MUMBAI - Although the
concept of business process outsourcing continues to
instill much fear and loathing in Western nations and
remains a constant area of attack for politicians,
little is heard about the actual cost-saving advantages
that accompany this controversial practice. But a report
released by global research firm Deloitte Touche
Tohmatsu supports company claims that offshoring is
becoming a necessity for survival in today's highly
competitive global market.
Deloitte
Research conducted a survey of offshoring practices in the
global communications industry. The study was completed
in December and featured 42 of the world's leading
communications operators representing all three major
segments: fixed, mobile and cable. The sample included
10 of the world's top 20 operators on a revenue basis,
and Deloitte estimates that the survey sample represents
30 percent of total industry revenues based on 2002
results. The sample was drawn from Africa (17 percent);
the Americas (12 percent); Asia-Pacific (14 percent);
Central Europe (7 percent); and Western Europe (50
percent).
Offshoring includes ventures that are structured
as outsourcing contracts (either with local firms
or via multinationals), joint ventures or wholly
owned subsidiaries. Pioneering companies in the
communications industry and other sectors are already
using offshoring to reduce costs without sacrificing
quality. But what does offshoring really deliver?
Benefits For most companies, the
primary goal of offshoring is cost reduction, according
to the Deloitte report, which is titled "Making the
Offshore Call: The Road Map for Communications
Operators". Early adopters in the communications
industry have reported initial savings of 20-30 percent,
with additional savings expected as operations increase
in efficiency and scale.
Some companies in other
sectors, such as financial services, report cost savings
in excess of 40 percent. Based on operators' responses
to the survey, the report calculates operators will save
at least US$14.5 billion annually from offshoring by
2008.
Exceptionally low wage rates and
increasing education levels make it possible for
companies to hire offshore workers who are even more
qualified than their existing staff - and still save
money. Deloitte claims the result is an alluring
combination of lower costs and higher quality, with
growth in data applications expected to further drive
the need for workers with superior technical
qualifications.
For example, call-center staff supporting
broadband technology require greater technical
proficiency than those handling voice services such
as call waiting. Reduced time to market is
another key benefit. And by taking advantage of time-zone
differences, companies can create a 24-hour working day,
allowing them to accelerate development of product
offerings and technology applications.
According
to Deloitte,
time to market will be increasingly
important for operators as the intensity of competition
ratchets up. For most companies, the economics of
offshoring are simply too powerful to ignore. Deloitte
says offshoring has the potential to improve the
competitiveness of the entire global communications
industry, driving down the overall cost structure, and
leaving those companies without offshore capabilities
struggling to compete.
An offshoring
roadmap Offshoring is already a common practice
in other industries, particularly financial services,
professional services, and high-tech manufacturing with
the communications industry following quickly. Companies
generally use offshoring for business processes that are
standard, routine and mature, while keeping innovative
and high-value activities at home.
Information
technology was the initial focus for most early adopters
and remains the most common offshore function. Contact
functions, which generally account for a high percentage
of an operators work force, are second in popularity and
are expected to be the next major focus. Operations
functions trail the others, but significant growth is
expected in this area as well.
Different countries adopt
offshoring at different rates. The practice is
already common in the United States, the United Kingdom, Australia,
the Netherlands, Belgium, Denmark and Poland. It is less
accepted in Germany, Japan, France and Italy.
Based on responses to the Deloitte survey, the
company expects communications operators to employ at
least 275,000 people offshore by 2008 corresponding to 5
percent of the industry's global work force.
The
report claims that large international companies will
generally lead the way since they face the most
competitive pressure and have sufficient scale to
overcome the start-up costs and management overhead.
They also tend to be more financially secure, allowing
them to absorb the potential risks better.
Challenges Although offshoring
presents compelling benefits, it also provides some
significant challenges. For most companies, the biggest
concerns are operational complexity and loss of control.
Moving activities offshore and managing them at a
distance across multiple time zones is inherently more
difficult than keeping everything at home.
Language barriers and cultural differences can
also be a challenge, increasing the risk of
miscommunication and possibly making customers
uncomfortable.
Equally detrimental is the
opposition companies are receiving in their home
countries, particularly in the US and the UK, where
unions and other critics of offshoring are becoming more
active, claiming the practice sacrifices local jobs and
exploits underpaid workers in developing countries. With
November elections looming in the US, the issue has
become a political platform in itself, with politicians
at all levels proposing new laws to limit or prevent it.
Legislatures in 35 US states have introduced bills
seeking to address the outsourcing issue, usually by
banning the state from contracting with companies
planning to employ offshore workers. Intense lobbying by
business groups has so far managed to prevent the
majority of the backlash from having much of an impact.
But supporters of outsourcing say that shifting
jobs such as call center positions to India actually
benefits developed economies because it enables firms to
reduce costs and in turn the prices they charge domestic
consumers. Those in favor also claim that creating new
jobs encourages a wider increase in trade between the
two countries in question, however such reassurances do
little to quell the anger of those whose jobs are being
sent overseas.
Cost savings It is no
secret that labor costs are the biggest source of
savings, with wage rates in developing countries as low
as one-tenth the rate of an equivalent resource back
home. Additional savings come from reduced overheads,
including lower costs for recruitment, national
insurance and real estate. Some of the savings are
inevitably lost to increased management overhead,
communications costs, start-up costs and other
administrative inefficiencies. Yet most companies still
report net savings of 20-40 percent.
Exceptionally low wage rates and increasing
education levels in developing countries make it
possible for companies to hire offshore workers who are
even more qualified than their existing employees and
still save money. In the US and Western Europe, for
instance, call centers typically employ recent graduates
and casual workers often competing with fast food
outlets for staff. Those relatively unskilled workers
can earn an annual salary of nearly $20,000. Yet in
India, a university graduate capable of carrying on a
technical conversation can often be hired for a quarter
of that amount. Staffing call centers with workers who
are both affordable and technically competent will be
increasingly important as communication applications
become more complex.
India Among the
offshore contenders, India is currently in a class by
itself. Relatively speaking, it has highly educated
workers with strong English-language skills and a solid
work ethic.
Because it has been in the
offshoring game the longest, it has deep experience and
a top-notch infrastructure making it easy for companies
to get their off-shore operations up and running
quickly.
Within Deloitte's sample, the
company says India was by far the most popular offshore
location, both for operators who were already working
offshore and those that were still considering their
options.
Ironically, India's biggest challenge in
the short term might be its own success. Rapid growth in
offshoring is creating a shortage of qualified labor,
driving up costs and threatening quality. Pay increases,
which in 2003 were in double figures, far outpace the
global average. Staff turnover is a growing concern. And
local companies are finding it increasingly difficult to
recruit qualified workers. One common approach for
starting a new offshore company is poaching an
incumbent's workforce by offering higher wages. And
according to recent reports, certain positions that used
to require a technology degree are now being offered to
anyone who can speak English and use a computer. Wage
inflation has even spawned a wave of secondary
offshoring, with some suppliers in India subcontracting
their most routine processes to China.
On
the political front, India's tensions with Pakistan
remain a concern despite recent positive developments
and a broadening dialogue between the two governments.
India's problems create an opportunity for other
countries wanting to get in on the action.
Other players Second-tier players such as
China and Mexico are moving aggressively to fill the
gap, offering plentiful labor at lower prices as well as
other potential advantages such as a more favorable
geographic location.
It is
worth noting that most second-tier countries have at
least one significant weakness that makes them less
attractive. Ireland, which during the 1990s emerged as the
preferred call-center location for European technology companies,
is losing its competitiveness because of wage inflation.
In
China, the main issue is a shortage of English-language
skills, although that problem can be addressed over the
medium term. For some other countries, the primary issue
is political instability.
But regardless of how
detrimental offshoring becomes to a company's survival,
job protection will always be an area of contention in
the West, and opposition will remain unless the benefits
are noticeably reaped by everyone.
