Offshoring Business Process IntroductionVendor Management

Over the past three decades almost all companies, ranging from all sizes, have realized savings by applying strategic sourcing practices. These sourcing efforts frequently yielded remarkable reductions in cost; often in the range of 5 to 25% as spend was consolidated and resources were streamlined. These efforts demonstrated substantial returns on investment making many Chief Information Officers (ClOs) heroes in the boardroom. The question at top of mind today is: What is the next wave of strategies for sustaining cost reductions and driving efficiencies in an intensifying and competitive business environment? The answer is in how companies are pushing the boundaries of outsourcing in a quest for further cost reduction by creating incentives that leverage the capabilities of their current provider partners.

Even as they seek new opportunities in sourcing, leading companies are finding themselves dependent on an increasingly complex multi-sourcing provider base, with the need to drive further cost and performance improvements, manage provider risk, and streamline costs of vendor management. These companies are developing a new set of Vendor Relationship Management (VRM) capabilities including processes, governance mechanisms and systems to manage vendors on a day-to-day basis over the full relationship lifecycle. Early adopters of VRM are realizing savings in existing relationships, remediating relationships that are not working, working with vendors to build joint capabilities and improve joint processes, effectively managing vendor risk, and reducing internal costs of vendor management.

Vendor Management and relationship

Vendor Relationship Management (VRM) is a set of principles, processes, templates, and tools to maximize relationship value and minimize risk and management overhead over the entire vendor relationship lifecycle. VRM enables organizations to effectively:

Stratify vendors based on importance and define relationship expectations

Establish the governance structure and process for internal and vendor interactions across the lifecycle of the vendor relationship Define formal processes for management involvement in the relationship Clarify internal roles and responsibilities to achieve operational alignment Secure required vendor management tools and skills Put in place processes to effectively manage vendor performance and develop vendor capabilities to continuously drive innovation and improve value World Class Vendor Relationship Management includes five key practices:

1. Vendor Tiering

Effective VRM requires a clear company-wide understanding of which vendors are the most strategic to the organization and which are less important. However, in the absence of balanced, formal criteria for vendor tiering, vendors on which the organization spends the most are inevitably viewed as the most important and tend to capture the greatest relationship focus and effort. Factors such as business criticality, operational / technical integration, alignment with business strategy, conformance to quality and long-term cultural fit with the organization are often ignored, reducing the organizations vendor management effectiveness. In addition, effective vendor tiering requires a set of common definitions of how vendors in strategic and non-strategic tiers should be managed. This common set of definitions enables companies to:

Optimize resource allocation across a broad multi-vendor base Establish and manage relationship expectations by vendor tier, providing a common reference point for what it means for a vendor to be strategic Define for vendors what financial and non-financial benefits can be realized from moving up the vendor tiering ladder Provide functional and business groups with consistent partnering strategies within their multi-vendor bases Provide functional and business groups with a fresh view of their vendor portfolios based on relationship value, enabling improved decisions on further vendor consolidation and leading to further strategic sourcing opportunities Create incentives to motivate vendors to strive for advancement across vendor tiers 2. Vendor Management and Governance Organization

Once the importance of a strategic vendor to the organization is established via Vendor Tiering, the next step is for the organization to define the team structure that will be required to manage the vendors on a day-to-day basis and how to establish a Vendor Management Organization with the right roles, activities, skills and knowledge needed for effective multi-vendor management. Formalizing these definitions across the organization can reduce duplication of effort confusion within the company and among vendors and inefficiency. In addition, a VMO structure eliminates many of the dropped hand-offs and helps operationally align among business functions and among vendors to make vendor management more proactive.3. Vendor Training and DevelopmentDue to increasing multi-vendor sourcing, a companys overall performance and efficiency is more and more dependent on the capabilities of its vendors. An organization benefits greatly when key vendors dramatically reduce costs, introduce innovation and new services designed to address the organizations needs, expand their footprint to provide seamless coverage in multiple regions, and work with the organization to operationally align and streamline joint processes.

Technology Support and BPO operation

Companies need to invest, upgrade and provide end-to-end support services keeping pace with the ever-changing technology without having a negative impact on the quality of service. There is a need to focus on customer service and post-sale technical support as critical service differentiators that help organizations stay ahead in a highly competitive business environment. Outsourcing technical helpdesk is no longer looked upon as a short-term cost-cutting tool with the focus now shifting to long-term competitive gain.In order to provide customers with end-to-end support services, firms must deliver a superlative customer experience and also find ways to reduce the cost of operations while driving for new revenues.

The technical helpdesk infrastructure capabilities of the offshore partner are a significant factor in ensuring seamless transitioning of helpdesk functions. Offshore technical support centers and helpdesks in India are thus investing in cutting-edge technologies and state-of-the art technical helpdesk.

BPO is a leading and respected player in the Technical Support Services segment and aims to relentlessly deliver value in addressing each Clients specific business goals. Helpdesk models are thus tailored to meet the needs of individual customers for successful outsourcing outcome, as the one-size-fits-all option no longer exists. Acknowledging the concerns of the market through commitment and customer feedback, the company has developed solutions for the entire Support Life Cycle Management.Types of Services Provided by the BPO Industry

The various types of services provided by the BPO Industry include Customer Support Service; Marketing and Sales (inbound/ outbound); Technical support; Help desk; HR Administration services; Finance and Accounting services; Content development; Medical transcription services; Knowledge processes related services like, Analytics, Modeling, Forecasting and Legal support.

1. Call Centers

A contact center is a facility for multipurpose, multi-channel interaction that serves the needs of the various constituents of an organization customers, prospects, supply chain, distribution channel and employees. Call centers are contact centers that handle only voice interactions. The outsourcing model has gained quick acceptability in contact centers, subject to strict adherence to nondisclosure contracts and service level agreements. The opportunity in India was stimulated by advancements in communications technology. U.S. and European companies such as GE and American Express pioneered this activity in India by starting their own offshore and shared service centers.

2. Insurance Claims Processing

The insurance industry in the US is highly complex. Healthcare practitioners and hospitals in the United States find it very cumbersome to manage the documentation and to follow up with insurance companies for their fees. Many find it easier and more cost-effective to outsource the documentation and follow-up activity to Enterprise Service Providers (ESPs). Medical billing and claims processing services offered by Indian vendors include data entry, patient enrollment, accounts receivable, denials/rejections analysis, rebilling, insurance follow-up, and collection agency reporting.

3. Transcription Services

Transcription services involve conversion of information from voice format into text format. Transcription services take two main forms: medical transcription and legal & business transcription. Medical, legal, and business transcription is a big business opportunity for Indian vendors by virtue of the English-speaking talent available at significantly lower costs than the United States. The level of confidentiality involved in the information shared by the client is higher and the Service Level Agreements (SLAs) and Non Disclosure Agreements (NDAs) are bound to be more complex. To benefit most from this opportunity, vendors have to ensure good quality of output, and a high degree of assurance towards their ability to successfully manage the security and confidentiality of customer data.

4. Human Resources Services and Accounting

Managing human resources (HR) involves a number of routine, time-intensive tasks that distract HR managers from more important functions. Once again, external service providers offer a viable alternative. Services offered by ESPs in India include payroll processing, pension management, and resume management. Indian service offerings in accounting typically include remote data entry, general accounting, accounts receivable, accounts payable, customer invoicing, credit application, and collection processing and collection calling Only a few companies in India offer these services, but each one processes millions of transactions annually. Setting up to provide these services demands a significant investment in IT infrastructure and staff with relatively higher qualifications.

5. Forms Processing

Forms processing services promote speed, accuracy, and low cost. Manual key entry can be integrated with high-end tools for forms capture. Data from paper, optical and magnetic media may be converted, inputted to a database and validated. Customized data capture can span orders, invoices, warranties, survey forms, check information, customer enrollments, government statistical information, and intelligent abstraction of data from financial reports. Only a few companies in India, such as Datamatics, have been providing such services from their data-processing centers.

6. Legal Databases

Timely access to relevant laws, amendments and precedents has driven the emergence of a legal database industry in the US. BPO service providers train lawyers to work closely with their clients to create and maintain an extensive database of their records and conduct supporting research. Salaries and qualifications are higher than those for employees engaged in other BPO activities, but so are the margins, and the cost of a lawyer in India continues to remain a fraction of the cost of his/her counterpart in the United States. Indian legal service providers are in an advantageous position over other Asian BPO providers for reasons other than cost: Indian lawyers operate in a large scale democratic environment (India is the worlds largest democracy) similar to that of the United States, and can readily understand the approach and requirements of their U.S. counterparts.

7. Data Centers

Clients typically sign up for data center services to take care of their incremental storage requirements at lower costs. Data centers are also seen as a solution for data backup as part of disaster-recovery and business-continuity policies. A data center service provider should be able to offer multiple platforms, easy scalability, reliable connectivity, and data security.

8. Digital Media

The service portfolio for digital media and animation content development includes data collection, collation, sorting into meaningful categories, data presentation and developing animated movies and cartoons for films, television, advertisements and educational media. India has a huge talent pool trained in media and animation development that is already being utilized by US filmmakers. Educational CDs (for Distance Learning) represent another significant opportunity for the Indian ITES industry.

9. Data Digitization

Data digitization services include converting data in various forms into a digital format that can be easily accessed, analyzed, and manipulated on a computer. The range of services provided by Indian ITES companies includes data capture, data conversion, software intelligence (SI) and consulting. This service differs from most other BPO services in that it is more IT-intensive and requires people with higher levels of IT and spatial skills than in other services, which also means margins are higher.

10. Research & Development

Indian BPO vendors are well-positioned to provide outsourced web search, archiving, and analysis services. Teams of people dedicated to specific research areas and/or geographies can continuously monitor, archive, and catalog information, and respond to queries from global clients. Beyond general online research, such companies can provide more valuable services in customized research, business intelligence (BI), operations research and business valuation. The Indian IT company Wipro has around 9,000 engineers designing products for about 100 companies making it the world's largest third-party R&D outsourcer

11. Engineering Design and Biometrics

This is a niche IT services activity in India. Indian universities produce a large number of engineers across various science and technology disciplines. This resource pool can be applied to R&D and engineering design services. A few companies in India provide such services. Bio-informatics, and specifically genomics research, represents another BPO opportunity for Indian providers because of the tremendous amount of information across tens of thousands of genes that must be simultaneously accessed, organized and searched for novel relationships. Although this is a new area for Indian BPO vendors, some Indian companies have already ventured into offering services through tie-ups with US companies involved in R&D on genomics and with companies that aggregate published information focused on medical research.

Offshoring BPO as Business Opportunity Outsourcing industry is the sunrise industry in India, which plays a vital role in the sustained growth of the economy. It is, roughly, growing at the rate of 60-70 per cent per annum. This industry is estimated to be worth about $52 billion. Its main driving forces being the Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO).Information technology enabled services (ITES) and BPO are the fastest growing sectors in the Indian IT industry, both in terms of employment opportunities and revenue generation. They have become a highly sought after career option for fresh graduates, especially those from the Information Technology (IT) sector. This is due to the advantageous position of India in having one of the largest pools of low cost, English speaking, scientific and technical talent. The total number of IT and ITES-BPO professionals employed in India has grown from 2, 84,000 in 1999-2000 to over 1.63 million in 2006-07. The direct employment by this industry has grown at a compounded annual growth rate (CAGR) of 26 per cent in the last decade, making it the largest employer in the organized private sector of the country.

There are numerous opportunities in setting up and development of both domestic and international call centers in India. A company can set up its own call centre to deal with its customers, and/ or it can hire a professional firm to do the job. On one hand, these creates more employment opportunities for people at large with good pay package, and on other hand, brings global businesses into the country and thus, helps to increase India's national income. Hence, as the outsourcing activities booming in the world, India stands to gain with more foreign exchange earnings.

Further, BPO exports from India grew from US$ 3.1 billion in year 2003-04 to over US$ 8.4 billion in the year 2006-07. The Indian software and services exports including ITES-BPO are estimated at US$ 40.3 billion (Rs.163,000 crore) in 2007-08, as compared to US$ 31.4 billion (Rs.141,000 crore) in fiscal year 2006-07, an increase of 28.3 per cent in dollar terms and 15.6 per cent in rupee terms. Further, the export revenues from ITES-BPO are estimated to grow from US$ 8.4 billion (Rs.37,700 crore) in year 2006-07 to US$ 10.9 billion (Rs.44,600 crore) in year 2007-08, a year-on-year growth of over 30 per cent (in dollar terms) and 18.3 per cent (in rupee terms).

While, KPO sector is increasingly becoming most preferred option for the growth of Indian economy, where the Indian companies outsources their high-end knowledge work. Here, major advantages and opportunity areas are cost savings, operational efficiencies, access to the skilled and talented workforce, multilingual capabilities and improved quality norms.

Further, business of India's outsourcing industry mainly comes from advanced and developed countries like United States (US), United Kingdom (UK), etc. Thus, it is a great opportunity for India to acquire major chunk of income from such countries. Also, this encourages Indian counterparts to upgrade the skills of their present employees, improve working conditions, improve quality standards, etc. Although US and UK are the key markets for Indian IT-BPO exports (excluding hardware), accounting for nearly 80 per cent of the total exports, the industry is steadily increasing its exposure to other markets like Continental Europe and Asia Pacific. This is a positive opportunity for Indian outsourcing industry.

Although, India's outsourcing has been facing many challenges, internally as well as from global markets, but it is creating many innovative business models that can actually save precious management time and resources as well as allow companies to focus on their core competencies. In order to meet international standards, outsourcing to India is now focusing more on high and stable quality systems rather than only on cost savings.

Though the IT-BPO sector is export driven, the domestic market is also significant. BPO demand in the domestic market has witnessed noticeable growth over the past few years. It has led not only to job creation and income generation, but also triggered the growth process of several ancillary industries such as transportation, real estate and catering, etc. as well as created a rising class of young consumers with high disposable incomes, triggered a rise in direct-tax collections and propelled an increase in consumer spending.

All these shows that India is poised to emerge as a global powerhouse for outsourcing of IT software, ITES and BPO/ KPO sectors and for other types of outsourcing categories as well. There exists innumerable opportunities in Indian outsourcing industry and is considered to be an attractive destination for investors the world over. This industry has also helped in increasing adoption of technology which enhances performance and competitiveness in the domestic market as well as seeks to reduce economic disparities by greater participation of women in the workforce.

Risk involved in OutsourcingWhen services are outsourced to offshore providers, a customer faces increased costs and risks compared to solutions involving on-shore resources. Offshoreoutsourcing, though potentially more cost-effective, may involve hidden costs including: a more expensive and lengthy step of vendor selection, a longer (3-12 month) timeframe to complete work handover to the offshore partner, severance and costs related to layoffs of local employees who will not be relocated internationally, turnover cost, and costs associated with addressing language and other communications or cultural differences. Lastly, managing the actual offshore relationship is also a major additional and sometimes unforeseen cost. Overall, a company may end up paying up to 50% moreinfront end costs than initially expected and only achieve a cost savings of up to 15%-25%inthe first year; well below the expected 35%-40%insavings, which will only be achievedinthe third year of the agreement. An increaseinfront-end costs may cause theoutsourcingorganization to agree to lengthen the initial term of the agreementinorder to generate the required financial benefits, which ultimately involves making a larger commitment and therefore increasesrisk. Aside from costs, other risks which must be considered whenoutsourcingto offshore companies include:

Data/Security ProtectionWhile most IT organizations find offshore vendor security practices impressive (often exceeding internal practices), therisk of security breaches or compromised intellectual property (IP) rights is inherently raised when working internationally. On the IP front, some Indian courts have recently demonstrated a meaningful response to the problem of respect for and enforcement of IP rightsintheir respective countries by awarding punitive and exemplary damagesininfringement cases.Process disciplineThe Capability Maturity Model (CMM) becomes an important measure of a companys readiness to adopt an offshore model. META Group observes that approximately 70% of client IT organizations are at CMM Level 1, whereas offshore vendors require a CMM Level 5 standardized and repeatable model. This disparity creates a gap that is usually compensated for by additional vendor resources on-site. [5] Companies lacking internal process model maturity will therefore find it challenging to realize upon the cost savings which should arise from the retention of an offshore service provider.

Loss of business knowledgeCompanies must carefully assess business knowledge and determine if moving it to an offshore location will compromise the companys ongoing ability to perform at the required levels.

Vendor failure to deliverA common oversight for IT organizations liesinnot implementing a contingency plan to deal with theriskthat a vendor, for whatever reason, fails to deliver as expected. Highriskor exposure might force the organization to unexpectedly alter its outsourcingstrategy (i.e. from a single offshore vendor to multiple vendors).

Compliance with Government Oversight/RegulationUtilities, financial services institutions, and healthcare organizations - among others - face various degrees of government oversight. The negotiating team advising this type of regulated entity must ensure that the selected offshore vendor is aware of and will be compliant with industry-specific requirements and that the vendors compliance will be demonstrable to, among others, all necessary auditors.

Culture

Cultural differences include religion, mode of dress, social activities and even the way a question is asked or answered. Although most leading vendors have cultural education programs, the challenges and costs associated with cultural alignment may not be insignificant or trivial.Turnover of key personnelRapid growth amongoutsourcingvendors has created a dynamic labour market. Common turnover rate levels, especially inIndia, areinthe 15-20% range. A high turnover rate has an indirect impact on the client organization because it forces it to increase time spent on knowledge transfer and training new individuals. To address this concern, clients have recently tended to demand that contracts place a liability on the vendor for any personnel that must be replaced.

Productivity fluctuationsMost IT organizations experience a 20% declineinproductivity during the first year of an agreement, largely due to time spent transferring both technical and business knowledge to the vendor. Furthermore, the cost savings achieved from an offshore arrangement often come at the expense of personnel layoffs by the client organization. Layoffs can cause significant morale problems among the inhouse survivors, which may sometimes lead to dissatisfaction and work slowdowns.

Competitive ProcurementPotential Pitfall: A customer may enter into an agreement with a service provider that does not generate the expected benefits and/or undermines the bargaining position the customer will have during any renewal negotiations.

It is critical that the customer develop an accurate baseline of the process(es) or function(s) to be outsourced prior to entering into negotiations with the service provider. The baseline will establish important negotiation input data, such as the number and type of internal resources currently required to perform the function/process and the service levels then being experienced by the internal service recipients. Once acquired, these data will assist the partiesinnegotiating the appropriate deal parameters including pricing, service levels and the length of the initial term.

It is now the norm thatoutsourcingservices providers are selected after robust request for proposal (RFP) processes have been followed, that RFP process having possibly been preceded by initial request for information (RFI) or request for quotation (RFQ) phases. For significantoutsourcingtransactions, it is now quite usual for the customer to enter into substantial negotiations with the top two bidders and to only make the final selection once further discussions have taken place and details uncovered via those negotiations.

ChangesPotential Pitfall: A service provider may become opportunisticinits pricinginthe event that material changes to the relationship need to be introduced mid-stream during the initial term or any renewal term of the agreement (a likely occurrence given the usual lengthy duration ofoutsourcingarrangements). Thisriskis particularly present when, as a result of an over-reliance upon the competitive procurement process just discussed, the customer has aggressively negotiated down the profit margin accruing to the service provider pursuant to the agreement as initially negotiated.

One way for the customer to manage theriskof change-related costs subsequently undercutting the economic viability of theoutsourcingarrangement, is to obtain the service providers promise to use commercially reasonable efforts to quote a fixed price for implementing any proposed change.Inthe event a fixed price cannot be quoted, the service provider shall quote the customer a charge for the proposed change which is equal to the service providers incremental direct cost of providing the change, plus a profit margin equal to a defined amount less than its annual operating margin as reportedin its most recent annual report.

BenchmarkingPotential Pitfall: A service provider may not pass on the appropriate portion(s) of the cost reductions generated during the term of an agreement, such that the customer is subsequently placed at a relative competitive disadvantage.

Inorder to have a viable means for testing whether any promises made by the service provider have been adhered to and that the expected cost reductions have materialized and have been appropriately shared during the term of the agreement, the customer will often propose that benchmarking provisions also be includedinthe agreement.

Benchmarking provisions allow a customer to have a knowledgeable third party compare the service providers pricing with the pricing being offered to other customers operating under similar arrangements. The negotiation of benchmarking provisions can be challenging, as the service provider can be expected to resist the imposition of terms which are perceived by its negotiating team as materially enhancing theriskof an unfair clawback on the profitability of the arrangement, particularly since customer concerns about minimizing upfront transition costs generally resultin outsourcingcontracts that are back-end loaded (i.e. the service providers profits often only arise during the latter portion of the initial term and, of course, during any renewal terms). On the other hand, a customer would be leery to agree to provisions where the output of a time consuming and expensive benchmarking process is merely an opportunity to meet with service provider representatives to discuss the possibilities for reducing costs, and therefore pricing, under the agreement.

Service LevelsPotential Pitfall: A failure to adequately define the nature of the service expectations via the service level agreement (SLA) portion of the overalloutsourcingagreement, and the initial monetary consequencesinthe event of failure(s) on the part of the service provider to meet those expectations, will increase the likelihood of disputes between the parties and leave the customer with inadequate means of incenting the service provider to meet its contractual commitments.

It is difficult to overstate the importance of negotiating a comprehensive and realistic SLA and, generally speaking, this portion of the negotiations tends to be both challenging and time consuming. The SLA negotiations should serve to shed light on many of the existing grey areasinthe relationship and so it will likely also be time well spent during the formative period of the relationship. As the service provider can be expected to resist the imposition of SLA fee clawback regimes which allow customers to impose a penaltyinthe event of a breach of an SLA metric,inseeking to negotiate the SLA provisions the customer should be guided by the principle that it will pay 100% of the agreed to rate(s) for full service and a reasonable amount less for less than full service up to the defined point(s) where a customer termination right will arise. It is critical that the SLA also define the point at which poor service will give rise to a customer option to terminate the agreement for cause (i.e. without an obligation to pay termination fees) and it include a provision stating that termination rights not be subject to an additional cure period. This approach addresses the reality that termination tends not to be an attractive remedy for the customerinthe event of poor service and thus should only be considered after less draconian options have been exhausted.

DisputesPotential Pitfall: Not having an appropriate dispute resolution process. As is the case with other sophisticated commercial contracts,outsourcingcontracts usually include dispute resolution provisions. Such provisions can provide for an initial phase during which a dispute will be escalated up through a series of suitably constituted committees staffed by representatives of the parties. This is followed by a second more formal phase during which any dispute which remains unresolved at the conclusion of the initial phase becomes the subject of: (1) litigation; (2) mediation (a voluntary, non-adjudicative processinwhich the mediator assists the partiesinnegotiating a settlement); or (3) arbitration (arbitration can be considered as providing the function of a private judge and accordingly is an adjudicative option conducted before either a panel of one or three arbitrators). Another dispute resolution mechanism sometimes used is last offer arbitration, colloquially known as baseball arbitration.Inthis scenario, each party submits their last best offer to the arbitratorinadvance of the hearing. This process is intended to promote the submission of reasonable offer proposals by the parties as the arbitrator is limited to awarding one of the offers submitted.

Transition OutPotential Pitfall: The customer will beina weak position at the time theoutsourcingrelationship is being terminated or is expiring to negotiate transition out terms and runs theriskof being exposed to large unexpected costs.A failure on the part of the customer to be comprehensiveinits approach to defining the transition out process will leave it vulnerable at a time when the service providers behaviour may not be moderated by the prospect of future revenues. Typically, this portion of anoutsourcingagreement will set out the maximum duration of a termination period during which the service provider is required to provide defined termination services to the customer and/or its new third party provider under a termination services plan. The obligation to provide such termination services should be made contingent upon the payment to the service provider of all prior undisputed service fees and the execution of an appropriate confidentiality agreement by any such third party provider. The service provider will generally be entitled to additional compensation (at defined rates) if,inproviding the termination services, it is required to use additional resources or additional resource hours. Transitioning out provisions also usually address: the return of data and records relating to the services, eachina specified format; the return of ownership to the customer of assets previously sold by a customer to a service provider; the reassignment of contracts (including licenses) to the customer that were originally assigned by the customer to the service provider; the provision by the service provider of the necessary staff, services and assistance to effect an orderly transition and migration, which obligations will frequently encompass the hiring of staff, software training, access to personnel, provision of copies of procedures manuals, use of software, sale to the customer or the third party provider of dedicated equipment, and the disclosure of service provider proprietary information. Lastly, it is a good idea to include at least a soft cap on transition out fees.

US financial crisis that started in 2008 changed several industries permanently; offshore outsourcing is not immune to the changes.Top outsource vendorssuccessfully managed the global recession by adopting different global delivery models and by understanding customers business started providing direct business value in the projects. Customers from their part started managing their outsourcevendorsmore efficiently and with better performance metrics they started getting maximum benefits in minimum cost.Following are some of trends that are happening in offshore outsourcing.

1. Outsource vendor delivery model

Outsource vendors started with Staff Augmentation as the primarydelivery modelslowly changing to Managed delivery model. In staff augmentation, client sends RFP to offshore vendors asking for specific technical skills like Java, C++, Oracle DBA, etc. Outsource vendors respond to the RFP by sending their employees resume with an hourly rate. Generally outsource vendor with lowest hourly rate (cost arbitrage) wins the RFP. In this model customers did not have a way to find the business value provided by the contractors. Yes the customers saved money in their projects, but they do not have a way to specifically point out the business value added by those contractors. Also customers measurement did not include the time spent (and productivity lost) by their own employees in managing and training the contractors.

2. From cost arbitrage to managed delivery:The cost arbitrage model gave little or no incentives for the outsource vendors in providing other business values like quality, process efficiency, time to market, etc. In the managed delivery model outsource suppliers agree to deliver specific functionality for a given price. For example, customers outsource their call center operations with specific service level requirements like call wait time less than one minute per customer, number of calls processed in a given time etc. In the managed delivery model both client and the outsource supplier work closely from the beginning of the project, often client considers the outsource provider as a partner and gave full control in managing their own employees. Customers benefit from getting the desired services without managing the variable requirements of the contract resources needed for the projects.

The new managed delivery model is getting wider acceptance in both onshore and offshore outsources projects. Compared to cost arbitrage model, in managed delivery model clients must spend significant up-front cost in working with theoutsource vendors teamin making them understand their business processes, IT infrastructure, project management, etc. So they may not see the ROI for a long time, but still customers are moving towards managed delivery model due to the benefits offered by the new model.

3. Different pricing models: In the managed delivery model customers started negotiating different pricing models like fixed price, transaction based, performance based, etc. For customers these new pricing models are helping to reduce their capital (capex) and operational expenses (opex). For offshore vendors it is helping to use their resources efficiently to achieve the SLA set in the outsource contract and to meet their profit margins.

4. Outsource vendor domain maturity: In the managed delivery model offshore vendors moved from lower to higher value chain, working closely with the customers, started offering business solutions that are strategic in nature. This is helping the customers to identify long-term need for the offshore vendor services and managing the project more efficiently. The offshore vendors are benefiting repeat business from their customers and it also helping them to sell their domain expertise to other customers in similar business verticals.

5. Outsource project metrics and accountability: Traditionally offshore outsourcing performance metrics was performed with the main focus on cost savings. But now in the managed outsource model, customers started measuring business value provided by the offshore teams. Typically both the client and the offshore vendor identify minimum number of measurable goals in the beginning of the project, add those goals in the SLA, and manage it throughout the duration of the project. This gives the client and the offshore vendor proper project governance in resolving issues that arises during the course of the project. The transparency provided by the new model is helping the offshore vendors to correct their mistakes and offer better service to their customers.ANALYTICAL MECHANISM TO MEASURE OFFSHORING SUCCESS

In today s sourcing business, many companies are offshoring IT services and projects to India, some as a Captive Center (employment of own Indian staff), others choose external service providers for delivery.

While a few years ago such offshore decisions have primarily been made to save costs, today these decisions are more often included into a global multi-sourcing strategy, where overall sourcing goals determine the right sourcing method. And, offshore outsourcing (e.g. to India), is still a good solution for specific situations.

A challenge for decision makers is to profit from lessons learned other companies have experienced, since companies are typically not willing to openly admit and share their failures. Thus, information on key success factors are mostly collected by consulting companies or in-house, while even in-house knowledge is often not shared.

The underlying article comprises a series of key success factors that can be observed in almost any mid-size to large-size offshoring project focusing on India. The question is: how is success measurable?The answer to this is very simple: from the very beginning, KPIs should be defined to measure the success of the project. In addition, it is advisable to institutionalize regular satisfaction surveys that measure the perception of the engagement across several stakeholder levels.

The success of an offshore outsourcing engagement should be pro-actively addressed. The following list is a key collection of criteria to ensure a successful offshore engagement:1. Cultural awareness: In most cases, there is tremendous time pressure to offshore services or projects. The tight time schedule of a project plan forces the management to save costs quickly. The consequence is that often knowledge on already existing offshore experience is not sufficiently shared, not even within the company, and therefore, with respect to cultural awareness, this is very important. A misunderstanding of the Indian culture will result in higher costs later and can at times result in cost deficit disasters. Indian staff working with Western staff (on each level) and Western staff working with Indian staff must be trained on cultural differences. Very helpful for effective working relationships are mutual visits in the other country. This has shown drastic improvement on each others understanding and quality of work. Furthermore, it is beneficial to have a specific percentage of Indian colleagues work onsite (e.g. 20% onshore - 80% offshore). The assumed higher costs mostly compensate for costs that arise otherwise (see below).

2. Strong Management & Sponsorship: For offshore outsourcing projects, a strong management team (onshore and offshore) and a fully dedicated sponsorship are crucial to enable fast decisions and clear directions. The continuous drive and proactive attitude must come from the service recipient. For large-size projects, it is inevitable to have a Program Management Office (PMO) in place that ensures all communication is bundled, interpreted and available. The PMO ensures that respective rigor is given throughout the overall engagement, that the right communication is done in time and that problems are de-escalated appropriately.

3. Governance Framework: Watching the market, it has proven that most offshore outsourcing initiatives fail with their goals unsatisfied because of the fact that a clear governance framework has not been defined. The governance framework ensures that all managerial rules, regulations and processes are explicitly stated and will be followed by all stakeholders. It is considered as the backbone for an engagement. Typically, it is aligned to internationally accepted quality models and adjusted to the project needs.

4. Offshoring Readiness: Several questions need to be addressed in order to evaluate offshoring readiness. Is the internal staff ready for offshoring? Extensive knowledge and training are required prior to transfers and need to be consistently supported; strong resistance might adversely affect a company s success. Are processes mature enough to be offshored? Have the processes been scanned and evaluated carefully, considering maturity and risks to ensure they are suitable? What is the documentation level of the processes? In most cases, this question will be answered with "90% documentation had done while the reality shows that instead "30% documentation is done". Documentation is a time intense activity and mostly underestimated.5. Experience: The bigger the offshore outsourcing initiative the more important it is to have the right experience available. Identification of risks and foresights are crucial to ensure a successful engagement offshore. Wrong decisions and wrong expectations can easily result in a back transfer of the services to onshore.

6. Quality Adherence: Services are typically offshored to save costs. Although most experienced consultancy companies today discourage this perspective, nevertheless, many offshore businesses are motivated primarily by cost advantages. It is often realized late in the process that quality is one of the top two to three driving factors for a successful offshore engagement. Lacking qualities have an impact on performance and reputation of the engagement. Poor qualities can cause considerable follow-up costs, which in turn have a negative impact on the business case.

A close adherence to Industry Standards, such as ITIL, ISO9000, Six Sigma, CMM, etc. is highly recommended, as well as regular quality audits and continuous quality improvements. Quality initiatives should be a standard asset for successful delivery.

7. Expectation Management: Outsourcing engagements have a supplier (also in-house) and a recipient, which causes different expectations. The fact that a service is delivered from India, complicates the expectations. Expectations are often becoming unrealistic and sooner or later, these wrong expectations become problematic. It is important to close expectation gaps which lead to dissatisfaction.

One typical example for expectation gaps is when service owners are in doubt about the service provider s capability and hesitant to give services offshore, while the service provider (also in-house) might feel unchallenged by dealing only with standard, unchallenging topics.

A good expectation management will ease communication and sets expectations right. This can be accompanied by innovative approaches - initiations by quality management, for example.

8. Contract: In case the services are handed out to an external service provider, a respective contract management is needed. If there is no in-house legal department available, external legal advice is inevitable to ensure that the business is built on a stable base.

Over the past several years it has proven that "built for change" contracts are most suitable. More and more companies are starting to negotiate penalties for lacking service quality or specific situations.

9. Onshore-Offshore Ratio: A 100% offshore model (all resources working from offshore) is very challenging for both the service provider and service recipient. Interactions and exchange opportunities are missing which often leads to functional, technical, and cultural misunderstandings. Frequent exchanges or a ratio of 20:80 or 10:90 can be recommended and assumed to be covered in the business case.

Offshore outsourcing is seen now as one out of several sourcing options. It can be selected in alignment with the overall company Multi-Sourcing strategy. India, as one of the choices for offshoring, is constantly becoming more and more expensive. While it is not clear when stagnation can be expected, India has a few advantages to offer. Today, the key players in India can offer very good experience, skilled management staff, a good infrastructure and a decent understanding of the Western IT market and needs.

BPO Operation in India

FY2012 is a landmark year while the Indian IT-BPO industry weathered uncertainties in the global business environment, this is also the year when the industry is set to reach a signicant milestone aggregate revenue for FY2012 is expected to cross USD 100 billion. Aggregate IT software and services revenue (excluding hardware) is estimated at USD 88 billion. During this year, direct employment is expected to reach nearly 2.8 million, an addition of 230,000 employees, while indirect job creation is estimated at 8.9 million. As a proportion of national GDP, the sector revenues have grown from 1.2 per cent in FY1998 to an estimated 7.5 per cent in FY2012. Its share of total Indian exports (merchandise plus services) increased from less than 4 per cent in FY1998 to about 25 per cent in FY2012.

Exports market: Export revenue (excluding hardware) during FY2012 is likely to reach USD 69 billion, accounted for by about a 2.2 million workforce. This represents a growth of 16.3 per cent; these exports also account for over 68.5 per cent share in aggregate IT-BPO revenue.

Service lines: Within exports, IT services segment is the fastest growing at 19 per cent over FY2011 with export revenue of USD 40 billion, accounting for 58 per cent of total exports. This sector has seen the emergence of full service players offering traditional services like application development and maintenance to testing, infrastructure, consulting and system integration, as also niche providers offering end-to-end services in particular verticals or customer segments. This sector is now focusing on moving further up the value chain by positively impacting business outcomes and customer revenues.

The BPO segment is expected to grow by 12 per cent to reach USD 16 billion in FY2012. In the last few years, the BPO segment has been focusing on re-engineering itself in order to deliver transformational impact to customers. A Verticalised approach has been a key marketing strategy developing indepth capabilities across the entire value chain in specic verticals. BPO rms are also increasing their onshore and near shore footprint to enable customer entry into local markets; rms have also been actively implementing non-linear growth initiatives that ensure higher realisations for service providers, while controlling costs, facilitating faster time-to-market and improving satisfaction at the clients end. The ER&D, OSPD and software products segments are expected to generate exports of USD 13 billion, a growth of nearly 14 per cent over FY2011. ER&D rms are increasingly developing capabilities that are enabling them to participate across all stages of ER&D, thereby delivering high-end services to customers. Disruptive technologies cloud, mobility, social media and big data/analytics are playing a signicant role in driving growth of OSPD and software products Geographic focus: US continue to drive IT-BPO exports growth. Export revenue from the US is likely to grow by over 17 per cent in FY2012, driven by higher demand for IT services and support. Europe has gone through a tough period in the last couple of years, however, growth is returning gradually and this region is expected to show good performance in FY2013. APAC region exhibited fastest growth at nearly 18 per cent as customers in that region showcase increased adoption to IT as they aim to compete on a more even scale in the global market

Vertical markets: The BFSI vertical is set to increase its share in IT-BPO exports to 41.2 per cent; however, share of telecom is to decline from 20 per cent in FY2011 to 19 per cent, largely due to slowdown in telecom investments in the US and UK. Emerging verticals retail, healthcare, media and utilities continue to record fast growth.

Domestic market: Domestic IT-BPO revenue (excluding hardware) is expected to grow at almost 17 per cent to reach ` 918 billion in FY2012. Strong economic growth, rapid advancement in technology infrastructure, increasingly competitive Indian organisations, enhanced focus by the government and emergence of business models that help provide IT to new customer segments are key drivers for increased technology adoption in India

IT services is the fastest growing segment in the Indian domestic market, growing by 18 per cent to reach ` 589 billion, driven by increasing adoption from all customer segments government, enterprise, consumers and SMBs

Domestic BPO segment is expected to grow by 17 per cent in FY2012, to reach ` 149 billion, driven by demand from voice-based (incl. local language) services and increasing adoption by both traditional and emerging verticals, including the government

The domestic software products segment is set to grow to ` 180 billion in FY2012, a growth of ~13 per cent over FY2011. This segment is being driven by the need to replace legacy systems and technology advancements around cloud, mobility, etc.

Indias customer base government, large enterprises, micro, small & medium enterprises and household consumers, represent unique set of requirements. Government IT spends is led largely by hardware and IT services; large enterprises have mature IT infrastructure and are driven by need for applications that improve productivity and efficiencies. SMBs are focusing on solutions that enable greater customer reach and better marketing. Household investments are largely for hardware laptops, notebooks, etc. and consumer applications around mobility and social media

Indian IT-BPO value proposition

Even in the face of stiff competition from other locations, India retains its position as the worlds leading global sourcing destination for IT-BPO services with a share of 58 per cent in 2011. Indias value proposition rests on its ve pillars of strength: Continued focus on optimal cost efficiency: India continues to be the most cost-competitive provider of IT-BPO services. Cost efficiencies further maintained through various internal process and productivity improvement initiatives including stable entry level salaries, widening the pyramid, tightening non-employee cost structures, fast career growth, movement into Tier II/III cities, and a non-linearity focus through platform and cloud products Unparalleled human capital: India churned out an estimated 4.4 million graduates in FY2012, retaining its position as the largest source of employable talent in the world. Service providers are effectively utilising Indias talent pool by designing large scale talent re-engineering initiatives and employee engagement activities. This is enabling the industry to provide both end-to-end and high-end value-added services across sectors

Unique customer centricity: Leading industry players has been able to deliver continuous value to customers. This unique customer-centric approach is best demonstrated by re-engineering their business/organisational structures, engage in strategic advisory relationships, focus on delivery innovation and manage high-end complex engagements

Scalable and secure environment: The sheer size of the Indian market provides a high level of stability in terms of managing concentricity risk as compared to other sourcing markets. With political/economic stability, major service providers in India have managed to further de-risk their delivery approach by expanding their global delivery network, in addition to adopting robust disaster recovery/business continuity models

Supportive ecosystem: Indias infrastructure development landscape is expected to transform to the next level in the coming years, driven by the governments massive thrust on over USD 1 trillion in investments (2013-17) on infrastructure development. Besides, with further simplication of laws and regulations, large scale investments in e-Governance projects and focus on establishing the national cyber security policy, the IT-BPO industry is well-poised to maintain its growth trajectory in the domestic market