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A wake up call for BPO firms

Seetha in New Delhi | September 08, 2004

Indian business process outsourcing companies had better wake up: the West has moved into second- and third-generation outsourcing deals. That warning comes from James Longwood, research vice president, sourcing, at IT research firm Gartner.

Simply put, outsourcing will move from mere contracting out of utilities to process enhancement (which is going to see an upturn) and further to business transformation.

This will bring in its wake new sourcing arrangements, more complex deal and relationship management and higher expectations.

In second-generation outsourcing deals, Longwood advises clients to, among other things, adopt a strategic sourcing framework and focus on the business value of a deal, not just on cost and efficiency.

He also tells clients to be more careful when selecting and evaluating service providers as well as signing deals, which should have some flexibility to provide for business environment changes.

Can Indian BPO firms rise to the challenge? At a Gartner summit last fortnight in Mumbai, Longwood deftly sidestepped that one.

"Gartner's message is that the market is changing already and the advantage of cost arbitrage lasts only a short time." Over the long term, he says, companies will have to deliver real value in order to stay ahead of the game.

Both Saurabh Srivastava, executive chairman of Xansa, and S Nagarajan, founder and chief operating officer of 24/7 Customer, contend that India already provides more than a pure cost advantage. "Companies come for cost and stay for quality," asserts Nagarajan.

Srivastava says that Indian companies are unlikely to completely lose this cost advantage. "Moving up the value chain does not mean that cost becomes less important," he argues.

But the edge that Indian companies currently have, he acknowledges, may not be of much help in a situation where companies are outsourcing whole functions in large multi-million or billion-dollar deals spanning several years.

Indian companies can survive, says Nagarajan, by providing value-added bundled services, something his company is planning to launch very soon.

Examples of bundled services would be adding data analysis to data collected during simple contact centre work or adding market research to customer acquisition work. It could even go up to providing process consulting.

Companies can also help customers improve their processes, instead of merely transitioning them on an as-is basis. "Offshore service providers that cannot provide the next step of value addition are going to be the losers in the future," Longwood warns.

Companies have already started doing this. When a process is outsourced, some process inefficiencies are often not mapped. The BPO vendor can identify this and improve it. "This goes beyond cost arbitrage. We can convert a process inefficiency into a business advantage," says Nagarajan.

In one case, 24/7 Customer noticed that the client had put down an amount as due to suppliers that should actually not have been paid. It was pointed out, resulting in significant cost savings to the client.

In the initial stages of offshoring the process, Wipro Spectramind, for example, merely transitions it on an as-is basis, and the client gains value by reduced operational cost owing to labour arbitrage. "That brings a quick win for the client," says Raman Roy, chairman and managing director.

As the process matures and next level of upgrade is needed or whenever a bottleneck is encountered, it uses process improvement tools like Six Sigma to enhance productivity and then showcases the process improvement in the offshore location.

The Wipro Technologies connection has helped Spectramind provide a variety of services, ranging from handling just infrastructure and operations, to operations and application/infrastructure, to operations, applications and infrastructure.

"When you provide such integrated services, the understanding of the pain areas of the client is so clear that the relationship deepens and we are able to provide proactive solutions for further improvement," says Roy.

Future deals, says Srivastava, will require Indian companies to get a fair degree of sophistication not only in technological skills but also business skills, commercial skills and the ability to do different financial engagement models.

Companies will have to hire people in the countries they operate in who can engage with senior level executives in the client companies, since outsourcing decisions are increasingly being taken higher up the management hierarchy. These people must possess in-depth knowledge of their clients' businesses as well.

Says Longwood: "If you don't have knowledge of the vertical or business process, you cannot add value and will lose out to those who can."

Indian companies must also look at setting up offshore centres in different countries and opt for a global delivery model, says Longwood. 24/7 Customer, for example, is looking at acquisitions in south-east Asia, the United Kingdom and north America. "It will not change the dynamics of value-add," says Nagarajan, "but will improve customer traction. Many of them may want to outsource but not offshore immediately."

Most of the companies that will succeed, says Srivastava, will have a model that is reasonably well distributed between onsite and offshore, though Indian companies will have to learn how to handle a multi-cultural workforce.

All this will put pressure on the cost competitiveness of Indian companies, but he is certain that it won't go away entirely.

Companies that are not able to sustain the value proposition could, says Longwood, be acquired by larger players. In fact, he feels small and smart players may position themselves for acquisition and cash out. Stay put and get better or sell out? Either way, the future shape of the BPO industry will be an interesting one.

What clients may demand

  • Adopt the strategic sourcing cycle.
  • Move sourcing up the management agenda.
  • Develop a sourcing strategy aligned to business goals.
  • Leverage global and local lessons learnt.
  • Develop guiding and pricing principles.
  • Plan for additional transition risks.
  • Understand the costs involved.
  • Configure and bundle services required.

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