The "secret" that vast savings can be obtained by outsourcing work to India is no longer a secret. In the mid '90's a few enterprising firms were able to confirm their theory that highly educated, but much lower priced, labor in India could perform knowledge based work that had previously been performed only in the U.S. and Europe. Early pioneers such as McKinsey and General Electric blazed a trail in India and laid the foundations of what would become a thriving Business Process Outsourcing industry. In a few short years that trail was traveled by executives from a host of Fortune and FTSE 500 businesses. With every passing year the "wilderness" in India was being transformed into the worlds leading location for knowledge work, with a huge number of BPO's to choose from, or if you prefer, numerous corporate parks built expressly to support outsourcing. Captives could now choose to completely manage a center or bring in partners who can recruit, train or handle other aspects managing the Off Shore center. With so many different choices, should a firm choose a captive, a BPO or a hybrid? This article will explore the key drivers in your decision to build or buy an offshore center.
HISTORY
The first wave of what we now call Off Shoring began just over a decade ago when American Express and CitiBank began hiring accountants in India. Based on their success, numerous other firms joined the race to India. The two most influential firms were McKinsey and General Electric. They established that a wider range of knowledge work could be performed in India, and then they became the evangelists of Off Shoring. GE's storied CEO, Jack Welch, made it a personal mission to show the world the value of Off Shoring. McKinsey, the world's largest consulting firm, turned it's expertise in Off Shoring into a new consulting practice. As the Alumni of both firms moved on and migrated into many of the world's largest firms these Evangelists spread their gospel and brought Off Shoring to world just as the world entered the 21a Century.
But this next wave of Off Shoring was a bit different than its predecessor. GE and McKinsey not only moved into existing corporations, they also created new corporations. Convinced that there were better ways to bring the benefits of Off Shoring to a much wider audience, they took the knowledge gained from running captive sites and created a new industry, Business Processing Outsourcing. These BPO's allowed firms to benefit from overseas labor markets without the long lead times and steep financial commitments required to set up a captive facility. As India now settles into the third wave of Off Shoring, new clients are seeking more flexible solutions for more complex work. Knowledge Process Outsourcers, such as Integreon, are providing integrated solutions in the field of analysis, financial and legal support by: building dedicated delivery centers for clients; providing "utility" services that clients can use on demand; and by working inside of a client's captive center to provide recruiting, training and other services.
CHOOSING A MODEL
While BPO's provide quick ramp up, their expertise does not come free. The price of labor offered by a BPO may be less than on shore, but it is considerably more than the price they pay for staff. If your firm is taking the risks, investing the time and funding the creation of an offshore center, shouldn't it be your firm that receives the maximum possible benefit from the decision to outsource? Is a captive center a better option?
The current generation of outsourcing is a formidable competitor to the traditional captive center. Firms interested in Off Shoring no longer need to incorporate in India, build a physical site for their center, hire local management, and get involved in all of the details necessary to develop a world class service center. Captives will probably continue to be a viable option for firms that already own Off Shore offices, or are under special legal restrictions, or will build a facility that employs thousands of workers. But for operations of a few hundred and less, an outsourcing partner may be the best option.
COMPARING COSTS
To understand how an outsourcer can deliver a product at a lower cost and still earn a profit, let's compare the development of a Captive vs. a BPO/KPO. Because the outsourcer has a facility and staff, a client can quickly get started and produce results. Alternatively, the Captive must first gain consensus from a large number of stakeholders (Legal, HR, IT, Procurement, Corporate Security, Facilities Management, etc.). The firm must them agree to fund this experiment, costing hundreds of thousands to millions of dollars; the captive will then need to wait years to see if the experiment has worked as expected.
In this hypothetical model, we look at a center of a little over 100 people that costs $ 10 million a year to operate, with most of those costs paying for staff. This model assumes a top level manager of the center, less expensive managers at the next level, workers with numerous titles or levels, and multiple shifts working 24x7. Over the next several years the two models will try to move half of their capacity offshore. Here is how the models compare.
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BPO/KPO |
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Captive |
6 Months |
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Completed pilot stage, in early production (Accrued savings $200,000) |
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In discussion about legal, technical, and financial requirements to work offshore (Accrued savings $0) |
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12 Months |
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Productive capacity added Off Shore (Accrued savings $800,000) |
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Review potential sites, examine candidates for manager, HR, Training, IT, etc. (Accrued savings $0) |
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18 Months |
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Reduction of on shore administration, support and space needs (Accrued savings $1,900,000) |
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Hiring of manager, lease of facilities, purchase of equipment, build out of space (Accrued savings -$700,000) |
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24 Months |
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Use best practices developed by outsourcer, further reduction of administrative overhead (Accrued savings $3,500,000) |
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Begin pilot and early production phase (Accrued savings -$370,000) |
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30 Months |
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Pause, allow changes in operation to settle in and (Accrued savings $5,000,000) |
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Expanded production, review if program is meeting expectations (Accrued savings $750,000) |
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36 Months |
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Prepare for new saving or use existing capacity to deliver more services (Accrued savings $6,700,000) |
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Look for deeper onshore reductions (Accrued savings $2,200,000) |
As the table shows, by rapidly delivering cost savings the BPO/KPO model has a huge advantage in initial savings. The up-front outlay needed to fund a Captive site further increases the gap in savings between the two models. By year three the Captive model has finally paid back it's costs and is beginning to deliver significant savings, but it is still far behind the savings offered by the BPO/KPO model.
Every firm works differently. Some might be able to achieve savings sooner; some may need to take longer. Many managers would be challenged in keeping the captive site running long enough to demonstrate savings, especially if the program began because of a pressing need to deliver savings.
We also assume in this model that both the outsourcer and the Captive are capable of achieving similar levels of success in recruiting, training and managing costs. In reality, firms with little experience in the offshore market will find it difficult to replicate the success of a firm with considerably more experience and resources. Perhaps the most important consideration is that the ultimate managers of a captive site have other issues to deal with than Off Shoring. A manager can only maintain focus on a large and long term project for so long. "Off Shore Fatigue" has become a fact of life for some early adopters, and one of the contributing factors to the decline in the captive. Time will tell if the BPO/KPO model can avoid the mistakes of the Captive, but adding to the resources that are available to a manager rather than having that manager split their resources between on and offshore management seems like a better formula for success.
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