W13172

EAST SOLUTIONS: TRANSFORMING A BPO PROVIDER IN INDIA

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Copyright © 2013, Richard Ivey School of Business Foundation Version: 2013-04-26

East Solutions was a successful business process outsourcing (BPO) provider based in Bangalore, India.
Initially, East Solutions — and other companies like it — simply replicated work produced by North
American and European companies. These companies outsourced non-core work to India where it could
be done much more affordably. At first the Indian industry had trouble convincing potential clients that
quality and accountability would be maintained in these operations; privacy and confidentiality were
further concerns. However, these concerns were slowly put to rest as the industry grew and gained
legitimacy by winning contracts from major companies. From 2005 to 2010, salaries for experienced
information technology (IT) professionals increased by 12 to 14 per cent per year. Although salaries for
Indian IT professionals were still about half of those of their colleagues in the United States, the board of
directors at East Solutions recognized a worrying trend. If salaries in India continued to grow at this rapid
rate, they would soon erode the cost advantage of sending work to India — thereby potentially
threatening the entire Indian BPO industry. The board decided that decisive action was needed. East
Solutions would reposition itself by leveraging technical, industrial and processing expertise to form a
partnership with clients based on value in addition to cost savings. The board knew this move would
require a fundamental change in the firm’s strategy and culture. Furthermore, the board recognized the
need for a very special chief executive officer (CEO) to implement this plan. At the beginning of 2009,
the board announced that Suresh Patel would be the new CEO of East Solutions. Much progress was
made over the subsequent two years. The only exception was in regards to the newly introduced profit-
sharing scheme. Why had it not succeeded?

BACKGROUND

Patel joined East Solutions from a major software and hardware company where his last assignment was
that of Vice-president, Operations, Asia Pacific leading selective sourcing and small and medium
outsourcing deals. Born in India, Patel was a Chartered Accountant from the Institute of Chartered
Accountants of India. He began his career with in 1987 with an international assignment to Bangkok
where he focused on the manufacturing industry. Over the next two years, Patel began to focus his efforts
on the information technology industry. Recognizing his initiative and leadership, he was promoted to a
managing role in the Manufacturing and Telecom team in 1990. His success as a manager continued in
1997, when

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he was named the President of the Indian subsidiary. There, he worked at improving the total customer
experience and strengthened the company’s position in India. He was then promoted to the position of
Asia-Pacific Director of Marketing for the Customer Satisfaction Centre in 2003. Over the past two
decades, Patel gained experience working across South East Asia (Singapore, Malaysia, Thailand, the
Philippines, Indonesia, Vietnam and Asian emerging countries) and India. He was selected for the CEO
position East Solutions because he was a global visionary leader with a proven track record for managing
change.

Patel was surprised at how industrious and ambitious the Indian information technology (IT) and BPO
industry had become. He chuckled and instantly identified with the good-natured pride behind a popular
joke that circulated in the high-rise offices of Bangalore:

When the Americans first landed on the moon and Neil Armstrong made his famous first step he
was surprised to find two merchants from India waiting for him. One was selling hot tea and the
other was selling roasted peanuts. They explained that they took a balloon up to the moon a week
earlier. When the Russians finally made it to the moon several years later they were greeted by a
single Indian merchant who was selling both tea and peanuts. The Russians inquired about the
second vendor and were told: “Oh, he has gone to Mars to wait for the Americans.”

Ingenuity, whether from street vendors, entrepreneurs or business professionals, had long been
championed as a driving force behind the growing Indian economy, which was second only to China. The
decades preceding 2006 were filled with pessimism and worry over a slow gross domestic product (GDP)
growth of 3 to 3.5 per cent. However, by 2006, India was described as a global growth leader. In the
middle of the deepest global recession in decades, when other national economies were contracting,
growth was an impressive 6.7 per cent in fiscal year 2007/08 and 5.7 per cent in 2008/09 with forecasts
for 2009/10 and 2010/11 in the eight per cent range. India’s rapid growth was largely possible because of
the country’s growing domestic market.

The societies of developed regions, such as Western Europe, and some emerging nations, such as China,
were aging. The cost of looking after retirees was gradually increasing, falling on the shoulders of fewer
and fewer working-aged citizens. Contrastingly, India had a very young and desirable demographic. By
2020, the average age in India was projected to be 29, compared to 45 in Western Europe and 37 in
China. This meant that in India there would be more working-aged citizens than retired citizens and the
already low dependency ratio would fall even lower. By 2035, almost 70 per cent of the population of
India would be of working age, compared to 51 per cent and 60 per cent in Western Europe and China,
respectively.

India was quickly becoming wealthier and a growing middle class was evident, although the exact size of
the emerging middle class was debated: it was often pegged at 200 million; however, a widely cited
McKinsey1 report suggested that India’s middle-class population was only 50 million strong. The same
conservative report projected that by 2025, the middle class would expand to 583 million, Indian incomes
would nearly triple and almost 300 million people would emerge from poverty, making India the fifth-
largest consumer market in the world. The authors of the report explained: “We believe this optimism is
justified because of the substantial scope for continued productivity increases in Indian business, the
growth and openness and competitiveness of the Indian economy, and favourable demographic trends.”
There was also the intangible value of younger citizens — citizens with fresh ideas, an acceptance and
intuitive understanding of technology and a greater willingness to take risks.
1
Jonathan Ablett et al., McKinsey Global Institute, “The Bird of Gold: The Rise of India’s Consumer Market,” May 2007,
www.mckinsey.com/mgi/reports/pdfs/india_consumer_market/MGI_india_consumer_full_report.pdf, accessed August 11,
2011.

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Nowhere else was optimism about India’s economy more evident than in the country’s IT and BPO
industry. Though surprisingly small in terms of employment numbers (employing only a few million
people out of a population of more than 1.1 billion), this sector had been a major factor in the country’s
unprecedented growth rates. By 2010, the industry accounted for four per cent of India’s GDP, four times
as much as it had 10 years earlier. Many people were familiar with the global reach of the sector’s call
centres, but as the use of technology and global business processing became more entrenched in
multinational companies, the importance and sophistication of Indian BPO and IT operations was
expected to increase.

A 2009 report by McKinsey and India’s National Association of Software and Service Companies
(NASSCOM)2 enthusiastically described the sector’s “unprecedented impact on the Indian economy” and
the fact that “the industry exports offset close to 65 per cent of India’s cumulative net oil imports,
strengthening India’s foreign reserves.” The report also noted that the industry created jobs largely for
younger people, providing them and their companies with global exposure as well as a great deal of
training and development. In the Indian context, the sector initiated the idea of employee ownership and
profit sharing and had been central to movements encouraging diversity in the workplace and corporate
social responsibility; it had also created many leadership opportunities for Indians.

East Solutions delivered applications services, infrastructure services and BPO services globally through
a combination of technological experience and domain and process expertise. The firm serviced clients in
many industries, including: financial services; manufacturing; communications; media and entertainment;
health care and life sciences; transportation and logistics; retail and consumer packaged goods; energy
and utilities; and governments around the world. Revenue was almost entirely earned outside of India
with 60, 30 and 10 per cent coming from the United States, Western Europe and other countries,
respectively.

In the beginning, East Solutions and other BPO start-ups modeled themselves after the offshore
manufacturing industry. If factories in China could produce goods at a fraction of the cost of an identical
North American made product then companies in India like East Solutions, aspired to provide
administrative support at a fraction of the cost of a North American office. At first large companies from
the West had concerns about privacy and confidentiality issues. Concerns over quality, accountability and
privacy were slowly put to rest as the industry grew and gained legitimacy by winning contracts from
major companies. Soon the use of Indian BPO became standard practice and a necessary step in
controlling costs and remaining competitive. The cost savings model worked well and revenue for East
Solutions grew. Growth was aggressively pursued and was largely driven by the demand for its services.
Between the period of 2000 and 2010, East Solutions expanded into 120 different countries and pursued
eight different areas of services in more than 100 industries, with 20,000 total employees, including 326
IT Managers in Bangalore.

The IT managers were usually the only point of contact with clients once a contract was assigned. The
manager assigned to a project ensured an appropriate process was devised for handling the work within
East Solutions and was responsible for delivering the conditions stipulated in the client contract. This
involved supervising the work of IT technicians and ensuring the process was strictly followed at all
levels of production. There was no scope for creative or customized service. For example, a life insurance
company based out of the United States might contract East Solutions to prepare a standard decision form
that the insurance underwriters use to determine policy fees. This form required information from
multiple sources, including an applicant survey, past claims and medical documents. The IT manager
for this

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2
McKinsey and Company and NASSCOM, “Perspective 2020: Transform Business, Transform India,” McKinsey Global
Institute, April 2009, www.mckinsey.com/locations/india/mckinseyonindia/pdf/NASSCOM_report_exec_summ.pdf, accessed
August 11, 2011.

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project would create a process that systematically collected the information from various databases and
input the relevant information into the appropriate fields of the decision form. The manager would then
ensure that the project’s technicians followed the process as developed.

By 2010, the BPO industry in Bangalore was estimated to employ 33,000 IT professionals, working
mostly in new high-rise complexes in the Whitefield Industrial Park area. Compared to some other
developing countries, India had an excellent system of post-secondary education, which produced roughly
2.5 million new IT graduates every year. Although these graduates were well trained academically, they
required at least three additional years of on-the-job experience before they began to provide marginal
returns. The growth of the industry placed a heavy demand on IT professionals with sufficient work
experience and competition for these workers was fierce. Turnover rates were very high at an industry
average of 30 per cent per year. IT professionals occasionally left one employer for another in order to
pursue greater opportunities to learn and perform more varied skills; however, more frequently,
employees were attracted to new positions with offers of higher salaries. From 2005 to 2010, salaries for
experienced IT professionals increased by 12 to 14 per cent per year (see Exhibit 1). Although salaries for
Indian IT professionals were still about half of the salary of their colleagues in the United States, the
leadership team at East Solutions had recognized a worrying trend. If salaries in India continued to grow
at such a fast rate, they would soon erode the cost advantage of sending work to India and potentially
threaten the entire Indian BPO industry.

With this concern about rapidly increasing salaries in mind, the board of directors at East Solutions hired
Patel as the company’s new CEO of Indian operations to implement a new strategy and fundamentally
change the business model before it was too late. The board and Patel estimated they had about five years
before the industry reached the point when growing Indian salaries would significantly erode the cost
advantage of sending business to India. With this deadline in mind, Patel prepared to reposition East
Solutions by altering its relationship with clients and changing the organization accordingly.

CHANGING THE ORGANIZATIONAL STRATEGY

Patel called his leadership team together and explained the plan to reposition East Solutions. The
company would reinvent itself to become a value-added partner to its clients in North America and
Europe. East Solutions would still provide traditional BPO services but it would also be proactive and
sensitive to the challenges facing its clients. The company would leverage its technological and process
expertise as well as its knowledge of the industry in order to advise clients on the best practices and
possible partnerships with others clients for achieving economies of scale. East Solutions would work
closely with each client to solve a problem; for example, if the client was a life insurance provider, East
Solutions would do additional research to identify market segments that were under-insured and suggest a
possible process to offer insurance products to this underserved segment.

Patel realized that this new approach involved not only a strategic adjustment in terms of East Solutions’
relationship with clients, but also a potentially difficult cultural change within the organization.
Specifically, the company’s IT professionals would need to become more sensitive to the needs of the
client and provide both customized and proactive support.

In order to be more responsive to clients, it was clear that East Solutions needed to become much more
focused in terms of the geographic regions it would service and the types of services it would provide.
East Solutions had clients in 120 countries and worked in eight different sectors. Patel and his team
settled on eight countries/regions based on a combination of market potential and East Solutions’ ability
to execute

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its service plan. They also halved the number of industries that East Solutions would service to four; these
areas offered the greatest opportunity to provide value in addition to cost savings. The change that Patel
implemented would help East Solutions provide more detailed and higher-value service to its clients,
albeit to a more limited set of clients. At first Patel met with resistance from members of his leadership
team. They objected to what amounted to severing relations with certain clients that had proved
profitable. Patel understood their concern; however, he was convinced that the industry was about five
years from a major shake-up and those companies that had not evolved from a pure cost advantage model
would not survive. Gradually, his team accepted his mode of thought and his plan.

EMPOWERING FRONT-LINE IT MANAGERS

After focusing East Solutions’ client base in terms of geography and sector/industry, Patel explained that
the company was too hierarchical and that those with the power to make decisions were too far removed
from the clients. The existing organizational structure may have been appropriate in the past, when
workflows and client demands were fairly stable and strictly governed by formal contracts and
agreements; however, the new strategy required a much more important role for front-line managers who
interacted with clients. Patel used an analogy to justify his strategy: previously, “a hiccup in the client
would be absorbed by the first few levels of the organization and not make it to those with the power to
make decisions and aid the customer. However, with a flatter organization a hiccup in the client would
send a tremor throughout the entire organization.” Patel detailed his plan to flatten the organization by
empowering front-line managers to make decisions.

For the company to prosper in the changing IT and BPO industry, Patel felt that when clients worked with
their contact at East Solutions they needed to feel as though they were working with a valuable member
of the team who was able to make decisions and access resources. Having to interrupt the problem-
solving process for a week at a time to wait for approval from a superior at East Solutions was not in
keeping with the new value added approach. For the IT managers, this required a fundamental change to
their job. Traditionally, these managers were rewarded for meeting quality and cost targets, which
involved a strict adherence to company processes and hierarchy. New ideas and innovations were mostly
discouraged and treated as a deviation from efficient company processes; in other words, the IT managers
were accustomed to doing what they were told and ensuring that their team followed the process.
However, this was all about to change.

To empower the front-line IT managers, the company needed to train these employees in different areas
that involved its clients’ strategies as well as East Solutions’ new overall strategy. Enabling managers to
leverage the industry, technology and process expertise of East Solutions required an understanding of the
core competencies of its clients. It was anticipated that much of the value that East Solutions would
provide would be a result of collaboration between various East Solutions managers working with
different clients. This would also require a shift in priorities, considerable in-house training and, most
importantly, a shift in company culture. How do you encourage managers to use the knowledge they are
offered in the new training and development regime? How do you encourage front-line IT Managers to
start thinking in terms of innovation and value added? Patel realized that it was one thing to offer training
and coach for collaboration and innovation but it was an entirely different thing to secure willing
participation. In fact, Patel knew that his plan for transforming East Solutions would not work unless he
secured the enthusiastic and passionate participation of the managers.

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In addition to offering a new and extensive training regime, Patel approached the task of motivating the
managers in two ways. Firstly, he increased the operating budgets of the managers and relaxed the
reporting constraints. He explained that:

Managers must have the right to make mistakes. You can never go to a manager and ask, “Why
did you commit $50,000 to that failed initiative?” Once you ask this question, you send the signal
that risk-taking is only acceptable if it has a positive outcome. Clearly, this is not a healthy
environment for collaboration and innovation. It also adds to the bureaucracy of the organization
because at every layer of the hierarchy justification for a decision is added, so that talented people
spend more and more of their time justifying past decisions rather than looking ahead.

Consequently, Patel increased operating budgets by 20 per cent. These extra funds did not require the
usual reporting process; rather, only a bare minimum process was required to discourage unethical
expensing (such as personal luxury goods). The spending of these funds would not be challenged from a
cost-benefit perspective. These additional funds were made available to managers to allow them to try out
new ideas — in essence, to give managers the “right to make mistakes.” Patel called these resources the
Creative Account. Six months after the launch of the new training regime and the Creative Account, Patel
saw that his plan was working. He noticed that managers were eagerly discussing new ideas and results of
‘test solutions’ with both East Solutions colleagues and visiting clients. The only problem was that the
funds for the operating budget initially came from the CEO’s own discretionary account and it was almost
depleted. Patel needed to find some alternative funds to continue this program. It was time for his final
step in empowering managers: this step involved ensuring that innovations translated into firm
performance. Patel devised a new compensation strategy that would align the goals of the individual
managers (earning income) with the goals of the organization (earning profits).

From discussions with his senior team and from some industry research, Patel knew that the
compensation of IT managers in Bangalore was characterized by steadily increasing fixed salaries. Merit
pay (variable pay), benefits and other perks, such as paid travel, paid time off or company vehicles were
rare. Although he did not sense any discontent from the managers in terms of their compensation, Patel
suspected that he could use compensation to achieve two goals: lower turnover by motivating managers
and encourage managers to form new habits, skills and relationships that would contribute to the
organization, even if it was not previously part of their job. This approach would become Patel’s pet-
project — something he would take personal interest in and use to attract new talent. He wanted to keep
the new compensation plan simple, as the IT managers were accustomed to the most basic compensation
strategy available: 100 per cent straight annual salary. East Solutions paid in the 85th percentile of large
IT employers in Bangalore and Patel felt this was sufficient for the time being.

Patel’s compensation plan involved dedicating 30 per cent of total compensation to a profit-sharing
scheme (variable pay); the remaining 70 per cent would remain a fixed annual salary. As a vote of
confidence for Patel’s repositioning efforts, the board of directors had approved a plan to set aside one per
cent of profits to go into a profit-sharing account that would be paid to managers. In order to stay
competitive with total compensation, Patel did not want to fall below the 85th percentile. He was
comfortable with occasionally having a bad year and falling slightly under this mark but wanted to be
slightly above the mark on average. Considering that East Solutions had a five-year average profit rate of
29 per cent — and that the entire industry similarly enjoyed 18 per cent profits for the same period — a
profit-sharing scheme making up 30 per cent of the total compensation could be very lucrative for the
managers. Accordingly, Patel adjusted the 70 per cent fixed portion to reflect 70 per cent of the previous
year’s salary (thus freeing up finances to fund the Creative Account). Even with an average profit-sharing
payout the managers would be further ahead, putting them in the 89th total compensation percentile for
the local industry. On exceptionally good

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years, the managers would share in the success of the firm and could expect to be the very best paid IT
managers in Bangalore.

Patel took pains to communicate the purpose and design of the new compensation plan to the managers.
He held workshops and information sessions to ensure the plan was fully understood both in terms of how
it worked and how it fit in with the new overall strategy and role of IT managers at East Solutions. Patel
carefully explained that this plan would reward the managers for their hard work and that they would now
share in the company earnings. However, right from the beginning Patel knew something was wrong. He
expected that the managers would be very excited, perhaps even grateful for the change, since in average
years they stood to make considerably more money (about four per cent more) than before. Patel also
expected managers to feel a greater sense of pride in the company as they shared in the company’s
success.

After two years as CEO and 18 months after launching the new compensation plan, Patel knew his pet-
project had failed. Every six months the human resources (HR) department conducted an employee
feedback survey and although the comments were generally positive, reflecting the overall satisfaction
and enthusiasm of the managers, they were almost unanimous in their discontent with the new
compensation plan. This was surprising considering the past 18 months were average and the profit-
sharing payout had indeed put employees in the 89th percentile (a four per cent increase). Confused and
disappointed, Patel decided to abandon the new compensation plan that included profit sharing and return
to the 100 per cent annual salary at the 85th percentile. After he announced his decision he was discreetly
informed that the managers were happy and relieved to go back to the old compensation plan.

Reflecting back over the past two years, Patel was very happy with the progress East Solutions had made
in repositioning itself as a provider of valuable strategic solutions rather than simply as a low-cost
outsourcing destination. He felt that the company had come a long way in securing its future. The only
thing Patel did not understand was why the profit-sharing scheme had failed; as far as he could tell, it
should have been a good fit with the other changes he implemented.

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EXHIBIT 1: IT AVERAGE ANNUAL SALARIES FOR INDIAN AND U.S. PROFESSIONALS

(IN $US)

Year Salaries in India Salaries in the Savings

United States differential %*
2005 $34,000 $115,000 70.4
2006 $38,420 $116,000 66.9
2007 $43,030 $116,800 63.2
2008 $49,484 $118,100 58.1
2009 $55,198 $118,900 53.6
2010 $62,628 $120,000 47.8

*The differential is reported as a percentage of salaries in the U.S.

These values are approximate and estimates for senior professionals

Source: Authors estimates using data from various online salary survey tools and forums.

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