PricewaterhouseCoopers 1


1. Foreword 3

2. Preface 4

3. Approach and Methodology 5

4. Executive Summary 6

5. The BPO Landscape 8

5.1 An Overview 8

5.2 Demand and Supply Equations 8

5.3 Advantage India 10

5.4 Location Analysis 12

5.5 Industry Structure 14

6. The Evolution of BPO 15

7. The Governance, Risk and Compliance Perspective 17

7.1 Deal Structuring and Pricing 18

7.2 Migration Strategies 21

7.3 Assessment & Management Risks 23

7.4 Governance and Monitoring 27

7.5 Contract Renegotiation and Exit Strategies 29

7.6 Impact of Compliance Legislations 31

8. The Human Resource Challenge 32

9. Change Management 34

10. Concluding Remarks 36

11. Appendix 37

Table of Contents


The report, culminating from a Survey, aims tocapture the changing hues of the offshoringindustry and provide critical insight into the keystrategic and operational issues that service-providers are being asked to address. Thereport contains best practices with respect todelivery models and implementation plans,reflecting the growing competitiveness anduniqueness of the sector.

FOREWORD

I am pleased to present “The Evolution of the BPO Industry” fromthe Indo-American Chamber of Commerce, andPricewaterhouseCoopers. This is part of a continual initiative tobring to light, the service-provider’s perspective of the key trendsand challenges of the Indian BPO Industry.

I would like to thank all the respondents of thesurvey, who spared their valuable time to sharetheir experiences with us. I hope that the reportwill help them assimilate and learn from bestpractices shared by others in the industry.

Our thanks to PricewaterhouseCoopers, ourpartner for this Survey, for their detailed workand for sharing their knowledge.

Ashank DesaiChairman, Mastek LimitedRegional Vice President, WIC IACC


However, the process of transitioning to aBPO-based model is not easy. It raises manyquestions, presents many challenges andposes many risks. Further, with the BPOindustry of India entering into a phase ofmaturity, a significant change in the nature ofopportunities and challenges is beingwitnessed. Concerns and solutions are nolonger the same as they used to be.

It is in this light that IACC-PwC have jointlycarried out a survey, aimed at highlighting thefiner nuances of the evolution of the BPOservice provider in India; the shift in complexityof processes and the strategic and operationalrisks involved.

PREFACE

Outsourcing is a management process in the globalized businesscontext that has been well understood, tried and tested by suc-cessful organizations across the world. The competitive pressuresarising from the emergence of a ‘boundary-less’ global economy,have spurred the faith in the process - as a means for providingsignificant cost savings, flexibility and improved operational perfor-mance. Offshoring is no longer being considered a short-term toolfor cost-savings - the focus is steadily shifting to long-term competi-tive advantage, an integral part of the global corporation’s strategy.

The objective of the report is to illustrate theemerging issues of the sector from structuralchanges in the industry to the human resourcechallenge, from migration strategies togovernance and monitoring. The issuesidentified reflect the changing concerns of theglobal market, from a position of ‘whether tooffshore’ a few years ago, to the currentperspectives of ‘how to best manage’ thisglobal inevitability.

We thank all the participants who took timefrom their schedules and shared theirperspectives on the industry. We are confidentthat this report will help us learn from ourshared experiences, to proactively manage andleverage the emerging trends of the offshoringindustry.

Joydeep Datta GuptaExecutive DirectorPricewaterhouseCoopers Pvt.Ltd.


APPROACH AND METHODOLOGY

The sample of respondents consisted of ajudicious mix of 20 key service providers inIndia, with respect to ownership type (captives,joint venture companies, and third partyvendors), nature of services being offered(voice, non-voice) and functional offerings(niche vertical players, general players etc.)This was to ensure that the analysis drawn andrecommendations made, were representative ofthe Indian offshoring industry.

The methodology deployed for this surveyconsisted of primary research, with insightsbeing captured through questionnaires and face-to-face discussions with senior management ofparticipant organizations. Inputs from potentialcustomers to this industry have also been

collated, with respect to their key concernswhile considering outsourcing to India. Theanalysis was further supplemented by PwCknowledge-bases and published data tovalidate trends and best practices, emergingfrom primary sources.

Our analysis and findings are based onconsensus findings from the survey and aresupported by quantitative and qualitativeinputs from the respondents.

The data presented in this report is based oninformation received from the respondentsand has been collated to represent anindustry trend. Nowhere in this report haveindividual company statistics been published.

The aim of this survey has been to identify key strategic andoperational trends of the BPO industry in India, from both acustomer’s and a supplier’s perspective.


based approach.Service-providers are realizing that thetraditional sources of cost advantages -manpower and infrastructure costs, may nolonger be sustainable. Service-providershave initiated significant cost-control andreduction initiatives, such as efficientutilization of capacity, accurate costplanning techniques, training on costconsciousness, to meet the challenge.

Service providers are diversifying theirgeographic bases, by creating newinfrastructure in Tier II cities, in order toleverage the lower costs and lower attritionrates, as well as to find access to a largertalent base. This also helps serviceproviders to better equip themselves from acontingency perspective.

The BOT model of deal-structuring hasbeen cited as an emerging area ofpreference for clients, due to lower riskswith higher control, and for service-providers, due to higher levels of profitmargins.

Pricing models are being centered onachievement of SLA’s, indicatingmovement away from the traditional fixedprice model.

Migration strategies, risks and costs areincreasingly becoming the area of focus for

The report aims to highlight the changing trendsof the Indian offshoring industry, as it showsindications of entering the next phase ofmaturity. The changes are all-encompassing,driven by key participants of the BPO sector -service-providers, clients, employees, externalstakeholders and the Government. Below is anoverview of our major findings:

The supplier-side of the global offshoringmarket is anticipated to become morecompetitive in light of the emergingpreference for presence in offshore as wellas near-shore locations. Canada andIreland, traditionally perceived as high-costlocations, will emerge as strongcontenders.

The structure of the Indian offshoringindustry is witnessing steady change, withthe emergence of domain/industryspecialized BPO’s. A noticeable change inthe service offerings of service-providers isbeing witnessed; service providers aremigrating to higher-end strategic processes.Correspondingly, the traditional growthdrivers of the industry (voice, dataprocessing), will lose focus.

The objective of offshoring has progressedfrom being a mere cost-saving initiative toone that is adopted for realizing processimprovements, and enhancing efficiencies.This shift has resulted in maturing of theclient-vendor relationship, to a partnership

EXECUTIVE SUMMARY

Business process outsourcing (BPO) is not a new managementstrategy, but has received heightened interest in the past severalyears because of its potential economic and strategic impact.Companies look to outsourcers to provide process efficiencies andeconomies of scale, as well as continued investment in the latesttechnology, which can be more effectively cost-justified whenspread across multiple organizations.


clients. Leading service-providers areleveraging this concern to differentiate theirservice-offerings by providing value-addservices during the stages of transitioningincluding knowledge management,performance improvement, base-lining etc.

The focus for clients with respect to riskidentification and mitigation, has broadenedto include internal risks including transitionrisks, data security risks, loss of control,brand damage, weak governance etc.Service-providers are able to play a criticalrole to mitigate the risks.

Exit clauses are being diligently built intocontracts, clearly specifying reasons forexit, notice-periods and issues related tointellectual property security etc.

To meet the challenge of high rates of

employee attrition, service-providers areaiming to reposition the BPO industry as along-term career option. In addition, thefocus has shifted to ensuring that therecruitment processes are aligned withretention strategies, by utilizingcompetency based frameworks forrecruitment.

In conclusion, the changing trends haveresulted in increased client and service-providerconcentration on BPO Assurance,encompassing areas of program management,project management, performance monitoring,SLA management etc. The ROI aspect ofoffshoring, is now assumed as a given. It is theGovernance, Risk and Compliance aspect thatclients are now taking note of. Thepsychological leap that clients must make tooffshore is requiring them to be sure of the risksthat they are facing and the strategies thatmust be in place to manage them.


An Overview

Reduced international trade barriers andimproved telecommunication and IT capabilityover the past decade has led to a situationwhere organizations across the world areincreasingly interlinked with each other. Thishas resulted in intense global competition,challenging business managers across theworld to find ways to reduce the cost ofconducting business and accessing globalresources in meeting the need of globalmarkets. In such a context, the reorganizationof business models to leverage benefits ofoutsourcing and focus on core competencies,has become a key strategy pursued by largecorporations across the world.

BPO service-providers are expected to providea wide spectrum of benefits to their customers,ranging from having greater expertise in theoutsourced processes, lower costs achievedthrough economies of scale, scalability and theability to absorb cyclicality of loads.

Demand-Supply Equations

According to market analysis firm Gartner, theglobal outsourcing market in 2000 wasapproximately $119 bn and will touch $234 bnby the end of 2005. The market is expected togrow to about $310 bn by the end of 2008.Contribution from the North American continentstands at about 59% of the total market, withEurope contributing about 27% and Asia-Pacregion (including Japan) contributing theremaining portion of the market.

In terms of vertical contribution, the financialservices industry contributes approximately17% of the total market size, followed by theTelecom sector (16%), Consumer Goods andServices (15%), Manufacturing (9%) and therest by the Information Technology sector.

The BPO market can be broadly broken downinto three areas of functional operations:

i. Business administration (falling under G&Aexpense costs)

ii. Supply chain management (COGS), and

iii. Sales, marketing and customer care(selling and marketing costs)

THE BPO LANDSCAPE

Global BPO Market by Industry

Financial Services

17%

Communication (Telecom)

16%

Consumer Goods/ Services

15%

Manufacturing9%

Information Technology

43%

Global BPO Market by Geography

United States59%

Europe27%

RoW5%

Asia-Pacific (including Japan)

9%


India has emerged as one of the bright stars inthe global Business Process Outsourcingmarket and has maintained its globalcompetitiveness by offering the bestcombination of cost, quality and scalability.

The growth rates* of the Indian BPO-ITESindustry have been 59%, 45.3% and 44.4% inyears 2002-03, 03-04 and 04-05 with revenuesof over $3.9 billion in FY 2003-04 and expectedto touch $5.7 bn in FY 2004-05.

In terms of markets, the US continues to be themain consumer of India’s ITES-BPO services(with a 66% share of the market), followed byWestern Europe (including the UK), whichaccounted for 20% of export revenues. In termsof functional service offerings, Customer Careand Support services contributed approximately34% of the industry’s revenues with the otherleading service lines including Finance (with acontribution of 22%), Administration (13%) andContent Development (19%). The globalfinancial services vertical remained the largestuser of Indian ITES-BPO services, followed bytelecom, healthcare and airline segments.Captive units continued to dominate the ITES-BPO industry, accounting for over 65 percent ofthe value of the work offshored to India.

Currently the sector employs approximately2,45,100* people and another 94,500 jobs areexpected to be added in the current financialyear. There are over 400 ITES-BPO companiesoperating in the Indian market, including captiveunits (of both MNCs and Indian companies) andthird-party services providers.

* NASSCOM

Size and Growth of BPO in India

0.0

1.02.0

3.0

4.05.0

6.0

2002-03 2003-04 2004-050%10%20%30%40%50%60%70%

Size (USD bn) Growth rates

Size

in U

SD b

n

Gro

wth

in %

Export Revenues by Geography

USA

66%

Western Europe20%

Others14%

Supply Chain Management

Sales, Marketing,Customer Care

Business Administration

Direct Procurement

Warehouse / inventory

Customer Analytics

Customer Acquistion

Customer Retention

Cross Selling

Finances

Payment Services

Human ResourcesTransportation & Logistics

General Administration


Despite a growing number of offshoring locationoptions available with organizations today, Indiahas emerged as one of the most preferredlocations for outsourcing.

The primary factors in consideration whiledeciding on an offshore location include:

Cost Competitiveness, which consists ofcost of labour, infrastructure costs andcurrency exchange rates

Labour Competitiveness, consisting of thesize of the available labour, level ofeducation, domain skills, fluency in theEnglish language, cultural compatibility towestern markets and attrition rates

Other factors, which consist of existingbusiness and political risks associated withthe country, geographic location (timedifference), tax regime and regulatoryconsiderations such as Data Security andIPR issues

A country-level analysis of people and costcompetitiveness reveals that India has greatertraction primarily due to the availability ofadequately trained manpower. It offers a large(over a million graduates each year with350,000 engineers), well-qualified, Englishspeaking labor force to offshoring organizations.It is on this parameter that potential andexisting outsourcers perceive it more favorablythan other low-cost countries such as Brazil,

* Gartner Research

Advantage India

Hungary, Philippines and China. Canada, aviable “near-shore” option for manyorganizations, recognized for its peoplecompetitiveness, is however, considered ahigh-cost location.

The cost advantages of offshoring to India aresignificant. It costs less than US$ 7,500*

annually to hire a call center agent in India(cost to company) as compared to US$ 19,000in the United States and US$ 17,000 inAustralia. It is also estimated that the averageannual salary of graduates in India is just US$2,400 as compared US$ 2,900 in Philippines

and US$ 19,500 in Ireland. Moreover, with afavorable exchange rate with the US Dollar,BPO service providers are able to pass onthese benefits to the customers, making it oneof the more attractive destinations.

In conclusion, India is uniquely positioned toleverage its cost and quality advantages, tocater to the escalating demand for offshoring oftransactional and strategic business processes.

-

5,000

10,000

15,000

20,000

India USA Australia

Call Center Employee Costs

USD


Mode of Operations

Our survey found an interesting trend with respect to the choice of the outsourced location.The general perception that organizations prefer a single outsourcing location is misleading.In reality, organizations have multi-locational outsourcing strategies to ensure businesscontinuity in case of a disaster in the primary location, as well as to expand the access toresources and talent in other locations.

Most industry players believe that the BPO-ITES would move to a “Global Delivery Model”wherein the service provider has a delivery presence in the market that they are serving.This model is more suited to mid-market clients who still look for physical presence as apre-requisite for outsourcing. The perception amongst the service providers is that middle-market customers, who in the past, have had experience with near-shoring, are much morereceptive to the idea of considering a mixed model of delivery where part of the processesare delivered from the India centre and part of it from the near-shore facility. The proof-of-concept, in these cases is done from the near-shore facility and eventually the large shareof processes are carried out in India, with a small part of the processes continuing to becarried out from the near-shore facility.

However, some respondent’s state that thoughpeople competitiveness is one of the primaryfactors for India’s attractiveness as anoffshoring destination, the recent double digitwage increases coupled with high rates ofattrition are acting as dampers to the successstory. Until now, these wage increases havebeen offset by the large decline in telecommuni-cation costs, which have currently stabilized –resulting in service providers looking at othermeans to reduce costs.

Based on our survey respondents, it appearsthat the potential challenge for the BPO indus-try could be the perceived lack of regulationaround issues such as Data Security and IPRissues. Moreover, with respect to ease ofoperations in setting up shop and running aBPO centre, respondents state that clients donot perceive India to be as competitive ascountries like Philippines, Australia, Ireland. Wediscuss the potential risks in a typicaloffshoring arrangement in subsequent sectionsof this report.

Cost Control and Reduction Techniques

Efficient utilization of capacity - servicingmultiple geographies, offering multipleservices – time dependent and offlineofferings

Enhancing internal efficiencies throughprocess improvement

Accurate cost planning techniques

Training programs on cost consciousness

Setting up new facilities in Tier II cities


Although India’s position as a preferred locationfor offshoring is well established, the growth ofthe industry has been concentrated around afew key cities such as Bangalore, Delhi-NCR,Chennai, Hyderabad, Mumbai etc. Discussionswith service-provider reveal the followingadvantages of these cities -

Availability of well-qualified, adequate andlow-cost manpower

Well-developed social infrastructure tosupport residing population

Well defined real estate laws, regulationson ownership and transfer of property

Respondents reveal that infrastructure costsconstitute a major cost for a service provider.However, there is an emerging trend tominimize this cost to be able to maintain costmargins and enhance profitability.Consequently, service providers areincreasingly looking beyond the traditionallyfavored destinations towards Tier II cities suchas Jaipur, Pune, Chandigarh, Indore,Ahmedabad, Cochin and Nagpur.

Tier II cities offer a cost advantage due to therelatively lower cost of living. For instance,according to a BPO major currently consideringsetting up operations in Chandigarh, foremployees, it is 60% more expensive to live inDelhi-NCR, a traditional BPO hub, as comparedto Chandigarh, a Tier II city.

Location Analysis

Established connectivity to internationaland domestic cities

Well-established physical infrastructure e.g.power, water, telecom etc. However, costof infrastructure for these locations seemsto be an area of immense concern forservice-providers and clients

Source: Knight Frank, Cushman & Wakefield, Colliers Jardine

City Ranking Based On Real Estate Prices(Rent per sq ft / month)

Kochi

Ahmedabad

Hyderabad

Kolkatta

Chennai

Banglore

PuneNational Capital

Region (NCR)Mumbai

15.5

16

24

25

25.2

30.3

35

57

87

1

2

3

4

5

6

7

8

9

Source: Knight Frank, Cushman & Wakefield, Colliers Jardine

Kochi

Ahmedabad

Hyderabad

Kolkatta

Chennai

Banglore

Pune

Mumbai

Rank17.0

19.9

20.4

21.0

21.6

23.9

28.4

50.9

51.6

1

2

3

4

5

6

7

8

9

City Rankings Based On Manpower Rates (Rs./hour)

National CapitalRegion (NCR)

City LoadShedding

Cost Rank

(Hours perday)

(Rs perunit)

City Ranking on Power Scenario

KolkataChennaiHyderabadAhmedabadMumbaiKochiBangalorePuneNCR

----------

0.32.44

4.6

3.14.14.34.853

4.14.14.2

123456789


Tier I cities have witnessed attrition rates ashigh as 60% over the past few years. Serviceproviders and clients have becomingincreasingly concerned about this trend as ittranslates into increased recruitment andtraining costs, impacts service quality and alsoposes a significant data security threat.However, survey respondents state that smallertowns have relatively lower employee attritionrates of around 10-15 %, making them anattractive destination, especially fortransactional offshoring. In addition, locationspecific sops (like tax holidays) from stategovernments enhance the investmentattractiveness of the Tier II cities.

However, the decision to move to Tier II cities,the respondents believe is not without itsnegatives. For one, training costs foremployees are higher (especially for voice-based processes). Secondly, cost ofmaintaining 24x7 operations in Tier II cities isinflated (especially due to the lack ofinfrastructure – e.g. frequent power outages),resulting in a cautious and a ‘wait and watch’approach being adopted by most service-providers.

An advantage of a strategy that leverages TierII cities is that these cities, though low ininfrastructure, are significant contributors to thetalent pool. In other words, whilst infrastructureis concentrated in Tier I cities, human resourcetalent is distributed all over India.


The growth of BPO in India can be classifiedinto four distinct phases:

The First Wave: Company Owned UnitsPioneered BPO in India

Company owned units such as AmericanExpress, General Electric (GE), Citibank,and AOL etc. triggered the trend ofoutsourcing back office operations and callcentre services to India.

Since then several banks, insurancecompanies, airlines and manufacturingcompanies have set up back office servicecenters in India.

The Second Wave: Venture Funded NewCompanies

Over the last few years, a number ofexperienced professionals have set upstart-up operations in India. Generally suchstart-ups have been funded by venturecapital funds.

The Third Wave: Leading IT ServicesCompanies enter BPO

Given the magnitude of such opportunity,natural synergies with the software servicesbusiness and the ability to leverage theirhigh-end physical infrastructure andmanagement band-width, most large ITservices companies have ventured intoITES.

Consolidation of the market with the smallerplayers merging with each other/ largercompanies for economies of scale

The Fourth Wave: Domain / IndustrySpecialized BPO’s

Niche players in industry verticals orspecific business processes have setupBPO businesses. Many of these playershave had vast experience in the domesticmarket and are now offering offshore BPOservices

Generalized large BPO players are nowfocusing on “verticalizing” theircompetencies and structures

A majority of the key players in the BPOindustry in India are captive units of MNCs andinternational BPO companies desiring to takeadvantage of the cost arbitrage offered by India.For the Indian ventures of these MNC’s therisks are limited since they are captive unitsand volumes are assured. Many of the BPOventures of MNCs are now trying to offer theirservices to other companies. Several ventureshave been hived off into independentcompanies to attract other customers andbecome profit centres as opposed to the costcentres they used to be earlier. Examplesinclude eServe International, World NetworkServices (British Airways) and GECIS.

Industry Structure

MNC subsidiaries

GEBritish AirwasyseServe, HSBC,Scope, AmExHewlett Packard

International BPOCampanies

ConvergysSiteleFunds

Diversified

DakshBrigadeTalismaHero

IT Companies

Infosys (Progeon)Wipro (Spectramind)SatyamHCL


An interesting trend witnessed as part of thissurvey was the perception of service providersthat customers considering offshoring are doingso to “Build on distinctive competencies andretain the competitive edge to create value forstakeholders”. As per our analysis, the focus ofan offshoring arrangement is on business

outcomes, not just infrastructure or tasks. Themain goal is to achieve sustainable enterprise-level service improvements by transformingprocesses.

With maturity building in offshoring programs,the management focus on the decision-makingprocess has crystallized around the availabilityof a highly-skilled workforce and the scope ofscalability, with cost advantages being nowtaken for granted.

Apart from the traditional back-officeprocesses, some of the participants in thissurvey are engaging in performing highend services including research in globalmarkets, credit rating, lending limits,customer analytics

In this light, the traditional growth drivers of theindustry (voice, data processing services) willlose focus, and processes higher in the valuechain (such as Financial Close, Order Booking,General Ledger, Research and Analytics) willgain the attention of the industry; a fact thathas been corroborated by all of theorganizations participating in this survey.

From a supplier’s perspective, there is adefinite need to move up the value chain. Mostrespondents to the survey concur to the fact

THE EVOLUTION OF BPO

Amex and GE pioneered the trend of outsourcing to India bysetting up facilities in Gurgaon, near Delhi, in the early 1990s.Some of the other early birds were companies such as BritishAirways who have also been operating their back office in Indiasince the mid-1990s. The early reasons for considering offshoringto India were centered around reducing costs and minimizing theeffort spent on “non-core” activities. With increasing confidence ofthe companies in the capabilities of Indian operations, higher valueadded activities such as processing of HR, accounting and othernon-core functions is reaching the Indian shores.

Why outsource?

Refocus energies on strategic and core issues

Access to world-class capabilities

Capital Reallocation

Reduced Operations expenses

Reduced time-to-market

Risk mitigation

OffshoringB2B AlliancesProcess Outsourcing

Shared Business Services

Entire IT Operations

Data Processing

Time Sharing

2000s:

1990s:

1980s:

1970s:

1960s:


that in order to improve profitability they wouldneed to move to high-value processes. Inaddition, attrition rates have been observed tobe lower for higher-end processes, translatinginto lower costs.

In this maturing paradigm of offshoring, clientsare no longer passive participants. Theirexpectations have risen, their involvement hasdeepened and their approach has become more

cautious. They demand more than a temporaryanswer to tighter budgets, seek a balancebetween cost, quality and control, and expectlasting partnerships, that continuously deliverquality and affordability over the total lifecycle.This has an implication on the nature ofrelationship between the service-provider andclient, maturing to a deeper ‘partnership’approach – based on long-term stability,commitment and mutual benefit.

The partnership approach becomes all the morecritical as companies start moving higher-endprocesses to their offshore facilities. Typicallyhigher-end processes are more critical to thebusiness and have a greater degree ofintegration with the company’s global processesin other countries.

BPO is therefore evolving from a solution thatcan dramatically lower cost in the short run –almost as an alternate or interim solution toautomation, to an approach to access globaltalent.

End to End TxnProcessing andVoice Support

DocumentationCompletionCustomer ServiceCross-sell / Up-sell

Channel supportOperations HelpdeskCollections

Loan ProcessingApprovalsUnderwriting

Basic Data Entry

Fullprocess

outsourcing

Customercontact

Problem solving

Rule basedprocessing

Data capture / transcription


As offshoring moves towards the mainstream,addressing governance issues up front isessential to long-term success. Doing it rightthe first time is more critical now than ever. Inthe past, offshoring generally involvedoutsourcing single functions within specificbusiness units. Risk and governance issuessurrounding offshoring did not rise to theorganizational level. However, integrating

THE GOVERNANCE, RISK ANDCOMPLIANCE PERSPECTIVE

offshoring, especially captive sourcing, into acompany’s global business model demandsstrong controls, robust reporting and manage-ment processes and risk management strate-gies that are aligned with the company’s globaloperations. It is imperative that companies takean enterprise-wide, holistic view of governanceand risk issues.


The importance of picking the right dealstructure in offshoring, is critical in light of thelong-term strategic implications it has on costsavings and performance quality. The choicecan be a difficult one – between pursuing acaptive model, doing a BOT (build operatetransfer), doing a joint venture with a supplier,or going straight to the supplier for a directservices relationship.

The deciding factors depend broadly on thelevel of flexibility that an organization is willingto assume and the degree of control that itwishes to exert on the overall operations. Inaddition, there may be other factors such as taxand legal considerations, cultural issues andtime to market aspects that may influence thechoice of model.

Respondents state that there is no one ‘mostsuitable’ model that exists in the industry,stemming from the fact that the requirements,expectations and risk appetite of clients varysignificantly. Interestingly, the requirements ofa specific client may also vary with time - theprime reason for the emergence of a market forBOT models with call options, which clientsmay or may not chose to exercise.

“The core competency of having an in-housecaptive unit and the advantages associatedare tremendous compared to third-partyoutsourcing in terms of committed employees,infrastructure understanding andcustomization of processes to specific andchanging business needs.”

- Agilent Technologies, India

Industry research indicates that currently, thecaptive model of offshoring is predominant. Thereason for this, respondents’ state, is that theearly adopters of the BPO concept simply hadno other choice, thereby being forced to adoptthe ‘do it yourself’ model. The industry did nothave a critical mass of third party players towhom processes could be offshored or thosewith whom more sophisticated arrangementssuch as BOT or joint ventures could be enteredinto. The captive model offers companies highmanagement control over the operations, whichwas critical during the early ‘proof of concept’stage of the industry. Further, businesscontinuity risks are perceived to be low anddata security is more reliable.

Some of the respondents however feel that thecaptive model of offshoring may witnessreduced activity in the years to come. The

DEAL STRUCTURING AND PRICING

Investment

Time to market

Perceived level of data security

Control over operations

Management bandwidth

Exit costs

PARAMETERS CAPTIVE THIRD-PARTY JOINT-VENTURE

High Medium Low


prime reason stated for this is the high leadtime for operationalizing the center. Withoffshoring perceived to have entered the nextstage of maturity, global organizations feel thatthe time-to-market needs to be minimized to thegreatest extent possible to retain competitiveadvantage. In addition, the requirement ofsubstantial management bandwidth, scaling upof leadership and organizational capabilities inthe subsequent stages of the project, poseformidable challenges to the operationalfeasibility of the model. Nonetheless, somerespondents state that clients are steadilyquestioning the applicability of the third-partymodel, in an era where taking control of productand service quality has become a criticalsuccess factor. Further, with the feasibility oftransaction-oriented offshoring having beentested, clients are now willing to experimentwith offshoring their core processes for whichaccess to knowledge, proprietary systems andintellectual property is preferred to be retainedin-house.

The third-party offshore model has witnessedconsiderable activity over the past few years, adirect consequence of the emergence of world-class service providers with significant criticalmass. Respondents stated that the preferencefor this model may be attributed to the shorterpayback period (between 6 months to a year),and lower exit costs. In addition, clients believethat the third party models hold the maximumpotential of leveraging economies of scale –thereby reducing costs and maximizingefficiencies. However, the nature of workoutsourced is typically non-core and non-critical, in light of a perceived lower level ofdata security.

An emerging trend with respect to dealstructuring is preference for BOT models, amajority of the respondents stated. It is a win-win situation, with suppliers keen to participateon account of the opportunity to earn highermargins and clients navigating the learningcurve with experts and assuming control onlyon stability of the outsourced process.However, some respondents suggest that theBOT wave is only temporary. Cost savings are

the maximum in the first few years ofoffshoring, stabilizing to approximately 10-15%thereafter, making it an unattractive propositionfor clients to maintain the offshore centerthemselves.

“It is unlikely that the future deals willconverge towards any one model. Allthese models will continue in theimmediate future.”

- Survey Respondent

A hybrid approach, wherein a client outsourcesa set of processes to a third party andsimultaneously operates a captive for otherprocesses, may also assume importance in theyears to come. This flexible structure enablesclients to simultaneously leverage the benefitsof scale for volume driven processes, andaddress risk-management concerns for othercore activities.

As the BPO sector matures, it has also beenprivy to evolving pricing models. These rangefrom the traditional vanilla time-based models tothe more value based pricing mechanisms andcomplex management fee models that areemerging. These pricing models may depend onone or more of the following variables:

Full Time Equivalent

Time-based

Volume-based

Per-seat

Fixed

Fixed plus variable

Gain share

For captive units, the respondents state thatthe pricing techniques are based on the cost-plus approach, ensuring that offshore centersoperate as profit centers and are incentivized toadopt a ‘cost-minimization’ approach.

“A key challenge that is faced for pricing isto come up with a comprehensive solutionthat will be able to capture time and cost atthe required level of granularity.”

- Survey Respondent


Standard CAPEX items such as cost ofbandwidth / connectivity, infrastructure andfacilities costs and technology costs also needto be factored into pricing models to arrive at anoptimal pricing strategy.

An interesting pricing model cited by arespondent is based on a ‘step-down’ pricingapproach, wherein the pricing reduces with pre-defined time milestones, allowing operators tobuild requisite skill sets to maximize operationalefficiency and effectiveness.

In this manner, service providers are willing tocustomize pricing agreements to client andprocess specifications to ensure a collaborativeapproach to profit maximization. However alarge number of respondents in the surveyhighlight an intensification of client’s preferencefor SLA-linked or gain share models,incentivizing service-providers to achieve andsurpass SLA targets. On the flipside, there hasbeen a trend towards more stringentenforcement of penalty clauses for non-achievement of targets, which had traditionallybeen viewed as a mere contractual necessityby clients.


Migration Success Parameters

On time

Least cost

Least process disruption

Transitioning involves knowledge transfer to alarge block of new resources with no previousknowledge of the systems, corporate cultureand industry. It is an area that is being plannedminutely by clients, with detailed transitionplans being created - addressingmethodologies, milestones, documentation andcosts. In specific cases, respondents sharedthat the plans also describe strategies tomitigate risk and manage productivity during theperiod of transitioning. Capacity planning andtechnology issue analysis also form integralparts of the overall transition plan. The client’sobjective, respondents state, is to minimize thecosts and avoid any surprises at the laterstages of the project. In this light, clients alsoaddress issues of onsite redundancy, re-organization and retraining in the transition plan.

The principles of migration are centered onminimizing the implementation risk, costs anddisruptions to the business and realizing thebenefits as soon as possible. Based on theseprinciples, there exist two basic models ofmigration wherein the processes to be offshoredmay be improved onsite and then migrated, orsimply migrated on an As-Is basis.

A majority of the respondents claimed thatclients prefer the latter route for migration, withprocesses being migrated in their existingstates, and being improved only on achievingstability in the offshore location. ‘Clients don’twant to deal with too much change at once’, arespondent cited. A phased, ramp-up approachis typically preferred by clients, offshoring oneprocess at a time, and identifying improvementopportunities at later stages. The Big-Bangapproach of offshoring multiple processessimultaneously is adopted in exceptional caseswhere the client faces an urgency with respectto timelines.

With the methodology of transitioning agreedupon, the next step involves an assessment ofthe client’s existing processes, andcorresponding people and technology support.For this, a cross-functional team, spearheadedby an expert in the function being outsourced iscreated – both by the client and the service-provider. For the client, this team is often a partof the Program Management Office (PMO),constituted to support the project during thelifecycle of the project.

This stage of knowledge transfer between anonsite and offshore team is one of the mostvital to the success of transitioning a projectoffshore. There are various modes of migrationthat may be adopted including onsiteshadowing, remote transitioning or a hybrid of

MIGRATION STRATEGIES

Migration is the first test of the offshoring relationship, and often themost difficult. It involves migration of people, processes, technologyand in some cases, culture. The psychological leap theorganization is required to make at the time of offshoring can bechallenging. Even with detailed planning, it is often a learningcurve for both parties, wherein several steps may be taken toreduce the risk of subsequent failure.


the two. However, survey respondentshighlighted that from their perspective, thepreferred route for knowledge transfer is when ittakes place at the client’s location, with thevendor team being able to appreciate andexperience the work environment and moreimportantly, the organization’s culture.Shadowing of resources by allowing theoffshore resources to visit onsite, and thenusing a train-the-trainer approach at the offshorelocation also helps the project to adhere tobudgetary limits. In addition, respondents statethat this approach allows them to study theripple effect of offshoring on the upstream anddownstream processes being retained in-house.

Key Service-Provider Differentiators

Migration Methodologies

IT Security Strategies

Business Continuity Planning

Change Management Support

Risk Management Methodologies

During the stage of knowledge transfer, theservice-provider’s team gathers existingdocumentation from all sources (companyrepositories, IT resources, business end-users),analyzes and understands the existing internalprocesses to identify minor adjustment areas.These learning points are consolidated andpresented to the other members of the teams,subsequent to which the transition commences.This rigorous approach is often adopted formigration of the first few processes or forcritical processes. However, some respondentsstate that as clients develop a degree ofcomfort with the service-provider, migrationmay also shift to a pure remote migrationmodel, currently being adopted on a limitedbasis for capacity ramp-up offshoring initiatives.

“Proven transition methodology is aguarantee for success in the BPO space.”

- Pradip Advani, Nipuna

Migration techniques adopted by leadingservice providers, are structured around

six-sigma methodologies. Respondents statedthat in addition to risk management strategies,IT security policies, BCP and changemanagement, the robustness of the migrationmethodology is often a key differentiator for aservice-provider. Leading players of the industryhave customized or proprietary transitiontoolkits – each with detailed processes thatinclude steps, check points, milestones,documentation and templates. Examples ofspecific value-add features being provided byleading BPO players, as specified by a surveyrespondent, include:

Knowledge Management and BusinessIntelligence: Knowledge assimilation anddissemination around transitioning, ensuringshorter transition cycles and greater clientsatisfaction.

Performance Improvement duringtransitioning: Some service providers offerperformance improvement initiatives prior toactual transitioning, which includesupstream and downstream processanalysis.

Base lining: A test run of the processoffshore is done within the transitioningphase itself and helps establish a clearbaseline.

Comprehensive Service Level Agreementsbacked by stringent reporting systems.

Respondents state that transition for BPOoutsourcing may take anywhere from 5-7months for the first process outsourced, whichmay reduce in subsequent transitions.However, this may be influenced by factorssuch as process complexity, availability ofdocumentation and communication plans andprior experience of service-providers. Thistime-frame also includes development andimplementation of training programs,establishment of Service Level Agreements, fullresponsibility transfer and integration ofoperations.


External risks

Country infrastructure

Management challenges

Business continuity

Vendor selection

Cultural and language differences

Geo-political concerns

The risks of flawed location selection, providerselection, and poor management areconsiderable, attracting substantialmanagement time and investment. Howeverthere are some other risks which are not soobvious but impact the business and itsinterests. Respondents to the survey state thatas clients become more knowledgeable aboutoffshoring, greater emphasis is laid onassessing risk areas where there may besignificant impact on people, processes,technologies, on existing facilities, and onregulatory and legal requirements both in thehome and offshore environments. A noticeabletrend, as per the survey, indicates the steadyshift in the focus of clients from external tointernal risks.*

Transition Risks

As a part of internal risks, transition risks havebeen cited to be the most severe. These risksinclude errors in estimating overall time formigration, intensity of efforts involved andcosts that shall accrue. To mitigate these risks,clients are adopting sophisticated approachesfor identifying the critical path for successfultransition and understanding the level of riskassociated with realizing each key benefit area.Sensitivity analyses are also conducted toassess the probability and impact of any delayand reduction of benefit levels due touncertainties or inter-dependencies with otherprojects, operations or functions during plannedtransition.

RISK ASSESSMENT ANDMANAGEMENT

Offshoring services can reduce costs, provide higher qualityprocesses and allow management to focus on core business.But it also introduces substantial risk management challenges,which when combined with increasing regulatory scrutiny andnegative public sentiment about moving jobs overseas, make riskassessment and mitigation imperative.

* Source: Mercer Management Journal 18

Internal risks*

Transition risks

Data Security risks

Loss of control

Brand damage

Weak governance

Staff resistance

Hidden costs


Data Security Risks

Global customers consider network security,physical security, customer privacy andinformation protection to be critical. A fewrespondents state that the criticality of datasecurity is more concentrated in the areas ofvoice-based offshoring, with employees oftengaining access to customer id’s, pin codes andother confidential data. In addition, theimportance is magnified in specific strategicprocesses such as financial reporting, tax andlegal support and in the verticals of healthcareand insurance. Service providers are aware ofthe privacy and IP related concerns of theirclients and in a large number of cases, as perthe survey, are compliant with global standardssuch as BS 7799, ISO 17799, COBIT andITSM, now considered ‘must-haves’ for thelarger players. Further, most respondents havetaken steps in the areas of physical security,technological initiatives, policies, ethicalguidelines on their own initiative, to ensure thatdata confidentiality is maintained. Regulartraining on issues of security awareness, non-disclosure agreements, screening of employeesand periodic compliance audits are some of thebest practices that had been observed in thesurvey. In addition to the above, clients have

also begun to detail specific steps that theyexpect the service providers to take to ensuredata confidentiality. Security clauses at networkand data level are built into contracts. Further,technological arrangements between clients andservice-providers may ensure that offshoreemployees are unable to enter the client’ssystem, with all offshore inputs being mirroredonto the master database on a periodic basis.SLA’s also cover relevant laws that offshoreproviders are to comply with, detailed withactions that can be taken in case of breaches.

Managing Data Security Risks

Security certifications e.g. BS 7799, ISO 17799,COBIT

Non-disclosure agreements between clientsand employees

‘Clean-Desk’ policies – no paper, no pens onworkstations

Disabled technologies e.g. floppy drives, CDdrives

Employee screening for cell-phones

Dedicated seating

Firewall arrangements

Employee awareness programs

*Source: Barrar, Wood, Jones, 2002

*PERFORMANCE MODEL

Effectiveness EfficiencyPerformance Dimensions

Profit Quality Cost Productivity

ROCE ROI No. of invoices

Reports per month

No. of employees

Cost perinvoice

No. of auditcomments

No. of errors

Performance Criteria

Performance Metrics


Loss of Control Risks

Loss of control on offshored operations is anarea that clients have traditionally beenconcerned of in light of the cultural,administrative and geographic distance betweenthe client and the service-provider. The anxietyaccrues due to two prime factors respondentscite – perceived inability to influence the qualityof the service and the inability to determinewhat is going wrong due to inadequate orinaccurate information. The implication of theperceived loss of control has been on highexpectations from service providers and thedetailed drafting of SLA’s with respect to qualitycontrols and communication flows.

Although SLA’s encompass all areas of clientand service-provider rights and responsibilities,the expected quality of the service and theevaluation criteria for measuring the servicedelivery is the one of the most critical aspectsof the contract. In addition to the traditionalmetrics of quality such as accuracy levels,rejection rates, field error rates, turnaround timeetc., the role of softer aspects of quality suchas client and end-user satisfaction is beinghighlighted. This change is being stressed inlight of the maturing drivers of offshoring,moving away from a pure cost-saving objectiveto one enhancing overall productivity andquality of service. Although leading serviceproviders invest continually in quality initiativessuch as six sigma, COPC, lean-servicemodels, respondents foresee that in the yearsto come, these initiatives will progress frombeing service differentiators to ‘must-haves’.

To corroborate adherence to the defined qualitystandards, respondents state that the role ofpresenting accurate, consistent and timelyinformation has also become critical.Dashboard and MIS report structures aredefined for each stage of the project clearlyspecifying aspects such as frequency, time,content, initiator, participants and medium. Inaddition, escalation timelines and levels arespecified to ensure de-bottling ofcommunication flows. In terms of operationalcommunications, immense importance is beingattached to the documentation of

communication flows between the clients andservice providers. This also facilitatescompliance with the legislations such asSarbanes Oxley and SAS 70, detailed in latersections of the report.

Brand Risks

Brand risk is another area of concern forclients, stemming from poor service by service-providers resulting in end-customerdissatisfaction or service-provider practices notbeing in line with stated practices (ethical orotherwise) of the regulated entity. Themagnitude of reputational risk is amplified withthe political overtones of offshoring for whichclients have begun to develop proactiveexternal communication plans.

Risk of Arrested Evolution

An emerging area of concern for clients is therisk related to arrested evolution. These risksrelate to the inability of an outsourcing solution,defined from a short-term perspective, torespond to changing business requirements.Due diligence in this respect is being carriedout, with focus on issues of scalability androbustness of proposed technology platforms tounderpin transition of existing operations,support ongoing business and enable any futureexpansion of offshore strategy such assignificant increases or spikes in transactionprocessing requirements.

Risk of Hidden Costs

In the financial domain, risks that clients arebecoming wary of include hidden costs - notforeseen in initial stages of projects.Respondents cite examples of the costs ofevaluating vendors, managing major contracts,travelling to offshore sites, enhancing security,and paying severance for laid-off workers asinstances of hidden costs. Exit costs areanother hidden risk, as ending an arrangementprematurely exposes both buyer and provider tolitigation. Clients are resorting to careful costmodelling and scenario planning which include


Cost of Outsourcing

Service providers are getting affected with what is being termed as the “Hidden Costs” in anoutsourcing arrangement. The respondents in this survey pointed out the importance of educatingthe end customer on the actual cost of outsourcing, which can vary significantly from the initialfigure that the customers have in mind. The variation in estimation can depend on the number offactors that the customer considers while considering an outsourcing contract. Typical areaswhere cost estimates can go askew include, “costs of layoffs, cost of vendor selection, transitioncosts, and also cost of ramping up”.

This survey reveals that the variation in cost estimates can end up being as high 38%. The onlyway to avoid such variations, service providers believe, is to be as transparent as possible. Thetable below reveals indicative areas where costs can get overlooked/ not accounted for.

benchmarked information and soundunderstanding of current activity-basedperformance and costing.While most companies are focused on riskissues at the offshoring decision point (e.g.,contract signature/change of control/ physical

move), it has been observed that the focusfades with time. It is critical to keep the ongoingcommitment to risk management; risk profilesand exposures change over time, and whilesome risks can be eliminated or mitigated,others must be actively managed.

Costs associated with Indicative Figures (in%)

Ramping up 1 to 10

Selection of a provider 1 to 10

Contract Management 6 to 10

Transition 2 to 3

Layoffs 3 to 5

Total 13 to 38

Source: Overby, 2004


The survey reveals that most companiesestablish a steering committee at the beginningof the offshoring process to oversee initialdeployment and on-going operations. Thesecommittees are constituted of functional headsin the areas of finance, human resources (HR),legal etc. Respondents state that in the past,these functions had played only supportingroles in structuring the offshore operations. Thispractice is changing as risk, HR, regulatory andtax issues are coming to the surface and arebeing considered critical functions. For in-stance, tax has not been a high priority thus far,but with cost-reductions having been achievedand organizations seeking more sophisticatedways to enhance profitability, this trend iswitnessing a change. In addition, in light ofcompliance requirements such as Sarbanes

Oxley and Basel II, the role of the risk and legalfunctions has begun to assume dominance ascompared to previous trends.

Under the steering committee, a small high-caliber team is created to retain strategicdirection and control of the activities. Com-monly known as the Program ManagementOffice (PMO), it is a strategic entity that isformed at the corporate level. Although exactstructures vary with the nature of outsourcingagreement, respondents state that the team isoften cross-functional, constituted to supportproject management methodology, training,internal consulting etc. In certain cases,service-providers reveal that the PMO isspecifically spearheaded by an executive ofIndian origin, to leverage cultural similarities

GOVERNANCE AND MONITORING

A large number of companies did not anticipate the complexities ofmanaging large outsourced relationships. Services wereoutsourced on an ad hoc basis, resulting in responsibility forperformance diffusing throughout the organization. As a result,organizations began to lack coherent policies and conditions andwere unable to leverage the benefits of significant outsourcingvolume. However, with the maturing nature of the offshoringconcept, clients are now becoming aware of the role of strategicsuppliers as true partners and are developing formal partnermanagement principles, processes, and governance incollaboration with them.

Source: Renodis Global Outsourcing Solutions

In an effort to maximize cost savings, manyorganizations fail to dedicate resources tosuccessfully manage an offshore initiative.It is recommended that organizations spendapproximately 2.7% of the contract value in perform-ing management activites.

Strategic direction and oversightFinancial stewardshipSponsorship of strategic initiatives

Vendor relationship (onshore/offshore)Performance dashboardKey operational issuesFinance and budgetsEnterprise-wide initativesService Level Management

Project prioritizationProject managementProcess and technology evaluation

ExecutiveCommittee

ProjectManagement

Office

Business UnitSteering Committee


Types of MIS Reports Produced:

Production Reports: Production Report measures the operational efficiency of individualprocesses by evaluating the output against the inputs received.

SLA Compliance Report: SLA Compliance Report measures the SLA compliance withregard to quality and timeliness.

Case Tracker Reports: This lists out the cases that are yet to be completed although actedupon.

Weekly and Monthly Review Reports:(On Production, SLA Compliance, and Errors etc)The Weekly and Monthly report facilitate review of weekly/monthly production statistics,error analysis, SLA compliance and pending cases to be resolved. This facilitates a causalanalysis to identify error prone areas and to prevent recurrence of the same in future.

Project Management Office (PMO) Reports: This includes daily reports to be submitted tothe PMO which incorporates details on Idle Hours, Production Efficiency, SLA compliance,QC, Errors etc.

Senior Management Reports: Typically, a performance summary of activities during thecourse of the evaluation period would be of interest. These reports are adapted in closeconsultation with the client.

- Survey Respondent

during the project. In other cases, the surveyreveals that the management of the functionthat is being offshored drives the PMO. (e.g. ITfor applications development). The objective ofthe PMO is to monitor the operational aspectsof the projects, by ensuring that all projects arecontrolled by experienced project managers,project quality is continuously monitored andareas of risk are regularly identified and miti-gated. More importantly however, the PMO isresponsible for ensuring that aspects of cost,quality, scope and exception reporting are beingeffectively communicated across geographies.

The critical role of the PMO is to monitorachievement of SLA’s during the lifecycle of theproject. Respondents revealed that in the initialstages of the project, interactions with theonsite PMO team are fairly regular, and maytake place on a weekly basis. The objective ofthese discussions is to highlight risk areas and

report process exceptions. In the subsequentstages of the project, the PMO is responsiblefor oversight and decision-making in the areasof training, recruitment, SLA monitoring,process improvement opportunities etc.

A key input provided to the PMO is MIS reportsand dashboards, containing summaries ofperformances and adherence to SLA targets.Respondents stated that the typical areashighlighted in MIS reports include volumes,accuracies, employee attendance and excep-tion reporting. In addition, a large number ofservice-providers stated that clients werebecoming increasingly demanding with respectto the information provided in MIS reports. Forinstance in a specific case, a client stipulatedthat the MIS report contain details on thenumber of errors per day segregated by thenature of error viz. typographical errors, casualerrors etc.


The survey highlighted that the typical tenure ofcontracts ranges between 2-3 years, followedby renewal on an annual basis. Serviceproviders indicate their preference of enteringinto long-term contracts, a minimum of 2 years,to allow time for processes to stabilize andsubsequently identify process reengineeringopportunities. However, respondents state thatthere is an emerging trend of contractrenegotiation and exit clauses being diligentlyincorporated into contracts.

“Contract renegotiations are notnecessarily a ‘bad thing’ - they may be acritical opportunity to ensure long-termsuccess.”

- Survey Respondent

Survey respondents cite that contractrenegotiations are more common than might beexpected. Clients and outsourcers see theadvantages of structuring “better deals” up-front. The best antidote to renegotiation hasbeen to build greater flexibility into contractstructures, to allow for changes without end-to-end renegotiation. They claim that contractrenegotiation is not necessarily a “bad thing”from the outsourcers’ perspective, and in fact,may be a critical opportunity to ensure long-term success or salvage a failing relationship inneed of review and updation. As perrespondents, renegotiation is most often a

result of business change, a more routinefunction to adjust service levels, or is aprescribed part of standard contract terms(such as a formalized annual renegotiation).A few service-providers have also sharedexperiences of contract renegotiation takingplace for additional data security and legalcompliance requirements.

Why clients may want to exit:

Dissatisfaction with performance levels

Change in control through M&A activity

Pricing issues

Political requirements

Relationship breakdowns are being anticipatedand built in to contracts through well thought-outexit clauses. Respondents state that the mostprominent reasons for client exit may includecontinual quality failures for a pre-defined timeperiod, and merger and acquisition activity inthe client’s organization leading to a change inthe strategic imperatives. In addition, clientsmay realize that the process is moreconvenient to retain in-house in light of itscritical upstream and downstream linkages. Exitdue to pricing issues has also been cited as areason by some respondents. Contracts todayhave in-built clauses which allow clients tobenchmark prices to competitors after pre-

CONTRACT RENEGOTIATION ANDEXIT STRATEGIES

One of the prime advantages of outsourcing is that it enables acompany to respond quickly to changing market needs. In thesame context, a change in the geopolitical climate or in the client’sfocus or profitability could necessitate renegotiating or worse, end-ing an outsourcing relationship. Whether it is the relationship endingprematurely or simply having run its course, the only safeguard thatexists is diligent structuring of contract tenures and incorporation ofcontract renegotiations and exit clauses into contracts.


defined periods, usually 12-18 months. In caseclients feel that an opportunity for cost-savingsexists, they may chose to terminate thecontract. However, with intensified focus on acollaborative, partnership approach tooffshoring, respondents anticipate that that notonly will the average contract tenures getextended, but the number of premature exitoptions exercised by clients will reduce to aminimum.

Contract termination from a service-providersperspective is a rare finding. A typical conditionfor this to take place is continual non-paymentof dues by clients.

A majority of the survey respondents revealthat the typical notice period for exit is 3-6

months, which takes into account the timeneeded by the client to transition theoutsourced business functions onsite or toanother local vendor. However the industrytrend is primarily that of a ramp-down approach,wherein the client gradually reduces the depthand breadth of offshoring with the service-provider, and eventually exits.

In specific cases, clients require service-providers to cooperate during the transitionphase leading up to and following termination ofthe outsourcing agreement. Further, options toacquire key resources of the vendor and retaincritical assets, including intellectual andknowledge assets, may also be built intocontracts. Specifications on the amount andtiming of compensation, if due, are also pre-defined.


This has led to a situation wherein many clientshave been forced to have a re-look at theiroutsourcing strategy. In case of “financiallysignificant” processes being outsourced, theservice provider has to provide assurance tothe auditors of the user organization as to therobustness of the controls existing at their end.In these situations, certifications such as SAS70 (Statement of Audit Standards No.70) arebeing adopted, which require an independentauditor (“service auditor”) to issue an opinion on

IMPACT OF COMPLIANCELEGISLATIONS

One of the most important pieces of legislation impacting the BPOindustry today is the Sarbanes Oxley Act. This act, which has beenenacted for all companies listed on US stock exchanges, requiresmanagement to certify the internal controls of the company forfinancial reporting (S404) and directly impacts processes which areconsidered “financially-significant” to an organization’s business.Generally, an outsourcing situation would need to consider aSection 404 assessment only when outsourced activities constitutea significant process or when the function performed by a thirdparty generates information significant to the financial reportingprocess.

a service organization’s description of controlsthrough a Service Auditor’s Report. As a resultof this, auditors of the user organization are nolonger required to audit the internal controlframeworks of offshore locations.

In conclusion, a number of service providers inIndia are either already SAS 70 certified, orhave initiated the certification process, rapidlyemerging as a required factor for most clientsconsidering an offshoring option.


Although the respondents to the survey agreeto average attrition statistics ranging between40% and 60% for the industry as a whole, theactual company rates may vary based onregional presence, functional offerings and evenprocess offering within specific functions. Forinstance a few respondents state that theircenters in Tier II cities such as Jaipur,Managalore, Coimbatore and Chandigarhwitness a lower degree of turnover as comparedto metros. Reasons cited for this include thepsychographic profile of the residents or couldbe simply because of the lower density ofoffshoring setups in the city. Other trends thatservice-providers highlighted include attritionrates being higher in voice-based processesvis-à-vis non-voice based processes anddeclining attrition rates as processes move upthe value chain within functional offerings.

Explaining attrition is often challenging, in lightof the innumerable causative variables -behavioural, organizational and industrial -which may be involved. This challenge ismagnified in the offshoring industry on accountof the absence of any historical industryprecedence compounded with the typicaldemographic profile of the employees, often intheir early twenties. However, respondents tothe survey identify three prime reasons toexplain the high-attrition phenomenon, whichinclude perceived lack of growth opportunities inthe organization, migration to more stable workenvironments and most importantly, search forhigher pay-scales.

Employee Retention Strategies

Clearly defined career paths

Tie-ups with educational institutes for post-graduation programs subsidized by theservice-provider

Informal anti-poach agreements withcompetitors

Cross functional training

Performance-linked remuneration

Tenure-linked bonuses

Recognition schemes

Flexible working hours

To counter each of the above, organizationshave been focusing minutely on designing andimplementing the best-in-class retentionstrategies.

The respondents stated that the most far-reaching yet implicit strategy being adopted byservice providers is that of repositioning theBPO industry as an attractive long-term careeroption, so far considered a ‘stop-gap’ solution tofresh graduates – the target employee segment.A majority of the respondents have takenproactive measures such as detailing careergrowth plans for employees and communicatingthe intent to potential candidates throughcampus road shows and employment fairs.However, service-providers assert that for theimage makeover of the industry to fructify,

THE HUMAN RESOURCECHALLENGE

With employee turnover in the Indian offshoring sector ranging over40%, it is not surprising to find attrition being cited as one of themain causes of concern for the BPO industry. It has attracted theattention of the top management of both clients and service-provid-ers, who are now viewing this as an area of strategic importance,rather than an operational issue.


solitary efforts are inadequate, requiring theindustry to collectively make compelling effortsin this area. In their individual capacity how-ever, service-providers are striving to reinforcethe power of their brand, an important pull factorfor employees of the industry. Mid-sizedindustry respondents state that in a consider-able number of cases their employees chose tomove to global or large Indian service-providers,resulting in a high degree of ‘brand-switching’within the industry itself.

In the same light, the intent of getting a majorityof organizations to develop an informal “no-poaching” agreement is another retentionstrategy being deliberated, requiring collabora-tive effort of the industry. However industryexperts agree that a more viable model in theshort-term is the signing of bilateral agreementsbetween companies, as industry-wide agree-ments may require a longer time frame tomaterialize. All respondents cite the require-ment of organizations to adopt responsiblebehavior in order to ensure that the industrydoes not become a victim of its own actions.

In keeping with the strategy of positioning theBPO industry as a serious career option,service-providers have entered into exclusivetie-ups with educational institutes to provideprofessional degree courses to their employees.This allows employees to pursue their aca-demic interests and simultaneously remainemployed.

In addition, performance-linked remuneration,transparent recognition schemes, cross-trainingetc. are other practices being adopted a major-ity of the survey respondents. Althoughconstrained by time-zone differences, a fewrespondents state that they try to accommo-date flexible working hours wherever possible,aiming to minimize the outflow to sectors suchas retailing and hospitality, which compete forsimilar skill-sets.

Recruitment Strategies

Use of competency frameworks

Hiring from the higher-age bracket of popula-tion. Example : officers who have taken VRSfrom banks

In addition to pursuing innovative retentionstrategies, respondents state that the focus issteadily shifting to ensuring that recruitmentprocesses are aligned with retention strategies.The effectiveness of any system depends onthe quality of the inputs, in this case the newemployees. A few respondents to the surveyhave realized this, and correspondingly made aparadigm shift in their hiring process by focus-ing on competency frameworks and otherselection instruments. In some cases, respon-dents highlight that clients take an activeinterest in the recruitment process, clearlyidentifying profiles and positions. This isespecially true for BOT models, wherein theclient is preparing to take over all assets –human and physical after a pre-defined period.In addition, an interesting strategy beingadopted by a few respondents includes recruit-ing employees belonging to an older agebracket, for want of a higher degree of em-ployee stability and commitment.

It is estimated that, by the year 2008, Indiawould have approximately five million peopleemployed by the ITES industry.1 In order toensure a consistent flow of trained manpower inthe future, the industry is exploring the possibil-ity of working with the government to introducecourses at a school and college level, in linewith the requirements of the ITES-BPO industryof India.

Although service providers are focusing onrecruitment and retention of skilled manpower,steps are also being taken to reduce theadverse impact of attrition on business continu-ity through building robust processes especiallywith respect to data security, reducing depen-dency on individuals by making relationshipsand processes system-driven rather thanperson-driven, increasing back-up benchstrength and investing in adequate successionplanning.

1 NASSCOM


“Change management is often an over-looked aspect in offshoring – but has thepotential to emerge as one of the biggestbarriers to its success.”

- Survey Respondent

Offshoring strategies create a fundamental shiftin the human resources models and forceorganizations to reassess and actively managetheir human assets. The shift can take place attwo levels:

Roles retained in-house with increased/changed responsibilities

Changed roles with new characteristics,skills and expertise relevant to both in-house and offshore centers

Respondents cite that clients are becomingincreasingly concerned of the risks of inad-equately planned change management initia-tives, which they believe result in lowering ofstaff morale, productivity and service quality.

To mitigate change management risks, respon-dents state that in many cases, the clients’senior management has begun to assume therole of evangelists, winning over resistance byclearly communicating, to all key stakeholders,the strategic payoffs from outsourcing. Inaddition, the management takes initiatives tosensitize employees to the new paradigm andhelps them ease into it by clearly outlining thenew structures, work processes, roles andresponsibilities well in advance. The areas on

which employees are sensitized include workingin remotely-enabled business environments andcultural issues.

“For effective change management,communication is the key to success.”

- Survey Respondent

A few leading respondents state, that in spe-cific situations they have provided advisoryinputs to their clients on issues relating tochange management. For instance, serviceproviders have conducted workshops andseminars to stress the requirement of executivecommitment at the highest level and havehighlighted the leadership on the strategicimportance of offshoring initiatives from achange management perspective.

In addition to the above, respondents cite thefollowing aspects which are typically addressedin change management initiatives:

Timely, honest and consistent internal andexternal communication plans

Two-way cultural orientation, identificationof discrepancies and similarities amongcorporate cultures

Retention strategies for key personnel andcontractors

Compensation to the retained organizationfor successful operation of the offshorecenter

Cross training, job rotation and job mobilityprograms

CHANGE MANAGEMENT

Offshoring poses significant cultural and change managementchallenges, which companies today cannot afford to overlook. En-gaging the work force to ensure success requires aligning all lev-els, functions and businesses with the strategic outsourcing visionand gaining a collective commitment to the vision. Most companiesrealize the importance of the task but require support to translatethe knowledge into action.


SLA’s between onshore and offshoreoperations

Nearshore facilities allow service-providers toassist clients in change management, byabsorbing a part of the displaced workforce.A trend which service providers are observing isthe timely action being taken by clients withrespect to change management. They state thatas soon as the decision to offshore has beentaken; organizations identify affected roles,positions and individuals - an activity tradition-ally left to the last stages of the project. Foremployees to be retained in-house, new rolesare clearly defined and integrated into a perfor-mance management system. This includesdeveloping a comprehensive change manage-ment process and ongoing tools for evaluationand monitoring. For instance, a respondent

cited the example of an Application Engineer’srole changing from primary involvement intechnology development to vendor managementof an outsourced contract. The client tooktimely action to not only address the change inthe employee’s job description, but also on therelated aspects of the compensation structure,HR metrics and required training and develop-ment to ensure continued productivity.

Given the increased participation of variousfunctions in the offshoring process and theirmounting importance, respondents state that itis becoming crucial to establish appropriategovernance structures, not only for the programitself, but for the ongoing management andoversight of offshored operations.


Despite the growth that this industry is witness-ing, there are certain areas that require greaterattention going forward from service providersto ensure that the industry remains firmly on thegrowth path.

This survey was conducted with the objectiveof analyzing some of the key trends that willdrive the future direction of the industry. Wehave endeavored to highlight some of the keyrisks that the industry faces and will face as the

CONCLUDING REMARKS

The BPO industry is drawing significant attention and India, byvirtue of its dominance in this sector is at the center of thisattention. The shift of the Indian economy towards more service-orientation suggests that in the long term, India will continue to be amajor player in the global BPO industry.

industry evolves. We have also discussed thecorresponding risk-mitigants that serviceproviders and companies are focusing on, tomanage the risks.

We hope that this survey provides serviceproviders with a deeper understanding of theindustry they operate in and acts as an impor-tant input to potential customers consideringoutsourcing their processes to India.


Discussion Document (Guideline document fordiscussions)

Section I:Strategic Issues

1.1 Business Case Development

Key aspects that clients must address inbusiness cases

Instances of under/over estimation ofoffshoring benefits, which the businesscase failed to capture

Experience and case studies of participa-tion with clients for developing businesscases. Ones that worked and those that didnot.

1.2 Process Selection Framework

Trends of the BPO industry expanding toinclude more strategic service offerings,rather than being (just) volume driven

Views on emergence of niche playersresulting in industry re-structuring alongverticals rather than functions

Future for pure voice-based BPO serviceproviders?

1.3 Deal Structuring

Models (JV, co-sourcing, hybrid) holdinggrowth potential in the future and the driversthereof

Future of BOT models in India and thegrowth enhancers/inhibitors? Are youseeing more of these?

1.4 Pricing Framework

Trends indicating a change in client prefer-ences of pricing modes

Experience in your organization in theemergence of new pricing modes anddrivers of the same

1.5 Migration Strategy

Success and failures stories of migrationwith emphasis of migration modes adopted

Are you seeing clients simplify /standardise and then migrate? Or do seeclients migrate processes and then stan-dardize them?

Typical time to migrate processes, andtrends in reduction of migration time

‘Least time to migrate and ‘Maximum timeto migrate’ – examples…

Techniques adopted for reduction of migra-tion time

Assessment of costs of migration

Trends towards additional service offeringsto clients around migration of processes

1.6 Governance and Monitoring

Client’s modes of addressing governanceand monitoring issues? Are you seeinggreater investments by clients on gover-nance?

Trends of changes in client involvement,monitoring etc. due to legislations such asSarbanes Oxley, BS 7799….

Are clients evolving with regards to lookingat wider issues -beyond cost and efficien-cies – to look at impact on brand, publicperception etc.

APPENDIX


1.7 Contract Renegotiation and Exit Strategies

Experience in the recent past of contractrenegotiation?

Exit strategies for clients and degree of‘brand switching’ in the industry?

Are you seeing clients build exit strategiesinto their outsourcing plan from day 1?

Section II:Operational Issues andChallenges

2.1 HR Challenges

Any experience in the depletion of highquality manpower resulting in skill unavail-ability? Are clients asking questionsregarding scarcity of resources as demandrises? How do you see this panning out?

New trends in training for skill upgrade, costminimization…

Attrition trends and retention strategies

2.2 Cost Challenges

Future trends in changes of cost structureswith the evolution and maturity of the BPOindustry in India.

‘Double digit wage increases in India.’ Doyou see a real threat of manpower costadvantage diminishing?

2.3 Quality Challenge

Instances of breakthrough QC initiativesimplemented in the organization

Tools and techniques recommended forenhancing quality

2.4 Dispersal of Growth

Plans and experience of expansion to TierII ? Drivers/Inhibitors for expansion to TierII cities

2.5 Consolidation of Industry

Growth of BPO companies through acquisi-tionsAcquisition of BPO companies by potentialclients


About PricewaterhouseCoopers Pvt. Ltd.

PricewaterhouseCoopers Pvt. Ltd. (PwC) is one of the largest and most reputed professionalservices networks in India, providing industry-focused services to public and private clients.PwC specialists from the advisory and tax teams connect their thinking, experience and solutionsto build public trust and enhance value for clients and their stakeholders.

PricewaterhouseCoopers’ Business Solutions group offers comprehensive services designed tomeet today’s management issues in the areas of Business Planning, Finance FunctionEffectiveness, Shared Services, Corporate Governance, Supply Chain Improvement, CostReduction, HR & Organization Transformation and Technology Linked Solutions. The BPO sectoris a key focus area for the advisory team at PricewaterhouseCoopers, with services andcompetencies that span Strategy, Process, Tax & Regulatory and Risk delivered through aglobal network of practitioners servicing clients across a range of industry verticals. The team’srich experience includes having previously set-up and managed PricewaterhouseCoopers’ BPOpractice in India. A Center of Excellence, showcasing the experience of clients, has been estab-lished in Kolkata. PwC has offices in Bangalore, Kolkata, Chennai, Hyderabad, Mumbai, New Delhi,Bhubaneshwar and Pune.

For information please contact:

Kolkata DelhiJoydeep Datta Gupta Neel RatanEmail: [email protected] Email: [email protected]: +91 98300 30999 Telephone: +91 98100 48596

Mumbai BangaloreDevinder Chawla Jaideep GanguliEmail: [email protected] Email: [email protected]: + 91 98201 46222 Telephone: +91 98861 84999

Hyderabad ChennaiGutala V.Subrahmanyam Sanjukta PalEmail: [email protected] Email: [email protected]: + 91 98490 13872 Telephone: + 91 98410 39627

All rights reserved. No part of this document could be reproduced in any form without express prior written permission of PwC.This document should not be acted upon for decision making without consultation with experts. No warranty is implied. In noevent will PwC be liable to anyone for any decision made or action taken on the basis of this contents herein.

PricewaterhouseCoopers 1 - PwC

Documents

Transcript of PricewaterhouseCoopers 1 - PwC