by Stephanie Overby

Offshore Outsourcing: Kenya Shows Promise

Nov 03, 20084 mins

When examining offshore outsourcing options, Kenya shows a lot of promise for cost savings, however, it has seen its IT services potential slowed by political instability and infrastructure improvement delays. When will this alternative to India and China be viable?

With India’s rising costs and employee turnover encouraging information technology executives to look beyond the subcontinent for offshore outsourcing providers, a country like Kenya could be poised to win more IT services business from abroad. The East African nation boasts a big pool of English-speaking professionals and its government has invested millions to improve its telecommunications infrastructure.

However, recent events have conspired to slow Kenya’s growth potential in the near term.

Most dramatically, a disputed election at the end of 2007 ignited two months ethnic tensions and violence in the country, leaving hundreds of citizens dead and hundreds of thousands more displaced. In late February 2008, former United Nations Secretary General Kofi Annan negotiated a power-sharing deal between the two presidential candidates that established a coalition government. But uncertainty about the new government continues. “Kenya has a young democracy that will result in more growing pains,” says Ralph Schonenbach, president of Zurich-based sourcing consultancy Trestle Group.

Geopolitical concerns are never good for IT services business. “Outsourcing has risks, offshore outsourcing even more, offshore destinations with political instability even more,” Schonenbach explains. “Kenya’s disputed presidential election, post-election violence and civil unrest raised a significant red flag for decision makers considering outsourcing to Kenya. Watching riots and chaos broadcast around the world makes a very tough sell inside the board room.”

“(Political instability) has derailed the Kenyan economy from its growth momentum,” agrees Eugene M. Kublanov, CEO of San Ramon-Calif.-based sourcing consultancy neoIT. Early estimates put the cost of the political crisis to the Kenyan economy at $1 billion, with some revising Kenya’s 2008 economic growth projections from 7 percent down to 3.2 percent. The economy is expected to recover in the mid-term, says Kublanov, with growth estimates for 2009 nearing 5 percent.

And the IT services sector may be poised to persevere.

Once the political issues are addressed, Kenya could be one of the world’s fastest developing outsourcing destinations due to its large English speaking population, low costs, and near shore status for European and Middle Eastern companies, says neoIT’s Kublanov, putting it on par with its IT services competitors on the continent including South Africa, Mauritius, Egypt and Ghana. The East African nation could become a preferred destination for call center and smaller business process outsourcing contracts. Thus far, the local call center industry employs 3,000 professionals and has grown to $5 million since the first call center opened a few years ago, says Kublanov, leaving plenty of room for growth. The most established local providers include Skyweb Evans, Kencall, and Preciss, who serve customers in the United States, Canada, and Europe.

One giant obstacle has been the local data and telecom infrastructure. “Call center operators in east Africa’s biggest economy rely on an outdated satellite system where echoes caused by latency—the time gap created when calls travel some 36,000 kilometers through space and back—spoil call quality,” says Kublanov. And for that shoddy service, they pay $7,000 per megabyte of bandwidth per month, compared to the $500 a month an Indian provider would pay.

Infrastructure improvements are coming, slowly but surely. The Kenyan government has invested $100 million in The East African Marine Systems (TEAMS), an undersea cable to connect Mombasa with Fujairah in the United Arab Emirates, which is expected to bring the cost of connectivity down to the levels India pays, says Kublanov. In addition, construction has finally begun on the Eastern Africa Submarine Cable System (EASSy), spearheaded by the World Bank back in 2003, which will connect East African countries to the rest of the world via high-bandwidth fiber optic cable. The project is slated for completion in late 2010.

The Kenyan government also plans to complete a 5,000-seat technology park and export promotion zone by 2012, a move aimed at boosting the BPO industry. IDC Kenya says data centers, managed services, help desks, call centers, and application and hosting services will be key areas to watch in 2009.

Quality and speed could be more important than cost in future growth for the Kenyan IT services industry. “Confidentiality and the ability to handle important client information is another important factor that prospective buyers have as priority,” says neoIT’s Kublanov. One potential role for the East African country is as a subcontractor for other offshore IT service providers. “Indian companies have begun looking to outsource their own outsourcing operations to Kenya to battle higher wage inflation, over-heated infrastructure, et cetera,” says Kublanov. “And there are reports of a ready pool of investors looking to enter the Kenyan industry, particularly from South Africa where labor costs are much higher.”

Ultimately, for IT services customers, it comes down to a risk-reward calculation when deciding on a new offshore outsourcing destination. “Are there risks by outsourcing to Kenya? Most definitely,” says Schonenbach of the Trestle Group. “Executives need to carefully weigh risks versus opportunity and evaluate the impact on their business.”