Business process outsourcing (BPO), has become an increasingly important part of Sri Lanka’s economy. The country’s BPO industry recorded export revenue of $850m in 2015, according to figures from the Central Bank of Sri Lanka, making it the country’s fifth-largest export revenue earner that year. Industry leaders expect this number to rise to $5bn by 2022.

Growing Segment

On the basis of demand from companies based in Western economies, the global knowledge process outsourcing (KPO) market is expected to grow at a compounded annual growth rate of 23% from 2015 to 2018. Processing and analysing the massive amounts of data gathered and stored in these companies’ IT systems requires data analytics to evaluate performance, implement business strategies and enhance operational efficiency. Sri Lanka’s IT-BPO industry in 2015 employed around 80,000 professionals, with a goal of reaching 200,000 by 2020, according to central bank figures. The vast majority of these jobs are based in Colombo, which was ranked among the Top 20 Emerging Cities list compiled by Global Services magazine. What’s more, Sri Lanka was named the Outsourcing Destination of the Year by the UK’s National Outsourcing Association in 2013 and 2014.

Although Bangalore in India remains the overall leader in many if not all global BPO rankings, according to the consultancy Tholons’ “Top 100 Outsourcing Destinations 2016” report, Colombo was ranked 16th in outsourcing destination globally in 2016. All indications are, however, that its star is still rising. In 2016 management consultancy firm AT Kearney ranked Sri Lanka 14th in its global services location index, up two places from the previous year, calling the country “one of the hidden jewels in the offshoring space.”

Meanwhile, Cushman Wakefield’s “BPO and Shared Service Location Index” report placed Sri Lanka ninth in its 2016 BPO pioneering locations index. This ranking measures regional shared service facilities – the consolidation of several facilities spread over a wide geographic area into one – which allow the operation and administration of an organisation’s tasks in one entity. Cushman Wakefield’s index is further weighted to evaluate and measure each country’s relative conditions, risk and cost. It ranked Sri Lanka at fifth for cost, making it among the world’s most cost-efficient places to locate BPO, after Vietnam, Honduras, El Salvador and Peru. Sri Lanka is already home to more than 300 IT and BPO companies, many of which are small and medium-sized enterprises, according to Sri Lanka Association of Software and Service Companies (SLASSCOM), the national chamber for the BPO industry. Global BPO firms currently operating in Sri Lanka include WNS, Aviva, CMA-CGM, IFS and Virtusa, among others. Added to this, a number of large multinationals – the London Stock Exchange, Microsoft, Google, JPM organ and HSBC – have set up offshore business support and shared service centres in the country.

Key Industry

In recognition of the industry’s potential, the Sri Lankan government has identified BPO as a thrust industry, providing fiscal incentives and concessions to spur the sector’s development such as funding for firms. These include grants for training, marketing, consulting and quality enhancements, among others. Legal acts underpin the positive legal and regulatory atmosphere in which the BPO industry operates. The government permits 100% foreign ownership in the sector, with the exception of a few specified sectors, with no capital controls or repatriation risk.

Sri Lanka’s legal system follows the principles of British commercial law, and has an independent judiciary. The country is a signatory to international treaties on intellectual property rights and has a regime that is among the most rigorous in the region, according to AT Kearney. Furthermore, Sri Lanka has passed laws relating to electronic transactions and computer crimes. It is also a signatory to the UN’s e-contracting convention.

At the national level, competency development programmes for the BPO industry are focused on building a Centre of Excellence in Sri Lanka to emphasise key areas, such as investment research and accounting services. Additional measures are being taken by the government to ensure an adequately skilled workforce, such as the Institute of BPO, which was set up under purview of the Ministry of Youth Affairs and Skills Development and operates under the BPO Certification Institute (BCI). BCI is a US-based body for the BPO industry that provides professional certifications for a variety of industry roles. These certifications are the basis used by many BPO companies for hiring and promotion decisions, as well as performance management. Finally, Sri Lanka’s negotiations with Singapore over a free trade agreement could help open doors.

Competitive Edge

The success of the BPO industry has persuaded some client companies to fold higher-value process outsourcing services into their offshore operations in order to expand and compete more effectively. These higher-value services include the outsourcing of data-based business activities in the next level of outsourcing: KPO, finance and accounting and IT outsourcing. An array of highly specialised capabilities such as data integration and advanced technical analysis in areas such as software and IT development, legal and accounting processes, clinical research and engineering are key services.

KPO operations require employees with advanced educational qualifications and training. For example, outsourcers of financial services depend on employees with graduate degrees and certifications such as chartered financial analysts. This is especially true within the KPO subsectors of financial and accounting services in Sri Lanka, which have grown markedly in recent years. Indeed, Colombo now has the world’s largest pool of UK-qualified, English-speaking accounting professionals outside of the UK, according to SLASSCOM.

While India, the global outsourcing leader, may offer a wider variety of outsourcing services at a lower price, Sri Lanka’s BPO professional pool maintains an emphasis on ICT engineering and software development. Indeed, one of Sri Lanka’s greatest assets could be the increasing numbers of IT graduates from its technological institutes. According to the Ceylon Chamber of Commerce, the number of IT graduates increased from 3800 in 2007 to 7000 in 2014, with the majority finding employment at local BPO providers.

Sri Lanka has another competitive advantage relating to outsourcing for Western-based companies: English is the country’s primary business language, and its English speakers have a high level of fluency. In addition, its talent pool is deep, with a section of its graduates choosing to enter a work study or certification programme, the completion of which allows them to enter the workforce early, and which results in comparatively lower entry-level wages for their employers.

Speed Bumps

One issue that could potentially curtail the outsourcing industry’s growth is the country’s internet access speeds. Although local telecoms operator Mobitel has successfully trialled 4.5G LTE advanced pro technology capable of achieving speeds of 1 GB per second, the average speed is not quite as fast. In its “State of the Internet” report for the fourth quarter of 2016, Akamai Technologies revealed Sri Lanka’s average connection speed was 7.3 Mbps, higher than Indonesia (6.7) and India (5.6), but lower than Malaysia (8.2) and Vietnam (8.3). The report ranked Sri Lanka’s internet speed 73rd out of 202 countries.

Another challenge to the BPO industry’s growth are the high rental prices in Colombo’s commercial property sector. Because cost reduction is a prime motivator in deciding where to locate an offshore office, it is crucial that office space be economical and abundant in order for the industry to thrive. BPO industry leaders have already targeted Kandy, Kurunegala, Hambantota, Jaffna and Galle as potential regional hubs for expansion of the industry, which would take some pressure off Colombo. As improvements are made to Sri Lanka’s telecoms sector and local infrastructure – and as long as it continues to provide a highly skilled, economical workforce – the country’s reputation as a BPO destination of choice will continue, bringing with it the opportunity to move further up the outsourcing value chain.