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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.
Table of contents
CHAPTER 1: INTRODUCTION AND PROBLEM STATEMENT
1
1.1
INTRODUCTION 1
1.2
RESEARCH PROBLEM STATEMENT
3
1.3
IMPORTANCE AND CONTRIBUTION OF THE RESEARCH REPORT
5
1.4
ASSUMPTIONS AND DELIMITATIONS
6
1.5
PRELIMINARY LITERATURE REVIEW
6
1.6
SUBSEQUENT CHAPTERS OF THE REPORT
8
CHAPTER 2: LITERATURE REVIEW
9
2.1
INTRODUCTION 9
2.2
OFFSHORE SOURCING OF CALL CENTRES SERVICES
9
2.2.1
Firm motivations for offshore sourcing
12
2.2.2
Outsourcing in the call centre offshoring scenario
14
2.2.3
Trends in global call centre services and outsourcing
15
2.2.4
Determining location attractiveness
16
2.2.5
Summary
19
2.3
THE UK CLIENT MARKET
20
2.3.1
Economic outlook
20
2.3.2
The UK call centre industry
22
2.3.3
Selected offshore destinations
23
2.3.4
Summary
27
2.4
OFFSHORE DESTINATION SOUTH AFRICA
27
2.4.1
The South African economy
27
2.4.2
The South African call centre industry
29
2.4.3
Offshore call centre outsourcers in South Africa
34
2.4.4
Offshore captive call centres in South Africa
37
2.4.5
Summary
38
2.5
SOUTH AFRICA AND FACTOR ATTRACTIVENESS
39
2.5.1
South Africa's business environment
39
2.5.2
People skills and availability
41
2.5.3
Financial attractiveness 44
2.5.4
Summary
48
2.6
SUMMARY
49
CHAPTER 3: RESEARCH DESIGN AND METHODOLOGY
50
3.1
INTRODUCTION 50
3.2
RESEARCH DESIGN
51
3.3
SAMPLING 51
3.4
DATA COLLECTION
54
3.5
DATA ANALYSIS AND CONCLUSIONS
57
3.6
STRENGTHS AND SHORTCOMINGS
58
3.7
SUMMARY
59
CHAPTER 4: ANALYSIS AND INTERPRETATION PRIMARY RESEARCH 60
4.1
INTRODUCTION 60
4.2
GROWTH AND DEVELOPMENT OF SOUTH AFRICA'S OFFSHORE CALL CENTRE
INDUSTRY
61
4.3
THE UK CALL CENTRE CLIENT MARKET
64
4.4
MOTIVATIONS FOR OFFSHORE SOURCING
66
4.5
OTHER OFFSHORE LOCATIONS RELEVANT FOR THE UK CLIENT MARKET
RATED
69
4.6
SOUTH AFRICA'S LOCATION ATTRACTIVENESS RATED
71
4.7
SOUTH AFRICA'S LOCATION ATTRACTIVENESS THE EVALUATION
FRAMEWORK APPLIED
73
4.8
OTHER ASPECTS AROUND THE OFFSHORE LOCATION SOUTH AFRICA
78
4.8.1
Aspects around perceptions of the offshore location
78
4.8.2
Aspects around positioning as offshore location
79
4.8.3
Aspects around call centre activities
80
4.8.4
Aspects around vertical markets
81
4.8.5
Aspects around language availability
82
4.8.6
Aspects around government incentives
82
4.8.7
Aspects around the role of the domestic call centre market
83
4.8.8
Aspects around South Africa's urban regions
83
4.8.9
Aspects around attracting offshore business
83
4.8.10
Aspects around the role of global outsourcers
84
4.9
WRAPPING UP
84
CHAPTER 5: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
86
5.1
INTRODUCTION 86
5.2
REVIEW OF SECONDARY RESEARCH RESULTS
86
5.3
REVIEW OF PRIMARY RESEARCH RESULTS
90
5.3.1
Introduction 90
5.3.2
Review of growth and development of South Africa's offshore call centre industry
91
5.3.3
The UK call centre client market
92
5.3.4
Motivations for offshore sourcing
92
5.3.5
Other offshore locations relevant for the UK client market rated
92
5.3.6
South Africa's location attractiveness
93
5.3.7
Other aspects around the offshore location South Africa
97
5.3.8
Outlook and recommendations
98
5.3.9
Conclusion
98
5.4
CONCLUSIONS 99
5.5
RECOMMENDATIONS 101
REFERENCES
103
Appendix A: A.T. Kearney's Location evaluation framework
111
Appendix B: Global Competitiveness Index South Africa 2011
112
Appendix C: Interview Guideline
113
Appendix D: Results of the evaluation questionnaire
118
List of tables
Table 2.1: Motivations of firms to offshore source
14
Table 2.2: Location attractiveness evaluation framework for call centre offshoring
18
Table 2.3: Adapted from A.T. Kearney global service location index 2011
24
(selected countries attractive for English voice services)
24
Table 2.4: Income thresholds for establishing stages of development
29
Table 2.5: Annual agent salaries in call centre outsourcing
45
Table 2.6: Annual supervisor salaries in sub-contracted call centres
45
Table 3.7: Themes covered in the interview
54
Table 4.8: List of interview candidates
60
Table 4.9: UK firms' motivations for offshoring as rated by respondents
66
Table 4.10: Respondents rating offshore locations as attractive for the UK call centre client
market
69
Table 4.11: Respondents rating South Africa as offshore location for voice call centre services
to the UK client market
71
Table 5.12: Promoters for South Africa's offshore attractiveness
94
Table 5.13: Distracters for South Africa's offshore attractiveness
96
List of figures
Figure 2.1: Call centres serving domestic versus international markets
11
Figure 2.2: Annual GDP growth rate in the United Kingdom, 2000 - 2011
21
Figure 2.3: Unemployment rate in the United Kingdom, 2000 - 2011
21
Figure 2.4: Inflation rate in the United Kingdom, 20002011
22
Figure 2.5 : Growth of call centre agent positions in the UK (1995 - 2007)
22
Figure 2.6: South African GDP growth, 2000 - 2011
28
Figure 2.7: Call centre outsourcing market size and forecast
30
Figure 2.8 : South African call centre outsourcing vertical split, 2011 2016
31
Figure 2.9: Categorisation of offshore destinations
32
Figure 2.10: Market share by vertical market for offshore jobs in South Africa, 2009
33
Figure 2.11: Offshore call centre services delivered to client markets (based on jobs in South
Africa), 2009
33
Figure 2.12: South African unemployment rates, 2000 2011 Percentage of labour force
41
Figure 2.13: Cost and cultural fit in offsoring
43
Figure 2.14: South Africa inflation rate, 20002011
46
Figure 2.15: Great British Pound versus South African Rand, quarterly averages 20002011 47
Figure 3.16: Call centre operators in South Africa, 2010
53
Figure 3.17: Location attractiveness evaluation questionnaire section A, B and C
56
Figure 4.18: Rating result of the location evaluation questionnaire
74
Figure 4.19: Decision influencing metrics and scores for South Africa
75
List of acronyms and abbreviations
BPeSA
Business Process enabling South Africa
BPO
Business process outsourcing
BPOC
British Philippine Outsourcing Council
BSA
Business Services Association
CAGR
compounded annual growth rate
CIA Central
Intelligence
Agency
CIPD
Chartered Institute of Personnel and Development (UK)
CCI Call
Centre
International
CWU Communication
Workers
Union
DTI
Department of Trade and Industry
DVD
digital video disc
FIFA
Fédération Internationale de Football Association
GDP
gross domestic product
ICT
information and communication technology
IMF
International Monetary Fund
MCSE
Microsoft Certified Systems Engineer
NCCU
National Contact Centre Union
OECD
Organisation for Economic Co-operation and Development
ORN
Offshoring Research Network
RFP request
for
proposal
TV television
UK United
Kingdom
US United
States
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
1
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
2
(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.
3
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.
4
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.
5
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.
6
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.
7
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.
8
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.
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).
9
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).
10
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).
11
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.
12
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).
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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
Motivation to offshore
Implications for offshore
locations
Institutional theory
· Shareholders' expectation to
deliver on targets
· Competitive pressure to follow
· Have a positive reputation
as offshore destination
Transaction cost
theory
· In search for cost savings to
increase profitability
· Risk management through spread
of operations and functions
· Offer low cost factors and
acceptable quality
Resource based theory
· To gain access to a skilled labour
pool
· To gain market access and new
business opportunities
· Availability of workforce
· High education levels and
skills
· Commercial
sophistication
of agents and cultural
alignment
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).
14
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
15
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.
16
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).
17
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
Business environment
· Ease of doing business
· Political, regulatory and economic stability
· Business ethics and the protection and security of data
· Employment laws (flexibility) and labour unions
· Time
zones
· Quality of infrastructure (telecom, electricity)
· Public
transport
· Crime and safety
18