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July 2010 | Outsourcing Blog | BPO Industry Updates and Articles

Outsourcing is still in its Early Stages

In a recent global study by ESI International on the effectiveness and best practices in risk management by companies involved in outsourcing and offshoring, the results reveal that most companies in the industry are unaware of how to effectively manage the risks involved in outsourcing/offshoring projects. Of the 95% of the organizations found to be engaged in outsourcing activities, less than half utilize effective risk management practices.

According to a survey in the report, 70% of respondents indicated that product management or service quality is the top risk to organizations involved in outsourcing and offshoring. The survey gathered responses from decision makers in the outsourcing industry and governments in major outsourcing locations (South America, UK/Europe, Asia/Pacific, the Middle East, and India).

“The ubiquity of project outsourcing creates opportunities for, and demands on, organizations to better develop and refine their outsourcing competencies,” commented ESI International’s vice president of product strategy and management, J. LeRoy Ward. “The results of ESI’s global survey indicate areas for greater performance, productivity, and competitive advantages through better risk management.”

The results reveal a need in the industry for organizations to rethink risk management approaches in order to capitalize more effectively on the profit margins to be had by outsourcing projects. With close to two-thirds of organizations spending almost half of their budgets on outsourcing, it is clearly something that merits closer scrutiny.

Of the organizations surveyed, 19% claimed that their organization is not very effective at assessing the risks of outsourced projects and another 36% said that they were only somewhat effective.  Of the respondents, only 39% of the respondents were confident that their organization had a strong risk management culture.

Managing outsourcing risks is a critical part of ensuring successful outsourcing partnerships - especially in locations where IT infrastructure is not up to par and with service providers that are not 100% transparent about prices and contract agreements. As such, shortfalls in effective requirements management and development must be addressed.

According to the study, 75% of organizations don’t always clearly define requirements of outsourced projects. Clearly defining your requirements is always the first step of the outsourcing process and thus serves as the foundation for successful project management. Despite this, only a third stated that their organization clearly articulates and defines financial goals to their outsourcing partners.

With over half of the organizations acknowledging a need for improvement in their outsourcing capabilities, there is clearly much more growth to be had in the industry should these pitfalls be addressed.

The offshoring of IT operations has become a trend among companies worldwide in both the public and private sector. Offshoring is a process that, if done right, can yield maximum returns on investment for both the client and service provider. As with any corporate endeavor, however, there are pitfalls that companies need to be aware of and avoid in the process of establishing a successful outsourcing operation.

IT outsourcing has long been a way to cut costs - especially so given the financial limitations in struggling economies undergoing a downturn. Businesses of all scales worldwide are searching for a means to cut costs. Offshoring has become a means to not just reduce costs, but maintain a high level of service - if not higher - than was established beforehand.

“In-house IT management is complicated, time-consuming and requires the finance, resource, and capacity that businesses, especially following the recession, simply don’t have - something which is not set to change any time soon,” commented Onyx Group CEO, Neil Stephenson.

A company that removes a process that unnecessarily consumes such an amount of time and resources can stand to steer the course of the company towards core goals. However, before such a direction can be taken, all risks and the alternatives need to be analyzed.

Assessing the risks and considering the alternatives are, according to outsourcing expert, Iain Monaghan, inevitably linked together: “Some organizations looking to outsource give their existing in-house departments the opportunity to put forward a competing bid, while others conclude that the benefits available from outsourcing could be obtained more economically by changes in internal processes; for example, increased standardization.”

IT outsourcing still a growing trend in major offshoring countries

IT outsourcing is still a rapidly growing trend in major offshoring countries such as the UK despite the many traps that companies tend to fall into during the process. Analysts predict that outsourcing has yet to experience its “golden age”. With figures indicating that approximately £80 billion of public sector services in the UK are currently outsourced - a figure that could well exceed £140 billion by 2015 - the prediction holds much weight.

According to Monaghan, the success of an IT outsourcing partnership can be measured by business value and customer satisfaction. He further adds that customers expect improvements in both the quality of services and its costs.

The popularity of IT management outsourcing has far-reaching implications and presents small-to-medium businesses an opportunity to purchase high-end services at minimum costs. 

As the global economy recovers from last year’s recession, the outsourcing and offshoring market has witnessed increased activity as indicated by the latest report from the Everest Research Institute.  According to Everest research director Anand Ramesh, where once the growth of offshoring slowed down due to financial reasons or a lack of management focus, it is showing signs of total recovery.

Throughout the course of the recession, offshoring clients in the U.S and other major locations became much more focused on cutting costs.  According to Ramesh, this remains true in today’s context as more companies look to offshore work that was once being outsourced to local suppliers.

Offshoring a viable option in locations such as the Philippines and India

However, according to Ramesh, more companies that were once alien to the industry are looking at offshoring as a viable option in locations such as the Philippines and India. This has coincided with what Ramesh perceives as an increase in the credibility and scale of offshore suppliers in major offshoring destinations such as India. 

The report by Everest group reveals that many of the Business Process Outsourcing (BPO) industry’s current buyers have plans of expanding aggressively. This claim was backed by data showing that 75% of small and medium-sized companies engaged in offshoring plan to expand their offshore outsourcing operations by over 500 full-time employees in a span of two years. This trend is also seen in large offshoring companies with 90% of the population claiming they had plans of expanding operations by over 500 FTEs as well over the next two years.

Everest defines small adopters in the offshoring industry as organizations that have less than 500 FTEs working offshore. Medium adopters refer to organizations that have 500 to 2,500 FTEs offshore whereas large adopters are organizations with offshore FTEs that already number at over 2,500.

According to the report, India remains the number one offshore location for outsourcing with over 70 percent of buyers in the industry revealing plans to expand in the country. The report also indicates that while India is the top choice, companies are showing a tendency to spread risks by not sending all their work to a single location. The Philippines and China are two alternate locations with a good portion of companies showing interests in expanding to them as well. However, according to Ramesh, China mainly offers BPO services to neighbors such as South Korea and Japan. Meanwhile, Malaysia, Brazil, and Mexico are three other locations that have invited a significant amount of interest from companies looking to expand offshore.

Employee Wellness Suffering in BPO Sector

Offshoring in the Business Process Outsourcing (BPO) industry has been the focal point of economies of many Third World countries. India alone employs one million people in its BPO sector. While they may be able to pay a reasonably good amount to locals in such economies, the industry has much to do in order to improve stressful working conditions. Such was the verdict of a study which was recently released by the International Labor Organization (ILO).

Among the advantages of offshoring work, particularly to cost-effective locations such as India and the Philippines, is the ability to set up a 24/7 operation due to the time zone differences. Companies from the US and the UK have outsourced services that have allowed for much higher paying jobs for these locations. Indian BPO workers, for instance, receive a salary that is close to double the amount in other sectors of their economy. Meanwhile, the BPO employees in the Philippines have salaries that are higher than that of other sectors by 53%. However, the survey by ILO has given truth to concerns over stressful working conditions from trade unions and social workers in India.

According to the study, workers in the offshoring industry are faced with heavy workloads, strict procedures enforced through electronic monitoring, and for customer service agents, difficult clients. According to Anna Fos, head researcher at the Trade Union Congress of the Philippines, efforts by trade unions in both the Philippines and India to introduce collective bargaining have proved fruitless.

"We have not had any success in introducing collective bargaining in call centers and other BPO companies in the Philippines," Fos said. She added that one of the main reasons for this is the ease of which BPO workers are able to switch from one employer to the next should problems with their current employer occur: "They will not come to us, if there is a problem, as there are lots of jobs available", she commented.

Despite the working conditions of such offshoring outfits, analysts believe that employers have generally shown a lack of interest with regards to joining trade unions due, among other things, to fear of reprisals from their employers.

ILO’s study, which has shown high rates of staff turnover in the BPO industry, suggests that the working conditions endured by BPO employees represent a “tailor-made recipe” for hazards related to stress. Turnover rates have peaked at 100% annually in certain offshoring companies - representing one of the industry’s major concerns.

Anti-offshoring "Schumer Bill"

A recently proposed anti-offshoring bill by US Senator Charles Schumer has recently come under criticism by the Filipino-American community. The Schumer Bill, which enforces taxes on businesses that practice offshoring, could hinder what’s been known in the Philippines as its sunshine industry. Filipino-American community members recently visited the capital in an effort to voice their opinions regarding the bill.

The Schumer Bill, which puts a 25-cent tax on every call made to a contact center based outside the US, was proposed with hopes that offshoring customer calls to offshore agents will ultimately cease to become the most cost-effective option. Should a call be answered offshore, the bill mandates that the agent state the location from which the call is serviced. India and the Philippines, which enjoy the majority of the global contact center outsourcing pie, have players in their respective economies that will stand to lose most should the bill be enacted.

NaFFAA (National Federation of Filipino American Associations) member Loida Lewis reportedly told the Asian Journal that Sen. Gillibrand has agreed to speak to Sen. Schumer in an effort to convince him of the negative impact of such an act. The NaFFAA reportedly sent a letter to the senator claiming that the bill was not in the best interests of the long-standing mutual relationship between the US and its former colony.

Philippine Trade Commissioner and California resident Josephine Romero was quoted as saying that American citizens are “fighting the highest unemployment rate in California”. The decision regarding the anti-offshoring petition, she added, should be left to the companies themselves because they are accountable for their shareholders. The companies, she continued, have a duty to examine the effect of a tariff on customer service and its effects on a company’s ability to provide quality customer care services.

Outsourcing companies based in the US have also opposed the bill, claiming it is an act of protectionism. Hit Rate Solutions operations director Adam Shore commented that the bill showed “no clear understanding of outsourcing or business operations”. He further added that it can potentially hurt global firms not just in the US but around the globe as more and more outsourcing locations have developed following the rapid growth of the contact center outsourcing and offshoring industry.

According to Shore, Schumer may not be aware of just how dependent companies small and large have become on offshore service providers that can now offer a seamless customer service experience at significantly lower costs. 

Offshore Outsourcing Trends 2010

A continuously maturing global sourcing arena has caused the creation of a dynamic marketplace with changes in buyers’ needs and demands. These changes can have a severe impact on the need for next generation characteristics in today’s global service delivery models. These are furthermore marked by globalized approaches, industrialized delivery, and a growing global talent pool, reported Everest Group, a major global outsourcing and offshoring research firm.

Companies that have invested in offshoring have, over the years, realized that actual savings were not as high as initially projected. Costs can come great from cultural gaps and communication issues that directly impact the turnaround time as well as the quality of the end products. Furthermore, the synergy between the offshore team and the company can be lost due to management deficiencies.

Following the evolution of the offshoring industry into a more complex and sophisticated space, its service providers are required to look for a means of servicing the progressively higher professional needs of buyers that have gone far beyond mere labor arbitrage. Emerging as key factors on offshoring delivery redesigns worldwide are things such as operating model, talent management, and a good location portfolio.

These are the topics of a new global outsourcing and offshoring study conducted by research giant Everest, entitled Global Sourcing 2.0 - Evolving Global Delivery Imperatives for Outsourcing Service Providers.

The research group’s report on global sourcing gathers analyses on global delivery trends of all leading global service providers involved in offshoring. This is further supplemented with discussions with India’s buyers, services providers, and the group’s experience in serving the global sourcing industry.

 “The evolution of the supplier delivery models is evident; more so with the industry dynamics to remain high on growth requirements, even when faced with an extreme competitive environment. As the buyers’ sourcing strategies and engagements mature, service providers are re-thinking their global delivery models to meet evolving buyer requirements related to location risk diversification, location-agnostic & consistent delivery experience, faster and lower cost transitions and deep domain expertise,” commented Everest Group Vice President of Research Amneet Signh.

Meanwhile, Guarav Gupta, Principal & Country Head of Everst Group, believes that understanding such trends “holds importance for service providers and buyers alike”.

“While it is critical for service providers to be aware of these imperatives and prepare to compete with the changing market paradigm, buyers need to incorporate and leverage these next-generation global delivery characteristics in their decision making to drive improved value from their sourcing programs”, said Gupta.

Advantages of Bookkeeping Offshoring

Bookkeeping can sometimes be hectic and can be very demanding mentally. The level of expertise is always high when it comes to putting in timely and accurate work in various types of account books for an organization. It is therefore an ideal solution to seek the assistance of experienced professionals who know how to consistently deliver the right results. However, the procurement of reliable specialized services is not only hard to find, it’s not kind to your bank account.

Technological advancements have made it possible to offshore bookkeeping work. Advancements in the service delivery capabilities of service providers have made it possible to do so without compromising the quality of work. Bookkeeping offshoring now yields many benefits to businesses across the globe.

The main benefit for bookkeeping offshoring, as with any service in the offshoring industry, is still related to cost. On top of that, a marginal amount of time is saved. Today, services such as employer tax expense, worker’s compensation, insurance, liability, and health insurance can be rendered in offshore locations where labor arbitrage is favorable to the client.

Client companies that are looking at offshoring as an option would do well to be reminded that because bookkeeping service providers are already adept at the craft, no interviews, recruitment or training process will need to be conducted in-house. In addition to that, there is no investment needed in operating infrastructure such as software, hardware, and office space as the service provider will have already secured the necessary workstations - allowing for a fast ramp-up time.

Bookkeeping offshoring opens client companies up to a host of options for updating their books. This, in turn, creates flexibility in which they are able to acquire services according to their requirements and corporate context. There are just as many choices in offshore locations as the actual processes to be transferred offshore.

The delegation of a task as burdensome as bookkeeping will allow the company to streamline existing processes. In effect, the company can return to activities that are crucial to its strategic direction and competitive edge. These can include services that can directly impact the revenue generation of a company such as customer relationship management and after sale services.

The benefits of outsourcing bookkeeping has been a proven strategy for large corporations as well as SMEs and start-ups - allowing significant cost savings, process optimization, and flexibility to divert time and energy where it counts: the core of the company.

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