The attractiveness of South Africa as offshore destination for call centre services

Table of contents

Acknowledgements

Abstract

Terminology

List of tables

List of figures

List of acronyms and abbreviations

CHAPTER 1: INTRODUCTION AND PROBLEM STATEMENT
1.1 Introduction
1.2 Research problem statement
1.3 Importance and contribution of the research report
1.4 Assumptions and delimitations
1.5 Preliminary literature review
1.6 Subsequent chapters of the report

CHAPTER 2: LITERATURE REVIEW
2.1 Introduction
2.2 Offshore sourcing of call centres services
2.2.1 Firm motivations for offshore sourcing
2.2.2 Outsourcing in the call centre offshoring scenario
2.2.3 Trends in global call centre services and outsourcing
2.2.4 Determining location attractiveness
2.2.5 Summary
2.3 The UK client market
2.3.1 Economic outlook
2.3.2 The UK call centre industry
2.3.3 Selected offshore destinations
2.3.4 Summary
2.4 Offshore destination South Africa
2.4.1 The South African economy
2.4.2 The South African call centre industry
2.4.3 Offshore call centre outsourcers in South Africa
2.4.4 Offshore captive call centres in South Africa
2.4.5 Summary
2.5 South Africa and factor attractiveness
2.5.1 South Africa’s business environment
2.5.2 People skills and availability
2.5.3 Financial attractiveness
2.5.4 Summary
2.6 Summary

CHAPTER 3: RESEARCH DESIGN AND METHODOLOGY
3.1 Introduction
3.2 Research design
3.3 Sampling
3.4 Data collection
3.5 Data analysis and conclusions
3.6 Strengths and shortcomings
3.7 Summary

CHAPTER 4: ANALYSIS AND INTERPRETATION – PRIMARY RESEARCH
4.1 Introduction
4.2 Growth and development of South Africa’s offshore call centre industry
4.3 The UK call centre client market
4.4 Motivations for offshore sourcing
4.5 Other offshore locations relevant for the UK client market rated
4.6 South Africa’s location attractiveness rated
4.7 South Africa’s location attractiveness – the evaluation framework applied
4.8 Other aspects around the offshore location South Africa
4.8.1 Aspects around perceptions of the offshore location
4.8.2 Aspects around positioning as offshore location
4.8.3 Aspects around call centre activities
4.8.4 Aspects around vertical markets
4.8.5 Aspects around language availability
4.8.6 Aspects around government incentives
4.8.7 Aspects around the role of the domestic call centre market
4.8.8 Aspects around South Africa’s urban regions
4.8.9 Aspects around attracting offshore business
4.8.10 Aspects around the role of global outsourcers
4.9 Wrapping up

CHAPTER 5: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
5.2 Review of secondary research results
5.3 Review of primary research results
5.3.1 Introduction
5.3.2 Review of growth and development of South Africa’s offshore call centre industry
5.3.3 The UK call centre client market
5.3.4 Motivations for offshore sourcing
5.3.5 Other offshore locations relevant for the UK client market rated
5.3.6 South Africa’s location attractiveness
5.3.7 Other aspects around the offshore location South Africa
5.3.8 Outlook and recommendations
5.3.9 Conclusion
5.4 Conclusions
5.5 Recommendations

REFERENCES

Appendix A: A.T. Kearney’s Location evaluation framework

Appendix B: Global Competitiveness Index South Africa 2011

Appendix C: Interview Guideline

Appendix D: Results of the evaluation questionnaire

List of tables

Table 2.1: Motivations of firms to offshore source

Table 2.2: Location attractiveness evaluation framework for call centre offshoring

Table 2.3: Adapted from A.T. Kearney global service location index 2011

(selected countries attractive for English voice services)

Table 2.4: Income thresholds for establishing stages of development

Table 2.5: Annual agent salaries in call centre outsourcing

Table 2.6: Annual supervisor salaries in sub-contracted call centres

Table 3.7: Themes covered in the interview

Table 4.8: List of interview candidates

Table 4.9: UK firms’ motivations for offshoring as rated by respondents

Table 4.10: Respondents rating offshore locations as attractive for the UK call centre client market

Table 4.11: Respondents rating South Africa as offshore location for voice call centre services to the UK client market

Table 5.12: Promoters for South Africa’s offshore attractiveness

Table 5.13: Distracters for South Africa’s offshore attractiveness

List of figures

Figure 2.1: Call centres serving domestic versus international markets

Figure 2.2: Annual GDP growth rate in the United Kingdom, 2000 - 2011

Figure 2.3: Unemployment rate in the United Kingdom, 2000 - 2011

Figure 2.4: Inflation rate in the United Kingdom, 2000–2011

Figure 2.5 : Growth of call centre agent positions in the UK (1995 - 2007)

Figure 2.6: South African GDP growth, 2000 - 2011

Figure 2.7: Call centre outsourcing market size and forecast

Figure 2.8 : South African call centre outsourcing vertical split, 2011 – 2016

Figure 2.9: Categorisation of offshore destinations

Figure 2.10: Market share by vertical market for offshore jobs in South Africa, 2009

Figure 2.11: Offshore call centre services delivered to client markets (based on jobs in South Africa), 2009

Figure 2.12: South African unemployment rates, 2000 – 2011 Percentage of labour force

Figure 2.13: Cost and cultural fit in offsoring

Figure 2.14: South Africa inflation rate, 2000–2011

Figure 2.15: Great British Pound versus South African Rand, quarterly averages 2000–2011

Figure 3.16: Call centre operators in South Africa, 2010

Figure 3.17: Location attractiveness evaluation questionnaire section A, B and C

Figure 4.18: Rating result of the location evaluation questionnaire

Figure 4.19: Decision influencing metrics and scores for South Africa 75

List of acronyms and abbreviations

illustration not visible in this excerpt

Acknowledgements

I want to thank all my colleagues during my MBA class who provided a unique environment in which to experiment, where one felt safe to leave one‘s comfort zone and who ultimately made the year a true and lasting memory

This research report is dedicated to my parents who have strengthened me through their love and belief in me.

Abstract

This research report is entitled: „An investigation into the attractiveness of South Africa as offshore destination for call centre services to the UK“

Advances in information technology and along the reduction of telecommunication cost have made the sourcing of call centre services from across country borders (near and offshoring) a viable option for firms to take advantage of favourable factors like low labour cost or labour availability.

With their low labour cost and good English language skills, locations like the Philippines and India have for some time been the dominating call centre offshore locations. South Africa, although it is more expensive with higher labour cost, has in recent years established itself as an offshore call centre destination, in particular around 2007 when global sourcing boomed and was high on firms’ agendas. South Africa is a very viable location with English as its official language, low labour cost compared to places in Europe as well as other aspects like cultural affinity and industry domain knowledge that match European standards, such as financial services, insurance and others. South Africa’s major offshore client market is the UK

UK offshoring to South Africa has stagnated in recent times even though the government launched new attractive financial incentives in 2011. A decline could also be observed as some UK offshore campaigns terminated. This was impacted by the fact that the UK was badly hit by the global economic turmoil as it experienced negative growth rates and rising unemployment. Consumer sentiments have emerged that demand for jobs not to be moved abroad (essentially the core activity around offshoring) any longer and to even bring current offshore jobs back onshore.

All this raises questions whether South Africa gained UK offshore business merely because client firms were open to test new locations during the global offshore boom as alternative to the Philippines and India, or whether South Africa is in itself an attractive and sustainable offshore location that can be expected to come out strong again in the near future.

An important objective of this research report was therefore to investigate the factors and key issues that determine South Africa’s attractiveness to deliver offshore call centre services to the UK, largely from the perspective of existing call centre outsourcers with their recent and first-hand experience and expertise in this industry. The ultimate objective was to determine the attractiveness of South Africa for UK call centre offshoring.

To achieve the above, it was determined that a combination of qualitative, investigative research combined with a quantitative approach would be conducted with data gathering. The research methodology used was a combination of secondary and primary research. Literature has been reviewed thoroughly to bring together existing knowledge and views on the research topic to serve as the foundation on which to conduct primary research. Primary research was done by conducting in-depth interviews with individuals holding management positions with established call centre outsourcers in South Africa to determine the attractiveness of the location.

Overall, it was found that South Africa is averagely attractive for UK call centre service offshoring. Outsourcers highlight that at present offshoring is, because of the global economic climate, a very difficult market to be in. However, if South Africa addresses challenges successfully (e. g. skills shortage in middle management) it can build the right foundation to grow the industry for the future. The location is attractive as it offers cost savings when compared to the UK client market but other locations outperform South Africa in this respect. Therefore, the location is only attractive for a UK niche market as a cheaper but nonetheless premium location that delivers additional benefits relevant to UK business which other locations do not offer. These can be found in service delivery and quality and South Africa’s alignment with Western industry standards.

A clear positioning of South Africa as premium offshore location with the UK target client market is currently missing but it is a necessity to justify the location’s potential to become more attractive. Both government and call centre outsourcers that want to attract future UK offshore business must now invest in a clear and effective marketing and branding strategy for the location South Africa.

Finally, it is recommended that the above UK niche market and its economic drivers are researched and defined to provide the relevant input for a clear marketing and branding strategy. In addition, with new trends changing the request for and nature of call centre services (e.g. new online communication channels like chat functions), South Africa has an opportunity to re-address skills and skills development and to position the location as first choice from where to deliver new and premium call centre services. Relevant research is recommended.

Terminology

Business process outsourcing

The term business process outsourcing refers to a client firm transferring business processes or functions to an external firm that can be termed outsourcer, external service provider or third-party vendor. The relationship between the client firm and the outsourcer is typically documented in a contract to ensure shared understanding of the service and relevant deliverables. Levels of quality are defined and measured.

Offshore sourcing

Offshore sourcing or just offshoring means the sourcing of business functions from further away countries. The offshore country is the location where the business function or service is produced but not consumed as it is delivered to the host country (other terms used are client country or client market). The opposite of offshoring is onshoring which refers to sourcing in the same or neighbouring country.

Call centre

Call centres are business functions or operations characterised by structured information and telecommunication environments with technologies enabling the efficient distribution of calls to available staff (agents). Such calls are incoming (=inbound) or outgoing (=outbound). The medium of production is voice. Call centres fulfil functions like offering customer support, selling, helpdesk and technical support and others.

Call centre outsourcing and captives

Call centres are often non-core business functions that are suited for being outsourced. Call centres that remain in-house are in the context of offshoring particularly referred to as ‘captives’.

Call centre agent

The individual in a call centre who performs the call centre work like talking directly to customers.

Customer

The customer is the party talking to a call centre agent.

Location attractiveness

The term location attractiveness indicates the suitability of a country to enhance a firm’s competitiveness. Country factors like labour cost and others are usually relevant in determining a location’s attractiveness.

Location factors and metrics

Location factors and metrics refer to economic or social aspects in a country that contribute to its attractiveness to do business with, e.g. labour cost or size of labour pool. The terms metrics and factors are used inter-changeably in this research report.

CHAPTER 1: INTRODUCTION AND PROBLEM STATEMENT

1.1 Introduction

The function of this chapter is to clarify the research subject, to outline the research purpose and to formulate research questions for which answers will be found. In doing so, the reader is introduced to the topic of offshore sourcing of United Kingdom (UK) call centre services from South Africa and a brief discussion of this matter clarifies the relevance of this research report.

The global phenomenon of companies moving service jobs and business functions like call centre work across country borders (near- or offshore sourcing) and often to third parties (outsourcing) has gained strong momentum in past years, creating a multi-billion dollar market (Srivastava & Theodore, 2006: 19).

Market experts forecast continuous growth rates for offshore sourcing, strengthening its importance as a vital step in globalisation. Forrester Research estimated in 2002 that over the coming 15 years, 3.3 million US service jobs would be moved offshore to countries like India, Russia, China and the Philippines (Srivastava & Theodore, 2006: 19). Everest Group highlights in their 2010 Market Vista report that around 1730 offshore sourcing transactions were recorded in 2009 which increased to around 1979 the year after. The United States (US) is the leading nation with around 35 percent of global offshore sourcing transactions, and the UK as the leading offshore sourcing nation in Europe is accounting for around 14 percent (Pritchard, 2011).

Offshoring was made possible by the rise and expansion of information and communication technology (ICT) and the reduction in operating cost that has gone along with this. Call centre services are strongly built around information technology and can now be provided from anywhere in the world which has lead to the creation of offshore call centre industries in various countries (Srivastava & Theodore, 2006: 20). The largest offshore countries for English call centre services are reported to be India and the Philippines (A.T. Kearney, 2011: 13).

For any company deciding to offshore source, there are motivations to do so. The dominating motivation to offshore is understood to be the generation of cost savings whilst maintaining an equivalent or acceptable level of quality (Samulevicius & Samonis, 2006: 149). With labour cost being typically the highest direct cost in a call centre, offshoring to a country with lower respective cost levels offers saving potential (Srivastava & Theodore, 2006: 20; Tate, Ellram, Bals & Hartmann, 2009: 512).

The presence of low labour cost makes a country potentially suitable, or in other words attractive, for offshore sourcing of call centre services. For this research report, it is understood that a country is considered attractive for call centres offshoring when it offers factors or metrics that enhance firms’ competitiveness and satisfy business motivations.

Any firm wanting to offshore call centre functions may engage a call centre outsourcer. These are companies originating and operating in the offshore country or international outsourcers that operate across various countries. Outsourcers are revenue and profit driven companies and therefore invest and set up offshore operations to meet the market demand for offshore services.

South Africa has been widely recognised as an offshore location for call centre services from where to service the UK market. It saw strong growth around 2006 and 2007 when offshoring experienced a global boom. AvantiCall, a call centre outsourcer in the UK, claims that with regards to call centre offshore services “South Africa occupies an important position in most firms’ global operations portfolios” (AvantiCall website, no date).

South Africa is considered to be politically stable and to have a similar legal and regulatory framework to Western countries. As found during secondary research, the country appears attractive for its English speaking capabilities, its cultural affinity to the UK, and the availability of lower cost talent. By successfully hosting the FIFA World Cup in 2010 the country proved to have world class infrastructure to support such an information and telecommunication technology depending industry.

While South African average labour cost is approximately 55 percent lower than European countries, South Africa is considered a more expensive offshore destination (see Section 2.9.3.1) compared to countries like India where the labour cost is on average 90 percent lower than Europe. Nonetheless, the South African offshore call centre industry experienced noticeable growth in recent years. Various international firms and call centre outsourcers like Tele Tech, Teleperformance, or Aegis have been setting up operations in Johannesburg, Cape Town and Durban. According to Business Process enabling South Africa (BPeSA), five of the top ten global voice companies have moved to South Africa, making it the third largest low cost offshore location for the UK market (BPeSA, 2010b: 41). Most recently, global online technology company, Amazon, made a significant commitment and opened a site in Cape Town to host 1 400 in-house agents to serve the global English speaking market (Mawson, 2011).

The South African government is recognising the offshore call centre industry as an important contributor to economic well being and growth. This is understandable when looking at the success of India and the Philippines where global firms started operations and created thousands of jobs. South Africa aims to increase the country’s cost competitiveness and has launched grant incentive programmes, allowing firms to reduce operating expenses by an estimated 20 percent. The incentive subsidises each offshore agent job created with R112 000 over a period of three years (Pritchard, 2011). This is certainly a significant government budget allocation to the offshore industry.

All this supports the view of considering South Africa an attractive location for firms interested in offshore sourcing of UK call centre services.

Recent developments of South Africa’s offshore call centre industry, however, give reason for concern. Offshore growth has been stagnant and even declined. Global call centre operator TeleTech, for example, closed its 2 000 seat offshore call centre in Cape Town in 2010. Dialogue Group liquidated in the same year after losing significant offshore contracts. This development may have come about because of the financial crisis that has impacted the global economy since 2008 and many companies have seen themselves going through difficult times. The South African offshore industry may therefore have been at a temporary disadvantage. This would suggest that with the recovery of the global economy, South Africa will see a rejuvenated interest for offshoring with growth coming about.

Personal observations made by the author, as a manager with one global offshore call centre outsourcer, underline the above described offshore euphoria experienced for the country first and the presence of challenges that should not be ignored. The biggest challenges perceived by the author are the difficulty to attract and win new offshore clients, the value proposition offered in the South African offshore context which appears expensive when compared to other locations and unfavourable and expensive labour law regulations.

In summary, some success of South Africa as a low cost offshore destination for call centre operators is visible and indicates some level of location attractiveness. The sustainability of the location, which is considered a more expensive offshore destination compared to other locations and its potential to attract further offshore business, is uncertain. The situation is complex and a clear view as to what makes South Africa as offshore destination for call centre services attractive or unattractive is missing. This research report attempts to fill this gap by exploring the views of established offshore outsources. Outsourcers are pivotal for offshoring as they have an influential role in defining South Africa’s service profile, in attracting business and in promoting South Africa for offshoring.

1.2 Research problem statement

As outlined above and further elaborated in the literature research (which was conducted prior to conducting personal interviews), the offshore sourcing of call centre services from developing countries is considered a multibillion dollar market with strong growth rates foreseen for years to come. A major rationale for offshoring is to make use of economic or social factors found in other countries, predominately resulting in cost advantages based on lower wages.

South Africa is a rather young and immature offshore destination for call centre services. Although considered a more expensive offshore destination compared to countries like India or the Philippines, it has been recognised as an attractive offshore country and has attracted call centre outsourcers to serve clients predominantly in the UK, therefore shaping the South African offshore call centre industry.

All this leads to the current situation when an assessment of offshoring from South Africa is required. The main research question is: Is South Africa an attractive location from where to operate offshore call centre services to the UK? With English being the dominating call centre voice offering coming from South Africa and with the UK being the most relevant client market, the scope of the research report is limited to focus on the attractiveness of South Africa for UK specific call centre offshoring. This allows for delving deeply into the matter and to present a thorough understanding and relevant results.

The primary objective is to gain a better understanding of the subject in general and of influencing factors in particular, and to present findings as to why UK firms and outsourcers alike have been and are choosing South Africa. The study follows an exploratory approach and does not attempt to compare or quantitatively measure South Africa’s attractiveness as such or against other locations.

Secondary objectives are:

(i) To describe the global offshore sourcing phenomenon and underlying motivations;
(ii) To gain an understanding of South Africa’s current state as an offshore call centre destination and to introduce the UK call centre client market;
(iii) To evaluate how call centre outsourcers rate South Africa as offshoring destination;
(iv) To bring to light key issues and challenges seen by outsourcers for South Africa’s offshore call centre industry.

The research report would optimally consider several research populations like existing UK client firms that opted for call centre offshoring to South Africa, potential new UK client firms and call centre outsourcers in South Africa with their broad expertise in the field. To focus on current UK client firms would lead to a better understanding as to what motivated them to decide on South Africa and whether expectations have been met and are found to be sustainable. To include potential UK client firms would give insight into perceptions and acceptance of the location and its offshore attractiveness and would therefore indicate a level of growth potential, limitations and issues. The strength of opting to choose outsources currently present in South Africa as research population is found in their broad experience and expertise gained on a local and a global level. They have a good understanding of UK firms’ motivations and views on offshoring to South Africa. Outsourcers have been a vital backbone for the offshore call centre industry in South Africa and a driver for its very creation.

In order for this research report to be completed within a timeframe and for budgets to remain within a certain scope, a choice from above listed populations must be made. The study therefore is limited to consider outsourcers in South Africa as study population. Their expertise and experience discussed above as can provide valuable and relevant insight that leads to finding answers to research questions. An advantage is also seen in the fact that this population is located in South Africa and such proximity simplifies the step of winning candidates for personal in-depth interviews (which could be more difficult to achieve with client firms located in the UK). On the other side, this approach presents limitations as views of current or potential clients are excluded and a possible bias in this research report towards outsourcers must be taken into account when drawing conclusions.

The research problem can be divided into the following sub-questions:

- Offshore call centre industry development: how has South Africa’s offshore call centre industry developed in recent years?
- The UK client market: what are UK firms’ motivations to offshore call centres to South Africa? what offshore locations are relevant to the UK and can further offshore growth be expected?
- South Africa’s location attractiveness: how attractive is South Africa for UK call centre offshoring? what country factors and metrics do outsourcers see as strengths, weaknesses and challenges? how do outsourcers foresee the future for offshoring in South Africa and what possible recommendations can be made?

1.3 Importance and contribution of the research report

With offshore sourcing of services being a rapidly growing phenomenon in global business and relatively little research done in this area, it affords an interesting and relevant research opportunity. A wider range of literature covering established offshore destinations like India and the Philippines is available which explains their success in global service sourcing. With regards to South Africa, with its rather young history as call centre offshore destination, limited literature is available. White papers and research reports on South Africa have mostly been commissioned by South African government bodies with the aim to establish knowledge on job creation for policy formulation.

A study at this point in time of South Africa’s offshore call centre industry is important since a number of operators have established themselves and valuable experience can now be accessed. The report can bring to light success factors and challenges, which, if addressed timely, can strengthen the future of the South African offshore industry.

The study will be valuable for the foreign and domestic investor communities, existing international and national call centre operators, the government and people generally interested in offshore sourcing. It will contribute to existing knowledge and fill gaps in research done on South Africa as offshore call centre destination.

1.4 Assumptions and delimitations

The aim is to investigate the view of established outsourcers in South Africa. As such, research report findings will need to be understood as being purely based on the perspectives from respondents who are managers of outsourcers who already operate in South Africa. The attractiveness of South Africa for firms who do not operate in South Africa may well be very different and do not reflect in this research report. Hence, the results are limited in their usefulness for identifying issues that will make current outsourcers more successful and the results have the potential to make South Africa more attractive for firms that are not yet operating in South Africa.

With the focus on outsourcers only, the views of in-house offshore call centres (‘captives’) are not specifically investigated. Captives may have different sets of motivations or drivers and the establishing of such is beyond the scope of this research report.

The author recognises the presence of other languages in South Africa, which could add to the attractiveness as offshore location but the study does not investigate specifically in this direction. To accommodate for this shortcoming, the interview guideline is kept open and flexible enough to allow for facts like the respective relevance of foreign languages from a UK perspective to surface.

Call centres traditionally operate with voice as delivery medium but have in recent years expanded into written medium incorporating email support and chat, leading to the new and broader term ‘contact centre’. For the purpose of maintaining clarity, the focus of this study is limited to voice as call centre medium and no specific consideration is given to the written medium.

This research project in its character is a situational analysis of South Africa and its offshore industry. Although recent developments will be researched in order to establish the correct background, the study does not pursue to understand complete historical developments. Future trends will in a similar fashion be established through anecdotal investigation and no claim for trend predictions will be made.

1.5 Preliminary literature review

A wide range of subject relevant literature has been consulted including books and journals, case studies, research papers and the World Wide Web.

With offshore sourcing of services being a rather new research topic, a small body of academic literature in the form of fragmentary contributions exists so far. No clear theoretical concept was found that could sufficiently explain the offshore sourcing phenomenon or be applied to measuring the attractiveness of an offshore location. Indeed, literature suggests that offshoring rather highlights limitations of established theories or even produces contradictions because of its complex and dynamic nature (Doh, 2005: 695).

Little research has been conducted to date on South Africa’s offshore call centre industry, in particular, on its attractiveness from a UK client market perspective. A few studies address South Africa’s offshore potential for call centre services, however, such were often commissioned by the South African government with the focus on job creation relevant for policy formulation (e.g. Naidoo & Neville, 2005: 3). Other studies as for example published by global consulting companies like A.T. Kearney (2011) cover a wide range of destinations and present only high level views.

A valuable point of departure was the book ‘ Outsourcing and offshoring in the 21st century: a socio-economic perspective ’ edited by Kehal and Singh (2006) which is a comprehensive collection of fundamental and rather recent research findings on offshoring.

A further interesting source is The Offshoring Research Network (ORN) project which was launched in 2004 at Duke University. Since its launch, ORN has become a respected authority on research and analysis of offshoring trends and has been the host of numerous conferences dedicated to the subject (Duke CIBER, 2008).

Consulting companies share a keen interest in offshoring with papers and articles available on this subject. These sources are interesting since these companies have been involved in many offshore sourcing arrangements and therefore can share expertise gained in the field. At the same time they may be biased stakeholders in the offshore business since it is in their interest to create a demand for offshoring leading to new business opportunities for consulting services. A critical approach must be taken when using information and data provided by such stakeholders.

It was found that South Africa’s emergence as offshore destination is generally discussed positively by market experts like Datamonitor and the Everest Group. However, much of Everest Group’s research has been commissioned by the South African government and as such could be seen as a marketing vehicle intended to attract foreign investment.

In order to determine a firm’s motivations for offshore sourcing, established theories were reviewed for relevant aspects. A useful approach was found in Tate et al. (2009) as the authors approach the topic applying different theoretical lenses like institutional theory, transaction cost economics and the resource-based view.

With regards to evaluating a country’s metrics and factor attractiveness, Porter’s Diamond framework was found useful as well as the offshore evaluation guidelines recommended by the consultancy firm A.T. Kearney. These have been combined as will be outlined in Section 2.2.4 of Chapter 2 to create an evaluation questionnaire used during primary research when respondents will be asked to rate South Africa’s attractiveness.

1.6 Subsequent chapters of the report

Chapter 2: Literature review

This chapter presents an overview of the existing body of knowledge utilising secondary research and presents the background to the research subject. An overview of the global landscape of offshoring is presented and the concept of call centre service offshoring is defined and its rationale is discussed. Furthermore, a conceptual framework to evaluate the attractiveness of offshore destinations is introduced. Particular focus is given to the UK client market, to other offshore locations considered attractive, and South Africa as offshore location for call centre services is introduced. This chapter concludes with a summary on the literature research findings.

Chapter 3: Research design and methodology

Taking into consideration the understanding gained through secondary research, this chapter clearly outlines the research design and research methodology applied. It comprehensively explains the approach taken to gathering and analysing primary data.

Chapter 4: Analysis and interpretation

This chapter reviews and analyses results and findings from data collected through primary research. The overall purpose of this chapter is the comprehensive analysis and interpretations of the primary data.

Chapter 5: Summary, conclusions and recommendations

The final chapter summarises the study project by reviewing findings from primary and secondary research and by consequently drawing conclusions from these results. Finally, recommendations will be made that lead to further research needs.

CHAPTER 2: LITERATURE REVIEW

2.1 Introduction

This chapter presents findings from secondary research. It provides the relevant background to the study and serves as foundation to answer the research question through primary research. In doing so, the reader is introduced to call centre offshoring and outsourcing as well as to the concept of location attractiveness and the evaluation of such. Particular focus will be given to the UK call centre client market, and South Africa as offshore location for call centre services being introduced.

2.2 Offshore sourcing of call centres services

The term offshoring falls into the wider arena of sourcing strategies of firms. Axelsson, Rozemeijer and Wynstra (2005: 7) define sourcing of products, services or business functions as a “cross-functional process, aimed at managing, developing and integrating with supplier capabilities to achieve a competitive advantage”.

Shoring is concerned with the geographical aspect of sourcing. Terminologies predominately used in shoring are onshoring, nearshoring and offshoring. In an onshoring scenario, a company is sourcing from within country boarders (=domestic). Nearshoring refers to sourcing from neighbouring or close countries and offshoring refers to sourcing from further abroad, typically from lower-cost emerging economies^[1] (Chakrabarty, 2006: 26). Therefore, with services being offshored, such services are then produced in an offshore country or offshore destination and they are received and consumed in the host or client country.

Offshoring was made possible by the rise and expansion of information and communication technology and the reduction in operating cost that goes with it. It allows for relative ease with which workflows can be routed to different geographic locations, organisations, or employees. This has allowed companies to shift service delivery from local operations to more remote ones (Holman, Batt & Holtgrewe, 2007: 4; Chakrabarty, 2006: 26).

Samulevicius and Samonis (2006: 148) highlight that the trend to offshore was strongly influenced by the dual pressure of global competition and shareholder expectations leading to a cost cutting mentality that is embedded in contemporary business culture. They argue that companies are roaming the globe in search of locations that provide them with cost reduction potentials.

The consultancy firm A.T. Kearney (2011: 1) concludes similarly that service offshoring “is now a natural element of corporate services supply chains”. The global service or business process offshoring market is estimated to be worth up to US$154bn. The Everest Research Institute forecasts that the offshore industry will grow for decades to come stating that 73 percent of Fortune 2000 companies see offshoring as an important part of their overall growth strategy (Town, 2007: 13).

A.T. Kearney (2011: 5), next to cost saving potentials, highlights national demographics in the developed world as a further impact strengthening the case for service offshoring in the near future. With aging populations in Western countries, developing countries with a large and young population are well-positioned to take on greater roles in delivering services to countries with shrinking labour pools.

Services and processes offshored are typically non-core standardised processes such as call centre functions or others with relatively little business risk attached. Offshoring research indicates that the degree of commoditisation of services has been identified as an important indicator not only for their general ‘offshoreability’ or in other words their ‘separability’ from other services but for the degree of coordination and local firm-specific investment needed to provide these services offshore. A high degree of commoditisation means that knowledge about a service is generally widely spread across companies, industries and potentially nations (Manning, Roza, Lewin & Volberda, 2009: 15).

Call centres are structured telephony and technology mediated environments typically using voice as communication medium. Call centres manage the handling of inbound or outbound customer calls and cover for example general customer support, more active selling functions or technical support. Centres that deliver voice but also non-voice services like back-office tasks and data processing are term contact centres (Grazebrook, 2011: 12ff; Srivastava & Theodore, 2006: 23).

Research suggests that the call centre sector has emerged in many countries around the globe at about the same time in the 1990’s. They have experienced phenomenal growth, along with the advances in information and communication technology and the strong reduction in data transmission cost (Holman et al., 2007: v). Figure 2.1 shows that national call centre industries primarily serve local markets. The global exceptions to this pattern are countries that have specialised in nearshoring (e.g. Canada, Ireland) and offshoring (e.g. India).

illustration not visible in this excerpt

Figure 2.1: Call centres serving domestic versus international markets

Source: Holman et al., 2007: 5.

A further aspect found is that two thirds of all call centres are in-house operations or captives which are serving the firm’s own customers, and the remaining one third is managed by third parties. Financial services, credit card, insurance, technology and communications appear to be lead vertical markets with call centres activities. Currently, the financial services industry is on a global level the largest user of call centres services (Frost & Sullivan, 2009: 3; Holman et al., 2007: 4ff).

This emerging offshore call centre industry is a complex and rapidly changing landscape. Datamonitor (2008: 1) suggests that the number of offshore outsourced agent jobs will grow substantially over coming years because of advantages in terms of price, scalability and quality. Certain current challenges for Western call centre industries are strengthening the business case for offshoring, like increased customer demand for personal and integrated services, the treatment of call centres as profit rather than cost centres (with a subsequent greater emphasis on revenue generation though selling), attempts to make the call centre more central to an organisation’s relationship with its customers, and potentially high levels of employee turnover or low labour force willing to work in the call centre industry. All these translate into potentially higher cost therefore making the offshore option interesting or even necessary (DTI, 2004: 5). In 2008, Datamonitor (2008: 2) estimated the number of offshored call centre agent positions that are located outside Western Europe, North America and Australia at 340 000 and then to grow to 400 000 by 2012 (taking into consideration the currently experienced global economic slowdown).

The geographical spread of call centre offshoring is rather uneven and shaped particularly by language and culture. Many centres that are providing international services follow historic patterns of linguistic ties, e.g. between France and Morocco, between Spain and Latin America or between the UK and English speaking countries like Ireland, India, and South Africa (Holman et al., 2007: 4).

2.2.1 Firm motivations for offshore sourcing

A firm’s motivation to engage in international business and to source from other countries has been a longstanding focus of researchers and academics. Tate et al. (2009: 512), for example, in their research apply theoretical concepts like the institutional theory, the transaction cost theory and the resource based view to help understand the offshore sourcing motivations of firms. These are outlined below.

Institutional theory proposes that in international trade external and environmental factors lead to ‘competitive pressure’ that influences the organisational decision-making process. Competitive pressure translates into being forced to act and to do what is considered the right business move because competition is doing it. The general request from shareholders for increased returns and to deliver cost saving along with the media friendly trend to offshore source is therefore motivating firms to offshore non-core services (Tate et al., 2009: 515).

Above implies that companies prefer to select offshore locations with a positive reputation or which have been chosen by competition before. A country wishing to grow as offshore destination should be positioned favourably in the minds of firms as competitive pressure applies.

The transaction cost theory looks at the make-or-buy decision with the focus on cost and the efficiency and effectiveness of markets internally and externally. Applied to offshoring it suggests that if the external offshore market is more efficient, offshoring will follow (Tate et al., 2009: 514).

The typical direct costs in call centre business that are strongly influenced by location are labour, telecommunications, rent or real estate, utilities and travel cost (Kumar, Acquino & Anderson, 2007: 334). Labour cost typically constitutes a high proportion levelling at an average of 65 percent of total costs (Holman et al., 2007: 38). By moving call centre services offshore companies can take advantage of labour cost differences existing between countries, typically between the developed and the developing world (Tate et al., 2009: 517). Labour cost savings from offshore sourcing can be substantial considering that for example a call centre agent in India earns between US$ 2 400 and US$ 4 000 per year whereas the same job in the US would have an annual salary of US$ 16 000 to US$ 20 000 (Srivastava & Theodore, 2006: 20). However, savings in other areas such as information and telecommunication or rent are less noticeable or may even be more expensive offshore (DTI, 2004: 6).

Datamonitor (2008: 3) highlights that property cost tends to be at a lower price point in offshore locations therefore offering further potential to reduce the cost of delivering the service. Furthermore, offshore locations tend to be more enthusiastic than Western countries about offering government investment incentives (e.g. grants and subsidies), allowing the cost of service to be reduced further.

Transaction cost theory addresses the factor risk and attributes cost to it. Applied to offshoring, operations therefore may be motivated to choose more than one different geographical market aligned with the risk profile of a firm.

The transaction cost view also motivates to look at a spread of geographies since the attractiveness of locations may change over time as for example labour cost may increase with increased labour demand or political and social factors may change.

On the side of indirect overhead elements, cost may be variable based on factors that impact the complexity of doing business, therefore creating hidden cost (Kumar et al., 2007: 334). Hidden costs are contingent upon interaction intensity (e.g. management control) and interaction distance (Tate et al., 2009: 514). Hidden costs create limitations to cost savings as for example low cost locations where corruption or management inefficiencies (limited skills) are prevalent require control and interaction, resulting in an increased need for management time and business travel (A.T. Kearney, 2009: 1; Larsen, Manning, & Pedersen, 2011: 3).

The resource based view looks at resources (physical resources, human resources and organisational resources) or capabilities in the offshore market. Datamonitor (2008: 3) highlights that offshore locations are attractive with their significant labour pool from which to draw staff as high labour availability positively aligns with low wages and reduced agent turnover (attrition), therefore reducing recruitment and training needs.

Offshoring may provide benefits like access to untapped human potential in the form of educated workers (Tate et al., 2009: 514ff; Srivastava & Theodore, 2006: 20). Trefler (2005: 24) highlights that such motivation is supported by the fact that 85 percent of US service offshoring is with other OECD countries, therefore suggesting that it is not exclusively driven by the search for low-cost labour.

Datamonitor (2008: 3f) suggests that firms that are looking at offshoring benefit by selecting locations where agents have relevant commercial skills and cultural understanding and highlight that one example is South Africa for Western countries. Agents there can compete against their UK onshore counterparts in terms of sophistication and customer empathy when supporting products and services. Furthermore, firms are motivated to look at offshore locations with a vertical market orientation therefore choosing locations with established industries similar to the onshore ones to ensure product familiarity.

A further aspect of this view is that through offshore sourcing the firm can gain experience in doing business in a country, therefore opening up access to potential new markets, e.g. in the case of India with a very large consumer market (Tate et al., 2009: 514ff).

Table 2.1 provides a summary of above motivations to offshore source and possible derived implications for offshore locations:

Table 2.1: Motivations of firms to offshore source

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Gartner (2010: 11) suggests that the recent global recession posts renewed emphasis and re-asserted focus on cost and therefore labour cost savings over other possible motivations.

2.2.2 Outsourcing in the call centre offshoring scenario

The term outsourcing, like offshoring, falls into the wider arena of sourcing strategies of firms. Sourcing differentiates two aspects which are either to source from within company structures from an in-house vendor (=captive) or from an external vendor (=outsourcers) (Chakrabarty, 2006: 26).

Outsourcing of business processes and services has been a growing phenomenon for many years. It is a management concept which historically became popular in the 1980s when companies started transferring recurring internal business processes that are further away from its core activities to external providers (Greaver II, 1999: 3ff).

In doing so, factors of production like the firm’s resources (people, facilities, equipment, technology and others) and decision rights are transferred to the outsourcer, with the underlying relationship being defined in a contract (Buchanan, 2008: 87). It is widely agreed in literature that the main motivation of firms to outsource is to hand over business functions to an expert third party who can deliver the same or better at reduced cost (Greaver II, 1999: 4f).

Outsourcing of services involves two parties, the client firm and the outsourcer. Typically, the client firm invites outsourcers for tender submissions by issuing a request for proposal (RFP). This is a structured document that allows the client firm to compare offers (Greaver II, 1999: 5).

Companies considering outsourcing may also consider offshoring, or the other way round (Greaver II, 1999: xiii). Call centre outsourcers are important drivers for offshore sourcing. With their expertise they can offer companies that would otherwise not consider a venture like the relocation of a call centre to a far away country, the opportunity to reduce their cost base significantly. Offshore call centre outsourcers started with initially very little competition allowing for high margins and growth. Today, this international industry has evolved into a highly competitive one. This leads to outsourcers having to evaluate and enhance their location footprints and many of the larger call centre outsourcers have operations in various offshore locations, therefore utilising each one’s advantages (Everest Research Institute, 2010: 2ff).

Offshore call centre outsourcers are in an interesting and challenging position as they act in-between the client firm and their customers whereby the client firm and their customers are located in the host country, e.g. the UK, and the outsourcer is located in the offshore destination, delivering the service with employees of a different culture and background.

2.2.3 Trends in global call centre services and outsourcing

Frost and Sullivan (2009: 3) report a trend in call centre outsourcing to enhance the customer experience by way of high quality call centre interaction linked to increasing of sales through up-sell and cross-sell activity. Customer retention activity is becoming a more important focus with growth in targeted outbound calling in order to expand company value and branding with existing customers and acquire new ones. Technical support and general customer servicing continue to be the fastest growing segments in particular for call centre outsourcing.

A trend towards call centres that focused on voice as communication medium to now offer a multi-channel set up to deliver on consumer experience is a current key driver for the industry. Consumer trends are changing and technology innovations are influencing services that consumers expect which are influenced by the rise of online platforms and social media. The UK is considered one of the largest online economies in the world with more online spend per capita than any other country (Grazebrook, 2011: 12).

Call centres succeed in providing a coherent customer experience and going forward this lies in the ability to support businesses in meeting customer expectations to interact with firms using their channel of choice. A multi-channel approach means that a call centre supports other channels than voice as well as response to voice not always being first choice of a consumer. This trend has lead to the more recent term ‘contact centre’ to embrace the fact that call centres are converting into multi-channel customer service operations. The requirement to meet high productivity levels and customer satisfaction translates into agent skills being complemented by competency in web chat and instant messaging as well as continuous multi-tasking capability (Grazebrook, 2011: 12).

2.2.4 Determining location attractiveness

Doh (2005: 698) emphasises location as being an important variable for cost-minimisation, market-seeking, and resource-seeking strategies. In the greater scheme of sourcing, companies look at different countries and offshore options to find the one matching their strategies best by applying some form of an evaluation process.

Academics have long been concerned with international business and trade and the question of location. One of the first important theories was established by David Ricardo (1817) in his economic theory of comparative advantage. It focuses on a country’s factor endowments with the traditional ones being land, labour, and capital. One important proposition of the theory is the motivation for a country and its firms to import and source from abroad to free up own resources (e.g. workforce) to do something else that produces higher value (Fletcher, 2010: 3).

Porter (1990: 11) later argued that the Ricardian theory was too narrowly focused on country factor endowments and does not sufficiently explain the presence of necessary conditions to advance economic development. In his quest to understand how a nation is relevant for a firm to build and enhance its competitiveness, he researched successful industries in various countries and introduced what he called the diamond framework. It presents itself as interesting management concept and approach that looks at clusters of useful country metrics and factors that may enhance a firm’s competitiveness. Porter suggests to look in particular at the following clusters: factor conditions, demand conditions, related and support industries, strategy and rivalry and government policy (Smit, 2010: 105ff).

Factor conditions include factors relevant for production like human resources (quantity of labour and skilled labour in particular, cost of personnel, working hours, work ethic), physical resources (land and similar, a nation’s location, distance from other markets, time zones relative to other nations), capital resources or infrastructure (communication infrastructure, transportation system, health care, factors affecting the quality to live and work) (Porter, 1990: 71).

Demand conditions look at the domestic consumer demand for the output of a domestic industry. The assumption is that the stronger the domestic demand is, the more sophisticated and experienced the industry is as it has to respond competitively and with high quality standards to the demand (Porter, 1990: 86). In the offshoring context, this leads to the understanding that strong local demand, e.g. for call centre services, creates a sophisticated industry and skilled labour which an offshore firm can tap into.

Related and supporting industries’ clustering look at enabling industry sectors. In the international call centre business important enabling industries are telecommunications, education, information technology, telephony systems, transport and real estate.

Context for firm strategy and rivalry motivates to look at a nation’s context to support its businesses. It points to the presence of trade associations to create a global voice promoting the industry and to raise awareness through marketing initiatives.

Government conditions look at whether sound overall economic policies are in place and what stance government has on business. Governments can put supportive measures like subsidies and grants in place to strengthen local industries. They may engage in a collaborative process with business or bring about reforms.

Porter’s framework is widely used. In the context of offshoring, Doh (2005: 696) however suggests limitations of the model with regards to demand conditions. He points out that the explosive growth of offshoring in India attests that home market demand is not a necessity anymore in today’s internationally competitive environment where new, efficient industries rapidly develop in regions with little home market demand and little relevant sophistication.

The location metrics and factors introduced above are helpful in evaluating the attractiveness of a country. The definition for location attractiveness followed in this research report is to consider a location (or country) as attractive for call centre offshoring when it offers factors that enhance firm competitiveness and satisfy business motivations and similarly does not have factors that would outweigh positive attractive factors which reduce a firm’s competitiveness.

With offshoring of services having gained increased recognition and economic importance, next to academics, consultancy companies too have increased their activities in this field, offering services and publishing guidelines derived from own research, experience and expertise.

Consultancy firm A.T. Kearney, for example, regularly publishes their Global Service Location Index ranking countries for information technology, business process and voice services outsourcing and offshoring potential and attractiveness, based on surveys done and knowledge obtained in client engagements. This index is meant to give guidance to companies for their offshore decision-making process. It is arrived at by rating offshoring relevant factors or metrics, then clustering them and attaching a weighing system. The clusters in A.T. Kearney’s evaluation method are: business environment, people skills and availability and financial attractiveness and their respective weight distributions are 30:30:40 as established during their surveys. The higher weight attributed to financial attractiveness reflects that the cost advantage is typically the primary driver behind location decisions (A.T. Kearney, 2011: 3, 19) (see Appendix A for A.T. Kearney’s evaluation model).

Both A.T. Kearney’s index framework and Porter’s general analytical model are useful for evaluating location attractiveness and they are complementing each other. A.T. Kearney guideline is specific to offshore sourcing and uses business relevant terms when clustering country metrics. It has the advantage as it attaches a weighted index to locations which is useful in the selection process.

Porter’s diamond framework does not attempt to conclude in one index or rating system. Its motivation is to present a generic analytical model to help understand a country’s business potential from various angles as described above and therefore its attractiveness for firms. The strength of Porter’s framework is that it discusses a variety of country factors to help understand their relevance for location decision making.

The attractiveness evaluation framework as illustrated in Table 2.2 is a possible outcome when combining both approaches. It follows in principle A.T. Kearney’s offshore framework and then Porter’s diamond approach to complement the framework with metrics relevant for the purpose of this research report. This framework serves as basis from which to develop a questionnaire that will form part of the primary research when the attractiveness of South Africa will be evaluated.

Table 2.2: Location attractiveness evaluation framework for call centre offshoring

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2.2.5 Summary

This section has introduced the reader to offshore sourcing and outsourcing of call centre services. Call centre industries in many countries have seen tremendous growth globally in the last decade. Such services are typically non-core to a business and the advance of information and communication technology now allows for such services to be delivered from anywhere. They use voice as main communication channel but with consumer attitudes changing and their preference to use other channels of communication, non-voice elements like chat or instant messaging are increasingly used when servicing consumers. Firms in many cases engage third-party vendors termed call centre outsourcers who are experts in their field to set up and operate client call centres services.

The main motivation of firms to opt for offshoring of call centre services is the potential to reduce cost which is often requested by shareholders and board members. The main cost component in call centres is direct labour cost and by moving call centre services to lower cost locations, firms expect a reduction of such. Other motivations like the availability of and access to a skilled labour pool, better quality or risk management are also relevant considerations.

Many offshore locations, like India and the Philippines, have in recent years seen a tremendous growth in their business process offshoring sectors along with the arrival of global outsourcers that expand their footprint with foreign direct investment and the creation of jobs.

The business decision-making process for selecting an offshore location involves the consideration of location factors or metrics that are relevant for the firm to enhance its competitiveness. The definition for location attractiveness followed in this research report is to consider a location as being attractive for call centres offshoring when it offers metrics or factors that enhance a firm’s competitiveness and similarly does not have metrics or factors that outweigh positive attractiveness factors.

The section has introduced various angles of how to look at evaluating location attractiveness. Two approaches have been looked at closely, being firstly Porter’s diamond framework and secondly A.T. Kearney’s location indexing approach. A combined framework incorporating relevant perspectives has been defined which will be used further during the primary research phase.

Next in this chapter, the UK client market will be the focus followed by a brief overview of current relevant offshore locations that service the UK. Client market developments need to be understood in order to establish an outlook for call centre offshoring.

2.3 The UK client market

2.3.1 Economic outlook

Economic growth in the UK slowed down when in 2008 the global financial crisis hit the UK economy particularly hard, due to the importance of its financial sector. As Figure 2.2 illustrates, the UK experienced a record low in 2009 with a reported gross domestic product (GDP) growth rate of minus 5.90 percent (Trading Economics, 2011a; CIA, 2011). The International Monetary Fund (IMF) reports for 2011 for the UK growth of GDP of only 1.1 percent and points to an ongoing risk of stagnation and recession (Elliott, 2011).

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Figure 2.2: Annual GDP growth rate in the United Kingdom, 2000 - 2011

Source: Trading Economics, 2011a.

The UK has a population of 61.9 million (World Economic Forum, 2011: 360). The unemployment rate in the UK was around at 8.1 percent in August of 2011 representing a significant high point compared to recent years as illustrated in Figure 2.3. The high unemployment is a result of the recent recession and economic turmoil.

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Figure 2.3: Unemployment rate in the United Kingdom, 2000 - 2011

Source: Trading Economics, 2011b.

The inflation rate in UK was reported at 5.2 percent in September 2011 which is significantly higher compared to previous years where the country saw inflation rates of only up to two percent as shown in Figure 2.4.

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Figure 2.4: Inflation rate in the United Kingdom, 2000–2011

Source: Trading Economics, 2011c.

2.3.2 The UK call centre industry

The service sector is an important economic driver in the UK and one that saw consistent growth in recent years was the call centre industry. The UK call centre industry started to develop in 1984 triggered by the deregulation of the local telecommunication monopoly (DTI, 2004:19ff). Holman, Wood and Stride (2005: 8) estimate that the UK call centre industry has around 5 320 operations. The number of people employed in call centres has grown between 1995 and 2007 by 250 percent as is reflected in Figure 2.5. The industry was estimated to count around 790 000 jobs (agents, management and support functions) before the economy started to slow down in 2008.

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Figure 2.5 : Growth of call centre agent positions in the UK (1995 - 2007)

Source: DTI, 2004: 25.

The industry saw an equally strong trend to outsource which started around 1998. However, the majority of call centres (72 percent) are still in-house call centres. The market is considered mature but still experiencing growth in outsourcing (Frost & Sullivan, 2009: 1; Holman et al., 2005: 8). The size of the current outsourced call centre market is estimated at around 1.4 billion – 0.2 billion Great British Pounds for the public sector and 1.2 billion Great British Pounds for the private sector (BSA, 2011: 10ff).

The largest vertical call centre markets are the financial services sector with almost twice as many call centre employees as the next largest vertical market which is reported to be the retail and distribution sector (DTI, 2004: 30).

The trend to offshoring started around 2001 and the UK market is considered to be still a largely untapped market with high potential for offshoring (BPOC, 2010: 8). Based on a survey done by CIPD in 2010, around 15 percent of private sector firms stated that they planned to offshore UK jobs to other parts of the world in coming months (CIPD, 2010: 12).

In the early stages of offshoring, the majority of UK call centre traffic was placed in India. Over recent years, other locations have been increasingly important players in this market. The Philippines is now the second largest offshore destination for UK call centre traffic, well ahead of the next biggest offshore destination which is South Africa (BPOC, 2010: 3f). A study done in 2005 showed that the UK’s top 1 000 companies actually ranked South Africa ahead of India and the Philippines as their ideal offshore location (Town, 2007: 14; Deloitte, 2008: 8).

By 2009 it was estimated that overall around 120 000 UK jobs have been moved abroad with 70 000 jobs going to India, 25 000 jobs to near-shore Ireland, 15 000 jobs to the Philippines, 4 500 jobs moving to South Africa and around 2 500 jobs that moved to Egypt. The offshore opportunity for the UK’s call centre market is estimated to be between 125 000 and 150 000 jobs (BPeSA, 2011: 42).

Offshoring of call centre functions have potential risks attached. When looking at customer attitudes in client markets, research suggests that consumers often have a negative attitude towards offshoring as they expect to receive a lower service quality. Another reason for explaining negative consumer attitudes is the assumption that offshoring translates into domestic jobs being moved abroad therefore contributing to local unemployment. With possible negative consumer perceptions towards offshoring of call centres, a company choosing to offshore may face the risk of having an adverse impact on customer satisfaction (DTI, 2004: 5). Frost and Sullivan (2009: 3) report that outsourcing in the UK sees a trend of wanting to keep customer sales and service programmes onshore or perhaps at alternative cost-effective near-shore locations.

2.3.3 Selected offshore destinations

As suggested in the previous chapter, various offshoring locations have become relevant destinations for UK service offshoring. According to A.T. Kearney, the Philippines and India are the most relevant locations for English voice based call centre service offshoring and also reports Egypt as potential voice destination and upcoming but still immature offshore location (A.T. Kearney, 2011: 13).

Table 2.3 lists selected countries attractive for English voice services indicating how they feature in A.T. Kearney’s global service location index 2011 (as introduced in Section 2.2.4), with locations ranked based on their financial attractiveness score. The table also indicates how the ranking changed compared to 2009.

Table 2.3: Adapted from A.T. Kearney global service location index 2011

(selected countries attractive for English voice services)

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Source: A.T. Kearney, 2011: 2ff.

A.T. Kearney attaches a weight distribution to the three categories of 40:30:30. Financial attractiveness is rated on a scale of 0 to 4, and the categories for people skills and availability and business environment are rated on a scale of 0 to 3.

This overview indicates that the Philippines, India, Egypt and South Africa are financially attractive and have a cost advantage over the UK, therefore building the case to offshore services away from the UK. Countries like the Philippines, India and Egypt outperform South Africa in this category and also in the availability of workforce and talent (see category people skills and availability).

The report highlights that the UK which ranked 31st in the 2009 index jumps to place 16 due to the country’s currency devaluation and slowing wage increases following the globally experienced financial crisis. Therefore, benefits of sourcing offshore have reduced significantly for UK firms.

South Africa is the only location in above table that sees a deteriorating ranking moving from rank 40 in 2009 to rank 45 in 2011 due to the strengthening of the country’s currency.

India

A.T. Kearney’s Global Service Location index in 2011 ranks the country 1st in delivering global services (A.T. Kearney, 2011: 2). The Indian economy has shown high economic growth rates in recent years with the service sector being the major source of economic growth. India has capitalised on its large numbers of well-educated people skilled in English (Outsource Offshore, 2011)

Some of the country’s factors of attractiveness are (BPOC, 2010: 2; BPeSA, 2010c: 5):

- Low wage rates
- High workforce availability with 40 million fluent English speakers
- High education levels and around three million additional entry level talent annually.

Some challenges relevant for call centre services (BPOC, 2010: 4; MacIver, 2009: 1; World Economic Forum, 2011: 30):

- High competition for experienced staff combined with the ambition of employees to move up the job ladder fast leads to a trend of rising wages and higher attrition rate which negatively impacts quality

- Issues with language proficiency
- Infrastructure and corruption as major challenges cited for doing business.

The Philippines

A.T. Kearney’s Global Service Location index in 2011 ranks the country 9th in delivering global services (A.T. Kearney, 2011: 2). The Philippine offshore call centre industry started in 1999 with strong growth ever since seeing a five-year compounded annual growth rate (CAGR) of as high as 38 percent. The country is reported to have the third largest English speaking population in the world (BPOC, 2010: 2).

The attractiveness of this location in the international call centre industry is driven by (BPOC, 2010: 2; BPeSA, 2010c: 5):

- Low labour cost
- 60 million fluent English speakers including a large pool of educated graduates
- Around 500 000 additional entry level talent entering the labour market annually
- Increasing government support
- Well priced telecommunication infrastructure.

The country’s ranking in the Global Competiveness Index, now ranking 75th, improved by 10 places compared to the year before. Although seeing this overall improvement, World Economic Forum report states that the challenges are still many especially around the foundation to make a competitive economy sustainable (World Economic Forum, 2011: 31).

Some challenges relevant for call centre services (BPOC, 2010: 9; World Economic Forum, 2011: 31, 294)

- Issues of corruption and physical security
- Inadequate supply of infrastructure
- Despite an enrolment rate of around 90 percent, primary education is characterised by low-quality standards
- Risk of natural disasters.

Egypt

A.T. Kearney’s Global Service Location index report highlights Egypt as an important country for global service sourcing with its economical wage rates and the large supply of talent and ranks the country 4th in delivering global services ahead of the Philippines (A.T. Kearney, 2011: 2ff). The Egyptian government actively promotes the sector abroad whilst aggressively pushing the industry to bring its standards up to international levels. The country’s development benefited from strong government support given to that sector and international investors.

Egypt is estimated to have around 14 000 offshore jobs (BPeSA, 2011: 8).

Some factors of attractiveness are the following (McCue, 2006; Datamonitor, 2009: 3):

- Nearshoring to Europe
- High workforce availability and English speaking labour pool
- University graduate output of 250 000 per year
- Low labour cost with the location being potentially 20 to 30 percent cheaper than India.

Recent political turmoil in the country could have long-term consequences for Egypt as a sourcing location since political and social unrest has negatively impacted investor confidence. In the Global Competitiveness Index published by the World Economic Forum for 2011 the country ranking dropped by 13 places to 94th, reflecting increased uncertainty regarding the direction of future economic policies as well as higher public awareness of the country’s structural weaknesses (World Economic Forum, 2011: 37).

Some challenges relevant for call centre services (Datamonitor, 2009: 3):

- Young and immature market compared on a global level
- Political stability and uncertainty.

2.3.4 Summary

The UK is an interesting call centre service client market and attractive to many offshore locations that can offer English voice services. Historically, India was the major partner for offshoring, but other locations like the Philippines, Egypt and South Africa now also deliver offshore services to the UK.

The UK economy was showing significant growth in the first years of this decade. Growing economic activities increased the demand for call centre services and businesses soon opted to outsource such non-core business and to shift jobs to low cost locations, therefore maximising cost saving potentials expected from outsourcing.

Global financial turmoil experienced in 2008 and 2009 hit the UK economy particularly hard with the result of consumer demand slowing down and unemployment increasing to new heights of around eight percent. Simultaneously, the currency devalued against other major currencies and therefore made imports or offshoring of services more expensive. The UK economy still shows signs of economic weaknesses which suggests a low growth rate for coming months.

The offshoring landscape is a dynamic environment. According to A.T. Kearney’s global service sourcing report, India ranks 1st as the most important offshore location. The location attracts with low labour cost and a well-educated labour force. However, reports suggest that India sees increasing labour cost, high attrition and related challenges impacting the delivery of quality, and corruption.

The Philippines have become a growing offshore destination thanks to low labour cost and more UK call centre services have moved there, now making it the second largest offshore destination for UK businesses. However, corruption is seen as a challenge for businesses doing business.

Lately Egypt has grown in importance as offshore destination for the UK with labour cost as low as seen in India, an educated young labour force and its close proximity to the UK. According to A.T. Kearney’s report, Egypt ranks 4th. The country has recognised the importance of marketing itself well and did so in recent years, offering support to industry and investors. The political challenges that the country has had recently, will however limit the impressive growth and success in recent years.

2.4 Offshore destination South Africa

2.4.1 The South African economy

South Africa is considered the economic engine on the African continent and with GDP of 357.3 billion US$ reported for 2010, it is certainly the largest. It has a population of around 50.5 million and eleven official languages with English being the most widely spoken (World Economic Forum, 2011: 322).

The country has shown political, regulatory and economic stability in recent years. South Africa has a two-tiered economy; one rivalling developed countries and the other having only the most basic infrastructure. It is therefore described as being a productive and industrialised economy that exhibits many characteristics associated with developing countries (Trading Economics, 2011d).

Historically, from 1993 until 2011, South Africa's average quarterly GDP growth was 3.3 percent with its high seen in 2004, until reaching a historical record low of minus 5.9 percent in March 2009. As Figure 2.6 demonstrates, South Africa did not stay untouched by the global financial crisis. The country experiences slow growth as it expanded only 1.3 percent in the second quarter of 2011 over the previous quarter (Trading Economics, 2011d). However, latest forecasts show positive developments with growth from 3.4 percent (South African Reserve Bank) to more than 4.0 percent to come, as suggested by economists (Business Day, 2011b: 2).

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Figure 2.6: South African GDP growth, 2000 - 2011

Source: Trading Economics, 2011d.

The South African economy is dominated by the services industry contributing around 65 percent of gross domestic product with the major sectors being financial services, tourism and hospitality and communications services. The service sector has seen significant growth rates of 8 to 13 percent over the past decade (New Zealand Trade and Enterprise, 2010: 5).

According to the Global Competitiveness Index published in 2011 by the World Economic Forum South Africa ranks 50th in global competitiveness, showing an improvement of four places compared to the previous year^[2]. It does well with regards to quality of institutions and factor allocation such as intellectual property protection (30th), the accountability of its private institutions (3rd), and its good market efficiency (32nd). The World Economic Forum highlights as particularly impressive the country’s financial market development (4th) which indicates high confidence in South Africa’s financial markets at a time when trust is returning only slowly in many other parts of the world. South Africa also does reasonably well in more complex areas such as business sophistication (38th) and innovation (41st) (World Economic Forum, 2011: 39).

The World Economic Forum equally categorises countries into stages of economic development based on their per capita GDP as illustrated in Table 2.4.

Table 2.4: Income thresholds for establishing stages of development

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Source: World Economic Forum, 2011: 10.

With a GDP per capita reported in 2010 of 7 158 US$, South Africa is an efficiency driven economy (Stage 2 in above table) (World Economic Forum, 2011: 322). Therefore, although generally considered an emerging economy, South Africa is globally not competing on low (factor) costs as do other emerging offshore locations like India or the Philippines which are ranking as factor driven economies (Stage 1 in above table).

While featuring in the efficiency driven category, South Africa is rated low in meeting some basic requirements which does not contribute to an environment fostering competitiveness. The World Economic Forum suggests that South Africa should address weaknesses like labour market efficiency (95th) with rigid hiring and firing practices (139th) and significant tensions in labour-employer relations (138th). Furthermore, the infrastructure needs upgrading (62nd) and the poor security situation remains another important obstacle to doing business in South Africa. The business costs of crime and violence (136th) and the sense that the police are unable to provide protection from crime (95th) are serious concerns (World Economic Forum, 2011: 39). A summary of South Africa’s ratings on the Global Competitiveness Index is shown in Appendix B.

2.4.2 The South African call centre industry

South African call centres have been growing in recent years with a majority of growth coming from foreign investments motivated by the possibility of offshoring from South Africa (Finweek, 2008b: 65). There are an estimated 1 500 call centres with around 17 percent being owned by overseas companies (Finweek, 2008a: 26). Around 92 percent of call centres are covering the domestic market with the remaining eight percent servicing international markets (Benner, Lewis & Omar, 2007: 4; Finweek, 2008a: 26).

South Africa’s call centre industry (captive and outsourced) employs approximately 100 000 agents (BPeSA, 2010d: 6).The call centre outsourcing market size is estimated to account for 27 000 agent positions with strong growth rates expected as indicated in Figure 2.7, as South Africa is still a young outsourcing market (Ryan, 2011: 2).

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Figure 2.7: Call centre outsourcing market size and forecast

Source: Ryan, 2011: 2.

Financial services represent the largest vertical market sector (30%) followed by communications services (19%) (Finweek, 2008a: 26). When looking at outsourced call centres only, then communications and media services are well ahead with around 39 percent, followed by financial services with around 27 percent (see Figure 2.8).

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Figure 2.8 : South African call centre outsourcing vertical split, 2011 – 2016

Source: Ryan, 2011: 3.

South Africa has been busy positioning itself as an alternative call centre offshoring destination with particular focus on the UK client market. An estimated 10 000 call centre agents in voice and back-office services specifically work for overseas clients. The target set by the government is to grow to 40 000 offshoring jobs by 2015 (BPeSA, 2011: 8ff). The country delivers offshore English speaking call centre services work next to other players like India, the Philippines and Egypt. However, local government states that South Africa does not see itself competing with these successful low cost countries (Finweek, 2008b: 65).

In a paper presented by the Emerging Market Focus consultancy the approach is taken that offshore destinations can be categorised in (a) low cost no quality and (b) relatively higher cost and higher quality, implicitly suggesting that low cost destinations do deliver services at lower quality (Town, 2007: 5).

South Africa has been marketing itself as a value-based offshore location offering high-value at relatively low cost, as shown in Figure 2.9 (Finweek, 2008b: 65).

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Figure 2.9: Categorisation of offshore destinations

Source: Town, 2007: 5.

A value-based offshore location offers benefits over and above just low costs. On a global call centre outsourcers’ web site the company promotes South Africa with “English as its first language, its similar business culture and shared time zone with Europe, it presents strong advantages for outsourcing from the UK” (Teleperformance, 2011b).

Other benefits promoted for South Africa are the higher call centre service quality of and sector specific knowledge resulting from South Africa operating some mature and advanced industries. A number of vertical sectors that also meet European standards have been identified as such knowledge markets in terms of service delivery from South Africa and these include (Ryan, 2011: 13; Town, 2007: 5, AvantiCall, 2011):

- Telecommunication services: South Africa's telecommunications sector is quite robust and sophisticated.
- Financial services and insurance: The banking, insurance, and credit industries are sophisticated with a relatively experienced labour pool. There are structural and regulatory similarities between South Africa's financial services sector and the ones of Western countries like the UK.

Figure 2.10 illustrates the current offshore job distribution in vertical sectors. The majority of offshore call centre services are located in the telecommunication sector followed by the financial services sector.

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Figure 2.10: Market share by vertical market for offshore jobs in South Africa, 2009

Source: BPeSA, 2010b: 41.

The UK is the most important market for South Africa for offshore call centre services, as shown in Figure 2.11:

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Figure 2.11: Offshore call centre services delivered to client markets (based on jobs in South Africa), 2009^[3]

Source: BPeSA 2010b: 41.

Offshore contracts for the UK grew particularly strong around 2007 and 2008 before the financial crisis affected various economies. At the time the South African Rand was weak relative to the British Pound and UK companies were looking for alternatives to India and the Philippines to de-risk their offshore strategies (Finweek, 2008b: 65).

The government funded marketing voice representing and promoting the call centre industry abroad to attract foreign direct investment is BPeSA. The mandate of this body is to internationally increase awareness and interest for South Africa as offshore business service destination and therefore to attract investors and drive the growth of offshore jobs in South Africa. The operating plan for 2011 and 2012 sets the goal to create more than 3 000 additional offshore jobs, to focus on the UK voice segment and to consider a strategic move away from just voice towards non-voice services. The marketing plan for 2012 onwards is drafted to achieve the goal of having created 40 000 offshore jobs by 2015 of which between 17 000 to 20 000 offshore jobs are envisioned to service specifically the UK voice and call centre market. BPeSA recognises the immense shortage of skilled talent needed and a skills development programme has been drafted to fill this gap (BPeSA, 2011: 9ff).

2.4.3 Offshore call centre outsourcers in South Africa

South Africa currently has a number of global call centre outsourcers that service the domestic and offshore market. This indicates that international business has confidence in the country’s business climate, labour force, and infrastructure and considers South Africa as an attractive market (Ryan, 2011: 5).

Outsourcing call centre operators can be categorised into two distinctive groups (BPOC, 2010):

1 Global entities: These are large international companies like those that operate in many countries and have typically started their operations in developed nations. They entered various countries to set up offshore operations in the early part of the last decade.

2 Local entities: These are local outsourcing firms that grow in their domestic environment and expand their portfolio by adding offshoring services.

Some of the major global entities located in South Africa are listed below with the year indicated in brackets when they started operating in South Africa to service the domestic or the offshore market.

- Sykes (1997)
- Fusion (2003)
- Teleperformance (2007)
- TeleTech (2007); specifically servicing the US client market
- Chase Response (2008)
- Aegis (2009); entered the market by acquiring Call Centre Nucleus (2011), a local entity that started offshoring in 2002
- Stream Global Services (2009); acquired UK Carphone Warehouse’s captive call centre which started offshoring in 2006.

Some of the local entities in South Africa that traditionally started to service the domestic market but have also been operating offshore campaigns are listed below (in alphabetical order).

- Blakes
- Call Centre International (CCI)
- Dialogue Group
- Merchants (2001) (owned by Dimension Data).

SYKES

Sykes operates around 80 centres with around 51 000 employees globally focusing strongly on servicing the financial services, telecommunications, and technology sectors. English is the most universal of languages and Sykes operates offshore operations servicing the English speaking market with sites in Egypt, South Africa and the Philippines. The company entered the South Africa market in 1997 and runs one operation in Johannesburg servicing the domestic and the offshore market (Sykes, 2011).

FUSION

Fusion Outsourcing Services, a division of BGL Group in the UK, has been established as a captive in 2003 to run the group’s call centre offshore. The company has engaged in growing its offshore presence moving away from a pure captive to host other offshore campaigns. It now has two sites in Johannesburg and Cape Town employing around 1 400 staff members servicing the domestic and offshore market (around 350 seats) (Fusion, 2011).

TELEPERFORMANCE

Teleperformance, founded in 1978 in France, is a worldwide provider of outsourcing call centre services which employs around 128 000 employees in 50 countries covering more than 66 different languages. The Group also operates next to the US and Europe call centres in India, the Philippines and other offshore locations. In South Africa, the company operates a 700-seat call centre in Cape Town which was established in 2007 (Teleperformance, 2011a; 2011b).

TELE TECH

US-based call centre group, TeleTech, started operations in Cape Town in 2007 to service the US client market with around 2 000 seats. The operation, however, closed down in 2010 (Mawson, 2010).

CHASE RESPONSE

Chase Response is a UK call centre outsourcer and operates contact centres in multiple languages with its head office in London. The company operates one site in Cape Town with around 170 seats which was established in 2008 (Chase Response, 2011).

AEGIS LTD South Africa / Call Centre Nucleus Group

Aegis is an Indian based outsourcing company owned by Essar Group. The company operates in 32 countries and with around 50 000 staff. The company recently entered the South African market through acquiring Call Centre Nucleus Group in 2009, a South African call centre outsourcing specialist that started in 1996 servicing both domestic and offshore customers, with strong focus on the UK (Aegis, 2011). Aegis entered the South African market with the aim to serve the South African and UK markets and as a stepping stone into African markets (NelsonHall, 2011: 24).

Call Centre Nucleus operates two facilities with 1 300 seats in Johannesburg and employs around 1 700 staff (Finweek, 2009: 26). Call Centre Nucleus Group has been growing significantly in recent years with around 50 percent of growth coming from foreign investments through offshoring to South Africa (Finweek, 2008b: 65). Some of the major clients are Virgin Mobile UK, Pfizer, Toyota, the Southern Sun Group, Samsung Europe, and DaimlerChrysler (Gauteng Enterprise Propeller, 2010: 4).

STREAM GLOBAL SERVICES (former CARPHONE WAREHOUSE)

Stream is a business process outsourcing covering 22 countries, with more than 30 000 employees across 50 locations including sites in India and the Philippines. Steam South Africa was established as an offshore site in 2009 by acquiring a UK offshore captive operation (Talk Talk / Carphone Warehouse). The company occupies one site for around 700 seats in Cape Town (Stream Global, 2011).

BLAKES

Founded in 1990 in South Africa, Blakes operates one site in Durban with around 3 000 seats but also operates in other Southern African countries like Namibia and others. The company focuses on customer call centre services, debt collection and on telesales and service solutions in the financial services, clothing and furniture retail, telecommunications and medical arenas. The company has experienced strong growth recently and is considered a growing player in South Africa, also delivering successful offshore services to the UK (Blakes. 2011).

CONTACT CENTRE INTERNATIONAL (CCI)

This South African call centre operator is specialising in outsourcing of outbound, inbound and blended multi-channel contact centre operations and is supporting some UK clients in the mobile, technology, telecommunications and financial industry sectors. CCI has 2 000 permanent employees and three fully functional sites in Durban with the capacity to grow to 4 000 seats (Contact Centre International, 2011).

DIALOGUE GROUP

The Dialogue Group was one of the early outsourcers offering offshore services from South Africa as early as 2000. It owned three facilities in Cape Town, Gauteng and Durban and had a combined capacity of over 3 000 seats (Gauteng Enterprise Propeller, 2010: 4). The company was positioned predominantly in financial services. It ran very successfully and received international awards for customer service. Dialogue SA was hit had by the global economic crisis and had been running at a loss for some time before liquidating in 2010 (Dlamini, 2010).

DIRECT CHANNEL HOLDINGS

Direct Channel Holdings was founded in August 2001 by brothers Suleman Shaik and Shaffee Shaik with now five sites and 3 000 seats nationally (Direct Channel, 2011).

MERCHANTS

Merchants is the call centre section of Dimension Data, a specialist IT services and solutions provider founded in 1983 (Gauteng Enterprise Propeller, 2010: 4). Merchants is represented in the UK and South Africa with offshore call centre operations located in Cape Town, Durban and Johannesburg. The company currently delivers call centre services to South African and international clients with its largest offshore client being UK retailer, ASDA Walmart with 750 seats (NelsonHall, 2011: 24).

2.4.4 Offshore captive call centres in South Africa

There is only a small number of captive call centres that are servicing the UK market. When companies consider offshoring they tend to engage an experienced outsourcer to set up and run such a rather complex project and therefore offshore markets tend to see only a limited number of captive operations.

CAPQUEST

CapQuest is the second largest debt management company in the UK with around 100 seats operating from Cape Town since 2007. The captive is using a hosted environment provided by Full Circle (this company is further discussed below). The company indicates that the South African workforce has a higher success rate in collections performance compared to like for like control groups in the UK, indicating that agents have the right aptitude and attitude for the collections environment (NelsonHall, 2011: 28).

AMAZON

US online retailer Amazon expanded its call centre operations to Cape Town in 2011, creating 1 400 jobs. The company claims to have been attracted by the city’s service focus and hospitality (Phakathi, 2011). The online retailer is servicing Amazon customers across the globe who shop at its US (.com), UK (.co.uk) and German (.de) stores therefore utilising the local German labour pool (Tarrant, 2011).

FULL CIRCLE

Full Circle was established in 2005 in South Africa offering offshore support services to assist international clients launching offshore operations in South Africa (the latest client was global online retailer Amazon when the company decided to build a site in Cape Town in 2011). Therefore, the company is not a traditional call centre outsourcer but allows and supports clients to run low-risk pilot projects. It provides hosting environments which are currently occupied by two captives (UK company CapQuest and US company Bloomberg). Full circle is active in promoting the South African value proposition abroad (Full Circle, 2011).

2.4.5 Summary

South Africa is an economically strong and stable country with positive growth rates seen in particular from 2004 onwards until the global financial crisis impacted the local economy and has caused low growth since then. The country impressed by going through the financial crisis rather well as praised by the World Economic Forum.

South Africa is a two-tiered economy with some of its industries being at similar standards as seen in developed countries, in particular with its financial market standards, intellectual property protection and its good market efficiencies. On the other side, in some areas the country offers only the most basic infrastructure as seen in developing countries.

Weaknesses that have been highlighted for some time are South Africa’s labour market challenges with low labour market efficiency, a very rigid hiring and firing practice and unfavourable labour-employer relations. Furthermore, crime and violence are repeatedly seen as major concerns for South Africa.

The domestic call centre market in South Africa is well developed serving the financial services, the telecommunication and many others industries in a similar fashion as seen in Western countries like the UK. The call centre industry has around 100 000 call centre agents.

Offshoring in South Africa started in approximately 2000 and grew significantly around 2007 when global economic growth was at a high leading to significant investments done by international companies. It is reported that around 10 000 agents service offshore client markets with the largest being the UK. Overall South Africa wants to attract as a high quality – lower cost offshore location and does not see itself competing against other locations like the Philippines that are even cheaper. Local government bodies like BPeSA have been installed to attract new offshore call centre business and to market the country internationally.

2.5 South Africa and factor attractiveness

The remainder of this chapter reviews South Africa’s metrics (also referred to as factors interchangeably) as relevant for offshoring of UK call centre services along the framework introduced in Table 2.2 (location attractiveness evaluation framework) and discussed in Section 2.2.4.

2.5.1 South Africa’s business environment

2.5.1.1 Ease of doing business and business confidence

According to a World Bank survey South Africa ranks 35th on the ease of doing business. This is ahead of other established and emerging outsourcing locations like Egypt (110th), India (132nd) and the Philippines (136th) (World Bank, 2011: 6).

South Africa features well in business transparency, business ethics and the protection and security of data which is important for giving potential investors a relatively high degree of confidence. According to the Corruption Perception Index the country ranks 48th ahead of countries like India (87th), Egypt (96th) and the Philippines (134th) (Ryan, 2011: 9).

South Africa’s distance from major western locations could be a disadvantage as distance results in an increased time for business travels, a factor that would also influence other offshore locations. However, access to South Africa is easy as a result of regular and frequent international flights (Ryan, 2011: 12).

2.5.1.2 Political, regulatory and economic stability

The political, regulatory and economic stability was discussed in Section 2.4.1. Special consideration here needs to be given to the high ranking of South Africa for its financial market development where the country ranks 4th globally according to the 2011 competitiveness report (World Economic Forum, 2011: 322).

2.5.1.3 Employment laws and the influence of unions

As highlighted in Section 2.4.1, the World Economic Forum ranks South Africa low as 95th in labour market efficiency with rigid hiring and firing practices (139th) and significant tensions in labour-employer relations (138th) (World Economic Forum, 2011: 39). This year South Africa is considering amending existing labour law which is not taken positively by existing business and international institutions like the World Bank. Critics highlight that suggested new changes make labour law even more restrictive, having a negative impact on new hiring and retaining of staff (Business Day, 2011a: 2).

Unions do exist in South Africa and they represent a major part of domestic industries. However, in the call centre industry unions are not strongly represented. The more noticeable unions are the National Contact Centre Union (NCCU) and the Communication Workers Union (CWU). In a study done on South African call centres, only 25 percent of them have a recognition agreement with a trade union for collective bargaining purposes which is lower than the international average, where 40 percent of call centres are covered by a collective bargaining agreement (Benner, Lewis & Omar, 2007: 6).

2.5.1.4 Quality of infrastructure

According to the World Economic Forum index, South Africa’s infrastructure is in need of upgrading but nonetheless delivers a stable electricity supply. It is averagely ranked 62nd which is higher than other offshore locations like India or the Philippines (World Economic Forum, 2011: 39).

For offshoring, reliability of telecommunication in the destination is an important consideration. South Africa's telecommunication connectivity to the rest of the world has improved, with more undersea cables being networked. The quality and reliability of lines to international countries is regarded as generally good (Ryan, 2011: 6).

2.5.1.5 Public factors

The availability of economic and efficient public transport is important for call centres as it allows the labour market to commute to work. A challenge in South Africa is that the target labour pool lives outside and around the city centres with restricted public transport facilities in particular after 7pm. Therefore, even though there may be a willingness to work in a call centre, it may be negatively impacted by infrastructure. Call centre operators may need to provide transport facilities and shuttle services at their cost depending where they are located or what times they operate (Deloitte, 2008: 16).

The poor security situation is considered an important obstacle to doing business in South Africa. The business costs of crime and violence (136th) and the sense that the police are unable to provide protection from crime (95th) are serious concerns (World Economic Forum, 2011: 39).

2.5.1.6 Time zones

The aligned time zone with Europe makes South Africa attractive as it makes interactions easier. However, if a company wants to offshore its late hour operations then other locations like India or the Philippines may be more attractive as work would be done during normal day operations which is typically seeing less attrition than nightshift and costs are potentially lower as no night shift allowances may apply (Ryan, 2011: 12).

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^[1] The offshoring of services and business functions can be categorised in two categories, firstly, the offshoring of IT functions (e.g. software programming) and, secondly, the offshoring of business processes (BPO) which include call centre services. The offshoring of IT services has a longer history and more research has been done on this topic compared to the younger trend of offshoring of business processes and services (Srivastava & Theodore, 2006: 22).

^[2] This ranking is established by evaluating the set of institutions, policies, and factors that determine the level of productivity of a country (World Economic Forum, 2011: 3ff)

^[3] Tele Tech, the largest call centre in South Africa servicing the US market pulled out of South Africa in 2010 and therefore the 17 percent portion indicating US offshoring is no longer valid.