Offshoring, which can be considered as the migration of business processes to a location offering cost advantages, is firmly at the forefront of the strategic agenda within a large number of companies in the UK. Those that have not already outsourced business processes, are either in the midst of doing so through trial operations, or are seriously exploring offshoring as a strategic option. Much has been written and spoken about the economic rationale behind this strategic trend; “Outsourcing” and “Offshoring” are now terms that have come into common parlance and seem to increasingly make sense and cents!
The evolution of this strategic business model has been gradual. It began with the shared services approach in the 1960’s with the 70’s and 80’s witnessing Information Technology aspects being outsourced in part or whole. The nineties saw the advent of more partnerships and alliances in outsourcing of other business functions such as HR, F & A, Logistics etc. with emerging emphasis on facilitating the migration of other processes that could be outsourced using effective technology deployment. The 2000’s are testament to IT enabled services coming of age with more and more functions and processes being brought under the ambit of outsourcing.
Processes
The current spectrum of processes that can be outsourced ranges from IT development, to back-office processing and call centres. More recently, the non-core activities have focussed around the finance function; from general ledger accounting, to the provision of management information, and more recently high-end value-added activities such as equity research and risk analytics. There are also several specialist functions, which are industry specific, and capable of being transferred outside the organisation such as share transfer registry work, superannuation fund accounting and trust administration accounting.
Location
India is an extremely popular outsourcing location and is now the back office of many banks and a magnet for customer service processes; companies such as National Rail and British Gas are rapidly seeing the benefits of moving their call centres to India which boasts a highly skilled and low cost labour force with experience in offshore activities. Within finance and accounting, it has proven capabilities in managing a range of processes of varying complexity. With vibrant capital markets, world class investment management and financial services expertise and a talent pool of over 200,000+ qualified accountants augmented by over 50,000 accounting majors annually. Indian firms are fast gearing to provide a wide range of outsourcing services that range from preparing payroll and payroll tax returns, using accounting records such as check registers, cash receipts and sales journals, bank statements and other items, to reconciling bank accounts, create a general ledger and financial statements to more value added services such as stock valuations and equity research.
Most people assume India as a principal location when they consider offshoring, and there are extremely valid reasons for doing so, as mentioned above. However India may not be the only answer to the question of where to locate offshore business operations. China has a large, low-cost labour pool, which is particularly attractive for high volume business processes. However, the workforce lacks the depth of experience within BPO and IT, and the fluency of English is not up to required business standards. In addition there are overall concerns about the country’s sustainability of its unprecedented growth . The Philippines have strong cultural affinities with the West; there are some comparable business processes to the USA (for example, similar accounting qualifications), which means that the workforce is accustomed to particular business requirements. In addition, a recent HR study has highlighted the benefits of setting up call centres in the Philippines; 64% of all Filipino agents can speak more than two languages, whereas only 40% of all Indian agents are multilingual. There is also a marked difference in employee turnover; an Indian call centre worker spends an average of 11 months at a job, while a Filipino call centre worker spends an average of 15. However the Philippines has a smaller labour pool of skilled resources and a less attractive time zone.
There has also recently been a trend to move services to the emerging European countries such as Poland, Hungary and the Czech Republic. These shores offer many cultural similarities, attractive costs and good language skills for the European countries such as Germany. Governments in these countries are committed to upgrading their infrastructure to reach EU levels and companies such as Dell and Accenture have taken advantage of this within the BPO space.
In this dynamic environment, some companies are prudent and adopt multi-country strategies, thereby diversifying risk and exploiting the best of all worlds. India has maintained its position as a dominant player for UK offshoring activities, principally stemming from the language and cultural affinities. However it faces a number of significant challenges, principally due to the emergence of competition from other developing countries that hope to emulate India’s success. How it responds to this, as well as other geopolitical and economic challenges (such as rising wage levels), will determine whether it retains its leadership position.
Value creation
The speed with which the outsourcing trend has gathered momentum has been sparked by hunger for the financial benefits that could be potentially leveraged though the focus has now turned towards controlling costs without compromising quality.
At the micro-level, the laws of comparative advantage dictate that firms should source their activities from countries that incur the lowest costs. In fact, this concept is nothing innovative and can be gleaned from any economics thesis - however in this case the driver of the unique benefits is the breaking down of global boundaries resulting from the increased sophistication of IT and telecoms. The economics of offshoring are compelling enough - what this broadly translates to is a potential 40-60% reduction in operational costs – an irresistible saving potential! The US banking, financial and insurance services industry alone is estimated to have saved close to $6 billion in the last four years by offshoring to India and consequently costs are 7-10% lower than that of its European counterparts. A recent IDC reports suggests that outsourcing and offshoring are set to increase in the banking industry despite rising profits in the sector, because of the pressures of market consolidation, fierce competition and the need to cut costs. The view ties in with Deutsche Bank's announcement in March that it will slash 6,400 jobs, consolidate its IT platforms and outsource and offshore more non-core functions.
And it isn’t just the big multinational giants that have caught on the numbers game; it also makes perfect sense for small and medium sized enterprises. For example a medium sized London accounting firm, that handles tax returns and accounting work, would have to employ part qualified accountants costing a minimum of 60 pounds an hour, while the same work can be handled by a fully qualified Indian accountant at a cost of 10 pounds an hour; significant cost savings can visibly be achieved. The additional savings made on the cost reduction can be invested into further value-added activities, which would have otherwise not been possible.
Further visible benefits other than cost savings, include shifting the fundamental dynamics of a company, by focussing it on change, efficiency and innovation – essential ingredients for today’s competitive environment. Companies have found that their overseas operations present distinctive advantages such as “follow the sun” approach (24 hours coverage) and a skill-set not present in the West, which translates into more efficient processes and superior performance.
Case study
Currently 45% of offshoring relates to financial services; this trend is set to rise, with Deloitte’s predicting that 2 million jobs in financial services could be relocated over the next 5 years translating to approximately $356 billion of global cost savings. With offshoring rapidly gaining management attention, Abbey has followed banks such as Lloyds, Citigroup and HSBC in moving operations to India in a bid to streamline processes and reduce costs.
Initially Abbey transferred its IT development and back-office processes but in the last twelve months, inbound customer calls, namely banking enquiries, have been routed to MsourcE, the partner in Bangalore. This call centre, with over 500 employees, is now Abbey’s biggest and currently responds to between 40-50% of customer calls. Although it is still early yet to comment on the actual savings, it is believed that the business case for this strategic decision will be proved successful, with Abbey and other companies unequivocally recognising the benefits.
Factors to consider
In moving towards an offshoring strategy, the key decisions of choosing the most appropriate location or commercial model occupy most of the planning approach. However, there are other strategic factors and issues that are important to analyse since they too are challenges that companies must approach and overcome. Careful consideration of these will ensure a smoother transition process and influence the success of the implementation phase and the ongoing performance of the operations.
Partner selection - Whichever commercial model is chosen (for example, outsourcing or JV), the right choice of partner is a fundamental decision, which can impact the ultimate success of the business operations. Given the physical distance from the offshoring location, together with the unfamiliarity of the players in the market, companies are advised to conduct the partner selection process aggressively in order to bring to the forefront any issues, which need to be resolved. Some of the criteria are similar to those used for an onshore selection process, however differences in the territory, immaturity of the market and culture present further factors to consider and risks to mitigate.
Reputation risk - Good corporate reputations are built through effective management, sound business ethos and a clear understanding of the values. Given the strong correlation between value and reputation, it is important for companies to be aware of the implications of external interest on the perceptions of the company. If firms portray the benefits of their offshoring strategy on the basis of cost reduction, stakeholders will expect to see the financial gains together with visible signs of where this investment has been made. Recent controversial and emotive media comments have revolved around issues such as labour relations and fears over quality of service; this has sparked a political debate about whether the offshore phenomenon is necessarily a positive move from security, quality and economic concerns. This therefore requires a commitment to understanding stakeholder opinions in more detail, and being careful about external communication and what the messages actually portray. The commercial realities and positive business case need to be explained backed by accurate facts and figures. Companies such as Barclays have been relatively successful in handling the issues around labour by negotiating agreements with UNIFI and thus ensuring affirmative media coverage.
Culture - Cultural issues may cause misaligned initial expectations and many barriers may be created if much implicit communication is lost or misinterpreted. Therefore a key challenge is managing multicultural teams where differences in values, systems, and approaches can have a direct impact on the success of projects. For example, the Indian working style may sometimes be that of a “foot in the door” approach where the vendor may underestimate the time and implications effects just so that the project is won. In the West, the style used is the opposite where some buffer time is built in so as to ensure that the project doesn’t under deliver.
Industry - In recent years the BPO industry has risen from strength to strength and demonstrated excellent financial returns for most vendors and clients. The sophistication and maturity of the industry has presented enviable performance to other countries. However, as with the momentum of any business cycle, there are factors that will influence the dynamics of the industry and may destabilise it such that the nature of conducting business may change. This does not imply that caution is required, but it simply presents issues that companies need to be wary of so that they can take full advantage of the situation.
Conclusion
All in all, as the global interest in outsourcing and offshoring increases, so does the need for enterprises to re-evaluate their strategies. Not all work can be outsourced or offshored and not all work that can be so done, could generate savings and efficiencies unless the service provider is one who understands not just the organisation, its needs and processes but can assimilate the essence of its strategy, philosophy, service discipline and work culture.
Sanjeevan Valanju is the Vice-President of SKP Crossborder Consulting, India. Nina Sodha is a Strategist.
