Offshoring - Frequently Asked Questions

• Why is work going offshore?
• Which industry is leading the offshoring wave?
• Where is the offshore work going?
• Which country is dominating the offshoring market?
• What is the growth trajectory of offshoring in India?
• What types of operational models exist?
• Who are some well-known offshoring companies?
• How do you develop an offshore sourcing strategy?
• What are the risks to consider in picking an offshore location?
• What criteria do companies use when they select a business process to offshore?
  

Why is work going offshore?
Work is traveling offshore because of new information technologies such as the Internet, voice over IP, and enterprise applications, which make it easier than ever to hire, manage, and coordinate lower-cost, well-educated labor in the global economy.

There are also competitive and cost management reasons. Many executives know that if their competitors are going offshore to find technology or process support for drastically lower costs, they have to follow suit. If their competitors are finding the skills they require through an offshore outsourcing firm, they have to do the same.

Work is also migrating offshore because of the recent global economic downturn. Companies are more focused on improving their return on IT investments and closely managing IT spending. To attain high-quality IT services at a lower cost, companies are turning to providers with offshore delivery capabilities.
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Which industry is leading the offshoring wave?
Financial services firms - retail banking, investment banks, and insurance - have been aggressive offshore outsourcers, with GE Capital, American Express, and Citigroup leading the way.

On the business process outsourcing side, the migration thus far in financial services has spanned lower-level clerical and call center jobs, as well as back-office transaction processing. Higher-end managerial and professional jobs, including more sophisticated relationship-oriented customer contact work, are likely to remain in the United States. Firms are selectively offshoring work such as financial product modeling, risk analysis, and decision support.

In recent years, the number of IT financial services jobs flowing overseas has accelerated. Prudential, Merrill Lynch, J.P. Morgan Chase, Lehman Brothers, MetLife, Sallie Mae, Guardian Life Insurance Company of America, Conseco, and Bank of America all have struck offshore outsourcing deals.
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Where is the offshore work going?
Bill Gates has said that outsourcing mission-critical work offshore is "a common-sense proposition." The five countries that are emerging as offshoring leaders are India, the Philippines, Canada, Ireland, and Russia. Canada and Ireland have the highest average programmer salaries (which translates into the lowest potential savings for you), while the Philippines, Russia, and India are the lower-cost alternatives.

Which country is dominating the offshoring market?
India is the leading destination for offshoring services. The proven track record and client relationships of established Indian IT service companies, favorable wage differentials, and large, high-quality, English-speaking talent pool are driving India's emergence as a global outsourcing hub.

However, what makes India unique is its education system, which generates 200,000-250,000 engineering and computer science graduates and more than 2 million other graduates, most of whom speak very good English. According to a NASSCOM-McKinsey report, India's business process outsourcing (BPO) industry is expected to grow to more than $21 billion by 2008. Revenues from the export of India's BPO services are expected to increase from 19% in 2002 to 27% by 2008, as a proportion of the total revenues from export of IT services from India.

Various tax incentives are stimulating India's BPO industry. The Indian government has provided a ten-year tax holiday for IT service companies in 2000. As a result of this tax break, the effective tax rate for most of these companies was reduced from the normal 36%-plus to around 15% currently. For export-oriented firms this rate effectively is 0%. However, the net tax rate should rise through 2009 as these breaks expire. This rise should be steep since most of these breaks expire in 2008-09.

What is the growth trajectory of offshoring in India?
The Indian IT-enabled outsourcing market has its roots in the early 1990s when companies such as American Express, British Airways, and GE Capital set up offshore captive units for customer support and transaction processing services. Independent business process outsourcing (BPO) vendors began emerging three to four years ago, although some healthcare BPO and customer relationship management (CRM) companies existed earlier. Recently, IT service companies have also ventured into the IT-enabled outsourcing realm.
Over the past decade, India has emerged as a preferred location for organizations planning to outsource a variety of services ranging from call centers and other customer interaction services, insurance claims processing, payroll processing, medical transcription, electronic CRM, and supply chain management (SCM), to back-office operations such as accounting, data processing, and data mining.
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What types of operational models exist?
Three main types of operational models exist:

1. Captive processing centers,
2. Third-party providers, and
3. Joint ventures (build, operate, and transfer).

Captive centers undertake business processing only for their own multinational businesses. Some examples include HSBC (Hyderabad), American Express (Delhi), British Airways (Mumbai), Citibank (Chennai), and Dell (Bangalore).

The second operation model is called a third-party provider. Third-party providers supply outsourcing services to other companies. They resemble Internet software service firms that complete IT systems setup projects for various companies. Some examples of these companies include Nipuna (a subsidiary of Satyam), MsourcE, 24/7, Spectramind, and Daksh.

The third operational model often used in offshoring is the joint venture (JV) model. In a JV, often called a build, operate, and transfer model, two entities own the operation. For instance, in December 1998, Satyam Computers entered into a joint venture with an affiliate of GE Industrial Systems. The joint venture company provided the GE affiliate with engineering design services, software development, and system maintenance services. In early 2003, Satyam sold its interest in this joint venture after an affiliate of GE exercised its option to purchase Satyam's interest for $4 million.
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Who are some well-known offshore vendors?
There are many choices when it comes to offshore vendors. Typically companies interested in offshoring select the best operational model for them before deciding what type of vendor they are looking for. Many firms often seek out vendors that specialize in the type of process they have decided to outsource. Some companies, however, go a different route and select the country first and then evaluate the top vendors in that location. There are so many vendor options that careful planning is one of the key factors in making your offshoring project a success.

Some of the top offshore BPO service providers follow:

• In India, Nipuna, a subsidiary of Satyam Computers; Progeon, a subsidiary of Infosys; Spectramind, a subsidiary of Wipro, and WNS, owned by Warburg Pincus and British Airways, lead the way.
• In the Philippines, eTelecare and Ambergris Solutions compete for BPO business.
• In Russia, LUXOFT has surfaced as a leader.

For more information on vendors, see Offshore Vendor Sourcing and Selection.
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• Select the country first. Understand the capabilities, risks, and benefits of the country including: political stability; availability of skilled resources and infrastructure; size and quality of the labor pool; language and cultural issues; data security; IP protection and software piracy; and government support.
• Scan the vendor landscape in the country. Shortlist the vendors based on specific screening criteria, for example, experience, domain expertise, cost, quality, and financial stability.
• Determine the best-fit delivery model for your business: pure offshore, onsite/offshore, or onsite/onshore/offshore.
• Narrow down the vendors according to years in business, scale of operation, range of services, geographic span, delivery model options, industry focus, and cultural fit. For those vendors on the short list, we highly recommend that you visit each vendor to personally assess each key performance criterion that is important to your company.
• Negotiate and attempt to build a relationship with the vendor. Remember that this is a strategic relationship that might be difficult to exit later, so taking the time to find the right vendor is very important.

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What are the risks to consider when picking an offshore location?
Offshore location risk factors include:

• Infrastructure instability
• Management of offshore resources
• Confidentiality of information
• Time zone differences
• Cultural differences
• Language barriers
• Unknown suppliers
• Uncertain legal rights
• Geopolitical instability

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• Size of cost base.
• Labor necessary to complete the task, i.e., is it labor intensive?
• Presence of interlinkages that would be violated by relocation.
• Availability of full-time offshore employees skilled in the particular business process.
• Difference in onshore and offshore wage levels.
  

After the evaluation, most companies assign processes to one of three categories: probable, possible, and unlikely for offshoring. The most experienced companies tend to implement a phased approach:

• First, they start small with well-documented processes that require little day-to-day interaction such as data entry or legacy application maintenance.
• Gradually they move to more value-added processes such as customer support, accounts payable, or software development.
• Eventually they try new operational models such as a dedicated center, joint venture (JV), or build-operate-transfer (BOT) model.

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