Today, the Malaysian economy is in a transition stage - aiming to transform itself from an agricultural, commodity-based economy to a service led one focused on improving the contribution from the technology sector. Unlike other emerging economies like India, the transition from manufacturing to services in Malaysia is influenced by the government primarily through providing incentives and additional investments to the technology and pharmaceutical sectors.

Under the Ninth Malaysian Plan (9MP) – a parliamentary planning initiative focused on mid to long term development aspects – the government increased its ICT spend as compared to the previous plan. This in turn has given a boost to the outsourcing industry in Malaysia.

Malaysian outsourcing industry

Over the last decade, the outsourcing pie has expanded significantly across the globe. Today, as outsourcing transcends pure cost-arbitrage and becomes a norm in many industries, the preference for diversified destinations is also growing. Amongst the emerging destinations, Malaysia has had a good start in many areas. While it is still exploring its niche, it has established credibility as an outsourcing destination.

The Malaysian outsourcing industry has a relatively smaller share in the $220bn global IT/ ITeS outsourcing market, with revenues of $1.1bn for the year 2009.

Evolution of the Malaysian outsourcing industry

Malaysia is not new to outsourcing with several technology companies being active in the country since the early 1990’s. With the formation of the Multimedia Super Corridor (MSC) in the mid-90s, the outsourcing industry got a jumpstart.

The Malaysian outsourcing industry has been built on attracting investments in captive and third party outsourcing operations from several leading global companies (DHL, Shell, BAT, HSBC, Standard Chartered) spanning across various verticals (oil & gas, logistics, banks). Today, outsourcing in Malaysia has evolved to provide services, niche as well as integrated, in IT, BPO and knowledge processing in multiple industry verticals.

Industry Structure

Currently, MSC has over 1,000 large and small service providers as members, offering a range of outsourcing services.

Market Size

Revenues from the Malaysian outsourcing industry for the year 2009 are estimated to be $1.1bn. This includes revenues from IT, business process outsourcing and knowledge services. With the industry growing at a CAGR of 15%, it is expected to touch $1.9bn by 2013.

Drivers for the Malaysian outsourcing industry

Some large multinational companies have successfully leveraged the strength and maturity of certain sectors in the Malaysian economy for setting up their outsourcing operations. Traditionally, the BFSI, oil and gas, and logistics sectors have been driving the Malaysian economy. The country has had a significant base of manpower with domain expertise in these sectors. While several companies initiated captives to serve their local operations, they subsequently scaled up their operations using the abundant manpower with requisite domain expertise, to serve global counterparts.

Outsourcing market drivers in Malaysia are primarily dependent on three factors – government initiatives for the outsourcing industry, the Malaysian economy and other factors related to the country’s population, culture and society.

Issues and challenges

Although Malaysia has been ranked the fourth most cost-effective country behind the Philippines, India and Thailand by the IMD World Competitiveness report, the country is yet to become a first choice outsourcing destination for companies. Global companies continue to think of it as an alternative or complement to operations in India or the Philippines. There are several issues related to the size, scale, scope and maturity of the Malaysian outsourcing industry that weaken its competitiveness as compared to other destinations.

First, Malaysia has been a relatively late entrant in the outsourcing industry, hence a steep learning curve. Secondly, there are severe limitations when it comes to scaling up outsourcing services in Malaysia, primarily due to lower population base (compared to overall opportunity size) and lack of alignment in skills available within the country and those required by the outsourcing industry. Third, most of the service providers have started their business deriving heavily on government incentives and local clients.

Comparison of top players from Malaysia and India

We do not see clear leaders in Malaysia as are evident in India where there is Infosys, TCS and Wipro controlling nearly 35% of the outsourcing revenues. Top Malaysian companies like Scicom, Symphony, VADS, Heitech and VPI account for about 15-20% of the Malaysian outsourcing revenues.

Trends and Insights

The ITO industry in Malaysia, which contributes about 60% to the country’s outsourcing revenues, will see a relatively slow growth with a CAGR of 10% over the next five years.

The BPO industry contributes about 30% to Malaysia’s total outsourcing industry. BPO services are expected to grow at a CAGR of 15% over the next five years. This will be driven primarily by an increase in processing services from BFS  companies and firms looking to outsource HR functions.

Malaysia’s multilingual capabilities will help it attract business from mature markets in Asia such as Singapore, South Korea, and Taiwan, as well as emerging markets in the region like Indonesia, Vietnam and Middle Eastern countries.

For a sustained growth in the long run, the Malaysian outsourcing industry will have to identify, invest and strategize for capturing niche opportunities that fit the strengths of its industry rather than follow the success of large companies in India and the Philippines.

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