Vantage View: Region needs to tap trend of outsourcing services

The first wave of globalisation saw multilateral institutions from the US, Europe and Japan move the production of clothes, appliances, electronics and cars abroad.

A significant part of the production chain was outsourced from low wage countries. The second wave of globalisation and one of the biggest trends reshaping the global economy is the outsourcing of business support services from developing countries who have English speaking workforce with a good number of university graduates and where the salary structure is way below that of the rich countries.

The work is normally shipped electronically in what has become to be known as IT enabled services or teleworking. India, China, Philippines, Hungary, South Africa, Costa Rica and several other countries across the developing world have become the new back offices and support centres for Corporate America, Japan Inc. and Europe's giant companies.

There is no reason why such Arab countries like Jordan, Lebanon, Egypt, Bahrain and UAE do not become as well important centres for outsourcing business support services.

Only very few companies from the region have so far participated in the second round of globalisation, even though several Arab countries do meet the criteria to become centres for outsourcing of businesses and IT related support services.

Jordan, Lebanon, Bahrain and Egypt for example have a high number of English speaking university graduates in the fields of IT, engineering, medical services, accounting, finance and other related fields. Wages in Arab countries are a fraction of those in the US, Europe or Japan.

Many of them have put in place investor friendly policies or joined WTO. However, to succeed in attracting outsource business, domestic companies should be able to prove that quality work can be executed locally.

There are several examples of Arab companies who were called upon to provide outsourced business support services to international companies abroad.

One of those companies is Rubicon, a small Jordanian company specialising in animation and digital media production, who has entered recently in a partnership agreement with Fat Rock Entertainment, a Los Angeles based film and animation company.

Based on this agreement, signed in July 2002, Fat Rock will assist Rubicon in building local capacity for animation, outsourcing work from the United States, as well as enable it to participate in joint animated productions.

Leveraging capabilities

In so doing, Rubicon places itself at the forefront of the computer graphic industry in the Middle East and will also be able to leverage its capabilities to offer high-quality animation products and services in theatrical TV productions, as well as, the web animated e-learning products in Arabic to a large Middle Eastern client base.

The global market for outsource business is still small but is likely to grow at double digit rates in the coming few years. For example, the news service agency Reuters announced on July 28 that it will move 600 or so jobs from New York and London to its operations in India. First-world companies still do most of their back office and support activities in house, even though these tend to be expensive and are not related to the core competence of companies.

For example, it is estimated that a typical bank in the US or Europe can outsource 25 per cent of its support and back office activities, reduce its cost to income ratio by up to 10 per cent and in many cases double its profits. Outsourcing makes sense not only because of lower cost but also because of efficiency and higher productivity.

The back office of an American company is a cost centre staffed with people who are not highly motivated, while the same work when outsourced to companies in the developing countries becomes an income generating activity for these companies and the staff treat these jobs as well paying serious career opportunities.

In the 1990s and in order to ease the shortage in IT, engineering, medical research, accounting work, American companies had to hire hundreds of thousands of university graduates, mostly from developing countries, who came to study in the US. The end of the IT bubble in 2000 reduced demand for these qualifications, while the events of September 11 and the visa and work restrictions that followed encouraged corporate America to explore more the outsourcing channels.

By sending routine service and engineering tasks to nations with a surplus of educated workers, prices of these services have stayed under control, just as had happened with prices of clothes and appliances when manufacturing went offshore. Outsourcing is making it possible for American and European companies to reduce overhead costs and improve efficiency.

The trend is likely to continue, with a global market for IT related outsourced services estimated by the research firm Bradstreet to exceed $200 billion this year.

The driving forces for the new phase of globalisation is the Internet and the high speed data networks that connect the world. The most important IT related services outsourced abroad include call centres, or customer interaction centres for banks, airline companies, credit cards and computer companies among others.

Employees in India or Costa Rica are now responding to people in Europe and the US who inquire about bank balances, credit card payments, airline reservations and upgrading and how to install software on newly purchased computers. The value of outsourced business here is forecast to exceed $5 billion in 2005.

Second in importance is data entry and conversion which includes medical transcription. Companies in Philippines, India and elsewhere convert dictation by doctors in America into written medical reports. The value of outsourcing of medical transcription coming from the US is estimated to reach $4 billion by 2005.

Third in importance is the outsourcing of problem solving. Here services such as processing insurance claims, selling stocks, analyzing companies and evaluating credit ratings can all be outsourced for one third of their cost in the US or Europe. By utilizing databases over the web, offshore staff can offer independent research on companies, sectors or individuals.

Specialists

Finally, expert knowledge services that require specialists are also being outsourced. These include architectural work, animation and computer graphics, design work and technical analysis among others.

Several IT companies in the region have shown that quality work can be performed locally and few of them were able to sign outsourcing agreements with major counterparties abroad.

This should become a trend followed by other companies in order to capture part of the multibillion dollar business being outsourced by corporates in the US, Europe and Japan.

Salaries of graduates in IT related fields in various Arab countries are quite competitive by international standards, and there is a sizeable pool of well trained people in these fields.

Businessmen, entrepreneurs and investment bankers should work jointly to bring part of the burgeoning outsourcing business to the region.