beyondbrics

By Abigail Fielding-Smith

Turmoil in Egypt has raised well-publicised concerns about its finance, energy and tourism sectors. But there is one low-profile industry where the impact of the crisis is just as serious: IT outsourcing.

Although no rival to India, Egypt has spent the last 10 years building up an IT, research and business process outsourcing (BPO) sector that generated over $1bn revenues last year. Now its future could be in doubt as companies look again at political risk.

Phil Fersht, the head of HfS Research, an outsourcing research and advisory firm, says recent events in Egypt will change the way decisions about outourcing are made.

Egypt’s crisis has now changed the game – major international organizations moving work overseas are going to have political upheaval right at the top of the agenda…Political risk was always a big factor in outsourcing, and the Mumbai events reminded us of that a couple of years’ ago. However, that had no impact on the availability and delivery of sourced services within India. The Egypt political crisis is the first time that political risk has directly impacted outsourcing.

International businesses, which are mostly based in the gleaming, futuristic ‘Smart Village’ business park on the outskirts of Cairo, suffered disruption during the protests with staff struggling to get to work. They were hit particularly hard by the government’s decision to cut off the internet for 5 days.

German software tester SQS had to transfer service delivery to other locations to ensure continuity. Vodafone of the UK reportedly moved some call centre operations to the UK, whilst Indian software companies Infosys Technologies Ltd. and Wipro Ltd. evacuated their expatriate employees.

SQS says it remains “fully committed” to Egypt as an offshore location, but the recent unrest, and the internet shutdown in particular, has alarmed industry representatives worldwide.

As Qadir Marikar, a risk specialist at PricewaterhouseCoopers, puts it, “a government acting to shut down communication and data services wouldn’t have been something on the risk logs.”

Marakar argues that the risk of other governments copying Egypt’s example and shutting off the internet completely to dampen protest is low. There are more sophisticated ways of clamping down on social networking media, and the economic costs are too high.

But, he says, the Egypt crisis is likely to accelerate a trend towards a more holistic assessment process when deciding on and managing offshore locations. Industry analysts say companies are going to have to start factoring in not only labour costs but the potential costs of relocation when deciding whether to outsource somewhere or not.

“Previously political risk evaluation was binary, is a country stable or not,” says Marakar. “I think its not going to be the same going forward.”

Last year Egypt made news in the industry when it was named outsourcing destination of the year in 2010 by the European Outsourcing Association. Companies liked the convenient time-zone (closer to Europe than India) and the pool of accent-free speakers of European languages. This year’s headlines are quite different.