The Outsourcing Blog..."Horses for Sources"

Sourcing advisors - your opinion is valuable

We've had some pretty spicy debating this year about the role and importance of third-party sourcing advisors.  In addition, we've had lively discussion on the boutique advisors which are proving to be an active low-cost channel for many buyers.  As part of my ongoing research into this market, I am very interested in what today's buyers and providers of outsourcing services are experiencing with the sourcing advisor medium.  Please take a few minutes to add your opinion here. And yes, you can remain anonymous if you prefer.

The Evolution of Captive and Outsourced delivery models for business processes: what is the right option for your company?

We are privileged to showcase the following incisive article from my good long-time friend Graham Russell, who leads Global Transaction Processing for pharma giant AstraZeneca.  Graham has been a long-established and respected authority on shared services and outsourcing for many years, and is one of a rare breed of executives who has had many years of experience managing both models.  I can't think of many other people in the industry more qualified than Graham to discuss the merits and shortcomings of both captive and outsourced delivery models.  Over to you Graham:

Birth of captives

Once upon a time, global and pan regional companies operated as a collection of single country businesses. Their back-office financial support was organized in the same way, with processes and systems being developed at a local level in each country. In the eighties, new global companies such as Microsoft entered the scene and were able to quickly organize their businesses and their back-office support services in a different manner since they were able to start with a clean sheet of paper, making them appear lean and nimble.

Should you sell your offshore captive to an outsourcing provider - ten questions to ask yourself...

I am constantly surprised by how many times I get pulled into the "captive versus outsource" debate.  I thought this one was settled long ago, but it seems many firms are still trying to go it alone.  If you are a well-resourced firm which has a set of processes that need to be kept inhouse, or are core to your business - and you can save substantial costs by moving these processes offshore - then my advice is to maintain a captive center.  However, make sure you have the local management expertise to hire the staff you need and develop career plans to retain them.  If you are a top tier brand, you stand a good shot at running a successful captive operation, but if you are a lesser-known firm with a small global presence, you will struggle to retain and develop your staff in this intense offshore environment.  There are many firms which still persist in funneling low-value administrative processes into their captive centers, where you have to question the business case of doing so.  Utkarsh Rai, in his guest post here entitled "offshoring secrets" does an excellent job surmising how challenging and expensive it is to run your own captive operation in India.  Utkarsh has spent most of his career managing offshore operations and here are some excerpts (and these are best-practices, not warnings):

Attracting Talent: Providing an excellent work environment, a challenging work and a competitive compensation and benefits package are important in attracting the talent

Cost of operations: For the last three four years the salary raises have been given to India employees in the range of 15-20%. But this does not translate into the payroll cost. The annual payroll cost increase can be around 5% or so, depending upon the type of growth in the headcount.

If your company runs an offshore captive, ask yourself the following questions:

1) Is the work being performed in the captive truly core to our business, or could we move it over to a third party?

2) How much risk are we exposing to our business by transitioning the captive operations over to an outsourcer?  Can we work with the outsourcer to manage the transition process to ensure there is a smooth transition of people and operations?

3) By selling off our captive, how much can we save over a 5 year period?

4) What is our option-value in the future if we want to take some of these operations back in-house?

5) How severe is our attrition rate, and how does  this impact running costs and quality?

6) Is the captive truly a part of our global organization, or is it really a distant support center that doesn't play a core role in our day-to-day business operations?

7) How much management time, and how much cost, is spent flying senior executives over to offshore locations to oversee low-value processes such as accounts payable, help deck support etc.? 

8) How much experience with offshoring do our firm's senior executives currently have, or are they learning it by trial and error and substantial cost to our organization?

9) How complex is it to transfer knowledge from our parent operations over to our offshore operations?  Wouldn't it be cleaner and easier to move the work to a third party outsourcer, who will take on the work they are contracted to do?

10) Is it worth keeping our captive, but re-locating it to a more appropriate location?  And what are the costs / benefits associated with doing that?

Alternatively, look at the Aviva model, and get a third party to build your captive for you with the future option-value of selling it to a third party.  However, with the amount of captives currently operating, my prediction is that the market for selling captives will be pretty much dusted in 2 years... so is this a sensible option? 

The outsourcing providers are primed to grow through two channels:  (1) buying captives and (2) taking on business from firms with no offshore or shared services support. If you already have an established captive you have a compelling option to investigate over the next 18 months:  do you sell it to one of the ambitious outsourcing providers looking to grow their business? If you have a well established captive operation now, you are in a lucky position.  The outsourcing firms prefer to acquire captives to grow their businesses, than acquire each other (as discussed here).  With a limited number of captives currently up for sale, you will find a handful of outsourcing providers interested in your business - and you could make a tidy windfall from the sale. They will take from it what they need to run your business, and utilize some of the resources to support other clients.  They also have the advantage of running your captive virtually by integrating it into their multi-location delivery infrastructure, that can cater for multi-lingual support and a whole variety of IT and business processes that you can't often manage from a single location.  You will also minimize your business risk by having these services run by an experienced provider with a multi-location delivery strategy. 

This discussion between Genpact's European leadership and Michael Jones, editor of Finance Director Europe, raises some compelling arguments in favor of this virtual captive model that Genpact has successfully developed during its recent hyper-growth.  Other leading providers, namely Accenture, IBM, HP, ACS, Cap Gemini, Infosys, TCS and Wipro, are also extremely adept at delivering services from their multi-location infrastructures. The other major advantage of selling your existing captive is that transition is far less painful for both buyer and provider.  Retaining key staff is often less challenging, as working for a services firm, rather than a captive, can often provide a more compelling challenge for the offshore professional. 

 

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'  Have you evaluated whether you should go captive, or just sell out altogether?

Is the financial services sector finally warming to BPO?

My interest has been piqued by the recent announcement of Sunlife of Canada outsourcing its UK customer services operation to TCS's Diligenta subsidiary in a $200m deal.   This comes hot on the heels of some financial services captive buy-outs in India.  The financial services sector has long been the problem child of the BPO industry, with operational executives extremely reluctant to relinquish control over business processes - especially finance and accounting.  As I have said on record several times, it will only take a few big deals to hit and many others will follow in a domino effect.  Bottom-line, the large BPO providers have capacity and are willing to invest in clients to gain an edge in this market.  Most of the near-term deals will more likely be captive acquisitions like the two mentioned above, but this is the clear strategy some of the providers are following to build out a global delivery infrastructure.  (Hey - I managed to avoid saying lift n' shift).

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So why do I think this sector is poised to become a BPO hotbed?

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• Competition is too fierce and the incumbents are looking at all options to contain costs and improve margins;
• Decreased shelf life of products;
• Business impacts and high costs of maintaining non-strategic and closed blocks of business;
• Rising wage costs and attrition within captives is proving too costly and taking up far too much management resources - the outsourcing option is becoming increasingly attractive and less risky from a business perspective;
• The sub-prime fiasco has really changed the game with several FSI firms - they are now prepared to take on more risk to remain profitable;
• BPO models can help firms scale up and down quicker - particularly with a looming economic downturn.  Having that flexibility could prove vital, especially in times when FSI firms need to get product to market quickly;
• Improved service levels from providers and their willingness to take on more customer risk;
• Improved technology add-ons at no incremental cost, for example analytics tools, that can sweeten the BPO opportunity.

More on this issue shortly....

Is India adapting to the Night Shift?

A new report released by the Associated Press is highlighting the issues of outsourcing jobs on Indian workers' health.  While the report lacks any hard evidence and focuses on a handful of individual cases, data released by the Indian Council for Research on International Economic Relations estimated the cost of these increased health issues, namely sleep disorders, heart disease and depression, could amount to $200bn for the Indian economy over the next 10 years "if corrective action is not taken quickly".

As we discussed here on HFS a few weeks' ago, the business case for organizations outsourcing certain services to locations closer to home (or even at home?) is becoming increasingly appealing - especially for those services that require a high degreee of interaction between the organization and its outsourced workers (for example software development).  For those services where the offshore workers need to be operating at the same hours as US companies, for example customer support / help-desk services, the Indian workers must adapt to working swing-shifts and unsocial hours.  My concern here is that Indian culture is very family and social-centric, and these types of jobs are becoming increasingly less desirable for many workers who go into these jobs initially to enjoy the increased compensation on offer, but are quickly realizing the trade-off with their lifestyle, health and family / social issues.  As long as outsourcing providers are servicing US businesses from India that require a large degree of worker overlap, they are going to be faced with increasing issues of attrition and rising wages to keep workers in these jobs.  This is the chief reason why the Latin America region is on the cusp of a major upswing of taking on outsourced jobs that benefit from the time overlap.  At the same time, it increases the appeal of UK and European-centric services being run out of India, where the time differences are far less oppressive on the offshore workers. 

These health and social issues are very symptomatic of a developing economy like India - and my only surprise is the speed at which they are happening.  I believe these issues will only be magnified when work is outsourced from US businesses to China, where the time differentials are even more brutal, and the language issues much tougher.  That is one of the principal reasons why China is (and will continue to be) far more successful at taking on services such as engineering and manufacturing, where these worker interaction issues between offshore staff and Western organizations and their customers are less crucial. 

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Is India growing up too quickly?

Cost reduction is not the only medicine many companies need in these times

The recent post "Will an economic downturn spark a new wave of outsourcing growth" provoked several differing views on how outsourcing will be impacted by a potential economic downturn:

My good friend David Sheinfeld, who wrote a great piece here back in May, has contributed some very forthright views regarding how an economic downturn will impact the BPO industry and the fact that cost reduction is not the only medicine many companies need in these times... take it away David:

So much has been made of the downturn in the economy and the credit crunch that it is hard to believe that any industry stands to gain over the short term let alone the BPO market.  But as they say with every downturn, an opportunity is created.  The traditional story line sounds something like this; the company’s outlook is bleak and its financial model is flawed. 

Upward, Onward, Onsource!

To celebrate the return of Horses for Sources, I wanted to feature an excellent piece submitted by Deborah Kops, who is embedded in sourcing folklore, having led global transformation efforts at Deutsche Bank and Bank of America and was also one of the founding partners at PwC's outsoucing division.  Today, Deborah is Chief Marketing Officer for WNS Global Services, a leading offshore BPO provider.  We will be featuring a lot of debate on the future of shared services / offshore captives and the road to BPO services over the coming months on this site, and Deborah's insight here typifies the approach many world class organizations are taking with regards to their sourcing journey.  Take it away Deborah....

The microscope is on the performance of the estimated +2500 shared services operations worldwide now reaching performance maturity.  What’s next for these centers as the pressures of competition and globalization demand more and more...

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Three to five years in, and step changes in performance has been achieved by consolidating back office operations in shared services centers (SSC). Aggregation of processes has yielded the benefits of scale and scope. Near- shore locations have delivered cost arbitrage and language capability. Best practices have been implemented end-to-end, resulting in standardization across both business lines and geographies.  Business unit customers have adopted new ways of working. And the paraphernalia of good business management—dashboards, service levels, KPIs--have been put in place, supported by reasonably efficient governance routines.  Has nirvana been reached?

Yet the C-suite is demanding more out of the shared services organization. Since outsourcing is no longer a dirty word, all delivery options are now on the table for consideration in order to reach the next level of performance. Corporate strategy could allow a spin off of the one or more of the centers, ‘commercializing’ the captive. Or the time may be right to embrace full-fledged outsourcing as a next logical step? 

There is another, less radical option to evolve shared services---onsourcing could be the right answer for many organizations.

Moving select processes out of existing SSC operations to a more cost effective near- or offshore provider may provide the solution.  In this scenario, the SSC management identify those processes which can be either ‘lifted and dropped’, or further improved, to benefit from the advantages of labor arbitrage and/or consolidation.  SSC leadership retains control of delivery, managing a portfolio of services provided to the business.

Why ‘onsource’ rather than transfer the entire operation to a third party lock, stock and barrel, either through a services contract or a sale?  Onsourcing provides an approach to outsourcing that gives a comfort to those organizations for which full scale outsourcing is difficult from a cultural, process complexity or regulatory standpoint.  Process delivery remains under the control of the company’s trusted services organization; services are then ‘retailed’ to the end user.

With control in the hands of the SSC, onsourcing results in a low risk, gradual approach to outsourcing, adjustable whenever.  It can be structured within a framework contract and ‘gated’ according to the ability to manage the velocity of change.

A challenge of full-scale outsourcing is knowledge retention and customer intimacy. By itself, outsourcing a specific scope is not a difficult proposition; breakpoints come from the point at which the outsourced workflow connects to upstream/downstream client processes. Onsourcing preserves that knowledge because a client layer is still firmly embedded in the SSC, ensuring that corporate knowledge is retained, and delivery remains end-to-end.

Onsourcing alleviates investment in lower cost locations to sustain delivery economics. With a rapidly globalizing services landscape, corporations cannot afford an ongoing investment in program management, property, infrastructure, and local branding to attract qualified staff.

Successful outsourcing implementation requires a change in the capabilities of management.  Good shared services managers have advanced their skills moving the corporation from vertical process delivery to consolidation. Onsourcing represents the next measured, step in evolving the capabilities of the retained team. Onsourcing managers become the ‘switching station,’ managing the expectations of the business by fitting the right ‘made or bought’ delivery solution.

Flexibility to adjust the speed of implementation of outsourcing is a key benefit. If business conditions change, the strategy can adapt.  Alternatively, if the velocity or complexity of transactions increases, onsourcing becomes a flexible delivery mechanism.

Onsourcing also acts as a buffer to the inevitable politics surrounding the decision to outsource. Since the SSC is still the corporate provider of services, onsourcing can be implemented without angst to the business.

Who can argue with the benefits of transitioning quickly and containing implementation costs? Full scale outsourcing requires substantial investment in business case development, sourcing, and transition.  Onsourcing can be implemented under a task order framework, justified by incremental business cases which can be approved quickly.

Onsourcing keeps the SSC competitive, and rate card increases static.  More expensive, high touch, risky or complex processes can continue to be delivered by the SSC while onsourcing can offset increases in costs, reducing the inevitable noise that comes from the annual transfer pricing exercise.

Is onsourcing a new idea?  No--just a simple term for the way in which many organizations would like to outsourcing business processes.  Benefits to the SSC can be easily understood—continuous improvement at a digestible pace, avoidance of investment, lessened impact of change-- with control in the hands of an organization with a strong corporate reputation. Many SSCs are seeing the virtues of incorporating selective or phased outsourcing into their delivery strategies. It’s time to give the trend a name.

• Deborah S. Kops is Chief Marketing Officer of WNS Global Services

Is Bangalore no longer a cost-saving location?

My good friend and former colleague at the Yankee Group, Arijit "Apu" Sengupta (pictured) - who is now CEO of BPO quality improvement software firm BeyondCore - alerted me to a startup that reverse-offshored its development team from Bangalore back to the US: 

“Bangalore wages have just been growing like crazy. To give you an example, there is an employee of ours who took the first 5 years of his career to get from 1% to 10% of his equivalent US counterpart. He then jumped from 10% to 20% of his US counterpart in the next 1 year. During his time with us (less than 2 years) he jumped to 55% of the US wage.  In the next few months we would have had to move him to 75% just to ‘keep him at market. Once the salary rises to 75% of US salaries, the overhead cost differences between India and the US would overwhelm the financial viability. Consider the additional overhead of managing two offices, flying between the two centers, dealing with the cultural differences.  The costs of having two offices, which are twelve time zones apart, is significant. People in both offices frequently had conference calls at 10pm and midnight every night (as a result the office in the US didn’t get started until noon sometimes or people rolled in tired). We were all traveling constantly. Development and communication moved slower due to the distance and teams.”

For more on Apu's story, go to the CIO Magazine website