Written by Aishah Mustapha

Wednesday, 26 August 2009 00:25

PETALING JAYA: Revenue from Malaysia's outsourcing industry rose 18% year-on-year to US$1.1 billion (RM3.9 billion) last year, contributing less than 1% to the country's total gross domestic product and representing a small fraction of the US$220 billion global outsourcing market.

However, the local outsourcing industry is forecast to have a 15% compounded annual growth rate over the next five years, which will bring total revenue to US$1.9 billion by 2013.

In a 12-month study released by PIKOM (National ICT Association of Malaysia) together with ValueNotes Database, a business information and research company, almost 62% of the total outsourcing revenue in Malaysia came from the information TECHNOLOGY outsourcing (ITO) space, followed by business process outsourcing (BPO) at 36%.

BPO services include contact centres, sales, marketing, accounting, finance and human resource management.

Meanwhile, the high-value service of knowledge process outsourcing (KPO) is still in its infancy stage at 2%. KPO involves high-end work such as animation services and engineering design and is undertaken by a few small service providers.

The study analysed 140 service providers, both foreign and domestic players based in Malaysia, which contribute almost 80% of the total revenue and employee strength of the industry. All types of service providers are considered including captive centres, which are offshore centres of multinational corporations.
The number one challenge cited for Malaysia in the outsourcing space is the lack of scalability due to a lower population base compared with India, China and the Philippines. The number of local university graduates is around 200,000 in 2007, significantly lower than India with more than a million graduates.

Furthermore, the high employee cost in comparison to other countries in Asia Pacific poses another threat. The IMD World Competitiveness Report has ranked Malaysia fourth in terms of cost effectiveness behind the Philippines, India and Thailand.

In addition, the lack of alignment between the education system and industry needs means the talent pool is less robust. Finally, the study cited the lack of a vibrant funding landscape in terms of venture capitalist and private investments as another hindrance for service providers to grow big.
Seen in this light, the study stressed the importance of Malaysia to move away from competing on cost alone, to a talent-based model.

By leveraging on existing strength in Islamic finance, engineering, and oil and gas sector, it can grow its annual revenue through high-skilled services. Islamic finance can also open up new markets in the Middle East as well as Asia, which are pegged to grow a larger outsourcing market.

ValueNotes managing director Arun Jethmalani said companies were always worried about the lack of talent when outsourcing. "They might not ask about cost anymore. They want to know, can I get the best engineers? Can I get the best lawyers?" he said.

Malaysia's ICT (information and communications technology) spending is higher this year than other emerging markets at 2.8% of gross domestic product (GDP) compared with India (1.3% of GDP) and China (1.5% of GDP). This is close to the budget in developed countries such as the United States at 3.4% of GDP.