Outsourcing in Indonesia

Outsourcing in Indonesia: Competitive Factors and Entrepreneurial Challenges

Indonesia, ranking as the fourth most populous nation globally, stands as the largest archipelago on Earth, boasting over seventeen thousand islands. Housing a population of at least 270 million, 60% of whom reside in Java, the nation’s capital and the most advanced island where governmental activities and business operations are actively conducted. Regarded as a ‘youthful’ country, individuals aged 40 and below make up 60% of the population. The workforce comprises 129 million people, with the services and agriculture sectors employing 44% and 43% of the working population, respectively.

Outsourcing in Indonesia: Competitive Factors and Entrepreneurial Challenges

Indonesia stands out as an appealing global business outsourcing destination for various reasons, encompassing its favorable business environment, cost-effectiveness, digital presence, skilled workforce, and ample labor availability. The subsequent key elements contribute to positioning Indonesia as one of Asia’s premier outsourcing hubs:

Leading Southeast Asian Economy: Indonesia boasts the largest economy in Southeast Asia, projecting an anticipated GDP of $970 billion by the close of 2020. It holds the status of an emerging market economy on the global stage.
Global Economic Significance: Ranking among the world’s top ten largest economies in terms of purchasing power parity, Indonesia is one of the twenty wealthiest economies, contributing 79% to the global economic landscape. It is often referred to as the “new tiger of Southeast Asia” and is the sole Southeast Asian nation with G20 membership, positioned as a MINT country with the potential to emerge as a global economic powerhouse.
Internet Economy Leadership: Indonesia stands as Southeast Asia’s largest and fastest-growing internet economy, amassing a revenue of at least $100 billion in 2019, with projections to triple by 2025.
Mobile-First and Social Media Advantage: Recognized as a top-ranked mobile-first country, Indonesia exhibits high social media usage, presenting a strategic advantage for businesses aiming to penetrate the Indonesian market.
Infrastructure Development Priority: The Indonesian government places a premium on infrastructure development, targeting a substantial investment of $429 billion by 2024 to enhance the country’s overall infrastructure.
Robust Economic Fundamentals: Indonesia features strong domestic consumption, investor-friendly policies, and a low, stable inflation rate, ensuring sustained economic growth.
Strategic Development Plan: Emphasizing a 20-year development plan (2005-2025), Indonesia prioritizes infrastructure development as a catalyst for economic growth and competitiveness on the global stage.

COMPETITIVE OUTSOURCING FACTORS

Low Labor Cost

In the Asian region, Indonesia maintains a monthly minimum wage of $138, which, while modest, surpasses those of Vietnam and India, standing at $126 and $54, respectively. For context, the countries with the highest monthly minimum wages are Australia, Luxembourg, and New Zealand, commanding figures of $2,262, $2,102, and $1,805, respectively. Opting for countries with economical labor resources, such as Indonesia, proves advantageous for businesses engaged in labor-intensive operations, offering the potential for increased profit margins and reduced overall operating costs through the outsourcing of production processes.

Digital Resonance

This pertains to the nation’s degree of digital transformation, indicating its likelihood to offer services in sectors like business process outsourcing (BPO), information technology (IT), and voice services. The attractiveness of a country for global business outsourcing is also influenced by factors such as automation and cybersecurity.

As per the assessment by A.T. Kearney, a global strategy and management consulting firm, Indonesia holds the fourth position concerning the presence of a proficient workforce with digital capabilities and software development skills. Additionally, the country possesses a digital business environment that incorporates technological innovation, enhancing the efficiency of core business services across various industries.

Furthermore, Indonesia boasts a competitive cloud service industry, along with robust telecoms and digital finance markets. Projections indicate that these sectors are anticipated to generate an estimated $22.5 billion and $1.2 billion in profits by 2022, respectively.

Business-Friendly Outsourcing Requirements

In order to encourage foreign investment in the outsourcing industry, the Indonesian government backs the following initiatives:

Implementation of one-stop services for the expedited processing of business licenses within a maximum period of 15 days.
Revision of its Investment Law of 2007 to ensure parity in treatment between foreign and domestic investors.
Allowing 100% foreign ownership in specific sectors like e-commerce, pharmaceuticals manufacturing, film, and cold storage. Meanwhile, ownership thresholds are established for sectors such as banking, insurance, as well as raw commodity production, refining, and export.

ENTREPRENEURIAL CHALLENGES TO OUTSOURCING

Poor Outsourcing Skills

The tepid commitment to investments in the outsourcing industry stems from the dearth of specialized talent in the domestic customer service market. The limited workforce capable of handling crucial tasks and core competencies necessary to support the overarching goals of global businesses hinders opportunities for growth and expansion.

Despite being the largest economy in ASEAN, Indonesia grapples with the highest youth unemployment rate in the region, standing at 16.15%. Moreover, educational concerns compound the issue, as less than 10% of the 127 million-strong workforce holds university diplomas. Furthermore, only 65 out of nearly five thousand universities in the country boast globally satisfactory accreditation status. Unfortunately, the provision of substandard educational services is likely to yield graduates of poor quality.

Persistent challenges in job growth persist in the country due to the proliferation of unskilled workers and a scarcity of employees with higher levels of educational attainment. Realizing a flourishing digital economy and a robust outsourcing industry becomes challenging unless measures are taken to reduce the number of job-seekers struggling to meet basic employer requirements. Without equipping its populace with the necessary skills, knowledge, and attitude to remain competitive, Indonesia cannot reasonably expect its enterprise software and cloud computing sectors to act as key drivers for economic growth.

For Indonesia to be competitive in the global business outsourcing industry, the government must implement educational reforms and training programs. Ideally, addressing this gap should not only be viewed as a means to bridge the skills gap among college students and new graduates in Indonesia but also as an opportunity to re-skill and up-skill outsourcing professionals in areas such as business fundamentals, digital innovation, software technology, Artificial Intelligence (AI), and the Internet of Things (IoT), among others. Until such initiatives are realized, Indonesia will encounter significant challenges in the realm of global business outsourcing.

Vulnerability to Cybercrimes

Adding to Indonesia’s challenges, it lacks a robust legal framework for personal data protection. This deficiency has resulted in the misuse of citizens’ data and the easy accessibility of consumer personal data on digital platforms. The government’s failure to prioritize the enactment of a comprehensive data privacy law, which has been stalled since 2015, further impedes Indonesia’s progression into a significant global outsourcing player.

From alleged data leaks and hacking attempts to the government’s lenient data storage regulations, Indonesia faces the risk of attracting numerous cybercriminals and deterring both local and global outsourcing companies from investing in the country. The inadequate legislative environment in Indonesia, coupled with its citizens’ low digital literacy, forms a perilous combination that has the potential to escalate cybercrimes and result in an estimated economic loss of $150 billion.

Conclusion

Indonesia holds the potential to emerge as a prominent global outsourcing player, but it must first tackle substantial issues, including education and cybersecurity. Before engaging with a local outsourced services provider in the country, it is crucial to carefully assess your company’s specific requirements, day-to-day needs, and comfort level with the discussed challenges. For further insights on identifying the ideal outsourcing partner for your business, you can find more information here.

Outsourcing in Indonesia