Industry news

The BPO market

In our current economic climate, enterprises are vigorously looking at ways to retain their core talent and processes while containing costs on routine, tactical functions such as administrative finance, HR, customer management, and procurement processes.

The industry for BPO (the transfer of management responsibility of these routine business processes to a third party) has been enjoying steady growth the past decade and we anticipate this will accelerate with current economic conditions. BPO is a logical direction for many. Service providers can offer companies cost efficiencies and improved process rigor using appropriate low-cost offshore talent and standardized processes underpinned by the latest technology tools and platforms.

The Asia-Pacific region has been crying out for more comprehensive shared services and outsourcing structures for years. Singapore and Hong Kong have been the regional hubs for most multinationals the past 20-plus years, but are now far too costly for running shared services or outsourced operations. And many Pan-Asian businesses, or regional hubs of global multinationals, have shied away from shared services or outsourced models because they didn't have low-cost options available. The Asian business culture has also favored in-house models for its administrative support functions like HR, finance, and procurement.

Enter China?

Chinese BPO firms can perform well in the medium term, delivering knowledge-based services to Chinese speaking, and some Japanese and Korean speaking businesses, but breaking into the global market to deliver services to Western enterprises will be much more difficult. Consider the following:

China is in a time-crunch. China is already touting its Tier 2 cities, such as Xi'an and Chengdu, as the mainstays Beijing and Shanghai already suffer from chronic job attrition (30%) and wage inflation. India and other offshore locales, such as the Philippines and Eastern Europe, have enjoyed a stable period of several years to develop their BPO infrastructures before these issues crept in.

China is moving into BPO with little breathing space to establish its infrastructure and build critical mass. It is easier for BPO firms to combat attrition and wage inflation once there is a critical mass of staff and infrastructure available.

Wages and attrition for knowledge workers in China are already high and are not much lower than in India, which has more experience in BPO and much better English language skills. We are also seeing attrition rates as high as 30% in the major cities of Beijing, Guangzhou, and Shanghai.

Vendors wary of the 'India experience' all over again

With all the initial teething problems firms endured sending out BPO services to India, why would they want to go through all this again with China?

Some outsourcing giants, such as Infosys and Tata Consultancy Services (TCS), have only established a token foothold in the region, in the hundreds of employees, as opposed to the multiple thousands in India. This seems to indicate these firms are still hedging their bets on China. Only IBM has surpassed 1,000 employees in China for BPO services.

Latin America is a compelling alternative for US businesses. We are already seeing strong competition for BPO services from Latin American countries such as Brazil, Argentina, and Mexico for the following reasons:

* Wages rates are comparable.

* There is little need to relocate staff into the United States

* There is no need for bridge teams, which spend their time overlapping development work with onshore and offshore teams

* Staff travel costs are far lower for nearshore.

* English competency is strong.

* Staff attrition is lower in Latin American countries than in India or China.

The strong competency for Latin American workers to deliver English and Hispanic voice-based services and their ability to administer routine business services makes the region an attractive location for services providers to develop BPO service delivery centers. For example, companies can now source administrative accounting tasks for comparable rates in Mexico as compared to China or India. See “Time Zones Do Matter: Rediscovering the Americas and Nearshore Delivery” for a more detailed discussion of Latin America as a nearshore location for North American operations.

China's core competency is engineering

China is more of a manufacturing/industrial powerhouse and it is adept at performing administrative business services. Rather than BPO, R&D services are much more in the Chinese DNA and a direction it will likely go. China could do very well pursuing outsourced industrial design work, contract manufacturing, biotech services, etc.

The trend is away from mere labor arbitrage. BPO services are increasingly moving away from the body-shopping game and more toward the provision of value-added business services and innovative products. Most of the offshore BPO providers increasingly prefer to price their services by transactions, for example invoices produced per day or reports per month, as opposed to cost-savings per employee salary.

Pricing services by employees provided as opposed to services delivered expose the service provider to increases in wage and currency appreciation, which is threatening to erode the offshore service models of today’s BPO providers. With China’s prime attraction for BPO services being low-cost workers, moving work over here could be a regressive step for many enterprises, with the current wage appreciation and employee attrition dynamics. Having said that, experienced outsourcing providers delivering Chinese-based BPO services can claim to have learned from past mistakes and seek to rectify them.

China's English competency is a major minus for BPO. While Singapore and Hong Kong adopted English as their mother tongue many years ago, China is still a good decade away from being able to boast decent English-speaking competency. Beyond the Chinese-speaking languages and some surrounding Asian languages, such as Japanese and Taiwanese, it is difficult to see China becoming more than a local hub for its domestic economy and some neighbors.

To run truly pan-Asia-Pacific services, not having a strong English-speaking competency is a major issue with BPO. When running the vast majority of BPO services, there needs to be elements of close interaction between the outsourcer, or offshore worker, and the mother company outsourcing the services.

A shaky legal system, lax data privacy, and patent protection remain a problem. BPO services rely on sensitive employee, customer, and financial data being sent to remote locations and adhering to a multitude of industry regulations, data privacy, and compliance standards. China does not have a good track record on these issues.

China's 'Great Firewall' could inhibit its knowledge services industry

Just last month, there were 868 arrests made of people providing “unhealthy” content over the Internet. Google reports that the most searched for words in China are related to money and technology, which indicates that this unhealthy content probably wasn't all pornography.

People talk a lot about how China will be changed more by the Internet than the Internet will change China. However, if the Chinese government manages to keep most Western sites from being accessed and persists with stepping up attempts to block this unhealthy content, then surely there will be a limit to the level with which China can be changed.

One of the reasons India and the Philippines, for example, have been so successful delivering outsourced services, such as application development, insurance services, and accounting services, is the ability for their workers to learn and assimilate with Western business culture. Interaction with Western staff is vital and so is the ability for offshore workers to research information from the Web. If the Chinese middle classes are continually blocked from integrating their online culture with the rest of the world, won't this affect their ability to assimilate, understand Western business culture, and deliver knowledge services for customers outside of the Great Firewall?

The constant attempts by the Chinese government to keep China sectioned off from the rest of the world could substantially hold back the country from delivering knowledge-based business services, such as BPO services, for Western companies. If their development is stifled through restricted access to information and people outside of China, they could be left performing knowledge tasks that require very limited critical business thinking, like data-cleansing services, digitization, data entry, and forms processing.

Reality check

China has potential to develop a compelling BPO industry, but many obstacles stand in the way before it can offer anything beyond serving a sub-region.

It’s tempting to get overexcited about anything China-related these days, but a look beneath the surface may offer a reality check of what you’re really getting.

Harvey Nash outsourcing has announced the signing of a two-year call centre services contract with Prudential plc’s Vietnamconsumer finance business, Prudential (Finance) Vietnam.

The contract, which was signed in the presence of Prime Minister Nguyen Tan Dung at the ‘Discover Vietnam’ business forum, will see Harvey Nash outsourcing become the largest BPO and call centre provider in Vietnam with close to 400 staff. With its VoIP-based telephone infrastructure, Harvey Nash outsourcing will support the sales drive for Prudential’s range of personal finance products via 250 call centre representatives based in Ho Chi Minh City and Hanoi. Commenting on the contract, Kalidas Ghose, Chief Executive Officer, Prudential, said: “We have been working with Harvey Nash outsourcing in Vietnam on a much smaller scale for the past nine months, and the team has really exceeded our expectations. As such, we were delighted to extend and expand our contractual agreement with Harvey Nash outsourcing.” Harvey Nash outsourcing Vietnam will support Prudential by generating leads, pre-screening potential customers, and providing them with information about Prudential’s products and services. Marc Voss, Vice President, Harvey Nash Vietnam, added: “Prudential is the market leader for financial products in Vietnam and we are very excited to continue our strong partnership. Our experienced and dedicated team at Harvey Nash outsourcing, together with our state of the art telecom infrastructure, will enable us to deliver value-added services to Prudential. Prudential’s decision to expand its partnership with us reinforces our belief in the potential of BPO outsourcing in Vietnam.” Harvey Nash outsourcing has been working in Vietnam since 2000 and recently acquired SilkRoad, a technology and software development company, to further cement its position in the region, and widen its international reach and service offering.

Business is becoming increasingly concerned over the health of the UK economy, with senior management fearing they lack the experience to cope with a major slowdown, according to research by Pentacle, The Virtual Business School.

The survey of over 200 businesspeople found that sixty-nine percent senior UK executives believe the UK is heading into recession or a serious downturn – and over 70 percent of respondents admit UK bosses have little or no experience of how to deal with a downturn. Only three percent believe an economic recession in the UK is highly unlikely.

Other key findings are that 62 percent believe business leaders lack experience of being more tactical and exercising caution in a difficult economic climate. However, over 60 percent think a downturn will bring some benefits, cutting out the fat in many businesses and clearing out some of the competition.

The research casts doubt on the capacity of businesses to cope in an adverse economic climate. A majority of executives (62 percent) estimate that under a quarter of the senior staff at their own firm held key senior positions at the time of the last UK recession in the early 1990s. Sixty-four percent believe that the UK economy has been booming for so long that many senior bosses have little or no experience of how to deal with a downturn.

Sixty-two percent think that business leaders have been valued for their vision, positive culture and risk-taking, leaving them with little experience of being more tactical and exercising caution in a difficult economic climate.

More worrying still, those in the know – the CEOs and those at Board level – estimate the number of business leaders with experience of handling a downturn is considerably smaller. Half of the so-called “C-suite” believe only one in ten senior managers held equivalent positions at the time of the last UK recession.

They are also more downbeat on the capabilities of UK management to survive a downturn more broadly. Seventy-one percent of them believe that the economy has boomed for so long that UK management lacks experience of a less benign economic climate.

Professor Eddie Obeng, director of Pentacle the Virtual Business School and a former executive director at Ashridge Management College, said: “After a long economic cycle with nearly 15 years of growth, most of those at the top of business today are used to vigorous expansion, ambitious projects and taking major risks, all with unwavering confidence. A strong economy has often protected them from the impact of bad decisions.

“For the Googles of this world, the closest they have been to a recession is post 9/11 – a much more contained economic crisis than the global tightening we are now witnessing. The question is whether these same bold leaders have the expertise to adapt to much more challenging conditions.

"With most British workers questioning the ability of bosses to be more tactical and exercise caution on this side of the pond, you have to wonder about the effectiveness of management to deal with a downturn. A steep learning curve is coming.”

Seventy-four percent of junior staff confess that insecurity, distraction and 'fear of the chop' may damage struggling businesses further, as workers vie to impress those at the top.

Only half of their senior colleagues predict such a scenario could occur, even though 71 percent admit that as soon as the downturn hits the bottom line there will be a knee jerk reaction of 'panic firing' from the top.

Eighty-three percent of executives argue that senior management should invest in strong internal communications in a downturn, yet only one in five believe that they will actually do so.

Similarly, 56 percent believe that businesses should actively remunerate key staff, but only 26 percent think this will happen.

The research reveals a widespread view that cost-cutting will be the top priority, with 95 percent believing that reviewing headcount will be the prime focus.

Professor Obeng said: “On the whole, staff appear to be quite clued-up on the agenda of senior management and the watchful eye that will be kept on financials when things get tough. Yet interestingly, two-thirds still argue that curbing business plans and investment should be a low priority for management.

"The very nature of a downturn – from staff insecurity to effective financial control – means that priorities must change with business plans being reviewed, for the security of the business and its employees.

“Management needs to identify the essential priorities for the business – those that are achievable, do not require unnecessary investment and will produce swift returns. Cost-benefit analysis has an important role to play here in the shaping of strategy as it forces companies to think much more critically about their condition and the needs of the market. Businesses need to focus solely on the things that will have the most robust financial impact.”

The survey also highlights severe criticism from business of the Government’s handling of the economy.

Eight-one percent of executives – and even 76 percent of those working within Government – believe the Government was running too large a budget deficit at the height of the boom, making it difficult to give the economy a fiscal stimulus in hard times.

65 percent go so far as to claim that it would be better if a downturn had materialised earlier, to check the excesses of the credit boom.

On the upside, 69 percent believe the Bank of England and Government still have the financial and economic ability to alleviate the current turmoil.

The Government should remain concerned, however. While business is split 50:50 on whether the emerging downturn will be a brief dip or poses a more significant threat, 65 percent of those working in financial services believe the downturn will be more serious. The nature of the credit crunch has seen the financial sector, which accounts for about a tenth of UK GDP, the most badly affected sector to date.

Professor Obeng said: “The business community is clearly concerned about the Government's handling of the economy in response to both the credit squeeze and Northern Rock. With the last run on a bank having been a century ago, we should not be surprised that the Treasury had no ready management experience to draw on when dealing with such a large financial crisis.

"With Northern Rock clocking up a liability equivalent to the cost of four Olympic Games or two Iraq wars, one would hope that business leaders will recognise the need to show a little bit more foresight and control with their own bottom line. "It is encouraging that the financial services have already recognised the risks of the current climate, but it is important this attitude spreads to other sectors of the economy. The challenge is to run a much tighter ship now that the party – of explosive global growth – is coming to an end.”

AstraZeneca has announced it has signed a five-year business process outsourcing (BPO) deal worth approximately £47.4 million with Cognizant to streamline its clinical data management.

AstraZeneca, who last year signed a £684 million IT outsourcing deal with IBM, is intending to centralise the management and delivery of the clinical part of its business.

After the systems' transition is complete by the end of this year, AstraZeneca will move into a transformation phase, to optimise and drive further efficiencies from management of key clinical data.

Buyers have forced discounts of up to 23 per cent on outsourcing deals during the first two months of this year, a study by Compass Management Consultancy (CMC) has found.

The 12-month analysis of 120 deals worth more than £30m each showed UK companies opened negotiations with demands of between 15 per cent to 23 per cent cuts across the board as long-term deals were renegotiated.

Compass claims that many clients are renewing deals in order to get short term discounts from vendors without due diligence and with no understanding of the competitiveness of their current contract.

Compass warns that even though outsourcing providers might offer discounts of 18 per cent below the in-house operation on day one of a deal they will often recoup the discount over the term of the contract.

Private equity firm Kohlberg Kravis Roberts & Co (KKR) has acquired Northgate Information Solutions in a deal valued at over £1bn.

Chris Stone, chief executive officer at Northgate Information Solutions, commented: “KKR’s investment approach makes them an ideal partner for Northgate, as we share a common business philosophy for long-term value creation. The opportunities for us to expand the business under their ownership are extremely exciting.”

For Northgate HR & Arinso, the HR Division, the plans are to strengthen the human resources outsourcing, systems integration and software businesses, both through organic growth and a programme of strategic acquisitions. The plans include continued geographic expansion, with new offices being opened in fast growing markets, as well as increased investment in existing operations.

According to Stone “The acquisition of Arinso last year was transformational,” he commented. “Now operating as a single global company, our HR division is leading the way in the global Human Resources market. Under our new ownership, we will continue to drive delivery excellence in all areas.”

The deal completed in accordance with the original timetable at an enterprise valuation of £1.1bn.

TheTrainline, the UK’s leading online train ticket provider, has signed a deal with First Ondemand to supply a security system for a new e-ticketing service. Travellers will now be able to buy tickets on their mobile phones.

Dubbed the new Trainline Smart system, a pilot will be carried out later this year, allowing customers to download via the Internet before downloading them onto a smartcard either at home with a plug-in reader, or at stations. To validate tickets, customers simply tap them against a reader at railway stations, or with a handheld version onboard the train.

First Ondemand CEO, Stephen Moore said: "Smart technology is changing the way the world does business and how companies and people communicate. The popularity of the London Oyster smartcard shows this innovative method of rail ticketing is clearly becoming the delivery channel of choice for many customers. The ability to incorporate an identity and authentication layer brings a greater level of client and customer assurance for transactions through the mobile phone."

Over the next 12 months, IT expenditure is set to beat inflation, says the National Computing Centre (NCC).

According to the NCC, businesses are optimistic about their IT Expenditure, despite the looming recession. With a large number of companies outsourcing their IT function, among 120 firms surveyed, 58% predict an above-inflation increase in their IT expenditure over the next 12 months. The construction and health sectors are set to see the highest growth, said NCC.

Stefan Foster, Managing Director of NCC Ltd said: “We hear talk of a recession, but the Benchmark results indicate that IT purchasers are remaining confident about future economic conditions; they are making sure that their businesses have the right technology to deliver growth over the coming years, but they are not over optimistic”.

Wiltshire County Council has signed a seven-year, £12m contract to improve its frontline support services.The project, led by IT services supplier Logica, will cover upgrades to finance, payroll and human resources (HR) systems and aims to save £11m a year.

Logica will set up a shared services centre to support the enlarged unitary authority and will host a centralised system for the new council, containing all financial and HR information.

Financial services group Prudential has signed a two-year agreement with supplier Harvey Nash for the outsourcing of its call centre operations.

Using voice over IP technology, the outsourcer will handle the sales of consumer finance products through a 250-strong workforce based in Ho Chi Minh City and Hanoi in Vietnam.

The contract will also include generation of leads, as well as pre-screening potential customers and providing them with information about Prudential’s products and services.