Offshore Outsourcing: What Role Will the Recession Play?

The ongoing credit crisis is a concern for everyone in nearly every industry—fear of lost jobs, foreclosed homes and bankrupt businesses. But those lost jobs are likely to further bolster the booming offshore outsourcing market—so the experts predicted. (Also read How to Save Your Job During a Recession and 10 Secrets for Searching for a Job During a Recession.)

Fast-forward two months: it's time for them to eat their words. Neither are customers outsourcing more nor is the industry growing any faster. In fact each day service providers only revise their growth estimates in the downward direction.

Some brave analysts are finally coming out with the truth. Days after Wall Street's collapse, vice-president and principal analyst with US research firm Forrester, John McCarthy, said the scale of the crisis had rendered all previous studies including Forrester's own survey, released earlier this month, redundant, and that Indian IT providers should prepare for slower growth and lower profits. "It is naive to say an economic slowdown is good because cost-cutting will lead to higher offshoring. This is no longer a recession, it is fundamental restructuring of financial services that is taking place," says McCarthy.

What the hell happened in these two months?

Multiple factors are at play here—some recent developments and some historic issues that have been building over time.

About 20 percent to 40 percent of the revenues of offshore outsourcing firms are tied to the financial services industry. With its collapse, companies have been forced to look to other vertical markets. In normal circumstances, that should have been enough to offset the revenue erosion. But the problem is, that everyone is in the same boat and those other industries are also impacted by the crisis, fading consumer demand and reduction in spend.

For example, the travel vertical has started seeing a rise in ticket cancellations and refunds, which has led service providers like WNS to greater conservatism on revised guidance. Hexaware stated that delayed decision-making is spreading out from BFSI to travel, and it has now reduced its annual growth estimate from 24 percent to 7 or 9 percent. Sasken is now cautious about telecom handset segment as all the top-five handset customers are seeing a slowdown in sales (a u-turn from Sasken's bullish stand on this segment a couple of months ago).

So, suddenly all players are chasing a smaller market, in which there was little differentiation amongst players anyway, and it will lead to pricing pressure, reduced profitability and less growth.

It will also become difficult to generate new business (unless driven by price), which will result in generic and inefficient players rightfully getting wiped out of the market. Rather than getting upset about it, I think it's an exciting opportunity for service providers to innovate and build their differentiators. Customers, I would say, have never had it so good—they can finally be in the driver's seat.

It's also difficult to accurately quantify the business value of offshore outsourcing. At a theoretical level, it does make sense. At a headcount level, it also makes sense. But at a business outcome level, the real and hidden costs are often ignored and many companies are left thinking "hey wait a minute, I offshored hundreds of my staff...why isn't my profitability increasing?" And despite share of offshoring rising, why haven't we ever seen a reduction in IT spend? That's because offshore outsourcing has so far focused on headcount as the currency, not the business value generated. That is about to, thankfully, come to an end.

The more I think about the full value chain, the more intrigued, and sometimes scared, I get about the full impact. TCS has reduced its annual hiring estimate by about 30 percent, Wipro already reduced headcount in IT services last quarter, Polaris has resorted to just-in-time hiring, Infosys is visiting fewer campuses...what does it mean for the employment market in offshore outsourcing countries? Will wage inflations ease off? Will attritions finally come to manageable levels? Will being skilled come back in fashion compared to just having an IT diploma/degree? We'll have to wait and see...

It is the end of the golden age of offshore outsourcing, but it also heralds a new dawn—the age of truth and rationality. Where offshore outsourcing delivers real, tangible business value, and service providers are focused on making things work for customers in unique and innovative ways.

source:- cio.com/

Beyond BPO and into knowledge process outsourcing

Organisations have been outsourcing and offshoring business processes for many years now, to take advantage of the lower cost of labour in developing countries such as India or China. Many of these Business Process Outsourcing (BPO) contracts have focused on large scale transaction processing, frequently in 'non-core' processes such as accounting or human resources, or in areas of perceived lower value or complexity.

Recently this trend has begun to change.

Low-value, 'lift and drop' contracts have run into some severe and well-publicised problems. In the UK, most of us have either had, or heard about, a bad experience with an offshore customer service agent usually suffering from inadequate language skills or a lack of knowledge. On the other side of the fence, the offshore call centre agents themselves often face daunting overnight shifts (to field daytime calls from the other side of the world) and a job offering limited professional challenges to skilled graduates. Under these circumstances it's not surprising that offshore staff attrition rates per year can routinely be over 50% and that serious questions around customer satisfaction and operational stability have become common.

As these problems have hindered the development of offshore call centres and even prompted some organisations like LloydsTSB to use their onshore call centres as a selling point, other factors have led BPO providers to offer more complex, knowledge-based services that sit far closer to the core business. These higher-value processes, while still offering reduced cost, also take advantage of the wider availability of qualified talent in developing countries, exploit the benefits of operating in different time zones and allow added flexibility for ad-hoc or short-term projects.

Moving up the value chain
The issue of global talent is key - onshore availability of skilled graduates, say in the UK, is small compared with a country such as India with an estimated 2.5 million new graduates and 500,000 postgraduates entering the job market every year. The price of this offshore talent is far lower than the UK too. In fact, the wage differential between near and offshore skilled professionals with significant experience is greater than that of the graduates with lower levels of skill and experience traditionally hired into the transaction processing operations like call centres. Bearing this in mind, the higher knowledge-based BPO presents a better business case than low-value deals, albeit on a smaller scale. Crucially, higher-value BPO arrangements give offshore workers a far greater degree of job satisfaction and potential for career progression - helping to address the high attrition rates and customer service issues associated with transactional and support processes. Tasks are typically analytical and require staff to be highly qualified, professional and mature.

With many organisations now operating on a global scale, using third-party talent sourced from worldwide locations also means that business can respond and serve customers regardless of the time zone they operate in. The flexibility of using a third-party BPO provider also allows organisations to easily and quickly scale operations up or down in line with seasonal or otherwise predictable peaks.

Challenging underlying business assumptions

The cost savings offered by high-value BPO deals are important, but arguably of greater significance are the strategic opportunities that were not available with the traditional onshore models. Most human capital-intensive business processes within corporations were designed and based on certain underlying assumptions: about the supply, the demand and the price for talent in the geography where the process was originally based. When this underlying constraint is relaxed through global sourcing, the results can be dramatically different.

The idea is that by applying new knowledge, skill-sets or business savvy that were not previously affordable or available, organisations can enable new services or capabilities that, in the past, could not have been considered feasible. For example, one customer of Cognizant in the healthcare insurance industry has been taking advantage of skilled Indian labour to improve the effectiveness and extent of its investigation of fraudulent claims. Previously, with onshore employees the company wouldn't investigate any cases below $1,000, as the costs involved would outweigh that of the potential fraud itself. Taking advantage of the lower cost of labour has allowed the threshold to be brought down to $500, allowing more leads to be chased and reducing margin leakage.

This 'knowledge process outsourcing' approach should also have benefits for providers - involvement in these areas of a client's business brings greater understanding of business issues and the opportunity to serve clients better. For those outsourcing vendors who also offer IT services, there are opportunities to bundle together different services and offer complete packages to their clients, taking increasing accountability for delivering business outcomes.

Cost remains a strong motivator in outsourcing decisions, but the ability to source global talent to deliver business processes brings new challenges and opportunities. Organisations have to change their decision process to make the most of this worldwide knowledge base. They need to ask themselves, not how much more cheaply and efficiently a particular process can be done, but why they are doing it in the first place and whether they could achieve a different customer 'experience' if they had access to skills, expertise and talent at price points which were not previously possible.

source:- financeweek.co.uk/

How Offshore Outsourcing Affects Customer Satisfaction

The outsourcing of customer service to offshore providers has gotten a lot of bad press in the U.S., with reports citing language problems and the exporting of jobs. But, despite the potential for such reports to alienate consumers, this offshoring continues to grow, driven mainly by the lower labor costs overseas.

Are companies that send customer service abroad making a mistake? It's hard to answer that question without knowing offshoring's actual impact on customer satisfaction.

Our research indicates the effect in most cases is significantly negative -- but similar to the effect of outsourcing customer service domestically. That suggests companies shouldn't necessarily forgo the savings they can reap from offshoring. But if they're going to do it, they'd better do it right.

Negative Numbers

We analyzed the offshoring and outsourcing activities of 150 North American companies and business units from 1998 to 2006. As a group, those that outsourced customer service saw a drop in their score on the American Consumer Satisfaction Index, or ACSI, a measure created by the National Quality Research Center at the University of Michigan. The declines were roughly the same whether companies outsourced customer service domestically or overseas.

ACSI scores tend to move in the same direction as companies' share prices. Based on the historical data showing that connection, the average ACSI decline we found at companies outsourcing customer service is associated with a drop of roughly 1% to 5% in a company's market capitalization, depending on what industry the company is in.

That's a steep price to pay. But there are ways to make outsourced customer service more palatable to customers or to mitigate its negative effects, and in some respects that may be easier to do with offshoring. And there are offshoring alternatives that can save a company money without damaging its relationship with its customers.

An important step companies can take to improve the quality of outsourced customer service is to ensure that the provider has all the information necessary to help the customer and full authority to do so. Sometimes, because a company wants to protect information about its customers, the customer-service provider isn't given complete customer histories and profiles. Or the provider's authority to resolve complaints is limited; for instance, the provider may not be permitted to grant credits to customers. Companies need to weigh their concerns about information security and financial control against the damage that such arrangements can do to customer satisfaction.

Tapping Technology

Companies can also make customer service more effective by taking advantage of the technological innovations that some providers offer, and here there may sometimes be an advantage in offshoring. That's because some foreign outsourcing providers have offerings their domestic counterparts can't match in terms of technologies that help guide customer service by recognizing patterns in consumer behavior.

One way to mitigate the damage from outsourcing customer service is to invest the money the company saves to improve the quality of the company's products or services, or to cut prices, rather than simply pocket the savings as extra profit. Our findings suggest that this isn't happening in most cases. Among the companies we studied that had outsourced customer service, there was no increase in the perceived-value component of their overall customer-satisfaction score: Their customers didn't feel that they were getting any more for their money than they did before the company started outsourcing.

Here again there may be an advantage in offshoring. If a company can save more by sending customer service overseas, it will have more opportunity to devote at least some of that money to upgrading its business.

In addition to considering whether or not to offshore customer service, companies should consider whether back-office functions such as information technology may be suitable for offshoring. Our study found that back-office offshoring had no effect on overall customer satisfaction. So the savings a company garners this way aren't offset by dissatisfaction among customers.

source:- online.wsj.com/