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February - March 2004


Business Forum

India's Global Advantage: Business Process Outsourcing

by Rudy Wadhera


The Business Process Outsourcing ("BPO") industry encompasses all manner of customer support (including call-centres), transaction processing, HR / accounting administration and other back office functions carried out by the majority of large and medium scale commercial enterprises.

BPO has grown in relevance over the past twenty years alongside the meteoric growth of the computer and electronic technology industry. Initially populated by information technology-based consultancy and services companies, in the past fifteen years it has grown to include data management services, transaction processing centres, and call centres. Today, BPO is an intrinsic part of the business model within an array of industrial sectors including the financial, manufacturing, retail, media and consumer products industries.

The past ten years have witnessed the emergence of off-shore BPO services driven largely by a significant potential for cost reduction through the use of IT services and call centres located in low cost, high intellectual capital regions such as India. Since the mid-nineties, international organisations, particularly in the financial services sector such as HSBC, Citigroup and American Express, and others such as General Electric, have created substantial centres in India in order to gain from the cost advantages offered by relocating their business processing operations away from higher cost locations in the U.S. and Western Europe. This period has also seen the tremendous growth of Indian IT services companies such as Wipro, Infosys and Satyam, further building confidence in the enormous benefits of their service offerings, high quality execution combined with significant cost savings, among U.S. and Western European companies. Indian companies have gained a reputation of dependability and trust with these companies, particularly through work on critical projects such as Y2K code remediation.

NASSCOM, the Indian IT organisation, estimates that the BPO market in India will grow from US$2.3 billion in fiscal 2003 to US$24 billion by 2008, representing some 15% of the addressable global market. Several key factors will drive this:

  • Significant cost savings: an Ernst & Young study has shown that 36% of call-centre operational costs can be saved by relocating to India; an industry rule-of-thumb is that each call-centre employee based in India offers savings of US$20,000.
  • High quality, educated workforce: unlike the U.S. and Western Europe, the vast majority of BPO employees in India possess a graduate degree.
  • Large pool of intellectual capital: India has a sizeable number of graduates from its well-established university system available to the BPO industry.
  • Convenient time zone: this natural characteristic allows Indian BPO operations to provide functionality to U.S. and European clients during inconvenient, operationally expensive hours of the day.
The Financial Services Opportunity
As an example of the giant market potential of BPO, the financial services industry represents a very large target market for this infant sector. In a comprehensive Deloitte Research survey of offshore BPO in April 2003, the world's 100 largest financial-services companies have indicated that they expect to transfer an estimated US$356 billion of their operations and two million jobs offshore over the next five years in efforts to reduce their costs significantly. Financial institutions expect to reduce costs by some US$1.4 billion each by 2008 through relocating operations to low-cost centres like India from developed economies in North America, Europe and Asia.
The shift of operations offshore already is now underway. Thirty per cent. of the respondents currently have existing offshore operations and this is expected to climb to 75 per cent. within two years, according to the survey. It suggests that the firms achieve 39 percent cost savings from moving operations to low-cost centres where salaries and other costs are much lower.The study draws four principal conclusions:
  • The offshore trend is driving a radical shift in the structure of the global financial-services industry and this transformation is just beginning.
  • Financial institutions that can utilise their existing offshore facilities expect significant future savings because they leverage offshore scale and scope; the challenge is achieving economies of scale.
  • Firms aspiring to move offshore should move quickly to capture the benefits of doing so, but the challenge is building capabilities quickly and prudently.
  • Firms who don't move offshore risk being left behind because companies moving offshore estimate future cost savings at about 45 per cent

The survey shows that banks and insurance firms are transferring offshore such functions as application development, coding and programming, accounting and finance, operations, processing and administration, contact support and call-centre operations.

Since decisions to go offshore are significant ones, the chief executive officer, chief financial officer, chief information officer or chief operating officer makes 90 per cent. of them. As the size and complexity of the offshore moves increase, approval by the CEO is set to increase to 45 per cent. from 20 per cent.

Deloitte Research's estimate that US$356 billion in financial-services firms' cost base will move offshore is based on a US$2.3 trillion cost base for the top 100 institutions globally. The survey indicates that the financial-services firms plan to shift, on average, 15 per cent. of their global cost base offshore over the next five years. Using that same 15 per cent. assumption, two million positions of the thirteen million people employed in the financial services sector of North American, the European Union and Switzerland, and the Asian developed economies of Hong Kong, Japan and Singapore will shift to low-cost offshore locations.
The Keys to Successful Offshore BPO
Despite its popularity, successful outsourcing to India is still difficult. While the market has matured, telecommunications have improved and English fluency in India has flourished, challenges still remain. Cultural issues creep in, service-level expectations are set too high, transitional costs can be foreboding, and ongoing relationship management is expensive and labour-intensive. Most of the corporations that are using BPO agree that outsourcing to India is a work in progress - a journey, rather than a destination. International corporations are still strong believers in the India phenomenon - and here are some of the key lessons for constructing a sound offshore BPO model.
Designing a BPO Strategy
It's vital for any organisation that's considering BPO to create an overarching strategy for outsourcing to India. Taking the time to make such a strategy clear is something that many companies might skip, but that would be a mistake. There's much more to going offshore than sending out an request for services to fifty BPO providers, selecting a vendor and then moving processes offshore. Companies must go to extraordinary lengths to establish goals and objectives first. The basic processes must be well-thought-out, documented and understood by everyone before any work is transferred offshore.
In addition, when creating an offshore BPO model, companies really need to look at their own business model. For example where their IT departments are currently located, what processes are key to competitive strategy (and should therefore be kept internal) and then customise the BPO model based on that analysis.
Choosing The Right BPO Provider
In order to help key business areas accept the idea of outsourcing to India and leverage the available scale, it's important to create a list of preferred vendors and negotiate prices up front. Corporates must filter the list of potential providers based not only on cost, but on key additional criteria in the areas of service offerings and capabilities, price, management practices and procedures, customer base, and business profile and strategy. When deciding the right BPO provider, it's useful to give more weight to service offerings and price than to other, less important criteria such as business strategy and customer base.
Managing the Transition
As is the case with almost all offshore work, the most critical phase is the transition. The transition period requires bringing a few people who will eventually be working offshore into the company's onshore site to go through the process, get an understanding of it and create the documentation that's required. This should include writing standard technical documentation outlining such things as file-naming standards, and hardware and software environments; creating a high-level project plan; identifying the best onshore and offshore managers; and providing opportunities for knowledge transfer such as job shadowing.
Quality Assurance
BPO requires a robust quality assurance process. It's vital for companies to invest in the outsourcing relationship on an ongoing basis in order to catch mistakes and improve processes. It's one thing to have excellent processes in place, but these also need to be constantly monitored and improved on.
Offshore BPO: A Sector With Huge Growth Prospects
Depending on whom you ask, anywhere from 50 to 70 per cent. of all Fortune 500 companies are already outsourcing to India, and, according to Forrester Research, the amount of work done there for U.S. and Western European companies is expected to more than double this year. If corporations are not already sending some development or maintenance work to Mumbai, Gurgaon or Chennai, chances are that they are looking into it since the offshore BPO model offers tantalising potential cost savings of up to 70 per cent. Much as Indian software and IT services have become a globally accepted for high quality, India clearly has the potential to establish herself as the leading provider of BPO services in the global economy.

Rudy Wadhera is an investment and business development consultant with longstanding experience of BPO within the financial services industry. E-mail: Rwadhera@rwadhera.plus.com

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