Asian Outsourcing O 0611

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KPMG INTERNATIONAL

Asian outsourcing: the next w ave

A report w ritten in co-operation w ith the Econom ist

Intelligence U nit.

ADVISORY


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C ontents

Executive sum m ary 1Introduction 4

State of play 5M anaging the relationship 14Problem s in outsourcing 19The next w ave 25

C onclusion 29


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Asian outsourcing: the next w ave 1

© 2006 K PM G International. KPM G International provides no client services and is a Sw iss cooperative w ith w hich the independent m em berfirm s of the KPM G netw ork are affiliated.

© 2006 KPM G International. K PM G International provides no client services and is a Sw iss cooperative w ith w hich the independent m em ber firm s of theKPM G netw ork are affiliated.

Executive sum m aryC onventional belief is that outsourcing is not yet pervasive in Asia, and that

it appeals only to com panies in developed but high-cost econom ies such

as A ustralia and Japan because it helps them to save on labor and operating

costs. The reality is, how ever, that even businesses in C hina and India,

w here there is little arbitrage in labor and operating costs, actually outsource

som e business functions. N ot that cost-cutting is the only benefit from

outsourcing. As the region's com panies are beginning to realize, outsourcing

has other subtler advantages: enhanced com petitiveness because of access

to global best practices, for exam ple, and a greater ability to focus on

core com petencies.

Asian outsourcing: the next w ave is a survey-based briefing paper w ritten

by KPM G International in co-operation w ith the Econom ist Intelligence U nit.

It aim s to explore the cost and productivity benefits that com panies believe

outsourcing can bring them , and looks at the im pact that outsourcing can

have on global com petitiveness. W hat are som e of the problem s that

com panies in A sia face w hen they outsource? W hat m easures should they

take to solve them ? G oing forw ards, w hat is the likely next w ave for

Asian outsourcing?

This briefing paper surveyed 305 com panies across the Asia Pacific, including

those in high-cost econom ies such as A ustralia, H ong Kong and Singapore, and

low er-cost em erging m arkets such as C hina and India. C om plem enting the

survey findings w ere interview s w ith com panies that outsource and the

service providers that w ork w ith them . The m ain findings of the report include:

• O utsourcing in A sia Pacific seem s to be m ore pervasive than generally

thought.C onfounding conventional expectations, outsourcing is quite

popular w ith com panies in the region. H alf of the surveyed executives (54

percent) say that they currently outsource inform ation-technology (IT)

solutions, w hile a third (35 percent) outsource accounting, debt collectionand tax processing. Som e com panies also outsource data collection and

report w riting (26 percent), hum an-resources m anagem ent (22 percent),

and supply chain m anagem ent (19 percent). O utsourcing as a business

strategy looks set for grow th in Asia –about a third of respondents say

they plan to outsource hum an resources m anagem ent in three years; and

a quarter each intend to outsource inform ation technology solutions, and

data collection/report w riting.


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2 Asian outsourcing: the next w ave

• It is not only com panies in expensive econom ies that are outsourcing, but

also those in C hina and India, w here labor and operational costs are low .

Traditionally com panies outsource prim arily to cut business costs, and

so A sian outsourcing clients are expected to com e m ostly from

labor-short and expensive places like Australia, Japan, H ong Kong and

Singapore. Because they operate in the sam e country as the outsourcing

providers, enterprises in low er-cost China and India are seen as not really

interested in these services. H ow ever, 55 percent of surveyed com panies

in India and 46 percent in C hina say that they already outsource. M oreover

24 percent of respondents in India plan to outsource in three years, and

30 percent in C hina say the sam e.

• Com panies in India seem to be far m ore open to outsourcing all kinds

of business functions than are their peers in the rest of Asia.Fully 64

percent of respondents in India say they currently outsource or plan to

outsource accounting, debt collection and/or tax processing. O nly 50

percent of com panies in the rest of Asia say the sam e. Six out of ten

respondents from India (65 percent) already outsource or plan to

outsource hum an resources m anagem ent. O nly about half (47 percent)

say the sam e in the rest of Asia. The level of interest in outsourcing IT

solutions is equally high in both places, how ever (India: 80 percent, rest

of Asia: 78 percent).

• Language is an im portant criterion for com panies w hen selecting service

providers.In going offshore, one com m on thread for com panies appears

to be language. The m ajority of survey respondents (56 percent) say that

language and country/organizational culture strongly or very strongly

dictate their outsourcing requirem ents. H ow ever, although English m ay

be the key language of the subsidiaries of m ultinational com panies in

the region, this is not alw ays the case w ith local com panies. Services

providers should be aw are, therefore, that there is a need to have staff

fluent in Asian languages.

• Integrating outsourcing into business results is one strategy for success.

Fully 54 percent of respondents believe this is am ong the best strategies

to m anage the outsourcing relationship; ensuring objectives are clear

at the outset is also im portant, say 50 percent of those surveyed, and

40 percent point to the need to ensure a provider's fees are com petitive.

• Availability and quality of service providers are the key hindrances to

outsourcing in A sia. Respondents also believe that services such as

strategic planning, sales and m arketing, risk m anagem ent, and research

and developm ent (R & D ) are strategic to the com pany, and therefore

should be done in-house. Asked w hat services they have no plans to

outsource, survey respondents overw helm ingly singled out strategic

planning (89 percent), sales and m arketing (78 percent), risk m anagem ent

(75 percent), and research and developm ent (72 percent).



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• The next w ave of outsourcing looks set to be far bigger than it is now , andto see business process outsourcing (B PO ) services catch up w ith IT.

The grow th of B PO services should happen as com panies in A sia becom e

m ore com fortable w ith the idea of entrusting som e finance, accounting

and hum an resources functions to outsiders. Six out of ten respondents

say som e services are strategic to their com pany, and so m ust be

done in-house. A bout half are also w orried about lack of controls and

insufficient security in the system s of the service provider. Som etim es,

cost considerations can w in over the client's qualm s, but the experiences

of service providers suggests that a client base for next-w ave outsourcing

can really be built one custom er at a tim e.

• An explosion in dem and m ay result w hen critical m ass is reached.

H old-out com panies w ill be forced to outsource R & D , engineering,

risk m anagem ent and so on once they see rivals becom ing m ore

com petitive because they are outsourcing these strategic services.

Who took the survey?

A total of 305 senior executives from com panies in A sia Pacific participated

in the study, w ith about 43 percent based in Singapore, H ong Kong,

M alaysia, Japan, Australia and N ew Zealand. A little under half of

respondents w ere based in India and C hina.

The respondents w ere chief executives/presidents/m anaging directors (25

percent), senior vice-presidents/vice-presidents/directors (13 percent), heads

of departm ent (10 percent), heads of business units (7.6 percent), and board

m em bers (4 percent). The rest included other C -level executives and

m anagers.

Inform ation technology and technology accounted for 19 percent of

respondents, follow ed by professional services (13 percent), m anufacturing

(12 percent), healthcare, pharm aceuticals and biotechnology (9 percent),financial services (6 percent) and consum er goods (5 percent). O ther

industries include transportation, travel and tourism , chem icals, energy and

natural resources, telecom m unications, autom otive, and construction and

real estate.

In term s of global annual revenue, 52 percent of respondents w ere from

com panies w ith U S$500m or less, 11 percent w ere from firm s w ith

U S$500m to U S$1bn, 16 percent from firm s w ith U S$1bn to U S$5bn,

7 percent from firm s w ith U S$5bn to U S$10bn, and 13 percent from firm s

w ith U S$10bn or m ore.


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IntroductionO utsourcing is not new in A sia, or anyw here else. M ost com panies do not

directly hire janitors and security guards, for exam ple. They sign contracts

w ith third parties that provide cleaning and security services. Enterprises

typically engage advertising agencies to run their m edia cam paigns and law

firm s for advice on legal m atters. A nd external auditors, by definition, are

independent experts w ho alw ays com e from outside the organization.

W hat is new is the expansion of the types of business services that can

be outsourced and the physical location of the providers of those services.

Advances in telecom m unication technologies, the arrival of the internet, and

the m aturation of high-speed broadband services now allow offshore

outsourcing. C om panies are no longer lim ited by geography in their choice

of providers. They literally have the w orld from w hich to pick and choose.

Silicon Valley firm s w ere the first on the train, outsourcing coding and other

softw are developm ent grunt w ork in the late 1980s to providers in India,

w hose institutes of technology w ere turning out highly regarded graduates.

The m ain attraction w as cost. C ontracting Indian providers such as Infosys

Technologies and W ipro Technologies to do inform ation technology (IT) w ork

typically saved U .S. com panies substantial am ounts because IT professionals

in India w ere paid m uch low er than those in the U .S.

Soon, IT services providers w ere springing up in other low -cost but talent-rich

countries like the Philippines. The types of services offered expanded to call

centers, help desks, and business process outsourcing, including hum an-

resources m anagem ent and financial and accounting functions. The clientele

spread out from tech firm s to Fortune 500 com panies and even sm all and

m edium -sized businesses in the U .S. and Europe. The latest buzzw ords are

know ledge process outsourcing, w hich involves contracting out research and

developm ent functions and specialized projects such as D N A sequencing,

and engineering services outsourcing.

The explosion in the num ber of outsourcing providers, the types of services

they offer, and the continued dem and from custom ers attest to the cost and

productivity benefits that outsourcing can bring. A re com panies in A sia also

taking advantage of the new possibilities of outsourcing? If they are not,

w hat are the reasons behind it, and w hat are the im plications on their global

com petitiveness? If they are outsourcing, w hich services are they contracting

out and w hat countries are they tapping? These are som e of the questions

that Asian outsourcing: the next w ave aim s to answ er.

Egidio Zarrella

G lobal Partner in C harge

Inform ation R isk M anagem ent


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State of playC onfounding initial expectations, outsourcing in Asia Pacific appears to be

m ore pervasive than generally thought. It is attractive not only to com panies

in rich but high-cost econom ies like Australia and Japan, w hich reap savings

from labor arbitrage, but also to businesses in C hina and India, w here there

is little labor arbitrage. It depends on the need. In the Econom ist Intelligence

U nit survey conducted for KPM G , half of the 305 respondents say that they

currently outsource inform ation technology (IT) solutions (54 percent), w hile

a third outsource accounting, debt collection and tax processing (35 percent).

Som e com panies also outsource data collection and report w riting (26

percent), hum an resources m anagem ent (22 percent), and supply chain

m anagem ent (19 percent).

Exhibit 1: W hat services are currently outsourced?

IT solutions 54%

Accounting, debt collection, and/or tax processing 35%

D ata collection and/or report w riting 26%

H um an resources m anagem ent, including healthcare

and benefits processing 22%

Supply-chain m anagem ent 19%

C ustom er servicing, including after-sales service 14%

Research & developm ent 14%

R isk m anagem ent 10%

Sales and/or m arketing 9%

Strategic planning 5%

Source: KPM G International / Econom ist Intelligence U nit Survey -S eptem ber 2006

O utsourcing as a business strategy looks set for m ore grow th in Asia.

Three of ten com panies surveyed (30 percent) say they plan to outsource

hum an resources m anagem ent in three years. A quarter each intend

to outsource IT solutions (25 percent) and data collection/report w riting

(24 percent) by 2009. O ne fifth are planning to outsource supply chainm anagem ent (22 percent) and accounting (20 percent).

Exhibit 2: W hat services w ill be outsourced in three years?

H um an resources m anagem ent, including health care

and benefits processing 31%

IT solutions 25%




Accounting, debt collection, and/or tax processing 20%




Strategic planning 6 %




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C om bining the “currently outsource”and “w ill outsource”responses, ITsolutions em erges as far and aw ay the m ost pervasive business function

outsourced in A sia, at 79 percent. B PO services such as accounting (55

percent) and hum an resources m anagem ent (53 percent) com e second and

third, respectively.

This m ay be a case of fam iliarity breeding confidence. IT services started in

the 1980s and are the m ost established outsourcing practice, and are offered

by global providers such as IB M and H ew lett Packard, and established Indian

com panies like Infosys and W ipro. The sam e providers started developing

B PO offerings in recent years, possibly lending instant legitim acy to these

relatively new services because of their brand nam e and track record.

W hile m ost incum bent service providers still focus on the W est, and have yet

to m ake a big push in Asia, their export services are w ell know n across A sia.

Sm aller enterprises that are starting to offer the sam e services to com panies

in the region, som e of them founded by form er executives of the

incum bents, thus find m any custom ers already fam iliar w ith the concept and

open to the idea of outsourcing.

Who is outsourcing?

The conventional w isdom is that com panies outsource prim arily to cut dow n

on business costs, and so A sian outsourcing clients are expected to com e

m ostly from labor-short and expensive places like Australia, Japan, H ong

Kong and Singapore. Because they operate in the sam e country as the

outsourcing providers, enterprises in low er cost C hina and India are seen

as not really interested in outsourcing because they are not likely to enjoy

significant labor arbitrage.

B ut 55 percent of surveyed com panies in India and 46 percent in C hina also

say that they outsource. Furtherm ore, 24 percent of respondents in India

plan to outsource in three years, w hile 30 percent of those in C hina say the

sam e. In reference to IT solutions, half of respondents from Australia, and aneven higher proportion of those in H ong K ong (59 percent) and in S ingapore

(61 percent) do say they outsource, as expected. (There are too few

respondents from Japan to draw conclusions.)

Exhibit 3: W ho are outsourcing?

Currently outsource Will outsource

IT solutions IT solutions

in three years

Singapore 61% 21%

H ong Kong 59% 18%

India 55% 24%

Australia 51% 22%

C hina 46% 30%



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Interestingly, 79 percent of respondents in India cite the opportunity to focuson core com petencies as a key benefit of outsourcing, m ore than those

w ho single out cost savings (74 percent). N early seven of ten (67 percent)

point to the chance to access skills not present in-house as another benefit.

In contrast, m ost respondents from the rest of A sia Pacific put cost-savings

first (78 percent), follow ed by better focus on core com petencies (68

percent) and access to skills not available in-house (54 percent).

Exhibit 4: Benefits of outsourcing

India Rest of Asia

A llow focus on core com petencies 80% 68%

C ost savings 74% 78%

Access skills lacking in-house 67% 54%

Im prove in-house perform ance 40% 28%

Forge strategic partnership w ith vendor 36% 30%

Easier and extended access to services 28% 18%


D espite the fact that there is really little room for labor arbitrage in C hina,

because outsourcing service providers and their clients draw from the sam e

em ployee pool and pay m ore or less the sam e w ages, com panies in C hina

still cite cost savings as the prim ary benefit of outsourcing. G anesh Ayyar,

vice-president for m anaged services A sia Pacific at H ew lett Packard in

Singapore, has a theory about this contradiction. “IT infrastructure

outsourcing is really a business strategy, but culturally C hinese com panies

have not yet sw itched over to that kind of thinking,”he says. “They still see

outsourcing as a purely IT issue, so they look at labor arbitrage as a key

benefit versus anything else, even though for a C hinese custom er, to gain

from labor arbitrage w ould be a tough call.”

Things are different in India, at least am ong the larger com panies.

“They are quickly getting to a stage w here em bracing global best practicesto effectively com pete w ith com panies entering India is becom ing a critical

issue,”says M r Ayyar. “And since they have access to the best talent [via

India's IT services export sector], they don't need to go through the

evolutionary steps of learning to bring global best practices into their IT

environm ent.”O utsourcing brings them up to speed, and thus quickly

enhances their com petitiveness and ability to focus on their core

com petencies, although it does not necessarily m ake for big cost savings.

(See box,India: a w orld apart , for other differences betw een India and the

rest of Asia in term s of outsourcing practices.)



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India: a w orld apartIndia's gifts to the W estern civilization, says A m erican historian W ill D urant,include gram m ar and logic, philosophy and fables, hypnotism , chess,

num erals and the decim al system . Add this latest one: outsourcing. In

m odern tim es, India has served as the cradle of offshore outsourcing w ith

its big pool of talented, and until recently affordably priced, inform ation

technology (IT) professionals, engineers and English-speaking custom er

service w orkers.

Som e of our survey's findings bolster the view of India as a w orld apart in

outsourcing. For exam ple, respondents in India cite “allow ing the com pany

to focus on its core com petencies”as the num ber one benefit of

outsourcing. The rest of Asia points to “cost savings”, w hich is particularly

true of high cost econom ies like A ustralia, H ong Kong and Singapore. M ost

respondents in India outsource to service providers that are also in India, so

they don't really reap savings from labor arbitrage. B ut they outsource

anyw ay, in order to focus m ore on core com petencies.

C om panies in India also appear to be far m ore open to outsourcing all kinds

of business functions than are their peers in the rest of Asia. Fully 64 percent

of respondents in India say they currently outsource or plan to outsource

accounting, debt collection and/or tax processing. O nly 50 percent of

com panies in the rest of Asia say the sam e. Six out of ten respondents from

India (65 percent) already outsource or plan to outsource hum an resources

m anagem ent. O nly about half (47 percent) say the sam e in the rest of the

Asia. The level of interest in outsourcing IT solutions is equally high in both

places, how ever (India: 80 percent, rest of Asia: 78 percent).

What services do you outsource or plan to outsource?

India Rest of Asia

IT solutions 80% 78%

H um an resources m anagem ent 65% 47%

Accounting, debt collection, 64% 50%and/or tax processing

D ata collection and/or report w riting 57% 48%

C ustom er servicing 51% 34%

Supply-chain m anagem ent 46% 40%

R isk m anagem ent 38% 18%

Research & developm ent 29% 27%

Sales and/or m arketing 20% 21%

Strategic planning 16% 8%



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C om panies in India are also far m ore optim istic than those in the rest of Asiaon the tim e it w ould take for gaps in the availability of specific outsourcing

services to be closed. Four out of ten respondents in India (44 percent)

expect providers to start offering services in areas currently not covered

w ithin tw o years. O nly 25 percent of com panies in the rest of Asia say the

sam e, w ith 33 percent predicting it w ill take five years.

How long before providers start offering services not currently available?

India Rest of Asia

W ithin tw o years 44% 25%

W ithin five years 33% 33%

M ore than five years 3% 9%

D on't know /tim e uncertain 20% 33%


Finally, there is a significant difference in the w ay com panies in India

describe their approach to outsourcing, com pared w ith those in the rest

of Asia. In India, the preference is to cultivate a partnership relationship

w ith the service provider (42 percent), w ith few er opting for a vendor

relationship (30 percent) or regarding outsourcing as only a procurem ent

exercise (12% ). In the rest of Asia, the attitude is alm ost split in the m iddle,

w ith 35% saying the outsourcing relationship is one of partnership and 33%

describing it as a vendor relationship.

What best describes your relationship with your service providers?

India Rest of Asia

Partnership 42% 35%

Vendor relationship 30% 33%

Pure procurem ent exercise 12% 14%

G roup shared services center 9% 8%

C aptive service provider 5% 5%

Acquired service provider 0% 1%

D on't know 2% 4%Source: KPM G International / Econom ist Intelligence U nit Survey -S eptem ber 2006

W hy the differences? It m ay be that, because respondents in India are so

close to the action, so to speak, they are m ore in a position to see w hat is

really happening in the outsourcing industry. If so, w e m ay expect to see

m ore new outsourcing offerings w ithin tw o years than generally thought,

m ore contracts for accounting and hum an resources m anagem ent

outsourcing, and a m ore pronounced tilt tow ards partnerships w ith service

providers, as opposed to a vendor relationship.



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Where do they outsource?This analysis is consistent w ith our findings about outsourcing destinations.

N early all respondents from India (97 percent) say their m ain service

providers are located in India. A m ong com panies in C hina, 95 percent say

their key service providers are also in C hina. Interestingly, half of the

surveyed com panies in A ustralia (53 percent) outsource to India, w hile 38

percent outsource to C hina. M ost H ong Kong firm s outsource to others in

H ong Kong (86 percent) and also to C hina (61 percent), w ith just 4 percent

going to India. C om panies in Singapore outsource to others in Singapore (57

percent), India (50 percent) and C hina (40 percent).

In aggregate, the m ajority of com panies in A sia outsource to India (55

percent), w ith C hina as the second m ost popular destination (36 percent).

Singapore (20 percent) and H ong K ong (16 percent) com e next, far ahead of

the Philippines (7 percent) w hich has been touted as a low er cost alternative

to India.

Exhibit 5: W here are your m ain service providers located?

India 55%

C hina 36%

Singapore 20%

H ong Kong 16%

M alaysia 9%

Philippines 7%

Vietnam 2%

Japan 5%

Taiw an 5%

Indonesia 4%

South Korea 4%

Thailand 4%

O ther 15%


H ow are w e to read these findings? In going offshore, one com m on

thread appears to be language. English speaking A ustralia outsources to

English speaking India, w hile C antonese H ong Kong outsources to C hina.

Singapore, w here E nglish and M andarin are official languages, outsources to

both India and C hina.

R aym ond Lee, chief inform ation officer at H ong K ong logistics com pany

BA Ltrans H oldings, puts the issue in perspective (see case study,BA Ltrans:

partial outsourcing).“An Indian com pany approached us several w eeks ago,

but w hen I asked w hether they speak or read C hinese, they said no,”he

recounts. “So how can they help m e resolve an IT problem in m y G reater

C hina operations? The language difference is one reason w hy I can't

outsource a lot to India, although they are really strong in such areas as

softw are coding.”


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Speaking in many tonguesThe question of language loom s especially large in call centers and

technical help desks. C ustom er support m ust be extended in A ustralian

accented E nglish for com panies in A ustralia, in Japanese for com panies in

Japan, in Korean for those in Korea, C antonese in H ong Kong, M andarin in

Taiw an and C hina. This helps explain the in-country outsourcing bias in C hina,

H ong Kong, and to som e extent in Singapore, and m ay account for the

relative unpopularity of English speaking Philippines as an outsourcing

provider for com panies in A sia, in aggregate.

English is also the m ain outsourcing language in India, of course, but unlike

the Philippines, IT services and call centers there have a longer track record

and enjoy access to a larger pool of qualified people. C om panies in Australia,

for exam ple, are therefore m ore likely to outsource to India than to a relative

new com er like the Philippines. H ow ever, labor costs are rising rapidly in

India, and that m ay persuade E nglish speaking com panies to give the

Philippines a second look. N ot surprisingly, the m ajority of survey

respondents (56 percent) say that language and country/organizational culture

strongly or very strongly dictate their outsourcing requirem ents.

Exhibit 6: H ow strongly are your outsourcing requirem ents dictated by

language or culture (either country or organizational culture)?


There's a m essage to the region's service providers here, and that is the

need to have staff w ho are fluent in Asian languages. M ost service providers

are currently oriented tow ard W estern custom ers, w hose lingua franca is

English. If they think of Asian languages and cultures at all, it is in the context

of hiring bilingual speakers for sales and m arketing in countries w here their

m ultinational clients have operations.



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Those w ho assum e that English is the language of business and technologyin A sia, and that catering to this m arket is only a m atter of reorienting

existing staff used to dealing w ith custom ers in the W est, m ay be bound for

disappointm ent. English m ay be the language of the subsidiaries of

m ultinationals in the region, but this is not alw ays the case w ith local

com panies and their m ass-m arket custom ers.

Language can be an im portant com petitive advantage for new er service

providers seeking to differentiate them selves from the incum bents. It is a

m ain m arketing plank at M alaysian contact center specialist Scicom , w hich

w as form ed in 1997. “W e are the only m ultilingual, m ultichannel B PO service

provider in A sia,”claim s chief executive Leo A riyanayakam . C ollectively, the

com pany's 1,400 staff speak 13 Asian languages, am ong them Japanese,

Korean, M andarin and Bahasa M elayu, in addition to English. Scicom 's client

list already includes m ajor M alaysian corporates like oil com pany Petronas

and M alaysia A irlines, regional operators like Star Cruises, and m ultinationals

such as Fuji Xerox, C itibank and insurance giant A IA .

Aon: the art of outsourcingA Fortune 500 com pany, Aon is the w orld's largest reinsurance broker and

second biggest insurance broker, w ith operations in m ore than 120 countries,

including 15 m arkets in Asia. O utsourcing is w idely practised across the group's

various com panies, from call centers to inform ation technology (IT) services to

hum an resources m anagem ent to accounting and payroll. As the chief

inform ation officer of Aon H ong Kong, Suk W ah Kw ok is involved in regional

outsourcing activities because A on's Asian headquarters is in H ong Kong.

O utsourcing in A sia, says M s Kw ok, presents special challenges. “For

exam ple, w e have studied outsourcing our call centers for the w hole region,

but w e m et difficulties because of the language issue,”she says. “It's hard

to find hotline support staff w ho can speak good Japanese, good Korean,

good C antonese, good M andarin. The need for m ultiple language support inAsia is one reason w hy w e don't outsource som e IT services that our

counterparts in other parts of Aon do. D espite the diversity of the locations

they have to support, for exam ple in the U .S. or U K, they all speak one

language, English.”

O utsourcing IT services is easier because only internal em ployees are

involved, and m ost speak English. Even so, not all IT services are

outsourced. “W e outsourced desktop and laptop hardw are m aintenance for a

num ber of years, but w e eventually stopped,”recalls M s Kw ok. “W e had to

pay an annual m aintenance fee for each m achine, and once you outsource

hardw are m aintenance, you can't be selective. You have to cover all


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desktops.”As the num ber of staff increased, so did the num ber of desktopsand total annual m aintenance becam e too expensive. These days, Aon buys

com puters bundled w ith a three-year w arranty. If a m achine breaks dow n

after the w arranty has expired, the com pany sim ply replaces it. “This has

turned out to be m ore cost-efficient,”says M s Kw ok, “because hardw are is

getting cheaper and cheaper, but labour costs rem ain high.”

The lesson here: com panies should base their decisions of w hat to

outsource on actual econom ics. Aon outsources m aintenance of printers, for

exam ple, because these m achines are m ore expensive than w orkstations and

laptops –printers are priced from H K$20,000 to H K$30,000 each (U S$2,570

to U S$3,860 each) –and therefore cannot be replaced as easily after their

w arranties expire. Aon also outsources the m aintenance of servers and the

data centers w here they are housed. “An external vendor com es in at least

once a m onth to do regular checks on all data-center equipm ent such as U PS

and air-conditioners,”says M s Kw ok. Aon has tw o such centers in H ong

Kong–one w hich serves H ong Kong users, and the other w hich serves regional

users and custom ers, and doubles as A on's disaster recovery site.

In som e instances, efficiency and em ployee satisfaction trum p cost savings

in deciding w hether or not to outsource an IT service. W hen A on did

anti-spam m ing for its e-m ail system in-house, for exam ple, there w as no

additional cost involved since existing staff could be deployed for the task.

B ut em ployee m ailboxes w ere still getting spam from tim e to tim e because

it w as difficult to keep spam definitions up-to-date. In the end, the

anti-spam m ing function w as outsourced. Today, Aon pays a m onthly fee for

anti-spam m ing services, but em ployees are happier because few , if any,

spam m essages get through.

H ow successful is Aon's IT services outsourcing? M s Kw ok points to an

interesting statistic. The num ber of IT staff in her departm ent has rem ained the

sam e in the past five years, but the num ber of users the departm ent supports

has grow n by 30 percent. The num ber of countries it services has alsoincreased by 50 percent. “There's your cost savings right there,”she says.



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M anaging the relationshipM anaging the outsourcing relationship in Asia can be com plicated by the

tendency of com panies to m ulti-source, rather than have one service

provider take care of related functions across the business. This is prim arily

for language reasons, as discussed earlier. It is also difficult to find one

service provider that has units across Asia. “Even the global providers don't

have a presence in all Asian m arkets, although they m ay have m arketing

units there,”observes M r Lee of BA Ltrans. A t BA Ltrans, six outsourcing

com panies handle IT services. “It can get com plicated, but that is an

inherent problem if you m ulti-source,”says M r Lee. O ne of his strategies is

to devolve the responsibility to m onitor service-level agreem ents to regional

IT m anagers, instead of headquarters or the individual subsidiaries being

serviced.

C om panies in Asia typically let the departm ent that is outsourcing its needs

m anage the relationship w ith the outsourcing provider (43 percent), but there

are also those that give the responsibility to procurem ent (28 percent),

finance (27 percent), and IT (23 percent).

Exhibit 7:W hich departm ents in your com pany are chiefly responsible for

m anaging the relationship w ith outsourcing providers and m easuring their

perform ance?



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Partner or vendor?The type of business function appears to determ ine the kind of relationship

that arises betw een outsourcer and service provider. Four out of ten

com panies that currently outsource accounting services characterize their

relationship as one of partnership (40 percent). O nly 29 percent describe it as

one betw een buyer and vendor. Typically, a high level of trust is required for

financial and accounting outsourcing, as the relationship involves financial

inform ation and actual cash transfers, in som e cases.

O n the other hand, com panies that outsource IT services are split dow n the

m iddle, w ith 36 percent describing the relationship as a partnership and

another 35 percent saying it is a vendor arrangem ent. A nd nearly four out of

ten respondents w hose com pany outsources hum an resources m anagem ent

say the relationship is a partnership (39 percent), w hile another 36 percent

regard their service provider as a vendor.

In aggregate, 38 percent of respondents regard the outsourcing relationship

as a partnership, w ith another 31 percent seeing it as a sim ple vendor

relationship. Som e think of outsourcing as purely a procurem ent exercise (14

percent).

Exhibit 8: W hich of the follow ing best describes your com pany's approach

to outsourcing?




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It helps to rem em ber here that there are m any sub-types of accounting,H R and IT services. Som e m ay involve only routine activities such as filtering

e-m ail spam m essages, and therefore the client m ay not w ant to spend too

m uch tim e and effort cultivating a partnership w ith the service provider.

O thers m ay involve m ission-critical functions such as m anaged security

services, in w hich the service provider guards against m alicious softw are

getting into a com pany's IT system s, am ong other things. H ere, a close

relationship is in order. The client w ill require daily reports on attem pted

intrusions into its system s, and w ill expect constant updates from the

service provider on new threats and how it plans to com bat them .

M ost of our interview ees stress the need to cultivate a partnership

relationship w ith service providers. “There are a lot of suppliers out there,”

says W C Lai, quality and m anufacturing director at Solom on Systech, a

leading global m aker of integrated-circuit chips for m obile phone displays

(see case study). “But there are too few good ones, so you m ust do all you

can to keep them .”Solom on outsources its supply chain, including

m anufacturing and logistics, to providers in C hina and Taiw an, including giant

silicon w afer foundry TS M C . “W e cultivate not only a business relationship

w ith our suppliers, but also people relationships,”says M r Lai. “If they trust

you, they w ill support you in good tim es and bad tim es.”

As our findings show , how ever, not all outsourcing relationships need to be

partnerships, w ith all the investm ent in tim e and effort that im plies. For the

region's service providers, this finding underscores the need to be sensitive

to the circum stances and preferences of the custom er. Som etim es, a vendor

relationship is easier on everyone.

BA Ltrans: partial outsourcingAs a relative new com er to the industry, the BA Ltrans group still has to catch

up w ith m ore established freight-forw arding and logistics com panies such as

A irocean G roup, N ippon Express and SEKO W orldw ide. This is one reason

w hy H ong Kong-listed BA Ltrans, w hich w as founded only in 1982,outsources m ost of its inform ation technology (IT) services needs. “W e

outsource to get a speedy solution,”says R aym ond Lee, chief inform ation

officer (C IO ) at BA Ltrans. “By getting an alm ost ready IT solution instead of

spending tim e and m oney to build from scratch, w e can begin surpassing our

com petitors.”

But only up to a point. “In our industry,”continues M r Lee, “IT is a source

of com petitive edge, so if you outsource everything, you run the risk of being

like everyone else.”H is approach is to keep a core IT m atrix in-house,

outsourcing only the basics, such as the netw ork service and sim ple

softw are applications. “It also depends on the com pany set-up,”Lee adds.

“W e are alw ays doing M & A , so if the acquired com pany has a w ell


19/34


developed IT system , w e can outsource less, but if it is new or sm all, w e w illoutsource m ore.”

The sam e philosophy applies to non-IT services. M r Lee says B A Ltrans is

looking at business process outsourcing (B PO ) for generic functions like

accounting, but he doubts w hether functions like strategic planning, sales

and m arketing w ill be outsourced. “Perhaps things like research and

developm ent of a product or solution can be partly outsourced,”he allow s,

“but not com pletely.”If outside expertise is needed, the com pany w ill hire

consultants, w hose recom m endations in-house departm ents w ill execute.

C ost and quality of service are also im portant considerations. M r Lee says

BA Ltrans know s it cannot m atch certain services by specialist providers, but

if “w e can't do better than them …m aybe w e can do it cheaper in-house”. The

com pany w ill have to w eigh the pros and cons. C an em ployees live w ith

occasional inconveniences like e-m ail spam , for exam ple? The com pany w ill

have to decide w hether the trade-off in quality is w orth it. The sam e

dynam ics m ay apply in m aking a choice betw een an expensive global

services provider and a sm aller but cheaper local or regional provider. W ill the

low er cost m ake up for the lack of global scope?

A n increm ental approach can help com panies com e to a decision, says M r

Lee. “Instead of a B ig Bang approach,”he suggests, “you can test an

outsourcing solution increm entally, site by site, before you com m it full-scale.

So during the transition, you m ay have five sites outsourcing and five others

doing it in-house.”

O nce the decision is m ade, though, the com pany should do its best to m ake

the relationship w ork. M r Lee prefers a partnership relationship: “W hen you

find reliable and good partners, spend som e effort to train them on the

intricacies of your com pany and industry, and establish an on-going

relationship. They can becom e your extended divisions.”

Strategies for success

Asked to nam e the best strategies to m anage the outsourcing relationship,

half of respondents cite the im portance of integrating outsourcing into

business results (54 percent) and ensuring objectives are clear at the outset

(50 percent). The financial issue com es third, w ith 40 percent pointing to the

need to ensure the provider's fees are com petitive and that it is actively

com m itted to reducing costs.

The preferred approach appears to be to m ake sure that broad guidelines for

success are in place, and then to leave the provider alone to do its thing,

rather than to m icrom anage the relationship. For exam ple, just a third of



20/34



respondents say it is im portant to actively m easure the provider'sperform ance on a regular basis (34 percent), and only a fifth advocate

m aintaining a close relationship w ith the provider throughout the negotiation

and delivery processes (23 percent).

Very few depend on perform ance bonuses (8 percent) or perform ance

penalties (5 percent) to ensure success, w hich is consistent w ith the

respondents' broad guidelines approach. Even if the service level agreem ent

provides for financial com pensation, says BA Ltrans' M r Lee, “w hat's the use

of m aking a claim ? A t the end of the day, w hen there's a failure, you've

m issed serving your custom ers, you've m issed business opportunities. It

doesn't m atter w hatever m oney or free extension of the service you get.”

Exhibit 9: W hat do you think are the best w ays to m anage the outsourcing

relationship for your com pany?



21/34


Problem s in outsourcingW hat is ham pering outsourcing in A sia? Respondents cite problem s related

to availability of service providers, the quality of the services currently

available, and the belief that services such as strategic planning, sales and

m arketing, risk m anagem ent, and research and developm ent are strategic

to the com pany, and therefore should be handled in-house.

At the Second A nnual CIO Forum Asia in H ong Kong in S eptem ber, A nthony

Lloyd, head of the technology and com m unications group in Asia for M inter

Ellison Law yers, identified tw o specific issues. “There is the problem of

language,”he says, alluding to the diversity of languages and cultures in Asia

discussed earlier in this paper. “The other thing is there aren't a lot of vendors

that have a presence in each of the different jurisdictions. You m ight w ant to

give everything to one com pany, but then that com pany does not have offices

in each country, and in fact subcontracts the w ork in those places.”

Availability

Asked w hat services they have no plans to outsource, survey respondents

overw helm ingly singled out strategic planning (89 percent), sales and

m arketing (78 percent), risk m anagem ent (75 percent), and research and

developm ent (72 percent).

Exhibit 10: W hat services do you not plan to outsource?

Strategic planning 89%







H um an resources m anagem ent, including health

care and benefits processing 47%Accounting, debt collection, and/or tax processing 45%

IT solutions 21%


B ut it seem s that a few of these com panies are actually interested in

outsourcing these services, except that they cannot find providers that

specifically offer them . Asked w hich services they w ould like to outsource

but do not because no provider specifically offers them , a quarter of

respondents cite risk m anagem ent (27 percent), w ith at least a fifth each

pointing to H R m anagem ent (24 percent), research and developm ent (23

percent), data collection and/report w riting (22 percent), and custom er

servicing (22 percent).



22/34



Exhibit 11: W hich of the follow ing services w ould you like to outsource butdo not, as currently there are no outsourcing providers offering the specific

service?


N early seven of ten respondents, how ever, believe that these services

w ill be provided w ithin five years, w ith three out of ten believing this w ill

happen w ithin tw o years. H ow ever, as noted earlier, the m ajority of survey

respondents say they have no plans to outsource these services, so it

is not clear w hether these providers w ill find enough clients in A sia.

Exhibit 12: H ow long do you think it w ill take for providers to begin offering

outsourcing services in the specific areas noted above?



23/34


In the m eantim e, w hile w aiting for outsourcing providers to offer the specific

services they w ant to outsource, the few com panies in A sia that are w illingto outsource these services are boosting in-house capabilities and setting up

shared services centers. Presum ably, those respondents w ho do not plan to

outsource these strategic services even if they can find providers are also

boosting in-house capabilities and setting up shared services centers, since

these essential functions are crucial to com petitiveness.

Exhibit 13: G iven these perceived gaps in services, w hat can com panies

do to m eet their current services requirem ents?


Quality

Asked w hat problem s they encounter in dealing w ith the region's

outsourcing service providers, com panies in Asia cite three w eaknesses:

insufficient know ledge of the client's business and industry (52 percent),

non-responsiveness to client concerns (47 percent), and low perform ance

standards (35 percent).

Exhibit 14: W hich of the follow ing quality problem s have you encountered

w ith outsourcing services providers, either in evaluating them or in

outsourcing w ith them ?




24/34



A t a recent C IO forum , the chief inform ation officer (C IO ) of a m edium sized

C hinese bank in H ong Kong com plained that his staff som etim es pay m oney

and spend a lot of tim e teaching the outsourcing service provider all about

the bank's business. Then arm ed w ith its new found know ledge of how

m ainland C hinese banks do things, the service provider then bids for a

sim ilar project w ith a com peting bank, som ething that understandably irks

the C IO .

C om plicating m atters are new com pliance requirem ents under the

Sarbanes-O xley Act from the U .S., w hich apply to U .S. subsidiaries in A sia

and A sian com panies issuing securities in the U .S. Sim ilar regulations are

being contem plated in Japan, South Korea, India and other places in A sia.

“You have to show that you still have control over the processes [you

outsource] and those processes are sound,”says Anthony Lloyd of M inter

Ellison Law yers. “You have to do m ore due diligence before you get into a

relationship. You have to go and see how the providers w ork, and stress test

them . There's a bit m ore w ork that goes into a deal before [a service level

agreem ent] is signed.”

There are also som e specific actions that can be taken by outsourcing

service providers and their custom ers in light of Sarbanes-O xley and other

regulatory requirem ents being introduced throughout the w orld. For exam ple,

one of the m ost effective w ays for service providers and their clients to

com m unicate inform ation about the organization's internal controls is

through a Statem ent of Auditing Standards (SAS) N o. 70 report, a Service

Auditor's R eport. This report is designed to provide inform ation about the

service organization's controls that m ay be part of a user organization's

inform ation system as it relates to the user's financial statem ents.

The m essage here is that service providers w ith substandard dom ain

expertise, controls, responsiveness to client concerns, and perform ance

standards are setting them selves up for failure. This is especially true ifoutsourcing services currently not offered w ill be offered in five years'

tim e, as our respondents anticipate. C om panies in Asia w ill then have m ore

providers to choose from , possibly including globals and Indian incum bents

m aking a big push in A sia.


25/34


Solom on Systech: “fabless” but fabulousLast year, Solom on Systech shipped 263 m illion proprietary integrated circuit(IC ) products to M otorola, Sony, C reative Technology and other global

custom ers w ithout ow ning or operating a single fabrication factory. H ong

Kong-listed Solom on Systech is a w orld leader in the design, developm ent and

sale of IC products that m ake it possible for m obile phones, handheld devices

and liquid crystal display television sets to display high resolution still and

m oving im ages.

Solom on is w hat industry people call a “fabless”sem iconductor com pany,

one that outsources its supply chain. “W e are big enough to build our ow n

w afer fabrication factory, but w e w ill need to spend not only m oney, but also

invest tim e and expertise,”says H um phrey Leung, president and m anaging

director. Setting up a silicon w afer foundry, w hich requires not only a

spacious, ultra-clean environm ent free of vibrations but also state-of-the-art

precision equipm ent, requires m ore than U S$1bn in upfront capital

investm ent. That m oney is better spent on recruiting and groom ing talented

IC engineers and funding for research and developm ent centers, w hich after

all represent Solom on's core com petency.

Fortunately, the com pany has outsourcing experience and expertise that

predate its form al founding six years ago. Before then, it used to be a

division of U .S. electronics com pany M otorola, w hich spun off its IC design

and other non-core units in 2000. Three em ployees w ho used to oversee

M otorola's direct and outsourced m anufacturing activities joined the new ly

established Solom on; the trio included 21-year M otorola veteran W C Lai, w ho

is now quality and m anufacturing director at Solom on.

Today, M r Lai and his 40-strong staff m onitor the adherence to service level

agreem ents (SLAs) of factories and testing facilities in C hina, Singapore,

South Korea and Taiw an, laboratories in H ong Kong, logistics firm s, and other

providers of outsourced supply chain services. They m ake sure not only that

products and services m eet punishing production schedules, but also thateach IC is m anufactured according to design specifications and is delivered

to the client on tim e. They also periodically audit the contracted factories and

suppliers that they use to ensure best practice environm ental standards, as

required by the m obile phone, handheld and television m anufacturers that

use Solom on's IC products.

W hat m akes this com plex w eb w ork, says M r Lai, is a com puterized

m anagem ent system that Solom on developed itself. The heart of the system

is a digital D ocum ent C enter that contains each and every SLA , outsourcing

contract and purchase order that Solom on has ever signed. It also contains

schem atics of every IC product the com pany has designed and contracted

out for m anufacture. Everyone in the com pany can access the docum ents,

except for the m ost sensitive papers, such as financial statem ents, that are

available only to certain staff.



26/34



U sing the electronic system , M r Lai's unit peruses progress reportssubm itted by factories, suppliers and other outsourcing providers, as w ell as

the results of ocular inspections by Solom on engineers in C hina, Taiw an and

other locations w here providers are based. In this w ay, they can red-flag

potential schedule and quality problem s, and can troubleshoot at the earliest

stage. The visibility m ade possible by the m anagem ent system also helps

supervisors to keep track of the inspectors, and their com pliance w ith

scheduled audits of the outsourcing providers.

A ll this sounds like a round-the-clock, peer-over-the-shoulder outsourcing,

and it is. Solom on cannot afford to m iss deadlines or fail to m eet quality

standards because it, too, has SLAs w ith clients further up the value chain –

Solom on is an outsourcing provider itself to the M otorolas and S onys of the

business w orld, w hich contract their IC and other com ponent needs w ith

com panies like S olom on for assem bly by their ow n or outsourced factories.

A nd just as S olom on seeks to cultivate long-term partnerships w ith those

clients, it also nurtures partnerships dow n its ow n supply chain w ith

outsourcing providers like w afer foundries TSM C and S M IC , both in Taiw an,

and C hartered Sem iconductors in S ingapore.

There is any num ber of suppliers out there, says M r Lai, but few really good

ones, so S olom on m akes sure it does everything it can to secure their

loyalty. In addition to cultivating w hat M r Lai calls “people relationships”,

Solom on m ay buy a sm all m inority stake in the factory, purchase an

expensive piece of equipm ent and park it in its prem ises, and share plans

and technologies w ith them as m uch as possible. “They like it very m uch if

you develop a product that uses future technology,”says M r Lai. “O f course,

w e need to keep the details a secret, but w e tell them enough to help them

plan ahead.”

H e adds that unlike som e com panies, Solom on does not w ant its providers

to over-invest in new equipm ent w ithout guarantee the new capacity w ill be

used. Eventually that w ill lead to a glut, and that w ill be bad for everyone inthe industry, he believes. “You m ust treat [the outsourcing provider] like your

ow n factory,”says M r Lai. “You don't w ant your provider to w aste capital on

unnecessary capacity. If it can save on costs, you save on costs too. That's

our philosophy of m anaging the supply chain.”

Is it w orking? Solom on claim s to account for 20 percent of the global m obile

phone IC business. Last year, it earned U S$76.3m , up 32 percent from 2004,

on sales of U S$394.1m . N ot bad for a fabless sem iconductor com pany w ith

not a stick of m anufacturing equipm ent to its nam e.


27/34


The next w aveAsia's outsourcing industry looks set to be far bigger than it is now if the

expectations of survey respondents do com e to pass. W e m ay see B PO

services catch up w ith IT outsourcing as com panies in A sia becom e m ore

com fortable w ith the idea of entrusting som e finance, accounting and H R

functions to outsiders.

The m essage to the region's established outsourcing service providers is

clear: it is tim e to focus m ore attention on m arkets closer to hom e instead of

concentrating exclusively on W estern m arkets, w hich are already getting

saturated and show ing signs of a backlash against offshore outsourcing.

Significantly, the incum bents have not yet m oved in a big w ay, if at all, in

nascent segm ents such as R & D outsourcing and engineering services

outsourcing, w hich are currently offered m ostly by young specialist

organizations like India's M indTree C onsulting (see case study). W ill these

new services catch on in A sia as w ell?

Perhaps not, or at least, not as rapidly as IT services has done or B PO looks

likely to do. The key reason m ay be the belief that these services represent

com petitive advantages, and therefore m ust be totally controlled by the

com pany. Asked w hy they do not outsource, six of ten respondents say

som e services are strategic to their com pany, and so m ust be done in-house

(61 percent). The m ajority (53 percent) are also w orried about lack of controls

and insufficient security in the system s of the service provider.

Exhibit 15: W hat are the top reasons for not outsourcing any of these

services?




28/34



Still, w e argue that this m indset can change going forw ard. For one, thesecond reason cited, lack of controls and insufficient security in place, im ply

som e openness to the idea of outsourcing elem ents of these strategic

functions if security can som ehow be assured.

O n sales and m arketing, Scicom 's M r A riyanayakam concedes that

com panies in A sia traditionally keep this function w ithin the organization.

B ut the M alaysian com pany has succeeded in persuading som e clients to

let it do part of their custom er relationship m anagem ent (C R M ). That's

because, in the course of their w ork, Scicom 's contact centers gain intim ate

know ledge of their clients' custom ers, and can thus serve as a sounding

board on how a new product w ill be received, or the likely response to a

m arketing initiative. From there, the next logical step is to let it m anage parts

of the custom er database and generate reports for planning, m arketing,

product developm ent and other purposes.

Sim ilarly, M indTree C onsulting acknow ledges that outsourcing R & D and

engineering functions to a third party is a sensitive issue for m ost

com panies. B ut it says it w orks hard to w in and m aintain the trust of clients,

particularly in the areas of security, confidentiality and respect for the client's

intellectual property rights. Typically, the relationship starts sm all, perhaps

research on a m inor feature of a client's new product. Then as trust is

established, M indTree is given progressively larger roles.

Som etim es, cost considerations w in over the client's qualm s. The

m edium -sized C hinese bank in H ong Kong m entioned earlier has decided

to outsource to a provider in S ingapore the generation of risk m anagem ent

reports in com pliance w ith the risk-adequacy ratios and other requirem ents

of the international Basel II agreem ent. The C IO estim ates that at least

U S$3m w ould be needed to develop in-house system s. In contrast, the

service provider charges less than U S$128,375 a year.

W hat the experiences of these service providers tell us is that a client basefor next w ave outsourcing can be built one custom er at a tim e. A n explosion

in dem and m ay result w hen critical m ass is reached, since hold-out

com panies w ill be forced to outsource R & D , engineering, risk m anagem ent

and so on once they see rivals becom ing m ore com petitive because they are

outsourcing these strategic services.

According to a study by U .S. m anagem ent consultant Booz A llen H am ilton,

only U S$10bn to U S$15bn (out of a potential U S$750bn) w orth of

engineering services outsourcing is currently being done globally. M ost

providers are located in Israel, C anada, M exico, Eastern E urope and C hina,

w hose substantial m anufacturing capabilities require engineering know -how .


29/34


A nother consultancy, Evalueserve, estim ates that know ledge processoutsourcing (KPO ) services w ere w orth only U S$1.2bn industry in 2003.

B ut by 2010, it predicts, KPO m ay be w orth U S$17bn, representing an annual

com pound grow th rate of 46 percent.

It is a given that these services w ill be offered by providers in India, C hina,

the Philippines and other talent-rich econom ies in Asia, since they are already

leaders in IT services and B PO . In turn, this m eans com panies in the region

can easily gain access to these strategic services if they choose to outsource

them . It m ay take a w hile, but next w ave outsourcing –KPO , ESO , C R M , risk

m anagem ent and strategic planning –m ay yet rival IT services and B PO in

size and value in the Asia Pacific region.

M indTree: w hen an outsourcer outsourcesIndia's M indTree C onsulting is an outsourcing services provider focusing

on inform ation technology (IT) services and, increasingly, research and

developm ent (R & D ) and engineering services. It also outsources som e of its

ow n processes. “All our payroll is outsourced, part of our recruitm ent, and

som e of our engineering activities,”says Vinod D eshm ukh, chief technology

officer, R & D Services. “W e don't have our ow n facilities for PC B [printed

circuit board] layer, PC B fabrication, and com ponent assem bly. W e use a lot

of outsourced partners. H e adds: “W hatever can be or should be outsourced,

w e w ill outsource.”

Accountability, of course, is never outsourced. In-house executives and staff

take responsibility for setting policy, direction and strategy, and for seeing to

it that these are executed correctly. B ut parts of the process m ay be

outsourced. In strategic planning, for exam ple, M indTree often invites

academ ics to high level m eetings. In custom er relationship m anagem ent,

IT-related back office operations are outsourced, but anything that has a

direct im pact on the custom er and on the com pany's relationship w ith the

custom er is done in-house.

Being an outsourcing services provider itself, M indTree treats its service

providers in the sam e w ay it w ants to be treated by its clients. “W e

understand the difficulties of the service provider,”says M r D eshm ukh. “O ur

objective, both as a provider and [a client of] an outsourcing partner, is to

nurture a partnership.”A one-off, short-term project m ay be treated as a

vendor relationship or pure procurem ent, but in a relationship w ith a longer

tim e span, says M r D eshm ukh, “you get the best from a partnership. That is

how w e build our ecosystem .”The provider gets a deeper understanding of

the client's business and industry, requires few er briefings and less

oversight, and delivers higher quality service.



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A t the m om ent, IT services account for three-fourths of M indTree's practice.B ut product realization services, including R & D and engineering, are com ing

up fast. M any of the contracts are w ith start-up Silicon Valley clients, such as

a recently com pleted project involving the design, engineering and

m anufacture of a B luetooth-enabled handheld device using the custom er's

proprietary softw are applications. “But now w e have quite a few from

Europe,”says M r D eshm ukh.

The next grow th area: India and the rest of Asia. Profit m argins m ay not be

as high, but M indTree is seeing A sian m arkets, particularly India, grow ing at

phenom enal rates. W hen the region is ready for R & D and engineering

outsourcing, it w ill be there w aiting w ith a m enu of services honed from its

w ork w ith the W est.

KPO : the next big thing?W ith so m any abbreviations used in outsourcing, the addition of another m ay

not seem a big deal. B ut KPO , or know ledge process outsourcing, is

generating excitem ent in the industry. This new service, w hich already

accounts for 11 percent of India's export revenue from outsourcing, is

projected to becom e a U S$12bn m oney earner for India by 2010, w ith an

additional U S$5bn going to KPO providers elsew here in the w orld.

As the term suggests, know ledge process outsourcing involves know ledge

intensive business processes that require significant dom ain expertise,

analytic skills and judgm ent m aking capabilities. KPO providers typically offer

high-end services not only to clients in the traditional banking and financial

services industries, but also to those in pharm aceuticals, healthcare and life

sciences, law , design, anim ation and even education.

In India, for exam ple, M olecular C onnections undertakes both custom ised

and syndicated research on gene pathw ay m apping. The Bangalore

com pany's 100 or so P hD s use an internally developed N ational Language

Q uery tool for the job, w hich includes the creation of a protein interactiondatabase. A nother Indian firm , M arketR x, com bines technology, analytics

and m arket research to provide services that enable the pharm aceuticals and

life sciences industries to im prove their sales and m arketing initiatives.

O ther em erging players in India's KPO space include Evalueserve, Sm art

Analyst, N etscribes, ValueN otes, U gam Solutions, Inductis, B2K , Scope

eKnow ledge, Atlas Legal Research, Pangea 3, and Copal Partners. They operate

across a w ide range of industries, offering a m ix of services that range from

patent filing and search to econom etrics and exhaustive data m ining.

A bout 25,000 Indian specialists are said to be in the KPO segm ent now . B y

2010, says KPO player Evalueserve, 250,000 w ill be lending their brains to

the w orld's com panies.


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C onclusionO ur findings have im plications for com panies in Asia in general, and also for

com panies that provide outsourcing services. W e sum m arize them below .

For companies in Asia

* O utsourcing is gaining steam in the region. C om panies that have no

plans to outsource at all m ay find them selves at a com petitive

disadvantage if their rivals that do outsource reap anticipated benefits in

cost savings, efficiencies, ability to refocus energies on core

com petencies, and access to w orld-class best practices.

* O utsourcing is being adopted not only by com panies in high cost

econom ies like A ustralia, H ong Kong and Singapore, but also by

enterprises in low er cost C hina and India. C ost saving is evidently not the

only benefit from outsourcing. If done right, it can also allow a com pany

to focus on its core com petencies and access skills that are lacking in-

house.

* A t present, there are few outsourcing services providers w ith a

presence in all Asian countries and w ith capabilities not only in English but

also various Asian languages. C om panies that plan to outsource should be

aw are that they m ay need to go w ith five or six providers in different

locations, and m ust be ready to deal w ith the resulting com plexities.

* C om panies that currently outsource take a hands-off approach to the

relationship, depending m ore on integrating outsourcing into business

results and clarifying objectives at the outset, rather than m icro-m anaging

outsourcing activities and rew arding or punishing providers. This is a

strategy that enterprises planning to outsource w ill do w ell to consider.

* Regulations like the Sarbanes-O xley A ct of 2002 in the U .S. and sim ilar

legislation under consideration in Japan, South Korea, India and otherAsian countries have im plications for the outsourcing industry. C om panies

should be ready to be m ore thorough in vetting service providers to m ake

sure their outsourced functions rem ain com pliant w ith applicable law s.

For providers of outsourcing services

* C om panies in Asia are particularly open to outsourcing IT solutions, and

increasingly to business process outsourcing, such as financial and

accounting functions and hum an resources m anagem ent. It m ay be tim e

for providers that focus exclusively on serving custom ers in the U .S. and

Europe to start looking closer to hom e.

* The m ain com plaints of com panies in A sia about outsourcing providers

are insufficient know ledge by the provider of the client's business and

industry, and non-responsiveness to client concerns. Providers w ill do w ell

to focus on these areas.



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* C om panies in A sia do not alw ays w ant a partnership relationship w iththeir outsourcing provider. Som e are m ore com fortable treating their

provider as a vendor. Providers should be sensitive to the client's

preferences and m ake appropriate adjustm ents.

* C om panies in Asia are reluctant to outsource strategic planning, sales

and m arketing, risk m anagem ent, R & D and custom er servicing as they

are considered to be strategic services. O utsourcing providers in these

areas should be aw are of this attitude, and m ust w ork to overcom e it by

em phasizing their com m itm ent to security, confidentiality and intellectual

property rights. They can also focus on offering only elem ents of these

functions, not take over the w hole function. For exam ple, instead of doing

all the engineering w ork on a new cell phone m odel, an outsourcing

provider m ay offer to do only the B luetooth w ireless connection. This w ay,

the client w ill be exposing only a m inor portion of the project. O utsourcing

providers m ay also consider bundling the service on a one-off, per-project

basis, rather than a continuing, m ulti-year contract.

* C om panies in A sia take language and com pany specific and national

culture into account w hen deciding w hich outsourcing provider to use.

Providers w ill do w ell to hire local language speakers or develop

m ultilingual capabilities am ong their staff, as w ell as prom ote cultural

sensitivity.


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N ovem ber 2006.Q LD 0492ICE

Egidio Zarrella J oAnne Stephenson Stephen Lee

G lobal Partner in C harge Partner Partner

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KPM G in A ustralia + 61 3 9288 5458 + 852 2826 7267

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