Letting go

The Middle East’s IT outsourcing market is riddled with contradictions, as low level out tasking appears to be booming, but high level handovers remain few and far between. As Dubai Internet City prepares to open its outsourcing free zone, it is clear that vendors need to invest in educating end users while the region’s ambitious enterprises need to follow the early adopters and incorporate the model into their everyday operations.

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By  Alicia Buller Published  August 31, 2004

|~|Hani5000.jpg|~|Hani Harik, president of Emirates Computers|~|Spending on information and technology outsourcing in the Middle East, Africa and Europe will rise from US$54.7 billion in 2003 to US$67.6 billion in 2007, according to Gartner Group. The research firm also predicts that up to 25% of today’s IT jobs in developed countries will be outsourced to emerging markets by 2010. However, it remains to be seen if this outsourcing trend will be truly replicated in the Middle East. When a business is faced with a new IT project it will assess its current inhouse capacity. If, upon review, the company is under-resourced or under-skilled, it may opt to outsource its IT requirements to a third party. This kind of decision will also hinge upon other factors, such as expense and company politics. However, if an organisation’s budget and experience allows it to cope with the project without resorting to any outside expertise, it does exactly that. The value proposition of IT and business process outsourcing (BPO) services is that it enables companies to concentrate on core business functions, while also ensuring a fixed monthly IT fee rather than a cost that rises unpredictably. Usually, when managers plan outsourcing, they are looking at reducing the company’s expenditure by 30%. In the Middle East, outsourcing is a fairly new concept. While the major IT and BPO players, such as EDS and IBM, do have a presence in the Middle East and local businesses are keen to outsource basic functions, a practice known as ‘out-tasking’, there is little evidence of the sort of multi-million dollar deals that make headlines in Europe and the US. As of year-end 2002, at least 14 IT outsourcing megadeals were signed and worth a total of US$28.4 billion, according to Gartner Dataquest. Tellingly, not one of these was based in the Middle East. EDS has been in the region for about two years and has spent that time doing the groundwork. At this stage the vendor does not have any major customers, but is in the process securing a couple of deals. “We are talking to few organisations who are in the process of shortlisting candidates for outsourcing. The market is slowly maturing so there will be opportunities for organisations like ours,” says Mohammad Yassin, chief executive officer of EDS Middle East. Vendors like EDS only target enterprise customers and go for deals worth US$15 million to US$20million over five to ten year periods. Such deals are going to be rare in the Middle East, but EDS wants a piece of the local outsourcing pie and, thus, it is willing to go for contracts worth even US$1million. “EDS customers are mostly the corporates and the contracts are worth millions of dollars, however the Middle East market is a mixed one, which has big and small businesses, so there is a lot of different opportunities and we plan to exploit them,’ says Yassin. The current unstable political landscape of the Middle East does not assist in luring the bigger outsourcing players to the region. For instance, EDS is comfortable to have a business presence in many regions of the Middle East but not in Iraq. The war-torn nation is a complete no-go zone area for the vendor. These factors go some way to explaining the slow uptake of full outsourcing in the region. However, Emirates Computers, a local IT services provider, believes that the outlook is not as bleak as it might first appear. “Forget about the way outsourcing is done globally, with the likes of IBM, HP and EDS — the Middle East is very different. There is a lot of outsourcing activity but this is just not offered as a total package to one organisation. This, wrongly, makes people think the Middle East is really behind in the market. The real reason is that the vendors are not offering the full package to large organisations,” says Hani Harik, president of Emirates Computers. “We don’t see many large organisations yet going to an IT company and saying ‘take over the day-to-day running of my IT department’.” The regional trend to out-task IT bit parts is reflected in Al Faisallah Group’s recent deal with Hyderabad-based Yash Technologies, which will see the Indian firm carry out software development on behalf of the Saudi Arabian organisation. Under the contract, Yash will build a mobile sales and route accounting application for the US$800 million conglomerate by converting its platform from Delphi to Microsoft .Net. In addition, Yash will provide enterprise resource planning (ERP) services such as implementation, upgrades and support in SAP and Oracle to Al Faisallah’s business and technology services arm. Another example of the region’s cautious foray into some larger outsourcing services is the fact that Wipro Infotech has inked outsourcing deals with four companies in Kuwait — Gulf Insurance companies, Kuwait Foundation for the Advancement of Sciences, Investment Dar and Future Communications Company. The agreements include tasks such as application development, IT consultancy and infrastructure-related services. Wipro’s growing portfolio of Middle East clients includes, among others, Dubai e-Government and Doha Bank. “The Middle East is a critical component of our global expansion strategy as it is a rapidly growing IT services market. We are committed to building a strong business base here in Kuwait, as well as in rest of the [region],” says Suresh Vaswani, president of Wipro. Despite such deals, Meta Group still has its reservations about the prospects of outsourcing in the Middle East. While outsourcing works well in bigger economies like America and the United Kingdom, it can be a challenge in smaller, less mature economies. “It’s not that we think outsourcing hasn’t kicked off, it’s just that we’re talking about a lower maturity level [in the region] compared to the West,” says Azzam Al-Dari, director of consulting services at Meta Group, Middle East. “The demand for outsourcing is formulating, but it has yet to formulate fully,” he adds. An example of how this demand is emerging is the imminent launch of the world’s first outsourcing centre, Dubai Outsourcing Zone (DOZ). The Dubai Internet City (DIC) initiative will offer its clients a ready-made outsourcing environment with a customised infrastructure and support services across its three million square feet. “In the initial period, our main market will be from within the region itself. The Middle East has long been sleeping over the possibilities that outsourcing can offer,” says Dr Omar Bin Sulaiman, chief executive officer of DIC. “There is little outsourcing in the Middle East at present. This is because the region is still developing in terms of its economy and technology. But, on the flip side, this represents opportunities — it’s an untapped market,” he adds. Rami Darwesh, marketing consultant at Dubai-based Emirates Consulting Group, also shares Dr Sulaiman’s optimism for the regional services market. “For now, they [users] are just comfortable outsourcing little bits, here and there. But as the market grows you’ll see more vendors to outsource to and you’ll see more companies doing it on a larger scale. We predict it will grow in two main areas: IT and customer service,” he says. “As technology advances it becomes difficult to keep hiring experts to run systems, training is expensive and IT is a very fast moving industry,” Darwesh adds. One factor that has impacted on the uptake of outsourcing in the Middle East is the cultural barrier. Companies in the region are not comfortable in either sharing or handing over part of their business responsibilities to third parties. Businesses believe that once a project is outsourced they lose control of it. “The psychological barrier of relinquishing business power to another company needs to be addressed before the market can grow. Middle East companies don’t want to give their business [control] to an outsider,” says Al-Dari. Unlike the West, business regulations in the region are not particularly stringent, so there’s less of a safety net if something goes wrong, or service isn’t up to scratch. In light of this, smaller businesses are looking for outsourcing success stories from the corporate sector before taking the plunge. “Trust is a major barrier in the Middle East. There is a cultural attitude of taking control and owing something that has been paid for,” says Dean Polley, general manager at ASP Gulf. “But I think companies are starting to [realise] that [outsourcing] is no longer an uncharted territory. Large companies have gone down that road and they have success stories to tell. There is huge growth potential in the market. We see that through the number of customer acquisitions we take up on a monthly basis,” Polley adds. ||**|||~|DeanASP100.jpg|~|Dean Polley, general manager at ASP Gulf. |~|One local company that has taken the plunge with the outsourcing firm is maritime services company, Elcome International. The company has invested in its own software applications — Microsoft (MS) Great Plains ERP and MS e-mail and group messaging service — and chosen to centrally deliver them throughout its regional offices via ASP Gulf. The third-party company supports and maintains all of Elcome’s mission-critical applications at its host centre. “If we’d managed our own infrastructure we would have had to hire people first and then physically have space in our office to keep the servers in a clean environment. For a small company like ours it just did not make sense,” says Jimmy Grewal, IT & security manager at Elcome. “Our number one motivation was cost. Second, it’s given us additional functionality and it [the infrastructure] is easier to manage. We now run our ERP system through terminal services, so we can use either old PCs or HP thin client machines that only cost about US$272 each,” he adds. The partnership means that every time Elcome needs to upgrade its memory or add new functionality, it does not need to buy a new server because all its apps are centrally managed by ASP Gulf. The centralised network also means that Elcome is free from worries about installing anti-virus software or updating applications. “We have branches throughout the region and they all needed to be linked. That’s where ASP Gulf came in. They own and keep the servers and lease them to us,” says Grewal. By offloading most of its IT functions, Elcome is now able to focus on its core competencies. In addition, by handing over IT services to a third-party, Elcome is able to keep up with the bigger market players. Paying for monthly access to a third-party network allows small-to-medium-sized businesses (SMBs) to access the latest IT apps and hardware, which might otherwise be out of their financial reach. While Elcome is aware of these benefits, other SMBs in the region have yet to catch on. This is partly due to the nascent nature of the Middle East market — companies need to have a mature IT infrastructure and a knowledge of what does or does not works before they can know what needs to be outsourced. Another factor that is inhibiting the uptake of outsourcing in the region is lack of awareness. The responsibility for educating businesses lies largely with the vendors. However, how much effort is made on the part of the vendors in educating the market about the benefits of outsourcing remains questionable. “It should be about working with the client and making them understand what it means to the business to outsource. The problem is that all the major vendors are moving from software and hardware to services — they’re trying to score deals too quickly without taking the time and effort to walk at the client’s pace and understand their needs,” says Meta Group’s Al-Dari. “Vendors need to offer regional companies a specific value proposition, not a globalised shopping list. They [vendors] need to demonstrate specifically how they can integrate with the customer’s business plan and provide value,” he adds. In their clamour to have a bigger slice of the outsourcing pie, vendors are forgetting to undertake the required pre-deal planning. As a result, a lot of IT outsourcing in the region tends to be not well thought out. Middle East companies are content to outsource small functions to vendors, like payroll or web hosting, but there is scant evidence of large deals similar to those in Europe and the US. “Everybody is taking the path of [least] resistance — nobody wants to question anything. Customers are happy just to out-task bit parts and vendors are content just to offer bit parts,” says Syed Mansoor Ahmad, general manager at Wipro Middle East. “Vendors should take the blame. They are not offering full services that can be fully exploited by their customers. There’s a lot of pure resource augmentation, which is the lowest form [of outsourcing]. There’s no value in it except for simply delivering resource to the customer. It’s only when you add in project management and processes that the real value kicks in,” he explains. The fact that Bahrain has opened its first out-tasking call centre, InfoCall, supports Ahmad’s view that this trend is on the rise. InfoCall will offer customers lead generation, telesales and marketing services from its local host site. The company’s primary target audience will be finacial institutions. “Companies are slowly realising that they that need to provide good customer service, and to do this effectively they need to outsource,” says Chander Jethwani, programme manager at InfoCall. Other imminent out-tasking arrivals in the region include an office procurement service from Tejari, where online traders will source office essentials for clients. IT reseller Enigmatis is also about to launch its own SMS out-tasking service, which will take care of its content management and delivery. Another reason why Middle East businesses are content to outsource only small parts of their business is because they are small. These companies do not possess the economies of scale that are necessary to reap return on investment (ROI) with full scale IT and business process outsourcing. There has to be a major business driver to warrant outsourcing because it can be costly as well as risky endeavour. “There has not been any comprehensive outsourcing, where you take over processes and people,” says Fawaz Qaddan, technology solutions group manager at HP Saudi Arabia. “Outsourcing is a sexy subject, but it only makes sense if the company is big enough and there is a compelling business need.” However, economy of scale is one barrier that has the potential to subside over the next few years. As parts of the region’s economy continue to grow exponentially so will the size of their companies. There is also the issue of the IT market not being mature enough, but this again is a concern that will be resolved over time. “Businesses are growing. However, we will not see the change immediately, it will be a mid-term thing — in two to three years time. A lot of companies are in the midst of investment,” says Vineet Chatwal, director of business solutions for PriceWaterhouse Coopers. “First, companies have to have a certain set of mature resources and then they can start looking at the next stage. For example, a diversified family-run company may first decide to embrace a shared data centre… then the next step would be to outsource it,” he explains. Overall, the evidence points towards a strong regional outsourcing market in the years to come. But its growth will hinge on three major factors; economic growth in the region, the first deal signings by the major global players and vendors building awareness in the region and explaining the benefits of outsourcing to their customers. On a positive note, vendors are already showing signs that they’re ready to step up their commitment to their customers. “You can get jobs done more effectively via outsourcing, but how do we convince the customers of this? Well, we invite them to see how we do it. Typically, we’ll have them visit our plant in India so they can see for themselves how it works,” says Hari Padmanabhan, executive director and president of ICICI Infotech, which has its own outsourcing subsidiary, One Source. Once customers are aware of the benefits of outsourcing, it is likely to be a domino effect scenario with the smaller companies following the lead of the larger corporations. The arrival of DOZ in eight months time will also help to raise the profile and knowledge of outsourcing in the region. DIC’s Dr Sulaiman has high hopes for the advent of outsourcing in the Middle East: “Dubai Outsourcing Zone will change the region’s landscape and create a whole new industry in the region. The initiative will not only create a lot of jobs, but it’ll also create cost-savings and new efficiencies within companies,” he says. “There’s so much market ready to be tapped into. The growth potential is huge. The time is now.” ||**||

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