Global Outsourcing

Submitted in partial fulfillment of the requirements for the award of the degree of

Bachelor of Business Administration (BBA) To Guru Gobind Singh Indraprastha University, Delhi

Guide: Ms. Manmohan Chaoudhri

Submitted by: Karan Gupta Roll No.: 02221101709

Institute of Information Technology & Management, New Delhi 110058 Batch (2008-2011)

Acknowledgements

This study would not have been possible without the cooperation of and generous help from a number of people. I am heartily thankful to my supervisor, Ms. Manmohan Chaudhary, whose encouragement, guidance and support from the initial to the final level enabled me to develop an understanding of the subject.

Lastly, I offer my regards and blessings to all of those who supported me in any respect during the completion of the project.

Table of Contents

Page no

Section I: Introduction

03

Section II: Objectives and scope

07

Section III: Case Study

17

Section IV: Conclusion

37

Bibliography

39

SECTION I

INTRODUCTION Outsourcing is any task, operation, job or process that could be performed by employees within an organization, but is instead contracted to a third party for a significant period of time (James Bucki)

Global outsourcing is a procurement strategy in which a business seeks to find the most cost efficient location for manufacturing a product, even if the location is in a foreign country. For example, if a toy manufacturer finds that manufacturing and delivery costs are lower in a foreign country due to lower wages of foreign employees, the company might close the domestic factory and use a foreign manufacturer.

Global outsourcing mitigates risks for the customer as it is not country-specific or geographydependent and allows more freedom and flexibility in decision-making and operations during the outsourcing process. It allows businesses to learn, adapt, grow and evolve while ensuring predictability in quality and delivery in their business processes.

Global outsourcing uses a blend of onsite, offshore and nearshore outsourcing solutions to achieve strategic business objectives for the outsourcing company. Today, there are job titles like "Chief Globalization Officer" and "Strategic Services Manager" - which just goes to show that organizations are taking seriously the impact of global outsourcing on the revenue growth and business value of their companies.

Global outsourcing is enabling business without barriers in a borderless world. As enterprises think global, their outsourcing models have changed to follow suit. 4

Outsourcing is no longer just a short term quick-fix to achieve cost reduction. Global outsourcing uses a blend of onsite (onshore), offshore and nearshore outsourcing solutions to achieve strategic business objectives for the outsourcing company. Today, there are job titles like "Chief Globalization Officer" and "Strategic Services Manager" - which just goes to show that organizations are taking seriously the impact of global outsourcing on the revenue growth and business value of their companies. As customers get more demanding, competition gets more intense and product life-cycles shrink, there is increasing pressure on operating margins. The complexity of global cross-border business management presents new challenges as companies try harder to stay agile, profitable and innovative. Business processes need to be flexible and adaptable to enable people to respond faster to changing business needs. Services outsourcing must be aligned to business goals, rather than be seen as just a tool for enhancing operational efficiencies. Global outsourcing takes a long-term holistic view of the client enterprise and aligns its business goals to the outsourced service offerings, in contrast to tactical short-term contracts that take a piecemeal project-by-project or simple "out-tasking" approach to outsourcing.

The process of outsourcing generally encompasses four stages: Strategic thinking, to develop the organization's philosophy about the role of outsourcing in its activities. Evaluation and selection, to decide on the appropriate outsourcing projects and potential locations for the work to be done and service providers to do it. Contract development, to work out the legal, pricing and service level agreement (SLA) terms. Outsourcing management or governance, to refine the ongoing working relationship between the client and outsourcing service providers. 5

In all cases, outsourcing success depends on three factors: executive-level support in the client organization for the outsourcing mission; ample communication to affected employees; and the client's ability to manage its service providers. The outsourcing professionals in charge of the work on both the client and provider sides need a combination of skills in such areas as negotiation, communication, project management, the ability to understand the terms and conditions of the contracts and service level agreements(SLAs), and, above all, the willingness to be flexible as business needs change. The challenges of outsourcing become especially acute when the work is being done in a different country (off shored), since that involves language, cultural and time zone differences.

TYPES OF GLOBAL OUTSOURCING

1. NEARSHORING Near shoring is one of the forms of outsourcing, where an organization outsourcers its business processes to an outsourcing partner who provides cheaper services. The main differentiator between offshore outsourcing and near shore outsourcing is that the outsourcing partner in near shore outsourcing is located geographically closer than the outsourcing partner in offshore outsourcing. The term "Near shore" has been taken from the fishing industry and now it is used widely in the world of outsourcing. Advantages of Near shore Outsourcing Closer proximity Both the outsourcer and the vendor are in the same time zone Better coordination and communication Similar culture, mindset and language 6

Frequent visits to the outsourcing partner is possible Greater efficiency

2. OFFSHORING Off shoring simply means having the outsourced business functions done in another country. Frequently, work is off shored in order to reduce labor expenses. Other times, the reasons for offshoring are strategic - to enter new markets, to tap talent currently unavailable domestically or to overcome regulations that prevent specific activities domestically.

3. ONSHORING Onshore outsourcing (also called domestic outsourcing) is the obtaining of services from someone outside a company but within the same country. The process of engaging another company within your own country for SOFTWARE or ITO services

ADVANTAGES OF OFFSHORING AND ONSHORING:

Reduced and controlled operating costs Improved company focus on its core competencies and strategic imperatives Access to world-class capabilities and best of breed technology Re-allocation of internal resources to higher-value purposes Address the issue of limited internal resources Accelerates re-engineering/transformation efforts More effective management of a difficult or problematic function

SECTION II

OBJECTIVES AND SCOPE

Why should a company Outsource? Outsourcing gives Cost savings the lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.

Focus on Core Business Resources (for example investment, people, and infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialized IT services companies.

Cost restructuring Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.

Improve quality achieve a steep change in quality through contracting out the service with a new service level agreement.

Knowledge Access to intellectual property and wider experience and knowledge. Contract Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.

Operational expertise Access to operational best practice that would be too difficult or time consuming to develop in-house.

Access to talent Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.

Capacity management an improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.

Catalyst for change an organization can use an outsourcing agreement as a catalyst for major step change that cannot be achieved alone. The outsourcer becomes a Change agent in the process.

Enhance capacity for innovation Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.

Reduce time to market The acceleration of the development or production of a product through the additional capability brought by the supplier.

Commodification The trend of standardizing business processes, IT Services, and application services which enable to buy at the right price, allows businesses access to services which were only available to large corporations.

Risk management An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.

Venture Capital Some countries match government funds venture capital with private venture capital for start-ups that start businesses in their country.

Tax Benefit Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.

Scalability The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production.

Creating leisure time Individuals may wish to outsource their work in order to optimise their work-leisure balance. 9

Benefits of global outsourcing

The outsourcing decision is not location - or country - dependent. Work is done at the place that does it best and is most effective in delivering value in terms of competence, price, and resources available. The outsourcing company gains access to the specialized knowledge and technological infrastructure of service providers in different parts of the world. Nearshore solutions offer the advantages of cultural compatibility, linguistic ability and similar time zones. Offshore solutions from countries located in different time zones offer access to specific skills, better quality and the 24x7 advantage for faster time-to-market. Onshore solutions offer the benefit of efficient knowledge transfer and understanding of client requirements and processes, while laying the groundwork to transition the process offshore. Global outsourcing leverages a blend of these solutions to offer the client best-of-breed services at the best price, and follow-the-sun flexibility. In case disaster hits one region, work can be quickly transferred to disaster recovery centers, thus mitigating risk, offering service redundancy and allowing business to carry on smoothly. Global outsourcing allows consolidation of services and operational efficiencies across borders, eg a single global delivery center can take care of the order management system for an entire global enterprise where there would have earlier been 30 centers or more. Another benefit of outsourcing process is that there is more freedom and flexibility in decisionmaking and operations. Businesses are not locked into outdated or static processes but can change and evolve to meet new business challenges, while benefiting from the predictability and quality of service levels.

10

Strategic business objectives are met by gain-sharing arrangements defined by SLAs, where an outsourcing service provider's income is related to key metrics of a client's business success. This way, both the outsourcer and the service provider stand to gain from achieving the stated objectives. Transformational outsourcing results in big leaps and innovation by optimizing and simplifying complex business processes to offer value-added benefits.

DISADVANTAGES OF OUTSOURCING

Loose of control Quality problems Slow response time Can't understand foreign accents Slow resolution times Can't produce desired results Reduced sales Irritated customers Irritated employees, unions, people within community

DRIVERS OF OUTSOURCING Cost savings: The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Improve quality: Achieve a step change in quality through contracting out the service with a new Service Level Agreement. 11

Knowledge: Access to intellectual property and wider experience and knowledge. Contract: Services will be provided to a legally binding contract with financial penalties and legal redress.

Operational expertise: Access to operational best practice that would be too difficult or time consuming to develop in-house.

Staffing issues: Access to a larger talent pool and a sustainable source of skills. Time zone: A sequential task can be done during normal day shift in different time zones - to make it seamlessly available 24x7.Same/similar can be done on a longer term between earths hemispheres of summer/winter.

Increase in business: Benefit of outsourcing is seeing a big increase in your profits, productivity, level of quality, business value, business performance and much more.

Concentrate more on your core business: One of the benefits of outsourcing is that your organization will be free to concentrate on your core business. By outsourcing all your non-core functions, your employees can be put to better use and you will be able to see a huge growth in your core business.

Make faster deliveries to customers: Another benefit of outsourcing is that you can make quicker deliveries to customers. Your outsourcing partner will be able to provide faster deliverables and you in turn will be able to make quick deliveries to your customer. Faster deliveries can also help you save on time.

Improved customer satisfaction: With timely deliveries and high- quality services you can impress your customers. Outsourcing can help you benefit from increased customer satisfaction and your customers will remain loyal to your organization

12

GROWTH OF SOFTWARE INDUSTRY IN INDIA

The economic outlook for India is positive. A growth rate of above 8% was achieved by the Indian economy during the year 2003-04 and it reached 6, 9% in 2004-05. Growth in the Indian economy has steadily increased since 1979. In fact, the Indian economy has posted an excellent average GDP growth of 6.8% since 1994. Many factors are behind this robust performance of the Indian economy in 2004-05. High growth rates in industry & service sector and a benign world economic environment provided a backdrop conducive to growth of the Indian economy. Another positive feature is that prices have been relatively stable.

Market size indicators India has during the 1990ies and until today built a reputation as being one of the worlds strongest software nations. The primary focus of the Indian software industry has been export sometimes in corporation with foreign companies who are established in India as a subsidiary. The main reason for the foreign companies to establish themselves in India is still the low cost of labor coupled with a highly educated workforce with excellent English language competencies. The Indian IT industry spans from huge world-renowned Indian companies like Infosys, Tata Consulting Services (TCS), Wipro etc. who are almost in the same

13

league as international companies such as IBM, Sun Microsystems, Oracle, Microsoft, Dell etc. who are also present in India, to a host of small startups.

Hence, within most IT areas and disciplines the worlds highest competence levels can be found in India. This can be seen, by looking at the IT quality certification SEI-CMM Level 5, which is the hardest certification to obtain in the IT industry. Worldwide there are only 52 companies, which have that certification 43 of these have an entity in India. All in all the Indian software industry is only second to that of the US. The largest of the IT companies such as e.g. Infosys has its own campus with more than 45 buildings most of them 3-5 stories high, workout facilities for the employees and its own golf course all located in the same campus area.

India has an edge on growth as we consider the following: Tech savvy professional Cost effectiveness Superior competency 24 hour service Economy of scale

INFORMATION TECHNOLOGY OUTSOURCING IT outsourcing occurs when an organization contracts a service provider to perform an IT function instead of performing the function itself. The service provider could be a third party or another division or subsidiary of a single corporate entity. Increasingly, organizations are looking offshore for the means to minimize IT service costs and related taxes. Many times, the outsourcing decision 14

results in a transfer or sale of the information processing assets and the people who performed the inhouse function to the service provider. Outsourcing is also a common option for start-up operations and for organizations entering new business lines. Rather than devoting time, energy and capital to the creation of IT processing services, organizations feel they can minimize the start-up time required to enter new markets by contracting a third party to provide those services immediately. IT outsourcing is an attractive option for many organizations. IT outsourcing should be an integral part of an organizations overall business strategy, involving senior executives and key IT staff. The rationale for pursuing outsourcing options involves the strategic, financial and technological benefits to be gained. KNOWLEDGE PROCESS OUTSOURCING Knowledge process can be defined as high added value processes chain where the achievement of objectives is highly dependent on the skills, domain knowledge and experience of the people carrying out the activity. And when this activity gets outsourced a new business activity emerges, which is generally known as Knowledge Process Outsourcing. Knowledge Processing Outsourcing (KPO), calls for the application of specialized domain pertinent knowledge of a high level. In fact, it is the evolution and maturity of the Indian SOFTWARE sector that has given rise to yet another wave in the global outsourcing scenario: KPO or Knowledge Process Outsourcing. The success achieved by many overseas companies in outsourcing business process operations to India has encouraged many of the said companies to start outsourcing their high-end knowledge work as well. Cost savings, operational efficiencies, availability of and access to a highly skilled and talented workforce and improved quality are all underlying expectations in outsourcing high-end processes to India.

15

CONTRIBUTION Though many qualified Indians continue to migrate, there are enough qualified people in India, which leads to a high level of entrepreneurship and availability of managerial talent. Industry and service sectors show high growth rates, benefiting the outsourcing industry, serving both domestic and international demand. High value-adding, intellectual work starts to come to India. Indian outsourcing companies dominate the global competitive scenario as access to capital becomes easier. Many qualified Indians continue to migrate, but there's enough quality manpower in India, leading to a high level of entrepreneurship, as well as the availability of managerial talent for the outsourcing industry. When we talk about Indian society, then definitely one can notice and observe the change brought by the outsourcing services and institutions. Being worlds second most populated country, human resources are a boon by itself, in India. Outsourcing can be both beneficial as well as harmful to the society. This industry, which booms in metro cities, has caught hold of what can be called as the jugular vein. Its role is somewhat restricted to the developed cities only and can be least found in the villages and remote areas of India. Outsourcing industry has improved Indian economy primarily by employing a large number of people and building and maintenance of infrastructure. It is because of the outsourced projects that people at large in India get opportunities to know and work in multinational corporations. SOFTWARE companies also provide ample opportunities for women and as such help them in their liberation and liberalization. There is a good percentage of women workforce employed in the outsourcing companies in the cities. The role of women has consistently changed and they can better take care of their finances and their career. Meanwhile we are also losing on several cultural and

16

traditional benefits. The outsourcing companies and projects emphasize on the foreign cultural values, the place from which the original project has been outsourced. The holidays, the work culture, day-to-day dealings and more tend to lay greater importance on the social norms that are not part of our system, our community. We are slowly adapting to the change, accepting the dominant culture and yielding to such values, which neither we have assigned, nor have they come from our own social domain. Outsourcing based on call centers comes with a package of cultural and value systems associated with western culture. The continuously growing SOFTWARE sector in India is the new call for young generations of the country who are on the verge of make their careers. The SOFTWARE industry boom in India is bringing along with numerous of job opportunities for young as well as old from various different backgrounds .Software industry in India gives tremendous opportunities for professionals pertaining to different backgrounds. SOFTWARE undertakes tasks of various natures. There are opportunities in operations, quality maintenance and control, client servicing etc. As Indian SOFTWARE s serve mainly customers from western countries, their employees are provided with opportunities and training in understanding the culture, accent, and customs existing in the outsourcing receiving countries.

17

SECTION III Case Study Following are some of the great examples wish prove how different organizations were benefited by practicing outsourcing

At the height of the Internet boom and Y2K mania, JPMorgan's U.K. operation found that attracting and keeping technology talent was difficult and costly. While the concept of remote IT operations was controversial at the investment banking firm, a decision was made early in 1998 to establish a secondary center away from the hypercompetitive environs of London that could serve ongoing technology-development needs. "All of our development, training, back office and middle offices were basically in London," says Paul Murphy, CEO of JPMorgan Scotland, now a subsidiary of JPMorgan Chase (New York, $759 billion total assets, 2002). "We were suffering a high attrition of staff and paying a lot of money." Over the next year, the company considered about 20 European locations for the new center. Murphy explains, "We didn't want to come out of the London market, only to move into the same environment 400 miles away."

Eventually, executives settled on Glasgow, which offered a steady stream of computer science and engineering graduates from local universities. "There was a good pool year-on-year going out, but there were also a number of technology employers locally

18

- such as Sun Microsystems, Motorola and Compaq - that we could attract job changers from," says Murphy.

JPMorgan's European Technology Centre (ETC) opened in Glasgow in October 1999 with a small management team. "The development of the group went on two fronts at first - one was hiring local employees, and the other was effectively garnering work from within the [JPMorgan] group," recalls Murphy. Though the ETC initially enjoyed central funding, he adds, "From day one it had to prove its existence by convincing enough people to give us work."

Among the ETC's first major projects was the migration of a fixed-income middleoffice/back-office application from JPMorgan's Paris technology center. "We migrated it to Glasgow within nine months and reduced the workforce by 50 percent, with a per-head staff cost of 30 to 40 percent less," Murphy says.

Having established a reputation, the ETC had to start anew following the 2001 merger of JPMorgan and Chase Manhattan. In addition to losing work due to systems retirement, the ETC also faced the possibility of being folded into Chase's existing technology facility in Bournemouth, England. According to Murphy, "Thankfully, we had established enough credibility and executive sponsorship in the preceding 24 months to affirm our value proposition."

The ETC currently operates with a staff of about 430, providing software development and support to supplement program management, business analysis and requirements-gathering technology work in London. "We work on project

19

assignments developing internal banking systems, be it for front-office trading systems, all the way to back-office enter, connection, settlement and confirmation systems," Murphy explains. While the facility's mandate was to cut project and engineering costs by 30 percent compared to London's operating costs, it has consistently produced more than a 40 percent cost saving, according to Murphy. The ETC is also the first group within JPMorgan to achieve CMM (capability maturity model) Level 3 certification. Its goal is to reach 500 employees during 2004.

The ETC's success as a remote IT shop spawned a similar facility in the United States in July 2002. "With the Glasgow/London model working so well, we created a sister establishment in Houston that serves the New York base," Murphy says.

The ETC has also led to the development of what JPMorgan calls a multi-location strategy, which looks beyond near-shore to offshore options. Now, projects are planned based on what kind of work needs to be done at primary, secondary and tertiary locations, corresponding to risk, cost and technology profile evaluations. Given the company's novel openness to offshoring, Glasgow's quality proposition is vital, in Murphy's view. "We have to be positioned a bit further up the value proposition chain," he asserts.

20

Changes in technology and the business landscape can necessitate implementing strategic changes for a company to remain competitive. Add new government regulations, and you have a good reason to outsource. The Equity Insurance Group is one of the five largest vehicle insurers in the UK. Headquartered in Essex and founded in 1946, Equity recognized the need to change its back-office functions in 2002. "The entry of new players into the UK insurance industry coupled with the introduction of new technology resulted in a change in customer loyalty and buying behavior patterns. In addition, the government introduced more stringent regulations," says John Josiah, senior executive, Equity Insurance Group. "These changes pressured insurers like us to not only reduce cost but also deliver higher levels of customer service." Coming out of the economic downturn of 2001, Equity recognized a changing business landscape. Josiah emphasizes his company chose a holistic strategic approach to outsourcing that goes beyond cost savings. "We adopted business process outsourcing as part of our operating model in 2002 to improve efficiencies, rationalize costs, and enhance competitiveness," he explains. "People have targets on their backs," observes Dana Stiffler, research director for AMR Research. "People are tactical and cost focused because they want a quick, immediate hit to their expenditures. But in order to really be successful, they have to inject long-term improvements in efficiencies into the engagement." Businesses need to be proactive not just reactive Figure 1, from the July 2009 AMR Research report, "State of the Outsourcing Industry in Mid-2009: Activity To Resume With a More Cautious and Global Focus,"

21

indicates that finance and accounting outsourcing (FAO) is the area with the highest percentage of respondents who indicated they will outsource.

Stiffler points out that while cost reduction is the primary consideration for big enterprises and the mid-market, the secondary factors vary, as indicated in Figure 2. "Our data shows that clients that have another key driver for outsourcing in addition to cost cutting are the ones that are most successful. Mid-market clients in particular may not have the scale to get the percentage of cost savings that the large enterprises do. They need to have other important reasons for accessing a provider such as access to skills." 22

Incremental steps to success "We evaluated a number of providers before deciding to partner with WNS," says Josiah. "We were impressed with their commitment to our business, their understanding of the insurance industry, and their strong, proven operational capability, he explains. The insurance company began its journey into outsourcing in 2002 with a pilot of 25 people. It signed a five-year contract based on the successful pilot, which it renewed for another five years in 2008. WNS provides a suite of underwriting, claims administration and broking operations (data-only) processes for Equity that includes: Underwriting process: Setting up policies 23

Issuing policy certificates and schedules Updating the UK Motor Insurance Database Amending policies when required Writing renewals Claims administration: Claims Bordereaux (aggregated batch payments to a single vendor) Indexing and referencing Support of broking operations: Issuing quotations for new business Setting up new business Issuing policy documents and schedules Amending policies when required Writing renewals When a customer initiates contact on the Web site or e-mail, or an insurance broker contacts the company, the new data and information goes to the provider where the services are performed. The carrier's in-house team receives more complex issues. The internal staff can devote its efforts to exception-based cases outside of normal parameters since the provider is handling the routine work. The number of business processes WNS delivers increased from 19 to 98 in six years, while the corresponding range of work evolved from simple transaction processing to more complex work, Josiah states. WNS also started undertaking more value-added management information reporting and analytic work. It also now assists with ad-hoc project work. The success of the engagement involved formulating a dynamic incremental roadmap (the plan specifying the order of process the buyer will transfer.) The success of the

24

methodology and improvements in efficiency has led to WNS playing an increasingly greater role over time. Making the relationship work Success involved extensive collaboration and interaction between the two parties to manage the relationship. "One of the key things is to have dedicated management. Equity has an offshore services manager to liaise with us in the UK," stresses WNS senior vice president insurance sales, Jeremy Owenson, who is also based in the UK. "I like to meet with the heads of the functional units at least once a month to have a high-level strategic conversation." By meeting face to face, the two parties are better able to understand and manage the engagement. The Equity offshore services manager and team visit India at least once a quarter to have an on-site review meeting, says Owenson. In addition, WNSbrings its senior management and operations team from India to the UK to meet with Equity for a week. "The visits help us understand their requirements by reviewing the onshore process," he says. "Physically meeting together really establishes the relationship," Owenson points out. "It also provides a joint review to discover how we can work better together." An example is how the two worked together to reduce the percentage of referrals back to the UK. When WNS took over the fleet processes involving companies owning large numbers of vehicles, there was a six percent referral rate back to the underwriter. "We have gotten that rate down to one percent by improving our processes and better understanding their rules," explains Owenson. The two parties have prospered with properly designed SLAs. The original metrics and KPIs (key performance indicators) remained intact when the two partiers renewed

25

the contract last year. "We have a mechanism in place for reviewing KPIs and all SLAs on an annual basis," says Josiah. Stiffler says providers that help clients manage their KPIs tend to have better relationships. "One of the things an established provider can do is create the right expectations on time frames. They need to share what is possible as opposed to pipe dreams. And they need to explain some benefits may be some years out," Stiffler explains. The parties made no modification to their metrics and KPIs when they renewed the contract, but they did introduce a gain-share mechanism "to incentivize further productivity/efficiency improvements," Josiah adds. "We put at risk some of our profit margin where we fail to meet our service levels or KPIs," explains Owenson. "We also have a monetary incentive to achieve more than the levels stipulated by our KPIs." Business benefits Equity has benefited from reducing costs. Josiah says, "In our experience, outsourcing typically provides an approximate 35-40 percent saving on pre-outsourced costs." In addition, WNS delivered benefits by consolidating and standardizing business processes and improving process efficiencies, he adds. Benefits include: Customer inquiries: WNS answers them now within 24 hours with an accuracy rate of over 98 percent Average handling time for inquiries: WNS improved them by a range of 10-15 percent through the creation of ready reference files Staff cross-training: WNS optimizes the buyer's ability to support a dynamic business environment Lessons from the Outsourcing Journal:

26

Developing a roadmap to transition processes over time yields enhanced business benefits. Pilot programs allow the buyer and provider to make adjustments to improve efficiencies before transitioning the entire process. Increased communication and face-to-face visits facilitate greater understanding of business objectives and opportunities in offshoring relationships.

27

Outsource Case Study: Blue Shield of California By Pam Greenberg August/September 2005

With 3.2 million members, Blue Shield of California (BSC) is one of the largest nonprofit entities in the country and one of the nation's top 20 health plans. In 2001, BSC faced a balancing act: how to reduce the cost of handling customer interactions with physicians and hospitals, while maintaining the level of quality that had always been a hallmark of its brand. In the years since, BSC has decreased its cost per call by 35 percent, racked up quality scores consistently in the 96 to 98 percent range and kept center uptime at 99.99 percent - all of this while making the transition to an outsourced contact center solution. So how exactly did BSC manage to make such strong transition and how did they make it look so easy? The Decision to Outsource: More organizations than ever are turning to experts to help them manage their contact centers. They see an opportunity to employ the most advanced technology available, without the large-scale investment that binds them to infrastructure that may be outdated in a matter of months. In 2001, BSC chose business process outsourcing expert TeleTech to help the organization manage its relationships with healthcare providers. A 20-plus year veteran of contact center outsourcing, TeleTech was quick to provide ideas to successfully transition the program, using a combination of onshore and offshore centers.

28

After assessing BSC's contact center operations and technology, TeleTech established an onshore "staging area" in Enfield, CT, in the heart of the Northeast insurance corridor. The outsourcer also redesigned the training program for customer service reps, reducing training time from six to four weeks and boasting a graduation rate of 95 percent. The Enfield operation went live in November 2001 with 60 customer service reps, handling 50 percent of BSC's eligibility and benefits call volume. By early 2002, the operation had already proven itself in head-to-head competition with BSC's in-house resources. High productivity led to an increase from 50 to 100 percent of provider eligibility and benefits calls by the end of the first year, with zero transfers back to BSC. The operation was handling 185,000 calls per month and demonstrating success at every turn. Further Cost Cuts With International Operations: Following 18 months of successful service, TeleTech successfully transitioned the less complicated calls to its contact center in the Philippine capital of Manila, making room for more complex interactions at the Enfield location. Manila was selected as an optimal offshore location due to its American-accented, service-minded agents, presence of medical skills, and compelling cost savings. There were three keys to a successful launch of high-quality operation in Manila. The first was selective hiring, with a five-percent acceptance rate. The second key was the appointment of an expatriate management team with extensive call center experience. The final key to success was making a significant investment in onsite resources - BSC sent one person for three months and TeleTech sent seven people for three weeks each. 29

To route calls to the offshore center, BSC used dynamic call routing via a Voice over Internet Protocol (VoIP) network. VoIP allows voice and data to traverse the same network, providing flexibility in how companies route and handle customer contacts. Perhaps the most important trend in call center technology today, VoIP takes the place of large, costly, technology-laden customer contact sites and allows companies to easily shift their telephone traffic anywhere in the world. Deployment of VoIP technology supported a seamless transition to the Manila center. Another cost savings of using VoIP is that the technology reduced onshore

telecommunications costs by 80 percent. The result of shifting calls to the center was an average cost per call that was 35 percent lower than BSC's in-house centers. Measuring a Successful Program: By January 2004, outsourced contact centers were taking 100 percent of all provider calls and meeting or exceeding all designated goals. By late 2004, TeleTech handled the five-millionth call for BSC. "During our three year relationship, our contact center operation has performed above expectations by delivering strategies that streamline operations, leverage technology, and decrease costs," said Ken Wood, Chief Operating Officer and Executive Vice President of Blue Shield of California. Additional measurements of program success:

Delivered cost per call is 20 to 25 percent lower than internal benchmarks. Earned quality scores are in 95 to 97 percent range, equal to or superior to internal centers.

First call resolution is 99.9 percent.

30

Average handle time was reduced 37 percent from January through September 2002.

Number of customer service reps grew from 60 in November 2001 to 100 in January 2003.

Interactive Voice Response (IVR) enhancements reduced provider call volume by 20 percent.

Outsourcing its contact center operation has made a dramatic impact on BSC's bottom line. It has given the organization the freedom to focus on what is does best providing access to high-quality health care at a reasonable price.

31

Increasing Productivity and Efficiency -

The RBOC Case Study This case study illustrates how efficiency and productivity can be negatively affected when a company - working outside the scope of its core competencies - does not fully understand the requirements of a successful call center operation. A Regional Bell Operating Center (RBOC) set up a call center to sell and service its voice mail products. Staffed with employees hired from seven different temporary agencies, the center was plagued with problems, including lengthy calls, high abandon rates, high staff absentee rates, and a lack of service continuity. At the same time the center was projected to increase both its customer base and range of services. Realizing the strength of the technology already in place at the center, company management decided to approach the problem as an outsourcing opportunity. Working together, they developed a training program for both the staff already at the center as well as new hires. After three weeks of instruction, they assigned each newly trained employee to one of three skill-based groups: the priority group, who serve the largest customers; the regular customer service group, who handle the majority of existing customers; and the telemarketing group, who field inbound sales calls. "Outsourcing is a strategic tool that can react faster to the demands of the marketplace and their customers. It allows companies to shift gears quickly while not losing their emphasis on maintaining the core business". - Business Weeks. - Business Week The call center made significant improvement in all areas, including: Improved the sales close ratio by 19% Reduced the length of business calls by 20% Reduced the length of residential customer calls by 40% Decreased the wait time - with 80% of the 32

calls answered within 20 seconds - resulting in a significant reduction in the abandon rate

Maximizing Revenue -

The Sun Microsystems Case Study Service/maintenance contract sales are highly profitable for many high-tech businesses. In order to reap the financial rewards however, a company must have in place a focused channel strategy for implementing and managing maintenance contract sales. It is well documented that an expertly run contract sales program can net a corporation millions in incremental revenue. Without such a program much of that income is lost. Sun Microsystems is a case in point. When they discovered that this important revenue stream was eroding, they quickly identified the cause: Because their field sales force did not have the "bandwidth" to provide cost- effective service contract sales to small-to-mid-size customers, they were not adequately covering those accounts. This opened the door to third-party vendors and also resulted in customers who were out of warranty or whose contracts had expired. When they needed assistance, those customers would have to renew before they could get service. Needless to say, these were not satisfied customers. Sun decided to outsource the development of a dedicated TeleServices Center - in essence creating a new distribution channel for this product. Working closely together, they designed and installed an on-site TeleSales Center whose charge is to

33

thwart third-party vendors and to comprehensively target contract renewals in smallto-mid-size accounts. Selling maintenance contracts requires TSRs who understand the service requirements of each customer. The right TSR has a background in both inside sales and customer service and can identify decision makers and close a sale. In addition, they must be "specialists" in Sun's service products. The typical sales cycle for a renewal contract is 90 days, involves two decision makers, and six-to-twelve conversations with the customer. Each TSR can contact and service 25-30 customers per day, far more than possible with field staff alone. They developed a Renewal Program based on a 90/60/30-day strategy: Quotes are sent out 90 days prior to the contract expiration date, a phone call is made 60 days prior to the expire date, and the contract is renewed at 30 days. Results of this program speak for themselves:

Increased the contract renewal rate 24.6% Reduced the cost to retain customers 34.5% Lowered the cost of new customer contracts more than 33% Freed field staff to focus on major accounts Developed a renewal management database to efficiently handle the contract renewal process

Designed an instructional curriculum that reduced TSR training time by 40%

34

Focusing on Core Competencies -

The IBM Case Study In 1992 IBM encountered a different set of problems. Facing fierce competition, they realized the need to re-engineer their go-to-market strategy to dramatically reduce both sales and service costs - to move away from a "blue suit," field sales business model. Looking for the best solution, IBM decided a call center would provide the best blend of quality and cost- efficiency as a channel for both sales and customer service. They also recognized they had no experience designing, much less managing, a call center. And, as if this weren't enough of a challenge, the center needed to be up and running "yesterday." "Outsourcing enables executives to focus their energies on the "what" of their business and less on the "how." Executives believe this is often the most compelling reason for outsourcing".- The Outsource Institute IBM outsourced the design, staffing, and management of a TeleServices Center capable of supporting customers in all phases of their life cycle. Within 90 days, the first TeleServices Center was up and running - a third of the time IBM estimated it would take to accomplish internally. Working in partnership, they set up a strategically located call center at an IBM facility in California. The call center was charged with all facets of customer acquisition and retention - from lead generation to assuring customer satisfaction to inbound customer service and support. To provide truly integrated and comprehensive marketing, the IBM TeleServices Center was carefully organized into three groups: The Customer Service Group handles simple inquiries as well as provides customers with technical support and

35

assistance solving complex problems. The Telesales Group handles account management and sales of IBM products and services that do not require field sales support. The Direct Marketing Group is responsible for generating new product leads, upgrades, service contracts and seminar attendance. The successful integration of the TeleServices Center within IBM's corporate structure requires that TSRs receive training to develop the required product knowledge and customer skills to act as an agent of IBM. As one would expect from such thorough planning and implementation, the results have been dramatic:

Reduced the cost of customer contact 97% - from $500 for field contact to $15 for telesales contact

Shortened the field sales cycles up to 80% Generated 125% of goal for leads Exceeded customer expectations 78% of the time - based on a customer service satisfaction survey

Built a marketing database - with customer information that improves targeting, responsiveness, relationships, and retention.

Turning a Cost Center into a Profit Center -

The Siemens ROLM Case Study There are many aftermarket sales that cannot be handled cost- effectively by field sales staff - their cost-of-sales-to-revenue ratio is too high. Yet the sale of these products offers significant income possibilities and can serve as a relationship bridge 36

that helps identify future big-dollar sales. Siemens ROLM was faced with just such a dilemma; they needed to devise a strategic and cost-effective program for aftermarket sales. They required a solution that allowed field staff to focus on strategic clients while developing a low-cost distribution channel to support mid-tier clients. Siemens ROLM working in conjunction with an outsource agency, designed and implemented an on-site Client Call Center. With performance goals jointly set by field staff, management, and the agency, the center's three pronged mission is to manage leads, stop third-party encroachment, and extend client relationships and contracts. The call center, which provides a cost-efficient alternate sales and marketing channel for Siemens ROLM's move/add/change (MAC) product lines, has more than proved its worth. Both leads and sales generated far exceeded goals, the center reversed a projected MAC revenue decline, and more than 2,800 customers are contacted each month. In the first six months of operation, the center:

Generated 116% of goal for sales leads Grossed over $4.2 million in MAC sales Produced leads valued as high as $1M

The center allows field staff to concentrate on what they do best: develop face-to-face client relationships and sales; and the outsource agency to focus on what it does best; provide teleservices for lead generation and sales. "If you do not outsource any of the activities where you are not best in world, and your competitor does, you have just lost the competitive edge. Simple as that"Professor James Brian Quinn Tuck School, Dartmouth 37

SECTION IV

CONCLUSION

In many large organizations, outsourcing is being considered as a viable cost reduction alternative. Cost reduction is the main driving factor for outsourcing their activities. Other than cost reduction, short-term requirement of highly skilled resources is an-other objective for the firms to outsource. The top management of the firms is convinced of the benefits of outsourcing and sup-ports the outsourcing decisions. More than anything, support of the top management is the key towards the success of outsourcing for firms. There are a lot of things to be learned from these two cases. First, risks in outsourcing can be managed through proper contractual agreement and quality standards. In addition, continuous monitoring of projects can also re-duce risks. The organization have risk contingency plans. Broadly, risk is measured on performance metrics over time. Risk factors are weighed to reflect financial implications as well. The metrics to measure the effectiveness of an outsourcing arrangement are checked frequently, and are brought up during the quarterly review meetings. If a risk is time bound, risk migration plan is created and executed. If there are repeated and multiple failures to meet the Service Level Agreements (SLA) goals, then alternative vendors may be identified for a part or rest of the work. If the business processes and the QA methodology are very robust and well thought of, risks will be reduced in global outsourcing.

38

Other than effective project management, and participative association of vendors in formulating design specifications, is very important to have planned and periodic reviews to improve the communication with the team members. The concept of one-team should be strengthened. Also quality management pro-grams and metrics should be followed. It is again a good practice to have an out-clause and penalty for not meeting the SLAs. The organizations described their relation with the outsourcing partners as very collaborative and healthy. The outsourcing relationship is managed using a combination of performance metrics, periodic discussions regarding timely delivery, budget and schedule. Other than this, selecting the right outsourcing partner is an important factor in a successful outsourcing project. Another interesting observation is that the organization and the outsourcing vendor are forming partner-ships, which is based on mutual trust and long term commitment. In addition, there are many risks involved in global outsourcing. We identified the key risk factors that commonly arise in global outsourcing. This study will help the management to identify the risk factors and take necessary steps to reduce them.

39