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Thu 1 Feb 2007 03:46 PM

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Sourcing benefits

India has long been the outsource powerhouse in terms of workforce, scale of operation and resources, but now the Middle East wants its piece of the pie. ACN examines the outsourcing aspirations of the Gulf region.

Outsourcing hubs like India are capable of supplying an IT literate workforce at a fraction of the cost of its European and US counterparts. Reducing cost of operation, without damaging the quality of service, and streamlining IT infrastructure look great on paper but companies are rightly apprehensive of the risks involved. Will externalising functions compromise the quality of service? How will it impact productivity? Do the risks outweigh the potential benefits? These are some of the questions the discerning company should ask before deciding to outsource.

All routes typically lead to India, and although China has the potential to rival the major Indian and Western markets, in terms of IT and workforce, it's still emerging in comparison. While the onset of global sourcing has seen US and Western-based companies continue to strengthen their offshore presence in India and China, despite rising wages and data security issues, India will retain top spot for at least the next five years.

Major Indian IT companies, such as Infosys, Tata Consultancy Services and Wipro, saw phenomenal profit growth over 2006. TCS and Infosys announced second-quarter profits of 44% and 53% respectively, while Wipro saw profits increase 40% for the same period.

Outsourcing is a booming industry. IDC predicted that the global outsourcing industry would reach US$23 billion in 2006 and expects it to grow steadily until 2010. As more organisations look to outsourcing to develop products and services on a global scale, companies will need to become increasingly specific when selecting their services - this is where the Middle East market looks to find its niche.

"We're focusing on four main regions; Germany, UK, US and India," explains Ismail Al Naqi, site director at Dubai Outsource Zone, "This is where we proactively go to attract companies and we do a lot of local and regional awareness sessions to encourage investors."

He believes that as the market becomes increasingly crowded, companies should assess all available options to ensure their needs are addressed. For example, the Dubai Outsource Zone (DOZ) has a clear industry focus. Concentrating on the banking, healthcare and insurance markets, the zone provides government subsidised tax incentives, such as cheap employee accommodation, and it believes measures to alleviate the high cost of living will attract companies to the zone.

"People will always say Dubai is expensive and that is where we do what we can to overcome the weaknesses of Dubai today, which is the expensive real estate and cost of living," he continues.

Al Naqi also believes that Dubai can claim a piece of the outsourcing pie, even if it means streamlining operations to meet the zone's strategic business plan. "The size of this business means that no one can eat the whole pie. We have a target we want to achieve but we don't want to have 700,000 people working in this business. We are looking at a maximum of around 300,000 over the next 10-15 years. If we can reduce it to 150,000 key people than that would be good enough for us. We are focusing on the high end," he explains.

As the Middle East region looks to capitalise on a growing industry, projects like DOZ highlight the regions intent to expand the market. The zone itself has grand aspirations. 5,000 people are expected to be working at the site by the end of 2007 with Jumeirah Group the first company operating at the zone.

Focusing on business process outsourcing services in the banking, IT, insurance and healthcare sectors, the zone has seen healthy demand. Attracting over seventy companies, it is also expecting fifty-five firms, including ABN Amro Bank and AXA Insurance, will be operational by the beginning of this year with another 20 scheduled before June 2007.

"The sky is the limit, but as per our strategy, in the next five years we plan to attract 400 companies, varying from small to international operations. We expect to have the first company operational by the end of January. The first company that will be operational is Jumeirah Group who are setting up their entire back office operation including sales, call centres, airport services, IT and they are going to have around 400 people in the outsource zone," he continues.

Companies outsource for a number of reasons. Factors like reducing cost of operation, hiring a capable workforce without heavy investment and improving service levels are typical incentives that are driving the process. Eliminating non-core functions and streamlining IT infrastructure are equally prominent issues from a technological perspective.

"Companies outsource because they want to focus on their core business and make sure that an outsourcer is by their side to manage other vital activities. Cost control, efficient investment in a skilled workforce, increasing service levels and accelerating business development are all essential factors in the outsourcing process," states Eddie Cunningham, sales and marketing director at Injazat Data Systems, an Abu Dhabi-based IT and business process services provider.

Dubai Roads Transport Authority (RTA) decided to outsource some of its help desk services to India in conjunction with Wipro, a multi national outsource provider, as the firm aimed to improve system uptime and streamline its IT infrastructure.

"We outsourced our IT infrastructure operations and helpdesk services, so it's basically end user support. We have a service level agreement (SLA) from an infrastructure point of view and turn around time for various types of services. One section was the IT infrastructure and the other section is the IT service management. For the service management we have an SLA in terms of uptime, performance and prioritisation of problems on a sliding scale but for infrastructure any issues are either top agenda or medium agenda," explains Indranil Guha, manager of IT infrastructure management at RTA.

"The primary reasons for our decision to outsource was keeping the organisation lean and efficient. Cost benefit is one of the objectives but our customer satisfaction level; response times, resolution times and monitoring the systems internally have improved as a result.

"Efficiency is another primary objective but I personally don't feel outsourcing brings a huge amount of cost benefits. We would have spent around the same amount to employing people here, but the kind of service we get means that it's cost efficient for us," he continues. Allowing a third party to outsource certain business functions might come with perceived risk, but it can also allow a company to prioritise its processes and focus on a particular function.

"Our policy is to outsource to keep our internal organisation lean so that we can focus on strategic initiatives. My core team would be working on strategic directions in terms of architecture and infrastructure leaving me to address issues like: ‘Should I make Wi Fi available in metro stations?'

"These strategic initiatives allow us to focus on how we will integrate multiple services and how will we collaborate with other government agencies who require IT and infrastructure support," states Guha.

It is a sentiment echoed by Munir Zhara, business development and marketing director at Ebttikar, a Saudi IT infrastructure solutions provider. He is convinced outsourcing can directly benefit companies but also acknowledges that they need to have a clear strategic plan to ensure their needs are addressed. He believes outsourcing takes unneccessary pressure off companies, giving them peace of mind to concentrate on their core operations.

"When you talk about total cost of ownership and costs in the long term, outsourcing is the right solution. It leaves the customer to focus on its core business and leaves the burden and problems of managing to a qualified company. They bring expert skills and this is another benefit," says Zhara.

"Outsource providers are experienced in certain processes and it helps the company focus on its core activities, however outsourcing is not right for every company. We don't recommend that every company should outsource its IT services. The company may be too small and in this case outsourcing will not provide the same benefits," he continues.

Despite clear business benefits, the majority of companies are apprehensive of delegating responsibility to a third party. Relinquishing control of a function, regardless of importance, can have a negative impact on an organisation, and in some cases, halt the operation altogether.

Major banks like HSBC and Citibank have both outsourced operations to Indian call centres but found security and data protection seriously lacking. Non-existent Indian data protection laws, despite a swift re-evaluation in the after math of high profile incidents, reaffirmed that security of information is of paramount importance to any companies externalising services.

Ask some Citibank customers if they have confidence in outsourcing after three former call centre employees obtained customer credit card details and stole $350,000 from Citibank accounts in New York, or why, despite system downtime and doubts over quality of service, HSBC plans to invest another US$5 billion in its integrated global IT infrastructure. For HSBC, the answer is easy - the bank expects to save 10% on worldwide operations in 2006 as a result of its outsourcing strategy.

Although the Middle East benefits from clear data protection laws, they are yet to be tested. However, outsourcing projects such as DOZ in Dubai have strong governmental regulation and the emirate is hoping to use its data protection laws to its advantage. For DOZ, with a strong interest in the banking sector, the strength of its data protection is a crucial selling point.

"We have a central coordinator who contacts the ministry of labour, the ministry of foreign affairs, ministry of economics who talks about intellectual property rights and data protection rights because data protection law is one of the most important criteria. We have a good data protection law but because we have not faced an incident we don't know whether the law is enforced or not," explains Al Naqi.

"It is not easy for them to let go of their operation so this is the main challenge if you want to help companies overcome that fear. You will see a lot of bank operating zone so obviously security and data protection are important to them," he explains.

With the market regionally focused at best in the Middle East, the challenge to transform it into a serious outsourcing hub was one taken up by a few companies and providers willing to take a risk, even if it meant ignoring informed advice.

"We took the responsibility of developing this industry. When we started in the beginning we had a lot of people trying to push us back - a lot of consulting firms were telling us it would not work. Now we have proved them wrong because we understood what the client requirement was," says Al Naqi. The RTA faced a similarly perilous situation in its decision to outsource. Little more than a year old - and determined to take advantage of the opportunity - the support of Wipro helped the firm through the transition and sustenance periods, and progress has been healthy ever since.

"We knew that this wasn't going to be easy. There is not an established market in terms of outsourcing, so we took that challenge and we knew that there are areas that we needed to keep a close eye on and took it as a project. The transition period was around three months and then we entered a period of sustenance where the service began to be delivered. The RTA is just over a year old and we weren't in as strong a position as other companies so we had our doubts. After seven or eight months we have seen an upward trend but we understood there would be glitches but we saw this opportunity as a way forward," explains Guha.

"The good thing about Dubai is it's surrounded by a multiple pool of talent," explains Al Naqi. "You can go to India, Pakistan, Lebanon, Jordan, Egypt and this gives you different cultures, different mentalities and different training. If you are an international company you can service Europe as well as the U.S because you have people who can speak multiple languages as well as English and Arabic. You can't get this anywhere else. If you're looking at a big scale operation then you can't provide a local workforce," he continues.

Phillip van Heerden, programme manager of services and verticals, IDC Middle East, is more sceptical in his analysis of the UAE's efforts to build a long term outsourcing industry and views the reliance on overseas employees as a flaw. "The UAE want a complete outsourcing industry built here with the Dubai outsource zone but they haven't really been that successful because they haven't aggressively moved it forward. If you have local staff available that can provide services then you would use them instead of going overseas. It's a short-term solution until they have enough resources to do it on their own," he explains.

Cultural and operational integration could provide stumbling blocks for companies looking to operate in the region. "Sometimes the culture may not be appropriate and this is one of the many challenges companies are facing these days. They don't take into consideration the culture integration. We are seeing some companies, in Saudi for example, not being able to engage with a service provider, especially the management, to integrate with people from another company and make sure they work as one team. Companies have to work internally on these issues before they outsource," explains Zahra.

After assessing a number of local and international providers - as the transport arm of the government the RTA also waived government subsidies - Wipro was selected because it met the organisations requirements. It seems international providers have begun to see potential in the region and are gradually beginning to take an active interest in it. "We looked at multiple companies; some in the region internally, a couple of multi nationals and some purely government owned Dubai companies also and being a Dubai government there were some priorities given to internal companies. Wipro clearly addressed our requirements, were flexible to meet them and were prepared to adapt to any changes in the market," explains Guha.

"Wipro have a strong interest in establishing themselves in the Middle East market. They were focused to get this project going. Although Wipro were a bit cheaper, our selection criteria was not pricing; we were trying something very new and we had quite aggressive targets to meet. We didn't have much room for failure. We were confident in outsourcing and we don't regret that decision," he adds.

India undoubtedly remains the superlative destination for the majority of companies looking to outsource but the outlook for the Middle East market is promising if it can build on what's already been established.

"I think the outsourcing market is developing and I'm happy we took a conscious initiative to make it successful for RTA, but also to help develop outsourcing in the region because that is Dubai governments strategy," explains Guha.

Building on the point Zahra says: "I don't think the Middle East will challenge India in terms of providing but it will influence the way in which outsourcing projects are handled. In terms of people and skills India is still a market leader but outsourcing is growing. There is a demand for services in this market."

Projects like DOZ, in tandem with government initiatives, have gone a long way to promote and generate business interest in the region but more can be done. For DOZ, the question remains how much of the outsourcing pie will it get and is this a taste of things to come? "I'm not afraid of competition but the answer is very simple; nobody in the world can compete with India when it comes to price or availability at least for the next five years," concludes Al Naqi.

“Nobody in the world can compete with India when it comes to price or availability at least for the next five years.”
“I don’t think the Middle East will challenge India in terms of providing but it will influence the way in which outsourcing projects are handled.”
“The UAE want a complete outsourcing industry built here with the Dubai Outsource Zone, but they haven’t really been that successful because they haven’t aggressively moved it forward.”
“The problem is that the hardware manufacturers don’t really give the proper training or information.”

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