Malaysia Joins the Outsourcing Parade

Malaysia is an infant in the business process outsourcing business, but the country has ambitions to join behemoths like India and the Philippines in providing backshop services to the developed world.

The question is why it’s so far behind, even as a rather elderly infant, having been around for more than a decade. It has a communications system far better than those in either the Philippines or India. Its overall infrastructure is better than either. It has a population that is fluent not only in English but segments of which are fluent in Chinese dialects and Hindi as well as Malay that ought to appeal to both Indian and Chinese companies looking to outsource their own operations. It is ranked the world’s sixth best country overall for ease of doing business by the World Bank, compared with China (96), the Philippines (108) and India (134)

Yet Malaysia’s total business processing business was worth a modest US$1.7 billion in 2012, compared with India at US$47 billion and the Philippines at US$13 billion. India’s total IT and business processing industries employed 2.2 million people in 2012, the Philippines 926,000. Outsourcing now accounts for 10 percent of Philippines’ GDP. Malaysia’s outsourcing business employs about 45,000.

Nonetheless Malaysia is pushing ahead with a RM626 million development in the gigantic Iskandar metropolitan development across the Causeway from Singapore in Johor for its outsourcing operations, in addition to 10 centers scattered across the country, with more than 200 industrial estates or parks and 14 Free Industrial Zones -- even as it as it bets into an industry in ferment.

India has lost an estimated million jobs to countries as far away as Poland, Egypt and Romania over the past five years, and Indian companies have started scaling back their voice operations because margins have collapsed from as high as 40 percent to 15 percent as competing companies offer services at cheaper rates. The world’s companies that depend on putting their backshop operations overseas can move to lower-cost countries a lot faster than manufacturers can. This has led to a generation of young people who are burning out from working on the wrong side of clock and who see their workloads constantly increasing.

Malaysia also faces a wage problem. Its annual per capita GDP by purchasing power parity is US$17,200, ranking it 78th in the world, compared with the Philippines at US$4,500 (165th) and India at US$3,900 (168th) although outsourcing centers are in higher-income areas in both countries, like Bangalore, Mumbai or New Delhi in India or Manila in the Philippines.

Nonetheless, David Wong, Chairman of Outsourcing Malaysia, is optimistic that Malaysia, with 10 BPO centers scattered around the country, can double its outsourcing industry annual income by 2017, with compound annual growth forecast at 15 percent. It takes an average of just six days for a potential investor to start a new business in Malaysia, he said, compared with an average 36 days to do the same thing in other APEC (Asia-Pacific Economic Cooperation) countries.

Some 300 companies, including HSBC, DHL, Standard Chartered Bank and others have set up operations in Malaysia, Wong said in an interview. But, he said, because Malaysia is priced out of the mass market, its BPO operations have to aim for companies seeking higher skill sets, focusing on operations that include high-end analytics and highly specialized services such as the business financial services industry, health care and oil and gas services. What that has meant is that Malaysia – with a better education system than most of its competitors – has gone looking for smaller, more upscale companies than either India or Malaysia. Its biggest outsourcing company employs 5,000 people, compared with companies in India or the Philippines that employ as many as 100,000.

“This is why we have to focus on providing more highly specialized end-to-end services in niche markets in order to remain globally competitive,” he said.

Business financial services currently account for 30 percent of the market share and is expected to escalate further. The fastest growth is expected in health care (CAGR 10 percent), Government (CAGR 9 percent) and Travel and Logistics (CAGR 8 percent). Infrastructure management and payment processing are some of the services that are being predominantly outsourced by business in the sector.

It also benefits from close proximity to one of the world’s premier financial centers, Singapore, with per capita GDP of US$60,100 and a need to move its back shop operations across the Causeway to Malaysia’s gleaming new Iskandar development, where the country is building an entire new metropolis, and where proximity makes up somewhat for Malaysia’s lack of labor competitiveness. As multinationals move their operations to Singapore, one of the world’s most densely packed cities, there is no room for their logistical and other ancillary operations.

Malaysia also has the advantage of promoting itself as the world’s Islamic finance center, encompassing the Islamic capital markets, banking, money markets, fund management and professional ancillary services, giving it entrée into the middle eastern world of Islamic banking and back shop operations in a talent starved region.

“Strategically, we think we can be strong and focused on specific areas, in addition to supply chain logistics, technical support, data centers, all of which we are ranked in the top 20,” Wong said.