India and China are the locations most companies think of when considering offshoring. But unreliable power supplies, cultural differences and high staff turnover are increasingly leading CEOs to look elsewhere. Mark Stuart considers South Africa's chances of becoming the twenty-first century's outsourcing location of choice.
According to recent research by McKinsey Quarterly, US companies are expected to offshore 2.8 million jobs by 2008. And in the UK, a report by Deloitte estimated that two million service jobs will be outsourced to low-cost countries in the financial sector alone by 2010.
India is unlikely to be toppled as the main destination for outsourcing, with 80% of global offshoring now located in the subcontinent. But South Africa is fast emerging as a rival to India's dominance, thanks to closer cultural links with the west, a more reliable telecoms infrastructure and relatively low labour costs.
A 30-mile stretch between Pretoria and Johannesburg has quickly become the country's first technology hub, and the government is investing significantly in frameworks that will actively encourage foreign investment.
Specifically, the country is targeting call centre outsourcing. The number of call centres in South Africa is likely to almost double between now and 2009, and the number of agents is expected to quadruple in the same time.
As a consequence, South Africa recently came top in a survey of favoured offshore contact centre locations by Ion Group, a marketing services specialist in the UK.
There are several reasons why South Africa is well placed to compete with its more-established Asian competitors. The most appealing factor is the closer cultural bond for Americans and Britons.
Far more western in approach than India or China, South Africa has a cultural viewpoint that enables call centre staff to have 'a much better ability to empathise with customers on the phone', according to Ryan Powell of Datamonitor. There is better fluency in English too, and an accent that is easier for British or American customers to understand.
One of the key issues for companies looking to set up call centres abroad is network reliability – any cost savings from operating in a cheaper location can be offset if the systems are prone to failure. This has been one of the major complaints for companies working in India. However, South Africa has recently perfected a highly sophisticated telecommunications network, secured by a fibre-optic link with Europe laid along the west coast and a second east-coast link, which was laid in 2003. South Africa has by far the best telecommunications infrastructure in Africa, and investment in telecoms is high (over 7% of GDP in 2002).
Historically, the high cost of South Africa's telecommunications system has been off-putting for foreign investors. But the government-backed monopoly of Telkom, which charges much higher rates than equivalent providers in other offshore destinations, is in the process of deregulation. And since South Africa's recent embracing of VoIP (voice over internet protocol) technology, international call charges have plummeted.
President Mbeki recently stated in an address to the nation his belief that 'the unacceptable situation in which some of our fixed line rates are ten times those of developed (OECD) countries will soon become a thing of the past'.
The government proactively encourages foreign investment. It has spent $23m on a technology park in Pretoria and set up a Presidential task force to consider ways to improve IT infrastructure, with an ambitious target of 100,000 new jobs created by foreign outsourcing by 2009.
TIME FOR CHANGE
For European companies, there is the significant bonus of time-zone compatibility. This is something that can cause major headaches when outsourcing contact centres in Asia because of the need to manage workers at non-standard hours. South Africa is in the same zone as most countries in central Europe, and the UK and most of Western Europe are just one or two hours behind. Logistically, this is far preferable to five-and-a-half hours behind (India) or eight hours behind (China).
Active Contact Solutions was the first UK company to set up outsourcing operations in South Africa, in March 2002. Since then, key companies to invest in the country have been Swissair and Lufthansa.
Recently, Datacall, a client liaison specialist for the office equipment industry, nominated South African call centre operator, Digicall, as its preferred telesales and telemarketing partner. Digicall uses advanced predictive dialling tools to target current and former clients of a major UK equipment supplier. With 2,000 calls a month, the company expects its relationship with Datacall to develop into a long-lasting partnership.
"India is a victim of its own success to a degree," says Datacall's Steve Blogg, who chose South Africa after careful consideration. "The labour market is not as stable as it is in South Africa, where there is more opportunity to build people and their skills, because working in a call centre is seen as a genuine long-term career option."
CAPE OF GOOD HOPE
CEOs need to know that any country they are seeking to invest in is politically, economically and socially secure. South Africa has quickly and successfully reinvented itself since the mid-1990s, leaving behind the international isolation that damaged the economy and lowered South Africa's image abroad.
President Mbeki is keen to banish the memories of previous regimes with their high tariffs, anti-competition measures and government intervention, and create good relations with foreign investors.
To this end, the government has lowered import taxes and local subsidies, reduced the secondary tax on corporate dividends and scrapped the non-resident shareholders tax – all-powerful disincentives to foreign investment just a few years ago. New tax incentives tailored towards potential outsourcers are also being planned for the 2006-7 budget.
OVER THE RAINBOW
Despite its cultural and technological advantages, South Africa still has a job on its hands to compete with India – the benchmark for offshoring. The publicised deregulation of Telkom would be more accurately described as turning a monopoly into a duopoly, and many workers in South Africa are still unhappy with some of President Mbeki's initiatives, despite the overall upward trend in the country's economy.
This means that companies considering outsourcing to South Africa will still need to complete full due diligence, and consider risk assessment carefully. But weighing up the long-term value that South Africa could generate, a CEO who wants better cultural links, guarantees of technological reliability and well-educated, enthusiastic employees need look no further: offshoring is fast becoming the new diamond mine of South Africa.
SOUTH AFRICA'S ADVANTAGES AT A GLANCE
- Labour costs two-thirds of US or UK call centres
- Westernised outlook
- Highly educated, multilingual staff
- Sophisticated telecommunications and utilities infrastructure
- Time-zone compatibility