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).
With 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 words, 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