BPO Journal

The difference between mediocrity and accomplishment

2007-12-01T14:26:00.000-08:00

It might well be defined by the chance to work hard at work worth doing. In my world, this is also known as a tenured faculty position in a business school of choice. I will be busy the next few months looking for that job, and hence, it's unlikely that I will find as much time to blog.

Check this space for updates on that next big chapter in my life.

Flash!

2007-11-07T23:19:00.001-08:00

FT's new Podcast Player page is up.

Financial Value of Outsourcing - IV

2007-11-01T22:12:00.001-07:00

Here's a look at the financial value of another outsourcing deal off the list published by HRO Today - a $4 billion / 7-year utility based deal between American Express (AXP) and IBM inked in February 2002. I've compared post-outsourcing returns of American Express with the closest size and book-to-market matched firm in the same industry that has not engaged in an outsourcing initiative of significant value - Freddie Mac (FRE). As shown below, AXP outperformed FRE by nearly 52 percent.

Financial Value of Outsourcing - III

2007-10-24T07:52:00.000-07:00

In early 2003, HRO Today reported on the top 24 IT outsourcing transactions implemented over the past 15 years. These transactions amounted to over $100 bn in outsourced services. For my third post on the financial value of outsourcing, I've selected one off this list - the $3 billion / 10-year IT outsourcing agreement between General Dynamics (GD) and CSC that was inked in May 1998. Again, I've compared the firm's post-outsourcing returns with the closest size and book-to-market matched firm in the same industry that has not engaged in an outsourcing initiative of significant value - Magna International, Inc. (MGA). As shown below, GD outperformed MGA by over 100 percent. The abnormal returns are consistent with the respective increase in operational performance of the two firms.

Financial Value of Outsourcing - II

2007-10-15T06:10:00.000-07:00

The second example of the financial value created by outsourcing is presented in the context of Best Buy, Inc. In late January 2004, the company signed a seven-year outsourcing agreement with Accenture HR Services. As per the contract, Accenture would provide a range of services that included compensation, payroll, benefits, bonus administration, and performance management, among several others. Best Buy retained overall HR strategy, guiding employees to achieve its customer-focused transformation. The details of the deal can be found in this release here.

As in the previous post, I compared the three year post-outsourcing stock performance of Best Buy (BBY) with its closest size and book-to-market matched competitors that have not engaged in an outsourcing initiative of significant value (this rules out Circuit City) - Bed Bath and Beyond (BBBY) and Radioshack (RSH). As shown in the graph below, BBY outperformed BBBY by over 45 percent and RSH by over 80 percent. The comparison is based on historical stock price information obtained from Yahoo Finance. As in all analyses, while the difference in stock performance may be attributed to other strategic choices of the firm, comparison with a firm from the same industry and with similar size and book-to-market adjusts for industry shifts and response to competitive pressures. Again, the financial performance of the companies is largely consistent with their respective gains in operational performance.

The Financial Value of Outourcing - I

2007-10-07T21:34:00.000-07:00

I had earlier blogged about introducing a series of posts that compare the overall financial value of companies that have outsourced a critical business process or function with similar firms (in terms of market size) in their industry that have retained that function in-house. Much like my post on Boeing and Airbus. Considering that 177 visitors on BPO Journal believe that there is a spike in their stock price surrounding an offshoring agreement (I should have attempted to capture how many of these were clients versus service providers since in the case of the latter, the offshoring announcement represents a clear tangible increase in revenue), I thought it's time I start the series. Every week, I'll examine one or two deals. Of course, only contracts of significant value may be directly linked to increases in firm efficiency and ensuing investor response.

The first on offer is Metlife. In July 2002, Siemens Business Services signed a major IT outsourcing contract valued at nearly $180 million with New York-based insurer MetLife for services within SBS's SieQuence solution methodology. The details of the deal can be found in this release here.

Below is a comparison of Metlife's three year post-outsourcing stock performance versus its closest size and book-to-market matched competitor that has not engaged in an outsourcing initiative of significant value - Allianz Insurance. As shown below, Metlife outperformed Allianz by nearly 60 percent. The comparison is based on historical stock price information obtained from Yahoo Finance. While the difference in stock performance may be attributed to other strategic choices of the firm, comparison with a firm from the same industry and with similar size and book-to-market adjusts for industry shifts and response to competitive pressures. Moreover, if you examine the accounting statements of the two companies, you'll find that the financial performance of the two companies is consistent with their respective gains in operational performance.

An Uneventful Summer

2007-10-07T21:06:00.000-07:00

The writing's back. Not counting the climb of the rupee from 40.85 to 39.49 to the dollar and India's triumph in a hip and swift version of cricket, it was a fairly uneventful summer. Wrote up most of my dissertation, decided this is a good year to graduate, and learnt from Harold Bloom how to read and why.

Summer hiatus

2007-05-18T21:38:00.001-07:00

I believe BPO Journal has a life of its own and after two work filled years in a row, it's only fair that she take a break.

Somewhere, a Swedish man is saying "You are crazy. This blog has no feelings."

Oh well, the comeback (in October '07) will only be better.

Happy Birthday

2007-05-08T12:08:00.000-07:00

BPO Journal is a little more than two years old now.

Given the inherent problems with statistics, I am sure you'll be happy to take my word that it's been a good run. To the regulars and oft first-timers who frequent the site everyday, thanks for your comments and feedback.

Rebranding TCS

2007-05-03T20:37:00.000-07:00

"Strong partners have the knowledge to measure promise against reality, the flexibility to seize opportunity, and the experience to deliver certainty"

So reads Tata Consultancy Services' (TCS) full-page ad in the Wall Street Journal. The message is reiterated in the company's corporate brochure and other media outlets as part its $10 million 'Experience Certainty' advertising campaign.

Why blog about an advertising campaign, you ask? That's because unlike the myriad of campaigns run by global IT giants IBM, Accenture and so on, or even the Indian service providers Infosys or Wipro, this is the first branding exercise ever by India's oldest and largest IT services company.

And many might argue it's due. A recent Business Today article reports that with annual revenues of over $4 billion, TCS is the eleventh largest player globally. In terms of market capitalization, the company is ranked fourth globally, behind IBM, HP and Accenture. The company's headcount of 89,000-plus employees also ranks fifth in the global order. Further, this workforce is truly global with almost 10% of the employees located outside India, thereby, facilitating global service delivery models and significant scale benefits. Yet, it is Infosys that finds mistaken mention in the Economist as India’s largest it services company and forms the context for Tom Friedman's yarn on the flat world.

But TCS is not aiming for brand recall among Indian outsourcing providers. Based on the findings of a recently commissioned study by strategic branding firm Siegel+Gale that people were not sure which outsourcing firm was third in the global pecking order after IBM and Accenture, TCS wants to fill that coveted position.

And the new campaign is a part of a 10-month effort of becoming a familiar name in the boardrooms of Europe and America.

Experience certainty.

The world's a better place

2007-04-30T08:26:00.001-07:00

The Employment Trends survey predicts (and India Today reports) that the organized sector in India will expand by 5.34% resulting in approximately 1.5 million domestic jobs. Added to the four hundred thousand global jobs Indians are expected to bag, for the first time, Independent India will have a record 1.9 million jobs created in the organised sector. The nature of jobs too is evolving from being transaction-intensive to being knowledge-intensive. 10% of the jobs in India currently fall in this category, and the latter's structure is also more diverse than ever.

While several countries in Asia are riding the wings of globalization to march far ahead of the colonial rapacity that they suffered in the early nineteenth century, we find that other parts of the world are not impervious to such growth. China’s president Hu Jintao recently promised $3 billion in soft loans and a doubling of Chinese aid to Africa by 2009. Zambian copper, Nigerian oil, Tanzanian timber and South African platinum might be behind the soaring of trade between China and Africa by 40% to a record $55.5 billion last year. The impact is seen on growth in this region. For the third year in a row, sub-Saharan African countries grew on average by 6% and are inching toward 7% this year. At this rate, Africa's poverty rate will halve by 2015.

Similarly, Indian information companies find it cheaper to hire software program developers in central Europe and other low cost economies in Asia than in India. Software giants Infosys, Wipro and TCS have offices in Hungary, Romania and Russia. Vietnam's labor pool comprises around 80,000 IT graduates, a level that is increasing by around 9,000 per annum. Accenture, Unisys and Intel have established large contingents in the country.

Now, that's a run-up of the world. As a recent Forbes magazine article states, "never before have so many people been so well off, and never have so many people had the chance to improve their lot in life".

Yet, this process of growth and "creative destruction" is not without hiccups. But, that's the subject of another post.

An elite group

2007-04-23T00:03:00.001-07:00

The International Association of Outsourcing Professionals (IAOP) has announced its list of the best outsourcing service providers for 2007. The top ten service providers include four Indian companies - Wipro Technologies, Infosys, Genpact and Tech Mahindra. However, what speaks for the significant growth of outsourcing spend in emerging markets is not the presence of these Indian companies on the list but rather, what the list masks.

In an ironic twist in the offshoring chapter, each of these Indian companies have leveraged untapped talent in diverse emerging markets such as Mexico and Eastern Europe to best service customers around the world. A significant part of the workforce of these companies comprises foreigners. Their service delivery models usually provide a common framework for managing projects and maintaining quality across all global centers of operations. In addition to boosting efficiency, service, and flexibility, this global service delivery model also helps to cater to a given customer's needs in different markets around the globe enabling scale of service spend.

And the list points to the significant growth in the outsourcing services industry. The IAOP states that "on average, companies on the list had $1 billion in annual sales, and a very high level of productivity: revenue per employee was a staggering $83,000. Employment growth was up, as well, rising 13% over the prior year to an average workforce of 13,688."

I though this is an interesting follow-up to my prior post on the slowdown in outsourcing spend. No paradoxes here?

BPO slowdown paradoxical?

2007-04-17T08:37:00.001-07:00

The recent TPI outsourcing index suggests a significant slowdown in the number and total contract value (TCV) of BPO contracts inked in the first quarter of 2007. Tekrati reports:

The downturn in overall outsourcing contract activity is exemplified in the decline of Business Process Outsourcing (BPO). This quarter experienced the smallest number (29) and lowest TCV of BPO contracts greater than $25 million being awarded in almost five years. The BPO share of the broader market TCV was down 50 percent quarter-on-quarter and 66 percent year-on-year. The adoption rate of BPO has hit a soft patch and is expected to grow at only 2 percent year-on-year, which is well off the double-digit pace of prior years.

This one's a paradox. In the early years of outsourcing, organizations knew little about how to disaggregate strategic processes from their value chains and manage them across organizational boundaries. Not surprisingly, the management of BPO relationships was more complex, expensive and time-consuming than anticipated, and firms experienced hidden costs related to contract administration, profit margins, and in-house management. Yet, the growing dissatisfaction with BPO arrangements was accompanied by an allied increase in the number of BPO contracts inked.

Now, as organizational learning enhances management of BPO relationships and the ensuing odds of BPO success increase (evidenced in numerous industry reports, the most recent being Duke University's Offshoring survey results), we're finding a dip in the number and TCV of BPO contracts.

Explain this paradox.

Rehauling Citigroup's IT

2007-04-12T20:34:00.000-07:00

Looks like I'll have to deliver on my promise of analyzing the financial value of outsourcing sooner than I expected.

Citigroup announced Wednesday its plans to create a more streamlined organization, reduce growth in expenses and drive future expansion as a result of a structural expense review conducted over the past three months as well as a previously announced IT optimization program in the company. The company will, it said:

Continue to rationalize operational spending on technology. Simplification and standardization of Citi's information technology platform will be critical to increase efficiency and drive lower costs as well as decrease time to market. Examples of this are: consolidation of data centers; improved capacity utilization of technical assets and optimizing global voice and data networks; standardizing how the company develops, deploys and runs applications; and maximizing value by limiting the number of software vendors to operate at scale.

Such rationalization is part of the company's campaign to cut $2.6 billion in expenses by 2008. Also included is the plan to cut 17,000 jobs - roughly 5% of its total employee base - and move an additional 9,500 positions to low-cost locations. Many of the 9,500 Citigroup jobs will be tech roles moving to India - where the company already maintains 19,000 workers who handle everything from call center support to number crunching for investment research.

Citigroup's outsourcing experience demonstrates that it's not merely outsourcing that creates value but rather, smart outsourcing. As shown in the stock chart, the company has consistently failed to meet the performance standards of competitors in its industry, including JP Morgan Chase, Bank of America or Merrill Lynch. And where it differs from its competitors may not be in the extent of outsourcing initiatives but in managing these initiatives and aligning them with an overall business vision. Citigroup lacks a clear long-term vision, aspiring to be the number one retail bank, the number one investment bank and the number one global bank. It's also plagued by operational inefficiencies. For example, the company's chief operating officer Bob Druskin has, on earlier occasion, mentioned that each of the different business segments in the company - consumer business, mortgages, car loans, etc. - has its own middle and back offices.

Outsourcing inefficient component business processes might reduce the cost of these inefficiencies but it does not make them go away.

So, before it externalizes IT functions to low cost service providers to rationalize IT spend, Citigroup might do well to address structural and operational inefficiencies and define the business strategy that dictates such externalization. Else, as this NPR broadcast voices, the company would have gone too fast too far without control.

I am shorting this one.

Does outsourcing create financial value?

2007-03-31T09:58:00.001-07:00

Sometime early next month, I plan to start a series of posts where I'll compare the overall financial value of companies that have outsourced a critical business process or function with a similar firm (in terms of market size) in its industry that has retained core functions in-house. Much like my post on Boeing and Airbus. A pattern should speak fairly conclusively about the financial value of outsourcing.

Oh, I promise not to be biased.

A carload of irony

2007-03-27T13:04:00.000-07:00

Inspired by the success of the Chinese LaCrosse, General Motors has stated that the Chinese design team for the company will design the next Buick LaCrosse, due at the end of the decade, for the entire world. The Chinese team will have complete control over the interior design and partial control of the exterior design and overall logistics.

This is a discernible shift from the times when American tastes and preferences defined those around the globe. Now, with 50% of organizational sales coming from outside the United States and the Chinese market growing the fastest, it's only reasonable that Chinese sensibilities inform product design and development for the American consumers.

Now, that's a carload of irony!

All in the family

2007-03-23T22:39:00.001-07:00

"Don't ever take sides with anyone against the family again. Ever."
Michael Corleone to Fredo

Last week, I was chatting with a friend of mine, who recently relocated to India as the human resources head of a leading US-based technology firm. In the first few months of her new job, she found that acquiring talented human resources in India did not just involve making a pitch to the pertinent candidate - it often involved wooing the entire candidate's family. “Helicopter parent,” a tag coined in the early 1990s in the U.S. and made popular by the media, refers to a parent who hovers over a child of any age, and “Blackhawks” are extreme examples of this. However, "helopats" are ubiquitous in India and are in fact, the order of parenting. Parents and children live under a single roof in many Indian families, and often engage in cooperative decision making in both social and economic matters. Consequently, individuals well into their twenties and thirties typically defer to the authority of their parents who, in turn, take on significantly influential roles in directing individuals' careers.

My friend went on to say that what seems a mere cultural difference is now institutionalized in her firm as a recruiting strategy that addresses concerns of employee churn and attrition. Employee perks such as health insurance or club memberships extend to family members, the latter are flown in for company tours and events, and candidates are encouraged to bring along with their résumé, a family member who might well be the audience for the organizational pitch about culture, benefits and career potential. Since the company actively started wooing employee families in early 2006, its annual attrition rate has dropped to below 10%, significantly lower than the 15% industry average for software programmers in India (Source: Hewitt Annual India Salary Increase survey 2005).

Cool!

2007-03-18T20:38:00.001-07:00

An article in FastCompany provides examples of companies outsourcing brand invention and management - a truly core organizational function - to keep up with changing customer needs and preferences, manage the risk of staying cool and stay nimble and flexible.

Ronald Coase sought an answer to the question, "Why do firms exist?" more than thirty years and answered it in Noble-prize-winning terms of costs of transacting and internal organization. The examples in the article are evidence that as advances in technology diminish costs of transacting and firm boundaries become increasingly fluid, firms in future may well be viewed as clusters of temporary interdependencies that come together to achieve a shared economic objective.

India bears the brunt of selling

2007-03-14T22:51:00.000-07:00

The Indian sensex dove 453 points today. All stock markets are volatile but some are more volatile than others.

A book after my own heart

2007-03-11T20:44:00.000-07:00

Are you serious about your bullshit?

Market meltdown

2007-03-06T06:46:00.001-08:00

The Indian stock market was hit particularly hard in the recent Asian stock market slam. The benchmark Sensex tumbled over 471 points on the Bombay Stock Exchange on Monday, a fall of over 3.67%. Eddy Elfenbein submits that although the index has now lost 2,400 points in the last two weeks, the worst may be yet to come.

Cutting through the outsourcing hype

2007-03-02T08:27:00.000-08:00

Gartner's hype cycle is a graphical representation of the maturity, adoption and business application of specific technologies. It depicts how and when technologies move beyond the hype, offer practical benefits and become widely accepted.

In 2005, it seemed that outsourcing initiatives were largely in the "trough of disillusionment". For example, 70% of the participants in a survey by Deloitte Consulting ("Calling for a Change in the Outsourcing Market", April 2005) cited significant negative experiences with outsourcing projects. The firms stated that although outsourcing is largely driven by cost-related objectives, they experience hidden costs related to contract administration, profit margins, and in-house management. Therefore, the management of outsourcing relationships was discerned more complex, expensive and time-consuming than anticipated.

However, recent reports such as this IMF working paper on offshoring, productivity and employment or the recent survey results of Duke's Offshoring Research Network suggest that outsourcing is traversing the "slope of enlightenment" toward the "plateau of productivity" (!!). Of course, I am not sure how Gartner defines productivity, but let's just say that we're seeing more evidence that several firms across diverse industries are increasingly learning how best to leverage outsourcing to create strategic value.

The Price of Economic Nationalism

2007-02-24T09:50:00.001-08:00

Last April, I blogged about how Boeing (NYSE:BA), for the first time, was outsourcing more than half the structure of its 787, pieces of which were being manufactured in six different countries. Over the past year, this outsourcing initiative has helped Boeing streamline operations and acquire a slew of new orders for the "Dreamliner" jet, re-establishing the company as the number one commercial aircraft company.

Contrast this with the experience of its competitor, Airbus that has suffered delays on its A380, will have to spend heavily to design, from scratch, a competitor to the 787, and suffers from incurring costs in pricey euros while generating revenues in cheap dollars, in which jets are bought and sold. Airbus is also paying a heavy price for economic nationalism that renders it difficult for the firm to mitigate process inefficiencies and reduce costs through competitive measures as bringing in in new partners and outsourcing work outside Europe. For example, French president Jacques Chirac emphasized that restructuring efforts must maintain "absolute equilibrium" in employment and technology. Given the conflict between the roles of the government as owner and regulator, Airbus will always find it more difficult than Boeing to enhance efficiency and trim costs:

Airbus has some 57,000 workers and another 30,000 employees of contractors under its wing. Half the job losses will hit the latter group while Airbus itself will lose 5,000, mainly in Germany and France where most production happens. Strict European labour laws and political sensitivities dictate that the cuts will come through natural attrition. The bulk will be split roughly evenly between Germany and France (though Britain and Spain will share the pain). But before any ink was dry union leaders were already threatening to block reforms. (The Economist, Feb 2007)

And the difference is evidenced in the difference in the stock price of these companies. Perhaps, this discipline of international financial markets is what will ultimately prevail over economic nationalism. Meanwhile, it's more evidence that outsourcing creates financial value.

Counting the Savings

2007-02-17T02:26:00.001-08:00

This report by the Boston Consulting Group suggests that offshoring hitherto considered a cost saving tool for transaction intensive business processes, is fast evolving into a powerful organizational lever for business transformation:
Although 65% of India’s 180,000 outsourcing services work force is involved in transaction-intensive services like call-center support or check processing, the industry as a whole helps its clients save $1.5 billion annually, according to a recent research paper, “Offshoring: Beyond Labor Cost Reduction,” by the Boston Consulting Group (BCG). (India’s outsourcing services industries employed about 415,000 people as of March 2006, according to India’s National Association of Software and Services Companies). GE alone saves more than $350 million annually after offshoring about 900 different processes to India, according to the paper, which was written by analysts in BCG’s New Delhi offices.

It would be interesting to look at whether these savings translate into more transformative measures of performance such as innovation, customer satisfaction, market share or profitability.

Bridging the Digital Divide

2007-02-12T20:48:00.001-08:00

The benefits of technological advances and globalization have not yet touched the lives of many of India's people. A quarter of the population still lives below the poverty line and the Internet penetration rate is a little over 3%. Consequently, innovations that pop in this space have the potential to generate maximal fizz or profits.

One such innovation that only recently caught my eye is India Post's ePost service that allows email to be delivered as snail mail and vice versa. Delivery times in the former case average a day compared with about a week by snail mail. And the profits? The launch of corporate e-post, which is being promoted as an inexpensive and effective means to reach the hitherto unconnected masses. An article in this Indian daily suggests that corporate customers can "print their messages including text and picture on official letterheads and send them simultaneously to up to 9,999 addresses in one go".

Yes, if the digital divide must be bridged and the empowering benefits of the Internet must be enjoyed by all, so must the perils of corporate spam.