Malaysia

An Emerging Outsourcing Destination

By

Ravish Anand – FT 11158

Vishal Sawlani – FT11275

1
Table of contents

1) What is outsourcing?
2) Why Outsourcing?
3) Outsourcing Services: Choosing the Right Country.
4) Malaysia Economy
5) Cluster & factor Analysis.
6) Malaysia PEST Analysis
7) Outsourcing Growth in Malaysia
8) IT Growth in Malaysia
9) Malaysia Outsourcing: Road Ahead

2
What is Outsourcing

Outsourcing refers to a company that contracts with another company to provide services that
might otherwise be performed by in-house employees. Many large companies now outsource
jobs such as call center services, e-mail services, and payroll. These jobs are handled by
separate companies that specialize in each service, and are often located overseas.

Why Outsourcing:

Business services outsourcing includes a wide variety of businesses that offer services to
other businesses on an outsourced basis that can comprise of accounting, receivables
collection, benefits administration, HR administration, recruiting, training, security and
computer-relatedservices.

As organizations have become more comfortable with the benefits of outsourcing

transactional processes, they have progressively started to outsource higher value-added
services and more comprehensive processes for example, they move from outsourcing just
one, discrete function to outsourcing an entire end-to-end process (fromaccounts payableto
complete finance and accounting operations, from payroll to entire HR operations).As
companies move to more comprehensive outsourcing relationships, they are able to benefit
from greater economies of scale, broader transformation of their processes and an accelerated
speed to value.

Outsourcing Services: Choosing the Right Country to Outsource Business

Projects

Outsourcing services is a business strategy where companies abroad are hired to do business
or part of their business processes. It is a feasible strategy for companies that need to reduce
overhead expenses or expand their capacity without sacrificing their business functionalities.

Outsourcing is a large industry in developing countries, such as India, Malaysia &

Philippines, and many companies offering outsourcing services on many different technical
professions. It is important to consider the country that you intend to outsource to. Many
countries have their own education systems and cultures which vary. These differences
determine the different fields most likely to produce professionals.

Take the case of Malaysia, which has a vibrant ICT and Services industry that is world-class,
confirmed by the AT Kearney 2004 and 2005 Offshore Location Attractiveness Index, which
ranks Malaysia as the world's third most attractive Shared Services & Outsourcing (SSO)
location.

The services sector is a major contributor to the growth of the Malaysian economy and
functions include IT services, shared services and business process outsorcing (BPO),
regional headquarters, research and development (R&D), training and environmental
management.

Malaysia`s attractiveness as a regional/global SSO hub is evident by the many world-class

3
companies like ACS, BMW, DHL, HSBC, IBM, Intel, Motorola, Nokia, Shell, Unisys and
many others that have set up their base of regional and global operations here.

To date, there are over 130 Shared Services & Outsourcing companies in MSC Malaysia
ranging from major local players to multinationals. Malaysia is also home to 250 call centres.

The pulling factor has been contributed to the core competencies of Malaysia such as a well-
educated and multi-lingual workforce, a world-class infrastructure at lower cost, as well as a
conducive business environment.

Malaysia is an ideal location for most off shoring activities ranging from the back office
operations to upstream activities such as research, design and development to downstream
activities such as marketing.

Malaysia Economy
The Index of Economic Freedom in conjunction with the Wall Street Journal has ranked
Malaysia as the 59th freest economy out of 179 countries.Malaysia scored 64.8 this year, –
0.2 points better than last year.

Malaysia was ranked ninth out of 41 countries in the Asia-Pacific region and its overall score
was above the world and regional averages, the Index of Economic Freedom said. Malaysia’s
ongoing reform measures have improved the overall entrepreneurial environment, leading it
to score above the world average in eight out of 10 economic freedom components.

Malaysia’s highest score was 84.3 for fiscal freedom and the Index said that Malaysia’s
financial sector had weathered the global economic crisis relatively well.

Cluster & Factor Analysis

People

 KL: 87% speak English,

 50,000 educated overseas every year,
 5.5% wage inflation,
 5% attrition & Low cost of high value workers.

Cost

 Low infrastructure costs,

4
  No hidden costs,
 Low start-up costs & Low inflation rates.

Environment

 Stable popular government,

 No natural disasters,
 Robust economy,
 Excellent cost of living vs. quality of life.

Population:
Total Population: 25.7 million
Source: CIA World Factbook, July 2009

Economy:
Gross Domestic Product: $194.9 billion
Per Capita Income:
Gross National Income Per Capita : $6,970
Source: World Bank’09

IT Salaries:
Senior Software Engineer: 24.1 percent of US

IT Project Manager: 30.9 percent of US

Source: PayScale, SourcingLine, March 2010

BPO Salaries (Non-voice):

Skilled BPO Resource: 31.7 percent of US

Operations Manager: 60 percent of US

Source: Payscale, SourcingLine, March’10

BPO Salaries (Voice):

Customer Service Representative: 32 percent of US
Source: PayScale, SourcingLine, March 2010

Taxes:
Corporate Tax Rates: 25 percent

Indirect Tax Rates: 10 percent

Source: KPMG, October 2009

Workforce:

5
Total Workforce: 11.3 million
Source: CIA World Factbook, 2009

Outsourcing Sector:
Exports of Computer & Information Services: 1,025.2 million US dollars
Source: IMF, 2008
Exports of Misc. Business Services: 3,411.3 million US dollars
Rank: 11 of 24
Source: IMF, 2008

Basic Education:
Adult Literacy: 91.9 percent of population Source: UNESCO, 2009

Expenditures on Education: 6.2% of GDP

Source: CIA World Factbook, 2010

Language:
English Speaking Population: 33 percent
Source: Crystal, 2003

Technological Readiness:

Internet Access: 62.5 users per 100 inhabitants Source: ITU’09

Economic Competitiveness & Stability:

Economic Competitiveness: 4.8 GCI score

Macroeconomic Stability: 5 GCI Score

Source: The Global Competitiveness Report,09

Infrastructure:
Quality of Roads: 5.5 index (1-7)

Quality of Electric Supply: 5.7 index (1-7)

Source: The Global Competitiveness Report, 09

Regulation:
Overall Ease of Doing Business: 23 rank (1-183)
Source: Doing Business (World Bank), 2010

6
Intellectual Property Protection:
Intellectual Property Protection: 4.5 index (1-7)
Source: The Global Competitiveness Report, 2009
Software Piracy: 59 percent

Malaysia PEST Analysis

Government type: constitutional monarchy note: Malaya (what is now Peninsular Malaysia)
formed 31 August 1957; Federation of Malaysia (Malaya, Sabah, Sarawak, and Singapore)
formed 9 July 1963 (Singapore left the federation on 9 August 1965); nominally headed by
the paramount ruler and a bicameral Parliament consisting of a nonelected upper house and
an elected lower house; Peninsular Malaysian states - hereditary rulers in all but Melaka,
Penang, Sabah, and Sarawak, where governors are appointed by the Malaysian Government;
powers of state governments are limited by the federal constitution; under terms of the
federation, Sabah and Sarawak retain certain constitutional prerogatives (e.g., the right to
maintain their own immigration controls); Sabah - holds 20 seats in House of
Representatives, with foreign affairs, defense, internal security, and other powers delegated to
federal government; Sarawak - holds 28 seats in House of Representatives, with foreign
affairs, defense, internal security, and other powers delegated to federal government

Economy - overview: Malaysia made a quick economic recovery in 1999 from its worst
recession since independence in 1957. GDP grew 5%, responding to a dynamic export sector,
which grew over 10% and fiscal stimulus from higher government spending. The large export
surplus has enabled the country to build up its already substantial financial reserves, to $31
billion at yearend 1999. This stable macroeconomic environment, in which both inflation and
unemployment stand at 3% or less, has made possible the relaxation of most of the capital
controls imposed by the government in 1998 to counter the impact of the Asian financial
crisis. Government and private forecasters expect Malaysia to continue this trend in 2000,
predicting GDP to grow another 5% to 6%. While Malaysia's immediate economic horizon
looks bright, its long-term prospects are clouded by the lack of reforms in the corporate
sector, particularly those dealing with competitiveness and high corporate debt.

Ethnic groups: Malay and other indigenous 58%, Chinese 26%, Indian 7%, others 9%

Religions: Islam, Buddhism, Daoism, Hinduism, Christianity, Sikhism; note - in addition,

Shamanism is practiced in East Malaysia

Languages: Bahasa Melayu (official), English, Chinese dialects (Cantonese, Mandarin,

Hokkien, Hakka, Hainan, Foochow), Tamil, Telugu, Malayalam, Panjabi, Thai; note - in
addition, in East Malaysia several indigenous languages are spoken, the largest of which are
Iban and Kadazan.

Telephones: main lines in use: 4.4 million (1998) Telephones - mobile cellular: 2.17 million
(1998) Telephone system: international service good domestic: good intercity service
provided on Peninsular Malaysia mainly by microwave radio relay; adequate intercity

7
microwave radio relay network between Sabah and Sarawak via Brunei; domestic satellite
system with 2 earth stations international: submarine cables to India, Hong Kong, and
Singapore; satellite earth stations - 2 Intelsat (1 Indian Ocean and 1 Pacific Ocean)

Radio broadcast stations: AM 56, FM 31 (plus 13 repeater stations), shortwave 9 (2007)

Radios: 14.1 million (2007) Television broadcast stations: 27 (plus 15 high-power repeaters)
(2007) Televisions: 5.6 million (2007) Internet Service Providers (ISPs): 8 (2007) Merchant
marine: total: 361 ships (1,000 GRT or over) totaling 5,000,706 GRT/7,393,915 DWT ships
by type: bulk 61, cargo 119, chemical tanker 34, container 55 etc.

Outsourcing Growth in Malaysia

Malaysia's outsourcing industry is expected to grow between 15 and 20 per cent this year as
more companies outsource their services to remain competitive. Malaysia is currently ranked
third in the Asia Pacific region for outsourcing according to research firm AT Kearney. The
country’s success in the industry is due in part to the wide range of language skills in the
country including Malay, English, Chinese and Tamil.

Interactive Intelligence Inc’s regional sales director for Asean, David Toh Yue Heng told
reporters that “Malaysia has all the ingredients to become a successful contact centre hub”.
And he added that among the key areas that Malaysia could focus on were the government
sector, and inbound and outbound markets.

The Association of the Computer and Multimedia Industry of Malaysia (Pikom) says that the
country’s outsourcing industry revenue is expected to increase to US$1.1 billion this year
from about US$900 million last year.

The Association said this included revenues from IT, business process outsourcing (BPO)
services and knowledge services. Pikom chairman, David Wong Nan Fay, says that revenue
is expected to grow to US$1.9 billion in the next four years.

“The government’s initiatives for the outsourcing industry, the country’s economy and other
factors related to the country’s population, culture and society are expected to drive the
industry,” he told reporters & he added that the industry is focusing on expansion in Asia, the
Middle East and Africa.

However, to remain competitive in the outsourcing market in the future, Malaysia will have
to focus on segments where it can have an edge such as the mid-layer segment as the low-end
segment is now dominated by India.

Based on a study by AT Kearney, Malaysia is ranked third in the Asia Pacific region for
outsourcing.

8
.

IT Sector Growth in Malaysia

The Malaysian IT market is expected to grow at a compound annual growth rate of 12

percent over the next four years according to new market research.The Malaysia Information
Technology Report Q1 2010 says that IT spending is expected to grow to around $4.5 billion
in 2010 up from $4.2 billion in 2009 as demand begins to recover.

The report says that key sectors will include government, telecoms, finance and Islamic
banking. It adds that the IT services sector will also grow as the Malaysian government
begins to implement plans to boost the country’s role as a regional services hub.

There is significant potential in Malaysia it says due to currently low PC penetration, rising
incomes and a high tech focused national development plan. The Ministry of Rural and
Regional Development is working with the Ministry of Science, Technology and Innovation
on plans to develop more community PC centers in the country to improve computer skills.
The growing penetration of broadband is also expected to drive growth.

Malaysia’s services sector must grow by at least 6 to 7 per cent if the nation wants to achieve
a GDP growth of between 4 to 5 per cent in 2010, says International Trade and Industry
Minister, Datuk Seri Mustapa Mohamed.“The services sector has to grow a lot faster than the
GDP,” he said, adding that the sector has contributed 55 per cent to GDP in 2008 despite the
global economic slowdown.

“The services sector is the main focus of our efforts going forward as it offers high quality
jobs and wages,” said Mustapa speaking to reporters after opening the Malaysian
International Chamber of Commerce and Industry Services Summit, Mustapa says the
services sector, which grew by 3.2 per cent in the third quarter of 2009, was expected to
perform well even in the fourth quarter of the year.

“We can also expect to see a third year of continuous surplus in trade in services in 2009,” he
said. He added that more foreign participation could bring about the transfer of technologies
and expertise and create new capabilities.

9
Road Ahead – Malaysia Outsourcing
Malaysia has been recognized as one of the preferred destinations for outsourcing, however it
faces some challenges. “One of the major challenges for the Malaysian outsourcing industry
is to overcome constraints with regards to scalability. The total number of employees in the
industry is roughly comparable to the number of new hires by a leading Indian IT outsourcing
service provider,” says Suheil Patel, analyst and co-author of the report. Employee costs, too,
are 15% to 20% higher when compared to other popular destinations like India.

One of the key concerns for the outsourcing industry in Malaysia is the need to move up the
value chain to offer high value services as opposed to highly commoditized services in IT or
BPO.“Strand Aerospace Sdn Bhd is a prime example of a Malaysian company moving up the
value chain in outsourcing. The company specializes in computer-aided stress testing for
engines of Boeing and Airbus.”

Finding its own niche will be critical for the Malaysian outsourcing industry to sustain its
growth. For example, a majority of the local Malaysian service providers serve the Asian and
the Middle East markets. They are well poised to address the outsourcing opportunity in
Islamic banking services from these markets. “Malaysian companies have started to focus on
delivering business value to their clients through packaging of ITO, BPO and KPO. This
should and will be one of the ways forward to differentiate Malaysian companies from
others,”

10