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Globalizing services

Multinational companies already understand India’s

advantages as a platform for software development.

But increased bandwidth and universal networking

standards are now giving them an opportunity to

move many parts of their business systems.

For several years, multinational companies have known the

advantages of using India as a center for writing software: a supply

of educated workers who can be hired for a fraction of the cost of their

colleagues in the developed world and lower infrastructure expenses. Today,

the increase in cross-border bandwidth capacity and the emergence of uni-

versal networking standards are opening up possibilities for moving many

parts of a company’s business system—well beyond the writing of code—

to India.

So-called remote services are becoming widespread in a variety of indus-

tries. By 2008, global remote-service operations may undertake activities

accounting for half a trillion dollars around the world and representing every

element of the value chain: upstream activities such as research and design,

manufacturing-related activities such as procurement and logistics, front-end

activities such as marketing and sales, and staff functions such as account-

ing, information technology, and human-resources management. Such oper-

9G L O B A L I Z I N G S E R V I C E S

E X H I B I T 1

Who will benefit?

High

Low

Medium

G l o b a l c o s t b a s e

o f i

n d u s t r y

Low Medium High

Relative share of services that can be outsourced

Industries most likely to benefit

•Airlines•Computer manufacturing•Packaged goods•Pharmaceuticals•Retailing

•Car manufacturing•Utilities

•Entertainment•Hotels•Real-estate brokerage

•Chemicals•Shipbuilding•Steel

•Banking and financialinstitutions

•Insurance

•E-commerce•Software

•Telecom•Electronics•Energy equipment

•Aerospace

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ations could generate cost and other savings of about $400 billion, to be

shared by the users and the providers as profits.

The big question is how to decide if remote services are appropriate for your

particular company. The most important factors to consider are the cost

base and the share of services in your company’s business system that

could be handled remotely. Exhibit 1 shows the industries likely to benefit

from using remote services—above all, financial-services industries.

Seizing the opportunity, several companies in the financial-services sector

have gone ahead and remotely serviced certain processes out of India,

thereby cutting their costs by 50 to 60 percent, after adjusting for higher

telecommunications and management expenses (Exhibit 2). Retail and com-

mercial banks that very comprehensively locate their services in India could

improve their cost-to-income ratio by at least 6 percent, in some cases

almost doubling current

profits. One global finan-

cial-services companyhas already achieved

annual savings of more

than $250 million—

according to its manage-

ment, only a fraction of

the total savings potential.

Companies can also

create business opportu-

nities using the skills

acquired by operating

remote-service centers.

GE Capital, one of the

largest remote-service

operators in the financial

world, is planning to

extend its services

beyond GE companies

to external customers.

As part of that plan, during the next five years GE intends to increase the

number of employees involved in its Indian remote-service operation to more

than 10,000, from the current level of 3,000.

In India, wages for highly skilled professionals in accounting, engineering,

and languages (mainly English but also French and German) are 70 to 80percent lower than they are in developed economies. While pay will increase,

10 THE McKINSEY Q UARTERLY 2000 NUMBE R 4 : AS IA RE V ALUE D

E X H I B I T 2

Seize the savings

100Percent

Processingcosts in

developedcountries1

Processingcost

differential

Additionalcosts2

Remote-services

processingcosts

1Excluding remote services.2For instance, management and telecom costs.

50–60%savings

20

70–80

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11G L O B A L I Z I N G S E R V I C E S

the country’s already vast reserves of well-educated people, boosted by a

growing private education system, will ensure the sustainability of India’s

cost advantage over the next decade. And the attraction is no longer limited

to favorable economics; exploiting time zone differences and increasing lev-

els of specialization are important benefits as well. Multinational companies

can draw talent or learn from the large and rapidly growing number of

remote-service providers in the country. Already, leading remote-service

hubs such as Ireland and Singapore—where skilled labor is becoming more

and more scarce—are moving their back-end operations to India.

Setting up a remote-service operation may be alluring but it can also have its

problems, and not just the obvious ones of distance and culture. Managing

potential labor disputes back home when a company decides to transfer

jobs to a remote location such as India will prove to be a thorny issue. And

some employees of remote operations, armed with information about global

job opportunities and compensation levels, may eventually bid up the price

of their skills, reducing the cost advantage that companies currently enjoy.

—Sunish Sharma, Rahul Sood, and Marc Vollenweider

Sunish Sharma is a consultant and Marc Vollenweider is a principal in the

Delhi office, and Rahul Sood is a consultant in the Silicon Valley office. Copyright

© 2000 McKinsey & Company. All rights reserved.

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