The Egypt Meltdown: What Have Global Outsourcers Learned?

It’s a good bet that when the Internet went dark in Cairo over the weekend, executives from Stream Global Services, Teleperformance and Wipro all took a collective deep breath wondering  if the unrest was a momentary blip or part of a colossal seizure that will deliver deep wounds to their in-country investments. Once one of the most promising global sourcing destinations in the world, Egypt is rapidly descending into a very unsavory category – one defined by a high degree of risk and major political uncertainty.

We spoke with several global sourcing authorities with expertise in Egypt, to get their views on how this will play out, and what firms can do to minimize the risk to their investments.

The offshoring situation on the ground

“What I want to emphasize is you cannot say a destination is not 100% free of unrest,” says Anupam Govil, a principal with Avasant. “Geopolitical risk is always real.”

Egypt in recent years has become a choice destination in the North African/Mediterranean region, owing to the government’s very expensive marketing campaign, mainly to businesses in the UK and continental Europe. The country’s image as a Westernized, scalable location able to support multiple languages, has resulted in a high class of investors including IBM, TCS, Oracle and Verizon. But that strong reputation will disappear very quickly if things don’t improve soon. “Not only are agents unable to come to work, not only is the Internet down, but clients are left hanging”, says Peter Ryan, Lead Analyst at Ovum. “The scale of what’s happening in Egypt is huge. It’s a systemic revolution, and no one understands what the consequences will be”.

The Internet shutdown in particular is worrying to see from a country that for five years has consistently been telling everyone that it is free and open and ready for investment. It’s clearly a panic measure – Mubarak’s government is worried that civil unrest is being coordinated through social media. But the fact is that it’s causing trouble for businesses already itching to pull out their investments. “I’ve spoken to four companies in Egypt right now, and it’s very worrying for them”, says Stephen Bullas, Managing Partner of the European Centre for Offshore Development (eCODE). “Right now no one thinks it’s a long term problem. But if by Thursday the internet has not been turned on, we’ll see real issues next week.”

“The large players operating captive centers already have a strong continuity system in place, so they’re simply moving work into other countries. It’s the smaller firms, or those working through third party vendors that will be most affected” – Charles Eschinger, Principal Analyst at Gartner

Managing the risk

So if you’re a company invested in Egypt, what concrete steps can you take to maintain control?

Business continuity – Redundancy is critical at a time like this, so make sure your disaster recovery systems are running at 100%. Examine closely what the backup situation is for your data. The main question is, are you being backed up out of country, or just offsite? “The large players operating captive centers already have a strong continuity system in place, so they’re simply moving work into other countries”, says Charles Eschinger, Principal Analyst at Gartner. “It’s the smaller firms, or those working through third party vendors that will be most affected”.

Monitor the situation – The concern for some is that Egypt will fall into Islamic fundamentalist rule, but that is unlikely. There is an effective opposition party waiting in the wings, and if the situation can be contained in about a week, Egypt’s sourcing reputation may be salvageable. Either way, as Ryan says, “Firms need to monitor any new government changes very closely. If there’s a new administration, make sure relationships are forged with it as soon as possible”.

Consider alternative options – If any good can come out of this, it will be that companies do a reassessment of their global delivery platforms, and ensure that they’re invested in the most stable countries. But right now “you need to take out your contracts from the bottom drawer and look at what your exit options are. Also, who is going to be financially responsible for lost data or lost business? Those contracts need to be reviewed for that purpose specifically”, says Bullas. For smaller firms, he recommends switching to Romania, Malta or Poland – countries suited for medium scale operations that can all handle multiple languages in the way Egypt can.

Advantages for other destinations

So are companies thinking of pulling out of Egypt? How much of a hit will its reputation take? “It’s a little too soon to tell if we’re going to see a widespread pullout – that depends on the intensity and duration of the conflict. But it hasn’t come up as an issue at Gartner yet”, says Eschinger. “There’s no martial law, the airports are still open, and businesses right now are just being cautious and considering their options.”

Could something of this scale happen in the Nearshore? “The fact is that there are very few countries in Latin America that don’t have strong democracies in place,” says Ryan. “Yes we’ve seen violence in Mexico and Brazil, but there’s very little chance of a popular uprising. Egypt by contrast has elections every few years that are nothing more than window-dressing, and now we see the results.”