Outsourcing in Nepal: Competitive Factors and Entrepreneurial Challenges

Nepal wants to be the next big thing in the outsourcing industry. It is an ambition that can be realized if significant improvements will continue to manifest not just in its political and economic reform agenda but also, with the way it handles key issues such as investment policy, infrastructure gap, workforce development, workforce diversity, and inclusive job creation.

COMPETITIVE OUTSOURCING FACTORS

Low Labor Cost

The minimum monthly salary for domestic workers in 2020 is $113 (Rs 13,450). This is about 38% higher than two years ago at $81 (Rs 9,700) and almost five times higher than the basic wage of $28 (3,300) in 2007. Nepal belongs to the top 20 nations around the world with the lowest average monthly income in relation to purchasing power. It ranks 25th out of the 28 countries where the cost of living is less than $1,000 annually.

Young, Vibrant, Skilled Demographic

Nepal has a population of 30 million. Almost 60 percent are between the ages of 15 and 64 years old (18 million) while individuals below 15 years old account for almost 35 percent of the total population (10 million). This demographic has been either exposed to the world of technology or has become exceedingly comfortable with technology being part of their day-to-day living and career options. The country’s education system incorporated ICT-focused curriculum to equip students with essential digital skills in the workplace. Each year, more than 5,000 university graduates enter into the ITES (Information Technology Enabled Services) and BPO (Business Process Outsourcing) sectors.

Growth of ICT Sector

The Information and Communications Technology (ICT) sector in Nepal is growing at a rapid pace due to cheap labor, young workforce, and new political stability. The Government of Nepal (GoN) has supported the creation of Community Information Centers (CICs) in urban locations across the country while economic reforms are underway to ensure there is access to faster Internet infrastructure and better technologies in the market.

ENTREPRENEURIAL CHALLENGES TO OUTSOURCING

Lack of Business-Friendly Outsourcing Laws

Outsourcing firms in Nepal have long supplied local companies from various industries with employees to help them gain access to specialist skills, deal with core processes in their companies, and lower their production costs. However, the new provisions under its Labor Act 2017 will make it difficult to continue this current work setup and sustain its outsourcing business.

First, outsourcing companies are required to deposit a minimum of three months’ worth of pay for all employees they hire and outsource to other companies. Second, outsourcing service providers are not allowed to provide more than two types of business support services.

Of the 2,500 worker outsourcing firms which provide employees for call centers, security, construction, and domestic labor sectors in Nepal, many of them will take a hard hit by these new government-approved stringent labor rules which can lead to closing down of business. On the other hand, start-ups and SMEs will also find it difficult to survive as they rely on worker outsourcing firms to keep their businesses up and running.

Weak Data Protection Law

Countries in the Asia Pacific region have made significant strides on the implementation and enforcement of data privacy and data protection law. This move is essential not only to safeguard citizens’ personal information but also to defend businesses against data breach or cybercrimes.

Nepal has its own Data Privacy Act which came into effect in September 2018. It covers details on how to acquire, store, and utilize personal information. However, it lacks basic principles found in the EU GDPR and is constrained in many ways. There are provisions that exclude privately owned corporations from getting protection against data breach or cybercrime or that will penalize foreign companies if found not in compliance with certain provisions.

This can make global investors question the profitability of outsourcing in Nepal unless there is a full understanding of how current data protection policies will affect their businesses including in the outsourcing industry.

Controversial Special Service Bill

When government officials are given unlimited surveillance and search powers, one can only wonder if this is meant to protect or curtail people’s freedom and right to privacy. That is exactly what Nepal’s Special Service Bill is all about. The main goal is to detect and prevent potential threats and crimes against national security using all information and communication technology-based platforms including social media networks. However, the method of intercepting private communication without a warrant, among other controversial forms of intelligence gathering, is what worries human rights defenders.

Increasing Cybercrime Cases

Despite existing regulations on citizen privacy and data protection and the Nepalese authorities’ continued effort to curb cybercrime cases, this does not deter cybercriminals from committing illegal activities on the Internet in which ordinary citizens and businesses have no defense against.

There are rising cases of exposure of sensitive personal information, hacking of financial accounts, digital harassments, and cybercrimes against children and youth. Renowned companies in Nepal have been vulnerable to data breaches; worse, there is no legal protection against cyber-terrorism and phishing which can lead to terrible financial loss to businesses. Ironically, any entity with online content critical of the government can be instantly charged with cybercrime cases which put in question how authorities value freedom of speech in the country.

Low Private Investment

Since 2008, FDI (foreign direct investment) in Nepal hasn’t exceeded 0.2 percent of GDP. According to the World Bank’s Systematic Country Diagnostic Report, FDI inflow in Nepal falls behind most countries in the Asia-Pacific region and is one of the lowest across the globe. While its new federal government is a turning point for the resurgence of investor confidence, low rates of investment are not enough to boost the country’s competitiveness and productivity rates. If the government aims to attract more international businesses even in the outsourcing industry, key constraints such as political instability and inefficient government policies for businesses must be addressed properly.

ICT Infrastructure Gaps

With Nepal’s landscape shaped by the Himalayas, its geographic conditions affect its digital technology and ICT infrastructure, among other basic services, and the lack thereof proves to be bottlenecks for social and economic advancement. In terms of government-funded or private-initiated technological research, Nepal is also lagging far behind the rest of the world.

ICT infrastructure gaps pose many problems: 1) lack of access to education, health, and good standard of living; 2) failure to attract foreign investment; 3) failure to take advantage of services waiver by the World Trade Organization (WTO) in sectors of Communication services, Financial services, Education services, Tourism services, etc.

Conclusion

Nepal offers competitive outsourcing advantages, but you also must consider your company’s specific needs and requirements before entering into an agreement with an outsourcing service provider in the country. If you need more information on finding the right outsourcing partner for your business, read more here.