Source: www.sify.com

It’s the typical dilemma of a CEO in the West: Do I outsource to an offshore partner or do I just set up my own shop in an offshore location such as India? People have found no one right answer. GE was the first to hit on the offshore concept but after nearly two decades of owning the operations, spun off, and sold off its offshore unit, which is now Genpact. Citigroup, on the other hand, delisted its subsidiary, eServe, from the stock exchanges to fully own it. Now, unconfirmed reports have it that eServe is for sale.

So, what is the right path to generate savings while maintaining, or even improving, quality of services delivered? And what is the level of savings generated through outsourcing operations entirely to a third party?

eWorld chatted up Sreeram Iyer, CEO, Scope International, the back-office arm of Standard Chartered Bank in Chennai.

Excerpts:

Own your operations versus outsource entirely to third party vendors has been the topic of debate for large companies, including banks, traditionally. Has the argument tilted either way?

Of late, there has been a healthy debate among professionals in India about the future of offshore captive units established by several parent organisations around the world.

The debate is about the likely turn that this model may take in the coming three to five years. I do not think that the future of captives is at any risk nor will captives vanish from the BPO scene in an outsourced context.

Some assume all captives will be up for sale very soon. I disagree.

Recent research reports have claimed that a vast majority of such units are struggling to perform (over 60 per cent), suffer from high operating costs and face above-average challenges of staff attrition (above 40 per cent). Besides, their cost models are unrealistic, and integration with the parent is apparently a serious issue. They also suffer from poor execution and lack of scale.

As per the reports, it is therefore expected that parent organisations will finalise their exit strategies and may soon sell out strategically and reduce their stakes significantly. One estimate says that there are over 400 captive centres in India and the rising rupee is leading to their shakeout because they are ‘cost-centres’ with depleting margins.

Let’s look at the recent past of captive centres in India.

One reason why captive units were established in the first place is the absence of credible third party providers with adequate scale.

Indeed, it is the captives that have pioneered the offshore BPO business in India. We must not forget that this whole BPO industry is only about seven or eight years old and hence, in relation to other businesses such as auto or textiles or even IT, it is quite a ‘baby’.

Interestingly, consider the 100-year old automobile industry which grew dramatically on the back of an outsourcing model yet retaining, in many cases, basic manufacturing in high-cost locations, like in the heart of Japan, even today. The analogy applies equally to the pharma or textile industry in India. Retention of a particular geography as a production or service site is not necessarily a cost decision.

Another aspect that requires consideration is that what works (or does not work) for software Development Centres or Tech Support or Product Design is not necessarily the same for the BPO business in the context of a debate on the future of captives. Today, an estimated 67 per cent of all BPO business in the country arises from captives and one could argue that this has been the backbone of the success of this industry so far.

To what would you attribute significant wins that large captives have notched up so far?

Deepening the alignment and engagement with the overseas parent organisation; committing capital and huge financial investments (infrastructure and Technology) to establish and grow the offshore units; realising year-on-year productivity saves through automation and process efficiencies; migrating world-class Operational practices with focus on Service Quality; providing a framework as a ‘talent factory’ and genuine international career exposure for staff; enhancing People management practices in general and Staff Training in particular; managing operational risks and Business Continuity challenges.

One of the handicaps in this context is the lack of robust, credible, consistent data and benchmarks.

Today, what has indeed matured in the recent past is the emergence of some high quality real ‘scale’ players in the third party service providers business and that in itself has offered some options for captives to strategise their future models.

There are some excellent examples of business practices by third parties. Smarter utilisation of seats and physical infrastructure is a good example of this.

What about the cost comparison between a third party vendor and a captive?

It is a fact that certain types of costs in captives are indeed higher and perhaps there is room for improvement here. However, it is debatable if alternatively, a lower cost model on Health and Safety standards or on brand building is sustainable in the long run. It is more likely that international practices become mandatory for third parties to adopt to stay competitive. Here, it is interesting to be cautious and to learn a few lessons from the traditional industries over the years.

Apparently, WalMart shut more than 120 of its suppliers due to improper labour practices. It is difficult to secure international contracts if child labour is involved in, say, the leather industry in a remote offshore company. More recently, the recall of millions of toys from China due to poor quality adherence is another warning.

Several captives have successfully demonstrated undertaking of higher order capabilities and processes through innovative ideas and fresh, non-conventional vibrant thinking. After all, ‘Costs’ alone in isolation, are not necessarily the only measure of a successfully run unit.

What could possibly strengthen the case for captives?

Some industries, such as banking, are heavily regulated around the world. This, in itself, may prompt parent organisations to retain their captive centres. I think over the next three to five years, we will see an evolution and maturity of certain kinds of processes in the third party area, leading to a gradual migration of simultaneous transitions from captive to third parties.

Initially, this will be restricted to what captives may consider as being ‘non-core’ for themselves and where the cost of building scale and automation outweigh the benefits of retaining them inhouse. While ‘captives’ per se is not really the issue, the opportunity through M&A deals will bring in access to better practices more efficiently.

Source:www.informationweek.com

Outsourcing offers businesses the opportunity to cut costs and boost productivity — if it’s done right.

Offshore locations feature low-cost workers who can cut your labor costs by 50% or more. Tapping workers in India or China also affords the possibility of round-the-clock technical or customer support — when domestic staffers sign off in the evening, their Asian counterparts are just waking up. Companies can also transform labor costs from fixed to variable by working with an outsourcer. Need extra manpower during the holidays? A service provider can put more bodies on your account during crunch times. Finally, outsourcers can provide quick access to domain and technology experts who may be in short supply locally.

Despite these advantages, reports abound about outsourcing gone bad. Dell infamously had to repatriate some customer service operations after customers complained they couldn’t understand foreign phone reps. The bottom line: Outsourcing isn’t about blindly throwing work over the wall; it needs to be thought out and aggressively managed. Here are some pitfalls to watch for, and how to cope.

Many outsourcing projects fail because of lack of internal oversight. Forrester analyst Christine Ferussi Ross says businesses should establish formal vendor management offices staffed with professionals experienced in IT operations, contract negotiations, and procurement. Also needed is an individual with the diplomatic skills necessary to maintain vendor relationships over time. “Outsourcing implies some give and take,” says Ross.

Only 47% of 615 companies recently surveyed by Forrester reported having a centralized vendor management office.

Costs also need to be managed, or potential savings can evaporate quickly. Of concern lately for those outsourcing to India is the rising rupee, which has gained about 14% against the U.S. dollar over the past year. Businesses need to negotiate up front the extent to which their vendor is willing to insulate them from currency fluctuations. Labor costs in India are also rising — by as much as 15% per year — so companies interested in outsourcing for the first time might do well to scout out locations that haven’t been oversold, such as South America and China, and even second-tier cities in India. Not everything needs to be in Bangalore.

Deciding what to outsource is almost as critical as the decision to outsource itself. Not all IT projects or customer groups are created equally. Outsourcing the development of non-critical applications or customer service for low-revenue customers are good places to start. Dell’s mistake was offshoring service and support for its high-end business customers.

Regardless of what you outsource, the security of your company’s and your customers’ personal and business data must be a top consideration. When weighing vendors, it’s worth a trip to their facilities to inspect first-hand their security technologies and policies, even if that means a long flight. Most major offshore outsourcers, including India’s big four of Wipro, TCS, Infosys, and Satyam, have sophisticated security processes in place. Even so, it must be negotiated up front who is responsible for what if a breach occurs.