Following the sun

The popularity of offshore outsourcing looks set to rise with companies in the Middle East beginning to follow trends set by the West. The potential benefits are enormous, but so too are the pitfalls.

  • E-Mail
By  Shankar Sharma Published  April 25, 2005

|~|Offshore1.jpg|~|Customers should take measured and firm steps, and follow a proper evaluation process says Wipro’s Raman Sapra.|~|Had Adam Smith been conducting his research into the wealth of nations at the start of the twenty first century, it would almost certainly include a chapter on offshore outsourcing. In today’s age of increased globalisation, outsourcing has become a common feature of running enterprises. Just as one settles down each morning to a breakfast harvested from different regions, one similarly conducts the modus operandi of business on a multinational level.

In simple terms, outsourcing is the practice where an enterprise transfers the responsibilities of one or more of its functions or activities to another company, which would otherwise have been performed from within the organisation. ‘Offshore’ signifies that companies outsource their work to companies abroad in order to leverage their expertise in that field and gain benefits in cost and quality, thereby increasing their competitiveness in turn.

Technological advances and the universality of the English language have resulted in this phenomenon, as IT users strive to get their jobs done faster and cheaper. India, it is said, is fast becoming the ‘back office’ of the world, as companies look to outsource core processes to cut costs and improve efficiency. China, Africa and the Middle East are also key hubs, as businesses in developed countries can take advantage of lower labour and operation costs in these regions. There are various different forms of outsourcing. Project outsourcing refers to a scenario where a customer places an order to an external service provider (ESP) to implement a project. Business process outsourcing (BPO) involves the separation of core operational services from non-core support processes, with the latter being outsourced to a service provider in order to realise greater operational efficiency at a lower cost.

BPO encompasses a wide span of functions: accounting; call centre; customer support; finance; human resources and support. IT outsourcing means the outsourcing of technology applications, IT infrastructure or the outsourcing of relatively large software development projects. The outsourcing of basic functions — often practised by small, local businesses — is known as ‘out-tasking’.

Outsourcing’s popularity has surged in recent years, as many believe that it is no longer an option for businesses but a necessity. Western companies are jockeying for position in order to exploit the huge pools of educated talent available in the East. Operations can now be conducted round-the-clock and exchange rates result in a lower payroll and employee benefits such as pensions and insurance.

Dubai has established its own ‘Dubai Outsourcing Zone’ (DOZ), where wholly foreign-owned companies can operate tax-free. It is the world’s first outsourcing centre and has been established with the intention of creating jobs, cost savings and new efficiencies within companies. Wharton — the online resource that offers the latest business information, insights and research — recently concluded that Dubai has the potential to be a ‘Singapore-like hub’ within the Middle East region.

In December 2004, Sahm Technologies, a subsidiary of Emaar Properties, secured a deal with Indian services giant Wipro to provide Oracle e-business suite application management services for customers in the Middle East region.

Arvind Bhatnagar, who is the CEO of Sham Technologies, believes the local market is ready for these services, but advises companies not to jump on the offshoring bandwagon without due thought. “Educating staff is necessary,” he says. “Implementation is one thing, but sustenance is a totally different ball game.”

The partnership is aimed at delivering cost-effective services that are key to a client’s requirements. This is thanks largely to Wipro’s large IT, consulting and research and development (R&D) resource pool that undergoes constant training and re-training, as well as its extensive range of infrastructure and applications.

“There is always a pressure on your bottom line and where you can improve,” says Bhatnagar. He believes the partnership helps ensure that offshore methodology works, due to clear definition of these methodologies and processes, in addition to the customising of solutions for end users. However, Bhatnagar understands the pressures enterprises are under. “It’s not just about cost. For the same cost you can get better quality and reduce risks substantially,” he says.

Wipro has established a regional presence since 2001 and has over 400 consultants at its two regional offices. The first, in Dubai, caters for clients in the UAE, Qatar, Oman, Kuwait and the Levant region, while the second in Al Khobar, Saudi Arabia, deals with the aforementioned as well as Bahrain. Back office work often takes place in Bangalore, with the pair working as one integrated team to help deliver service level agreements (SLAs). “The relationship with Sahm is strategic and expands Wipro’s service line in the region,” elaborates Bhatnagar. “Both companies want to bring new ideas to the market. These will take time to get bedded, however just a couple of success stories will make others follow suit.”

Raman Sapra, Middle East regional manager for Wipro, shares Bhatnagar’s optimism. Sapra underlines the importance of the region to Wipro, citing the company’s deals with Dubai Metals and Commodity Centre (DMCC) and Qatar Petroleum. “From an outsourcing perspective, offshoring is just a delivery model,” he states, adding nonetheless that demand is increasing, albeit with trepidation. “Customers are cautious and they should be,” he explains. “So one must take measured and firm steps such as following a proper evaluation process.”

Wipro primarily leverages off its delivery model, which offers certain cost advantages when moving offshore. However, Sapra concedes there are challenges like maintaining clear communication between businesses and technical teams associated with offshore outsourcing. “Customers are taking firm steps and using the understanding of initial pilot projects to build relationships with IT companies like us,” he states.

Sapra acknowledges that increased demand has resulted in increased competition for Wipro. He regards this to be a positive development for customers. “They now have multiple options and approaches, which helps the whole IT industry,” he says.

On the surface, offshore outsourcing seems like a panacea. A belief prevails that there is plenty of market ready to be tapped into and the growth potential is huge. However, there has been a note of caution issued of late. Global research and analysis firm Gartner Group says 80% of companies looking to outsource customer service projects purely in order to cut costs look set to fail in 2007. This, Gartner predicts, is because of high staff attrition rates in areas such as offshore call centres.

The analyst house further says that many enterprises that embark on offshore outsourcing are neglecting to manage some of their outsourced operations. The prediction is that through to 2008, approximately 60% of companies that outsource customer-facing functions can expect hidden costs outweighing any potential savings and client defections.

“Companies are not looking at processes from a customer point of view and this is risky,” says Alex Bona, research director at Gartner Group. Poorly maintained models can reduce the quality of customer experience, dilute brand value and fail to deliver cost savings.

However, the research company does not paint the future picture entirely bleak. Its survey predicts the customer service outsourcing market to continue expanding from US$ 8.4 billion in 2004 to US$ 12.2 billion in 2007. The offshore element of this is expected to jump from present levels of 2% to 5% in that period. Gartner still maintains though that, if carefully carried out, offshore outsourcing can produce savings of 25% to 30% despite recent trends of high staff turnover.

This does, nevertheless, beg the question; if 80% of projects appear destined to fail, why then are organisations in the Middle East and across the world still pursuing offshore outsourcing? The issue is not merely a case of cost cutting, but one of end-to-end strategy. A strategic approach provides the necessary information to make meaningful cost and benefit analysis and focuses on unsuitable or immeasurable cost metrics and service levels. Furthermore, the experience of companies indicates that a controlled and phased approach beginning with onshore outsourcing represents the best path.

Dr Philip van Heerden, who is a senior analyst of IT services practice for the Middle East and North Africa region for IDC, believes the creation of the Dubai Outsourcing Zone has a rightful place in the global market. With its main benefit of being a 100% tax-free, the DOZ can manage key factors such as access to skills, cost and potential clients.

The IT offshore outsourcing industry in this region is still in its infancy, taking its lead from trends set in the US and Europe. Local end users at present remain hesitant about adopting this concept. Van Heerden, however, believes this is rapidly changing. “The key for outsourcing companies is not to look at local clients as their business opportunity, but rather at international clients that are in dire need of cost cutting and efficiency improvements,” he explains.

Greater dependence on complex solutions, knowledge management, security and storage is pushing some end-user organisations with large inhouse IT departments to opt for external support as an alternative to inhouse management. These include governmental departments. Overall expenditure on this type of IT service remains at a low level, despite a recent sharp increase.

Local enterprises, especially the larger ones, stand to benefit from outsourcing or at least from partial outsourcing. However, a fundamental shift in the mindset of local companies is necessary before these firms can make the leap to offshore outsourcing. Van Heerden believes that scepticism is the biggest stumbling block in the region. “The challenge to change the ‘we own it, we run it’ attitude held by many companies will continue to limit investments in information system outsourcing,” he states.

Other factors are also thwarting companies in the Middle East from taking the great leap forward into offshore outsourcing. Firstly, there is the sizeable number of companies, particularly in the UAE, which are not all that comfortable working with third parties. Secondly, relatively low labour costs in the region lessen the cost savings of outsourcing as an alternative to having inhouse IT staff, as Van Heerden explains. “The reluctance to outsourcing to an outside provider is further compounded by the relatively low cost of inhouse IT staff, which implies that potential profit gains from outsourcing are less important,” he says.

One company that is breaking the mould in the region is EastNets. The firm outsources IP connectivity to international providers to ensure resilience and business continuity. The EastNets Service Bureau (ENSB) enables banks and other financial institutions to effectively outsource their connectivity and infrastructure. It also provides the financial community with other internet protocol (IP) based applications and services.

This enables a total outsourcing solution to all institutions. The client’s data processing requirements are met by ENSB, which maintains two different infrastructure environments: one in Dubai and the other in Istanbul, Turkey. Hazem Mulhim, CEO at EastNets, believes that offshore outsourcing is profitable to customers. “Outsourcing means reduced time to market, reduced operational risks, increased security, extended services, lower costs and the opportunity for smaller organisations to compete with bigger players,” he states.

According to Mulhim, organisations in the Middle East are beginning to realise that there is often no competitive advantage to be gained by having their own inhouse solutions. Furthermore, the costs of development and implementation for inhouse solutions are often far greater than an outsourced service. “Through outsourcing, organisations can benefit from a secure, cost-effective environment that frees up resources to focus on core competencies and reduce total cost of ownership,” he says.

EastNets believes outsourcing is the way forward. The company already boasts over 50 banks from Europe, the Middle East and Northern African, using its SWIFT approved service bureau. Mulhim, nevertheless, urges a note of caution. “Outsourcing can be very beneficial but care should be taken when choosing outsourcing partners,” he says. It is imperative that organisations possess the right level of industry specific experience, project management and available resources. SLA and commitments need to be in place and should be very specific and clearly defined.

Satyam, which is an Indian global consulting and IT services company, adheres to these standards. It believes there is a lot of potential in the Middle East and can boast 150 clients on its books including National Bank of Dubai and Emirates Airlines. Ajith Menon, head of operations for the Middle East and Africa at Satyam, understands why his organisation is flourishing.

“We were one of the first companies to become involved with this region,” he says. “We have proven ourselves to have done a good job with the projects we have taken up, so clients find us a good, cost effective alternative.” Satyam uses a global delivery model in the Middle East, making sure the knowledge acquired globally is utilised and specifically customised for the region. Its levels of outsourcing correlates with the size of projects companies ask them to embark upon. Satyam employees in India handle software development in large part, and even smaller ERP implementations can be outsourced offshore in parts.

Menon acknowledges that in addition to cost cutting, companies benefit by attaining specific skills at specific times. Successful offshore outsourcers are versatile enough to deal with whatever internal requirements of any given company at any given time. However, there is reluctance among companies in the region to outsource offshore because user organisations face a challenge of being true to their own staff. “By outsourcing they are admitting to not being able to provide a career to their own IT people,” he adds.

As a result, many enterprises are unable to give companies such as Satyam sustained business. Outsourcers tend to be approached on a project-to-project basis, with requests often made sporadically. Some organisations become embroiled in price wars and therefore do not put the necessary effort into projects. Demand, nevertheless, is growing. Satyam experienced a 75% increase in growth for 2004 and it is hoping for a similar figure this year.

One company that knows first hand about Satyam’s work is Emirates Consulting Group (ECG). The two companies recently signed a strategic partnership deal to combine the former’s technical expertise and extensive offshore resources with the latter’s local know how. Mohammed Al Ali, CEO at ECG, considers outsourcing to be the modern way for conducting business services. “I feel our region can venture into a new level of demand. The industry provides that,” he states.

Emirates Consulting understands that outsourcing is a very large field and accommodates its clients on an individual basis. Ali recognises that cost cutting is only part of the reason for outsourcing — offshore or onshore. It is a complicated process, which requires skill and expertise. “We provide an option for our clients on how much they want to outsource, whether it is A to B or A to Z,” he says. “We’re very strong in providing the outsourcing component and provide operational skills and knowledge.”

Ali reiterates the point that responsibility needs to be ensured by all parties involved in an outsourcing project in order to preserve confidentiality and control. With comprehensive and detailed SLAs, enterprises can cover the legal aspects and makes certain of success. “You need to have in your own organisation a fundamental understanding of outsourcing,” he says. “If you internally know how to outsource, then it’s just a case of contacting the right people to outsource to Asia or anywhere else. You need to be simplistic and consistent.”

Kevin West, business development manager at EDS, echoes this view. His company is responsible for one of the biggest IT outsourcing operations in the region with its partnership with Gulf Air in Bahrain. Though outsourced, the project has not been taken offshore for the simple reason that the need has never arisen — despite the advantages touted in places such as India or Brazil. Outsourcers should not adopt a ‘one-size-fits-all’ approach, says West.

A master plan of how the technologies should sit together is crucial, however it should only serve as a template.
Flexibility is essential in consultancy, training and in choosing equipment. It is important not to play favourites with vendors while simultaneously maintaining a strong global alliance to provide certain specific sections of a solution. “People have realised that they need to focus on what they are good at and let someone else focus on what they are good at,” says West. “We can demonstrate what we can bring to clients. We can say to them: ‘you don’t have to worry about IT anymore.” West insists that international standard processes and tight SLAs are essential in ensuring that offshore outsourcing is a success.

Another noteworthy example of a successful joint venture is the recent collaboration between Lightspeed Communications (LSC) with Gulf Business Machines (GBM). The two parties have teamed up to launch the ‘iVault’ solution in Bahrain — the first alternative fixed-line telecommunications operator in the Kingdom — to enable financial and other institutions to securely host their mission-critical systems. Shaikh Abdulla bin Khalid Al-Khalifa, managing director of LSC adds. “We went through a very comprehensive and detailed analysis of what we needed and approached the company that would suit us best.”

The managing director does not see the attraction in offshore outsourcing, preferring instead to have operations in close physical proximity. Point of contact is critical in outsourcing projects so offshoring is risky. “Institutions do not want to take any chances or make many compromises,” he says. “Close proximity helps establish greater integrity and security between partners.”

Shaikh Abdulla Ishaq, general manager of Bahrain Business Machines (BBM) — GBM’s operation in Bahrain — understands the logistical and infrastructure problems of offshoring and does not believe that one should outsource offshore when one can conduct operations locally. “We are proud to be associated with LSC in this project,” he says. “It is a demonstration of Bahrain’s leading position in IT in the region.” He adds that functionality is also critical and believes it can be better guaranteed when partners are in close proximity.

It can be seen therefore that companies in the region have different approaches toward offshore outsourcing. Some, like ECG, Satyam and EastNets, can see enormous benefits. Others, like EDS, LSC and GBM, believe that it is better to concentrate more on one’s own region. An ITP survey shows that 35.8% of businesses that were polled believe offshore outsourcing to be ‘extremely beneficial’ with 47.2% regarding it ‘beneficial’. 17% thought offshore outsourcing was ‘not that beneficial.’

With the offshore outsourcing industry still in its infancy in the Middle East, the jury is still out regarding the effectiveness of offshore outsourcing. All concerned however, no matter where they are located, believe that outsourcing in general is an essential feature of contemporary business practice — if properly carried out. It can be a positive experience for companies across a range of sectors, provided there is thorough preparation and clear communication and SLAs between parties.||**||

Add a Comment

Your display name This field is mandatory

Your e-mail address This field is mandatory (Your e-mail address won't be published)

Security code