One of the most interesting discussion points I had on my recent visit to India was centered on the eagerness of some of the India providers to infiltrate the HRO market. I recall the entry of the Indian top tier into HRO three years' ago, and have to admit I was skeptical. Not many people believed you could take broadscale HR services offshore and run them successfully, while saving money for clients at the same time. However, times have really changed since then, with the Indian top-tier now competing aggressively for hybrid IT-BPO contracts. What's more, the Indian providers are very good at working out how to take on back office work remotely. It's their focus – and eagerness – to take on ground-up processes, such as payroll, data management, document fulfillment, which is driving a breath of fresh air into the flagging HRO business.
The old HRO model was focused on providers sub-contracting out a plethora of point-solutions to niche vendors in areas such as payroll, benefits administration, workforce management, recruitment and compensation tools. The value to the client was that they only had to deal with a single “end-to-end” provider for all these services, and the provider managed all these subcontracted services under a portal layer, while negotiating arrangements that would ultimately deliver some cost savings back to the client from its original budget. What resulted was a scale issue – the “end-to-end” providers struggled to find economies of scale for themselves (it’s not easy when most of the work is being subbed out), and in addition to that, too many points of failure emerge, when too many parties are involved in delivering the operations.
More recently, suppliers like IBM have focused on taking more of the HR work into their offshore delivery centers, for example with its recent Bristol Meyers engagement, in order to leverage more economies of scale and lower cost labor resources. They also have the ERP-enablement skills offshore to help develop and manage commonly used HR platforms, namely SAP and Oracle. This is where TCS and Wipro have begun to impress, with some notable inception HRO clients in the last two years. They are willing to develop ground-up competency in areas such as payroll, where many of their western counterparts have opted to subcontract to the likes of ADP and Northgate (ARINSO) in the past. They understand the cost-leverage they can pick up by taking on these processes offshore, in addition to driving their “Platform BPO” approach, where they can take on companies ERP solutions and dovetail the IT services with their corresponding business processes. What’s more encouraging, is the fact that they are prepared to move quietly into client situations, prove they can take on smaller piecesof work successfully, in order to win larger outsourcing contracts in the future. In three short years, we have seen the leading Indian firms break into the top tier of BPO services with a pragmatic approach to taking on routine work and moving up the value chain. Will this provide a new direction for an HRO industry that has suffered from a lack of scalability? You tell me!
TCS and Wipro already making strides into HRO services
As we discussed last week, BPO is rapidly evolving into “Global Services Provision”. Most enterprises ventured into early BPO engagements to take advantage of the quick cost-savings on offer from employee remediation, using low-cost offshore labor on offer from outsourcing service providers. Many enterprises undertook BPO in times of financial distress, their priority centered on their year-end balance sheet and satisfying short-term shareholder demand, as opposed to long-term strategic thinking.
However, this environment is quickly changing, due to the fact that there is a finite number of these employee remediation deals on the table; once a company has transitioned-out many of its onshore administrative staff and moved onto an offshore delivery model, their next challenge is to optimize what they have through better processes and technology, as they are unlikely to keep finding many additional onshore staff they can displace.This new phase of BPO is focused primarily on:
1) Global profession shifts:With tens of tens of thousands of Indian graduates moving into supporting BPO services, such as finance and accounting, India is quickly developing competency in finance in a similar fashion to the manner in which they developed themselves as a hotbed for IT talent over the last decade. While the majority of finance BPO services being delivered from India are currently centred on the routine transaction processes such as procure-to-pay and order-to-cash, the developing talent base is eagerly trying to move up the value chain to take on higher value services such as management reporting, risk management, and financial analysis. In concurrence with the emergence of a high-scale accounting profession in India, many of the leading western accounting firms and enterprises are moving their transactional accounting processes offshore, which traditionally provided a training ground for accountants in Western countries. Instead, newly-qualified accounting graduates in the West will be expected to move straight into decision-making roles, hence, there will be fewer opportunities for accountants in western countries. The profession has started a shift towards India and other emerging offshore nations providing global BPO services.
2)Global industry shifts:In addition to professional practices being developed offshore, Western business should beware of the development of entire industries that could be run from offshore locations, such as India and China in the future. This is especially the case for industries where the majority of the processes can be delivered from remote locations. Let’s take the example of the market research business, dominated by firms such as Taylor Nelson Sofres, AC Nielsen, Harris International and Gallup. The majority of these companies’ business is centered on data analysis, sampling, statistics and survey management. With Indian firms already proving adept at running these types of processes, and with the majority of survey work today being performed online, what is stopping Indian services firms stepping up and going direct to the customers of the incumbents and offering the same services at half the price? For example, Infosys, Satyam, TCS and Wipro are already conducting research services for Western clients – and some already on a broad scale.With their developing reputation as services firms, what is stopping them moving to the next level and displacing many of the established western providers And with many of the Western market research providers already using Indian providers for data and knowledge services; are they simply breeding their future competition for the sake of some short-term cost-savings?
Other industries where we can already see this “creeping competition” happening are insurance, life sciences, and even legal services, where a plethora of Indian firms are already moving up the value-chain. The Indians have already succeeded in developing a highly competitive IT services industry, so what’s stopping this happening across of the services and professions? Ten years is a long time in globalization and outsourcing, and we can expect significant shifts of industry development towards the emerging economies over the next decade. All-in-all, developing nations like India are not going to be content focusing primarily on delivering routine, transactional, low-margin services, and they will be trying hard to move up the value chain to deliver higher-value business services over time. However, while there has clearly been very high demand for these BPO services in recent years, much of this has been fuelled by Western enterprises seeking quick cost-savings from labor arbitrage, as opposed to their wanting higher-value services. The Indian BPO vendors will push hard to move up the services value-chain, but they are going to find it much more challenging to take on more complex solutions that require a deep alignment to enterprise decision-making. However, when you look at how far they have come in three short years, you have to expect that in another ten years, some of Indian service providers will have achieved much of what they are setting out to today.
Time to get on a 16 hour flight… see you Stateside. And yes, I am yearning for Pizza -:)
Have just listened to the inaugural NASSCOM address delivered by Som Mittal (President, NASSCOM), Ganesh Natarajan (Chairman, NASSCOM), Shri Jainder Singh (Secretary for IT and Comms Department for the India Government) and Pramod Bhasin (CEO Genpact). My main observation is the level of energy, passion and enthusiasm for the industry by the speakers – a far cry from some of the tired, jaded speeches I have been subjected to in the States and Europe recently.
Som Mittal talked about India's resourcing issues, with companies across different industries now competing for the same talent. He discussed the fact that 85% of India's outsourcing services are delivered from the main 7 cities, and even if they achieve a split between the tier 1 and tier 2 cities of 60/40 my 2018, that still represents a 250% growth for the tier 1s. He also discussed the influence of social networking tools, such as Facebook and YouTube, on India's youth and the influence it is having on their career development.
Shri Jainder Singh, revealed BPO exports for 07-08 totaled $10.9 billion, a 30% growth over 06-07. He also discussed the huge importance of KPO (Knowledge Process Outsourcing) as a driver for India's development as a provider of higher-value business services. He also cited the major infrastructure challenges ahead for India, namely creating new urban centers, educational reforms and a robust information security environment.
Finally, Pramod Bhasin, Genpact's CEO stormed into action declaring unprecedented growth in BPO – 33% overall (I think that one came from me), and 28% in BPO exports. He then went on to declare that we are "now past the era of BPO", and that we're now entering the "Globalization of services and building a full-scale services industry". Bhasin sees BPO as a convenient catchphrase that doesn't represent the depth of services. He also discussed the need for real process expertise and real domain expertise: companies today don't ask for "BPO", they ask for "finance solutions", or "HR services". Bhasin also discussed the fact that wage inflation was now under control, citing a 10-12% increase on a $4,000 annual salary being far preferable to the same increase at a much higher wage. He also mentioned that currency fluctuations were smoothing out and the real disease threatening india was attrition. He finished by emphasizing the need for massive public and private partnerships to develop their entire ecosystem, reform their healthcare and education systems. I hope someone sends a recording to Messieurs Obama and McCain…
Anyway… must run to a meeting. Nothing like blogging from the spare laptop in the speakers' room.
Welcome to a rather cool and cloudy Bangalore in June. Indians have no concept of how to slowdown in traffic: cars, motorbikes, trucks and buses all focus on where they are headed, and, as opposed to their looking around to check the way is clear, they hoot their horns to tell others to get out of their way, with a fearless disregard of the risks and consequences. The same can be said of their rampant services industry, where their businesses have refused to slowdown, check their wing mirrors or pad their brakes, in fear that their revenues or profit margins will be seriously derailed. Here's the evidence:
Our last debate about about "Platform BPO" got me thinking more about how outsourcing PMOs can be more successful at delivering these engagments, and reaching a desirable operating state sooner. While my good friend from SAP's BPO group, Gianni Giacomelli, makes an excellent point that service providers need to leverage economies of scale and process optimization ruthlessly to hit their targets, it also raises the question of how outsourcing PMOs within the buyer need to step up to the plate to take more owenership over their outsourced processes. (Gianni wrote an excellent piece here last year entitled "Why a good BPO provider is not enough for a successful BPO service delivery" on this topic).
Many BPO engagements are currently a lot more complex than IT outsourcing engagements, where there are many additional challenges from the buyers' standpoint, namely training personnel, mapping new processes, transfering knowledge, establishing realistic service levels, developing workable reporting models and understanding which processes can be offshored successfully, and which of them should remain onshore – on inhouse – with the buyer.
From the provider’s standpoint, it needs to work out how to help its customers reach their desired outsourced endstates, while meeting the pricing schedules and maintaining their own profit margins. In order for this to be successful for both sides, surely both parties need to take equal ownership of the solution development in order to meet their desired outcomes? I can’t tell you how many BPO buyers tell me the same story: that they didn’t start to find a successful operating balance until they stop being reactive with their provider and waiting for it to magically start sorting out their entire transition by themselves – they had to proactively grasp the bull by the horns, take control over the relationship, sit their operations people down with their service providers’ staff, and jointly work on knowledge transfer procedures, develop process flows that made sense for their existing staff and technology, and generally start working as a TEAM. When you go to your doctor, don’t you have to be specific about your symptoms, be open and honest about your lifestyle, then actually work to improve your health over a specific period, before you can start to feel the long-term benefits from your relationship and start judgeing her performance? You basically need to take ownership of the situation to get the best results.
Where some early BPO deals struggled, blame was commonly heaped on the service providers’ “operational defficiencies”. However, as outsourcing PMOs get more experienced, they realize that success lies in their own hands, and many of them are improving at working with their providers to drive more efficiencies into their relationships. You hear many buyers say today “we need to develop a strategic sourcing strategy” – they are realizing the world has changed and they need to change with it. Outsourcing is just one vehicle for change, and the onus is on them to drive it correctly.
What BPO buyers can learn from many of their ITO peers, who have been managing outsourced environments for several years, is the fact that experienced buyers today take far more ownership over their delivery that they used to. They realize their vendor can provide skills, resources, processes and technology, but arbitrage only works when the buyer takes on equal responsibility for delivery. You rarely hear and experienced ITO PMO complain bitterly about her provider – they talk about how they manage their retained organization and their provider’s staff as part of the same outfit. They view key project managers in theor service providers as critical to their success as if those people were employees of their own organization.
While several people have doubted the vailidity of HRO, IBM offers a strong ray of light for the sector by signing a $324m, 10year agreement with Bristol-Myers Squibb. As we mentioned here just earlier this week, leading proviers have been working hard to find a workable model for delivering using their global resources:
"As the global providers become increasingly proficient at deploying offshore resources to support these processes, they will generate more cost-savings and compelling business cases for their customers"
As a result of this engagement, IBM is leveraging its employee contact centers in Manila and Budapest, in addition to local US-based delivery faclitiles, to implement and deliver SAP-based HR services.
As we picked up on here a few weeks ago, the F&A BPO market has had a red hot 2007, and this growth is continuing into this year. The market saw a 30% growth in expenditure, a 20% growth in total contracts, and new contract expenditure totaling close to $4bn in contract value. So a record year and a critical mass is being reached. The barriers to entry in this market are getting harder and we're getting a clearer picture of how this could play out. So, what's driving this, and who are the key players? Read my aticle in the new issue of FAOToday magazine.
Following our recent discussions surrounding the successes and challenges of the HR Outsourcing (HRO) industry, I was sent a recent study from Erik Samdahl at the Institute for Corporate Productivity, which canvassed the opinions of 231 senior HR executives, mainly from large organizations, and has some telling stats on the future direction of HRO, which I wanted to share and interpret with you. There are two key observations from this study that standout in my mind:
1) HRO is massively under-penetrated outside of benefits administration:
72% said their organizations have elected to keep compensation functions in-house
58% say their firms do not plan to outsource their payroll function.
57% report that their companies do not plan to outsource employee contact centers
If you stick with the philosophy that dictates you should outsource when a 3rd-party can perform the work at significantly lower cost, and at an equal, or better, standard than you do already, then you have to conclude that these statistics point to plenty of future outsourcing opportunities for compensation, payroll and employee contact center solutions, due to the large majority of enterprises which have still yet to outsource these processes.
These are areas where HRO provision is constantly maturing and providers are working towards more common standards. As we see more of these “Platform BPO” solutions being delivered into the marketplace (I will be talking more about these in the coming weeks), I expect these three areas to form the centerpiece of future HRO activity. As the global providers become increasingly proficient at deploying offshore resources to support these processes, they will generate more cost-savings and compelling business cases for their customers.
54% say their organizations do not outsource for recruiting
46% of participants say training and development is kept within their organizations
Recruiting and training are processes where many companies need additional help, but the processes are often highly unique and finding cost savings and improved quality from a third-party can often prove challenging, if you cannot find an HRO provider specialized in your particular industry. This helps explain why many firms which outsource recruiting, often go with specialist providers with specific industry expertise (i.e. retails versus financial services).
Seventy percent report that their organizations either fully or partially outsource the administration of 401(k) plans, followed by flexible spending account administration (69%), COBRA administration (59%), and the administration of defined benefit plans (58%).
Unsurprisingly, benefits administration is the most widely-adopted of the HRO processes, where many firms have found significant cost savings by using a single outsourcing provider, in addition to high-quality solutions, with self-service hosted applications. No wonder firms such as Fidelity, Hewitt and Mercer have centered their HRO solutions firmly on their bedrock benefits services, where they can upsell their substantial existing client bases onto their existing technology and delivery resources.
2) Once outsourced, HR functions are rarely brought back inhouse:
Less than 2 in 10 companies have brought an outsourced function back into the organization
As we discussed here back in March, most companies which venture into HRO don’t go back. Of the 200 comprehensive end-to-end HRO adopters, only 6 have pulled services back, and not always for operational reasons. This 8/10 HRO-sustainability ratio, which includes single as well as multi-process solutions, indicates that once firms have moved into an an outsourced end-states for an HR process, the chances are they see little strategic value in internalizing it again, and will only bring work back if it no longer made business sense – normally due to a change in business strategy or volume, or the provider did a poor job satisfying the client.
Is Platform BPO the answer?
All-in-all, this data tells us that HRO is only really beginning taking shape, and both vendors and clients are learning what works, what doesn‘t work, and where to center HRO solutions in future. The move towards consolidating BPO solutions under a common platform layer is clearly taking center-stage among the major global outsourcers with transactional HRO functions proving core to these offerings. The key is finding new avenues for driving out cost, as this is still the major driver behind HRO, and it will be interesting to see how the new offshore-centric entrants, Infosys, TCS and Wipro fare as they push hard with their platform-centric BPO solutions to compete with the incumbent HRO providers.
One of the most interesting discussion points I had on my recent visit to India was centered on the eagerness of some of the India providers to infiltrate the HRO market. I recall the entry of the Indian top tier into HRO three years' ago, and have to admit I was skeptical. Not many people believed you could take broadscale HR services offshore and run them successfully, while saving money for clients at the same time. However, times have really changed since then, with the Indian top-tier now competing aggressively for hybrid IT-BPO contracts. What's more, the Indian providers are very good at working out how to take on back office work remotely. It's their focus – and eagerness – to take on ground-up processes, such as payroll, data management, document fulfillment, which is driving a breath of fresh air into the flagging HRO business.
TCS and Wipro already making strides into HRO services
