The new face of outsourcing

While growth in offshore call centres slows, companies are moving more of their day-to-day operations such as HR and accounting to India and elsewhere, writes Dan Roberts

Milind Kharosekar is looking for recruits who can empathise with someone who has had their home burgled 5,000 miles away. Role-playing games, psychometric tests, "accent neutralisation" lessons - anything is worth trying if it helps bridge the cultural gap between his Indian call centre, where insurance claims are handled, and the house in Britain with the break-in.

Only there are constant reminders that this is Bangalore, not Birmingham. Lights flicker on and off as the electricity grid betrays a city groaning under the strain of breakneck economic growth. Cows amble through streets that are gridlocked for much of the day with commuter traffic ferrying workers to the big foreign outsourcing companies.

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"Obviously there are examples where there are cultural misunderstandings or miscommunication, but that is rare," insists Kharosekar, a local manager for one such company, Accenture. "When we carry out surveys, Indian employees stand out for their diligence, process and compliance. What we still need to work on is listening, patience and empathy."

Inside "Bang 3" - the largest of several Accenture offices in Bangalore - there is a growing range of British business for its employees to learn from. The 10,000 Indians working there provide outsourced services for companies such as Royal & Sun Alliance, Thomas Cook and BP.

Back home, the patchy experience of offshore call centres has given outsourcing a bad name of late. Several British companies such as Lloyds TSB have recently brought customer services back "onshore". Many British consumers will by now have experienced the sometimes teeth-grinding frustration of communicating with those that remain offshore such as National Rail Enquiries or BT's broadband support centre.

But it would be a mistake to think this was the end of the story. Though growth in offshore customer call centres appears to be slowing, a far bigger revolution in back office outsourcing is only just beginning.

The majority of the people working in the sprawling Bang 3 facility are not answering phones to customers but dealing with each other - accountants, computer technicians and personnel officers working on the often mundane administrative tasks that make any large organisation tick.

The 200-odd Accenture employees running Thomas Cook's accounts department, for example, rely on a computer system maintained by an 80-strong IT department one floor below. Here, practically everything possible has been moved offshore. Only critical financial reporting is left in the UK. Even PWC's annual audit of the Thomas Cook accounts is carried out in India.

The basics of business process outsourcing, or BPO as it has become known, are nothing new. Many of the pioneering early deals were signed in 2001 or 2002 when a slowing economy forced companies to cut back after the 1990s technology bubble. Five years on these contracts are coming up for renewal and some companies are on to their second wave or third wave with much more confidence.

Insurance companies and banks were early adopters, but have redoubled their efforts to find more efficient ways of operating their day-to-day business functions. Prudential, for example, announced just last week it was considering outsourcing a further 2,000 UK jobs.

"Companies are now buying bundled products - not just one or two specific tasks," says Accenture's Kharosekar. "We are providing claims processing, customer relations, back office, accounting, HR, training, you name it."

Traditionally only a small number of big technology companies have competed for IT outsourcing deals - such as IBM and home-grown Indian rivals Wipro and Infosys. But more focused BPO players are emerging rapidly. Xchanging, a rival London-based outsourcing provider founded by former Accenture partner David Andrew, is shortly planning to test growing investor appetite with a stock market flotation [see box].

Today's BPO industry is worth $55bn (£28bn) globally and is growing at 30-35pc annually. Independent industry researchers IDC forecast it will hit $100bn by 2010. But the sales and general administrative costs of just the top 500 US companies alone add up to $2 trillion, so the scope for further growth is potentially enormous.

How far they will be prepared to go is another matter. Sceptics fear it will not be as easy to move the guts of a company as it might be just to hive off a discrete function.

"This industry is very young," says Xchanging's founder. "It's still forming and that's because it is very complex: taking something that has been welded into a company's organisation for many years and putting it on a free-standing basis is difficult."

But the principle is slowly catching on in services in much the same way as globalisation transformed the manufacturing industry. Just as companies discovered that cheap labour and raw material costs meant it made sense to source physical components from around the world rather than make them all on one expensive site at home, so the standardisation of business processes and ubiquitious internet connections are allowing managers to break up white-collar work and shop around for the cheapest accountants and administrators.

Except many jobs are ending up in the same place - reassembling the large integrated head offices they left behind at home. Accenture, for example, has one client in Bangalore for which it provides around 1,000 staff.

With wages for graduates five or six times what companies might pay for school-leavers back home, total cost savings from moving a back office to India can amount to between 30 and 50 per cent. This implies, of course, that labour is considerably less productive than before: requiring several Indians to do what was handled by a seasoned old hand working for the client.

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Neverthless, the sales pitch is relentless and outsourcing companies are keen to boast that you get better quality too. There are not many fully trained accountants in London willing to sit and process invoices all day long. So the next stage is to try to use the new-found expertise to do clever things with the way companies are run.

"The industry began with call centres and then moved to non-call centres, but much of the work was still what we call 'lift and drop' or 'we do your mess for less' which means it was iust about exploiting the difference in labour rates,'' says Pankaj Vaish, Accenture's BPO managing director. "Now we see ourselves as offering much more than that. Labour arbitrage is table stakes. We want to increase quality too with non direct benefits such as increased time-to-market for new products."

How far can this go? For the industry's cheerleaders, the limit is only in the minds of client chief executives who must decide what they want to cling on to as core competencies. Insurance outsourcing providers, for example, have their eye on almost every part of the insurance process bar marketing new policies and investing the surplus capital.

It is not just British and American companies who are taking note either. Despite initial scepticism, European businesses are catching up fast, developing their own clusters of outsourcing activity according to available local language skills: Mauritius and Bucharest for France; Riga for Scandinavia, Prague for German companies.

The next frontiers are Russia and South Africa. And within India, where the industry vies with the Philippines for English-speaking work, companies are spreading far beyond Bangalore and Delhi to other cities such as Chenai and Mumbai.

Now the creative brainpower is starting to follow the back-offices.

Companies such as General Electric, which pioneered outsourcing in India during the 1990s, recently opened a major new research facility for its scientists in Bangalore.

On a smaller scale, Accenture last year opened its fourth global R&D headquarters in the southern Indian city. Lin Chase, who heads it up, says: "For most of our clients, the biggest and most complex projects are happening here now, so it makes sense to study them here."

This means, for example, that new software to monitor how banks keep their computer systems from crashing was developed in Bangalore, since many of the systems are managed there already. In the case of Thomas Cook, Indian computer engineers were able to find cost savings in mundane but valuable areas such as more efficient use of bandwidth, or new software to back up files.

It all may be great for the Indian economy, but the extent of today's business process outsourcing can leave companies looking hollowed out - sucked of all the people who actually know how they work.

It is not all high-tech in India either. Some 8,000 of the people at Accenture's Bang 3 office are on strict rotating shifts, sharing only 2,000 seats in a giant game of round-the-clock musical chairs. Rice is stockpiled in the event of civil unrest or flooding. No personal possessions are allowed and the rows of artificially lit cubicles have a soulless feel.

Although Indians will soon account for the majority of Accenture's global workforce, they represent around just 5 per cent of its senior management. Unions are non-existent and long hours are encouraged.

n many respects what has been exported to India as a result of this new variety of business process outsourcing are all the very boring administrative jobs that appear unattractive in the UK.

"In many countries, some graduate from business school may not be happy processing accounts receivable," says Accenture manager Javier Vergara.

"There is a cost arbitrage but also a motivation arbitrage."

Just in case they need any more encouragement, there are the posters on the wall: "Bite your v's and kiss your w's, this is an accent neutralised area."