[kictanet] Kenya on the News

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FYI.






Technology
The Outsourcing Upstarts; Parts of Eastern Europe, Africa, and the Middle
East are vying to become new offshoring hubs -- and nudging aside
established players
Rachael King
1467 words
31 July 2007
BusinessWeek Online
English
Copyright 2007 McGraw-Hill, Inc.

In 2000, when employment-screening service provider HireRight was looking
for a low-cost locale for software development, the Irvine [Calif.]
company turned to an unlikely destination: Estonia. The Baltic nation
hasn't traditionally been thought of as a hotbed of tech talent, but it
presented HireRight with a pool of well-educated, tech-savvy workers; a
modern telecommunications infrastructure; and costs that were 2.5 to 3
times lower than they'd find in the U.S. "It's very easy to do business in
Estonia. We didn't have any roadblocks at all," says Stefano Malnati,
vice-president for engineering at HireRight.

The secret's out. Estonia has become a target of several other companies
hoping to take operations offshore at the right price. In October, 2006,
Internet calling company Skype opened an office in Estonia's capital city,
Tallinn, now home to the largest office of eBay (EBAY) subsidiary Skype
Worldwide. Estonia has become such an attractive destination that this
year it made its debut at No. 15 on A.T. Kearney's list of the top 50
global offshore outsourcing locations, beating out more established
countries such as Russia, Argentina, and Canada.

Very Competitive Market

Estonia is just one of many countries learning from the example set by
India, which remains the top outsourcing destination on A.T. Kearney's
list, and the country is eager to carve out a piece of the bulging market
for offshore outsourcing services. The global market for shared services
and outsourcing is expected to grow to $1.43 trillion by the end of 2009,
from $930 billion in 2006, according to a report released this month by
consultancy Frost & Sullivan. Globally, companies spent about $233 billion
on IT outsourcing in 2006.

Offshoring upstarts are making so many inroads, in fact, that by 2012,
they'll significantly dilute India's dominance, says consultancy Gartner
(IT). The consulting firm says that by 2010 about 30% of Fortune 500
enterprises will outsource to three or more countries, from less than 10%
today. "So many governments have realized what an opportunity this is and
there's a lot of effort being spent in promoting their countries to the
market," says Johan Gott, manager of A.T. Kearney's Global Services
Location Index.

The jockeying has become so intense, and the field so wide, that the big
challenge facing many new entrants isn't just getting established as an
offshoring hub but hanging onto that distinction. Since 2005, when A.T.
Kearney last compiled its list, it has added 10 new countries, including
Latvia, Uruguay, Mauritius, Lithuania, Sri Lanka, Pakistan, Morocco,
Senegal, and Ukraine. Four of those countries ranked in the top 25 in the
2007 list, released in March.

Lowering the Bottom Line

Becoming and remaining an attractive outsourcing location depends on a
number of factors, including language and education skills and the
reliability of a nation's telecommunications infrastructure. At the heart
of most outsourcing deals, though, is lower cost. So when A.T. Kearney
puts together its list, it gives a 40% weighting to the financial
attractiveness of a country, taking into account the cost of wages,
infrastructure, and taxes. Vietnam and Pakistan, for instance, are even
more financially attractive than India, according to A.T. Kearney.
Conversely, high costs are the primary reason that countries including
Ireland, the U.S., and Canada are slipping in the rankings.

In fact, the recent appreciation of certain foreign currencies in relation
to the U.S. dollar has begun to affect corporate decisions to outsource or
set up their own operations in certain countries. U.S. companies have long
outsourced work to Canada, where they've enjoyed a similar business
environment along with a 20% reduction in labor costs because of the
exchange rate. But the appreciation of the Canadian dollar has wiped out
most of those savings and some U.S. companies are wondering why they
should go to Canada if they can get the same thing locally without having
to cross a border, says A.T. Kearney's Gott.

Besides costs, considerations include the education and language skills of
workers, the availability of labor, and attrition risk. A country's
economic and political environment and the quality of its infrastructure
also factor into outsourcing decisions. Some emerging countries may not
appeal to U.S. companies as outsourcing destinations but may find markets
in other parts of the world. For instance, the appeal of Pakistan's IT
workforce of 90,000 people has been overshadowed by post-September 11
security concerns. "It's fallen off the radar screen of U.S. buyers," says
Frances Karamouzis, vice-president for research at Gartner. Other analysts
say there is still a market for Pakistan's services in the Middle East.
And countries such as Senegal and Morocco are becoming attractive places
for French-language call-center outsourcing for Francophone Europe.

Infrastructure Is Key

HireRight found it easy to do business in Estonia in part because of its
political and economic environment, as well as its infrastructure and
cultural affinity. Estonia has invested significant resources in improving
its technology infrastructure since it gained independence from the Soviet
Union in 1991. During the late '90s, the country began modernizing its
telecommunications infrastructure and providing Internet access and
computer labs for schools.

Estonia's Baltic neighbors, Latvia and Lithuania, also former members of
the USSR, have undertaken similar initiatives. Since the late '90s,
there's been a conscious effort on the part of all three governments to
use technology to transform economies, according to research from VTT
Technical Research Centre of Finland. "Most countries were trying to
attract tourism and build a manufacturing economy, but locations like
India have shown them that you can have a vibrant services economy that is
more vibrant than a manufacturing economy," says Atul Vashistha, chief
executive of management consultancy NeoIT.com and co-author of the book
The Offshore Nation.

Building a vibrant services economy, though, often takes buy-in from the
government. India, for instance, knew it needed to overcome cumbersome
government policies and procedures and poor communications infrastructure
to become a successful outsourcing destination [see BusinessWeek.com,
3/19/07, "The Trouble with India"]. In 1991, it created an autonomous
agency known as the Software Technology Parks of India under the Ministry
of Communication & Information Technology. The agency helps provide the
technology infrastructure for companies that want to do business in India
and serves as a liaison between government and industry. It also helps
provide tax breaks and other incentives for doing business in India.

Kenya's TEAMS

Government support is crucial, given the significant investment in
communications systems and liberalization of the telecom sector. Kenya,
for instance, is trying to become a destination for business process and
IT outsourcing. The Kenyan government has worked in recent years to
liberalize its telecom sector, which has lured more operators and helped
drive telecom services prices down by 70% in a short time, according to
the World Bank. Yet the country relies on satellite connections to link to
the rest of the world. That makes it costly for outsourcers to do
business. "Lack of high-capacity bandwidth connectivity has limited Kenya
from exploiting its full potential," Mutahi Kagwe, Kenya's Minister for
Information & Communications, said in a July speech at the Kenya College
of Communications Technology. So Kenya's government has collaborated with
the United Arab Emirates to install The East African Marine Systems
[TEAMS], a submarine cable from Mombasa to

Fujairah in the UAE that will give Kenya affordable high-capacity bandwidth.

Kenya will need to address not only telecom issues but also the readiness
of its labor force. "If I wanted to have 150 people there tomorrow, it
would take six or seven months to hire that amount of skilled people with
business acumen," says Gartner's Karamouzis.

In many of these emerging outsourcing countries, the lack of available
labor could eventually hinder growth. In fact, that's one of the
challenges facing HireRight in Estonia. "The talent pool is not very big,"
says HireRight's Malnati, who says that HireRight now sees more
competitors for talent. Yet, instead of pulling up stakes and moving to
another destination, HireRight is trying to maintain its low attrition
rates by giving Estonian employees incentives such as inviting them to
spend time at its headquarters in Irvine. A winter trip from frigid
Tallinn to sunny Southern California, Malnati says, can do wonders for
employee retention. And the interest from more companies like HireRight
may even boost Estonia a few rungs in the outsourcing rankings.




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