Egypt as a global offshoring destination

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


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


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

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


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)


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



2

1


Proposed Approach4





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


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


University Educated Young Professionals, 2003%, (Thousand)


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)



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 + +


Comparative Advantages of Different Regions

Source: adapted from Mckinsey Global Institute, CB Richard Ellis


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


3

1

Analysis of The Global Offshoring Market2

Proposed Approach4





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


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


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


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


4

1






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


5

1



Proposed Approach4




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


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


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


6

1



Proposed Approach4



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


7

1



Proposed Approach4



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

Egypt as a global offshoring destination

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