M'sian outsourcing players not moving up value chain

KUALA LUMPUR--Malaysia is long ranked the third-most preferred global destination for shared services and outsourcing (SSO), but its efforts to move up the value chain to become a preferred knowledge process outsourcing (KPO) hub remains a challenge.

Citing IDC's Global Delivery Index study, Sudev Bangah, the research firm's Asia-Pacific senior research manager, noted that Malaysia is fairly well positioned among its counterparts in the region as one of the choice locations for global services delivery.

"Malaysia's strategic location, trade-economic ties, the easy setup of businesses via MSC Malaysia, and the expedition on the acquisition of foreign knowledge workers have aided Malaysia in gaining prominence as being a choice shared-services location in the region," Bangah told ZDNet Asia.

Woon Tai Hai, executive director of advisory and management consulting at KPMG, concurred, noting that the country's multi-lingual capability, diverse culture, cheap labor cost, and relatively safe environment free from natural disasters, also add to its foothold as the third-most preferred SSO destination.

"However, scaling to the next level such as a KPO hub will require more than the above factors," Woon said in an e-mail interview. "The attractiveness of any location from a KPO perspective is closely related to the quality and quantity of highly skilled workforce available."

However, Bobby Varanasi, CEO of Matryzel Consulting, was more critical of Malaysia's SSO ranking, noting that these figures--released by various research firms--were becoming less important and less reflective of reality on the ground. Matryzel is a strategic and outsourcing consultancy based in Malaysia.

The country's oft-cited No. 3 ranking is quite meaningless from an industry standpoint, Varanasi told ZDNet Asia. The consultant explained: "All it does is assure the marketplace that it is one country--among many--where sourcing activities are being aggressively promoted."

Instead, Varanasi suggested that Malaysia would do well to look beyond the rhetoric and place emphasis on what matters the most for the industry--delivery capabilities and vertical centricity.

"Too much marketing may get sufficient attention in the shorter-term, but hides the more important components that enable attracting sustainable investments," he noted.

Tackling the challenges
Bangah noted that while the Malaysian government and independent associations had invested a lot of effort to raise the game of local outsourcing services providers, several aspects of competition, expertise and specialization still need to be addressed and are keeping the country's KPO ambition at bay.

The IDC analyst pointed out that Malaysian organizations currently are still seen as only "generic" outsourcing players, with very little emphasis on niche specialization or expertise to support specific verticals.

Bangah added that the outsourcing market now is relatively borderless, with competition keenly fought among services providers rather than between nations.

"Based on our discussions with service providers and end-users in Malaysia, the key differentiating factors between service providers include proximity, service level agreements (SLAs), business models, cost, technology and specialization," he explained.

He added that there had been discussions in the past few years around business analytics, equity research outsourcing, higher value financial-related services, IT and business consulting, and engineering process outsourcing as potential areas for KPO-related services. "However, at no point was there a significant drive toward skilling or re-skilling individuals within business process outsourcing (BPO) services providers to achieve this," he noted.

KPMG's Woon believes Malaysia certainly is in a good position to scale up from a value point of view, rather than challenge the might of India and China, as it already has a fairly matured outsourcing industry.

With this experience, he said, Malaysia would benefit from a shorter learning curve when entering the KPO space. But to do so, the country needs to have a readily available pool of highly skilled and relatively affordable talent, he said.

"KPO is about 'intellectual arbitrage', unlike BPO which very much emphasizes 'cost arbitrage'," he explained.

In addition, Woon noted that there must be a change in mindset in the industry, such as its willingness to outsource critical areas including "core" activities to a third-party.

Besides these factors, he pointed out that intellectual property protection and data privacy management are other important elements in the KPO sector, and require proper enforcement of law governing such activities.

Local capabilities still "mediocre"
Despite the potential Malaysia has had over the years to become a preferred destination, Varanasi believes local SSO players have "cocooned themselves into believing their services are excellent". "But the marketplace knows they are at best mediocre and unsustainable," said the Matryzel executive.

Noting that a client will outsource to a service provider that has proven capabilities to deliver in accordance with global best practices, Varanasi believes Malaysian service providers sorely lack these competencies.

"The fundamental point to understand is this: clients will engage a provider for their innate capabilities to deliver, not because they are located in a beautiful location," he said. "We need to understand that an enabling environment is not sufficient, and people competencies and forward-looking leadership are crucial."

He added that it was not important what terms--be it BPO or KPO--are used to describe Malaysia's SSO industry as it was more important to focus on specific verticals and craft services, at the back and mid-ends, to create front-end value for clients.

"BPO or KPO are meaningless terms in the marketplace today," he said. "Malaysian companies need to focus on the business value for the client and not their own margins, as the latter follows the former.

"They need to understand the business and industry, craft services and solutions that address their clients' pain-points. Value will automatically follow, and so will revenues and margins," Varanasi said.

Edwin Yapp is a freelance writer based in Malaysia.