackner reveals that in the last 18 months offshore outsourcing business going to India and the Philippines has created about 300 000 jobs. "In that same timeframe, SA has created only 2 000 jobs in offshore outsourcing.

"But people that come here are impressed with the business climate. This tells me that cost is still the main barrier to success in this field locally; companies outsource to third-parties in order to save money."

Hackner says SA`s telecoms issues are being noticed internationally and need to be addressed. "A sobering fact emerged a couple of weeks ago when SA hosted visitors from the global outsourcing council, which incorporates representatives from the biggest outsourcers in the world. After conducting due diligence on the South African market, the council passed a report back to the DTI stating that the council will not recommend offshore outsourcing business to SA unless deregulation takes place.

"From a global perspective, customer satisfaction and customer retention has become more important than market share. South African companies need to follow that trend and the onus is on all of us to foster a culture of customer service. Focusing on outsourcing is an excellent opportunity to do that."

Commenting on the AT Kearney survey on offshore outsourcing attractiveness, Hackner says: "Just by making changes to local telecoms costs, we could be in the top five countries. One of the biggest growth areas for SA is going to be the call centre space, since it requires a relatively unskilled type of labour. The inhibiting factor here, however, is the telecoms costs. I don`t expect SA to compete on the same level as India, since the costs of Indian call centres is extremely low at $20 to $30 per call centre agent per hour - for a workforce which is made up by a majority of double-degreed agents.

"I also see growth in the upper ends of the application development value chain. More specifically, I`m talking about Visual Basic and Java developers, business process consultant and systems analysts."

DiData`s Vercellotti agrees that growth in the offshore outsourcing arena will be achieved through niche market focus and the delivery of exactly what customers want.

"It is important that the customers are up to speed also, since outsourcing is not an emergency stopgap measure, it`s a long-term relationship. Essentially, customers need to outsource the commodity and non-core aspects of their business to an outsource partner and ensure they keep their eye on the ball from a core competency perspective," says Vercellotti.

Spescom DataFusion`s Fick believes the local IT industry should be asking itself what it can do to support local industry in acquiring offshore outsource business and simultaneously achieving maximum revenue and margin growth. "One way is for the call centre industry to focus on some of the technology-related obstacles that we have a proven ability to influence, and to find cost-effective solutions around them that can be offered to industry," says Fick.

The AT Kearney report sums up what SA needs to do to become more attractive: "To compete, countries concerned about exporting jobs should address the factors that they can affect on their own shores. The countries should raise educational standards, invest in research, provide more extensive training and promote their ICT industries at both state and national levels.

"They should reinforce the cultures of innovation and experimentation that create new technologies, processes and products. Clearly, the offshore challenge calls for realistic self-appraisal and action," the report says.