US tax move sets new pace for outsourcing jobs growth

The US government’s plan to withdraw tax breaks for American companies that export jobs is forcing Kenya’s budding outsourcing industry into the unchartered waters of mergers and acquisitions that could change the shape of the business in the next decade.

Kenyan operators say they have had to open up to possible partnerships with US and British firms in readiness for the Obama administration’s action that is expected to drastically reduce the amount of business that US companies outsource and tilt the ground in favour of homegrown firms.

If effected, the US action could slow down jobs growth in the outsourcing or ICT sector that the Kenya government has identified as a key pillar of the Vision 2030 development blueprint.

Two Kenyan BPO operators say they have partnered with foreign firms in search of a foothold in foreign markets or opened up to takeover proposals that may give them easy landing in key US and UK markets.

Peres Were, the managing director of Cascade Global and Nick Nesbitt of KenCall Limited said it had become necessary to partner with foreign companies that outsource their non-core jobs to remain relevant in the highly competitive business.

Kenya’s business process outsourcing (BPO) industry is estimated to be worth $5 million (Sh400m) with the US market accounting for nearly 80 per cent of the business.

The Obama administration announced in May that it intends to remove tax breaks for US companies that shift jobs abroad and offer tax incentives to those that create jobs at home – a move that is also expected to help the world’s biggest economy to tackle currency fluctuation at home.

That announcement has opened the race for a presence in the US among the world’s leading outsourcing operators mainly based in India and the Philippines.

Many of these operators are setting up operations in the US hoping to gain competitive advantage for business from American firms that will be looking for new opportunities to escape the administration’s tax hurdle.

ICT experts say setting up bases in the US, should also help Indian outsourcing service providers to offer an optimal mix of onshore and offshore operations that will suit their clients’ needs and drive growth.

That is in turn moving the frontier of competition away from budding outsourcing operators such as Kenya’s who lack the financial muscle to acquire partners or set up operations in foreign markets.

“The BPO and call centre business has taken a new twist forcing local operators to change their game plans to remain relevant,” said Ms Were whose firm has partnered with a US company to acquire a Ghanaian outsourcing operator at a cost of $350 million.

KenCall is on the other hand opening up to partnership deals with foreign companies hoping to drive growth of the business.

Mr Nesbitt says having a physical presence in source markets is informed by the fact that events marketing has proved to be a very slow driver of growth for the business.

“We have just completed a very successful two week tour of the UK with some very large UK companies who expressed strong interest in working with us citing our new access to fiber connectivity,” said Mr Nesbitt. “They have always wanted to work with us but were shy about doing business on a purely satellite technology-based platform.”

In moving to stop outsourcing by US firms, the Obama administration is hoping to stop an escalation in job losses at home that last month passed the 10 per cent threshold despite recent signs of economic recovery.

To shield their businesses from the looming loss of tax benefits, some US companies are also moving out to acquire established operators in foreign countries for a possible interfacing of future operations.

Last week, for instance, 15 US investors arrived in Kenya in search of acquisition or buyouts candidates in various sectors including IT.

“Kenya is attracting a number of US firms who are looking for top talents in the ICT sector especially in software development. They however do not want to make the moves public because of what is happening back at home,” said a senior Ministry of Information official who asked not to be named due to the sensitivity of the matter.

Other than enabling local companies to reduce the amount of money they need to set up base in foreign markets, acquisitions or mergers should enable local companies to ride on the relationships for knowledge and insight they need to do business in the new environment.

Mergers or acquisitions should, for example, help them to spend less money and time marketing their services in the new destinations.

That will however require that they involve the equity partners in fundraising efforts that will be required to pull the deals through.

US is the top IT and ICT-enabled service exporter, accounting for $270 billion in 2007.

A recent UNCTAD report indicates that the outsourcing business is still heavily dependent on foreign clients even in mature markets such as Philippines.

Major local BPO and contact center operations in Kenya depend on foreign clients with local corporations such as banks, insurance companies and telecommunication operators preferring to have their call center in-house (captive).

A change in the global arena and lack of financial ability to set up offices in foreign countries places yet another hurdle on the path of Kenya’s nascent BPO industry that is only beginning to overcome the high cost of international connectivity with the landing of fibre optic cables in July.

A state of the global outsourcing industry report says reverse outsourcing is likely to continue to grow.

More than 50 per cent of India’s outsourcing company revenue is expected to come from North American clients, making the movement to the US critical to their continued survival and growth.

Outsourcing firms

“Not only will the US center provide closer proximity and enhance services to clients, the facilities will also enable the outsourcing firms to draw from the local talent pools” reads the report.

As wages continue to rise in India and the US dollar’s value decreases against the rupee, it becomes expensive for Indian companies to maintain operations solely in India.

In its Vision 2030, that among other things intends to create employment and wealth in the country, the Kenya government identified BPO and Call Center as one of its pillar that it use to archive this goals.

Currently the country has about 50 small operators but only ten are said to be handling big jobs, such as animations, software development and data transcriptions.

The country is trying to position itself to these promising sector through its unique geographical position, skilled population who have good English accent and low labour cost compared to other destinations that it intends to compete with.