New locations (think Jamaica, Romania, Malaysia, and Singapore) are gaining traction as Global In-house Centers (GICs) and service providers seek to match talent to specific need, as well as to diversify their location portfolios
Availability of relevant talent for digital and complex services is driving large setups in Singapore, Romania, Ireland, and Mexico
Service providers seek to optimize delivery mix by exploring new locations while also developing onshore capabilities
New demands are driving changes in location maturity for life sciences ITO, but India remains the preferred delivery location
Even excluding Brazil, which is more than 5x the annual BPO operating cost per FTE of India, annual BPO operating cost per FTE varies by more than 200% across cities and regions
85% of the all GIC FTEs are located in only 6 countries: 55% located in India; 30% spread among Philippines, Poland, China, Malaysia, and Costa Rica
Annual ITO operating cost per FTE varies by more than 4x across regions
Malaysia, which has been trying its fortunes in the global sourcing industry, has positioned itself as a destination for high-value services. On the back of strong government support, a skilled talent pool, sectoral expertise, first world infrastructure, and ease of travel, there has been an influx of MNCs setting up their back offices in the country in recent years.
The Malaysian IT-BPO industry is estimated to have grown at a CAGR of 15 percent in the last five years. Enterprises are predominantly leveraging centers based in Malaysia to serve their regional operations, and in some cases as part of their global business services portfolio. Shared services centers, or global in-house centers (GICs), are also a considerable component of the market, with marquee name companies such as AIG, GlaxoSmithKline, HSBC, Manulife, and Shell establishing their back offices in the country.
Following is a snapshot view of Malaysia’s GIC market:
It’s an attractive destination for multiple source markets including the United States, Europe, Asia, and the Middle East. Indeed, it is so appealing that firms such as OCBC and Pacnet, based in neighboring Singapore, have selected it for their back office delivery work
Financial services is the largest vertical in Malaysia in terms of scale, with more than 1,000 FTEs in a center (although typical center size is less than 500 resources.) Manufacturing and distribution and oil and gas firms also have noticeable presence in the country
F&A is the dominant function, as the majority of graduates have been trained in accounting/commerce and business administration-related disciplines. The second largest function is ADM services
The majority of activity is concentrated in the government-designated MSC zone, particularly in Klang Valley, which houses about 90 percent of the GICs in the country
So, what is Malaysia’s value proposition over credible, low-cost options such as India and the Philippines? Newer adopters of offshoring and those with mid-sized demand have a lower risk appetite and want a boutique experience. Thus, they are willing to pay a risk premium to avail themselves of differential advantages that Malaysia offers:
Multi-lingual competencies in Malay, English, Cantonese, Japanese, and Thai, stemming from a multi-cultural, multi-ethnic workforce
Lower costs than source markets and its Asian counterparts of Australia and Singapore
Strong support of organizations involved in development of IT-BP industry, such as the Multimedia Development Corporation (MDeC), which directs and oversees Malaysia’s National ICT initiative, and Outsourcing Malaysia/PIKOM
Overall macro-level factors such as a strong economy, political stability, good connectivity, and a well-developed infrastructure
Following are two key issues – and associated opportunities – Everest Group has identified about Malaysia’s shared services industry:
Scalability: Malaysia has a small labor pool. While most centers are within the 500 FTEs scale range, there is a limited evidence of back-offices with thousands of FTEs. The industry is struggling from a high level of attrition, with the average levels standing at approximately 15 percent. Indeed, one of our financial services clients is currently facing a churn rate of close to 25 percent
Opportunity to leverage untapped tier-2/3 cities: The current demand-supply imbalances in the labor market will propel firms to move to tier-2/3 cities from the highly penetrated Klang Valley. Besides controlling attrition, such a shift will also provide cost advantages and access to new pockets of talent. However, success will be dependent on creating a healthy ecosystem that is capable of providing sound physical and social infrastructure to support growth. Relevant industry associations are striving hard to attract investments by creating stable infrastructure, establishing training institutes, and providing incentives. We already see a shift in this direction with Frost and Sullivan’s recent establishment of a global innovation center in Nusajaya.
Talent retention: The sector’s biggest challenge is attracting and retaining top-notch talent, as perceived lack of defined career paths are driving top business school graduates to shun the shared services industry for the “Big Four.” Malaysian universities are not yet aware of the industry’s prospects and career opportunities.
Opportunity to move up the value chain from shared services to global business services: After proving their credentials, the next wave of growth for shared services lies in moving up the value chain by: 1) taking ownership of end-to-end delivery processes; 2) offering specialized/complex work such as financial planning and analysis, budgeting, forecasting, and reporting; and 3) creating a bench of local leaders capable of taking on roles beyond delivery.
While Malaysia is doing a good job of attracting the first wave of companies and delivering transactional processes and fair degree of application services, it needs to up its game by moving up the value chain and identifying niche pockets to build and own. Perhaps big data, analytics, social media, and supply chain BPO could be its new fortes?
For more detailed coverage on Malaysia’s GIC market, please refer to our recently released report, “Global In-house Center (GIC) Landscape in Malaysia and Trends in Offshore GIC Market.”
Photo credit: Muhd Amirull