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Shared Services for General and Administrative Functions: Deciding Between Internal and Outsourced Models

Secrets to Mid-Market HR Outsourcing Success

Refining the business process outsourcing process: the value of talent management

How a Tight Collaboration Between Software Vendor, BPO Provider and Customer Improves BPO Service Delivery

BPO: The Year Ahead- A Perspective on Evolving Worldwide Requirements

Best-of-Breed, Software-on-Demand, and Integrated ERP Suites - What is Best for BPO?

An Investor's Guide to BPO Economics

Location Optimization - Perspectives on Delivery Center Locations for BPO - Central & Eastern Europe (CEE)

Consolidation in the Utility Industry

Best Practices: Selecting a BPO Service Supplier

Emergence of the Mid-Market in Business Process Outsourcing

Key Challenges in Transitioning BPO Projects

Business Process Outsourcing: Taking the Lead with IT

BPO is gaining significant traction in the outsourcing marketplace because of new components that create additional levels of value. Last month we discussed the use of transaction engines, one of BPO's new drivers. We explained why transaction engines, which are generating remarkable value in the human resources (HR) arena, are not as potent a tool for other BPO processes, particularly finance and accounting (F&A). However, process reengineering and the use of offshore labor are generating significant savings for all BPO processes.

Labor arbitrage - the ability to utilize less expensive labor to produce results with the same or better quality - is a significant BPO lever. How much money can you save? Companies have quoted a wide range of savings, probably because they define savings differently. Everest defines savings this way:

1. Gross savings: For example, an American worker with a college education with five years experience in a call center typically earns a $50,000 salary plus benefits and overhead. In India, a call center worker with a university degree with the same experience earns between $5,500 and $7,600 a year, according to Atul Khosla, a senior engagement director who heads Everest's Indian office in Delhi. The savings can be even greater if the American worker is employed in a high cost area like Manhattan or San Francisco.
2. Net savings: Projected savings over the life of the contract,taking into account the up-front investment in selecting a provider, setting up the offshore center, knowledge transfer, etc.
3. Budgetary savings: Given the overall budget, what percentage of savings hit the bottom line? The decision to increase consumption or hold it steady, and the percent of the work sent offshore affects this number.

According to our real world experience, gross savings are often greater than 50 percent; net savings fall in the 40 to 50 percent range; and budgetary savings can be 15 to 30 percent (when considering IT application development and maintenance only). This picture is further complicated by the impact of productivity, which providers are often able to increase substantially through deployment of more robust quality processes, such as CMM.

Who's Going Offshore

Americans are discovering not all talent on the planet resides in the United States. Major companies using offshore resources include:

• Technology companies. Many companies have moved research and development, elements of electrical/mechanical engineering, and software engineering offshore. Media reports have cited Microsoft, Cisco, and GE, to name a few.
• Call center support. Many technical support jobs have moved offshore, driven by a combination of domestic labor shortages and the attractive cost savings in an increasingly competitive environment.
• Financial services companies. Movement of back office transactions overseas is occurring here too, but companies such as Merrill Lynch and Goldman Sachs have added a twist by recently announcing plans to hire equity analysts in India.

The Everest Group is about to launch an offshore research study with users of offshore resources to quantify how offshoring generates savings. We expect this study to validate our firm belief that labor arbitrage is one of the most compelling value drivers in BPO today. (If you are a user of offshore services and would like to participate in this research, please contact Offshore Survey at offshoresurvey@everestgrp.com.)

Offshore outsourcing is not new. How service providers are using their offshore components is the big change. Until the last 24 months, offshore outsourcing consisted mostly of short-term IT projects. These projects were simple and their progress was easy to measure. Offshore work got a big boost with Y2K remediation. Software companies sent thousands of lines of code to offshore providers, requesting them to read each line and fix every date reference.

The success of these initial projects gave service providers the confidence to expand the offshore work into BPO. Today, large pieces of a BPO process are finding themselves shipped overseas. These projects are sustainable since the transaction requires the provider to permanently allocate resources.

Three Ways to Offshore

There are three ways companies can take advantage of labor arbitrage. First, large global corporations can open their own offices in a foreign country, called setting up a captive company.

Second, they can outsource the work to a foreign firm. For example, India has several large outsourcing service providers specializing in BPO work, including Progeon, Spectramind, Intelenet, Nipuna, and Daksh. Firms that outsource to these companies develop long-term, long-standing relationships and view their workers as augmenting their own staffs.

Third, some buyers prefer to utilize an American-based global service provider like Accenture, ACS, EDS, IBM or OPI, who already has a staff in place in one or more offshore locations. In this case, the provider shifts the back office work to the most appropriate location, called best shoring. Buyers don't have the opportunity to select which country to do the work; the provider makes those decisions.

The size of the company and the scope of the job determine which option is the best fit.

Sending work to another country carries new risks. I will discuss those risks next month.

Lessons from the Outsourcing Journal:

• Labor arbitrage is a major value driver propelling the growth of business process outsourcing.
• While American and western European countries have been outsourcing to foreign countries for years, sending business processes overseas is a relatively new development.
• There are three ways to offshore: Work directly with an offshore provider in your country of choice; work with an American service provider who has offshore offices; and create your own captive company overseas.
• Best shoring allows a service provider to send work to the most appropriate location anywhere in the world.

Publish Date: September 2003

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Related Articles
Part 1: What's Driving the Growth of BPO?: The Impact of Labor Arbitrage
When Transaction Engines Aren't the Key to BPO Gains

Copyright © 2003 - Everest Partners, L.P.

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