SA's stronger currency is weakening the case for international companies to invest in SA's outsourcing sector.
The rand has strengthened 14.3% against the euro and 11% against the British pound in the past year, which makes the country a more expensive destination in which to set up outsourcing businesses.
Business process outsourcing (BPO) and off-shoring is a key growth sector for the country, but has come up against several constraints recently, including higher electricity prices, the cost of communications and an insufficient pool of skilled workers.
SA's stronger currency is expected to dent the amount of money being invested in seats in SA. Although hard figures are difficult to quantify, anecdotal evidence indicates a few hundred seats have already been lost, because of the stronger currency.
Call centre operator Merchants' director of marketing, Vanda Dickson, says the stronger rand is only one reason why companies may not invest in SA. She says, overall, SA is not cost-effective enough due to a range of factors, including the high telecommunications costs, and the rand is not expected to aid this situation.
External factors
IDC senior economist Gerhard Kuhn explains that the currency is too strong from a price point of view. He says the rand is stronger due to the euro being lower off the back of Greece's mammoth debt.
Frost & Sullivan ICT industry analyst Spiwe Chireka explains that most of the growth in the market is expected to come from international companies moving into SA through a typical off-shoring model.
“If you look at the SA BPO market, we expect most of the growth to come from offshore, which is potentially the largest contributor to growth over the next two to three years,” Chireka notes. A key reason why companies would look at off-shoring in SA is to save costs, she adds.
However, because the rand has strengthened significantly against currencies in markets where SA seeks to market itself, companies may put new investments on hold, or look to more competitive markets, says Chireka.
SA has a $960 million annual BPO industry, which is forecast to grow to $1.9 billion by 2015, according to the latest figures available from Frost & Sullivan. This growth is now under threat, says Chireka.
“The primary driver for coming to SA to offshore is coming under threat; the stronger rand is a threat to the local market,” says Chireka.
She explains that the stronger currency makes investing in SA less cost-effective, eating into any potential savings companies could expect by moving into the country. “It is likely to deter investors.”
Making a plan
Business Process Enabling SA, the national industry association representing the BPO sector, says it is looking at ways of mitigating the effects of the stronger currency.
Interim CEO Bulelwa Koyana says the stronger rand has had an adverse effect on investments.
At a recent outsourcing forum in the UK, investors indicated their reluctance to put money into SA because of the strength of the currency, she says. “The strong rand is not making us favourable.”
However, the umbrella body has a few tactics for swaying investors' minds. One of these is to chat with the Department of Trade and Industry (DTI) this Friday about reworking the incentive model. Koyana says this could include better incentives for companies that do not turn a profit.
In addition, the organisation is encouraging innovative use of the current incentives, she explains. The DTI has unveiled two incentives aimed at attracting investment into SA. Both run from December 2006 to March next year.
The first is an investment grant that ranges between R37 000 and R60 000 per seat that is built. In addition, the department also contributes R12 000 towards training per agent. Both these grants depend on projects being approved by the DTI.
Koyana says it is possible to use these incentives to trim the cost of investing in SA. In addition, the industry is encouraging companies to hedge the rand, which will protect it from unexpected moves.
She adds that SA has other positives in its favour, including its lifestyle, cultural affinity with European countries and language compatibility. “The holistic offering of SA stands out pretty strongly.”
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