South Africa carves its outsourcing niche amid flurry of acquisitions

South Africa carves its outsourcing niche amid flurry of acquisitions

Summary: Companies from India and the UK are snapping up South African business process outsourcing (BPO) firms, as the country asserts itself as an offshore outsourcing destination.

SHARE:

Government incentives and falling telecoms costs have helped to spur a flurry of international investment in the South African business process outsourcing (BPO) market over the past few months, with the promise of more to come before the end of the year.

The deals underline the reputation of South Africa, particularly its Western Cape province, as an offshore outsourcing destination for the UK and other English-speaking markets.

cape-town-story
South Africa's Western Cape, home to the city of Cape Town, is one of the country's outsourcing hubs. 
Image: Shutterstock

Indian outsourcing group WNS announced in June that it had acquired South African BPO provider Fusion Outsourcing Services from UK-based BFSL for £10m. Fusion employs about 1,500 people. Following the Fusion transaction, FTSE-listed Capita acquired Cape Town-based contact centre operation Full Circle to boost its offshore outsourcing capabilities. Capita has promised to invest R500m (about £37m) into growing the South African business.

"India and the UK are realising the potential of the South African market and the message it is sending to the international market is enormous" — Gareth Pritchard, BPeSA Western Cape

South Africa's BPO market is tiny compared to India's £10.4bn BPO industry, but it is carving out a niche as a provider of high-quality, medium-cost back-office and contact centre services. According to outsourcing trade association Business Process Enabling South Africa (BPeSA) Western Cape, BPO and offshoring contributed R7.9 bn (£585m) to the province's GDP in 2011.

Of the 33,000 or so fulltime employees in the Western Cape working in the BPO sector, about 6,800 are dedicated to serving the offshore market. Another 3,900 people serve the offshore market from the province of Gauteng and 3,300 from Kwa-Zulu Natal.

BPeSA Western Cape hopes that the province will be able to create another 10,000 fulltime jobs serving offshore clients over the next three years, says the organisation's CEO Gareth Pritchard. The Fusion and Full Circle transactions – along with a significant investment into the Western Cape by UK BPO firm Serco – put the province on track to meet its goal, he added.

The transactions bring offshore business from major UK brands such as Shop Direct and O2 to South Africa. "India and the UK are realising the potential of the South African market and the message it is sending to the international market is enormous [in significance]," says Pritchard.

Incentives

One reason for a sudden surge in interest in the South African BPO sector is a new incentive programme from the country's Department of Trade and Industry for companies that create permanent jobs in the sector, he adds.

Introduced last year, the incentives offer foreign and local companies R112,000 (about £8,300) for every job created and maintained for three years. When these are factored in, they reduce South Africa's costs of operations by 20 percent and make it more competitive with low-cost destinations such as India and Egypt.

BPeSA research indicates that 65 percent of the Western Cape's offshoring clients are based in the UK, with the balance spread across Europe, North America and Australia. UK companies that have offshored to South African include the likes of Asda, British Gas, TalkTalk, Carphone Warehouse and Virgin Mobile. South African BPO providers do well in the UK market because of the cultural affinity between the two countries and the fact that they fall in nearly the same time zone, says Pritchard.

The similarity of the professional qualifications and the compatibility of the data protection laws also helps. Though South Africa is more expensive than India, it differentiates itself on the customer experience it offers, Pritchard says: "You pay more and you get more."

One of the major challenges that the South African BPO market faces is that telecoms costs are still high compared to other offshoring destinations. But these costs have fallen more than 50 percent since new submarine cables started to land on the country's coast in 2009, and they are expected to drop a further 15 percent to 20 percent a year through to 2015, says Pritchard. "We are still not competitive as far as telecom costs go, but this is offset by the incentives."

Social unrest is another concern, with wildcat strikes in the country's platinum mining belt affecting investors' perceptions of South Africa. This will hopefully be a "blip" that will pass in the next few months, says Pritchard. He expects at least one more major deal to be announced in the Western Cape's BPO sector by the end of the year, but declines to give further details.

Topics: Outsourcing, Tech Industry

Lance Harris

About Lance Harris

Lance Harris is a writer with more than 18 years of experience. Over the years, Lance has written about technology in business, the business of technology, and the African telecommunications industry for many of South Africa’s top business and IT publications.

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

4 comments
Log in or register to join the discussion
  • and yet again..

    I am testing to see if I can post
    tcavadias0987
  • trying again

    almost 30 minutes later
    tcavadias0987
  • Expansion of Outsourcing

    Outsourcing is inevitable in today’s world. It is spreading like wildfire to nations all over the world. These trends will continue, so why not embrace it with web tools like odesk and ziptask.com
    McTw33ts
  • Great news for the Mother City

    No wonder UK firms outsource there. Similar time zone, language and a great destination for a "business" trip. Yes, comms are improving for corporates, still stuck in the slow lane for consumers though.
    capeleopard