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COUNTRY ANALYSIS REPORT

South Africa as a BPO* destination

Student: Anand Kulkarni

Course : D-503 (International Business Environment)
Taught by Professor Roberto P. Garcia
I have neither given nor received unauthorized aid on this deliverable.
NOTE: BPO stands for Business Process Outsourcing

Table of Contents
1

Introduction..........................................................................................................................- 4 -

General Environment & Industry Impact............................................................................- 5 2.1

2.1.1

Cultural Proximity to the United States and the United Kingdom.......................- 5 -

2.1.2

Linguistic flexibility..............................................................................................- 5 -

2.1.3

Cultural ties with India common colonizer........................................................- 5 -

2.2

Administrative and Political factors.............................................................................- 6 -

2.2.1

Common Polity.....................................................................................................- 6 -

2.2.2

South African Government incentives and motives..............................................- 6 -

2.2.3

Confidentiality of information..............................................................................- 6 -

2.3

Geographic factors.......................................................................................................- 6 -

2.3.1

Time zone differences...........................................................................................- 6 -

2.3.2

Near-shore scalable destination for sub-Saharan Africa.......................................- 6 -

2.4

Economic factors..........................................................................................................- 7 -

2.4.1

A well run economy..............................................................................................- 7 -

2.4.2

Two tiered economic structure..............................................................................- 7 -

2.4.3

Foreign Investment...............................................................................................- 7 -

2.4.4

Foreign trade.........................................................................................................- 8 -

2.4.5

Better quality at lower cost relatively speaking....................................................- 8 -

2.5

Social factors................................................................................................................- 8 -

2.5.1

Education-availability of scalable, high quality English skills.............................- 8 -

2.5.2

Skills Emigration...................................................................................................- 9 -

2.5.3

Crime.....................................................................................................................- 9 -

2.5.4

Social unrest may rise...........................................................................................- 9 -

2.6

Cultural factors.............................................................................................................- 5 -

Technology and infrastructure......................................................................................- 9 -

2.6.1

Connectivity..........................................................................................................- 9 -

2.6.2

Power..................................................................................................................- 10 -

2.6.3

Telecoms.............................................................................................................- 10 -

2.6.4

2010 FIFAWorld Cup..........................................................................................- 10 -

Brief comparison of strengths and weaknesses.................................................................- 11 -

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4

Conclusion.........................................................................................................................- 11 4.1

Recommendation........................................................................................................- 11 -

4.2

Type of business venture............................................................................................- 11 -

4.3

Stand of South African government...........................................................................- 11 -

Exhibits..............................................................................................................................- 12 -

References..........................................................................................................................- 15 -

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To:

BeyondBorders India Ltd

From:

Anand Kulkarni, International Business Development Group

Subject:

Foreign Direct Investment Recommendation

Introduction

BeyondBorders, a strong BPO player from India, has engaged the services of IBDG
(International Business Development Group) to explore the Republic of South Africa as a
destination of choice to enter the business process outsourcing market. BeyondBorders has a
successful track record in the BPO industry in India and would now like to expand beyond India.
The key considerations have been along the following three dimensions:
a. The general business environment prevailing in South Africa and its impact on potential
business opportunities
b. Specific conditions within the business environment in South Africa that are of special
significance to the BPO industry from the perspective of BeyondBorders. For example:
the time that it takes to setup a BPO facility 1in South Africa, the availability of skilled
labor, etc.
c. Specific conditions within the business environment in South Africa that are of special
significance to the potential future clients of the envisaged BPO center. For example:
Cultural differences and similarities, language barriers, etc.
These three dimensions have NOT been separately delineated to avoid a contrived or forced
analysis since many issues are universal and not necessarily specific to any party. Instead, the
context of the discussion would clearly indicate the issue at hand.
At this stage, this is still a market entry decision, leading to a focus on the big picture and higher
level issues without delving too much into the details. Overall, an extended CAGE framework
has been employed to conveniently categorize the various issues thus enabling better decision
making.

1 A BPO facility might typically consist of a call center with the required telecommunication
infrastructure housed in a building containing a certain number of seats that corresponds to the
number of employees available to handle customer calls at any given time

General Environment & Industry Impact

2.1 Cultural factors

2.1.1 Cultural Proximity to the United States and the United Kingdom
South Africa is culturally closer to the United States and United Kingdom that is India.
Connectivity to the major hubs of activity, Cape Town and Johannesburg is excellent, with 50+
flights from each location to both the UK and the USA. There is quality infrastructure, in terms
of property, telecoms, power and utilities around main hubs. The lifestyle afforded by the country
generally appeals to expatriate employees, enabling companies to attract managerial talent to
assist in set up of operations and partnerships (1) . South Africa also enjoys the advantage of
having strong product affinity with Western Europe and the US in many sectors, meaning that the
people handling outsourced or SSC2 work for those geographies are equipped with a naturally
developed understanding of their subject matter. All of these factors should contribute to smooth
transition of work and relatively rapid return on investment.
2.1.2 Linguistic flexibility
It has long been acknowledged that India, and indeed Chinas, capacity to service diverse
language speaking customers is extremely limited. Companies looking for outsourcing providers
able to service the pan-European market, or indeed a suitable location for establishment of a panEuropean SSC, have traditionally therefore turned their attention to Eastern Europe Poland,
Czech Republic, Hungary, Bulgaria and more increasingly Romania and Serbia - where a ready
supply of young, language-trained workforce is available to meet their need for linguistic
flexibility. South Africa, whilst not shaping up quite as well as Eastern Europe in the language
diversity stakes, does offer a fairly impressive supply of French, German, Dutch, Italian and
Portuguese speakers, with average hiring lead times quoted as between 6 and 8 weeks, with
Afrikaans to Dutch conversion at a lengthier 20 weeks. Although South Africa largely lacks
suitability for servicing the Scandinavian or Baltic markets, it seems equipped to cater for a high
proportion of mainstream European requirements, and the advantage offered by having an accent
neutral, native English speaking population is considerable.
2.1.3 Cultural ties with India common colonizer
South Africa and India were both British colonies at one point in time and therefore have
significant administrative and political common ground. Besides, there is also a considerable
population of Indian origin living in South Africa even today. These factors would work in favor
of any Indian firm looking to enter the BPO market in South Africa.

2 SSC stands for Shared Services Center. Shared Services refers to the provision of a service
by one part of an organization or group where that service had previously been found in more
than one part of the organization or group.

2.2 Administrative and Political factors

2.2.1 Common Polity
The Economist Intelligence Units 2007 democracy index ranks South Africa 31st out of 167
countries, putting it among the 54 countries considered "flawed democracies". Although South
Africa narrowly missed the classification of a "full democracy"; it scored reasonably well across
all the categories. Importantly, South Africa has held a series of competitive elections starting in
1994, which have been undisputedly free and fair, and the institutions of democracy are certainly
not in doubt. In addition, South Africa is characterized by growing state capacity, which is vital
for the protection of civil liberties, as well as reasonably effective leadership and good levels of
public participation in elections. However, the long-term development of democracy in South
Africa may be under threat: the problem lies with the fact that, because no party has been able to
challenge the hegemony of the ruling African National Congress, it is becoming a de facto oneparty state. The development of a major opposition party is crucial to the development of full
democracy. (1)
All in all, the political environment is at least as conducive to business as in India, if not more so.
2.2.2 South African Government incentives and motives
South Africa is looking toward the business process outsourcing sector to help drive economic
growth, and is offering potential investors incentives in the form of start-up and expansion grants
and developmental pricing for telecommunication. The incentive comprises a grant towards
approved qualifying expenditure for start-ups and expanding BPO operation, aimed primarily at
serving offshore clients.
BPO is considered a key sector under the Accelerated and Shared Growth Initiative for South
Africa (Asgi-SA), which seeks to achieve an annual economic growth rate of 6% between 2010
and 2014, in order to halve poverty and unemployment by 2014.
Thus the Government has taken a pro-business stance and is likely to foster a supportive
environment and not raise barriers to entry. There is clearly a win-win situation here for the
foreign owners and the local populace.
2.2.3 Confidentiality of information
Although no formal data privacy legislation is yet in place, compliance with international data
privacy regulations is commonplace (1).

2.3 Geographic factors

2.3.1 Time zone differences
In India and in the Phillipines (which are already major participants in business process
outsourcing) often times BPO employees have to work at night shifts, and have to be
appropriately compensated (above normal) for the odd work hours.
South Africa shares the same time zone as much of Europe, enabling many companies to avoid
paying a premium for out of hours working to service their home markets.
2.3.2 Near-shore scalable destination for sub-Saharan Africa
South African Financial Services majors are expanding operations rapidly into sub- Saharan
Africa. This presents opportunities for service providers to use South Africa as a base to serve the
sub-Saharan Africa operations of domestic majors. Although costs in South Africa are higher
relative to other locations in the region (e.g. Kenya, Nigeria), South Africa is well positioned to
serve as a near-shore scalable destination given its larger talent pool, more evolved BPO industry
and better quality infrastructure (3).

2.4 Economic factors

2.4.1 A well run economy
Stabilizing the state finances has been a policy priority for African National Congress (ANC)
governments. The pursuit of a conservative fiscal policy has helped to bring down the budget
deficit dramatically budget surpluses were recorded from 2006/07"and to reduce government
debt to provide a sustainable platform for development expenditure. Revenue collection has
consistently outperformed targets owing to the successful restructuring of the South African
Revenue Service and an expanded tax base. As a result, South Africa has been awarded
"investment grade" ratings from the international credit-rating agencies. After an impressive
seven years of consolidating public finances and fiscal constraint, the governments fiscal policy
began to shift in fiscal year 2001/02 (April-March) to a moderately expansionary stance in order
to address socio-economic challenges and infrastructure backlogs.
2.4.2 Two tiered economic structure
South Africa has a two-tiered economy; one rivaling developed countries and the other with only
the most basic infrastructure. It therefore is a productive and industrialized economy that exhibits
many characteristics associated with developing countries, including a division of labor between
formal and informal sectors, and uneven distribution of wealth and income. The formal sector,
based on mining, manufacturing, services, and agriculture, is well developed (1).

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This allows the co-existence of excellent infrastructure alongside a labor pool with matched
skills which are relevant to the BPO industry.
2.4.3 Foreign Investment
South Africa offers foreign companies a promising but somewhat difficult operating
environment. The country has market-determined interest rates and a free-floating currency, but
these remain highly volatile. The central bank has shifted its monetary focus to targeting inflation
and has resisted intervening in foreign-exchange markets in recent years. The government has
gradually relaxed exchange controls, and it welcomes foreign investmentboth directly and
through the securities markets. Systems of taxation and corporate disclosure have improved and
now approach the norms of more developed economies. The most recent example of this is the
phasing out of the Secondary Tax on Companies with the shareholders dividend tax in 2007to
align South Africa with international practice. The country has enjoyed success in attracting both
direct and portfolio investment, though the flow of funds remains sensitive to changes in
sentiment among international investors. (2)
This augurs a generally favorable climate for foreign investment.
2.4.4 Foreign trade
South Africa has a relatively open economy, with foreign trade (imports and exports) accounting
for 66.1% of GDP in 2007 and an estimated 75.8% in 2008, according to the Economist
Intelligence Unit. The main destinations of South Africas exports in 2008 were the United States
(12.1%), Germany (9.4%), Japan (9.1%) and the UK (7.2%); the main origins of imports were
Germany (12.3%), China (10.8%), the United States (8.2%) and Saudi Arabia (6.6%).
This would mean that South Africa is a known entity as far as foreign trade is concerned.
Moreover, many of the trading partners would be potential targets for business process
outsourcing opportunities and because of their trade contacts would be more open to outsourcing
their business processes to South Africa based vendors (6).
2.4.5 Better quality at lower cost relatively speaking
Current arbitrage potential from South Africa relative to western markets (e.g. U.S., UK) is quite
significant, with a savings potential of ~50-60 percent on an operating cost basis. While South
Africa is not the lowest cost destination, the savings gap with other low-cost destinations is
narrowing. Two factors drive the narrowing savings gap. First, while most currencies largely
appreciated over the past 3 years (2005-08), the South African currency depreciated. Second,
inflation levels in South Africa are lower than in other low-cost destinations. Exhibit 5 indicates
the extent to which the savings gap has been narrowing for the front-office (customer service)
function. (4)

2.5 Social factors

2.5.1 Education-availability of scalable, high quality English skills
Under apartheid3, racially biased education policies undermined the skills resources of the
country, with long-term implications for the labor market and South Africas competitiveness.
However, education levels increased dramatically with the transition to democracy as more
schools were built and school attendance was made compulsory. The 2001 population census put
adult literacy rates at 82.4%; youth literacy (15-24-year-olds) is higher at 94%. According to the
1996 population census, 19.3% of South Africans had no schooling; this improved to 17.9% of
the total population by 2001 and 10.3% in 2007. (3)
Over 300,000 school leavers and 100,000 Graduates enter the labor pool each year.
While South Africa lacks the scale of university graduates like other populous countries, highschool graduates in South Africa (as in other developed countries) prove effective in BPO
operations. The estimated total entry-level talent pool for BPO in South Africa (including highschool graduates) is ~470,000 annually. In addition to scale, the talent pool in South Africa has
strong English language proficiency (5).
2.5.2 Skills Emigration
One of the weakest aspects ofand greatest threats toSouth Africas recent strong economic
performance is the accelerating rate of skills emigration, especially at the executive level. The
Labor Market ReviewLabor Migration and South Africa 2007, which the South African
Department of Labor released in June 2008, cites a sample survey of the skilled population, in
which as many as 69% of respondents admitted to having given some thought to leaving South
Africa permanently. A total of 58% expressed a desire to leave and 49% said it was likely or very
likely that they would do so at some point. Although only 7% said that it was likely that they
would leave within six months, 25% said they would do so within two years, and 42% within
five years. Most affected was the high-technology sector (33%), followed by manufacturing
(11%), education and health (10%), and business services (9%). (4)
2.5.3 Crime
Crime continues to be a concern in South Africa and companies have to use access control,
guards on premises and security cameras. Companies screen recruits for criminal records and
have stringent procedures in place. Many monitor calls in the call centre. All of this leads to
additional financial burden for doing business.
2.5.4 Social unrest may rise
The main risk to medium-term stability in South Africa is the threat of violence posed by
disgruntled shanty-town dwellers and other disaffected groups angry about job losses, income
3 Apartheid is a social policy or racial segregation involving political and economic and legal
discrimination against people who are not Whites.

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inequality and poor service delivery. A series of protests and strikes in mid-2009 highlighted the
problem, although the unrest was of a lower intensity than the xenophobic attacks on African
foreigners that took place a year earlier: these were short-lived but exposed failure of policies
towards Zimbabwe (the source of 3m refugees), towards migrants (who are given few rights) and
towards the local poor (who often lack basic amenities). A failure to tackle these underlying
problems risks a repeat or, worse, the emergence of inter-ethnic and inter-racial violence between
South Africans. Widespread strikes could become another potential flashpoint. However, South
Africa's strong institutions, well-established democratic traditions and widely respected
constitution will curtail the risk of instability (3).
In the long term, if not addressed, this may balloon into a major decisive factor for firms
considering foreign direct investment into South Africa but for now it is not a major issue.

2.6 Technology and infrastructure

2.6.1 Connectivity
More than 50 airlines, making around 230 000 aircraft landings and carrying about 33-million
passengers a year, move through South Africa's 10 principal airports. These include three major
international airports in Johannesburg, Cape Town and Durban, as well as airports in Port
Elizabeth, East London, George, Kimberly, Upington, Bloemfontein and the Pilansberg. (5)
Connectivity lends itself to easier management of onsite teams and projects and greatly improves
the odds of a successful off-shoring experience.
2.6.2 Power
While the cost of electricity in South Africa is among the world's lowest, the country's strong
economic growth, rapid industrialization and a mass electrification program led, by early 2008,
to demand for power outstripping supply.
As a result, state energy company Eskom has embarked on a massive program to upgrade and
expand the country's electricity infrastructure.
The government and Eskom have acknowledged their mistakes, and are working to bring South
Africa's electricity supply and distribution system back into balance. In January 2008, the
Department of Minerals and Energy and Eskom released a new policy document, "National
response to South Africa's electricity shortage".
The plan includes work on the country's electricity distribution structure, and the fast-tracking of
electricity projects by independent power producers.
So, even though power has become a problem in the recent past it is not likely to act as a major
deterrent for foreign investment, since adequate and timely measure are apparently being taken
to address this issue.

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2.6.3 Telecoms
With a network that is 99.9% digital and includes the latest in fixed-line, wireless and satellite
communication, the country has the most developed telecoms network in Africa.
Bandwidth, however, remains relatively limited and expensive in South Africa, hampering the
rate of economic growth. But the government has committed to increasing accessibility and
bringing down costs.
To this end, the Cabinet approved laws early in 2008 to enable the formation of Infraco, a new
state-owned company that will provide broadband capacity through fiber-optic cables to other
telecoms operators in the country.
For instance, there is an initiative that will lead to developmental pricing for
telecommunication, which essentially ensures that the prohibitive cost of telecommunication
will not hinder economic development.
2.6.4 2010 FIFAWorld Cup
Also, South Africa plans to spend R9-billion on improving and extending the transport
infrastructure in nine host cities to cope with the massive influx of visitors expected for the 2010
FIFA World Cup.
Preparations cover major upgrades to the country's airports and improvements to the general
transport system, including a taxi recapitalization program, the consolidation of passenger rail
entities and the transformation of the bus industry.
This suggests that 2009-2011 time frame may be ideal for entry into the South African market.

Brief comparison of strengths and weaknesses

STRENGTHS
Good infrastructure
Stable political and legal environment
Same time zone as Europe
Cultural affinity to Europe and USA
No language barriers
Availability of relevant skills

WEAKNESSES
Social unrest and crime on the rise
Skills emigration
HIV/AIDS highly prevalent
Telecom infrastructure not affordable
Recent energy issues
Exposure to the financial services
industry

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Conclusion

4.1 Recommendation
Overall, South Africa seems to be a promising destination for setting up offshore BPO services.
We would recommend that you proceed with the necessary due diligence in that direction. There
are some critical issues like crime and HIV prevalence but these are being tackled aggressively.

4.2 Type of business venture

Even though Indian BPO companies have tremendous experience and a track record of success
in India, this (South Africa) is a new country with significantly different dynamics. We would
advise you to enter through one of the following routes:

Joint venture with an existing BPO player in South Africa

Joint venture with a large client. For example, taking on the operations of the clients
shared services center.

Going the joint venture route would also enable smoother exit if the need for that arises.

4.3 Stand of South African government

Foreign direct investment is welcome in all sectors and there are no restrictions on ownership
except in the financial services sector. In fact, the government is actively promoting foreign
investment in the BPO sector by providing various types of incentive, for e.g., the developmental
pricing scheme for telecom services.

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Exhibits

Exhibit 1 : Detailed map of South Africa

Source: Economist Intelligence unit

Exhibit 2 : Clean Map of South Africa

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Source: www.southafricanbedandbreakfast.info/ (9)

Exhibit 3 : Map of South Africa indicating 9 provinces and countrys location in Africa

Source: Website: http://afrilux.co.za/quickies/South_Africa.htm (2)

Exhibit 4 : Economy at a glance - percentage of estimated 2008 GDP

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Source : Economist Intelligence Unit

Exhibit 5 : Comparison of savings gap between South Africa and India

Source : Ready to compete, (4)

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References

1. Stabler, Jill. Knowledge Articles / White Papers. http://www.alsbridge.eu. [Online] October 1,

2007. [Cited: 10 10, 2009.] http://www.alsbridge.eu/knowledge/articles.html?id=35.
2. Economist Intelligence Unit(4). Country Profile: South Africa. London : Economist
Intelligence Unit, 2008. ISSN 0269-8153.
3. Everest Group and Letsema Consulting. Ready to compete. s.l. : Everest Group and
Letsema Consulting, 2008.
4. Global Edge. South Africa: Economy. Global Edge. [Online] 2007.
http://globaledge.msu.edu/countries/South-Africa/economy/.
5. Economist Intelligence Unit(3). Country Finance: South Africa. London : EIU, 2008.
6. Economist Intelligence Unit(1). Country Commerce: South Africa. London : Economic
Intelligence Unit, 2009.
7. Economist Intelligence Unit(2). Country Report : South Africa. London : Economist
Intelligence Unit, 2009. ISSN 0269-6738.
8. http://www.southafrica.info/business/economy/infrastructure/. http://www.southafrica.info.
[Online] 10 01, 2009. [Cited: 10 01, 2009.]
9. www.southafricanbedandbreakfast.info/. www.southafricanbedandbreakfast.info/. [Online]
[Cited: 10 01, 2009.]
10. Quickies .... topical bits and pieces of Southern and Eastern Africa. Africa Deluxe tours.
[Online] http://afrilux.co.za/quickies/South_Africa.htm.
11. Everest Research Institute. Impact of Global Crisis on Offshore BPO Market and
Implications for South Africa. s.l. : Everest Research Institute, 2009.