Screen Shot 2015-02-25 at 11.35.43

I’m happy to report the release of a new report that comes our of a multi-year project to student the Internet and the Business Process Outsourcing sector in East Africa. This work has, in many ways, informed the research design and framing of our current Geonet project.

Mann, L., Graham, M. and Friederici, N. 2015. The Internet and Business Process Outsourcing in East Africa. Oxford Internet Institute Report, Oxford, UK.

Abstract

Internet connectivity is widely considered to be a game changer for knowledge economies of developing countries. The arrival of submarine fibre-optic underwater cables in East Africa in 2009 and 2010 is seen by many as a strong case in point. The fast evolution of the information and communication technology (ICT) landscape of Kenya and Rwanda that ensued has attracted the attention of actors from private investors, development agencies, NGOs, policymakers and many other groups. Kenya became a role model for its wide-spread adoption of mobile money services and a burgeoning ICT application development sector; Rwanda’s government became known for its explicitly ICT-oriented development agenda as well as large-scale ICT projects in government, health and education that aimed to latch onto fast-growing mobile subscription rates and 3G network roll-outs.

For this report, we set out to examine the role that changing connectivity has played for a particular component of the ICT sector in Kenya and Rwanda: ICT-enabled business process outsourcing (BPO). BPO has been a priority in the national ICT strategies of both countries, so we anticipated this sector to provide a fertile ground for comparing expectations and practices of the roles that changing connectivity has played following the deployment of fibre-optic cable infrastructure. BPO is also an interesting sector because internet connectivity is at the heart of its value chain: At first glance, fast internet connections should go a long way in bridging geographical distance and enabling Kenyan and Rwandan businesses to tap into continuously growing BPO demand from all over the world. BPO is also inherently a global, or at least a widely geographically distributed, industry. Our analysis was therefore designed to shed light on the risks and opportunities of establishing connectivity-based local sectors that are bound to be exposed to international markets and competition.

However, the development of ICT sectors fell short of many original hopes. Internet connectivity proved to only function as a catalyst for economic growth in combination with other enablers. Competitive advantage is always relative, and, in the case of Kenya’s and Rwanda’s BPO sectors, India and other Asian BPO destinations have maintained the edge in international markets. Despite the overall positive evolution of ICT-based subsectors in Kenya and Rwanda, the role of internet connectivity for growth in knowledge economies continues to be a complicated one, including for connectivity-based enterprises. Future opportunities might actually lie in ‘close’ (local and regional) markets, and policymakers (and indeed all economic actors) will need to continue to learn and adjust to other unexpected developments brought about by internet connectivity.

Executive summary

Internet connectivity is widely considered to be a game changer for knowledge economies of developing countries. The arrival of submarine fibre-optic underwater cables in East Africa in 2009 and 2010 is seen by many as a strong case in point. The fast evolution of the information and communication technology (ICT) landscape of Kenya and Rwanda that ensued has attracted the attention of actors from private investors, development agencies, NGOs, policymakers and many other groups. Kenya became a role model for its wide-spread adoption of mobile money services and a burgeoning ICT application development sector; Rwanda’s government became known for its explicitly ICT-oriented development agenda as well as large-scale ICT projects in government, health and education that aimed to latch onto fast-growing mobile subscription rates and 3G network roll-outs.

For this report, we set out to examine the role that changing connectivity has played for a particular component of the ICT sector in Kenya and Rwanda: ICT-enabled business process outsourcing (BPO). BPO has been a priority in the national ICT strategies of both countries, so we anticipated this sector to provide a fertile ground for comparing expectations and realities of the role that changing connectivity has played following the deployment of fibre-optic cable infrastructure.

BPO is also an interesting sector because internet connectivity is at the heart of its value chain: At first glance, fast internet connections should go a long way in bridging geographical distance and enabling Kenyan and Rwandan businesses to tap into continuously growing BPO demand from all over the world. BPO is also inherently a global, or at least a widely geographically distributed, industry. Our analysis was therefore designed to shed light on the risks and opportunities of establishing connectivity-based local sectors that are bound to be exposed to international markets and competition.

We used an analytical framework that honed in on the effects of increased internet connectivity on the value chains of the BPO sector. Since we wanted to examine potential benefits and risks of changing connectivity for local BPO businesses in Kenya and Rwanda—that is, businesses that create and extract economic value through and for individuals regularly located in Kenya and Rwanda—we further examined the interaction of value chains with geography and the locations of different actors on those chains. We wanted to identify both the geographically contingent exchanges that happen along the BPO value chain and the exchanges that happen locally across the value chains of related sectors.

Our team of researchers from the Oxford Internet Institute developed a staged, in-depth analytical approach to elicit the expected and actual roles that changing connectivity played in the Kenyan and Rwandan BPO sectors. We first conducted a content analysis of 378 East African media sources to understand the hopes and visions invested in the arrival of fibre-optic cables. Once we started conducting interviews, we quickly found that mainly the Rwandan but also the Kenyan BPO sectors were less active than we had envisioned. We then included other kinds of ICT-based companies in our sample in order to understand the environment of the core BPO sector and potential barriers that had kept it from growing further. Broadening the scope also made sense as policymakers in both countries had come to recognize that the promotion of international BPO was likely to require more fundamental changes in the structure of their domestic economies. We ultimately conducted 102 interviews with policymakers and private sector representatives in both countries. Two open focus groups in 2013, in Nairobi and Kigali, were used to corroborate preliminary findings, and to disentangle inconclusive ones. A final workshop held in August 2014 in Kigali served to collect a last round of feedback from Rwandan BPO practitioners.

Findings

  1. An active BPO sector was found to exist in Kenya but not in Rwanda. Even Kenya’s, over a decade-old, BPO sector has not been able to capture large amounts of work from foreign clients, falling far short of original hopes and expectations.
  2. Two additional sectors within local ICT industries have distinct value chains while also playing a role in shaping the BPO sector: ICT innovators (such as start-ups developing new applications and software) and ICT connectivity enhancers (such as electronic payment intermediaries).
  3. The three sectors together (BPO, ICT innovators and ICT connectivity enhancers) can be summarized as connectivity-based enterprises: these businesses provided content and services through value chains and networks that depended on ICT infrastructure (hardware and software) put in place by local and international ICT corporations or government entities (such as subsidized/government-owned and private mobile network operators, device manufacturers, and software multinationals).

We first outline findings that apply specifically to the BPO sector, before outlining findings that hold more broadly across all three connectivity-based enterprise sectors.

BPO-specific findings

1. Diverse but persistent (re-)intermediation

The limited outsourcing opportunities that were available from international clients were usually subject to various forms of mediation: such as, through online platforms, through international consultants, through governmental or government-affiliated agencies or through impact sourcing agencies. Our observations also supported the idea of ‘re-intermediation’. Distributed work platforms like Odesk and elance, by virtue of their design principles, offer only certain kinds of barely-profitable and non-sustainable work in a ‘take it or leave it’ format. Better connectivity also allows international consultants and more powerful companies to re-package and re-distribute work to Kenyan and Rwandan companies that are lower down in the chain. Kenyan and Rwandan BPO actors believe that this intermediation lowers their margins and that a greater degree of disintermediation would benefit the sector.

2. Understanding the market forces of global BPO value chains and networks

As late follower countries for BPO, Kenya and Rwanda have faced strong competitive pressure from mature BPO industries in India and South East Asia. The local BPO sectors do not have the depth, scale efficiencies, cost-competitiveness and skill base to compete for international customers with established foreign BPO companies and markets. Due to a lack of international competitiveness, Rwandan and Kenyan-born BPO enterprises have largely expanded within their home countries or across Africa (for some Kenyan companies), where they can offer a better fit of supply and demand (defined by provided/demanded quality and price). At times, local BPO companies themselves “re-outsource” their work abroad, hiring foreign companies, as this can still be cheaper than doing it locally for large scale and complicated projects. In addition, subsectors of BPO do not always adhere to the same market dynamics, for instance, regarding available deal flow and required skills.

3. Gaps in workers’ skills on multiple levels

Among the contributors to low competitiveness, shortages of human capital and skills stood out on multiple levels, even for parts of the BPO sector focusing on “low-skill” work. Mostly lacking were technical skills, but also limited soft skills were problematic. Higher education institutions appeared unable to fill skill gaps comprehensively and prepare a BPO work force. BPO providers often trained their employees themselves; however, this increased their cost.

4. Late-follower challenges

In both countries, the sectors went through a learning curve concerning the potentials and limitations of BPO work. The main learning outcome was that internet connectivity does not eliminate the need for direct, trusted interactions with clients and an understanding of their needs. Both continue to be easier to achieve in markets close to the BPO operator’s own location or when temporary physical proximity (Torre, 2008) can be established (e.g. during shorter visits of international clients). It appeared no longer possible for Kenya or Rwanda to achieve the overwhelming scale efficiencies and trust advantages of Indian and other Asian operators. Notably, Rwandan interviewees expressed a firmer belief in the elimination of geographical distance due to internet-mediated connectivities. This might mean that internet connectivity is an initial hurdle that prevents managers from seeing other hurdles until it has been transcended.

Findings for connectivity-based enterprises

1. The importance of skills, learning and combinations of local and global knowledge

Value chains and networks of all connectivity-based enterprises relied heavily on learning and skill formation, in particular for technical knowledge such as in software development. Internet connectivity, through enabling access to open source software communities and resources, had a meaningful impact on enhancing the skills of Kenya’s and Rwanda’s work forces. Yet, hands-on mentoring, talent with complementary non-technical skills and exposure to new contexts and networking opportunities usually generated the greatest successes. International exposure in particular enabled actors to leverage the ‘best of two worlds’: local knowledge and superior skills. This meant that a small but growing segment of local connectivity-based enterprises, offering services to domestic and African markets, has been able to derive a palpable net benefit from improved connectivity. Over time, the value derived from internet connectivity and the value derived from ICT-related skills appear to have mutually enhanced each other.

2. Social connectivity and trust as necessary conditions for ICTs to bridge distances

ICTs could not replace or make superfluous the need to establish trusted social relations with clients and business partners to enable economic interactions. This was true even though value chains of connectivity-based enterprises were predicated on ICTs’ distance-bridging potential. Connectivity-based enterprises engaged in value creation and extraction that served (end) customers at a distance (without face-to-face interaction), but any larger and more sustained economic transaction required the establishment of social connectivity and trust. Temporary geographical proximity between actors (for instance, during conferences or short in-country visits by international actors) was one initiator of ongoing transnational business relationships, but relationships were rarely “born online”. Lacking conceptual connectivity—a collective and a priori trust between East African companies and foreigners—was often an important initial burden before any company would even be able to prove itself as trustworthy in a one-on-one relationship. The only exceptions were internationally operating companies where trust was established via alternative pathways (such as the company’s brand and reputation or broader contractual arrangements).

3. Domestic and regional markets as newly found opportunities

Companies in all three sectors were largely focused on businesses generated within Africa. In Kenya, businesses were mainly focused on Uganda, Tanzania, and South Sudan. Rwandan-based companies were focused on similar countries, but also on the Democratic Republic of the Congo and Burundi. Increasingly, domestic and regionally proximate markets have revealed unexpected potentials, and have been developed into modest but sustainable and growing value creation and extraction opportunities.

4. Gateways and gatekeeping

Connectivity-based enterprises followed diverse pathways of transitions and upgrades, usually based on iterative increases in social connectivities and trust. By and large, the most prevalent expansion paths proceeded from local to regional to global, and rarely was a ‘born-global’ strategy realistic. Small Rwanda- or Kenya-based businesses often began with one formal contract with a foreign client that helped them to establish themselves. Foreign large companies typically entered the Rwandan or Kenyan market through tenders for large projects. ICT innovators would start with website design or international and practical exposure and sometimes flourish from there. Government and large institutional actors occasionally acted (unintentionally) as gatekeepers towards smaller firms through rigorous tendering requirements.

Download:

Full Report (6.2Mb)


Note: This post was originally published on the OII's Geonet project blog on . It might have been updated since then in its original location. The post gives the views of the author(s), and not necessarily the position of the Oxford Internet Institute.