BUSINESS PROCESS OUTSOURCING:

Prospects for Ethiopian Economy

                                                                                                     Dr. Udai Lal Paliwal

Assistant Professor and Coordinator

Distance Education Program (A DIF Project)

University of Gondar, Gondar; Ethiopia

 

Abstract

 

            Recently business process outsourcing, especially offshore outsourcing has become the new          wave of business. It has assumed significance as an important tool for strategic management         and increasing shareholders’ value. The present paper which is divided into four parts       discusses the trends of business process outsourcing activities, presents a brief overview of   activities that are domain of outsourcing game and prospects for developing countries in     general and Ethiopia in particular.

I. Business Process Outsourcing:

Gone are the days when the businesses used to work effectively and efficiently on their own. With passage of time and growing competition, it is becoming exceedingly difficult for organizations to survive and remain in the competition on their own. In order to stay competitive companies are being forced to devise new ways and means of doing business including hunting for new technologies and strategic partnerships or tie-ups. In the process, business process outsourcing has emerged as an effective mechanism to increase value creation along with cost minimization and stay ahead in the competition. Even the companies resilient to change are forced to do so as they crave to survive in the highly competitive and volatile marketplace.

Business process outsourcing (BPO) may be viewed as apportion of non-core activities to the third party vendors having expertise in the concerned activities. There are different facets of outsourcing arrangements such as professional services, project management, a joint venture with an offshore trader or an owned subsidiary for offshore outsourcing services. Offshore outsourcing services have become the best and the most popular practice because of the inherent advantages for both the parties i.e.; the client and the service provider.

It is becoming indispensable for every business enterprise to utilize outsourcing process, as the world has become a global market with concentrated competition. Organizations have recognized that they have to focus on their core competencies with respect to the limitations that they have. More and more organizations have realized the fact to expertise comprehensively on the core competencies and outsource the non-core activities to other organizations that have expertise in those non-core activities. Because of the need to expertise in core competency, outsourcing services have become the most sought-after business or strategic partnerships. According to Peter Carey 1 and others outsourcing is associated with perceived cost savings and the technical competence of the external service provider. In a survey of 99 companies they found that 45.5 percent outsourced some or all of their internal audit functions. The survey also revealed that larger the size of firm the greater the propensity to outsource.

Business process outsourcing saves precious management time and other resources. Thus, it permits focus on building core competencies. Functions being outsourced include but are not limited to purchasing and disbursement, order processing, sales support, billing and collection, airline/hotel reservations, technical queries, managing bank accounts, client services, receivables management, Tele - marketing, market research, recruitment, human resources administration, pay roll, cash and investment management, tax compliance, internal audit,...the list gets longer everyday.

The BPO market is projected to be worth $ 1 trillion by 2008 2. As corporations are facing acute pressure from shareholders to increase profits, BPO is emerging as an important way out of increasing core competencies and profits.

            II. Offshore Outsourcing:

Outsourcing is not a new approach. Its origin may be traced as back as the history of organized trade and commerce. Outsourcing activities such as transportation, communication and other ancillary activities has been practiced over centuries. It has been a popular management tool for decades and an important topic of cost accounting texts under the heading Make or Buy. During the second half of 20th century many corporations have used outsourcing as a tool of increasing competitiveness and survive in the competition. However, it has been limited to manufacturing activities and most of the game was onshore outsourcing. With globalization and increasing liberalization which lead to removal of trade barriers and boundaries the whole globe has become a virtual village transforming the outsourcing activities also both in size and nature. Consequently the concept has matured through on shoring – off shoring - near shoring to global sourcing. Offshore outsourcing is not just about cost saving or creating value for shareholders. Rather it is realization of the truth that today, it is not just difficult, but impossible to create value without involving more than three fourth of the world population 3.

Organizations in developed countries are now penetrating into emerging markets and developing economies, which offer the very attractive prepositions of talented workforce at a fraction of the price. Developed and developing economies both are poised to exploit each other’s markets, economies and labour forces 4. Benefits derived from offshore outsourcing include but are not limited to the following:

 

1.      Productivity & quality improvements

2.      Access to expertise

3.      Re-allocation of the resources and focus on core business activities

4.      Cost savings and huge profits

5.      Improved accountability

6.      24 X 7 production or sales process

7.      Risk minimization

8.      Favorable tax implications.

Though offshore outsourcing is still in induction stage, it has shown huge market potential and benefits. Multinationals representing the developed countries want to focus on the core-activities, where as the companies representing the developing countries are trying to leave an impact on the world market with their eminent expertise, skilled labor and abundant resources - both natural and intellectual.

Offshore Outsourcing: Some Facts: Offshore Outsourcing & Offshore Development Centers have clearly become an integral part of the overall outsourcing strategy of companies around the globe. Here are some facts on Offshore Outsourcing and the Offshore Development Centers 5:

1.      In an attempt to reduce costs, the world's 100 largest financial-services companies say they expect to transfer about $356 billion of their operations and 2 million jobs offshore over the next five years

2.      Offshore Outsourcing Services are expected to save the companies approximately $1.4 billion each by 2008, according to a report from Deloitte Research, an arm of Deloitte Consulting, a global management-consulting firm.

3.      It is predicted that more than 1 million jobs will move to the Indian Ocean rim over the next five years. Based on the Indian Quality Standards , nearly half of the global corporate world is targeting India, which has a huge market of Business Process Outsourcing services as compared to other offshore outsourcing destinations.

4.      A survey conducted by Deloitte Research notes that the companies can achieve a 39 percent cost savings by moving work to areas where salaries and other costs are much lower.

5.      The survey also shows that increasing number of banks and insurance companies are transferring offshore, functions like application development, coding and programming, accounting and finance, contact support and call-center operations.

The following presentation (table 1 and chart 1) indicates the cost differences (so far the principal factor behind outsourcing decisions) between the cost of US firms and the cost of most preferred outsourcing destination.

Table 1

Cost Per Full Time Employee in BPO Industry

(All figures in US $)

 

Category

US Costs

Cost Of Outsourcing Service Provider

Service Provider’s  Cost as

Percent of US Costs

Personnel Costs

42,927

6,179

14%

General and Administrative Expenses

8,571

1,000

12%

Telecom Charges

1,500

2,328

155%

Property Rentals

2,600

847

33%

Depreciation Expense

3,000

1,500

50%

Total Cost

58,598

11,854

20%

 

Source: Industry Sources, Merill Lynch6 2003; as quoted in NASSCOM Strategic Review, 2003 (Adapted)

Chart 1

 

 

It is clear from the above table and chart that costs such as personnel, general and administrative costs, of outsourcing service provider were considerably less (less than 1/5) than the US costs. Costs such as property rentals and depreciation were also very less. The telecom charges were found to be more in case of outsourcing service provider than the US costs. It was probably due to the high cost of infrastructure and less user volumes. However, the trends indicate that governments of many outsourcing service provider countries are very much concerned about the fact and trying to bring it at par with the US costs if not less than that.

 

Offshore outsourcing has immense job and revenue potential for developing countries without much capital investment. The table below (Table 2) presents the US jobs estimated to be outsourced during the next decade, the employment potential of offshore outsourcing.

 

 

 

 

 

 

 

 

 

 

 

 

Table 2

 

Number of US Jobs for Offshore Outsourcing

 

S. No

Job Category

Period 1

Year 2005

Period 2

Year 2010

Period 3

Year 2015

1

Management

37,477

117,835

188,281

2

Business

61,252

161,722

380,288

3

Computer

108,991

276,954

640,372

4

Sales

29,064

97,321

126,564

5

Office

295,034

791,034

1,659,310

6

Architecture

32,302

83,237

184,347

7

Art & Design

5,576

13,846

29,639

8

Legal

14,220

34,673

74,642

9

Life Sciences

3,677

14,478

36,770

10

Total

587,593

1,591,100

3,320,213

           

Source: US Department of Labour and Forrester Research, Inc.

 

Based on the absolute numbers the above jobs have been divided in to two categories viz., high end jobs (Number 1 to 6) having more than 100000 of jobs available on offer and low end jobs (Number 7 to 9) having employment potential of less than 100000 jobs. The following line charts (Chart 3 and 4) indicate the job potential of both categories.

 

Chart 2

 

 

Chart 3

 

The foregoing presentation indicates that the offshore outsourcing has immense job potential. The number of jobs outsourced from US alone is expected to increase by 565 percent over the next decade. In absolute terms the back office operations are estimated to make the biggest share of the pie (Chart 4) followed by computer related jobs. Under professional job categories such as legal, art & design, architecture also the growth is expected to be more than five fold. Apart from this, Japan and European market combined together is also expected to offer more or less similar number of jobs under the net of various outsourcing activities.

Chart 4           

 

Further, to avail favorable tax benefits, spreading risks and because of the fact that competitive cost and skill advantages may not be available within the same country more and more companies are falling prey to offshore outsourcing.

III. Types of Outsourcing Activities: A Brief Overview

Many times outsourcing has been appraised as confined to the IT sector only. However, in reality it is associated to various business activities, which can be broadly divided in to two parts viz., manufacturing sector and service sector. The IT services are just a part of the service sector. The following section presents a brief view of outsourcing activities pertaining to these major categories.

Services Sector:

IT –enabled Services: more and more companies are relying on offshore companies for services such as data entry, mass e-mailing, and clerical support for inbound & outbound communications.

IT Services: IT services outsourced includes, Data warehousing and mining, E-commerce applications, offshore IT consulting services, Software development services etc.

Back - office Operations: These back office operations includes activities like, hardware maintenance, internal auditing, payroll processing, inventory management etc.

Media and Entertainment: Media and entertainment industry is no exception for outsourcing. Media and entertainment companies from different countries are inclined to outsource the activities like animation, advertising, film- making, photography etc.

Medical Transcription: This is an upcoming area and one of the best examples of outsourcing in the services industry. Medical transcription deals with crucial data regarding the patient’s medical history, their physical reports, clinical notes, consultation notes, discharge summaries, etc.

Web Development Services: This includes E-commerce consulting, website design and development, website maintenance and promotion, etc.

Infrastructure: Activities being outsourced under this sector include system maintenance, application hosting, application integration, order processing, system implementation and integration, work flow enhancement, evaluation and benchmarking, communication & messaging, upgrading and configuring software etc.

The above are few areas where services are being outsourced. There is a continuous addition to the list. Probably whatever could be outsourced, will be outsourced in coming days.

Manufacturing Sector: Manufacturing information systems, assembly, component manufacturing, consulting and training, publishing, testing, general manufacturing are some of the activities currently being outsourced by various companies. Producing in bulk and serving the global market are two of the important factors influencing managers to outsource manufacturing activities. The outsourcing services offered by offshore service providers for manufacturing sector are widespread in different sectors. Some sectors that are prominent and have immense potential with regards to offshore outsourcing services are described below:

Chemical Industry: The chemical industry is gigantic and complex worldwide. One can notice the large presence of the multinationals in this field. Broadly speaking the industry can be divided into petrochemicals, inorganic chemicals, organic chemicals, bulk drugs, agro chemicals and paints and dyes. The large players are usually found in the bulk manufacturing of the chemicals and outsource their non-core business processes to outsourcing firms which are small or medium in size. The processing and packaging is the core activity of the outsourcing service provider companies. In this way, offshore outsourcing services in chemical industry is a huge and ever expanding market.

Pharmaceutical industry: The pharmaceutical industry is one of the hottest sectors for offshore outsourcing services. The pharmaceutical outsourcing market comprises of diverse areas such as outsourcing process development, production of active ingredients, outsourcing physical processing [preparations], outsourcing formulation and production of formulation, packaging etc.

Textile Industry: The textile industry is no exception when it comes to offshore outsourcing. The labor cost in the Asian and African countries is substantially low when compared to European markets. It attracts major players in the field to outsource labor-intensive activities such as production and packing to thousands of small outsourcing service providers from such countries.

Electronics Industry: Large and medium enterprises in the industry out-source their non-core electronics manufacturing activities such as assembling, testing and packaging. Outsourcing to these service providers also reduces the problem of huge stock piles. Countries like Malaysia and Philippines have always had back-end assembly lines and testing procedures for the range of electronic items.

Automobile Industry: Automobile sector has been a popular domain for outsourcing activities for quite a long time. In past leading players in the field have established tie ups or joint ventures with their counterparts in developing countries to reap cost benefits. Currently the assembly and manufacturing of parts are mainly outsourced activities in the industry.

IV. Prospects for Ethiopian Economy: the Way Ahead

 

As discussed earlier offshore outsourcing has a lot much to offer to both the parties. So far as outsourcing service providers are concerned it has immense job potential and contributes significantly to their economy. India has already emerged as the global hub for outsourcing activities and accounts for approximately 80 percent of the total outsourcing business at present. However, the researches indicate that due to several causes this share is going to decline up to 57 percent in near future 8 – the potential for other countries to avail the opportunity.

 

Countries such as Mexico, South Africa, Egypt, Philippines, China, Hong Kong and Israel have already registered their presence in the game and other countries like Pakistan, Bangladesh and Nigeria are trying to build competencies in the field. Further, the estimates that India, the global leader in outsourcing, will have shortage of 262000 professionals by 2012 7, indicates the room for other small and medium players to take the opportunity. It has also been revealed that the most of the new outsourcing business will come from non English speaking countries, which means that those having expertise in Spanish, German and French will have good opportunities. At the same time, as the trends have shown, most of the countries outsourcing their activities are looking for multiple offshore destinations to hedge the risk.

 

When off shoring is accelerating day by day and everyone is busy finding new locations, it is high time for countries like Ethiopia to show their capabilities and strong commitment to grab the opportunity. If Ethiopia could attract even 0.1% of total outsourcing game it will increase country’s GDP by more than 30% and transform the Ethiopian economy from agrarian to service sector based economy. Factors such as less costly labour, suitable work time vis-à-vis US and/or European market, quite a large population base, strong education system, technological infrastructure and strong government commitment makes a  country favorably destination for outsourcing activities.

           

Every nation has certain qualities, which make it stand alone amongst others and helps to attract outsourcing business. Ethiopia enjoys certain qualities such as better law and order, dedicated, integrated and law abiding people, which ensures data privacy and secrecy, the biggest non cost concern for outsourcing decisions. At the same time Ethiopia can out price many of the competitors because of low wage costs. The other favorable factors for Ethiopia include better geographic location and matching time zones to European market. Quite large population base and the governments thrust in education sector are other promising factors that are expected to provide competitive edge for the country. However, it lacks on several fronts including infrastructure and there is need of developing an action plan and implementing it to build competencies and demonstrate the traits sought after by the clients. It requires political will, strong government commitment and partnership among various agencies so as to ensure availability of required infrastructure, skilled labour and encouraging tax and other laws. It is recommended that ministry of capacity building takes initiative in this regard. The following points may be used as guidelines for preparing the action plan and making it a reality.

 

Ø      Develop clear goals with periodic targets and specific plans to achieve them

Ø      Identifying areas where we can serve better

Ø      Developing and maintaining infrastructural facilities in information technology, telecommunications and electricity sector and ensuring cost competitiveness.

Ø      Assessing human resource capabilities and ensuring availability of skilled labour

Ø      Training facilities in information technology, devising relevant courses and imparting technical know-how

Ø      Building competencies in English and other foreign languages such as Spanish, German and French

Ø      Developing ethical and quality manpower

Ø      Enacting provisions to ensure data privacy and security

Ø      Stable political environment and active government support

Ø      Amendment in tax and other laws to make outsourcing an attractive preposition for both the parties

Ø      Learn from the best practices, processes and employees from all over the world.

 

            References:

1.           Peter Carey, N Subramaniam and KCW Ching, Internal Audit Outsourcing in Australia, Accounting and Finance, Vol. 46 No 1, March 2006; Pp 11-30

2.           Gartner, International Data Corporation, as quoted in “Offshore BPO: Is India Losing Out?” Chartered Financial Analyst, February 2005, Pg 65

3.           Das Shyamanuja; “The Next Impact of Global Outsourcing” A paper presented at the              International Conference on Outsourcing, August 5-6, 2006, Udaipur, India.

4.           Srivastava Sanjay and others; “Outsourcing and its Impact on HRM” a Research Paper, Amity Business School, Noida, India

5.           http://www.offshoroutsourcingservice.com

6.           Merill Lynch, Industry Sources,  2003; as quoted in NASSCOM Strategic Review, 2003

7.           National Association of Software and Service Companies, India

8.           Gartner, Ibid