Offshore sourcing Global Trends and Opportunities for North ...


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  • TECHNOLOGY and Technological convergence enabled cross border trade in services allowing for the remote provision of Financial, Customer care, Accounting and Administrative services. BUSINESS INNOVATIONS (1980’s) wsere reinforced by technological advancement and now allow outsourcing to offshore operational units or purchasing from foreign third-party suppliers. Other factors contributing to Cross-border trade in services are: SKILLED WORKFORCE AVAILABILITY In parallel, developing countries which have invested in education are offering a large pool of skilled human capital at a low wage (characterized by higher average birth rates and reduced employment opportunities) FREE-TRADE AGREEMENTS
  • No commonly accepted definition of offshoring currently exists, the term has been used to include a wide range of business activities. Technology frees businesses and government from in-house production and allows them to Source it to a different provider domestically or internationally on the basis of cost and efficiency considerations. International Sourcing can be called offshoring and can be of various types. The broader calssifications are: captive/ non captive. It can be in-house through a wholly-owned subsidiary in another country, or partnering in a joint venture with a local company. It can be done by using the services supplied by an unaffiliated foreign-based company (captive). The decision depends from an evaluation of benefits and costs.
  • Benefits or Drivers Reduced Production Costs: manufacturing inputs, labor, taxes (Foreign Breaks or Domestic Savings) Access to skills: skilled, multilingual labor Labor market flexibility: availability to work around the clock Access to new markets: large population, demand growth potential Business strategy: need to refocus on core business Costs or Inhibitors For the firm: Reduced control of production and quality Change in cost structure: lower production but higher management costs Change in commercial image: offshoring might be perceived by the public as a betrayal to domestic economy Political/ business climate risk: dependence on foreign country’s stability, red tape For the recipient country: Reliance on foreign economic performance: exchange rate risk, financial markets risks Dependence on foreign firm’s business cycle: firm-level performance (IT bubble)
  • There is also a lack of a common offshoring market estimate. From surveys: Outsourced IT services have grown, in absolute value, 26% from 2001 to 2003, reaching a volume of 322 Bil $, or roughly half the value of the total IT market. Of these 322 Bil $ of outsourced IT services, 14% were Offshored in 2003, compared to a 12% in 2001. From WTO and IMF BOP stats (2003): Computer and Information services represent 15% of world exports of business services and 10% of world import of business services.
  • Move to off-shore is accelerating -> Several markets are saturated (USA, Can) or saturating (UK, Eire, Neth,Fin, Aus); move off-shore is inevitable Move to off-shore is increasingly based on skills -> Higher VA processes are off-shored in search of specialized skills and cost is not a prime offshoring driver anymore (70-80% of outsourcing is still supplied domestically) Offshoring is evolving: end-to-end outsourcing and spin-off of non-core function; Regulatory changes/ challenges (direct marketing ‘do not call list’ in the US; security required by offshoring of government functions, etc..) The offshored operation can be divided in four main types: IT Operations- most common Contact functions- second most common and increasing through call centers Business Operations- growth conditional on workforce’s skills Manufacturing Operations- dependent on production costs
  • Improving Trade Balance and Diversification The region’s share in world trade declined from 9.6 % in 1981 to 3.2 % by 2002. Non-oil exports dropped to only 2.1 % in 2002, from 4.2% in 1981. FDI flows to the Arab region dropped from almost US$3 Bln (2002) to US$2 Bln in (2003), only 1.5% of total FDI flows to developing countries and only 1/3 of the FDI expected for a developing country of comparable size. FDI flows to the Arab region was mostly targeted to a handful countries (Saudi Arabia, Egypt, Tunisia, Bahrain, and Morocco). Increasing growth and employment Arab GDP remains little more than Spain’s GDP (US$599 billion), and only a quarter of that of Germany. 1990’s Economic growth was 1.3% compared with 4% average for all developing countries The combined Arab (GDP) of US$604 billion is modest and remains affected by persistent high unemployment and high population growth rates (per capita GDP). Enhancing Technological Transfer Servicing Domestic Markets
  • Identify and position for specific offshoring segments where country has better resources, capabilities, Prioritize reforms creating an enabling environment for the specific segment where the country manifests its comparative advantage Legislate and regulate
  • Significant Competition Increase since 2000. Morocco and Algeria have recently ended incumbent’s monopoly on PSTN. The region needs to upgrade its information technology links to become integrated into the global economy. The number of Internet users was the fastest growing between 2000 and 2005 (311% in North Africa and Middle East versus an average global 160%); however, it started from a very low base and remains low by international standards (8.3% of the population uses the Internet versus 8.9% in Asia, 12.5% in Latin America, 36.8% in Europe and 68% in North America). High social/ business demand faces: Access limitations- price and bandwidth Service limitations- no e-gov or e-comm Local content production limitations- little R&D, difficult access to credit Traffic limitations- IXPs, censorship and control
  • The various Arab IP systems do not interconnect, impeding interregional IP communications and inter-Arab trade and e-commerce. When a consumer in Cairo wants to access information on a Qatar-hosted website, his/her communication goes via the IP backbone into a New York gateway and is then redirected into Qatar! With no Pan-Arab connectivity initiative, some Arab states rely on regional cooperation, linking their gateways to the global backbone. Fibre Optic Gulf, the leading GCC initiative, linking Kuwait, Qatar, Bahrain, and the United Arab Emirates, is a prime example of successful cooperation. Links between Levant states are underway. Infrastructure fragmentation consequences: slow service, minimal inter-Arab e-commerce, reliance on international private or semiprivate IP networks, and lack of competitiveness in connectivity alternatives. Few Arab states are privy to backbone connectivity initiatives at the global level. Saudi Arabia, one of the founding financers of FLAG14 Europe-Asia, is linked via a 10 gbps gateway connection to the global backbone. It also partnered with France Cable Radio on the SE-ME-WE15 project. The success of these initiatives in the early 1990s has not been met by expansion and upgrade plans. In subsequent developments, FLAG now offers its north east Asian loop a capacity of up to 3,800 gbps. Consequently, it is simpler for Arab end users to connect with European and U.S. IP destinations, rather than with IP destinations within Arab states.
  • North African countries can rely on a bilingual, young population, a potential workforce for the emerging market of offshoring of activities of French companies; Egypt has a bilingual population, and sound links with US and UK IT firms. However, the educational systems in North Africa rarely offer the marketable skills needed in this industry : Marketing, IT, management, and customer support skills are often left to the initiative of the investors, which increases their costs. (i.e.)Tunisia and Egypt subsidize firm-specific training. The level of post-graduate engineers in North African schools is high. However, there is a lack of middle and low level technicians which could fill positions in the offshoring business.
  • Improve flexibility of the labor market to facilitate absorption of unemployment. Unemployment in North Africa stands between 25 and 60% of the labor force, with a large majority of the unemployed having secondary or post-secondary degrees. Part of this unemployment is “wait” unemployment, resulting from the explicit or implicit guarantees of employment (minimum wage legislation and layoff restrictions) common in the region’s public and private sectors but enforced mostly in the public sector Restrictions on layoffs in the formal sector (and often generous severance payments) make firing redundant workers difficult and restrict the incentives for firms to hire.
  • Inproving the business environment ha a positive impact on job creation, reduction of the informal sector, Business climate is a challenge in all four North African countries. Tunisia, Morocco, Algeria and Egypt ranked respectively 58, 102, 128 and 141 out of 155 countries surveyed in terms of Ease of Doing Business. Streamline and informatize administrative procedures (one-stop-shop agencies). Facilitate access to industrial land, a key determinant in offshoring location decisions is quoted by a major impediment in Algeria. Bureaucracy and red tape are acknowledged as a comparative disadvantage in Morocco. The most significant changes in the Doing Business Report 2006 indicate that: Egypt’s streamlining of customs procedures and trade documents: single window for trade documents and merged 26 procedures into 5. A time limit of 2 days for passing through customs applies, custom improvements were part of a system to cut the number of tariff bands from 26 to 7 and simplify inspections procedures at the border. The country still ranks 141th out of 155 countries. Tunisia reduced the capital requirements for starting a business to a tenth of what it had been 􀁺 Egypt cut the fees for registering commercial property by a third, from 4.5% to 3% of the property value 􀁺 The credit registry in Lebanon decreased its loan cutoff from $6,600 to $6,000, adding 10,000 more borrowers to the registry. This reform helps lenders evaluate creditworthiness 􀁺 Egypt was the world’s top reformer of customs procedures. It established a single window for trade documentation and merged 26 approvals into 5. Improvements at customs were part of a broader reform that cut the number of tariff bands from 27 to 6 and simplified inspection procedures at the border 􀁺 In the United Arab Emirates new berths were added at Jebel Ali port. Last year it took 6 days to load cargo. Now, an average of 17 hours.
  • uneven records in legal and regulatory issues, weak ICT strategies, chronic R&D shortages, excessive reliance on foreign technology, ongoing weaknesses in ICT implementation, Arab states are frequently lagging in their readiness for the networked future.
  • Offshoring is not a perennial process, in the next five to ten years we estimate international firms to have located their offshoring destinations. This is a window of opportunity for MENA Region, as shown by the share of projects (72%) belonging to Telecoms, Informatics and Services Sectors.
  • Offshore sourcing Global Trends and Opportunities for North ...

    1. 1. Offshore sourcing Global Trends and Opportunities for North African Countries R. Gianfranchi, C. Rossotto, Y. Burtin, Global Information and Communication Technology Department, The World Bank
    2. 2. Contents <ul><li>Understanding and measuring Offshoring </li></ul><ul><li>The MENA Region </li></ul><ul><li>Reforms needed to attract Offshoring </li></ul><ul><li>Technology Investments in MENA </li></ul>
    3. 3. Origins of Offshore sourcing <ul><li>1: Technology </li></ul><ul><li>Mobile telephony </li></ul><ul><li>Internet </li></ul><ul><li>Customer Relationship Mgm (CRM) </li></ul><ul><li>Portable computing </li></ul><ul><li>2: Business innovations </li></ul><ul><li>Just-in-time inventory management </li></ul><ul><li>Supply chain integration </li></ul><ul><li>Customer-supplier partnerships </li></ul><ul><li>3. Skilled Workforce Availability </li></ul><ul><li> Young, unemployed, multilingual, skilled </li></ul><ul><li>4. Free-trade Agreements </li></ul><ul><li>WTO -> GATT, GATS, TRIPS, trademark, patent, and (IPR) protection. </li></ul>Allow outsourcing to offshore operational units or purchasing from foreign third-party suppliers. Remote provision of Financial, Customer care, Accounting, Administrative services
    4. 4. What is Offshoring? <ul><li>Businesses and Governments face a sourcing decision. </li></ul><ul><li>Should we: </li></ul><ul><li>Produce our services internally ? </li></ul><ul><li>Source them domestically (outsourcing) ? </li></ul><ul><li>Source them offshore (subsidiary or captive offshoring)? </li></ul>
    5. 5. Offshoring Benefits/ Costs <ul><li>Reduced Production Costs </li></ul><ul><ul><li>Inputs </li></ul></ul><ul><ul><li>Labor </li></ul></ul><ul><ul><li>Taxes </li></ul></ul><ul><li>Access to Skills </li></ul><ul><li>Labor Market Flexibility </li></ul><ul><li>Access to New Markets </li></ul><ul><li>Business Strategy </li></ul><ul><li>Risks for offshoring firm: </li></ul><ul><ul><li>Reduced control of production, quality </li></ul></ul><ul><ul><li>Change in cost structure </li></ul></ul><ul><ul><li>Change in commercial image </li></ul></ul><ul><ul><li>Political/ business climate risk </li></ul></ul><ul><li>Risks for recipient country: </li></ul><ul><ul><li>Reliance on foreign economic performance </li></ul></ul><ul><ul><li>Dependence on foreign firm’s business cycle </li></ul></ul>
    6. 6. Global Offshoring Markets
    7. 7. Major Offshoring Trends <ul><li>Move to off-shore is accelerating due to market saturation </li></ul><ul><li>Prime driver is not cost, rather search of specialized skills </li></ul><ul><li>Evolution: end-to-end outsourcing and spin-off of non-core function; </li></ul><ul><li>Regulatory changes/ challenges </li></ul>largely diffused thanks to low production costs (even after factoring in the logisitc and tariff costs) and priviledged access to emerging market apparel and textiles, toys, woodworks, consumer electronics and microelectronics, automotive Manufacturing Operations trail the others, but significant growth is expected in this area as well, conditional on workforce skills' upgrade finance and accounting, data processing and administration, operations and project management Business Operations second in popularity and are expected to be the next major focus, particularly through call centers call centers, customer support, telemarketing and sales Contact functions initial focus for most early adopters and remains the most common function outsourced off-shore application development, programming, testing, and network support Information technology Operations Outlook Typical Functions Offshored Operations
    8. 8. MENA Profile <ul><li>8 MENA countries, 183M people </li></ul><ul><li>50 M between age 15-35 </li></ul><ul><li>Average GDP/cap US$ 4,896 (lower than China on a PPP basis) </li></ul><ul><li>50/50 Francophone/Anglophone </li></ul><ul><li>Good education systems; strong technical education; highly literate (60% secondary enrollment) </li></ul><ul><li>Most ranked among 60 in engineering talent worldwide </li></ul>
    9. 9. Offshoring importance for MENA Region <ul><li>Improving Trade Balance & Diversification </li></ul><ul><ul><ul><li>The region’s share in world trade declined from 9.6% in 1981 to 3.2% by 2002. </li></ul></ul></ul><ul><ul><ul><li>Non-oil exports dropped to only 2.1 % in 2002, from 4.2% in 1981. </li></ul></ul></ul><ul><ul><ul><li>FDI flows to the Arab region dropped from almost US$3 Bln (2002) to US$2 Bln in (2003). </li></ul></ul></ul><ul><li>Increasing Growth and Employment </li></ul><ul><ul><ul><li>The combined Arab (GDP) of US$604 billion is modest. </li></ul></ul></ul><ul><ul><ul><li>1990’s growth was 1.3% compared with 4% average for all developing countries </li></ul></ul></ul><ul><li>Enhancing Technological Transfer </li></ul><ul><li>Servicing Untapped Domestic Markets </li></ul>
    10. 10. To attract global Offshoring MENA needs to… <ul><li>Identify Specific Segment </li></ul><ul><ul><li>Where the country has better resources, then create an enabling environment for it </li></ul></ul><ul><li>Regulate & Reform </li></ul><ul><ul><li>IT Infrastructure, Workforce competitiveness, Labor markets, Business environment </li></ul></ul><ul><li>Legislate & Regulate </li></ul><ul><ul><li>Intellectual property, IT legislation, cybercrime </li></ul></ul><ul><li>Promote </li></ul><ul><ul><li>The country’s competitive assets </li></ul></ul>
    11. 11. REGULATE AND REFORM-> ICT Infrastructure Competition has increased in the sector since 2000. Mostly cellular, VSAT and ISPs. Internet user density was the fastest growing between 2000 (1.6%) and ‘05 (6.7%) 2 2 3 3 Number of VSAT operators Yes Yes Yes Yes VSAT 11 13 3 30 Number of ISPs (Operational) Yes Yes Yes Yes ISPs Yes No No No Data and VAS Partial No No No Leased lines 2 2 2 3 Number of mobile operators Yes (1998) Yes (2002) Yes (1999) Yes (2001) Mobile telephony No No Yes (2004) Yes (2004) Fixed telephony Egypt Tunisia Morocco Algeria Liberalization
    12. 12. REGULATE AND REFORM-> IT Infrastructure <ul><li>The region needs to upgrade its IT links. </li></ul><ul><li>Missing Backbone connectivity and Arab IP interconnection. </li></ul><ul><li>After 1990’s ->lack of following expansion and upgrade plans. </li></ul><ul><li>East Asian loop capacity 3,800gbps vs Saudi’s 10gbps. </li></ul>
    13. 13. REGULATE AND REFORM-> Workforce competitiveness <ul><li>Facilitate employment searches: </li></ul><ul><ul><li>Constitution of HR datababses </li></ul></ul><ul><ul><li>Candidates pre-selection agencies </li></ul></ul><ul><ul><li>Favorable labor contracts (apprenticeship) </li></ul></ul><ul><ul><li>Review social contribution schemes </li></ul></ul><ul><li>Enhance multilinguism </li></ul><ul><li>Subsidize otherwise unavailable training </li></ul><ul><li>Address weak Marketing, IT, Management, and Customer Support skills. </li></ul>
    14. 14. REGULATE AND REFORM-> Labor Market <ul><li>Remove explicit or implicit guarantees of employment (minimum wage legislation and layoff restrictions) </li></ul><ul><li>Reduce restrictions on layoffs in the formal sector, severance payments, facilitate hiring and firing redundant workers </li></ul>48 48 35 38 Legal weekly work duration (hours) 147 180 81 105 Minimum wage (US$) 13.8% 11.3% 11.0% 25.4% Unemployment rate Tunisia Morocco Egypt Algeria  
    15. 15. REGULATE AND REFORM -> Business Environment <ul><li>Streamline and informatize administrative procedures through one-stop-shop agencies (Egypt) </li></ul><ul><li>Reduce capital requirements for starting a business (Tunisia). </li></ul><ul><li>Cut the fees for registering commercial property (Egypt). </li></ul><ul><li>and facilitate access to industrial land (Algeria) </li></ul><ul><li>Reduce bureaucracy and red tape (Morocco). </li></ul><ul><li>Facilitate hiring, firing, closing a business (Egypt, Algeria) </li></ul><ul><li>Business climate is a challenge in all four North African countries. </li></ul><ul><li>Tunisia, Morocco, Algeria and Egypt ranked 58, 102, 128 and 141 </li></ul><ul><li>out of 155 countries surveyed in terms of Ease of Doing Business. </li></ul>
    16. 16. LEGISLATE & REGULATE -> ICT Legislation <ul><li>Adopt specific ICT legislation strengthening the country’s international competitiveness: </li></ul><ul><ul><li>Protect Copyrights, facilitate data transmission </li></ul></ul><ul><ul><li>Enact, enforce E-commerce legislation (e-signature, e-payment systems) </li></ul></ul><ul><ul><li>Regulate internet service providers and information technology, defending customers from computer misuse and cybercrime </li></ul></ul>
    17. 17. PROMOTE -> <ul><li>Actively promote the country as an offshoring location </li></ul><ul><ul><li>Attending world business summits </li></ul></ul><ul><ul><li>Expressing commitment to reform to international business leaders and approach business partners looking for offshoring destinations </li></ul></ul>
    18. 18. ANIMA-MIPO Survey (01/03-03/05) <ul><li>137 investment projects identified through local Investment Promotion Agencies </li></ul><ul><li>72% of projects belong to Telecoms, Informatics and Services Sectors </li></ul><ul><li>Source: ANIMA, Mediterranean Investment Project Observatory, 2005 </li></ul>