Tech support en français s’il vous plaît!? The challenges of becoming a new global outsourcing hub

By Stephan Manning.

Outsourcing of IT, tech support and other business services has become a global trend. Watching India’s success in the outsourcing space, many developing countries now try to grow their own business service economy. Even African countries, including South Africa, Egypt, Morocco, Ghana, and Mauritius, have built up outsourcing capabilities in recent years (see recent article by Abbott). In fact, 8 out of the Top 100 outsourcing destinations worldwide, according to the latest 2013 Tholons Ranking, are located in Africa. Not surprisingly, Kenya’s government for example also lists business process outsourcing (BPO) as a major economic building block in their Vision 2030. Boasting an improved IT infrastructure, political stability and English language capabilities, Kenya is hoping to become a major BPO hub. Other countries are following suit. But what does it really take to become a global outsourcing hub? Can any country with low-cost labor, a good IT infrastructure and favorable business climate join the club?

In my new Research Policy article ‘New Silicon Valleys or a New Species? Commoditization of Knowledge Work and the Rise of Knowledge Services Clusters’ I argue that the answer to this question depends a lot on the commoditization of service capabilities offered by a particular country. Commoditization refers to the extent to which services, such as IT services, tech support, and software testing, are standardized across products, industries and client firms. In general, commoditization creates business opportunities for specialized vendors around the world, and, in turn, makes it attractive for client firms to outsource processes to these vendors. For example, whereas in the past software developers would typically run their own tests, today many firms outsource testing to vendors who can perform tests for various products and platforms at a lower price.

This is good news and bad news for developing countries. Good news is that service commoditization increases global demand for low-cost technical skills which do not need to be highly product or firm- specific. Thanks to this trend, thousands of service providers have emerged in recent years not only in India and China, but in Eastern Europe, Latin America and Africa, who are capable of performing tech support, call center operations, or software tests. This has generated jobs and career opportunities for young science and engineering professionals in developing countries – albeit at the expense of many well-paid technical jobs in advanced economies.

Bad news is that because so many countries today can potentially train young people to perform commoditized work for global clients, competition and cost pressure have also increased. For example, because of ‘wage inflation’ in India, many client firms have shifted their IT and software operations from Indian hotspots to cheaper locations with similar capabilities, such as Ukraine. However, the more commoditized a particular service is, the lower the chances of any of these regions to benefit from providing such services in the long run, since there will always be a lower-cost option for clients.

I therefore argue that the ‘trick’ is to develop capabilities that are, on the one hand, applicable across products, client firms and industries, in order to stimulate global demand and scale economies, but, on the other hand, sufficiently distinctive and region-specific, in order to lower cost pressure and global competition. For example, Russia has been rather successful in utilizing its rather distinctive pool of highly trained, yet underpaid mathematicians and scientists to take on sophisticated analytical and scientific work from Western firms. India has equally been successful for a long time in utilizing its incredibly large pool of software engineers to take on labor-intensive IT and software work in particular for large client firms across industries. The Philippines have benefited from their availability of a young population with American English language capabilities suitable for call center and tech support services catering particularly to U.S. clients.

In all these cases, the services provided – analytical work (Russia), IT support (India), call centers (Philippines) – are not specific to any products or industries, thus generating scale economies. Yet, each one of these regions has certain advantages which build ties to particular types of clients – firms with R&D departments (Russia), large organizations (India), U.S. firms (Philippines). The highest growth potential therefore comes from a combination of sufficient commoditization to attract a large client base, and sufficient distinctiveness to lower global competition. By contrast, capabilities that are too specific are likely to limit global demand, and services that are too generic are likely to increase global competition. This is what I try to illustrate in my article with this inverted U-shape curve (see Figure).

MountainWith this insight, we can better assess the potential of new players to participate in the outsourcing space. Let’s take the example of Kenya again. How likely is it that Kenya can catch up with other countries in Africa, such as Morocco, and become yet another global outsourcing hub?

Let’s look first at Morocco which has been a recent success story in the outsourcing world. Like Kenya, Morocco is a latecomer. And like Kenya, Morocco does not provide any particular skill nor is it the cheapest outsourcing location. Its political climate is even more uncertain than Kenya’s. Yet, Morocco has managed to become an important outsourcing hub. Why? Well, if you ever travel to Morocco you will notice one thing: Even the local camel guide, who lives in a desert village and who never enjoyed higher education, can speak at least Arabic, French and Spanish, thanks to the mix of Colonial powers (and tourists) shaping Morocco over centuries. Morocco is also located in a time zone close to European clients. All this makes it attractive for French firms for example to outsource call centers and tech support to Morocco rather than India or the Philippines. Unless India or the Philippines improve their French and Spanish language education any time soon, Morocco is likely to further benefit from its distinctive advantages. Anecdotal evidence suggests that even Indian providers increasingly set up service hubs in Morocco to cater to French client firms.

Now what about Kenya? Kenya offers a good IT infrastructure, high English literacy rate and time zone proximity to Europe. Yet despite some early successes, such as the Kenyan call center operator KenCall (see picture), global demand for outsourcing services from Kenya has been limited so far. Unlike Morocco, Kenya has excellent English language capabilities, but, because of that, it also competes with India and the Philippines on cost. (In fact, even Kenyan firms often prefer working with better known and often less costly vendors from India and the Philippines.) Time zone proximity to European clients may be an advantage, but not enough for most clients to switch to Kenyan operators. In other wordsKenCall, compared to Morocco, Kenya’s service capabilities are too commoditized. Whereas Morocco’s French and Spanish language skills provide some distinctiveness, while still allowing for scalable service offerings, Kenya does not have comparable competitive advantages.

There might be another way though: Countries like Kenya increasingly turn their attention to regional rather than global clients. When interviewing Kenyan firms, I realized how important clients in Central Africa and South Africa have already become. For example, some Kenyan BPO providers offer IT infrastructure and software services to governments in their neighboring countries in Central Africa, thereby leveraging political connections in the region. But guess where these service capabilities come from? Not just Kenya, but increasingly India where several Kenyan vendors have recently established service delivery hubs and training centers to utilize India’s software expertise and reputation. It’s an interesting world we live in!

References and Links

Abbott, P. 2013. How can African Countries Advance their Outsourcing Industries: An overview of possible approaches. The African Journal of Information Systems, 5 (1), 27-35.

AT Kearney’s Global Services Location Index

Kenya’s Vision 2030

Manning, S. 2013. New Silicon Valleys Or a New Species? Commoditization of Knowledge Work and the Rise of Knowledge Services Clusters. Research Policy, 42: 379-390.

Tholons 2013 Top 100 Outsourcing Destinations


12 thoughts on “Tech support en français s’il vous plaît!? The challenges of becoming a new global outsourcing hub

  1. Pingback: Slumdog Millionaires: Can Impact Sourcing Alleviate Poverty? | Organizations and Social Change

  2. Pingback: Can Africa Become a Global Outsourcing Hub? Some Food for Thought | MYC4

  3. It seems that as the US work force pushes the message that we need to keep jobs on our shores that we are starting to see more and more servies go abroad. Recently I read of x-ray reading, especially during off hours is being outsourced due to the shortage of radiologists in the states. What’s even more interesting is that I now see people buying cars to restore and then shipping them off to eastern Europe to have mechanics work on them there. In the states they would have to pay $100+/hr to get quality work but in a place like Romania they can get the same quality for 10-20% of the cost which saves big money even when including the costs of shipping.

  4. Pingback: After the Decline of Large U.S. Corporations: Where Do the New Giants Come from? | Organizations and Social Change

  5. I’d also suggest that it’s not a static trade off between going after commodity services and distinctiveness – firms (and regions) can start off with the lower value added commodity services and try to build distinctive capabilities – and market niches – over time. My broader concern with using this value chain approach to development policy is the increasingly fierce competition for all types of offshored services, which reduces margins for all the suppliers. The dominant firms, usually located in the West, seem to be developing the capacity to standardize, modularize and commoditize production and service tasks, offsetting the efforts of developing countries to develop more specialized and higher ‘value’ capabilities and markets.

    Note that value added is a really a euphemism for market power – developing countries can develop more skills, but value added remains low if they lack market power due to commoditization. Something of a treadmill here. My 2008 AMR paper on Global Production Networks develops this theme.

  6. It’s a very interesting article… while reading it, it made me wonder what the evolution will be with the Asian countries… Similar to how Morocco has extra differentiation due to it’s French and Spanish speaking abilities because of it’s location and history, could we then assume, in the future when customer service calls in Japanese, Mandarin, and Korean could be taken over by sites in China?

    I assume locations in China because they have the cheapest labor, a lot of people in China will need help when they get more modern, and Korea and Japan could take advantage of the cost savings of outsourcing to Chinese employees that speak Mandarin, Korean, and Japanese (and maybe even English).

    They could maybe leverage their location and their ability to learn languages. A matter of investing long term in the work force and education systems…

    From my own family, (my father from Hong Kong, fluently speaks English, Mandarin, Cantonese, and Korean, my mother fluently speaks Japanese, Korean, and English, my sister speaks English, French, Korean and Japanese.)

  7. I really identified with your idea ” the more commoditized a particular service is, the lower the chances of any of these regions to benefit from providing such services in the long run, since there will always be a lower-cost option for clients”.

    Since developing countries have huge amount of natural resources and low cost advantages; with the movement of globalization, people from developing countries will know more about the outside world. In addition, the government from developing countries want to seek a sustainable development strategy rather than purely focus on the heavy industry. Therefore, the competitive advantages of some developing countries such as china will lose in the next 10 years; lots of companies will move out and find another substitute countries. This trend will move constantly.

  8. Given India’s success in cultivating a domestic BPO industry, which stimulated the country’s economy and created jobs for citizens, it’s no wonder other countries are hoping to follow suit. However, as you point out, simply replicating the same conditions (cheap labor, IT infrastructure and a welcoming business climate) in another country is not sufficient. You argue convincingly that differentiation plays an important role in successfully fostering a robust BPO industry in a particular country.

    The market for BPO that you describe in your article should remind us of the importance of understanding market structures. While the BPO industry does not fit neatly into one market structure, it does exhibit characteristics of perfect competition. A perfectly competitive market is characterized by low barriers to entry and little product differentiation. Firms (or in this case countries) in a perfectly competitive market cannot control the price of their product, and simply respond to price changes which effect the overall market. In this case, selling business services isn’t that much different than selling corn, or aluminum. As your assessment of the Kenyan BPO industry shows, firms in a perfectly competitive market are typically involved in a race to the bottom. Any inability to match price reductions in the overall market can be disastrous for a firm.

    In comparison, the BPO industry also exhibits signs of monopolistic competition in which there are still few barriers to entry, however firms are able to exert some control over price (and demand) through differentiation of their products. Buy carving out a niche (but as you point out, a niche that is not too narrow) a firm is able to take a segment of the market that has been under-served by the industry as a whole. As your article illustrates, Morocco has been able to do just that. The country’s BPO market has been able to avoid the pitfalls of a perfectly competitive market by offering foreign businesses unique services using language and time zone differences as differentiating factors.

    Certainly other countries can learn from this case. It is not simply enough to do something just as good as someone else. You must be able to identify your unique characteristics and leverage these distinctive attributes to create something products or services which are distinctive enough to carve out a niche, yet broad enough to build meaningful market share. Very interesting article.

  9. You have made it clear that the mixture of commoditization and distinctiveness are often keys to a nation’s ability to offer services to overseas customers. I would focus in even further on the distinctiveness issue. I believe that the distinctiveness of the service being offered is strongly linked to the values of the culture. Your example of Moroccan proficiency in multiple languages is tied to the country’s history and culture. I believe that countries such as Kenya have values which can be transformed into a distinctiveness advantage. I believe that such countries must encourage businesses to expand their models such that these distinctiveness advantages are discovered.

  10. Well, to respond to Sabine’s excellent question, many developing countries (including African countries) try to build an outsourcing industry (and attract global clients) by doing pretty much the same thing: provide a good IT infrastructure, tax incentives, technical training programs at universities, industrial parks etc. So there is ‘rationality’ behind that. The only problem is that most policy-makers do not sufficiently understand the global competitive dynamics in the outsourcing domain. For example, quite paradoxically, having a high English literacy rate (as a latecomer) may be LESS attractive to global clients than having capabilities in a less spoken, but still widely used foreign language. And, at the same time, having very specialized technical capabilities (which may sound distinctive) will again most likely be LESS attractive than more generic technical skills which are (or will be) in demand across client industries and countries. So, the point is less about how deliberate government efforts are, but how much governments understand the global outsourcing game. There are of course many other facilitating factors, such as the presence of large multinational clients, diaspora effects (e.g. young returning entrepreneurs with training and work experience in the US or Europe) and so on. It is important therefore to create the right incentives. For example: Instead of preventing young people from going abroad, they should be encouraged to do so AND opportunities should be given to them to return back home to establish businesses serving foreign clients. This is what Saxenian and others have called ‘brain circulation’. Likewise, instead of investing into sophisticated technical capabilities (to ‘move up’ the value chain), utilizing region-specific advantages, e.g. time zone, language, political connections, may be much more effective at least in the short and medium term. Having said all that, I truly believe that global services outsourcing DOES have the potential to benefit many developing regions, including Africa – which is one of the reasons why I wrote this blog post.

  11. It’s fascinating, as Stephan’s assessment of the example Kenya shows, how the dynamics of business practice are always ahead of rational foresight. The firms seeking to establish themselves as global or regional players are obviously the major driving force, with all the unpredictable risks and chances involved. But to what extent is Kenya’s prospect of becoming an outsourcing hub also influenced by policy analysis and governmental strategies?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s