History of Outsourcing

Outsourcing is said to have emerged a few thousand years ago with the
production and sales of food, tools and other household appliances. As soon
as small communities and societies began to form, people with specialized
professions began to trade with each other for goods and services. In effect it
can be said that each worker was outsourcing some activities to others. The
history of outsourcing shows that even in the industrial age, a few thousand
years later, very few companies outsourced any of their operations.
Companies in the 1800s and 1900s were vertically integrated organizations,
taking care of their own production, mining, and manufacturing from raw
materials to finished goods as well as then shipping the goods to company
owned retail outlets. These companies were often self-insures, handled their
own taxes, employed their own lawyers, as well as designed and built their
own buildings without outside assistance. This of course is not applicable to
all companies during that time period, but it gives a general idea of the time.

The history of outsourcing shows that through specialization contracting

began to be more popular, especially in the service industry. This in turn led
to the first wave of outsourcing during the industrial revolution pushing the
large-scale growth of services such as insurance services, architecture and
engineering services, among many others. At this time the companies doing
the outsourced work were mostly located in the same country, often in the
city, just like the customers.

The history of outsourcing portrays that as onshore outsourcing continued

manufacturing outsourcing of low-tech items such as toys, shoes and apparel
goods began to take place. After this manufacturing higher value items like
high-tech components and consumer electronics began to appear. In fact
outsourcing history demonstrates that manufacturing was the first activity
that began to move to offshore destinations in a quest for lower costs.
Through the development of infrastructure as transportation and logistics
improved, the costs decreased and offshore manufacturing increased. As the
education and skills on lower wage countries developed, outsourcing
manufacturers gained more value. More recently, in the US during 1970s, it
was common for computer companies to export their payrolls to outside
service providers for processing. This continued into the 1980s, when
accounting services, payroll, billing, and word processing all became
outsourced work.

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Towards the end of modern day history of outsourcing, the trend has moved
into the world of information technology, data transcription and call center
operations. Studies on the history of outsourcing conclude that outsourcing
is clearly not just about payrolls and call centers- this can be seen by simply
looking into your medicine cabinet. It is very likely that the R&D of your
daily medicine was outsourced to companies in India. Your insurance
company, which covers the costs of your medications, may have their claim
processing to offshore transcription providers. And your medical clinic may
easily be outsourcing the administration of your confidential medical records
to India, Russia or the Philippines.

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What is business process outsourcing (BPO)?

BPO is the process of hiring another company to handle business activities

for you. BPO is distinct from information technology (IT) outsourcing,
which focuses on hiring a third-party company or service provider to do IT-
related activities, such as application management and application
development, data center operations, or testing and quality assurance.

In the early days, BPO usually consisted of outsourcing processes such as

payroll. Then it grew to include employee benefits management. Now it
encompasses a number of functions that are considered "non-core" to the
primary business strategy.

Now it is common for organizations to outsource financial and

administration (F&A) processes, human resources (HR) functions, call
center and customer service activities and accounting and payroll.

These outsourcing deals frequently involve multi-year contracts that can run
into hundreds of millions of dollars. Often, the people performing the work
internally for the client firm are transferred and become employees for the
service provider. Dominant outsourcing service providers in the BPO fields
(some of which also dominate the IT outsourcing business) include US
companies IBM, Accenture, and Hewitt Associates, as well as European and
Asian companies Capgemini, Genpact, TCS, Wipro and Infosys.

Many of these BPO efforts involve off shoring -- hiring a company based in
another country -- to do the work. India is a popular location for BPO
activities.

Frequently, BPO is also referred to as ITES -- information technology-

enabled services. Since most business processes include some form of
automation, IT "enables" these services to be performed.

An offshoot of BPO is KPO -- Knowledge Process Outsourcing. Considered

by some to be a subset of BPO, KPO includes those activities that require
greater skill, knowledge, education and expertise to handle. For example,
whereas an insurance company might outsource data entry of its claims
forms as part of a BPO initiative, it may also choose to use a KPO service
provider to evaluate new insurance applications based on a set of criteria or
business rules; this work would require the efforts of a more knowledgeable
set of workers than the data entry would. The current definition of KPO

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encompasses R&D, product development and legal e-discovery, as well as a
number of other business functions.

Also coming into use is the term BTO -- business transformation

outsourcing. This refers to the idea of having service providers contribute to
the effort of transforming a business into a leaner, more dynamic, agile and
flexible operation.

Business process outsourcing (BPO) is the contracting of a specific business

task, such as payroll, to a third-party service provider. Usually, BPO is
implemented as a cost-saving measure for tasks that a company requires but
does not depend upon to maintain its position in the marketplace. BPO is
often divided into two categories: back office outsourcing, which includes
internal business functions such as billing or purchasing, and front office
outsourcing, which includes customer-related services such as marketing or
tech support.

BPO that is contracted outside a company's own country is sometimes called

offshore outsourcing. BPO that is contracted to a company's neighboring
country is sometimes called nearshore outsourcing, and BPO that is
contracted within the company's own country is sometimes called onshore
outsourcing.

The most common examples of BPO are call centers, human resources,
accounting and payroll outsourcing.

Use of a BPO as opposed to an application service provider (ASP) usually

also means that a certain amount of risk is transferred to the company that is
running the process elements on behalf of the outsourcer. BPO includes the
software, the process management, and the people to operate the service,
while a typical ASP model includes only the provision of access to
functionalities and features provided or 'served up' through the use of
software, usually via web browser to the customer. BPO is a part of the
outsourcing industry. It is dependent on information technology, hence it is
also referred to as information technology enabled services or ITES.
Knowledge process outsourcing and legal process outsourcing are some of
the subsets of business process outsourcing.

Information technology enabled services, or ITES, is a form of outsourced

service which has emerged due to involvement of IT in various fields such
as banking and finance.

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ITES: Telecommunications, insurance, etc. Some of the examples of ITES
are medical transcription, back-office accounting, insurance claim, credit
card processing and many more.

Firms usually from developed countries outsource such services to countries

like Egypt, India, Bangladesh, China, Romania and Philippines in order to
gain from large talent pool and low labor cost.

Industry size: India has revenues of 6.4 billion USD from offshore BPO and
36 billion USD from IT and total BPO. India thus has some 5-6% share
of the total BPO Industry, but a commanding 63% share of the offshore
component. This 63% is a drop from the 70% offshore share that India
enjoyed last year, despite the industry growing 38% in India last year,
other locations like Eastern-Europe, Philippines, and South Africa have
emerged to take a share of the market. China is also trying to grow
from a very small base in this industry. However, while the BPO
industry is expected to continue to grow in India, its market share of the
offshore piece is expected to decline.

The top five Indian BPO exporters for 2006-2007 according to NASSCOM
are Genpact, WNS Global Services, Transworks Information Services, IBM-
daksh, and TCS BPO. However, people who talk about the Indian Big 5 in
the UK will usually be referring to TCS (Tata), Wipro, Infosys, Satyam
Computer Services, and HCL Technologies.

The global BPO Industry is estimated to be worth 120–150 billion dollars, of

this the offshore BPO is estimated to be some US$11.4 Billion.

BPO [Business Process Outsourcing] has been the latest mantra in India
today. As the current sources of revenue face slower growth, software
companies are trying new ways to increase their revenues. BPO is top on
their list today. IT services companies are making a quick entry into the
BPO space on the strength of their existing set of clients. We hope to
address all issues related to BPO in India on this portal.

We will attempt to explain what it takes to setup a BPO facility in India.

Actually, setting up a call center is capital intensive. An ordinary BPO
center that takes care of pure back office operation [e.g. payroll, data entry]
will not be as expensive as a call center.

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The philosophy behind BPO is specific- “Do what you do best and leave
everything else to business process outsourcers”. Companies are moving
their non-core business processes to outsource providers. BPO saves
precious management time and resources and allows focus while building
upon core competencies. The list of functions being outsourced is getting
longer by the day. Call centers apart, functions outsourced span purchasing
and disbursement, order entry, billing and collection, human resources
administration, cash and investment management, tax compliance, internal
audit, pay roll... the list gets longer everyday. In view of the accounting
scandals in 2002 [Enron, WorldCom, Xerox etc], more and more companies
are keen on keeping their investors happy. Hence, it is important for them to
increase their profits. BPO is one way of increasing their profits. If done
well, BPO results in increasing shareholder value.

Typically, a customer calls the call center [usually a toll-free number]. After
pressing numerous numbers [1 for English, 2 for Spanish, 3 for bank
balance!] the operator will answer your query by accessing the database.
Call centers address sales support, airline/hotel reservations, technical
queries, bank accounts, client services, receivables, telemarketing, and
market research.

If a bank shifts work of a 1000 people from US to India it can save about
$18 million a year due to lower costs in India. According to Mckinsey, giant
US pharmaceutical firms can reduce the cost of developing a new drug,
currently estimated at between $600 million and $900 million by as much as
$200 million if development work is outsourced to India.

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Benefits derived from BPO can be summarized as follows:

1. Productivity Improvements
2. Access to expertise
3. Operational cost control
4. Cost savings
5. Improved accountability
6. Improved HR
7. Opportunity to focus on core business

Outsourcing is not new - it has been a popular management tool for decade.
One can safely say outsourcing has evolved :-

• 1960's - time-sharing
• 1970's - parts of IT operations
• 1980's - entire IT operations
• 1990's - alliances/tie-ups
• 2000's - IT-enabled services

India has one of the largest pool of low-cost English speaking scientific and
technical talent. This makes India one of the obvious choice to outsource to.
Dell, Sun Microsystems, LG, Ford, GE, Oracle all have announced plans to
scale up their operations in India. Others like American Express, IBM and
British Airways are leveraging the cost advantage India has to offer while
setting up call centers. Several foreign airline and banks have too set up
business process operations in India. Indian revenues from BPO are
estimated to have grown 107 per cent to $ 583 million and this particular
area employs 35,000 people in the year ending March 31, 2002.
Many European and US companies have realized that they should focus on
their main business and outsource their Human Resource Department,
accounting department etc. Bingo! it is here exactly India fits in! Today US
corporations have embraced BPO wholeheartedly.
Managed Care Companies, which is more popularly known as Healthcare
payers, are increasingly outsourcing business processes due to changing and
challenging business environment and technological and legislative changes.
There is a good opportunity for Indian BPO vendors in this space. BPO
vendors will need to have good domain knowledge, process know-how and
competence with technological solutions to cater to these Managed Care
Companies.

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BPO Advantages- At a Glance

Cost reductions- Cost reduction is done through process improvements,

reengineering and use of technologies that reduce and bring
administrative and other costs under control.

Concentration on core business- With the day-to-day back office

operations taken care of, the management is free to concentrate more on
the core business of the company.

Outside expertise- Company is saved from the hassles of recruiting and

training personnel. BPOs ensure that experts from another company
provide the needed guidance and skills.

Cater to changing customer demands- It is another great advantage of out

sourcing the business processes. Many BPOs provide the management
with flexible and scalable services to meet the customers' changing
requirements, and to support company acquisitions, consolidations, and
joint ventures.

Revenue increase- As stated above, by outsourcing non-core processes,

companies can concentrate on increasing their sales and market share,
develop new products; spread out into new markets and increase
customer service and satisfactions.

The Outsourcing market is estimated to grow tremendously in the

coming few with an increasing number of companies planning to
outsource both low end and high-end jobs to offshore destinations. Also
the number of companies providing outsourcing services is on the rise,
thus resulting in larger variety. Due to the fact that more and more
companies are outsourcing, the risks are getting smaller as businesses
have more experience and clearer objectives.

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There are several marked advantages of outsourcing:

1. Concentration on core business areas

Back office operations of a company require high maintenance and

specialized attention. Yet most of them are critical for the company's
everyday activities. By outsourcing their back office operations
businesses can concentrate on their core competencies, while their back
office operations are being managed smoothly by a specialized third
party company.

2. World-class technology at lower rates

Investing in new technology is very costly and often risky. As the

technology market develops rapidly, it is difficult to keep up with latest
innovations and solutions. Thus outsourcing to companies that have the
resources, expertise and desire to continuously update their technological
solutions, offers a true advantage of outsourcing.

3. Skilled manpower at affordable prices

Outsourcing gives a company the ability to get access to skilled and

trained manpower at extremely low rates. This in turn leads to an
increase in productivity as well as cost savings. By outsourcing a
company saves on recruitment, training and other human resource costs
it would otherwise have to maintain internally. Also an advantage of
outsourcing is that a company is able to utilize the kind of expertise it
could not internally provide.

4. Increased productivity

By employing skilled manpower in larger numbers at lower costs

companies can really increase their productivity. This in turn would
result in better customer satisfaction and increased profitability.

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5. Beat Competition

In today’s fast paced global economy a company needs to provide high-

quality services to its customers in order to retain them, as well as
provide the services for cheap prices. Outsourcing in this case can help
the company maintain lower rates with better service solutions, thereby
giving them a better market position or even a competitive advantage.

6. Tax benefits

By selecting the right BPO destination companies can save up on taxes

in turn saving on costs.

Disadvantages

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|
BPO is the delegation of one or more IT intensive business processes to an
external provider that in turn owns, administers and manages the selected
process based on defined and measurable performance criteria. It enables
organizations to concentrate on their core business, carry out business
reengineering and provide information that is valid timely and adequate to
assist decision making at the management level and quality and cost control
at the middle and lower levels. Services ranging from Back office
operations, insurance claims processing Medical Transcription to legal and
HR services are being outsourced now through call centers.

India has one of the largest pool of low-cost English speaking scientific and
technical talent. This makes India one of the obvious choice to outsource to.
India graduates perhaps about 140,000 engineers a year, second only to the
US worldwide. There are over 1670 educational institutions including
engineering colleges, technical institutes and polytechnics that train more
than 41000 people annually. This is in addition to the graduates coming out
of the prestigious Indian Institute of Technology (IITs)

Now coming to the disadvantages of BPO as often pointed out by many the
odd work hours has had an impact on the mind and body of the individuals
working in the call centers. Health takes the worst hit in a call center job.
Intense stress resulting from 24x7 shifts; long hours at work, night shifts,
pressure to perform on metrics and high call volumes tend to affect the
health of workers. Common ailments among BPO executives are sleeping
disorders, insomnia, digestive system-related disorders, eyesight problems,
ear problems, among others.

What are the cons of outsourcing to third party vendors?

• Burden of excess capacity or challenge of insufficient capacity is done

away with.
• High unit personnel cost.
• Tight business margins.
• Not enough financial muscle to sustain very tight payback periods.

What are the cons of outsourcing to a captive center?

• Expensive specialist skill in host countries.

• Compliance and legal restrictions.
• Unavailability of skilled manpower due to market stagnation.

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Requires considerable effort in terms of management's time and attention to
establish.

“ BURN OUT AND STRESS SYNDROME”

Call center employees are under constant stress because of their workload,
competitive pressures and surveillance. Workers are monitored for the
number of calls, the average call time and time between calls. Closed circuit
cameras and electronic timers monitor the time staffs are away from their
desk, including in the bathroom

The study outlines that management often sets call rates at a level at which
the employees have to “burn out” to fulfill. Workers regularly make or
answer hundreds of calls per day, which the report equates to “assembly line
manufacturing”. The most stressful aspect of the job is on the caller
operator’s emotions. Workers are required to remain constantly pleasant and
attentive, particularly when speaking to agitated and irate callers. A
considerable proportion of the Indian call center workforce has a syndrome
popularly referred to as “Burn Out and Stress Syndrome”.

Three Major Disadvantages

There are three main disadvantages of outsourcing marketing.

• You are the best judge of what a customer requires from you and your
product.
• Feedback from the market comes to you through an intermediary
channel so you lose the controlling power.
• Every company has its own style of functioning. Therefore, you
cannot expect that the company that you are going to choose for
outsourcing marketing will work according to your method.

Marketing research companies may perform the research in an unbiased way

because it is a neutral third party, yet they lack the insight of your business
that you or your employee might possess. No matter how informed the
professionals at the company that is providing outsourcing marketing are,
they are not as efficient in providing outcome of the market research and
analysis as an employee of your company can be. There is no doubt that
these companies are capable of contacting a large number of consumers, but

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do not forget that they are not always representing you exclusively.
Although you get the marketing research report very quickly, sometimes in
this haste they may authorize an inexperienced person to write such reports.

Marketing Companies Take Advantage of Your Dependence

Furthermore, when you start outsourcing marketing, you are broadcasting to

the world your dependence on third-party organizations. The more your
dependence will increase, the more your marketing expenses increase
because this third party will also start demanding more money. Another
disadvantage of outsourcing marketing is that these third parties tend to
resist when you try to apply some innovative idea or wish to provide specific
training.

Now coming to the disadvantages of BPO as often pointed out by many the
odd work hours has had an impact on the mind and body of the individuals
working in the call centers. Health takes the worst hit in a call center job.
Intense stress resulting from 24x7 shifts; long hours at work, night shifts,
pressure to perform on metrics and high call volumes tend to affect the
health of workers. Common ailments among BPO executives are sleeping
disorders, insomnia, digestive system-related disorders, eyesight problems,
ear problems, among others.

So even though I know that call center jobs are not limited to just taking
calls are we losing an entire young- English speaking- IT skilled- generation
to call centers?. Whether these are the jobs that define men and women,
giving them an identity, making them realize their potential by a learning
process and contribute something to the nation building. Progress is building
something lasting for the future. Whether these BPO jobs are adding value
to the national product? Now the question arises is that at the end of it, will
it strengthen us or weaken our human resources.

Outsourcing in India

Outsourcing in India is one of the most popular management decisions

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today. Although it is generally supported by the cost reduction factor,
this is just one of the reasons companies outsource to India. Many parties
who outsource are unaware that Indian BPO companies do not simply
offer cost effective solutions, but also provide value addition by
improving productivity and quality. Already many companies are
outsourcing with quality rather than cost in mind. The vast talent pool in
India and not necessarily the cost cutting aspect motivates several
companies.

In today’s world a company must outsource to stay competitive. Leading

companies worldwide acknowledge that to stay ahead, they need to
reduce costs, provide the best quality, use the latest high-tech skills, as
well as be reliable and creative. There are several simple reasons why to
outsource in India. India is a talent-rich country that exports software to
some 95 countries around the world. India has a mature industry with
world-class systems and quality. Not only does India offer technological
agility, flexibility, time-to-market and a competitive advantage, it also
offers world-class infrastructure and numerous incentives for foreign
investments.

India is emerging as a global brand when it comes to superior quality

which is not only seen in BPO but also in manufacturing which has so
far been considered China's strong-point. India stands out as a leading
market for call center and IT outsourcing. India has high tech facilities
and the good infrastructure that is required for setting up e.g. call centers.
Also the endless pool of English speaking workforce that provides good
quality voice based services for extremely low costs results in huge
savings for companies. This is the reason why most fortune 500
companies outsource to India.

The majority of outsourcing contracts are moving to India, even though

countries like China or Russia are offering better rates in some of the
services. The dollar buys a lot in India and companies in the USA are
saving billions of dollars by outsourcing their non-core operations.

Cities such a Bangalore, Chennai, Calcutta, Pune and Mumbai are really
jumping on the call center market boom and more and more Indian
companies have started investing in the industry. Offshore outsourcing in
India is developing by the minute with new companies, big and small,
setting up shop at a very fast pace. As a result of the increase in the BPO

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operations, India is also seeing an increase in IT consulting services
outsourcing as well as other outsourcing service companies that are on
the rise presently. The development of IT outsourcing to India over the
last few years is definitely worth paying attention to.

International Outsourcing

International outsourcing or global outsourcing is the process of outsourcing

services to offshore destinations. Most companies in first world nations like
the US and the UK take to international outsourcing in third world countries
like India, China, Philippines, Mexico, Israel, Malaysia, Ireland, Canada and
Brazil.

Companies in developed nations take to international outsourcing to cut

costs, make use of latest technologies, make use of cheap labor, increase
productivity and concentrate on core competencies. In addition to benefiting
the companies and in-turn the customers of developed nations to get better
products at cheaper rates, global outsourcing also helps the citizens in the
developing nations by giving them better job opportunities and helping them
increase their standard of living.

The future looks good as far as international outsourcing is concerned as the

technology improves. Development of high end outsourcing relationship
management software and intermediaries like the paper outsourcing institute,
will only help improve international outsourcing. The IT outsourcing market
trends clearly suggest an increase in the software development outsourcing
when newer and better technologies develop.

Conclusion

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Very simply business process outsourcing can be seen as a process in which
a company delegates some of its in-house operations/processes to a third
party. Thus business process outsourcing is a transaction through which one
company acquires services from another while maintaining ownership and
ultimate responsibility for the processes. The company then informs its
provider what it wants and how it wants the work performed. So the
company can authorize the provider to operate as well as redesign basic
processes in order to ensure even greater cost and efficiency benefits.

The main motive for business process outsourcing is to allow the company
to invest more time, money and human resources into core activities and
building strategies, which fuel company growth.

In today’s business environment outsourcing is often not a decision that

needs to be justified. In fact some work that is handled internally but could
be outsourced can be seriously questioned as a bad business decision.

The global market today is highly competitive and continuously changing. A

company must thus focus on improving productivity and at the same time
cut down costs. Therefore, a lot of processes that take up precious time and
resources are being outsourced. Business process outsourcing companies are
often considered to provide more flexible, faster, cheaper and effective
services.

Business process outsourcing helps free up a company’s capital and reduce

costs. The operations or processes being outsourced vary from
manufacturing to customer service to software development and much more.
Most of the companies that are looking to outsource are multinationals, or
companies from western countries and most of the BPO units are in
countries such as India, China, Malaysia and even Russia.

One way of looking at it is that business process outsourcing is just a name

for already existing practices. Services such as, bureau services, contract
programming and project management have been outsourced for a long time.
In its present meaning, however, business process outsourcing refers to a
greater level of handing over ownership and/or managerial control than has
before been the case.

Companies turn to resources outside their organizational structure, usually to

save money and/or make use of the skilled professionals. For instance, a

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company might outsource its IT management because it is cheaper to
contract a third-party to do so than it would be to build its own in-house IT
management team. Or a company could outsource all of its data storage
needs because it is easier and cheaper than buying and maintaining its own
data storage devices. A business might also outsource its human resource
tasks to another enterprise instead of having its own dedicated human
resources staff.

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