Analysis of the Business Process Services Sector. Final Report

Transcription

1 Analysis of the Business Process Services Sector Final Report 23 February 2015

2 Document Reference: Analysis of the Business Process Services Sector Date: 23 February 2015 Contact Information Genesis Analytics (Pty) Ltd Office 3, 50 Sixth Road Hyde Park, 2196, Johannesburg South Africa Post to: PO Box , Craighall, 2024 Johannesburg, South Africa Tel: Fax: Authors Genesis Analytics Contact Person Paul Zille ii

3 Table of Contents EXECUTIVE SUMMARY... VI 1. INTRODUCTION... 1 PART A: SSC AND LPO ANALYSIS SHARED SERVICES CENTRE Overview Functions serviced by an SSC Drivers and benefits of an SSC Typical challenges to setting up an SSC Geography of SSCs Industry demand SSC trends in sub-saharan Africa SSC industry in South Africa Profile of the industry Considerations when setting up a SSC Competitiveness of SA as a BPS destination Growth potential of the SSC sector Recommendations LEGAL PROCESS OUTSOURCING Overview Drivers and benefits of LPO Functions serviced by an LPO Geography of LPOs Considerations in setting up an LPO LPO industry in south africa Profile of the industry Competitiveness of SA as an LPO destination Growth potential of the sector Recommendations PART B: PROVINCIAL BPS ANALYSIS iii

4 4. EASTERN CAPE BPS opportunities Provincial competencies FREE STATE BPS opportunities Provincial competencies LIMPOPO BPS opportunities Provincial competencies MPUMALANGA BPS opportunities Provincial competencies NORTHERN CAPE BPS opportunities Provincial compentencies NORTH WEST BPS opportunities Provincial competencies SUMMARY CONSIDERATIONS OF PROVINCIAL ANALYSIS APPENDIX A APPENDIX B Value chains Automotive Agriculture value chain Financial services value chain Mining value chain List of Figures Figure 1: Services provided by SSCs... 4 Figure 2: Location of organisations' headquarters... 6 Figure 3: Location of SSCs... 7 Figure 4: Geographic trends of SSCs over the last two years... 8 iv

5 Figure 5: SSC by industry Figure 6: Shared service deployments by function Figure 7: Share of captive and third party SSC operators Figure 8: Geographic location of the SSCs in South Africa Figure 9: Source markets serviced by SSCs in South Africa Figure 10: Key considerations when setting up a SSC Figure 11: Annual per job cost for financial services back-office excluding incentives, 2014 (USD 000s) Figure 12: Impact of the incentive on higher value work's operating costs Figure 13: Approach trend line: Use/expansion of SSCs Figure 14: Functional area demand (4Q12, 1H14, future-looking) Figure 15: Domestic and export SSC revenue growth in India Figure 16: Categorisation of LPO services Figure 17: Offshore LPO seats in South Africa Figure 18: Onshore LPO seats in South Africa Figure 20: Global LPO market by service, , (USD Million) Figure 21: Geographic sources of BPS services in automotive sector (Eastern Cape) Figure 22: Geographic sources of BPS services in financial sector (Eastern Cape) Figure 23: Geographic sources of BPS services in financial sector (Free State) Figure 24: Geographic sources of BPS services in the mining sector (Free State) Figure 25: Geographic sources of BPS services in the mining sector (Limpopo) Figure 26: Geographic sources of BPS services in the agricultural sector (Limpopo) Figure 27: Geographic sources of BPS services in the mining sector (Mpumalanga) Figure 28: Geographic sources of BPS services in the agricultural sector (Mpumalanga) Figure 29: Geographic sources of BPS services in the mining sector (Northern Cape) Figure 30: Geographic sources of BPS services in financial sector (Northern Cape) Figure 31: Geographic sources of BPS services in the mining sector (North West) Figure 32: Geographic sources of BPS services in financial sector (Free State) Figure 33: Automotive Value Chain Figure 34: Field Crop Agricultural Value Chain Figure 35: Financial Sector Landscape Figure 36: Mining Value Chain List of Tables Table 3: Comparison of labour supply and cost of labour Table 4: Key Sectors by Province (as measured by GDP contribution) Table 5: Eastern Cape employment of youth by occupation type (Thousands) Table 6: Free State employment of youth by occupation type (Thousands) Table 7: Limpopo employment of youth by occupation type (Thousands) Table 8: Mpumalanga employment of youth by occupation type (Thousands) Table 9: Northern Cape employment of youth by occupation type (Thousands) Table 10: North West employment of youth by occupation type (Thousands) Table 4: Stakeholders consulted for the SSC research Table 4: Stakeholders consulted for the LPO research Table 6: Stakeholders consulted for the provincial analysis research List of Boxes Box 1: Definition of an SSC... 3 Box 2: Poland case study... 9 Box 3: India case study Box 5: Definition of an LPO Box 6: Development of rural BPOs in India Box 7: Volkswagen call centre Box 8: Bloemfontein medical transcription v

6 EXECUTIVE SUMMARY The Department of Trade and Industry (the dti) has commissioned Genesis Analytics (Genesis) to conduct a study that will inform the growth of the Business Process Services (BPS) industry in South Africa. The study is split into two separate parts. Part A involves an analysis of the Shared Service Centres (SSCs) and Legal Process Outsourcing (LPO) subsectors; and Part B looks at a provincial analysis of BPS opportunities and competencies in 6 provinces of South Africa Eastern Cape, Free State, Limpopo, Mpumalanga, Northern Cape and North West. Part A An analysis of the Shared Service Centres (SSCs) and Legal Process Outsourcing (LPO) subsectors. An SSC is the centralisation of support functions (such as human resources, finance, information technology and procurement) for a particular company which may have branches in various regions. The SSC takes over certain non-core functions of the organisation, allowing the various business units of the firm to focus on their core business functions. The primary rationale behind setting up an SSC is to standardise business processes cost-effectively and efficiently. Most companies that set up SSCs have headquarters in Western Europe, followed by the United States/Canada. There is an increasing trend for organisations from emerging markets to set up SSCs to support their business operations. South Africa s SSC industry is nascent, and to date has grown organically through businesses drive to reduce costs and improve efficiency. Based on our estimations, there are approximately 40 firms with SSCs currently operating in South Africa. 87.5% of the stakeholders interviewed and surveyed run captive operations, while only 12.5% are third party. The main industries where SSCs have been set up are banking, financial services and insurance, mining, oil/petroleum, telecommunications, retail and electronics. Finance, Human Resources (HR), Information Technology (IT), and supply chain management and procurement are the top services provided by SSCs. It is estimated that the SSC industry employs between and people. Majority of this is in the purely domestic market. Where companies were looking to set up an SSC in Africa, the choice was between Ghana, Kenya and South Africa. In assessing the competitiveness of South Africa as an SSC destination of choice, the following strengths were identified, South Africa is more economically developed than these two countries, South Africa is familiar and home to most multinationals; South Africa has a large pool of qualified resources to work in SSCs; and South Africa has cultural and business environment affinities with Western Europe, particularly the United Kingdom, placing it well for offshore SSC work. Labour constraints were the most noted barrier to setting up in South Africa, relating mainly to a lack of middle level skills with experience in the SSC environment, and inflexible labour laws. Other constraints identified include immaturity of the SSC market resulting in a lack of investor confidence; a lack of stringent data protection laws; and unreliable infrastructure, particularly electricity supply. The following set of clear achievable recommendations has been developed to grow the SSC industry: A targeted marketing approach to multinationals that have existing operations in South Africa should be developed by the dti given that organisations tend to set up captive SSCs where they have an existing presence. vi

7 EMEA is currently seen as a strategic location for companies to access and expand their operations. South Africa s SSC market should leverage this growth by strategically targeting international companies that are moving into the EMEA market. Companies that have set up in South Africa for their front-office BPS operations should be encouraged to move up the value chain and offer services aligned to the SSC industry. This can be achieved through strategic and targeted marketing by the dti. The above three recommendations relate to a target marketing strategy. Such an approach is cost-efficient and effective in the short-run. As such, investment should be made towards strategic marketing for the next 1-3 years. Following this, a thorough assessment should be undertaken, assessing the effect that this has had, both domestically and globally, and resources should be reallocated accordingly. The dti should investigate the development of an accredited SSC course. This will act as a signal for investors and employees alike. For investors it signals the maturity of the industry and a commitment to the industry. For employers it shows the commitment of employees to the job and organisation and reducing the training costs associated with up-skilling staff. Given that a lack of data protection regulation is a constraint to the SSC industry, and given that legislation to this effect that has been drafted but not yet promulgated 1 ; the dti should keep existing and potential SSC stakeholders informed about the progress of the legislation and the implications this will have. Legal Process Outsourcing is the delegation or outsourcing of legal or quasi-legal processes to a lower cost operator, either external (3rd party) or in-house (captive). Businesses outsource their legal processes mainly to achieve cost savings. Legal processes that are typically outsourced include contract management, document review, editing and transcription, commercial due diligence, e-discovery analysis, patents, research and opinions. India is the biggest LPO provider, with approximately one million lawyers and around 130 LPO providers. The Philippines is considered the next biggest LPO provider, followed by Fiji, China, Eastern Europe and, then South Africa. The South African LPO domestic market is fairly new but is fast growing. The landscape of the industry is clustered regionally, with primary locations in Johannesburg and Pretoria, Durban, and Cape Town. For the off-shore market, the Western Cape has five large operators together with a few small captive operations, employing approximately seats. Gauteng has three large operators together with a few small captive operations, employing approximately 600 seats. KwaZulu-Natal has small independent operators employing approximately seats. For the onshore market a similar trend is seen with hubs in Johannesburg and Pretoria, Cape Town and Durban. In assessing the competitiveness of South Africa as an LPO destination of choice, the following strengths were identified - the legal and regulatory framework in South Africa compliments that of the United Kingdom, the main originating market for LPO in South Africa; there is a ready supply of law graduates and legally trained skills; South African skills are extremely affordable and compare well with competitive locations such as India and the Philippines. The main constraint currently is the lack of knowledge about South Africa as an LPO destination. South Africa is also seen as having an inflexible labour market and labour 1 Protection of Personal Information Act 4 of 2013 vii

8 laws. Thirdly, law firms are reluctant to remove data, information and client instructions to a perceived distant location outside of their control. The following set of clear achievable recommendations has been developed to grow the LPO industry: South Africa has made significant inroads into the UK market and there is already a recognisable profile in the BPS sector. There is some more work to be done to showcase the legal capacity and expertise South Africa has to offer. The historical relationships and existing commercial alliances between the UK and South Africa are useful levers to access the UK market. Outsourcer markets such as Australia are starting to show an interest in South Africa as an offshore destination. With strategic marketing, South Africa can be positioned as a viable if not preferred location to India and/or the Philippines. The above recommendation relates to a target marketing strategy. Such an approach is costefficient and effective in the short-run. As such, investment should be made towards strategic marketing for the next 1-3 years. Following this, a thorough assessment should be undertaken, assessing the effect that this has had, both domestically and globally, and resources should be reallocated accordingly. South Africa does not have an accurate picture of the availability of legal and paralegal skills. Similarly, the relative level of South African LPO skills to the outsourcer skills pool is not well understood (e.g. is a post qualification experience (PQE) 3 years legal skill the same as a South African PQE 3 years?). A skills mapping and tracking exercise should be undertaken by the dti to resolve this. Once this has been developed, it can be used as either marketing collateral or as collateral to be sold to the industry. The dti should investigate the possibility of accrediting paralegals as they do in outsourcer jurisdictions. This would prove depth in the skills pool and support marketing. Given that a lack of data protection regulation is a constraint to the LPO industry, and given that legislation to this effect that has been drafted but not yet promulgated 2 ; the dti should keep existing and potential LPO stakeholders informed about the progress of the legislation and the implications this will have. Part B A provincial analysis of BPS opportunities and competencies in 6 provinces of South Africa Eastern Cape, Free State, Limpopo, Mpumalanga, Northern Cape and North West. The BPS industry is well established in the three main economic provinces: Gauteng, Western Cape and Kwazulu-Natal (we term them the primary BPS cities). Understandably, there is an increasing impetus to explore the opportunities for developing BPS activities in the other six provinces of South Africa. This is drawn from the Government s strategy for the sector, which is to develop a national BPS offering, as well as a push from the individual provinces for a clearer understanding and exploitation of the BPS opportunities available to them. This component of the study thus explores the opportunities for BPS activities in the six provinces Eastern Cape, Free State, Limpopo, Mpumalanga, Northern Cape and North West (termed secondary BPS cities). The provincial analysis focused on two critical elements of creating a successful BPS city identifying possible BPS opportunities, as well as outlining the provinces current competencies and competitiveness as prospective BPS locations. 2 Protection of Personal Information Act 4 of 2013 viii

9 The analysis clearly showed that opportunities where a clear provincial advantage exists are limited as the six provinces essentially have to compete with the established, primary BPS cities for all the BPS opportunities that exist and have been identified. Where possible, a BPS opportunity specific to a particular province was identified. More importantly the existing competencies of the provinces to offer a competitive BPS offering was analysed, based on two necessary capabilities skills and infrastructure. The general conclusion reached was that due to structural reasons related to their geography in relation to global sources of demand, the six provinces currently do not have a compelling offer for the off-shore market. Opportunities for provincial BPS opportunities are likely to arise when the primary cities see the opportunity for sub-contracting services to secondary cities to overcome rising cost and other factors that inform their competitiveness Beyond the province specific analysis, a number of general but crucial considerations that will influence the potential for a province to become a credible BPS location were identified: Provinces should pursue a phased and systematic approach to building the necessary competencies as a BPS location Developing competitiveness at a national, not a provincial level should be the aim of provinces Provinces must focus firstly on building up their skills and infrastructure to meet the standards required to provide a quality, reliable and cost-effective BPS offering An additional strategy to be pursued by the provinces should be to identify niche opportunities that leverage existing expertise, infrastructure and capabilities within the province Provincial governments must focus improving the enabling environment and addressing the key factors affecting the competitiveness of their provinces generally, rather than acting as a BPS investor ix

10 1. INTRODUCTION South Africa s reputation as a Business Process Outsourcing (BPO) location has been gaining credibility over the last decade, culminating in the award of the National Outsourcing Association (UK) and European Outsourcing Association, Offshoring Destination of the Year Awards in 2012 and The quality of agents and high level of customer satisfaction that have become synonymous with South Africa s BPO industry have attracted many international outsourcers and captive operations to set up in South Africa; including Shell, MTN and Barclays. The Department of Trade and Industry (the dti) has commissioned Genesis to conduct a study that will inform the further growth of the industry in South Africa. The study is split into two separate parts. Part A An analysis of the Shared Service Centres (SSCs) and Legal Process Outsourcing (LPO) subsectors. In terms of back-office outsourcing, South Africa is increasingly attracting work in knowledge process outsourcing (KPO), specifically in the shared service centres (SSCs) and Legal Process Outsourcing (LPO) subsectors. There is however limited information about the scale and effectiveness of these subsectors. The dti wishes to better understand the size, competitiveness and growth potential of these subsectors in South Africa s BPS offering. The analysis covers the following: Their current and potential scale The cost-effectiveness of these subsectors in South Africa in relation to other offshoring destinations South Africa s competitive advantage in these subsectors with respect to our BPS value proposition An estimation of the growth potential of the sectors Chapters 2 and 3 cover Part A of the study. Part B A provincial analysis of BPS opportunities and competencies in 6 provinces of South Africa Eastern Cape, Free State, Limpopo, Mpumalanga, Northern Cape and North West. The purpose of this work is to identify provincial BPS opportunities and competitive and comparative advantages for the provinces. This will inform the provinces of the factors that underpin the development of a unique value proposition within South Africa s broader BPS value proposition. The components of this section will include: Identifying the drivers of a BPS value proposition in the secondary cities, typically the provincial capitals, in the six provinces Identifying BPS opportunities in the provinces main economic sectors Assessing the competencies of the provinces to provide a BPS service 1

11 Part B of the study is covered in Chapters

12 PART A: SSC AND LPO ANALYSIS Part A of the report unpacks the SSC and LPO sectors in more detail. The ultimate use of the research is to assist the dti in determining if there is a business case for the support of the LPO and SSC sectors. Thus the specific purpose of the study is to map the current landscape of the two sectors, noting the critical success factors and constraints. It is estimated that between 8 10% of total offshore jobs in South Africa are made up of the higher value service offerings, to which SSCs and LPOs belong 3. Although it is recognised that these two subsectors are unlikely to be a major source of direct job creation, they are vital in the strategy to increase the proportion of higher value jobs in the BPS portfolio. The two chapters below clearly indicate that there is potential for growth in these sectors. This is however dependent on a clear, focused strategy. 2. SHARED SERVICES CENTRE 2.1. OVERVIEW Shared services is an operational philosophy that centralises business process functions of an organisation that were once performed in separate divisions or locations. The aim of this centralisation is to achieve cost savings and increase efficiency by standardising practices and procedures and by creating economies of scale 4. While there are many definitions of an SSC, the generally accepted definition for the purposes of this research is as follows: Box 1: Definition of an SSC A shared services centre is the centralisation of support functions (such as human resources, finance, information technology and procurement) for a particular company which may have branches in various regions. As with all forms of BPS, an SSC can be set up as an internal division (captive) or outsourced to an external party to provide the service (third-party operator). Captive SSCs typically charge the business units for the services they provide and enter into service level agreements with the business units that specify cost, time and performance measures. This allows the business unit to focus on their core business, customers and strategic planning 5. The use of the SSC model began in the United States in the mid-1980s with companies such as General Electric and Baxter Healthcare. Since then, the concept of shared services has matured and there have been proven examples of their effectiveness. Consequently, an increasing number of multinationals have adopted this model, whereby it is currently estimated that 80% of multinational companies globally have established SSCs and more than 65% of them have built SSCs into their business strategy 6. 3 Figures based on estimations from Trade and Investment South Africa (TISA) 4 Deloitte (2011). Shared Services Handbook: Hit the road 5 Deloitte (2011). Shared Services Handbook: Hit the road 6 Ernst & Young (2011). SSCs Enabling your business for success 3

13 Functions serviced by an SSC The early SSCs were primarily established to centralise organisations finance functions, which gradually expanded to include information technology (IT) functions. Over time additional functions have followed finance s lead whereby SSCs currently provide a wide range of noncore business support that continues to expand. Figure 1 illustrates the functions that are most commonly serviced by an SSC non-core, key business process - illustrating that SSCs undertake an organisation s non-core services which are key to the efficient running of the organisation. Figure 1: Services provided by SSCs Non-core, non-key business processes Non-core, key business processes Core business Facility mangement Auxillary services Transportation Security Finance Human resources Information technology Procurement/supply chain Customer services Corporate strategy Brand management Innovation/ R&D Finanical management Fund management Sales and marketing Source: Ernst & Young (2011). SSCs Enabling your business for success Based on the findings of the Deloitte s 2013 global survey of SSCs, 93% of SSCs provide financial and accounting services (F&A), 62% human resources (HR), 52% information technology (IT), 41% procurement and 31% customer services 7. In addition to these typical services, the study found that there is a growing number of SSCs servicing organisations legal and real estate functions Drivers and benefits of an SSC Through focusing non-core business functions to a single entity whose primary focus and responsibility is providing these services, organisations are able to achieve an improvement in the quality and efficiency of support services as detailed below. 7 Deloitte (2013) Global Shared Services Survey Results 4

14 Increased efficiency: SSCs are associated with reduced costs given that support services are provided by lower cost locations both in terms of staff costs and facility costs. Where more than one service is provided by an SSC, the SSC is also able to reduce costs through the integration of these services. Best practice delivery and operating models are employed by SSCs resulting in faster processing times and standardised processing. The SSC model is more efficient than a decentralised model as a result of the economies of scale achieved through centralisation and reduced duplication of work. Greater returns from investments in technology and process developments are achieved through SSCs. Increased effectiveness: By sourcing all non-core business functions to a single entity, organisations are able to focus on their core business. Organisations can redirect resources to more strategic activities as they are not occupied with non-core activities. SSCs achieve enhanced customer service as they are mandated by service level agreements and their performance is measured by pre-defined indicators. By centralising to an SSC, organisations can access specialist skills, talent and resources. Data warehousing is easier when it is centrally located. SSCs result in standardised business processes and resources across business units and departments. SSCs enable greater flexibility to an organisation, its structure, business needs and cyclical volumes Typical challenges to setting up an SSC As with any change in a service delivery model, setting up an SSC is faced with a number of challenges. KPMG s Global Pulse Survey (2014) identified some of these challenges, which include: Retained organisation/transition/governance challenges; Inadequate change management capabilities; Inadequate executive/management support; Prioritising opportunities and different change programmes; Inadequate business case; Compliance and regulatory challenges/restrictions; 5

15 Accounting for/managing the complexity of change efforts; Costs to do the deal; Economic uncertainty/inability to plan medium/long term; Quality/fit of supporting service providers; and, External business event While these challenges are varied, they are not new or unique to setting up an SSC, they mostly reflect the challenges businesses face when developing a new business unit or embarking on strategic organisational change. As the complexity and scope of SSCs continue to increase, the complexity of these challenges are expected to increase as well 8. These challenges are particularly important for South Africa to consider given that it is growing and developing its SSC industry and companies setting up in South Africa will be facing many of these challenges Geography of SSCs The Deloitte s Global Shared Service Survey (2013) found that the majority of the organisations making use of SSCs globally have headquarters in Western Europe, followed by the United States/Canada (see Figure 2 below). Figure 2: Location of organisations' headquarters Source: KPMG (2013) Global Shared Services Survey Results Similarly, these organisations SSCs are located primarily in Western Europe and the United States/Canada (see Figure 3 below). This illustrates the historical trend for organisations to set up their SSCs close to their area of operation or headquarters. 8. KPMG (2014) Global Pulse Survey 6

16 Figure 3: Location of SSCs Source: KPMG (2013) Global Shared Services Survey Results This regional spread is broken down further per country in Figure 4 below. As this shows the United States, Spain, the United Kingdom, Germany, India, Brazil, and the Philippines dominate the SSC destination landscape. Africa is, however, still developing as an SSC destination of choice. As Figure 4 illustrates, South Africa, Kenya, Ghana, and Egypt are the key African SSC destinations. When the geographical distribution is assessed across time, 60% of SSCs that are 10 years or older are located primarily in four countries, including the United States and the United Kingdom, which are the traditional source locations and India which was a one-time pioneer and now a mainstay 9. The dominance of the United States and the United Kingdom over the last ten years reiterates the historical trend for organisations to set up SSCs in a location that they are familiar with and where they have significant business operations. 9 KPMG (2013) Global Shared Services Survey Results 7

17 Figure 4: Geographic trends of SSCs over the last two years Source: Deloitte (2013) Global Shared Services Survey Results As companies expand their businesses operations, and costs are becoming more of a driving factor, cities in developing countries are increasingly being considered as potential SSC destinations. The Deloitte survey also asked respondents what locations they are considering for new centres or SSC relocations. Approximately 70% of the locations identified as potential SSC locations were countries in Latin America (29%), Eastern Europe (21%) and Asia-Pacific (19%). Specifically, Brazil led in Latin America followed by Mexico and Argentina; Poland led in Eastern Europe followed by Hungary and Romania and finally, India led in Asia Pacific. As Poland is an emerging SSC destination, the interrogation of this country as a case study provides relevant insights for South Africa in developing its SSC industry. Similarly, the success of India in developing its SSC industry provides relevant insights for South Africa in how to establish itself as an SSC destination of choice. Case studies on these two countries are provided below. 8

18 Box 2: Poland case study 10 In 2014, the SSC industry in Poland was estimated to consist of 165 SSCs employing a total of people. Poland has the following competitive advantages to other SSC destinations: Availability of highly qualified personnel: Poland has the sixth largest population in the European Union, of which more than 64% of the population under the age of 49 and nearly graduates per year. Foreign language capabilities: Learning a foreign language is compulsory in the Polish education system. Consequently, more than 90% of students can speak a foreign language. This is necessary for understanding and serving the various branches to which the SSC serves. Centrally located in Europe: Accessibility is a key criterion for stakeholders of large organisations who do not have time to take multiple flights to access the SSC. Government incentives: The polish government provides a number of incentives that make Poland more cost competitive. These include a corporate income tax exemption if the SSC operates in a Special Economic Zone (SEZ) and competitive land prices in a SEZ, and Government Grants for Modern services for creating jobs in the business services sector. Good IT and telecommunication infrastructure: Poland has stable and fast IT connectivity. Stable macroeconomic environment: Poland has a stable economy and political landscape, particularly compared to many of its neighboring Eastern European countries. 10 Polish Information and Foreign Investment Agency Presentation on Investment opportunities in BSS sector in Poland (2014) 9

19 Box 3: India case study 11 The growth of the Indian shared services industry has been prominent in the last two years whereby, in % of global organisations had SSCs based in India and by 2014 this figure doubled to 14%. This growth has been attributed to India s low costs, a highly skilled workforce, low development costs, advanced infrastructure in Software Technology Parks and a time zone differential that allows round-the-clock operations. In order to grow the BPO sector as a whole as well as the SSC sector, the Indian government has implemented a number of support systems for the sector. These include: Tax incentives on IT and IT-enabled services exports Tax holidays for setting up in technology park, free-trade zone or SEZ. Subsidies on telecom and infrastructure Industry demand In terms of industry demand for SSC services, KPMG s Global Pulse Survey (2014) found that the banking, financial services and insurance industry have the highest demand for SSCs globally 12. This is followed by manufacturing, health care, consumer products and energy/utilities. Proportionately, the demand for SSCs in the manufacturing, healthcare, consumer products and energy/utilities industries increased over two years from 2012 to 2014, while it decreased for the banking, financial services and insurance industry SSC trends in sub-saharan Africa Most organisations start by centralising a few traditional back-office functions such as HR and finance and as the SSC stabilises and the benefits of centralisation are realised, the SSC expands. This expansion includes providing additional services, increasing third party operations existing client base, diversifying into different markets, and moving even further up the value chain to provide value-add services such as data analytics or research and development 13. Research by Accenture (2013) illustrates that SSCs in sub-saharan Africa are more aggressive in their expansion strategies than the global norm; whereby approximately 95% expand in less the three years of their launch. In addition to expanding their SSC, organisations also look to changing the model of service delivery. Most organisations begin the SSC journey as a captive model and once this stabilises and has proven to be effective, they consider outsourcing these functions to a thirdparty. However, SSCs in sub-saharan Africa have not yet matured to this extent, whereby 33% of SSCs in sub-saharan Africa have no outsourcing in place compared with only 6% globally A.T. Kearney (2013) Rewriting India's Shared Services Playbook; ; 12 KPMG (2014). Global Pulse Survey 13 Accenture (2013). Evolution of Shared Services: A Sub-Saharan Africa Perspective 14 Ibid 10

20 2.2. SSC INDUSTRY IN SOUTH AFRICA As South Africa s BPS market has matured, investors have increasingly been looking for the services of more complex back office functions. While the concept of SSCs is still relatively new in the South African BPS environment, it is gaining traction. To date, most of the growth has been organic, providing the foundation for a strong and sustainable industry. While the previous sections have been based primarily on secondary data and literature, the data in the following sections draws also on primary data from the KIIs and surveys Profile of the industry As noted above, South Africa s SSC industry is relatively immature, however it is gaining traction as a competent location for multinational companies to consider. Based on our assessment of the industry, there are approximately 40 firms with SSCs currently operating in South Africa. As Figure 5 below illustrates, the dominant industries making use of SSCs in South Africa are banking, financial services and insurance, mining, oil/petroleum, telecommunications, retail and electronics. Figure 5: SSC by industry Based on the responses from the companies interviewed and extrapolating this to the industry broadly, the SSC industry employs between and people. Majority of this is domestic market. Interviews with officials from the dti indicated that the SSC subsector accounts for 8-10% of total employment in the BPS sector. Based on a study by Frost and Sullivan (2012) 15, the size of the South African BPS market was USD1.3bn in 2010, estimated to grow to USD3.06bn by Extrapolating using the portion of SSC employment to total BPS employment, it is 15 Frost and Sullivan (2012) Demand Analysis of the BPO and Contact Centre Market within the South African Financial and Retail Sectors. 11

21 estimated that the size of the SSC market was approximately USD117m in 2010 and is projected to be USD275m in Figure 6 below illustrates the functional areas supported by SSCs in South Africa based on the interviews and survey. As this illustrates, finance, HR, IT, and supply chain management and procurement are the top functional areas supported by SSCs. This is confirmed in the KPMG study (2013) which found the same four functional areas to be dominant in South Africa currently as well as historically. According to the study, the growth projections of these functional areas will be similar to the current market trend with the exception of supply chain management and procurement, whereby 68% of SSC advisors/consultants identified this as a growing area of interest in South Africa, mirroring the global trend for increased interest in this functional area. Figure 6: Shared service deployments by function The South African SSC landscape is dominated by captive operations. As shown in Figure 7 below, 88% of the stakeholders interviewed and surveyed run captive operations, while only 12.5% are third party. Both the third party operators and the captive operations service primarily the domestic market. There is however a growing trend for these to service their Africa operations. This trend is driven by two factors, firstly, many organisations reported that their business is expanding further into Africa and once these operations go live they will be supported by the SSC in South Africa. Secondly, a few respondents have relatively new SSCs and thus are still in the process of onboarding their operations to the SSC; given time they will onboard the rest of their Africa operations. 12

22 Figure 7: Share of captive and third party SSC operators As illustrated in Figure 8, 55% of the SSCs consulted are located in Johannesburg, 14% in Pretoria and 18% in Cape Town (some companies have SSCs in more than one location). The key factors that inform the location of an SSC within South Africa are proximity to the organisation s headquarters and current operations, and infrastructure. The main reason stakeholders offered for keeping the SSC close to the organisation s headquarters is internal business strategy. In terms of infrastructure, organisations require both ease of accessibility, as well as robust IT infrastructure. In addition to this, a key location consideration is access to the necessary skills. Figure 8: Geographic location of the SSCs in South Africa Figure 9 below illustrates the source markets that are serviced by SSCs in South Africa. As this illustrates SSCs in South Africa are primarily serving the domestic market and broader African operations. However, there are also SSCs which service the European market and Middle East. 13

23 Figure 9: Source markets serviced by SSCs in South Africa Considerations when setting up a SSC The primary rationale behind setting up an SSC is to standardise business processes costeffectively and efficiently. The choice of a BPS destination for a multinational will thus be primarily driven by an assessment of how well a location enables the business to achieve these objectives. Figure 10 illustrates the key considerations for respondents when deciding on the global location of an SSC. Many of the factors influencing the choice of location are similar to the general BPS industry. In discussions with firms with an SSC operation, 88% of respondents listed cost as one of the main factors to consider. This relates to the cost of labour, infrastructure and rent, equipment and telecoms, and other operating expenses. Figure 10: Key considerations when setting up a SSC Interestingly, 63% of respondents listed their internal business strategy as a key consideration. This is an important observation as it indicates that setting up a SSC must make operational sense to the organisation. This consideration speaks both to the objective of setting up an SSC, as well as the location of it. The presence of business operations is a very important factor in where an SSC is established. Many organisations set up their SSC in a location that is close to their headquarters or operations. It is highly unlikely that an organisation will set up an SSC in a 14

24 location where it has no business presence, unless the location is well established globally as a provider of cost-effective quality SSC services (e.g. India). Labour considerations are similarly critical concerns; particularly as these relate to the quality and quantity of labour available, language similarities, availability of skills, and labour policies or labour laws. Organisations look at the availability of labour with experience working in an SSC, which is proxied by maturity of the industry. Given the important and usually complex nature of the services provided by the SSC, the skills required are usually higher than for other BPS operations. In many SSC s university degree or other forms of higher education is required. Thus in selecting a destination, organisations look at the quantity and quality of graduates with HR degrees, financial/accounting degrees, engineering degrees and enterprise resource management degrees. In terms of the cost of labour, organisations look beyond the full time equivalent cost per hour but also look at the cost of up-skilling staff and retention rates as attrition has indirect cost implications. While not as frequently noted, internet connectivity, economic stability and ease of access were also considerations for setting up an SSC. In terms of IT infrastructure respondents spoke to the need for both robust IT infrastructure and reliable, fast internet connectivity. Ease of access refers to physical access in terms of both air and road transportation. Linked to costs, the incentives offered by a country are also a key consideration when deciding where to set up an SSC as these have a direct implication on an organisation s bottom line Competitiveness of SA as a BPS destination South Africa s main competitors are the United States of America, tier two cities in the United Kingdom, Ireland, Germany, Spain, Poland, Hungary, China, India, the Philippines, Ghana, Kenya and Egypt. The success of South Africa as an SSC destination is dependent on its competitive position in comparison to others in the market. SSC stakeholders were therefore asked about South Africa s competitiveness as an SSC location, based on the considerations highlighted above as well as from experiences with other destinations. It is important to unpack clearly the strengths and weaknesses of South Africa s SSC offering, as this will inform the development of a business case for South Africa s SSC industry. Strengths of South Africa The interview and survey process identified the following strengths to South Africa s SSC offering: Business hub of Africa: Organisations with an African presence stated that in pursuing the SSC strategy it was critical that the SSC had an African presence. These organisations identified South Africa as the economic hub of Africa and therefore the best African destination for setting up an SSC. While Nigeria is statistically the largest economy on the continent with a GDP per capita of $510bn, South Africa is still perceived by many as the economic hub of Africa as a result of its more sophisticated, developed and diversified economy, and advanced financial markets Reuters (2014), Update 2-Nigeria surpasses South Africa as continent's biggest economy 15

25 In many instances the decision in setting up an SSC in Africa was between Ghana, Kenya and South Africa. As South Africa is more economically developed than these two countries, it was found to be the preferred location. We wanted to have an African presence for our SSC, and as South Africa is the business hub of Africa, it was the most obvious choice ~ The manager of a large telecommunication company s SSC Proximity to multinationals regional headquarters: Multinationals with an African presence have historically set up their regional headquarters in South Africa. One of the key findings of the interview process was that captives pursuing the SSC centralisation strategy are reluctant to locate their SSC in a location that is geographically too far removed from their headquarters. As such, the fact that South Africa is home to a number of multinationals headquarters places it in an ideal position to service their African SSC. Our largest African operations are set up in South Africa. Multinationals like having our SSCs close to our main hubs. As such South Africa was a logical choice for locating our SSC. ~ The manager of a large manufacturing company s SSC Availability of the necessary technical skills To run an SSC, organisations require that there is a large pool of skilled personnel. At an operational level, SSCs typically require that employees have the minimum of a matric pass, a diploma in their relevant field or a specialist course certificate. Qualification requirements will necessarily differ across organisations, across service functions and across the activities performed in a service function for example in HR most employee benefits managers are required to have a diploma while most on-boarding managers are only required to have a matric pass. Despite this, at the operational level, most companies require that at a minimum the employee has a matric pass. In 2014, approximately students passed matric in South Africa 17. This represents a sizable pool of potential SSC employees entering the labour force each year. Furthermore, given that SSCs are partial to a young labour force with youthful energy and enthusiasm for service, this figure is particularly appealing. 17 Department of Basica Education (2014) 16

26 South Africa has a large pool of matriculants that have the necessary skills for working in a SSC. ~ SSC advisor Language, cultural, legislative and regulatory compatibility: Africa is a heterogeneous continent with a multitude of different languages and cultures. Many of the SSCs which are based in South Africa service their African operations which are based in Francophone or Portuguese-speaking countries. While the services of an SSC are back office functions, they require an understanding of the various countries laws and regulations which are all drafted in the country it is servicing s local language. Similarly, when the country which is being serviced has a query or request of the SSC, it is important that the SSC can understand and respond to this request. Figures from the 2011 census suggest that approximately 1.7 million people in South Africa are non-south African citizens. The issuing of permanent residence permits can be used as a proxy for the demographics of these non-south Africans. This suggests that in 2013, 67% of all non-south Africans are from African countries such as Zimbabwe (42.6%), DRC (12.9%), Nigeria (103.%), Lesotho (4.7%), Cameroon (3.5%), Congo (3.0%), Zambia (2.1%), Kenya (2.1%) and Ethiopia (2.0%) 18. This presents a range of available language capabilities, cultural affinities and understanding of other African countries business environments and frameworks. This is important for those SSC that are based in South Africa to service their company s African operations. As illustrated in Figure 2 above, 42% of organisations that make use of SSCs are based in Western Europe. South Africa has cultural and business environment affinities with Western Europe, particularly the United Kingdom. This positions South Africa ideally for offshore SSC work from organisations with headquarters in these regions. In terms of the business environment, South Africa s financial systems are robust, sophisticated and well regulated. In addition to this, the basis of the South African system aligns to that of the United Kingdom. This makes conducting business with South Africa easier for organisations that are based in the United Kingdom or are familiar with these systems. Similarly, South Africa s legal system - which governs all aspects of business interactions is based on the Roman-Dutch law system; a system which was inherited from the United Kingdom and Europe. This similarity in legal systems makes doing business easier and provides familiarity for organisations based in the United Kingdom. In terms of the United Kingdom similarities, South Africa has a large pool of proficient English speakers. As the United Kingdom conducts business in English, this positions South Africa ideally for offshore work from organisations based in the United Kingdom. Finally, South Africa having been an English colony has a number of cultural affinities with the United Kingdom. These include speaking the same language, similar religions and playing the same national sports. In addition to this, there are a significant number of United Kingdom citizens and people of British decent. 18 Statistics South AFrica (2013) Documented immigrants in South Africa 17

27 South Africa has a diversity of languages. Language is needed because of the operations across the world that the SSC is servicing for example operations in Senegal require that the SSC has French capabilities. ~ The manager of a large manufacturing company s SSC South Africa is a good fit for the UK market - good cultural alignment with the UK and the economics of setting up here for UK companies make sense. ~ The manager of a large financial services SSC Cost competitive: Respondents noted that setting up an SSC in South Africa is cheaper than setting one up in competing locations in Europe and the United States of America. However, it is said to be more expensive than locations in the Philippines and India. This is confirmed in research conducted by Everest Group (2014) which compares South Africa s costs for providing high value work (including shared services) against its competitors, excluding incentives. This research is illustrated in Figure 11 below, showing that South Africa s cost are higher than most of its competitors, except for Poland. Operating costs in Egypt are 30-35% lower than South Africa, while costs in more established locations such an India are 50-55% lower than South Africa. Figure 11: Annual per job cost for financial services back-office excluding incentives, 2014 (USD 000s) Source: Everest Group

28 The above research does not take into account the incentive scheme which respondents did say contributed to South Africa s cost competitiveness. The incentive scheme, however, was said not to cover a long enough duration, nor was considered to be adequately tailored for the various functions within BPO. However, these comments were based on the old incentive scheme which has subsequently revised and now addresses these concerns. When the Everest research took the revised incentive scheme into account, it was found that the incentive reduced operating costs by 11.5% for higher value work. This is illustrated in Figure 12 below. Similarly, this was found to reduce the cost gap between South Africa and its competitors when the incentives are factored in for all countries. Figure 12: Impact of the incentive on higher value work's operating costs Source: Everest Group 2014 The proposed incentive scheme was indeed re-launched. Based on the most probable macroeconomic trends, Everest found that currency depreciation, reduction in telecom costs and expected lower inflation compared to other countries, will result in South Africa s cost competitiveness strengthening further. The new incentive scheme introduced a differentiation in incentives based on the level of job created. Jobs created in the SSC industry fall into the L2 criteria referring to high end back-office jobs which usually employ graduates or people with some diploma education. While the incentive does reduce the cost gap, it does not eliminate it. However, respondents noted that South Africa s greater expense is warranted because it offers higher quality service than destinations such as the Philippines and India. Furthermore, South Africa is said to have a lower rate of attrition higher up the value chain than some of these Asian destinations. As such, SSC operators obtain cost efficiencies from not having to up skill new staff on a regular basis. 19

29 An international financial institution with an SCC in South Africa undertook a review of the cost differential between its SSC and the alternative of setting up one in India. The outcome of this research indicated that while South Africa s labour appears more expensive at face value, the higher rate of attrition in India potentially makes the labour costs higher in India due to the costs of hiring and training labour frequently in India. Time zone similarity with African countries and the United Kingdom Many of the SSCs interviewed are providing support services for their African operations. These African operations require support during their business hours. As such, it is important that the SSC is operating in the same time zone as the African operations. For the most part South Africa s time zone is aligned to those of other African countries. This is particularly the case if one compares South Africa s time zone with the rest of Africa against a location such as India s time zone with African countries time zones. Similarly, the time zones of South Africa and the United Kingdom are compatible for working the same shifts in the same business hours. South Africa is only one hour ahead of the United Kingdom from March through October, and only two hours ahead from November through February, as a result of daylight savings. As the United Kingdom is a key source market for SSCs, this is a comparative advantage for South Africa. Companies like having their SSC in the same time zone as their operations, working the same business hours so that if there is a question it can be resolved immediately. ~ SSC advisor Shared services is a subsector of the broader BPS sector. As such, a number of South Africa s strengths as a SSC location align with South Africa s strengths as a broader BPS location. The following competitive advantages were identified through the research process as some of South Africa s strengths as a SSC destination but are not exclusive to the shared service subsector. Political stability Many organisations want an African presence, however, they do not want the political instability associated with many African countries. South Africa was the highest-ranked African country in the World Economic Forum s (WEF s) Global Competitiveness Index. South Africa was ranked 36 th in terms of the quality of its institutions, which includes protection of intellectual property (22 nd ); property rights (20 th ), efficiency of legal framework in challenging and settling disputes (9 th and 15 th respectively) and accountability of private institutions (2 nd ) 19. Stability and growth of the country is very important to us as this provides us a base of clients. ~ An SSC that provides third-party services 19 WEF s (2015). Global Competitiveness Index 20

30 Good quality of life: Many international SSCs noted that they import their local expertise to South Africa when the SSC is starting up. This ensures the company has the required skills, expertise and in-house knowledge and familiarity of the company upon start-up of the SSC. South Africa is considered by many to have a good quality of life for expatriates. In contrast to many other African destinations, South Africa also has first world systems and services, for example good health care facilities that are attractive to expatriates. As such South Africa is an attractive destination for SSCs. Good IT infrastructure and robustness: South Africa has world-class telecommunications infrastructure and connectivity. In addition to this, South Africa has new fiber optic cables that provide robustness of the infrastructure. IT infrastructure needs to go beyond high speed connectivity and coverage but also needs to include robustness. The fact that South Africa has more than one fiber optic cable is a significant selling point. ~ The manager of a large telecommunication company s SSC Good infrastructure and accessibility: South Africa s infrastructure is highly developed, particularly the road, retail, banking, connectivity and office infrastructure. This makes for an easy environment to set up an SSC and makes for a better quality of life for expatriates. For offshore investors, South Africa is highly accessible with multiple international flights per day, particularly from the United Kingdom. Similarly for domestic operators, the road infrastructure in South Africa enables ease of access to all locations. Constraints to South Africa as a SSC location As with all locations, there are a number of constraints to setting up a SSC in South Africa. These are detailed below: Labour constraints: Labour constraints were the most noted barrier to setting up in South Africa. These refer specifically to: A lack of expertise working in the SSC industry: Stakeholders reported that they have to import this expertise to South Africa as the SSC industry is immature and thus there is a limited pool of people with experience working in a SSC, particularly at the managerial level. Lack of formal SSC training or accreditation: there is no formal training or certification for SSCs. Operational staff are not required to have a tertiary education, however, having a basic knowledge in the various functional areas is valued. Currently, there are no courses for potential employees on the fundamentals of working in an SSC. Having such a course will decrease on-the-job training and will provide SSC employers with a formal assessment of potential employees. 21

31 Inflexible labour market and labour laws: the hiring and firing of employees in South Africa is highly restricted by labour laws and the trade unions. In addition to this, obtaining work permits is a tedious but necessary process as the SSC expertise does not exist in-country. In addition to being tedious, the immigration laws are felt to be constantly changing, thus creating uncertainty in the workplace, particularly for international companies who feel they cannot get abreast of the changes. The biggest constraint is recruiting, training and retaining senior staff in the SSC. There is a shortage of supply at this level. ~ The manager of a large logistics company s SSC Immaturity of the market: The immaturity of the market was also noted as a constraint to developing it further. Aside from the above mentioned skills implications, an immature market results in investor uncertainty. Organisations reported having to convince their management teams of the SSC market in South Africa rather than relying on the country s background to sell itself. Interviewees stated that South Africa has a negative perception in the international space as a consequence of negative media publicity around South Africa s crime rate. This further adds to investor uncertainty and hesitancy to set up an SSC in South Africa; thus adding to the immaturity of the SSC industry. The general sentiment is that South Africa is not well marketed as an SSC destination. Through targeted, strategic marketing, the negative perception around South Africa can be reduced and the industry will gain traction among investors looking to set up an SSC. South Africa is not well-known as an SSC destination it needs to be better marked in order to grow. ~ SSC advisor Broad-Based Black Economic Empowerment (B-BBEE) While employment equity is a necessary strategic objective for South Africa, this does have adverse implications on investor appetite. A number of the international companies reported that if investors are deciding between South Africa and an alternative SSC location, B-BBEE requirements detract from South Africa as a result of the additional burden it places on the company as well as the fact that this increases cost of operations. Linked to this, the dti has recently published its revised Business Process Services Incentive Programme Guidelines (October 2014) which has a new B-BBEE requirement. A few respondents close to the guidelines noted that this is increases the costs of operation for off-shore clients, creating a barrier to entering the South African market. Data protection laws 22

32 A number of respondents noted that South Africa s data protection laws are not as stringent as they would ideally like. This sentiment is shared by experts in data protection: There is, at present, no comprehensive data protection or privacy statute in effect in South Africa in terms of which mandatory data protection obligations are imposed on data controllers with regard to the processing of personal data. The processing of personal information in South Africa is currently regulated in terms of the common law and constitutional right to privacy, and in terms of requirements that emanate from other legislation (such as the Electronic Communications and Transactions Act 25 of 2002 and the National Credit Act 34 of 2005). The protections afforded in terms of the common law and constitutional right to privacy are fairly weak, and the risk of litigation has, historically, been low. 20 While the Protection of Personal Information Act is set to allay many of the fears around data protection, this is still to be implemented in its entirety. Until such a time, SCC investors will remain concerned around data protection. It must be noted that many respondents stated that data protection is a concern facing most SSC destinations, not just South Africa. This provides an opportunity to improve our competitive advantage through the improvement of our data laws. Unstable electricity supply Load shedding is contributing to investor uncertainty in the SSC industry. This is to the extent that one of the SSCs involved in the study was closing due to the uncertainty around electricity supply. Not only does inconsistent electricity supply effect investor confidence, but it also adds to companies operating costs as they have to buy generators as back-ups to the national electricity grid. These are an expensive capital outlay at the outset and are expensive to run thereafter. SSCs are leaving South Africa as a result of the uncertainty around South Africa s electricity supply and the additional cost burden this places on companies which have to buy generators. ~ SSC advisor Growth potential of the SSC sector As the SSC industry in South Africa is immature and rapidly growing, projecting future growth based on past trends does not offer an accurate projection. On a quarterly basis, KPMG releases its Pulse Surveys which provide insights into future trends and projections in the SSC industry. These projections are based on the insights of KPMG firms consultants and advisors who work closely with organisations that are exploring or undertaking shared services. As these consultants are closest to the SSC organisation and the reality of their operations, this provides the best estimate of the industry. Based on the KPMG 1Q14 South African Sourcing Survey (2014), South Africa s shared services market is accelerating rapidly, growing at roughly 30% per year. 20 Bowman Gilfillan (2015). 23

33 The South African Sourcing Survey asked respondents what approaches they are using to capitalise on positive business trends and mitigate against negative business trends. While the majority of respondents are focusing on restructuring their internal business processes, the use of SSCs is picking up significantly and is likely to overtake internal business process improvement initiatives. The growth of SSCs in South Africa is illustrated in Figure 13 below 21. This illustrates the slowdown in the growth of all types of service delivery change and improvement efforts from 2Q12 to 4Q12 as a result of the uncertainty experienced in the South African economy at the end of As the dotted line shows, survey respondents believe that there will be an increase in shared services over the next 6 months. All forms of sourcing activity were considered to be on the increase in the next six months, including SSCs, BPO and Information Technology Outsourcing (ITO); however this response was greatest for shared services growth. Figure 13: Approach trend line: Use/expansion of SSCs Source: KPMG (2014) 1Q14 South African Sourcing Survey Figure 14 below illustrates the demand for shared services in South Africa across functional area, historically (4Q12), currently (1H14) and going forward. As this illustrates, finance and accounting, HR, IT and sourcing and procurement are currently the most popular functional areas aligned to the findings from this research process presented in Figure 6 above. It is anticipated, however, that the demand for HR and IT will fall significantly going forward. In contrast, there is significant expansion predicted for souring and procurement, real estate facilities management, and data and analytics going forward. As a whole, however, South African organisations are using, and expanding, SSCs across a broad range of functional areas. 21 KPMG (2014) 1Q14 South African Sourcing Survey 22 KPMG (2013) 2 nd and 3 rd Quarter 2012 South African Pulse Sourcing Survey 24

34 Figure 14: Functional area demand (4Q12, 1H14, future-looking) Source: KPMG (2014) 1Q14 South African Sourcing Survey The quantitative findings from the KPMG Sourcing Survey (2014) align to the qualitative findings from our interview process. The overarching indication from interviewees is that the industry is set to grow through the expansion of existing SSCs, the establishment of new SSCs, and through third party service providers expanding their client base, elaborated on below: Captive SSCs with operations in Africa stated that their SSC would grow depending on the growth of the company into more African countries and the on-boarding of these operations into the SSC. Captive SSCs spoke to diversifying their service offering such that once they are more established, they will move into the third party service provider space whereby they will provide these services to other companies in addition to their captive operations. Captive SSCs noted that they will continue to expand as the concept of SSCs becomes more familiar in their organisation and more functional areas and business units are on-boarded to the SSC. Third party service providers will continue to expand their customer base and grow their SSC. South Africa s growth and development translates into organisations expanding and requiring the efficiency gains associated with an SSC. As such third party service providers are optimistic about expanding their domestic clientele base and thus expanding their SSC. The growth rates for the SSC industry in India, Malaysia and Poland were analysed in order to get a more holistic understanding of South Africa s projected growth rate. India s growth in terms of revenue, in this area is depicted in Figure 15 below. As this illustrates, the domestic market grew by 18% while the export market grew by 13%. Taking both of these growth rates into account, and the fact that India s SSC market is more mature market than South Africa s, substantiates South Africa s projections of 30%. 25

35 Figure 15: Domestic and export SSC revenue growth in India Source: A.T. Kearney (2013) Rewriting India's Shared Services Playbook Malaysia s finance and accounting shared services market is expected to growth with a compound annual growth rate of 13.1% going forward 23. Given that this is the growth for a subsector within the shared services industry further provides reinforcement for South Africa s projected growth rate. Figures for Poland s growth in terms of revenue could not be ascertained, however, in terms of number of SSC investments, Poland is averaging 68% growth in number annually 24. As Poland is also an emerging SSC destination, like South Africa, this further provides impetus for South Africa s growth rate being as high as 30% per annum Recommendations A set of achievable and realistic recommendations which have emanated from the findings of the research are outlined below. A targeted marketing approach to multinationals that have existing operations in South Africa should be developed by the dti given that organisations tend to set up captive SSCs where they have an existing presence. EMEA is currently seen as a strategic location for companies to access and expand their operations. South Africa s SSC market should leverage this growth by strategically targeting international companies that are moving into the EMEA market. Companies that have set up in South Africa for their front-office BPS operations should be encouraged to move up the value chain and offer services aligned to the SSC industry. This can be achieved through strategic and targeted marketing by the dti. The above three recommendations relate to a target marketing strategy. Such an approach is cost-efficient and effective in the short-run. As such, investment should be made towards strategic marketing for the next 1-3 years. Following this, a thorough assessment should be undertaken, 23 Malaysia National ICT Initiatives (n.d) Shared Services: The bigger picture 24 FDI Intelligence (2012). Poland on the rise in shared service centre rankings 26

36 assessing the effect that this has had, both domestically and globally, and resources should be reallocated accordingly. The dti should investigate the development of an accredited SSC course. This will act as a signal for investors and employees alike. For investors it signals the maturity of the industry and a commitment to the industry. For employers it shows the commitment of employees to the job and organisation and reducing the training costs associated with up-skilling staff. Given that a lack of data protection regulation is a constraint to the SSC industry, and given that legislation to this effect that has been drafted but not yet promulgated 25 ; the dti should keep existing and potential SSC stakeholders informed about the progress of the legislation and the implications this will have. 25 Protection of Personal Information Act 4 of

37 3. LEGAL PROCESS OUTSOURCING 3.1. OVERVIEW Legal Process Outsourcing (LPO) is viewed as a sub sector of Business Process Services (BPS) and fits under the banner of more complex high value services. LPO is a fairly recent BPS phenomenon and is a growing trend in high cost legal jurisdictions where profitability is eroded by regulatory interventions and cost pressures. A concise definition of LPO is not yet settled as the industry is still evolving. A general definition that captures the LPO concept is as follows: Box 4: Definition of an LPO Legal Process Outsourcing is the delegation or outsourcing of legal or quasi-legal processes to a lower cost operator, either external (3 rd party) or in-house (captive) The difficulty in finding an LPO definition of universal application lies not in the concept of outsourcing which is easily defined and accepted but rather in the content of the legal processes to be outsourced. Many processes that are classified as legal are in fact administrative in content, and some are a blend of core legal processes and varying levels of administrative complexity. This leads to a spectrum of legal processes with some administrative or managed services overlap Drivers and benefits of LPO LPO, as is the case for BPS, arises out of an imperative to contain costs, drive efficiencies and improve profitability. However there are sector-specific nuances that must be considered which drive LPO activity in particular. The legal processes that are considered eligible for outsourcing and/or offshoring originate in these categories of service lines: In-house legal processes: These are processes which are typically high volume, low level repetitive tasks that can be managed and supported by technology and non-critical staff. In outsourcing these processes, companies alleviate cost and free up in-house resources to manage more complex core business. In-house General Counsel: General Counsel (GC) are increasingly under pressure to drive down cost and improve profitability. They are actively pursuing innovative mechanisms to meet budgetary constraints and will demand their service providers (law firms as well as ABS 26 ) provide low cost solutions for their litigious and non-litigious matters. Law firms: Traditional corporate / law firm fee arrangements per/hour can no longer be supported. Law firms have been forced to provide more cost effective solutions; as a result they have turned to technology to provide LPO solutions either through a 3 rd party provider or directly themselves. 26 Alternative Busness Structures (ABS) are quasi legal entities entitled to undertake work previously reserved for lawyers and where non-lawyers are permitted to hold shares in the entity. ABS are permitted in terms of UK legislation and carefully regulated. 28

38 In addition, there are regulatory requirements in most developed economies curtailing legal costs and legal fees recoverable. These regulations, coupled together with the relaxing of laws and regulations reserving work for lawyers have resulted in a rapidly growing wave of ABS. Law firms, too, have been forced to provide innovative, cost effective and efficient services which can only be achieved by applying enabling technology LPO provides the mechanisms to deliver cost effectively whilst freeing up highly skilled legal resources to focus on complex high value legal work which cannot be outsourced. The reasons then that businesses outsource their legal processes relate to cost savings primarily. The market forces creating the cost pressure are, however, unique to the legal market and influence what kind of processes can be outsourced Functions serviced by an LPO The degree to which a legal service can be outsourced is dependent on two factors the required technical legal skills, and the availability of specialised resources. Where the former is low, and the latter high, the service can be more easily outsourced. A reflection of the most common LPO services is shown below in Figure 16. Figure 16: Categorisation of LPO services Source: Deloitte 2010: The resurgence of corporate legal process outsourcing As illustrated in Figure 16, legal processes that are typically outsourced include: Contract Management Document Review, editing and transcription Drafting witness statements and other litigious documents Commercial Due Diligence 29

39 Commercial and Litigations Opinions E-Discovery Analysis Legal Compliance advice Patents Research and Opinions Document Production Services audio typing, review, copy typing, pdf conversion, formatting Legal Secretarial Services Legal Back Office Support Geography of LPOs Originating markets, or jurisdictions that outsource LPO, are the United Kingdom, USA and some parts of Europe. Additionally, Australia is expected to contribute significantly as an outsourcer destination in the near future as LPO is increasingly adopted. These jurisdictions all have common challenges; they are high cost operating environments functioning against severely pressurised revenue models. This tension lends itself to outsourcing and offshoring. In addition, there are regulatory requirements in most developed economies curtailing legal costs and legal fees recoverable. These regulations, coupled together with the relaxing of laws and regulations reserving work for lawyers have resulted in a rapidly growing wave of outsourcing legal work. Law firms, too, have been forced to provide innovative, cost effective and efficient services which can only be achieved by applying enabling technology LPO provides the mechanisms to deliver this cost effectively whilst freeing up highly skilled legal resources to focus on complex high value legal work which cannot be outsourced. India is the biggest beneficiary of this work, with approximately 1 million lawyers and around 130 LPO providers 27. The Philippines is considered the next biggest LPO provider location with some lawyers 28. Other countries competing for this more complex and valuable work include Fiji, China, Eastern Europe and, South Africa Considerations in setting up an LPO LPO, as is the case for BPS, arises out of an imperative to contain costs, drive efficiencies and improve profitability. However there are sector-specific nuances that must be considered which drive LPO activity in particular. Although the off-shore LPO market is growing steadily, onshore LPO operators continue to be fierce competitors in this space. This is particularly important for a destination such as South Africa where many companies and law firms based in the United Kingdom already take significant benefit by moving their operations from high cost locations, to lower cost locations onshore such as Manchester, Bristol, Wales, Scotland and Northern Ireland. These so-called on-shore or near-shore operations provide immediate cost relief and are perceived as less of a 27 Wood (2010) Research and Markets: Indian Legal Process Outsourcing Market 28 (2011). Legal Process Outsourcing is as Much About Efficiency as Cost-Cutting 30

40 risk than offshoring to other countries where the regulatory environment may be different and the distance perceived as adding to risk. Once the decision to offshore has been made, companies face the following three key considerations when deciding on the geographical location for their operations: Cost: Through outsourcing its legal processes, the company is looking for cost efficiencies. A comparison needs to be made across the various geographies to determine their cost differentials. Similarity with legal framework and systems: Performing legal support work requires that there are similarities between the originating market and the offshore destination. Language compatibility: In order to perform the work, the offshore destination needs to be proficient in the language of the originating market. Once the geography has been decided and the company is using a 3 rd party provider, the decision needs to be made as to which LPO provider to select. Some of the key criteria in making this decision are detailed below 29 : Security of information and business confidentiality: It is imperative that the LPO provider has the necessary systems and procedures in place to ensure that all information is kept confidential and secure. Cultural fit: Companies prefer to work with LPO providers that are culturally aligned and have a similar work ethic and cultural understanding. Language compatibility: LPO providers need to be proficient in the outsourcing company s language. Experience in outsourcing: Providing outsourcing services differs to typically legal work; as such when looking for an LPO provider, companies will look for experience in outsourcing. Delivery capability: The outsourcing company needs to be assured that the LPO provider can deliver on their expectations timeously. Quality control: Linked to the above, the outsourcing company needs to be assured that the LPO provider can deliver on their expectations to the required standard. Cost: Pricing will always be a factor in the decision of which LPO provider to select LPO INDUSTRY IN SOUTH AFRICA The following sections are based on primary data from the KIIs as well as secondary documentation Profile of the industry LPO in South Africa is neatly dissected into two areas, namely domestic and off-shore. There is an unavoidable link between the domestic market and off-shore capabilities. At the very least, we know that a healthy domestic market supports the growth of an offshore market not 29 Vantage Partners (2012). Legal Process Outsourcing: A workbook for in-house counsel. 31

41 only does it demonstrate capability but it provides operators with comfort that the risks are understood and can be dealt with. The South African LPO domestic market is fairly new but is rapidly maturing as it faces the same market forces already in play in more developed economies. Both corporates and law firms are exploring, if not actually implementing models designed to reduce cost and improve efficiencies. LPO is organically rolling out primarily in low-level legal tasks and back office support functions and it is a question of time before these operations begin to organise more formally or outsource to specialist LPO service providers. It is important to take note of the strategic alliances and relationships already forged in the South African legal sector. Many global multinational law firms already have relationships or partnerships with South African law firms and are already collaborating in delivering legal services. Recently, Hogan Lovells merged with a South African law firm to take advantage of the South African value proposition. Other law firms with international affiliation include: Norton Rose Fullbright, Cliff Dekker Hofmeyer (DLA Piper Group), Webber Wentzel, Bouwman Gilfillan and others. Legal processes that South Africa is currently providing include the following: Discovery / Document review (e-discovery) Mergers and Acquisitions (due diligence document review) Contract Management (volume / indexing) Legal research Claims Processing Standardised document drafting The South African LPO landscape is clustered regionally, with primary locations in Johannesburg and Pretoria, Durban, and Cape Town. Figure 17 below illustrates the number of offshore seats across these three regions. As this illustrates, Cape Town has the largest number of seats, followed by Johannesburg and Pretoria and the Durban. These seats are split across the following number of operators: Western Cape: Five large operators together with a few small captive operations, employing approximately seats. Gauteng: Three large operators together with a few small captive operations, employing approximately 600 seats. KwaZulu-Natal: small independent operators employing approximately seats. 32

42 Figure 17: Offshore LPO seats in South Africa Source: Channel Consult (2015) The South African domestic LPO market is immature and is largely comprised of collections which may span both front- and back office. There are a number of operations that tackle more complex legal or quasi-legal processes such as claims management or transcription services many of these repetitive tasks are undertaken in-house and are not recognised as an LPO operation and are therefore not visible in the landscape. Furthermore, many of these collection processes are undertaken by banks and insurers who do not consider themselves LPO operators. Given these difficulties quantifying the number of onshore LPO seats in South Africa is difficult. However, the best estimate of onshore LPO seats is presented in Figure 18 below. As this illustrates, Johannesburg and Pretoria have the most onshore seats, followed by Cape Town and Durban. 33

43 Figure 18: Onshore LPO seats in South Africa Source: Channel Consult (2015) Interviews with key LPO stakeholders indicated that the LPO subsector is estimated to account for 7% of total BPS revenue in South Africa. Based on a study by Frost and Sullivan (2012) 30, the size of the South African BPS market was USD1.3bn in 2010, estimated to grow to USD3.06bn by Extrapolating from these figures, is estimated that the size of the LPO market was approximately USD91m in 2010 and is projected to be USD214m in Competitiveness of SA as an LPO destination The success of South Africa as an LPO destination is dependent on its competitive position in comparison with its other markets. LPO stakeholders were therefore asked about South Africa s competitiveness as an LPO location. It is important to unpack clearly the strengths and weaknesses of South Africa s LPO offering, as this will inform the development of a business case for South Africa s LPO industry. As with SSCs, the competitiveness of the LPO sub-sector is also grounded on the broader BPS value proposition. Looking specifically at the LPO market, South Africa s competitiveness is based mainly on two important elements the availability of skilled resources, and the affinity of the South African legal framework to its main source market, the United Kingdom. Strengths Complementary legal framework The legal and regulatory framework in South Africa compliments that of the United Kingdom, the main originating market for LPO in South Africa. South Africa s legal framework, particularly commercial, is built on British jurisprudence and therefore highly compatible. This makes the United Kingdom, or any Commonwealth country, a prime source market with a 30 Frost and Sullivan (2012) Demand Analysis of the BPO and Contact Centre Market within the South African Financial and Retail Sectors. 34

44 natural regulatory and compliance fit. Sharing a common legal language provides outsourcers with a level of comfort around skills and operating processes that de-risks operations. Having a similar legal system to that of the UK was one of the main draw cards of South Africa. ~ LPO provider in South Africa Available quality legal skills Not only are the legal skills comparable to outsourcer jurisdictions, but there is a ready supply of law graduates and legally trained skills. According to the Law Society of South Africa, there is an average of approximately first time legal registrations and some students graduate annually. According to the Law Society of South Africa, there is an over-supply of legal skills with only about attorneys admitted into formal practice. In addition to this, there is a significant pool of paralegals, which refers to people who do not have a degree in the legal field but have other certifications or in-depth experience in legal processes. Furthermore, South Africa has a large pool of management, finance and administration skills which are often required in the LPO space. South Africa has availability of good quality legal skills ~ LPO provider in South Africa Strong cost competitiveness The primary driver of LPO continues to be cost, or rather escaping the high cost of developed economies. Whilst the operating environment undoubtedly contributes to the cost reduction, it is the cost of skills where the biggest savings are achieved. The outsourcing decision aims to ensure the benefit of the same level of skills at a reduced cost. Outsourcers therefore are looking for both quality and cost savings. South African skills are extremely affordable and compare well with competitive locations such as India and the Philippines. The justification for UK firms to outsource their legal processing requirements to South Africa clearly exists as South Africa is more than 50% cheaper than England, Wales, Scotland and Ireland. 31 South Africa is more expensive than India and the Philippines. However once the additional advantage of compatible legal frameworks, effective regulatory and compliance environment and commercial affinity are factored in South Africa becomes a compelling proposition for the UK market. 31 These savings are further amplified by the Rand s weak position. 35

45 Table 1: Comparison of labour supply and cost of labour Location Number of Legal graduates Approximate Graduate yearly cost of England and Wales R Scotland 3100 R612, 000 Ireland 3500 R510, 000 South Africa 3800 R204,000 India R170, 000 Philippines 5000 R136, 000 Source: Channel Consult Low labour costs was one of South Africa s competitive advantages ~ LPO provider in South Africa Ability to process complex LPO work South Africa is able to perform the simpler legal processes associated with dicta-typing, other transcription services and certain property transactions as well as the more specialised legal services such as collections and commercial transactions. More complex the legal processes require more specialised legal services and skills. As noted above, South Africa has a large pool of these skills available for the LPO market. In addition to this, as one moves up the value chain to the more complex legal processes, alignment with the regulatory and legal framework becomes more important. As South Africa s legal framework, particularly the commercial framework, is built on British jurisprudence, it is ideally placed to undertake LPO work higher up the value chain. South Africa is particularly competitive higher up the value chain ~ BPS provider that has also provides LPO services Strong existing networks Another unique feature of the South African legal landscape is the legal relationships already forged between multinational law firms. These offshore firms have already laid down networks 36

46 and in certain instances infrastructure to support their business relationships. In many instances, the offshore business looks to South Africa to broker or guide them into African opportunities. It is not a stretch for South African firms to leverage these relationships to promote LPO operations locally. With our existing networks, South Africa was a natural choice for business expansion ~ LPO provider in South Africa Cultural and language similarities with originating markets The United Kingdom is the main originating market for the South African LPO subsector. South Africa has a large pool of proficient English speakers. As the United Kingdom conducts business in English, this places South Africa ideally for LPO work. Additionally, South Africa having been an English colony has a number of cultural affinities with the United Kingdom. These include the above mentioned language similarities, similar religions and playing the same national sports. In addition to this, there are a significant number of United Kingdom citizens and people of British decent in South Africa. Our LPO operators sometimes have to liaise with our clients around their claims, as such the accent similarity and cultural affinity that South Africa offers to our customer was a selling point. ~ LPO provider in South Africa Respondents noted South Africa s good infrastructure and accessibility; and time zone similarity with originating markets as two of South Africa s advantages. While these are not unique to LPO, LPO is a subsector of the broader BPS sector and as such forms part of South Africa s LPO offering Good infrastructure and accessibility: South Africa s infrastructure is highly developed, particularly the road, retail, banking, connectivity and office infrastructure. This makes for an easy environment to set up an LPO and makes for a better quality of life for expatriates. South Africa is highly accessible with multiple international flights per day, particularly from the United Kingdom. Time zone similarity with originating markets The United Kingdom is the main originating market for the South African LPO subsector. The time zones of South Africa and the United Kingdom are compatible for working the same shifts in the same business hours. South Africa is only one hour ahead of the United Kingdom from March through October, and only two hours ahead from November through February, as a result of daylight savings. Barriers and constraints Despite these competitive advantages, there are some barriers and constraints to the South African LPO subsector. These are listed below. 37

47 Immaturity of the market: The main constraint currently is the lack of knowledge about South Africa as an LPO destination. The growth of the industry to date has been mainly organic without a deliberate marketing strategy. Given the high risk associated with outsourcing legal processes, multinational firms are averse to locations that are not recognised globally as reliable LPO destinations. Linked to the immaturity of the market, there is insufficient information around skills, the level of skills and the availability of these skills. There is reliable evidence from the Law Society of South Africa that there is an over-supply of legal skills but accurate records of these skills or categorisation of these skills is not readily available. In addition, the so-called paralegal skills which are a staple supply of the LPO operation are not tracked. This hampers investors ability to accurately market and cost LPO activity. Similarly, this makes finding the relevant skills difficult for the LPO providers. While the skills are available they are not aware of the potential work opportunities in LPO as this is not a known career choice. Consequently, law graduates or paralegals are more likely to seek work in traditional law firms rather than LPO companies. This is a function of the immaturity of the market and a lack of awareness of the LPO opportunities. We need skilled individuals, but in South Africa those people wanted more of a career in law, not to be providing legal services in an LPO. ~ UK-based law firm outsourcing to South Africa Inflexible labour market Respondents noted that South Africa has an inflexible labour market and labour laws. This restricts companies ability to hire and fire staff. This is has adverse implications on investor confidence and ease of doing business. Reluctance to move data and confidential information offshore Law firms are reluctant to remove data, information and client instructions to a perceived distant location outside of their control. Until there is sufficient evidence that the location is safe and that there are sufficient data protection protocols in place this will remain a challenge. While the Protection of Personal Information Act is set to allay many of the fears around data protection, this is still to be implemented in its entirety. Until such a time, LPO investors will remain concerned around data protection Growth potential of the sector In order to understand the potential growth of the LPO market in South Africa, it is important to understand the growth of the legal market broadly, the trends in the legal market towards outsourcing and finally the growth of the LPO industry specifically. 38

48 The global legal services market was estimated to have a value of $716 billion in This is an increase of 23.3% since This illustrates that the legal services market has had an upward trend historically. Furthermore, the Commonwealth Bank reported that 100% of United Kingdom-based law firms are expecting revenue increases from the end of It also reported that a significant portion of these firms (62%) are diversifying over the next two years and expect to see increased revenues in non-legal services. 35 This suggests that forward looking, the legal market is looking to expand into LPO-type of work. Finally, research done by Grand View Research (2014) estimated the growth of the LPO market from 2012 to 2020, illustrated in Figure 19 below. As this shows, the global LPO market was estimated to be USD 1,085 million in 2012, which is expected to reach USD 8,568.5 million by 2020, growing at a CAGR of 29.6% from 2014 to What this also shows is that the growth is relatively evenly spread across all the market segments. Figure 19: Global LPO market by service, , (USD Million) Source: Grand View Research LPO Market Analysis by location, by service market segment, April 2014 Given that South Africa is in the top four LPO providers, these market conditions provide the ideal background for LPO growth in South Africa. As the industry is so immature, providing an accurate estimate of the industry s growth going forward is infeasible. This estimate would be loaded with assumptions and inaccuracies. However, given that South Africa is one of the leading LPO countries, the potential growth in the industry should not be underestimated and South Africa should be aiming for a fair portion of the global growth, conservatively around 15 20%. 32 Bloomberg (2011). Legal Services: Global Industry Guide 33 Ibid 34 Commonwealth Bank (2014) Legal Market Pulse Ibid 39

49 Recommendations A set of achievable and realistic recommendations which have emanated from the findings of the research are outlined below. South Africa has made significant inroads into the UK market and there is already a recognisable profile in the BPS sector. There is some more work to be done to showcase the legal capacity and expertise South Africa has to offer. The historical relationships and existing commercial alliances between the UK and South Africa are useful levers to access the UK market. Outsourcer markets such as Australia are starting to show an interest in South Africa as an offshore destination. With strategic marketing, South Africa can be positioned as a viable if not preferred location to India and/or the Philippines. The above recommendation relates to a target marketing strategy. Such an approach is costefficient and effective in the short-run. As such, investment should be made towards strategic marketing for the next 1-3 years. Following this, a thorough assessment should be undertaken, assessing the effect that this has had, both domestically and globally, and resources should be reallocated accordingly. South Africa does not have an accurate picture of the availability of legal and paralegal skills. Similarly, the relative level of South African LPO skills to the outsourcer skills pool is not well understood (e.g. is a post qualification experience (PQE) 3 years legal skill the same as a South African PQE 3 years?). A skills mapping and tracking exercise should be undertaken by the dti to resolve this. Once this has been developed, it can be used as either marketing collateral or as collateral to be sold to the industry. The dti should investigate the possibility of accrediting paralegals as they do in outsourcer jurisdictions. This would prove depth in the skills pool and support marketing. Given that a lack of data protection regulation is a constraint to the LPO industry, and given that legislation to this effect that has been drafted but not yet promulgated 36 ; the dti should keep existing and potential LPO stakeholders informed about the progress of the legislation and the implications this will have. 36 Protection of Personal Information Act 4 of

50 PART B: PROVINCIAL BPS ANALYSIS The BPS industry is well established in the three main economic provinces: Gauteng, Western Cape and Kwazulu-Natal (we term them the primary BPS cities). Understandably, there is an increasing impetus to explore the opportunities for developing BPS activities in the other six provinces of South Africa. This is drawn from the Government s strategy for the sector, which is to develop a national BPS offering, as well as a push from the individual provinces for a clearer understanding and exploitation of the BPS opportunities available to them. This component of the study thus explores the opportunities for BPS activities in the six provinces Eastern Cape, Free State, Limpopo, Mpumalanga, Northern Cape and North West (termed secondary BPS cities). At the outset it must be understood the outsourcing industry by definition does not lend itself to geographic restrictions. The demand for a BPS service can be met in most instances from a remote geographical location that meets the important factors driving the BPS investment decision. Identifying a BPS opportunity that links to the predominant economic activity in a province has little or no bearing on the origin of the service that may be required to meet that opportunity. It is rare that the existence or nature of a BPS service demand implies that the provider of the service must be located in the geographic area in which the demand originates. Therefore an analysis of the possible growth of the BPS industry in a province, which focuses only on demand-side opportunities arising from economic sectors within a province, will miss the crucial and determining - component of the analysis which concerns the capacity of a province to establish and package a competitive BPS offering. The provincial analysis that follows will thus focus on both aspects identifying possible BPS opportunities, as well as outlining the provinces current competencies and competitiveness as prospective BPS locations. Identifying BPS opportunities BPS services have typically been most valuable for fast-growing sectors with operations across a number of locations, and sectors requiring a continual interaction with their customer base. Industries where supporting functions can be easily centralised and simplified into standardised processes are particularly amenable to setting up a BPS function in support of the core business. That said, in areas without an established BPS offering, a useful starting point for identifying BPS opportunities is to assess the main economic sectors that characterize the province. This in no way implies that the opportunities for BPS in a province will arise only from the identified sectors in that province. As discussed, demand for BPS may emerge from other emerging sectors within a province and/or nationally. However identifying opportunities in a province s dominant sectors can allow the province to test its proficiency as a BPS location, before an assessment is made of the feasibility of launching out to attract business from other provinces and, eventually (possibly), the international market. The approach taken here is to firstly identify the dominant economic sectors in each province, and then subsequently unpack the BPS opportunities that exist within the value chain of these sectors. Table 2 below shows the top three economic sectors per province: 41

51 Table 2: Key Sectors by Province (as measured by GDP contribution) Province Sector 1 Sector 2 Sector 3 Limpopo Mining Agriculture Tourism Mpumalanga Mining Agriculture Manufacturing North-West Mining Community & Government Services Finance Free State Community & Government services Financial & Business Services Mining Northern Cape Mining Community & Government services Finance Eastern Cape Automotive Financial Services Community Services Source: Genesis Analytics, using Stats SA data and provincial stakeholder consultation The green-shaded blocks highlight the largest two sectors in each province, excluding Community and Government services 37. The sectors to be explored in further detail are Mining, Financial Services, Agriculture and the Automotive sector. Mining features in five provinces, Financial services in four, and Agriculture is common across two provinces. The Automotive industry is the only industry unique to the Eastern Cape. The value chains for each sector are outlined in section Given that BPS opportunities are determined by the structure and business process that characterise a sector, it is highly likely that the same opportunities will emerge across provinces with common sectors. Thus the discussion of BPS opportunities will be applicable to all relevant provinces for which a particular sector is one of the top two sectors. It is acknowledged, however, that the emphasis is on providing an analysis for each province and therefore the analysis is set out per province. This unavoidably leads to repetition of the writeup of BPS opportunities. A general reader of the report will come across identical analysis of the sectors in various provinces, and thus only needs to read the analysis of a sector once. The value of this layout, though, is that each province will obtain a section relevant to it, obtaining all necessary information therein. Assessing provinces competencies to provide a BPS service While exploring possible sources of BPS demand within a province highlights opportunities to provide services to meet the demand, it is more valuable for a province to clearly outline its competencies and competitive advantage (if any) against other provinces as a provider of BPS services. Thus given the fact that geographic location has a minimal influence on the ability to provide a quality BPS offering, all provinces must, by definition, compete with each other for the BPS market, domestically and internationally. In essence, geographic exclusivity is absent in the BPS industry. 37 Community and government services have been excluded as they do not provide opportunities for growth in the Shared Services or Legal Process Outsourcing sectors of BPS. 42

52 To be a successful BPS location, a city must meet the primary drivers that influence an outsourcer s decision as to which location best suits its needs. A study conducted by the London School of Economics in identified six primary factors that influence the competitiveness of a location for BPS: 1. Costs labour, infrastructure, corporate taxes and incentives 2. Skills size and quality of labour pool, existing labour market with BPS experience 3. Infrastructure Telecoms and IT, Transport networks, power reliability, real estate 4. Environment Government support, business environment, accessibility 5. Risk Security, regulatory, intellectual property 6. Market potential Attractiveness of local markets, local economic development, access to nearby markets Across the five categories, the availability, reliability and costs of these factors determine the competitiveness of a location for BPS. The two most important factors are those relating to skills and infrastructure. For the international market, the business environment is also an important consideration that, if not conducive, can become a barrier to entry. The attractiveness of a BPS location to international clients is also dependent on the ease of access and costs of reaching, setting up and visiting the location. Infrastructure such as an international airport and first-class road networks are imperative to providing a compelling offer for global offshore clients. Based on these factors, it is natural that the offshore business will congregate around the country s main economic cities Johannesburg, Cape Town and Durban all of which comprehensively fulfill the key criteria that make up a compelling BPS offer. For the six selected provinces for review, a phased approach will be most appropriate, developing a strong local presence which targets the national BPS market which in future may be leveraged for the international market. Currently the provinces do not have a competitive offer for the off-shore market. There is a global trend towards the development of secondary cities in established BPS locations. This is premised on these cities presenting a clear rationale and providing the same quality of service at a lower cost than the more established cities targeting the local market first and then graduating to an offer for off-shore clients. The case study below on the development of Rural BPOs in India speaks to the gradual development of secondary BPO cities. 38 The BPO Landscape: Destination South Africa The Outsourcing Unit, London School of Economics and Political Science 43

53 Box 5: Development of rural BPOs in India India has been a popular destination for BPOs, given that its low cost, English speaking workforce made it an attractive destination to multinationals. However, globally India has lost this competitive edge due to the emergence of more competitive alternative geographical regions and rising labour costs. To remain competitive in these circumstances, the BPO industry has evolved with the emergence of secondary cities termed Rural BPOs. Rural BPOs have been successful because they are 40 50% cheaper overall compared to their city peers, and have a much lower attrition rate of 8 12%, arising from the fact that there are fewer BPO employers and a high demand for what are relatively wellpaying jobs. Third party companies such as RuralShores have set up BPO operations for international clients such as American Express, Airtel, and Quattro. Larger BPS operators such as Genpact India have outsourced some services to rural BPOs. Indicating that the bigger domestic firms operating in the pioneering Tier 1 cities are getting saturated and expensive, leading to a spill-over of work opportunities into the rural areas. Critical success factors for a rural BPO are as follows: Access to the same quality of skills at better prices is most important. Leading tier 2/3 locations are typically centres of higher education within the region/state ensuring long-term talent sustainability. The also attract talent from nearby areas adding to the overall pool. Availability of quality infrastructure (high speed internet, good telecommunication systems) Geographically close to major cities for easy movement of materials and clients The next six chapters set out the BPS opportunities and provincial competencies as a potential BPS destination. Based on the lack of detailed information, the provincial competencies are noted at a high level, focusing on the key determinants of skills and infrastructure. While a more in-depth study should be conducted by each province, the analysis here provides a useful overview of the provinces current capabilities, along with pointers for future research and development. 44

54 4. EASTERN CAPE 4.1. BPS OPPORTUNITIES The Automotive sector The automotive industry in the Eastern Cape contributes to 51% of South Africa s vehicle exports, it is home to four out of seven of the country s Original Equipment Manufacturers (OEMs), and manufactures half of the country s passenger vehicles. Vital to the economy of the Eastern Cape, it employs around individuals in the formal sector and has attracted major international vehicle assemblers such as Volkswagen (situated in Nelson Mandela Bay) and Mercedes Benz (in East London). The national government has identified the automotive industry as a potential growth sector, as is illustrated through the Motor Industry Development Programme (MIDP). So too has the Eastern Cape provincial government. With policy initiatives focused on automotive logistics parks and multi-oem models as well as the development of institutional support through the Eastern Cape Automotive Cluster; the automotive industry in the Eastern Cape is expected to grow further. Identified BPS opportunities within the Automotive Value Chain are as follows: Logistics: o o o The activities involved in raw material production, material processing and parts manufacturing can be grouped together under raw material and component logistics. These consist mainly of transportation logistics focusing primarily on freight forwarding 39 and the clearance of raw materials and components. Within this space, there is a potential BPS opportunity available for a transport logistics company to take control of the overall raw material and component logistics functionality. There is also an opportunity for the centralisation of the organisation s transportation functions to one, captive unit which provides logistic support in raw materials and component transportation during the raw material production, material production and parts manufacturing phases. Vehicle assembly, retail sales and marketing, and after sales logistics create another opportunity for BPS. The secondary phase is referred to as the distribution and export logistics. The aim functions are again transportation orientated, but in this phase transportation is mainly focused on final products. Supply chain solutions o Through-out the automotive value chain, it is essential for the organisation to have oversight of their supplies, specifically through inventory and order management systems. Everything from raw materials and components, to the final vehicle product need to be recorded, tracked and monitored on an effective operating system that is geared to all aspects of the supply chain. Technology and systems infrastructure is then a vital aspect to supply chain solutions. 39 The coordination and shipment of goods from one place to another via a single or multiple carriers via air,marine, rail or highway 45

55 o Inherent to supply chain solutions, is the requirement that this function is centralized across the organisation. Thus the BPS opportunity would then exist rather for a thirdparty supply chain management company to provide the technological and systems infrastructure necessary to ensure system coherence, tracking and monitoring through-out the organisation supply chain. Human resources - Human resources functions are extended to all employees throughout the organisation, and as a result it is an easy activity to either centralize or outsource to a third party service provider. Given the sometimes sensitive nature to parts of human resources work it is more likely to the BPS opportunity to stem from the centralisation of human resources across the automotive value, although a third-party provider with the adequate confidentiality arrangements may also be an attractive option for the automotive organisation. Legal- Regulatory, compliance and risk function are all performed at the organizational level; that is, they are applied across and within any point in the automotive value chain. A skilled group of individuals is required to conduct these activities; however this work is not required to be conducted on site through-out the value chain. BPS opportunities exist to centralize legal work to a head-office, or to outsource this work to a legal firm or legal services centre to implement Financial - Highly skilled and conducted across all components of the automotive value chain, financial activities can be done remotely and thus BPS opportunities exist for both a centralized head office financial unit and the development of third party financial services providers to fill the outsourcing of this function. IT systems - Similar to the cross-cutting functions mentioned above, the IT systems must span the whole organisational value chain, which then provides an opportunity for third party company to develop specialized IT services and fulfill this function to a variety of organisations in the automotive industry. However, sometimes the security concerns around data and production processes might mean that organisations would prefer to keep this function in-house and the BPS opportunity would actually exist in the creation of a captive IT unit. After sales Customer support There are also BPS opportunities in the after sales function performed in the automotive industry. Box 6: Volkswagen call centre Customer service centres assist with technical, financial and explanatory queries for vehicle customers. Centralised services also include the Volkswagen has capitalised on the rrovision of road assistance to vehicles skills and infrastructure currently available in the Eastern Cape, and experiencing technical difficulties. Monitoring, launched a customer support call ordering and delivering of spare parts across all centre as an offshoot from their vehicles sold is a further BPS opportunity. manufacturing plant. Retail sales and marketing One of the most likely areas of BPS opportunities relate to retail sales and marketing. Typically set up in a call centre, there is the need to coordinate all activities in the sales process, from beginning to end, irrespective of geography Providing advertising for the final product across all retail This provides a good example of the benefits that can be realised from BPS opportunities in the automotive value chain. However, with another call centre in Midrand, and the constraints to skills and infrastructure in the Eastern Cape; the sustainability of the Uitenhage call centre is currently under examination. 46

56 outlets and the tracking of the supply of vehicles and the stage of the order process of current applications also fall within this category. After unpacking the BPS opportunities in the value chain as summarized above, the analysis must centre on how these opportunities are most likely to be met. Figure 20 illustrates which BPS services can be met by a provider located anywhere nationally and those which are best met by a provincial player. The dark green circles represent services most likely to be captive operations and the white are those that can easily be outsourced. Figure 20: Geographic sources of BPS services in automotive sector (Eastern Cape) National IT systems Legal Supply chain solutions Local After sales customer support Human resources Financial Retail sales & marketing Logistics raw materials Logistics export & distribution Third party outsourcing potential Captive The nature of the value chain, being heavily coordinated by the individual firms headquarters, does not immediately offer the Eastern Cape any competitive advantage in BPS. Most of the BPS services can be offered from any province. The coordination of the value chain is driven by demand and competitiveness factors which reside mainly in Gauteng, the Western Cape and Kwazulu-Natal. These provinces therefore naturally become the centre of the outsourcing of BPS opportunities for the sector. The Eastern Cape is mainly a recipient of the instruction to produce vehicles. Opportunities might exist in the logistics around the coordination of the supply of raw materials and inputs to the manufacturing plants, both of which are areas where a strong provincial player may, backed by local knowledge and supply chain networks, provide a compelling offer. The financial services sector Given the more complex nature of the financial sector value chain, the degree of centralisation of BPS opportunities is even higher than in most other industries. This is coupled with the high risks and regulatory constraints associated with the sector. Most BPS opportunities in the financial services sector are, for these reasons, set up as captive operations and managed 47

57 centrally at the headquarters level, which usually sits in Gauteng or the Western Cape. The main BPS opportunities are identified below: Customer relations Most banks, insurance firms and other financial sector institutions have call centres to respond to customer queries. Most banks call centres are large captive operations run out of a few centres strategically located. The primary decision of where to locate a call centre is driven by the availability of the skilled labour to provide these services (e.g. Barclays as set up a call centre in Pretoria close to the University of Pretoria to maximize on the availability of students looking for part-time work). IT systems - IT infrastructure is a crucial component of the operations of the financial sector. Most IT systems are centralised, usually to a captive operation. This is driven by data privacy and security concerns which make financial institutions wary of outsourcing such functions. Where the IT systems and support are outsourced, this is usually to a wellestablished provider with the required infrastructure to support the institution s operations and platforms across all its branches. Change and process management - Change and process management inherently operates at the institutional level. Thus in the majority of cases it is already centralized across a level of business units. Given the skills required in the implementation of this function, there is an opportunity for a third-party service provider to enter the market and offer outsourcing services to financial institutions. Human resources - Human resources functions are extended to all employees throughout the organisation, and as a result it is an easy activity to centralise in a captive operation or outsource to a third party service provider. Legal and compliance - Regulatory, compliance and risk functions are another BPS opportunity across the financial sector value chain. However, as with IT systems, most of the established financial institutions have set up a legal/compliance unit that provides these services across the various branches and divisions of the organisation. Operational logistics - The activities involved in logistics mainly include maintenance of equipment such as ATMs and Point of Sale machines and the facilitation of the transportation of different types of necessary resources between branches and/or units within a financial institution. Activities in this area require up-to-date systems, significant capital investments as well as continued management on a daily basis. As a result, there is a significant BPS opportunity for third party transportation companies to enter the market. This is one of the few instances where a provincial preference might be an advantage. Marketing and communication - All those activities associated with marketing, advertising, the creation of a communications strategy and platform as well as branding are usually centralised in one unit, captive or outsourced. BPS opportunities in marketing and communications exist in both the centralised shared services model as well as third-party outsourcing. Ultimately, it would be a business decision on whether to go with a separate advertising and marketing agency, or to employ those skills in-house. Whether the financial institution decides on third-party or in-house, is usually dependent on the size of the company. For example, a small real estate agency might chose to outsource ad hoc marketing work to an agency, while a large bank which is continually concerned with branding and marketing opportunities, would most likely choose an in-house centralisation model. 48

58 Data management and analysis A huge function in the financial services relates to the sorting, processing and filing of data/information. In most cases a centralised data team is set up to fulfill this function. It is evident that the main BPS opportunities in the financial sector exist as captive operations. Thus the province s strategy should be to convince the institution that it should set up its centralised operations in that province to service the institutions operations across the country. Beyond competing nationally as a BPS destination, there are few opportunities which originate at the provincial branch of the financial institution, and which may therefore best be met by a provider in close geographical proximity to that branch. Figure 21 sets maps out which BPS services can be met by a provider located anywhere nationally and those which are best met by a provincial player. The dark green circles represent services most likely to be captive operations and the white are those that can easily be outsourced. Figure 21: Geographic sources of BPS services in financial sector (Eastern Cape) Change & process management National Customer relations Human resources Local Data management Legal & compliance Operational Logistics Supply chain solutions Key: IT systems Third party outsourcing potential Captive Very few BPS opportunities in the financial sector are intrinsically better met within the province in which the demand originates. Majority of the BPS opportunities are centralised at the national level and meet the needs of branches across the provinces. Operational logistics around ATMs and Point of Sale (PoS) machines appear to be the only opportunity where a local player might have some advantage over providers outside the province PROVINCIAL COMPETENCIES 49

59 Skills The province has a surplus of partially qualified individuals seeking employment. There is therefore some scope for employment in BPS services. The unemployment rate among the age group is 40.7%. There is thus a large pool of labour to be employed in BPS service providers should the sector develop. It is quite difficult to assess the skills of the labour market in Eastern Cape for the critical skills required. However just 43% of the youth labour force have a matric or higher qualification, which is the second lowest in the country, behind the Northern Cape. Department of Higher Education (DHET) figures indicate that in 2011, there were learners at university in the province. The primary fields of study at the province s four universities are Science, Engineering and Technology and Business and Management, where most learners are enrolled in undergraduate certificates and diplomas and a mere 20% end up graduating 40. with Rhodes University contributed the highest pass rate in the country, 25% 41. There are two Further Education and Training (FET) programmes which cater to the majority of learners in the Eastern Cape - the National Certificate Vocational (NCV) and Report 191. Both of these contain practical and theoretical components to specialisations in the fields of Engineering, Information Technology and Computer Science, Marketing and Management; as well as Human Resources Management, Financial Management and Motor and Electrical Engineering, respectively. In 2011, DHET statistics indicate that learners were enrolled at the eight FET colleges; about half as many as those who were at university 42. In 2011 there were learners in Adult Education and Training institutions but only 15% of those successfully completed their programme 43. This low pass rate illustrates that AET does not contribute significantly to the pool of skill competencies in the Eastern Cape. Most youth in the Eastern Cape are elementary workers or work in the sales and services sector (see Table 3). Although elementary workers have consistently formed the largest pool of occupation type, they are unlikely to meet the skill requirements for the BPS industry. The most likely source of experienced labour will be from the sales and services industry. Table 3: Eastern Cape employment of youth by occupation type (Thousands) Manager Professional Technician Clerk Sales and services Skilled agriculture Craft and related trades Machine operator Elementary Domestic worker Total Department of Higher Education and Training, Republic of South Africa (2013): Statistics on Post-School Education and Training in South Africa: Department of Higher Education and Training, Republic of South Africa (2013): Statistics on Post-School Education and Training in South Africa: Ibid 43 Ibid 50

60 Infrastructure The Eastern Cape is on the coast and is home to the country s most important harbor in Port Elizabeth. Compared to some other provinces, the logistics industry has a competitive advantage in exporting and distribution infrastructure. The Eastern Cape is home to the Port Elizabeth and East London harbours as well as the Coega Industrial Development Zone (IDZ). Car imports and exports are responsible for the largest value of goods transported through East London harbour, while the Coega IDZ unfortunately hasn t proven as useful for BPS as was initially conceived. The Eastern Cape ranks low compared with other provinces in ICT infrastructure, a critical factor for BPS. Of the 60 cities South Africa assessed in November 2014 for internet download speed, Eastern London was ranked 53 rd (3.03 Mbps), Port Elizabeth 36 th (3.98Mbps) and Bisho was not even measured 44. Considering the transport network, Eastern Cape has the largest road network compared to the other eight provinces. Unfortunately, the quality of road infrastructure is disappointing. SANRAL estimates that around 30% of the network is poor or od very poor quality 45. The National Infrastructure Plan of 2012 also identified the need to develop rail and port capacity so as to improve industrial ability in the automotive sector Ratings as conducted by Oolka and accessed 01/12/2014:: 45 DBSA & the Department of Performance Monitoring and Evaluation (2012): The State of South Africa s Economic Infrastructure: Opportunities and challenges 46 Presidential Infrastructure Coordinating Commission: A Summary of the South African National Infrastructure Plan (2012) 51

61 5. FREE STATE 5.1. BPS OPPORTUNITIES The financial services sector Given the more complex nature of the financial sector value chain, the degree of centralisation of BPS opportunities is even higher than in most other industries. This is coupled with the high risks and regulatory constraints associated with the sector. Most BPS opportunities in the financial services sector are, for these reasons, set up as captive operations and managed centrally at the headquarters level, which usually sits in Gauteng or the Western Cape. The main BPS opportunities are identified below: Customer relations Most banks, insurance firms and other financial sector institutions have call centres to respond to customer queries. Most banks call centres are large captive operations run out of a few centres strategically located. The primary decision of where to locate a call centre is driven by the availability of the skilled labour to provide these services (e.g. Barclays as set up a call centre in Pretoria close to the University of Pretoria to maximize on the availability of students looking for part-time work). IT systems - IT infrastructure is a crucial component of the operations of the financial sector. Most IT systems are centralised, usually to a captive operation. This is driven by data privacy and security concerns which make financial institutions wary of outsourcing such functions. Where the IT systems and support are outsourced, this is usually to a wellestablished provider with the required infrastructure to support the institution s operations and platforms across all its branches. Change and process management - Change and process management inherently operates at the institutional level. Thus in the majority of cases it is already centralized across a level of business units. Given the skills required in the implementation of this function, there is an opportunity for a third-party service provider to enter the market and offer outsourcing services to financial institutions. Human resources - Human resources functions are extended to all employees throughout the organisation, and as a result it is an easy activity to centralise in a captive operation or outsource to a third party service provider. Legal and compliance - Regulatory, compliance and risk functions are another BPS opportunity across the financial sector value chain. However, as with IT systems, most of the established financial institutions have set up a legal/compliance unit that provides these services across the various branches and divisions of the organisation. Operational logistics - The activities involved in logistics mainly include maintenance of equipment such as ATMs and Point of Sale machines and the facilitation of the transportation of different types of necessary resources between branches and/or units within a financial institution. Activities in this area require up-to-date systems, significant capital investments as well as continued management on a daily basis. As a result, there is a significant BPS opportunity for third party transportation companies to enter the market. This is one of the few instances where a provincial preference might be an advantage. 52

62 Marketing and communication - All those activities associated with marketing, advertising, the creation of a communications strategy and platform as well as branding are usually centralised in one unit, captive or outsourced. BPS opportunities in marketing and communications exist in both the centralised shared services model as well as third-party outsourcing. Ultimately, it would be a business decision on whether to go with a separate advertising and marketing agency, or to employ those skills in-house. Whether the financial institution decides on third-party or in-house, is usually dependent on the size of the company. For example, a small real estate agency might chose to outsource ad hoc marketing work to an agency, while a large bank which is continually concerned with branding and marketing opportunities, would most likely choose an in-house centralisation model. Data management and analysis A huge function in the financial services relates to the sorting, processing and filing of data/information. In most cases a centralised data team is set up to fulfill this function. It is evident that the main BPS opportunities in the financial sector exist as captive operations. Thus the province s strategy should be to convince the institution that it should set up its centralised operations in that province to service the institutions operations across the country. Beyond competing nationally as a BPS destination, there are few opportunities which originate at the provincial branch of the financial institution, and which may therefore best be met by a provider in close geographical proximity to that branch. Figure 22 sets maps out which BPS services can be met by a provider located anywhere nationally and those which are best met by a provincial player. The dark green circles represent services most likely to be captive operations and the white are those that can easily be outsourced. 53

63 Figure 22: Geographic sources of BPS services in financial sector (Free State) Change & process management National Customer relations Human resources Local Data management Legal & compliance Operational Logistics Supply chain solutions Key: IT systems Third party outsourcing potential Captive Very few BPS opportunities in the financial sector are intrinsically better met within the province in which the demand originates. Majority of the BPS opportunities are centralised at the national level and meet the needs of branches across the provinces. Operational logistics around ATMs and Point of Sale (PoS) machines appear to be the only opportunity where a local player might have some advantage over providers outside the province. The mining sector The Free State is home to twelve gold mines, which together produce 30% of South Africa s gold output. Activity is generally restricted to the area considered the gold reef which stretches across Gauteng and Free State, with the largest gold-mining complex, the Free State Consolidated Goldfields, spanning 330 square kilometers. Important gold mining players include Harmony Gold which owns one of only two gold refineries in South Africa. Apart from gold, a sector which is in historical decline in the Free State, the province also has silver, diamonds and bituminous coal reserves. Many services in the mining industry are usually centralised at the head-office locations in a captive centre, providing support services that cut-across the business units of the organisation. However, a number of the large mines are run as stand-alone operations, and do not refer functions to their mining headquarters. Furthermore, given the large turnover of most mines, the cost savings from incorporating captive shared services to streamline efficiencies is small relative to the size of overall operations. There is therefore an increased tendency towards third-party players in the mining industry vs. captive operations. The BPS opportunities identified in the mining value chain are therefore likely to be of the third party outsourcing variety. Identified BPS opportunities within the mining are as follows: 54

64 Operational Logistics- The activities involved in logistics mainly include coordination of the transportation of mining equipment and output through-out the mining value chain. Large mining companies might however wish to keep all the logistics in-house purely because they have a larger capacity to accommodate the coordination of large scale investments with significant capital requirements. A larger mining organisation might view a logistics third-party as a middle-man operating at armslength from the decision hub, which increases both costs and risks. The BPS opportunity in the logistics activity is most likely more of a potential for smaller mining companies, but even here the opportunity is uncertain. Legal and compliance services - Regulatory, compliance and risk functions are all performed across the various processes in the mining value chain. A skilled group of individuals is required to conduct these activities; however it is not necessary for these people to be physically on the mining site in order to conduct this work. Thus there is a BPS opportunity to facilitate the legal functions needed on behalf of the mining company. This function is potentially most suited to head office centralization in a captive operation. It may be outsourced if deemed to be cost-effective, although the customized nature of legal and compliance services and the risks associated with poor performance probably mitigate against these being candidates for outsourcing. IT systems - Similar to the cross-cutting functions mentioned above, the IT systems must span the whole organisational value chain, which then provides an opportunity for a third party company to develop specialized IT services and fulfill this function to a variety of organisations in the mining industry. However, sometimes the security concerns around production processes might mean that organisations would prefer to keep this function inhouse in which case the BPS opportunity would be limited in the mining value chain. Ultimately the realization of the IT systems BPS opportunity will come do to the mining company s business risk assessment. The nature of any outsourcing function is likely also to be highly specialized. Human resources - Human resources functions are extended to all employees throughout the various sites of a mining company, and as a result it is an easy activity to centralise in a captive operation or outsource to a third party service provider. Marketing and communication - All those activities associated with marketing, advertising, the creation of a communications strategy and platform as well as branding are usually centralised to one unit, captive or outsourced. BPS opportunities in marketing and communications exist in both the centralised shared services model as well as third-party outsourcing. Ultimately, it would be a business decision on whether to go with a separate advertising and marketing agency, or to employ those skills in-house. Data management and analysis A huge function in the mining sector relates to the sorting, processing and filing of data/information across the various mines of a mining company. In most cases a centralised data team is set up to fulfill this function in a captive operation. The BPS opportunities identified above are mainly filled at a national level. That is, coordinating functions such as human resources, finance, legal and compliance as well as IT systems are contracted at a national level with either captive or, less likely, third-party providers filling a standard service across all mining sites and offices. Even when looking at logistics and vehicle management, while the vehicles are serviced in the province, it is most likely that the coordinating function of this servicing is conducted via a headquarters sitting in 55

65 Gauteng. Contracts with a third-party logistics company are likely to be held at the national level, even if those companies are based in a province such as Mpumalanga. Figure 23 below illustrates the BPS opportunities within the mining value chain. It indicates those that are fulfilled at a national level; and points to two potential areas where the opportunity may be better serviced at the local provincial level. Figure 23: Geographic sources of BPS services in the mining sector (Free State) National Human resources Labour & support services Logistics Local Legal & compliance IT systems Marketing & communication Supply chain managem ent Key: Third party outsourcing potential Captive 1. Labour and supporting services: in the tense and politically-motivated mining sector, it is imperative that mining companies have a good relationship with the local community. In order to provide these services (including for example, security, transport, water and electricity and housing), mining sites will sometimes outsource these local coordination and employment functions to local companies, to further illustrate their commitment to a developmental agenda. This could however also be controlled through an internal unit at a mine site; and in some cases be centralized all the way to up to headquarters. The important point however, is that given the sensitive interaction required with the local community, there is a geographical advantage to providing labour and supporting services within the province. This must be assessed against the countervailing requirement for close head office oversight and risk management, and will vary on a cas-by-case basis. All things considered, this does not point to a large and scaleable BPS opportunity for mining provinces to pursue. 2. Supply chain management: similar to the labour and supporting services case; local suppliers and SMEs form a large cohort of suppliers in the mining procurement process. In coordinating this function there is sometimes an advantage to being in close geographical proximity to these suppliers so as to management their process and supplier-company interaction more efficiently. It is unclear, and will vary on a 56

66 case-by-case basis, whether the scale and nature of the supply chain function points to a significant outsourcing opportunity, especially considering the risks involved in managing this on an armslength basis PROVINCIAL COMPETENCIES Skills Free State has the highest unemployment rate among the age group in the country %. The high unemployment rate indicates the possibility of accessing a large labour pool for a BPS industry. Balancing this against the skill level, 48.8% of the youth labour force have a matric or higher qualification, which ranks 5 th in the country. According to DHET statistics, in 2011, learners were enrolled in the province s two universities 47 and average graduation rates for undergraduate degrees and diplomas are around 23%. The Free State has four FET colleges, with the majority of learners registered for the Report 191 programme, which offers Engineering and Business studies. In 2011, FET colleges in the province totaled learners 48. DHET 2011 statistics show that only out of initial entrants in AET institutes successfully passed 49. This mirrors the poor performance of AET institutes across the country. University students, and most importantly university drop-outs, together with the FET learners provide a large potential BPS talent pool, particularly for the financial services opportunities. There are some concerns however, with the level of quality and practical experience gained in FET colleges, particularly in the areas of engineering. Furthermore, financial graduates from FET institutes and universities typically don t exist with FICA or FIAS compliance, which is a highly demanded skill set for BPS opportunities. Most youth in the Free State are elementary workers or work in the sales and services, or craft/trading sector (see Table 4). Although elementary workers have consistently formed the largest pool of occupation type, they are unlikely to meet the skill requirements for the BPS industry. The most likely source of experienced labour will be from the sales and services industry. Table 4: Free State employment of youth by occupation type (Thousands) Manager Professional Technician Clerk Sales and services Skilled agriculture Craft and related Box 7: Bloemfontein medical transcription One good example of leveraging available skills is as a the development of a medical transcription outsourcing service, which was begun by the Medical School of the University of Free State, to leverage its skill base in this area. 47 Ibid 48 Ibid 49 Ibid 57

67 trades Machine operator Elementary Domestic worker Total Should the province look to establish a nice offering, it might want to consider the LPO market. Bloemfontein is home to the Supreme Court of Appeal and is the judicial capital of the country. With the prominence of the legal services sector, it makes sense for the province to aim to stimulate the BPS opportunities (both captive and third-party) within the legal and compliance areas in particular. Infrastructure Bloemfontein is home to Telkom s switching centre which services international and national routes. As a result, there is an extensive fibre optic network which facilitates enhanced communications speed and ICT capacity 50. In November 2014, internet download speed surveys for Bloemfontein indicated it was 9 th out of the 63 South African cities surveyed (6.64 Mbps) 51. With regards to transportation networks, SANRAL indicated that the Free State road infrastructure is one of the best performing in the country - around 65% of roads were classified as good or very good quality 52. In the 2012 National Infrastructure Plan, the Durban - Free State Gauteng logistics and industrial corridor was highlighted as a priority focus area 53. This will facilitate further infrastructure competencies for the province, and can be leveraged to assist in attracting BPS investments specifically around logistics opportunities. Bloemfontein is Free State s economic hub. The presence of Bloemfontein international airport enhances the city s position as the primary source of activity and investment. 50 Free State Development Corporation: 51 Ratings as conducted by Oolka and accessed 02/12/2014: 52 DBSA & the Department of Performance Monitoring and Evaluation (2012): The State of South Africa s Economic Infrastructure: Opportunities and challenges 53 Presidential Infrastructure Coordinating Commission: A Summary of the South African National Infrastructure Plan (2012) 58

68 6. LIMPOPO 6.1. BPS OPPORTUNITIES The Mining sector Mining in Limpopo is centred on the platinum group metals, iron ore, chromium and diamonds to name a few. Other base commodities such as black granite are also located in the province. It has an abundance of resources that are essential to the mining economy, for example an abundance of labour. However this industry is still relatively under-developed. It relies on the exporting of raw materials together with the importing of manufactured goods and services. Overall, the mining industry contributed 28.7% to provincial GDP in Many services in the mining industry are usually centralised at the head-office locations in a captive centre, providing support services that cut-across the business units of the organisation. However, a number of the large mines are run as stand-alone operations, and do not refer functions to their mining headquarters. Furthermore, given the large turnover of most mines, the cost savings from incorporating captive shared services to streamline efficiencies is small relative to the size of overall operations. There is therefore an increased tendency towards third-party players in the mining industry vs. captive operations. The BPS opportunities identified in the mining value chain are therefore likely to be of the third party outsourcing variety. Identified BPS opportunities within the mining are as follows: Operational Logistics- The activities involved in logistics mainly include coordination of the transportation of mining equipment and output through-out the mining value chain. Large mining companies might however wish to keep all the logistics in-house purely because they have a larger capacity to accommodate the coordination of large scale investments with significant capital requirements. A larger mining organisation might view a logistics third-party as a middle-man operating at armslength from the decision hub, which increases both costs and risks. The BPS opportunity in the logistics activity is most likely more of a potential for smaller mining companies, but even here the opportunity is uncertain. Legal and compliance services - Regulatory, compliance and risk functions are all performed across the various processes in the mining value chain. A skilled group of individuals is required to conduct these activities; however it is not necessary for these people to be physically on the mining site in order to conduct this work. Thus there is a BPS opportunity to facilitate the legal functions needed on behalf of the mining company. This function is potentially most suited to head office centralization in a captive operation. It may be outsourced if deemed to be cost-effective, although the customized nature of legal and compliance services and the risks associated with poor performance probably mitigate against these being candidates for outsourcing. IT systems - Similar to the cross-cutting functions mentioned above, the IT systems must span the whole organisational value chain, which then provides an opportunity for a third party company to develop specialized IT services and fulfill this function to a variety of organisations in the mining industry. However, sometimes the security concerns around production processes might mean that organisations would prefer to keep this function in- 59

69 house in which case the BPS opportunity would be limited in the mining value chain. Ultimately the realization of the IT systems BPS opportunity will come do to the mining company s business risk assessment. The nature of any outsourcing function is likely also to be highly specialized. Human resources - Human resources functions are extended to all employees throughout the various sites of a mining company, and as a result it is an easy activity to centralise in a captive operation or outsource to a third party service provider. Marketing and communication - All those activities associated with marketing, advertising, the creation of a communications strategy and platform as well as branding are usually centralised to one unit, captive or outsourced. BPS opportunities in marketing and communications exist in both the centralised shared services model as well as third-party outsourcing. Ultimately, it would be a business decision on whether to go with a separate advertising and marketing agency, or to employ those skills in-house. Data management and analysis A huge function in the mining sector relates to the sorting, processing and filing of data/information across the various mines of a mining company. In most cases a centralised data team is set up to fulfill this function in a captive operation. The BPS opportunities identified above are mainly filled at a national level. That is, coordinating functions such as human resources, finance, legal and compliance as well as IT systems are contracted at a national level with either captive or, less likely, third-party providers filling a standard service across all mining sites and offices. Even when looking at logistics and vehicle management, while the vehicles are serviced in the province, it is most likely that the coordinating function of this servicing is conducted via a headquarters sitting in Gauteng. Contracts with a third-party logistics company are likely to be held at the national level, even if those companies are based in a province such as Mpumalanga. Figure 24 below illustrates the BPS opportunities within the mining value chain. It indicates those that are fulfilled at a national level; and points to two potential areas where the opportunity may be better serviced at the local provincial level. 60

70 Figure 24: Geographic sources of BPS services in the mining sector (Limpopo) National Human resources Labour & support services Logistics Local Legal & compliance IT systems Marketing & communication Supply chain managem ent Key: Third party outsourcing potential Captive 1. Labour and supporting services: in the tense and politically-motivated mining sector, it is imperative that mining companies have a good relationship with the local community. In order to provide these services (including for example, security, transport, water and electricity and housing), mining sites will sometimes outsource these local coordination and employment functions to local companies, to further illustrate their commitment to a developmental agenda. This could however also be controlled through an internal unit at a mine site; and in some cases be centralized all the way to up to headquarters. The important point however, is that given the sensitive interaction required with the local community, there is a geographical advantage to providing labour and supporting services within the province. This must be assessed against the countervailing requirement for close head office oversight and risk management, and will vary on a cas-by-case basis. All things considered, this does not point to a large and scaleable BPS opportunity for mining provinces to pursue. 2. Supply chain management: similar to the labour and supporting services case; local suppliers and SMEs form a large cohort of suppliers in the mining procurement process. In coordinating this function there is sometimes an advantage to being in close geographical proximity to these suppliers so as to management their process and supplier-company interaction more efficiently. It is unclear, and will vary on a case-by-case basis, whether the scale and nature of the supply chain function points to a significant outsourcing opportunity, especially considering the risks involved in managing this on an armslength basis. 61

71 The Agriculture sector The Limpopo province is a significant contributor of total agricultural output in the country. Limpopo is home to a wide range of agriculture types - cattle farming, sunflowers, cotton, maize, table-grapes and peanuts (grown in the Bela Bela and/or Modimolle regions), tropical fruit and nuts (grown in Tzaneen and Makhado), and forestry plantations. The climatic conditions are a significant comparative advantage for the province; specifically, rain-fed instead of irrigation controlled agricultural activities are possible given the rain-fall patterns. The main BPS opportunities are identified below: Operational Logistics - The activities involved in logistics mainly include farming equipment and transportation. Transport is necessary throughout the value-chain; however the product may vary dependent on the stage of production, e.g. crates of apples versus packaged bags of apples. Irrespective, the organisation and infrastructure involved in transportation is significant, as a result there is a BPS opportunity for the coordination of transportation. Supply chain management - Through-out the agricultural value chain, it is essential for the organisation to have oversight of their supplies, specifically through inventory and order management systems. Everything from inputs and raw materials, to the final packaged product need to be recorded, tracked and monitored on an effective operating system that is geared to all aspects of the supply chain. Technology and systems infrastructure is then a vital aspect to supply chain management. Inherent to supply chain solutions, is the requirement that this function is centralized across farming sites (for a large commercial farming operation). Thus the BPS opportunity would relate to the provision of the technological and systems infrastructure necessary to ensure system coherence, accurate tracking, verification and monitoring through-out the organisation s supply chain. Legal and compliance This is an important service for commercial agricultural operations. Regulatory, compliance and risk function are all performed at the organizational level; that is, they are applied across and within any point in the agricultural value chain. BPS opportunities exist to centralize legal work to a captive operation, or to outsource this work to a legal firm or legal services centre to provide. Compliance - Agricultural organisations need to be aware of the regulations which inform the growing, distribution and sales of their products. This element of the value chain requires specialist skill and experience and would be very suitable to either outsource to a third party, thus creating a BPS opportunity in product labeling services; or to create a centralized unit which would provide this service across and between agricultural value chains. Phyto-sanitary compliance may be another area where a BPS opportunity could emerge, relating to the monitoring and compliance of standards, particularly for the export market. Product labeling Another niche function in the agricultural chain relates to product labeling. This is a comprehensive and highly-specific function which needs to be performed during the processing, product manufacturing and wholesales stages. Product labeling is closing related to the compliance function. In areas where a number of commercial farming operations exist, there might be the business case for a third party player to coordinate the generation and auditing of product labels. Figure 25 sets maps out which BPS services can be met by a provider located anywhere nationally and those which are best met by a provincial player. The dark green circles 62

72 represent services most likely to be captive operations and the white are those that can easily be outsourced. Figure 25: Geographic sources of BPS services in the agricultural sector (Limpopo) National Supply chain management Legal Product labelling Local Operational Logistics Key: Compliance Third party outsourcing potential Captive Very few BPS opportunities in the agricultural sector are intrinsically better met within the province in which the demand originates. Majority of the BPS opportunities are centralised at the national level and meet the needs across the provinces. Product labeling coordination appears to be the only opportunity where a local player might have some advantage of providers outside the province PROVINCIAL COMPETENCIES Skills Limpopo has seen the largest decline in unemployment of youth (15 34) in the country since In 2008 the province had the highest youth unemployment level of 43.5%, this has reduced sharply to 28.6%, now the lowest in the country. However, in terms of skill levels, the province ranks 7 th in youth labour force with a matric or higher qualification, with a percentage of 43.6%. Average graduation rates for undergraduate degrees and diplomas are around 17.5%. Most learners are registered in the field of Science, Engineering and Technology, mirroring the national trend. DHET statistics indicate that in 2011 the two universities in the province had learners enrolled 54. In 2011, the seven FET colleges enrolled learners across all programmes. Aiming to equip learners with qualifications equivalent to the National Qualifications Framework (NQF) level 1 and the Senior Certificate (Grade 12), AET colleges in Limpopo contribute just under a third to the national cohort of AET learners. 54 Department of Higher Education and Training, Republic of South Africa (2013): Statistics on Post-School Education and Training in South Africa:

73 Unfortunately, in 2011 only 19% of the enrolled learners successfully completed their programmes 55. Most youth in the Limpopo are elementary workers or work in the sales and services, or craft/trading sector (see Table 5). Although elementary workers have consistently formed the largest pool of occupation type, they are unlikely to meet the skill requirements for the BPS industry. The most likely source of experienced labour will be from the sales and services industry. Table 5: Limpopo employment of youth by occupation type (Thousands) Manager Professional Technician Clerk Sales and services Skilled agriculture Craft and related trades Machine operator Elementary Domestic worker Total Infrastructure Limpopo is part of the Maputo Development Corridor, providing access to Mozambique; and also contains the Great North Road which provides a link to Zimbabwe. Limpopo logistics companies are then well-placed to assist in the export of primary goods and import of manufacturing equipment from the two neighbouring countries. Limpopo has a relatively well developed road and rail network. According to SANRAL the province has one of the best quality road networks in the country, with around 65% of roads described as being of good or very good quality 56. Together with the development of storage dam, bulk raw water distribution system and regional bulk infrastructure in the Sekhukhune District 57, Limpopo s infrastructure is geared towards supporting the industrial capability of mining activities. Broadband Infraco is a State Owned Enterprise (SOE), which has identified the need for improved network access and broadband connectivity within the Limpopo province. They are currently upgrading network infrastructure in the Northern Ring northern Gauteng, Mpumalanga and Limpopo and it seems the impact has already been seen for Polokwane. In January 2014, Polokwane was ranked 53 rd out of 62 cities surveyed by Ookla on internet 55 Department of Higher Education and Training, Republic of South Africa (2013): Statistics on Post-School Education and Training in South Africa: DBSA & the Department of Performance Monitoring and Evaluation (2012): The State of South Africa s Economic Infrastructure: Opportunities and challenges 57 DBSA & the Department of Performance Monitoring and Evaluation (2012): The State of South Africa s Economic Infrastructure: Opportunities and challenges, page

74 download speeds, but by November 2014 the city s ranking had jumped to 6 th (7.58 Mbps) 58. This provincial competency could then be leveraged to attract investments into BPS opportunities, specifically for potential mining BPS opportunities, if they exist. 58 Ratings as conducted by Oolka and accessed 02/12/2014:: 65

75 7. MPUMALANGA 7.1. BPS OPPORTUNITIES The Mining sector Three of the southern hemisphere s largest coal-fired power stations are situated in Mpumalanga. The province produces more than 80% of the country s coal, and the resulting power generation ability is large. Eskom s Kusile power generation plant is currently being built in Mpumalanga, thus the potential for future growth in the coal-orientated mining industry is large. Both big coal mining houses, Anglo and Xstrata, have a presence in the province. Coal isn t the only important reserve in the province. Gold is present in the Witwaterstrand, while Platinum Group metal and Nickel also have a presence in the economy. In terms of district municipalities, the Nkangala economy benefits the most from mining activities in the province - in 2012 it added 29.5% to district GDP 59. Many services in the mining industry are usually centralised at the head-office locations in a captive centre, providing support services that cut-across the business units of the organisation. However, a number of the large mines are run as stand-alone operations, and do not refer functions to their mining headquarters. Furthermore, given the large turnover of most mines, the cost savings from incorporating captive shared services to streamline efficiencies is small relative to the size of overall operations. There is therefore an increased tendency towards third-party players in the mining industry vs. captive operations. The BPS opportunities identified in the mining value chain are therefore likely to be of the third party outsourcing variety. Identified BPS opportunities within the mining are as follows: Operational Logistics- The activities involved in logistics mainly include coordination of the transportation of mining equipment and output through-out the mining value chain. Large mining companies might however wish to keep all the logistics in-house purely because they have a larger capacity to accommodate the coordination of large scale investments with significant capital requirements. A larger mining organisation might view a logistics third-party as a middle-man operating at armslength from the decision hub, which increases both costs and risks. The BPS opportunity in the logistics activity is most likely more of a potential for smaller mining companies, but even here the opportunity is uncertain. Legal and compliance services - Regulatory, compliance and risk functions are all performed across the various processes in the mining value chain. A skilled group of individuals is required to conduct these activities; however it is not necessary for these people to be physically on the mining site in order to conduct this work. Thus there is a BPS opportunity to facilitate the legal functions needed on behalf of the mining company. This function is potentially most suited to head office centralization in a captive operation. It may be outsourced if deemed to be cost-effective, although the customized nature of legal and compliance services and the risks associated with poor performance probably mitigate against these being candidates for outsourcing. IT systems - Similar to the cross-cutting functions mentioned above, the IT systems must span the whole organisational value chain, which then provides an opportunity for a third 59 Socio-economic Review and Outlook of Mpumalanga,

76 party company to develop specialized IT services and fulfill this function to a variety of organisations in the mining industry. However, sometimes the security concerns around production processes might mean that organisations would prefer to keep this function inhouse in which case the BPS opportunity would be limited in the mining value chain. Ultimately the realization of the IT systems BPS opportunity will come do to the mining company s business risk assessment. The nature of any outsourcing function is likely also to be highly specialized. Human resources - Human resources functions are extended to all employees throughout the various sites of a mining company, and as a result it is an easy activity to centralise in a captive operation or outsource to a third party service provider. Marketing and communication - All those activities associated with marketing, advertising, the creation of a communications strategy and platform as well as branding are usually centralised to one unit, captive or outsourced. BPS opportunities in marketing and communications exist in both the centralised shared services model as well as third-party outsourcing. Ultimately, it would be a business decision on whether to go with a separate advertising and marketing agency, or to employ those skills in-house. Data management and analysis A huge function in the mining sector relates to the sorting, processing and filing of data/information across the various mines of a mining company. In most cases a centralised data team is set up to fulfill this function in a captive operation. The BPS opportunities identified above are mainly filled at a national level. That is, coordinating functions such as human resources, finance, legal and compliance as well as IT systems are contracted at a national level with either captive or, less likely, third-party providers filling a standard service across all mining sites and offices. Even when looking at logistics and vehicle management, while the vehicles are serviced in the province, it is most likely that the coordinating function of this servicing is conducted via a headquarters sitting in Gauteng. Contracts with a third-party logistics company are likely to be held at the national level, even if those companies are based in a province such as Mpumalanga. Error! Reference source not found.figure 24 below illustrates the BPS opportunities within the mining value chain. It indicates those that are fulfilled at a national level; and points to two potential areas where the opportunity may be better serviced at the local provincial level. 67

77 Figure 26: Geographic sources of BPS services in the mining sector (Mpumalanga) National Human resources Labour & support services Logistics Local Legal & compliance IT systems Marketing & communication Supply chain managem ent Key: Third party outsourcing potential Captive 1. Labour and supporting services: in the tense and politically-motivated mining sector, it is imperative that mining companies have a good relationship with the local community. In order to provide these services (including for example, security, transport, water and electricity and housing), mining sites will sometimes outsource these local coordination and employment functions to local companies, to further illustrate their commitment to a developmental agenda. This could however also be controlled through an internal unit at a mine site; and in some cases be centralized all the way to up to headquarters. The important point however, is that given the sensitive interaction required with the local community, there is a geographical advantage to providing labour and supporting services within the province. This must be assessed against the countervailing requirement for close head office oversight and risk management, and will vary on a cas-by-case basis. All things considered, this does not point to a large and scaleable BPS opportunity for mining provinces to pursue. 2. Supply chain management: similar to the labour and supporting services case; local suppliers and SMEs form a large cohort of suppliers in the mining procurement process. In coordinating this function there is sometimes an advantage to being in close geographical proximity to these suppliers so as to management their process and supplier-company interaction more efficiently. It is unclear, and will vary on a case-by-case basis, whether the scale and nature of the supply chain function points to a significant outsourcing opportunity, especially considering the risks involved in managing this on an armslength basis. 68

78 The Agriculture sector The majority of land in Mpumalanga is classified as grassland ; however the escarpment and lowveld allows for the creation of anew savanna geography. Agricultural activities are wealthy in citrus and subtropical fruit, while the region is also known for nut and vegetable production. In assessing the different regions within the province, further variety in agricultural types emerge - Mbombela is known for citrus production, Carolina-Bethal-Ermelo is mainly a sheepfarming, Groblersdal contains crops such as citrus, cotton, tobacco, wheat and vegetables, which rely heavily on irrigation. The main BPS opportunities are identified below: Operational Logistics - The activities involved in logistics mainly include farming equipment and transportation. Transport is necessary throughout the value-chain; however the product may vary dependent on the stage of production, e.g. crates of apples versus packaged bags of apples. Irrespective, the organisation and infrastructure involved in transportation is significant, as a result there is a BPS opportunity for the coordination of transportation. Supply chain management - Through-out the agricultural value chain, it is essential for the organisation to have oversight of their supplies, specifically through inventory and order management systems. Everything from inputs and raw materials, to the final packaged product need to be recorded, tracked and monitored on an effective operating system that is geared to all aspects of the supply chain. Technology and systems infrastructure is then a vital aspect to supply chain management. Inherent to supply chain solutions, is the requirement that this function is centralized across farming sites (for a large commercial farming operation). Thus the BPS opportunity would relate to the provision of the technological and systems infrastructure necessary to ensure system coherence, accurate tracking, verification and monitoring through-out the organisation s supply chain. Legal and compliance This is an important service for commercial agricultural operations. Regulatory, compliance and risk function are all performed at the organizational level; that is, they are applied across and within any point in the agricultural value chain. BPS opportunities exist to centralize legal work to a captive operation, or to outsource this work to a legal firm or legal services centre to provide. Compliance - Agricultural organisations need to be aware of the regulations which inform the growing, distribution and sales of their products. This element of the value chain requires specialist skill and experience and would be very suitable to either outsource to a third party, thus creating a BPS opportunity in product labeling services; or to create a centralized unit which would provide this service across and between agricultural value chains. Phyto-sanitary compliance may be another area where a BPS opportunity could emerge, relating to the monitoring and compliance of standards, particularly for the export market. Product labeling Another niche function in the agricultural chain relates to product labeling. This is a comprehensive and highly-specific function which needs to be performed during the processing, product manufacturing and wholesales stages. Product labeling is closing related to the compliance function. In areas where a number of commercial farming operations exist, there might be the business case for a third party player to coordinate the generation and auditing of product labels. 69

79 Figure 27 sets maps out which BPS services can be met by a provider located anywhere nationally and those which are best met by a provincial player. The dark green circles represent services most likely to be captive operations and the white are those that can easily be outsourced. Figure 27: Geographic sources of BPS services in the agricultural sector (Mpumalanga) National Supply chain management Legal Product labelling Local Operational Logistics Key: Compliance Third party outsourcing potential Captive Very few BPS opportunities in the agricultural sector are intrinsically better met within the province in which the demand originates. Majority of the BPS opportunities are centralised at the national level and meet the needs across the provinces. Product labeling coordination appears to be the only opportunity where a local player might have some advantage of providers outside the province PROVINCIAL COMPETENCIES Skills Mpumalanga has the second highest unemployment rate among the age group in the country 42.8%.. Balancing this against the skill level, 49.5% of the youth labour force have a matric or higher qualification, which ranks 4 th in the country, behind the three dominant provinces Gauteng, Western Cape and Kwazulu-Natal. The high unemployment rate coupled with a relatively high education level compared with the other six provinces positions Mpumalanga well to leveraging its large labour pool for a BPS industry. Up until 2014, Mpumalanga did not have a university; which has been rectified with the establishment of the University of Mpumalanga. This investment into tertiary education is expected to improve future skills capabilities; however given its recent formation we cannot yet assess the type and volume of graduates that will emerge. The majority of FET learners in the province divide between NCV and Report 191 programmes, with slightly more enrolled in 70

80 Report 191. NCV has a compulsory English language course which assists BPS capabilities specifically in call centre work. A higher value skills competency in fields such as Engineering and Business studies is offered through Report 191. In 2011, there were only learners registered in the province s three FET colleges DHET statistics indicate that learners were registered for enrollment in Mpumalanga s AET institutions, however only 11% of that group were successful in passing the course, 7% worse than the national average of 18% 61. Most youth in the Mpumalanga are elementary workers or work in the craft/trading, or sales and services sector (see Table 6). Although elementary workers have consistently formed the largest pool of occupation type, they are unlikely to meet the skill requirements for the BPS industry. The most likely source of experienced labour will be from the sales and services industry. Table 6: Mpumalanga employment of youth by occupation type (Thousands) Manager Professional Technician Clerk Sales and services Skilled agriculture Craft and related trades Machine operator Elementary Domestic worker Total Infrastructure Mpumalanga is part of the Maputo Development Corridor which provides an infrastructural link to Gauteng and the port in Maputo, Mozambique. The province is also home to the majority of the country s power stations. ICT, particularly network access, in Mpumalanga has been identified as a provincial need by the State Owned Enterprise, Broadband Infraco. They are currently upgrading network infrastructure in the Northern Ring northern Gauteng, Mpumalanga and Limpopo and to some extent, the impact of this has already been realised in Nelspruit. In January 2014, Nelspruit was ranked 19 th out of 61 cities survey and by November it had gained 11 places to 7 th (7.52 Mbps) 62. As with many of the more rural provinces, ICT infrastructure is relatively inconsistent Secunda for example is rated 32 nd out of 61 and Middelburg is 34 th Department of Higher Education and Training, Republic of South Africa (2013): Statistics on Post-School Education and Training in South Africa: Ibid 62 Ratings as conducted by Oolka and accessed 02/12/2014:: 63 Ratings as conducted by Oolka and accessed 02/12/2014:: 71

81 Mpumalanga road network quality has been rated by SANRAL as the second worst in the country 35% of road infrastructure is considered to be poor to very poor 64. Due to the high reliance on the power generated in this province, and particularly the coal mining activities feeding into electricity generation; the 2012 National Infrastructure Plan has detailed two important infrastructure improvements for Mpumalanga 65 Majuba Rail coal line: 140km of new rail in Mpumalanga will help to move coal from road to rail transportation networks. Using the northern mineral belt and Waterberg in the development of rail network capacity to Mpumalanga The infrastructural projects will assist to improve provincial competencies in this area 63km of the Majuba line has already been built, while the Komati water scheme will help with electricity generation in the province. 64 DBSA & the Department of Performance Monitoring and Evaluation (2012): The State of South Africa s Economic Infrastructure: Opportunities and challenges 65 Presidential Infrastructure Coordinating Commission: A Summary of the South African National Infrastructure Plan (2012) 72

82 8. NORTHERN CAPE 8.1. BPS OPPORTUNITIES The Mining sector Mining activities allow for the export of minerals such as diamonds, zinc, lead, and manganese as well as iron ore. The country s largest diamond pipe is located in Kimberley which accounts for 7% of global diamond exports. The region also contributes 13% of global zinc and lead exports as well as over 25% of global manganese exports. Large companies currently in operation in the Northern Cape include Mittal Steel, Samancor, Gold Fields, PPC Lime and Assmang. These companies also enjoy the mining of other minerals and metals, spanning from copper to limestone, rose quartz and semi-precious stones. Many services in the mining industry are usually centralised at the head-office locations in a captive centre, providing support services that cut-across the business units of the organisation. However, a number of the large mines are run as stand-alone operations, and do not refer functions to their mining headquarters. Furthermore, given the large turnover of most mines, the cost savings from incorporating captive shared services to streamline efficiencies is small relative to the size of overall operations. There is therefore an increased tendency towards third-party players in the mining industry vs. captive operations. The BPS opportunities identified in the mining value chain are therefore likely to be of the third party outsourcing variety. Identified BPS opportunities within the mining are as follows: Operational Logistics- The activities involved in logistics mainly include coordination of the transportation of mining equipment and output through-out the mining value chain. Large mining companies might however wish to keep all the logistics in-house purely because they have a larger capacity to accommodate the coordination of large scale investments with significant capital requirements. A larger mining organisation might view a logistics third-party as a middle-man operating at armslength from the decision hub, which increases both costs and risks. The BPS opportunity in the logistics activity is most likely more of a potential for smaller mining companies, but even here the opportunity is uncertain. Legal and compliance services - Regulatory, compliance and risk functions are all performed across the various processes in the mining value chain. A skilled group of individuals is required to conduct these activities; however it is not necessary for these people to be physically on the mining site in order to conduct this work. Thus there is a BPS opportunity to facilitate the legal functions needed on behalf of the mining company. This function is potentially most suited to head office centralization in a captive operation. It may be outsourced if deemed to be cost-effective, although the customized nature of legal and compliance services and the risks associated with poor performance probably mitigate against these being candidates for outsourcing. IT systems - Similar to the cross-cutting functions mentioned above, the IT systems must span the whole organisational value chain, which then provides an opportunity for a third party company to develop specialized IT services and fulfill this function to a variety of organisations in the mining industry. However, sometimes the security concerns around production processes might mean that organisations would prefer to keep this function inhouse in which case the BPS opportunity would be limited in the mining value chain. 73

83 Ultimately the realization of the IT systems BPS opportunity will come do to the mining company s business risk assessment. The nature of any outsourcing function is likely also to be highly specialized. Human resources - Human resources functions are extended to all employees throughout the various sites of a mining company, and as a result it is an easy activity to centralise in a captive operation or outsource to a third party service provider. Marketing and communication - All those activities associated with marketing, advertising, the creation of a communications strategy and platform as well as branding are usually centralised to one unit, captive or outsourced. BPS opportunities in marketing and communications exist in both the centralised shared services model as well as third-party outsourcing. Ultimately, it would be a business decision on whether to go with a separate advertising and marketing agency, or to employ those skills in-house. Data management and analysis A huge function in the mining sector relates to the sorting, processing and filing of data/information across the various mines of a mining company. In most cases a centralised data team is set up to fulfill this function in a captive operation. The BPS opportunities identified above are mainly filled at a national level. That is, coordinating functions such as human resources, finance, legal and compliance as well as IT systems are contracted at a national level with either captive or, less likely, third-party providers filling a standard service across all mining sites and offices. Even when looking at logistics and vehicle management, while the vehicles are serviced in the province, it is most likely that the coordinating function of this servicing is conducted via a headquarters sitting in Gauteng. Contracts with a third-party logistics company are likely to be held at the national level, even if those companies are based in a province such as Mpumalanga. Figure 28Figure 24 below illustrates the BPS opportunities within the mining value chain. It indicates those that are fulfilled at a national level; and points to two potential areas where the opportunity may be better serviced at the local provincial level. 74

84 Figure 28: Geographic sources of BPS services in the mining sector (Northern Cape) National Human resources Labour & support services Logistics Local Legal & compliance IT systems Marketing & communication Supply chain managem ent Key: Third party outsourcing potential Captive 1. Labour and supporting services: in the tense and politically-motivated mining sector, it is imperative that mining companies have a good relationship with the local community. In order to provide these services (including for example, security, transport, water and electricity and housing), mining sites will sometimes outsource these local coordination and employment functions to local companies, to further illustrate their commitment to a developmental agenda. This could however also be controlled through an internal unit at a mine site; and in some cases be centralized all the way to up to headquarters. The important point however, is that given the sensitive interaction required with the local community, there is a geographical advantage to providing labour and supporting services within the province. This must be assessed against the countervailing requirement for close head office oversight and risk management, and will vary on a cas-by-case basis. All things considered, this does not point to a large and scaleable BPS opportunity for mining provinces to pursue. 2. Supply chain management: similar to the labour and supporting services case; local suppliers and SMEs form a large cohort of suppliers in the mining procurement process. In coordinating this function there is sometimes an advantage to being in close geographical proximity to these suppliers so as to management their process and supplier-company interaction more efficiently. It is unclear, and will vary on a case-by-case basis, whether the scale and nature of the supply chain function points to a significant outsourcing opportunity, especially considering the risks involved in managing this on an armslength basis. 75

85 The financial services sector Given the more complex nature of the financial sector value chain, the degree of centralisation of BPS opportunities is even higher than in most other industries. This is coupled with the high risks and regulatory constraints associated with the sector. Most BPS opportunities in the financial services sector are, for these reasons, set up as captive operations and managed centrally at the headquarters level, which usually sits in Gauteng or the Western Cape. The main BPS opportunities are identified below: Customer relations Most banks, insurance firms and other financial sector institutions have call centres to respond to customer queries. Most banks call centres are large captive operations run out of a few centres strategically located. The primary decision of where to locate a call centre is driven by the availability of the skilled labour to provide these services (e.g. Barclays as set up a call centre in Pretoria close to the University of Pretoria to maximize on the availability of students looking for part-time work). IT systems - IT infrastructure is a crucial component of the operations of the financial sector. Most IT systems are centralised, usually to a captive operation. This is driven by data privacy and security concerns which make financial institutions wary of outsourcing such functions. Where the IT systems and support are outsourced, this is usually to a wellestablished provider with the required infrastructure to support the institution s operations and platforms across all its branches. Change and process management - Change and process management inherently operates at the institutional level. Thus in the majority of cases it is already centralized across a level of business units. Given the skills required in the implementation of this function, there is an opportunity for a third-party service provider to enter the market and offer outsourcing services to financial institutions. Human resources - Human resources functions are extended to all employees throughout the organisation, and as a result it is an easy activity to centralise in a captive operation or outsource to a third party service provider. Legal and compliance - Regulatory, compliance and risk functions are another BPS opportunity across the financial sector value chain. However, as with IT systems, most of the established financial institutions have set up a legal/compliance unit that provides these services across the various branches and divisions of the organisation. Operational logistics - The activities involved in logistics mainly include maintenance of equipment such as ATMs and Point of Sale machines and the facilitation of the transportation of different types of necessary resources between branches and/or units within a financial institution. Activities in this area require up-to-date systems, significant capital investments as well as continued management on a daily basis. As a result, there is a significant BPS opportunity for third party transportation companies to enter the market. This is one of the few instances where a provincial preference might be an advantage. Marketing and communication - All those activities associated with marketing, advertising, the creation of a communications strategy and platform as well as branding are usually centralised in one unit, captive or outsourced. BPS opportunities in marketing and communications exist in both the centralised shared services model as well as third-party outsourcing. Ultimately, it would be a business decision on whether to go with a separate advertising and marketing agency, or to employ those skills in-house. Whether the financial 76

86 institution decides on third-party or in-house, is usually dependent on the size of the company. For example, a small real estate agency might chose to outsource ad hoc marketing work to an agency, while a large bank which is continually concerned with branding and marketing opportunities, would most likely choose an in-house centralisation model. Data management and analysis A huge function in the financial services relates to the sorting, processing and filing of data/information. In most cases a centralised data team is set up to fulfill this function. It is evident that the main BPS opportunities in the financial sector exist as captive operations. Thus the province s strategy should be to convince the institution that it should set up its centralised operations in that province to service the institutions operations across the country. Beyond competing nationally as a BPS destination, there are few opportunities which originate at the provincial branch of the financial institution, and which may therefore best be met by a provider in close geographical proximity to that branch. Figure 29 sets maps out which BPS services can be met by a provider located anywhere nationally and those which are best met by a provincial player. The dark green circles represent services most likely to be captive operations and the white are those that can easily be outsourced. Figure 29: Geographic sources of BPS services in financial sector (Northern Cape) Change & process management National Customer relations Human resources Local Data management Legal & compliance Operational Logistics Supply chain solutions Key: IT systems Third party outsourcing potential Captive Very few BPS opportunities in the financial sector are intrinsically better met within the province in which the demand originates. Majority of the BPS opportunities are centralised at the national level and meet the needs of branches across the provinces. Operational logistics around ATMs and Point of Sale (PoS) machines appear to be the only opportunity where a local player might have some advantage over providers outside the province. 77

87 8.2. PROVINCIAL COMPENTENCIES Skills Similar to Mpumalanga, the Northern Cape did not have a university until very recently with the opening of Sol Plaatjie University in Kimberley. The Northern Cape has the smallest number of FET colleges and learners only two institutes, which in 2011, catering to only learners 66. As is the case with most of the FET colleges around the country, most learners are enrolled in NCV and Report 191 programmes, however at the Northern Cape Rural FET College there is also a large number of learners studying for occupational qualifications. These qualifications allow recognition of work-place learning and are funded by the SETAs. Northern Cape also have the smallest number of learners enrolled in AET, typically representing about 2% of the total number of AET learners nationally. In 2011, this manifest through a mere 125 learners who had successfully passed 67. Northern Cape has the third highest unemployment rate among the age group in the country 42.4%, marginally behind Mpumalanga. Balancing this against the skill level, only 41.4% of the youth labour force have a matric or higher qualification, which ranks last in the country. The Northern Cape skills pool for BPS is therefore very limited. With the smallest number of both FET and AET graduates and containing only one, brand new, university, it is unsurprising that the province is the worst performing province in terms of skills competencies. As with the other provinces, the elementary, sales and services, and craft/trading sectors are the largest employers of youth (see Table 7). Although elementary workers have consistently formed the largest pool of occupation type, they are unlikely to meet the skill requirements for the BPS industry. The most likely source of experienced labour will be from the sales and services industry. Table 7: Northern Cape employment of youth by occupation type (Thousands) Manager Professional Technician Clerk Sales and services Skilled agriculture Trade Machine operator Elementary Domestic worker Total Infrastructure 66 Department of Higher Education and Training, Republic of South Africa (2013): Statistics on Post-School Education and Training in South Africa: Ibid 78

88 The Northern Cape Provincial Growth and Development Strategy (NCPGDS) has identified the mining and mineral processing industry as one of the key priority areas for potential economic growth. The Northern Cape has identified four investment corridors, the Namaqua corridor, the Karoo corridor, the Diamond field-kalahari corridor and the Orange River basin. This development plan has facilitated the initiation of a range of infrastructural supporting features, including the Buchu Bay-Doring Bay deepwater harbour, Upington airport, and the Gamsberg to Loop 10 railway line. BPS opportunities in the mining logistic space should then endeavour to align their growth with that of these corridors, so as to benefit from investment synergies. The Square Kilometer Array (SKA) Project is based in the Northern Cape and has brought with it large investments in high speed ICT network connectivity particularly with a km undersea fibre-optic cable. As of November 2014, Kimberly was rated 55 th out of 63 surveyed cities for internet download speed in South Africa 68. This poor performance will hopefully be alleviated through the increased SKA-related investment in ICT. The State Owned Enterprise Broadband Infraco estimates that only 2.1% of total national bandwidth traffic origination is realised in the Northern Cape, which is mainly due to its sparse population and very poor infrastructure 69. Looking at the transportation network, Northern Cape performs averagely in road quality; however the DBSA does raise concerns over the fast deterioration of networks 70. Identified infrastructure projects and areas for improvement within the Northern Cape including - Transnet investments into improved railway capacity between Northern Cape and Port Elizabeth 71 The development of a Saldanha-Northern Cape corridor as identified in the National Infrastructure Plan 72 and; Other infrastructure investments related to the development of four corridors in the region - the Buchu Bay-Doring Bay deep-water harbour, Upington airport, and the Gamsberg to Loop 10 railway line 73. There is potential for increased provincial competencies in both areas of infrastructure; and until this potential has been realised, BPS investment is unlikely to be attracted to the province. 68 Ratings as conducted by Oolka and accessed 02/12/2014:: 69 Broadband Infraco Annual Report (2013), page DBSA & the Department of Performance Monitoring and Evaluation (2012): The State of South Africa s Economic Infrastructure: Opportunities and challenges 71 Ibid 72 Presidential Infrastructure Coordinating Commission: A Summary of the South African National Infrastructure Plan (2012)

89 9. NORTH WEST 9.1. BPS OPPORTUNITIES The Mining sector The North West is home to 94% of the countries platinum output, with the majority of activities stemming from the Rustenberg and Brits districts. Mining accounts for a substantial number of jobs in the province, over a third of the population works in the Platinum Corridor. Mining players in the area include Anglo American, Impala, Lonmin and Royal Bafokeng Platinum. The North West provincial government has a vision to spur economic growth through movement upwards along the value chain, as part of their Provincial Economic Review in 2013 they indicate that 16 higher value products have been identified, some of which rely on mineral inputs currently mined in the province. Many services in the mining industry are usually centralised at the head-office locations in a captive centre, providing support services that cut-across the business units of the organisation. However, a number of the large mines are run as stand-alone operations, and do not refer functions to their mining headquarters. Furthermore, given the large turnover of most mines, the cost savings from incorporating captive shared services to streamline efficiencies is small relative to the size of overall operations. There is therefore an increased tendency towards third-party players in the mining industry vs. captive operations. The BPS opportunities identified in the mining value chain are therefore likely to be of the third party outsourcing variety. Identified BPS opportunities within the mining are as follows: Operational Logistics- The activities involved in logistics mainly include coordination of the transportation of mining equipment and output through-out the mining value chain. Large mining companies might however wish to keep all the logistics in-house purely because they have a larger capacity to accommodate the coordination of large scale investments with significant capital requirements. A larger mining organisation might view a logistics third-party as a middle-man operating at armslength from the decision hub, which increases both costs and risks. The BPS opportunity in the logistics activity is most likely more of a potential for smaller mining companies, but even here the opportunity is uncertain. Legal and compliance services - Regulatory, compliance and risk functions are all performed across the various processes in the mining value chain. A skilled group of individuals is required to conduct these activities; however it is not necessary for these people to be physically on the mining site in order to conduct this work. Thus there is a BPS opportunity to facilitate the legal functions needed on behalf of the mining company. This function is potentially most suited to head office centralization in a captive operation. It may be outsourced if deemed to be cost-effective, although the customized nature of legal and compliance services and the risks associated with poor performance probably mitigate against these being candidates for outsourcing. IT systems - Similar to the cross-cutting functions mentioned above, the IT systems must span the whole organisational value chain, which then provides an opportunity for a third party company to develop specialized IT services and fulfill this function to a variety of 80

90 organisations in the mining industry. However, sometimes the security concerns around production processes might mean that organisations would prefer to keep this function inhouse in which case the BPS opportunity would be limited in the mining value chain. Ultimately the realization of the IT systems BPS opportunity will come do to the mining company s business risk assessment. The nature of any outsourcing function is likely also to be highly specialized. Human resources - Human resources functions are extended to all employees throughout the various sites of a mining company, and as a result it is an easy activity to centralise in a captive operation or outsource to a third party service provider. Marketing and communication - All those activities associated with marketing, advertising, the creation of a communications strategy and platform as well as branding are usually centralised to one unit, captive or outsourced. BPS opportunities in marketing and communications exist in both the centralised shared services model as well as third-party outsourcing. Ultimately, it would be a business decision on whether to go with a separate advertising and marketing agency, or to employ those skills in-house. Data management and analysis A huge function in the mining sector relates to the sorting, processing and filing of data/information across the various mines of a mining company. In most cases a centralised data team is set up to fulfill this function in a captive operation. The BPS opportunities identified above are mainly filled at a national level. That is, coordinating functions such as human resources, finance, legal and compliance as well as IT systems are contracted at a national level with either captive or, less likely, third-party providers filling a standard service across all mining sites and offices. Even when looking at logistics and vehicle management, while the vehicles are serviced in the province, it is most likely that the coordinating function of this servicing is conducted via a headquarters sitting in Gauteng. Contracts with a third-party logistics company are likely to be held at the national level, even if those companies are based in a province such as Mpumalanga. Figure 30Figure 24 below illustrates the BPS opportunities within the mining value chain. It indicates those that are fulfilled at a national level; and points to two potential areas where the opportunity may be better serviced at the local provincial level. 81

91 Figure 30: Geographic sources of BPS services in the mining sector (North West) National Human resources Labour & support services Logistics Local Legal & compliance IT systems Marketing & communication Supply chain managem ent Key: Third party outsourcing potential Captive 1. Labour and supporting services: in the tense and politically-motivated mining sector, it is imperative that mining companies have a good relationship with the local community. In order to provide these services (including for example, security, transport, water and electricity and housing), mining sites will sometimes outsource these local coordination and employment functions to local companies, to further illustrate their commitment to a developmental agenda. This could however also be controlled through an internal unit at a mine site; and in some cases be centralized all the way to up to headquarters. The important point however, is that given the sensitive interaction required with the local community, there is a geographical advantage to providing labour and supporting services within the province. This must be assessed against the countervailing requirement for close head office oversight and risk management, and will vary on a cas-by-case basis. All things considered, this does not point to a large and scaleable BPS opportunity for mining provinces to pursue. 2. Supply chain management: similar to the labour and supporting services case; local suppliers and SMEs form a large cohort of suppliers in the mining procurement process. In coordinating this function there is sometimes an advantage to being in close geographical proximity to these suppliers so as to management their process and supplier-company interaction more efficiently. It is unclear, and will vary on a case-by-case basis, whether the scale and nature of the supply chain function points to a significant outsourcing opportunity, especially considering the risks involved in managing this on an armslength basis. 82

92 The financial services sector Given the more complex nature of the financial sector value chain, the degree of centralisation of BPS opportunities is even higher than in most other industries. This is coupled with the high risks and regulatory constraints associated with the sector. Most BPS opportunities in the financial services sector are, for these reasons, set up as captive operations and managed centrally at the headquarters level, which usually sits in Gauteng or the Western Cape. The main BPS opportunities are identified below: Customer relations Most banks, insurance firms and other financial sector institutions have call centres to respond to customer queries. Most banks call centres are large captive operations run out of a few centres strategically located. The primary decision of where to locate a call centre is driven by the availability of the skilled labour to provide these services (e.g. Barclays as set up a call centre in Pretoria close to the University of Pretoria to maximize on the availability of students looking for part-time work). IT systems - IT infrastructure is a crucial component of the operations of the financial sector. Most IT systems are centralised, usually to a captive operation. This is driven by data privacy and security concerns which make financial institutions wary of outsourcing such functions. Where the IT systems and support are outsourced, this is usually to a wellestablished provider with the required infrastructure to support the institution s operations and platforms across all its branches. Change and process management - Change and process management inherently operates at the institutional level. Thus in the majority of cases it is already centralized across a level of business units. Given the skills required in the implementation of this function, there is an opportunity for a third-party service provider to enter the market and offer outsourcing services to financial institutions. Human resources - Human resources functions are extended to all employees throughout the organisation, and as a result it is an easy activity to centralise in a captive operation or outsource to a third party service provider. Legal and compliance - Regulatory, compliance and risk functions are another BPS opportunity across the financial sector value chain. However, as with IT systems, most of the established financial institutions have set up a legal/compliance unit that provides these services across the various branches and divisions of the organisation. Operational logistics - The activities involved in logistics mainly include maintenance of equipment such as ATMs and Point of Sale machines and the facilitation of the transportation of different types of necessary resources between branches and/or units within a financial institution. Activities in this area require up-to-date systems, significant capital investments as well as continued management on a daily basis. As a result, there is a significant BPS opportunity for third party transportation companies to enter the market. This is one of the few instances where a provincial preference might be an advantage. Marketing and communication - All those activities associated with marketing, advertising, the creation of a communications strategy and platform as well as branding are usually centralised in one unit, captive or outsourced. BPS opportunities in marketing and communications exist in both the centralised shared services model as well as third-party outsourcing. Ultimately, it would be a business decision on whether to go with a separate advertising and marketing agency, or to employ those skills in-house. Whether the financial 83

93 institution decides on third-party or in-house, is usually dependent on the size of the company. For example, a small real estate agency might chose to outsource ad hoc marketing work to an agency, while a large bank which is continually concerned with branding and marketing opportunities, would most likely choose an in-house centralisation model. Data management and analysis A huge function in the financial services relates to the sorting, processing and filing of data/information. In most cases a centralised data team is set up to fulfill this function. It is evident that the main BPS opportunities in the financial sector exist as captive operations. Thus the province s strategy should be to convince the institution that it should set up its centralised operations in that province to service the institutions operations across the country. Beyond competing nationally as a BPS destination, there are few opportunities which originate at the provincial branch of the financial institution, and which may therefore best be met by a provider in close geographical proximity to that branch. Figure 31 sets maps out which BPS services can be met by a provider located anywhere nationally and those which are best met by a provincial player. The dark green circles represent services most likely to be captive operations and the white are those that can easily be outsourced. Figure 31: Geographic sources of BPS services in financial sector (Free State) Change & process management National Customer relations Human resources Local Data management Legal & compliance Operational Logistics Supply chain solutions Key: IT systems Third party outsourcing potential Captive Very few BPS opportunities in the financial sector are intrinsically better met within the province in which the demand originates. Majority of the BPS opportunities are centralised at the national level and meet the needs of branches across the provinces. Operational logistics around ATMs and Point of Sale (PoS) machines appear to be the only opportunity where a local player might have some advantage over providers outside the province. 84

94 9.2. PROVINCIAL COMPETENCIES Skills The only university in the province, North West University, matches Rhodes University in achieving the highest rate of undergraduate degree and diploma learner graduation rates in the country - 25% 74. The main area of tertiary study in the province is Education, and the most prominent qualification type is undergraduate certificate and diplomas 75. According to DHET statistics, in 2011 the University of the North West had registered learners the second large enrollment rate for a university in the country (excluding UNISA) FET colleges housed learners in 2011, where the majority were enrolled in the NCV programme. Providing theoretical and practical component to Business and Engineering studies, NCV also has the compulsory English language component which is an important competency for companies looking to locate BPS opportunities in a certain area. As per the national trend, there is an extremely low completion and pass rate for adult learners at AET institutes in the North West. In 2011, only 14% passed which resulted in just over 1000 successfully trained adult learners 77. The Northern West Cape has a comparatively decent unemployment rate among the age group in the country 38.4%, which is very close to the national average, and just above Gauteng, Western Cape and Kwazulu-Natal. 47.0% of the youth labour force have a matric or higher qualification, which ranks 6th in the country. Most youth in the Limpopo are elementary workers or work in the sales and services sector (see Table 5). Although elementary workers have consistently formed the largest pool of occupation type, they are unlikely to meet the skill requirements for the BPS industry. The most likely source of experienced labour will be from the sales and services industry. Table 8: North West employment of youth by occupation type (Thousands) Manager Professional Technician Clerk Sales and services Skilled agriculture 1 1 Craft and related trades Machine operator Elementary Domestic worker Total Department of Higher Education and Training, Republic of South Africa (2013): Statistics on Post-School Education and Training in South Africa: Ibid 76 Ibid 77 Ibid 85

95 Infrastructure The ICT network in the North West has been characterized by the State Owned Enterprise, Broadband Infraco as that with a poor infrastructure spread, which contributes only 5.9% of national bandwidth traffic origination 78. Not all of the cities in the North West have been surveyed by Ookla for download speed; Mahikeng and Mmabatho do not have a ranking while Potchefstroom has received an internet download speed ranking of 41 st out of 62 surveyed cities 79. In terms of transportation infrastructure, the North West is the third worst province according to SANRAL; in particular, around 30% of roads were poor to very poor quality 80. Furthermore, the fast deterioration of this network should be a large concern for the province. The 2012 National Infrastructure Plan also makes reference to the importance of opening up beneficiation opportunities through accelerated investments in all forms of infrastructure (road, rail, bulk water and transmission) as it talks to Strategic Integrated Project (SIP) 4 which focuses on unlocking opportunities in the North West. Currently infrastructure in the North West is sub-standard for BPS competency requirements, and although SIP 4 does talk to the importance of infrastructure in unlocking economic opportunities, without any concrete investment projects guaranteed, it is unlikely this assessment will change in the near future. 10. SUMMARY CONSIDERATIONS OF PROVINCIAL ANALYSIS The preceding chapters have unpacked the BPS opportunities and provincial competencies relevant to an assessment of their ability and readiness to meet BPS demand in South Africa. Opportunities where a clear provincial advantage exists are limited as the six provinces essentially have to compete with the established, primary BPS cities for all the BPS opportunities that exist and have been identified. The following important considerations will influence the potential for a province to become a credible BPS location: Due to structural reasons related to their geography in relation to global sources of demand, the six provinces currently do not have a compelling offer for the off-shore market and should therefore not prioritise direct marketing activities to the off-shore market. Opportunities for provincial BPS contracts are likely to arise when the primary cities see the opportunity for sub-contracting services to secondary cities to overcome rising cost and other factors that inform their competitiveness. Thus provinces should pursue a phased and systematic approach to building the necessary competencies as a BPS location, focusing their efforts on identifying and exploiting competitive advantages in relation to the primary BPS cities. Provincial cities will only effectively compete directly in the global BPS market if and when they overcome the disadvantages associated with their two-stop flight dislocation from the global source markets. Developing competitiveness at a national, not a provincial level should be the aim of provinces. Provinces should not be looking to exploit BPS opportunities in their geographic 78 Broadband Infraco Annual Report (2013), page Ratings according to Ookla: West&city= DBSA & the Department of Performance Monitoring and Evaluation (2012): The State of South Africa s Economic Infrastructure: Opportunities and challenges 86

96 area alone, or should not be under the illusion that a potential BPS demand emanating from their province necessarily provides the province with an advantage in meeting that demand. In certain instances, and by the very nature of the BPS industry where factors underpinning cost-competitiveness outweigh geographical location per se, a BPS service may actually be more effectively and efficiently provided by a provider not located in the province demanding the service. This will be informed by factors such as experience, economies of scale and costs, amongst others. The first step towards developing a national competitive advantage is to ensure that the province meets the basic criteria required to provide a BPS service competitively. In this regard, it is critical that provinces focus firstly on addressing the main drivers of BPS competence and competitiveness, namely building up their skills and infrastructure to meet the standards required to provide a quality, reliable and cost-effective BPS offering to clients across the country. Given that the primary BPS cities have a substantial and, for the foreseeable future, an unassailable advantage over the secondary cities in relation to global demand, as a starting point, an additional strategy to be pursued by the provinces should be to identify niche opportunities that leverage existing expertise, infrastructure and capabilities within the province. The case study on the medical transcription services in the Free State, where a BPS competence was developed out of a pre-existing specialist research institution, is a clear example of such an instance. This will help to form the platform from which a BPS offer can be grown within the province. Once established, this frequently leads to a snowballing effect, with other services clustering around the initial niche offering. The growth of the industry in the three dominant provinces, coupled with the well noted and growing skills shortages they confront implies that there is the potential for spillover demand for BPS support into other provinces. An opportunity therefore exists for a province(s) to establish itself as a supplier of skilled labour to the BPS providers in Johannesburg, Cape Town or Durban. Established players will be open to sub-contract their off-shore work to an emerging location as long as it can match the reliability and quality of output expected at the international level in addition to offering cost advantages. The provinces should therefore concentrate on systematically building close, strong networks with established BPS players in the primary BPS cities a) to identify any opportunities for spillover work, and b) to understand what is required in terms of types of BPS services, costs and quality standards. Provinces should then use this information to build their offer to meet the emerging constraints faced by service providers in the primary centres. It is important that provincial governments are conscious of the relevance of a strong BPS industry to a province s economy. However they should understand the drivers of (and the constraints to) their potential competitiveness, and should focus on building the critical factors required to realize the identified opportunities. In doing so, provinces should focus their efforts on improving the competitiveness of their province as a secondary BPS centre, rather than becoming an active player in the BPS industry (e.g. through building dedicated BPS business parks). The record globally and from South Africa clearly shows that the state works most efficiently and effectively as a promoter of BPS investments when its efforts are directed at improving the enabling environment and addressing the key factors affecting the competitiveness of destinations, rather than acting as a BPS investor. 87

97 11. APPENDIX A Table 9: Stakeholders consulted for the SSC research Organisation DTI (IDD) DTI (TISA) DTI (IDIAD) Idwala Industrial Holdings Ricoh Shared Services Barclays Africa Group Limited Shared Services MTN Shared Services TATA Shared Services KPMG Shared Services Genpact Shared Services Sappi Procurement SSC Exxaro SSC Novo Nordisk Gauteng SSC Cummins Eskom Everest Group The Rockefeller Foundation Western Cape: Department of Economic Development and Tourism OUTsurance Shared Services Lonmin Sasol Individual Ntokozo Mthabela Dean Hoff Angela Kays Reshni Singh Themi Argyrou Richard Pinker Andrea Schaffell Paul Riley Mr. Martin Lamprecht Gary Mukheibir Alida Taylor Rein van der Horst Avesh Singh Carel Opperman Waldo Hattingh Debasis Guha Morris Pereira Riette le Roux Lulekwa Ngcwabe H Karthik Traci Freeman Dieter Hoffman Jan Hofmeyr Happy Nkhoma Linda Fourie 88

98 Anglo American Andrew Jackson Table 10: Stakeholders consulted for the LPO research Organisation Leah Cooper Consulting DLA Piper Radiant Law Hive Legal Bespokelaw Beaton Consulting Elavate Allans Corrs BPO Global Cognia Law Exigent WNS Cliffe Dekker Hofmeyr RL Daly Cogent Law Norton Rose Webhelp The Law Society of South Africa DTI (TISA) DTI (IDIAD) Individual Leah Cooper Stephen Allan Alex Hamilton Justin Cornish Jodi Baker Simon Khalil George Beaton James Odell Gwen Taylor Michael do Rozario Jan Scholtz Janet Taylor-Hall David Holme Johann Kunz Preeta Bhagatjee Dennis Dallas Beverley Howe Jean du Toit Craig Gibson Nic Swart Barbara Whittle Dean Hoff Angela Kays Reshni Singh 89

99 Table 11: Stakeholders consulted for the provincial analysis research Organisation Individual DTI (IDD) Ntokozo Mthabela DTI (TISA) Dean Hoff Angela Kays DTI (IDIAD) Reshni Singh Automotive industry specialist Justin Barnes Agricultural industry specialist Nokuzola Jenness Mining industry specialist Deon Visser Financial industry specialist Nikki Corbett Swart Business Process Services expert Traci Freeman 90

100 12. APPENDIX B VALUE CHAINS Automotive The value chain (VC) analysis for the automotive industry is a high-level description of the process starting at raw material production and moving through to product distribution and after sales services. Figure 32 below sets out a schematic outline of the automotive VC. Below each of the main value chain components are examples of the activities that are conducted per VC component. The grey horizontal blocks illustrate activities which cut across all components involved in the VC. Figure 32: Automotive Value Chain 1. Raw material production: Involves the identification and sourcing of quality materials necessary for manufacturing. Encompassed in this component will be the tracking and management of inventory, including storage and transportation. 2. Material processing: A warehouse receives the raw materials and endeavors to refine and modify the material into that which is necessary for parts manufacturing. Within this stage, it is important to maintain continued tracking and management of inventory, 91

101 data capturing and the implementation of process maps so as to ensure the completion of necessary modifications. 3. Parts manufacturing: In South Africa parts manufacturers often rely on Tier 1 and Tier 2 suppliers. Tier 2 suppliers, such as Spizer Axle, are dependent on designs, volumes and technological information from Tier 1; and produce specified components for the use of Tier 1 suppliers. Tier 1 suppliers, such as Bosch, then use the components obtained from Tier 2 suppliers to manufacture automobile subsystems. Parts manufacturers might receive subsystems and parts from either Tier 1 or Tier 2 suppliers, or they may manufacture components and automobile subsystems themselves. The parts manufacturers will then combine the necessary elements and assemble the vehicle. This process is operationally intensive and relies on close integration between parts manufacturers are their suppliers. Tier 2 manufacturers also supply into other value chains, for example the foundry (metal casting) in the automotive value chain is also supplied into construction and mining. The economies of scale experienced by the indirect benefits of a Tier 2 manufacturer are an importance consideration in understanding the functioning of the automotive VC. 4. Retail sales & marketing: This value chain component allows for distribution to automobile retailers. Receiving the assembled vehicle from the parts manufacturer, retailers are able to conduct their marketing, sales and customer experience activities. The South African automobile market is a platform into African automotive markets; therefore, at this stage final products might get sent to domestic or international vehicle retailers. In the case of vehicle export, the retail sales and marketing would also include aspects of quality control, reporting requirements and other compliance activities as set out by World Trade Organisation (WTO) regulations. 5. After sales: The diagram indicates that sometimes Tier 1 manufacturers might perform the parts manufacturing and sales components themselves, thus jumping straight to after sales. However, usually the process followed is that mapped out by the main flow. After sales involves all the activities which follow up on the sale of a vehicle; for example any warranty breaches, technical assistance, replacement of parts, vehicle insurance and customer support including road side assistance. There are seven cross cutting sectors in the automotive value chain: Logistics o o Logistics of raw materials and components: freight forwarding, clearance, transportation, organising labour Logistics of export and distribution: transportation, storage facilities, organising labour Supply chain solutions o o Supply chain for raw materials to parts manufacturing: Warehouse, inventory management and order management solutions Supply chain for sales and after sales: export and distribution inventory management between retailer to customer 92

102 Human resources: recruitment and retention, career consulting, resource performance monitoring, employer disputes, CCMA cases Legal: risk and compliance management; response to changes in the policy and legal environment Financial services: payroll, accounting, financial portfolio management Enterprise resource management: identification and planning of all resources (human, capital, goods etc.) within the company IT systems: overall connectivity, data warehouse, tracking systems, hardware and software Agriculture value chain The agricultural sector pertains to animals, animal products, horticulture and field crops; each with unique value chains. Agriculture in Limpopo and Mpumalanga is linked primarily to field crops. The value chain below pertains exclusively to field crops, with the process components in green above and the cross-cutting activities indicated in grey below. Figure 33: Field Crop Agricultural Value Chain The figure above explains the eight components involved in the field crop value chain, from agricultural inputs through to retail sales and marketing. In order to get from agricultural inputs to retail sales and marketing, a relatively simple process is followed. 93

103 Through-out the field crop value chain process, there are seven activities which are conducted. Most of these have been explained above, but we highlight three important activities for the agriculture value chain. 1. Logistics: In field crop production, it is necessary for continued tracking, monitoring and management of crop inventory. This forms an important part of logistics. 2. Agricultural consulting: There are a number of considerations to take into account during the agricultural production process. Sometimes it is useful for farmers to get advice from consulting agencies (such as the Agri Council) in order to assist with decision making. While larger commercial farmers might not need this cross-cutting function, smaller farmers with limited experience would rely heavily on external support and assistance. 3. Product labeling content requirements: Agricultural produce must follow extremely specific requirements in terms of product labeling; for example, which nutrients are included and how they are to be reported. There are also a number of different government departments that have policies in this regard, thus product labeling compliance is a significant activity which needs to be considered mainly during the processors, product manufacturers and wholesale stages of the field crop value chain Financial services value chain The financial sector is services orientated, and as a result, it is particularly hard to map the process flow from start to finish. Ultimately, a financial services institution will follow a unique process depending on the type of customer as well as type of goods and/or services required. For example, an existing bank customer might not need to go through a risk assessment while a new customer certainly would. As a result, there are a multitude of different value chains that exist within a services sector such as finance. Our approach has been to map the landscape of a generic financial institution. While this map may vary between finance industries, overall the figure below takes into account the general structure, including the different business units, which are most likely in the everyday functioning of a financial sector institution. 94

104 Figure 34: Financial Sector Landscape The figure above reflects the generic business units expected to be housed within a financial sector institution. The units are indicated in the circles above. They usually operate independently at a product or service level and not at the institutional level, although this is not always the case. The units mentioned in the outer ring are those which generally service the financial institution as a whole, again this is a simplified depiction and is not always the case for all South African financial institutions. Some of the key functions within a financial institution are explained further below. Fulfillment and processing: involves the capturing, and recording of client, goods or service information. Typically this function is informed by the legal and compliance environment, and it could occur at more than one time within a client s lifetime in the institution. Customer relationship management: this function includes all those activities that rely on interaction directly with the client. For example the call or services centre, relationship managers for large accounts, queries and administrative support. This unit would most likely interact closely with the sales and customer retentions teams, firstly to pass on potential cross-selling opportunities to other areas of the institution and secondly so as to mitigate poor client relations. Change and process management: is a function that is often done at the institutional level. Generally, the change management team would be trained in process mapping so as to streamline methods in order to create efficiencies, allow for cost-saving opportunities and meet certain business objectives. This team is generally highly- 95

105 skilled and would conduct process mapping across the institution so as to allow for cross comparisons and the utilization of efficiencies across business units. Goods/service delivery: this involves getting the final product or service to the client. Attention would be paid to transportation, mediums of client communication, inventory management, compliance and client identification procedures as well as service delivery agreements. Generally, each segment would control the goods and/or service delivery individually, however there are cases whereby one financial institutions (particularly if they have a national presence), might make use of the same delivery system for more than one product or service. Marketing and communication: is conducted at the institution level as generally there is one coherent marketing strategy that is followed. Similarly, marketing guidelines and requirements are set for all units within the institution Mining value chain The stages in the value chain are relatively generic across the different minerals and thus relevant for all five provinces. Specificities arise in certain components of the mining activities phase of the value chain. However from on outsourcing perspective, the support functions for the mining activities cut across the different mine types and thus there is no need to develop a separate chain for each mineral type. The value chain presented below thus suffices, where elements of the chain are unique to a province or mineral type, this is noted. Figure 35: Mining Value Chain 96