Globalisation, integration of labour markets and IT advancements continue to be the key drivers of global outsourcing. However, offshore outsourcing is evolving and becoming more strategic in nature, slowly bringing about transformational change within companies.

Offshoring to mature locations such as India are no longer driven just by lower cost and better quality, but are increasingly based on strategic business drivers such as continuous improvement, speed or time to market, innovation, flexibility and efficiency. New trends in offshore outsourcing are beginning to emerge.

Emerging drivers
‘Beyond cost and labour arbitrage’ is the new ‘mantra’ of offshore BPO. In the past, outsourcing was largely governed by considerations like cost savings, labour arbitrage, reduction of overheads, etc. Companies outsourced only non-core/non-critical activities and only to generic service providers with low cost delivery capability. But this has changed with time. Today, companies measure the benefits of outsourcing against business outcomes like increased speed to market, reduced defects or rework, lower working capital requirement and new market opportunities.

Global delivery
For many industries, global delivery is an integral part of the business strategy and is key to continued business growth and success. In the IT industry, this approach is being adopted by most of the major IT companies such as IBM, EDS and Accenture who have spread their work force across multiple low cost locations to expand their business across the globe. Adopting a global delivery approach has helped these companies survive and meet more competitive market conditions and compete more effectively with the large Indian IT and BPO service providers such as Infosys and TCS.

On the demand side, where outsourcing forms part of a corporate strategy, there is greater inclination to leverage the off-shore model for integrated sourcing of services, unlike the current emphasis on functional outsourcing.

Under the evolved model of offshoring, the offshore service provider bring four key practices to the table in the form of streamlining processes:

*Best practices across industries for specific functions or activities
*Operational discipline and improvements through the use of quality tools
*Scale-driven cost reduction because of centralisation and standardisation of processes
*Use of new and standardised technology across all processes across business units, group companies and geographies

Today, with most outsourcers increasing the processes or functions in their outsourcing portfolio, multi-location BPO is gaining fresh ground. India maintains its leadership position in the offshore services market due to its low wages and large labour pool and its experience in this industry for over two decades.
However, India’s leadership is being challenged by emerging offshoring destinations such as the Philippines, Malaysia, Vietnam, East European nations including Hungary and Poland and Central American nations such as Mexico.

Organisations that embraced outsourcing as a lever for reducing cost now demand much more from their vendors. We have seen the development of outsourcing into its critical three stages. In stage one, the focus is on operational efficiency resulting in cost savings.

Stage two shifts attention to process effectiveness resulting in productivity related gains. In the third stage, it is the ability to respond to business demands in a globally integrated approach which is most important, and which results in generation of new business opportunities. Companies are no longer looking for just cost savings from labour arbitrage, but instead are seeking productivity gains through process improvements, revenue enhancement, speed to market, innovation and greater efficiency.

Key to success
Offshoring is a major and complex change in the delivery model within an organisation and requires strong managerial will and capability to execute. The success of the offshoring effort is highly dependant on the time and effort invested up front in planning the entire initiative and the quality and consistency of execution.

Given the up front investment in capital, time and managerial resources, offshoring can generate negative returns in the first 12-18 months before generating benefits. Benchmarking of performance with external peers and governance of the offshore initiatives are crucial to ensuring success of the offshore initiatives. With focus on superior/efficient IT enablement, improved productivity, and increased control, beyond the immediate labour cost arbitrage, has resulted in greater success in offshore initiatives, The example are: IBM, GE, Dell, Citigroup, American Express, etc.

BPO models
We have seen several organisational models deployed for BPO such as a Captive, a Third Party Provider (TPP) or a Build-Operate-Transfer (BOT) model. Experience and knowledge of the offshore location and its regulatory framework are helpful since it is essential that you understand the contractual and legal complexities around each model in making your selection.

A Captive BPO is under the direct management control of the parent organisation and therefore requires high management effort in setting up and running it. It also involves higher initial investment and operating costs.
Since it is solely dependent on the parent for its business, a captive has limited scalability and low operating risks in terms of data privacy, data confidentiality, etc. Genpact was a captive for several GE divisions until its spin-off in 2005.

Offshoring to an Outsourced Third Party Provider (TPP) requires the parent to relinquish operational control and hence requires far less management effort and initial investment. Management control is retained through the metrics in the Service Level Agreements (SLAs). This model therefore has more scalability, but has additional operating risks.

In a Build, Operate & Transfer (BOT) model, the initial investment and set-up of the delivery center is entrusted to a TPP with a proven track record of offshoring. The parent company retains the option to regain management control of the center once it has been established and is operational, thereby reducing its initial investment and risks. Once the transfer is complete, it becomes a captive model. PeopleSoft is an example of a BOT that was set up by Hexaware.

Other models include joint ventures between the overseas parent company and an Indian partner/service provider and Hybrid models involving both, a captive and outsourcing to one or more TPPs.

The road ahead
Exciting and challenging times lie ahead of this industry in India, which will continue to evolve over the next few years. We will see consolidation amongst the generic BPO players, with buyouts both, within India and BPOs overseas. More of this will be seen among the small and medium BPOs who may not be able to deal effectively with the appreciating rupee and the supply side challenges

Many captive BPOs could be converted into TPP with rich domain expertise in their functional or business domains. There will be focus on niche areas of BPO and KPO such as LPO and analytics, research, risk management, modeling, etc.

We may also see emergence of BPO relating to industries which may not have explored this option such as media, advertising, education, etc. We may see new untested locations with smaller but cheaper labour force to break into the growing BPO business pie.

Source: Nasscom BPO Summit, 2007