What's next for outsourcing?

Outsource Magazine
On August 29, 2012 http://www.outsourcemagazine.co.uk The global crisis and subsequent economic downturn caused significant operational and financial challenges for most US firms, and now we see a similar play-out in Europe. The next round of outsourcing is being driven out of compulsion to cut cost aggressively just to stay in business and protect margins. Years back, Harvard Business Review declared outsourcing as one of the most important management practices of the last 75 years. The current downturn is accelerating it; earlier outsourcing was merely focussed on basic functions like customer care (call centre), AP, IT help desk etc., but now it encompasses the entire organisation. So whats next? Post-crisis, more and more firms are relooking at what their core functions really are. Increasingly they are finding things that can be moved or outsourced. So, the extent and complexity level of functions outsourced is growing from call centre to sales/collections; from AP to GL accounting; from IT help desk earlier to software development now. IT was the most common outsourced function, but now others like F&A, HR, Legal are also getting outsourced. The deal size of outsourcing contracts has increased significantly over the last decade. The choice of outsourcing destinations is expanding from India and the Philippines earlier to Eastern Europe, China and South America now. So let us take a closer look at things to come and how all of this is impacting us. Deal size (F&A) After IT, F&A is the second most popular segment and is also one of the fastest growing. Companies like British Telecom, JP Morgan, HSBC are all outsourcing their F&A in a big way.

BPs F&A outsourcing was an industry first with a contract worth $20m*. By 2002, it was extended to all businesses globally valued at $1.5bn*). Services provided: GL, Retail site accounting, Inventory accounting, AP.

British Telecom outsourced their global F&A to Accenture in Czech Republic, India. Accenture provides management reporting, financial planning, GL close, budgeting/forecasting etc. (Deal value estimated at $575m/5,000 FTE*).

JP Morgan outsourced nearly $400m* of IT, F&A and back office functions to India which is part-vendor managed (Cognizant/TCS/Accenture) and part captive centre (4,000* jobs offshored, mostly IT / F&A). HSBC is a market leader; it has so far created 20 Centres of Excellence (according to hsbcglobalsourcing.com) in various emerging markets like India and the Philippines to support its global businesses and outsourced its entire shared service function (IT, HR, Finance, Procurement).

In one of the first large contracts for the UK banking industry, Lloyds TSB outsourced HR, AP, T&E, fixed asset accounting to Xansa (later acquired by French firm Steria). The Steria (ex-Xansa) contract included processing 330,000 invoices* and 144,000 T&E bills* from its offshore delivery centre. (*Source: industry estimates)

Expanding outsourcing destinations India is currently the preferred outsourcing destination due to its low wages and large English-speaking populace. Studies indicate it enjoys as much as 60 per cent market share. The Philippines with excellent English-language skills and infrastructure (but fewer skilled workers) is placed second. Other outsourcing destinations gaining ground are Poland and China. The exhibit below provides a ranking of the top outsourcing destinations.

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Region South Asia South Asia South Asia South East Asia South Asia South Asia South Asia Western Europe South East Asia East Asia Eastern Europe East Asia South America East Asia South America

Country India India India Philippines India India India Ireland Philippines China Poland China Brazil China Argentina

City Bangalore Mumbai Delhi NCR Manila NCR Chennai Hyderabad Pune Dublin Cebu Shanghai Krakow Beijing Sao Paulo Dalian (Dairen) Buenos Aires

Status Established Established Established Established Established Established Established Established Established Established Emerging Emerging Emerging Emerging Emerging

Currently US and European cities dont appear in top outsourcing destinations (except Dublin/Krakow). But, strong political will, government incentives, and a positive economic climate will allow US and European cities to grab market share through nearshore and insourcing deals. This will happen as Tier 2 cities in Europe (like Dublin and Glasgow) and the US (like San Antonio) will come up as preferred destinations with the added benefits of being in the same timezone, excellent talent pools, competitive cost

and similar culture. More and more firms are tired of timezone differences (8+ hrs between US and India); frequent long-distance travel, higher communication costs and cultural differences causing team friction and clashes offshoring fatigue and nearshoring will avoid all these issues. So, lets understand whats being outsourced now and what is in store for the future (in the F&A domain at least). Growing complexity level Low-End (routine, simple, high-volume): Processes such as AP, T&E claims, AR, Payroll, and Settlements are low-end, simple and routine. They represent the bulk of functions outsourced with higher success rates as witnessed in several outsourcing deals since 2000s. Mid-End (slightly complex): Post-crisis, processes like GL accounting, Reporting, SOX that are somewhat complex are getting outsourced. Even in this segment slightly more complex ones like Budget, Tax are rarely outsourced but in the not-so-distant future they will get nearshored or insourced within the organisation. High-End: Highly complex & analytical functions like Planning, Board/Investor reports, Reg Report, Accounting Policy are still at their principle locations with a low probability of outsourcing. But in future these functions will get consolidated in the organisation through insourcing and organisations will create their own centres of functional excellence to manage such complex work.

Per the exhibit above, jobs attached to low-end processes (grey shaded area) are currently the bulk of stuff outsourced. Looking at the trend over the last three to four years, the complexity level of processes outsourced is rising (i.e. the grey shaded area is increasing). The future of outsourcing and offshoring Companies are realising outsourcing is one of the most potent management tools ever invented to drive efficiency. The future of outsourcing is bright and the model will continue to grow. Both governments and organisations in the western world need to work closely to identify strategies to take advantage and fight South Asian dominance. Here is some insight into the future of offshoring/outsourcing:

Excellence Hubs: Large firms will follow their peers (like HSBC) by creating Centres of Excellence but they will do this locally in Europe/Americas. They will move jobs from multiple high-cost cities to single low-cost locations, where they will establish best practices, standardise similar processes and create Excellence Hubs.

Insourcing/Nearshoring: Insourcing or nearshoring will get increasingly popular and will be the preferred choice of governments, people and firms alike. Insourcing is where work is performed by a specialised team in the firm. Nearshoring is where work is performed by another firm locally, sometimes just around the block. Both will benefit to help preserve jobs locally in the Americas and Europe.

Service Level Agreements (SLAs): In most large firms, shared services in general and F&A in particular, work without hard KPIs or service level targets is simply looked as fixed and is allocated out to frontline business. One reason offshoring has worked wonders is due to internal SLAs (for captive units) and vendor SLAs established

and followed rigorously. Similar SLAs will be the norm in future to ensure timely, high-quality, and cost-effective

delivery of tasks. Benchmarks: Outsourcing helped firms innovate, standardise and generate lower costs through benchmarks. This will be mirrored locally while establishing insourcing deals. A future focus will be to improve quality through, for example, Six Sigma programs. Best practices in one division dont benefit other teams doing similar work due to Silos, and this will change. Conclusion Outsourcing offers many benefits (cost, quality, innovation) and is now the most potent tool available to management as it drives efficiency and excellence. Organisations that outsource their non-core activities can yield up to 40-45 per cent cost reductions (Source: NASSCOM). As outsourcing continues to grow it has significant impact on labour markets. This in part explains why unemployment is at record levels even though companies are showing good turnaround and churning decent profits. Outsourcing is resulting in skill obsolescence and higher unemployment among youth, and the semi-skilled workforce. Workers associated with low-end jobs are increasingly finding their skills getting obsolete. Outsourcing will continue to be the preferred and strategic choice of firms to lower costs and improve processes. Governments, firms and workers in Europe and America need to work closely to create a favorable political, economic and incentive program to take advantage of it. (Here is a recent example: the UK has recently stated that it is not restricting outsourcing rather, the country is encouraging service providers to set up delivery centres in the UK.) Eventually, both nearshoring and offshoring will co-exist with the low to medium end of the work increasingly offshored to India and/or China and complex, highvalue processes in finance consolidation, group reporting, planning etc. nearshored in Europe and America.

About the Author Ash Bisaria is VP at Credit Suisse. http://outsourcemagazine.co.uk/whats-next-for-outsourcing/