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Business Process Outsourcing Trends:
The Wildfire of Globalization
Like a wildfire, globalization is sweeping the planet. Spreading along high bandwidth telecommunications lines and driven by the winds of lower labor costs, the fire finds it's sparks and embers igniting on the kindling of computer infrastructure in developing countries. Globalization is presently ablaze in India and set to catch fire in the Philippines, China, Pakistan, Sri Lanka, Malaysia, South Africa, Mexico, Vietnam, Russia and elsewhere.
But unlike the devastation wrought by nature's wildfires, this conflagration spawns business growth, improved standards of living and advancement of the offshore economies it consumes. For companies in developed countries, globalization offers lower operating costs and the opportunity to focus on core competencies. This will lead to new jobs and new job categories.
Many developments and conditions have encouraged this wildfire. With the exuberance that accompanied advances in computer technology and global communications in the last quarter of the last century, millions of miles of fiber optic cables were strung under oceans and across vast stretches of land around the world. This led to a glut of capacity resulting in very low telecommunication costs. Multinational firms expanded their offices in developing countries and entrepreneurs in some developing countries, particularly India, established information technology (IT) centers in a few large cities expanded in the hope of capturing some of the offshoring action. Later, telecommunications centers sprang up to handle simple customer calls and transaction processing remotely.
But the wildfire that is globalization actually began as a brush fire in the United States. Maintaining large back-office operations in a major city headquarters was a high cost assumed to be irreducible. American corporations are driven by the perpetual need to lower operating costs and increase profits. Back-office business processes are labor intensive. Once it became obvious that computers allowed some back-office processes to be separable, those processes could be segmented. Now viewed as segments, the next paradigm shift was to realize these segmented business processes could take place anywhere there exists computer infrastructure connected by high quality telecommunications.
Major U. S. corporations began opening remote back-office operations in rural areas of the Mid-western states where qualified labor was less expensive. Meanwhile, many multi-national corporations (MNCs) realized they could export certain headquarter operations to branch offices in diverse countries they had previously set up to service local needs. These MNCs knew labor was abundant and cheap in these locations. If IT processing and business process outsourcing (BPO) can be done in less expensive American states, why not low cost countries? It's a “no brainer."
Local populations and their governments sought to encourage this exported work. In India, a computer industry had emerged in major cities such as Mumbai (Bombay) and New Delhi to service government and local business. It was in the mid-1980's that India began to see itself as a destination for offshore software production. By the late 1990's, it had become a major supplier of computer programming as a result of its skilled, low-cost personnel and project management talents. Increasingly, these IT operations expanded as companies outsourcing from the developed countries realized cost savings of 40 percent, some as much as 80 percent. For the local service providers, part of the income from receiving outsourcing projects could be used to improve and expand the technical infrastructure of their businesses and provide expanded training of personnel allowing for not only increased business but for offering additional services. As a result, the quantity and quality of their service offerings expanded.
Why India?
India, in hindsight, was the most likely spot to catch fire. India leads the world in population growth and population density. In size, India's one billion people account for one-sixth of the world's population. In density, it's 100 times more populated than the United States (India averages 733 people per sq. mile versus 72 people per sq. mile in the U. S.). By contrast, now with more than 1.2 billion people, China has the largest population in the world--one-fifth of the total. And although China's landmass is roughly the same size as the United States, it has 4.5 times the population. However, India has nearly the same number of people, even though it is only one-third the geographic size of China.
India's population is largely impoverished. Yet, they are generally educated and skilled. Most educated Indians are at least bilingual. English has been a common second language since the days of British colonial rule.
American companies, already accustomed to major manufacturing functions being outsourced offshore (principally to China), took note of the large, educated pool of labor in India. The first MNC to move segments of it's business processes to India was American Express, the giant U. S. credit and financial services company, in 1993. The second was British Airways in 1996. General Electric, another U. S. giant, opened business process operations nine years ago. These were followed by the likes of Citigroup, Dell, Hewlett-Packard, AOL, HSBC, and JP Morgan Chase.
Today, GE is the largest business processing employer with more than 12,000 people, and is likely to reach 20,000 by the middle of next year. In fact, the growth of the business process industry in India since 2000 has been nothing short of phenomenal. According to some estimates, very soon India is set to become the top BPO center in the Asia/Pacific region, larger than the present leader Australia, which has seen it's share flatten as firms sought out lower cost destinations such as India, China and the Philippines.
The Indian trade association NASSCOM estimates offshored BP employment was 171,500 in March 2003, an increase from 106,000 the year before. NASSCOM estimates that BPO operations will employ at least 1 million people by 2008.
Increasing Contribution by IT-enabled (BPO) Services
in Total Exports
IT-enabled Services IT Services
1999-2000 14% 86%
2000-2001 14.5% 85.5%
2001-2002 19% 81%
2002-2003 24% 76%
Table 1 Source: NASSCOM
Table 1 shows percentages of total Indian exports. In terms of overall growth for the Indian software and services sector during 2002-03, NASSCOM's figure is 30 percent but this includes a blended growth of 22 percent in the IT services space and 60-65 percent in the IT-enabled (ITES) BPO outsourcing segment. The ITES BPO market, which grew at a hefty 71 percent during 2001-02, accounted for around 20 percent of the total software and services export revenues in that period. Over the next 12 months, this revenue contribution is expected to rise to 24 percent of total software and services export revenues, according to the NASSCOM figures.
The Indian BPO industry is comprised of MNCs with business processing operations to serve the Indian market as well as offshoring of segments of their own back-office operations (these are often referred to as “captives"), MNCs active in business process outsourcing (BPO), smaller MNCs specializing in specific business processes, Indian firms operating as independent BPO vendors, non-resident Indian firms in developed countries outsourcing to India, Indian BPO vendors specializing in specific business processes, as well as long established Indian businesses that are moving into the “Gold Rush" of the BPO industry. Captive centers are the most prevalent, accounting for about a third of all employees in this market.
IT-enabled (BPO) Services: Market Segmentation
1999-2000 2000-2001 2001-2002
Employ-ment Revenues Employ-ment Revenues Employ-ment Revenues Growth Revenue
Customer inter-action services including call centers 8,500 400 16,000 850 33,800 1,790 94%
Back-office operations, revenue accounting data entry/conversion including finance & accounting/HR services 15,000 950 19,000 1,350 35,000 2,850 111%
Transcription/translation services 5,000 120 6,000 160 5,200 150 -6%
Content development/-animation/engineering & design/GIS 15,000 820 27,000 1,500 30,000 2,100 31%
Other services including remote education, data search, market research, network consultancy & management 1,400 110 2,000 140 3,000 210 50%
TOTAL 45,000 2,400 70,000 4,100 107,200 7,100 70%
Table 2 Source: NASSCOM
Table 2 shows the various segments of the Indian ITES BPO services, their respective revenues per annum, and growth percentages.
According to NASSCOM, the BPO sector's revenue for the financial year ending March 2003 was estimated at $2.375 billion, compared with $1.475 billion in the previous year. Note that this implies that revenue per employee was $13,848 in 2002–03, unchanged from the previous year, indicating in turn that there was no labor supply shortage despite rapid demand growth.
One who knows the Indian BPO industry well is Dr. Rafiq Dossani, senior research scholar at the Asia/Pacific Research Center at Stanford University in California, and co-author of “Went for Cost, Stayed for Quality?: Moving the Back-office to India," issued in November 2003 (http://iis-db.stanford.edu/pubs/20337/dossani_kenney_09_2003.pdf). This paper offers the first useful taxonomy of types of Indian BPO work and the rationale for how things will evolve.
According to Dossani, pressure is on companies in the developed countries to lower costs and India offers the solution. Dossani believes the Indian BPO phenomenon is here to stay. “It's hard to find a place with the same combination of a deep labor market, high telecom availability and managerial skills," Dossani says. And, Dossani points out, anything that does not need direct face-to-face human interaction can potentially be outsourced. “So the high end work and customer facing work will stay [in the developed countries]," Dossani says.
Quoting from Dossani's recent paper,
To date, the firms that have most aggressively offshored work to India have been in the healthcare, banking, technology, and insurance sectors. The business processes have been medical transcription, call centers, accounting, and claims processing. The initial activities have been highly routinized, and resemble the initial phase of software outsourcing, where the first phase was coding and remote project management. More complex processes, such as preparation of receivables statements and managing collections, have also proven amenable to transfer. The next phase may take several directions:
1. Processes linking the organization with customers, suppliers, or supporting production processes that may be amenable to remote fulfillment.
2. As BPO providers develop expertise through working for several clients, they may be able to move upstream and provide advice on business process reengineering.
Dossani identifies two key challenges in sustaining the pace of growth of BPO in India: A shortage of managerial talent and a shortage of expertise, especially in the fastest growing BPO industries of finance, insurance, real estate, healthcare, and logistics.
Firms Involved in BP Activity Offshoring to India
Typical MNC/NRI/Indian Outsourced (Y/N) Current
Size
MNC captives (India experience) Amex, Citi, GE, HP, HSBC, JP Morgan MNC N VS/M/L
MNC captives (No experience) AOL, Axa, Dell, Fidelity MNC N VS/M
MNC outsourcers Convergys, Sitel, Sykes, Teleperformance MNC Y VS/S/M
MNC specialists:
GIS, medical transcription, publishing eBookers, Kampsax, TeleAtlas MNC Y VS/S
NRI-promoted:
General outsourcing, medical transcription, publishing eFunds, Genisys, Heartland, Max Healthscribe, Techbooks NRI Y VS/S
Indian independents 247 Customer, Epicenter, Daksh, EXL, First Ring, iSeva, Infowavz, Msource, Tracmail, Transworks, Vcustomer, WNS Indian Y VS/S/M
Indian specialists: GIS, medical transcription, publishing, travel ADS, BDCS, Kale, Thomson Indian Y VS/S
Indian subsidiaries (IT industry) Progeon, Wipro Spectramind, HCL BPO, TCS Intellenet Indian Y S/M/L
Indian subsidiaries (non-IT industry) ICICI Onesource, Ienergizer, Jindal Transworld, Zenta Indian Y VS/S/M
Table 3 Source: Dr. Rafiq Dossani's compilation
Moving Up the Value Chain
As these skills vacuums get filled by training and investments in human capital, Indian BPO service providers will move up the value chain in order to expand their businesses. According to Dossani, in today's Indian BPO space, “overall, we found that about 70 percent of the work is some form of call center, about 25 percent is back-office support and five percent is front office support."
In healthcare, for example, BPO service providers may move from simple transcription work to converting the medical event transcribed into items on a patient billing statement or, in finance, moving from answering calls from potential loan services clients to pre-qualifying those clients.
BPO service providers are trying to offer more value-added strategic services to their customers in developed countries and those companies seem ready and willing to offshore more and more segments of routine work. BPO service providers, by assuming full process management responsibility and providing more comprehensive services instead of simply a number of selective process specialties, will reduce the cost of delivering BPO and facilitate the developed country's company's utilization of BPO as a tool for continuing development.
Corporations in the developed countries, in the course of reducing costs through BP outsourcing, can streamline their organizations and focus more on core competencies. Therefore, BPO is being increasingly seen in developed countries as not only cost reduction but also as a competitive and strategic advantage and BPO service providers in the developing countries are seeking to move their best personnel into higher strata of the client company's business processes.
Moving BPO To Other Global Regions
Today, seeking lower cost labor in areas outside the major cities, the phenomenon that had begun it all in the United States, is beginning to occur in India. Some operations are moving from the large centers such as New Delhi, Mumbai, Gurgaon, Bangalore, Hyderabad, Chennai to smaller cities such as Kochi, Pune, Pondicherry, Roorkee, Kolkata and even Goa where labor is even cheaper. And there is wide spread talk of Indian companies now eyeing low cost labor in other countries such as the Philippines.
Entrepreneurs and governments in other global regions are sitting up and taking notice of the successes in India. And they are attempting to learn from the Indian model. India has the vast and deep labor pool of skilled English-speaking workers that other developing countries do not have in the same abundance, therefore limiting their potential scale.
While the Indian model may not be fully exportable, countries with low-cost labor may find niche specialist work or may focus on BPO services that do not require English language skills, for example, tech support in China. And, according to Dossani, “On the other hand, Korea, Philippines and Taiwan have business systems much more close modeled on the U.S. than India, which is based on UK systems of law and business organization. So, the Philippines, at least, should have the biggest advantage in this respect," Dossani adds.
Of course, Australia will continue to be an important destination for BPO offshoring but, for similar reasons, South Africa may emerge as a beneficiary as well. But not only are factors such as English language skills, compatible business practices and organization, and low cost labor pools important. Cultural compatibilities can play a role, especially in filling the gap in middle management ranks. Malaysia, Taiwan, Singapore and Korea have opportunities in higher-end front office support and providing managerial backup to Indian operations for business continuity, says Dossani.
Beyond India, other developing regions of the world need to realize that the market for BPO is yet to mature. There is ample room for them to emerge and capture market share. According to one consultancy, Gartner Inc., the $536 billion worldwide IT services industry is expected to grow to $727 billion by 2007. And the consultancy Deloitte Research reports the world's 100 largest financial-services companies indicate they expect to transfer an estimated $356 billion of their operations and two million jobs offshore over the next five years in efforts to reduce their costs significantly.
Dossani and most other experts looking at the larger picture agree what is lacking on the global scene is service providers with the expertise to handle the process of international outsourcing, matching outsourcer with the best fitting service provider, wherever they might be. There are many smaller organizations that will help a company outsource to one location, such as non-resident Indian firms targeting outsourcing to India. And there is an abundance of Internet-based companies that have set up simple auction-type web sites that prominently feature projects and allow service providers to bid on them.
A couple of the better auction sites are guru.com (http://guru.com) headquartered in Pittsburgh, Pennsylvania, and eLance (http://elance.com) in Sunnyvale, California.
But there are few whose core competency is the full servicing of the outsourcing process on a global scale. One that does is eLancerAsia with major divisions strategically located throughout the Far East and South Asia. Headquartered in Hong Kong, eLancerAsia's branch offices include Hong Kong (http://elancer.com.hk), Korea (http://elancer.co.kr), Japan (http://elancer.co.jp), and India (http://elancerindia.com). And eLancerAsia is operating 24/7 with a full service approach in that it offers outsourcing management for all size outsourcers, from large multinational corporations seeking major business process outsourcing to small and medium enterprises (SMEs).
Getting Involved
The English language is the predominant language of global commerce today. And America is the most important source for BPO deals. So, English language skills and understanding the American culture and business environment facilitates the capture of BPO contracts by countries with low-cost labor.
Since decisions to go offshore are significant ones, the chief executive officer, chief financial officer, chief information officer or chief operating officer make 90 percent of them, according to Deloitte Research. And as the size and complexity of the offshore moves increase, approval by the CEO is set to increase to 45 percent from 20 percent. This, of course, highlights the need for competent agencies working both sides of the equation for the management of the global outsourcing process.
Best practices dictate that, typically, a MNC or SME should seek an agency with developed partnering skills, a global scope plus intimate local knowledge. How can a corporate officer find such an agency? In the case of eLancerAsia, a simple email to cs_asia-pacific@elancerasia.com will do the trick. ELancerAsia will assess the scale of the outsourcing project and assign appropriate resources to managing the account, both in relation to the outsourcing company as well as locally with offshore service providers. Currently, eLancerAsia has more than 350,000 service providers listed throughout Asia. ELancerAsia also offers extensive new training and new projects opportunities for employees and workers displaced by the outsourcing process.
Independent service providers have significant global opportunities available to them. Companies in developed countries are seeking low cost labor to perform a wide range of services. But what do they look for in a service provider apart from the prerequisites of language, job skills and low cost?
BP outsourcing companies will be looking for reliability and deep credibility. They will want predictability and will want no surprises as the work is accomplished. They will be looking for BPO service providers who can demonstrate they will follow best business practices in terms set by the outsourcing company. They will see themselves best served by a service provider who can assure them of quality control during and after the transition as well as management of the relationship between the companies.
The outsourcing companies will be looking for experienced service providers with an excellent track record. Of course, this puts newcomers at a significant disadvantage. How does one develop a track record in the first place if potential clients are looking for experienced service providers to begin with?
A good way to start is with pilot projects you can find at Internet web sites where new outsourced projects are posted. Bid on these projects and complete them successfully. This will build your experience and provide you with a portfolio of clients.
Use, for example, eLancer HK (http://www.elance.com.hk) where new projects are posted and you can openly bid on them. Currently, eLancerAsia is focused on the full range of IT segments (around 70 percent) because that is the bulk of outsourcing being conducted, but has also seen significant activity in the areas of language translation, graphics, copywriting and related projects as well as some consulting and law. Accept projects that suit your capabilities. Carry them out well, on time and on budget. This is one of the best ways to establish an excellent track record of experience and credibility.
Remember, the outsourcer's back-office is your front-office and that gives you an advantage. Their back-office functions are not viewed by them as a core competency but you will be focused on it as your core competency. The outsourcer will gain increased performance by outsourcing to you as well as reduced costs. It can be a win-win situation for both.
The globalization wildfire is hot and spreading opportunities and development to far reaching regions of the world. It is defining how business is done in the 21st Century.
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