Why Kenyan SMEs should invest in outsourcing

Traders selling greens in Ongata Rongai, Kajiado County. [Boniface Okendo,Standard]

For a majority of Kenyan small and medium enterprises (SMEs) or startups, selling products by wholesale and retail is a core business model. 

As such, the market appears to be at times flooded with so many products that young companies without huge budgets for marketing die as soon as they get started.

However, this situation would be different if most firms instead pursued other models, such as business process outsourcing (BPO), according to a paper published by Viffa Consult Ltd.

BPO is the process of getting a third-party service provider to perform specific tasks that you would otherwise have performed in-house as a business. The idea comes from the manufacturing industry where manufacturers would hire other firms to do procurement, branding and distribution.

A BPO can be in the same locality or elsewhere depending on the services it offers.

Examples of BPO include call centres, human resources, back office processing and engineering design, data transcription, accounting and payroll outsourcing, software development and creative services such as animation.

The global market for outsourced services as of 2019 was $92.5 billion (Sh10.4 trillion) with the US generating the lion’s share of the revenue ($62 billion).

“India is among the leading countries for offshore business services due to solid investment case, supportive policy and legal environment and abudant skilled labour,” says the paper.

Business longevity

In a country where the business environment is not very conducive for SMEs, Viffa Consult suggests in the research paper titled BPO Market Opportunity for Kenyan SMEs: A case of the Philippines, that if SMEs instead invest in outsourcing, one of the net effects will be their longevity in the market.

This is based on comparison with The Philippines, whose BPO industry employs over 1.3 million people and generates $26.7 billion (Sh3 trillion)  as per 2020 figures and is expected to increase to $29 billion (Sh3.2 trillion) this year.

The firm notes that SMEs in Kenya continue to face numerous challenges, leading to their high mortality.

The paper attempts to address two main challenges that have failed these businesses: access to market and reliance on unsuitable business models that are weak and susceptible to external shockl.

“The paper offers alternative business through BPO services and highlight the potential thereof through comparative case study of the Philippines,” reads the paper.

“(It) espouses to expand the market horizon of Kenyan entrepreneurs as well as add to existent body of knowledge on SME policy discourse.”

Computer programming, call centres, IT and computer services, data processing and computer facility management are some of the services outsourced in the Philippines.

The paper notes that employment generated by BPO activities in the Philippines in 2012 stood at 455,643. The bulk of these jobs were in call centres (379,010), followed by computer programming (35,776) and data processing activities (25,848).

Understanding outsourcing models

In the Philippines, there are two major BPO business models; captive market and third-party outsourcing. The difference between the two is the approach based on risk management, cost and preference in management structure.

Captive market model is used when an organisation needs a cost-effective way to run its core business activities and limit the risk of disclosing confidential and sensitive business information.

Through captive market, the company can either build its resources in the location of its operations (starting from zero model) or build-operate-transfer model where the firm works with a third-party service provider to open the business in the designated area.

“The provider has to take care of the requirements, manpower, and operations for a certain period of time. After the contract expires, the client will take over the management of its operations,” explains the paper.

Wells Fargo is one of the companies that have used the captive model.

If an organisation chooses to use the third party outsourcing instead, there are two options: project based outsourcing and dedicated development centre.

Project based outsourcing, the paper says, is advantageous for activities that do not have a regular pattern or schedule.

“Its costing method typically involves computing the time and resources used to deliver the service or product,” it explains.

Dedicated development

For a dedicated development centre, this setup, the paper says, is beneficial for companies who have long term and specific requirements for delivery of the product or service.

“A development centre is a common partner for companies developing software or any tech product,” it adds.

In Kenya, Konza Technology City is one of the initiatives the government has set up to enable the BPO environment.

The paper notes that one of the lessons Kenya can learn from the Philippines is to have BPO specialisation. This will in turn ease the unemployment burden and poverty rates.

“Kenya can harness its highly educated youthful labour that is proficient in English to tap into these three specialised areas: call centre, computer programming and data processing,” the paper reads.

“Based on Kenya’s unemployment challenge, third party outsourcing may be the best as opposed to captive market.”

In the Philippines, employees in the software publishing according to the paper received the highest annual compensation per employee followed by workers in the computer programming activities and computer consultancy and computer facilities management activities.

Leveraging on technology

The paper says that in the long term, aware of the advancement of artificial intelligence and de-globalisation as countries strive to create more jobs, Kenya must align itself accordingly and invest in deep technology through infrastructure as well as human capital through the education system.

Kenya can as well establish a BPO economic zone and aggressive marketing such as The Philippines. The paper notes that The Philippines passed a Special Economic Zone Act in 1995, which created the Philippines Economic Zone Authority and provided tax incentives and lower area requirements for development.

“Due to these benefits, foreign companies were attracted to open offshore offices in the country,” the paper reads.

The paper notes that Kenya has a similar function but under Special Economic Zone Authority.

It adds that Kenya needs to aggressively target captive markets in America and Europe either through formal bilateral trade agreements or directly with industry in respective countries like what the Philippines had done through memoranda of understanding with multinationals and local SMEs.

“Similarly, Kenya can leverage on its strong brand underpinned on horticulture, tourism and athletics to cross-sell BPO,” says the paper.