ECONOMY

 
1- PAK-IRAN ECONOMIC RELATIONS
2-
BPO EVERYTHING IS FAIR GAME!
 

BPO EVERYTHING IS FAIR GAME!

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By IMRAN HUSAIN
Feb 28 - Mar 06, 2005
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This article is divided into 3 parts.  Part 1 will provide a background on Business Process Outsourcing (BPO) describing what it is, how it started, why companies are so interested in this area, and how it is projected to grow over the next decade.  Part 2 examines three services within the BPO space that show how outsourcing has moved beyond software development to value-added areas.  Part 3 summarizes the key characteristics of successful BPO firms and offers insights into what Pakistan-based firms should focus on as they look to grow market share in the USA and Europe.

PART 1

BPO is the strategic use of outside resources to perform activities traditionally handled by internal staff and resources, none of which are core to the functioning of the company. It is a strategy by which an organization contracts routine functions to service providers who specialize in such functions. Thus the service provider is not only responsible for the execution of a business process but also for improving it.  For example, if a US company that manufactures and sells stationery products decides that it does not need to hire IT programmers to develop systems it needs for inventory management and instead contracts with a software development firm to design, build, test and deploy the system for it, it is now a user of BPO services.  The software development firm takes the work and eliminates the need for the company to hire and train IT programmers, something it traditionally would have done.  When the software development firm is based out of Pakistan, India or any country other than the country in which the stationery products company is located, this arrangement is considered "offshore" BPO.

Companies usually offshore their services due to one or more of the following reasons:

* Take advantage of the low wage structure in some countries, in order to reduce overall operational costs

* Gain access to a larger and more specialized talent pool

* Achieve productivity gains through focus on core functions and reduced amount of time spent on non-essential activities

* Take advantage of the time zone differences to enhance flexibility (such as adding another shift of work), thereby, bringing products and services faster to market

The recent glut in telecom capacity all over the world has led to a reduction in telecom costs. This, coupled with the increased digitization of services, is helping many companies to offshore their services. In fact, to achieve global competitiveness and high profitability, it has now almost become imperative for companies to offshore some of their IT and non-IT BPO services.  Companies are using BPO to reach a wide range of goals. BPO was once viewed primarily as a way of reducing expenses. Today, enterprises are leveraging BPO services to achieve productivity gains, shorten innovation cycles, enhance customer intimacy and enter new markets.

According to Gartner Research, a leading US research firm, the global market for BPO is expected to grow at an astounding 68% compounded annual growth rate (CAGR), and reach $173 billion by 2007.  India, the Philippines, and China are the major destinations that are expected to attract offshored jobs in the near future. Ireland, Canada, Russia, and some Central and Eastern European countries (Romania, Belarus, Hungary, Latvia, Poland, and Ukraine) are other small but promising destinations that are also likely to attract offshored non-IT BPO work.  Pakistan is currently a laggard in this area but the emergence of a few strong call center companies is increasing the countries visibility and high-lighting some of the inherent advantages that Pakistan offers as an offshore destination.  

Considered by many as a pioneer in offshore outsourcing, GE Capital started BPO operations in India in 1997 and today employs more than 8,000 employees across several captive processing centers. The company reports hard savings in excess of 60% due to its activities in India. Dramatic quality improvements have also been witnessed across several business processes.

American Express, also an early adopter of BPO, opened its Financial Center East in New Delhi in 1994 which handled functions like accounts payables, incoming payments, general accounting, and financial forecasting.  The company uses a combination of outsourcing partners and captive centers in India. Since its entry into India, American Express has reported savings in excess of 50% annually.

McKinsey and Co., the world's largest strategy consulting firm, started an offshore knowledge center in India in 1998.  This center provides research support and other information services to consultants around the world. Not only has the company experienced dramatic cost savings, but quality and productivity levels have also improved significantly.

Examples of major US companies that have outsourced business processes to India include:

COMPANY

OUTSOURCING SINCE

BUSINESS PROCESS

Swiss Air

1992

Back Office

Lufthansa

1992

Back Office

American Express

1993

Call Center, Back Office

British Airways

1994

Back Office, Processing

General Electric

1997

Research, Call Center, Back Office

McKinsey & Co.

1998

Research & Graphics Services

BechTel

1998

Engineering, Call Center

Ford Motors

2000

Back Office

Amazon

2000

Web-Based Customer Support

Conseco

2000

Call Center, Back Office

Dell Computers

2001

Call Center, Back Office

World Bank

2002

Back Office

AIG

2002

Back Office

AOL

2002

Call Center, Back Office

PART 2

 

 

The current wave of offshore outsourcing has its roots in IT outsourcing. Y2K resulted in much greater market awareness of the capabilities and costs savings resulting from moving IT work offshore. Costs savings in the neighborhood of 50-60% provided the economic incentives for companies to move greater amounts of IT work offshore. As the market for IT offshore services matured and became commoditized, two factors fueled the expansion of offshore services outside the IT arena. First, the clear economic benefits of moving offshore coupled with a maturing of offshore processes provided US companies with the confidence to explore areas outside of IT. At the same time, the price pressure resulting from the commoditization of IT services coupled with a desire to grow their business provided the incentive for offshore service providers to expand their offerings.

As companies gain success with moving more and more of their business offshore, the economics of offshoring will continue to exert pressure and push the boundaries of what companies will consider as candidates for offshore outsourcing. The fundamental question will shift from "what is a good candidate for sending offshore?" to "what is it that truly needs to remain onshore?" There are some core and strategic activities that will never be good candidates for offshore outsourcing. However, economic pressure will cause companies to think harder and more carefully about which of the activities in their value chain are in fact a core competence. It will also force companies to become more creative in how they disaggregate the steps within their activities to identify what is truly value creating and should remain onshore. Already, some areas previously categorized as strategic and as a result deemed as poor candidates for offshoring are now being reexamined.   While a number of core activities are now being considered for outsourcing, three areas are listed below to demonstrate the extent to which BPO can be taken:

1) FINANCE & ACCOUNTING

Finance and accounting (F&A) outsourcing typically involves managing procedure-driven functions such as accounts payable, general ledger, fixed assets, accounts receivable, billing, payroll, and benefits administration, among others.  Of all the BPO processes, F&A has the most opportunity for offshore leverage.   Other than the core accounting functions, areas like insurance underwriting, credit analysis, claims processing, and tax return preparation are seen as leading growth areas.

GE Capital Services opened India's first service center in Delhi in 1993. Its 12,000 employees now handle accounting, claims processing, and credit evaluation services for more than 30 General Electric divisions.

Rhodia, a $7 billion maker of specialty chemicals headquartered in France, turned to F&A BPO to achieve improved performance and cost reductions. In 2001, the company entered into a six-year contract with Accenture to transfer the bulk of its financial and accounting functions to a shared service center in Prague, Czech Republic. Transitioning to Prague shared services center required a phased approach, starting with all the UK units and following with several waves (30-50 people at a time) from the French locations. By the December 2002 target date, almost 90 percent of the transition was completed. The lower cost of living and salaries in Prague is estimated to have yielded several millions in annual savings.

  Ford has over 400 people in their Business Services Centre in Chennai, India doing accounting for Ford worldwide.

Citibank employs over 2,500 people in Mumbai and Chennai where they handle finance and loan processing

American Certified Public Accounting (CPA) firms are turning to offshore firms to cut the cost of preparing tax returns. In fact, one of the areas powered by offshore labor is the preparation of US individual tax returns (Form 1040), corporate returns (Form 1120) and Non-Profit Returns (Form 990).  Tax returns are a particularly attractive for CPA firms to outsource since the tax season runs in the USA from January through April of each year and is characterized by seasonal hiring challenges, tight deadlines and inability to focus on other high-margin services like tax planning or retirement planning.  By outsourcing tax returns, CPA firms free up time and lower costs.

In the late 1990s, Dairy Farm International Holdings, a leading retailer of fast-moving consumer goods in Asia Pacific, with more than $6 billion in annual revenues and 60,000 employees in ten territories, teamed with Cap Gemini Ernst & Young (CGE&Y) Asia Pacific to build OneResource Group (ORG). ORG provides accounting, finance, and procurement services to companies globally. During the first two years of operation, ORG radically reshaped the finance function for Dairy Farm. Now, Dairy Farm Hong Kong only employs one finance person outside of ORG. In the first two years joint venture  with CGE&Y, Dairy Farm reduced the finance and accounting staff by nearly 50% a overall reduction, achieved a 30% decrease in costs, established a low-cost processing operation in mainland China and built world-class capabilities in finance and procurement while avoiding the associated capital outlays.

As firms experience ongoing pressure on their cost base, the transfer of F&A processes to lower-cost offshore centers is an increasingly compelling alternative.  Companies usually begin with F&A transaction processing and book keeping. As they gain experience, they migrate towards activities like financial trend data analysis information that will help the chief financial officer (CFO) to make better decisions.  According to IDC, the global market for outsourcing finance and accounting functions is expected to grow at a 9.6% compounded annual growth rate (CAGR), and top $47.6 billion in 2008.

2) HEALTH CARE

The health care environment in the USA today faces challenges that it has never seen before. The industry is under attack from every possible direction from cost containment, HIPAA (Health Insurance Portability & Accountability Act) compliance, lack of stability, to an uncertain future. After trying various managed care techniques and concepts the onus to contain costs is now on the health care consumer. Health care payers are facing issues with managing increasing medical costs and balancing customer satisfaction, reducing operating back-office costs, complying with HIPAA standards and requirements, upgrading IT infrastructure and moving to the web to provide real-time connectivity, and focusing on survival and developing a strategy to differentiate products from other incumbents and new players.

The types of services that can be offered through offshore BPO include:- Enrollment Services (for enrollment of new members and verification of eligibility for existing members); Claims Adjudication (including data entry of claims, adjudicating claims, managing billing); Customer Service (call center handling and email/web support); Imaging & Data Digitization (mailroom service, scanning of documents, converting text into electronic forms); Account Administration (balancing suspense accounts, making GL entries).

The year 2002 saw the emergence of offshore BPO in the health care industry. Fueled by the success that Aetna, a very large health insurance company, had in moving its claims adjudication process to India, many other organizations followed the same path.  A Health Maintenance Organization out of Florida, Wellcare has also employed this strategy to lower cost and increase flexibility. Other large payers moving in this direction include Wellpoint, Coventry Health, United Healthcare, Horizon BCBS, & BCBS of Michigan.

 

 

A significant development has been the decision by major US-based IT companies such as CSC, EDS, ACS and Perot Systems, to start the process of migrating business processes offshore, on behalf of their clients. Having already experienced success in offshore IT outsourcing these organizations have been the early adopters of this concept. The other notable fact has been the foray by Progeon (subsidiary of Infosys), Nipuna (subsidiary of Satyam) Spectramind (subsidiary of Wipro) and Intellinet (a joint venture between TCS & HDFC) to penetrate this niche. The advent of the big 4 Indian IT & BPO vendors into this segment clearly demonstrates the latent potential and the opportunity for offshore BPO.

HUMAN RESOURCES

The HR function within US companies has been under pressure to satisfy the needs of the business. Challenges include the increasing costs of administration, need for timely access to information, demand from employees for improved service levels, need to scale support & technology capacities, and the imperative to rapidly respond to organizations being changed through global growth and competition and mergers and acquisitions.  HR executives in the US recognize the importance of having their staff focus on core functions of setting HR policies, helping achieve integration between employees of recently acquired companies or divisions, designing and monitoring incentive plans and commission schemes.  Functions like HR Administration, Payroll Processing (producing checks, handling taxes, and dealing with sick time and vacation time), Training & Development, Hiring/Staffing (recruiting, hiring, firing, background interviews, exit interviews, and wage reviews), Benefits Administration (Health, Medical, Life, 401(k) plans, cafeteria plans) can then be examined and outsourced.

Research firm Gartner has forecast HR BPO to reach $51 billion and represent 39 per cent of all BPO revenue by 2004-end. "Payroll and benefits services are the most popular in HR BPO and are driving the growth of the market," said an analyst with Gartner.

CEOs are raising their expectations of HR performance, demanding

* Measuring & managing organizational process
* Enabling a consistent global culture
* Creating a learning organization
* Improving knowledge management
* Developing performance-based employee relationships
* Improving HR management

US companies are increasingly looking towards HR BPO to reduce costs and increase efficiency in their HR functions:

In 2002, the State of Florida's signed a $280 million, seven-year deal to outsource its human-resources functions to a company that will take over such tasks as benefits and payroll administration and recruiting and training. The objective for Florida's outsourcing was to improve the quality and efficiency of personnel services for state employees, enhance access to current information and reduce costs by utilizing state-of-the-art technology.  Some 10 to 15 States are now said to be considering HR outsourcing. The Government trailblazers include the US Transportation Security Administration, Detroit Public Schools and the Texas Health and Human Services Commission.

- Global BPO players including Fidelity, Exult and Hewitt have begun setting up operations in India

PART 3

It should be clear by now that the market for BPO, across F&A, Health Care, HR and other areas, is exploding.  Market leaders and innovators are constantly identifying new areas for BPO offerings while major companies in the USA and Europe look to establish captive centers.  While the large revenue growth figures will come from the areas identified, other areas like investment research will emerge.  As an example, Reuters, the financial news giant, officially launched its Bangalore operations in October 2004. Twenty journalists based in this south Indian city will cover 2,000 small to medium-sized American companies listed on the New York Stock Exchange. The division has already been up and running for six months, and employs 300 people staffing the data unit which archives material for 30,000 global firms.

Leading BPO firms seem to have the following characteristics:

* Strong track record of operating in an offshore model

A number of leading BPO firms started off as IT firms and hence learnt how to handle their US or European clients in the offshore model.  These firms leveraged extensively their existing relationships with clients and presented BPO offerings as a logical extension of their software development activities.  An excellent example of this is Progeon, an InfoSys company, that started off with $25 million in funding in April 2002, of which $20 million came from Citigroup.  By August 2002, the company had grown to 265 employees and had 3 live clients.  The company touted its roots in Infosys, as a company that had 20 plus years of outsourcing experience, strong customer focus demonstrated through 85% repeat business and a robust infrastructure.  Clients worry about how an outsource provider is going to be able to manage communication across time zones and geographies.  A BPO provider needs to map outsourced business processes to the client's internal processes and there is more complexity than under an IT outsourcing arrangement.  Companies that have delivered offshore IT services successfully are perceived as being more qualified to handle BPO work.

* Dedicated sales and marketing and relationship management presence in the USA

In this environment, it is simply not possible to have aggressive and sustainable growth without having a physical presence in the target client country.  Leading firms have made commitments to setting up offices in the USA and Europe either through direct investment, acquisitions or via strategic alliances with established players.  Relationship management can not be done effectively remotely and while clients in the USA make decisions on which BPO vendors to work with based on technical merit, another key factor in the decision-making is the credibility and experience of the executives and sales people from the BPO firm who they interact with during the sales cycle.

* Comprehensive knowledge of the business processes supporting BPO product offerings 

Leading BPO firms have management teams and sales personnel who understand the business processes and understand the market into which they are selling.  Winning teams are able to win because they demonstrate to the client the completeness , relevance and robustness of the methodologies they will employ to make the BPO work for the client. 

* Build strong training programs and acquire certification

Training is a critical piece of the puzzle and leading firms will support their training programs with certifications from recognizable organizations.  For instance, companies proving services in book-keeping and general accounting should consider getting certified by the American Institute of Certified Book-Keepers, a national certification body in the USA, as well as through the QuickBooks Certified Advisor Program (Quickbooks is a leading accounting software that is widely used in the USA).

Pakistan-based BPO companies clearly struggle with our countries negative perception in foreign media.  The objective should be to give a potential client enough compelling reasons to work with your BPO firm that the fact that it is based out of Pakistan is not a major discussion point.  There are several strong reasons for a potential client in the USA or Europe to consider a Pakistan-based BPO firm:

* The BPO firm's knowledge of the business process and availability of a robust delivery infrastructure

* Reliable and redundant technology platform and an approach for addressing security and data privacy issues

* Strategic partners in the USA that will complement the strengths of the delivery arm

* Pakistan's educated work-force which offers better value for money than some of the Indian firms which are becoming to expensive

* Incentives by the Government of Pakistan including tax breaks and low tariff structure

* Competitive rates for Internet, International Private Leased Circuit and subsidized satellite connectivity

* The track record of Pakistan's 30-year old software industry

The offshore BPO market is in its early stages and there are still abundant opportunities to be capitalized upon.  Investors, entrepreneurs, and business professionals in Pakistan should look at this market carefully and focus on identifying ways of providing value-added services to clients abroad.

Imran Husain is a management consultant with BearingPoint Inc. (formerly KPMG Consulting) in New York and has more than 10 years of experience leading Business Process Outsourcing and Information Technology projects for large financial institutions like Deutsche Bank, American Express, and AIG.  Imran is recognized as a Thought Leader in these segments and interacts closely with senior executives at major financial firms.  Prior to BearingPoint, Imran was at Nomura Securities, a global Japanese investment bank, running systems initiatives for the Risk Management group.