Egypt: Following the Trend of IT Outsourcing

The world of outsourcing today is getting bigger and bigger. Huge IT companies around the globe are gradually hooked-up on the trend of outsourcing and are opting to outsource their businesses or services outside the country to cut-cost, as well as to achieve growth and agility.

Countries such as India, Philippines, and China are the world leaders of IT outsourcing services today. Egypt is the newest in the long line of countries that is about to set up a government agency that would focus on putting its IT services on the market and make it open to businesses overseas.

According to Amin Khaireldin, a board member of Egypt’s Information Technology Industry Development Agency (EITTDA) the country has learned a lot from India’s paradigm. He also said in his statements that they have studied the happenings in India carefully and later learned two things: that there is a need to focus on the country’s talent pool in order to keep supply ahead of demand and that it has to be made sure that there are enough reliable infrastructures”.

The Egyptian government together with representatives of the industry has approached universities to help design an IT curriculum that hopes to produce 40,000 graduates per year for the next three years who are able to work for the outsourcing industry.

The central infrastructure investments, along with the construction of a technology village near Cairo, have attracted three huge companies to outsource business processes in Egypt. The internal IT infrastructure investment has grown from $4bn (£2bn) to $12bn (£6bn) in the past three years. Consequently, rising labor costs in India have led cost-cutting outsourcers to look elsewhere.

Egypt has cut corporation tax from 42 per cent to 20 per cent and began customs reforms to improve trade. Also, a competition prize offering three startups a year worth $50,000 (£25,000) and free resources has led to a number of innovative new firms.

According to Stephen Page, Chief Executive of hardware manufacturer Sapphire, says he has been happy with his company’s recent outsourced operations in Egypt. “It has good value, good workers and not too much red tape. We have found that the infrastructure is at least as reliable as in Russia or India.”

As of now, Egypt is the 13th best outsourcing destination globally, and on average 14 per cent cheaper than India.

It is a good thing for Egypt to be receiving positive feedbacks from companies who outsource their business functions to the country. If they show continuous progress and increased competitiveness in the industry, huge companies from the US and Europe would probably decide to outsource their business functions in the country.

Outsourcing: Differences Between European and US Companies

European and US companies are competing with each other, and showing their differences on outsourcing. According to Ernst & Young’s “European Outsourcing Survey 2008”, 70% of European companies are already outsourcing at least one function of their business, with 20% set to increase their level of outsourcing in the next two years, as they increasingly view it as a means to gaining a competitive edge.

The survey is consisted of interviews with more than 100 business leaders from companies with an annual turnover more than 100M euros in France, the UK, Germany, Italy, Spain and Belgium. Moreover, the survey found the main reasons for outsourcing were cost savings (49%) and better quality through the hiring of specialists (33%). The functions usually outsourced maintenance (76%), logistics (73%) and computing/telecommunications (68%).

Companies from Belgium recorded the highest rate of outsourcing with 81%, while France recorded the lowest start rate at 63%, though they established one of the widest ranges of outsourced functions, with an average of five functions outsourced per company. Although a widespread business practice in the UK (71%), outsourcing remains limited to an average of only three functions.

European firms need to be more scalable and profitable when competing in the global economy, having to deal with a strong euro is creating a general movement towards the disintegration of the traditional vertically integrated business.

However, in the US, outsourcing is more multifaceted or complex, particularly in the manufacturing division as soaring fuel and transport costs raise concerns.

The outlay of shipping an average container from Shanghai, China, to the US eastern seaboard, as well as inland costs, has tripled since 2000 and will triple again if oil prices reach $200 per barrel as some experts predicted.

According to the survey by the National Association of Manufacturers, nearly half of North American manufacturers consider the US is the most attractive country for business growth in the next three years, and more than half expect to become more globally competitive in the next five years.

However, it may impact the fuel prices, sluggish or even reverse outsourcing in some business sectors; it will not cause a dramatic shift in the globalization of the supply chain.

The Effect of Outsourcing in US Economy

The impact of outsourcing in the US economy has evoked extensive emotions to many, especially from presidential candidates and labor groups who criticized its practice. But economists and chief executives defend it as a natural succession of the economy.

In today’s fast paced economy, it’s not new that outsourcing chased cheap labor costs around the globe for decade. But in recent years, the effort has move stealthily into higher mechanism and income brackets, and it shows no signs of slowing down.

The latest protest is fueled by the fact that some service professionals, once insulated from outsourcing, are watching their jobs head out of the country during a largely jobless recovery. It is undecided how many engineering, technical support, accounting and other professional jobs have moved offshore in the recent years. However, various industry watchers believe that 200,000 service jobs could be lost each year for the next 11 years, and that some American job seekers are concerned as well.

Although, the outlook for others is that it is an opportunity that we are just on the leading edge of a transformation of what work means around the world.

There are a number of reasons why outsourcing occurs; corporations are under constant pressure from their investors to increase profits. Going from $9.00 an hour for tech workers to 27 cents an hour for labor, has provoked corporations to overlook other costs associated with outsourcing. Bonuses are defined at the year’s end and that is long term enough for these corporations.

Another reason why outsourcing still evolves is that more and more companies are viewing the world as a global marketplace, and sometimes requires building factories within outsourced countries in order to sell products, wherein manufacturing companies also don’t want to be left behind. Almost everything in this world is moving to outsource.

The impact of outsourcing in different parts of the world today was so tremendously huge. Even though, the effect of outsourcing in the US economy is negative, still majority to the countries around the globe who have favored that outsourcing really did well for their economy.