Outsourcing, no matter which way economists will look at and how industrialists define it, is here to stay. The concept is not new. It has been around in various guises for centuries, but it is only in the past 20 years that is has really taken off. Globalisation and the effect of free trade agreements between nations and blocks of nations have spurred the process and it has rapidly become a multi-billion dollar industry in a surprisingly short time.

It could be said that it is a natural effect of the advantages of globalisation or it could be described as a negative consequence, depending on which side of the argument people take. Some say it helps keep prices low and others say it encourages cheap labour. It might be better described as a double-edged sword.

What outsourcing does best is reduce overheads and, some say, increase productivity and that is something that shareholder and profit driven companies cannot ignore. The spread of globalisation means that companies have to be much more competitive in order to survive and survival is not enough anymore, they have to be seen to be thriving. The markets are, in some respects much more sensitive to the tremors that less than stellar quarterly results can yield and the increased power of shareholders means that they will demand immediate results, or calls will come for the head of whoever is responsible for a lacklustre performance.

The whole debate is, however, a lot more complicated than either side of the increasingly fraught argument is likely to admit. Some governments find their hands tied. They want to attract more foreign direct investment, but they need to keep costs down in order to do so. Allowing companies to outsource a certain percentage of their workforce to what is seen to be a third world country does not go down well in western nations, where the job can be done for a fraction of the cost.

One of the first places to feel the effect of the outsourcing boom was Silicon Valley in California. More than one million jobs in the US as a whole, and around 200,000 jobs in California were lost between 2001 and the middle of 2003, according to a University of California at Berkeley report. Most of these losses were as a result of the dotcom collapse. Some IT companies realised that it was cheaper to produce its high tech products in somewhere like India during tough economic times, than in the US where average wages were much higher.

JP Morgan ChaseJP Morgan Chase has led the banking pack by shifting a not insignificant part of its investment banking activities abroad. The investment bank was amongst the first to shift the company's back-office and call-centre operations abroad. It also set up a team of research analysts in India, Hong Kong and Singapore to support its senior research teams in the US. The investment bank declared its intention to have around 9,000 staff members in India by the end of 2007 and over 30 per cent of those will be employed by the company's investment banking unit with some doing foreign exchange trades and others working on highly complicated credit derivatives contracts.

The UAE has, in the past few years begun to position itself as a centre for outsourcing. The country had already been very successful in bringing in a significant number of large financial institutions and soon it became apparent that it would be no bad thing if the country were to help by providing them with facilities to cater to their back office and customer support functions. The country already had a large population of English speakers, quite a few of them from places like India and the Philippines, the same countries that are the backbone of the outsourcing boom.

So the government established the Dubai Outsource ZoneDubai Outsource Zone to cater for the burgeoning industry. The region needed such a hub, and moreover the industry and especially the financial services needed Dubai to compliment the worldwide demand and the first phase was completed in the middle of 2006. The outsourcing industry is one that is growing at a rapid pace and the plans were devised to tap into this in order to develop the industry both locally and regionally.

Emirates bank set up 'Buzz Contact Centre Solutions' in 2002 to cater for all of the Emirates BankEmirates Bank Group's back office customer care business, whether it is Emirates Islamic Bank, Network International, meBank or Union Properties, Emirates Financial Brokerage, Emirates International Service, Emirates Islamic Financial Brokerage. The customer care is consolidated, so they might have different phone numbers or email addresses or different business operations, but it all comes together into one shop and gets done at Buzz Contacts. The management team is employed by Emirates BankEmirates Bank and only the agents work on contracts. Buzz has 500 staff, split evenly between centres in Dubai and Sharjah. But what is interesting is that National Bank of DubaiNational Bank of Dubai, which recently announced that it is going to merge with Emirates bank, has launched a new state-of-the art 24 hour call centre. How this will fit in with Emirates bank's Buzz Contact facilities remains to be seen.

But Dubai has to compete with the likes of Lebanon, Egypt and Israel, which is the largest outsourcing centre in the Middle East.

Jordan has been quick to spot the advantage that outsourcing can provide. It began by setting up a number of business parks in the late 1990s and it is working hard to establish itself as the premier destination for businesses that are looking for a low cost Middle Eastern hub that offers a labour force with a natural command of both English and Arabic. The Jordanian government, lead by King Abdullah, has made the most of its good international reputation with western countries and has encouraged western businesses to set up shop everywhere from the port city of Aqaba to the capital of Amman by providing them with a highly educated workforce and tax benefits. The king has made sure that universities across the country offer the kinds of courses that most businesses require.

The kingdom, which lacks a lot of the natural resources that many of its neighbours have in abundance is wisely increasing the size and variety of its talent pool and is marketing itself as a low cost alternative to places such as Lebanon and the UAE, with a business friendly government that has a very international outlook. Telecoms and IT companies have noticed and have set up shop in the country and small to medium enterprises are moving into business parks, not all of them foreign. Local businesses have been spurred by what they have seen and local entrepreneurs are following suit.

A survey by Simmons & Simmons International showed that the likelihood of outsourcing contracts failing is very high. Around 70 per cent of contracts have to be renegotiated within two years and 50 per cent within 12 months. Major issues between the two parties caused 90 per cent of the contracts to be renegotiated and 95 per cent of contracts were terminated early. Logica CMG, an IT company, said that over 30 per cent of large outsourcing deals can expect to fail. These large deals usually make up around 80 per cent of the money spent on major outsourcing deals.

However the attraction of outsourcing cannot be denied or ignored. Struggling companies that were desperate to achieve a five or 10 per cent increase in productivity, usually by cutting staff to the bone, would see an increase of around 30 to 40 per cent by outsourcing many of the labour intensive back office procedures abroad. This would free up the remaining staff and allow them to concentrate on the core parts of the business.

Forrester Research has estimated that as many as three million jobs and $136 billion in wages could be outsourced by US companies to places which not only include India, but also Russia and Eastern Europe, where outsourcing industries are expected to account for roughly 25 per cent of the GNP of some countries.

But even the 'booming' outsourcing game has its up and downs. The worldwide market is experiencing a bit of a slow down. The total value of outsourcing deals in the first three months is thought to have been around $17 billion, down from around $25 billion in 2006 and this would make the first three months of 2007 the slowest first quarter since 2001.

Deutsche BankDeutsche Bank believes thinks that while costs in places like India are low at the moment, they will be more or less equal to places like New York or London in 12 or 15 years time.

JP MorganJP Morgan has gone a step further and turned the idea of outsourcing to its advantage in another way. The investment bank is one of the first banks to launch an outsourced in-house banking solution based in Dublin, which allows corporates to outsource the management and cost of setting up an in-house bank as part of a broader managed services solution.

Building on expertise established in the treasury-outsourcing arena, the extended solution features multibank reporting and payment capabilities and has a number of corporate clients, one of whom has already implemented an in-house bank. "We do not manage your companies; we just run the processes for them," Anne Collard, head of JPMorgan Chase's treasury services consulting group for Europe, Middle East and Africa explained. Corporates will be able to receive full data visibility and reporting via Web screens. Collard maintains that the bank's existing core payments infrastructure, and its track record in terms of resiliency, contingency and operational risk, means it is well placed to provide corporates with further economies of scale.

So will the whole business of outsourcing eventually come full circle? Not for at least 20 years according to analysts. Banks and other large business will always look for economies of scale and governments in an increasingly globalised world will have to be sensitive to the needs of big corporations by keeping human capital costs low and talent levels high.

© Banker Middle East 2007

 

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