Bringing in global business: An accommodating environment and low costs attract outsourcing

Long associated with call centres in low-income economies like India and the Philippines, outsourcing is seen as a growth industry in Malaysia under the government’s Economic Transformation Programme (ETP). While Malaysia cannot compete with these cheaper competitors for basic services on the basis of cost, it is bidding for competiveness in higher-value-added processes like knowledge process outsourcing and shared services. This burgeoning market offers potential for ICT-enabled growth in the services sector. Malaysia is quite highly regarded as an outsourcing destination, placing third behind India and China in AT Kearney’s Global Services Location Index for the eighth straight year. Interestingly, it performs well despite not placing higher than 17th in any of the three subcomponents of the index– financial attractiveness, people skills and availability, and business environment. Malaysia is in an excellent position for high-end outsourcing: it has a better business environment and more human capital than low-cost locations like Indonesia (5th) or Thailand (7th), and is cheaper than more developed countries like the US (18th) or Brazil (12th). Notably, it scores worst on the human resources component, due to low size and availability of the labour force.

OFFSHORE OPTIONS: Statistics on Malaysia’s outsourcing industry vary by the provider. Malaysia’s 216 active “global sourcing” companies make up 10% of all Multimedia Super Corridor (MSC) companies and account for nearly 30% of revenue, with RM9.1bn ($2.94bn) in 2011. This includes all components of outsourcing: Business Process Outsourcing (BPO), voice, and IT. A June 2012 report from IDC, meanwhile, estimates the BPO market at $989m, over half of which was from finance and accounting business outsourcing. It also estimates a $702m market size for offshore “shared services” – a popular alternative in which large businesses consolidate services like IT or accounting and occasionally move that unit overseas. This approach has drawn over 200 companies to set up shared services centres in Malaysia. Accounting firm Frost & Sullivan is one of the most recent companies to make the move, establishing a Global Innovation Centre with 830 people in Kuala Lumpur. Indeed, the ETP’s Performance Management and Delivery Unit (PEMANDU) reported that overseas sales revenues for outsourcing firms reached RM848 ($273.6) in 2011, 139% of the target of $610m set by the ETP. IDC’s report noted that key factors for businesses that chose Malaysia as an offshoring location included government incentives (Cyberjaya, Iskandar Malaysia, and foreign direct investment policies), the ICT environment, labour skills and infrastructure. At the same time, “talent risk” was a concern and the IDC report stated “addressing possible talent shortages in the near future will be one of the keys to attract foreign players.”

KEEPING IT LOCAL: Despite the sparkling reputation, many in the outsourcing and shared services (OSS) sector fear being overtaken by hungry competitors like India and the Philippines, which are trying to boost their value-add to take business away from richer countries. As David Wong, head of the National ICT Association of Malaysia’s (PIKOM) Outsourcing Malaysia initiative, told journalists, “The industry in developed nations is growing at a pace of 25% to 30% a year, while ours is only 15-20%. In a smaller economy like ours, it should be growing at a faster rate.” Wong noted that the OSS industry is being driven by multinationals and that many local companies are reticent to give up control by outsourcing IT or financial services.

One emerging trend in the IT outsourcing subsector will be the transition to, and merge with, cloud computing. AT Kearney’s report highlights the shift away from the model of code delivery, where hordes of outsourced programmers develop custom code on a one-off basis, to a cloud infrastructure, where a BPO provider both develops and hosts the code itself. Malaysia provides a good deal of traditional IT outsourcing, but is also investing heavily in cloud and data-centre technologies, which will likely increase the ability of the country’s companies to market themselves overseas.