BUSINESS PROCESS OUTSOURCING AS A GLOBAL · PDF fileBUSINESS PROCESS OUTSOURCING AS A GLOBAL...

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Transcript of BUSINESS PROCESS OUTSOURCING AS A GLOBAL · PDF fileBUSINESS PROCESS OUTSOURCING AS A GLOBAL...

  • BUSINESS PROCESS OUTSOURCING AS A GLOBALPHENOMENON: A GLIMPSE OF SELECT COUNTRIESIN NORTH AND SOUTH

    Dolly Sunny*

    INTRODUCTION

    Outsourcing is an activity wherein a firm or client enters into an agreement with a provider orvendor to perform an activity that was previously performed by the firm (Dutta and John, 2005)Outsourcing is not a new concept, particularly in the Indian context. It dates back to the age ofthe Ramayana, where Muni Vishwamitra, in the Ramayana, while performing AshwamedhaYagna, asked King Dasarath of Ayodhya to help him carry out his yagna in a peaceful manner.For this he requested the King to send Lord Rama and his brothers, or rather, outsourced securityto Lord Rama. Thus it has been around in different forms earlier, but the importance of it has notbeen felt as much as it is felt in todays age of cut-throat competition. (Singh and Dutta, 2004).

    Outsourcing is the delegation of tasks or jobs from internal production to an external entitysuch as a subcontractor. Most recently, it has come to mean the elimination of native staff tostaff overseas, where salaries are markedly lower. The concept started with Ross Perot when hefounded Electronic Data Systems in 1962. (www.outsourceking.com)

    AN OVERVIEW OF BUSINESS PROCESS OUTSOURCING

    Business Process outsourcing more and more takes the form of Offshore Outsourcing, wherewhole business processes including support and development are outsourced. The client is usuallyfree to choose who provides the outsourced business processes, while stock markets press thefirm to do more for less. This requires that managers search out the cheapest sources they canfind. In countries like India and China, firms like IBM, Microsoft, Hewlett Packard, and Novellchoose to get BPO business services from sub-contractors in these countries or movemany development and support jobs there. Smaller businesses can also take advantage offreelancing on the Internet to get smaller projects done by offshore developers at minimum cost.(http://www.24x7bpo.com/aboutbpo/bpobenefits.htm)

    In short, off-shoring is the relocation of jobs within a firm to a lower-cost location on a longterm basis. For example, JP Morgan Chase has recently shifted some of its economic researchwork to Mumbai. So the firm is off-shoring its process to India. These firms that offshore areknown as captive processing centers or captive units. On the other hand, BPO is the contractingof jobs to a third-party firm either onshore but increasingly in offshore locations. Many call

    * Professor, Department of Economics, University of Mumbai, Vidyanagari PO, Mumbai-98,([email protected], [email protected])

  • 2 IJRQOM

    centers in India are third party firms that provide services to foreign firms. There is also a thirdtype of off-shoring operation known as the Joint Venture (JV) model. In a JV, often called abuild, operate and transfer model, two entities own the operation. For instance in December1998, Satyam Computers entered into a JV with an affiliate of GE Industrial Systems. The JVfirm provided the GE affiliate with engineering design services, software development andsystem maintenance services.(www.BPOIndia.org).

    In the corporate environment, the term outsourcing often refers to a particular type ofoutsourcing, business process outsourcing (BPO). BPO occurs when an organization turns overthe management of a particular business process such as accounting or payroll to a third partythat specializes in that process. The underlying theory is that the BPO firm can complete theprocess more efficiently, leaving the original firm free to concentrate on its core competency.Through the right mix of business process improvement, labor arbitrage and technologyenhancements, BPO is aimed at reducing cost, improving service levels and thus improving theenterprise value of the business processes. Blending qualified workforce with a faster adoptionof well-defined business processes leads to higher productivity gains without compromising onquality. (www.24x7bpo.com/aboutbpo/whatisbpo.htm)

    Globalization, a process of economic, political, social and cultural integration is acceleratingthe transformation of the world into Global Village. The process is driven by an increasingdegree of liberalization of restrictions on the mobility of goods, services, capital and technologicalknowledge. Globalization is recognized as one of the most dynamic aspects of the corporatestrategy of both survival and success through expansion of business opportunities (Gupta, 1997).

    While taking the years 2002 and 2003 together it can be stated that the last three quartershave registered a time of growth for the BPO segment. Smaller facilities and providers are onthe verge of being acquired and hence the consolidation trend has started to be the next strategyfor horizontal growth. However, the uniqueness of the BPO segment is the domain expertisethat each firm has developed, for instance, ICICI Onesource, for financial services and SpeedwingWorld network services, now known as WNS, for airline processes. (www.BPOIndia.org) Indiaexcels in delivery and service quality standards. Some of the BPO firms of India have emergedas benchmarks for newer facilities in Asia and the Southeast- Asian region. Indian BPO serviceproviders could plug the gaps in process efficiency. A large firm is skeptical to outsource itsbusiness process on the grounds that the service provider may not actually understand the businesscompletely, but this has been changing in the last 18 months. Again, consolidation is the key forthe continuation of this sentiment. Consolidation improves the knowledge base and learningcurve for newer processes, which would make the development of these newer processes fasterand more efficient. This is crucial, because most of the BPO contracts, which Indian BPO firmsget, are those with a high level of direct interaction with customers. A small foul-up would havea direct impact on the clients business image. The similar kind of crash experienced by infamousdot com cannot be repeated in the case of BPO segment. (www.BPOIndia.org) The new breedof VC backed third-party BPO vendors in India has the best of the domain knowledge, mainlybecause the people who set up these are ex-employees in top IT-services firms with a strongcommand over IT-outsourcing concepts and industry requirements. Hence, they are able toplace themselves accurately in the value chain offering world class customer contact centersand back office processing services providing absolutely spot-on voice/data connectivity and

  • Business Process Outsourcing as a Global Phenomenon: A Glimpse of Select 3

    integrated services. (www.BPOIndia.org) Outsourcing implies loss of work from stategovernments of USA to Indian BPO firms. From a revenue point of view, these losses of contractsdo not adversely affect the BPO earnings as the proportions of such contracts are far lesser thancorporate BPO contracts. Although the bills proposed in the states of USA did not directly hintat the termination of offshore contracts, it placed a minimum wage requirement. The bills wantedgovernments of the respective states to pay American wages to the service providers, whichallegedly amount to about $ 6 USD an hour as against local wages which are far lower. Thismove indirectly hinted at the termination of offshore contracting. (www.BPOIndia.org) HoweverBPO and call center industries face certain challenges related to future growth. First, the issue ofinvestor sentiment. Secondly, Indian CEOs are detained in a foreign land for Visa irregularitiesand the unexpected L1 Visa restrictions. These hurdles will not affect the Information TechnologyEnabled Services( ITES) and BPOs. The ITES-BPO businesses is affected by the investorsentiment. In these situations, growth can still be sustained mainly because of the extensivedomain knowledge, the ability to lower costs and delivering quality services that India hasexcelled in. (www.BPOIndia.org).

    WHY HAS BPO BECOME SO IMPORTANT?

    BPO occurs when a firm turns over responsibility for an internal business process to an outsideservice provider. The customer will transfer the knowledge the customer uses to perform theprocess. The main IT processes outsourced to India are applications management like IT servicesITES, call centers and back office operations. It includes data conversion, data entry, insuranceclaims processing, medical transcription and data scanning, ITES.Firms are moving theirnon-core business processes to outsource providers. BPO saves precious management time andresources and allows focus while building upon core competencies. The number of functionsbeing outsourced is at an increase. Call centers apart, functions outsourced span purchasing anddisbursement, order entry, billing and collection, human resources administration, cash andinvestment management, tax compliance, internal audit, pay roll and the list gets longer day byday. In view of the accounting scandals in 2002 Enron, WorldCom and Xerox are keen onkeeping their investors happy by increasing their profits. BPO is one way of increasing theirprofits.BPO is the delegation of one or more IT-intensive business processes to an externalprovider that in turn owns, administers and manages the selected process based on defined andmeasurable performance criteria.

    Reasons for the Popularity

    The population of BPO is associated with factors such as factor cost advantage, superiorcompetency, utilization improvement, economy of scale and business risk mitigation.Theavailability of highly qualified skill pool and faster adoption of well-defined business processeslead to higher productivity gains without compromising on quality. Customers across verticalslike Insurance, Banking, Pharmaceuticals, Telecom, automotive and airlines, are seen to be theearly adopters of BPO. Among the vertic