Egypt As a Global Offshoring Destination By: Mohamed Ibrahim An Initiative for The Egyptian Economy Apr. 2011
Jan 21, 2015
Egypt As a Global Offshoring Destination
By: Mohamed Ibrahim
An Initiative for The Egyptian Economy Apr. 2011
Highlights
Objectives: i) promote Egypt as one of the top global offshoring destinations for the services sector, ii) expand the talent pool of qualified young professionals, iii) stimulate the global demand for offshoring jobs to Egypt, and iv) establish an industry association that supports emerging local offshoring service providers
Benefits: reduce unemployment rates, improve living standards of wider segments of youth, and raise the taxable income for the government, while decreasing the deficit in the balance of trade
Approach: target and prioritize services to be offered, based on our potential supply, global offshoring competition and demand conditions, and the investments we may need to undertake. Then decide on the operating mode (location decision and service delivery method) and consider the possible evolution path
Resources: voluntary endeavors will avail much of the needed resources in terms of time offered by academicians and professionals (theoretical and on-job training), and material supplied by large enterprises (office equipment and shared infrastructure). This is crucial to creating a viable cost advantage of our offshored services
Critical to Success: effective coordination between the government, universities, and large enterprises, enforcement of the Intellectual Property Rights (IPR) law, improvement of the business environment, and incentives policies
Contents
Objectives and Scope of The Initiative
Analysis of The Global Offshoring Market
1
2
Egypt’s Talent Pool3
Proposed Approach4
Needed Roles and Resources5
Critical Success Factors6
Lessons Form Other Countries7
Objectives and Scope of The Initiative
What is Offshoring?
Control
Outso
urce
OnshoreOutsourcing
OffshoreOutsourcing
Captive
SharedServices
CaptiveOffshoring
Onshore Offshore
Location
Focus of the initiative Offshoring is a company’s location decision that refers to performing some activities in another country outside the market where it sells its goods/services
Outsourcing is a company’s control decision that refers to buying some activities from a third party supplier
The focus of this initiative is on offshore outsourcing (the upper right quadrant of the matrix)
Captive offshoring is excluded as it requires higher commitments and investments of the foreign companies that may currently perceive Egypt as riskier for this mode of entry
Source: adapted from OECD
Objectives and Scope of The Initiative
Services Offshoring
The service sector in developed countries supplies most jobs and the bulk of many countries' positive trade balances
Offshoring of services to emerging markets has been growing at a very fast rate of 30% annually over the past decade
This increased its share of the global services trade from 3% to 10%, making it a significant subcomponent of services trade
Source: International Labor Organization
Share of Employment by Economic Sector
Objectives and Scope of The Initiative
Objectives
Craft an integrated strategy that positions our country as a distinguished global offshoring destination for the services sector
Develop the talent pool of the higher education graduates necessary to prepare Egypt to tap into the opportunity of the global offshoring market
Establish an industry association that orchestrates the implementation of our offshoring strategy, markets Egypt’s offerings externally to stimulate global demand, and provides information and expertise to emerging local offshoring service providers
Reduce government bureaucracy and improve and enforce the legislations protecting intellectual property rights
Encourage universities, large enterprises, and other civic organizations to take their roles in expanding the talent base and providing the necessary facilities to support the initiative
Objectives and Scope of The Initiative
Scope
The scope of offshored services within this initiative cuts across multiple industries, for example: banking, insurance, pharmaceuticals, software, auto, healthcare, and retail
It eventually includes all office-based occupations that can be done remotely, for example:
• Application development/maintenance
• Programming
• Web design
• Graphics design
• Contact center
• Analytics
• Accounting
• Payroll administration
• Claims processing
• Book keeping
• Data entry
Prioritization of offshored jobs will be needed depending on many factors including the quality and scale of our supply, global competition and demand conditions, and the needed investments (for more details, please refer to the section: Proposed Approach)
Objectives and Scope of The Initiative
How Egypt Will Benefit
Create more job opportunities, especially for the young university graduates, who suffer from high rates of unemployment
Leverage the earning capacity of wider segments of youth, and accordingly enhance their living standard
Increase Egypt’s export of services, and accordingly help decreasing the deficit in the balance of trade
Diversify our portfolio of economic activities, and accordingly boost the stability of the economy
Raise the taxable income for the government, and accordingly improve its tax revenues Source: CAPMAS
Unemployment Rates by Educational Attainment and Sex, 2009
Contents
Analysis of The Global Offshoring Market
Objectives and Scope of The Initiative
2
1
Egypt’s Talent Pool3
Proposed Approach4
Needed Roles and Resources5
Critical Success Factors6
Lessons Form Other Countries7
Analysis of The Global Offshoring Market
Market Size
Mckinsey Global Institute (MGI) estimated the potential global market of services offshoring to be $300 billion. The captured portion of addressable market in 2010 was 35%
However, offshoring continued to grow at 30% annually over the past decade, as the pace of offshoring adoption accelerated in all industries
Source: Mckinsey Global Institute
Degree of Offshoring Adoption in Different Sectors
Analysis of The Global Offshoring Market
Global Supply and Demand
In a sample study of 28 countries, MGI found that offshore talent potential (university graduates with up to 7 years of experience) in low-wage countries is double the high-wage countries potential, and that India and China dominate low-wage labor supply
Three factors, however, reduce the potential talent supply in low-wage nations:
• 13% only of the potential talent supply in low-wage nations is suitable to work for multinational companies (due to lack of necessary language skills, low quality of the educational system, lack of cultural fit, and attitude towards teamwork and flexible working hours)
• Dispersion of the labor forces out of major cities
• Competition for talent from non-offshoring companies
Source: Mckinsey Global Institute
University Educated Young Professionals, 2003%, (Thousand)
Analysis of The Global Offshoring Market
Global Supply and Demand
MGI estimated that offshore employment demand reached around 4.1 million jobs in 2008, representing 1%of total nonagricultural employment in the developed countries
Factors that encourage companies to resource labor globally include continuous pressure for cost reduction, existing global scope, and desire for access to attractive markets
Factors that inhibit companies from resourcing labor globally include operational, structural and regulatory barriers, and management attitudes
Offshore Employment in Eight Sectors, 2008 (Thousand)
Source: Mckinsey Global Institute
Analysis of The Global Offshoring Market
Global Market Inefficiencies
Companies hiring offshore frequently follow each other to cities or locations that already have a track record in providing offshore talent
The resulting “agglomeration“ of companies in popular locations may lead to concentrated demand, and labor supply becomes constrained, which in turn leads to higher local wages and higher levels of attrition
This is already starting to erode the competitive edge of Indian cities like Hyderabad and Bangalore, where the salaries of IT engineers and project managers inflated annually by 13% and 23% respectively
If agglomeration makes conditions in a chosen offshore location deteriorate, a company may not be able to relocate quickly to a better place due to its initial capital outlay to set up an offshore enterprise. This causes "stickiness“ of the company to that location
Offshored activities require different levels of investment in physical and human capital, making some "stickier" than others
Companies that use vendors to provide offshore services (offshore outsourcing) generally have fewer sunk costs in any location. Consequently, it is easier for them to switch locations
Inida China Southeast Asia
Eastern Europe
South America Egypt
Cost + + + +
Quality of labor + + +
Offshore vendor landscape + +
Market potential + + + +
Risk profile + + + +
Business environment + + +
Quality of infrastructure + + + + +
Concentration of research universities + + +
Language proficiency + + + +
Cultural fit + +
Analysis of The Global Offshoring Market
Comparative Advantages of Different Regions
Source: adapted from Mckinsey Global Institute, CB Richard Ellis
Analysis of The Global Offshoring Market
Egypt’s Opportunity
Big offshore destinations, like India, are experience escalating wages and attrition rates, due to agglomeration effects
Some services are less dominated by the big players, and hence have more fragmented markets, which makes them easier for us to compete for
Egypt, currently, has comparative advantages with regard to cost (labor and non-labor), quality of ICT infrastructure, and the availability of multilingual talent pool with good accent
And, if we improve the quality of labor and its cultural fit to the multinational environment, we will improve Egypt’s competitiveness in this arena
This improvement calls for an inevitable, long-term course of action to change the educational system
But, we still need a short to medium-term action to achieve a quick win. One option is a condensed skills development program for the higher education graduates
To further boost our cost advantage, this program will be entirely a voluntary endeavor, jointly carried out by the government, universities, and large enterprises
Combining efficient labor skills development with effective targeting of offshored services, and creative offerings, we can create an opportunity for Egypt to develop a reasonable footprint in the global offshoring market
Contents
Egypt’s Talent Pool
Objectives and Scope of The Initiative
3
1
Analysis of The Global Offshoring Market2
Proposed Approach4
Needed Roles and Resources5
Critical Success Factors6
Lessons Form Other Countries7
Egypt’s Talent Pool
Potential Supply of Suitable Talents
12.6% of Egypt’s workforce has a university degree or higher. This is 5% above the average ratio in low-wage countries
There exists a strong preference for education that prepares for administrative careers:
• 64% of students are enrolled in social studies (Commerce, Law, Arts and Education)
• 18% of students are enrolled in Engineering, Medicine, Pharmacy and Science
• 15% of students are enrolled in applied sciences
The highest unemployment rates are in commerce (34.7%), followed by arts and archeology (about 15.3% for each), then agriculture and law (14.5% for each), other fields of specialization (10%), social work (7.3%), and finally engineering (3.8%)
Private universities, to a large extent, duplicate public university curricula with no qualitative addition, often using the same pool of teaching staff and attracting students with lower entry grades
Private universities focus mainly on engineering, medicine, management and media, but they do not contribute to the improvement of the quality of graduates that are demanded by the labor market
Egypt’s Talent Pool
Potential Supply of Suitable Talents
Source: Egypt Human Development Report, 2010
Distribution of Young Workers’ Skills According to an ILO survey, the level of satisfaction of employers with their young recruits is generally fair (66%)
However, 41% of employers criticized the low ability of young graduates to apply knowledge learned
The same low ranking is given to the practical training provided to young applicants at school (48% of employers)
The education and training system visibly fails to produce skills that are required to perform jobs
13% only of recruits have a very good overall preparedness, which is interestingly the same result as MGI international study
Egypt’s Talent Pool
Skills Base Development Program
This program is a core component of the initiative and it aims to equip the university graduates with the necessary hard skills and soft skills in order to become suitable candidates for offshoring jobs
The program is condensed (around 600 hours / 5-6 months) and consists of two tracks:
• Hard skills track, which is job dependent, and consists of:
• theoretical training part (e.g. computer programming languages for programmer job candidates)
• on-the-job training part
• Soft skills track, which is generic to all types of jobs and includes training on:
• language
• interpersonal skills
• cross-cultural communication
• time management
• Decision making
This program is essentially a voluntary endeavor that is carried out by universities and large enterprises, and coordinated with the government in the form of Public-Private Partnership
Egypt’s Talent Pool
Admission Criteria
Admission criteria is a crucial element for the success of the initiative as it should help carefully identify and select those candidates who will be able to:
• Commit to and successfully complete the skills development program
• Work effectively in offshored jobs and fit and adapt easily to different environments
Important criteria include:• Academic credentials
• Personal discipline and drive for achievement
• Willingness to work on shift basis
• Willingness to relocate within the country
Contents
Proposed Approach
Objectives and Scope of The Initiative
4
1
Analysis of The Global Offshoring Market2
Egypt’s Talent Pool3
Needed Roles and Resources5
Critical Success Factors6
Lessons Form Other Countries7
Global Competition
High
Low
Low High
Our Potential Suitable Labor Supply
Proposed Approach
Targeting of Offshored Services
Targeting of services to offer will depend on the scale of our suitable labor supply, global competition, market size, and the needed investments
Suitable supply refers to workforce that is both competent to work in a global environment and available for hiring (after the skills development program)
Based on the relative positions of different job categories in the right side matrix, high priority may be allotted to support, generalist, and accounting jobs
Second priority then goes to designer and engineer jobs
Finally comes the analyst jobs. Despite the low competition, its global market size is very small, which inhibits the buildup of scale economies
Designer/DeveloperEngineer
Finance /Accountant
Generalist
AnalystSupport
Circle size represents relative global market size
High priority opportunity
Proposed Approach
Targeting of Offshored Services
Support jobs are entry level jobs and may not require a college degree (e.g. data entry and book keeping)
Generalist jobs require a university degree (e.g. G&A, contact center, payroll administration, and claims processing)
Finance and accounting jobs require a relevant university degree and training
Designer or developer jobs require a university degree (preferably a technical degree) and a specialized training (e.g. web design, graphics design, and programming)
Engineer jobs require an engineering degree and a specialized training (e.g. IT and application development and maintenance)
Analyst jobs require a specialized technical university degree and strong analytical skills (e.g. marketing research and R&D)
Considering huge startup investments that it requires, contact centers might be removed from the first priority targeted jobs
However, some innovative solutions can work: JetBlue Airways 800 reservation agents work from home, their computers connected to the airline's servers; they stay connected to customers via voice-over-IP phones
Proposed Approach
Mode of Operation
Location decision:
• Depending on the success of the initiative in creating offshored jobs, we may adopt a hub and spoke approach to building a network of offshoring centers
• Hubs will be located in tier-1 cities (i.e. Cairo and Alexandria) and will focus on administrative, back office, and HR activities, beside providing access to the largest talent pools in the country
• Spokes will be located in promising tier-2 cities/regions (e.g. Delta and Canal) and will provide access to the fragmented talent pools in these regions
• Delivery method:
• Two service delivery methods can be adopted, depending on the sophistication of client’s offshoring practices, and on our own capabilities: staff augmentation and managed services
• Staff augmentation: clients manage staff members directly, as if they were their own employees, and pay for each staff member a supplier adds to complete a contract
• Managed services: suppliers agree to deliver a specified capability or functionality with a desired level of service for a fixed fee
• The second method requires a higher level of trust, as clients cede more control to suppliers
Proposed Approach
Evolution Path
Our offshored services can evolve -at lowest incremental investments- with regard to:
• Job complexity: from back office jobs like contact center, accounting, and claims processing to the more complex functions like solution/application development
• Geography: from regional markets like Europe and Middle East (near-shore) to the global market
back-office processing functions with little decision making involvedin key tasks
higher value-added services such as new product development, based on creative talent and advanced development enviornments
customer solutions basedon extending knowledge and experience
Global Service Centers
Solution CentersProcess Centers
Contents
Needed Roles and Resources
Objectives and Scope of The Initiative
5
1
Analysis of The Global Offshoring Market2
Egypt’s Talent Pool3
Proposed Approach4
Critical Success Factors6
Lessons Form Other Countries7
Needed Roles and Resources
Role of The Government
The government has to warrant the success of this initiative by effecting strong liaison between:
• Ministry of Higher Education
• Institute of National Planning
• National Council for Youth
• Observatory for Education, Training, and Employment (IDSC)
• Universities
• Large enterprises
This liaison can be better realized if an industry association for the services offshoring is established
This association will also market Egypt’s offerings externally to stimulate global demand, and provide information and expertise to emerging local offshoring service providers
Offshoring Industry Association
Ministry of Higher Education
Institute of National Planning
National Council for Youth
Observatory for Education, Training
& Employment
Universities
Large Enterprises
Needed Roles and Resources
Role of Universities and Large Enterprises
Universities must play a fundamental role by providing the needed curricular support in the form of:
• Training needs analyses
• Curricula and studying material development
• Training delivery
• Assessment of the trainees
Large enterprises must also play a crucial role by providing the necessary practical and logistic support in the form of:
• Selection of suitable candidates
• On-Job-Training
• Office equipment (e.g. computers, software)
• Infrastructure and other facilities
As mentioned earlier, these roles have to be voluntary, in order to keep our overall costs at a minimum, and accordingly boost our cost advantage further
We will also need to capitalize on successful experiences and relational networks of local companies that have record in offering offshoring services, like Xceed
Needed Roles and Resources
Youth Centers and IT Clubs
There exist 263 IT clubs in youth centers distributed across the 29 governorates. These already established facilities can be utilized as small regional offshoring centers
The best governorates for this are those with both sizeable pool of unemployed university graduates, and a reasonable number of IT clubs
Alexandria, Asyout, Gharbia, Kafr El-Shaeikh, Menoufia, Port Said, Qena, Sharkia and Suhag are suitable governorates that we can utilize their IT clubs for our initiative
Source: CAPMAS, Egypt’s Youth Portal
Distribution of Unemployed University Graduates and IT Clubs
Contents
Critical Success Factors
Objectives and Scope of The Initiative
6
1
Analysis of The Global Offshoring Market2
Egypt’s Talent Pool3
Proposed Approach4
Needed Roles and Resources5
Lessons Form Other Countries7
Critical Success Factors
Effective governance and coordination
• As this initiative comprises a multitude of complex and inter-dependent activities that will be carried out by many entities
Enforcement of Intellectual Property Rights (IPR) law
• Sectors where R&D is critical need effective laws to protect their IP and make them confident of moving their services to Egypt
Improvement of the business environment
• Reduction of bureaucracy and simplification of doing business are essential requirements to enhance Egypt’s competitiveness in the global marketplace
Incentives policies
• Policy makers can develop policies that encourage large enterprises to participate into the initiative, for example, through better tax treatment
Contents
Lessons Form Other Countries
Objectives and Scope of The Initiative
7
1
Analysis of The Global Offshoring Market2
Egypt’s Talent Pool3
Proposed Approach4
Needed Roles and Resources5
Critical Success Factors6
Lessons Form Other Countries
ILO conducted two case studies for offshored data services in Barbados and Jamaica and had useful conclusions from which we may extract important learned lesson
Low wages and low-skill jobs cannot by themselves make developing countries globally competitive in the rapidly changing offshore data services sector
Very low wages and poor working conditions tend to undermine the stability of the workforce and contribute to high labor turnover and negative impact on productivity
Access to new technology and trade relations have a greater impact on global competitiveness than cheap labor
Adaptation to technological change is encouraged through the introduction of educational programs mainly targeted at youth. Barbados has established "INFO TECH 2000" while Jamaica has launched "EDUTECH 2000" and "Jamaica 2000"
Occupational Safety and Health (OSH) training and adequate ergonomic equipment are necessary to reduce occupational injuries and maintain high productivity. There is a high cost to "flying fingers" operating at sustained speeds above 10,000 keystrokes an hour
Barbados and Jamaica Case Studies
Biography
Education
• Candidate for Doctorate of Business Administration, AASTMT, 2011
• Masters of International Business Administration, ESLSCA, 2007
• BSc of Telecommunication & Electronics Engineering, Ain Shams University, 1997
Certifications
• Six Sigma Black Belt, ASQ, 2011
• Project Management Professional, PMI, 2010
Professional experience
• Around fourteen years of managerial and technical experience in the telecommunications industry
• Currently, holding the position of network strategy and PMO senior manager, Kuwait telecommunications company (VIVA)
Academic experience
• Part-time lecturer at Misr International University, spring 2010
Mohamed Ibrahim
One day, we were a great nation, and once more we will be.. God willing