Going Offshore For Services

Like other studies by third-party researchers, the recent AT Kearney study on Location Choice in Offshore Outsourcing gave a clear verdict: India is the location of choice.

On parameters ranging from talent availability, process maturity to infrastructure, India scored high marks. The AT Kearney study reinforced the reality–India as the world’s preferred outsourcing base is here to stay.

What began as a small ripple on the surface of good economic growth and employment at the start of the new millennium is now getting to be a tidal wave–the outsourcing wave.

And now the services outsourcing boom has arrived, and is expected to continue till most functions that are non-customer facing are moved away from high-cost Western economies to India, China and the Philippines.

In an article published earlier this year, the Washington Post points out that a “jobless recovery” really is a recovery, at least for those with a job. As recent data confirms, workers continue to be more productive while disposable income continues to rise. To many forecasters, all of that suggests that the economy will continue to grow, albeit at a slow and unsatisfying pace for the balance of the year. The combination of over-capacity in many industries and the rise of low-cost nations will put downward pressure on prices.

A Forrester Research report of November 2001 has identified examples from different industries of successful outsourcing that proves that offshore outsourcing is no longer a hypothesis but the biggest reality of the current times. Here’s where the action is:

Software development: Oracle, Microsoft and IBM have begun sourcing work through dedicated offshore centers in India to join the ranks of HSBC (the Hong Kong and Shanghai Bank)–which recently announced a 1,000-seat center in Pune in western India–GE, Cisco, Citigroup, etc, which have used firms like Infosys, TCS, Wipro, MphasiS and Zensar to build optimal outsourcing capabilities in this area.

CRM work including customer service centres and call centers out of the Philippines, India, Ireland and some Latin American countries. Companies like Zomax in the US and Ireland, Sykes in Latin America and the Philippines and Spectra—mind, MsourcE, HCL, Suntech, Daksh, Epicenter and a dozen others have started seeing significant work move to India.

Back office accounting, payroll and HR administration, insurance claims processing: Hospital records and billings are a few other traditional back office functions finding their way to India and the Philippines, with majors like AIG, GE, the World Bank and major financial institutions all setting up large offshore support
centres.

Product engineering: Is a new area that is gaining ground. With venture funds drying up for many product companies, they are finding that Indian software companies with proven offshore processes and systems are ideal partners to maintain their systems, customize for the needs of new customers and generate new versions of their products on new platforms. Companies like Ericsson, Ask Me and scores of others have taken advantage of this opportunity in India.

Knowledge management outsourcing by investment banks, consulting firms and news providers: They are finding the talented Indian workforce an ideal resource for information collation, processing and presentation creation. Early pioneers like McKinsey with the successful McKinsey Knowledge Center in north India have now been followed by AT Kearney and a number of other knowledge purveyors.

So is the net result simply cost savings and the flight of jobs?

What is most important to recognize even for advanced economies like the US and the UK is that offshore outsourcing actually has the potential to add billions of dollars to economic gain. While the visible loss due to perceived job losses may look big, this is more than compensated by not just the savings to companies and investors, but the import of goods and services and, of course, repatriation of profits to American companies. The total percentage of services jobs that will move is still less than 2% of overall employment.

All in all, outsourcing is a win-win situation for all and will be the practice for most medium to large companies in the next few years.

For a few dollars less?

Cost saving is the first and foremost reason for many Fortune 1000 organizations to consider offshore outsourcing, as a cheaper workforce enables significant improvements in profitability. But the real benefits of aggressive outsourcing are from four different dimensions.

Specialization: Offshore companies with well-trained manpower, supported by established processes and world-class infrastructure give the necessary confidence to global organizations to outsource all their “context” activities to organizations for whom it’s “core” business.

Technology expertise: Access to technology is today global and many organizations from India and Ireland are able to enhance the technology capability of their clients and increase the value of their applications.

Resource flexibility and scalability: The benefit of planning manpower at average levels while the offshore firm caters to peaks and troughs and the functional flexibility of having less manpower with multiple skills capable of handling multiple roles.

Value addition: A virtual offshore workforce familiar with the organization’s systems and people is capable of generating new productivity and performance enhancement ideas that greatly enhance the capability of the organization.

Beyond all the hype that accompanies outsourcing, enterprises must stop for a reality check–the real benefits that can be targeted in financial terms.

• A 10% reduction in house fixed cost can be expected in the first year mitigated by a 1% additional cost of managing the outsourced partner.
• A saving of up to 17% can be expected in variable costs by using offshore suppliers mitigated by up to 9% additional
  
  change management costs.

Location Attractiveness
Infrastructure l Communication l Other basic infrastructure
Country risks/FDI Incentives l Attractive incentives l Political Environment
Time Zone l attractiveness
People Attractiveness
l Quality l Cost l Type of skills l English Language	Source: McKinsey Report 2002 (Nasscom)
India scores over many other destinations on cost as well as quality/quantity of human resources available

If the total saving of 17% looks small compared to the order of magnitude savings sometimes promised by outsourcing champions, the real benefits come when the program matures. That’s when up to 15% productivity improvements and hence cost savings can be expected on an annual basis. Our experience is that the total benefit plateaus in the 40% to 45% range in purely financial terms, but that the additional soft benefits we’ve discussed earlier are what make an offshore outsourcing initiative truly rewarding in the medium to long term.

Outsourcing and India

The key considerations for the choice of an outsourcing location and the status of India on each factor are:

Infrastructure: Office and production facilities, technological and support infrastructure and quality of life have historically been better in Ireland and the Philippines, while Chinese locations are emerging as truly first class because of significant government investments. But significant initiatives by many state governments in India have ensured that:

• Technology and support infrastructure and office space is readily available in the many multiple techno parks in India.
• Telecom costs are low with public and private sector organizations helping create a strong backbone for the country.

For international connectivity, there are submarine cables and satellites to ensure connectivity and redundancy.

• There is significant technical support in terms of big players such as Nortel and Hughes operating in India. Organizations can partner with them directly for technical support.
• Power reforms are under way in most states in India.
• The quality of life in major cities like Mumbai, Delhi, Bangalore, Chennai and Hyderabad as well as next tier cities like
  
  Pune, Bhubaneshwar and Trivandrum has improved substantially, and a host of technology focused towns like the Madhavrao Scindia counter magnet city near Gwalior have significantly expanded the choices of locations.

Skilled Manpower: An outsourcing destination is chosen not just because of the availability of high-quality trained manpower but because of the scalability of the entire operation. While the ability to set up a 100 or 200-seat outsourced center is there in Ireland, the Philippines and Latin American countries, India has the second-largest pool of technically trained manpower available anywhere in the world, and has made adequate plans to ensure a virtually limitless pipeline of resources through several steps.

• High quality engineering schools and private training institutes provide as many as 40,000 trained professionals every year.
• The increasing use of distance learning is standardizing the quality of educational inputs across most of the major educational towns and cities in the country.
• The rapid proliferation of computer education beginning at the school level and the entry of high-quality national and international school builders, including the industrial houses of the Birlas and Reliance, renowned institutions like the Delhi Public Schools and recent international entrants like GEMS and the Varkey Group are helping ensure an IT-literate future population.

Maturity of Processes: This area is a no-contest for India. The majority of the world’s SEI CMM Level 5 certified firms are in this country and process maturity has reached the highest levels in software firms. It is also beginning to pervade the business process outsourcing centers. In addition, emphasis on initiatives like Six Sigma, People CMM, COPC and customer-oriented flexible quality systems enables most of the professional firms in India to meet and exceed the expectations of all outsourcing companies.

Specific comparisons

If one looks at the major countries that compete with India for the global outsourcing business, the impact of some of these developments becomes obvious. The Gartner Group in May 2002 had ranked Canada high for application outsourcing, BPO and contact centers, Ireland for packaged applications, localization and product development, Israel and Russia for high-end software, China for embedded software and hardware services, and the Philippines for BPO, contact centers and animation. India was rated high for application outsourcing, IT outsourcing, BPO and product development.

On parameters ranging from talent availability and process maturity to infrastructure, India scored high marks in the recent AT Kearney study on “Location Choice in Offshore Outsourcing”

Forrester Research predicts that over 70% of outsourced jobs will move to India, the Philippines and China. The percentage for India is likely to be even higher because outsourcing will call for higher and higher value addition, something that only India, with its vast pool of knowledgeable manpower, will be in a position to provide on an continuing basis.

India isn’t just the world’s preferred technology outsourcing destination: it’s a global benchmark for outsourcing today.

Ganesh Natarajan & Uma Ganesh

Uma Ganesh is CEO and founder of Kalzoom Technologies and chairs the CII’s HR panel in the western Indian city of Pune, Maharashtra. Ganesh Natarajan is deputy chairman and managing director of Zensar Technologies, and a member of Nasscom’s executive council. He also chaired CII’s National Outsourcing Conclave in Mumbai in September 2003