MICHAEL HARRIS: The geopolitics of global services

Global outsourced business services can be a driver of SA’s growth over the next generation. Like international trade of any kind, however, the sector is exposed to external barriers in customer countries and the global commons. The geopolitics of these trade relationships brings both foreign and domestic policy to the fore.

For SA services businesses the global outsourcing opportunity requires substantial investment with medium-to-long term return horizons. For the risk to be worth the reward, a stable and predictable operating environment is required. Working to ensure this stability is in the national interest because it leads to employment, foreign receipts and expanding final demand

To achieve a stable operating environment a forward strategy is necessary that prioritises three strategic focus areas:

• Fostering trust-based relations with customer countries;
• Upholding the global commons that facilitate trade in services; and 
• Maintaining the comparative advantages that underpin the opportunity.

These priorities exist within a fluid geopolitical landscape. The transition into a multipolar world order is well advanced and now increasingly well recognised. This will bring alliances and allegiance to the fore once more and risks closing off portions of the global marketplace if poorly managed.

Fragmentation of the global technology architecture is already one result of this process. Since the delivery of global services is reliant on this architecture, its future prospects are of concern to SA. China’s Great Firewall is an advanced expression of technological fragmentation, while the free flow of data across borders, one of the principles of the “open internet”, is now subject to legal restrictions and regulatory scrutiny in most territories. Divergence into regionally distinct silos with reducing level of interoperability is expected to intensify.

Alongside these shifts, many countries, led by the US and Western Europe, are seeking to partially disconnect from

China, both to derisk their supply chains and to bring jobs home. Onshoring is therefore the immediate priority, but where costs and other practicalities prevent this near-shoring or “friend-shoring” is the preferred strategy. This will favour nations with the necessary comparative advantages, such as SA, but will also require that these countries reside within a trusted alliance network and that they respect and uphold accepted global commons arrangements.

SA’s priorities should therefore be clear. The emerging preference for friend-shoring requires that the country evaluates who its customers are and works to develop productive, trust-based relationships with each of them. Adopting the rules, protocols and protections that these customers deem necessary will also be critical to positioning as a reliable partner. 

The UK has thus far been SA’s major client location and companies in the US and Australia are increasingly looking to the country as a service provider. While the Spanish, French and German markets all present opportunities, the predominance of demand for English-language services, and SA’s ability to supply, means this market structure will persist.

SA’s approach to the rules of the game aligns with key customers and the direction of the “digital” global commons. Data privacy protections, in the form of the Protection of Personal Information Act, and cybersecurity provisions enshrined in the Cybercrimes Act, are closely aligned to European legislation. While the stringency of Europe’s protections has created challenges for data flows with the US, the point of convergence will likely be around Europe’s position.

By aligning to emerging global norms SA has positioned itself well. Since this is the first generation of such digital policies, they will have a meaningful effect on the development of the country’s technology and services economy. However, these norms are also likely to evolve to accommodate both technological change and shifting geopolitical preferences. It is important that the country remains active in shaping this evolution and agile in accommodating the changes that result. 

SA’s weaknesses in the game relate to the fragility of its comparative advantage and the posture of its international relations. The country’s comparative advantage is derived from a combination of time zone, English language proficiency, relative skills base, cost advantages, ICT infrastructure and the rule of law. In the developing world, only India and the Philippines offer comparable value propositions, and in recent years SA has been recognised as the most attractive of this group.

Yet with the exception of time zone, each element of this advantage must be cultivated if it is to be sustainable. Here, the relationship between the country’s domestic and global services industries will be fundamental. SA already has a sophisticated tertiary sector, with embedded capacity that can incubate a growing and increasingly diverse position in the outsourced business services market. However, the ability of this collective capacity to scale and innovate will determine long-term competitiveness. Poor educational outcomes, currency volatility and deteriorating infrastructure as well as regulatory and law enforcement capacity all contain material risks in this regard.

Since 1994 SA has been a responsible participant in the global political economy. At times, however, a commitment to nonalignment, solidarity-based allegiance and deference to sovereignty have left the country isolated from its most important export partners. The most recent example was SA’s refusal to condemn Russian aggression against Ukraine. The time is fast approaching where such actions will have consequences, and SA cannot afford to be perceived as an unreliable or bad actor.

Geopolitical forces are impersonal. SA can either respond to the basic set of constraints it faces or be constantly frustrated by them. Global technology and business services overcome the country’s geographic isolation in a way that no other industries do. They therefore represent perhaps the best prospect for long-term, sustainable competitive advantage in the post-mineral economy. It is an opportunity that must be taken.

• Harris is a partner at management consulting firm Letsema.