Business Book Review

Monday, October 30, 2006

Offshore Outsourcing - Business Models, ROI and Best Practices - by Marcia Robinson and Ravi Kalakota - PART II: OFFSHORE OUTSOURCING—THE BUSINESS...

Reading Suggestions & CONTENTS
About the Authors

“Offshore outsourcing has come a long way in a short time. Corporations largely understand traditional IT outsourcing and are beginning to get comfortable with more complex process outsourcing.”

“Thanks to the relentless pressure to cut costs, reduce capital outlays, and maximize operational efficiencies, we expect the demand for F&A offshoring to exceed that of many other processes for the foreseeable future.”
Robinson and Kalakota note that, according to Richard Swanson, director of BPO Services at Patni Computer Systems, “The services that are working best offshore are those that are labor intensive, well structured, repeatable, nonproprietary, and low risk to the business.” These services generally fall into seven broad categories: (1) information technology (IT), (2) customer care, (3) finance and accounting (F&A), (4) human resources (HR), (6) supply-chain management, and (7) manufacturing. The first five categories are the ones most widely outsourced, thus, they are the ones on which the authors focus their discussion.

Back in the mid-1980s, IT (hardware and software) companies were the first to move into the offshore sector, using offshore labor for low-end, lost-cost work, such as language localization, device and printer drivers, and motherboard production. Today, with the promise of better quality, cheaper resources, and faster development, more and more IT organizations are taking an increasing array of processes offshore. According to the authors, more than 200 of the Fortune 500 currently send some of their IT work to India. Of all the industries involved, however, the information-intensive financial services industry leads the business world in IT offshoring. And, it is expected that this offshore component will increase considerably over the next three years because the cost savings are just too compelling to ignore.

Presently, the range of possible IT processes that can be effectively offshored includes: (1) application development and maintenance—new feature and new application development, old release maintenance, and packaged application customization; (2) quality assurance—application and compatibility testing, regression analysis and bug testing, and test suite building; (3) IT support services—help desk support, problem resolution, remote diagnostics, documentation support, and application maintenance; (4) implementation services—product lifestyle management, consulting services, prototype development, technology evaluation, and application testing; (5) new product engineering—product applications, implementation services, version management, professional services, and documentation.

Multifunctional customer-service contact centers handle a wealth of scenarios from product ordering to processing email, resolving billing complaints, and chatting with customers online. Thus, these centers represent a $650 billion industry, employing 4 million people in the U.S. alone. Companies in many industries, including financial services, travel, retail, telecom, and media are racing to develop and implement an offshore strategy, for while the function is critical, the location is not.

Robinson and Kalakota have found that companies implement offshore customer care strategies for four primary reasons. First, of course, is cost. The average bundled costs for a U.S. call center agent are estimated to be approximately $34 per hour. In India, however, a call center can hire a new graduate, with a four-year degree, and with English and technical skills, for about $12 per hour. Flexibility is the second reason. Offshore providers can handle large volumes of incoming customer requests (voice and data) at peak times. Moreover, savings are a factor here as well, for staffing at peak times translates directly to costs. Quality is third. In many offshore locations, a highly educated labor force is readily available and a powerful advantage in improving overall service quality. Finally, one of the major challenges of contact centers is high turnover—bringing a new agent up to speed can take four to twelve weeks of costly training. Thus, better employee retention is the fourth reason for offshoring customer care.

Given these objectives, this BPO category offers a plethora of processes ripe for outsourcing: (1) support—customer service, billing query resolution, order taking, account activation, new customer registration, and complaints; (2) marketing—outbound and inbound email, telemarketing, surveys and poling, marketing campaign management, and customer win-back; (3) sales—inbound and outbound sales, Web chat and callback, and co-browsing processes; (4) technical support (often the first customer care process to go offshore)—data verification, application support, address updates, help desk, and problem resolution; (5) customer analytics—probability analysis, quality auditing, reporting, and complaint analysis.

Robinson and Kalakota note that because recording and reviewing every financial transaction is an enormous, time-consuming task, CFOs and managers have begun to outsource those financial activities they have identified as noncore. Cost, talent, availability, and technology are the drivers of this trend. Companies with performance metrics in place to measure their gains report significant savings from offshoring F&A (the cost ratio for an Indian accounting professional and a U.S. professional is 1:10). Another motive can be found in the fact that accounting talent is often in short supply in developed regions. Countries such as India, however, have an abundant supply of accountants, who obtain significant hands-on experience before becoming CPAs or CFAs; thus, they understand thoroughly the basics of financial management and GAAP accounting. In addition, the offshore F&A operating model can reposition the F&A support organization so that companies can move controllers from the purely transaction-centric processes and allow them to work actively with line managers to improve cash flow and profitability. Thus, outsourcing F&A is often part of an overall restructuring program to improve the quality of accounting operations.

The final driver of F&A offshoring is technology, or investment in single companywide software platforms. Such products as SAP R/3, Oracle, and PeopleSoft have helped in the reengineering of F&A processes, and this reengineering has led to more consolidated, streamlined workflows and the next phase of cost reductions.

Within the F&A process category, the authors have found that many subcategories can potentially be offshored. These include: (1) transaction processing—accounts payable and receivable, travel and expense reimbursement, payroll, and credit management; (2) general accounting—fixed asset accounting, general ledger, account reconciliations, and bookkeeping; (3) financial management—financial analysis, management and cost accounting, budgets and forecasts, capital planning, and cash management; (4) financial reporting—financial statements, consolidations/eliminations, variance analysis, statutory/external reporting, external audit support, and quarterly/annual reporting; and (5) tax processing—internal audit, unemployment, quarterly tax, federal tax returns, foreign exchange, and payroll taxes.

Robinson and Kalakota report that according to Fortune magazine’s Global 500 list for 2002, “Large corporations employed more than 47 million people, and the median number of employees for these corporations was approximately 63,000, in multiple locations and countries.” Obviously, an employee base of this magnitude presents enormous complexities for the human resources function: First, the function covers a large range of processes, from recruitment and retirement, to basic transactions and workforce development. Second, multiple HR groups exist for different business units. And, third, corporations lack central information repositories or integrated HR technology infrastructures. Simplifying this complex organizational structure and lowering the cost of providing employee services are the primary drivers of HR outsourcing.

As with other processes, HR contains many categories that can be offshored: (1) Compensation services—payroll, time and attendance, stock options, and payroll taxes; (2) benefits management—health benefits, 401(K), retirement plans, leave tracking, vacation schedules, and benefits termination; (3) employee relations—employee development, employee communication, record management, training administration, labor management, and learning solutions; (4) workforce management—selection, recruiting, relocations, performance review, and employee termination.

The final BPO considered is transaction processing. Organizations, in such industries as credit card, insurance, mortgage, retail banking, and telecommunications, face the tedious task of processing countless transactions (e.g., data entry of paper documents; processing of credit card applications, transfers, or payments; account reconciliation and records management; legal and medical transcription; document processing; and order processing). This critical, but time-consuming, task results in the need to generate, manage, and document data in an organized, accessible manner, forcing organizations to devote resources to activities that may not be core.

Thus, as an increasing number of companies seek to focus on their core business, improve service levels, and reduce implementation costs, offshore transaction processing is growing. Because this “low-level work” has few barriers to entry, and because better IT and communication infrastructures have enabled this work, many vendors specializing in this category are springing up in India, China, the Philippines, Malaysia, and Mexico.

The most popular types of transactions being handed off to these offshore vendors include: (1) mortgage processing—application processing, direct sales, credit scoring and approval, title verification, insurance tax, escrow processing, early collections calling, most of the customer service center functions, part of loan-service setup, post-closing documentation, manual payoff processing, account balancing, statement printing, and refinancing; (2) insurance claims processing—electronic information capture, information verification, eligibility determination, and reporting; (3) medical transcription—transcribing medical records from an audio format to a hard copy or electronic format; (4) content management—the processing of paper and electronic documents (newspapers, magazines, or journals) into searchable catalogs and archives.

Finally, for each of the five BPO categories, Robinson and Kalakota emphasize the importance of determining the scope of the project (i.e., determining what processes—should be retained and which processes should be sent offshore). Typically, if a process is a central contributor to the organization’s success—is a core competence—then that process probably is not a strong candidate for offshoring. However, managers must take care to not confuse core with critical. Critical functions can be outsourced as long as the right planning, oversight, and training are in place. Moreover, the authors note that more and more companies are pushing the boundaries in this regard. In F&A, for example, pioneers such as GE are moving beyond basic accounting transactions (a “commodity” process) and beginning to include budgeting, forecasting, strategy, and policy (i.e., the core “thinking” processes) in their offshore strategies.


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