53

CHAPTER-3

CONCEPTUAL FRAMEWORK OF BPO

Introduction

In the era of “global market” and “e-economy” Business process outsourcing

(BPO) has become one of the main pillars to conceive the relationships among

companies. BPO from India to US has become a hot topic for media in both countries

in recent times. Not a day passes without BPO headlines in both print and electronic

media. About 20 states in US tried to put legal barriers against awarding sub contracts

to non -United states countries. The flight of white-collar jobs from developed

countries to low-wage developing countries in the form of BPO has threatened low-

skill sectors in developed countries. The issue has become politically sensitive, as

several lobbies want to stop this flight of jobs to the developing countries. But, in era

of LPG, where free trade of goods and services is promoted, countries and companies

need to compete on a global basis and keep up with the latest advancements and

technology. The waves of protectionist attitudes at cross border will no longer work.

Globalization is not a phenomenon or just some passing trend; indeed it is an

overarching international system shaping the domestic politics and foreign relations of

virtually every country. While it is homogenizing cultures, it can democratize

opportunity and panic. According to world leaders, countries can no longer wall

themselves against the economic globalization trends (Robinson, 2004).

In the light of this importance the chapter has been used to study the concept

of BPO, its growth and importance. This chapter is a forerunner in understanding the

significance of BPO in FMCG sector.

 54

Concept of BPO

According to Oilman (1995), to be successful in this competitive world,

companies need to streamline and integrate their operations globally. They need to

focus on core i.e. main stream operations and outsource their non core activities. He

also commented that whether business process outsourced to third party is at distant

locations or near does not matter as long as the competitive advantage is retained.

Business process outsourcing facilitates processes and allows companies to

become partners with experts in this field. It is slowly but surely becoming an integral

part of modem management. BPO has thus become a business necessity and has

caught attention of business strategist to explore the opportunity of delegating some

non-core functions to specialize and efficient service providers.

Outsourcing trend is not recent phenomenon. Its root can be traced back when

world to the start of the world. When GOD sent Moses to pass the Ten

Commandments to the world, delegation of work to third party was witnessed (Wang,

1994). Presently, the emphasis on subcontracting non core business process is what is

new.

Elfing and Baven et al., 1994, viewed outsourcing as predetermined provision

made with external enterprise, for delivery of goods and services which was

previously done in-house.

According to Johnson (1997), Outsourcing if applied properly, organization

can reap huge benefits and set the equations right. It can transform into a powerful

management process. Many a times, outsourcing is misunderstood as downsizing,

implemented for the purpose of giving quick solutions and cost controlling tool by

contemporary managers. However, in the hands of the right management, it can be a

 55

true strategic weapon and can be pervasive at all levels and comers of management

process.

Williamson (1996, p.133) argues that firms need to derive their boundaries

from the market rather than take what is given. In the similar stratum, merger of firms

with complementary assets enhances value and merger with independent assets

reduces value.(Hart, 1995, pp. 7-8).

Outsourcing as a concept is very difficult to pin down as the same is able to

have huge impact on so many organizations. However, the definition is changing

permanently and suppliers are found to slice the market into further more niches.

According to Benn and Pearcy (2002, p.l), outsourcing allows the partner to

manage part of their business.

Lei and Hitt (1995) define outsourcing as ‘reliance on external sources for

manufacturing components and other value adding activities’

Perry (1997) stressed on employment and defined define outsourcing as

“another firms employees carrying out tasks previously performed by one’s own

employees”.

Sharpe (1997) defined outsourcing as “turning over to a supplier those

activities outside the organization’s chosen core competencies”.

According to Chace, Assistant President of the public sector division of

Unisys (Europe Middle East and Africa Division, EMEAD), — Outsourcing is a

process and delegates responsibilities and functions to third party. It involves transfers

of operations, people, materials, and facilities to third party and retains responsibility

of strategic planning, integration and control.

 56

However, there are many other ways of explaining it. Some other leading

authors would define it as

“The transfer to a third party of the continuous management responsibility for

the provision of a service governed by a service level agreement” (Gay and Issinger,

2000 p.5).

Charles Les Wang, CEO of software giant Computer Associates commented

that outsourcing entered CEO dictionary in July 1998 when Kodak company

announced that it was stripping away its computer operations, lock, stock and

mainframe, and framing them out. When such decision is taken by a company which

falls in global top 50 company list, the world had to listen, watch and follow. While

this happened, researchers came up with another concept of —core competence. This

concept stressed on handling the core parts by corporate itself and other things being

bought from third party supplier (Peters, 1994).

Lonsdale and Cox (2000, pp: 445-9) aptly summarize the history of

outsourcing, noting that it is some kind of substitute for the once fashionable

enthusiasm for the conglomeration, horizontal integration, vertical integration, and

internal integration.

All the above-based definitions call for examination of the literature on

vertical integration, vertical disintegration and make or buy. During 1960, the

business trend was of acquisition and mergers. However the trend reversed in 1980s

and Thackray (1986) records how FORD sold its sheep farm that grew wool for car

seat covers. Others followed similar trend, GM sold their paint manufacturing

capability, and tyre manufacturers sold rubber plantations, newspaper magnate’s

divested forests.
 57

Williamson (1985) heralded the trend towards vertical disintegration

(outsourcing) and portrays alternative organizational forms. Porter( 1988) found over

half the acquisition in new industries and 60% in new fields were divested. Kumpe

and Bolwjin(1988), Gadde and Hakansson (1990) and Child(1987) provided

evidence of ‘buy’ rather than ‘make’ strategies.

From the above definition and literature review it is evident that outsourcing is

fashionable way of solving some business problems and there are numerous reports of

its increasing use. The traditional perception of outsourcing has gone far beyond the

use of other local firms in various operations (such as hiring law firms for legal advice

or companies like Federal Express and others for logistics control).

Over the last few years, with advancement in information technology,

worldwide outsourcing industry has also undergone rapid transformation. ITES, the

Indian terminology for BPO offers companies more complex jobs to achieve

transformational outcomes much more quickly (such as payroll or bank loan

processing, and customer relations management through call centers). Today,

outsourcing is possible from single aspects of information technology to offloading

the entire business functions to be performed and managed away from clients’

locations and even in a different country.

The use of BPO is becoming more sophisticated and strategic in nature and

managing outsourced business processes is the key in providing competitive products

or services to the market and customers.

 58

Evolution of Business Process Outsourcing (BPO)

The BPO industry took nearly 20 years to transform itself from a company

owned center to an offshore unit. In the initial stages, the company allocated separate

division in its own premises to cater to its needs. However, the service was not to the

expectation and the companies were forced to discontinue the division. Later, the

BPO unit were physically kept away from the company premises to get better results

but resulted with little change in the cost. Further, the companies hired external BPO

units resulting in high service levels. As significant cost reduction was not witnessed,

the companies started their own units in low cost countries called captive BPO units.

Most of the banks, airlines, manufacturing and insurance companies set up their back

office operations in low cost countries. But, BPO units with professional experience

were able to drive the start up operation to low cost countries. These units were able

to deliver better results and were cost competitive than captive units. In addition to

this, IT companies with their high-end infrastructure ventured into ITES services.

Industry/domain specific BPOs having good experience started entering into offshore

BPO services.

Primarily, in the USA, information technology (IT) based outsourcing has

been a popular management tool for decades. IT-related outsourcing has evolved

since 1960 and has diversified to various IT applications.

Evolution of IT-related outsourcing has occurred in following phases:

1970’s - elements of IT operations

1980's - entire IT operations

1990's - alliances/tie-ups

2000's - IT-enabled services

 59

The management guru, Peter druker brings fresh insights and propounds that

outsourcing is able to increase the workforce quality as the workforce is able to spend

time productively on core areas. He explained the same by quoting an example of

total quality specialist who would be spending time of just 6 weeks which otherwise

would be 48 weeks if the job is not outsourced. Though rationale behind outsourcing

is cutting cost, Peter Drucker opines that it brings better effectiveness. To summarize,

outsourcing helps in improving quality in non core areas and utilizes service

providers’ expertise and competencies to the maximum. It also enables reduction in

cost of the outsourcing company.

Evolution of BPO in India

The Indian BPO industry has evolved significantly over the past few years.

Despite its recent arrival in India, the BPO industry has grown phenomenally and has

now become a major segment of the export-oriented IT software and services sector.

It initially began as an activity confined to MNCs, but today it has developed into a

broad based business platform backed by leading Indian IT software and services

organizations and other third- party service providers.

The ITES/BPO market expanded its base followed by the entry of Indian IT

companies worldwide. The evolution growth of the BPO industry in India has been

predominantly facilitated by the success of the Indian IT sector in servicing Fortune

500 clients. The BPO market of the present day is characterized by the existence of

these IT giants who are able to leverage their broad skill-sets and global clientele to

offer a wide spectrum of services. The spectrum of services offered by Indian

companies has evolved substantially from its humble beginnings, like call centre, data

entry and customer support.

 60

Today, Indian companies are offering a variety of outsourced services ranging

from customer care, transcription, billing services and database marketing, to web

sales/marketing, accounting, tax processing, transaction document management,

telesales/telemarketing, insurance claims processing, HR hiring and biotech research.

Although the IT industry in India existed since the early 1980s, it was the

early and mid 1990s that saw the emergence of outsourcing. The Indian BPO industry

is currently in the fourth phase of growth.

First Phase: In the early 1990s multinational corporations (MNCs)

established wholly-owned subsidiaries in India for customer and technical support

services and tele-marketing services. Some of the earliest players in the Indian market

were American Express (1993), British Airways (1996) and GE Capital. Medical

transcription was one of the first outsourced services to India.

Second Phase: In mid-1990s, established software services companies and

non-resident Indians (NRIs) ventured into the BPO business. The established

customer care and transaction services continued to grow rapidly because of labor

arbitrage and process efficiencies. Being fully satisfied with the quality and efficiency

of the services rendered by the Indian BPOs, MNCs began outsourcing their complex

transaction services like data-processing, accounting and data conversion processing

to India. Tier-I cities, namely, Mumbai, Bangalore , Chennai, Delhi and Hyderabad

were the preferred destinations for BPO companies.

Third Phase: At the end of the 1990s, the BPO industry in India ventured into

a number of diversified activities like insurance claim processing, risk management,

analysis and tax consulting thus witnessing a rapid growth. Tier-II cities, namely,

Jaipur, Pune, Indore, Mangalore, Mysore and Kolkata emerged as favorite

 61

destinations for BPO companies as they offer some cost benefits compared to Tier-I

cities. In the third phase, Indian BPO industry witnessed mergers and acquisitions

(M&As) activities within the industry.

Fourth Phase: In the current phase of evolution of the BPO industry in India,

there is an increasing trend of overseas acquisitions. Indian companies are acquiring

small to medium-size businesses in overseas locations; these acquisitions are probably

in the nature of a market entry strategy. Moreover, Indian BPOs, apart from

consolidating their presence in traditional verticals such as customer and technical

support, data-processing and complex transaction services, are now diversifying into

new verticals such as offering more critical services in the same domain and by

expanding service portfolio by moving into sophisticated areas like accounting,

insurance, data analytics, research, banking, financial analysis and risk management.

In short, Indian BPOs now have begun offering more knowledge-based services. In

addition, now the shift of Indian BPO industry is from cost to quality.

Business Process Outsourcing (BPO)

According to Jones (2003), outsourcing as a field has transformed from a

buzzword to an internationally accepted phenomenon. It is quite interesting to note

that it has specifically demonstrated growth in Europe. This growth has helped in the

emergence of new outsourcing model such as business process outsourcing quite

often referred to as BPO. A report by Dun and Bradstreet (2000) confirms the trend

towards outsourcing, although some companies have shifted their focus from

information technology to BPO.

The predominant business model of the ’50s and ’60s is that size was good.

The creation of a huge, lumbering corporation with sprawling campuses was seen as a
 62

mark of success, and CEOs would boast that "our company’s so big we have our own

in-house print shop. We have a separate warehouse just to hold office supplies. We

employ more mid-level bureaucrats than an agency of the United States government."

But was all that necessary? Time has revealed the obvious answer to that

question, and a company that would adhere to the above business model would not

last long today. The rules have changed, and business process outsourcing (BPO) has

become the cornerstone of the "lean and mean" way of doing business and staying

competitive. There is, however, a right way and a wrong way to approach BPO, and

Michael Montonen revealed in a recent interview, stating that spinning off as many

internal processes as possible is no guarantee of success. (Montonen, a vice president

with Gartner, is the BPO and offshore practice lead for the Gartner Consulting

Sourcing team.)

According to Dataquest, BPO implies the delegation of an intensive business

process to an external provider, which owns, administers and manages it according to

a defined set of metrics. Companies may procure these services either through

external contracts with BPO vendors (outsourced) or through a remote subsidiary of

the same company (off shored/out-located).

NelsonHall defines BPO as the outsourcing of business functions or processes,

such as procurement, to a third party. In these contracts the provider is responsible for

performing and managing the outsourced function or process on behalf of the

customer. In order to qualify under this definition, BPO contracts must involve the

provider taking overall responsibility for the business process and not just supplying

IT applications or services to facilitate the process.

 63

It must be noted that for many companies, outsourcing contracts include

document management, e-enablement, and print and mail functions as a part of the

outsourcing services. This represents another encroachment into the market by

companies outside the traditional range of players. This type of outsourcing deals in

identifying a complete business function.

For example office paper work and documents handling to an outside

organization dealing in outsourcing functions and then takes care of the related

activities and personnel. The importance of this type of outsourcing is clearly evident

from the fact that many companies have now started to include this in its facilities

offered lists.

BPO occurs when an organization turns over the management and

optimization of a business function to a third party that conducts the activity based on

a set of predetermined performance metrics. A scrupulously documented example of

business process outsourcing is the Coca-Cola Corporation. For over 100 years,

Coca-Cola has been producing syrup and bottled marketing. The actual production of

Coca-Cola is done by its global partner’s i.e. the bottling firms. By concentrating on

protecting its core formula and brand image, Coca-Cola has managed to build a

successful business where the vast majority of the supply chain sits outside it

operations (Benn and Pearcy, 2002).

Other companies include IBM’s development of PC, facilities management at

Rank Xerox, IT at Kodak and IT at Cable and Wireless. In India, companies like

Hindustan Lever, Thermax, Tata Motors, Ranbaxy have all joined the manufacturing

outsourcing bandwagon. Daimler Chrysler has outsourced manufacturing of auto

components to India. Toshiba has set up a television-manufacturing unit in India.

 64

Recent news indicated that CNH Global, makers of New Holland Tractors, is

outsourcing component manufacturing to India. The spectrum of manufacturing

outsourcing is varied right from auto components, electronics equipments to clothing.

Apart from manufacturing, business processes that are frequently outsourced

can be categorized as follows

• Customer care services including call centers

• Financial services including F&A, equity research, insurance claim

processing

• HR services

• Content development including animation/engineering/GIS Biotech

research etc

• Real estate facilities management

• Supply chain/Procurement

• Logistics

• IT

• Payment services including credit/debit card services, etc.

In an organization there are number of processes which can be outsourced.

However, in typical outsourcing company, processes, which have minimal strategic

value, are outsourced. These processes if not executed properly by the supplier will

not create serious problem. If these processes (low end) are executed are executed

properly and proved successful, then management may think of outsourcing those

processes which are of more strategic value. These processes are more crucial for the

organization and if not executed properly by the service provider may lead to

organization threatening consequences.

 65

Finally, if the company continues to perform well with all or part of these

processes outsourced, it will consider moving to outsourcing the most important

processes. This progression is seen in Chart 3.1 (Bragg, 1998)

Figure 3.1
The typical path for outsourcing functions.
------------------------------- -

Ettgiiwarstg
Co raputer Science
Manufictuong
Strategic Importance

Customer Service
Sales & Marketing
Accounting
HR

Maintenance
Administration

Time to decide to implement

Source: Bragg, 1998, p6

The above figure explains how strategically important processes take more

time to be implemented. However, as it can be noticed, no matter how important a

process is, an organization can outsource almost every corporate function.

As outsourcing brings economies of both scale and skill, it is useful to break

the outsourcing market into four quadrants based upon the type of benefits being

applied as shown in Chart 3.1. Each quadrant has different characteristics and a

different need profile.

Conventionally, outsourcing was focused on business functions that had no

bearing on core business i.e. example, cleaning, operating the staff transport or

cafeteria, etc. But advancement in technology and innovation has increased the scope

of business functions and includes facilities management, marketing services, human

 66

resources (HR) administration, telesales, information technology (IT) and of course

customer service. The trend in outsourcing, increasingly, is towards broadening the

services from pure business functions to operations i.e BPO (Benn etal. 2002).

Figure 3.2
Battenburg model of outsourcing categories.
9 m
ECONOMYOFSKILL

**
#
Source: Benn and pearehy,2002, p.43

From the above given model, it can be seen that the types of outsourcing

differ based on service outsourced as dedicated or shared and whether it is aimed at

technical level or business level. The battenburg model given below explains the

difference.

The services listed in the left-hand quadrants (see above figure) offer better

management process, standardization, business focus improvements and access to a

wider pool of specific skills. Those in the right hand quadrants sacrifice uniqueness

for significant economies of scale. Those appearing in the upper quadrants also offer

improvements i.e. complete service is delivered to the clienfs end customers, while

lower- quadrant services promise benefits in terms of delivering services to internal

clients.

X -5 P2
 67

BPO i.e. third parties deliver their service with complete infrastructure and

their capabilities are built around the organization business functions. They manage

complete business divisions. Though BPO projects involve great deal of analysis and

planning from client’s perspective, the end results can be worth the effort. If BPO is

properly implemented, then organization can exhibit radical improvements and not

simply more of the same at low cost.

Drive for outsourcing

Two essential reasons for outsourcing are scale economies and strategic

sourcing, which are explained as under.

Scale economies

Finlay et al. 1999 found that scale and costs are the two most import factors

that have an impact on outsourcing of product and services.

BCG studied and concluded that companies outsource primarily to save cost

or to save cost overhead. They arrived at this conclusion after studying 100 western

companies.

Me farlan et al. in his study commented that basic reason for outsourcing IT

was to access special functional capabilities at cost effective prize and avoid in-house

IT skills or system development skills.

Chalos 1994 dispute that ‘non core competencies’ i.e. indirect cost are

increasingly being outsourced.

 68

Outsourcing is a trade -off between lower production costs and higher

monitoring costs. This was concluded after examining the incentives for outsourcing.

(Lewis and Sappington 1991)

Grant 1995; Dombeger 1998, commented that due to global competitive

pressures, large companies are adopting greater market disciplines and are reducing

their product range. Scholar and practitioners further added that these big companies

are loosening their vertical links in production process to be competitive in the

market.

Grant ( 1995, pp 318), found that corporate have “divested ‘peripheral or

supplementary’ businesses in order to focus upon their ‘core’ business and, in turn,

have vertically ‘de-integrated’ by increasingly outsourcing their requirements for

components and business services”.

The search for greater efficiency, in mm, has led to increased specialization,

and as such, certain writers see outsourcing as a manifestation of this trend

(Domberger, 1998).

For example, Unilever, with a portfolio of 1,600 food, toiletries and household

products, in September 1999, announced that in order to enhance sales growth and

profitability, it would focus on a smaller number of “power brands” (core products)

which have world-wide reach, thereby reducing costs and exploiting new channels of

distribution, such as the Internet (Willman, 1999).

Research show#that, even in the late 1990s, cost-savings and freedom to focus

upon core business are still major reasons for outsourcing (Currie and Willcocks,

1997)
 69

Strategic sourcing

In contrast, the strategic sourcing literature positions that the outsourcing of

goods and services should be integral to an organisation’s overall strategy formulation

process (Quinn and Hilmer, 1994; Venkatraman, 1997; DiRomualdo and Gurbaxani,

1998; Domberger, 1998; Quinn, 1999).

Domberger, 1998 found that organization needs to determine the scope of its

internal activities by reference to its objectives, in contrast to resorting to outsourcing

when there is a pressing need to apply cost disciplines

DiRomualdo and Gurbaxani (1998) argue that firms use outsourcing in order

to satisfy any one or more of three strategic intents, namely strategic improvement

(cost reduction and enhancement of efficiency), strategic business impact (improving

contribution to companies’

Performance within existing lines of business) and strategic commercial

exploitation (focus on leveraging technology-related assets).

Chalos and Sung, 1998, study provided compelling evidence in US auto

industry that outsourcing is driven by cost reduction efforts. Ex: Chrysler estimated

that for the fiscal year 1997, supplier cost reduction efforts (“SCORE”) would add

$325 million to its annual profits and eventually generate over $1.2 billion in savings.

Similarly, General Motors insist that its 30,000 worldwide parts suppliers must

hold warranty costs below predetermined levels (Blumenstein, 1997), and through

such discipline, attempt is made to eliminate waste through the entire supply chain

(Christian, 1997).
 70

From the IT view, networks encourage vertical de-integration of firms by

lowering the costs of “buying” compared to “making” in-house (Malone et al., 1987).

Reduced co-ordination costs imply an “unbundling” of functions, making it

easier and more efficient to enter into value chains rather than maintain inhouse

ownership (Kakabadse and Kakabadse, 1999).

An enterprise would consider outsourcing when in-house performance falls

below the performance of external suppliers (Blaxill and Hout, 1991; Chalos, 1994).

Quinn (1999) suggests that unless the company develops best-in-world

capabilities, including transaction cost disciplines, the company should purchase

goods/ services from providers who have best-in-world skills, in order achieve

competitive edge.

Williamson et al, 1988 suggest that managerial incentive intensity becomes

the primary motivation for outsourcing, as managerial efforts are focused on core

competency maximization when undistracted by non-essential tasks

Irrespective of the reasons for strategic outsourcing, the prime reason still

remains the same i.e. reduction of cost, however at the same time; cost considerations

have been escalated to strategic levels of decision making thus promoting new

organization forms.

Price Waterhouse Coopers (1999) has established that outsourcing has moved

markedly from attending to a single function more efficiently, to reconfiguring a

whole process in order to attain greater shareholder value across the enterprise. In

effect, emphasis is shifting from outsourcing parts, facilities and components, towards
 71

outsourcing the intellectual based systems, exemplified by customer response

handling, procurement and management (Quinn, 1999).

Daimler Chrysler, the car manufacturer, for example, outsourced the

management of its supplier relationship portfolio to Andersen Consulting, for the

i

production of the “smart car” in France. The emerging view from the literature is that

service quality improvement, the need for strategic flexibility and the focus on core

competencies are now becoming predominant concerns for sourcing decisions (Van

Laarhoven et al., 1999; Peters et al., 1998).

Sourcing: What and How?

As organizations redirect valuable internal skills and capabilities to high

value- added activities, the sourcing debate has moved from whether to outsource, to

what and how to outsource (Venkatraman, 1997, p. 60).

Scholars adopting the strategic perspective and practitioners adopting

conventional wisdom argue that core activities should stay in-house, whilst non-core

activities can be outsourced, in order to preserve core competencies (Prahalad and

Hamel, 1990; Bettis et al., 1992; Lacity et al., 1995; Quinn and Hilmer, 1994;)

Research findings suggest that this debate is steadily moving up the

organisation to the CIO (chief information officer), CFO (chief financial officer) and

CEO (chief executive officer) levels, with the most sensitive issues still remaining as

to what, and what not, to outsource.

Where “core competencies” (Prahalad and Hamel, 1990) and “distinct

capabilities” (Kay, 1993) are essentially a “bundle” of corporate skills that cut across

traditional functions, such as product or service design, technology creation, customer

 72

service, and logistics, certain scholars postulate that outsourcing decisions should be

driven by the nature of the sourcing contracts, the contractual and informal

relationships between the purchaser and supplier, the use of market opportunities for

competitive advantage, and the successful management of contracts (Willcocks and

Fitzgerald, 1993; 1994). However, defining what is core competency for any one

organization is loaded with many ambiguities. Some regard core activities as core

competencies, namely those activities that the firm is continuously engaged in, whilst

peripheral activities are those that are intermittent and therefore can be outsourced

(Quinn and Hilmer, 1994).

Alternatively, Alexander and Young (1996) suggest that four meanings are

commonly associated with “core activity”:

(1) Those traditionally performed in-house;

(2) Those critical to business performance;

(3) Those that create current or potential competitive advantage; and

(4) Activities that will drive further growth, innovation, or rejuvenation.

Others argue along the lines of Porter’s (1990) competitive advantage thinking,

asserting that core competencies are those activities that offer long-term competitive

advantage and thus must be kept in-house. This view contends that many traditionally

considered integral activities, for which the firm has no crucial strategic need, can be

outsourced (Quinn and Hilmer, 1994).

Quinn and Hilmer (1994) coined the term “strategic outsourcing” in order to

provide a guide as to what is the strategic core of the firm and those other activities

which are necessary to attain the firm’s strategic goals (Brueck, 1995; Alexander and

Young, 1996; Chalos and Sung, 1998; Quinn, 1999).

 73

Nike, for example, outsourced shoe production and manufactures only the key

elements of its “Nike Air” system. Nike creates maximum value by concentrating on

the production of what is unique to them, such as research and development and post­

production activities, i.e. distribution, sales and marketing, with the exception of

advertising, which has been outsourced.

Similarly, Argyle Diamonds, one of the world’s largest diamond producers,

outsources all aspects of its operation (earth-moving operations, housing and services

for workers, distribution) to best-in-class suppliers of services, with the exception of

the crucial steps for the separation and the sorting of diamonds, which it carries out

itself (Quinn and Hilmer, 1994).

Likewise, Apple Computers outsources 70 per cent of their manufacturing as

well as additional critical elements such as design, printers and every aspects of

marketing, in order to focus on the production of unique items, such as Apple DOS

(disk operating system) and the supporting macro software, which give Apple

products their unique look and feel (Quinn and Hilmer, 1994).

In contrast, when the firm’s strategy is overly dependent on creativity, personal

dedication, and initiative or on attracting top-flight professionals, the current wisdom

is that core competencies need to be monitored within the enterprise (Quinn and

Hilmer, 1994).

For some organisations with high- specificity, the significant nature of

inseparable supplementary services may warrant the need for internal sourcing to

ensure tighter quality control (Murray and Kotabe, 1999).

 74

In keeping with the philosophy of tighter quality control, CNN, SAP and the

French company ACCOR have adopted the “value innovation” model, as they are

focused on enhancing client value and thereby adopting an improved market position

(Kim and Mauborgne, 1997).

In pursuing value innovation for growth, the leverage gained through high

quality internal capabilities (appropriate IS/IT and operational efficiency) needs to be

maintained in-house, both for control and quality purposes and so as not to lose such

expertise on completion of contract.

Core and Non-Core Activities

In any organization core and non core activities are executed. What is

important is to identify the core activities. If this is done then organization can

concentrate in developing these core activities. Non- core activities remain important

for the overall success of the organization and are best provided by specialist

organization.

Every organization that has a competence for satisfying specific customer

needs has core activities, which other organizations do not possess. Such a definition

is straightforward; but establishing the ’specific’customer needs is not.

Ford and Rolls-Royce both produce cars and satisfy a demand for mobility.

However, Ford satisfies a customer need for inexpensive personal transport; Rolls-

Royce produces a form of personal transport to boost the customers’ need for

recognition. Each recognizes its customers’ needs, and designs and delivers a product

to meet them. A core competency lies in the ability to differentiate outputs so that

they match a market segment very precisely.

 75

In the retail sector, for instance, Marks & Spencer and Armani both sell

clothes but their market segments are quite different, as are their core competencies.

Marks & Spencer is a retailer selling clothes to a largely middle-income customer

base. It contracts design and manufacturing to others, and its core competencies lie in

buying, promotion and retail management. Armani is satisfying a very different

market segment-rather like Rolls-Royce-as his clothes are for a customer base that

buys exclusivity. His core competencies are innovative designs, production and public

relations; and retail management skill accounts for little added value.

Market research informs organizations as to where customers see their

competitive edge, and enables management skills to be focused on meeting their

needs. They may also detect that changing demand requires a refocusing of their

competencies either to increase their added value or to maintain market share.

Achieving management focus on core activities will help company for long-term

survival as well as adds value. However, business support activities must also be

managed, and management should be equipped with the skills to do so. Many

organizations spend a disproportionate amount of management time managing non­

core business process activities.

For example, in investment banking, attention was diverted from risk

management and new product development and was spent on information technology.

In consequence, the UK banks have been swallowed up by US and other European

Countries’ competitors, or have collapsed due to management failure to exercise

proper control. If the management’s effort spent on developing technology had been

focused on banking, UK would have been better represented amongst the worlds

leading financial institutions.

 76

To identify the core activity, assessment of the contribution of every activity

under taken in organization need to be judged as under

* It has a direct effect on satisfying Customers’ needs;

* It would earn superior returns

* Outsourcing would achieve comparable quality more cheaply

Advantages and disadvantages of outsourcing

Outsourcing is used because it supposedly advantages the organization. The

advantages and disadvantages can be categorized as strategic or tactical, long-term or

short-term, and tangible or intangible.

Advantages

Reduce and control operating cost

Outsourcing reputedly reduces IT costs. Vendors tempt firms by purporting to

cut costs by 10-50 percent (Lacity and Hirschheim, 1993, p. 74).

By having expertise and/or up-to-date software and hardware a vendor may be

able to build, maintain and/or run an application more cheaply than can be done in-

house (Collins and Millen, 1995; Lacity and Willcocks, 1998; Lacity et al., 1996; Loh

and Venkatraman, 1992; McFarlan and Nolan, 1995; Willcocks et al., 1995).

McFarlan and Nolan (1995, p. 12) and Quinn and Hilmer (1994, pp. 48-9)

allude to accessing lower labour costs through international outsourcing.

Economies of scale can lower costs; a vendor can supply, run and update the

software needed for a common application (classically payroll and share registries

(Behara et al., 1995, p. 48)) and distribute costs over many clients. Obvious
 77

economies of scale pertain to physical distribution. By purchasing services at a fixed

cost per transaction, a client can control cost.

Concentration on core activities and competencies

Managers should apply their experience and knowledge to core competencies

and outsource activities in which they are less competent and can benefit from

vendors’ expertise. Vendors can supply expertise and state-of-the-art technology

(Benko, 1993) and increase the flexibility and quality of IT services (Antonucci et al.,

1998).

Variable and fractional demand

A small firm’s limited internal resources may find difficult to cope up with

sudden changes in demand. On account of this, they lack demand as new capacity or

new staff to be recruited and trained. Under such circumstances outsourcing is of

greatest advantage as fixed cost are converted into variable cost and are able to handle

demand variation.

Diminished demand may necessitate dismissing loyal staff in whom training

and experience has been invested (Computer Sciences Corporation, 2002). On the

contrary, a vendor may have ample resources. A small organization will not hire half

a lawyer, but outsource its legal requirements.

Avoidance of cultural problems

“Cultural differences can also often cause friction between IT and

management” (Williamson, 1997); and outsourcing may allow the “elimination of an

internal irritant” (McFarlan and Nolan, 1995, p. 14).

 78

Disadvantages

It is notoriously difficult to allocate the costs of internal IT amongst individual

applications or to quantify the fixed and variable components (Quinn and Hilmer,

1994).

Barthelemy (2001) lists “the hidden costs of IT outsourcing.”. He expresses

that documenting internal operations being considered for outsourcing and preparing

service level agreements (SLAs) (Sturm et al., 2000) may be a lengthy and expensive

exercise.

Maintaining the relationship

An outsourcing relationship can be characterized as either arm’s length or

collaborative (suggestive of out-tasking and partnership respectively). The former is

appropriate when the services and quality attributes (turnaround time, unit price and

accuracy) can be unambiguously defined and is most likely to arise in simple

transaction processing. When significant aspects of performance have to be measured

using intangible criteria, a cooperative or partnership relationship will be required.

This is exemplified by a vendor developing a computer system (Davey and

Allgood, 2002, pp. 14-5): it is nearly impossible to precisely specify all requirements

in advance; the vendor learns about the client’s business and the client learns about

IT’s potential and its application to the business. Both parties’ employees exchange

knowledge and information in myriad conversations. The relationship will be most

fruitful when both parties share the benefits of an improved business process.
 79

Managing the outsourcing of a significant business process may be a

substantial task entailing non-trivial costs ( Barthelemy, 2001; Lacity and Willcocks,

2001) that normally comprises of the following stages (Sturm et al., 2000):

• Defining the scope of the services to be outsourced,

• Deciding on relevant measures of quality,

• Deciding on transition arrangements (including disposition of staff),

• Writing and agreeing to a contract (the service level agreement or

SLA),

• Changing from internal to external operation,

• Monitoring the quality of service, negotiating changes triggered by

changing business conditions, and renegotiating or terminating the
agreement.

Loss of distinctive competencies

Bettis et al. (1992, pp. 14-7), Lonsdale and Cox (2000) and Quinn and Hilmer

(1994) stress that outsourcing the intellectual or other skills underlying a distinctive

competence may be a bad strategy.

A bank that outsources the development of software driving its automatic

telling machines (ATMs) may advantage competitors or create new competitors

because the skills and knowledge accumulated by the contractor are applicable to the

development of a competitor’s similar system.

It may be impossible to recreate in-house outsourced knowledge and skills

(Bettis et al., 1992; Earl, 1989), the vendor may use its monopoly power to demand a

high price for changes.

 80

Change problems

Outsourcing creates change problems. If an in-house system is replaced by a

vendor’s system, there is danger of disruption caused by misunderstanding or failure

to transfer data properly.

Outsourcing a function may entail dismissal or redeployment of employees,

changes in the work they do or their transfer to the vendor’s employment and its

different conditions (Antonucci et al., 1998; Caldwell and McGee, 1996; Useem and

Harder, 2000, p. 32).

Loss of flexibility

Signing a 3-year outsourcing contract lessens flexibility. If business

requirements change or changes in technology create new opportunities or lower

prices, then the client has to renegotiate the contract to access them.

Other factors, Strassmann (1997, pp. 181-92) finds that (in the USA) major

decisions to outsource are correlated with worsening profits. He postulates that firms

with declining profits outsource IT to improve cash flows. The mere threat of

outsourcing may galvanise departments (Hirscheim and Lacity, 2000) and

management may be influenced by departments’ track records.

Like TQM and BPR, outsourcing may be a managerial fad (Loh and

Venkatraman, 1992, p. 340; Shapiro, 1995) for which enthusiasm may fade.

Outsourcing may be cosmetic avoiding head-count limitations, converting a capital

expenditure into a continuing expense or realizing cash by selling IT assets to the

vendor.
 81

Dimensions of Outsourcing

The BPO industry is witnessing a continuous change in terms of client

requirements, domains in which BPO solutions is offered, value proposition and

delivery models. Though outsourcing has a fairly long history, there have been

various forms and figures and delivery models and proposition which have been tried

and tested. The value proposition which have stood firm till date can be broadly

categorized as below

a) Business process outsourcing

It involves the full transfer of responsibility for routine organizational

processes such as transaction processing, policy servicing, claims management, HR,

finance, and compliance to the outsourcing company. The outsourcing provider then

administers these processes on their own system to agreed service standards and at a

guaranteed cost. Some of the BPO contracts call for performance based payouts,

tying vendor payments to business performance or overall cost savings.

b) Business process Off-shoring

It is the transfer of business tasks (medical transcription) or business processes

(call centers) with the primary focus being cost reduction. The interaction is

conducted over telecom networks and the Internet. Offshoring typically includes tasks

like transaction or accounts processing, credit card processing, call centers, translation

and transcription. Most of this work can be sent without the need for in-person

interaction.
 82

c) Business application outsourcing

This is seen where company A (vendor) rents application to company B (user).

Increasingly corporate are renting applications like CRM, ERP, e-business, system

maintenance and troubleshooting, messaging and collaboration etc. The value

proposed in this model is to relieve the corporate from the day-to-day management

activity and lower the total cost of ownership. In this, the outsourcer provides critical

enterprise application, which often forms the backbone of the client’s operational

performance and consequently determines their performance. The outsourcer hosts the

software solutions ensuring a preset level of performance and reliability, which is

monitored by a pre-defined and agreed upon contract like the SLA (Service level

agreement). This is also termed as ASP (Application service provider).

d) Multi sourcing

It is the management and distribution of different business processes among

multiple BPO vendors. For Ex: logistics is outsourced to one vendor, IT development

and maintenance are given to another vendor, HR processes are outsourced to best

vendor. Risk mitigation is the prime drive behind multi outsourcing.

e) Shared service (In-sourcing)

It is a form of internal outsourcing enables organization to achieve economies

of scale by creating a separate internal entity within the company to perform specific

services such as payroll, accounts payable, travel and expense processing. A typical

shared services initiative take advantage of enterprise application and other

technological developments, enabling the company to achieve further improvements

to quality in processes such as finance, accounting, procurement, IT and HR.

 83

Then, location wise delivery models are :

On-shoring - outsourcing to another company within the same country

Near-shoring - outsourcing to a country nearby

Offshoring - outsourcing to another country which does not qualify as near

shore.

Considering these basic delivery models, three main types of operational

models can be identified.

• Captive processing centers

• Third party providers

• Joint ventures (build, operate and transfer)

Captive centers undertake business processing only for their own

multinational businesses. These can be formed as part of the shared services model

also. Some examples are HSBC(Hyderabad), American express (Delhi), British

airways (Mumbai), Citibank (Chennai) and Dell (Bangalore).

The third party providers supply other companies with outsourcing services.

Nipuna (a subsidiary of Satyam), Msource, 24/7, spectramind and Daksh which

resemble internet software service firms that complete IT system set-up projects for

various companies.

The JV model is often used in offshoring. In a JV, better known as build,

operate and transfer model, two entities own the operation. For Ex: In December

1998, Satyam computers entered into a JV with an affiliate of GE industrial systems

for providing engineering design services, software development and system

maintenance services.
 84

f) Business transformation outsourcing

If BPO or KPO could not help transform businesses of FORTUNE 500

companies, BTO is planning to deliver exactly that. BTO involves the transfer of the

responsibility for all back office functions as well as a comprehensive business

change management process to an external vendor, and is a natural extension of the

tactical BPO model. The objective is to maximize the long term benefits of the BPO

operations, resulting in a comprehensive tool for change and not a tactical issue which

has a simple logic: big gains in performance only come about through business

transformation.

Vendors that started with call centers have tried hard to change that business

to either a BPO or a niche KPO. They are now planning to enter the BTO sector. The

entire industry is making this shift to a BTO model now, as clients are asking for

more value additions and also they want to know what else their outsourcing vendor

can do for them. Be it EBM Daksh, Wipro BPO or Satyam Nipuna, all have adopted

the latest mantra, which is embedded in transformation of client business. IBM and

several others call it as BTO whereas HP calls it as integrated service offering -

providing both IT and BPO services to clients.

Indian BPO market

Other than MNC-BPO units there are a host of Indian players operating in the

BPO market. These include venture capital funded BPO entities, Indian specialists,

Indian IT industry subsidiaries, Indian non-IT industry subsidiaries and few from

Indian companies in the financial sector. An important group of Indian players in the

BPO market includes subsidiaries of Indian IT majors. Such majors include

companies like Infosys, TCS, Wipro and Satyam. While, some of these companies
 85

like Infosys and Satyam have established dedicated BPO subsidiaries, others like TCS

have entered the BPO market through joint ventures. Wipro and HCL have entered

the business through acquisitions. The segment of Indian non-IT industry subsidiaries

includes entities established by large Indian business conglomerates. This segment is

the latest in the Indian BPO market (for example, ICICI Onesource, Jindal Transworld

and so on).

Type of services offered by Indian BPOs

Table 3.1 gives details relating to types of services offered by Indian BPOs.

Table 3.1
Types of services offered by Indian BPOs

SI.
Services Service Example
No.
1 Customer Support Services Customers calling to check on their order
status, to check for information on products and
services, account status & customers calling to
check their reservation status, etc.
2 Technical Support Services Customers calling to resolve a problem with
their home PC, to understand how to dial up to
their ISP, & for problems with their software or
hardware.
3 Telemarketing Services Outbound calling to retail households to sell
leisure holidays, to sell credit or debit cards etc.
4 Data Entry Services Data entry of e-books, electronic books,
receipts, catalog, business card, paper books
and entry of transaction data like
sales/purchase/payroll.
5 Employee IT Help-desk System problem resolutions related to desktop,
Services notebooks, OS, connectivity etc., office
productivity tools support including browsers
and mail, new service requests, IT operational
issues, product usage queries, routing specific
requests to designated contacts and remote
diagnostics etc.
6 Insurance Processing New Business / Promotion and Policy
Maintenance / Management
 86

SI.
Services Service Example
No.
7 Data Processing Services Copy, Paste, Editing, Sorting, Indexing Data
into required format etc
8 Data Conversion Services (1) Conversion of data across various databases
on different platforms (2) Data Conversion via
Input / Output for various media (3) Data
Conversion for databases, word processors,
spreadsheets, and many other standard and
custom-made software packages as per
requirement. (4) Conversion from Page maker
to PDF format.
9 Scanning Services High speed Image-Scanning and Data capture
services (2) High speed large volume scanning
(3) OCR Data From Scanned page / image
(4) Scan & OCR paper Book in to CD.
(5) ADOBE PDF Conversion Services.
(6) Conversion from paper or e-file to various
formats.
10 Book Keeping and (1) General Ledger (2) Accounts Receivables
Accounting Services and Accounts Payable (3) Financial Statements
(4) Bank Reconciliation (5) Assets / Equipment
Ledgers etc
11 Form Processing Services (1) Insurance claim form (2) Medical Form /
Medical billing (3) Online Form Processing
(4) Payrol Processing etc.
12 Internet / Online / Web (1) Internet Search, Product Research, Market
Research Research, Survey, Analysis. (2) Web and
Mailing list research etc.
Source:Bpoindia.org.

Performance of the Indian BPO industry

Table 3.2 gives a brief account of the performance of the Indian BPO industry

Table 3.2
Indian software and services exports
(US $ Billions)
Year IT Products and Total Export
ITES-BPO
Services Revenues
1999-00 - 0.6 0.6
2000-01 - 0.9 0.9
2001-02 - 1.5 1.5
2002-03 7.1(74.0) 2.5 (26.0) 9.6(100)
2003-04 8.9(71.2) 3.6 (28.8) 12.5(100)
2004-05 (E) 11.2(68.7) 5.1(31.3) 16.3(100)
Note: 1. Figures in brackets denotes percentage share.
2. means data not available
Source:Nasscom
 87

The ITES-BPO industry 'lias witnessed phenomenal growth since 1999. The

1TES-BPO exports of the Indian BPO market was $600 million in 1999-00, which

surged to $1.5 billion in 2001-02. Furthermore, it increased by 42 per cent from $2.5

billion in 2002-03 to $3.6 billion in 2003-04. The ITES/BPO segment contributed 29

per cent of the total IT software and services export from India in 2003-04. Revenue

from the export of software and from services sold to companies from outside India

(what’s known as offshore outsourcing, from the U.S. perspective), reached $17.2

billion during fiscal 2004-2005, according to the group, which is also known as

Nasscom. The jump represents growth of 34.5 percent over the previous year’s

revenue of $12.8 billion. Of the $17.2 billion, $5.2 billion was revenue from call

centers and business process outsourcing services, it said. The remaining $12 billion

was generated by software and other services. Table 3.3 gives information relating to

employment provided by Indian BPO.

Employment in Indian BPO Industry

Table 3.3 gives the employment in Indian BPO industry

Table 3.3
Employment in Indian BPO Industry in 2002-03

Service Area Employment

Customer care 65,000

Finance 24,000
HR 2,100
Payment service 11,000
Administration 25,000
Content devel pment 44,000
Total 1,71,100
Source: Nasscom

In 2000-01 there were around 70,000 people employed in the ITES/BPO

business. In 2002-03 the total number of people employed increased to 1,71,100 (0.17
 88

million) of which 65,000 (38.0 per cent) were employed in customer interaction

services. Finance and payment services accounted for 20.5 per cent whereas HR and

administration accounted for 15.8 per cent.

In the year 2001-02, around 20 per cent of the software professionals were

engaged in ITES-BPO sector that increased to around 30 per cent in 2003-04. As per

Nasscom, 2007-08 expected people to work in ITES is around 5,45,000.

Sector wise analysis of BPO/ITES

Table 3.4 gives information relating to sector-wise analysis of BPO/ITES in

India:

Table 3.4
Sector-wise Analysis of BPO/ITES in India

SI.
Industry Contribution (%)
No.
1. BFSI 35
2. Telecom 12
3. Retail 4
4. Telecom service 3
provider
5. Health care 3
6. HR 3
7. Hospitality 2
8. Utilities 2
9. Transportation 1
10. Government 1
11. Others 22
Source: Nasscom.org.

It can be seen from table 3.4 that BFI sector contributes largest extent of BPO

followed by telecom sector

Cost advantage offered by Indian BPO

Table 3.5 gives information relating to cost advantage offered by Indian BPOs
 89

Table 3.5
Cost advantage Offered by Indian BPOs

Cost Savings EBIDTA increase

Particulars
(in %) (Multiplying factor)

Insurance 10-15 3.5

Banking & finance 8-12 1.5
Pharmaceuticals 5-6.5 1.3
Telecom 5-6.5 1.1
Automotive 5-6.5 1.1
Airlines 5-6.5 1.2
Source: Mckinsey Analysis

As per Mckinsey analysis, BFI sectors is able to save cost in the range of 8 -

15% if offshored to India. The total cost saving on account of BPO is coming in the

range of 5% to 15% across the different sectors

Relative advantage of Outsourcing to India.

Table 3.6 shows the relative advantages of outsourcing to India.

Table 3.6
Relative Advantage of Outsourcing to India

Advantage In %

Cost reduction 100

Improved quality of service 83
Productivity gains 76
Others 12
Source: Industry sources, Cygnus research, Oct 2007

Cygnus research reveals that by outsourcing work to India, companies are at

the benefit of cost reduction, improved quality of service and productivity gains. The

survey found that companies agree for 100% cost reduction, 83% of the companies

believed that there will be improved quality of service and 76% of the companies said

that they have productivity gains by outsourcing work to India. Around 12 % of

 90

companies outsource work to India for other reasons. From this, it clear that

advantages of outsourcing work to India are more.

Regulations

Recognizing the growing importance of the IT- enabled outsourcing sector,

the Government of India has introduced various policy concessions and initiatives to

accelerate the growth of the market.

• Foreign Direct Investment (FDI) for 100 per cent equity has been permitted in

BPO companies.

• Duty-free imports of capital goods are permitted (under the Export Promotion of

Capital Goods scheme) for BPO companies.

• The Government has promoted several Software Technology Parks (STPs) which

provide ready-to-plug IT and telecom infrastructure. STPs also allow single­

window clearance for all regulatory compliance issues. Currently, STPs have

been established in 20 locations across India covering most of the major

towns/cities.

• BPOs for insurance, credit cards, pension funds services are out of the tax
bracket.

• Abolition of license fees for entry into the industry.

• Telecom costs constitute almost 25-35 per cent of the operating costs of a call

centre. The government is asking various steps to bring the telecom

infrastructure of India to global standards.

• Various Indian states have also introduced regulatory and infrastructure-related

initiatives to encourage ITES investments within their territories.

 91

• Incentives such as income tax holiday until 2010 have been provided for the

export of IT enabled services.

Policy initiatives by Government

The Government of India recognizes ITES-BPO as a major thrust area and

provides incentives to industry players. Some of the key incentives are as follows:

• Sharing of bandwidth for disaster recovery and mission critical

applications between multiple entities.

• Call centre approval is not required to be customer-based but specific to a

place of presence (PoP), or by installed capacity at the place of

termination. This not only assists in reducing the lead-time for

implementation of programmes for new customers but also adds to the

savings in costs and time that can be channelised for more productive

usage.

• Approved Internet and IPLC connectivity on the same LAN.

• Allowed connectivity of a LAN in an international call centre to a

domestic ISP. This enables a call centre operator to choose his service

provider. Competition is expected to drive down prices while offering a

higher service-reliability value proposition.

• The Government of India has allowed total income tax exemption on

export of IT enabled outsourcing services (Sections 10A/10B of the

Income Tax Act). These cover a wide range of services such as customer

interaction services, BPO/Back office operations, medical transcription,

legal databases, digital content development, engineering and design

 92

services, support centres, payroll/HR services, web-site services, data

digitization /GIS and online education.

State-Government initiatives

The state governments also have taken several factors into consideration when

designing a policy for ITES sector. These include factors like getting enablers

(decision making bodies, policies, institutions, IT architecture) in place, defining

thrust areas, catalyzing the creation of infrastructure, leveraging private sector

initiatives, accelerating the development of a knowledge hub and providing the right

social environment.

Indian state Governments have taken the following steps to boost the growth

of the ITES/BPO industry within their domains. These include the following:

• A majority of the states have either promulgated a government order or a

notification permitting all establishments in the respective jurisdictions engaged in

IT-enabled services (including call centers) to: work on national holidays; allow

women to work in night shifts; and offices to function 24 hours a day, all through

the year (i.e. 24x7x365).

• State governments have announced IT policies that seek to create (through

focused Human Resources Development (HRD) programs), a trained pool of

manpower with the skills and aptitudes appropriate for the ITES industry

requirements. Bridge programs for engineering graduates, communicative

English, soft skills, accent neutralization, ITES sub-domain level training, etc.

have been given focused attention by the state governments. These programs have
 93

been woven into the mainstream collegiate education system, including

continuing.

• IT Industry employment Promotion Scheme has been introduced, that is a direct,

simple-to-participate-in incentive spelling a win-win situation for both the

Government and the industry.

Critical Issues

Presently Indian BPO industry is shifting both ways - a vertical movement

(offering more critical services in the same domain) and a horizontal movement

(expanding service portfolio by moving into sophisticated areas like analytics and

complex transactions); these will continue to be so. Even as the Indian BPO industry

is poised for growth, a major inhibiting factor is the high attrition rate in the Indian

BPO companies. In addition to high attrition rate, Indian BPO companies have to

overcome the possible challenges of the potential BPO backlash, and more

importantly, competition from other countries.

As per Gartner, an international research firm, India will lose its current

market share in the BPO business from 80 per cent to 55 per cent by 2007 owing to

lack of clear strategy and competition from countries like China. Various countries

like Ghana, Fiji, South Africa, Mauritius, Malaysia, Philippines, Australia, New

Zealand and China have now understood BPO’s potential to create new jobs and have

put together integrated strategies to develop BPO business. In addition, India might

face competition from small, highly developed economies like Singapore, New

Zealand and Ireland, which offer excellent infrastructure, education systems, and

business-friendly low-risk environments that make them attractive off- shoring

locations. India BPOs may possibly lose business to some of these countries, as its
 94

long-term plan for improving infrastructure and increasing the supply of quality

employees, leaves much to be desired. Additionally, poor infrastructure adds to the

cost of doing business in India.

Furthermore, in just four to five years of BPO business in India , there is

already a huge staff attrition problem. Therefore, at present, high attrition rate is the

major concerned issue in the Indian BPO industry. Indian BPO companies are

offering hefty salaries and other benefits and privileges to its employees, like

subsidized food and transportation, company leased accommodation, recreation and

cafeteria facilities, performance-based incentives, flexi-time and employee referral

scheme. In spite of all these benefits, the attrition rate in BPO industry is vastly high.

Some of the reasons attributable to high attrition rates are:

1) Lack of opportunity for growth.

2) No personal life (owing to working in night-shifts).

3) Desire for pursuing higher education and

4) Involves intense physical strains.

Opportunities & Challenges for India

Near-shoring as a business strategy

India can collaborate with other countries to leverage local knowledge of the

business environment and language skills while providing its domain knowledge and

technological expertise for successful outsourcing. For example, TCS has a Latin

American arm based in Mumbai, India which serves an insurance client in Chile with

a center in Uruguay as a near-shore location. Outsource2india has collaboration with a

company in NE India that leverages the unique talents of the people of this region.
 95

Opportunity areas

Today more industries are where IT was in the 1990’s - knowledge based.

Research and Analysis Outsourcing may soon be the biggest revenue grosser in India

as BPO companies move up the value chain in their service offerings. This includes:

1. Research and Development

Product Innovation - Companies are going beyond basic research to

invest in innovation and new product development. Companies that have invested in

R&D in India are Cisco Systems, Motorola, Hewlett-Packard, Google General Motors

Corp. and Boeing Co among others.

Co-development- In pharmaceuticals, India has the opportunity of co­

development and ownership of new patented drugs through drug research, clinical

trials and manufacturing. Indian pharma major Ranbaxy has an agreement with MNC

GlaxoSmithKline to commercialize compounds they develop together.

2. Legal Outsourcing

India’s large pool of qualified English-speaking lawyers with experience in the

British legal system can offer paralegal support, legal support and patent services. A

few Indian companies affiliated with American law firms are now able capture a tiny

piece of the American market. They are now doing legal research at very high rates by

Indian standards but yet 50% below typical American rates.

3. Engineering Outsourcing

India can provide high-quality engineering services in the fields of:

a. Mechanical & Electronic engineering - analysis and design,

embedded software.
 96

b. Plant Design, Process Engineering.

c. Plant Automation Services.

d. Enterprise Asset Management and OEM solutions.

4. Remote Infrastructure Management Services

India can offer management services for IT infrastructure, applications

operations, IT security and maintenance. This sector presents great potential through

large-value multi-year contracts.

5. Accounting Services

We are in the initial stage where payroll processing services and some

accounting is being done for large American companies. This trend will continue and

soon a full range of accounting and tax services will be provided by Indian

companies.

6. Outsourcing opportunities

Opportunities for India exist in other fields like Financial Research, content

development, medical writing: animation, film, publishing, web services; Human

Resource outsourcing: recruitment, training, Education, Nanotechnology and many

others.

Challenges for India

1. Rising competition

a. In the next ten years, China will replace India in its number 1 position in

the global ITES-BPO industry.

 97

b. Rising costs and low efficiency in many cities like Bangalore will make

software outsourcing less attractive in future. The giants may show a drop

in earnings.

c. India’s terrible Infrastructure will continue to be a drag on the potential of

India giving other countries the competitive advantage.

d. Other competing countries providing low-cost outsourcing options will

exert a downward push on costs - East Europe, Latin America, South

Africa.

2. Infrastructure

a. India ’s ability to develop infrastructure is far outpaced by neighboring China.

b. Metro cities are getting saturated and costs are rising — Tier II towns need to

develop infrastructure but India’s track record does not bode well for fast

development.

3. Human resources and training

a. The demand-supply gap in India for knowledge workers is being felt now in

Bangalore but may peak India wide in 2008-2009.

b. The education system needs transformation to produce people with skill sets

that match industry needs.

c. The transition to knowledge processing will be a much bigger challenge for

the Indian company and employee than it was for BPO services. The typical

college graduate many not have background or flexibility to understand global

issues required by this type of service.

 98

References

1. Antonucci, Y.L., Lordi, F.C. and Tucker, J.J. (1998), The pros and cons of IT
outsourcing, Journal of Accountancy, Vol. 185 No. 6, pp. 26-31.

2. Barthelemy, J. (2001), The hidden costs of IT outsourcing, Sloan Management

Review, Vol. 42 No. 3, pp. 60-9.

3. Behara, R.S., Funderson, D.E. and Capozzoli, E.A. (1995), Trends in

information systems outsourcing, International Journal of Purchasing and
Materials Management, Vol. 31 No. 2, pp. 45-51.

4. Benko, C. (1993), “Outsourcing evaluation: a profitable process",

Information Systems Management, Vol. 10 No. 2, pp. 45-50.

5. Benn, I., Pearcy, J. (2002), Strategic Outsourcing: Exploiting the Skills of

Third Parties, The Management Consultancies Association Series, Hodder &
Stoughton.

6. Benn, I., Pearcy, J. (2002), Strategic Outsourcing: Exploiting the Skills of

Third Parties, The Management Consultancies Association Series, Hodder &
Stoughton.

7. Bettis, R., Bradley, S.P. and Hamel, G. (1992), Outsourcing and industrial
decline, Academy of Management Executive, Vol. 6 No. 1, pp. 7-22.

8. Bettis, R.A., Bradley, S.P. and Hamel, G. (1992), Outsourcing and industrial
decline, Academy of Management Executive, Vol. 6 No. 1, pp. 7-21.

9. Biswajit Nag, Business Process Outsourcing: Impact And Implications,

Bulletin on Asia-Pacific Perspectives 2004/05, pp: 59.

10. Blumenstein, R. (1997), GM puts onus for some costs on suppliers, The Wall
Street Journal, May 16, p. A3.

11. Bragg, S. M. (1998), Outsourcing, a Guide to Selecting the Correct Business

Unit, Negotiating the contract and maintaining the control of the process,
John Wiley & Sons, New York.

12. By Rachael Stormonth (2006), Procurement BPO: An Introduction to the

Market, HRO Today: September/October.

13. Chalos, P. and Sung, J. (1998), Outsourcing decision and managerial

incentives, Decision Science, Vol. 29 No. 4, Fall, pp. 901-19.

14. Child, J. (1987), Information technology, organisation and the response to

strategic challenges, California Management Review, pp. 35-50.
 99

15. Christian, N. (1997), Chrysler suppliers’ cost saving ideas likely add $325
million to its 1997 net, The Wall Street Journal, June 5, p. A6.

16. Current Economic Statistics and Review, for the Week Ended May 07, 2005
(19th Weekly Report of 2005)

17. Currie, W. and Willcocks, L.P. (1997), New Strategies in IT Outsourcing:

Major Trends and Global Best Practice ± Report, Business Intelligence Ltd,
London, December.

18. Dan Blacharski (2006), Basics of BPO, Sourcing mag.com, <http://www.

sourcingmag. com/ content/ c060405a.asp> CTQ Media LLC, July 17.

19. Davey, H. and Allgood, B. (2002), Offshore development, building

relationships across international boundaries: a case study, Information
Strategy: The Executive’s Journal, Spring, pp. 13-16.

20. DiRomualdo, A. and Gurbaxani, V. (1998), Strategic intent for IT

outsourcing, Sloan Management Review, Vol. 39 No. 4, Summer, pp.67-80.

21. Domberger, S. (1998), The Contracting Organization: A Strategic Guide to

Outsourcing, Oxford University Press, Oxford.

22. Domberger, S. (1998), The Contracting Organization: A Strategic Guide to

Outsourcing, Oxford University Press, Oxford.

23. Dun & Bradstreet (2000), The Outsourcing Index, The Outsourcing Institute,
December, New York, NY.

24. Elfing, T. and Baven, G. (1994), Outsourcing technical services: stages of

development, Long Range Planning, Vol. 27 No. 5, pp. 42-51.

25. Finlay, P.N. and King, R.M. (1999), IT outsourcing: a research framework,
International Journal of Technology Management, Vol. 17 No. 1-2, pp. 109-28.

26. Friedman T.L (1999), Lexus and olive tree: Understanding Globalization,
Farrar Strauss and Giroux, New York.

27. Gadde, L.E. and Hakansson, H. (1990), The changing role of purchasing,
research developments in international industrial marketing and purchasing,
Proceedings of 6th IMP Conference, Milan.

28. Gay, C. L., Essinger, J. (2000), Inside Outsourcing: The Insiders Guide to
Managing Strategic Sourcing, Nicho las Brealey, London.
 100

29. Grant, R.M. (1995), Contemporary Strategy Analysis, Blackwell Business,

Cambridge.

30. Harsh Bhargav and Deepak Kumar(2006), BPO: A Business Necessity, ICFAI
University Press, first edition, pp. 6.

31. Hart, O. (1995), Firms, Contracts and Financial Structure, Clarendon Press,
Oxford.

32. Hirscheim, R. and Lacity, M. (2000), The myths and realities of information
technology outsourcing, Communications of the ACM, Vol.43 No.2,
pp.99-107.

33. http://epubl.ltu.se/1404-5508/2005/082/LTU-SHU-EX-05082-SE.pdf

34. http://www.ciol.com/content/news/2005/105021005.asp

35. http://www.csend.org/pdf/DP-DSP.pdf

36. Johnson, M. (1997), Outsourcing: In Brief, Butterworth-Heinemann.

37. Kakabadse, A. and Kakabadse, N. (1999), Essence of Leadership,

International Thompson, London.

38. Keith Porter (2003), Globalization Good or Bad?, Global Envision

Publication, http://www.globalenvision.Org/librarv/8/545/. Oct. 10.

39. Kim, C.W. and Mauborgne, R. (1997), Value innovation: the strategic logic of
high growth, Harvard Business Review, Vol. 75 No. 1, January-February,
pp. 40-48.

40. Kumpe, E. and Bolwjin, P.T. (1988), Manufacturing: the case for vertical
integration, Harvard Business Review, March/April, pp. 75-81.

41. Lacity, M.C. and Hirschheim, R. (1993), The information system outsourcing
bandwagon, Sloan Management Review, Vol. 34, No. 3, Fall, pp. 73-86.

42. Lacity, M.C. and Hirschheim, R. (1995), Beyond the Information Systems
Outsourcing Bandwagon, Wiley, Chichester.

43. Lacity, M.C., Willcocks, L.P. and Feeny, D.F. (1995), IT outsourcing
maximises flexibility and control, Harvard Business Review, Vol. 73 No. 3,
May-June, pp. 84-93.

44. Lei, D. and Hitt, M. (1995), Strategic restructuring and outsourcing: the effect
of mergers and acquisitions and LB Os on building firm skills and capabilities,
Journal of Management, Vol. 21 No. 5, pp. 835-59.

45. Lewis, T. and Sappington, D. (1991), Technological change and the

boundaries of the firm, American Economic Review, September, pp. 887-900.
 101

46. Loh, L. and Venkatraman, N. (1992), Determinants of JT outsourcing: a cross-

sectional analysis, Journal of Management Information Systems, Vol. 9 No. 1,
pp. 7-24.

47. Lonsdale, C. and Cox, A. (2000), The historical development of outsourcing:

the latest fad?, Industrial Management and Data Systems, Vol. 100 No. 9,
pp. 444-50.

48. Malone, T., Yates, J. and Benjamin, R. (1987), Electronic markets and
electronic hierarchies: effects of information technology on market structure
and corporate strategies, Communications of the ACM, Vol. 30 No. 6,
pp. 484-97.

49. McFarlan, F.W. and Nolan, R.L. (1995), How to manage an IT outsourcing
alliance, Sloan Management Review, Vol. 36 No. 2, pp. 9-22.

50. Murray, J.Y. and Kotabe, M. (1999), Sourcing strategies of US service

companies: a modified transaction-cost analysis, Strategic Management
Journal, Vol. 20 No.9, pp.791-809.

51. Perry, C. (1997), Outsourcing and union power, Journal of Labour Research,
Vol. XVIII No. 4, pp. 521-34.

52. Peters, T. (1994), The Tom Peters Seminar, Crazy Times Call For Crazy
Organizations, Vintage Books, New York, USA.

53. Porter, M.E. (1988), Managing value: from competitive advantage to

corporate strategy, McKisey Quarterly, pp. 35-66.

54. Prahalad, C. and Hamel, G. (1990), The core competence of the corporation,
Harvard Business Review, Vol. 68 No. 3, May-June, pp.79-91.

55. PriceWaterhouseCoopers (1999), Global Top Decision Makers, Study on

Business Process Outsourcing, PriceWaterhouseCoopers, Yankelovich
Partners, Goldstain Consulting Group, New York, NY.

56. Quinn, J.B. (1999), Strategic outsourcing: leveraging knowledge capabilities,

Sloan Management Review, Vol. 40 No. 4, Summer, pp. 9-22.

57. Quinn, J.B. and Hilmer, F.G. (1994), Strategic outsourcing, Sloan
Management Review, Vol. 35 No. 4, Summer, pp. 43-55.

58. Robinson, M.. Kalakota, R. (2004), Offshore Outsourcing, (2nd ed.), Mivar
Press Georgia

59. Shapiro, E.C. (1995), Fad Surfing in the Boardroom, Harper Collins, Sydney.
 102

60. Sharpe, M. (1997), “Outsourcing, organizational competitiveness, and work",

Journal of Labour Research, Vol. XVIII No. 4, pp. 535-49.

61. Sturm, R., Morris, W. and Jander, M. (2000), Foundations of Service Level
Management, SAMS, Indianapolis.

62. Thackray, J. (1986), America's vertical cutback, Management Today, June the
Contract, Maintaining the Control Process, John Wiley & Sons Ltd., NY Inc.

63. The Future of Outsourcing - Opportunities and Challenges for India,

Outsource2india

64. Useem, M. and Harder, J. (2000), Leading laterally in company outsourcing,

Sloan Management Review, Vol. 41 No. 2, pp. 25-36.

65. Van Laarhoven, P., Berglund, M., Peters, M., Quelle, G. and Ross, H. (1999),
Third-party logistics in Europe ± five years later, International Journal of
Physical Distribution and Logistic Management ± European Supplement.

66. Venkatraman, N. (1997), Beyond outsourcing: managing IT resources as a

value centre, Sloan Management Review, Vol. 38 No. 3, Spring, pp. 51-64.

67. Willcocks, L. and Fitzgerald, G. (1993), Market as opportunity? Case studies

in outsourcing information technology and services, Journal of Strategic
Information Systems, Vol. 2 No. 3, pp. 223-42.

68. Williamson, O.E. (1985), The Economic Institutions of Capitalism, Free Press,
New York, NY.

69. Williamson, O.E. (1988), The logic of economic organization, Journal of Law
Economics and Organization, Vol. 4 No. 1, pp. 65-93.

70. Willman, J. (1999), Unilever to focus on core ‘power brands’, Financial

Times, 22 September, p. 25.