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 / Autumn 2006 / Issue 44(originally published by Booz & Company)


How to Be an Outsourcing Virtuoso

Meanwhile, a quiet revolution was occurring abroad. Fueled by the Internet, plummeting telecommunication prices, government incentives, and growing awareness of the cost advantages and abundant skilled labor pool in India, offshore BPO made its first forays into Western enterprises on two fronts. First, a select group of companies, including General Electric, American Express, and British Airways, set up their own offshore units for processes such as customer call centers, back-office administration, and systems development. Second, a handful of Indian providers, including TCS, Infosys, Wipro, and Satyam — seeing opportunity in extending their service offering and aware of companies’ growing appetite for cost reduction — began to expand beyond IT into the same areas of work that the privately owned captives were engaged in. Along the way, their investments in systems and scale began to pay off, and the case for BPO grew to encompass not just cost advantage but also increased quality and effectiveness. As Mr. Cannon-Brookes put it, customers saw that BPO could “take your mess for less, transform it, run it, and add real value.”

Other companies soon began implementing their own comprehensive outsourcing arrangements. In 2003, Procter & Gamble contracted its IT processes to Hewlett-Packard, its HR services to IBM, and its facilities management to Jones Lang LaSalle. Each of these engagements has yielded improvements in service and efficiency. “We thought we were doing good work by any standards, but the rigor and the quality of the measures in a commercial partnership are on a completely different scale,” says Filippo Passerini, P&G’s chief information officer. “Our partners brought a whole new level of methodology and discipline to the process.”

The menu of BPO offerings continued to expand. Sophisticated end-to-end services are now available in human resources, finance, and procurement, along with such forward-looking offerings as analytics, advanced customer care, and innovation. (See “Innovators without Borders,” by Kevin Dehoff and Vikas Sehgal.) Many companies use BPO as a springboard for building capabilities in knowledge process outsourcing — a subset of business process outsourcing requiring a much higher level of expertise in such areas as product development, clinical trials, research and analytics, media production, and animation.

Over the last few years, new suppliers with nothing to lose and everything to gain — and, consequently, a mind-set that is more attuned to customer needs — have entered the fray. Pushed by buyers to demonstrate business value, service providers are building robust, highly tailored offerings that deliver economic, strategic, operational, and human resources benefits. Further, they are differentiating their offerings in some cases based on industry expertise. Within industries, service providers are standardizing business processes to meet customer demands for cost savings, as buyers now refuse to pay the 10 to 20 percent premium for tailored processes. This standardization is setting the stage for the proliferation of one-to-many solutions.

• Consolidation of Suppliers into Two Primary Business Models. Although the mix of supply options is still in flux, two types seem likely to prevail in the end: large, full-service vendors (Tier One firms) and specialist vendors (Tier Two firms) that serve niche markets, such as animation production houses for media companies. Because Tier One firms work on a global scale, with multinational clients and immense resources, there is not room for many of them. “When we started this business 12 years ago, there were 700 or 800 firms in India that had the same idea,” says Francisco D’Souza, COO of Cognizant, a leading U.S. provider. “Today, there are four Tier One firms. That’s just an artifact of a maturing market and of the importance of scale.”

As the Tier One firms standardize their business processes and evolve their contractual practices, they will increasingly seek to help their customers transform their operations through outsourcing — with decisive impact on customers’ processes, management approaches, and outcomes. Mr. D’Souza is convinced that this evolution offers a significant opportunity to engage more deeply with his clients: “It’s not about delivering technology solutions. It’s thinking about how we make our customers’ businesses stronger at the end of the day. As a part of that, we’ve made a big effort to build within our teams experience and expertise about the industries that we serve. We want not just technologists, but technologists who understand, for instance, financial services, health care, or retail. Ultimately, everything you do needs to impact the top line or the bottom line or the cycle time of your client.”

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  1. Amy Bernstein, editor, Outsourcing Thought Leaders: Managing Business without Borders (strategy+business Books 2006): In-depth interviews with the customer and provider executives quoted in this article. Click here.
  2. Anne Chung, Tim Jackson, and Tim Laseter, “Why Outsourcing Is In,” s+b, Third Quarter 2002: Strategic operations outsourcing encompasses core activities, such as manufacturing or logistics, that could substantially affect a business if not performed well. Click here.
  3. Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-First Century (Farrar, Straus and Giroux, updated 2006): The clarion call of globalism — how lower trade barriers, reduced political resistance, and technological advances have transformed business across the world.
  4. Alex Kandybin, Martin Kihn, and Cesare R. Mainardi, “Reinventing Scale: How to Escape the Size Trap,” s+b, Second Quarter 2002: Outsourcing can be a useful tool in applying the concept of scale differently across different parts of a business to unleash real power and unlock hidden value. Click here.
  5. Bill Lakenan, Darren Boyd, and Ed Frey; “Why Cisco Fell: Outsourcing and Its Perils,” s+b, Third Quarter 2001: Warning signs from the last wave. Click here.
  6. Tim Laseter, “When Offshoring Isn’t a Sure Thing,” s+b, Fall 2004: How transportation costs, labor intensity versus capital intensity, and market responsiveness play into decisions about offshoring. Click here.
  7. For more business thought leadership, sign up for s+b’s RSS feeds. Click here.
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