Demystifying offshore outsourcing: despite the risks, the benefits can be great.

Globalization has had a profound impact on the way business is conducted. Money, goods and services today flow freely across national borders as business executives try to maximize efficiencies and improve profitability. Manufacturing is one example of how globalization has changed the landscape of an entire industry. Over the past two decades, the production of goods in offshore locations was the inevitable consequence of the labour and raw material cost advantage found in Asia. The model proved successful and many companies realized that an offshore manufacturing strategy would be necessary to remain competitive.

Offshore software development became the next successful trend. Driven by the critical challenge of recruiting IT professionals in the '90s, combined with rapidly changing technologies and shrinking IT budgets, firms began to look beyond national borders in the search for low cost IT talent. Countries with large, highly technical English speaking labour pools such as India became hotbeds for offshore software development. Today, India exports over $4 billion in computer code to the U.S. and Canada, with growth expected to exceed 30% per year for the foreseeable future.

Offshore business process outsourcing

This offshore revolution is now migrating to the business services industry, driven by many of the same forces that existed in the manufacturing and software industries. Weak economic conditions, cost pressures, and rapid advancements in communication technology, as well as the explosion of service delivery over the Internet, have eroded geographic borders. Companies can now look at resources in India, China and the Philippines to perform highly critical, but often mundane, labour-intensive tasks.

These new market forces have generated a flurry of business opportunities collectively referred to as offshore business process outsourcing (BPO). Offshore BPO can encompass a broad spectrum of activities, including customer interaction functions, finance and accounting, data processing, transcription, human resource administration, research and graphics design. Although offshore BPO is still in its infancy, the market is picking up steam. McKinsey estimates that by 2008, global BPO will amount to over $500 billion and will span the entire value chain of a company. Today, in India alone, five new offshore BPO centres are constructed every month by non-Indian companies.

Reduced costs and improved quality are two benefits that executives can quickly quantify in this shift. The difference in labour costs between countries like India and Canada can often be as much as 90%. Even with additional expenses tacked on due to travel, international communications and management, cost savings can range between 50-75%. Quality improvements can be quantified through reduced employee turnover, improved customer satisfaction and decreased error rates.

Case Studies

Considered by many as a pioneer in offshore outsourcing, GE Capital started BPO operations in India in 1997 and today employs more than 8,000 employees across several captive processing centres. The company reports hard savings in excess of 60% due to its activities in India. Dramatic quality improvements have also been witnessed across several business processes. Loan origination processing time has been reduced by 80%, while underwriting productivity metrics have improved by more than 50%.

American Express, another early adopter in India, performs several accounting functions in India, including revenue accounting, expense accounting, ledger management, audit control, reconciliation, profit and loss reporting, budgeting and forecasting. The company uses a combination of outsourcing partners and captive centres in India. Since its entry into India in 1993, American Express has reported savings in excess of 50% annually.

McKinsey and Co., the world's largest strategy consulting firm, presents another interesting case study. Started in 1998, McKinsey's offshore knowledge centre in India provides research support and other information services to consultants around the world. Not only has the company experienced dramatic cost savings, but quality and productivity levels have also significantly improved. The time difference between India and North America also works to McKinsey's advantage. Consultants can submit an inquiry at the end of the day and a response can be formulated in India while the consultant is sleeping.

Challenges

The level of effort and commitment required to achieve these benefits shouldn't be understated. To effectively conduct business in a developing country like India or the Philippines can be challenging and at times frustrating. Offshore BPO requires careful planning and execution to work effectively. A few simple steps can be taken to make the transition easier.

Firstly, decide if the specific business process and the company can operate using an offshore model. While some companies are attracted to the offshore option by lower costs, many other factors must be considered. Can the process be easily extracted out of the company and sent offshore? How much interaction is required with onshore employees and customers? Will the company culture accept such a change? Does the offshore initiative have executive level support?

Secondly, prior to making a commitment, develop a business case to identify risks and provide financial justification. In this planning exercise, spend considerable time researching the choice of countries available and the specific capabilities of those countries. Review as many case studies as possible. The most effective way to learn how to operate in an offshore model is to examine success stories.

Thirdly, once the offshore decision has been made, seek the help of an outside consulting firm with local country expertise to help reduce risks. Use this firm to help build and manage timelines, negotiate service levels, hire people, select vendors, implement processes and interact with government authorities. Without local country expertise, these tasks can prove to be costly and time consuming. Because a decision to go offshore is so uncommon, the expertise necessary for successful execution of the project is generally not found within a company.

Finally, take it slow. Develop a phased approach by starting with simple tasks such as data entry. Develop performance metrics with each phase and carefully evaluate progress. The offshore BPO market remains immature and control over an entire suite of processes should never be given to an offshore centre at one time. The evolution toward full business process outsourcing should be achieved through several contract extensions rather than a "big bang" approach. During the process, have the flexibility to adjust and pull back if necessary.

In summary, offshore outsourcing is a concept that will remain on the corporate strategic agenda for many years to come. Market dynamics will slowly begin to force companies to source services from locations that provide the most cost effective and efficient solutions. The benefits are real and through careful planning and execution, companies can quickly gain a competitive advantage.

Companies that Outsource Business Processes to India:

Company                Outsourcing Since

Swissair               1992
Lufthansa              1992
American Express       1993
British Airways        1994
General Electric       1997
McKinsey & Co.         1998
BechTel                1998
Ford Motor Company     2000
Amazon.com             2000
Conseco                2000
Dell Computers         2001
World Bank             2002
AIG                    2002
Standard Charter Bank  2002
America Online         2002

Company                Business Process

Swissair               Back Office
Lufthansa              Back Office
American Express       Call Center, Back Office
British Airways        Back Office Processing
General Electric       Research, Call Center, Back Office
McKinsey & Co.         Research and Graphics Services
BechTel                Engineering, Call Center
Ford Motor Company     Back Office
Amazon.com             Web-based Customer Support
Conseco                Call Center, Back Office
Dell Computers         Call Center, Back Office
World Bank             Back Office
AIG                    Back Office
Standard Charter Bank  Back Office
America Online         Call Center, Back Office

Shailen Gupta ([e-mail]) is president of Renodis, a company in the rapidly expanding offshore business process outsourcing (BPO) market.