An attractive choice: Business process outsourcing and offshoring offer major potential

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Information technology (IT) is one of the sectors with significant growth potential in Morocco’s ongoing economic development. Notwithstanding, recent years have seen both substantial growth in the offshoring industry alongside several challenges for the domestic IT sector related to funding and a limited appetite among Moroccan companies to invest in IT infrastructure. A range of public and private initiatives is set to turn this around, however, helping the kingdom on its way to anchoring investments of blue-chip companies, all the while benefitting local providers and clients alike.

MARKET COMPOSITION: Morocco’s domestic IT sector is highly fragmented. As of year-end 2013, the industry was home to more than 200 service providers, most of which are small sized and operating at the local or regional level. While no official figures were available at the time of writing, according to local information and communications technology (ICT) solutions provider Microdata, the sector’s gross turnover in 2013 was estimated at Dh36bn (€3.2bn).

The main players comprise a small selection of domestic firms operating at a national level, including CBI, Microdata, Munisys, IB Maroc and Wincor Nixdorf (which works exclusively in the financial sector). Over the years, these groups have each developed a diverse supply of services ranging from systems integration, network architecture implementation, migration and software development. Fierce competition in recent years has led to some speculation about consolidation.

“In the next few years, the industry is likely to see medium-sized companies making bids for growth through acquisition, while the larger companies will maintain focus on cost competition,” Salim El Jaï, deputy general manager of Microdata, told OBG.

The most recent liquidity shortages in the market may accelerate that trend. Delayed implementation of the 2012 and 2013 national budgets, in addition to deficient state funding, has led to payment defaults from clients in the public and private sector. Moreover, it has led to a reduction in IT spending, further exacerbated by changes at the helm of key ministries, including ICT, in 2013. “IT investments by large corporations in the banking and telecommunication sectors have a limited spin-off on the large pool of small and medium-sized enterprises (SMEs), which are critical to shaping the demand to keep our many indigenous companies afloat,” Redouane Bennani, vice-president of strategy for Groupe Medtech, a local ICT holding company, told OBG.

Another issue is the impact of the growing offshoring industry on supply of local IT solutions and demand for qualified IT professionals. While until recent years domestic groups were the designated channels for global IT firms, the advent of the offshoring industry has seen new players enter the foray, such as IBM, Dell and Hewlett Packard (HP). The mandate of these companies, prescribed by their incorporation as an offshore company, is focused on overseas markets. Yet as Moroccan companies continue to build their international footprint, local IT providers find themselves competing more regularly with global players.

Similarly, foreign companies have created a new dynamic to the local labour force. Indeed, the availability and cost of qualified professionals is at the core of the sector’s challenges and will have a direct impact on the ability of domestic companies to promote and develop nationwide IT demand. To this end, it is crucial for Morocco to sustain global competitiveness.

OUTSOURCING & OFFSHORING: Capitalising on its proximity to European markets, as well as its regionally competitive telecommunication infrastructure and multilingual workforce, Morocco has had a fair bit of success in building up an outsourcing and offshoring model. Designed as part of its industrial development policy, which grouped the sector together with automotive and aeronautical industries as primary growth areas, the sector employed some 60,000 people in 2013, more than half of the government’s goal of 100,000 jobs by 2015, and achieved export revenues of $1bn, according to a study by global consultancy group McKinsey. In fact, Morocco was ranked as Africa’s leading nation in business process outsourcing (BPO) based on private and public investment levels.

The establishment of dedicated technology parks, which operate under offshore status, has been key to this success. Likewise, exporting companies are provided with a range of incentives, including an exemption of income and corporate taxes for the first five years of operations, discounted rates for the following 20 years and simplified Customs procedures.

SETTING THE BENCHMARK: The two leading zones in the country, Casanearshore Park in Casablanca and Technopolis Park in Rabat, now host 100 and 76 companies, respectively. The former occupies an area of 53 ha and was constructed with an investment of Dh3.4bn (€301.9m). Since its opening in 2007, Casanearshore Park has welcomed the arrival of blue-chip companies such as Dell, Accenture, Atos Origin, HP, PwC and Outsourcia. Technopolis Park, meanwhile, was built with an investment of Dh3.2bn (€284.2m) and covers 107 ha.

In recent times, new parks have been opened in other large and mid-sized industrial cities including Fez and Tétouan. In mid-2013, Oujda Shore, became the latest in the series of new offshore parks to come on-line, after the first part of the project was inaugurated by King Mohammed VI. Covering an area of approximately 44 ha, a total of 50,000 sq metres of serviced office space will be available for investors.

The project is financed and managed by MedZ Sourcing, which also operates the technology parks of Casablanca, Rabat and Fez. The first phase of Oujda Shore consists of two buildings, offering a combined surface of 11,000 sq metres of office space.

Although growth indicators look solid, a recent, slow pick-up of occupancy rates in the parks, in particular Fez and Oujda, has called for a revision of the model. As a result, under the supervision of the Ministry of Industry, Commerce, Investment and Digital Economy (Ministère de l’Industrie, du Commerce, de l’ Investissement et de l’Economie Numérique, MICIDE) a study is being conducted to evaluate the strategy’s implementation in a bid to update the plans with changes at the national and international level. Of particular interest is the impact of struggling economies in the Eurozone, notably France and Spain, which are Morocco’s two biggest trading partners.

CHALLENGES TO GROWTH: While advocates of the outsourcing model claim that European companies’ focus on cost-cutting strategies will work to the industry’s advantage, reducing salary levels and societal pressures to employ locally have caused some companies to repatriate or internalise services. In addition, a reduction of outbound calling campaigns has affected the volume of demand for call centres, which comprise some 70% of the industry.

An added complication is the rise in the cost structure of Morocco. In line with consistent macro-economic growth in recent years, salary levels have risen. “Five years ago salary costs made up a maximum of 40% of our cost structure; today it is closer to 50%,” Abdelaziz Boumahdi, general manager of Atento Morocco, a local branch of the leading global BPO group, told OBG. Indeed, a higher cost structure has opened up competition from other, less established, outsourcing destinations serving Europe such as Colombia, Mauritius, Senegal, Madagascar, Tunisia and Egypt, among others. In response, the industry is eyeing developments outside of Casablanca and Rabat. “On average, salary costs in Tétouan are 25% lower than Casablanca,” Boumahdi told OBG. Notwithstanding, proximity of a qualified labour force remains important.

The industry is also focused on language competency in a bid to serve new markets. This is being facilitated by repatriating the Moroccan diaspora from the UK, Germany, the Netherlands and Italy, while French speakers are promoted in Switzerland, Canada and Belgium. Even though, in general, salary demands of this group are higher than the local labour force, knowledge of foreign language and cultures make for a competitive skill set. “Morocco offshoring supply relies on assets such as cultural and geographical proximity with European clientele and the availability of a qualified workforce,” Chafik Sabiry, managing director of HP-CDG IT Services Morocco, a joint venture, told OBG.

As competition is fierce in basic BPO services, such as call centres and back-office admin, migration towards higher-value services is needed to support growth in the country’s offshoring and outsourcing industries. The government’s overarching digitalisation strategy is helping to secure specialisation into areas such as data analytics, cloud computing and software development. However, further investment in specialised areas will require new and more effective incentives from the top.

A much-cited shortcoming is assistance in human resource development. Although the government has a fund in place to compensate up to €5800 per Moroccan candidate, the application process, overseen by the Office of Vocational Training and Employment Promotion, is cumbersome and slow. Even though the issue has been delayed following recent changes under the Ministry of Communications, operators note that the new minister’s commitment to improve and accelerate the application process will have an impact.

EXPANSION: Another avenue to growth being explored is geographical diversification. While the greatest demand for outsourcing and offshoring comes from European-based companies, growing demand from the domestic and regional market is offering new growth potential. Domestically, the roll-out of e-government plans has made proximity of public services to citizens a key priority. Call centre operators are hopeful that this will result in increasing demand from the government to take on the role of contact centre.

While demand from the private sector is still limited as companies become more focused on cost rationalisation, encouraged by a disappointing macro-economic performance in 2013, new demand is expected from service sectors such as banking and telecommunications. “For the moment, outsourcing is still considered complementary rather than strategic, but we are at the bottom of the curve. With growth prospects looking bullish, it is a good time to get involved,” José Alonso, managing director for the Morocco division of Accenture, a global consulting and outsourcing group, told OBG. A second, and much bigger, growth segment is sub-Saharan Africa. Although little developed today, centralised activities are a likely result of Moroccan companies venturing southwards. Established players like Maroc Telecom, Royal Air Maroc and Attijariwafa Bank have embraced the continent as key to their mid-to long-term expansion strategies. Provided Moroccan policymakers find a way to maintain competitiveness, these and other related business may well define the future of the kingdom’s offshoring industry.

SECTOR DEVELOPMENT: Government policy has been driven by the priorities laid out under the “Digital Morocco” strategy, or Maroc Numérique in French. The plan, budgeted at Dh5.18bn (€460m), was first launched in 2009 and targets several key goals. Among these, SMEs are supported in the acquisition and upgrade of their IT infrastructure in two ways.

The first one concerns the reimbursement of up to 60% of IT investments by the state (funding is capped at Dh400,000, €35,520), while the second targets cooperation between SMEs and large state-owned groups, such as Office Chérifien des Phosphates and L’Office National de l’Electricité et de l’Eau Potable, in a bid to streamline IT systems and build technological capacities to optimise the processing of large public orders. In addition, the government aims to increase the share of IT investments from SMEs’ turnover from 0.5% to 1%. A second area is to promote local technology firms. To this end, the Moroccan Innovation Centre and the Moroccan Digital Fund (Maroc Numeric Fund, MNF) were established to accompany technology start-ups via technical and financial assistance.

As such, MNF, owned by the state-owned Deposit and Management Fund (Caisse de Dépôt et de Gestion, CDG) and the country’s three biggest commercial banks, has a value of approximately Dh100m (€8.88m). Since its inception, it has invested in 10 start-ups, including Netpeas, a cyber security consultancy, Greendizer, an online invoicing platform, and Soukaffaires and Mydeal, both e-commerce platforms. Further, an IT cluster has been established to promote collaboration and knowledge transfers between local and foreign entities.

Another core pillar of the strategy concerns e-governance. A total of 89 digitalised projects and services are being introduced, with the aim of optimising efficiency and cost within public departments, in addition to facilitating public enquiries and services to Moroccan businesses and citizens. Notable examples include centralised public procurement, applications to and management of public tenders, tax and Customs declarations, company registration, school enrolment, and health insurance disbursements.

The plans are overseen by the National Commission for Information Technology, headed by the prime minister, while the E-government Interdepartmental Committee, is presided by MICIDE. Although the initial deadline for completion of the roll-out was set for 2013, not all objectives have been met. At the end of 2013, most government ministries had migrated to e-platforms, including the Ministries of Interior, Justice and Liberties, and Health, as well as consulates, the tax office, and the port authority. Of the 89 public services shortlisted for digitalisation, 56 had been completed, while another 19 were still under way. In an evaluation of the achievements at the end of 2013, then-minister for MICIDE, Abdelkader Amara, declared that an unforeseen level of challenges were hampering the digitalisation of public records, largely owing to poor administration procedures in preceding decades. A lack of consensus on implementation issues among key ministerial departments, meanwhile, was also seen as having an adverse impact on the programme’s rollout. While it is yet unclear what will be done to address such challenges during the finalisation of the plans, Amara noted the possible creation of a dedicated e-governance agency, with strong executive powers. MICIDE is expected to present the implementation guidelines under the EU’s Horizon 2020 research and innovation programme before year-end 2014.

NEW MARKETS & TRENDS: Despite the challenges, growth fundamentals in the Moroccan IT sector are strong. According to the market intelligence group International Data Corporation (IDC), the sector will likely see average growth levels of 10.3% until 2017. Key growth drivers include several planned projects in banking, telecommunications and the public sector.

The banking sector is among the most mature regarding IT investments, driven by the industry’s concerted effort to expand through alternative banking channels, in particular mobile and internet. In terms of the state level, IDC estimates that in 2012 total IT-related government expenditure reached $150m, which is projected to grow to $200m by 2015. Much of this will be encouraged by upcoming projects in the health and education sectors. One such project is GENIE, known as the “GEN eralisation of Information Technologies and Communication in Education in Morocco”, which aims to supply schools nationwide with IT hardware, internet connectivity and qualified personnel to train students. While the programme was established in 2006, some 10% of infrastructure supplies had yet to be received at the end of 2013. “Over the course of 2014, we are expecting public investments of Dh500m (€44.4m) to Dh1bn (€88.8m) into the IT infrastructure of the education system,” El Jai told OBG.

KNOCK-ON EFFECT: Sector-specific developments are setting a precedent for the wider economy as both the private and public sectors consider new technologies as a way to increase productivity. “Companies are gradually moving from basic infrastructure requirements to information services such as installation, integration and support,” according to the IDC report. In addition, greater competition from domestic and overseas markets is forcing firms to revise their cost structure, promoting technological solutions such as virtualisation, outsourcing and cloud computing. “Going forward, mutualisation is the primary way to reduce costs and a strategic tool for cash-strapped SMEs to optimise their investment capacity in IT infrastructure. Due to its large size and influence over the private sector, it is important that the public sector takes the lead here,” Groupe Medtech’s Bennani told OBG.

GLOBAL HORIZONS: In July 2013, IBM concluded negotiations with the Moroccan government for the expansion of activities via the creation of a service centre for some 400 employees in Casablanca’s offshore technology park, Casanearshore. The centre will serve Moroccan as well as other African markets and is planned to be modelled on existing centres in Vietnam, Malaysia, China, Brazil and Bulgaria.

As part of the agreement with the government, IBM has committed to collaborate with Moroccan universities and academic institutions to develop local competences in growing technologies such as cloud computing, big data, system integration and outsourcing. The pace of development for such services has accelerated in recent years in line with rapidly growing usage of social media in the kingdom. Other drivers include expanding e-commerce platforms, internet banking, and an anticipated rise in data traffic as a result of the pending migration to 4G.

“While the segment is likely to grow progressively in the next two years, I am expecting exponential growth in the medium run towards a multi-million dirham industry,” Anass Bensrhir, general manager of Bold Data, a Morocco-based specialised consultancy in big data, recently told local media.

OUTLOOK: While in general 2013 has gone down as a transition year for the Moroccan IT sector, influenced by political reshuffling and overall liquidity constraints, growth perspectives look strong for 2014 and beyond.

With the new government now firmly settled in, the sector’s development plans are being revitalised, in particular the roll-out of e-governance plans, which bring about a range of business opportunities for local IT providers. Meanwhile, global developments towards virtualisation and big data are not leaving Morocco untouched. Due to the local presence of some of the world’s biggest IT conglomerates, anticipating action is ongoing to tap into these new segments as soon as local demand reaches its critical size. At the same time, the kingdom has an opportunity to consolidate its position as an IT centre in the region and to host services supplied to countries in North and West Africa.

Nevertheless, while such opportunities bode well for the sector’s top-line performance, policymakers are challenged to secure the benefits for domestic companies. A key constraint here is the quality and availability of human resources. While the government has considered this in its long-term strategy for the sector’s development, more can be done to encourage sustainable collaboration between local and foreign players, in a bid to encourage knowledge transfers, as well as an improvement in the national educational system.

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The Report: Morocco 2014

Telecoms & IT chapter from The Report: Morocco 2014

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