Business Process Outsourcing: High Value South African BPO: What Would it Take?

This article was contributed by Conor Godfrey, SAIBL Associate

As the fallout from the global financial crisis forces companies to become leaner and focused on core competencies, the international competition for business process outsourcing (BPO) grows fiercer. South Africa currently has a US $969-million horse in this race, and the consultancy Frost & Sullivan believes that value could grow to $1.9-billion over the next five years.

Studies conducted by the Gartner Group credit South Africa’s success to its English language proficiency, a sufficiently educated labor pool and cultural compatibility with the West. Naturally these skills make South Africa a destination for call centers, and all of this spells jobs and foreign direct investment. Service providers such as Direct Channel Holdings prove that South Africa is, and will continue to be, home to world class BPO.

Despite these rosy predictions, the South African government and private sector cannot afford to become complacent. Potential obstacles come in two flavors which we shall label as ‘present’ and ‘absent’. Present obstacles include grossly uncompetitive telecommunications prices, lack of bandwidth and the high cost thereof, rising electricity prices and higher labor costs than competitors in South East Asia. These challenges are formidable, but many of them are fixable.

A map of Africa showing the route that the Seacom subsea cable system will take on the east and south coast of Africa. Source: Seacom HQ c/o Linda Carter (www.seacom.mu).

The original submarine cable laid by Corporate Council on Africa (CCA) member SEACOM, as well as the EASSY submarine cable that recently landed in Southern and Eastern Africa, will soon make bandwidth bottlenecks a thing of the past. Telkom’s monopoly of the telecommunication sector is over, and competition from Vodacom, MTN, and Neotel is already forcing prices down (ITWeb). While South African labor costs do not compete with the 70-75% savings companies can expect by moving operations to India or the Philippines, Western companies can still expect to save 40-50% by moving select business operations from Europe and/or America to South Africa (Business Report).

When you consider the language skills and cultural compatibility of the South African labor pool, a saving of 40% seems sufficiently thrifty to set up a call center. Companies are, however. reluctant to follow the set up of that call center with loan processing, accounting, disaster recovery or any of the other sophisticated processes that require domain expertise. For that, they still prefer destinations in South East Asia.

The obstacles labeled as ‘absent’ refer to a mixed bag of legitimate incentives currently being offered through overwhelming Government support for the BPO sector.

The South African Government provides between R37,000 ($5300) and R60,000 ($8600) per seat (a seat equals 1-3 people/jobs) to foreign and domestic companies to encourage job creation and investment in human capital. It also promises to address telecommunications costs and focuses on marketing South Africa in general and the BPO sector more specifically. The presence of Fagri Semaar, interim CEO of Business Process enabling SA (BPeSA) in President Zuma’s most recent delegation to the UK, underscored the sincerity of their efforts. (South Africa’s own service providers need to be woven into South Africa’s marketing blitz so that specific companies profit from brand South Africa rather than compete with it for air time).

However, the scale of this incentive program pales in comparison to the 10 year tax holiday Indian BPO outfits enjoy in their infancy. The tax breaks for Indian industrial parks and special economic zones (mainly used by IT companies) work synergistically with tax incentives for telecommunications companies, infrastructure initiatives, and an education system that graduates 350,000 English speaking engineers every year!

Explosive short term growth in South African BPO must not blind decision makers to the mid-term reality that South Africa will not retain its call center market share in perpetuity; cheaper English speaking alternatives in Kenya and Nigeria are coming along fast.

Furthermore, call centers do not provide the high-end domain expertise that can fuel longer term growth in the South African economy. Ideally, higher value BPO such as billing, software engineering and loan processing, will equip entrepreneurs and funnel trained staff into growth sectors of the economy, such as varied financial services and engineering. The shift is already underway and Keryn House, CEO of BPeSA Gauteng, claims that “Gauteng will add back-office processing services to its current customer service skills within call centres to create 4 000 new jobs and exceed revenue of R7.4-billion this year, growing from R6.1-billion last year” (ITWeb).

Every job created by BPO should be celebrated - but all BPO is not equal. The South African government should take the long view of BPO in South Africa and consider policies of a similar magnitude to those in India to graduate to more advanced BPO.