VZCZCXRO0653
RR RUEHLMC
DE RUEHLM #1926/01 3201053
ZNR UUUUU ZZH
R 161053Z NOV 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 4748
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 0231
RUEHKA/AMEMBASSY DHAKA 9603
RUEHIL/AMEMBASSY ISLAMABAD 6533
RUEHKT/AMEMBASSY KATHMANDU 4590
RUEHKP/AMCONSUL KARACHI 2058
RUEHCG/AMCONSUL CHENNAI 7075
RUEHGV/USMISSION GENEVA 1526
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 03 COLOMBO 001926 
 
SIPDIS 
 
SIPDIS 
 
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 
 
COLOMBO 00001926  002 OF 003 
 
 
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. 
 
 
COLOMBO 00001926  003 OF 003 
 
 
--------------------------------------- 
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