Ranganatha Maligi, Consultant, Capco
Although reduction in operating costs is not necessarily the first reason to outsource, practically every such decision should result in cost savings. Yet some companies (or departments within companies) actually resist outsourcing, believing that they can do it better and more cheaply in-house. In a few cases, this may be true. But in most, this thought process is not based on a complete and accurate analysis of the facts.
Direct costs:
When considering outsourcing parts, or the entirety, of any business process the following associated costs need to be taken into account: salaries, benefits, training/education, specialized software, travel, phone charges, depreciation/amortization, mail costs and postage, MIS support, office supplies, equipment, management time, information costs, and occupancy charges. It is essential to understand these costs in the context of the activities which make up the function. Unfortunately, most organizations capture costs on a cost element basis (salaries, benefits, rent, and depreciation) rather than on a process or activity basis. Without good knowledge of the process cost, it is not possible to compare the value of an external provider of the service.
The process of determining activity-based costs involves five steps:
1. Identifying all activities which make up the function.
2. Grouping similar activities (10-15 with no one activity representing more than 20% of the total cost).
3. Determining the activity drivers. For example, labor (% of people's time used by an activity) and non-labor drivers (% of office space utilized or number of machine hours required for the activity).
4. Determining the costs of the activity drivers.
5. Producing the list of costs related to each activity. For a truly complete understanding, anticipated future costs of maintaining the process in-house also need to be calculated.
Indirect costs:
Besides the direct costs involved, there are other, cost-related benefits of outsourcing to be considered.
Turn fixed costs into variable costs - For most companies, employee related costs and the associated overhead are relatively fixed, regardless of product or service demand. This can be very costly during slow sales periods. Outsourcing turns these fixed costs into variable costs, as the providers have greater economies of scale and thus can price for variable demand.
Reduce investments in assets - There are current expenses that benefit future years, like investments in training, other employee development, and transformation/re-engineering programs. Outsourcing effectively transfers these ongoing investments to the provider.
Improve cash flows - Future growth is always dependent upon adequate cash flows. Outsourcing some or all of the receivable management functions can assure a company of tying receivable resources directly to sales volumes. Companies experiencing strong growth cannot afford to have cash tied up in receivables while new credit and collection staff take 3-6 months getting up to speed.
Once you have determined your process costs, comparison to industry benchmarks can give you an idea about how you are doing in relation to other companies, and how the provider's quotations stack up. A recent article on BPO quotes a Fortune 500 firm which benchmarked its back-office process against its competitors. The resulting variances were 50-75% in process costs! Obviously given this kind of differentiation, efficient back-office operations can provide significant cost advantages.
Evaluating outsourcing as a strategic management tool requires a complete cost analysis. The following worksheet can assist in the completion of a true cost analysis:
In-house:
Activity costs, inclusive of labor and overhead
+ Raw Materials, inclusive of shipping, storage, handling, and overhead
+ Cost of invested capital
+ Estimated impact of outsourcing on costs and revenue
= Total cost of performing activity in-house
Versus
Outsource:
Proposal for outsourcing
+ Anticipated future pricing adjustments
+ Additional one time costs of outsourcing
+ Additional ongoing costs of outsourcing
= Total cost of outsourcing activity
The value proposition of outsourcing creates a powerful case to leverage this tool not only as a stopgap measure, but also as part of the overall management strategy.
The drive toward outsourcing is "irreversible," according to an Outsourcing Center BPO Special Report, and will have long-term ramifications of: (1) forcing companies to use process-based (activity-based) costing models and (2) eradicating 'cost centers' forever.
1/04/2007
Expand your outsourcing horizons
The advantages of outsourcing technology requirements that are not core to a business are familiar. Many organisations need to reduce back-office costs and improve overall operating efficiencies to maintain a competitive edge.
However, media coverage of such deals may leave industry observers with the impression that they are the preserve of large, multi-national corporations with the IT budgets to match.
Ironically, smaller or mid-sized firms that have less IT expertise or budgets, but with turnovers as large as £200m, may actually have a more compelling business case for evaluating outsourcing's ability to initiate cost savings, provide process efficiency and the freedom to innovate. But that does not just include outsourcing the IT, but the people and processes that IT supports.
Internal administrative departments, such as HR, finance and accounting, procurement and customer call centres are increasingly being outsourced to third parties.
According to analyst firm Datamonitor, the business process outsourcing market is the single fastest growing area of the IT services sector. Growing at a rate of 8% annually, it is estimated to be worth £214bn today and is predicted to grow to almost £375bn by 2008.
John Willmott, chief executive of UK-based research company Nelson Hall, said, "Over the past nine months business process outsourcing has accounted for 38% of outsourcing activity in Europe, with IT outsourcing contributing 62%. So [business process-led outsourcing] is not quite dominant yet. The principal sectors remain financial services and government, though we are seeing increased HR and finance and accounting outsourcing across other commercial sectors."
But he said there was very little activity in the SME business process outsourcing space at present. "The market is very immature in regards to SME offerings. It depends how you define SME, but [this market sector] probably still only makes up less than 10% of the business process outsourcing market in general at this stage. Largely local accountants and payroll services companies serve this market. An example of a payroll company serving SMEs is MidlandHR."
Other companies that can be put in this space include Go4BPO, a provider of mortgage loan, insurance claim and outsourced data entry and transaction processing services in the UK, US and India. And Middlesex-based Damco Solutions specialises in document and data processing, content management, and legal support services for customers as diverse as local councils, legal or financial services firms and wood products manufacturers.
Another example is financial systems and outsourcing specialist BancTec. It recently announced the release of The Mortgageweb, a new automated data exchange system designed specifically for the mortgage market to automate electronic data exchange relating to the mortgage application process for financial services companies.
Rob Liddell, BancTec new product development director, said, "Our research indicates that the majority of lenders and packagers cite manual processes and data re-keying as being highly detrimental to the efficient processing of mortgage applications."
IT service providers, management consultancies and specialist business process outsourcing suppliers are all positioning themselves to gain a share of this growing market, which is increasingly merging the traditional areas of IT services and specialist business process management services.
This can make it harder for an SME to find the right provider for business process outsourcing services. Some specialist services, like payroll, are even being offered by banks as part of small business banking packages.
Willmott said, "Most SMEs want up-to-date technology, and actually, the need to refresh or update systems, and hence processes, is a more important driver in the SME market than for multinationals.
"However, the technology needs to be relatively straightforward to use and relatively low-cost to implement. It also needs to be highly modular so that it can be tailored to the specific needs of the SME."
The needs of an SME are no less specific than a large enterprise when it comes to business-to-business process management. "Suppliers have always tried to provide standard services, and SMEs are no different from any other organisation in needing suppliers to understand them and their place in their industry, as well as provide an account manager who will match the supplier's capabilities with the client's requirements," said Willmott.
"The client needs to feel special and as though the service is designed with them in mind, even if they are a small organisation," he said.
He advocated services that simultaneously offer cost reduction, service improvement and process improvement or innovation. "In general, business process outsourcing is an operations rather than technology player, so IT capability is less important than operational capability," he said.
"Nonetheless, most offerings need to be underpinned by good data capture, imaging, workflow or document distribution, and agent management technology. After that it depends on the area being outsourced."
Independent industry analyst, Derek Miers, said that from a technology perspective, SMEs are most likely to struggle to handle the choreography and orchestration of their electronic data interchange business processes. Basic knowledge of the processes involved are desirable, but not essential.
When outsourcing such core business functions, Miers said companies could consider adding to the in-house technology infrastructure with tools that can help better orchestrate the business processes being outsourced. SMEs should also monitor the service provider's choreography of them according to the service level agreement and pricing conditions of the business process outsourcing contract.
"There are those packages, like Peoplecube, N8 and Digital Fuel, which help automate and monitor workflow administration," said Miers. "They help suppliers and users in modelling the services and reporting on them. A business process outsourcing company may be providing services to 28 different companies, but needs to charge them at a granular level."
Process notation and modelling standards could go a long way to opening up the business process outsourcing market, according to Miers. "Companies should ask about the notion of process modelling protocols like enterprise data fabric, which allows for outsourcing outside the business firewall," he said.
"These standards are all about how an organisation defines the boundaries of how it interacts with other suppliers, like outsourcers', systems. Take a fresh approach to how you understand your processes before outsourcing them."
Peter Redshaw, Gartner investment services research director, said toolsets occupy only a thin slice of the business process outsourcing technology stack, and to a very low level of granularity, which need not necessarily have an impact on an SME's decision to outsource.
"If the brief is business process outsourcing, that might lead to some level of understanding of business process management technology, which is all about methodology, tools and standards. But a deal will essentially be about process workflow, which is a very specific part of business process management," he said.
Rather than pursuing a deeper understanding of in-house technology investment, Redshaw urged a pragmatic approach to business process management technology. SMEs should ensure that the benefits available offset the inevitable extra management and governance requirements involved in running a successful business process outsourcing contract.
"These are often white label services that deal with high-volume, low-value transactions. And for small firms, where it can be difficult to get economies of scale, it does not add any value to keep tweaking code to stay ahead of regulations. These deals can give access to offshore resources too," he said.
Allan Cook, director of IT strategy and outsourcing consultancy Akubra, agreed. According to Cook, the real challenge is getting the SLAs and exit strategy right.
"Setting up and automating the processes themselves comes from the workflow and business process management engines that have orchestration technologies built-in as a commodity. Focus less on the technology and more on the enablement of SLAs and contract governance."
Cook pointed out process technologies used to deliver business specific applications with a web front-end form the basis of a majority of functional and business specific outsourcing offerings.
"The outsourcers are exposing as much integration and specialisation as web services as they possibly can, to make the service as simple to use and attractive as possible," he said.
"There are some industry areas where older methods of integration are more linked to the type of technologies used on the back end. In financial services, for example, applications are probably built on mainframe technology.
"Any business process outsourcing service should be able to display the process exchange inside a browser and handle authentication," said Cook.
Cook pointed out that the design of the contract is actually much harder than the design of the technology. "When considering whether to outsource a process, it is more about the risk associated with outsourcing and the cost than what technology is involved - interoperability and workflow have been around for some time."
Outsourcing, regardless of what size of company, is now less about technology and more about service and cost. "It is not a technology problem you are solving, it is a business one. The technology is just there to plug the companies together now," said Cook.
Finding the right service provider is the most important consideration. And in a rapidly expanding market, where large organisations have laid the groundwork for exposing some heavy technical processes to non-technical users using web standards, the SME's choice is likely to be greater than ever before.
However, media coverage of such deals may leave industry observers with the impression that they are the preserve of large, multi-national corporations with the IT budgets to match.
Ironically, smaller or mid-sized firms that have less IT expertise or budgets, but with turnovers as large as £200m, may actually have a more compelling business case for evaluating outsourcing's ability to initiate cost savings, provide process efficiency and the freedom to innovate. But that does not just include outsourcing the IT, but the people and processes that IT supports.
Internal administrative departments, such as HR, finance and accounting, procurement and customer call centres are increasingly being outsourced to third parties.
According to analyst firm Datamonitor, the business process outsourcing market is the single fastest growing area of the IT services sector. Growing at a rate of 8% annually, it is estimated to be worth £214bn today and is predicted to grow to almost £375bn by 2008.
John Willmott, chief executive of UK-based research company Nelson Hall, said, "Over the past nine months business process outsourcing has accounted for 38% of outsourcing activity in Europe, with IT outsourcing contributing 62%. So [business process-led outsourcing] is not quite dominant yet. The principal sectors remain financial services and government, though we are seeing increased HR and finance and accounting outsourcing across other commercial sectors."
But he said there was very little activity in the SME business process outsourcing space at present. "The market is very immature in regards to SME offerings. It depends how you define SME, but [this market sector] probably still only makes up less than 10% of the business process outsourcing market in general at this stage. Largely local accountants and payroll services companies serve this market. An example of a payroll company serving SMEs is MidlandHR."
Other companies that can be put in this space include Go4BPO, a provider of mortgage loan, insurance claim and outsourced data entry and transaction processing services in the UK, US and India. And Middlesex-based Damco Solutions specialises in document and data processing, content management, and legal support services for customers as diverse as local councils, legal or financial services firms and wood products manufacturers.
Another example is financial systems and outsourcing specialist BancTec. It recently announced the release of The Mortgageweb, a new automated data exchange system designed specifically for the mortgage market to automate electronic data exchange relating to the mortgage application process for financial services companies.
Rob Liddell, BancTec new product development director, said, "Our research indicates that the majority of lenders and packagers cite manual processes and data re-keying as being highly detrimental to the efficient processing of mortgage applications."
IT service providers, management consultancies and specialist business process outsourcing suppliers are all positioning themselves to gain a share of this growing market, which is increasingly merging the traditional areas of IT services and specialist business process management services.
This can make it harder for an SME to find the right provider for business process outsourcing services. Some specialist services, like payroll, are even being offered by banks as part of small business banking packages.
Willmott said, "Most SMEs want up-to-date technology, and actually, the need to refresh or update systems, and hence processes, is a more important driver in the SME market than for multinationals.
"However, the technology needs to be relatively straightforward to use and relatively low-cost to implement. It also needs to be highly modular so that it can be tailored to the specific needs of the SME."
The needs of an SME are no less specific than a large enterprise when it comes to business-to-business process management. "Suppliers have always tried to provide standard services, and SMEs are no different from any other organisation in needing suppliers to understand them and their place in their industry, as well as provide an account manager who will match the supplier's capabilities with the client's requirements," said Willmott.
"The client needs to feel special and as though the service is designed with them in mind, even if they are a small organisation," he said.
He advocated services that simultaneously offer cost reduction, service improvement and process improvement or innovation. "In general, business process outsourcing is an operations rather than technology player, so IT capability is less important than operational capability," he said.
"Nonetheless, most offerings need to be underpinned by good data capture, imaging, workflow or document distribution, and agent management technology. After that it depends on the area being outsourced."
Independent industry analyst, Derek Miers, said that from a technology perspective, SMEs are most likely to struggle to handle the choreography and orchestration of their electronic data interchange business processes. Basic knowledge of the processes involved are desirable, but not essential.
When outsourcing such core business functions, Miers said companies could consider adding to the in-house technology infrastructure with tools that can help better orchestrate the business processes being outsourced. SMEs should also monitor the service provider's choreography of them according to the service level agreement and pricing conditions of the business process outsourcing contract.
"There are those packages, like Peoplecube, N8 and Digital Fuel, which help automate and monitor workflow administration," said Miers. "They help suppliers and users in modelling the services and reporting on them. A business process outsourcing company may be providing services to 28 different companies, but needs to charge them at a granular level."
Process notation and modelling standards could go a long way to opening up the business process outsourcing market, according to Miers. "Companies should ask about the notion of process modelling protocols like enterprise data fabric, which allows for outsourcing outside the business firewall," he said.
"These standards are all about how an organisation defines the boundaries of how it interacts with other suppliers, like outsourcers', systems. Take a fresh approach to how you understand your processes before outsourcing them."
Peter Redshaw, Gartner investment services research director, said toolsets occupy only a thin slice of the business process outsourcing technology stack, and to a very low level of granularity, which need not necessarily have an impact on an SME's decision to outsource.
"If the brief is business process outsourcing, that might lead to some level of understanding of business process management technology, which is all about methodology, tools and standards. But a deal will essentially be about process workflow, which is a very specific part of business process management," he said.
Rather than pursuing a deeper understanding of in-house technology investment, Redshaw urged a pragmatic approach to business process management technology. SMEs should ensure that the benefits available offset the inevitable extra management and governance requirements involved in running a successful business process outsourcing contract.
"These are often white label services that deal with high-volume, low-value transactions. And for small firms, where it can be difficult to get economies of scale, it does not add any value to keep tweaking code to stay ahead of regulations. These deals can give access to offshore resources too," he said.
Allan Cook, director of IT strategy and outsourcing consultancy Akubra, agreed. According to Cook, the real challenge is getting the SLAs and exit strategy right.
"Setting up and automating the processes themselves comes from the workflow and business process management engines that have orchestration technologies built-in as a commodity. Focus less on the technology and more on the enablement of SLAs and contract governance."
Cook pointed out process technologies used to deliver business specific applications with a web front-end form the basis of a majority of functional and business specific outsourcing offerings.
"The outsourcers are exposing as much integration and specialisation as web services as they possibly can, to make the service as simple to use and attractive as possible," he said.
"There are some industry areas where older methods of integration are more linked to the type of technologies used on the back end. In financial services, for example, applications are probably built on mainframe technology.
"Any business process outsourcing service should be able to display the process exchange inside a browser and handle authentication," said Cook.
Cook pointed out that the design of the contract is actually much harder than the design of the technology. "When considering whether to outsource a process, it is more about the risk associated with outsourcing and the cost than what technology is involved - interoperability and workflow have been around for some time."
Outsourcing, regardless of what size of company, is now less about technology and more about service and cost. "It is not a technology problem you are solving, it is a business one. The technology is just there to plug the companies together now," said Cook.
Finding the right service provider is the most important consideration. And in a rapidly expanding market, where large organisations have laid the groundwork for exposing some heavy technical processes to non-technical users using web standards, the SME's choice is likely to be greater than ever before.
Chinese tech park woos Indian IT, BPO players
Even as the visit of the Chinese President preoccupied Indian officialdom in the New Delhi, Indian and Chinese technology teams have been meeting in Mumbai and Bangalore to explore areas of cooperation.
A team from the Suzhou Industrial Park (SIP), based in China's garden city (80 km inland from Shanghai), has been showcasing its extensive infrastructure for high tech development and manufacturing.
The Park is China's number one target of foreign investment and is already home to over 2,500 registered companies, spread across electronic hardware, software services and bio-sciences. The biggest success for the team last week was the three-way agreement inked with the Gurgaon-based Quatrro BPO Solutions (headed by India's outsourcing pioneer Raman Roy), SIP and one of the Park's major `tenants' Suzsoft.
The deal will start joint studies aimed at promoting the business processing industry in China, specifically a BPO industry in SIP.
Business philosophy
Speaking to The Hindu on the sidelines of the SIP showcase in Bangalore, Suzsoft CEO James Tong said, "it is our business philosophy to partner with the best. We are excited to be associated with Mr. Raman and his Quatrro team.''
Ma Ming, SIP Administrative Committee Chairman, said, "Mr. Raman and his team are indeed the pioneers of BPO and SIP. Suzhou is the leader in IT and hi-tech services in China.
"My role, as a representative of the Chinese Government in this three party joint MoU, is to provide the platform and the `catalyst incentives' necessary for BPO to flourish in China.''
Quatrro will not be the first Indian player to partner with SIP. N. Murali Mohan, Vice President of the Bangalore-based IIHT Ltd explained that the company was present in Suzhou as part of its initiative jointly with Broadengate, a technology outsourcing company in Shenzhen, to provide training and services in technology infrastructure management.
Suzsoft's own BPO operations in SIP are headed by Sanjeev Joshi, who said over 800 Indian students in Suzhou studying at the medical college there had already created a mini India in one of China's fastest growing second tier IT destinations.
A team from the Suzhou Industrial Park (SIP), based in China's garden city (80 km inland from Shanghai), has been showcasing its extensive infrastructure for high tech development and manufacturing.
The Park is China's number one target of foreign investment and is already home to over 2,500 registered companies, spread across electronic hardware, software services and bio-sciences. The biggest success for the team last week was the three-way agreement inked with the Gurgaon-based Quatrro BPO Solutions (headed by India's outsourcing pioneer Raman Roy), SIP and one of the Park's major `tenants' Suzsoft.
The deal will start joint studies aimed at promoting the business processing industry in China, specifically a BPO industry in SIP.
Business philosophy
Speaking to The Hindu on the sidelines of the SIP showcase in Bangalore, Suzsoft CEO James Tong said, "it is our business philosophy to partner with the best. We are excited to be associated with Mr. Raman and his Quatrro team.''
Ma Ming, SIP Administrative Committee Chairman, said, "Mr. Raman and his team are indeed the pioneers of BPO and SIP. Suzhou is the leader in IT and hi-tech services in China.
"My role, as a representative of the Chinese Government in this three party joint MoU, is to provide the platform and the `catalyst incentives' necessary for BPO to flourish in China.''
Quatrro will not be the first Indian player to partner with SIP. N. Murali Mohan, Vice President of the Bangalore-based IIHT Ltd explained that the company was present in Suzhou as part of its initiative jointly with Broadengate, a technology outsourcing company in Shenzhen, to provide training and services in technology infrastructure management.
Suzsoft's own BPO operations in SIP are headed by Sanjeev Joshi, who said over 800 Indian students in Suzhou studying at the medical college there had already created a mini India in one of China's fastest growing second tier IT destinations.
The Top 21 Enterprise HRO Providers
Our annual list of the top provider's of the year: Who made it on and who dropped out of sight?
By Margo Alderton & Jay Whitehead
Growing, growing, grown: Last years list of 23 became this years 21. All the incumbents got bigger, mostly by acquisition. And the newcomersCGI, Adecco, and Manpowerare huge companies in their own right. The Tier 1 large-account game is becoming the Land of the Big. And those mid-market players are not doing too badly either.
Each year, we publish our annual list of the top enterprise HRO providersthose providers who offer end-to-end HRO services. And each year, the names are very familiar to those in the industry. But this years list marks a number of interesting changes.
Due to the flurry of M&A activity that took place in the market starting in mid 2004, youll see a number of changes on the list. Starting with Hewitt Associates acquisition of HRO pioneer Exult, followed not soon after by EDS and Towers Perrins joint venture to form ExcellerateHRO, and the most recently announced acquisition of Mellon HR&IS by ACS, youll note that the number of providers on the 2005 list has shrunk, although the range of services offered has actually expanded, and the total contract volume has ballooned.
We predict this M&A activity will continue in 2004. While there will be some dislocation, we consider this a marvelous example of a favorite private equity investor termcreative destruction. Sure, partnering among the larger enterprise-level (Tier 1) HRO providers is winnowing down the list of names. But we are also seeing European players such as ARINSO ramping up their North American operations. And there is some new blood as well. Witness CGI Groups entry into the market with its City of Montreal account (sounds like CGI has taken a page from ARINSOs book and is
making the migration from IT to HRO). And check out the global staffing players Manpower and Adecco, who are now both offering new services and expanding their reach into the North American market.
So on to the list of the new and improved top enterprise providers of 2005.
Criteria for the list: Providers must have at least one documented end-to-end HRO client,1,000 employees or larger, and be able to provide national service. Providers are listed in alphabetical order.
Top Enterprise HRO Providers
Accenture HR Services accenture.com/hrservices
Examples of End-to-end Clients: Best Buy, TSA, BT (second-generation), Sandvik, City of Copenhagen
HRO Services: Customer Contact Services, Exit Services, Information Services, Learning Services, HR Advisory Services, Pay & Benefits Services, Performance Services, Resourcing Services
Description: This provider offers customized, integrated HR solutions that span the entire employee lifecyclefrom recruitment to retirementfor larger enterprises. They also have a more standardized, integrated offering for medium-sized companies and individual services available a la carte. 2005 marked the signing of one of the biggest second-generation HRO contracts, as Accenture client BT re-signed a 10 year HRO contract with expanded global services.
ACS (Global HR Solutions) acs-inc.com/hro
Examples of End-to-end Clients: Chubb, Delta Airlines, Motorola, Goodyear, General Motors Europe
HRO Services: Benefits Administration, Compensation, Core Process Redesign, Employee Assistance Program, Employee Service Center, HR Information Systems and Employee Portal, Learning Services, Payroll, Performance Management, Relocation, Selection and Assessment, Staffing (contd on next page)
Description: One of the many M&A players in the HRO market this year, ACS recently acquired Mellon HR&IS to expand upon its benefits and consulting capabilities. Providing end-to-end BPO solutions to commercial and government clients worldwide, ACS offers a suite of transactional, professional, and
advisory HRO services.
Adecco (Global HR Solutions) adecco.com
Examples of End-to-end Clients: confidential
HRO Services: Payroll, Recruiting, Staffing, Training, HRIS, Employee Service Center, EAP
Description: With 125,000 clients for its global staffing business, Adecco also operates under additional brands such as Lee Hecht Harrison (outplacement) and Ajilon (specialized professional staffing).
Administaff administaff.com
Examples of End-to-end Clients: Access Worldwide, Fresh Success
HRO Services: Employment Administration (payroll, payroll taxes), Benefits Administration, Recruiting and Selection, Performance Management, Training and Development, Government Compliance, Employer Liability Management, Owner Support
Description: This national PEO has expanded beyond the small enterprise market to providing full-service HR support to medium-sized enterprises. With
multiple regional service centers and sales offices nationwide, Administaff was listed among Americas Most Admired Companies for four years in
Fortune magazine.
ADP (Employer Services) adp.com
Examples of End-to-end Clients: Tyco, IHG
HRO Services: Payroll, Benefits Administration, HR Information Management, 401(k)/Retirement Services, Screening and Selection Services, Expense Management, Time and Labor Management, Tax and Compliance Management
Description: Known for their data processing and payroll services, ADP also provides full-service, comprehensive HR services including traditional and Internet-based outsourcing solutions to employers in more than 26 countries. In addition to payroll solutions and tax returns, ADP also offers complete outsourcing services through ADP TotalSource, a PEO.
Advantec advantecHR.com
Examples of End-to-end Clients: Coral Beach Hotels & Clubs, Crown Auto
HRO Services: Benefits, Payroll, Recruitment, Risk Management, Human Capital Management Consulting
Description: Another PEO that is reaching into the mid market, this company provides a range of HR services to clients nationwide. Services include a strong focus on HR consulting and ongoing training as well as innovative technology.
Aon Consulting aon.com
Examples of End-to-end Clients: AT&T
HRO Services: Benefits, Communication, Compensation, Expatriate, Investment and Management Consulting, Retirement
Description: Aon Consultings global network of resources delivers solutions in the areas of employee benefits, compensation and rewards, communication, HRO, process redesign, and talent selection and development. With a recent reorganization of its HR outsourcing group, Aon hopes to better integrate its IT and consulting experience and leverage its experience in human capital throughout the upcoming quarters.
ARINSO International arinso.com
Examples of End-to-end Clients: GM Europe (partner with ACS), Kone, Schindler, Finnair, Elia
HRO Services: Consulting (business analysis, process improvement, transformation management, service-center design); Integration (HRMS, e-HR, enterprise portals); Operations (BPO, application maintenance, infrastructure management, payroll services); Health and Wealth Benefits
Description: This European IT giant has expanded to offer HRO services to more than 100 companies in more than 20 countries. Its recent signing of several U.S. HRO contracts has made it an up-and-coming player in the North American Market.
Ceridian ceridian.com
Examples of End-to-end Clients: Comerica Inc, Johns Manville, FMC Corporation, Symetra Financial, Sony Ericsson, Unisource
HRO Services: Staffing, HR Administration, Payroll and Compensation, Compliance, Employee Effectiveness, Benefits Administration, HRMS
Description: Providing HR solutions for employers in the United States, Canada, and Europe and serving almost 18 percent of the U.S. workforce in some capacity. Ceridian Small Business Solutions unit offers fast, Internet-based HR solutions for smaller businesses and Ceridian Centrefile offers HRO services in the United Kingdom and Europe.
CGI Group cgi.com
Example of End-to-end Clients: City of Montreal
HRO Services: HR Administration, Payroll, Time Management, Training & Development
Description: One of the newest players in the end-to-end HRO field, when CGI Group signed on the Montreal account, they offered a full suite of HR and payroll
services to more than 25,000 employees.
CheckPoint HR checkpointhr.com
Examples of End-to-end Clients: American Stock Exchange
HRO Services: Payroll, Benefits, HRMS, Recruiting and Staffing, Training, Compliance
Description: Targeting small and mid-sized companies, CheckPoint HR provides HR and payroll outsourcing through both Web-based HRMS and personalized
customer service.
Convergys (Employee Care) convergys.com
Examples of End-to-end Clients: State of Texas, State of Florida
HRO Services: Benefits, Payroll, Administration, Recruiting and Staffing, Learning and Development
Description: With two decades of outsourcing experience, this company offers full-service HRO to almost 600 clients in more than 60 different countries. Through their 50 service centers worldwide, they serve more than 2.5 million employees and 7 million retirees.
EADS eads.com
Examples of End-to-end Clients: Airbus
HRO Services: Business Transformation Outsourcing (payroll, training, time management, insurance and pension plans, recruitment and administration) and Application Management (applications maintenance and management of HRIS)
Description: In 2004, The European Aeronautic Defence and Space Company (EADS), a global leader in aerospace, defense, and related services, announced a joint venture with IBM to provide HR services. The venture, called HR Technologies and Management, or HRTM, launched with 100 employees and 35 business customers, including Airbus.
ExcellerateHRO (formerly EDS and Towers Perrin) excelleratehro.com
Examples of End-to-end Clients: CIBC, Infineon
HRO Services: Payroll, Training, Recruitment, Employee Relationship Management, Relocation and Expatriation, Knowledge Management and Reporting, Benefits Administration, HR Consulting
Description: One of the movers and shakers of 2004, ExcellerateHRO is a joint venture between EDS (which owns 85 percent) and Towers Perrin (which owns 15 percent). The new company expands upon EDS broad portfolio of business and technology solutions with Towers Perrins additional benefits and consulting experience.
Fidelity Employer Services Company (FESCo) fidelity.com
Examples of End-to-end Clients: Bank of America, ABB
HRO Services: HR Administration, Payroll, Defined Benefit/Contribution, Health and Welfare, Compensation, Consulting
Description: Offers a comprehensive suite of HR and benefits outsourcing to corporations around the world with more than 9,000 employees in six regional locations across the country.
Gevity gevityhr.com
Examples of End-to-end Clients: ComUnity Lending
HRO Services: HRIS, HR Administration, Recruiting and Staffing, Compensation and Pay
Description: Continuing their growth with the acquisition of other PEOs such as Epix, Gevity offers integrated HRO solutions to small and medium-sized businesses in the United States.
Hewitt Associates hewitt.com
Examples of End-to-end Clients: PepsiCo, Duke Energy, Capgemini, Sun Microsystems, Sony, BP, Prudential
HRO Services: HR Administration, Payroll, Benefits, Retirement and Financial Management, Recruiting, Training and Development
Description: Leaders of the flurry of M&A activity in 2004, when Hewitt Associates acquired HRO service provider Exult this year, they not only added a number of brand name clients to their roster, they also gave their traditionally consulting-focused services a strong dose of pure-play BPO power. Since the announcement, Hewitt has signed on a number of brand-name clients to a list that already included more than half of the Fortune 500 companies.
IBM Global Business Services ibm.com
Examples of End-to-end Clients: Procter & Gamble
HRO Services: Payroll, Benefits Administration, Compensation, Expatriate and Relocation, HRIT
Description: Although the HRO industry is still awaiting IBMs announcement of an additional end-to-end HRO deal since their signing of Procter & Gamble, Big Blue has been making big strides in defining themselves as a leader in the BPO (or BTO, Business Transformation Outsourcing as IBM defines it) market. Another company participating in the M&A mating game, this year marked IBMs acquisition of other BPO providers, such as FAO provider Equitant.
Manpower manpower.com
Examples of End-to-end Clients: Toyota Motor Manufacturing Kentucky, Suntrust Online
HRO Services: Staffing, Assessment and Training, On-site Workforce Management, Outplacement, BPO
Description: A global leader in employment services with offices in more than 65 countries, although best known as a staffing services provider, Manpower also offers full-service HRO to a number of clients. The company operates under additional brand names of Right Management Consultants, Jefferson Wells, Elan, Brook Street, and Empower.
RSM McGladrey Employer Services rsmmcgladrey.com
Examples of End-to-end Clients: BBB Services Corp
HRO Services: Benefits Brokerage and Administration, Payroll, HR Administration
Description: Although known for their strong focus on benefits services (due in part to the 2004 acquisiton of MyBenefitSource), RSM McGladrey also offers
end-to-end HRO services to hundreds of clients nationwide.
Xchanging xchanging.com
Examples of End-to-end Clients: BAE Systems
HRO Services: Recruitment, Payroll, Training and Development, Outplacement, Benefits, Compensation, Incentives
Description: Created through the spin off of BAE Systems in 1998, this U.K. company offers BPO, FAO, ITO, and HRO. Although BAE remains its only end-to-end HRO client, it offers a number of other BPO services to clients as renowned as the London Stock Exchange, Lloyds, and Boots.
By Margo Alderton & Jay Whitehead
Growing, growing, grown: Last years list of 23 became this years 21. All the incumbents got bigger, mostly by acquisition. And the newcomersCGI, Adecco, and Manpowerare huge companies in their own right. The Tier 1 large-account game is becoming the Land of the Big. And those mid-market players are not doing too badly either.
Each year, we publish our annual list of the top enterprise HRO providersthose providers who offer end-to-end HRO services. And each year, the names are very familiar to those in the industry. But this years list marks a number of interesting changes.
Due to the flurry of M&A activity that took place in the market starting in mid 2004, youll see a number of changes on the list. Starting with Hewitt Associates acquisition of HRO pioneer Exult, followed not soon after by EDS and Towers Perrins joint venture to form ExcellerateHRO, and the most recently announced acquisition of Mellon HR&IS by ACS, youll note that the number of providers on the 2005 list has shrunk, although the range of services offered has actually expanded, and the total contract volume has ballooned.
We predict this M&A activity will continue in 2004. While there will be some dislocation, we consider this a marvelous example of a favorite private equity investor termcreative destruction. Sure, partnering among the larger enterprise-level (Tier 1) HRO providers is winnowing down the list of names. But we are also seeing European players such as ARINSO ramping up their North American operations. And there is some new blood as well. Witness CGI Groups entry into the market with its City of Montreal account (sounds like CGI has taken a page from ARINSOs book and is
making the migration from IT to HRO). And check out the global staffing players Manpower and Adecco, who are now both offering new services and expanding their reach into the North American market.
So on to the list of the new and improved top enterprise providers of 2005.
Criteria for the list: Providers must have at least one documented end-to-end HRO client,1,000 employees or larger, and be able to provide national service. Providers are listed in alphabetical order.
Top Enterprise HRO Providers
Accenture HR Services accenture.com/hrservices
Examples of End-to-end Clients: Best Buy, TSA, BT (second-generation), Sandvik, City of Copenhagen
HRO Services: Customer Contact Services, Exit Services, Information Services, Learning Services, HR Advisory Services, Pay & Benefits Services, Performance Services, Resourcing Services
Description: This provider offers customized, integrated HR solutions that span the entire employee lifecyclefrom recruitment to retirementfor larger enterprises. They also have a more standardized, integrated offering for medium-sized companies and individual services available a la carte. 2005 marked the signing of one of the biggest second-generation HRO contracts, as Accenture client BT re-signed a 10 year HRO contract with expanded global services.
ACS (Global HR Solutions) acs-inc.com/hro
Examples of End-to-end Clients: Chubb, Delta Airlines, Motorola, Goodyear, General Motors Europe
HRO Services: Benefits Administration, Compensation, Core Process Redesign, Employee Assistance Program, Employee Service Center, HR Information Systems and Employee Portal, Learning Services, Payroll, Performance Management, Relocation, Selection and Assessment, Staffing (contd on next page)
Description: One of the many M&A players in the HRO market this year, ACS recently acquired Mellon HR&IS to expand upon its benefits and consulting capabilities. Providing end-to-end BPO solutions to commercial and government clients worldwide, ACS offers a suite of transactional, professional, and
advisory HRO services.
Adecco (Global HR Solutions) adecco.com
Examples of End-to-end Clients: confidential
HRO Services: Payroll, Recruiting, Staffing, Training, HRIS, Employee Service Center, EAP
Description: With 125,000 clients for its global staffing business, Adecco also operates under additional brands such as Lee Hecht Harrison (outplacement) and Ajilon (specialized professional staffing).
Administaff administaff.com
Examples of End-to-end Clients: Access Worldwide, Fresh Success
HRO Services: Employment Administration (payroll, payroll taxes), Benefits Administration, Recruiting and Selection, Performance Management, Training and Development, Government Compliance, Employer Liability Management, Owner Support
Description: This national PEO has expanded beyond the small enterprise market to providing full-service HR support to medium-sized enterprises. With
multiple regional service centers and sales offices nationwide, Administaff was listed among Americas Most Admired Companies for four years in
Fortune magazine.
ADP (Employer Services) adp.com
Examples of End-to-end Clients: Tyco, IHG
HRO Services: Payroll, Benefits Administration, HR Information Management, 401(k)/Retirement Services, Screening and Selection Services, Expense Management, Time and Labor Management, Tax and Compliance Management
Description: Known for their data processing and payroll services, ADP also provides full-service, comprehensive HR services including traditional and Internet-based outsourcing solutions to employers in more than 26 countries. In addition to payroll solutions and tax returns, ADP also offers complete outsourcing services through ADP TotalSource, a PEO.
Advantec advantecHR.com
Examples of End-to-end Clients: Coral Beach Hotels & Clubs, Crown Auto
HRO Services: Benefits, Payroll, Recruitment, Risk Management, Human Capital Management Consulting
Description: Another PEO that is reaching into the mid market, this company provides a range of HR services to clients nationwide. Services include a strong focus on HR consulting and ongoing training as well as innovative technology.
Aon Consulting aon.com
Examples of End-to-end Clients: AT&T
HRO Services: Benefits, Communication, Compensation, Expatriate, Investment and Management Consulting, Retirement
Description: Aon Consultings global network of resources delivers solutions in the areas of employee benefits, compensation and rewards, communication, HRO, process redesign, and talent selection and development. With a recent reorganization of its HR outsourcing group, Aon hopes to better integrate its IT and consulting experience and leverage its experience in human capital throughout the upcoming quarters.
ARINSO International arinso.com
Examples of End-to-end Clients: GM Europe (partner with ACS), Kone, Schindler, Finnair, Elia
HRO Services: Consulting (business analysis, process improvement, transformation management, service-center design); Integration (HRMS, e-HR, enterprise portals); Operations (BPO, application maintenance, infrastructure management, payroll services); Health and Wealth Benefits
Description: This European IT giant has expanded to offer HRO services to more than 100 companies in more than 20 countries. Its recent signing of several U.S. HRO contracts has made it an up-and-coming player in the North American Market.
Ceridian ceridian.com
Examples of End-to-end Clients: Comerica Inc, Johns Manville, FMC Corporation, Symetra Financial, Sony Ericsson, Unisource
HRO Services: Staffing, HR Administration, Payroll and Compensation, Compliance, Employee Effectiveness, Benefits Administration, HRMS
Description: Providing HR solutions for employers in the United States, Canada, and Europe and serving almost 18 percent of the U.S. workforce in some capacity. Ceridian Small Business Solutions unit offers fast, Internet-based HR solutions for smaller businesses and Ceridian Centrefile offers HRO services in the United Kingdom and Europe.
CGI Group cgi.com
Example of End-to-end Clients: City of Montreal
HRO Services: HR Administration, Payroll, Time Management, Training & Development
Description: One of the newest players in the end-to-end HRO field, when CGI Group signed on the Montreal account, they offered a full suite of HR and payroll
services to more than 25,000 employees.
CheckPoint HR checkpointhr.com
Examples of End-to-end Clients: American Stock Exchange
HRO Services: Payroll, Benefits, HRMS, Recruiting and Staffing, Training, Compliance
Description: Targeting small and mid-sized companies, CheckPoint HR provides HR and payroll outsourcing through both Web-based HRMS and personalized
customer service.
Convergys (Employee Care) convergys.com
Examples of End-to-end Clients: State of Texas, State of Florida
HRO Services: Benefits, Payroll, Administration, Recruiting and Staffing, Learning and Development
Description: With two decades of outsourcing experience, this company offers full-service HRO to almost 600 clients in more than 60 different countries. Through their 50 service centers worldwide, they serve more than 2.5 million employees and 7 million retirees.
EADS eads.com
Examples of End-to-end Clients: Airbus
HRO Services: Business Transformation Outsourcing (payroll, training, time management, insurance and pension plans, recruitment and administration) and Application Management (applications maintenance and management of HRIS)
Description: In 2004, The European Aeronautic Defence and Space Company (EADS), a global leader in aerospace, defense, and related services, announced a joint venture with IBM to provide HR services. The venture, called HR Technologies and Management, or HRTM, launched with 100 employees and 35 business customers, including Airbus.
ExcellerateHRO (formerly EDS and Towers Perrin) excelleratehro.com
Examples of End-to-end Clients: CIBC, Infineon
HRO Services: Payroll, Training, Recruitment, Employee Relationship Management, Relocation and Expatriation, Knowledge Management and Reporting, Benefits Administration, HR Consulting
Description: One of the movers and shakers of 2004, ExcellerateHRO is a joint venture between EDS (which owns 85 percent) and Towers Perrin (which owns 15 percent). The new company expands upon EDS broad portfolio of business and technology solutions with Towers Perrins additional benefits and consulting experience.
Fidelity Employer Services Company (FESCo) fidelity.com
Examples of End-to-end Clients: Bank of America, ABB
HRO Services: HR Administration, Payroll, Defined Benefit/Contribution, Health and Welfare, Compensation, Consulting
Description: Offers a comprehensive suite of HR and benefits outsourcing to corporations around the world with more than 9,000 employees in six regional locations across the country.
Gevity gevityhr.com
Examples of End-to-end Clients: ComUnity Lending
HRO Services: HRIS, HR Administration, Recruiting and Staffing, Compensation and Pay
Description: Continuing their growth with the acquisition of other PEOs such as Epix, Gevity offers integrated HRO solutions to small and medium-sized businesses in the United States.
Hewitt Associates hewitt.com
Examples of End-to-end Clients: PepsiCo, Duke Energy, Capgemini, Sun Microsystems, Sony, BP, Prudential
HRO Services: HR Administration, Payroll, Benefits, Retirement and Financial Management, Recruiting, Training and Development
Description: Leaders of the flurry of M&A activity in 2004, when Hewitt Associates acquired HRO service provider Exult this year, they not only added a number of brand name clients to their roster, they also gave their traditionally consulting-focused services a strong dose of pure-play BPO power. Since the announcement, Hewitt has signed on a number of brand-name clients to a list that already included more than half of the Fortune 500 companies.
IBM Global Business Services ibm.com
Examples of End-to-end Clients: Procter & Gamble
HRO Services: Payroll, Benefits Administration, Compensation, Expatriate and Relocation, HRIT
Description: Although the HRO industry is still awaiting IBMs announcement of an additional end-to-end HRO deal since their signing of Procter & Gamble, Big Blue has been making big strides in defining themselves as a leader in the BPO (or BTO, Business Transformation Outsourcing as IBM defines it) market. Another company participating in the M&A mating game, this year marked IBMs acquisition of other BPO providers, such as FAO provider Equitant.
Manpower manpower.com
Examples of End-to-end Clients: Toyota Motor Manufacturing Kentucky, Suntrust Online
HRO Services: Staffing, Assessment and Training, On-site Workforce Management, Outplacement, BPO
Description: A global leader in employment services with offices in more than 65 countries, although best known as a staffing services provider, Manpower also offers full-service HRO to a number of clients. The company operates under additional brand names of Right Management Consultants, Jefferson Wells, Elan, Brook Street, and Empower.
RSM McGladrey Employer Services rsmmcgladrey.com
Examples of End-to-end Clients: BBB Services Corp
HRO Services: Benefits Brokerage and Administration, Payroll, HR Administration
Description: Although known for their strong focus on benefits services (due in part to the 2004 acquisiton of MyBenefitSource), RSM McGladrey also offers
end-to-end HRO services to hundreds of clients nationwide.
Xchanging xchanging.com
Examples of End-to-end Clients: BAE Systems
HRO Services: Recruitment, Payroll, Training and Development, Outplacement, Benefits, Compensation, Incentives
Description: Created through the spin off of BAE Systems in 1998, this U.K. company offers BPO, FAO, ITO, and HRO. Although BAE remains its only end-to-end HRO client, it offers a number of other BPO services to clients as renowned as the London Stock Exchange, Lloyds, and Boots.
Talent, infrastructure boost software outsourcing firms
China, the world's second-biggest software outsourcing destination, is closing the gap with India because of the country's improved infrastructure, rich talent resources and government support, industry experts speaking at a Shanghai conference said yesterday.
China now has 12 percent of all global software outsourcing, up from 7 percent two years ago. India's portion is expected to drop to 43 percent from 69 percent in the same period, according to the International Association of Outsourcing Professionals.
"That doesn't mean China is eating into India's market share as the whole industry is growing rapidly," said Michael Corbett, an IAOP executive.
Global software outsourcing revenue grew to US$50 billion last year from US$32.8 billion the year before, according to Gartner Inc, a US-based consulting firm.
The Asia-Pacific region, powered by India and China, recorded an annual growth rate of more than 800 percent in the sector, according to Bleum Inc Chief Executive Eric Rongley.
China has a comparatively strong computer science talent pool, jumping from roughly 40,000 a year in 2001 to 140,000 in 2004, experts said. That allows China-based firms, like Bleum, to receive orders from the United States and Japan, according to Rongley.
At present, Chinese firms depend highly on Japan for outsourcing orders, but the size of that country's market is only one-fifth of that in the West, including the United States and United Kingdom.
China's software outsourcing industry generated about US$3 billion in revenue last year compared with US$23 billion in India, which gets most of the orders from the West, according to David Barrett, a senior lawyer and partner in Simmons & Simmons.
China's infrastructure, including airports, roads and Internet access rate, is a clear advantage in the competition against India, according to Rongley and Barrett.
"The government has also shown strong support for the outsourcing business, with tax incentives, logistics and special funds to encourage innovation," said Ju Dehua, vice president of the Shanghai Software Industry Association.
China now has 12 percent of all global software outsourcing, up from 7 percent two years ago. India's portion is expected to drop to 43 percent from 69 percent in the same period, according to the International Association of Outsourcing Professionals.
"That doesn't mean China is eating into India's market share as the whole industry is growing rapidly," said Michael Corbett, an IAOP executive.
Global software outsourcing revenue grew to US$50 billion last year from US$32.8 billion the year before, according to Gartner Inc, a US-based consulting firm.
The Asia-Pacific region, powered by India and China, recorded an annual growth rate of more than 800 percent in the sector, according to Bleum Inc Chief Executive Eric Rongley.
China has a comparatively strong computer science talent pool, jumping from roughly 40,000 a year in 2001 to 140,000 in 2004, experts said. That allows China-based firms, like Bleum, to receive orders from the United States and Japan, according to Rongley.
At present, Chinese firms depend highly on Japan for outsourcing orders, but the size of that country's market is only one-fifth of that in the West, including the United States and United Kingdom.
China's software outsourcing industry generated about US$3 billion in revenue last year compared with US$23 billion in India, which gets most of the orders from the West, according to David Barrett, a senior lawyer and partner in Simmons & Simmons.
China's infrastructure, including airports, roads and Internet access rate, is a clear advantage in the competition against India, according to Rongley and Barrett.
"The government has also shown strong support for the outsourcing business, with tax incentives, logistics and special funds to encourage innovation," said Ju Dehua, vice president of the Shanghai Software Industry Association.
Talent, infrastructure boost software outsourcing firms
China, the world's second-biggest software outsourcing destination, is closing the gap with India because of the country's improved infrastructure, rich talent resources and government support, industry experts speaking at a Shanghai conference said yesterday.
China now has 12 percent of all global software outsourcing, up from 7 percent two years ago. India's portion is expected to drop to 43 percent from 69 percent in the same period, according to the International Association of Outsourcing Professionals.
"That doesn't mean China is eating into India's market share as the whole industry is growing rapidly," said Michael Corbett, an IAOP executive.
Global software outsourcing revenue grew to US$50 billion last year from US$32.8 billion the year before, according to Gartner Inc, a US-based consulting firm.
The Asia-Pacific region, powered by India and China, recorded an annual growth rate of more than 800 percent in the sector, according to Bleum Inc Chief Executive Eric Rongley.
China has a comparatively strong computer science talent pool, jumping from roughly 40,000 a year in 2001 to 140,000 in 2004, experts said. That allows China-based firms, like Bleum, to receive orders from the United States and Japan, according to Rongley.
At present, Chinese firms depend highly on Japan for outsourcing orders, but the size of that country's market is only one-fifth of that in the West, including the United States and United Kingdom.
China's software outsourcing industry generated about US$3 billion in revenue last year compared with US$23 billion in India, which gets most of the orders from the West, according to David Barrett, a senior lawyer and partner in Simmons & Simmons.
China's infrastructure, including airports, roads and Internet access rate, is a clear advantage in the competition against India, according to Rongley and Barrett.
"The government has also shown strong support for the outsourcing business, with tax incentives, logistics and special funds to encourage innovation," said Ju Dehua, vice president of the Shanghai Software Industry Association.
China now has 12 percent of all global software outsourcing, up from 7 percent two years ago. India's portion is expected to drop to 43 percent from 69 percent in the same period, according to the International Association of Outsourcing Professionals.
"That doesn't mean China is eating into India's market share as the whole industry is growing rapidly," said Michael Corbett, an IAOP executive.
Global software outsourcing revenue grew to US$50 billion last year from US$32.8 billion the year before, according to Gartner Inc, a US-based consulting firm.
The Asia-Pacific region, powered by India and China, recorded an annual growth rate of more than 800 percent in the sector, according to Bleum Inc Chief Executive Eric Rongley.
China has a comparatively strong computer science talent pool, jumping from roughly 40,000 a year in 2001 to 140,000 in 2004, experts said. That allows China-based firms, like Bleum, to receive orders from the United States and Japan, according to Rongley.
At present, Chinese firms depend highly on Japan for outsourcing orders, but the size of that country's market is only one-fifth of that in the West, including the United States and United Kingdom.
China's software outsourcing industry generated about US$3 billion in revenue last year compared with US$23 billion in India, which gets most of the orders from the West, according to David Barrett, a senior lawyer and partner in Simmons & Simmons.
China's infrastructure, including airports, roads and Internet access rate, is a clear advantage in the competition against India, according to Rongley and Barrett.
"The government has also shown strong support for the outsourcing business, with tax incentives, logistics and special funds to encourage innovation," said Ju Dehua, vice president of the Shanghai Software Industry Association.
China strives to become Int'l service outsourcing powerhouse
China will strive to become a major base for international service outsourcing, said Chinese Vice Premier Wu Yi Friday.
Service outsourcing will become a new area of foreign investment for the country, said Wu at the 2006 International Investment Forum held in Xiamen, east China's Fujian Province.
China will encourage multinationals to outsource services from China, she said.
China is already a favorite choice for multinationals' overseas research and development (R&D) and could build on that to provide them with a range of outsourced services, Wu quote a report by the United Nations Conference on Trade and Development as saying.
More than four million students graduate from college every year in China, providing a huge talent pool for high-end industry service outsourcing, said the vice premier.
China's objectives for the 11th Five-Year Plan period (2006-2010) are to lower energy consumption per unit of gross domestic product (GDP) by 20 percent and also to boost GDP per capita to double the 2000 level.
As a vast developing nation, China faces an array of challenges in fulfilling the goal, said Wu.
As China seeks to restructure its industry, the service sector, service outsourcing, high-end manufacturing and R&D become increasingly attractive, said Wu.
Service outsourcing will become a new area of foreign investment for the country, said Wu at the 2006 International Investment Forum held in Xiamen, east China's Fujian Province.
China will encourage multinationals to outsource services from China, she said.
China is already a favorite choice for multinationals' overseas research and development (R&D) and could build on that to provide them with a range of outsourced services, Wu quote a report by the United Nations Conference on Trade and Development as saying.
More than four million students graduate from college every year in China, providing a huge talent pool for high-end industry service outsourcing, said the vice premier.
China's objectives for the 11th Five-Year Plan period (2006-2010) are to lower energy consumption per unit of gross domestic product (GDP) by 20 percent and also to boost GDP per capita to double the 2000 level.
As a vast developing nation, China faces an array of challenges in fulfilling the goal, said Wu.
As China seeks to restructure its industry, the service sector, service outsourcing, high-end manufacturing and R&D become increasingly attractive, said Wu.
China to promote outsourcing biz
The government is poised to prioritize service outsourcing in the coming years, in a bid to boost service industries, according to Ministry of Commerce officials.
"The government will establish specific policies to encourage service outsourcing in China," said Li Zhiqun, director of the ministry's department of foreign investment administration.
He said the ministry would consult with related ministries to have outsourcing listed as one of the industries in which investment is most encouraged.
The government will also provide enterprises with financial support, such as low-interest loans for qualified projects and insurance of credit for large-scale offshore projects.
"We will also help enterprises solve the problem of talent supply," said Li.
He added that service outsourcing enterprises purchasing services provided by a third party in order to complete their own internal work is an emerging way of attracting foreign investment.
The Ministry of Commerce will launch a project with an annual budget of at least 100 million yuan (US$12.5 million), to set up 10 bases for service outsourcing over the coming three to five years.
The ministry hopes to persuade 100 multinational corporations to transfer their partial outsourcing businesses to China, as well as creating 1,000 large-scale international service outsourcing enterprises.
Li said the ministry would particularly focus on 10 enterprises with over 10,000 employees, which will carry out international service outsourcing.
He said he expects China will focus on attracting multinationals to establish subsidiaries and joint ventures in the country, which he believes will help improve domestic outsourcing services.
"We also have to develop the domestic outsourcing market because the huge potential in the domestic market means China has a unique advantage in developing the service outsourcing industry," he said.
The global outsourcing market is expected to hit US$1 trillion by 2008, and so far China lags behind India in the sector.
However, China hopes to become the main international outsourcing service base within the next five to 10 years, predicted Wang Bo, vice-president of Accenture's Asia Pacific branch.
He said China has good communication and transport infrastructures in many cities, from the largest ones down to second- and third-tier cities, in comparison to India.
"The government will establish specific policies to encourage service outsourcing in China," said Li Zhiqun, director of the ministry's department of foreign investment administration.
He said the ministry would consult with related ministries to have outsourcing listed as one of the industries in which investment is most encouraged.
The government will also provide enterprises with financial support, such as low-interest loans for qualified projects and insurance of credit for large-scale offshore projects.
"We will also help enterprises solve the problem of talent supply," said Li.
He added that service outsourcing enterprises purchasing services provided by a third party in order to complete their own internal work is an emerging way of attracting foreign investment.
The Ministry of Commerce will launch a project with an annual budget of at least 100 million yuan (US$12.5 million), to set up 10 bases for service outsourcing over the coming three to five years.
The ministry hopes to persuade 100 multinational corporations to transfer their partial outsourcing businesses to China, as well as creating 1,000 large-scale international service outsourcing enterprises.
Li said the ministry would particularly focus on 10 enterprises with over 10,000 employees, which will carry out international service outsourcing.
He said he expects China will focus on attracting multinationals to establish subsidiaries and joint ventures in the country, which he believes will help improve domestic outsourcing services.
"We also have to develop the domestic outsourcing market because the huge potential in the domestic market means China has a unique advantage in developing the service outsourcing industry," he said.
The global outsourcing market is expected to hit US$1 trillion by 2008, and so far China lags behind India in the sector.
However, China hopes to become the main international outsourcing service base within the next five to 10 years, predicted Wang Bo, vice-president of Accenture's Asia Pacific branch.
He said China has good communication and transport infrastructures in many cities, from the largest ones down to second- and third-tier cities, in comparison to India.
China to encourage development of service outsourcing
Hong Kong-based Wen Wei Po quoted news from the Department of Foreign Trade and Economic Cooperation of Guangdong Province that China's Ministry of Commerce (MOFCOM) was brewing to promote preferential policies to encourage the development of the service outsourcing industry.
According to this report, MOFCOM is studying relevant policies to further loosen market access limitation, energetically support expansion and growth of service outsourcing enterprises, and focus on undertaking the service outsourcing business of multinationals investing in China so as to promote service outsourcing development.
Zhao Yufang, Deputy Director-General of the Department of Foreign Trade and Economic Cooperation of Guangdong Province and also President of Guangdong Association of Enterprises with Foreign Investment, revealed that MOFCOM planned to implement the "1000, 100, 10" project, namely establishing 10 bases to handle foreign service outsourcing business, introducing 100 multinationals that transfer their service business, and cultivating 1,000 enterprises to undertake service outsourcing business.
The report also indicates that China's relevant departments are working on the preferential taxation policies, the most eye-catching issue of relevant enterprises. Related officials predicted that as highly preferential taxation related and supporting policies will be offered in the future, and service enterprises might take this favorable opportunity to expand their scale.
According to this report, MOFCOM is studying relevant policies to further loosen market access limitation, energetically support expansion and growth of service outsourcing enterprises, and focus on undertaking the service outsourcing business of multinationals investing in China so as to promote service outsourcing development.
Zhao Yufang, Deputy Director-General of the Department of Foreign Trade and Economic Cooperation of Guangdong Province and also President of Guangdong Association of Enterprises with Foreign Investment, revealed that MOFCOM planned to implement the "1000, 100, 10" project, namely establishing 10 bases to handle foreign service outsourcing business, introducing 100 multinationals that transfer their service business, and cultivating 1,000 enterprises to undertake service outsourcing business.
The report also indicates that China's relevant departments are working on the preferential taxation policies, the most eye-catching issue of relevant enterprises. Related officials predicted that as highly preferential taxation related and supporting policies will be offered in the future, and service enterprises might take this favorable opportunity to expand their scale.
Xi'an aims to be service outsourcing center
Recently, when taking part in the 3rd China International BPO (Business Process Outsourcing) Conference held in Xi'an, Shaanxi Province - one of China's ancient capitals, the reporters have heard many stories of "transfer" and "choosing".
ACE Insurance from Japan is the biggest insurance enterprise in Japan. Due to the expansion of their business and the high costs in Japan, they have to transfer some of their basic data-processing tasks and system maintenance abroad so as to hire more professional people to help them do such things. Having conducted reviews, they chose the Xi'an Branch of UFIDA Software Co., Ltd.
Low costs are a key advantage of Xi'an. Jing Junhai, Director of the Administrative Committee of Xi'an Economic & Technological Development Zone, said, "I dare forecast that in the coming years, the largest enterprise in Xi'an will not be a manufacturing enterprise but a service outsourcing enterprise."
In 2005, the scale of the global service outsourcing market has amounted to US$624.4 billion, up 6 percent year on year.
It is forecast that in the coming years, the global outsourcing market will increase at a rate of 30 to 40 percent with the scale amounting to US$1.2 trillion by 2007. When the reporters asked David Tapper, IDC's program director for the Outsourcing, Utility and Offshore Services research team, what the outsourcers of outsourced services are most concerned about, his answer is "Costs and price".
Mr. Yan Jianfu, a traveling merchant from Singapore who came to attend the 3rd China International BPO Conference, said, "The costs for a BPO order in a city like Xi'an are only a quarter of the costs for such a BPO order in Europe and USA."
Jing Junhai, Director of the Administrative Committee of Xi'an Economic & Technological Development Zone, introduced Xi'an's advantage in low costs to anyone that he met that Xi'an's low costs have two meanings: firstly, the costs of employment are low. There are 37 public universities in Xi'an, and Xi'an ranks the third (Beijing and Shanghai ranks the first and second respectively) in China in terms of the comprehensive strength so far as talent reserves are concerned and there are 180,000 graduates from colleges and universities waiting to get employed each year. Among the 672 research institutes in Xi'an, one third are engaged in studies on Information Technology, communication and software technology while the index of human resource flow rate is comparatively low �� Secondly, the cost of urban living index in Xi'an is the lowest among the 9 key software cities in China.
Service outsourcing is an opportunity! But such an opportunity is especially important for an inland city like Xi'an. Chen Baogen, the Acting Mayor of Xi'an, even proposed that "The city will make every effort to develop its software service outsourcing industry".
The construction of infrastructure facilities is what almost all investors and partners are concerned about. In certain countries in Southeast Asia, many multinationals would get their generators prepared so as to respond to the frequent power cuts. But the electricity supply pattern of "Two-Way Main Supply" in Xi'an Economic & Technological Development Zone is a very striking point for software enterprises that have a higher requirement on the context for electricity use.
The most important point and also the most critical point for the development of service outsourcing is the environment for digital communications, i.e. ensuring a highly reliable and high-speed access of the local Internet to the international Internet. At present, two 155megawatt special lines have been connected from Xi'an to the international port of China Telecom; in the meantime, priority-degree ensuring measures will be adopted. As a result, the communication conditions of Xi'an Economic & Technological Development Zone are second to none among all software zones in China.
Talent cultivation is the focus of focuses. Although Xi'an is obviously advantageous in terms of talents, Xi'an still takes the cultivation of talents as the focus of focuses. In allusion to the direction of development for the industry and the features of demands for talents, Xi'an has planned the system of cultivating talents for software service outsourcing in a comprehensive way, set up a universal norm for education and training and a universal system of quality control while emphasizing particularly on the cultivation of talents of the application type and skilled talents. Each year, Xi'an will invest no less than RMB30 million yuan in constructing the first information service institute in China after a base for professional internship and trainings, which is centered around the Xi'an Software Zone, has been constructed.
There will be 200,000 people engaged in BPO. Xi'an has a fine plan for itself in the global BPO industry. Mr. Mao Ailiang, Director of the Xi'an Software Park, said, "We promise to latent investors and clients of the burgeoning BPO business in Xi'an that we are serious in our pursuit for our objectives in BPO." From 2006 to 2010, Xi'an will introduce in 30 service outsourcing multinational companies. By 2010, there will be a service outsourcing enterprise with over 10,000 staff members, 20 service outsourcing enterprises with over 1,000 staff members, and 100 service outsourcing enterprises with over 100 staff members. Xi'an will cultivate an industrial labor force of 200,000 people and realize a sales revenue of RMB 40 billion yuan from service outsourcing.
Although BPO has just begun in China now, it is just like what Qu Jiadong, President of Lucent Worldwide Services (Greater China) has said: only a latecomer can develop a new style of himself.
ACE Insurance from Japan is the biggest insurance enterprise in Japan. Due to the expansion of their business and the high costs in Japan, they have to transfer some of their basic data-processing tasks and system maintenance abroad so as to hire more professional people to help them do such things. Having conducted reviews, they chose the Xi'an Branch of UFIDA Software Co., Ltd.
Low costs are a key advantage of Xi'an. Jing Junhai, Director of the Administrative Committee of Xi'an Economic & Technological Development Zone, said, "I dare forecast that in the coming years, the largest enterprise in Xi'an will not be a manufacturing enterprise but a service outsourcing enterprise."
In 2005, the scale of the global service outsourcing market has amounted to US$624.4 billion, up 6 percent year on year.
It is forecast that in the coming years, the global outsourcing market will increase at a rate of 30 to 40 percent with the scale amounting to US$1.2 trillion by 2007. When the reporters asked David Tapper, IDC's program director for the Outsourcing, Utility and Offshore Services research team, what the outsourcers of outsourced services are most concerned about, his answer is "Costs and price".
Mr. Yan Jianfu, a traveling merchant from Singapore who came to attend the 3rd China International BPO Conference, said, "The costs for a BPO order in a city like Xi'an are only a quarter of the costs for such a BPO order in Europe and USA."
Jing Junhai, Director of the Administrative Committee of Xi'an Economic & Technological Development Zone, introduced Xi'an's advantage in low costs to anyone that he met that Xi'an's low costs have two meanings: firstly, the costs of employment are low. There are 37 public universities in Xi'an, and Xi'an ranks the third (Beijing and Shanghai ranks the first and second respectively) in China in terms of the comprehensive strength so far as talent reserves are concerned and there are 180,000 graduates from colleges and universities waiting to get employed each year. Among the 672 research institutes in Xi'an, one third are engaged in studies on Information Technology, communication and software technology while the index of human resource flow rate is comparatively low �� Secondly, the cost of urban living index in Xi'an is the lowest among the 9 key software cities in China.
Service outsourcing is an opportunity! But such an opportunity is especially important for an inland city like Xi'an. Chen Baogen, the Acting Mayor of Xi'an, even proposed that "The city will make every effort to develop its software service outsourcing industry".
The construction of infrastructure facilities is what almost all investors and partners are concerned about. In certain countries in Southeast Asia, many multinationals would get their generators prepared so as to respond to the frequent power cuts. But the electricity supply pattern of "Two-Way Main Supply" in Xi'an Economic & Technological Development Zone is a very striking point for software enterprises that have a higher requirement on the context for electricity use.
The most important point and also the most critical point for the development of service outsourcing is the environment for digital communications, i.e. ensuring a highly reliable and high-speed access of the local Internet to the international Internet. At present, two 155megawatt special lines have been connected from Xi'an to the international port of China Telecom; in the meantime, priority-degree ensuring measures will be adopted. As a result, the communication conditions of Xi'an Economic & Technological Development Zone are second to none among all software zones in China.
Talent cultivation is the focus of focuses. Although Xi'an is obviously advantageous in terms of talents, Xi'an still takes the cultivation of talents as the focus of focuses. In allusion to the direction of development for the industry and the features of demands for talents, Xi'an has planned the system of cultivating talents for software service outsourcing in a comprehensive way, set up a universal norm for education and training and a universal system of quality control while emphasizing particularly on the cultivation of talents of the application type and skilled talents. Each year, Xi'an will invest no less than RMB30 million yuan in constructing the first information service institute in China after a base for professional internship and trainings, which is centered around the Xi'an Software Zone, has been constructed.
There will be 200,000 people engaged in BPO. Xi'an has a fine plan for itself in the global BPO industry. Mr. Mao Ailiang, Director of the Xi'an Software Park, said, "We promise to latent investors and clients of the burgeoning BPO business in Xi'an that we are serious in our pursuit for our objectives in BPO." From 2006 to 2010, Xi'an will introduce in 30 service outsourcing multinational companies. By 2010, there will be a service outsourcing enterprise with over 10,000 staff members, 20 service outsourcing enterprises with over 1,000 staff members, and 100 service outsourcing enterprises with over 100 staff members. Xi'an will cultivate an industrial labor force of 200,000 people and realize a sales revenue of RMB 40 billion yuan from service outsourcing.
Although BPO has just begun in China now, it is just like what Qu Jiadong, President of Lucent Worldwide Services (Greater China) has said: only a latecomer can develop a new style of himself.
Long-term outsourcing deals decline
Long-term outsourcing contracts may have shrunk in volume and value, according to a quarterly global outsourcing report released by TPI, leading consultants for outsourcing operations.
According to TPI Index, for the first time, the July-September quarter saw a decline in contracts by volume and value, compared to the same quarter the previous year.
The cause of the falling aggregate contact values can be tied to the decline in contract durations, especially for Information Technology Outsourcing (ITO) deals.
Since 2001, the average duration of a broader market contract has decreased 12%. In ITO, it decreased 18% and for Business Process Outsourcing (BPO) it dropped 5%.
“There have been an increasing number of smaller, single-process contracts compared with larger, multi-process contracts in recent years. This trend holds true for both BPO and ITO contracts,” said Siddharth Pai, partner and managing director, TPI India. Shorter term contracts have become more popular. Only 12% of contracts signed in the broader market have 10 or more year terms.
An unprecedented percentage of contract restructurings, with even shorter average contract durations, was the other principal contributor to the smaller total contract values.
TPI found that fewer multi-process contracts (ITO + BPO) have been signed so far in 2006 than in each of the past three years. To date, there have been seven, compared with 20 in all of 2004, and 11 in 2005. By total contract value (TCV), multi-process contracts account for only 10% year-to-date, compared with 24% in 2004 and about 12% in 2005.
TPI expects BPO to grow by roughly 10% year-on-year due to the large number of under $25-million contracts. Although on lower TCV, BPO saw a great deal of activity in the third quarter, with 58 signed contracts - up 23% quarter-on-quarter, and more than 26% year-on-year. The value of the third-quarter contracts exceeded $4.5 billion, which is up about 9% quarter-on-quarter, but down 15% year-on-year due to the number of single-process deals.
On the global service provider landscape, TPI reports that Indian-based providers continued to gain TCV market share, increasing to slightly over 4% of the broader market so far in 2006, from nearly 1% in 2004. Their share of awarded contracts has also increased to nearly 8% during the same period, from about 2%. India-based providers are beginning to sign business in infrastructure-related areas, and they have over 25% TCV share in the pure applications development and maintenance (ADM) market, more than any single multinational service provider.
According to TPI Index, for the first time, the July-September quarter saw a decline in contracts by volume and value, compared to the same quarter the previous year.
The cause of the falling aggregate contact values can be tied to the decline in contract durations, especially for Information Technology Outsourcing (ITO) deals.
Since 2001, the average duration of a broader market contract has decreased 12%. In ITO, it decreased 18% and for Business Process Outsourcing (BPO) it dropped 5%.
“There have been an increasing number of smaller, single-process contracts compared with larger, multi-process contracts in recent years. This trend holds true for both BPO and ITO contracts,” said Siddharth Pai, partner and managing director, TPI India. Shorter term contracts have become more popular. Only 12% of contracts signed in the broader market have 10 or more year terms.
An unprecedented percentage of contract restructurings, with even shorter average contract durations, was the other principal contributor to the smaller total contract values.
TPI found that fewer multi-process contracts (ITO + BPO) have been signed so far in 2006 than in each of the past three years. To date, there have been seven, compared with 20 in all of 2004, and 11 in 2005. By total contract value (TCV), multi-process contracts account for only 10% year-to-date, compared with 24% in 2004 and about 12% in 2005.
TPI expects BPO to grow by roughly 10% year-on-year due to the large number of under $25-million contracts. Although on lower TCV, BPO saw a great deal of activity in the third quarter, with 58 signed contracts - up 23% quarter-on-quarter, and more than 26% year-on-year. The value of the third-quarter contracts exceeded $4.5 billion, which is up about 9% quarter-on-quarter, but down 15% year-on-year due to the number of single-process deals.
On the global service provider landscape, TPI reports that Indian-based providers continued to gain TCV market share, increasing to slightly over 4% of the broader market so far in 2006, from nearly 1% in 2004. Their share of awarded contracts has also increased to nearly 8% during the same period, from about 2%. India-based providers are beginning to sign business in infrastructure-related areas, and they have over 25% TCV share in the pure applications development and maintenance (ADM) market, more than any single multinational service provider.
Top ten IT services vendors target global sourcing
Capgemini's $1.3bn takeover bid for Kanbay International and EDS' continued rebalancing of its international workforce have put the spotlight on the increasingly aggressive global sourcing strategies of the world's largest IT services organizations.
Six of the top ten vendors now have more than 20% of their workforce based in low-cost delivery locations, with Capgemini, Accenture and IBM Global Services the most aggressive. There are no signs that they are going to rest at these levels, with many being open about their expansion plans. EDS plans to grow its offshore workforce from 30,000 employees to 45,000 by the end of 2008, and IBM has committed to tripling its group investment in India to $6bn over the next three years.
These companies are being forced to deliver more projects from low-cost locations in order to meet the challenge of India's major software services firms, which have expanded at such a rate that they are now able to compete for large, billion-dollar projects against the established Western players.
The number of Western vendors acquiring offshore delivery operations has increased significantly in 2006, with suppliers realizing that buying mature Indian service providers present a risky, but fast way of adding low-cost workers.
Four of the top ten IT services have made acquisitions designed to quickly build up their offshore resources in India during the last couple of years. IBM Global Services got the ball rolling with its $160m purchase of BPO vendor Daksh in April 2004. In February this year, Fujitsu's US-based consulting arm added 800 staff at two Indian development centers through its purchase of Rapidigm, and Capgemini's move for Kanbay last week came four months after EDS launched a $380m takeover of Mphasis.
Although there has been much discussion of how China will mount a major challenge to India's position as the premier global sourcing hub for major IT services firms, the current headcounts of the top ten firms in each country shows that China remains some distance behind. The vendors have a combined 109,000 staff based in India, which equates to 14% of their total workforce of 805,000. In contrast, just 6,000 or less than 1%, are based in China.
This balance seems unlikely to change in the near future. Fujitsu and NTT Data will continue to use Chinese centers to support their Japanese client base due to the language and cultural affinities, but the other top eight services firms remain more bullish about their Indian headcount growth targets than they are about China. Capgemini, for example, is aiming to have 35,000 staff in India by 2010, and Accenture plans to increase its Indian headcount by more than 50% in its current fiscal year to also take it to around 35,000. None of the top ten vendors are talking about similar targets for the Chinese divisions, and most remain more interested in selling to the country's larger corporations and the local operations of multinationals, than using China as a sourcing hub.
Brazil and Costa Rica are emerging as the top ten vendors' favored offshore hubs in Latin America. EDS has close to 8,000 staff in the country, although the majority are based on domestic accounts, while Accenture has around 2,500 at a delivery center in Sao Paulo, primarily supporting clients in the US and Iberia.
In Eastern Europe, Hungary appears to be emerging ahead of the Czech Republic and Poland as the favored location for the top ten services vendors to deliver low-cost support to Central and Western European clients.
Six of the top ten vendors now have more than 20% of their workforce based in low-cost delivery locations, with Capgemini, Accenture and IBM Global Services the most aggressive. There are no signs that they are going to rest at these levels, with many being open about their expansion plans. EDS plans to grow its offshore workforce from 30,000 employees to 45,000 by the end of 2008, and IBM has committed to tripling its group investment in India to $6bn over the next three years.
These companies are being forced to deliver more projects from low-cost locations in order to meet the challenge of India's major software services firms, which have expanded at such a rate that they are now able to compete for large, billion-dollar projects against the established Western players.
The number of Western vendors acquiring offshore delivery operations has increased significantly in 2006, with suppliers realizing that buying mature Indian service providers present a risky, but fast way of adding low-cost workers.
Four of the top ten IT services have made acquisitions designed to quickly build up their offshore resources in India during the last couple of years. IBM Global Services got the ball rolling with its $160m purchase of BPO vendor Daksh in April 2004. In February this year, Fujitsu's US-based consulting arm added 800 staff at two Indian development centers through its purchase of Rapidigm, and Capgemini's move for Kanbay last week came four months after EDS launched a $380m takeover of Mphasis.
Although there has been much discussion of how China will mount a major challenge to India's position as the premier global sourcing hub for major IT services firms, the current headcounts of the top ten firms in each country shows that China remains some distance behind. The vendors have a combined 109,000 staff based in India, which equates to 14% of their total workforce of 805,000. In contrast, just 6,000 or less than 1%, are based in China.
This balance seems unlikely to change in the near future. Fujitsu and NTT Data will continue to use Chinese centers to support their Japanese client base due to the language and cultural affinities, but the other top eight services firms remain more bullish about their Indian headcount growth targets than they are about China. Capgemini, for example, is aiming to have 35,000 staff in India by 2010, and Accenture plans to increase its Indian headcount by more than 50% in its current fiscal year to also take it to around 35,000. None of the top ten vendors are talking about similar targets for the Chinese divisions, and most remain more interested in selling to the country's larger corporations and the local operations of multinationals, than using China as a sourcing hub.
Brazil and Costa Rica are emerging as the top ten vendors' favored offshore hubs in Latin America. EDS has close to 8,000 staff in the country, although the majority are based on domestic accounts, while Accenture has around 2,500 at a delivery center in Sao Paulo, primarily supporting clients in the US and Iberia.
In Eastern Europe, Hungary appears to be emerging ahead of the Czech Republic and Poland as the favored location for the top ten services vendors to deliver low-cost support to Central and Western European clients.
Unlocking Offshore BPO Value
The phrase "Offshore BPO Operations" conjures up the image of a Low Cost Location where Smart People work for you, typically Indians or Philippinos. As the adage goes "you go for cost but you stay for quality". Is the Offshore BPO delivery model only about these two benefits - cost and quality?
Is there hidden value that Global Enterprises can unlock? Can Offshore BPO deliver (i) Business Results? (ii) Customer Insight? (iii) Brand Promise of Fortune 500 clientele? (iv) Innovation? Let us take a closer look.
(a) What do Clients have in mind when they talk about "Business Results"?
For Vonage, the VOIP service provider in U.S and Europe it means (a) Reduce Customer Acquisition Costs below $ 210 per customer (b) Reduce Customer Churn below 2% per month (c) Reduce SG&A below 12%. How can Offshore BPO help Vonage?
Through Offshore Telesales : By running telesales in collaboration with Vonage's marketing efforts and increasing the conversion rate. It means Consulatitive Selling over the Phone while keeping things very simple for the consumer. The BPO Service Provider who serves Vonage would need to sell the Vonage Value Proposition to a new breed of VOIP users - late technology adopters who have lot of choice of comparable offerings from Incumbent Landline, Mobile Service Providers and ISPs.
Offshore Customer Retention : A Proactive Customer Retention Program from offshore would certainly help. For example, if a Vonage Customer has not made any outbound call for 30 days it could mean that the customer is testing out a competitor's phone service. Retention rates would increase if the Offshore BPO Provider were to engage with this Zero Outbound Customer and find out whether he is satisfied with the Vonage service.
(b) What exactly is Customer Insight? Can this be delivered through Offshore BPO?
To my mind Customer Insight has got three dimensions:
(a) Analysis of Top Call Drivers and actions thereof focused on call avoidance.
(b) Analysis of Customer Experience - their emotions when they encounter certain processes and products and taking appropriate corrective action.
(c) Analysis of Customer Expectations - Analysis of Customer Verbatims to understand unmet customer needs. These unmet needs could result in new revenue and/or reduction in churn.
I have witnessed many examples of the (a) and (b) category mentioned above in the Indian BPO Industry and Prospective Clients can leverage the same now by working with certain Offshore BPO Players. If Clients were to allow Service Providers to access and analyse customer verbatims, many a revenue/customer retention opportunity would come to light.
Customer Insight could then be "lead indicators" to customer churn or needs for products/services. These of course can be delivered from Offshore Locations.
(c) What is Brand Promise? Can it be delivered through Offshore BPO?
Brand Promise for www.amazon.com is "Affordability, Convenience and Availability". Let us look at Convenience a little closer. A shopper who arrives on the Amazon site need three types of help (a) to find the product that he/she is searching for (b) once the product is found, to buy the same from the site and (c) once the product is bought, to get the product at his home in the quickest possible time. Amazon currently operates all three types of help mentioned above from India through Offshore BPO Players.
If Amazon, one of highest ever rated companies on the J.D Power Index can entrust their brand with the Indian CSP working for offshore BPO players, why would you hold back?
(d) Innovation? Isn't that a tad too much to expect from Offshore BPO?
There are innumerable examples of Accounts Payable operations of Clients getting streamlined once the offshoring decision is taken. This is since the paper invoices, goods receipt notes and purchase orders now needs to be digitized, indexed and transported over the wires to the offshore locations. Workflow systems get built to enable the management of workflow across mutliple continents. In the above example, automation is not what I am hinting at. I am pointing to the change of the business process where a new way of working is designed and then implmented using technology.
What are the benefits of the above Innovation example? (a) Ensure the Global Client gets the full benefit of the credit period agreed to with the vendor (b) Ensure prompt and accurate payment - no duplicate payment (c) Ensure Vendor Satisfaction (d) Ensure high employee productivity.
There are other examples of Innovation within the India BPO Landscape which one would like to cover later. The fact is :Innovation is very much prevalent in Offshore BPO.
The unsung hero in Unlocking of Offshore BPO Value is the Far Sighted Client - An organization which understands and invests in Offshore Strategies for Competetive Edge, not merely Cost and Quality. Therefore should the more relevant question be "When do you want to unlock the value of your offshore BPO operations"?
Is there hidden value that Global Enterprises can unlock? Can Offshore BPO deliver (i) Business Results? (ii) Customer Insight? (iii) Brand Promise of Fortune 500 clientele? (iv) Innovation? Let us take a closer look.
(a) What do Clients have in mind when they talk about "Business Results"?
For Vonage, the VOIP service provider in U.S and Europe it means (a) Reduce Customer Acquisition Costs below $ 210 per customer (b) Reduce Customer Churn below 2% per month (c) Reduce SG&A below 12%. How can Offshore BPO help Vonage?
Through Offshore Telesales : By running telesales in collaboration with Vonage's marketing efforts and increasing the conversion rate. It means Consulatitive Selling over the Phone while keeping things very simple for the consumer. The BPO Service Provider who serves Vonage would need to sell the Vonage Value Proposition to a new breed of VOIP users - late technology adopters who have lot of choice of comparable offerings from Incumbent Landline, Mobile Service Providers and ISPs.
Offshore Customer Retention : A Proactive Customer Retention Program from offshore would certainly help. For example, if a Vonage Customer has not made any outbound call for 30 days it could mean that the customer is testing out a competitor's phone service. Retention rates would increase if the Offshore BPO Provider were to engage with this Zero Outbound Customer and find out whether he is satisfied with the Vonage service.
(b) What exactly is Customer Insight? Can this be delivered through Offshore BPO?
To my mind Customer Insight has got three dimensions:
(a) Analysis of Top Call Drivers and actions thereof focused on call avoidance.
(b) Analysis of Customer Experience - their emotions when they encounter certain processes and products and taking appropriate corrective action.
(c) Analysis of Customer Expectations - Analysis of Customer Verbatims to understand unmet customer needs. These unmet needs could result in new revenue and/or reduction in churn.
I have witnessed many examples of the (a) and (b) category mentioned above in the Indian BPO Industry and Prospective Clients can leverage the same now by working with certain Offshore BPO Players. If Clients were to allow Service Providers to access and analyse customer verbatims, many a revenue/customer retention opportunity would come to light.
Customer Insight could then be "lead indicators" to customer churn or needs for products/services. These of course can be delivered from Offshore Locations.
(c) What is Brand Promise? Can it be delivered through Offshore BPO?
Brand Promise for www.amazon.com is "Affordability, Convenience and Availability". Let us look at Convenience a little closer. A shopper who arrives on the Amazon site need three types of help (a) to find the product that he/she is searching for (b) once the product is found, to buy the same from the site and (c) once the product is bought, to get the product at his home in the quickest possible time. Amazon currently operates all three types of help mentioned above from India through Offshore BPO Players.
If Amazon, one of highest ever rated companies on the J.D Power Index can entrust their brand with the Indian CSP working for offshore BPO players, why would you hold back?
(d) Innovation? Isn't that a tad too much to expect from Offshore BPO?
There are innumerable examples of Accounts Payable operations of Clients getting streamlined once the offshoring decision is taken. This is since the paper invoices, goods receipt notes and purchase orders now needs to be digitized, indexed and transported over the wires to the offshore locations. Workflow systems get built to enable the management of workflow across mutliple continents. In the above example, automation is not what I am hinting at. I am pointing to the change of the business process where a new way of working is designed and then implmented using technology.
What are the benefits of the above Innovation example? (a) Ensure the Global Client gets the full benefit of the credit period agreed to with the vendor (b) Ensure prompt and accurate payment - no duplicate payment (c) Ensure Vendor Satisfaction (d) Ensure high employee productivity.
There are other examples of Innovation within the India BPO Landscape which one would like to cover later. The fact is :Innovation is very much prevalent in Offshore BPO.
The unsung hero in Unlocking of Offshore BPO Value is the Far Sighted Client - An organization which understands and invests in Offshore Strategies for Competetive Edge, not merely Cost and Quality. Therefore should the more relevant question be "When do you want to unlock the value of your offshore BPO operations"?
s it time to outsource yet?
utsourcing, is not only a buzz word but is also a practice being used on a regular basis by SMEs in the UK, US and Europe. more than 50% of UK businesses currently outsource one or more business activities. With the pressure to become more efficient and competitive, businesses - both small and large - have turned to outsourcing as the solution.
With the constant need to cut cost outsourcing has gathered pace in recent years. It has also provided the means to bring a lot of good business ideas into reality.
There are a variety of reasons for outsourcing, including improved efficiency, cost reductions, and increased flexibility. Situations are familiar, ranging from high-tech start-ups which are unable to raise funds or risk manufacturing their products to companies with cyclical sales, making production planning difficult and expensive.
What is outsourcing?
Outsourcing is the delegation of a business process to an external service provider. The service provider will then be responsible for the day-to-day running and maintenance of the delegated process.
Do you really need to outsource?
Before outsourcing an IT function, look at your firm's own goals and culture. What business objectives are you trying to accomplish by outsourcing this particular function? How will sending this function to an outside party impact the work flow within the company? Clear answers to these questions can help guide a business owner toward the most appropriate vendor.
Consider the advantages and disadvantages of outsourcing before you make your decision.
Advantages
Allows a business to focus on core activities
Streamlines a business' operations
Gives you access to professional capabilities
Shares the risk · Piece of mind that the process is in good hands (reliability)
Do not have to worry about continually introducing new technologies
Improves service quality
Frees up human resources
Frees up cash flow
Increases the control of your business
Makes the business more flexible to change (i.e. demand)
Disadvantages
The fear of the service provider ceasing to trade (bankruptcy, etc)
You may lose control of the process
Creates potential redundancies
Other companies may also be using the service provider. Therefore in some cases, the best interests of the service provider may be diluted with other users
You may lose focus of the customer and concentrate on the product (the outsourced process)
The loss of talent generated internally
Employees may react badly to outsourcing and consequently their quality of work may suffer.
Buy the expertise
A valuable outsource partner will do more than lighten the load. Such a partner will lend expertise to ensure an optimum blend of in-house and outsourced functions. In the case of network management, for instance, an outsourcer should "provide a small business with an operational, tactical and strategic view of their network environment,
This allows for quality recommendations to ensure network availability, reduction of total cost of ownership, optimization of network assets for meeting business needs, and support of future growth.
Know who you are outsourcing to.
The two most important factors in a successful outsourcing relationship are trust and security - without these the relationship is destined for failure. It is therefore important that you take the time and effort required to find the perfect partner.
Make sure your service provider is keeping current. "IT is very dynamic, so it can be difficult to intelligently know what's happening in IT," said Jeremy F. Shapiro, professor emeritus of operations research and management at MIT. The best vendors can provide not just services, but also "state-of-the-art knowledge about IT needs and developments."
Does this vendor value its employees? What is the average length of employment of the staff? A company that retains its employees must treat them well and value them.
Meet the team: Before signing anything, meet the people who will actually service your account. Good outsourcers will have a dedicated team servicing the customer, led by the controller who acts as the 'go to' person. Chain of command: Along these same lines, know who is talking to whom. The last thing that you can afford to have are layers of contacts, especially when time means money. Finding a provider or consultant that provides one point of contact and even better, one person, is any business' best bet. The language barrier: Finally, it's important to remember that even an outsourced IT function does not go away entirely. In most instances the small-business owner still will have to maintain some involvement. Look for an expert who can clearly explain answers in non-technical terms and can make tech-talk clear to even novice questioners.
Know what you are buying
As you get closer to making a decision, it is important to agree upon a set of service level expectations or objectives," said Hoyer. "Measurement objectives can include streamlined operations, cost savings, and reporting with all activities pointing to an improved bottom line," he added. What matters most is to agree in advance on the service to be delivered and especially on the measures that will be used to determine satisfactory performance.
Many of the disadvantages of outsourcing can be avoided if you research the service provider and you do not regard outsourcing simply as a money saving scheme - this is not always the case. Consequently, you should be certain that you have a valid reason for outsourcing and that you intend to liaise regularly with the service provider to avoid loosing all control of the process.
With the constant need to cut cost outsourcing has gathered pace in recent years. It has also provided the means to bring a lot of good business ideas into reality.
There are a variety of reasons for outsourcing, including improved efficiency, cost reductions, and increased flexibility. Situations are familiar, ranging from high-tech start-ups which are unable to raise funds or risk manufacturing their products to companies with cyclical sales, making production planning difficult and expensive.
What is outsourcing?
Outsourcing is the delegation of a business process to an external service provider. The service provider will then be responsible for the day-to-day running and maintenance of the delegated process.
Do you really need to outsource?
Before outsourcing an IT function, look at your firm's own goals and culture. What business objectives are you trying to accomplish by outsourcing this particular function? How will sending this function to an outside party impact the work flow within the company? Clear answers to these questions can help guide a business owner toward the most appropriate vendor.
Consider the advantages and disadvantages of outsourcing before you make your decision.
Advantages
Allows a business to focus on core activities
Streamlines a business' operations
Gives you access to professional capabilities
Shares the risk · Piece of mind that the process is in good hands (reliability)
Do not have to worry about continually introducing new technologies
Improves service quality
Frees up human resources
Frees up cash flow
Increases the control of your business
Makes the business more flexible to change (i.e. demand)
Disadvantages
The fear of the service provider ceasing to trade (bankruptcy, etc)
You may lose control of the process
Creates potential redundancies
Other companies may also be using the service provider. Therefore in some cases, the best interests of the service provider may be diluted with other users
You may lose focus of the customer and concentrate on the product (the outsourced process)
The loss of talent generated internally
Employees may react badly to outsourcing and consequently their quality of work may suffer.
Buy the expertise
A valuable outsource partner will do more than lighten the load. Such a partner will lend expertise to ensure an optimum blend of in-house and outsourced functions. In the case of network management, for instance, an outsourcer should "provide a small business with an operational, tactical and strategic view of their network environment,
This allows for quality recommendations to ensure network availability, reduction of total cost of ownership, optimization of network assets for meeting business needs, and support of future growth.
Know who you are outsourcing to.
The two most important factors in a successful outsourcing relationship are trust and security - without these the relationship is destined for failure. It is therefore important that you take the time and effort required to find the perfect partner.
Make sure your service provider is keeping current. "IT is very dynamic, so it can be difficult to intelligently know what's happening in IT," said Jeremy F. Shapiro, professor emeritus of operations research and management at MIT. The best vendors can provide not just services, but also "state-of-the-art knowledge about IT needs and developments."
Does this vendor value its employees? What is the average length of employment of the staff? A company that retains its employees must treat them well and value them.
Meet the team: Before signing anything, meet the people who will actually service your account. Good outsourcers will have a dedicated team servicing the customer, led by the controller who acts as the 'go to' person. Chain of command: Along these same lines, know who is talking to whom. The last thing that you can afford to have are layers of contacts, especially when time means money. Finding a provider or consultant that provides one point of contact and even better, one person, is any business' best bet. The language barrier: Finally, it's important to remember that even an outsourced IT function does not go away entirely. In most instances the small-business owner still will have to maintain some involvement. Look for an expert who can clearly explain answers in non-technical terms and can make tech-talk clear to even novice questioners.
Know what you are buying
As you get closer to making a decision, it is important to agree upon a set of service level expectations or objectives," said Hoyer. "Measurement objectives can include streamlined operations, cost savings, and reporting with all activities pointing to an improved bottom line," he added. What matters most is to agree in advance on the service to be delivered and especially on the measures that will be used to determine satisfactory performance.
Many of the disadvantages of outsourcing can be avoided if you research the service provider and you do not regard outsourcing simply as a money saving scheme - this is not always the case. Consequently, you should be certain that you have a valid reason for outsourcing and that you intend to liaise regularly with the service provider to avoid loosing all control of the process.
Offshoring is about Tapping Global Talent: Study
The study finds that offshoring is evolving from a cost-saving tactic into a long-term workforce management strategy. Almost 70% of the 537 respondents across Europe and the U.S.A. stated that offshoring is driven by the need to tap the global talent pool, as opposed to last year’s survey where respondents stated lower costs as the highest incentive to offshore. Companies have stated shortfall of skilled personnel onshore as a reason for offshoring high-end work.
“Companies offshore because they can’t get it at home; they are reacting to the steady decline in the supply of graduates with advanced degrees in engineering and science and with the cutback in the annual H1B quota. Last year, it was estimated that U.S. companies were in need of more than 50,000 master and Ph.D. graduates,” says Professor Arie Y. Lewin, Director, Duke/CIBER (Center for International Business Education and Research) and Lead Principal Investigator, Offshoring Research Network project. The 2006 Duke CIBER/Booz Allen Offshoring study is the third in an annual series by the Offshoring Research Network.
The findings bear significance as offshoring high-end work has gained increased acceptance among customers. Offshoring of R&D work grew 65% during 2006 as opposed to 40% during 2005; engineering work grew from 36% last year to 85% this year and product design and engineering work registered 82% growth this year as against 80% last year.
The study also finds that offshoring of high-end work results in creation of one job in the U.S.A. per project as against offshoring low-end BPO work where 23 jobs are lost onshore per project. “This is because high-end jobs are sticky in nature and create value for the customer onshore, which fuels growth and hence creates more jobs,” says Matt Mani, Senior Associate, Booz Allen Hamilton and one of the authors of the report.
In the 2006 survey the average number of U.S. jobs lost per offshore project dropped by 71% from 2005 (38 jobs lost per project in 2005 vs. only 11 jobs lost per implementation in 2006). At the same time, the average number of offshore employees per project grew by 62% between 2005 and 2006.
Interestingly, the study found that small entrepreneurial companies are more likely to initiate offshoring of high-value functions than large corporations. Forty-eight percent of the companies with fewer than 500 employees reported that their first offshoring initiative involved product development, innovation or engineering as compared to 16% in the case of large companies.
The findings shatter a long-held myth that low-skilled jobs are most likely to get offshored while high-skilled jobs would remain onshore. On the contrary, experienced customers who have offshored low-end work to leverage labor arbitrage have found that they are not being effectively served from lower-cost countries because of cultural differences. Many have initiated steps to bring back customer-support functions in-house while higher-skilled work requiring technical knowledge is offshored. For instance, AT&T recently announced that it would bring back 2,000 jobs in-house, and step up offshoring of IT-development activities.
As the pattern of offshoring moves from low-end to high-end work, the challenges faced by the management have moved from battling political backlash to grappling with issues like retaining managerial control and gaining operational efficiency.
Forty-eight percent of companies cited the loss of managerial control as a major risk of offshoring, an increase of 30% over 2005’s result. In contrast, political backlash and political instability have steadily declined in importance as noteworthy risks with only 22% of respondents citing them as either “important” or “very important.” In all, companies cited greater concerns about their ability to manage their offshoring activities, while concerns about cultural differences, which ranked very high in the 2004–2005 surveys, dropped by 50%.
India remains the preferred destination for offshoring. However, China is emerging as an important location for engineering, product development and procurement as more companies co-locate engineering groups alongside manufacturing operations. Similarly, the Philippines is becoming increasingly attractive for office-administrative work and contact centers.
“Companies offshore because they can’t get it at home; they are reacting to the steady decline in the supply of graduates with advanced degrees in engineering and science and with the cutback in the annual H1B quota. Last year, it was estimated that U.S. companies were in need of more than 50,000 master and Ph.D. graduates,” says Professor Arie Y. Lewin, Director, Duke/CIBER (Center for International Business Education and Research) and Lead Principal Investigator, Offshoring Research Network project. The 2006 Duke CIBER/Booz Allen Offshoring study is the third in an annual series by the Offshoring Research Network.
The findings bear significance as offshoring high-end work has gained increased acceptance among customers. Offshoring of R&D work grew 65% during 2006 as opposed to 40% during 2005; engineering work grew from 36% last year to 85% this year and product design and engineering work registered 82% growth this year as against 80% last year.
The study also finds that offshoring of high-end work results in creation of one job in the U.S.A. per project as against offshoring low-end BPO work where 23 jobs are lost onshore per project. “This is because high-end jobs are sticky in nature and create value for the customer onshore, which fuels growth and hence creates more jobs,” says Matt Mani, Senior Associate, Booz Allen Hamilton and one of the authors of the report.
In the 2006 survey the average number of U.S. jobs lost per offshore project dropped by 71% from 2005 (38 jobs lost per project in 2005 vs. only 11 jobs lost per implementation in 2006). At the same time, the average number of offshore employees per project grew by 62% between 2005 and 2006.
Interestingly, the study found that small entrepreneurial companies are more likely to initiate offshoring of high-value functions than large corporations. Forty-eight percent of the companies with fewer than 500 employees reported that their first offshoring initiative involved product development, innovation or engineering as compared to 16% in the case of large companies.
The findings shatter a long-held myth that low-skilled jobs are most likely to get offshored while high-skilled jobs would remain onshore. On the contrary, experienced customers who have offshored low-end work to leverage labor arbitrage have found that they are not being effectively served from lower-cost countries because of cultural differences. Many have initiated steps to bring back customer-support functions in-house while higher-skilled work requiring technical knowledge is offshored. For instance, AT&T recently announced that it would bring back 2,000 jobs in-house, and step up offshoring of IT-development activities.
As the pattern of offshoring moves from low-end to high-end work, the challenges faced by the management have moved from battling political backlash to grappling with issues like retaining managerial control and gaining operational efficiency.
Forty-eight percent of companies cited the loss of managerial control as a major risk of offshoring, an increase of 30% over 2005’s result. In contrast, political backlash and political instability have steadily declined in importance as noteworthy risks with only 22% of respondents citing them as either “important” or “very important.” In all, companies cited greater concerns about their ability to manage their offshoring activities, while concerns about cultural differences, which ranked very high in the 2004–2005 surveys, dropped by 50%.
India remains the preferred destination for offshoring. However, China is emerging as an important location for engineering, product development and procurement as more companies co-locate engineering groups alongside manufacturing operations. Similarly, the Philippines is becoming increasingly attractive for office-administrative work and contact centers.
Size of global outsourcing market shrinking
he size of global outsourcing market has shrunk for the first time ever in Q3 of 2006 in what is considered the worst quarter for outsourcing deals since 2002, a leading advisory firm said in its report.
"The third quarter of 2006 saw a decline in contracts by volume and value for the same quarter last year," the firm TPI said in its TPI Index Report whose findings were released to reporters here.
The cause of the falling aggregate contract values could be tied to the decline in contract durations, specially for Information Technology Outsourcing (ITO) contracts, it said.
Since 2001, the average duration of a Broader Market contract has decreased 12 per cent. In ITO, it decreased 18 per cent while for Business Process Outsourcing, it dropped five per cent, the report said.
"There have been an increasing number of smaller, single-process contracts compared with larger, multi-process contracts in recent years. This trend holds true for both BPO and ITO contracts," Siddharth Pai, Partner and Managing Director, TPI India, said.
Shorter term contracts have become more popular with only 12 per cent of contracts signed in the broader market having a 10 or more year term, Pai said.
According to the report, an unprecedented percentage of contract restructurings, with even shorter average contract durations, was the other principal contributor to the smaller total contract values.
Fewer multi-process contracts have been signed in 2006 than in each of the past three years. To date, there have been seven, compared with 20 in all of 2004 and 11 in 2005.
By total contract value (TCV), multi-process contracts account for only 10 per cent year-to-date, compared with 24 per cent in 2004 and about 12 per cent in 2005, it said.
BPO is expected to grow by roughly 10 per cent year-on-year due to the large number of contracts valued at less than USD 25 million. Although the TCV was lower, BPO had a great deal of activity in the third quarter with 58 signed contracts -- an increase of more than 23 per cent quarter-on-quarter and more than 26 per cent year-on-year.
The value of the third quarter contracts exceeded USD 4.5 billion, which is up about nine per cent quarter-on-quarter, but down 15 per cent year-on-year due to the number of single-process deals, it said.
Indian-based providers continued to gain TCV market share, increasing from nearly one per cent in 2004 to slightly over four per cent of the Broader Market bookings so far in 2006. Their share of awarded contracts have also increased from about 2 per cent to nearly 8 per cent in the same period.
India-based providers are beginning to sign business in infrastructure-related areas and have over 25 per cent TCV share in the pure applications development and maintenance market, more than any single multinational service provider.
With shorter contract durations, it is unlikely that fourth quarter total contract value results will push total annual contract value beyond its 2005 mark of nearly USD 82 billion, the report said. Yet, the annualised metric shows a pace to achieve unprecedented heights in terms of annual flow of contracts.
TPI said it has advised on more than 25 per cent of total contract value awarded in the broader outsourcing market, including commercial contract awards each valued at Euro 40 million or more.
"The third quarter of 2006 saw a decline in contracts by volume and value for the same quarter last year," the firm TPI said in its TPI Index Report whose findings were released to reporters here.
The cause of the falling aggregate contract values could be tied to the decline in contract durations, specially for Information Technology Outsourcing (ITO) contracts, it said.
Since 2001, the average duration of a Broader Market contract has decreased 12 per cent. In ITO, it decreased 18 per cent while for Business Process Outsourcing, it dropped five per cent, the report said.
"There have been an increasing number of smaller, single-process contracts compared with larger, multi-process contracts in recent years. This trend holds true for both BPO and ITO contracts," Siddharth Pai, Partner and Managing Director, TPI India, said.
Shorter term contracts have become more popular with only 12 per cent of contracts signed in the broader market having a 10 or more year term, Pai said.
According to the report, an unprecedented percentage of contract restructurings, with even shorter average contract durations, was the other principal contributor to the smaller total contract values.
Fewer multi-process contracts have been signed in 2006 than in each of the past three years. To date, there have been seven, compared with 20 in all of 2004 and 11 in 2005.
By total contract value (TCV), multi-process contracts account for only 10 per cent year-to-date, compared with 24 per cent in 2004 and about 12 per cent in 2005, it said.
BPO is expected to grow by roughly 10 per cent year-on-year due to the large number of contracts valued at less than USD 25 million. Although the TCV was lower, BPO had a great deal of activity in the third quarter with 58 signed contracts -- an increase of more than 23 per cent quarter-on-quarter and more than 26 per cent year-on-year.
The value of the third quarter contracts exceeded USD 4.5 billion, which is up about nine per cent quarter-on-quarter, but down 15 per cent year-on-year due to the number of single-process deals, it said.
Indian-based providers continued to gain TCV market share, increasing from nearly one per cent in 2004 to slightly over four per cent of the Broader Market bookings so far in 2006. Their share of awarded contracts have also increased from about 2 per cent to nearly 8 per cent in the same period.
India-based providers are beginning to sign business in infrastructure-related areas and have over 25 per cent TCV share in the pure applications development and maintenance market, more than any single multinational service provider.
With shorter contract durations, it is unlikely that fourth quarter total contract value results will push total annual contract value beyond its 2005 mark of nearly USD 82 billion, the report said. Yet, the annualised metric shows a pace to achieve unprecedented heights in terms of annual flow of contracts.
TPI said it has advised on more than 25 per cent of total contract value awarded in the broader outsourcing market, including commercial contract awards each valued at Euro 40 million or more.
Investing in BPO
With transformational outsourcing deals, the one thing that organisations have to learn is how to manage change. This is the key learning of Steve Owen, partnership and operations director at National Savings and Investments (NS&I), seven years into a 15-year BPO contract with Siemens Business Services (SBS) to undertake all of its transaction processing activities.
"Managing a deal like this is a really tough option – and much more difficult than managing an in-house provider. You've got to be much clearer about exactly what it is you want and the hardest thing is that you don't have direct control. So it's more complex, but the benefits are higher," says Owen.
The government agency first embarked on its BPO journey in the mid-1990s at a stage when it was losing market share and its customer base was shrinking. One of the key problems the organisation faced was that, while it received a set amount from the government each year to cover running costs, the sum was not enough to invest in the business. But this made it difficult to compete with other financial services companies.
"We were struggling a bit to say the least. We could afford to pay wages, but we couldn't afford to invest and this thought process was the primary thing that drove us to outsource," Owen explains. "But we're also not particularly good at operations. Structurally, it's very difficult because of the way we're financed, which meant that we couldn't draw on the wider market."
The 10-year contract with SBS came into force on 1 April 1999 and has already had its five year extension option exercised. The decision was taken to structure it as a private finance initiative deal because of the large capital investment required to upgrade NS&I's underlying IT infrastructure, much of which was siloed and mainframe-based.
The revamp included moving to a single banking system to handle all back office processes; introducing a data warehouse to better understand customers and their requirements; and implementing scanning and imaging applications. The aim here was to improve the effectiveness of workflow-based processes between the organisation's sites in Glasgow, Blackpool, Durham and India.
But the biggest challenge that NS&I had to cope with was not so much technical in nature as people-oriented. As part of the deal, it agreed to transfer 4,200 staff to its provider, which at the time was the largest TUPE (Transfer of Undertakings [Protection of Employment] Regulations 1981 and 2006) transfer ever undertaken in the UK public sector.
These personnel process 60 million transactions each year and handle support activities for the public authority's 26 million customers. The move left a core team of about 200 to focus on strategic activities such as designing products, setting prices, contract and brand management and marketing.
"People are the big issue here and it's never painless. It doesn't matter how much spin you put on this, the real issue is the people side of the transition and it's difficult. But once we decided to outsource, we were as open as we could possibly be in selling the business case to them," Owen says.
Although many employees were unhappy about being outsourced to the private sector, "quite a lot realised that it was a bit of a failing business and while it wasn't going to collapse, it was on a downward slope. So when we presented them with a business case as to why we were outsourcing, most staff understood that it had to be done".
While Owen acknowledges that it is always impossible to win everyone over, he believes that "if the majority are behind it, it'll work". Another factor that helped to make the handover smooth, however, was that personnel were not required to change sites.
"We outsourced the whole operations so it was easier for everyone to stay where they were. It would have been too painful and expensive to lift it all up and move, but it led to a very smooth transition as people came in the next day and were doing the same job with no physical change," Owen explains. Since the transfer, 1,700 of predominantly the same staff still work on the NS&I account, while the balance have either been re-deployed to other contracts within SBS, taken voluntary redundancy or left due to various reasons such as retirement.
The NS&I strategy team, meanwhile, has also dropped in number to 130, although very few of the original staff members are left.
"There was a complete shift of focus away from operational to strategic issues and we moved from being a traditional civil service agency to essentially being a financial services business. Most of the staff working for us now have a financial services background so there's been big cultural change at the core of the business," says Owen.
This shift has been of huge benefit, he adds, because it means that the organisation is now more focused. A key advantage of reducing staff numbers, meanwhile, has been the resultant drop in operational expenditure. While in 1999, the deal cost NS&I £100 million per annum to run, by 2009, Owen expects this figure to have fallen to £43 million on a like-for-like basis.
Some of these savings have to date been reinvested in the business to create new services and channels to market and to open a 300-seat contact centre. But the rest has been used to boost interest rates for products and has also gone "back into the public purse because the business now costs less to run".
At a customer level, the move to BPO has likewise generated various benefits. While responding to a customer request or query used to take an average of 11.5 days in 1998, it now takes three, which is "a big improvement in timeliness and means that customer complaints are now at very low levels and satisfaction has grown".
Moreover, the organisation has moved from being very product- and site-centric to being more customer-focused, not least due to the introduction of its single banking platform.
"In the past, if a customer rang Blackpool about their premium bonds, but had a query about another product, we'd have had to redirect them elsewhere. But now we're a virtual business so customers go through to the call centre and have their query dealt with using a single IT platform, which holds all of the relevant information about them," Owen explains.
But this does not mean to say that everything is plain sailing with large complex transformational BPO projects of this type. Contract management is a big challenge as is handling change.
"What you outsource on day one is entirely different after the contract has been running for 15 years, but change has to be managed in partnership and that's a big challenge," Owen says.
The key, however, he believes, is "engagement" and building up and developing trust. Part of this process involves spending as much time as possible discussing with the provider how to introduce any necessary changes in a way that will be beneficial to both parties.
"It's not about being generous or soft, but about recognising your partner's point of view and taking that into account. But working in this way can take a lot of time, certainly more than just specifying something and throwing it over the wall," he explains.
It also requires proper governance structures to be put in place throughout the business so that the two organisations can interface at operational and board level. NS&I, for example, has a team of 11 staff that work on site at its four offices, with one manager, which until recently was Owen, taking overall responsibility for the contract.
"Open book accounting is not enough. You really have to understand your partner's business. That means getting a full break-down of how it ticks and understanding future projections and where its costs lie. You can only do that if you have good governance control in place, but that level of involvement is the key to success in a complex deal like this one," Owen concludes.
"Managing a deal like this is a really tough option – and much more difficult than managing an in-house provider. You've got to be much clearer about exactly what it is you want and the hardest thing is that you don't have direct control. So it's more complex, but the benefits are higher," says Owen.
The government agency first embarked on its BPO journey in the mid-1990s at a stage when it was losing market share and its customer base was shrinking. One of the key problems the organisation faced was that, while it received a set amount from the government each year to cover running costs, the sum was not enough to invest in the business. But this made it difficult to compete with other financial services companies.
"We were struggling a bit to say the least. We could afford to pay wages, but we couldn't afford to invest and this thought process was the primary thing that drove us to outsource," Owen explains. "But we're also not particularly good at operations. Structurally, it's very difficult because of the way we're financed, which meant that we couldn't draw on the wider market."
The 10-year contract with SBS came into force on 1 April 1999 and has already had its five year extension option exercised. The decision was taken to structure it as a private finance initiative deal because of the large capital investment required to upgrade NS&I's underlying IT infrastructure, much of which was siloed and mainframe-based.
The revamp included moving to a single banking system to handle all back office processes; introducing a data warehouse to better understand customers and their requirements; and implementing scanning and imaging applications. The aim here was to improve the effectiveness of workflow-based processes between the organisation's sites in Glasgow, Blackpool, Durham and India.
But the biggest challenge that NS&I had to cope with was not so much technical in nature as people-oriented. As part of the deal, it agreed to transfer 4,200 staff to its provider, which at the time was the largest TUPE (Transfer of Undertakings [Protection of Employment] Regulations 1981 and 2006) transfer ever undertaken in the UK public sector.
These personnel process 60 million transactions each year and handle support activities for the public authority's 26 million customers. The move left a core team of about 200 to focus on strategic activities such as designing products, setting prices, contract and brand management and marketing.
"People are the big issue here and it's never painless. It doesn't matter how much spin you put on this, the real issue is the people side of the transition and it's difficult. But once we decided to outsource, we were as open as we could possibly be in selling the business case to them," Owen says.
Although many employees were unhappy about being outsourced to the private sector, "quite a lot realised that it was a bit of a failing business and while it wasn't going to collapse, it was on a downward slope. So when we presented them with a business case as to why we were outsourcing, most staff understood that it had to be done".
While Owen acknowledges that it is always impossible to win everyone over, he believes that "if the majority are behind it, it'll work". Another factor that helped to make the handover smooth, however, was that personnel were not required to change sites.
"We outsourced the whole operations so it was easier for everyone to stay where they were. It would have been too painful and expensive to lift it all up and move, but it led to a very smooth transition as people came in the next day and were doing the same job with no physical change," Owen explains. Since the transfer, 1,700 of predominantly the same staff still work on the NS&I account, while the balance have either been re-deployed to other contracts within SBS, taken voluntary redundancy or left due to various reasons such as retirement.
The NS&I strategy team, meanwhile, has also dropped in number to 130, although very few of the original staff members are left.
"There was a complete shift of focus away from operational to strategic issues and we moved from being a traditional civil service agency to essentially being a financial services business. Most of the staff working for us now have a financial services background so there's been big cultural change at the core of the business," says Owen.
This shift has been of huge benefit, he adds, because it means that the organisation is now more focused. A key advantage of reducing staff numbers, meanwhile, has been the resultant drop in operational expenditure. While in 1999, the deal cost NS&I £100 million per annum to run, by 2009, Owen expects this figure to have fallen to £43 million on a like-for-like basis.
Some of these savings have to date been reinvested in the business to create new services and channels to market and to open a 300-seat contact centre. But the rest has been used to boost interest rates for products and has also gone "back into the public purse because the business now costs less to run".
At a customer level, the move to BPO has likewise generated various benefits. While responding to a customer request or query used to take an average of 11.5 days in 1998, it now takes three, which is "a big improvement in timeliness and means that customer complaints are now at very low levels and satisfaction has grown".
Moreover, the organisation has moved from being very product- and site-centric to being more customer-focused, not least due to the introduction of its single banking platform.
"In the past, if a customer rang Blackpool about their premium bonds, but had a query about another product, we'd have had to redirect them elsewhere. But now we're a virtual business so customers go through to the call centre and have their query dealt with using a single IT platform, which holds all of the relevant information about them," Owen explains.
But this does not mean to say that everything is plain sailing with large complex transformational BPO projects of this type. Contract management is a big challenge as is handling change.
"What you outsource on day one is entirely different after the contract has been running for 15 years, but change has to be managed in partnership and that's a big challenge," Owen says.
The key, however, he believes, is "engagement" and building up and developing trust. Part of this process involves spending as much time as possible discussing with the provider how to introduce any necessary changes in a way that will be beneficial to both parties.
"It's not about being generous or soft, but about recognising your partner's point of view and taking that into account. But working in this way can take a lot of time, certainly more than just specifying something and throwing it over the wall," he explains.
It also requires proper governance structures to be put in place throughout the business so that the two organisations can interface at operational and board level. NS&I, for example, has a team of 11 staff that work on site at its four offices, with one manager, which until recently was Owen, taking overall responsibility for the contract.
"Open book accounting is not enough. You really have to understand your partner's business. That means getting a full break-down of how it ticks and understanding future projections and where its costs lie. You can only do that if you have good governance control in place, but that level of involvement is the key to success in a complex deal like this one," Owen concludes.
Why Companies Outsource
Without question, outsourcing has fundamentally changed the global business landscape. Not long ago outsourcing was simply viewed as a means to reduce various operational costs. However, as competition increases and budgets wear thin, wise organizations are turning to outsourcing to add value beyond lowering costs.
A recent Duke University study of 100 companies in the Fortune 500 found that respondents were overwhelmingly satisfied with their outsourcing operations. Seventy-two percent said their implementations met or exceeded expected savings. Outsourcing providers have all but perfected the process of helping companies strategically reduce costs, but the industry must evolve to meet the additional demands of organizations that also embrace outsourcing as a way to increase both revenue and customer retention.
In recent years, five distinct reasons have emerged as the most important factors companies consider when electing to outsource:
Lower costs
Reducing cost remains the number-one reason that organizations elect to outsource. Virtually every company cites lowering costs as a primary driver. According to industry analysts at Gartner, 80 percent of companies name cost cutting as the main reason for outsourcing.
One ISP began outsourcing primarily as a cost-reduction initiative. The company had internally run a large call center operation that generated great results but at a high cost. Under pressure to reduce costs across all functions, the company began outsourcing exclusively in the U.S. As the ISP became more comfortable with outsourcing and saw comparable results, it moved part of the operations overseas. The initiative has been a success, saving the company $30 million a year without diminishing quality of service.
Cross- and upsell opportunities
The days of sales calls in the middle of dinner are over. Outbound calling is intrusive, disruptive, and ultimately damaging to the customer relationship, while inbound calls are a powerful and productive way to generate revenue. Companies leave a great deal of potential revenue on the table by not cross- and upselling at the right moments during in-bound interactions.
The financial services industry is surprisingly sophisticated when it comes to the benefits of cross- and upselling. The analyst group IDC says that U.S. spending on payments-related business process outsourcing (BPO) reached $3.3 billion in 2005 and will grow at a five-year compound annual growth rate of 5.5 percent.
One of the world's largest investment banking institutions decided to tap outsourcing to meet three primary objectives: drive additional revenue in sales campaigns; create lead generation for a growing offering; and manage customer inquiries related to credit card services. The company successfully met these objectives, upselling $50 million in balance transfers, ranking first among all service centers in customer satisfaction, and generating an additional $600 million in revenue.
Retention
One overlooked benefit of outsourced customer care is the ability to generate higher retention rates. The combination of creative programs, informed and talented agents, and timely execution can lead to dramatic increases in customer retention. Agents need to think of every customer interaction as an opportunity to increase satisfaction and retention, saving revenue by turning a cancellation call into a retained customer.
As satellite radio is proving, entire industries are now upping the stakes by giving away their service for a given period of time. These companies rely on talented customer care associates to make sure the customer starts paying for the service when the trial period is over. Customer retention is a central part of the company's business model, making outstanding customer care a critical part of the company's ultimate success.
Scale
One of the biggest benefits of outsourced customer care is flexibility. Partnering with an outsourcing company with a deep stable of agents worldwide enables a company to quickly scale up or down based on demand. Two of the biggest drivers that create this demand are seasonal spikes (Christmas, Valentine's Day) and marketing promotions. One consumer company that outsources its holiday calls experiences a volume increase of more than 500 percent, requiring several hundred temporary agents.
A large travel agency specializing in cruises experiences dramatic increases in enquiries and bookings from December to March. As cruise travel is highly personal, agents must be trained to understand the various cruise options and provide sound booking guidance.
Diversification
Some companies want to keep part of their call center operations internal and outsource other parts, often because they have experienced success running their operations internally, but are looking to supplement the program with outside expertise or geographies. Diversifying call center operations in this manner is an excellent way for companies to keep internal benchmarks in place to maximize the outsourcing results.
One rapidly growing financial services company turned to outsourcing for its prepaid debit card products and services. This company sees customer support as its most important competitive differentiator and diversified its call center operations to utilize offshore options.
A recent Duke University study of 100 companies in the Fortune 500 found that respondents were overwhelmingly satisfied with their outsourcing operations. Seventy-two percent said their implementations met or exceeded expected savings. Outsourcing providers have all but perfected the process of helping companies strategically reduce costs, but the industry must evolve to meet the additional demands of organizations that also embrace outsourcing as a way to increase both revenue and customer retention.
In recent years, five distinct reasons have emerged as the most important factors companies consider when electing to outsource:
Lower costs
Reducing cost remains the number-one reason that organizations elect to outsource. Virtually every company cites lowering costs as a primary driver. According to industry analysts at Gartner, 80 percent of companies name cost cutting as the main reason for outsourcing.
One ISP began outsourcing primarily as a cost-reduction initiative. The company had internally run a large call center operation that generated great results but at a high cost. Under pressure to reduce costs across all functions, the company began outsourcing exclusively in the U.S. As the ISP became more comfortable with outsourcing and saw comparable results, it moved part of the operations overseas. The initiative has been a success, saving the company $30 million a year without diminishing quality of service.
Cross- and upsell opportunities
The days of sales calls in the middle of dinner are over. Outbound calling is intrusive, disruptive, and ultimately damaging to the customer relationship, while inbound calls are a powerful and productive way to generate revenue. Companies leave a great deal of potential revenue on the table by not cross- and upselling at the right moments during in-bound interactions.
The financial services industry is surprisingly sophisticated when it comes to the benefits of cross- and upselling. The analyst group IDC says that U.S. spending on payments-related business process outsourcing (BPO) reached $3.3 billion in 2005 and will grow at a five-year compound annual growth rate of 5.5 percent.
One of the world's largest investment banking institutions decided to tap outsourcing to meet three primary objectives: drive additional revenue in sales campaigns; create lead generation for a growing offering; and manage customer inquiries related to credit card services. The company successfully met these objectives, upselling $50 million in balance transfers, ranking first among all service centers in customer satisfaction, and generating an additional $600 million in revenue.
Retention
One overlooked benefit of outsourced customer care is the ability to generate higher retention rates. The combination of creative programs, informed and talented agents, and timely execution can lead to dramatic increases in customer retention. Agents need to think of every customer interaction as an opportunity to increase satisfaction and retention, saving revenue by turning a cancellation call into a retained customer.
As satellite radio is proving, entire industries are now upping the stakes by giving away their service for a given period of time. These companies rely on talented customer care associates to make sure the customer starts paying for the service when the trial period is over. Customer retention is a central part of the company's business model, making outstanding customer care a critical part of the company's ultimate success.
Scale
One of the biggest benefits of outsourced customer care is flexibility. Partnering with an outsourcing company with a deep stable of agents worldwide enables a company to quickly scale up or down based on demand. Two of the biggest drivers that create this demand are seasonal spikes (Christmas, Valentine's Day) and marketing promotions. One consumer company that outsources its holiday calls experiences a volume increase of more than 500 percent, requiring several hundred temporary agents.
A large travel agency specializing in cruises experiences dramatic increases in enquiries and bookings from December to March. As cruise travel is highly personal, agents must be trained to understand the various cruise options and provide sound booking guidance.
Diversification
Some companies want to keep part of their call center operations internal and outsource other parts, often because they have experienced success running their operations internally, but are looking to supplement the program with outside expertise or geographies. Diversifying call center operations in this manner is an excellent way for companies to keep internal benchmarks in place to maximize the outsourcing results.
One rapidly growing financial services company turned to outsourcing for its prepaid debit card products and services. This company sees customer support as its most important competitive differentiator and diversified its call center operations to utilize offshore options.
Tricks of the BPO trade
Outsourcing is already commonplace, but as it stretches from the IT infrastructure into the back office, the next major upheaval for the CIO is likely to be in the form of business process outsourcing. Patrick O'Brien quizzes two industry leaders about best practice in BPO.
A report last month from outsourcing advisory firm TPI notes that, while revenue at IT outsourcing vendors is expected to stagnate, strong client demand means that business process outsourcing (BPO) revenue should continue to see double-digit percentage growth.
It seems BPO is now winning widespread adoption, particularly in the UK where firms are offloading 'non-core' operations such as human resources, finance and accounting and procurement functions, as well as industry-specific work such as mortgage processing and pensions administration.
Yet the immaturity of the industry has also brought some problems for early adopters. Hewitt Associates, a leading human resources outsourcing provider, recently admitted that it had underestimated the complexity and therefore the cost of delivering many of its major, long-term BPO contracts. In the wider BPO industry too, there has been a higher proportion of terminations as compared to IT services deals, and earlier in the contract cycle.
Despite these problems, however, demand for BPO is stronger than ever. The question of whether or not to outsource back office functions is rapidly being replaced by questions about how to ensure it is done effectively.
To find out, CBR interviewed the CEOs of two of the key BPO vendors that offer BPO services to the UK market.
Alistair Cox is CEO of Xansa, a UK-based BPO provider that has restructured its operations to focus on offshore delivery for UK clients. It now has more employees in India than it does in the UK, and has won major contracts with UK banks such as Barclays, HBOS and LloydsTSB.
TK Kurian runs Wipro BPO, a subsidiary of India's third-largest IT services provider. Wipro BPO has over 16,000 employees and provides a number of BPO services including customer care, technical support, finance and accounting, and transaction processing.
Optimum timing
Timing a deal would seem to be crucial, but there is no obvious milestone that a company should look to as the optimum time to consider a BPO deal - as with most aspects of outsourcing, it depends on the individual circumstances of the company.
Getting board-level involvement for a deal is always crucial and Xansa CEO Alistair Cox believes the most important factor is to ensure that these sponsors, and other key personnel, have the time to effectively manage a deal.
"There is no optimal time for a BPO deal, it comes down to the bandwidth on managing change, not on what else has already been done at the company," he says.
"The best outcomes are when the client approaches the vendor early on and involves them in what it plans to do. Rather than do internal work and say 'we'd like one of these please', they should liaise with vendors to see what the options are. It allows us to get a proper understanding of the business."
Kurian also advises clients to involve vendors as early as possible. While a couple of years ago companies were more likely to think about BPO after a major systems refresh, he says that now it is advisable for the vendor to be involved sooner so they can make 'transformational' changes in one step. The alternative is going through the process changes that often accompany a systems change, then going through the same process with the BPO deal.
A BPO deal can be done "even if you have a crappy system," says Kurian, and vendors will be able to offer greater value if changes are made in one jump.
Choosing a supplier
If you're convinced of the case for BPO in your organisation, understanding which vendor to turn to is a minefield. The UK BPO market is seen as ripe for consolidation, such is the level of competition, and this may have already started with the auction of customer care vendor Vertex by its parent, United Utilities.
There are a number of specialised advisory firms that have set up relatively recently to help the process, such as Morgan Chambers, TPI, Everest and Equaterra. Are they worth spending money on?
Vendors seem genuinely supportive of such operations. "I am not averse to advisory firms," says Cox, "but make sure you really understand why you want to use them, and be clear upfront what role you want them to play. They are fairly recent innovations and some don't fully know what we do."
Advisor bias
Cox believes that some are biased in favour of vendors that they have taken the time to fully understand. Kurian is also a little circumspect. "For new buyers attempting outsourcing for the first time, advisory firms make a lot of sense. For the smart buyer, with experience, it's not so much of a problem to make a transaction without them. The main advisors are neutral, but there are some 'mom and pop shops' that are clearly biased."
CBR parent company Datamonitor offers a mixture of independent published reports covering the BPO sector, while its ComputerWire brand publishes the monthly BPO Market Report, and also offers ad-hoc IT research under the Ask ComputerWire service. Visit www.computerwire.com for more information.
If choosing a vendor proves difficult, you can start off with a pilot operation, and some even get two competing vendors on pilots to see who performs best. According to Cox, pilots are not as popular as they once were, due to the number of references available now.
"Some companies still want to use pilots, such as our client Scottish Widows, which wanted to see how it all worked first. Before, pilots were needed to convince, but now there are references for them to see, and time is money in BPO, so it's not always advisable". Kurian is more enthusiastic: "Yes, try to do a pilot. Before you try it out it's just a sales pitch."
To offshore or not to offshore?
Many companies choose to use the 'captive' route, which sees a business send some of its back-office functions outside the company to a shared services centre - perhaps offshore, though not necessarily - yet they remain 'owned' by the customer. It's a form of BPO, but some argue that it falls short of all of the benefits of 'true' BPO, where a third party takes over the business processing.
Xansa's Cox sees 'captive' BPO deals as a short-term measure. "Captives can never get the scale that vendors can offer, and they are only ever going to be able to offer limited career opportunities to their staff, who will have to do the same thing, day in, day out," he says.
Of course, both Wipro and Xansa are heavily committed to offshore delivery, as are more and more of their Western rivals. But should customers even be part of the on/offshore discussion? For some companies all that counts is the result, not the strategy or locations that the provider has used to get those results.
Cox still thinks that companies should be involved in such decisions as to what goes offshore, but that the vendor's expertise should be trusted as far as which offshore locations are used. "You should think very hard about the risks and what you are prepared to move offshore," he says.
"You can trust the industry as to where the offshore element goes though, and also understand that attitudes to offshoring will change over time [during the terms of the contract]. They shouldn't worry about where, apart from some industries such as defence where there are added sensitivities. Still, the vendor should still be happy to show the client where the work is going; it should not be secret."
Management and partnerships
Signing a deal is only the start of it, and many BPO customers have publicly regretted not spending more resources on managing the deal. There are various estimates as to how much should be spent, but Cox claims that there can be no hard and fast rules, as each contract is completely different.
Kurian admits that "no vendor likes management by the customer". It does, after all, suggest that the vendor needs to be kept on its toes with close adherence to the terms and conditions of the contract. That said, he does advise customers to spend 4% to 6% of the total contract value on internal management. "Not all of them take our advice," he says.
Meanwhile, anyone who's ever been to an outsourcing conference will have heard the mantra, "it's all about partnerships". Client-vendor suspicions need to be brushed aside and replaced by a relationship built on trust - but how is such trust built up? Cynics may regard such notions as marketing designed to cover up the inability of a contract to ensure that both parties get the expected benefits.
"If you don't get the governance right you will have problems," says Cox. "Both have to understand their obligations - who is accountable for what. The client must understand that by outsourcing he has not thrown away his obligations for the service - outsourcing is just a way of delivering the service."
While Cox concedes that it is difficult for a client to work out which vendor it will be able to build a trusting relationship with, he says that there are ways of getting a clearer picture: "Look at your personal dealings with the firm, ring up reference clients, look at the reputation of the suppliers, use reference visits and use advisers. Find out how they have dealt with delivery issues in the past."
It's not a one-way street, though, as Cox warns. "Clients should also ask themselves, 'What am I like as a client to deal with?' and 'Are we the sort of people to go to the contract as soon as there's a hiccup, and then to court?' If so, then I don't want to be the vendor."
Kurian agrees that forming a trusting partnership requires more than just an understanding vendor.
"Every customer says they want to build a partnership, and says they want to stand 'shoulder to shoulder' with the vendor. It's what the customer wants, but in reality few pan out that way. Partnerships need 'skin in the game' and there are ways, such as 'gain-sharing', of getting these into the contract."
'Gain-sharing' is where the BPO provider has certain financial incentives to help the customer either make more revenue or save on costs. Should the client achieve certain cost-savings, as measured against agreed service-level agreements, some of those savings are passed back to the BPO provider. Or if the BPO deal leads to additional sales, a percentage of those go to the BPO provider.
The role of the CIO
For many BPO deals, the CIO doesn't get involved until much later in the process, sometimes not until after the vendor has been selected. "I think there should be more CIO involvement rather than less, it's a shame not to tap into the knowledge there," says Cox.
According to Kurian, the CIO's experience of using outsourcing is invaluable and often under-utilised.
"The CIO often only gets involved in the process late or not at all," he notes, "but the CIO should be looked at as a pioneer. IT is usually the first piece that goes out, and so has experience of the cycle. He has an important role to play, and can be the outsourcing evangelist within the organisation."
CBR Opinion
BPO has been shown to cut costs or improve efficiency for many enterprises, but, as was the case with early outsourcing deals, those who rush in may see the pain of being early adopters. Research and planning is vital, with choosing a supplier and deciding which functions should sensibly be outsourced being key decision-points. Research and advisory firms are recommended for those new to BPO, but in all cases it's vital that reference customers are sought and that sufficient resources are earmarked for ongoing monitoring and management of the project after the deal is done.
A report last month from outsourcing advisory firm TPI notes that, while revenue at IT outsourcing vendors is expected to stagnate, strong client demand means that business process outsourcing (BPO) revenue should continue to see double-digit percentage growth.
It seems BPO is now winning widespread adoption, particularly in the UK where firms are offloading 'non-core' operations such as human resources, finance and accounting and procurement functions, as well as industry-specific work such as mortgage processing and pensions administration.
Yet the immaturity of the industry has also brought some problems for early adopters. Hewitt Associates, a leading human resources outsourcing provider, recently admitted that it had underestimated the complexity and therefore the cost of delivering many of its major, long-term BPO contracts. In the wider BPO industry too, there has been a higher proportion of terminations as compared to IT services deals, and earlier in the contract cycle.
Despite these problems, however, demand for BPO is stronger than ever. The question of whether or not to outsource back office functions is rapidly being replaced by questions about how to ensure it is done effectively.
To find out, CBR interviewed the CEOs of two of the key BPO vendors that offer BPO services to the UK market.
Alistair Cox is CEO of Xansa, a UK-based BPO provider that has restructured its operations to focus on offshore delivery for UK clients. It now has more employees in India than it does in the UK, and has won major contracts with UK banks such as Barclays, HBOS and LloydsTSB.
TK Kurian runs Wipro BPO, a subsidiary of India's third-largest IT services provider. Wipro BPO has over 16,000 employees and provides a number of BPO services including customer care, technical support, finance and accounting, and transaction processing.
Optimum timing
Timing a deal would seem to be crucial, but there is no obvious milestone that a company should look to as the optimum time to consider a BPO deal - as with most aspects of outsourcing, it depends on the individual circumstances of the company.
Getting board-level involvement for a deal is always crucial and Xansa CEO Alistair Cox believes the most important factor is to ensure that these sponsors, and other key personnel, have the time to effectively manage a deal.
"There is no optimal time for a BPO deal, it comes down to the bandwidth on managing change, not on what else has already been done at the company," he says.
"The best outcomes are when the client approaches the vendor early on and involves them in what it plans to do. Rather than do internal work and say 'we'd like one of these please', they should liaise with vendors to see what the options are. It allows us to get a proper understanding of the business."
Kurian also advises clients to involve vendors as early as possible. While a couple of years ago companies were more likely to think about BPO after a major systems refresh, he says that now it is advisable for the vendor to be involved sooner so they can make 'transformational' changes in one step. The alternative is going through the process changes that often accompany a systems change, then going through the same process with the BPO deal.
A BPO deal can be done "even if you have a crappy system," says Kurian, and vendors will be able to offer greater value if changes are made in one jump.
Choosing a supplier
If you're convinced of the case for BPO in your organisation, understanding which vendor to turn to is a minefield. The UK BPO market is seen as ripe for consolidation, such is the level of competition, and this may have already started with the auction of customer care vendor Vertex by its parent, United Utilities.
There are a number of specialised advisory firms that have set up relatively recently to help the process, such as Morgan Chambers, TPI, Everest and Equaterra. Are they worth spending money on?
Vendors seem genuinely supportive of such operations. "I am not averse to advisory firms," says Cox, "but make sure you really understand why you want to use them, and be clear upfront what role you want them to play. They are fairly recent innovations and some don't fully know what we do."
Advisor bias
Cox believes that some are biased in favour of vendors that they have taken the time to fully understand. Kurian is also a little circumspect. "For new buyers attempting outsourcing for the first time, advisory firms make a lot of sense. For the smart buyer, with experience, it's not so much of a problem to make a transaction without them. The main advisors are neutral, but there are some 'mom and pop shops' that are clearly biased."
CBR parent company Datamonitor offers a mixture of independent published reports covering the BPO sector, while its ComputerWire brand publishes the monthly BPO Market Report, and also offers ad-hoc IT research under the Ask ComputerWire service. Visit www.computerwire.com for more information.
If choosing a vendor proves difficult, you can start off with a pilot operation, and some even get two competing vendors on pilots to see who performs best. According to Cox, pilots are not as popular as they once were, due to the number of references available now.
"Some companies still want to use pilots, such as our client Scottish Widows, which wanted to see how it all worked first. Before, pilots were needed to convince, but now there are references for them to see, and time is money in BPO, so it's not always advisable". Kurian is more enthusiastic: "Yes, try to do a pilot. Before you try it out it's just a sales pitch."
To offshore or not to offshore?
Many companies choose to use the 'captive' route, which sees a business send some of its back-office functions outside the company to a shared services centre - perhaps offshore, though not necessarily - yet they remain 'owned' by the customer. It's a form of BPO, but some argue that it falls short of all of the benefits of 'true' BPO, where a third party takes over the business processing.
Xansa's Cox sees 'captive' BPO deals as a short-term measure. "Captives can never get the scale that vendors can offer, and they are only ever going to be able to offer limited career opportunities to their staff, who will have to do the same thing, day in, day out," he says.
Of course, both Wipro and Xansa are heavily committed to offshore delivery, as are more and more of their Western rivals. But should customers even be part of the on/offshore discussion? For some companies all that counts is the result, not the strategy or locations that the provider has used to get those results.
Cox still thinks that companies should be involved in such decisions as to what goes offshore, but that the vendor's expertise should be trusted as far as which offshore locations are used. "You should think very hard about the risks and what you are prepared to move offshore," he says.
"You can trust the industry as to where the offshore element goes though, and also understand that attitudes to offshoring will change over time [during the terms of the contract]. They shouldn't worry about where, apart from some industries such as defence where there are added sensitivities. Still, the vendor should still be happy to show the client where the work is going; it should not be secret."
Management and partnerships
Signing a deal is only the start of it, and many BPO customers have publicly regretted not spending more resources on managing the deal. There are various estimates as to how much should be spent, but Cox claims that there can be no hard and fast rules, as each contract is completely different.
Kurian admits that "no vendor likes management by the customer". It does, after all, suggest that the vendor needs to be kept on its toes with close adherence to the terms and conditions of the contract. That said, he does advise customers to spend 4% to 6% of the total contract value on internal management. "Not all of them take our advice," he says.
Meanwhile, anyone who's ever been to an outsourcing conference will have heard the mantra, "it's all about partnerships". Client-vendor suspicions need to be brushed aside and replaced by a relationship built on trust - but how is such trust built up? Cynics may regard such notions as marketing designed to cover up the inability of a contract to ensure that both parties get the expected benefits.
"If you don't get the governance right you will have problems," says Cox. "Both have to understand their obligations - who is accountable for what. The client must understand that by outsourcing he has not thrown away his obligations for the service - outsourcing is just a way of delivering the service."
While Cox concedes that it is difficult for a client to work out which vendor it will be able to build a trusting relationship with, he says that there are ways of getting a clearer picture: "Look at your personal dealings with the firm, ring up reference clients, look at the reputation of the suppliers, use reference visits and use advisers. Find out how they have dealt with delivery issues in the past."
It's not a one-way street, though, as Cox warns. "Clients should also ask themselves, 'What am I like as a client to deal with?' and 'Are we the sort of people to go to the contract as soon as there's a hiccup, and then to court?' If so, then I don't want to be the vendor."
Kurian agrees that forming a trusting partnership requires more than just an understanding vendor.
"Every customer says they want to build a partnership, and says they want to stand 'shoulder to shoulder' with the vendor. It's what the customer wants, but in reality few pan out that way. Partnerships need 'skin in the game' and there are ways, such as 'gain-sharing', of getting these into the contract."
'Gain-sharing' is where the BPO provider has certain financial incentives to help the customer either make more revenue or save on costs. Should the client achieve certain cost-savings, as measured against agreed service-level agreements, some of those savings are passed back to the BPO provider. Or if the BPO deal leads to additional sales, a percentage of those go to the BPO provider.
The role of the CIO
For many BPO deals, the CIO doesn't get involved until much later in the process, sometimes not until after the vendor has been selected. "I think there should be more CIO involvement rather than less, it's a shame not to tap into the knowledge there," says Cox.
According to Kurian, the CIO's experience of using outsourcing is invaluable and often under-utilised.
"The CIO often only gets involved in the process late or not at all," he notes, "but the CIO should be looked at as a pioneer. IT is usually the first piece that goes out, and so has experience of the cycle. He has an important role to play, and can be the outsourcing evangelist within the organisation."
CBR Opinion
BPO has been shown to cut costs or improve efficiency for many enterprises, but, as was the case with early outsourcing deals, those who rush in may see the pain of being early adopters. Research and planning is vital, with choosing a supplier and deciding which functions should sensibly be outsourced being key decision-points. Research and advisory firms are recommended for those new to BPO, but in all cases it's vital that reference customers are sought and that sufficient resources are earmarked for ongoing monitoring and management of the project after the deal is done.
China sets its sight on becoming a global BPO player, interview
As the 3rd China International BPO opened its annual session on Oct. 26 in Xi'an, capital of northwest China's Shaanxi province, governmental officials and entrepreneurs from both home and abroad exchange views and share latest achievement on the theme of China's business process outsourcing.
At the two-day conference, Mark A. Boyle, Vice-President of Accenture's Greater China Region accepted an exclusive interview with People's Daily Online, during which he talks freely about the trends of global BPO development and the status quo of BPO development in China.
Reporter: You have been taking charge of Accenture's outsourcing business in Greater China since March this year, could you elaborate on the positive significance of BPO development here in China? And why is it so important?
Mark A. Boyle: As of the Chinese economy, I think the Chinese government is correct in pursuing BPO as an important initiative in terms of growing capability and establishing global market presence, and I personal appreciate that right approach.
Globally speaking, the market by 2010 is going to be around 290 billion US dollars and that number is certain to grow further. Under that circumstance what will allow China to position in the market is to deliver the services and grow GDP significantly ¨C bringing professionals and business opportunities into China, especially those multinational companies that want to do businesses with China.
Reporter: What will exactly happen and how will it contribute to the country's economic growth this time?
Mark A. Boyle: It will be easy to find that in the next two to three years, the revenue from BPO will probably increase by several hundred million and that will help position China as an emerging BPO player, which will attract greater attention from multinational companies.
Reporter: What was it like before and what is new this time?
Mark A. Boyle: Previously, the conference was very immature I think. But now the government has understood what needs to be done in the past years to help BPO industry. And I appreciate the positive role Chinese government played very much.
Reporter: Would you like to share your personal opinions on the market status quo of China's BPO development?
Mark A. Boyle: The BPO status quo in China so far still needs improving, but it is learning very quickly. The support and policies from government and conference like this will help the industry. I certainly hold that the industry in China is beginning to be favorably considered by companies from Japan, South Korea, the U.S. as well as the EU countries.
Reporter: What specific steps must China take to achieve BPO development?
Mark A. Boyle: China should continuously push with the protection of intellectual property right. The good thing is that Chinese government now has programme in place, and carries it out progressively.
Furthermore, people engaging in BPO industries need to improve the English language stills.
It is also crucial for the government to encourage cities like Xi'an, Dalian, Chengdu to become the heart of China's BPO industry.
At the two-day conference, Mark A. Boyle, Vice-President of Accenture's Greater China Region accepted an exclusive interview with People's Daily Online, during which he talks freely about the trends of global BPO development and the status quo of BPO development in China.
Reporter: You have been taking charge of Accenture's outsourcing business in Greater China since March this year, could you elaborate on the positive significance of BPO development here in China? And why is it so important?
Mark A. Boyle: As of the Chinese economy, I think the Chinese government is correct in pursuing BPO as an important initiative in terms of growing capability and establishing global market presence, and I personal appreciate that right approach.
Globally speaking, the market by 2010 is going to be around 290 billion US dollars and that number is certain to grow further. Under that circumstance what will allow China to position in the market is to deliver the services and grow GDP significantly ¨C bringing professionals and business opportunities into China, especially those multinational companies that want to do businesses with China.
Reporter: What will exactly happen and how will it contribute to the country's economic growth this time?
Mark A. Boyle: It will be easy to find that in the next two to three years, the revenue from BPO will probably increase by several hundred million and that will help position China as an emerging BPO player, which will attract greater attention from multinational companies.
Reporter: What was it like before and what is new this time?
Mark A. Boyle: Previously, the conference was very immature I think. But now the government has understood what needs to be done in the past years to help BPO industry. And I appreciate the positive role Chinese government played very much.
Reporter: Would you like to share your personal opinions on the market status quo of China's BPO development?
Mark A. Boyle: The BPO status quo in China so far still needs improving, but it is learning very quickly. The support and policies from government and conference like this will help the industry. I certainly hold that the industry in China is beginning to be favorably considered by companies from Japan, South Korea, the U.S. as well as the EU countries.
Reporter: What specific steps must China take to achieve BPO development?
Mark A. Boyle: China should continuously push with the protection of intellectual property right. The good thing is that Chinese government now has programme in place, and carries it out progressively.
Furthermore, people engaging in BPO industries need to improve the English language stills.
It is also crucial for the government to encourage cities like Xi'an, Dalian, Chengdu to become the heart of China's BPO industry.
订阅：
博文 (Atom)
