Analysis: Was Egypt oversold as a top offshoring spot?

Turmoil raises questions about decisions to outsource to nation

Before Egypt turned off the internet, the country had received increasingly high marks from leading analysis firms as a promising offshore outsourcing destination, despite the nation's political risk.

New Zealand customers of Vodafone were affected by the events, with Vodafone NZ shutting down its Cairo call centre.

When it comes to outsourcing, there are some things that analysis firms can no doubt do well. They can assess the labor pool, the educational system, and cost of business -- anything that can be measured and quantified. But as Egypt's political turmoil demonstrates, it's very difficult to predict the sweep of history.

Management consulting firm AT Kearney released an annual index this week that measures the attractiveness of offshoring locations, and it put Egypt fourth on the list after India, China and Malaysia.

In December Gartner included Egypt on its list of top 30 countries for offshore services.

These rankings, according to the analysts who did them, weigh many things (in Gartner's case 10 separate criteria), including game-ending political risks, and then base rankings on an overall assessment.

Egypt's rise as an offshore and regional tech venue is relatively new and rapid. It has succeeded in getting a number of U.S. firms, including Microsoft , Hewlett-Packard and Oracle , to establish offices in a government-backed tech office park that opened in 2003.

But in the wake of the crisis, tech work is being shifted out of country.

With no Internet, Egypt has descended into what might be a modern version of the Middle Ages. What was missed? One person who has studied historical trends for insights about future directions is Ian Morris, a professor of classics and history at Stanford University and author of the recently published, "Why the West Rules--for Now: The Patterns of History, and What They Reveal About the Future (Farrar, Straus and Giroux, 2010)", said that "we shouldn't be particularly surprised that unrest has broke out in North Africa."

"The conditions for violence have been there for a long time, and even before Mubarak took power," Morris said by e-mail. Egypt's prior leaders, Gamal Abdel Nasser and Anwar El Sadat, "constantly had to be maneuvering to keep the lid on a powder keg."

"But I can also see why analysts might have ranked the danger in Egypt lower than that in, say, large parts of sub-Saharan Africa or central Asia -- the Egyptian dictators have been very good at crushing and buying off challengers, and at least since 1973 the army has had a lot of respect in Egypt," said Morris.

Long-term historical trends "can give us a rough sense of the likelihood of unrest in different places -- very unlikely, say, in Demark, very likely in Somalia -- but not of the specifics of what will set off violence, when exactly it'll happen, or why some particular event like Mohamed Bouazizi burning himself in Tunisia will bring the Egyptian government to the verge of collapse, while the Libyan and Syrian rulers have survived, so far, anyway," Morris said.

At this point, in its still unsettled state, anything seems possible for Egypt. But even if it emerges quickly from its problems it's unlikely to see a smooth return to its outsourcing effort, according to Prof. Leslie Willcocks, director of The Outsourcing Unit at the London School of Economics.

Egypt's "outsourcing initiative was part of a much bigger economic development initiative, and it was all 'owned' by an inner group within the government and related agencies," Willcocks said by e-mail. "Any handover of ownership of these projects is likely to be very disruptive, and will slow the processes in hand."

"Any new government would be foolish to throw away the advances made," she said. "But worse things have been done in other countries as a result of political upheaval."

The emerging markets "are by their nature risky in some regard," said Ian Marriott, a Gartner analyst, who worked on the top-30 list. He cited riots in Indonesia, Thailand, concerns about gang violence in Mexico and the bombings in India as examples of continuing global volatility.

Marriott said that in terms of Egypt, Gartner did raise in its report the uncertainty of the politics in that country, the upcoming election and mistrust of the young people in it. "We called out to the extent that we could that there is a degree of political instability there," he said.

But you can't "get too far into the politics," Marriott said. "You have to make a balanced business decision."

Similarly, A.T. Kearney looked at political risk as well as broad spectrum of its business environment.

Gott said political risk is assessed as part of the overall business environment that includes such things as IT security , infrastructure, and level of corruption. But what gave Egypt strong marks are its workforce, with a large output of graduates in engineering and increasing levels of certifications.

Egypt had been moving up in its rankings, said Johan Gott, a manager at consulting firm and author of its Global Services Location Index.

Five years ago, Egypt was an unknown in outsourcing, Gott said. "Egypt was a late comer," he said. "[But] Egypt exhibits many of the same quantities that India had when India started to grow."

The Egyptian government estimates its outsourcing market at more than $1 billion, but Frances Karamouzis, an analyst at Gartner, estimates that Egypt's offshore services, measured as an export, is about $150 million.

Karamouzis said she reviewed three years' worth of material from key Egyptian entities, included presentations and written material, "and there was never a single slide that had extensive data and positioning regarding geo-political risk, government issues, treasury risk, crime, safety issues, and other items," she said by email.

"[Egypt] will now have to be in crisis mode to create materials, marketing collateral, substantiated data and factual information in order shift perceptions and reality," Karamouzis said.

Morris said that long-term patterns are good for predicting general trends and statistical probabilities but not so good for predicting details, such as that Ben Ali, the former president of the Tunisian Republic, would have to flee Tunisia and that Hosni Mubarak, the Egyptian president, might have to resign.

"And, of course, taking the long-term view, it could well turn out that after a few weeks of violence Egypt settles down again and emerges from all this with a stronger government and becomes an even more attractive location for offshoring technology," Morris said.

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