With many nations recognising the economic benefits of attracting companies, Katy Dowell reports on how South Africa is following India's lead by developing its outsourcing industry

Most consumers will associate outsourcing with India. After all, it is estimated that the country is home to 750,000 offshore agents who operate front and back office functions for businesses from all over the western world.

Norwich Union (NU) will have 7,800 roles located offshore by the end of the year, in a bid to slash £250m off the group's £2bn operating costs.

With business booming in India, other countries are beginning to move in on the act. South Africa is the latest nation to unveil tax breaks to incentivise firms to set up shop and it is promising better service standards than India.

Sustainable industry
The business process outsourcing industry is expected to grow at a rate of 50% a year for the next four to five years. That growth will generate revenues of between $50bn and $60bn. With unem-ployment rates at 25%, South Africa sees the industry as key to getting the unemployed trained in a sustainable industry which can provide desperately needed jobs.

In 2006 the country took steps to accommodate growth. In February 2006, UK-based telecommunications firms announced plans to spend ZAR200m (£14m) establishing two call centres, the first in Cape Town, the second in Johannesburg. The deal, the largest of its type in South Africa, was facilitated by Calling the Cape.

Founded in 2001, Calling the Cape was established with the aim of promoting investment in South Africa's outsourcing industry. As well as attracting new companies to the country it has also encouraged the call centres already there to grow further. In October the Budget Group, which is seeing phenomenal growth in the UK, announced plans to triple the size of its Cape Town call centre to 700 seats. Half of the new staff recruited by Budget will be provided by Calling the Cape.

Budget sees the step as different to NU's offshoring model. First the intermediary has committed to growing at the same pace in the UK – no jobs will be lost as a result of offshoring. Second, it believes South Africa is more culturally aligned with the UK, and many people will not have problems with understanding regional accents. Third, the labour pool is educated to a "matriculant" level, the equivalent of the UK's A-level, rather than to a degree standard as is often the case in India. In the long term this is viewed as a more sustainable labour force.

The success of Budget's offshore subsidiary, Fusion Outsourcing Services, is backed up by its business retention statistics. Serving the broker's Dial Direct and Budget motor insurance brand, it claims that personal lines sales are up 4% on the UK. In commercial vehicle successful sales were 11% higher than its UK equivalent. Although it may be more expensive to run a call centre in Cape Town than in India, Budget says the results prove themselves. And in comparison to the UK, where call centre attrition rates could be as high as 56% and the average cost per seat stands at £30,000, there is little competition.

As Fusion Outsourcing announced its recruitment programme it also received some good news from the South African government. The South African Department of Trade and Industry has allocated R1bn (£71m) to a fund aimed at promoting outsourcing in the country. This is equivalent to £2,500 per seat created in the industry. Grants will be made available to promote training and for employers there will be tax deductible costs of up to R60,000 per employee hired.

Meanwhile Calling the Cape will supply almost half of the new workforce which it will train at no cost to the intermediary. Focusing on the unemployed, the agency trains staff before they go through a period of unpaid work experience at Fusion Outsourcing. With no obligation to recruit those trained staff Fusion is able to select the most talented to take positions.

Growing confidence
Western Cape Premier Ebrahim Rasool is driving forward growth of the province's outsourcing industry. In the last four years the area, one of nine Cape Town provinces, has more than doubled the number of call centre seats to 13,000. "That shows growing confidence globally in South Africa's call centre industry but also growing affinity by Capetonians to participate in this industry," says Rasool. "Investment has been of the order of R1bn to create 13,000 jobs, and we have been given a major fillip with a further R1bn of incentives after the national government declared outsourcing and call centres a strategic industry that needs to be nurtured."

Strategic plan
India has long promoted the outsourcing industry. Contrary to recent reports NU will not move jobs back to the UK. The 150 staff it is reported to have brought back was part of a strategic plan put in place three years ago. It argues that the cost savings of overseas call centres will benefit customers.

"We have to ensure that NU remains a highly efficient and effective company, in what has become an increasingly competitive and dynamic environment," says Patrick Snowball, NU executive chairman. "Customer buying habits are changing rapidly as technology becomes more accessible."

In contrast to South Africa, India has a fully trained workforce ready to service the outsourcing market. Most are trained to graduate level, and NU will develop that further by requiring underwriting staff take up level 1 CII qualifications.

The insurer has more than 2,000 call centre seats based in India's university capital, Pune.

It is serviced by EXL, an end to end outsourcing provider, which handles both small end commercial and personal lines calls.

EXL acknowledges there are problems with the Indian outsourcing model, but claims it has built its services to accommodate those issues. The boom in the country's outsourcing market has brought with it a demand for increased wages.

"Every industry wants to have a wage rise three times a year," says one EXL director. "People are getting paid more and they want further wage increases. We know to keep doing this we will be fighting a losing battle. So we have designed our retention policy around loyalty so we can meet the challenges."

Consumer trust
There are also problems with how the UK perceives Indian customer service. Consumer Intelligence is just one of a number of companies which has released research criticising customer service levels.

It asked consumers to rate different insurers on service levels ahead of making the call. When the call finished they were asked to rate the actual quality of the call and their propensity to calling them again.

Ian Hughes, of Consumer Intelligence, says the results speak for themselves: "Consumers' trust and confidence in a company falls dramatically if they feel they are being handled by an offshore call centre. They feel there is a lack of empathy and they worry whether they are being misunderstood. Consumers know when they have been offshored and they don't like it.

"It's not a xenophobic thing, it's a confidence thing. One brand was destroyed in a swift 10-minute phone call and it could never be rebuilt."

EXL says NU is a "very demanding" customer, which regularly appraises service standards. The insurer is pushing ahead its plans for India and has not seen a dip in the number of customers because of it.

EXL is among the largest outsourcing providers in India, and it is not seeing a reduction in growth – despite a constant stream of criticism from UK media, it is still taking on new clients. Since its initial public offering in 2005 it has seen share process increase significantly to $23 per share from a float price of $13.50.

Offshoring is an emotive subject which invokes much criticism. Yet the industry is storming forward unabated with governments around the world recognising the economic benefits of attracting companies to their country.

South Africa hopes it will be able to move in where India has failed. Tax breaks and a ready labour pool will continue to attract companies to set up abroad. But whether India will continue to be the jewel in the crown remains to be seen. IT