By Jeffrey Marshall
A rapidly growing volume of routine back-office
and software development work is being sent to low-cost venues like
India, thanks to vendors that have sprung up to expand that pipeline.
Working out of a modern office building in steamy Bangalore, India,
a team of programmers and clerical workers handles a range of software
development and routine back-office support for a Fortune 100 company
in the U.S. Nearby, workers in another building, working in round-the-clock
teams, handle call-center duties for another American company, answering
customer inquiries and even doing some cross-selling of a few financial
Sometimes referred to as India's Silicon Valley,
Bangalore has become a poster city for a mushrooming phenomenon:
outsourcing routine data processing and clerical functions, including
call center operations, from companies in the U.S. and Europe. As
multinational companies scramble to wring still more out of parched
budgets, the lure of cheaper skilled labor has become very powerful.
A number of vendors, some of them with strong Indian connections,
have emerged to pitch business, mostly to major corporations. Their
principal appeal: a well-educated, courteous and English-speaking
labor force and potential savings of 30 to 50 percent on processing
and technology development costs.
To be sure, a number of companies have been sending
work to India for years through their own arrangements; General
Electric Co. and Oracle Corp. are often mentioned as leading lights
in this movement. And India isn't the only location targeted. Experts
mention Ireland, Canada, Mexico and even the Philippines as countries
to which foreign-based companies have turned for cheaper infrastructure
and applications outsourcing. China is being held out as perhaps
the El Diablo of outsourcing - costs would be lower than anywhere
in the world - but there are concerns about the lack of infrastructure
and the population's work experience and fluency in English.
Xansa, a British-based company with a specialty
in business process outsourcing BPO, has set up shop in four locations
in India. The company bought a company there and has fully integrated
it; workers in Delhi, for instance, are linked to others in England,
working on the same projects with the same manager, says Judith
Halkerston, Xansa's chief operating officer for North America. "We
started with IT development projects and applications management,
moved into IT outsourcing and established ourselves as a leading
player in business process management," she says. "We tie together
business process improvement, technology, and applications development
and optimization in our business process management offering." Xansa's
programs in India chiefly involve outsourced work for retailers,
utilities, financial companies and telecommunications; the company
recently signed a seven-year contract with British Telecom valued
at $350 million.
Xansa's approach echoes that of a number of other
outsource specialists: It looks for cost-reduction and IT optimization
opportunities, among them ways to transform core operations. "We
look at the way the whole system is managed to try to realize big
benefits early on," Halkerston says. "We're looking to improve efficiencies
over the life of legacy and enterprise-wide systems. We often integrate
new front-end applications, which make the systems more user-friendly.
It's about savings as well as service improvement; it's never just
one or the other."
Much of the interest in India stems from the experience
of major financial institutions that sought to scale down the horrific
cost estimates of converting their computer systems to Year 2000
specifications - the so-called Y2K phenomenon. A good deal of that
work was farmed out to programmers in India, and the experience
was so good that they began looking to do more, says Jeroen Tas,
president of MphasiS, an outsourcer with four locations in the U.S.
and 18 in all around the world.
In fact, Tas and many of MphasiS' management team
once worked at major banks like Citigroup. They saw an opportunity,
especially in the call center area, in handling both inbound and
outbound calls and doing cross-selling of financial products through
centers in India. The company now has 500 "seats" filled in three
separate shifts at centers in Bangalore and Pune. But Tas says MphasiS
"saw another stream of opportunity in BPO." Improvements in technology
have made it easier to deliver more at lower cost; every year the
cost of telecom networks drops by half, he says. "Setting up the
infrastructure is not really a major constraint. You need to see
that the details are understood thoroughly. The technology really
didn't allow this five or six years ago. A lot of this is relatively
new," Tas adds. "The trick is not having a big infrastructure, and
success comes from understanding the intricacies of the processes."
Cost savings clearly are the biggest draw, and
estimates vary somewhat. Shiraz Patel, senior vice president and
general manager of the applications solutions division for OAO Technologies
in Greenbelt, Md., puts them at 25-40 percent in India and up to
25 percent in Canada, where the company directs some of its IT "enhancement"
work. Xansa's estimates range from 30 to 50 percent. No one talks
about more than 50 percent, but Clarence Schmitz, chairman and CEO
of Outsource Partners International Inc. (OPI), says that companies
need to believe that they will get savings of at least 20 percent
Schmitz is a true believer in the need for outsourcing
finance and accounting functions. A board member of outsourcer itAccounts
(see "Technology Tools," May 2002), he helped engineer the acquisition
of KPMG LLP's BPO practice earlier this year. The combined company,
with about 300 people, was renamed OPI and was given a broader scope.
While itAccounts had focused on smaller businesses, the KPMG practice
had larger clients; Schmitz wants the new company to tackle both,
and to leverage KPMG's contacts to mine the large-company market.
"A great deal of savings and profits come from taking advantage
of the Indian labor arbitrage, and there's a certain [company] size
below which that doesn't make sense," Schmitz says. "We're not focused
on the small end of the market by any means - in general, a company
has to have 10 people in the accounting department beneath the controller
for us to have a meaningful impact." He adds: "The model we've chosen
is a hybrid model - it's most the appropriate for today's environment.
We'll maintain higher-level accounting people on-site - the controller,
the accounts payable people. They're just down the hall, so it's
not that big a leap for a CFO. The back-office clerical work will
be handled in India through scanning and document management systems
that are indexed."
OPI's Indian operations are in Bangalore, too -
it has a center that currently has 50 employees but could accommodate
300. The vendors are quick to point out that for many customers,
savings aren't the only benefit; quality also improves under the
outsourced arrangements. "There's much more of a service orientation
[in India], and the education is just as good as in the U.S.," Tas
says. Adds Halkerston of Xansa's employees: "We have a talented
and motivated workforce in India that delivers exceptional value
to our clients."
outsourcing does have some real heavyweights, companies like EDS
Corp., IBM Corp., Accenture (formerly Andersen Consulting) and Affiliated
Computer Services. And not all of that work, by any means, has been
taken to India. But in general, their services have been pitched
to very large companies where volume-based savings offer the most
promise. OAO Technologies partners with IBM and Accenture in
the large-corporation market; there, "we walk in and talk about
solutions. We can do that quickly and aggressively," says Patel.
"That large market is conditioned by lots of consultants and competition.
"The middle market is where we're headed, but it's difficult to
access," he adds. "Our strategy is to partner with ISVs [independent
software vendors] that have a vertical niche - in health care, for
instance. We're seeking out companies that are selling to that market,
then seeking out systems integrators that are vertically focused."
Patel adds: "We don't always pick what we get. We take on what the
client does and look to do it faster and cheaper." Besides India,
OAO uses programmers in Canada and Mexico, with Mexico offering
some of the best features of India, with more proximity.
OPI's Schmitz says that major corporations are
often selective in choosing the scope of their outsourcing, however.
"The large market has major corporations who have Tier 1 software
systems like ERP (enterprise resource planning). They won't outsource
the whole function, but maybe one to three discrete functions [such
as] accounts payable or T&E." In the middle market, on the other
hand, OPI wants to do "full-scope finance and accounting," using
a Lawson Software platform tied to document imaging and management
tools, Schmitz says. Solutions are geared to migrate clients' multiple
legacy systems into one standard platform. "We want to be their
pathway to India," he says simply.
MphasiS' Tas says that the bright future of outsourcing
overseas was a key reason for founding the company. "Twenty years
from now, it's clear that a lot of the clerical and administrative
work done by multinationals will be done in different places around
the world," he says. "The opportunities are too attractive."