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By Ali El Bahnasawy

For companies who want to outsource back-office operations, India has developed into the market model. But in a world where high-tech spending by both governments and the private sector exceeded $1.7 trillion (LE 9.35 trillion) in 2007, and the size of the global IT outsourcing industry reached $70 billion (LE 385 billion) with a growth of 30% in 2006, even a huge nation like India, which dominates international IT outsourcing with a 2/3 share of the industry, is facing a talent crunch. The solution? Outsource outsourcing.

India-based companies that were once notorious for seducing call centers and IT departments away from the West are now re-exporting their services outside India. Even with India’s massive population, the demand for IT services exceeds the supply of qualified labor in the country’s human resources market. Fueled by local successes, Indian IT companies are now buying companies in America, Europe and Asia to support their extended operations and cater to more than half of the globe’s high-tech needs.

Egypt has been ranked the thirteenth most attractive destination to set up an offshore service, according to a study by A.T. Kearney, a global management consulting firm. The study, which looked at 50 countries, was based on the evaluation of three main factors: financial structure, availability of skilled workers and overall business environment. As a result of reforms to Egypt’s business climate — such as lowering the cost of employment, the increased availability of attractive business properties like Smart Village and flexible income tax regulations — in addition to burgeoning language and computer skills on the part of the Egyptian population, Egypt is becoming a prime destination for India’s IT giants, who are coming to boost the industry as well as take advantage of Egypt’s underutilized workforce.

The Indian software industry grew from a mere $150 million (LE 825 million) in 1992 to $6 billion (LE 33 billion) in 2000, finally reaching a staggering $50 billion (LE 275 billion) in 2008, an annual growth rate between 28-50%. The Egyptian industry, on the other hand, doesn’t even maintain official figures on growth. Egypt’s registered ICT companies are said to be around 1,000, but even this number is unconfirmed because the government does not track the industry.

Dr. Hazem Abdelazim, CEO of the Information Technology Industry Development Agency (ITIDA) — a government agency established in 2004 with the aim of increasing the exports of ICT products and services and increasing investments in the sector — also does not know the numbers; the agency began its work four years ago, but has yet to begin the process of gathering comprehensive information about the industry. “We should gather information very quickly about the companies; we have to create a database. Working with good intentions but without numbers is not enough,” Abdelazim says.

So far, there are three sources that can be used to evaluate the Egyptian IT outsourcing market. The government puts the country’s total IT export services at $450 million (LE 2.475 billion). Local industry leaders, like Wael Amin, president and co-founder of ITWorx, which is considered to be the largest software service provider in Egypt, believe that the figure actually ranges between $500 million (LE 2.75 billion) and $1 billion (LE 5.5 billion). A study by Business Monitor, a print and online publisher of specialist business information, determined the market size to be $889 million (LE 4.9 billion) in 2006.

Amin explains that the discrepancy in figures is a result of the fact that while Egypt maintains export regulations for physical products, it lacks guidelines for the export of services. “The current law only looks at products and commodities, not at services; the services sector is pretty much unregulated. This has advantages and disadvantages,” he says. “The advantage is that it is easier to export, but more difficult to track trends as well as collect information to better understand the situation.” Amin says he recently filed a recommendation with the Ministry of Trade and Industry to review export regulations in order to better tailor them toward service-oriented industries, like ICT. “I was promised by the minister that the ministry will focus on service laws and regulations in 2008 and 2009,” he says.

The Egyptian government hopes that playing host to Indian companies will transform Egypt’s image in the international IT market and portray the country as a popular destination for IT outsourcing. The administration of Prime Minister Ahmed Nazif therefore seems likely to remain committed to developing the ICT sector, having hired an international public relations firm to help sharpen its image. The administration has set a target for ICT exports of $1.1 billion (LE 6.05 billion) by 2010. This figure is based on government meetings with the international management consulting firms McKinsey and A.T. Kearney. But taking into account the lowest figure for the size of the industry (LE 2.475 billion), this would mean the sector would have to maintain nearly a 25% growth rate for the next two years.

“We are implementing the strategy through three main pillars: one is attracting multinational [companies]; two is developing the capacity of the local Egyptian companies; and three is making the talent pool available and ready to serve the first two pillars,” Abdelazim says.

The plan also determined areas of expertise in which Egypt could develop a competitive edge in the ICT sector, including technical support, call centers, business process outsourcing and IT services. “In terms of having a competitive edge, the main focus will be on both IT service outsourcing and business process outsourcing,” Abdelazim says.

While the concept of IT outsourcing (the contracting of the performance of tech-related services to an outside firm or software house) is well known, business process outsourcing (BPO; the contracting of a specific business task, like payroll, to a third party) is relatively new. Indian service providers made $47.8 billion (LE 263 billion) in 2007 from BPO alone. Abdelazim believes BPO is a major breakthrough for the Egyptian workforce. “Anyone with some computer and language skills can be part of a respected business organization,” he says.

At the moment it looks like the government’s main goal is to attract foreign investors to Egypt by bringing big players to the IT outsourcing sector. Companies like Microsoft, Oracle, ALCATEL, Ericsson, Vodafone and Teleperformance are among the biggest names in the ICT industry, and all of them have so far established operations in Egypt.

Now, Indian IT giants Wipro and Satyam have also come to Egypt, possibly as a result of incentives and rewards offered by the government. “We gave them incentives like rental and training subsidies between 85% and 100%. The telecom infrastructure as well as furniture are also subsidized,” Abdelazim says.

The government incentives are based on two basic premises: one, the incentives help international companies bring their names to Egypt; and two, the companies are coming with both deep pockets and long-term plans, bringing employment to hundreds if not thousands of people, something local companies currently cannot do.

Guided by premium business models laid down by companies like IBM, which has a massive global workforce and raked in a staggering $55 billion (LE 302.5 billion) in profits between 2006 and 2007, India’s IT companies are looking to grow — and profit — fast.

But what they can’t buy is brainpower, which is one of the driving forces behind their move to Egypt. According to A.T. Kearney in their study on what makes the best location for an offshore business, the size and availability of a country’s labor force, education and language capabilities, are determining factors in making one country more attractive for outsourcing than another.

“In search of good, quality manpower, we found that Egypt has a large population with a high number of graduates with good computer skills,” says Virender Aggarwal, Satyam’s director and senior vice president for Asia, the Middle East and Africa. “[Egypt] can also serve as a good market for Europe, Africa and the Middle East because of the multilingual capabilities of the Egyptians. Many Egyptians speak French as well as other languages, like German.”

Satyam, the first Indian IT titan to open a branch in Egypt, decided to launch operations in the country after having studied the region carefully for an area that would give them the best return on investment. Also in search of ample talent resources and adequate IT facilities like the Smart Village, Satyam chose Egypt over countries like Jordan, Kenya and Oman, and plans to hire some 300 Egyptians in 2008. If things go well, Aggarwal says, the company may expand their workforce to include up to 2,000 employees in Egypt.

Aggarwal was also impressed by the speed with which the government responded to Satyam’s request for a new location for its development center. “The ministry contacted us and in 10 days we signed an agreement,” he says.

Wipro, another Indian company and the world’s largest independent research and development (R&D) service provider, will open its new branch at the Smart Village. With more than 72,000 employees worldwide, Wipro is impressed with the Egyptian human resources market. “We find the resources in Egypt to be very talented, and being present in Cairo will give us access to this talent,” says the company’s head of operations in the Gulf, Raman Sapra. “The objective is to hire all Egyptians in the Cairo Development Center,” he says, adding that Wipro plans to hire at least 300 Egyptians. Both Satyam and Wipro have announced they will establish R&D departments in Egypt.

Some in the industry are speculating that Indian companies, with their low-cost services, expertise and economies of scale, will end up dominating the local and regional markets. But the competition is not necessarily over local customers. On the contrary, local companies encourage international players to utilize and develop the Egyptian market, which is considered both small and underdeveloped.

“It is a difficult market even for the Egyptian players, as there is an [overall] lack of ‘e-readiness’, technology use, and e-literacy,” Amin says. “If the Indian companies are able to come to the market and make it profitable, this will benefit everybody, and raise the market’s level of maturity.”

With a focus on exporting services and consulting outside of Egypt, the Indian companies also claim they are not after the local market. “If the business comes to us, we will not say no,” says Aggarwal, adding that Satyam is willing to help small and medium organizations in Egypt obtain CMMI certificates, a qualification that indicates a certain level of maturity in a company’s business practices.

ITIDA is also starting an initiative to help local companies obtain marketing consulting through a global management company that has yet to be announced, and through which companies will benefit from an 85% subsidy for the cost of the services.

What may actually end up presenting a threat, however, is the lure of higher salaries with Indian companies. “Their arrival is going to have a huge impact on salaries,” says Amin, not only in draining brainpower from Egyptian companies, but causing salaries to rise throughout the market.

“We will pay 25% higher than most companies here, and will convince them to stay with us,” says Aggarwal. “The idea is to attract them and retain them; we will not offer high salaries to spoil the market.”

With plans among Satyam and Wipro to hire hundreds of experts, and the relatively small size of the Egyptian companies — ITWorx, for example, has around 700 employees — the impact of wage increases may be a very real threat.

To preempt the problem, the government has requested that the Indian newcomers focus on fresh graduates when hiring. “What we are requesting from the multinationals is that they hire fresh graduates,” Abdelazim says. “We told the Indian companies they will be measured by the amount of new graduates they take from both ITI institutions and universities. We will ignore transfers from other companies but within certain limits. Of course the salaries will go up, and we cannot play with the market dynamics.”

Like any other business, Indian companies will attempt to both attract and retain resources in order to expand and continue to dominate the industry against burgeoning IT players like China and Malaysia. While the Egyptian government is making strides to attract and accommodate foreign investors, leaving local companies behind may lead the industry to crisis if India’s multinationals decide to move on. But as talent remains scarce in India’s human resource market, and Egypt’s wage cost advantage keeps it among the top offshore destinations, it is likely that this is just the beginning of the story.  bt