The Middle East is set to become a global outsourcing centre for European organisations. In a desperate effort to cut costs following the financial crisis, European companies are now looking to locate much of their IT and communications support in countries such as Egypt.
According to analysts, European countries are using a tactic of bringing down national deficits and sovereign debt by outsourcing to regions such as the Middle East.
The European outsourcing market is set to rise by more than 1,000 per cent by 2020, according to an independent study commissioned by Egypt's Information Technology Industry Development Agency (ITIDA) and conducted by the research company Everest.
According to the Everest report, while global outsourcing adoption in Europe (especially in continental European countries) is less than that of the US, it has grown faster.
This growth was traditionally driven by multinationals with headquarters in Europe, who faced pressures to remain competitive with their global and US counterparts.
It is now driven by regional and local firms in Europe, in addition to increasing adoption among European multinationals.
Andrew Bartels, an analyst at the international research organisation Forrester, has identified weaknesses in the hitherto robust US outsourcing industry.
"With disenchantment with large-scale IT outsourcing deals and price pressure from offshore providers, revenues for IT outsourcing have shifted on to a low-growth track," says Mr Bartels.
"Applications outsourcing will grow by 2.9 per cent in 2010; mainframe outsourcing will expand by just 1.5 per cent; desktop support outsourcing will rise by 1.3 per cent; and distributed [server] environment outsourcing by 1.1 per cent. Only network outsourcing [rising by 4.7 per cent] and hardware maintenance and support services [7.5 per cent] will post revenue growth higher than 3 per cent."
In stark contrast, the Everest report commissioned by the Egyptian government points to strong growth.
According to Everest, the potential European global outsourcing market opportunity for 2020 is huge: US$250 billion (Dh918.25bn) to $300bn, about 10 times the current size.
Significant untapped opportunity exists across most European countries ($25bn each), with Germany, France, and the UK being the largest. The European global outsourcing market is large and is estimated to be worth $26bn to 30bn. Europe accounts for about 30 per cent of the overall global outsourcing market.
But the report adds a qualification that its predictions could be affected by a number of factors: "While there is huge opportunity, actual market growth will be influenced by a combination of environmental, regulatory and adoption factors. Growth rates could range between 10 and 30 per cent."
Locations such as Morocco and Egypt prove particularly attractive to companies that require French as well as English language skills. According to Everest, Egypt supports largescale English work along with multiple European languages (French, German, Spanish and Italian).
The research company Ovum believes that Egypt, in particular, has a crucial role to play in the development of the Middle East as an IT outsourcing location as a result of its low-cost base and skilled workforce.
"It is interesting that Egypt's ITIDA completed the [Everest] study," says Ed Thomas, an Ovum analyst. "It is largely as a result of the work of the ITIDA that Egypt has established itself as an outsourcing centre in that region.
"In Egypt the skills base is good, particularly when compared with other countries in the region. Significant numbers of graduates are being trained, although the total numbers are obviously below the number of graduates being produced in India and China … Egypt produces more graduates than a country like the Czech Republic, which is already a well-established sourcing location, particularly around the provision of nearshore services for European clients."
There are major demographic trends now underpinning the trend for mature economies such as those in Europe to outsource to developing countries such as Egypt.
"Another advantage Egypt has is the youth of the population," says Mr Thomas. "The country's median age is 24, and so there is a great pool of talent. This is important when countries across Europe are struggling with an ageing demographic."
The software testing company SQS has opened a delivery centre in Cairo. But according to analysts, although many companies are outsourcing to Egypt, most are reluctant to give any details for fear of criticism at home.
"I'm not sure it's a fear of enraging the workforce as much as a concern over the publicity which might be generated from publicising the decision to offshore. It's still a divisive subject, particularly in the current economic climate with high unemployment in many countries," says Mr Thomas.
But word on the grapevine is that Egypt's strategy of reinventing itself as an outsourcing location for overseas companies is proving a success.
"I have seen good reports from companies using Egypt as a sourcing location. Big corporations using Egypt are reported to be very happy with the service they are getting," says Mr Thomas.
"In Egypt, you also have English as well as the Arabic language, something that is essential for services to deliver to customers in both the Middle East and Europe."
Another factor underpinning Egypt's attraction for European companies seeking to outsource operations is its capital city's growing high-tech infrastructure.
"Cairo's Smart Village is rapidly growing. It covers a 32 million sq ft campus and there is another high-tech business park in Cairo located in the Maadi district," says Mr Thomas.
But industry watchers believe Egypt needs to expand its outsourcing centre outside Cairo if it is going to compete globally in the long term.
"The Egyptian IT industry is working hard to expand into other areas. The city of Cairo is very overcrowded," says Mr Thomas. "Locations like Alexandria really need to develop as alternative hubs to give companies more choice and avoid putting too much strain on the labour pool."
He says there are other factors now underpinning the growth of the international outsourcing industry. "Some types of organisation have driven forward faster than others," he says. "Financial services companies, for example, were at the forefront of activity a few years ago. But it [IT outsourcing] goes across all industries."