Effect of the crisis in Egypt on the outsourcing market

As the crisis in Egypt continues, Ovum lead analyst Peter Ryan asks what the effect on the country’s outsourcing market will be.

February 7, 2011

Unrest puts Egypt’s outsourcing credentials at risk

As the global community watches in horror at the scenes unfolding in Cairo, many in the outsourcing community are pondering the demise of what appeared to be the next big thing, in terms of location, in offshore services delivery. The virtual state of martial law imposed by the Mubarak government not only impacts the ability of outsourcers to service their clients, but also counters the pro-business message of openness that has been the watchword for foreign investment for the past several years. The largest question remains whether this once-waking outsourcing giant can recover regardless of a change in government, and what the broader implications are for offshoring.

Curfews, restricted movement, and no Internet impact service delivery

It is clear that the expression “business as usual” has no practical application for outsourcing work currently slated for Egypt. Communications within, to, and from the country have been minimal, and staff are under government curfews restricting movements to and from work. These constraints are giving outsourcers on the ground a significant amount of pain from the strain of fulfilling tactical processes and ensuring that adequate labor and technology backups are in place.

Many service providers, as well as their clients, are re-evaluating whether Egypt is still the right location for outsourcing deployments.

This is especially disturbing considering the large number of global players that have set up in Egypt in the past several years – among them most recently, Sutherland Global Services in Alexandria. Other IT vendors that have been investing in Egypt for longer periods, just as large, home-grown providers (including Xceed and Raya), could be impacted severely in the coming months as clients are anxious to minimize offshore risk. Microsoft has already begun to move some of its work out of Egypt.

Can Egypt’s outsourcing sector recover?

Over the longer term, it will be crucial to see how Egypt’s global reputation as a leading destination for outsourcing services can recover from this wave of violence and civil and political unrest. Effective damage control among prospective and existing investors will be difficult for any future administration, and convincing many outside investors of ongoing Egyptian stability will be a tough task to say the least. For nearly ten years, executives, consultants, and site selection specialists have been fed a steady diet of positive rhetoric from Egypt’s government, quasi-government affiliates, and the Egyptian private sector touting the country’s political and economic stability in order to secure BPO and IT service investment. It is unlikely that these same investors will be quick to take such declarations at face value in the future.

However, Ovum believes that Egypt’s outsourcing space retains value in the form of a sizable talent pool with significant education and language skills. This, along with generous financial incentives, has been the backbone of the country’s growth in services. That said, after recent events the extent to which educated, multilingual Egyptians will choose to emigrate to more stable shores (at least in the short term) is questionable. This could erode the country’s competitiveness further.

What are the Egyptian crisis’s broader implications for offshoring?

What has recently occurred in Egypt is certain to have ramifications for offshore outsourcing destinations the world over.

“Following recent border violence in Mexico and the 2009 terror attacks in Mumbai, the events in Egypt are certain to make outsourcers and their clients much more risk averse than any time in recent memory, and are likely to push many companies to choose the more secure , albeit costlier, option of keeping third-party work onshore,” added Ryan.

According to respondents to Ovum’s 2010 CRM outsourcing Business Trends survey, this sentiment is already present among Western enterprises. Approximately two-thirds indicated no offshoring plans, and regardless of location, the Egyptian unrest will reduce the bar for enterprise risk tolerance for offshore delivery.