OUTSOURCING: REALITIES

OUTSOURCING: REALITIES Outsourcing a new mode of operation is the result of business enterprises continuous quest for achieving excellence. Outsourcing has come into the spotlight of business lexicon during last decades. Outsourcing occurs when a company purchases product or services from an outside supplier, rather than performing the same work within its own facilities. In the words of Elliott, Outsourcing is a conscious business decisions to move internal work to an external supplier (Elliott, 1996).Outsourcing is the act of transferring some of the internal activities and decision rights to outside providers. This paper analyzes the outsourcing industry in context with the present economic scenario. The aim of the paper is two-fold; firstly the challenges posed by recession and secondly how to use outsourcing to achieve competitive advantage in spite of the challenges. A few years ago, when outsourcing started out its journey in India to become the back office of the world, the path was fraught with uncertainty. But now, a significant portion of India s G.D.P has been contributed from outsourcing industry The Indian Outsourcing industry remains on a growth path, emerging as one of the key investment markets in the country. Size of industry The industry has been growing rapidly. It grew at a rate of 38% over 2005. For the FY06 financial year the projections is of US$7.2 billion worth of services provided by this industry. The base in terms of headcount being roughly 400,000 people directly employed in this Industry. The global BPO Industry is estimated to be worth 120-150 billion dollars, of this the offshore BPO is estimated to be some US$11.4 billion. India thus has some 5-6% share of the total Industry, but a commanding 63% share of the offshore component. The U.S $7.2 billion also represents some 20% of the IT and BPO Industry which is in total expected to have revenues worth US$36 billion for 2006. The headcount at 400,000 is some 40% of the approximate one million workers estimated to be directly employes in the IT and BPO Sector. 1

The related Industry dependent on this are Catering, BPO training and recruitment, transport vendors, (home pick up and drops for night shifts being the norm in the industry). Security agencies, Facilities management companies Export revenue and growth estimates: India is at the forefront of the rapidly evolving Business Process Outsourcing (BPO) market, having established itself as a destination of choice. The sector, that has grown manifold in size and matured in terms of service delivery capability and footprint over the past decade, is now at an inflexion point. Today, it faces a unique opportunity to enhance its role as a fullservice, value-adding partner. There is significant headroom in the addressable BPO opportunity for buyers and providers, and there are sizeable untapped areas across a wide spectrum of segments. Also, the Indian BPO sector is favorably positioned to benefit from its established delivery capabilities, which influence buyers decision to expand their global sourcing exposure. Impact of Economic Slow down on the Outsourcing Industry in India: Due to downturn of the economy, there lies question before the policy maker whether the industry will grow or it will be derailed.but overall verdict was that a recession will not derail off shoring and infact, may even significantly increase demand for it. IBM's strategic outsourcing business grew 8 percent last quarter, fuelled by 21 percent growth in revenues from growth markets. However, long-term signings continued to fall. Going forward, IBM expects similar growth in the next quarter. HP's outsourcing revenues grew 15 percent, and the division had its best quarter in history with record profitability, and significant new wins. While not specific to outsourcing, HP was candid enough to say that "we don't know how the 2

economy will evolve, but at this point we are expecting the market to be challenging in 2009". In this context, an attempt has been put down to see the immediate effect of recession on outsourcing industry. 1. The Volume of Business: As around 60% of the BPO business comes from the United States of America and maximum of this is from the financial and banking institution. It is obvious in the wake of failed global financial machinery, the business coming to Indian outsourcers from banking, insurance, and the financial services sector is now uncertain. Hence the volume of outsourcing business will be influenced by the slow down. 2. Consolidation: Just as consolidation has occurred among IT firms in India, the business process outsourcing (BPO) sector is also showing sign of consolidating. 3. Opportunities for other destination: The financial turbulence might force some companies to outsource their business in pursuit of lower operating costs, thus creating more opportunities for some other outsourcing destination. In this process India may lose some of its business. 4. Employment growth: The employment growth rate in the industry is also hampered by the economic slow down. As companies are going for cutting down cost there might be little scope for new or fresh appointment. In this scenario they might even go for lay-offs to save cost. 5. Growth of related Employment: It has been seen there are some industries/services like Consultancy services, Catering services, Security services and training centre Services are growing parallelly with the growth of the industry in India. However, as the growth of the outsourcing business will be hampered, there might be less growth of those services. 3

6. Attrition: For, companies grappling with employee attrition over the last few years have been seeing fewer employees quitting because of strict cost control by firms. T V Mohandas Pai, head, HRD, Infosys said, The attrition in the company is down to 11 per cent from 25 per cent. With IT and ITES companies on a downsizing drive to cut costs, the hiring rate has come down. Issues to address: Let us now move to see in this situation what the business has to do to move up and to maintain competitive advantage. Both the service provider and the outsourcer are engaged themselves to develop a new model of outsourcing business. Issues to be addressed by the outsourcer: What to outsource: Companies need to identify which competencies should be developed and which activities should be outsourced. A company can outsource any of the activity and can be the source of its core competence. In order to accomplish this, companies should: Assess strategic priority: Can the company accomplish its strategic goals with outsourcing some of its activities? Examine supply option: Are the service providers having competency to perform these activities? Analyze total economics: What are the benefits of outsourcing relative to inhouse operation? Sustainable competitive advantage: o In order to derive sustainable competitive advantage from outsourcing, it is necessary for companies to heighten the priority within their business, reevaluate and re-configurate their business portfolios and process and select their providers scrupulously. An effective way for companies to prepare for such outsourcing is to reform themselves on the levels of resource and abilities. 4

To whom to approach: The most critical aspect in outsourcing is the choice of the service provider. With a cluttered service provider space, it is almost impossible to evaluate each service provider accurately. Here some guidelines are given for selecting the service provider to maintain its competitive advantage. Leadership: Does the prospective service provider have an experienced leadership team that can understand the customer s pain points and create a framework to address them? Reputation: Does the service provider enjoy a reputation of providing highquality services, consistently meeting SLAs and operating above industry benchmarks? Flexibility: Is the service provider a thought leader leading the industry in terms of process portfolio and strength across the service range (from low-end, rule-based services to high-end, judgment-based services)? Financials: Is the service provider financially strong, and open to making investments to improve service quality and processes? Approach: Does the service provider display a proactive, consultative approach to the relationship, putting in place a clearly defined plan to deliver consistently better results as the engagement matures? Experience: Has the service provider displayed change management capabilities in its existing relationships? Integration: Does the service provider have the capability to be a process integrator for processes across the organization? Issues to be addressed by the service provider: Innovation and value redistribution: Inspite of global economic turbulence, outsourcing continues to be driven by customer needs. Hence it stresses the importance of such collaborative relationships in taking outsourcing to the next logical phase of value redistribution.for new type of value redistribution, players have to take care of market-driven innovations. 5

Capability augmentation : The move toward transformational outsourcing has led companies and academics alike to reconsider the merits of sourcing to multiple providers versus a single provider. The issue is a complex one requiring careful balance. More recently, companies have begun to realize that the hidden costs of managing multiple providers are eating substantially into the value of the deals and into the effectiveness of the overall collaboration. By combining or bundling functions and processes to a single provider, companies can generate significant synergies resulting in both better cost savings and a greater impact on the business, especially because of the ability to create a deeper collaborative relationship. Using multiple outsourcing providers can result in excessive costs and complexity, with substantial impacts on resources required to manage the relationships. Companies are increasingly looking to simplify their outsourcing structure and drive greater value from deeper relationships with a few key partners. In the IT space, for example, consolidating the supplier portfolio can reduce total costs (one time and ongoing) by 22-28 percent. Governance: At the beginning of the outsourcing movement, companies saw their goal as being primarily concerned with the effective management of a contract. They soon realized, however, that the contract is not the best form of governance in the long term. Outsourcing engagements require relational governance, Conclusion: Prof. Colin Coulson-Thomas, an active consultant and author of 'Developing Directors, a handbook for creating an effective boardroom team' and 'Winning Companies: Winning People', offers a perspective in his research programme which identifies critical success factors and successful approaches to the challenges faced by directors and boards. Prof. Coulson-Thomas states, "While less capable boards focus on survival, cutting costs and laying people off, the more effective ones look beyond economies and at ways of improving performance and building market share. The astute invest in gaining competitive advantage while interest rates and prices are relatively low. They position themselves to both weather the storm and take advantage of recovery." 6