Harsha de Silva, Sriganesh Lokanathan, Dilshani Samaraweera A baseline sector analysis of the Business Process Outsourcing industry of Sri Lanka Harsha de Silva, Sriganesh Lokanathan, Dilshani Samaraweera 27 September, 2006

Agenda Overview of BPO sector Obstacles to growth and operations Growth plans Conclusions

Overview of BPO sector Composition Investment BPO entry and reasons Services Export markets Employment Skill requirements

Composition of Sri Lanka’s BPO industry Equal proportion of captive & non-captive operators (48%) While majority are offshore, value of total offshore investment is low = USD 4.3 million (out of USD 13.2 million) 86% have BOI status

BPO Investments with BOI status Type of BPO investment In millions (USD) BOI investments 11.8 Non -BOI investments 1.4 Total investment in the sector 13.2

Offshore/ Onshore Investments Type of BPO investment In millions (USD) Offshore investments 4.3 Onshore investments 7.8 BPOs that are both onshore and offshore 1.1 Total investment in the sector 13.2

BPO entry by year

Reasons for locating in Sri Lanka

Operating costs of BPOs

Government incentives used by BPOs Tax incentives is the third most frequently cited reason for locating in Sri Lanka

Most popular services Accounting = 43% of the companies Call centre services = 19% Medical insurance processing = 14% Non-captives offer more services than captives (avg. of 3.5 vs. 1.4)

BPO service offerings

Main export markets

Employment Total employment (21 BPOs) = 3,700 50% have up to 62 workers Avg. workforce at offshore BPOs = 265 Avg. workforce at onshore BPOs = 78 Avg. workforce at captive BPOs = 228 Avg. workforce at non-captive = 134 The average monthly salary of a BPO worker = USD 270 (inclusive of bonuses and commissions.) 95% provide training

Age distribution amongst BPO workers (excluding largest BPO)

BPO employees by educational qualification (excluding largest BPO)

Workforce composition of the largest BPO The largest BPO reported a workforce of 1,700 Degree holders = 25% Advanced Level qualified = 75%

Turnover in 3, 6 and 12 months (includes largest BPO) Avg. 1-year turnover = 6% Avg. 6-month turnover = 4% Avg. 3-month turnover = 3%

Skill requirements – Primary Skills Spoken language proficiency in English considered an important requirement by 95% Written proficiency in English considered important by 66%

Satisfaction on availability & quality of personnel

Obstacles to growth and operations

Leading obstacles

Operational stability Civil/political instability is the leading threat to operations and growth – 67% Further more: 67% expressed concerns about the state of law and order. 57% expressed concerns about maintaining Sri Lanka’s image abroad. 33% of the companies do not think that interpretations of regulations applicable to BPOs are consistent and predictable

Regulations Taxes are not considered an obstacle but tax administration is seen as an obstacle by 38% Labour regulation are considered a difficulty by 38% Customs/trade regulations are seen as obstacles by 10% but 67% do not think they pose a problem Environmental regulations are not considered problematic

Regulations

Delays due to regulations/procedures % of BPOs that experienced delays 29% Reported delays (in days) 21, 60, 90, 99, 210, 240 Reasons for delays Regulation payments Company incorporation and BOI procedures Registration procedures Formalities All of the companies that experienced start up delays are BOI companies

Public/Mass transport system Mass transport is the second most frequently cited obstacle to growth and operations 57% said mass transport is an obstacle 38% said transport infrastructure (roads) is an obstacle

Telecommunications facilities Reliability of leased lines and telephones

Types of Internet access used by BPOs Type of connection Bandwidth (Kbps) % of companies ADSL 256 - 2048 24% Shared leased line 256 -4096 19% Dedicated leased line 45 - 2560 67% VSAT 72 - 512 10% Other Not mentioned 5%

Growth plans

Expansion plans 95% plan to increase employment Employment growth of 30% in 2006-7 76% stated expansion plans out of which: Physical exp. = 50% Market expansion = 13% New partnerships = 6%

Conclusions

Primary requirements for BPO sector growth Capacity expansion English Telecommunications (+land) Mass transport Feasibility of setting up a dedicated BPO zone with enhanced transport and telecommunications infrastructure should be considered. Facilitation of entry & operations No specific regulatory changes facilitation mechanisms - investment entry & operations Marketing and promotions

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