Outsourcing:the emerging trend
With market pressures increasing day by day, companies find it profitable and cost-effective to outsource work to third-parties so that they can focus more on their core functions and thus perform those more efficiently.
Aug 25, 2009
With market pressures increasing day by day, companies find it profitable and cost-effective to outsource work to third-parties so that they can focus more on their core functions and thus perform those more efficiently. And it makes complete sense not to waste time and resources on tasks of secondary importance when that work can be completed more efficiently by organizations specializing in those functions. But a new trend we see emerging is that of companies outsourcing parts of their key businesses in areas where it proves profitable and efficient.
BPO (Business Process Outsourcing) is a growing sector today. According to Faraz Khan, Analyst at McKinsey, BPO and IT today make up a market worth over USD 530 billion, where BPO includes both domestic outsourcing and off-shoring. Outlining a survey his organization had carried out over 20 companies who had multiple relationships with vendors over time, to gauge the outsourcing scenario of the country, Faraz informs that when asked how many companies planned to increase outsourcing and off-shoring over the next few years, about 87% responded that they would increase the functions or the verticals that they outsource or offshore, saying their decision would be primarily driven by cost., while 13% said they planned to increase outsourcing and off-shoring and this decision would be driven essentially by the fact that they wanted to improve their efficiency model. No company said that it would decrease its outsourcing or off-shoring and thus Faraz stresses that BPO is a trend that has been growing for the last decade or so.
"It is a common belief that off-shoring is a huge business," says Faraz. "That is actually not true. If you look at the statistic, only 12% of the total is off-shoring, the remaining is based on domestic outsourcing. If you take BPO, almost 300 out of 330 billion comes from domestic outsourcing."
"The total market size between IT and BPO is around USD 530 billion. The domestic share out of that is 88%. 40 billion in BPO and 25 billion in IT goes into off-shoring, the rest is all domestic outsourcing. We estimate that domestic outsourcing will grow around 8-10% over the years, this is again a growing market."
So, why do companies outsource and why exactly should they be outsourcing? That is a question that often comes with a very matter-of-fact answer: to cut costs of course! Faraz has a slightly different view. "When we talk to people, the most common reason we hear for people to offshore or outsource is that of 'cost'," he says. "Of course, there are variable cost that you can save through economies of scale, and then there are fixed costs, which you can also save on. But before making a decision to outsource to a country, the overall cost isn't the only consideration. There are multiple other factors that we have to look at and whenever we make an outsourcing decision, you have to make sure that all of those parameters are in the picture." As is evident, when deciding on a vendor, you have to take a look at the complete picture, including that of infrastructure and expertise.
BPO greatly improves the quality of performance of a task as compared to the quality that comes about when performing the functions in-house. "To quote an example from the UK, some transactions for one of the banking systems was outsourced to Hyderabad, and efficiency went up from 100 transactions per hour to 120 transactions per hour with an accuracy of 98% instead of 94%. So you achieve both accuracy and efficiency improvements through outsourcing."
A lot of the services on which companies would otherwise be breaking-even or which would in other conditions be value-destroying, can become value positive for a company because of the cost advantage that outsourcing offers. "When outsourcing, companies should also see as to what new products and services they can bring into the market because they have a cost advantage now. For example, a lot of investment banks are now offering a service by the name 'Knowledge on Call', where you can call in and have an advisor on the call who can give you advise on how to manage a portfolio.
Similarly, there are insurance companies that are giving customized live broker advice on the phone. And while this was not done previously, most of it is actually done through outsourcing.
"Another important business advantage that arises out of outsourcing, although it holds much more for off-shoring, is that companies are able to tap a better talent pool. In outsourcing, this is relevant in the sense that when the vendor size is big, they are able to attract a better talent pool than the company itself. Outsourcing vendors at times, for instance in the Indian examples, are such large companies that are so good at managing talent and at recruitment that they are able to attract better talent. The key point here is that when you are making an off-shoring or outsourcing decision there are many things besides just price that you should be looking at."
Faraz also informs that the survey that was carried out by the company showed that the satisfaction level has actually improved over time. Almost three quarters of the companies were found to be satisfied or highly satisfied. "Companies should invest upfront in a relationship because overtime they will see that their satisfaction level with the vendors would improve," he says. "The satisfaction level with the vendors does go up as you go beyond the first and second year. Thus, working with the same vendors is a good decision."
Taking a decision about outsourcing is more than just deciding to delegate responsibility for only one or two processes of the business according to Faraz. "Whenever an outsourcing decision is being made it should not be a tactical decision to outsource one or two processes, instead it should be seen in a much bigger picture when you are actually looking at all the processes of the firm and making a decision on what should go out and not doing it piecemeal, rather doing it as a whole."
Speaking about which industries outsource the most globally, Faraz says banking and telecom account for about 40% of global outsourcing. "In developing markets, banking and telecom would account for two-thirds, may be 60-70%. The reason is that these two industries are a lot mature in developing markets as opposed to the other, therefore we see outsourcing in these industries has happened from before."
Globally, which industries outsource the most? "Banking and telecom together account for around 40% of global outsourcing," says Faraz. "If you look at emerging markets, the picture would be slightly different, banking and telecom put together here would account for may be two-thirds or 60- 70% of the total. The reason is that these two industries are a lot mature in developing markets as opposed to some of the others. That is why you would see that outsourcing in these industries has happened before. Telecom and the financial sector has been the most developed when it comes to outsourcing."
So, how is outsourcing split between different functions? "The first one is customer management which includes marketing and sales, the second one is HR. Between customer management and HR, you have almost 80% of the market covered. In emerging markets, customer care market - customer management call centers - would be even higher than 45%."
Moving on, Faraz explains that around 60-70% goes to customer care. The second one would be HR, but this would be a lot more than what you see globally. There's an increasing trend towards HR but it is not well established as it is across the globe in more developed countries. "What we see it that more and more functions are coming up so right now most of the focus for last decade has been on a customer care, call centers, billing system and HR."
By 2010, Faraz predicts a lot of finance and accounting will be outsourced as well, in addition to a lot of verticals including mortgages, treasuries etc. There is a trend today of a lot of businesses being willing to outsource part of their core business which they think they would benefit from. "There is an investment bank which recently outsourced its quant department, and as you know that is one of the key things in an investment bank and they have outsourced it and the key reason is not the price but the talent pool which they had not been able to attract."
Want to compare convergence and VoIP products? Visit the IT Product Guides now.
The view that high-end work has to stay in-house. This is changing. In the insurance industry, a lot of actuarial services are being outsourced now. So, high-end things which would never be outsourced once are now being outsourced. This is generally because of the quality and improvements that companies have been able to achieve."
Thus, as the trend has it and as predictions of the future hold, outsourcing will now be done for core business functions instead of just those that are secondary. "It is not only customer management and HR that can benefit from outsourcing, a lot of other functions can as well. Most of the horizontals would benefit from outsourcing. And a significant portion of it can be outsourced either partly or completely."
Faraz also puts forward that picking the team of vendors is also very important process of outsourcing. Crucial to managing talent is the issue of having low attrition. As an outsourcing company you have to make sure that you manage the talent well for the vendor so that there is low attrition because that drives satisfaction. "What people believe is that attrition would happen no matter what, that isn't true. For example in US attrition is around 40-100 % in some call centers, when you go to India, it is between 50 - 30%. The reason is that the kind of talent they are attracting is a lot better and secondly the model they have put in the place is a lot better for the people to actually stay back and the lower the attrition the higher the satisfaction for the client. So companies managing talent well have a lot lower attrition."
"One of the key reasons we found in vendor-client satisfaction were senior level relationships and we believe outsourcing is a key decision by any firm and it should be taken up at the highest level."
Not only that. The team a company gets from the vendors is also very important. "A lot of companies handpick the people they want to work with and they keep working with the same people project after project," shares Faraz. "There is a lot of effort that goes into managing the talent at the vendor.
"The delivery model you select also does make a huge difference. Satisfaction level is lower on more piecemeal basis. The point here is that the more you invest in a relationship the better it is. The longer the relationship, the more you are involved in the relationship, the better satisfaction you will achieve."
Sharing a few lessons he has learnt about outsourcing, Faraz says, "You need to set top-down targets. So, it can't be done on a tactical basis. If you have a process that you are not able to maintain in-house and you outsource it, the value that you would gain from it would actually be very minimal. This is a high level decision, you have to actually plan it out, see where you can reap the benefits for outsourcing and this has to be done in a proper relationship with one or multiple vendors that would grow over time. This is definitely a senior level management thing. It has to be taken up by senior level management. People in the company have to be assigned to the task of only working with the vendors.
Want to compare convergence and VoIP products? Visit the IT Product Guides now.
"One of the problems faced in the past has been that things have been outsourced but trying to tie them in with the internal processes has been an issue. The key is to manage a relationship and make sure that your old managers are involved.
Managing talent is the central to this. For example, one of the banks saw that there was a lot of attrition in their vendors.
They had two vendors, one was doing high-end stuff and the other was doing only data-entry stuff and they saw that in the data-entry vendor there was a huge attrition rate, so what they have done now is that they divided the work between the two vendors to make sure that they are able to retain talent. And that has led to huge improvements."
Faraz advises companies to start early. "There are a lot of structural advantages that companies would get from starting right now," he says. "Companies that outsource right now would end up with a lot of savings and a lot of performance improvements and it would be difficult to catch up with them."
Based on the article originally posted by NetworkWorld.com.
BPO (Business Process Outsourcing) is a growing sector today. According to Faraz Khan, Analyst at McKinsey, BPO and IT today make up a market worth over USD 530 billion, where BPO includes both domestic outsourcing and off-shoring. Outlining a survey his organization had carried out over 20 companies who had multiple relationships with vendors over time, to gauge the outsourcing scenario of the country, Faraz informs that when asked how many companies planned to increase outsourcing and off-shoring over the next few years, about 87% responded that they would increase the functions or the verticals that they outsource or offshore, saying their decision would be primarily driven by cost., while 13% said they planned to increase outsourcing and off-shoring and this decision would be driven essentially by the fact that they wanted to improve their efficiency model. No company said that it would decrease its outsourcing or off-shoring and thus Faraz stresses that BPO is a trend that has been growing for the last decade or so.
"It is a common belief that off-shoring is a huge business," says Faraz. "That is actually not true. If you look at the statistic, only 12% of the total is off-shoring, the remaining is based on domestic outsourcing. If you take BPO, almost 300 out of 330 billion comes from domestic outsourcing."
"The total market size between IT and BPO is around USD 530 billion. The domestic share out of that is 88%. 40 billion in BPO and 25 billion in IT goes into off-shoring, the rest is all domestic outsourcing. We estimate that domestic outsourcing will grow around 8-10% over the years, this is again a growing market."
So, why do companies outsource and why exactly should they be outsourcing? That is a question that often comes with a very matter-of-fact answer: to cut costs of course! Faraz has a slightly different view. "When we talk to people, the most common reason we hear for people to offshore or outsource is that of 'cost'," he says. "Of course, there are variable cost that you can save through economies of scale, and then there are fixed costs, which you can also save on. But before making a decision to outsource to a country, the overall cost isn't the only consideration. There are multiple other factors that we have to look at and whenever we make an outsourcing decision, you have to make sure that all of those parameters are in the picture." As is evident, when deciding on a vendor, you have to take a look at the complete picture, including that of infrastructure and expertise.
BPO greatly improves the quality of performance of a task as compared to the quality that comes about when performing the functions in-house. "To quote an example from the UK, some transactions for one of the banking systems was outsourced to Hyderabad, and efficiency went up from 100 transactions per hour to 120 transactions per hour with an accuracy of 98% instead of 94%. So you achieve both accuracy and efficiency improvements through outsourcing."
A lot of the services on which companies would otherwise be breaking-even or which would in other conditions be value-destroying, can become value positive for a company because of the cost advantage that outsourcing offers. "When outsourcing, companies should also see as to what new products and services they can bring into the market because they have a cost advantage now. For example, a lot of investment banks are now offering a service by the name 'Knowledge on Call', where you can call in and have an advisor on the call who can give you advise on how to manage a portfolio.
Similarly, there are insurance companies that are giving customized live broker advice on the phone. And while this was not done previously, most of it is actually done through outsourcing.
"Another important business advantage that arises out of outsourcing, although it holds much more for off-shoring, is that companies are able to tap a better talent pool. In outsourcing, this is relevant in the sense that when the vendor size is big, they are able to attract a better talent pool than the company itself. Outsourcing vendors at times, for instance in the Indian examples, are such large companies that are so good at managing talent and at recruitment that they are able to attract better talent. The key point here is that when you are making an off-shoring or outsourcing decision there are many things besides just price that you should be looking at."
Faraz also informs that the survey that was carried out by the company showed that the satisfaction level has actually improved over time. Almost three quarters of the companies were found to be satisfied or highly satisfied. "Companies should invest upfront in a relationship because overtime they will see that their satisfaction level with the vendors would improve," he says. "The satisfaction level with the vendors does go up as you go beyond the first and second year. Thus, working with the same vendors is a good decision."
Taking a decision about outsourcing is more than just deciding to delegate responsibility for only one or two processes of the business according to Faraz. "Whenever an outsourcing decision is being made it should not be a tactical decision to outsource one or two processes, instead it should be seen in a much bigger picture when you are actually looking at all the processes of the firm and making a decision on what should go out and not doing it piecemeal, rather doing it as a whole."
Speaking about which industries outsource the most globally, Faraz says banking and telecom account for about 40% of global outsourcing. "In developing markets, banking and telecom would account for two-thirds, may be 60-70%. The reason is that these two industries are a lot mature in developing markets as opposed to the other, therefore we see outsourcing in these industries has happened from before."
Globally, which industries outsource the most? "Banking and telecom together account for around 40% of global outsourcing," says Faraz. "If you look at emerging markets, the picture would be slightly different, banking and telecom put together here would account for may be two-thirds or 60- 70% of the total. The reason is that these two industries are a lot mature in developing markets as opposed to some of the others. That is why you would see that outsourcing in these industries has happened before. Telecom and the financial sector has been the most developed when it comes to outsourcing."
So, how is outsourcing split between different functions? "The first one is customer management which includes marketing and sales, the second one is HR. Between customer management and HR, you have almost 80% of the market covered. In emerging markets, customer care market - customer management call centers - would be even higher than 45%."
Moving on, Faraz explains that around 60-70% goes to customer care. The second one would be HR, but this would be a lot more than what you see globally. There's an increasing trend towards HR but it is not well established as it is across the globe in more developed countries. "What we see it that more and more functions are coming up so right now most of the focus for last decade has been on a customer care, call centers, billing system and HR."
By 2010, Faraz predicts a lot of finance and accounting will be outsourced as well, in addition to a lot of verticals including mortgages, treasuries etc. There is a trend today of a lot of businesses being willing to outsource part of their core business which they think they would benefit from. "There is an investment bank which recently outsourced its quant department, and as you know that is one of the key things in an investment bank and they have outsourced it and the key reason is not the price but the talent pool which they had not been able to attract."
Want to compare convergence and VoIP products? Visit the IT Product Guides now.
The view that high-end work has to stay in-house. This is changing. In the insurance industry, a lot of actuarial services are being outsourced now. So, high-end things which would never be outsourced once are now being outsourced. This is generally because of the quality and improvements that companies have been able to achieve."
Thus, as the trend has it and as predictions of the future hold, outsourcing will now be done for core business functions instead of just those that are secondary. "It is not only customer management and HR that can benefit from outsourcing, a lot of other functions can as well. Most of the horizontals would benefit from outsourcing. And a significant portion of it can be outsourced either partly or completely."
Faraz also puts forward that picking the team of vendors is also very important process of outsourcing. Crucial to managing talent is the issue of having low attrition. As an outsourcing company you have to make sure that you manage the talent well for the vendor so that there is low attrition because that drives satisfaction. "What people believe is that attrition would happen no matter what, that isn't true. For example in US attrition is around 40-100 % in some call centers, when you go to India, it is between 50 - 30%. The reason is that the kind of talent they are attracting is a lot better and secondly the model they have put in the place is a lot better for the people to actually stay back and the lower the attrition the higher the satisfaction for the client. So companies managing talent well have a lot lower attrition."
"One of the key reasons we found in vendor-client satisfaction were senior level relationships and we believe outsourcing is a key decision by any firm and it should be taken up at the highest level."
Not only that. The team a company gets from the vendors is also very important. "A lot of companies handpick the people they want to work with and they keep working with the same people project after project," shares Faraz. "There is a lot of effort that goes into managing the talent at the vendor.
"The delivery model you select also does make a huge difference. Satisfaction level is lower on more piecemeal basis. The point here is that the more you invest in a relationship the better it is. The longer the relationship, the more you are involved in the relationship, the better satisfaction you will achieve."
Sharing a few lessons he has learnt about outsourcing, Faraz says, "You need to set top-down targets. So, it can't be done on a tactical basis. If you have a process that you are not able to maintain in-house and you outsource it, the value that you would gain from it would actually be very minimal. This is a high level decision, you have to actually plan it out, see where you can reap the benefits for outsourcing and this has to be done in a proper relationship with one or multiple vendors that would grow over time. This is definitely a senior level management thing. It has to be taken up by senior level management. People in the company have to be assigned to the task of only working with the vendors.
Want to compare convergence and VoIP products? Visit the IT Product Guides now.
"One of the problems faced in the past has been that things have been outsourced but trying to tie them in with the internal processes has been an issue. The key is to manage a relationship and make sure that your old managers are involved.
Managing talent is the central to this. For example, one of the banks saw that there was a lot of attrition in their vendors.
They had two vendors, one was doing high-end stuff and the other was doing only data-entry stuff and they saw that in the data-entry vendor there was a huge attrition rate, so what they have done now is that they divided the work between the two vendors to make sure that they are able to retain talent. And that has led to huge improvements."
Faraz advises companies to start early. "There are a lot of structural advantages that companies would get from starting right now," he says. "Companies that outsource right now would end up with a lot of savings and a lot of performance improvements and it would be difficult to catch up with them."
Based on the article originally posted by NetworkWorld.com.