Israel–Hamas conflict impacts BPO/IT service delivery – but the resilience of the sector is apparent in the region

The ongoing Israel–Hamas conflict, currently intensified in Gaza, is a tragedy that has already extracted a massive humanitarian toll, with far-reaching regional and global implications playing out in the background.

The conflict has caused major disruptions to businesses in Palestine (Gaza and the West Bank) and Israel, including in the IT services and high-technology industries, which serve as the primary sectors that drive the economies in both locations.

Focused ICT investments

Both Palestine and Israel have invested heavily to leverage their technology expertise and position the locations as key providers of value-adding, non-voice outsourcing services.

Available expertise and specialist IT skills – coupled with location favorability to Europe and key source market regions among the Gulf Cooperation Council (GCC) countries – has positioned the region for nearshore outsourcing.

While the nascent Palestinian ICT sector is relatively small compared to neighboring MENA countries like Egypt, Jordan, Iraq, and Lebanon, the sector has grown rapidly in recent years.

Provisioning ICT services emerged as the most viable option to drive economic growth and support job creation, particularly in Gaza where unemployment rates are high. As such, the Palestinian Authority through the Ministry of Telecommunication and Information Technology (MTIT) has focused on building the Palestinian ICT industry and regaining sovereignty over this part of its economy to stimulate growth.

Within this context, the West Bank and Gaza are typically viewed as distinct markets due to their physical separation and geo-political differences.

Before the recent conflict, there were roughly 300 ICT-related companies in the West Bank and Gaza, supporting approximately 5,000 employees.

Israel is also burgeoning as an established tech and IT services hub. Commonly referred to as the ‘start-up nation’ after Dan Senor and Saul Singer championed the term in their 2009 best-seller, Startup Nation: The Story of Israel’s Economic Miracle, Israel is generally considered one of the largest tech hubs outside Silicon Valley. 

Recognizing the potential of the ICT sector, the Israeli government has supported industry growth through incentives to attract foreign investment, such as funding, grants, tax breaks and benefits, and support for workforce training and development.

For example, the government-funded Technology Incubator Program offers companies funding of up to 85% during the early stages of the project. In addition, the Israel Innovation Authority (IIA) offers initiatives worth US$400 million to help companies establish themselves. A four-year employment grant scheme also pays part of a new company’s payroll for every new employee.

As a result, Israel’s tech community accounts for nearly one-fifth of the country’s annual GDP, according to the IIA, making it the sector with the largest economic output for the country.

Tech supports BPO sectors

On the back of Israel’s thriving technology and startup ecosystem, the country’s business process outsourcing (BPO) sector has experienced significant growth and development over the past decade.

Israel’s high-tech IT sector supports a wide range of BPO services, as operators leverage cutting-edge technologies like artificial intelligence (AI), automation, and data analytics to enhance efficiency and service quality. The Israel BPO sector also provides customer support, technical support, IT outsourcing, finance and accounting, human resources, content moderation, and data-entry services.

The services sector accounts for 80% of GDP in the country, with the IT industry expanding by 400% in the last decade. In 2020, the country exported US$767.1 million and imported US$224.1 million worth of ICT services. In particular, the industry’s domain expertise and maturity in data security and privacy have made Israel a favored destination for IT and digital service outsourcing.

In Palestine, a Mercy Corp report explains how the ability to deliver software, ITO, and BPO services through wireless electronic communication creates the ideal borderless environment to support the sector. This is particularly apparent in Gaza, as services are not inhibited by restrictions on movement and access for people or physical products.

As such, most established IT companies offer outsourcing as a major aspect of their business model, with outsourcing accounting for approximately 80% of the Palestinian tech sector, according to a report by Forbes.

The core BPO/IT functions (specialized and lower-volume) offered in Palestine include back-office process, data conversion, multimedia, and graphic design services. These are the offerings available that align with restrictions to scaling in the sector, according to a research paper titled Palestine and ICT Offshore Sourcing: from CSR to Long-term Economic Impact.

As such, Palestinian companies provide IT nearshoring services to organizations in Israel, Europe, and the Middle East. This includes the United Kingdom, Switzerland, France, Germany, the Netherlands, Saudi Arabia, UAE, and Qatar, as well as offshore services to the US, Japan, and Australia.

Large talented labor pools

Both Palestine and Israel boast well-educated and highly skilled workforces, with domain expertise in fields such as technology, engineering, and finance.

According to the Global Skills Report 2021, Israel ranks 38^th globally and 2^nd in the MENA region (behind the UAE) based on expertise in technology (74%) and data science (80%).

The report highlights industry-leading spending on technology, with the local government routinely spending 4% of GDP on R&D, compared to about 2.8% by the US. The report states that this contributes to a vibrant ‘Silicon Wadi’ (Israel’s startup ecosystem), which routinely generates world-class startups in areas like AI and cybersecurity.

A World Bank report highlights key strengths of the Palestine ecosystem, with a large talent pool thanks to the region’s 13 universities with ICT faculties producing 2,500 graduates annually. Among these highly educated graduates, 85% have a university degree and 27% have graduate degrees. 

Palestine’s labor force is highly educated and skilled, and labor costs are extremely competitive – about 75% lower than Western European and USA rates. The labor costs also compete favorably with traditional outsourcing countries such as India (about 25% lower) and China (similar costs), according to Mercy Corp. Staff turnover rates are also low.

Cultural and language affinities

Additional strengths in each location include cultural affinities with multiple countries. Many Israelis study abroad, which means the workforce offers broad language proficiency, with bilingual or multilingual talent in English, Hebrew, and Arabic.

Likewise, the English, Hebrew, and Arabic language proficiency and neutral accents of Palestinians, coupled with a cultural affinity to Middle Eastern countries – which major destinations like India and China usually cannot offer – make it a favored nearshoring destination for organizations in the MENA region. 

This linguistic diversity aligns with the favorability of both locations, which enables providers to deliver various service and support operations to multiple nearshore and offshore buyer markets.

The business impact

However, the escalating conflict between Israel and Hamas has impacted these locations in different ways, with local companies in Israel and the West Bank generally advising staff to stay at home.

A report by news organization Al Jazeera stated that, with the current climate of the Israel–Hamas conflict, global companies with a presence in Israel either suspended operations or asked employees to work from home.

A considerable number of workers in the Israel tech sector, which makes up about 10% of the total labor force, have been called up for military reserve duty.

Notably, business continuity plans are in place to keep providing services, and the resilience of operators in the sector is apparent.

Based on the current geo-political situation, the ongoing Israel–Hamas conflict will necessitate adaptability from BPO/IT providers in Israel and Palestine as they face multifaceted challenges.

Israel itself is a large market for contracted work for the West Bank’s IT services and exports. It is currently unclear how the escalating conflict will impact ongoing business relations and the flow of business between the two locations.

Offshore and nearshore buyers, particularly from GCC countries will play an important role in supporting the BPO/IT sector in Palestine to sustain operations and provide employment and income.

From a broader perspective, there have been few immediate filter-through effects on the global BPO/IT sector. However, enterprises that outsource services to the MENA region should maintain a close eye on developments in the region. Establishing and refining a business continuity plan (BCP) will enable organizations to manage potential disruptions while ensuring the safety and wellbeing of employees.

Global BPO/IT buyers should also consider embracing refugee-enabled, impact sourcing to these regions amid the conflict escalation. While the region may face socio-economic instability, innocent citizens – many of whom have been displaced – should not be penalized for the conflict.

By engaging in socially responsible outsourcing, businesses can act as a force for positive change and empowerment by supporting the core BPO/IT sectors and leveraging the established capabilities in the region.