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Cablegate: Business Process Outsourcing: A Growth Opportunity For

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RUEHNE/AMEMBASSY NEW DELHI 0231
RUEHKA/AMEMBASSY DHAKA 9603
RUEHIL/AMEMBASSY ISLAMABAD 6533
RUEHKT/AMEMBASSY KATHMANDU 4590
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RUEHCG/AMCONSUL CHENNAI 7075
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UNCLAS SECTION 01 OF 03 COLOMBO 001926

SIPDIS

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DOL/ILAB FOR TINA MCCARTER

DRL/IL FOR LAUREN HOLT

STATE FOR SCA/INS

MCC FOR D NASSIRY AND E BURKE

GENEVA PASS USTR

COMMERCE FOR EROL YESIN


E.O 12958: N/A
TAGS: ECON ELAB EIND ETRD CE
SUBJECT: BUSINESS PROCESS OUTSOURCING: A GROWTH OPPORTUNITY FOR
SRI LANKA


1. Summary. As the business process outsourcing industry (BPO)
continues to grow in South Asia, Sri Lanka is looking to expand its
share of the market. However, attractive features such as low labor
costs, low operating costs and government tax incentives are
somewhat overshadowed by industry constraints, including inadequate
education and IT infrastructure. The ongoing ethnic conflict also
discourages new investors and BPO clients. Despite these
challenges, there is room for growth and there are possible niches
for Sri Lanka in providing disaster recovery centers and
specialized, high-end services. End Summary.

---------------------------------
Growing BPO Presence in South Asia; Limited Sri Lanka Growth
---------------------------------

2. The Business Process Outsourcing (BPO) industry continues to
pour money into South Asia. Companies are looking for cheaper
options for conducting basic business processes, and investors are
taking advantage of labor market efficiencies in Asia to offer these
services. The industry has grown to include many sophisticated and
technical processes and has spread throughout South and East Asia.


3. Sri Lanka has seen some investment in the BPO sector, which
currently employs just over 4,000 people. Sri Lanka is attractive
to BPOs because of its low labor costs, low attrition rates, low
operating costs, and significant government tax incentives.
However, a number of factors are deterring greater investment in Sri
Lanka including a relatively small labor pool, the ongoing ethnic
conflict, a lack of necessary specialized skills, and IT constraints
and costs. Addressing these problems will help Sri Lanka tap into a
growing industry as the country tries to diversify and reduce its
reliance on textiles.

--------------------------------------------- ----
Basic to High-End Services: All Are in Sri Lanka
--------------------------------------------- ---

4. There are three main levels of BPO services offered in Sri
Lanka, and U.S. companies are engaged in all three. The first level
involves basic data entry services and document conversions, for
example conversion of hard copy texts to e-books. The second level
involves more sophisticated processes such as desktop publishing and
basic accounting services. The third level includes high level
services such as investment research, financial modeling, and
quantitative analysis.

--------------------------------------------- ---
Poor English Skills and Scarcity of University Graduates Constrain
Growth
--------------------------------------------- ---

5. The growth of the BPO industry in Sri Lanka faces several
constraints. BPOs tell us one major constraint is the lack of
English language skills. Although Sri Lanka has a high rates of
primary education enrollment and literacy, BPOs say it is difficult
to find enough secondary school graduates with adequate English
language skills. BPOs that provide low or mid-level services are
willing to hire "A-level" (12 years of schooling) or "O-level" (10
years of schooling) high school graduates, but need them to have
working level English. English was widely taught and spoken two
generations ago, but for nearly 50 years most instruction has been
in Sinhala or Tamil. English is being reintroduced in schools, but
it will take many years to see significant improvement. U.S. BPO
executives tell EconOffs that while companies provide internal
training in "soft skills," such as communication skills, the
applicant must possess basic English language skills to be hired. A

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2006 baseline sector analysis of the BPO industry commissioned by
the Information and Communication Technology Agency (ICTA) of Sri
Lanka indicates that 95 percent of BPOs consider the ability to
communicate in English their most important skill requirement.

6. The dismal state of Sri Lanka's tertiary education system limits
the skilled labor pool. Sri Lanka's university system is entirely
state run and has not managed to keep up with the growing demands of
Sri Lanka's student population or the business community. According
to the Chairman of the University Grants Commission, only 15 percent
of those who qualify for university entrance are actually admitted.
Sri Lankan universities are not offering the subjects or the level
of quality instruction necessary to meet business needs. In
addition, there are few foreign schools present in Sri Lanka.
Foreign schools are not allowed to confer Sri Lankan degrees,
although they can offer foreign degrees. The ICTA study concludes
that the quality and size of the Sri Lankan labor pool are
inadequate to meet the competitiveness and growth needs of the BPO
sector.

--------------------------------------------- ---------
IT and Transportation Capacities Limit Expansion
--------------------------------------------- ----------

7. BPOs tell us Sri Lanka's information technology infrastructure
is inadequate. BPOs are able to obtain dedicated lease lines for IT
connectivity, but they say there is inadequate redundancy, or
back-up capacity. In many cases, if an broadband line goes down,
there is no way to continue to provide services to clients. There
is also a lack of IT capacity outside of Colombo. BPOs we talked to
said they would like to open offices in secondary cities like Kandy
and Galle to take advantage of cheaper labor costs and untapped
English language skills, but they cannot because of IT constraints.
Executives also told EconOffs that IT costs in Sri Lanka are about
40 percent higher than in India. The ICTA study states that nearly
half of BPOs surveyed listed telecommunications facilities as an
infrastructure constraint and nearly 40 percent were dissatisfied
with broadband facilities.

8. Road and mass transit systems also fail to meet BPO needs.
Industry contacts tell us conducting business outside Colombo is
practically impossible because of the lack of good roads connecting
secondary cities to the airport. They also say Colombo needs a
reliable 24-hour mass transit system to make it easier for employees
to get to work. BPOs often have employees working around the clock
on 2 or 3 different shifts to provide real-time services to clients.
City buses are overcrowded, do not run late at night, and are often
unsafe for women traveling alone. To compensate, most BPOs offer
transport to and from work for employees as well as meals, since
restaurants are not open at night and employees can not travel home
to eat. Nearly 60 percent of BPOs surveyed in the ICTA study
considered mass transport service the leading infrastructure
bottleneck to BPO operations and growth.

--------------------------------------------- ----
Lack of Industry Awareness Discourages Applicants
--------------------------------------------- ----

9. Finally, BPO executives say there is a need to raise awareness
of the BPO industry among the Sri Lankan public. BPO is a
relatively new sector for the country, and increased awareness would
result in a reduction in the stigma of working in the BPO sector and
more applicants for BPO jobs. One executive told us that he knows
of high school graduates with excellent language skills working in
less technically-demanding jobs (the Pizza Hut counter was given as
an example),because they do not know about the BPO industry and are
reluctant to apply.


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Political Concerns Also Deter Investors
---------------------------------------

10. The ICTA study revealed that 67 percent of the BPO sector is
concerned about domestic civil and political stability, in part
because they fear that domestic strife could disrupt service
delivery to clients. Our contacts at U.S. BPOs emphasized that one
bomb at the Colombo airport or port could scare away BPO clients.
One bomb could also destroy a company's telecommunications
connectivity, making it impossible to deliver services.

11. U.S. BPO executives also say there is a need for legislation
regarding working women. Technically, women in Sri Lanka are not
allowed to work past 8 p.m., but the government has issued a waiver
for the BPO sector. However, women remain reluctant to take BPO
jobs because of the stigma associated with working late at night.
Revising the laws might also help change public perceptions.

-------------------------------------
Government Incentives Possibly Fading
-------------------------------------

12. One positive force for the BPO sector has been Sri Lanka's
Board of Investment (BOI). The BOI provides investment incentives
and expedited services to foreign investors. To date, the BPO
sector has benefited from the BOI. However, the BOI is considering
raising the standards for new businesses to qualify for BOI
approval. Currently, there is no minimum capital investment
requirement for BPOs or IT companies, only a requirement that those
companies have at least 15 employees. The proposed regulations
would require a mandatory initial capital investment of $150,000 for
all companies, including BPO and IT companies. U.S. BPOs point out
correctly that many BPO and IT companies would not need to make an
initial $150,000 investment to set up business in Sri Lanka and the
new regulation will effectively discourage new companies from coming
here. The proposed regulation, aimed at keeping small beauty salons
and restaurants from getting BOI incentives, may have the unexpected
effect of discouraging two prominent industries from continuing to
expand and invest in Sri Lanka's economy.

13. Comment: Despite these challenges, the Sri Lankan BPO sector
provides attractive investment possibilities. The government and
business community need to actively market the country as an
advantageous site for back-up operations and disaster recovery
centers. Sri Lanka's smaller size in comparison to India makes it
ideal for these smaller scale operations. Sri Lanka can also create
a niche for itself by focusing on specialized, high-end services
where volume and scale are less important. US companies have been
successful in Sri Lanka and will continue to thrive as long as they
keep implementing creative solutions to the country's capacity
constraints.

BLAKE

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