Egypt as a global offshoring destination

An Initiative for The Egyptian Economy Apr. 2011

Egypt As a Global Offshoring Destination

By: Mohamed Ibrahim

Highlights

 Objectives: i) promote Egypt as one of the top global offshoring destinations for the
services sector, ii) expand the talent pool of qualified young professionals, iii) stimulate the
global demand for offshoring jobs to Egypt, and iv) establish an industry association that
supports emerging local offshoring service providers
 Benefits: reduce unemployment rates, improve living standards of wider segments of
youth, and raise the taxable income for the government, while decreasing the deficit in the
balance of trade
 Approach: target and prioritize services to be offered, based on our potential supply,
global offshoring competition and demand conditions, and the investments we may need to
undertake. Then decide on the operating mode (location decision and service delivery
method) and consider the possible evolution path
 Resources: voluntary endeavors will avail much of the needed resources in terms of time
offered by academicians and professionals (theoretical and on-job training), and material
supplied by large enterprises (office equipment and shared infrastructure). This is crucial
to creating a viable cost advantage of our offshored services
 Critical to Success: effective coordination between the government, universities, and
large enterprises, enforcement of the Intellectual Property Rights (IPR) law, improvement
of the business environment, and incentives policies

Contents

1 Objectives and Scope of The Initiative

2 Analysis of The Global Offshoring Market

3 Egypt’s Talent Pool

4 Proposed Approach

5 Needed Roles and Resources

6 Critical Success Factors

7 Lessons Form Other Countries

Objectives and Scope of The Initiative

What is Offshoring?
 Offshoring is a company’s location Focus of the initiative
decision that refers to performing some
activities in another country outside the
market where it sells its goods/services

Outsource
 Outsourcing is a company’s control
decision that refers to buying some Onshore Offshore
activities from a third party supplier Outsourcing Outsourcing

 The focus of this initiative is on offshore

Control
outsourcing (the upper right quadrant of
the matrix)
 Captive offshoring is excluded as it Shared Captive
requires higher commitments and Services Offshoring

Captive
investments of the foreign companies
that may currently perceive Egypt as
riskier for this mode of entry
Onshore Offshore
Location

Source: adapted from OECD


Services Offshoring
 The service sector in developed countries supplies most jobs and the bulk of many
countries' positive trade balances
 Offshoring of services to emerging markets has been growing at a very fast rate of 30%
annually over the past decade
 This increased its share of the global services trade from 3% to 10%, making it a
significant subcomponent of services trade

Share of
Employment by
Economic Sector

Source: International Labor Organization


Objectives
 Craft an integrated strategy that positions our country as a distinguished global offshoring
destination for the services sector
 Develop the talent pool of the higher education graduates necessary to prepare Egypt to
tap into the opportunity of the global offshoring market
 Establish an industry association that orchestrates the implementation of our offshoring
strategy, markets Egypt’s offerings externally to stimulate global demand, and provides
information and expertise to emerging local offshoring service providers
 Reduce government bureaucracy and improve and enforce the legislations protecting
intellectual property rights
 Encourage universities, large enterprises, and other civic organizations to take their roles
in expanding the talent base and providing the necessary facilities to support the initiative


Scope
 The scope of offshored services within this initiative cuts across multiple industries, for
example: banking, insurance, pharmaceuticals, software, auto, healthcare, and retail
 It eventually includes all office-based occupations that can be done remotely, for example:
• Application development/maintenance
• Programming
• Web design
• Graphics design
• Contact center
• Analytics
• Accounting
• Payroll administration
• Claims processing
• Book keeping
• Data entry
 Prioritization of offshored jobs will be needed depending on many factors including the
quality and scale of our supply, global competition and demand conditions, and the needed
investments (for more details, please refer to the section: Proposed Approach)


How Egypt Will Benefit
 Create more job Unemployment Rates by Educational
opportunities, especially for the young Attainment and Sex, 2009
university graduates, who suffer from
high rates of unemployment
 Leverage the earning capacity of wider
segments of youth, and accordingly
enhance their living standard
 Increase Egypt’s export of services, and
accordingly help decreasing the deficit
in the balance of trade
 Diversify our portfolio of economic
activities, and accordingly boost the
stability of the economy
 Raise the taxable income for the
government, and accordingly improve
its tax revenues Source: CAPMAS

Analysis of The Global Offshoring Market

Market Size
 Mckinsey Global Institute (MGI) estimated the potential global market of services
offshoring to be $300 billion. The captured portion of addressable market in 2010 was 35%
 However, offshoring continued to grow at 30% annually over the past decade, as the pace
of offshoring adoption accelerated in all industries

Degree of
Offshoring Adoption
in Different Sectors

Source: Mckinsey Global Institute


Global Supply and Demand
 In a sample study of 28 countries, MGI found that offshore talent potential (university
graduates with up to 7 years of experience) in low-wage countries is double the high-wage
countries potential, and that India and China dominate low-wage labor supply
 Three factors, however, reduce the potential talent supply in low-wage nations:
• 13% only of the potential talent supply in low-wage nations is suitable to work for multinational
companies (due to lack of necessary language skills, low quality of the educational system, lack of
cultural fit, and attitude towards teamwork and flexible working hours)
• Dispersion of the labor forces out of major cities
• Competition for talent from non-offshoring companies

University
Educated Young
Professionals, 2003
%, (Thousand)



Global Supply and Demand
 MGI estimated that offshore employment demand reached around 4.1 million jobs in 2008,
representing 1%of total nonagricultural employment in the developed countries
 Factors that encourage companies to resource labor globally include continuous pressure
for cost reduction, existing global scope, and desire for access to attractive markets
 Factors that inhibit companies from resourcing labor globally include operational, structural
and regulatory barriers, and management attitudes

Offshore
Employment in
Eight Sectors, 2008
(Thousand)



Global Market Inefficiencies
 Companies hiring offshore frequently follow each other to cities or locations that already
have a track record in providing offshore talent
 The resulting “agglomeration“ of companies in popular locations may lead to concentrated
demand, and labor supply becomes constrained, which in turn leads to higher local wages
and higher levels of attrition
 This is already starting to erode the competitive edge of Indian cities like Hyderabad and
Bangalore, where the salaries of IT engineers and project managers inflated annually by
13% and 23% respectively
 If agglomeration makes conditions in a chosen offshore location deteriorate, a company
may not be able to relocate quickly to a better place due to its initial capital outlay to set up
an offshore enterprise. This causes "stickiness“ of the company to that location
 Offshored activities require different levels of investment in physical and human
capital, making some "stickier" than others
 Companies that use vendors to provide offshore services (offshore outsourcing) generally
have fewer sunk costs in any location. Consequently, it is easier for them to switch
locations


Comparative Advantages of Different Regions
Southeast Eastern South
Inida China Egypt
Asia Europe America

Cost + + + +

Quality of labor + + +

Offshore vendor landscape + +

Market potential + + + +

Risk profile + + + +

Business environment + + +

Quality of infrastructure + + + + +

Concentration of research
+ + +
universities

Language proficiency + + + +

Cultural fit + +

Source: adapted from Mckinsey Global Institute, CB Richard Ellis


Egypt’s Opportunity
 Big offshore destinations, like India, are experience escalating wages and attrition rates,
due to agglomeration effects
 Some services are less dominated by the big players, and hence have more fragmented
markets, which makes them easier for us to compete for
 Egypt, currently, has comparative advantages with regard to cost (labor and non-labor),
quality of ICT infrastructure, and the availability of multilingual talent pool with good accent
 And, if we improve the quality of labor and its cultural fit to the multinational environment,
we will improve Egypt’s competitiveness in this arena
 This improvement calls for an inevitable, long-term course of action to change the
educational system
 But, we still need a short to medium-term action to achieve a quick win. One option is a
condensed skills development program for the higher education graduates
 To further boost our cost advantage, this program will be entirely a voluntary endeavor,
jointly carried out by the government, universities, and large enterprises
 Combining efficient labor skills development with effective targeting of offshored services,
and creative offerings, we can create an opportunity for Egypt to develop a reasonable
footprint in the global offshoring market

Egypt’s Talent Pool

Potential Supply of Suitable Talents
 12.6% of Egypt’s workforce has a university degree or higher. This is 5% above the
average ratio in low-wage countries
 There exists a strong preference for education that prepares for administrative careers:
• 64% of students are enrolled in social studies (Commerce, Law, Arts and Education)
• 18% of students are enrolled in Engineering, Medicine, Pharmacy and Science
• 15% of students are enrolled in applied sciences
 The highest unemployment rates are in commerce (34.7%), followed by arts and
archeology (about 15.3% for each), then agriculture and law (14.5% for each), other fields
of specialization (10%), social work (7.3%), and finally engineering (3.8%)
 Private universities, to a large extent, duplicate public university curricula with no
qualitative addition, often using the same pool of teaching staff and attracting students with
lower entry grades
 Private universities focus mainly on engineering, medicine, management and media, but
they do not contribute to the improvement of the quality of graduates that are demanded
by the labor market


Potential Supply of Suitable Talents
 According to an ILO survey, the level of Distribution of Young Workers’ Skills
satisfaction of employers with their
young recruits is generally fair (66%)
 However, 41% of employers criticized
the low ability of young graduates to
apply knowledge learned
 The same low ranking is given to the
practical training provided to young
applicants at school (48% of employers)
 The education and training system
visibly fails to produce skills that are
required to perform jobs
 13% only of recruits have a very good
overall preparedness, which is
interestingly the same result as MGI
international study Source: Egypt Human Development Report, 2010


Skills Base Development Program
 This program is a core component of the initiative and it aims to equip the university
graduates with the necessary hard skills and soft skills in order to become suitable
candidates for offshoring jobs
 The program is condensed (around 600 hours / 5-6 months) and consists of two tracks:
• Hard skills track, which is job dependent, and consists of:
• theoretical training part (e.g. computer programming languages for programmer job
candidates)
• on-the-job training part
• Soft skills track, which is generic to all types of jobs and includes training on:
• language
• interpersonal skills
• cross-cultural communication
• time management
• Decision making
 This program is essentially a voluntary endeavor that is carried out by universities and
large enterprises, and coordinated with the government in the form of Public-Private
Partnership


Admission Criteria
 Admission criteria is a crucial element for the success of the initiative as it should help
carefully identify and select those candidates who will be able to:
• Commit to and successfully complete the skills development program
• Work effectively in offshored jobs and fit and adapt easily to different environments
 Important criteria include:
• Academic credentials
• Personal discipline and drive for achievement
• Willingness to work on shift basis
• Willingness to relocate within the country

Proposed Approach

Targeting of Offshored Services
 Targeting of services to offer will Circle size represents relative global market size
depend on the scale of our suitable
High priority opportunity
labor supply, global competition, market
size, and the needed investments
Engineer Designer/Developer
 Suitable supply refers to workforce that

High
is both competent to work in a global
environment and available for hiring Generalist
(after the skills development program)

Global Competition
 Based on the relative positions of
different job categories in the right side
matrix, high priority may be allotted to
support, generalist, and accounting jobs
 Second priority then goes to designer
and engineer jobs Analyst
Finance / Support
Accountant
 Finally comes the analyst jobs. Despite Low
the low competition, its global market
size is very small, which inhibits the
buildup of scale economies Low High
Our Potential Suitable Labor Supply

Proposed Approach

Targeting of Offshored Services
 Support jobs are entry level jobs and may not require a college degree (e.g. data entry and
book keeping)
 Generalist jobs require a university degree (e.g. G&A, contact center, payroll
administration, and claims processing)
 Finance and accounting jobs require a relevant university degree and training
 Designer or developer jobs require a university degree (preferably a technical degree) and
a specialized training (e.g. web design, graphics design, and programming)
 Engineer jobs require an engineering degree and a specialized training (e.g. IT and
application development and maintenance)
 Analyst jobs require a specialized technical university degree and strong analytical skills
(e.g. marketing research and R&D)
 Considering huge startup investments that it requires, contact centers might be removed
from the first priority targeted jobs
 However, some innovative solutions can work: JetBlue Airways 800 reservation agents
work from home, their computers connected to the airline's servers; they stay connected to
customers via voice-over-IP phones

Proposed Approach

Mode of Operation
 Location decision:
• Depending on the success of the initiative in creating offshored jobs, we may adopt a hub and
spoke approach to building a network of offshoring centers
• Hubs will be located in tier-1 cities (i.e. Cairo and Alexandria) and will focus on administrative,
back office, and HR activities, beside providing access to the largest talent pools in the country
• Spokes will be located in promising tier-2 cities/regions (e.g. Delta and Canal) and will provide
access to the fragmented talent pools in these regions
• Delivery method:
• Two service delivery methods can be adopted, depending on the sophistication of client’s
offshoring practices, and on our own capabilities: staff augmentation and managed services
• Staff augmentation: clients manage staff members directly, as if they were their own employees,
and pay for each staff member a supplier adds to complete a contract
• Managed services: suppliers agree to deliver a specified capability or functionality with a desired
level of service for a fixed fee
• The second method requires a higher level of trust, as clients cede more control to suppliers

Proposed Approach

Evolution Path
 Our offshored services can evolve -at lowest incremental investments- with regard to:
• Job complexity: from back office jobs like contact center, accounting, and claims processing to the
more complex functions like solution/application development
• Geography: from regional markets like Europe and Middle East (near-shore) to the global market

back-office processing higher value-added services
functions with little such as new product
decision making involved development, based on
in key tasks creative talent and
advanced development
enviornments

Solution Centers Global Service
Process Centers
Centers

customer solutions based
on extending knowledge
and experience

Needed Roles and Resources

Role of The Government
 The government has to warrant the
success of this initiative by effecting
strong liaison between: Ministry of
Higher
• Ministry of Higher Education Education

• Institute of National Planning
Institute of
• National Council for Youth Large
National
Enterprises
Planning
• Observatory for Education, Training,
and Employment (IDSC)
Offshoring
• Universities Industry
• Large enterprises Association
 This liaison can be better realized if an National
industry association for the services Universities Council for
Youth
offshoring is established
 This association will also market Observatory
for Education,
Egypt’s offerings externally to stimulate Training &
global demand, and provide information Employment
and expertise to emerging local
offshoring service providers


Role of Universities and Large Enterprises
 Universities must play a fundamental role by providing the needed curricular support in the
form of:
• Training needs analyses
• Curricula and studying material development
• Training delivery
• Assessment of the trainees
 Large enterprises must also play a crucial role by providing the necessary practical and
logistic support in the form of:
• Selection of suitable candidates
• On-Job-Training
• Office equipment (e.g. computers, software)
• Infrastructure and other facilities
 As mentioned earlier, these roles have to be voluntary, in order to keep our overall costs at a minimum,
and accordingly boost our cost advantage further
 We will also need to capitalize on successful experiences and relational networks of local companies
that have record in offering offshoring services, like Xceed


Youth Centers and IT Clubs
 There exist 263 IT clubs in youth centers distributed across the 29 governorates. These
already established facilities can be utilized as small regional offshoring centers
 The best governorates for this are those with both sizeable pool of unemployed university
graduates, and a reasonable number of IT clubs
 Alexandria, Asyout, Gharbia, Kafr El-Shaeikh, Menoufia, Port Said, Qena, Sharkia and
Suhag are suitable governorates that we can utilize their IT clubs for our initiative

Distribution of
Unemployed University
Graduates and IT
Clubs

Source: CAPMAS, Egypt’s Youth Portal

Critical Success Factors

 Effective governance and coordination
• As this initiative comprises a multitude of complex and inter-dependent activities that will be
carried out by many entities
 Enforcement of Intellectual Property Rights (IPR) law
• Sectors where R&D is critical need effective laws to protect their IP and make them confident of
moving their services to Egypt
 Improvement of the business environment
• Reduction of bureaucracy and simplification of doing business are essential requirements to
enhance Egypt’s competitiveness in the global marketplace
 Incentives policies
• Policy makers can develop policies that encourage large enterprises to participate into the
initiative, for example, through better tax treatment

Lessons Form Other Countries

Barbados and Jamaica Case Studies
 ILO conducted two case studies for offshored data services in Barbados and Jamaica and
had useful conclusions from which we may extract important learned lesson
 Low wages and low-skill jobs cannot by themselves make developing countries globally
competitive in the rapidly changing offshore data services sector
 Very low wages and poor working conditions tend to undermine the stability of the
workforce and contribute to high labor turnover and negative impact on productivity
 Access to new technology and trade relations have a greater impact on global
competitiveness than cheap labor
 Adaptation to technological change is encouraged through the introduction of educational
programs mainly targeted at youth. Barbados has established "INFO TECH 2000" while
Jamaica has launched "EDUTECH 2000" and "Jamaica 2000"
 Occupational Safety and Health (OSH) training and adequate ergonomic equipment are
necessary to reduce occupational injuries and maintain high productivity. There is a high
cost to "flying fingers" operating at sustained speeds above 10,000 keystrokes an hour

Biography

Mohamed Ibrahim
 Education
• Candidate for Doctorate of Business Administration, AASTMT, 2011
• Masters of International Business Administration, ESLSCA, 2007
• BSc of Telecommunication & Electronics Engineering, Ain Shams University, 1997
 Certifications
• Six Sigma Black Belt, ASQ, 2011
• Project Management Professional, PMI, 2010
 Professional experience
• Around fourteen years of managerial and technical experience in the telecommunications industry
• Currently, holding the position of network strategy and PMO senior manager, Kuwait
telecommunications company (VIVA)
 Academic experience
• Part-time lecturer at Misr International University, spring 2010

One day, we were a great nation, and
once more we will be.. God willing

Egypt as a global offshoring destination

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