Market assessment of services for IT and ITES companies in Uganda

EXECUTIVE SUMMARY

NTF IV aims to enhance the export competitiveness of the Ugandan IT and ITES sector. This report identifies and assesses critical bottlenecks (root causes) that prevent Ugandan IT and ITES firms from entering the EU market. The assessment not only covers the core value chain, but also determines the enabling environment, in order to uncover what kind of Business Development Services (BDS) will be required to assist firms on their export journey. Applying the market systems development approach, the report provides a holistic analysis of the market, identifying the root causes of low export readiness and the related constraints in the supporting functions and the rules and regulations.

Uganda’s IT and ITES core market is broadly defined by three kinds of services, IT outsourcing (ITO), business process outsourcing (BPO) and knowledge process outsourcing (KPO), which all have a subset of different activities. The key inputs for all three services are human resources, connectivity, electricity and hardware. The supply of ITO services is highly fragmented, with numerous MSMEs and freelancers clustered in Kampala, who all offer a range of services with varying level of value addition. BPO services, however, mainly comprise call and contact centres. On the demand side, both the domestic and international markets can be segregated into transactions between IT and ITES firms of the same industry (horizontal activities), and services provided to other sectors (industry verticals). The biggest consumers of IT and ITES stem from banking, financial services & insurance (BFSI), telecommunications and e‑government. However, these are also the industries where Ugandan IT and ITES firms face stiff competition from foreign companies.

The supporting functions form the foundation for any market transaction taking place. Four essential supporting functions were identified: infrastructure; access to finance; skills; and capacity. Infrastructure comprises: access to internet and broadband, which is mostly available with good speed and at decreasing costs; availability and cost of software and hardware; reliable power, which is still a critical factor in Uganda; and mobile phone penetration. Access to finance is still constrained by banks not accepting intangible assets, highly volatile cash flows, lack of short-term and medium-term loans for capital expenditures, and poor investment readiness. Skills & Capacity: despite a large tech-savvy workforce, there is a lack of general management skills, as well as e-business and eTrade management skills, at company level.

 The rules and regulations define the ‘rules of the game’ and the terms of the market transactions which are being undertaken. On the legal side, the EU uses copyright to legally protect computer programs (Directive 2009/24/EC), while it also protects the personal data of people using online (and other IT) services. Several European buyers will require companies to have quality management standards, such as ‘ISO 9001:2015’ and ‘Capability Maturity Model Integration’ (CMMI), in place. There are also other Ugandan legal aspects that affect the local IT and ITES firms, such as the ban on importation of second-hand ICT equipment, over-the-top tax on social media and access to government tenders, that led to more imported hardware.

Access to business development services (BDS) is not only another vital supporting function, the provision of BDS itself also forms a market system. On the demand side, there is a moderate level of awareness and a relatively low level of compliance among a sample of Ugandan IT and ITES firms with regard to testing the awareness and compliance level of crucial legal and non-legal EU market entry requirements. Thus, unsurprisingly these firms indicate a high urgency for BDS assistance to be compliant with the EU market entry requirements. Equally, sampled firms show high demand for general BDS and give top priority to help that is directly linked to exports, thus strengthening eTrade management skills.

BDS are required at all three growth stages of a firm – BDS for Incubation, BDS for Survival and BDS for Growth – with the need for more tailored BDS assistance increasing at each stage. However, on the supply side, while there is a broad range of general BDS available, tailored support for IT and ITES companies that want to export to the EU is broadly lacking and mainly supplied by NTF IV itself. Nevertheless, there are stakeholders well suited to provide these services in Uganda. The Will-Skill Framework is a useful tool to assess their capacity and capability, as well as their commitment. Here, ministries, departments and agencies (MDAs) are located in the ‘Low Will, High Skills’ quadrant, while BMOs are more in the ‘High Will, Low Skills’ region. Commercial BDS providers will generally operate anywhere where there is a viable business case. Thus, they are placed in the ‘High Will, High Skills’ quadrant.

A well-functioning market for BDS is a vital element of the overall IT and ITES market system. Many of the identified root causes stem from the lack of tailored and affordable business support services. There are several local BDS providers – some more capable, some more committed – lined up to provide these services. Depending on where they are placed in the Will-Skill Framework, CBI should take the appropriate approach when engaging them. Going forward, this report aims to provide some guidance on how NTF IV Project Partners could improve their BDS portfolio and/or develop a new service tailored to the needs of the sector – while keeping in mind that ownership of the development and implementation of new concepts should remain with the partners. In addition, CBI should consider its own exit strategy and ensure it does not permanently fill any gaps.