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How to tap opportunities for outsourcing

Outsourcing has recently proved a political hot potato in both developed and developing countries. The transfer of business processes and production from advanced countries to developing economies has fuelled popular resentment, particularly in the US, where some politicians, unions and lobby groups have labeled it the prime cause of growing unemployment.

"Outsourcing" is often used interchangeably with "off-shoring" and sometimes with "business process outsourcing". It requires more precise definition. When a company outsources the supply of products, services or their component parts, it delegates them to a third party provider - whether abroad or at home. Business process outsourcing is a more specialised form of outsourcing in which an entire business process, such as accounting, procurement or human resources, is handed to a third party. When offshoring, a company relocates processes or production to a lower-cost, foreign location in the form of subsidiaries or affiliates.

In the 1990s, American Express, General Electric and British Airways began relocating their back office operations to India to cut costs. Gradually, other multinational companies followed suit, either by establishing their own subsidiaries in India and other low-cost destinations such as China and Mexico, or by sub-contracting to third-party service providers. Demand for low cost products and services in areas such as banking, telecoms, retail, utilities, financial services and manufacturing has spawned independent BPO companies in India, Mexico, China and the Philippines - and even in developed countries such as Ireland and Australia.

The economic travails of the past three years have hastened the trend: companies in Europe and the US have been under tremendous pressure to reduce costs without reducing quality. Outsourcing allows them to reduce staff costs by as much as 85 per cent, especially in non-core areas such as customer care and back office administrative work. Indian call centre employees earn an average salary of $2,400 a year; their counterparts in the US on average take home $18,000 a year.

Yet the reality of outsourcing is more complex than a focus on cost would suggest. People are often surprised that the BPO companies in India account for less than 3 per cent of global outsourcing operations.

Many started as offshore affiliates, providing back office services to their parent company, and are now becoming third-party service providers to other multinationals. Although they employ Indians in their BPO companies, profits ultimately end up in the parent's coffers. More than 70 per cent of the value created in India by outsourcing activity is accounted for by multinational companies such as IBM, Accenture or Convergys, or by offshoring captives of GE.

Globalisation lies at the root of this trend - businesses in developed economies are seeking to capitalise on the market potential of highly populated countries such as China and India.

In order to compete with local companies in their own markets, multinationals have either to develop their own capabilities in local markets or acquire them through mergers, acquisitions or alliances; they have to find a way to provide the same products and services at much cheaper rates. This is only possible either by setting up plants in cheaper locations or contracting production to companies in those locations.

Local businesses, which formerly competed only with a limited number of local competitors, suddenly find their competitors are now global companies with big brand names and deep pockets. As globalisation takes hold it becomes difficult for them to survive.

These are the hard facts of globalisation.

How can companies wishing to outsource identify the right provider? In some sectors, accreditation bodies can vouch for a company's quality of work: in IT services, high-quality BPO providers may have a Software Process Achievement (SPA) award; an internationally recognised standard. Companies should also look at the service provider's previous experience and its ownership status. Is the BPO unit a separate subsidiary of the parent company? If so, there are likely to be fewer conflicts between the employees of the two organisations; processes and resources are usually well defined. For certain type of outsourcing activities, such as call centers, the potential client should visit the outsourcing provider to ensure employees are properly trained, possess good language skills and hold the right educational qualifications.

Wherever possible it is better for companies to begin by outsourcing simple activities and step up to complex processes gradually, as both outsourcer and provider build up experience in the process. Simple activities might include outsourcing to a call centre or a data transformation project. More complex deals include remote financial services or coding work for medical data.

Outsourcing contracts need to include terms and conditions that clearly specify how a product or service should be delivered. Such checks and balances can help managers solve problems as they arise and reduce the risks. Contracts should also specify providers' incentives, such as bonuses for reaching performance targets.

According to a 1996 survey by the American Management Association, 25 per cent of companies surveyed were unhappy with the results of outsourcing and 51 per cent had recalled outsourcing activities in-house. Typical reasons for failure include unrealistic expectations of what could be done, poor communications and a lack of trust. Call centre growth has also created a new breed of employee and a working environment centred around the night shift. Typically, call centre employees in India work at night to service customers in the US and Europe. This puts pressure on their working and home life.

The attrition rates at call centers are striking: 16 per cent of the workforce left in 2002-03 and the rate more than doubled to 35-45 per cent in 2003-04, according to a study by People Equity and NFO India, a consultancy

The BPO industry is also plagued by price wars. Many smaller and emerging BPO companies - particularly those funded by venture capitalists - use price competition to win business from multinationals.

As a result some well-established companies, unable to break even, are beginning to shy away from BPO activities. As outsourcing activities become more complex, clients need to look beyond the obvious cost advantages towards issues such as quality and timeliness of delivery.

An exclusive focus on cost can have a disastrous effect on customers, goodwill and the strategic objectives of the company. With a little foresight it should be possible to synchronise the goals of the outsourcing client and the provider to create a profitable long-term relationship for both.

The Financial Times, April 25, 2004

ACTIVE VOCABULARY

1. to tap – использовать, осваивать

2. a hot potato – щекотливая тема, злободневный вопрос

3. resentment – негодование, возмущение

4. subsidiary – дочерняя компания

5. affiliate – филиал

6. destination – место назначения, цель

7. remote - удаленный

8. travails – тяжкий труд, муки

9. back office administration – вспомогательные сдужбы, службы технической поддержки

10. to capitalize on smth. – воспользоваться, получить выгоду

11. performance target – целевой показатель деятельности

12. venture capitalist – венчурный (рисковый) предприниматель/компания

13. to break even –выйти на уровень самоокупаемости/рентабельности

14. goodwill – оценка положения и репутации фирмы

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