Same challenge for Malaysian outsourcing

• US political rhetoric to have minimal if any impact at all on Malaysia’s SSO sector
• Moving up the value chain to escape commoditized services becoming ever more urgent

HOW will Malaysia’s positioning as an outsourced destination be affected by the outcome of the US elections? With ‘Jobs, Jobs and Jobs’ being a top of mind issue with American voters, it was no surprise that both presidential candidates, Barack Obama and Mitt Romney, trained their guns on the outsourcing of jobs by profit-at-all-costs US companies.
 
Romney cited 500,000 as the number of jobs lost over the last 12 years. There are other estimates that run into the millions even. The USA Today newspaper cited figures from the Bureau of Economic Analysis which estimated that from 2000 to 2005, US multinationals eliminated as many as 2.1 million jobs, while adding 784,000 abroad.
 
Whatever the number, both candidates pledged to do their best to make America the world’s most attractive place for entrepreneurs and manufacturers, while plugging offshore loopholes that are exploited by corporations that outsource American jobs. They also talked about investing in science and engineering to make America more attractive and as a magnet for innovation.
 
Obama however acknowledged that some jobs were not coming back and said his focus was in ensuring the high skill, high wages jobs would. I found this comment interesting as Malaysia is also positioning itself at a higher value outsourced destination and has had good success with some leading American companies, IBM and HP being the more prominent ones.
 
Speaking to some players in the outsourcing space however, it became clear that Malaysia has little to worry about as, while the political rhetoric will always be there and may flare up from time to time, the business reality dictates that outsourcing has become part and parcel of best practices in running a global company.
 
The main challenge for Malaysia, and this has been identified since at least 2007, is the urgent need for our own outsourcing players to move up the value chain as they will not be competitive against companies based in neighboring countries like the Philippines, Vietnam and Indonesia.
 
I am using a geographic yardstick as some outsourced business is geographically defined, with the decision made to invest in particular regions for risk diversification purposes.
 
Addressing the US situation
 
“The political rhetoric will always be there,” notes Ram Ramachandran, vice president and head of sales (Asean) for Mahindra Satyam, one of Indian’s leading technology companies.
 
But the reality is that with technology changing so rapidly, companies need to outsource that portion to specialists whose bread and butter is managing the technology needs of customers, he says.
 
Critically, one of the underlying drivers of outsourcing shows no sign of slowing down --  which is customers keep demanding best-of-breed solutions but are not willing to pay so much, Ram adds.
 
“It’s a Catch-22 situation,” he says, adding that he does however see some jobs going back to the United States. He does not see any impact to Mahindra Satyam’s Global Center in Cyberjaya, where it has 500 employees.
 
Outsourcing consultant Bobby Varansi also sees no impact on Malaysia from any moves that could happen in the outsourcing space in the United States. Varansi is chief executive officer of Matryzel Consulting Inc for Malaysia.
 
“Most of the American companies operating in Malaysia are cost centers and have stringent transfer-pricing rules with respect to operational costs. Sure, some belt-tightening will be seen in terms of both hiring and in compensation changes (remaining at near constant levels again), given cost-containment will drive much of the thinking here,” he says.
 
But Varansi, who has been based in Malaysia for close to 10 years, does zoom in on the single biggest challenge that faces Malaysian service providers in the outsourcing space, not so much the multinationals that send outsourcing jobs to their own operations in Malaysia – that it is not what happens in the United States that is a threat to Malaysian companies, rather it is cheaper competitors that continue to pose a major challenge given the diametrically opposite situations here.
 
“The services offered out of Malaysia are highly low-value and commoditized. Consequently, they have breached the maximum offer-price for such services that the Malaysian cost-structures cannot address. Unless Malaysia moves up the value chain in offering higher-value services, it will lose existing jobs to other cheaper locations, irrespective of what happens on the political front in the United States,” he says.
 
This type of comment scares me because it was already identified as far back as in 2007, if not earlier, but very few Malaysian companies have made the step up to escape the claws of commoditization.
 
This can be because clients are still comfortable working with Malaysian-based outsource specialists and the value they offer, but with 2013 looking increasingly dark for the global economy, cost-cutting rather than value maximization is going to be a key theme in business.
 
Will our home-grown outsourcing specialists survive the cold and calculating measures their clients will impose on suppliers moving forward, especially when contracts are up for renewal? Will all the up-skilling efforts over the years, led by the Multimedia Development Corporation (MDeC) and Outsourcing Malaysia, bear fruit?
 
I think 2013 could shape up to be the litmus test for the strength of our outsourcing industry.
 
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