Transformation is the first step in outsourcing

June 4, 2007

At the age of 25, Marco Cullen has just joined the global sourcing revolution. He graduated this summer from King’s College London with a degree in electrical engineering and is one of a group of 25 graduates from 12 UK universities who will spend the next six months in Mysore, India, on the Global Talent Programme run by Infosys, the Indian outsourcing specialist.

They will learn first-hand how their new employer uses its considerable global network to deliver IT services to multinational companies such as Boeing, DaimlerChrysler and Philips.

Naturally, Mr Cullen is excited. “Working for Infosys and being part of its Global Talent Programme will open doors for me that I didn’t even know existed. The people I will meet through this programme, the relationships I’ll foster and the internationally recognised skills I will gain will stay with me for life,” he says.

Plus, he adds, he’s never been to India.

For Infosys, meanwhile, the programme is a vital element of its aggressive global expansion plans. “In joining a global 8,000-strong community on the Mysore campus that includes trainees from India, the US, Australia and Japan, the UK graduates will be exposed to new cultures and ways of thinking,” says BG Srinivas, head of its EMEA region operations.

“Over time, that community will enable Infosys to become more embedded in the wide range of countries and communities we operate in.”

Infosys is just one of a number of Indian outsourcing providers that have seen their fortunes rocket as companies worldwide have looked to offshore providers to achieve the rapid business transformation that they themselves failed to achieve for years via process redesign, enterprise resource planning (ERP) implementations and shared service initiatives.

It took Infosys 23 years, for example, to reach total sales of $1bn, a milestone it passed in the financial year ending March 2004. This year, it is expected to add $1bn in sales in a mere 12 months, to reach total revenues of $4bn.

And it is not only Indian suppliers that have benefited from global sourcing trends.

A large part of the success of British outsourcing provider Xansa, according to company chairman Bill Alexander, is due the fact that in the late 1990s, it was the first UK supplier to realise the potential of carrying out much of its client work in India.

Today, while 99 per cent of Xansa’s business comes from UK clients, more than half its 8,000 employees are based in India, from Pune to Chennai. “As a result, we’ve been able to tap into a great talent pool, where the quality and skills of the people available never fails to impress and delight me,” says Mr Alexander.

For many outsourcing customers, meanwhile, the term “labour arbitrage” has become common parlance as they have sought to locate business functions with providers working in geographies where wages are lower.

Now, many are reassessing labour arbitrage as the main driver of their outsourcing decisions, says Ian Marriott of industry analyst company Gartner. “They’re realising that basing outsourcing decisions on nothing more than cost reduction doesn’t tend to result in good outcomes,” he says.

For one thing, says Clive Longbottom of analyst company Quocirca, global economic trends mean that labour arbitrage is a moveable feast and, as wages have spiralled in more established markets such as India, outsourcing companies have been forced to look to new territories in Asia and eastern Europe to keep costs down.

“But a strategy based on following arbitrage dynamics as they move around the world can negate any cost savings that could possibly be made, and this has a direct knock-on effect for clients, in terms of both cost and quality of services provided,” he warns.

This does not mean an end to the popularity of offshore outsourcing, he adds: “Far from it. All it means is that, for customers, it must be done for the right reasons, and with the right controls.”

That view is echoed elsewhere. In July 2007, management consultants at Deloitte warned that their research into the offshoring strategies of financial services companies suggested that a rethink of global sourcing strategies was long overdue.

“Most organisations [in our survey] have taken advantage of offshoring, but the key challenge is to optimise operations. In other words, they need to progress beyond pure labour arbitrage benefits by re-engineering business processes to make them world-class,” they said.

Companies in the survey that had successfully done that, they said, had achieved savings equivalent to 3 per cent of their total cost base. But those that had failed to apply best practices had, in some instances, experienced a decline in their operational performance. In many cases, the legacy inefficiencies of older, onshore processes had merely been transferred to an offshore location.

What is needed is an approach in which business processes are re-engineered for improvement before they are taken offshore, says Joel Roques, managing director of Hackett Group, a strategic advisory firm that assists global companies in their sourcing strategies.

According to Mr Roques, while the potential for companies to reduce costs by offshoring back office operations is dramatic, European companies can potentially increase these savings by 40 per cent by selectively integrating transformation and process improvement efforts into their global sourcing initiatives.

That is based on information kept in Hackett Group’s vast database of performance metrics captured in more than 4,000 benchmark studies of the best-practice business processes used by market-leading companies.

That information is made accessible to Hackett Group clients, who then work with the company to remodel their business processes along the same lines as world leaders, often before signing an outsourcing agreement.

Using data held in that repository, analysts at Hackett Group recently estimated that Europe’s 500 largest companies could generate annual cost savings of more than €67bn, or an average of about €134m per company, by opting for “transform and shift” initiatives, where processes are optimised and then taken offshore, instead of “lift and shift” efforts, where existing processes are moved overseas.

As this change in thinking takes hold among prospective clients, and their demands become more sophisticated, outsourcing companies are adopting a different language to engage with them, and at the same time, looking to deliver an increasingly broader range of business consulting services.

“These days, we don’t use the term ‘outsourcing’ much with our clients – it suggests to them that they are throwing a business over a wall for someone else to carry out on their behalf and they just don’t want to do that,” says Ross Perot junior, chairman of US outsourcing companies Perot Systems.

“Instead, we talk to them about business transformation, about how we can work with them to make them world-class.”

“We’re definitely seeing a greater level of maturity among our customers,” agrees PR Chandresekar, president of the Americas and Europe at Indian outsourcer Wipro Technologies.

“The size, scope and complexity of contracts are all changing to reflect more mature needs and demands. Smart companies now ask us not how much we can save them, but how we can improve their processes and their productivity,” he says.

According Mr Marriott at Gartner, companies considering offshore outsourcing should closely scrutinise an outsourcer’s track record in delivering business process improvements and seek out relevant customer references to back up their claims before signing any deal.

In addition, he says, they should establish a formal country selection process, with the three top criteria being quality and availability of skilled resources; language proficiency and affinity; and infrastructure quality and reliability for business continuity.

Those who do not take a rigorous approach to global sourcing run a serious risk of disappointment, adds Mr Longbottom of Quocirca. “Any outsourcing contract should be signed for the right reason and that’s because a provider can perform a task more efficiently and more effectively than the client can itself.

“Companies should be offloading such functions only if it allows them to become more flexible and if the deal leads to corporate value being increased. If the only reason behind a deal is cheaper cost, then the company involved deserves the level of service they may well receive.”

By Jessica Twentyman