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Out of Africa - outsourcing's false dawn?

Cath Everett Profile picture for user catheverett December 1, 2014
Summary:
Whatever happened to Africa's status as the next big thing in offshore locations for outsourcing?

 

 

Bangalore Employees at a call centre

A few years ago, there was a lot of talk about Africa becoming the next global outsourcing destination of choice - and the continent certainly appeared to have a number of factors working in its favour.

For starters, across its 53 countries, Africa has a population of just under one billion, the median age of which is the lowest in the world at 18.6 compared to developed nations’ average of 39.6.

This youthful populace, being predominantly of working age, has the potential to provide a vast and, in many instances, low-cost potential labour pool.

Although skills levels vary greatly across different countries, education levels are improving in general terms as the middle class continues to expand and government investment starts to bear fruit.

Moreover, Africa’s time zone is not dissimilar to that of Europe and, depending on where you go, boasts large numbers of English and French speakers.

Finally, the continent’s current growth rates are now second only to East Asia, which includes China, and since the Millennium, it has been home to eight of the world’s fastest growing economies.

In fact, its combined GDP amounted to more than $2 trillion in 2013, making it larger than India’s, which means that the opportunities offered by domestic markets, not least in terms of foreign direct investment, have the potential to be huge.

So the big question is then, has this much-vaunted move to outsourcing in general and IT/business process outsourcing in particular actually transpired, and is Africa likely to be in a position to take on the Asian giants such as India and the Philippines anytime soon?

The short answer, it seems, is no. A key reason for this is simply the continent’s lack of basic infrastructure. This shortfall translates into everything from power blackouts due to unreliable energy supplies to the high cost of international phone calls.

To make matters worse, internet access is also expensive and slow within urban centres – and generally non-existent should you move as little as 20km outside.

Africa’s challenges

Other big concerns, meanwhile, include corruption and political instability, which is a real turn-off for investors. Richard Hurst, senior analyst for enterprise services at market research organisation Ovum, explains:

Corruption is a major problem across the whole continent, but political instability is a big challenge too. Investors come into this for the long haul - they’ve got to establish a centre, hire staff and the like. They can’t just up sticks and leave very easily so they look for political stability – it’s one of the key issues.

But Pradeep Mukherji, president and managing partner at management consulting firm Avasant, also points to the bad luck that the continent seems to have experienced over recent times.

Four years ago, for example, Egypt was starting to build up a successful outsourcing industry. Then the Arab Spring struck and foreign investors withdrew almost overnight.

Until recently, Ghana and Nigeria were likewise seeing high levels of inward investment, but these have now been decimated since Boka Haram and ebola took their toll. Mukherji says:

People are now starting to understand Africa’s potential, but I almost feel as if the continent is jinxed. As soon as countries start establishing themselves, it seems like something happens just at the wrong time. So it ends up being one step forward and two steps back.

But the situation is also not helped by the high levels of red tape that many countries have in place as well as the often lacklustre government attempts to get an outsourcing industry moving in the first place.

One of the problems is that, despite the high returns that the sector can bring in terms of employment and boosting the local skills base, the focus and investment required, not least in terms of creating a reputation for trustworthiness, is long-term – and can be wiped out in an instant if the environment turns volatile. Hurst explains:

There’s been some effort by governments, but it’s often very haphazard and half-hearted because they tend to get distracted by more pressing challenges and so outsourcing drops off the table. The real issue though is competing against Asian destinations, which are focused, have better infrastructure and a greater knowledge base to draw on, and are also more competitive on price.

Long way to go

What this all means, in reality, is that Africa is often hard-pushed to differentiate itself from the competition.

 

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As a result, its IT/business process outsourcing (BPO) revenues from foreign customers are still only worth a miniscule $200 million (Avasant) compared with India’s formidable $75.8 billion sector, which admittedly includes both domestic and foreign business, according to India’s National Association of Software and Services Companies (NASSCOM).

As Hurst points out:

To attract an outsourcing customer from Europe or the US, you have to show that you can reduce their operational expenditure and it’s a very hard argument for Africa at the moment. A key issue involves reducing the cost of communications and, while the continent has made some headway, more needs to be done.

As to which countries constitute the largest players in the region, the winner by far is South Africa. As outsourcing research and advisory firm Tholons puts it in its 2014 regional overview of the top 100 destinations worldwide :

In general, the term ‘Outsourcing in Africa’, when used by global providers and service buyers, almost always only means South Africa – and Johannesburg in particular.

Joburg, the country’s economic and financial centre, currently comes in at number 21 in Tholon’s top 100 rankings and boasts more than 20 large captive providers operating there. Its speciality is English language IT and health-related call centre services.

Accra in Ghana (West Africa) is the region’s next country on the list at number 42, followed by Cape Town (number 60), which was said to show “promise” – it was the biggest gainer this year, moving up eight places. Hot on its heels at 61 was Casablanca in Morocco (North Africa) but it did not have such a good year, moving down four slots instead.

As to whether the continent will ever be able to take on its rivals to become a global force, meanwhile, the jury is still out. As Mukherji concludes:

Africa still isn’t holding its own and it’s still got a long way to go. It’s got the potential there, but realising that potential has been a challenge - and it’s difficult to say if things will ever really change due to the volatile environment in which it constantly finds itself.

 

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