I am constantly surprised by how many times I get pulled into the "captive versus outsource" debate. I thought this one was settled long ago, but it seems many firms are still trying to go it alone. If you are a well-resourced firm which has a set of processes that need to be kept inhouse, or are core to your business – and you can save substantial costs by moving these processes offshore – then my advice is to maintain a captive center. However, make sure you have the local management expertise to hire the staff you need and develop career plans to retain them. If you are a top tier brand, you stand a good shot at running a successful captive operation, but if you are a lesser-known firm with a small global presence, you will struggle to retain and develop your staff in this intense offshore environment. There are many firms which still persist in funneling low-value administrative processes into their captive centers, where you have to question the business case of doing so. Utkarsh Rai, in his guest post here entitled "offshoring secrets" does an excellent job surmising how challenging and expensive it is to run your own captive operation in India. Utkarsh has spent most of his career managing offshore operations and here are some excerpts (and these are best-practices, not warnings):
Attracting Talent: Providing an excellent work environment, a challenging work and a competitive compensation and benefits package are important in attracting the talent
Cost of operations: For the last three four years the salary raises have been given to India employees in the range of 15-20%. But this does not translate into the payroll cost. The annual payroll cost increase can be around 5% or so, depending upon the type of growth in the headcount.
If your company runs an offshore captive, ask yourself the following questions:
1) Is the work being performed in the captive truly core to our business, or could we move it over to a third party?
2) How much risk are we exposing to our business by transitioning the captive operations over to an outsourcer? Can we work with the outsourcer to manage the transition process to ensure there is a smooth transition of people and operations?
3) By selling off our captive, how much can we save over a 5 year period?
4) What is our option-value in the future if we want to take some of these operations back in-house?
5) How severe is our attrition rate, and how does this impact running costs and quality?
6) Is the captive truly a part of our global organization, or is it really a distant support center that doesn’t play a core role in our day-to-day business operations?
7) How much management time, and how much cost, is spent flying senior executives over to offshore locations to oversee low-value processes such as accounts payable, help deck support etc.?
8) How much experience with offshoring do our firm’s senior executives currently have, or are they learning it by trial and error and substantial cost to our organization?
9) How complex is it to transfer knowledge from our parent operations over to our offshore operations? Wouldn’t it be cleaner and easier to move the work to a third party outsourcer, who will take on the work they are contracted to do?
10) Is it worth keeping our captive, but re-locating it to a more appropriate location? And what are the costs / benefits associated with doing that?
Alternatively, look at the Aviva model, and get a third party to build your captive for you with the future option-value of selling it to a third party. However, with the amount of captives currently operating, my prediction is that the market for selling captives will be pretty much dusted in 2 years… so is this a sensible option?
The outsourcing providers are primed to grow through two channels: (1) buying captives and (2) taking on business from firms with no offshore or shared services support. If you already have an established captive you have a compelling option to investigate over the next 18 months: do you sell it to one of the ambitious outsourcing providers looking to grow their business? If you have a well established captive operation now, you are in a lucky position. The outsourcing firms prefer to acquire captives to grow their businesses, than acquire each other (as discussed here). With a limited number of captives currently up for sale, you will find a handful of outsourcing providers interested in your business – and you could make a tidy windfall from the sale. They will take from it what they need to run your business, and utilize some of the resources to support other clients. They also have the advantage of running your captive virtually by integrating it into their multi-location delivery infrastructure, that can cater for multi-lingual support and a whole variety of IT and business processes that you can’t often manage from a single location. You will also minimize your business risk by having these services run by an experienced provider with a multi-location delivery strategy.
This discussion between Genpact’s European leadership and Michael Jones, editor of Finance Director Europe, raises some compelling arguments in favor of this virtual captive model that Genpact has successfully developed during its recent hyper-growth. Other leading providers, namely Accenture, IBM, HP, ACS, Cap Gemini, Infosys, TCS and Wipro, are also extremely adept at delivering services from their multi-location infrastructures. The other major advantage of selling your existing captive is that transition is far less painful for both buyer and provider. Retaining key staff is often less challenging, as working for a services firm, rather than a captive, can often provide a more compelling challenge for the offshore professional.
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‘ Have you evaluated whether you should go captive, or just sell out altogether?
It’s been one of the best running blog discussions of recent months, where the Human Capitalist – aka Jason Corsello – predicted that Workstream would get acquired by Empagio. Credit also to Mark Stelzner for hitting the spot with this one. This is one of the first times I have seen a whole host of industry experts come together in one "location" to debate who would acquire who – and when it would happen. A great example of blogging leading the media charge on an issue like this. Interesting times we live in…
While we’re off the topic of outsourcing, I’ve been having some great conversations about social networking this week. Jonathan Yarmis has joined AMR Research to lead the analyst charge in studying this space and has some great perspectives on where social networking is headed – look out for his research in the coming months. New social media networking tools like Twitter and Snitter are enabling people to have multiple interactions with their networks where immediate synchronicity isn’t essential. Instant messenger clients, i.e. Skype, Yahoo, MSN, can be intrusive to people who have a heavy work schedule, and these new tools are more adaptable to people lives and work environments. We have to remember, this all really started with good ol’ LinkedIn, which has generated a powerful network of professionals who are connected on the Internet. The big challenge of the Twitters of this world is to get the less tech-savvy people to sign-up (i.e. 98% of the LinkedIn network). LinkedIn kept it relative simple – just copy and paste your resume into a form and you’re away. So while LinkedIn is positively antiquated these days, it is the one tool that has pretty much everyone on it… and has some great features like Q&A where you can pose questions to huge networks of people interested in that topic. It’s a powerful tool when you can get 50 or so people offering opinions and advice on business issues such as offshoring, or IT questions to solve immediate problems.
I’ll leave you with a great LinkedIn debate from over a year ago on Vinnie Mirchandani’s deal architect where I delivered my LinkedIn tips:
a) Avoid inviting people who work for a competitor. If they’re smart they’ll go through your contacts in 5 mins;
b) NEVER let a headhunter in. They’ll irritate the hell out of you trying to connect to anyone senior you know;
c) Don’t accept invitations from people who are either idiots, or very junior. Your contact collection is a prize tool (and you want it to look good when you’re enticing a prized new acquaintance) and you don’t want any rotten apples in there…:
d) If someone invites you, NEVER decline the invitation, just ignore it. If you decline, they will see it on their records. It’s worse than "blocking" someone from your IM and getting caught out. You will have an enemy for life;
e) Avoid technology luddites who never use any cool tech tools. They will call you up and make a huge deal about how to use the damn thing – you’ll be there doing help-desk for hours. Only focus on current LinkedIn users unless it’s someone you need to show off your network to….;
f) Always decline the LinkedIn spammer…you know the types who just go after everyone in the world;
g) Don’t make your network inaccessible to everyone. This just p****s everyone else off and defeats the purpose of the whole thing. It’s a bit like security-enabling your wireless LAN (I’ll save that debate for another time);
g) Avoid sales/BD people who have limited contacts or are not on LinkedIn at all. Any sales person worth his or her salt uses LinkedIn. If they don’t, they suck. If you’re interviewing a salesperson who isn’t on it, don’t hire them;
h) Think twice when being invited from the "company LinkedInner". Those are the folks who only invite people from their own firm ’cause they don’t know anyone in their industry…..;
i) Endorse people – it’s fun and they’ll love you for it.
Peter Schumacher, President and CEO of the Value Leadership Group sent me a very interesting article he wrote on the failure of the European IT services industry to compete effectively with the new wave of offshore outsourcing firms, and cites Cognizant’s recent growth surge (a 98% revenue increase for its European business in 2006) as a prime example of European’s IT services providers inability to cope with this competition. This is not dissimilar to the failure of the US IT services incumbents to recognize the growth surge of Infosys, Wipro and TCS in the late ’90s. The five key reasons discussed for this failure are:
European IT services firms…
1. Have failed to see the emerging competitive scenario
2. Face revenue deflation pressure from a smart arbitrage strategy
3. Have not addressed the holistic transformational challenges posed by offshore IT firms
4. Lack the financial resources to challenge offshore firms head-on, which are now driving the game
5. Will need to compete with powerful rule-breaker companies funded by private equity and venture capital firms
I nearly choked on my breakfast this morning with the stunning news that "34% Buyers Axe Their BPO Deals", according to a study conducted by Diamond Management & Technology Consultants and headlined in Global Services Media. I have observed over 400 publicly-announced and private BPO engagements over the last decade, and barely 6 of these were discontinued, normally as a result of the enterprise downsizing to the point where the BPO engagement was no longer viable for both parties. I am not arguing that the other 394 engagements are all going extremely well, but when enterprises move beyond a BPO contract transaction, the short answer is they rarely go back to the way they were.
For starters, the article states "One of three customers of Business Process Outsourcing (BPO) services ended their offshoring deals prematurely". There is a marked difference between "BPO" and "offshoring". Offshoring is the process of moving work offshore, and – in most cases – involves a firm moving more work into its own offshore "captive" center. So are we actually talking about Business Process Outsourcing or offshoring? This is a major difference, as many firms who try to "offshore" work themselves experience far more problems than they anticipated, usually because they do not have the skills or experience internally to manage offshore transition successfully. That is why many firms decide to outsource their business processes, rather than try to offshore them. That is also why many of the large BPO deals signed today are companies selling off their captive operations to an outsourcing provider.
I respect consulting firms that invest in quality research for their clients, to generate eminence in the marketplace, create discussion points with their clients, and use it to support their consulting engagements. However, "research" can be a dangerous tool when firms use it to panic people for the sole purposes of creating attention. I can understand why Global Services Media picked up on the story, as it is a major attention-grabber, but there are no details regarding how the study was conducted, what sample of firms was used and how exactly is "BPO" defined for the purposes of this research.
Coming from the old country and spending the last few years adjusting to life in the new world, it’s about time I started sharing some observations over the cultural chasm that exists. However, it’s probably better I leak out my views in digestible chunks to avoid risk of deportation. Anyway, let’s start with sport:
Savoring victory. Sorry, the Yanks just don’t know how to do it properly. Living in Boston, I have experienced the highs of Super bowl victory and the pain of defeat inflicted upon the locals. In the UK, if the local team wins the Cup Final, everyone goes nuts, has a parade in town and gets drunk for days, and savors that victory for years to come (we still celebrate our 1966 World Cup triumph…). When the Patriots last won the Super bowl, there were a couple of car horns tooting rhythmically, but it was pretty muted. Even the celebrations for the Red Sox winning the 2007 World Series barely lasted a day.
Coping with defeat. Now here is a marked difference. The depth of despair suffered by Yanks when they lose clearly outweighs their heights of ecstasy when they win. In the UK, it’s the reverse. When we lose, we go into a mild depression, take the mickey out of our team for being "rubbish" and quickly look forward to the next attempt at silverware. Over here, I have never seen anything like it – words such as "disaster" dominate the press. Inquests begin, radio phone-ins focus on the deep depression that has inflicted the local society. Another coping mechanism I have observed over here is to simply ignore their team if it is losing. I will never forget the Ryder Cup in 1999 (Brookline Mass) where the media made quite a fuss about the prestigious tournament and hyped it up considerably for two weeks prior to the event. Then disaster struck – the Europeans dominated days 1 and 2, racing into a seemingly unassailable 6-point lead moving into the final day. I was eagerly trying to find some media coverage, and only found a 6 inch sized write-up in the Boston Globe. So from hype to nothing in two days. No-one seemingly wanted to talk about the loser golfers. Then the famous "Day 3 comeback" happened. At about 3.00pm on the final afternoon. the media suddenly realized their boys were poised to pull off a stunning comeback. The golf returned to the main TV networks, and friends of mine who had zero interest in the sport started getting involved as if they never missed a PGA event…. that evening I had to be subjected to prolonged victory gloating from people who probably thought Jack Nicklaus had holed the winning putt…
My conclusion is that the Brits, quite simply, are used to losing, probably originating from the collapse of the British empire. When you’re downtrodden and no longer aspire to the greatness you once had, you take comfort in the small achievements when you get them. The US Empire is still pretty strong – the country still rules the world (until Beijing 2008 anyway). Maybe in another 20 years, they’ll start to take defeat with a pinch more salt and self-mockery than they currently do…
My interest has been piqued by the recent announcement of Sunlife of Canada outsourcing its UK customer services operation to TCS’s Diligenta subsidiary in a $200m deal. This comes hot on the heels of some financial services captive buy-outs in India. The financial services sector has long been the problem child of the BPO industry, with operational executives extremely reluctant to relinquish control over business processes – especially finance and accounting. As I have said on record several times, it will only take a few big deals to hit and many others will follow in a domino effect. Bottom-line, the large BPO providers have capacity and are willing to invest in clients to gain an edge in this market. Most of the near-term deals will more likely be captive acquisitions like the two mentioned above, but this is the clear strategy some of the providers are following to build out a global delivery infrastructure. (Hey – I managed to avoid saying lift n’ shift).
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So why do I think this sector is poised to become a BPO hotbed?
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Competition is too fierce and the incumbents are looking at all options to contain costs and improve margins;
Decreased shelf life of products;
Business impacts and high costs of maintaining non-strategic and closed blocks of business;
Rising wage costs and attrition within captives is proving too costly and taking up far too much management resources – the outsourcing option is becoming increasingly attractive and less risky from a business perspective;
The sub-prime fiasco has really changed the game with several FSI firms – they are now prepared to take on more risk to remain profitable;
BPO models can help firms scale up and down quicker – particularly with a looming economic downturn. Having that flexibility could prove vital, especially in times when FSI firms need to get product to market quickly;
Improved service levels from providers and their willingness to take on more customer risk;
Improved technology add-ons at no incremental cost, for example analytics tools, that can sweeten the BPO opportunity.
As I’ve mentioned before, I admire people with the dedication and focus to write a book… especially one about their experiences of offshoring. Step up Utkarsh Rai, who heads up India operations for Infinera, an optical transmission equipment supplier, after starting his career working for Siemens in India in the ’80s and spending time in Germany and Silicon Valley in various roles. Uktarsh has a deep and unique experience of setting up offshore operations in India and has kindly offered to share some of his views here, taken from his book Offshoring Secrets. I found the book an extremely informative and refreshing read about the trials, tribulations and best practices behind developing successful offshore operations . Over to you Utkarsh:
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Global corporations, especially those with large operations in the west, are constantly seeking to reduce costs, improve bottom lines, and create “quarterly results” magic in the least possible time. There are many secrets to make an India operation successful, to name a few:
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Leadership skills: It is not appropriate to expect that one person should be able to provide both management and technical leadership with equal ease. During the initial setup time where around 60-70% of the time of the leader spent in non-engineering activities, it is very important to have someone coming from parent company to provide the technical direction.
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People Management: The Indian IT industry is marked for their heavy dependence on people. People issues can arise due to any of the following: career crisis, appraisal, pay hike, designation & promotion, work content and many more. It is important to understand that people management demands a good amount of time & attention from people managers.
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Attracting Talent: There are many ways by which one can attract right talent: Few of them are: Rejected candidates sometimes help in spreading the word if they are impressed during the interview process. Providing an excellent work environment, a challenging work and a competitive compensation and benefits package are important in attracting the talent. Reference checkshould not be treated lightly and should not be left to the recruitment agencies or HR. Hiring manager or engineering head should personally undertake this activity as it will help in positioning the company better. Senior management should spend time with prospective candidates and last but not the least Ex-employees as company ambassadors so one should treat them well.
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Attrition and Retention: The widely held believe that most of the people leave because of salary is not true. It is mostly the manager.
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Cost of operations:For the last three four years the salary raises have been given to India employees in the range of 15-20%. But this does not translate into the payroll cost. The annual payroll cost increase can be around 5% or so, depending upon the type of growth in the headcount. Also the cost should be compared against the average experience level in the center, which can provide the correct data about cost escalation. Initial years might see a higher experience level and higher cost, which will lower with the expansion of team.
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Communication: There are many ways in which any surprises in execution can be avoided. Frequent voice contact is a must. Status report should state assumptions and facts clearly. Early identification of risks and its tracking is important. In order to get better result, it is imperative that engineer to engineer interaction should be high by travel and by voice contact.
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Cultural differences: Though there are many cultural differences between India and the West, but to name a few ones:
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“Compare and contrast” culture: The compensation and other personnel details are discussed freely leading to multiple people issues.
“Social” culture: The work environment also becomes a social network which on one hand helps in better teaming but on the other hand fuels “compare and contrast” culture.
“Seniority” culture: In Indian society, age and knowledge are important factors in commanding respect. Age usually takes precedence over knowledge.
“Difficult to say no” culture: Saying “no” means different to different people. It can be interpreted as impolite or disobeying or doubting ones skill etc.
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Commitment: This is the fundamental question which should be asked to the person responsible in the parent company for the offshore team in India. Most of the time the decision to open an offshore center or team is forced upon him and he has no other option for the lack of alternative plans for achieving the desired goals.
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Trust:The offshore center that is being setup or is operational will not be successful if the core ingredient of trust is not present between the parent organization and the India operations.Trust is mutual and plays a significant (but hidden) role in the success an Indian office.
Firstly, thanks to all of you who have sent me best wishes – both privately and on the site. I am currently in the throes of rolling out a research agenda that aims to fill a significant gap in the industry to advise buy-side clients on how to approach their complex sourcing issues, particularly in light of this mooted economic downturn. This will focus more on the how to source than the what, based on multiple ongoing discussions with enterprises that have been through the process and are continually looking to optimize what they have on a global basis. I wanted to invite regular visitors to this site to contribute their ideas and views on what the industry needs to see from a research perspective. Feel free to share your views here, or email me directly.
