Business process outsourcing (BPO) and the online marketing of agricultural exports are gaining momentum as potentially lucrative applications of information and communications technologies, particularly for developing countries, finds UNCTAD in its E-commerce and Development Report 2003 (1), released today.
BPO, in which companies delegate non-core operations to outside service providers - usually offshore and particularly through information technology - is only the most recent trend in outsourcing. Estimates for the growth of this worldwide market, which has surged 23% annually since 1999, range from $300 billion by 2004 (Gartner Inc.) to $585 billion by 2005 (Goldman Sachs).
"Moving functions such as call centres and customer support centres offering remote services providing Internet and Web-enabled applications to countries with a lower cost base has emerged as a new business model for enterprises in developed countries", the Report notes. India, with its skilled English-speaking workforce and salaries up to 80% lower than in developed countries, has captured a dominant share of the international outsourcing market. Information technology (IT)-enabled services are projected to employ up to 1.1 million people in India by 2008. Worldwide, offshore outsourcing could generate some 3.3 million jobs by 2015, 2.31 million of them in India alone. BPO service providers are also emerging in Bangladesh, Brazil, China, the Philippines, Romania, Russia, Singapore, Thailand, Venezuela and Viet Nam.
Steady improvements in IT infrastructure, the decline in costs of telecommunications and IT equipment, and the increased accessibility of the Internet have opened the way to the development of BPO services in both developed and developing countries. But the fact that these services have grown specifically in developing countries mirrors increasing demand for cost-saving measures from enterprises in the US and Europe. Lowering the costs of employing skilled and specialized workers is said to reduce operational costs up to 60%. BPO services provided by low-wage labour now cover everything from finance, banking, insurance, human resources and training to health care, mortgage and credit card services, asset management, customer care, logistics and distribution, engineering, procurement, real estate, sales and marketing and Web-related services. The rapid internationalization of these services offers developing countries a chance to exploit higher-value niches.
The Report shows how, once the minimum telecoms infrastructure is in place, BPO can materialize in developing countries, including least developed countries (LDCs), at least in the form of basic data entry services, where the required skill level is low. Cambodia is one such example, where a charity-funded enterprise called DDD (Digital Divide Data) is providing outsourced data services to clients while at the same time offering jobs and educational opportunities to disadvantaged groups. DDD partners with an Indian firm, Cyberdata, providing it with clients in exchange for software and IT and management training. DDD outsourced 60% of its activities to Cyberdata in 2002, as compared with just 30% this year.
DDD´s first client in July 2001 was Harvard University; now 70% of its clients are from the US, mainly universities and law firms, for whom it digitizes documents and returns them via email or on CD-ROM. Annual revenues last year totalled $150,000, and the company, which describes itself as a "self-sustaining cooperative", ploughs its profits back into the business to provide fair salaries, ongoing training and health services for its employees. Staff - who include people with disabilities, land mine and polio victims, orphans and women - may work flexible hours or part-time so that they can continue their studies. From only 10 employees at start-up and almost 100 in mid-2003, DDD hopes to employ 500 within the next two years, and has hired a sales and marketing representative for the US market.
Mauritius is also eyeing information and communications technologies (ICT) as a key to development and has embarked on ambitious long-range plans. The government plans to transform the country into a "cyber island" and a regional hub for ICT in the Indian Ocean. The strategy revolves around research and training institutions; a local labour market with high-quality technicians, engineers and software developers; tax and credit incentives; bureaucratic efficiency; and a world-class telecommunications infrastructure. An ATM network, ISDN lines and ADSL services are already in place, and the ICT sector has been liberalized to boost investment. Mobile phone and Internet use have soared in the past five years; 75% of businesses now have Internet access, and 21% have their own websites.
Government support is a key component for accelerating the sector´s growth, and is responsible for a strategic partnership formed with India to that end. Under a bilateral agreement, India has granted Mauritius a $100-million credit line that will provide for support from such Indian institutions as Software Technology Parks. BPO has been identified as a niche area, and IBM, Microsoft and HewlettPackard are among the companies already investing in local BPO projects.
Marketing agricultural commodities online
Some developing countries are also using the Internet to market their agricultural commodities, with similar success. The UNCTAD report describes how online sales of tea and coffee can improve prices and producers´ earnings by reducing transaction costs and expanding market reach. The two products are fairly representative of other agricultural commodities produced in all developing regions. Both have seen prices fall drastically in the past two decades, and both are labour-intensive, involving substantial rural employment. Because the marketing and supply chains of coffee and tea give greater market power to the import side than the export side, prices are largely determined by importers. The result is a growing gap between prices paid to tea and coffee growers and those paid by consumers in importing countries.
Most of the measures proposed to deal with these problems have focused on commodity supply management, improving quality and liberalizing marketing. The Report looks instead at how producers can use Internet commodity sales to bypass intermediaries, access more buyers in the global markets at lower cost and retain a larger share of the export price. It describes a number of strategies pursued by pioneers in several countries, with impressive results.
Developed countries like the US are already trading such commodities as meat and dairy products, grain and cotton online. In the developing world, e-markets and online auctions are increasingly used to sell coffee and tea, with far larger profits accruing to the producers than would otherwise have been the case. Price premiums from the online Brazilian auctions have been very high - as much as $2.60/lb for the "champion" coffee in 1999, when the comparable price on the New York Futures Market was between $1.32-and-$1.34/lb. A new record of $12.85/lb was set at last year´s auction, where the winning farms received up to 85% of proceeds. Based on each auction price, the net profit was distributed among the farmers, the Brazilian Specialty Coffee Association and exporters. Since the auctions began in 1999, nearly 6,000 bags of coffee have been auctioned, at an average price of more than three times the commodity market price per bag.
The Brazilian model has been emulated in Guatemala, Nicaragua and Kenya. At an online auction in the latter country in 2002, a Japanese buyer offered $4.12/lb for the champion coffee, nearly $1 more than at Kenya´s weekly physical auction, and exporters paid farmers the 50% of auction proceeds that exceeded the reserve price. A similar auction sponsored by the Guatemalan National Coffee Association in 2001 fetched $11/lb. for the best coffee - 20 times higher than on the New York Futures Market.
The Brazilian auctions show how online marketing can actually reduce the role of intermediaries. In the first online auction, in 1999, Cooperative Regional De Cafeicultures was appointed sole exporter for all auctioned coffee. Those bidders who were already its regular customers were not required to submit letters of credit - normally a complex and costly process. This enabled the exporter to take over a number of other functional links on the supply chain, such as transportation, payments, documentation and shipping, which are operated by multiple intermediaries in conventional trading. The cost of doing business is thereby reduced, and producers´ earnings increased.
Similar success was reported by India´s main online tea auction site, Teauction.com. Launched in 2000, its auctions have led to savings in transaction costs amounting to Rs 1.60 per kg. compared to conventional auctions, and the transaction time has been shortened from eight weeks to one week.
Yet another successful Internet auction has been organized by Africanlion.com, a company established in 1999 by two Kenyan entrepreneurs. Their electronic B2B exchange enables east African exporters to offer their coffees to the world, selecting the finest coffees and forwarding them to national and regional competitions. Samples of winning lots are sent on to prospective buyers abroad, along with instructions on the auction date and how to bid. The firm has also established links with major industry players, including specialty coffee associations in the US and Europe, to broaden its base.
These initiatives show that online marketing can be done using fairly inexpensive technology, which is critically important for developing countries. Similar experiments using non-agricultural commodities of interest to these countries could also be considered, says the UNCTAD report.