Onshore Cost Savings Drive North American Rural Sourcing
“The activity has been driven largely by specialist rural service providers, said Everest Group VP H. Karthik. “Clearly, one of the key things driving this is the desire to retain more work onshore.” According to The Everest Group, the factors driving rural sourcing in North America include cost savings relative to US Tier 1 cities, community development and job creation, government support, sensitivities towards offshoring, cultural fit and proximity to the client, access to an alternative talent pool, and the good physical infrastructure already installed domestically within the US.

Karthik explained that while the focus has largely been on the rural sourcing phenomenon in North America, it is also taking place globally in places like India. Based on Everest Group research covered during the presentation, there is a savings vs. scalability and skills tradeoff. Still, the cost savings are often significant and quantifiable.

For example, creating an index with Chicago as a benchmark of 100, indexed operating costs would be 89 for a tier 2 city like Jacksonville, Florida for a savings of 11%; a tier 3 city like Sioux Falls, Iowa rendered an 84 (16% savings), and rural towns like Jonesboro, Arkansas scored a 77 for a 23% cost savings when compared to US tier 1 cities like Chicago.

Scalability Poses Rural Sourcing Issue
Still, scalability is an issue as is the reduced talent pool. In rural towns, a call center might typically consist of fewer than 100 extensions and there may not be enough of an available talent pool to scale up considerable from that type of facility. “While the business case is still nascent, rural sourcing could offer selective opportunities in companies’ global sourcing portfolios,” summarized Karthik.

“This needs to be viewed in the context of the overall strategy and the trade-offs with scalability and breadth of skills,” he stated. “Also given the smaller size of these markets, there is a significant personnel disadvantage. If you have two or three players in a market, it could get saturated.  So those are other issues the companies need to think about in evaluating the business case for rural ops.”

Outsourcing/Offshoring Hold Steady
Taking a broader look at overall global BPO performance, Everest executives described a scenario where outsourcing and offshoring activity has held steady during Q1 2012, when compared to both a year ago and to Q4 2011.

“There were 441 outsourcing transactions in Q1 of 2012 compared to 433 during Q4 2011, while the number of captive outsourcing centers set up decreased from 23 to 18 during the same time period,” said Amneet Singh, Everest Group VP.  Singh went on to describe how the quantity of North American deals has dropped from 173 during Q4 2011 to 150 during Q1 2012, but this was offset by an increase in Continental European deals, from 104 during Q4 2011 to 137 during Q1 2012. The largest contributor to the increase was the telecommunications industry, followed by the public sector. Healthcare actually saw a decrease in outsourcing deals globally.

Top Performer Dominance Slightly Drops
In 2008, The Everest Group constituted an index of global BPO service providers for the sake of tracking the industry. This index includes global providers such as Capgemini, Accenture, Tata Consultancy Services, IBM, Unisys, Infosys and others. Measuring industry trends against these performers, Everest indicated that the top nine service providers in terms of deal activity in the Q1 2012 drove 19% of the BPO transactions, compared to 22% in the previous quarter. Smaller and specialist service providers increased deal share from 78% to 81%, indicating the growth of smaller and diversified providers, and their gaining a foothold in the share of large services transactions.

“Specialist service providers continue to have a meaningful role in the service provider portfolio of large enterprises,” said Singh. “This role is anchored on specialization, predominately on the domain expertise axis, and it is imperative for the big companies to focus on specialization as plan for differentiation.”

Karthik cautioned that though offshore location activity for Q1 2012 is steady compared to Q4 2011, it still reveals a significant decrease when compared to Q3 2011. In terms of service delivery centers set up globally, there were 24 in Asia during Q3 2011 compared to 18 during Q1 2012, 17 in the EMEA region during Q3 2011 compared to just six in Q1 2012, and Latin America held steady; it actually saw an increase from five during each of the last two quarters of 2011 to six during Q1 2012.

Most outsourcing participants are familiar with acronyms such as BPO, KPO, and ITO. However, there is another emerging outsourcing acronym, which is MPO, or Marketing Process Outsourcing. MPO refers to the outsourcing of all activities and processes associated with the marketing function.

MPO: Concept and Practice
To understand the MPO concept better, think about the calls telemarketers make pitching various products and services. This is a basic form of MPO, although the concept extends well beyond sales and lead generation to include the whole gamut of marketing activities. What this means is that MPO is a term that encompasses the traditional sales and marketing function, with a span of control extending to branding, liaising with the media, managing the public relations function, market research and marketing consultancy. In short, a vendor who provides MPO services is expected to take over all the marketing activities of the client and ensure that the end to end marketing activities are handled by the vendor.

SMEs Present Lucrative MPO Opportunity
Though the MPO industry is nascent, with the revenues from this sector totaling a few million dollars at the most, the market is expected to grow with the inclusion of the Small and Medium Enterprise (SME) sector into the MPO orbit. This is expected to change in the coming years because of the need to cut costs due to the fragile economic situation and since the gloomy economy puts pressure on bottom lines, companies, and SMEs in particular, seek whatever cost savings they can get.

For example, since according to an recent article in SME Times India has about 26 million SMEs and 70% of these do not have adequate marketing processes or expertise in the marketing function, there is an untapped market worth billions of dollars in India alone. However, these are early days yet and except for a handful of companies, there are not too many vendors in the MPO segment.

Quantifying and Qualifying MPO Benefits
Considering the fact that most marketing functions in many companies are staffed with temps and contractors, it makes sense to outsource the whole process to third-party vendors and ensure that there is rationalization and optimization of costs. Coordinating with multiple agencies and maintaining relations with the media, two activities that take up most of the marketing department’s time can be optimized if the process is outsourced.

Since the vendors operate by taking advantage of economies of scale and leveraging the synergies of combining all the activities, both the client and the vendor end up adding value to each other. Furthermore, the clients are left with enough time and bandwidth to concentrate on their core functions and not worry about whether their marketing department is getting results.

The point is that when clients outsource their marketing functions, they can negotiate the contracts with the vendors in such a way that targets and objective measures of performance can be drawn up so that there is a yardstick to measure the success of the outsourcing initiative. This means that MPO is not only qualitative in nature but its performance can also be quantified. This is indeed something that puts it at par with other outsourcing initiatives where objective measures are used to judge the performance of the vendors.

The Indian Connection
As mentioned above, MPO is becoming a popular outsourcing offering in India. But one area where Indian MPO differs from Indian BPO is that whereas the latter is mostly done for companies abroad and is an offshore phenomenon; Indian MPO is done mostly for clients in India. This is because unlike the BPO or the KPO, MPO needs the vendors to maintain personal contacts with the clients and the marketing agencies along with the media on a regular basis and hence, offshoring of such activities is not generally being considered. Of course, with the increasing use of teleconferencing and web conferencing tools, it is a matter of time before the Indian vendors in the MPO space decide to take up work on behalf of the foreign firms.

Downsides Exist, But MPO Future Looks Bright
Though the picture looks rosy, there are some downsides to the MPO as well. These include the need to maintain personal relationships with the media and marketing agencies by the clients which can only be outsourced to a point and not beyond. Furthermore, the time to get the MPO program up and running by the vendor can be lengthy due to the prolonged and protracted nature of the work. However, these downsides can be managed with some astute and agile strategies and overall, the outlook for the MPO sector looks bright and promising in the years to come.

BPO Outcomes recently spoke with Matt Ellis, associate director and carbon reduction manager of real estate services outsourcing firm CBRE, about the benefits of CSR outsourcing and the steps a company considering outsourcing CSR processes should take. CBRE is involved in CSR BPO as both a provider and purchaser, and in its role as real estate CSR services provider recently won the inaugural IAOP/ISG Global Outsourcing Social Responsibility Impact Award from the International Association of Outsourcing Providers and Information Services Group.

CSR Benefits Extend beyond Doing the Right Thing
While every company (hopefully) wants to “do the right thing,” enacting CSR efforts offers  more concrete business benefits, as well. “It really does come down to resource management,” says Ellis. “There are simply not enough trees, or iron, or oil in the world. Energy is volatile, and companies that smartly manage their resources will be the winners.”

Ellis says enacting CSR also pays dividends in bringing disparate units of the business together. “You’re talking about a broad topic that requires work across the organization,” he explains. “You get a lot of enhanced communication and eliminate silos. For example, environmental management systems require carbon inventory management plans, which are ‘Bibles’ that need input from lots of different people, top-down from members of the executive committee to grass roots facilities managers.”

Furthermore, CSR can enhance a company’s brand image, and not just with consumers. “There is such a competitive market out there for top talent,” says Ellis. “The differences are often made on the margins. If two great companies offer two great compensation packages, CSR shows that a company has ethics and motivation, which can make the difference for attracting motivated people.”

CSR: What to Outsource?
A company seeking to outsource CSR processes needs to determine what tasks to perform out-of-house and what tasks to keep in-house. Ellis advises a company in this situation to assess its core business, both to craft the overall strategy and decide what functions should be turned over to a BPO provider.

“CSR means different things to different companies,” he says. “Take Pepsi, for example. Pepsi is basically a water company, so it focuses its CSR program on water efficiency. CBRE is a real estate manager and outsourcer, and up to 16% of US carbon emissions come from commercial real estate, so we’re a huge driver of carbon emissions, which means we want to focus on energy.”

Ellis specifies that any company’s CSR program should focus on all aspects of sustainability, but have core business concerns at the center. As far as what to outsource, “if it’s not part of your core business, get it out of there.”

CSR: Who to Outsource?
Finding the right provider is crucial to any successful BPO relationship, and CSR outsourcing relationships are no exception. Ellis advises that buyers of CSR BPO perform some basic due diligence.

“Understand the capabilities of your CSR BPO provider,” he says. “The proof is in the pudding. What has the organization actually done?”

Ellis says reviewing a potential BPO provider’s reports on its CSR activities is very important, and can reveal problems. “Look for specificity of products,” he says. “If there is no CSR-specific language, that’s a great red flag the vendor is not right for the job.”

Ellis says BPO buyers should also look at the tenure of a provider’s involvement in the CSR area. And he speaks not just as a provider, but as a buyer. CBRE itself uses many different BPO vendors for certain non-core areas of its own CSR program. “For example, PricewaterhouseCoopers does validation of our carbon inventory management,” he states.

Multisource BPO certainly can provide buyers with these and other advantages, but companies investigating BPO deals should not dismiss sole source options out of hand. As detailed in a new white paper from outsourcing consulting firm Alsbridge, “The ‘New Market Entry’ Sole Source Option,” today’s BPO marketplace has room for both multisource and sole source BPO projects.

The Three Sole Source Scenarios
According to Alsbridge, there are three main BPO scenarios where leveraging a sole source provider makes sense. These are renewals of existing relationships, the existence of only one provider that can meet a buyer’s needs, and new market entries. Let’s briefly review each scenario.

Renewal of an existing relationship. If a current sole BPO provider is meeting all contractual and intangible commitments (such as being a good cultural fit) while providing innovation, Alsbridge advises buyers that competitively examining multiple providers at renewal time is likely a waste. Renewing the existing sole source relationship should be a foregone conclusion.

Only one buyer has the necessary capabilities. While this is a relatively rare scenario, Alsbridge says the outsourcing of industry-specific and high-level processes in recent years has made it more common. In these cases, the buyer lacks the internal capability, resources and/or time to perform a process, and only outside provider can perform it to their specifications.

New market entry. Described by Alsbridge as a little-known phenomenon, new market entry sole source relationships occur when a provider essentially “purchases” BPO expertise from a buyer by agreeing to host their employees and established processes at a less expensive offsite location. Thus a BPO provider can quickly develop expertise in a new practice area without having to build it from scratch, while a buyer can offload facilities and overhead without incurring severance risk.

New Market Entry: Like M&A
Alsbridge recommends that companies entering or considering entering a new market entry BPO deal think of it as a merger and acquisition (M&A) transaction, rather than as a traditional outsourcing deal. This is because as happens with an M&A transaction, the provider acquires the buyer’s employees, facilities, work, and intellectual property.

In addition, while the business case for a new market entry deal is straightforward for the buyer, for the provider, traditional pricing models will not provide satisfactory ROI. Alsbridge recommends that new market entry providers instead use a long-term business case, separating investment costs from service delivery costs, with a long-term service delivery contract offsetting some investment costs. Furthermore, the provider needs to consider harder-to-quantify returns such as the gain of credibility and flexibility in a new market.

The Five Principles of New Market Entry Sole Source BPO
In conclusion, Alsbridge presents five principles participants in new market entry sole source BPO transactions should follow. Namely:

Ensure trust and transparency. Trust and transparency must not only exist among buyer and seller, but among affected employees, who often have the best ideas about improving delivery and can have their effectiveness hampered by secrecy.

Commit to a “win-win” deal. Both sides must pursue a “win-win” deal where everyone achieves their business goals, although the buyer’s needs must come first.

Form joint teams. The buyer and provider should provide resources that will work together, with extensive due diligence and team-building.

Approach the transaction as an acquisition. Neither side should see the transaction as a divestiture, and discussions should focus on minimizing service delivery risk rather than price.

Set up a process. The process should include “gates” with incentives for both sides to get to and through key decision points.

BPO Outcomes recently spoke with two BPO contract experts: Marc Tanowitz, principal at outsourcing advisory firm Pace Harmon, and Stan Lepeak, director of global research, management consulting at KPMG. Tanowitz and Lepeak discussed exactly why and how BPO contracts have become more complex, the effect this increased contractual complexity is having on the BPO industry, and how vendors and buyers can collaborate to reduce contractual complexity while preserving the integrity of BPO projects.

BPO Grows Up
The most basic contributor to the complexity of BPO contracts is the simple fact that as BPO matures, users want to do more with it. “Five to seven years ago, BPO was focused on labor arbitrage,” says Tanowitz. “It was about finding resources in low-cost locations to do what they were told.” Tanowitz says this earlier iteration of BPO mostly dealt with broad transactional work such as accounts payable (AP) and general ledger.

However, according to Lepeak, more recently BPO has become a vehicle for delivering more sophisticated services. “There is now a more broad scope,” he says. “Multiple processes are pulled together and there is an offshore element.”

Technology Creeps In
Another major factor Tanowitz and Lepeak both cite was the growing importance of IT to outsourcing, even to BPO projects that don’t primarily focus on outsourcing technology systems. The increasing role of IT in BPO is also a reflection of outsourcing’s growing scope and sophistication.

“Now you often find IT bundled with business processes,” says Lepeak. “Companies also outsource the infrastructure supporting processes.”

Tanowitz’ commentary echoes that of Lepeak. “The BPO market shifted from labor deals to deals with a large IT component,” he says. “Providers deliver analytical support for discrete business processes, such as a collection tool.”

BPO Buyers Want More
Tanowitz and Lepeak both also refer to a maturing of BPO buyers along with a maturing of the BPO market. “BPO contracts were originally fairly simple, some were even written on vendors’ contract paper,” says Tanowitz. As a result, contracts were heavily skewed in favor of vendors, providing them with protections while not giving buyers the same level of protection or options for adding services or changing scale as their needs changed through the life of the contract.

However, Tanowitz said that eventually BPO buyers became more savvy and started demanding service level agreements (SLAs), price benchmarks, and other considerations which better protected them in the event of changes in project scope, currency value or vendor performance, but also greatly added to contract complexity.

Lepeak says buyers actually became “unrealistic” in their demands. “For example, BPO buyers wanted big cost savings, but no offshoring,” he explains. “Or they wanted to put in an ERP system but not change their processes.”

Lepeak vendors who did not have experience in delivering these types of sophisticated BPO services agreed to unrealistic contracts, “Which is why most of the big BPO deals of six to seven years ago were flops.”

Finding a Contractual Balance
Tanowitz and Lepeak both agree that the worst days of BPO projects being held up or resulting in vendor-buyer disputes due to contractual complexity are over, but the industry can still do much more to relieve complexity without damaging the quality of service delivery. Lepeak says buyers need to find a balance between pushing too hard and settling for too little, while having realistic expectations of BPO innovation.

“In reality, it is difficult to create a contractual arrangement that guarantees innovation,” he says. “Innovation comes from taking risks and doing things outside the box, which are hard to put in a contract.”

Instead, Lepeak says buyers should understand that lawyers and risk managers representing both parties in a BPO contract will likely nix anything that seems too risky, and accept the fact that well-written BPO contracts “offer less innovation but fewer failed deals.”

Tanowitz offers what at first sounds like a counterintuitive strategy of making contracts more complex upfront to provide more flexibility later in the life of the contract. “Do it right, do it once,” he says. “Deals change. Service levels may need to increase or be relaxed. Put in the mechanisms upfront to enable changes (without having to renegotiate the entire contract).”

The Young and the Restless
The customer interaction center, which provides integrated customer care services including call center and social media and serves multinational clients such as Coca-Cola Enterprises, has what John Sneed, senior director and principal, customer care and intelligence for Capgemini, refers to as a “very good” talent pool featuring young, hungry, college-educated workers.

“They are very energetic,” Sneed says in a video case study on Capgemini’s Guatemala City site. “Young and ambitious. There are a lot of folks for whom education is very important. There is a large population of college students looking for a career opportunity to grow in a business.”

To make sure it stays in sync with Guatemala City’s pool of young, career-minded professionals, Sneed says Capgemini spends a lot of time at the local colleges “to see what their needs are and to make sure they match ours.”

According to Sneed, needs of the local BPO human resources include having a good job in a professional environment. “The job is very important to them,” he says. “It’s almost a status of who they are. Professionalism is also important to them. It’s a significant part of who they are and how they fit into with their family and community.”

Ethics, Advancement, Teamwork
Sneed says Capgemini promotes an ethical culture in the workplace and that ethics are also very important to most of the local hires, who want to pursue ethics-driven objectives. In addition, he says most of the young employees want to advance into management positions.

To encourage advancement-minded employees to serve clients as best as they can and prove themselves worthy of promotion, Capgemini uses a team-based approach in the Guatemala City service center. Teams compete against each other, striving to meet goals such as complying with monthly service level agreements (SLAs) spelled out in client contracts.

Capgemini also employs cutting-edge technology whenever possible, which promotes innovation among employees while maximizing the quality and efficiency of services delivered.

Naturally, Eastern European countries like Romania and Czech Republic, as well as Latin American countries like Brazil, Mexico and Argentina, are taking advantage of the nearshore trend. But what does this mean for Indian BPO providers that have seemingly matured after two decades of outsourcing experience? Indian BPO veterans may be best served to lead a transition to establishing delivery centers in nearshore countries if this trend is not viewed as a threat. TCS and Genpact, two leading names in Indian BPO and ITO, are already doing that as they explore countries in Latin America and Eastern Europe to establish delivery centers.

Indian Companies Look to their Own ‘Near Shore’
However, one of the lesser-discussed possibilities is how Indian BPO providers could themselves nearshore some of the services they provide, which implies leveraging the talent pool in neighbouring economies such as Sri Lanka, Bangladesh, China, Thailand, Malaysia, Taiwan, Philippines and Indonesia. And some are heading down this path.

For example, as reported in Financial Express, TCS opened a back office service center in Manila two years ago.  Similarly, Computerworld reports that GenPact has only one-third of its staff working out of India, the rest are in various locations across the globe including China and the Philippines. So, Indian BPO and ITO companies do have a presence in its neighbouring outsourcing countries.

Nearshoring Poses Potential Risks, Benefits for Indian Companies
India has had a long history with BPO and ITO, which definitely has set up a base for domestic projects in India such as Aadhar, the digital ID project for all Indians. In the future, Indian domestic demand for IT-related services is also expected to increase, as is the demand for IT services in neighboring countries. The risks nearshoring poses to Indian companies would be the same as for any other foreign company doing business in China, Indonesia, Malaysia, or another developing region such as Latin America.

These include lack of sufficient infrastructure or educational resources, lack of a qualified labor pool, and security/political stability issues. In fact, the more the globally dispersed an Indian company’s outsourcing risk is, the less risk it poses. So, in a nutshell there are not any more or less risks associated with nearshoring for Indian companies than there are for companies located in other parts of the world.

Finally, while nearshoring may only have a negative connotation in the minds of Indian outsourcing industry, it is highly likely that Indian outsourcing giants will get over that and begin taking advantage of what appears at first glance to be a threat to them. It may also soon be a fact that a company outsources to different locations throughout the world through one common vendor. Indian companies do have the experience of being that common point for all of a company’s outsourcing needs, whether the location is India or nearshore.

In the finance & accounting outsourcing (FAO) marketplace, most buyers of OTC services are initially delighted when they trim 30% of their costs on one process, and 50% on another, yet once those costs disappear from the balance sheet, new initiatives to accomplish new thresholds of productivity or revenue growth are necessary and required.

Cash is King
Cash is king – always has been and always will be, regardless of economic forecasts. CFOs are tasked with being certain that their financial supply chain is optimized to guarantee optimal cash flow. To ensure that companies have a steady cash flow to develop and grow the business, outsourcing providers deliver on goals which are not only focused on profit generation, but also on working capital management. It has become clear to many successful CFOs that they need to implement unified financial standards and systems to achieve business goals.

Guaranteeing Long-Term Success
So how do successful companies get year-over-year efficiency once the initial cost savings are realized and achieve consistent performance and maintain an upward trajectory, even in a difficult economic climate that generally requires significant cost cuts?

It is critical for OTC outsourcing providers to engage in business relationships that show promise for the building of a successful partnership. The practice of outsourcing business processes is maturing and we are now able to better assess those factors that have led to successful or failed outsource relationships. High on the list of factors that result in successful outsourcing relationships is choosing the right partner to support an organization’s business needs – specifically, a partner who values the strategic evolution of long-term OTC services and the consistent inclusion of innovation through the endeavor.

The Right Decisions at the Right Times
The data points to three critical stages OTC outsourcing success: one at the commitment stage, a second at the analysis stage, and the third at the partnership stage. And decisions that companies make at the “innovation” juncture largely determine whether or not projects meet expectations.

Let’s look more closely at some of these crucial decisions.

Back-loaded benefits – Good outsourcing relationships are built on the expectation of steady improvement year over year, not on one quick hit followed by a flat line. The benefits of outsourcing are obvious: lower costs, focused expertise and access to the most relevant technology. And because outsourced solutions are driven by automation, business rules and best practice processes, they yield higher quality. As the use of outsourcing has matured, companies have realized that outsourcing of individual processes can achieve rapid and significant results with minimal risk.  Many outsourcing firms have single process solutions utilizing advanced technology and best practices to bring a true state-of-the-art solution to a client.

Broad outcomes – It is fine to target cost reduction as one of your immediate outsourcing goals, but once the easy dollars have been saved, what will you offer management as an encore? The biggest benefits in staffing outsourcing are not on the cost side; they’re on the income side – growth, cycle times, competitive advantage, revenues, and so forth. Those benefits start to accrue when you and your staff are freed up from A/R manual processes, allowing the outsourcing provider to come in, automate the processes and handle the transactions, etc.

Relationships trump contracts – Over time, business outcomes and the quality of the client/vendor relationship become the critical drivers of OTC engagements. Contracts are static. Historical documents can frequently become a set of handcuffs, rather than useful business tools when business conditions change rapidly.

Rather than tie success to a bullet-proof contract with dozens of cancellation and penalty clauses, it’s much more productive to identify a well-aligned, dependable outsourcing partner with a reputation for solid work, and then build the outsourcing relationship based on a commitment to the business outcomes at the core of the contract, plus a flexible, rational approach to problem solving. Think “partner,” not “provider.”

Improvement never ends – Continuous improvement over time requires investment, in new technology and training, for example. These investments, when made by the outsourcing partner, represent business risks. Experienced outsourcing managers have found that risk/reward incentives are good tools to use in driving performance. If you ask partners to invest, the rewards need to accrue to you both.

Active governance – Good partnerships are not hands-off, they’re especially hands-on. When problems arise, as they will constantly, they are best dealt with quickly, not at the next quarterly performance review. Best practice in outsourcing requires heavy, if not full-time, oversight by the best project managers available who report to engaged executives and managers on both sides.

Innovation: the Guiding Force - With both OTC buyers and service providers working collectively to achieve measurable business outcomes as part of organized and collaborative long-term partnerships, innovation becomes the glue that holds it all together. More often than not, enterprise buyers of OTC services enter into a service provider relationship polarized on the initial cost take-out from the ‘lift and shift’ and gloss-over the future initiatives they need to put into practice in the future when they look to find new value through better processes, talent and technology.

Robert Sherman is Principal, BPO Delivery Director, Capgemini.

SLAs fall down, said Mehra, because they don’t change with the customer’s requirements, aren’t defined precisely enough, and often aren’t structured to do a root-cause analysis of the root problem behind multiple failures.

“I love SLAs,” Mehra said in a session on “Best Practices for Ensuring Quality of Service in Multinational Outsourcing Engagements.” However, he continued, they are limited because they are just one “data point” measuring a provider’s performance.

Several Factors Can Limit SLA Effectiveness
While SLAs are the subject of intense negotiations at the start of engagement, he says, they may not be based on the right metrics to measure the effectiveness of the outsourced service for the customer. In addition, he said, SLAs “can be undermined by even minor changes” to the processes or systems they measure, and are often not updated often enough.

Another factor that limits their usefulness is “single incident limitation, (which makes) root cause analysis subject to an agreement of the parties,” said Mehra. Understanding and correcting the reasons for past failures can also be hindered by what English called a “statute of limitations” requested by vendors on how long a customer can ask for a service credit after a failure.

Taking a Common Approach
Both strongly suggested using a common approach to SLAs and other terms with all outsourcing providers, regardless of their location. “While that company may be India-based, and might be doing work for us in Asia, or might be doing work for us in Latin America…we don’t care,” said English. “We’re going to build in one global SLA.”

Two areas where the pair said specialized SLAs might make sense were to measure English language fluency and attrition. While Mehra agreed that “fluency” is subjective, he said it could be measured through a sampling of calls or surveys of whichever end users were being served.

Mehra said such SLAs often measure attrition on a rolling 12-month basis, and is an area where definitions (such as whether promotions, reductions in force or departures for personal reasons count as attrition) are often the cause of hard bargaining. “However reasonable the vendor’s concerns may sound, at some point, we have to draw a line” about where and how the customer will be protected from excessive turnover, he said.

In addition to SLAs, Mehra recommended regular payments based on the achievement of milestones, as well as periodic payments with provisions for holdbacks as a penalty to the provider for failures in delivery.

Rather than simply finding new customers and making them happy enough to come back, world class companies strive to provide a consistently top-quality experience; one that will transform satisfied customers into true brand advocates.

From ‘Acquire to Inspire’
Traditionally, business professionals have been taught that the process of customer engagement follows “ADR,” or Acquisition, Development, and Retention. However, in the modern world of CRM, the new customer engagement motto can now be characterized as “Acquire to Inspire.” At Capgemini, this phrase goes far deeper than cute semantics. It is baked into the operating model we apply when managing Customer Operations on behalf of our clients.

For example, by effectively monitoring and engaging with social media, we can now isolate individual users and influencers and then intercept them to deliver the most appropriate customer treatment. In turn, this can be the difference between having brand advocates or sabotuers out their in the connected world. As a result of these transparent  interactions, customers can now yield a higher level of influence on your other customers , and consequently on your overall brand image.

It therefore becomes ever more critical to understand exactly who your core customers are so you can deliver exactly the type of experience he or she desires.

Seamless Customer Interaction
Too many companies fall into the trap of having a fragmented customer engagement strategy ;one that ends up  in an idiosyncratic experience when interacting with your brand over the phone, online, through a social media platform,or IVR . In this day and age, an inconsistent experience will surely not win you any “fans.”

That is why at the Customer Interaction Centers Capgemini operates in Guatamela, Poland and Texas, we focus on “Select Care.”  For those clients that wish to differentiate themselves through customer intimacy we provide the multi-channel environment, customer savvy agents, and tools and insights that underly an enhanced customer experience. Social advocates sit side by side   with call center agents to better serve customers who may have  different interaction preferences.

And, as  more volume of interaction takes place outside the standard voice channel, companies will quickly need to learn how to engage customers in the  flatter mediums ;email, chat and social  platforms. A qualified BPO provider with an established cross-channel customer engagement model can help get you there faster, better and ultimately cheaper manner.

‘Knowing What You Know’
Too many companies simply rush to “close the loop” on customer engagement; viewing the interaction as a necessary evil rather than an opportunity to strengthen brand loyalty and grow the relationship. Of course, since “all customers are not created equal,” that is, their potential lifetime value and/or current profitability varies, it is important to invest in the right customers and in the proper circumstances.

In today’s hypercompetitive business environment where a customer can take their business to your competitor with the click of a mouse (or even the tap of a mobile touchscreen while they are in your place of business), knowing and predicting what customers want, and then engaging them on that basis, becomes a lynchpin to success. The data and feedback that you collect, analyze and act on can make the difference between a delighted vs. disgruntled customer and a profitable vs. unprofitable  relationship.

I can’t tell you how many clients have told me, “If we only knew what we knew, we could act faster and deliver better outcomes.” With all of the new ways of connecting with the customer comes new opportunities to learn how to better segment the market, target your message, and align your offerings to be able to deliver what the customer wants, when they want it and how they want it. This insight is garnered from 3 forms of intelligence; Customer feedback analytics( surveys, focus groups etc), Customer experience analytics( social listening, speech analytics) and CRM analytics( transaction analysis).Importantly, we can now dig into the psychology behind the behavior by analyzing tonality and sentiment.

Discovering the ‘Holy Grail’
For example, for one client we observed that some of their customers were becoming frustrated with difficulties using their branded gift cards. Through customer speech analytics, we isolated the activation issue relating to a third part supplier. We were then able to work with the client and the supplier to fix the upstream problem and thereby eliminate a customer dissatisfier and and avoid the cost of an unnecessary service call.

Naturally ,it is not easy to reach the “Holy Grail” of  a seamless, consistent, high-quality customer experience, but we believe it is worth the chase based on the promise that it will deliver dividends to both you and your customers. And, working with the right outsourcing vendor can help you find that competitive advantage in a faster, better and cheaper manner.

Paul Cole is SVP, BPO, Customer Operations Management for Capgemini.

In particular, Rudderham highlighted the importance of taking a local perspective when conducting BPO in Latin America. Following are summaries of his thoughts on a few key local factors buyers of Latin American BPO services should pay attention to.

Think Locally (to a Point)
Rudderham emphasized the importance of utilizing local talent and respecting local culture when running a BPO operation in Latin America. “The mistake some outsourcing companies have made is trying to put their own people into Brazil or Argentina, and the culture is very much about themselves. Particularly in places like Brazil, you try to put someone other than Brazilian in charge and your chances of success go way down.”

According to Rudderham, Capgemini uses all local talent in its Latin American BPO operation, up to the Chilean divisional leader. This follows some initial mistakes. “We tried transplanting Indians to Guatemala, but you need local people,” he said. “Make sure the leadership team is local, as workers will gravitate toward people they can talk to and who will understand them.”

However, Rudderham does not propose companies completely immerse themselves in local talent and customs to the point of cutting themselves off from the rest of their operation. “Encompass the local culture, bringing in what you’re good at,” he advised, stressing the importance of using global best practices such as Six Sigma and the enterprise BPO model in Latin America. In addition, Rudderham said Latin American BPO buyers should perform central analysis and risk modeling to evaluate performance.

LatAm BPO for LatAm Clients
Thinking locally also applies to evaluating what clients might be interested in obtaining Latin American BPO services. “Capgemini set up operations in Guatemala, Chile and Brazil for global clients as part of our overall global portfolio,” he said. “But in the last couple of years, we’ve seen a lot more ‘LatAm for LatAm.’”

Rudderham said Latin American companies are increasingly turning to Latin American BPO to consolidate their processes and in pursuit of transparency and better control. He cited Brazilian BPO buyers in particular as showing interest in domestic outsourcing for certain business processes.

“Brazil was very global (in its BPO market),” said Rudderham. “Now there are a lot of Brazil-for-Brazil BPO deals. Brazilian companies are seeing the benefit of outsourcing back end processes like accounts payable and accounts receivable.”

“Brazil has learned a lot from India, but the Indian ITO model doesn’t fit the reality of Brazil today,” said Shpilberg. “The process has evolved since India started it.”

Brazil Experiences Rapid ITO Growth
Shpilberg backed up his assertion of Brazil’s status as a major international ITO player with some figures. “Brazil is the fifth or sixth largest ITO market globally,” he said. “It has been growing at six times GDP for the last 15 years. IT usually grows at 1.5 to two times GDP.”

Shpilberg did attribute some of this rapid growth to the relative immaturity of the Brazilian ITO market, but also said there is an “inherent market demand” for ITO services in Brazil.

High Costs, High Sophistication

Brazilian ITO services have a higher cost than those available in many other destinations, but are also delivered with a high degree of sophistication. “Brazil’s cost structure is never as low as India’s; it is a significant percentage higher,” said Shpilberg. “Other nearshore options are also cheaper.”

However, Shpilberg noted that Brazil graduates about 250,000 professionals with “compatible” degrees in IT services each year, a number close to that in the US. In addition, he said the Brazilian ITO industry has developed an IT infrastructure sophisticated enough to support the provision of services based on specific processes, rather than number of services.

At Home in the World
As a result of many multinational ITO service providers opening up Brazilian offices, Shpilberg said there is a high degree of interactivity between Brazil and the rest of the globe. He advised that ITO buyers include Brazil as part of an optimally mixed nearshore/offshore outsourcing strategy.

“A ‘follow the sun’ strategy is important economically,” he said. “When you use resources in Brazil, India and Poland with the same tools and productivity, you can pass the baton seamlessly. You’re not paying for overtime or the increased attrition of the night shift. There is a net savings and productivity increase.”

A Bright Future
Looking ahead, Shpilberg said Brazil still has a way to go in its evolution from the Third World. “Brazil’s transition from a developing to developed country will take another 15 to 20 years,” he said.

However, Shpilberg cited several trends indicating Brazil is heading in the right direction in terms of its economy and business environment. “Exports are increasing,” he said. “Brazil is a net oil exporter, and new technology developed in Brazil for deep oil exploration recently found oil.”

In addition, Shpilberg said the Brazilian middle class is growing, which is producing a consumer base that in turn fuels general economic growth. “A transition is underway for the first time in history,” he stated.

In a recent webinar, “5 Common Myths of Location Selection,” Everest Group explained why generally held industry beliefs about the importance of location rankings, size and scalability, wage increases, labor conditions, and competition between high-cost and low-cost locations are actually “myths.” Following is a brief review of each myth and why it is actually false.

1. Rankings are helpful to understand relative attractiveness of locations. 
Despite heavy reliance on various “official” rankings of BPO locations, Everest Group says they are highly limited. Factors such as numerous competing rankings, a lack of correlation between rankings and actual end outcomes, score differences that are not meaningful enough to denote relative attractiveness, and the inability of generic rankings to take company-specific considerations into account limit the usefulness of rankings.

2. Size = scalability.
While the “size of an overall talent pool is often assumed to indicate scalability, Everest Group analysis indicates that in reality, scalability is driven by multiple factors including quality of talent, competition, and companies’ unique requirements. The size of what appears to be an available talent pool  can be significantly reduced by issues such as lack of quality of quality and propensity and competition, resulting in a much smaller net talent pool. In addition, Everest Group cautions that statistics on available talent pools of qualified college graduates can often be misleading, and that local college graduates are not always part of the available talent pool.

3. Wage increase directly leads to an increase in overall people costs.
Using the typical wages paid to ITO workers in India during the past few years as an example, Everest Group demonstrates that although wage inflation of 10-12% for senior programmers and 12-15% for junior programmers has often been reported, in actuality wages for these employees have actually risen 3-8%, with a net 4-6% impact on overall people costs. Everest Group attributes the disparity to lower levels of total inflation in salary bands than individual changes due to promotions and growth, as well as cost controls allowed by high rates of attrition among junior programmers.

4. Locations experiencing tight labor conditions are always unattractive.
Large cities in popular BPO locations often experience labor pool tightness due to competition for workers. However, Everest Group advises that BPO buyers can often supplement a “tight” labor pool in an urban BPO location with workers from adjoining areas, as well as the possible “additional” talent pool represented by employable high school graduates, part-time workers, and experienced professionals with similar skills from other industries. BPO buyers will need to implement the proper hiring and training models to implement and scale hiring of workers from the additional talent pool.

5. High-cost and low-cost locations are in competition with each other.
BPO buyers often assume they must select either a low-cost or a high-cost location, with an obvious bias toward the cheaper destination. In actuality, Everest Group says high-cost locations can supplement a BPO portfolio by fulfilling unique needs, such as niche skills, customer proximity, and time zone overlap. BPO buyers should also assess delivery risks, including stability and predictability and business continuity, as well as consider direct financial metrics such as labor arbitrage, operational costs and taxes and incentives.

As I sort through my notes from the recent Nearshore Nexus conference in New York, I am struck by how many of the lessons offered by a wide variety of speakers apply not just to nearshore BPO, but to BPO performed on any shore. While nearshore BPO does have its own unique benefits, issues and overall situation, it is still ultimately just routine BPO performed a little closer to the US border. Taking this global, rather than “shore-centric,” mindset, I would like to briefly review two of the most important (and not immediately apparent) lessons BPO buyers and providers based on any shore can learn from.

Politics Matter
Despite efforts by US politicians to turn BPO into a political hot potato, outsourcing in and of itself is not a political activity. Most BPO buyers do not treat it as such, instead focusing strictly on factors such as cost, resource availability, quality of service, and other business issues when assessing the viability of a particular BPO destination.

However, in his opening remarks and follow-up Q&A presentation at Nearshore Nexus, former President of the Republic of Colombia Mr. Alvaro Uribe, made it clear that the political situation in a BPO destination can have a major impact on its potential to deliver quality services. Uribe emphasized the “triangle of confidence” that is created for foreign investment (including BPO) when a country offers free enterprise, security, and democracy.

Uribe cited Colombia’s emergence as a major BPO destination as an example of the difference political stability can make to the viability of a BPO destination. With the help of the US, in the past decade Colombia successfully launched a $400 million program called “Plan Colombia” to eradicate the control drug cartels and terrorist groups once held in that country.

“Colombia went from unstable to booming with international tourism,” said Uribe. “The government consulted with the private sector and identified five or six sectors, including BPO services, where Colombia would become world-class. We went from 2,000 BPO jobs to now having close to 100,000 BPO jobs.”

Uribe is correct in stating the importance of free enterprise, security and democracy to the viability of a location as a BPO source. While it is unrealistic for BPO buyers based in the US and Western Europe to expect countries in other parts of the world to fully adhere to Western political and social standards, ideally a BPO destination would offer at least two of these features. For example, while China sadly lags in the area of democracy, it certainly supports free enterprise (with more state involvement than found in the West) and is a relatively secure nation. Especially when evaluating potential BPO destinations in emerging areas of the world or newer countries (such as the many small nations that sprang up in the disassembly of the USSR), buyers should carefully investigate the political situation.

Creativity Matters
Shifting for a moment to the sphere of IT outsourcing (ITO), in a morning keynote, Leonardo Mattiazzi, Vice President, International Business, Ci&T, stressed the importance of creativity in achieving a peak outsourcing experience. Mattiazzi held up the traditional “factory” approach to outsourced software engineering as an example of the dangers of making outsourced processes too standardized and automated.

“There is one issue (in ITO) which if not addressed, it doesn’t matter what shore you’re on, the result will be the same,” said Mattiazzi. “You will get mediocrity. Maybe not total failure, but mediocrity.”

Mattiazzi said the issue is the “software factory” approach which values process and methodology over innovation and client-provider collaboration. He compared developing software to writing a book. “Can you write a book by copying the first page 250 times?” he asked. “Try and come up with a book writing factory. You can’t. Writing software is the same as writing stories. You’ll end up with a dull book nobody cares about, just like you end up with dull software nobody uses.”

Applying Mattiazzi’s commentary to the world of BPO, while some low-level transactional processes can be successfully outsourced using a “factory” approach, many high-level business processes would also be better served if BPO buyers and providers stepped away a little from strict emphasis on specification and arbitrage and gave some focus to innovation, collaboration, and learning and adopting new best practices as they organically develop. As Mattiazzi said, this will be no easy task, and will require a shift in philosophy, but the result can be an evolution of BPO to a means of improving business processes, rather than simply cutting cost and inefficiencies from them.

But, everyone knows those problems exist and takes steps to mitigate them. Awareness of the potential problem areas is a good start but relationships deteriorate on a subtler level. Relationship failure occurs in much the same way as the boiled frog story. The story is that a frog dropped into boiling water will sense the heat and immediately jump out. However, if you place that frog into cool water and slowly heat the container, the frog will boil and never know until it’s too late.

It would be a better business environment if relationships would fail at the initial introductions rather than waiting until both parties have invested resources. If only we could sense the boiling water at the beginning instead of having the water slowly heat up around us. The reality is that most relationships, personal or business, fail over time and in small amounts. Like the frog, we boil one degree at a time.

The question is, “How do you recognize when your vendor/client relationship has failed?” The answers and experiences might surprise you. There are warning signs that you should pay attention to that point to problems. You have to be brave and be ready to cut your losses before it’s too late to leap from the boiling pot.

Testing the Waters
First time offshore outsourcers smile when they hear the pricing from vendors. And why shouldn’t they when quoted prices are as low as one-twentieth the price of local labor. It’s high-fiving and glass-clinking all around the conference table. The pricing, the promise of short delivery times, the open discussion and the friendly atmosphere coalesce into what can only be described as the business equivalent of “finding your soul mate.”

Everyone walks away happy from those first few “honeymoon” meetings. The calls go without any problem. Your offshore partners on the other end have an uncanny grasp of the English language. And, they understand the urgency and depth of the project ahead.

Taking the Plunge
You and your staff decide unanimously to engage the offshore partner for your project. You set milestones for progress and agree on delivery dates. Your partner keeps you informed, attends meetings conveniently scheduled during your standard working hours, keeps communications open and delivers your milestones as promised. Everyone is happy and you celebrate your win.

Turning up the Heat
The first sign that something’s going wrong in your newfound relationship is when your offshore partner begins to make excuses for non-delivery. Kevin Chandler of C3K Enterprises said that, “Everything went fine until our three-week promised delivery stretched into nine months with no usable progress. We found a local resource for the work and enjoy an ongoing and successful relationship with the company.”

Once a commitment had been made between Chandler and his offshore partner, the partner came back to him with, “It’s going to take longer and cost more.” This is a common ‘bait-and-switch’ routine with some offshore companies. This one came highly recommended to Chandler.

Chandler didn’t give up on offshore BPO. He tried a total of five different companies in various countries for his projects. All but one was a total fail for him. For the others, he’s decided to use local US-based resources. He said that he might try offshore outsourcing again but with caution.

Jumping Out of the Pot
Unfortunately, the lure of low cost labor is just too irresistible for some. This lure might not be palatable after several failed attempts. As Paul Midler writes in his book, Poorly Made in China: An Insider’s Account of the Tactics Behind China’s Production Game, the frequently heard phrases, “You heard me wrong” and “Price go up” wipe any cost benefits of going offshore.

Often what happens with offshore partnering is that you end up spending more time mitigating problems than you do producing results. Chandler said that he spent a lot of time on the phone at all hours of the day and night managing projects. One company “flat out lied about their capability,” he said.

You have to know when it’s time to cut ties with your offshore partner. Non-delivery, a breakdown of communications, rescheduling calls to times that are very inconvenient for you, prices that mysteriously rise in double or triple digits and inexplicable or repetitive production delays are all good reasons to sever your relationship. US-based companies want to create good working relationships with their foreign partners and most are willing to deal with a significant amount of delays, misunderstandings and price fluctuation but, at some point, the cost savings aren’t worth the headaches.

Keeping the Waters Cool
All such relationships aren’t bad nor do they have to fall into complete disrepair. When you find that something is going wrong, you have some options to revive the relationship and maintain your margins and your sanity.

What’s needed in such cases is honesty on the part of both partners. A candid phone conversation or a visit to your partner’s location will often resolve problems. One vendor suggests that you maintain close contact with your partner to keep the project and the relationship moving in the right direction. If you find your partnership failing because of missed deadlines or cost overruns, you need to discuss a detailed plan of action with your partner’s management team. You might have to revise milestones and expectations but you should put in the effort to create a productive and ongoing relationship with your partner. But don’t be afraid to call it quits on a partnership that just isn’t working.

Specific challenges facing the pharmaceutical industry include expiring patents, a shift from traditional chemistry to genetic-based therapies, the rising cost of discovering a drug and bringing it to market, the threat of litigation on the intellectual property and consumer liability fronts, and both market and regulatory pressures to lower the price of dosages.

Pharma Turns to BPO
This being the case, pharmaceutical companies are downsizing and employing outsourcing strategies to better compete with not only each other, but their smaller biotech competitors. The goal in many cases is to become more focused on innovation and less focused on manufacturing.

Chris Viehbacher, chief executive of global pharmaceutical firm Sanofi, which has gone through a highly publicized round of layoffs in an attempt to re-engineer its company and business model, commented on Sanofi’s outsourcing plans at the CED Life Sciences Conference in February 2012. “What Sanofi is doing is reducing its own internal research capacity,” Viehbacher said. “The days when we locked all of our scientists up in a building and put them on a nice tree-lined campus are done. “We will do less of our own research… we want to work with more outside companies, start-up biotechs, with universities.”

Focus: EU Regulatory Compliance
As a more specific example of how BPO can aid global pharmaceutical operations, let’s take a closer look at complying with pharmaceutical regulations in the European Union (EU). Global and non-EU companies would do well to work with an outsourcing provider with experience in EU regulatory compliance, especially in the areas of MedDRA (Medical Dictionary for Regulatory Activities), risk management, pharmaceutical IT and bioinformatics, and preparing and managing submissions through the regulatory process.

There are four steps to the EU drug approval process:

1. Apply for permission to conduct clinical trials.
2. Conduct the clinical trial (Phases 1-3).
3. Apply for authorization to market the drug.
4. Conduct ongoing post-marketing studies and safety monitoring.

Differing Global Regs Add to Challenge
Though the European Union’s EMEA (European Medicines Evaluation Agency), the FDA in the US, and Japanese regulatory authorities have been long at work harmonizing their regulatory regimes and approval processes, the procedures still remain separate and distinct in each case. In addition, regulations vary in other global regions. Different business practices, pricing schemes, political considerations and other unknown variables can make it a prudent decision to seek a local partner to handle the political and regulatory work, just as much as it makes sense to seek specialized talent and expertise in the research and initial drug discovery.

“Many companies recognize the need to start putting more resources and infrastructure in other regions and countries that have the potential to become significant sources of growth in the very near future,” wrote University of Pennsylvania researcher Donald Baines in his 2010 paper titled “Problems Facing the Pharmaceutical Industry and Approaches to Ensure Long Term Viability.”

Baines elaborated on this written statement when contacted by BPO Outcomes. “I think they (pharmaceutical companies) could use outsourcing to help drive regulatory approvals and access,” he stated. “As you may know, there is a lot of pressure on prices and a need to show the value of products and services, so being able to improve the process in these two key areas are examples of ways this could be accomplished.”

Baines also said that in the efforts among the EMEA, FDA and Japanese government to harmonize their regulations and procedures, there is a role that pharmaceutical companies can also play, by “partnering with local and country officials to upgrade their processes and provide solutions targeted to their specific needs.”

The importance of time zone and cultural similarities when selecting a BPO provider were discussed by several participants in a panel presentation at the recent Nearshore Nexus conference in New York, “Trends, Dynamics and Opportunities 2012,” Following is a summary of the input panelists gave to BPO buyers trying to select a shore for their outsourcing operations.

Staying in the Zone
Panelists agreed that nearshore outsourcing is advantageous for BPO projects that change on short notice or feature short work cycles. “Time zone becomes important (when we use an agile development process),” said Adriaan Bouten, SVP/CIO, information and media, The McGraw Hill Companies. “We need an overlap of a certain number of work hours.”

Jason Rodriguez, CTO of educational search engine Noodle, said his firm uses nearshore BPO when it has a project that needs to “pivot” quickly. “Offshore, it’s difficult to pivot,” he said. “With nearshore, we work in a one-week cycle in the same time zone, which lets us communicate more frequently.”

Rodriguez added that being able to work in the same time zone with nearshore BPO providers helps Noodle keep in-house headcount down.

Staying Out of the Dark
Despite the advantages of outsourcing time-sensitive business processes to a nearshore BPO provider based in the same time zone, panelists also delved into how BPO providers with farshore locations can offer advantages based on time zone. “There are inherent advantages to having a global partner that allows round the clock resources with different perspectives,” said Keith Jones, senior associate at outsourcing advisory firm Pace Harmon. “In remote infrastructure management, time zone is crucial. You don’t want to talk to the night shift.”

Cultural Considerations
Panelists concurred that nearshore BPO providers can offer a decided and often crucial advantage in having employees with cultural familiarity with and similarity to the US. “When you’re under stress, the similarity of culture aids the decision process,” said Jones. “People will be forthcoming with ideas immediately.”

Bouten offered an anecdote about how some cultures located further away from the US do not communicate in as upfront as manner as typically found in North and Latin American cultures. “I recall I spent a day with a (BPO) team based in India and nobody wanted to come forward with an idea,” he said. “The attitude was, ‘Why do I have to be in this room?’ The Indian employees did not feel empowered. But they are empowered. It’s a communication issue.”

Jones highlighted how the fluency of many nearshore providers in Spanish actually serves a significant portion of US culture, using the example of health insurance provider Aetna outsourcing calls relating to health concerns from Spanish-speaking customers in the US to Spanish-speaking call center employees working for nearshore providers.

“Health care compliance when customers could speak in their native language, especially about complex issues, was incredible,” said Jones. “The outcome in people’s lives was tremendous.”

BPO Outcomes recently had a chance to discuss growth trends in the global offshore IT services market with Elizabeth Leonard, senior professional services analyst at Technology Business Research (TBR). She discussed how headcount is up in India as well as in emerging destinations such as Romania and Costa Rica, with factors including complex client demands, the growth of cloud technology and increased talent pools in countries outside the traditionally dominant destinations of India, China, and the Philippines. TBR hosts a webinar, “Following the Sun in 2012: Insights from TBR’s Global Offshore Delivery Market” on Wednesday, April 25, 2012 at 2 PM EDT.

BPO: What kind of global headcount growth are you seeing at major IT services providers?

EL: “The research we conducted in our Global Delivery Market Landscape indicates that, for the 12 vendors we studied, global headcount is growing on average at about 12%, driven by demand from clients. Rates are different within the offshore and onshore headcounts, with annual low-cost headcount growth of more than 16% and annual onshore headcount up nearly 6%.

“In addition, Indian vendors are hiring onshore at a rapid rate. We believe this is due to the increasing complexity of client demands and India-based vendors playing catch-up to hire consultants to spearhead higher value and transformative engagements. The offshore headcounts are growing to support the increase in cloud solutions and engagements that may be in the pipeline.

“However, regarding BPO growth and headcount, more than half of the vendors we’re covering show a decline in average revenue per employee. The one notable exception we see is HCL, which is improving its ability to decouple headcount to revenue in what has been traditionally a very linear relationship.”

BPO: Are any specific regions growing or shrinking as service providers?

EL: “As I mentioned before, TBR finds the Indian vendors are driving a tremendous amount of resources into onshore presence, but within the rest of the Americas there is still a sizeable growth trend. The way we segmented our research shows systems integrators (SIs) with support and maintenance capabilities, SIs without, and India based vendors. There are hiring trends in both SI groups of vendors in low-cost APAC- and Americas-based resources; however, SIs with support and maintenance are gaining resources more aggressively in the rest of the Americas.

“In our research on EMEA we found an interesting trend where vendors are investing heavily in Romania, which indicates that a rekindled interest in nearshore is taking shape in Europe, which is likely to help spur economic growth with jobs near home. It is also not surprising to see that India-based low-cost headcounts are increasing, but what did strike us as a new trend is the precipitous decline in the headcount growth in China and Philippines, which were adding headcount very aggressively in our last report. We believe this is due to a labor skill shortage and the slowing of economic growth in those regions.”

BPO: Are particular industries/functions more likely to offshore?

EL: “Our research focuses on performance of service lines, so we can hypothesize that clients are refining their lists on higher SIs with support and maintenance capabilities, since we see an increase in cross-selling opportunities with those vendors. Furthermore, our research indicates vendors are investing in developing portfolios with a focus on IP, assets, frameworks and operational efficiencies to meet customer demand.

“So clients are more focused on higher-end transformational projects with a lower-cost implementation and solution delivery. But, as anyone in the industry can imagine, the biggest amount of outsourcing customers will do is outsource functionality to the cloud. The majority of the vendors TBR covered call out their cloud solution strategy, and we’ll be watching what happens with that market very closely between now and the next release of the Global Delivery Market Landscape.”

BPO: What countries are doing most of the offshoring?

EL: “We’ve talked a bit about growth in Romania and India, but the list of other countries to watch is shifting. There is still a flurry of activity in Brazil, followed by Costa Rica and Argentina. Africa is still attracting SIs and India-centric firms to invest in that geographic region, and will continue to grow at a slow but steady pace.

“Our belief is these emerging countries tend to have greater pools of talent available with less competition than the volatile Indian market, and will increase in importance to all three types of SI providers.”

TCO Remains ‘Table Stakes’
Herrera opened by saying TCO is very much alive and well as a standard measurement employed by BPO buyers. “How much will this cost me is still table stakes (for BPO buyers),” said Herrera. “Transformation is the next frontier.”

Herrera said buyers understand TCO better than other parameters that can be used to analyze the ROI of BPO contracts. “No CFO says, ‘I want to see non-linear revenue,’” he commented.

However, Herrera did note some changes in the world of BPO contracts. “There is a downward rate of pressure on new contracts and an upward pressure rate on contracts renewals,” he said. “Outcome-based pricing is gaining strength. Contract lengths are shorter. Three (years) is the new seven.”

Benchmarking Has Flaws
When it comes to setting performance benchmarks in BPO contracts, Herrera, who said he has extensive experience in setting contract benchmarks as a previous BPO practitioner, said the practice is overvalued. “Benchmarking can always be debunked by someone determined to do so,” he said. “It is overnegotiated and underutilized.”

According to Herrera, benchmarking almost never accounts for the actual total cost of a BPO contract. “It never tells the whole story,” he said. “Usually a relationship is already beyond repair when a benchmark is invoked.”

Nearshore Value Goes Beyond TCO
Peacock and Herrera both explained how nearshore BPO (outsourcing North American business processes to relatively close Latin American destinations rather than to “farshore” destinations in Europe, Asia/Pacific Rim, or Africa/Middle East) offers value that goes beyond simple TCO.

“Latin America has a TCO about 8% higher than outsourcing to traditional farshore destinations such as India, the Philippines or China, based on tangibles” he said. “But the intangibles of Latin American BPO probably will or already have erased the 8% advantage.”

Herrera said these intangibles include scale, the availability of talent, security, and business continuity. Peacock, whose company provides nearshore voice services to the hotel/travel industry, said when you “peel back” the TCO of outsourcing to India and China, there are added costs relating to complexity and coordination of services.

“There is a hidden cost of going fully offshore,” said Peacock. “Staying in your time zone (with nearshore) takes complexity and implicit cost out of the operation. You can quickly get a trainer or product person to a nearshore location. It’s a three-hour flight, not a 13-hour flight. You can stay welded to the process. The 8% uplift is easy to overcome.”

Staying out of the ‘Graveyard’
Another advantage of nearshore BPO that goes beyond TCO calculation is avoiding dealing with third shift employees. “I know very few really normal, bright people who want to spend their lives working the graveyard shift,” Peacock said. “Nearshore keeps you out of the graveyard.”

Peacock and Herrera both advised companies to consider a “follow the sun” outsourcing model that includes both nearshore and farshore elements, to avoid relying on third shifters and also to obtain the benefits of both models. They said dividing a BPO strategy like this especially makes sense for larger deployments.

“On a global scale, with more than 200 FTEs (full-time equivalents) it makes sense to have more than one BPO location,” stated Herrera. “With more than 500 FTEs it makes sense to have more than two.”

Gareth Pritchard is the CEO of BPeSA Western Cape, a Cape Town BPO trade promotion group. He believes South Africa’s rapid growth can be explained by a combination of natural advantages and key improvements to the business environment for BPO operators.

Call Centers Dominate Landscape

Outsourcing in South Africa is currently dominated by call centers, a sector in which it has a clear linguistic advantage over many of its rivals. According to Pritchard, South Africa produces 345,000 English speaking graduates a year, making it the third highest English servicing BPO supplier and South African English is widely considered a neutral accent.

The sector has also benefited from a dramatic drop in telecommunications costs, which had previously been an obstacle to investment. Telecom costs plummeted 85% between 2003 and 2009, according to Pritchard, and will continue to fall by 15-25% a year over the coming years.

Above all, the crucial factor for Pritchard is the cultural affinity between South Africans and the British – who make up the bulk of the South African market. “The average South African understands the average Brit exceptionally well,” he said, “and if you are talking about a value proposition that’s what we are working on – making people understand how close that cultural affinity is.”

Improving Market Share

However, the South African success story has not only been based on these advantages but also on learning how to successfully market them. “We haven’t done a good job at selling ourselves in the past,” said Pritchard. That, he says, has now changed. “Over the last two years we have positioned ourselves better. We’ve explained to the market that cultural affinity aspect and we’ve explained to the market what we’ve got – we have very strong infrastructure, we have good people and we have a competitive cost structure – putting it all together it is becoming formidable.”

The outsourcing boom in South Africa has also been fuelled by strong government backing. The South African government made the BPO sector one of its top three priority sectors in its Industrial Policy Action Plan and has been promoting investment through aggressive incentives programs. “All the companies here should be able to survive without those incentives,” said Pritchard, “but they are making heads turn dramatically.”

With the latest incentive scheme launched in January 2011, Pritchard has predicted a further 20% drop in cost arbitrage, which had stood at 50-60% from source destinations. Current incentives include large grants for each offshore job created with bonuses if the company reaches 400 and 800 seats. “That is the one that is making people raise their eyebrows and say ‘well, why wouldn’t we be there?’” said Pritchard.

Keeping a Handle on Growth

However, such rapid growth can bring its own problems, especially in ensuring human capital development keeps pace with expansion. In a bid to avoid exhausting its human resources, the South African government has initiated a training program that has already trained several thousand people in entry-level skills as well as offering tax incentives to companies for training employees. Nevertheless, there have been serious shortages at the mid-management level – something Pritchard identifies as the single biggest limitation to continued growth.

Kobus Van Der Westhuizen is a senior vice president at leading global outsourcers Aegis and the head of its South African operation. After arriving in 2009, Aegis South Africa more than doubled in size in its first two years of operations and it currently employs approximately 2,000 people in 13 contact centers. In attempting to manage such quickfire growth, Van Der Westhuizen has found the labor shortages at management level have increasingly become an issue.

“When you grow this fast then skills are always a challenge and you have to invest a lot in education, training and development of skills in the sector – not just on entry level but on middle and senior management levels as well,” he said. “When you grow too fast then you get scarcity in those skills and your costs escalate.”

External Interference

According to BPO analysts Fifth Quadrant, South Africa could also find external pressures limiting its growth. As it moves away from the pack of emerging locations, South Africa will increasingly have to compete with the established outsourcing powerhouses of India and the Philippines while still fending off competition from other developing markets in China and Latin America.

However, for the moment the sector is projected to continue to grow at around 30% a year. Most of that business continues to be from the UK, which makes up 56% of South Africa’s current offshoring market. For Van Der Westhuizen, the reason for South Africa’s success in capturing so much of the British market is simple. “It is in the same time zone, there are overnight flights so you don’t lose working hours … [and] people growing up here they speak the same language, they watch the same sports, they have the same cultural alignments and affinities,” he said. “We are seen as nearshore.”