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The Way Business Is Moving

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Issue Date: July 2005

Offshore panacea?

July 2005

How can the IT professional be confident that offshoring BPO will deliver anything more than negative publicity and customer dissatisfaction? John O ’Brien investigates.

The cost advantages of sending administrative work to low cost destinations such as India and the Philippines is the single largest driver behind the ever-increasing offshore drift. However, negative publicity has continued at an equally rapid pace, from blue and white collar workers, to the political world, through to customers themselves, who are ultimately the recipients of any adverse fallout.
According to Gartner, the offshore business process outsourcing (BPO) market is set to grow 65% in 2004, bringing the market to $3bn, or 2,3% of the $150bn worldwide BPO market. However, this rapid growth rate only highlights the immaturity of the market, and Gartner predicts that adoption will slow through 2007, before reviving towards the end of the decade. But some recent problems could threaten to derail this booming trend.
This year, the UK's National Health Service (NHS) decided to send medical secretarial work to India. But within a matter of two months, errors had already leaked into the system. Omnimedical, the BPO provider engaged to do the work, had sent back notes to UK hospitals rewriting diagnoses of various patients' ailments. A 'Eustachian tube malfunction' had become a 'Euston station tube malfunction', 'phlebitis [in the] left leg' had been renamed as 'flea bite his leg', and a 'below knee amputation' had been catalogued as a 'baloney amputation'.
Either shocking or amusing, depending on your point of view, these errors highlight some serious problems, such as the ability of the workers to translate information, and their understanding of the technical nature of the business functions they are supporting. Given these drawbacks, why are so many organisations potentially putting cost-cutting before the immediate needs of their customers, and what has been the response to this?
MORI research commissioned by LloydsTSB Group Union in April 2004, shows how negatively customers view offshoring in the banking sector. MORI found that 45% of bank customers would consider leaving if their accounts were managed in India, and for LloydsTSB customers, this was slightly higher at 49%. It made no difference for 40% of those interviewed, but only 2% said that offshoring these services would encourage them to stay with their existing bank.
Cliff Justice, multishore practice leader at advisory company EquaTerra, says the financial impact of offshoring means it is no longer just the domain of the IT professional: "The decision to offshore has moved from the CIO to the CFO because of the cost advantage and the access to labour," he says. Consider the maths: an Indian call centre worker is paid an average of $1,50 per hour, compared to one in the US on $12,57 per hour, while an Indian computer programmer is paid $8,000 per year, compared to one in the US paid $78,000 (Source: Institute for Policy Studies).
Cliff Justice, EquaTerra multishore practice leader
Cliff Justice, EquaTerra multishore practice leader
The pursuit of higher corporate profits is not something that sticks too well with those losing their jobs as a result. However, Alex Blues, head of offshore outsourcing at advisory company Orbys Consulting, says that if handled in the correct way, offshoring can free up resources for staff to perform more strategic functions at home: "Lots of companies are thinking about offshoring BPO, but they are not making people redundant necessarily, but rather they are moving people into higher-level jobs. This has happened with Barclays and HSBC who have done this to remain competitive."
Justice at EquaTerra, meanwhile, says that the media has distorted the scale of the problem: "These issues of poor performance are such a small percentage of what happens, and therefore are not the real issue," he says. "It comes down to a bad record of a particular company and poor selection of suppliers."
BPO projects best performed offshore are low-impact back-office services such as administration and transaction processing. As Justice points out: "The offshore model is beneficial when you take tasks that are repetitive, things which you would automate but cannot. Call centre and transactional BPO work are being done offshore. Offshore players say they do complex analytical work, but it is mostly transactional work such as processing and payroll."
The financial services sector, where the majority of BPO activity is taking place, is experiencing some of the biggest problems. Issues such as poor customer service and potential infringement of data protection laws are causing major concerns for consumers.
In a recently reported case at banking giant HSBC, a customer called into an offshore call centre to notify the bank of her husband's death. Rather than a sympathetic response to the news, the operative is alleged to have given the 'cultural sensitisation' training mantra they were taught, asking whether the widow had seen Coronation Street the previous evening.
In the UK, numerous institutions are facing criticism for their plans to offshore BPO services. UNIFI, the finance union that supports some of the largest financial companies in the UK, is up in arms with HSBC and LloydsTSB over their offshoring strategies. UNIFI is petitioning customers of HSBC to stop the bank offshoring any more jobs following a survey of over 2000 staff, which found that 93% believed customer service was declining as a result.
Another critical concern for the customer is data protection, and Rod Flavell, CEO of UK services company FDM Group, says that companies are taking the issue too lightly: "There are no laws in India for data protection. Most major corporations can take information offshore without impunity even though they should not. However, there is nothing that can fundamentally stop them."
Speaking at a recent conference, Michael Sinclair, partner at law firm Simmons & Simmons, said: "A question often asked by the client is what happens if a server is located outside the EU but data is processed in the EU? This is a case of offshoring outside of the EU, and therefore clients need to build-in proofing terms into outsourcing. Our experience in offshoring is that they respect customer data, but we are not sure that customers understand what is required by the Data Protection Act."
In the firing line over this issue is LloydsTSB, which is planning to move a further 1500 call centre jobs from the North East of England to India by the end of 2004. The company is currently being sued by a customer for sending her personal details offshore without express consent, and LloydsTSB Group Union's general secretary Peter O' Grady, says that the bank could be flouting the UK's Data Protection Act in doing so: "This is sensitive information and therefore we need clarification. We feel that written consent is already given when a customer signs up for an account, but the argument is that they do not know that information is being passed outside the EU."
Things can go very wrong when companies attempt to push higher-impact work offshore in order to boost both margins and revenue generating opportunities. Financial services giant, Capital One, experienced what is arguably the biggest mess to date in March 2004, when it discovered that about 30 of its telemarketing staff at BPO provider Wipro Spectramind had been offering its US customers additional credit that had not been authorised, by extending special offers, and increasing credit available. These employees were dismissed by Wipro Spectramind and Capital One pulled the plug on all outbound telesales work with the company.
These problems arise due to the nature of sales-led outbound calls. Telemarketing and outbound call-centre contracts often employ performance-based or gain-sharing incentives, where an agent's pay is determined by the amount of additional revenue generated for the company above and beyond agreed base levels.
One of the perceived advantages of offshoring BPO is the favourable tax breaks that geographies like India offer. However, in India there is a lack of clarity on how this works because the law states that foreign companies are taxable on their income if the core revenue-generating business has been carried out offshore in India, and only when the BPO unit has created a 'permanent establishment' in India. No tax is charged when services are considered to be 'incidental business processes', such as an Indian call centre answering calls for a European client.
The problem arises when Western companies are seen to be permanently settled in India and using BPO services to deliver 'core' business; for example, the services of a travel agent, software developer, software maintenance, investment consultant or debt collection service. This has particular importance for any joint ventures and acquisitions and captive BPO facilities in India, which are using their operations in India to deliver core business activities. The Institute for Policy Studies and United for a Fair Economy, argues that inequities are rife in offshoring.
The Institute found that the CEOs of the 50 largest US-based outsourcers of services jobs were profiting personally from the increased profits that offshoring generated. Between them, the average salary was $10,4m in 2003, 28% higher than the average large company CEO, who has seen a pay increase of 9% over the year. The report found that between 2001 and 2003, the 50 top CEOs made $2,2bn in salaries, while offshoring some 200 000 jobs. Sanford Weill, CEO of Citigroup, had the biggest pay packet in 2003, earning $54,1m in salary and options, up 305% on 2002.
Citigroup is also one of the biggest spenders globally on offshore BPO services, with 8000 employees in India, including 40 in Mumbai working in investment banking, equities and research. Citigroup sources a broad range of back-office functions from Eserve International, which employs 5000 employees and provides transaction processing, technology and call centre services. But is there anything wrong with using offshore BPO to maximise profits?
Forrester believes that 3,4 million service jobs will be sent offshore between now and 2015, and this statistic was being used as a weapon by Republicans in the run-up to the US presidential elections.
In the US, 37 states are attempting to ban offshoring public sector contracts and 15 have proposed bills to make it a legal requirement for contact centre operatives to reveal where they are calling from. California and Arizona aim to make it illegal for healthcare providers to send their patients' records outside the US. The state of Pennsylvania has gone one step further, aiming to give tax incentives for companies that keep their call centres within the state. But just as the government sector has become openly more fortress-like towards offshoring, the corporate world has become more covert. EquaTerra's Justice says that a huge amount of offshore work goes on below the radar. A lot of companies are doing this," he says. "Out of the Fortune 500, approximately 40% to 50% of companies have operations offshore."
So what are the offshore BPO providers doing to allay concerns? In August 2004, Indian software and services market research company NASSCOM hired companies such as PricewaterhouseCoopers, Deloitte, and Ernst & Young to carry out an audit of security processes of 860 member companies in an attempt to calm fears regarding privacy and data protection weaknesses.
Subramanian Ramadorai, CEO of Tata Consultancy Services, India's largest offshore company, meanwhile, says that the loss of jobs offshore is not as severe a problem as is believed. "If you actually look at the number of jobs being 'offshored', it is a very small proportion," he says. "In most cases, what we are helping companies with is jobs that they did not have the staff to do."
There is also, it seems, something positive stemming from the well-publicised problems, according to Orbys's Blues, as companies are now scrutinising their plans in order to minimise negative fallout: "We are seeing the buyer going through analysis of what is core and critical. And we are seeing more sharing of information with staff and unions," Blues says. "Therefore, from an internal management perspective, if it is well handled there may not be a negative impact."
Subramanian Ramadorai, Tata Consultancy Services CEO
Subramanian Ramadorai, Tata Consultancy Services CEO
CBR opinion
Offshore BPO has built up unstoppable momentum given its two driving forces: lower costs and greater profits. Although the market remains in its infancy, companies will eventually iron out some of the issues surrounding poor customer satisfaction, data protection, and law and tax, however not before many more embarrassing failures have hit the headlines. It will be a case of trial and error, but one thing is for certain, bad experiences and negative publicity are not going to hold it back. As CBR went to press, for example, UK insurer Royal & Sun Alliance announced its intention to offshore 1200 back-office and call centre jobs to India, after a six-month pilot.


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