Business Process Outsourcing to India: Cost, Benefits and Risks
In the face of mediocre economic prospects resulting from one of the largest economic downturns since the Great Depression, companies are striving to streamline and become profitable. In addition, scandal has befallen numerous US corporations, the indiscretions flowing from the upper echelon of corporate executives, CFOs CEOs and COOs.
As a result of public scrutiny of corporate “waste” and demand by shareholders for continually increasing shareholder value, managers are seeking outsourcing and offshoring as creative means to reduce cost in the areas of production and operations. Yet outsourcing and moving operations offshore are neither new nor creative solutions. However the trend is occurring in the industries “whose tech bubble burst” in the late 90’s – the IT industry. What is more creative is the destination of the outsourced work, India.
More American firms are looking at India to outsource software services, business processes and manufacturing. Firms are attracted by the prospects of high quality work at low cost, crucial in times of a downturn. Analysts at technology research firm Gartner Inc said. “Companies are interested in going offshore, and generally speaking most of the time that means going to India,” Rita Terdiman, Gartner Inc.’s U.S.-based research director. National Association of Software and Service Companies (NASSCOM) has projected that R and D outsourcing to India will grow to $ 11 billion by 2008. (C Pettey, 2001)
India is observing a change, a change which is introducing a new wave and a new model of economy in India. This is reflected in Bill Gates comments “Three years ago, during my visit to India, the country was emerging as an IT superpower. Today, the country is handling the most sophisticated projects in the world…I am impressed with the talent we have in our India Development Center and the quality of software being developed.” (offshoreitoutsourcing.com, 2004) This gives an indication, about a revolution observed in economy of India, which is highlights in form of rapid growth in e-commerce and IT related business processes. One of such major buzz words is BPO which is Business Processes Outsourcing.
Definition, Concepts and Process
The definition of outsourcing given by Webster’s Universal Dictionary is: “A company or person that provides information; to find a supplier or service, to identify a source”. And according to definition given by Australian Computer Society about Outsourcing (T. Worthington), stated that in business scenario outsourcing means is a pure contracting transaction whereby one company purchases services from another while retaining ownership and responsibility for the underlying processes; the clients tells the provider what they want and how they want the work performed. Here the client authorizes the provider not only to own and operate, but also redesign underlying processes, to reap even greater cost and efficiency benefits.
But what is that which makes India, a preferred destination for Business Process Outsourcing, a phenomenon boom in Indian economy, which is now attracting business gurus from world class business institutions from Wharton, Sloan, Kellogg, and Berkeley, to come for research in India. (Rediff.com, 2004) Furthermore, Business Process Outsourcing and India have now become a complementary term for each other.
The Indian BPO activity is currently shared by BPO pure-plays or captive subsidiaries of large US/European companies. The companies that are best positioned to take advantage in this growing business are those that have client acquisition capabilities. There are two strong groups of contenders that will pose a challenge to the current players:
1) International service firms with a presence in India – These include US/Europe based service and consulting firms with strong operations in India. Accenture and IBM are prime examples. IBM operates in the Indian BPO space through its recently acquired subsidiary Daksh eServices.
2) Indian IT services firms – Nearly all Indian IT services companies are currently busy building capabilities for offering BPO services to their clients. As they do so, the following factors will help them build sizeable BPO practices: the financial clout and the resulting ability to build a credible infrastructure; established client relationships; proven record of offshore execution albeit in a different field but one that has strong parallels to BPO.
BPO: What actually is BPO?
Business Processes Outsourcing is in reality a modern management concept. Evidences from business books indicate outsourcing as an activity primarily followed by global businesses such as heavy industrial manufacturing giants, to produce or manufacture some parts of their supply chain to other location in order to lower the cost of production and add value to business and business related processes.
But in today’s era of technology, outsourcing has taken a new avatar, it is not just limited to offshore manufacturing to save cost, it has developed itself in information technology enabled business processes which are handed over to an external agency or service provider, who takes control and performs operations of selected processes according to defined measures of performance. (Gartner Dataquest, 2004)
This means that BPO has became a part of business strategy which is focused towards outsourcing various key business processes. A leading BPO operator in India (http://www.daksh.com/) suggests that firms and multinational’s prefer to outsource there business activities such as core competencies: a) Customer Service, b) Technical Support, c) Collections, d) Telemarketing, e) Back office Services, f) Business Process Reengineering.
It is a point to be noted that not all the business activities are outsourced, every business do not needs a call center, but every business has some back office work, which business firms can outsource. The trend of outsourcing is now not only just limited to call centers; trend has spread across different sectors in business industries, for example Insurance, Banking, Pharmaceuticals, Telecommunication and Transport industries.
And out of these Banking and Financial sector is more successful in reducing cost and adding value in their business, because for this segment of Industry, cost reduction is achieved primarily by outsourcing some of their front end processes for instance, in Banking and Insurance industry, claims processing, loans processing and client service and all similar office works are off shored to achieve cost reduction (Spectramind, 2004)
Common outsourcing model
For understanding the process of outsourcing, let’s take a look at most commonly practiced outsourcing model.
This model is followed by India’s premier IT firm Wipro in their Wipro Spectramind Service Delivery Model. This model has four key stages, as shown in the diagram below and the objectives, activities, skills and responsibilities at each stage are different.
- Pre Analysis: This stage is basically an assessment stage. In this stage the analysis of important business activities is carried out. The major focus is on identifying actual business of client, with respect to internal and external environment, this phase takes about two weeks to determine the processes.
- Analysis: This is second stage, in this stage, the process which can deliver better results if outsourced are finalized. Then the solution and cost incurred on solution is determined. A strategy is formulated, which is then discussed with client, thoroughly documented and preparation to implement this plans are initiated.
- Transition management: This is implementation stage. Here, the strategy is matched with organization’s business, along with starting processes to integrate with ongoing business.
- Operation: The last end of BPO is operation phase, all the operation has been successfully implemented and business is now rolling with new methodologies. The practical problems which arise during running of business are again reviewed and feed back is obtained. At the end of this phase, the actual cost advantage and benefits of off shoring are observed.
Above figure displays a typical cost breakdown in a business organization, it suggests that technology and communication claims lion’s share about 47.5 % of the total costs, and other major is cost incurred on employees which counts to 29.2 %.
For a multimillion business, even a slight percentage of saving on above two factors results in enormous cost savings. And if such processes are off shored, they result in 35-40 % in cost savings, and Innovation India, another BPO operator, Innovision India claims that in some cases cost reaches to even 60 % in savings. (innovision-india.com, 2004, Frequently asked questions)
For successful operation of Business Processes, three fundamental ingredients are required, which are Technology Infrastructure, Skilled manpower and Low cost of labor, and fortunately India offers the optimum combination of all the three elements.(Wipro Technologies, Wipro Spectramind, 2004)
Quality Manpower and Technical Manpower Resource
India offers a sea of engineers and technically skilled people. According to Business Week, a popular business weekly magazine, says that, As of March 2001, India had over 410,000 working software professionals. Out of a total of 122,000 engineers trained each year, almost 75,000 new software engineers are ready to join the industry on an annual basis. Others migrate overseas or join end-user organizations.
Educational universities, as well as the prestigious Indian Institutes of Technology (IITs), are the principal sources of newly-qualified personnel. In addition, thousands of other technical personnel are trained by private sector institutes. (Business Week, 2004) This abundant availability of manpower provides sufficient insurance for Business organizations that they will not run out of talent.
Almost all articles for example business organization’s white papers, newspaper articles, journals, CEO interviews, and point out at one common and major success factors of BPO in India. Almost everyone is convinced that India has one of the world’s largest talents of English speaking professionals. This gives India a sustainable competitive advantage over other competitors.
India’s base salary for computer professionals is one of the lowest in the world. By having such a low base salary, India attracts many companies from countries with a stronger dollar. One could get the same project done in India for 1/10th the price it would cost in the US. This translates to huge savings for US companies, which makes outsourcing very attractive to them. (Anant, 2003)
Secondly, the cultural differences between India and the Western world (including Europe) are not as great compared to other countries like China or Korea. If we look back to over 60 years ago, India was under British rule. Under British rule, learning English was mandatory in all schools across India. Today, English is still mandatory in most schools across India and as a result, the communication gap between India and the Western world is much smaller than with countries like China and Korea, which also have equally qualified software professionals.
Additionally, most educated people in India know English. This knowledge of the English language allows for western influence with respect to media such as movies, music and entertainment. This social acclimation decreases the culture gap between India and the Western world as compared to other Asian countries.
Thirdly, just as the Persian Gulf has its natural resources in crude oil and South Africa in diamonds, India’s natural resources lie in its abundant technically skilled manpower. India produces about 73,500 software professionals per year and these numbers continues to grow. (Why India, 2004) A lot of countries do not have the manpower with the skills that are needed and have no choice but to outsource to countries like India. India has had a lot of growth in the IT field. In 1985-1986, there were about 6,800 workers in the IT industry and this number grew to about 522,000 workers from 2001-2002. (Why India, 2004)
In an article, ‘Indian IT Industry: Dream Run’, by Business Week, a very good equivalent, it says current scenario of Indian IT industry is as good and matured as old wine. The reason is justified and evident because many major business giants, for instance Microsoft, IBM, Sharp, General Electric, and many others industry competitors have considerable presence in India. Due to accessibility to most wanted skills and talents, they are all in India. (Business Week, 2004)
Bargaining power of Buyers. Buyers/customers are a strong force in the industry. Powerful buyers drive down profitability because they bargain for lower prices, demand better product features for the same price, and play one competitor against another. As buyer companies gain experience in offshore models, more will increasingly evaluate Build and Build, Operate, Transfer (BOT) captive delivery models as a means to move offshore.
Intra-Industry competitive rivalry. The market has gained additional players with the arrival of non-IT companies on ITES-BPO turf. The ITES-BPO market today is characterized by the presence of companies such as Dell, HP, EXL, WNS, Sitel, HSBC, the Standard Chartered Bank, Convergys, Wipro Spectramind, Infosys Progeon, Daksh, MsourcE, among others.
The increase in competition, both locally and from global vendors, will continue to chip away at the margins of domestic vendors particularly in the more developed offshore markets. The following are the key factors that currently impact offshore pricing (Industry Trends, 2004):
- Economic pressure on US-based companies;
- Size of deals are significantly higher than seen before;
- Market entry of multi-national supplier firms;
- Critical mass of qualified suppliers competing heavily.
Pricing pressure will continue in 2004 and beyond. Vendors that demonstrate strong client relationships, deep domain knowledge and productivity improvements will be able to better protect their margins.
Bargaining power of Suppliers. Suppliers are a weak force in the industry. This can be attributed to the fact that hardware, software, process training/certification and other vendors to BPO outfits supply relatively undifferentiated products/services.
Threat by Substitutes. The important factors which might enhance the threat of substitution are following. Emergence of alternative locations as outsourcing hubs. China, Philippines and a few Asian and East European countries are slowly building competencies, which could cannibalize India’s share of BPO business. As captive delivery centers mature in capabilities they may become potential threats to independent BPO outfits.
Threat by New Entrants. New entrants are potential competitors. New entrants are a moderate force in the industry. The easier it is for new companies to enter the industry the greater the competition in the industry. A number of leading industrial groups in the country have set up or are planning to set up ITES-BPO facilities with a view to participate in this emerging opportunity.
Till year 1994, Department of Telecom was monopolistically ruling the telecom market in India, and after liberalization of this sector, many private operators came in picture, this resulted in a telecom competition and services were improved, costs went down up to 85 % (Wipro Technologies & offshore outsourcing.com, 2004). These price reductions was followed by improvement in services, and since last 9 years India has became a symbol for having world class IT and telecom infrastructure. For example, today India has about 500 high-speed datacom links, connecting Indian IT companies with customers and partners worldwide. (Why India, 2004)
Even though there are a lot of arguments and concerns regarding spread of Business Processes Outsourcing in India, some of them relate to ethical issues. Great part of which arise due to job losses according to BPO from high wage countries like United States and United Kingdom, alone UK has lost 8500 jobs to India since last 7months (Hindu business online 2-Apr-2004), similar scene is observed in US Job market. US have observed 400000 service and about 1 million manufacturing jobs to offshoring.
The biggest issue here is about the future of those hi tech workers in US who lost their jobs to a guy in distant location, just because he can do the same job in 1/10th of the price (K Dollan & R Meridith, MSNBC) There are reports that the workers in US were forced to give training to their counterparts and then kicked off from their job, this has resulted in allegation on Indian IT firms for stealing of Jobs, tax payer’s money. But the answer comes from the process itself; people should acquire new skill sets in accordance with the changing trend of business (Indiatimes.com, 2004)
The advantage of outsourcing such processes results in increase in cash flow, efficiency in revenue generation and brings down cost. According to NASSCOM estimates, the Indian ITES-BPO industry in 2002-03 grew by 59.1 per cent to US$ 2.3 billion. In 2003-04, according to NASSCOM estimates, the Indian ITES-BPO industry is likely to grow by about 54 per cent to reach US$3.6 billion. (Industry Trends, 2004)
Although the best day of out sourcing saga of India is still far away, and if this trend continues at this pace, then one day world will see techies from US and other developed countries seeking working visa for India. But more or less, the fact remains same that for coming 4-5 years, India will definitely be apple of US’s out sourcing eye, and will continue the enjoyment of being the preferred destination for Information Technology enabled Services, for industry giants all over the world.
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Company Web Pages/Information/Business Processes:
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Wipro Technologies Ltd, 2004, ‘service offerings’, viewed on 29 November, 2004 http://www.wipro.com/spectramind/offerings.htm
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