Monday, April 28, 2008

The Egyptian Business Environment for Software Outsourcing Businesses

Egypt’s relative familiarity with Western culture and business values makes it a viable location for outsourcing growth.

However, success in the software outsourcing market will depend—at least in part—on overcoming some perception problems, especially in the North American market. Although US-based companies have grown increasingly comfortable with software outsourcing and offshore development (often more so than European-based companies, where labor laws are stronger and controversies about offshoring can be more intense), they still hesitate to send their
work—especially the highly sensitive data inherent in BPO work—to untested offshore locations. BPO, which includes human resources (HR) data and finance and accounting work, is something many North American companies still want done in nearshore locations—or at least in a company with a nearshore presence as part of its global delivery network.

Two of the biggest multinational service providers, IBM and Accenture, say they currently do not see Egypt as part of their BPO delivery networks because they are not seeing a need for such from their customers.

Egypt has a much better shot at building momentum with European-based companies. And it is taking steps to remove other impediments to growth as well. Reforms of the labor laws in 2003 created a very powerful, flexible workforce and removed many of the previous impediments to recruiting staff in Egypt. Reforms have focused on creating a balance between employees’ and employers’ rights. Specifically, the reforms address areas such as the right of an employer to
fire an employee and the conditions pertaining to this, and also grant employees the right to carry out a peaceful strike according to controls and procedures.

One of the biggest worries facing investors in an emerging market such as Egypt or China is the protection of intellectual property. In Egypt, intellectual property protection was introduced in 2002 under Law 82, indicating the Egyptian government’s commitment to protecting investors’ intellectual property.

In December 2004, the Egyptian government amended the investment Law 8 of 1997 by introducing Law 14/04. This made the General Authority for Investment and Free Zones (GAFI) the sole authority to which investors have to turn to have their proposed projects approved, making it a one-stop shop. The one-stop shop encompasses delegates from different governmental agencies under a single roof.

GAFI’s one-stop shop has streamlined the number of procedures and has simplified the investment law. For example, it has profoundly reduced the time necessary to establish a new company from 4 months to a maximum of 3 days. However, reducing the time to establish a new company was just one of six steps: registration, tax card, industrial project approval, building permit, industrial registration and operating license. Previously, the International Finance Corporation (IFC, the private sector arm of the World Bank Group) says the whole process took 277 days; now it’s 135 days and four steps. Soon it will be only 45 days and three steps: pre-approval and land assignment, final approval and building permits, and industrial
registration and operation licensing.

Since 2004, the Egyptian government has worked hard to increase the attractiveness of Egypt’s business environment. This includes the introduction an anti-trust law and a unified tax law. The latter increased the transparency of the Egyptian tax system and reduced corporate and personal taxes by half.

Within the ICT sector, the Egyptian government also offers incentives to attract international companies to set up call/service center and BPO-type operations in Egypt. These incentives include the Egyptian government (via the Ministry of Communications and Information Technology [MCIT]) paying for the training of staff to bring them up to the required standard to deal with the clients from the multinational companies they support. Orange Business Services is an example of a company that established a major service center that has received support in training its resources.

Egyptian Government Initiatives for the Outsourcing Market

To compete with China, India and other outsourcing destinations, Egypt needs to create a pipeline of highly skilled and trained, business-savvy graduates who will enable the country to compete successfully against the outsourcing giants.

The MCIT has a number of initiatives in partnership with the United Nations Development Programme (UNDP) under the banner of the ICT Trust Fund. These initiatives are backed by some of the global players in the ICT market, including:

• Egyptian Education Initiative (EEI): The EEI is to looking to use ICT as a vehicle to improve
education throughout the country via a public-private partnership model. It aims to benefit trade and industry by improving the standards of information and communications technology in the country’s schools and colleges through partnerships with private firms. CA, Cisco, HP, IBM, Intel, Microsoft, Oracle and Siemens each signed a letter of intent supporting the initiative. Phase 1 targets 820,000 students at more than 300 colleges.

• E-Learning Competence Center (ELCC): The ELCC was established in 2004 as a partnership between the MCIT and the Cisco Academy Program, a nonprofit arm of Cisco. ELCC is focusing on delivering elearning to universities and public and private (particularly SMEs) sector companies. Microsoft and Oracle have already signed agreements with ELCC.

• Illiteracy Eradication Initiative (IEI): The IEI is looking to create easily accessible digital media
(accessible via CDs or the internet) to teach written Arabic (both words and characters) and basic mathematics. The aim it to make this digital media available at Egypt’s numerous IT clubs. The ICT Trust Fund has partnered with the National Council for Women, several nongovernmental organizations

and the General Authority for Literacy and Adult Education (GALAE) for this project.
• Mobile IT Club: The ICT Trust Fund kicked off its Mobile IT Club project initiative to serve
communities in remote and rural areas in October 2005. The Mobile IT Club is a bus or a caravan equipped with a generator, air conditioning and satellite internet access, plus digital cameras, printers and a scanners. On average, the mobile units can accommodate 10 to15 visitors at a time and are accommodating between 40 and 150 visitors per day, depending on whether the unit is a bus or caravan.

The MCIT is implementing the National Telecommunications and Information Technology Strategic Plan aimed at building a strong IT industry in Egypt. This includes a number of initiatives focusing on developing the necessary high-quality human capital needed to drive the IT industry forward.

Key to this plan was the establishment of the Nile University (NU), which opened in early 2007. NU is focusing on applied IT research, looking to create solutions to industry challenges via strong linkages between the university and industry. NU has three main centers specializing in research and development (R&D), entrepreneurship and incubators, and innovation and intellectual property. These centers act as catalysts to drive and harness the technological capabilities of local industry, thereby improving Egypt’s international competitiveness.
In addition, the Egyptian government is constructing “smart villages”/technology parks as part of its efforts to entice ICT companies, targeting the Middle East market, to base their operations in Egypt. The first smart village was constructed outside Cairo.

Although Egypt is competing with other established centers of outsourcing such as India and China, the Egyptian government is setting up a number of intercountry initiatives. These cover education, assistance in building ICT workforce capacity and knowledge exchange.

Examples of these initiatives include pacts signed by the Information Technology Institute (ITI) of Cairo with NIIT (Asia’s largest IT trainer) in November 2006. NIIT will provide IT education programs to assist in building a pipeline of skilled ICT professionals. In September 2006, Cairo University signed a letter of intent with a Chinese educational delegation to set up a Confucius Institute to promote Chinese language and culture.

Most of the initiatives focus on creating the basic knowledge platform that will sustain the technology graduate pipeline supplying the IT sector. Yankee Group sees the important part as the specialist centers established within the Nile University to nurture R&D, incubators and innovation; these centers should lead to a sustainable IT industry.

However, what appears to be missing is the ability to teach business or IT process development, in which Egypt has no history. These skills should come from the links with NIIT and the Indian government, but the Egyptian government should not be overly reliant on external sources to assist with its IT capacity-building initiatives.

There is a dangerous overreliance of the Egyptian government to develop initiatives. The Egyptian government must ensure that bureaucracy and red tape do not strangle these initiatives. Therefore, it is imperative for the Egyptian government to encourage increasing levels of private sector involvement, which is one area where India is extremely successful.

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