The East side Story

(from Outsourcing Magazine Issue #4: Feb/Mar 2008)

Asia is the new "New World" – and it’s high time to exploit the vast territory, says Rob Cayzer

Not long ago, MSC Malaysia was written off as a non-contender in global and local arenas. Whatever press attention it received was focused on perceived weaknesses such as the lack of global companies and true technology. Worldwide publications on global hubs consistently omitted Malaysia as destination, highlighting instead outsourcing minnows such as Estonia, Thailand and Dubai. Well that is history.

It is a stark contrast to today's situation. MSC Malaysia now receives accolades from prominent global figures such as Steve Forbes. Similar positive reports from AT Kearney, McKinsey, Gartner and Frost and Sullivan have also helped a great deal.
Paul Laudicina from AT Kearney or Aroop Zutshi from Frost and Sullivan will tell you there is still a huge opportunity in offshoring. The estimates may vary but the numbers are indeed staggering. Tens of millions of new jobs are supposed to move from less competitive OECD countries to more competitive emerging economies, representing a noticeable percentage from OECD’s 400 million workforce. MSC Malaysia is positioned as a leader in this market and should get its fair share of the offshoring pie.

When you talk about outsourcing, we talk about companies not countries. It’s related but somehow a different story altogether. There are more opportunities in outsourcing. Frost and Sullivan say that today, more MNCs are outsourcing rather than insourcing or embarking on a shared services model. Only ten percent of this pie is located offshore. I believe there are three reasons for this.

Firstly, OECD based outsourcing firms do not yet know how to optimally tap global resources. Secondly, most service firms based in emerging economies do not yet know how to optimally tap OECD clients. Finally, outsourcing buyers are still working out ways to deal with massive changes in supply options. So naturally, there is room for more players. MSC Malaysia companies, especially local firms, should seize this opportunity.

So, to tap this opportunity, Malaysian firms should get ready. But being “world-class” is not enough. A firm must globally competitive, and deliver something better than its best competitor.
All great nations have done this especially from a perspective of traditional industries. The English did this to South Europe three hundred years ago. The US did the same with all of Europe. Japan, then Korea followed suit. In the outsourcing game, Indian and American firms are still reaping the rewards.


Study the Indian phenomenon

The Indian offshoring crop was initially seeded by GE fifteen years ago and fertilized by Y2K. Today presents a very different scenario. Indian firms like Infosys, Tata and Wipro have literally transcended their agricultural roots and now tap the USA market like Texan oilmen using their workforce as massive oil rigs. It looks like its going to accelerate further, notwithstanding a potential US recession this year.

They key ingredient to the Indian success is the steady and predictable pool of quality resources available to hubs in the subcontinent. This has also been driven by entrepreneurial spirit demonstrated by firms mentioned above. Most telling of all is the great salary divide between Indian-based and American-based paymasters. This winning formula remains true for some time and I expect this to continue to drive the Indian renaissance.

The great thing about this formula is that it can be replicated in other parts of Asia. You see, there is another 15 or 20 million jobs that can move offshore as a second wave if both suppliers and buyers can find a better way to deliver business. There is no way that India alone can bear this load. Concepts such as multishoring, distributed sourcing and new forms of sourcing are arising due to creaking of older models starting to burst at the seams.


Competitive firms

Malaysia shares many similarities to India. Both have an English colonial heritage and have developed cultural ties. Both are also considered engineering hot beds of the future. India, like Malaysia is also home to many multinationals. One other thing that is becoming very similar is the labour cost. Indian engineering wages have almost caught up to Malaysia’s. As a destination for foreign direct investment, Malaysia is now starting to harvest from the same Indian offshoring crop. More US-based work is flowing into Malaysia as supply markets such as India and Philippines are starting to strain.

The list of top global 100 outsourcing firms from advisory bodies NeoIT and CMPMedia shows that USA and India have the highest number of globally competitive companies.

Malaysia is also on the list. In fact it is an astounding third on the list. In reality it doesn’t matter exactly where Malaysia is placed in these overall rankings. The main point is to be in top of mind for the top media and analysts. These are really knowledgeable and smart people who make a living from giving advice about where and who to give the projects to. This then translates into top of mind in terms of business, assuming you develop the right capabilities in marketing, sales and service.


Difference to India

There are also many stark differences between Indian giants and Malaysian upstarts, other than the size of the immediate labour pool. In order to grow their business, Indian firms braved the treacherous “silk road” and Atlantic Ocean to explore opportunities in the West. Ok, so it’s a 20-hour flight. The fact is Malaysian firms are already surrounded by MNCs. This means Indian firms brought in the multinationals whilst multinationals are bringing up Malaysian firms.

Most importantly, Indian firms tapped the MNC nerve centre in order to get business to serving the West. Indian firms, endowed with the capability to attract talent into its hubs are able to deliver a lot of business very quickly.

Meanwhile in the Malaysian homefront, MNCs are hiring local firms to plow the Eastern harvest. These local firms are emulating the MNCs located in Malaysian and rely on immediate reserves are serving a much smaller market, for now. Well, I think this can be improved upon.

Another distinction between Malaysia and India is bound by the same factors but with divergent effects. These two factors are the Asian financial crisis and dotcom bust. Y2K, combined with the bottoming out of the ICT industry seven years ago, forced high tech firms to use low-cost Indian firms as a resource centre. For Malaysia, this event had the same effect as economic version of an uppercut. This happened soon after the bloody nose it received during the financial crisis. But that is history and MSC Malaysia has successfully emerged stronger from this trial by fire.

In any case, this is why Indian firms started with engineering and IT services, followed by BPO. Malaysian outsourcing firms are predominantly undertaking BPO, with limited IT practices.

But this will probably change. Hindsight now tells us that both major events were inevitable corrections of two mega-trends: the rise of ICT and the rise of the East. Despite the two crises, the east now is set to surge into a leadership position. Malaysia is poised to take advantage of the rise of the East and the upsurge of the digital age.


Supply: Tap the East

India’s “go west” growth was driven by an offshoring drive to tap a new source of low-cost resources, mainly in nerve centres such as Bangalore, Hyderabad and Gurgaon. Malaysia’s “stay in the east” growth was driven by a shared services drive, to centralize and homogenize resources into Malaysia using Klang Valley and Penang as hubs. Johor should also develop strongly, due to a combination of pent up demand from Singapore and the development of the Iskandar project.

Therein lies a deeper similarity between Indian firms and Malaysia. India already has a homogenous supply market. Firms based in India attract the best prospective employees to their hubs at the individual’s own cost and effort. As a result, Indian nationals are moving to these hubs from all over India.

Malaysian firms, spearheaded by big three S’s (Scicom, SnTGlobal, Symphony), are starting to adopt this model. This is availed by MSC Malaysia incentives that enable swifter movement of knowledge workers. The industry can develop a capability to emulate homogenous supply markets, similar to the great hubs of the world. This will alleviate supply constraints. More importantly, this will give seasoned enterpreneurs the confidence they need to grow fast and strong. The wellspring for talent outside Malaysia includes Philippines and Indochina. However, Indonesia is probably the greatest untapped source of high-quality talent. There is a lot of raw talent waiting.

In fact, MNCs based in Malaysia are doing this also, albeit to a limited extent. MNCs are not able to exploit this model to the full extent as local firms. In order to attract talent, organizations must promote, shout and sprout their attractiveness everywhere – and to everyone. For various reasons, MNCs prefer to keep mum about their strategic locations and activities. So it’s a lot more difficult for MNCs.

Whilst Indian firms were able to tap the talent attracted by institutions of higher learning (IHLs) in hubs such as Bangalore – there is another way. Some firms such as HCL have created their own academies and IHLs in order to attract staff by providing industry relevant training and immediate potential job prospects.


Strike the iron when it’s hot

Malaysia is third on the outsourcing list for the same reason that it is third on the offshoring list. Malaysian firms are tapping the same unique competitive advantage that Malaysia has – “The Best of All Worlds”. Malaysian firms must carve out its niche and also execute programmes to be No. 1 in this niche.

Has this happened? Yes, I believe the niche has been carved out albeit in a subtle, almost subconscious manner. The general awareness is still quite low . However, the prospects are high now that associations and participating firms in PIKOM, Outsourcing Malaysia, and Contact Centre Association of Malaysia are now building up the required programmes. But efforts must bulk-up swiftly.


The engineering opportunity

The local outsourcing industry will benefit by initially acting as a release valve for Indian engineering giants. But this hasn’t happened yet for local firms as most local firms do not “do IT”. But the exact opposite is true for global outsourcing firms in MSC Malaysia. These firms use MSC Malaysia as a base for Malaysian and Asian resources in for IT work. They also predominantly use a cost-plus model.

I’ve recently seen quite a few local startups try doing IT. But they are limited by competition from global firms who tap local resources. Moreover, their capability to source from the regional market is limited. But I think there is light at the end of the tunnel. A few of the larger local outsourcing firms have mentioned that they are getting into the technology space, starting with technical support.

So contact centres can migrate to technical support. HR and finance functions can move into providing software driven services. Most local firms can develop and implement a roadmap into a much higher value business activity.


“New World” opportunity: the East

In the past, many of the major local players have spent considerable effort in consolidating anchor MNCs accounts that serve or sell to the East, which includes the Middle East. Most of them have used this as an opportunity to develop globally competitive capability.

More strategically, the Malaysian outsourcing industry will benefit as the outsourcing nerve centre for the East. This is probably another topic on its own. This is one huge wave. A study of the ICT market reveals an interesting trend. According to WITSA and Global Insights, the ICT market will be around US$4 trillion within three years from now.

More importantly, they reckon that the East will comprise one third of the market. This means, the demand in the East will be as much as the other three time zones in the world. So those who are developing the competencies now are positioned for a big windfall in the future. The East is the New "New World" and those who invest time to understand this market and its evolutionary path will be the winners of the future.

For the meantime, the East via MNCs is a bread and butter business from which profits and innovation will probably occur.


When is Outsourcing not Outsourcing

No, this is not an existentialist posture. It relates to a developmental model used by many firms to create intellectual property. This has been a strategy adopted by some innovative MSC Malaysia creative multimedia firms that use competencies and cash generated during outsourcing deals to rapidly develop their own content. This is probably one of the unique opportunities for Malaysia to develop a truly knowledge based economy. There are some specific advantages Malaysia has over many hubs around the world.

Most world-class technoprenuers in Asia, especially in India have a hard time retaining staff. This is because big firms snap up their people like a giant vacuum cleaner. Though there is competition for resources in Malaysia, it seems it is nowhere as intense as in India and China. Malaysia is ideal for startups that require a smaller number of high-value, high-quality employees. For many years, MNCs have used Malaysia as a location to high small numbers.

So, it is a good time to tap venture capitalists to offer a stable and high-value place to develop next generation technology. VCs from around the world are always on the look out for high-tech hubs who can develop high-end applications. MSC Malaysia has started to tap this opportunity and the prospects for technology and IP creation here is fantastic. Top firms such as Entellium, Exact Technologies and NSS Systems are some great examples.


Time to act

In reality, offshoring has just begun. It will accelerate and mature as outsourcing firms and nations. Innovative organisations will find new ways to find and meet the demands of the untapped offshore wells. Malaysia is blessed with inherent capability to tap the East and Western demand markets. Local firms need to shake off an inherent inferiority complex and disbelief in the technology industry that stemmed from the recesses of the 1997 crisis.

For those with greater goals in sight, top shelf firms should develop a capability to execute a more aggressive human capital acquisition programme. Tap Malaysia, tap Asia, tap the East. Steady access to a large human capital pipeline will naturally enable investors and entrepreneurs to market, sell and support more aggressively. Industry players should create training programmes for the regional market, preferably in partnership with institutions of higher learning. This will unleash the Asian potential by pulling in top talent from Malaysia and the region.

MNCs are always on the lookout for new competitive, high-quality organizations who can make their life easier in the East. You don’t have need big projects to start with. The Indian firms started by cracking into major accounts with small projects. Up-selling, cross-selling combined with human capital reserves will take care of the rest.

Finally, there is a special message to traditional businesses and investors. Wipro, TATA, Birla and Onesource respectively came from primary sector, manufacturing, trading and finance sectors. So far, the main Malaysian players stemmed from startups. Today, ICT based industries in Malaysia’s is its most viable and lucrative knowledge-based industry. It is time for Malaysia’s big business to buy-in and cash-in.

Rob Cayzer is founder of MSC Malaysia's Shared Services and Outsourcing Programme and co-founder of Outsourcing Malaysia. He is now head of Marketing and Business Development in MDeC.