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Article : Partnership Options For Offshore Sourcing

Beyond the decision to employ offshore outsourcing lie a wide array of choices about the function and structure of the outsourcing operation itself. Options range from completely turning over the outsourced process to an offshore company, to opening a company-owned center in the offshore country. There are, of course, a host of options between these two extremes, and the possibility of changing the structure of the relationship over time always remains. This paper examines several of these options, along with decision factors that can drive the planning process, and presents recommendations on how to apply them in the planning of an offshore outsourcing operation.

Historically, offshore outsourcing has been used for business process outsourcing (BPO) for business processes that are regarded as non-strategic, allowing management attention to be focused on key strategic issues, while achieving cost savings due to labor cost arbitrage. Some executives do continue to only contract out narrow, non-strategic business processes for the traditional reasons. Today, however, companies that are leaders in strategic thinking are using BPO to achieve important objectives that go beyond reducing the cost and attention given to non-strategic business processes. Companies such as General Electric, Dell and EDS now have thousands of people in India carrying out their business processes.

Ashish Kumar
Assistant Vice President
Strategic Accounts
24/7 Customer

Today, sophisticated offshore outsourcing providers have assembled highly educated and experienced staffs. The best providers have active, ongoing quality efforts that enable their staffs to deliver high-quality results while improving the business processes they execute, bringing these business processes to a better state than when they were outsourced. Some of their accomplishments can be:

  • Cost Savings—leveraging the low cost of offshore labor to reduce the cost of business processes remains an important, and achievable, goal.

  • Consolidation—outsourcing of a business process can be used as an opportunity to centralize that process company-wide, achieving savings of scale as well as standardization of policy and procedure throughout the company.

  • Speed To Market—the resources of an outsourcer to completely take over a business process can be leveraged to allow the sponsor to focus on and accelerate the rollout of a new product or service.

  • Process Improvement—an outsourcer with highly qualified and experienced staff may be able to apply their expertise to achieve important improvements in the processes that have been outsourced.

Clearly, to achieve these varied objectives, neither simply turning over a business process to an outsourcer, nor starting a company-owned offshore operation, may be the best answer. There are issues that are unique to offshore outsourcing that must be dealt with, and the structure of the relationship between the sponsor and the outsourcer is a crucial aspect of handling them. This paper reviews a number of options for the offshore partnership relationship between the company and the outsourcing provider, and factors that can be used to choose between them.

Some of the key questions dealt with in the discussion that follows are:

  • Can only generic processes be outsourced offshore, or can strategic business processes be moved offshore to obtain the benefits of labor cost arbitrage while still maintaining complete control?

  • How can an offshore operation be started with minimal risk in an unfamiliar culture, where the sponsor may not be familiar with the local customs or business and human resources issues?

  • If the company is located in an area that charges VAT on purchased business process services, can offshore outsourcing be employed without incurring additional VAT liabilities?

  • Is it practical to plan for the nature of the outsourcing relationship to change over time?

  • How can the initial investment in offshore outsourcing, that must be made before savings are realized, be minimized?

  • What approaches to offshore outsourcing are associated with the lowest ongoing costs?

  • How can the risk of moving a business process to offshore outsourcing be minimized?

  • How can tight control be maintained over the offshore operation, to protect customer perceptions of the brand and the sponsor?

Figure 1. Outsourcing Partnership Options: The Spectrum Of Options Available, Arrayed By Cost Vs. Risk.

  • Co-Managed Outsourcing features a client on-site manager, who participates directly in the management of the outsourced operation. This is the lowest-risk approach, since the client directly manages the activity.

  • Traditional Outsourcing removes the client on-site manager, using the outsourcer to manage all aspects of the process. In this case, billing can be transaction-based, or it can be cost based, such as per FTE or per labor hour.

  • Reserved Capacity allocates a certain level of outsourced resources to the process. This capacity is reserved for this one process only. Billing is typically per seat per year.

  • Build-Operate Transfer leverages the outsourcer's staff and management resources to establish the outsourced operation, and then transfers it to the client.

  • The Co-Managed Facility uses the outsourcer to manage one of more processes that are outsourced, while the client directly manages other processes and owns the offshore facility and its technology infrastructure.

  • Captive Operations are owned and managed by the company that has moved its processes offshore, and has no involvement from an outsourcing company.

Note that there is another available option, which is not presented on the chart below: outsourcing a business process to an outsourcing provider who has a considerable onshore presence in addition to their offshore operations. This option is not discussed in the paper, because these providers usually do not deliver cost savings that are comparable to outsourcers who operate business processes entirely offshore.

Figure 1. Outsourcing Partnership Options

Co-Managed Outsourcing
Co-managed outsourcing is classical outsourcing, but with a manager from the company who is resident at the outsourcing provider. This approach provides an added level of confidence because of the presence of an experienced company manager, while it takes full advantage of the offshore partner's knowledge of local laws and culture. Therefore, this option has the lowest risk of any approach; however, it has relatively high ongoing cost because the client manager must be relocated to the offshore location and maintained there. These costs can be considerable, particularly for a senior individual. There is also the opportunity cost of dedicating a senior manager to the overseas operation.

Co-managed outsourcing can be used if a process to be outsourced lacks the maturity to be completely turned over to an outsourcing organization. The co-managed process can be used to leverage the outsourcer's process expertise to improve the maturity of the business process, so that other partnership options can be considered.

Costs, although relatively high, can all be reviewed by the resident manager, allowing billing to be based on costs incurred. Although costs are high, they can at least be well understood.

Traditional Outsourcing
Traditional outsourcing is the movement of a complete business process to the outsourcer, in this case offshore, taking advantage of the outsourcer's expertise with the process being outsourced. The outsourcing company takes complete responsibility for carrying out the business process. The company makes quality measurements on process outcomes, but is not involved directly in carrying out or directly managing the process itself.

This approach is most appropriate for processes that are mature and well understood. There must be adequate documentation on the process so that another organization can carry it out. Another essential ingredient of process maturity required for this option is the ability of the client to measure performance of the process once it has been transferred.

Traditional outsourcing has traditionally been billed either on a cost basis, per hour or per FTE, or on a transaction basis. Billing on a transaction basis gives the outsourcer great incentive to control costs; at the same time, it places even more requirements on the need for measurements so that important equities such as the client's image with its customers are preserved.

A weakness of this partnership model is its lack of incentive for the outsourcing provider to improve the effectiveness of the outsourced process and reduce its cost. However, there are measures that can be taken to deal with this limitation.

If this partnership model is employed, the company needs to structure incentives for the provider to reduce costs over time. Without such incentives, if the provider reduces cost, then their revenue and profit are reduced. With properly structured incentives, though, the provider can maximize their own profit by reducing total cost, resulting in a win-win situation.

As an example, suppose the outsourcing provider is performing telephone customer support, and suppose the partnership agreement stipulates that the provider is compensated on a per-transaction basis. In that case, the provider maximizes profit by carrying out all transactions. If the provider might learn in the course of this work that some measures taken by the company could reduce the number of service calls, such as a product change or even a change in the owner's manual, the provider has a disincentive to report such information to the company. On the other hand, if the partnership agreement gives the provider a share of the savings produced by provider actions, then the interests of the provider and the company are aligned, and they can work together to reduce total cost of the outsourced business process.

Another example of an incentive that helps to align the interest of the company and the outsourcing provider would be an incentive to reduce average handle time for calls. If the provider is compensated for minutes spent in call handling, there is no incentive to improve the process to reduce the average call handle time, such as by building an automated system to handle certain classes of calls. But if the provider has a specific incentive to reduce call handle time, then the cost of the outsourced process can decline as the provider reacts to the incentive.

Reserved Capacity (Fixed Cost)
Reserved capacity provides outsourcing at a fixed cost. This can be the lowest- cost approach, though only for captive operations. The reserved capacity option consists of the purchase of enough outsourced capability, in terms of staff and infrastructure, to perform a certain amount of work; this capacity is kept in place, regardless of the workload. When this option is employed, the outsourcer does not have to adjust staffing to meet workload demands; avoiding the expense of constant staffing adjustments reduces costs.

When this dedicated capacity is fully used, the reserved capacity partnership option can provide offshore outsourcing at the lowest possible cost for captive operations. If there is fixed capacity and the company has sufficient volume to use it to the maximum, then the service provider can fully leverage not only the staff but also the infrastructure that has been put in place across more hours of operation, and reduce costs.

Each seat that is established offshore has cost associated with. Not just the office it self, but also the technology infrastructure, in terms of computing and, particularly, redundant international communications. Using the reserved capacity approach, if there is work to keep one seat operating at all times, then the infrastructure costs for that one seat can be spread over 24 hours of operation per day.

Much call center outsourcing is characterized by high volume during the day; peaking during US business hours, then much lower volumes at other times. Such an operation might have a hundred people during US business hours but only 10 people at other times. With the traditional approach, in this case infrastructure would be provided (and paid for) for 100 seats, which would be 90% unused during off-hours.

The method used to balance workload 24 x 7 depends on the company and the nature of their work. If a large company has multiple centers with significant volume during the day, it may be possible to outsource some of this volume offshore to keep the offshore center working at a steady rate 24 x 7. Another approach is to perform real-time work, such as incoming calls, as it arrives, and to handle back-office work such as data entry, review of submitted forms, or email processing, at other times. Outsourcing a balanced mix of on-line and off-line work is a particularly effective technique, since it maintains full resource utilization even though the real-time part of the work fluctuates.

An international bank outsourced their customer contact and call centers offshore and used the reserved capacity partnership model. The bank had more than sufficient call volume to completely occupy the purchased capacity. A baseline volume of calls was sent to the offshore center for 16 hours per day, 7 days per week, so that it was kept completely occupied, and the bank handled the volume of traffic above that level in their own onshore centers. They have further reduced their outsourcing costs by using off-peak hours for non-real-time work.

With the build-operate-transfer option, the company invests in the facility, and the outsourcing provider constructs, staffs and operates it, and once it is fully operating, then ownership is transferred to the company. This approach provides the company with the captive operation partnership option, but removes most of the risk that is involved in starting a new business operation in an unfamiliar business environment.

The CEO of a major European insurance company started a major offshore outsourcing initiative, in order to move back office operations and customer service offshore. Because European companies are subject to value-added tax on work that is outsourced, which would add significantly to the cost, so captive operation was the chosen option. With this option, the offshore operation is owned by the onshore company, so there is no VAT added to the cost of the work that the offshore company performs. India was selected as the location for the outsourcing.

However, the company had no experience with starting an operation in India, including such issues as Indian employment methods and laws, linguistic training and other issues connected with operating an offshore business operation in India. For these reasons, the company structured the offshore partnering relationship as build-operate-transfer, with the transfer structured as an option that the company can exercise at their election.

Typically, the cost of build-operate-transfer includes significant upfront investment by the company in the establishment of the facility. The outsourcer is paid a management fee while operating the facility, plus a fee for the intellectual property that is transferred when the outsourcer's business processes are transferred to the company. However, that upfront investment affords a significant reduction in the risk of starting up the offshore process, and permits the company to obtain a captive facility, which can have the lowest ongoing cost of any partnership option.

Co-Managed Facility
The co-managed facility option has both the outsourcer and the client managing some business processes in the offshore facility, which is owned by the company, along with its technology infrastructure. This approach is particularly useful if it is desirable to obtain the labor cost arbitrage advantages of moving business processes offshore, while still maintaining tight company control of one or more processes that may be judged too strategic to be completely outsourced.

As an example, consider the example of a US company that operates as an outsourcer. The process that they provide, while not strategic for their clients, is their core competence, so they did not want to just provide that entire process to an outsourcer. They decided to open their own facility in India. They bought a facility, got a small team in place and started a pilot. The results were not as good as desired; in this unfamiliar business environment, they found it challenging to hire and train people. The company then partnered with an offshore outsourcer, who provided only hiring and training services for the company's captive operations. The facility is now operating successfully and is providing the results that were sought.

Typically, when this option is selected the outsourcer charges a management fee as well as a fee for the transfer of intellectual property in terms of expertise that is transferred.

Captive Operations
A captive operation is run by the company in the offshore location. Thus, although the work is moved offshore, it is really not outsourced—the company simply opens an office in another country to handle the business process that is to be moved offshore.

Well-known companies running captive operations include GE, Dell, American Express and HSBC. GE has operations located in three cities in India, with a total of 20,000 people. Dell and HSBC have sizeable operations in Bangalore.

This approach is typically used when the company wants to achieve the benefits of labor cost arbitrage from an offshore location, but the process to be moved offshore is strategic, and the company believes that is must maintain complete ownership and control of the process.

This option appears to offer the ideal combination of low cost—there are no costs at all from the involvement of any third party such as an outsourcing vendor, and the company controls all cost—with complete control of the operation. However, experience indicates that this option may not be as simple at it appears.

Opening the captive operation offshore requires the company to acquire a facility, recruit, train and supervise a workforce, all in an unfamiliar culture. The offshore culture may have norms—and laws—connected with contracts, leases, and dealing with employees that are unfamiliar to company management; establishing a large operation could become a costly way to learn about the offshore culture.

Because the captive operation must be started at a great distance from locations where the company has experience, in a different culture, it carries the highest level of risk of any of the outsourcing approaches. In addition, this approach also requires the greatest investment, since a facility must be acquired and staffed in order to establish operations. If successful, a captive operation can deliver the lowest cost of any partnership option, but again, has the highest level of risk and the greatest investment of any of the options. This approach is for the confident, with the financial ability to make the significant investment that will be required, and the patience to wait for the long time period for the return on investment.

If the company is located in a European country that has Value-Added Tax, this option may be especially attractive, because outsourcing a business process to another company would require VAT to be added to the outsourcer's costs. However, if the offshore operation is a captive operation, then VAT does not apply, potentially producing considerable savings.

A major insurance company that moved their customer service and claims processing operations offshore needed to use the captive operation approach due to VAT considerations, but they wanted to be in operation quickly and have great confidence in their ability to do so. They used the build-operate-transfer mode to build the captive operation. This option may make sense as an outcome of build-operate-transfer as an approach.

Selecting A Partnership Option
In the discussion above of partnership options, a number of factors were considered that could be influential in the choice of an approach for offshore business process outsourcing. They are:

  • Process Maturity—if the outsourcing company is to manage the process, then the process must have reached a state of maturity, including documentation and quality measurement methods, that allows is to be turned over completely to an outsourcer, and the company can use the established measurement methods to assure itself that process quality is being maintained.

  • Investment—a partnership option that relies on the outsourcer to provide facilities and staff, and lets the sponsor pay for work as the outsourcing proceeds, leverages the investment of the outsourcer and reduces the investment required. A company-owned operation may be appropriate if the company is strongly committed to the success of the outsourced operation, and is comfortable with the review that they have conducted of offshore outsourcing. The company must also be comfortable with the higher level of initial investment that will be required.

  • Ongoing Cost—the lowest ongoing cost can be achieved if the sponsor directly owns and manages the entire outsourced process. On the other hand, this is also associated with the highest level of risk and the highest upfront investment.

  • Strategic Nature of the Process—if the process to be moved offshore is strategic to the sponsor, turning this process over to an outsourcer may be inappropriate, and direct sponsor involvement in management, or even sponsor ownership of the entire outsourced operation, may be the choice.

  • Local expertise—establishment of an offshore process center requires an understanding of local laws, business practices and employee relations. If the sponsor has this expertise, then some partnership options that otherwise would be too risky become practical.

  • Value-Added Tax—several Western European countries impose a Value-Added Tax, which can require the sponsor company to pay a tax of 7% or more on the total amount billed by an offshore outsourcer. In this situation, the need to avoid VAT may dictate that the company either own or have the ability to own the entire offshore process.

The Table below shows each partnership option and the decision factors that have been discussed, that can influence the selection of one or another option. In the row for each partnership option is the value of the decision factors that favor the use of that option. The values of decision factors that tend to guide the decision toward the selection of each option are shown in green.

Table. Partnership Options And Decision Factors

Selecting An Offshore Partnership Option
The Table shows a major division between the three options at the top and the three options at the bottom, for a good reason. These options represent quite different approaches to outsourcing. The first choice to be made is between these two families of options.

The first three partnership options are variations of traditional outsourcing, where the company's business process is turned over to another company, the outsourcing provider, who carries it out. There may be some participation onsite on the part of the sponsor in management of the process, as in co-managed outsourcing, but all of these options share this property: the outsourcer carries out the business process and owns the infrastructure. The outsourcing provider is responsible for the results.

The second three partnership options represent a different approach to outsourcing: the company owns the infrastructure and is directly managing some of the offshore operations. In the captive operations option, the sponsor directly owns and manages the entire process; build-operate-transfer can be regarded as a step toward captive operations, where the local and process expertise of an outsourcing company can be leveraged to reduce the risk of starting a far-distant operation, and then, when it is fully operational and effective, it is turned over to the sponsor. The third choice in this family, co-managed operations, uses an outsourcing company to run some processes, with the sponsor directly managing other processes.

The first decision to be made is between these two families: whether the process is to be turned over to another company, or whether the company wishes to run, and even own, the entire offshore operation. VAT factors, and the extent to which the process is strategic to the business, can govern this decision. The final factor is the availability of the initial investment capital to establish and staff a new facility in a remote location.

If one of the first three choices is to be adopted, then process maturity can determine whether the process can be completely outsourced. If the process is mature, then if a continuous workload can be delivered to the offshore process, then the reserved capacity option provides the least cost. If the workload will vary, so that staffing adjustments and planning for workload variations will be required, then either traditional outsourcing or co-managed outsourcing are reasonable choices.

Co-managed outsourcing can be a way to provide company management with added confidence in the outsourcing approach. One approach that is sometimes taken is to use the co-managed approach to start an offshore outsourcing operation. It is then continued only until results of the desired quality and quantity are being delivered, and then transitioned to traditional outsourcing, to eliminate the cost of supporting one of the sponsor's senior managers offshore. The company takes responsibility for producing the desired results.

If one of the bottom three approaches is to be adopted, then if the company wants to directly own and run the offshore process operation, then captive operations will be the eventual goal. If the company does not have considerable local expertise and contacts in the offshore area, then build-operate-transfer can be considered as a way to reduce start-up risk. The co-managed facility is really a blend of two operations: captive operations and traditional outsourcing. This option can also be used along the path to captive operations.

About Ashish Kumar:
Ashish Kumar, Assistant Vice President –Strategic Accounts, is one of the founding members of 24/7 Customer, an offshore Business Process Outsourcing company. He currently handles Business Development for 24/7 Customer in the UK. Ashish has handled several key roles including program planning and transition, marketing, and strategic account management. He has been associated with the offshore outsourcing industry for the last 7 years. Ashish holds an MBA and a degree in Computer Science.

About 24/7 Customer:
24/7 Customer is a provider of business process outsourcing services and an offshore-based, integrated Customer Lifecycle Management services provider
. 24/7 Customer enables customers to enhance customer-impacting business processes through its experience, size, scalability, flexibility, business understanding and operational excellence. Founded in April 2000, 24/7 Customer employs over 4000 professionals across six offices.

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