Anticipating the Unexpected: Implications of the Egypt and Tunisia Crises on Global Sourcing | Sherpas in Blue Shirts

Posted On February 1, 2011

After spending most of Sunday evening watching the ongoing Egyptian crisis unfold on TV, our mailboxes were flooded with analyst perspectives and journalist queries on the impact it will have on Egypt’s information and communications technology (ICT) industry. While the recent turn of events is likely to hamper the brisk progress Egypt and Tunisia were making in global services, it may be too early to predict the impact on the future state of these outsourcing/offshoring destinations. As market participants in these countries try to weather the storm, and the concerned global sourcing community looks on, global investors and IT-BPO sector countries and industry organizations stand to learn important lessons from this situation.

Tunisia and, particularly, Egypt are among the emerging offshore services delivery locations that have in recent years significantly invested in growing their IT-BPO industries as they recognized this sector as a key driver of economic growth. Both countries have achieved considerable offshore scale (more than 8,000 in Tunisia, and 20,000+ in Egypt), and both have successfully attracted marquee companies including Vodafone, Stream, Teleperformance, Wipro, and Microsoft, to source services from these locations to fulfill language skills, cultural affinity, cost savings and geographic proximity needs. And until the last two weeks, both countries were considered relatively stable locations demonstrating rapid progress in embracing reforms and FDI inflows (endorsed by UNCTAD, and World Bank/IFC.)

This all raises two critical questions: did location decision makers misread the developments in these countries, or fall short in anticipating these scenarios? To some extent, as such incidents are unprecedented and almost impossible to predict, they would not result in a “no-go” decision in a location selection exercise. At the same time, this is not the first instance of a partial disruption or complete shutdown of offshore support operations in a country. Episodes in the recent past (e.g., the typhoons in the Philippines, the military coup in Thailand, the earthquakes in Chile, the Mumbai attacks, and the swine flu pandemic in Mexico) have unquestionably affected operations in global delivery locations. Thus, it is important to “anticipate the unexpected” in location selection decisions by planning ahead, and putting in place investments and robust blueprints to manage such risks. In well-prepared organizations, these types of events trigger implementation of well-crafted disaster recovery/business continuity plans.  For example, Infosys has a disaster recovery site in Mauritius where business critical processes can be swiftly migrated, and critical resources enabled to travel at immediate notice via a blanket visa agreement with the Mauritian government.

Amidst the crises in Egypt and Tunisia, single location sourcing buyers are undoubtedly hurting more than users of global delivery networks-based models, as global delivery portfolios built on a ‘plus one’ principle ensure redundancy. In building a global sourcing portfolio, a role-based delivery network designed to meet aggregate demand, and scenario-based work placement to fulfill business needs, provides flexibility and ensures talent sustainability while optimizing costs and minimizing risks. For example, most leading global financial services companies have a headcount cap in each location, and route overflows to alternative sites in their portfolio.

Such moments of crisis also provide an opportunity to revisit the frameworks governing location selection decisions. Mature users of global services approach location selection as a risk-reward tradeoff on a relative basis. And as potential investors assess locations across parameters of talent pool, cost structures and structural risks, this episode underscores the importance of adopting a risk-adjusted view to cost savings approach, and allocating higher weights to geo-political and macro-economic risk. For example, while Egypt offers 70 percent cost savings on support services compared to Tier-2 locations in the U.K. and the U.S., in a situation in which country stability indicators are no longer favorable, the risk-weighted cost savings are less attractive.

These are clearly trying times for IT-BPO investment promotion agencies and country/industry associations in these countries. Due to the Internet blackout in Egypt, their ability to communicate with the external world has been hampered. While the immediate objective is to sustain engagement with existing investors, and extend support to help them cope with the situation at hand, it is important to keep channels of communication open with potential investors and key influencers to ensure accurate information dissemination. The underlying theme here is the need for a disaster management and communication plan for country/industry organizations. Once the situation stabilizes, these countries will need to engage in a public relations initiative to restore confidence within the international global sourcing community. A country rebranding exercise may also be necessary, if investor perceptions about Egypt and Tunisia change dramatically.

While there’s no denying these events impact the investment/stability ratings of these countries in the immediate-term, the political and macro-economic developments will need to be closely monitored with a longer-term view. Things to watch out for include endorsement of political leadership from both internal and international quarters, recast country ratings/indicators from the likes of World Bank and WEF, country administration reiterating its commitment to the services industry (specifically the ICT sector), ability to maintain investment-friendly policies (e.g., tax breaks, incentives, foreign investment practices), and the collective response of global IT-BPO companies operating in these countries.

As close watchers and proponents of global services, we remain cautiously optimistic about the prospects of the IT-BPO sectors in Egypt and Tunisia. Only time will tell how the situation pans out, and how the global sourcing community responds to the now imminent damage control exercise expected from the country/industry associations. The learning for the location decision maker from this crisis is more pronounced: Anticipate the Unexpected.

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