As business activities start to pick up and positive sentiment gradually returns, Malaysia needs to realign its economic goals to prepare for the next big wave of outsourcing opportunity. Both industry experts and economists alike seem to agree that the worst is now behind us.
Today, outsourcing in Malaysia has evolved into a US$1.1 billion (RM3.7 billion) per year industry, with a projected 15% compound annual growth rate (CAGR). However, this is a meagre 1% of the global annual market size of US$250 billion, a mere drop in the ocean.
Malaysia is certainly not new to outsourcing, with several technology companies being active in the country since the early 1990s.
Despite getting a head start via various government initiatives, Malaysia is still “dwarfed” by countries like India, China and even the Philippines in terms of the global outsourcing trade volume. Today, as outsourcing transcends pure cost arbitrage and becomes a norm in many industries, the preference for diversified destinations is also growing. So, what are the issues that need serious attention and how can Malaysia take its outsourcing edge to the next level?
A recent research report by Outsourcing Malaysia (OM), a branch of Pikom (The Association of the Computer and Multimedia Industry of Malaysia) entitled “Outsourcing in Malaysia: Scaling new heights”, is a good starting point for outsourcing companies in Malaysia to mull over before forging ahead. The comprehensive report traces the evolution of the outsourcing industry in Malaysia and identifies the structure, operative models, market drivers and key challenges of this lucrative industry.
According to the report, the Malaysian outsourcing industry has been built on attracting investments in captive and third- party outsourcing operations from several leading global companies such as DHL, Shell, BAT, HSBC and Standard Chartered. While most of these centres started out as maintenance and support centres for its IT operations, they have evolved over the years to handle more complex activities.
In comparison, the large majority of our local outsourcing providers today offer predominantly information technology outsourcing (ITO) services. Many operate on a smaller scale compared to global ITO providers and do not offer any differentiated capabilities to compete effectively. And as for business process outsourcing (BPO) services, most of the smaller and mid-sized Malaysian service providers are offering solutions lower down the value chain such as contact centre, back office and data management services.
As such, OM sees a need for these companies to collaborate or merge together to create greater differentiation in their solutions as well as to scale up so that they are able to compete globally. Unfortunately, there is a lack of interest by larger local companies to consolidate, leaving only the small and medium companies to find their own way. This can be challenging as there are no compelling reasons for the shareholders of these companies to merge or be acquired as this would mean that they need to dilute their shareholdings or exit without attractive benefits.
Hence, OM had proposed that a merger and acquisition (M&A) fund be set up to facilitate the consolidation of these players. OM aims to expedite at least two to three major M&As within the next three years and will work closely with Multimedia Development Corp and other stakeholders to realise this goal.
Tough times ahead
The Malaysian outsourcing industry still faces some significant issues and challenges. Firstly, Malaysia has been a relatively late entrant in the outsourcing industry, and hence faces a steep learning curve. Increasingly, human capital deficiency also proves to be the Achilles heel of our growth. Even though Malaysia offers cost arbitrage in terms of salaries, we are still comparatively more expensive than India and the Philippines. Due to a lower population base, most of the Malaysian service providers currently operate on a scale that is not so attractive for large-scale outsourcing in IT or BPO services.
And with many of these services being increasingly commoditised, scalability is, unfortunately, essential to stay competitive.
Another major hurdle is the visible mismatch in skill sets available in Malaysia and those that are required by the outsourcing industry. While our quality of education is considered generally acceptable, low English proficiency and lack of soft skills mean that Malaysian graduates are not immediately employable by outsourcing companies. With a limited talent pool, we are unable to scale up the value chain. And, last but not least, most of our homegrown service providers have yet to achieve international competitiveness.
While the Malaysian government has indeed done a lot to drive information and communications technology (ICT) growth, its failure to provide sufficient infrastructure may prove to be yet another big snag. Broadband penetration rate, cost and quality are still disappointing in Malaysia compared to our regional peers, thus hampering the shift to a more progressive knowledge-based economy, which in turn slows the ICT growth engine. In this regard, Pikom’s recent National ICT Month 2009 provided some impetus to address the problem, but there is no doubt that Malaysia needs to play catch-up fast to close the infrastructure gap with other regional economies.
Recently, my company, SnT Global, tried to bid for a BPO project from Australia. The communication infrastructure cost works out to almost 30% of the total operating expenses of the project, which, by far, is almost 50% higher than equivalent connectivity to countries such as the Philippines or Hong Kong.
Outlook and trends
Looking ahead, the OM report offers some insight into the outlook and trends for the three main outsourcing areas, namely ITO, BPO and KPO (knowledge process outsourcing). While the industry growth rate of ITO is expected to be about 10% CAGR, ITO remains the biggest contributor of the overall Malaysian outsourcing revenue at 60%. BPO services are expected to post a growth of 15% CAGR over the next five years. This will be primarily driven by the increase in processing services, mainly from banks, financial firms and companies, looking to outsource human resources (HR) functions.
While Malaysia is gaining credibility as an outsourcing destination for knowledge services, the scope of outsourcing of knowledge-based activities is also expanding. Like BPO services, the growth in KPO services will be relatively steady, with a growth rate of 18% to 20% over the next three years.
The Malaysian outsourcing industry is now at a threshold. Outsourcing can be nurtured into a lucrative revenue earner for Malaysia if every effort is made to address those critical problems urgently. We are expecting significant growth in major areas such as finance and accounting, Islamic finance, logistics and HR services.
As the wheels of recovery begin to turn and with Asia poised to be the next economic powerhouse, Malaysia certainly needs to rethink its survivability and re-engineer before the next economic storm brews. For sustained growth in the long run, we will have to identify, invest and strategise in capturing the opportunities in outsourcing that fits our own strengths. Significant leverage can also be achieved through greater economies of scale by collaborating with each other.
David Wong is the group CEO of SnT GLobal, a BPO company. He is also chairman of Outsourcing Malaysia and the immediate past president of Pikom.
This article appeared in [email protected], the technology section of The Edge Malaysia, Issue 780 Nov 9 - 15 2009