Outsourcing to Ethiopia:  India, Watch Out

Jacob Eliosoff

Originally published in Tadias Magazine, January 2006

 

 

Outline of this article

1.       Free trade at last: the outsourcing opportunity

2.      India got food aid too: Ethiopia’s strengths as an outsourcing location

3.      Don’t build those call centers yet: challenges for Ethiopian contractors

4.      One Infosys at a time: next steps

5.       Sources

6.      Other links

7.      Acknowledgements

The fruits of globalization enjoyed by programmers in countries like India will come to Ethiopia too, sooner or later.  Why not right now?

 

Computer science graduates in the US have never had it better.  The tech industry is booming again, but CS enrollment is still 30% off its peak of five years ago1, and competition among recruiters is fierce.  Young top-of-their-class grads like Tilaye Yismaw are getting offers of $50,000 a year straight out of school – often more.2  But Tilaye isn’t getting those offers.  He graduated from Addis Ababa University, and he’s looking for work.

In Bangalore, Manila and Kuala Lumpur, grads who used to be in the same boat as Tilaye have escaped.  Upon graduation they enter a booming market for outsourced[*] American and European contracts – and, increasingly, for jobs in healthy domestic software industries spawned by outsourcing success.  Ethiopia may get there too, but when?  How many of the country’s economic, political, and infrastructural problems need to be fixed before its programmers can compete with the world?

This article will argue that international outsourcing opportunities are there for ambitious young Ethiopians, and their diaspora counterparts, now.

1. Free trade at last

Outsourcing is an irreversible trend with benefits in the long term for all involved, but especially for poor countries that move fast to grab a piece of the pie.

 

Tilaye won AAU’s Faculty Medal for graduating in 2004 with the highest GPA in his faculty.  It’s hard to rank that accomplishment against the graduates of reputable rich-country schools.  But it helps if you’ve taught both.  I taught Tilaye in his last year at AAU.  Before that, I studied and taught computer science at McGill University in Canada, which feeds large numbers of grads to the MITs and Microsofts of the world.  Tilaye might not have placed first in his year at McGill.  But he’d have easily made the top 10% – a group eagerly courted by the industry.

Tilaye’s problem is not ability.  Until recently, serious obstacles stood between him and employers.  Five years ago, an AAU student like Tilaye had extremely limited access to computers, and none to the Internet.  Communication with the US was expensive, making it hard not only to deal with employers and customers abroad, but even to keep up with the latest technologies and business culture.  If he somehow managed to build skills useful to foreign customers, there was no ready market waiting to match him up with them.  And even if such a market had existed, he probably wouldn’t have known about it.

All of these obstacles have now faded dramatically – except the last.

By June 2005, the end of my two years in Addis Ababa, I was able to communicate with all my graduating students by email.  My courses could make regular use of materials downloaded from the Web.  A company I consulted for had upgraded from a hopelessly flaky dialup connection to a much more stable 128-kbps leased line.  These are not mind-blowing statistics.  Ethiopia is not South Korea.  But over the last 5 years, the improvement in access has been far more significant in Addis than in Seoul.

Leading online outsourcing sites

·          RentACoder.com

·          TopCoder.com

·          Elance.com

·          Guru.com

Meanwhile, thanks to success stories in India and elsewhere, the West is more open than ever to remote outsourcing.[†]  Dozens of sites like RentACoder.com now list contracts open to bidding by contractors worldwide.  But Ethiopians don’t know about them.

One of these years, the international trade barriers that limit Ethiopia’s exports4 may crumble.  A better agreement may loosen Egypt’s grip on the waters of Lake Tana5.  I hope so.  But what supporters of these causes must realize is that, at this stage in history, improved agriculture can only turn a destitute country into a poor one.  Coffee is not the future.  Manufacturing, China’s engine of choice, is better but shares agriculture’s problems of falling prices and declining share of GDP.  The big growth area in the world economy is services, especially knowledge services such as software and biotech.6  And among the knowledge industries, software outsourcing has a special advantage: low cost of entry.

Future dot-com millionaires at AAU.

A fresh AAU graduate can’t start up a shoe factory, or a biotech research lab.  But with just a computer and basic Internet access, she can bid for an American Web site development contract, communicate with the customer, create the site and post it online.  (She’ll still need to find a way to get paid – perhaps through a relative in the States.)  If she already has access to the computer and the connection, say through school, her expenses are zero: the dollars go straight to her pocket.

$60 billion worth of contracts were outsourced globally in 2005, and demand for suitable engineers is growing faster than countries like India and China can supply them.7,8  A tiny slice of this pie would still be a welcome contribution to the Ethiopian economy.  And it would grow.

2. India got food aid too

Why outsourcers will come to Ethiopia

1.       Low salaries

2.      Basic infrastructure in place (Internet)

3.      Huge local interest in technology, rapidly growing skill base

4.      Strong diaspora

5.       Large population = large talent pool

6.      Schools & businesses use English

7.      Low crime/corruption

8.      Near Europe, close time zone

9.      Outsourcers will come everywhere

Ethiopia has disadvantages as an outsourcing location, but also real advantages.  And in the outsourcing game, if you win some and lose some, you win.

 

Nahom Tamerat, a fellow instructor at AAU, is another top computer science grad a couple of years older than Tilaye.  Local job prospects frustrated him too.  So he started a company and, using skills he taught himself from the Internet, created a slick Web site (AmestSantim.com).  Within weeks, Amest Santim Systems had its first foreign customer: an Ethiopian in the US.  As Amest Santim’s Web site says (and proves):  “In this IT-driven age, Web presence is no longer an option, rather a necessity!”

Growth in exports of ICT services, OECD and selected other countries, 2002-2003

1.       Estonia

71.4%

2.      China

67.6%

3.      Morocco

60.4%

4.      Ethiopia

58.7%

5.       Macedonia, FYR

53.9%

6.      Colombia

53.9%

7.      Cape Verde

53.6%

8.      Luxembourg

53.3%

9.      Bangladesh

51.0%

10.   Russia

46.7%

Source: OECD.  Note: Data for some countries unavailable, notably India

Nahom isn’t the first Ethiopian to exploit this market.  In fact, a 2004 OECD report ranked Ethiopia among the world’s five fastest-growing exporters of ICT services.9  Still, most onlookers and, worse, most Ethiopians, seem skeptical that an outsourcer would turn to Ethiopia for code.  Yet the reasons are there.

First of all, of course, Ethiopians are cheap.  Tilaye says he’d be comfortable starting at $400 a month.  That’s not only less than a tenth of what a graduate of his caliber can expect in the US, but also less than half the going rate in Malaysia and below the rate in India10 – all three of them booming job markets.  And salaries in countries like India are rising fast.11  An in-depth report by McKinsey & Co concluded that outsourcers need to start looking beyond saturated locations like Hyderabad:  “Local wage inflation will likely continue in some offshoring locations as long as companies concentrate their demand on a few cities.”12

Also, not only is Ethiopia finally building the network infrastructure it needs to compete, but among the urban population, demand for high-tech skills has surged.  Schools everywhere offer technology training courses, from “Word/Excel/Access” to Cisco certifications and Master’s degrees.  Interest goes beyond the usual college and engineering crowd, too: people I knew taking such courses included a messenger at work, a Miss Ethiopia contestant, and my maid.

Ethiopia is near Europe, only two time zones east of France, with a well-established diaspora.  The capital’s airport and top hotels are respectable.  Indian coworkers who had worked across East Africa were full of praise for the safety of Ethiopia’s streets; in my two years there I encountered little crime (none of it violent) and, amazingly, no corruption.  On a business trip to India I was surprised by airport staff who asked for tips and taxi drivers who drove away with my change.  All of these are points in Ethiopia’s favor.

Even one of Ethiopia’s core problems, overpopulation, has advantages.  China and India have long struggled to control their high growth rates, with good reason.  But would they have achieved their current prominence without it?  Throughout their histories, sheer size has helped them absorb invaders and sustain their cultures against outside influence.  Today it gives them geopolitical clout, some of the best universities in the world, and unparalleled economies of scale.  Meanwhile, rich countries like Japan face declining and aging populations.  This year Ethiopia passed Egypt to become Africa’s second most populous country.  By 2050 it’s expected to overtake Japan and every European country, including Russia.13  Many millions will suffer during this climb.  But eventually it may bring some of the consolations China and India now enjoy.

The idea that Ethiopia can’t compete with India is self-defeating and, as shown by entrepreneurs like Nahom, false.  Finland’s Nokia didn’t get where it is by lamenting the advantages of California and Japan.  To win foreign contracts from a poor, aid-dependent country with a backward socialist economy will be a challenge; but not a new one.  Infosys, founded in 1981, beat just those odds to become a $1.5 billion company and the pride of Bangalore.

3. Don’t build those call centers yet

Challenges for Ethiopian contractors

1.       Inexperience with entrepreneurial, creative, hard-sell “Silicon Valley” culture

2.      Branding: must shake Live Aid image

3.      International competition

4.      Bureaucracy: legal, banking, shipping

5.       Primitive infrastructure: Internet, phone, power

6.      Political instability

7.      High local costs, especially of electronics & specialized consultants

8.      Brain drain, both abroad and to high-paying pseudo-local employers like the UNECA

9.      Shortage of skills

10.   Lack of government support

Ethiopians angling to get in on the game will first need to navigate some key obstacles – first among them inertia, both institutional and cultural.

 

Some of the challenges facing entrepreneurs like Nahom are obvious.  Ethiopia’s infrastructure has a ways to go, especially Internet and phone lines.  Nahom’s home dial-up connection rarely exceeds a measly 14 kbps, and at peak hours he often can’t get through at all.

The state bureaucracy is improving in patches: I spoke to regular citizens who had obtained their passports within two days.  But units like the post office, or the Ministry of Education, still have the tar-pit inefficiency to kill a deal.  Nahom reports that the “arduous” paperwork to legally form Amest Santim Systems took almost a month.  To make online payments, a business necessity, he was able to arrange a credit card through a relative in the US.  But now the company faces trouble because local accounting rules include no way to account for these payments.

Items such as laptop computers are still much more expensive than in the US, and many specialized software and hardware skills are unavailable and have to be flown in.  Skilled employees are still liable to leave for a degree, or to disappear while abroad, or to be poached by local NGOs such as the UNECA paying above-market wages – all phenomena with their positive aspects, but causing real headaches for local employers.

Image remains a key problem.  Too many clients will still need to be reassured that their payment need not include food.  And it goes without saying that the battles over this year’s election won’t help.  In July my mother showed me a Montreal newspaper article about investment opportunities in Africa, and I remember the sadness of seeing Ethiopia listed under “Avoid”.

The Meles government deserves some credit for prioritizing technology, calling it a “crucial weapon to fight poverty”.14  Is this lip service?  Based on the projects I saw and worked on, I don’t think so.  The government is serious about building tech capacity.  But its methods are often counterproductive.  AAU, in particular, is creaking under government enrollment demands: the computer science graduate program was asked to quadruple enrollment in a year – and given a single extra professor.  McKinsey saw the same mistake made in India, where many graduates are sub-par:  “Countries seeking to play a role in the emerging global labor market should concentrate on improving the quality of their talent, not just the quantity of educated workers.”15

But the more fundamental lesson Ethiopia needs to learn from India’s story is that grand state-backed projects are no substitute for liberalization.  Instead of trying to stand in for private industry, the government should support it through initiatives like India’s NASSCOM.  Manmohan Singh was elected Prime Minister largely because his drastic reforms of the early 1990s are credited with revitalizing India’s then-stagnant economy.16

The main thing that will hinder Ethiopian Internet entrepreneurs, I think, will be the lack of a blueprint to follow.  I suppose it takes courage and inventiveness to start any company.  But how much more natural it must feel for the young hacker in his basement in California – or, now, in Pune.  He may not know which forms he needs to fill, but he probably has a schoolmate or uncle who does.  Like an Ethiopian runner, he has history at his back: he is playing a new tune on a familiar instrument.

It will take practice for the Ethiopian hacker to master this new instrument: to figure out the best sources of good customers, how to sell himself, how hard to negotiate, what customers care about and what they don’t really.  But as a few hustle and succeed, a blueprint – and an industry – will emerge.

4. One Infosys at a time

Steps to make it happen

1.       More awareness of the opportunity, by contractors, government, NGOs

2.      Better diaspora outreach

3.      Government support, marketing/rebranding

4.      Faster, more reliable Internet & phone lines

5.       More skills

Conditions should improve, but the point is this industry can grow right now.  These steps will help.

 

Broad problems like infrastructure, bureaucracy, and political instability are outside the average citizen’s direct control.  We should maintain pressure for improvements on the government and those it listens to.  Meanwhile, there are smaller steps individuals can take.

The diaspora has a huge role to play, especially at the beginning.  Other countries have shown this repeatedly.  A researcher at the Indian Institute of Management in Bangalore studied five examples of European firms outsourcing to Sri Lanka and found that in every case, the decision involved a well-placed Sri Lankan working for the European firm.17  Support need not mean favoritism.  Ethiopians abroad are lucky: they know the culture and the universities, probably have contacts there already, and can start dealings from a higher basis of trust.  There’s no reason this inside knowledge shouldn’t be turned to mutual business advantage.

Not quite 5¢, but a bargain for the quality.

Programmers in Ethiopia should pursue these opportunities through friends or relatives abroad, but they should dream bigger, too.  The Web is a largely anonymous place, and an Ethiopian company can earn the same dollars as American competitors if it consistently delivers top-quality results.  A small project for a cousin should be seen mainly as a chance to build an impressive reference for a bigger customer next time.

Improving Ethiopia’s image abroad may seem like another giant task for the government.  But it may turn out that individuals accomplish more.  The best way for Ethiopians to prove that they can do good work is by doing it.  A glossy ad in an airport brochure is worth nothing compared to a satisfied customer in Maryland.

Will outsourcers see Ethiopians as good value despite their country’s problems?  I asked Nahom for anecdotes.  He wrote me a long list of the challenges he faces doing business.  And as he wrote it, an email arrived from the US with another site for him to do.

5. Sources

1.       Eric Chabrow, “By The Book”, InformationWeek, August 16th 2004.

2.      “Most lucrative college degrees”, Money, February 10th 2005.

3.      Daniel H. Pink, “The New Face of the Silicon Age”, Wired, Feb 2004.

4.      See the World Bank on this, among many other sources.

5.      Mike Thomson, “Nile restrictions anger Ethiopia”, BBC News, Feb 3rd 2005.

6.      “The manufacturing paradox”, The Economist, Nov 1st 2001.

7.      “TPI Index Forecasts 10 to 15 Percent Decline in Global Outsourcing Total Dollar Value Awarded this Year”, TPI media release, October 17th 2005.

8.      Diana Farrell et al, “The Emerging Global Labor Market”, an in-depth research report on offshoring by the McKinsey Global Institute, June 2005, executive summaries, p42.

9.      Desirée van Welsum & Graham Vickery, “Potential Offshoring of ICT-Intensive Using Occupations”, OECD, Apr 5th 2005, p9.

10.  Sabyasachi Satyaprasad et al, “Offshore & Nearshore ITO Salary Report 2004”, neoIT research summary, May 2005.

11.   “The place to be”, The Economist, Nov 11th 2004.

12.   Farrell et al (cited above), executive summaries, p46.

13.   Carl Haub, “2005 World Population Data Sheet”, Population Reference Bureau, August 2005, p2.

14.  Michael Cross, “Ethiopia’s digital dream”, The Guardian, Aug 4th 2005.

15.   Farrell et al (cited above), executive summaries, p37.

16.   “After Sonia, Singh steps in”, The Economist, May 24th 2004.

17.   Ben Edwards, “Sink or Schwinn”, part of a survey of outsourcing in The Economist, Nov 11th 2004.

6. Other links

·         Tilaye welcomes inquiries from outsourcers.

·         As does his competitor, Nahom at Amest Santim Systems.

·         Concepts Data Systems, an Ethiopian company known for its Power Ge’ez word processing software, also does work for customers abroad.

·         Or why not compete yourself, at RentACoder.com and the other sites listed above?

·         Meanwhile the author, Jacob Eliosoff, welcomes all feedback or questions.

7. Acknowledgements

Thanks to Tilaye and Nahom for letting me draw on their experiences, and to Dawit Bekele for quick answers by email.

Thanks also to the sources quoted above for making their research freely available online, and especially to my two charming and industrious research assistants, Google.com and Wikipedia.org.


[*] “Offshored” is the more general term, since it includes captive operations like GE’s call centers in India, which have been part of the same phenomenon.  But the outsourcing label has stuck, and in any case tech companies won’t set up shop in Ethiopia until they’ve seen smaller outsourced projects succeed.

[†] I have not dealt here with the case against global outsourcing, ie, for protectionism by rich countries.  I consider it very weak.  See Dan Pink’s sympathetic assessment in Wired.3