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Outsourcing overseas: $avings Road Leads to India

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 services products.

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 by outsourcing.

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."

Technology 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."