Report for RBS on Offshoring to India

1. Offshoring - Background

The offshoring of business services is not a new phenomenon. Credit card processing and very small volumes of call centre work have been conducted in Latin America and the Caribbean for over two decades. In addition, the global relocation of IT and software services to India, particularly, but also including other destinations since the late-1980s and early 1990s. What is new, though, is the scale of development and the pace of change in the relocation of ITES-BPO (Information Technology Enabled Services - Business Process Outsourcing), driven by organisational and technological transformations and by economic pressures and facilitated by a hot of regulatory and political factors.

The relocation of business services from the developed countries to developing geographies now extends far beyond earlier experimental phases. Indeed, the remote delivery of services to low (or lower) cost destinations has become a core element in corporate re-structuring and process re-engineering programmes. Companies have shifted from tactical or responsive offshoring to strategic and to what has been termed transformational offshoring. The latter implies both that the migration of services has led to a transformation in an organisation’s operational structure and sourcing strategy and that offshoring has delivered a concomitant re-engineering of the business processes subject to this relocation.

India was the destination for pioneering initiatives in the global relocation of business services and remains the single most important remote geography for offshored BPO activity. One recent estimate has India as the current market leader in global sourcing supply, servicing 51 percent of overall global sourcing demand (KPMG-Asia Oceanic Computing Industry Organisation; see also Nasscom, 2010: 61). Notwithstanding the emergence of other global markets, it may even be the case that India has retained – or even increased – its share of global BPO. In 2005, India was believed to account for 46 per cent of offshored BPO (Nasscom-McKinsey, 2005: 55). As is discussed below, there are multiple reasons why India established and has retained this dominance.

India’s initial attractiveness as a location for BPO derived from the demonstrable success of the country as a destination for IT and software services from the late-1980s and increasingly through the early 1990s. Financial services were at the heart of early decisions to offshore BPO. The impact of decisions taken by American Express and GE Capital to locate facilities in India during the mid 1990s was enormous. The motivating factor was the promise of substantial cost savings in conditions of tightening domestic labour markets in the 1990s ‘boom’. Little wonder that the business case for India seemed incontestable when Nasscom-McKinsey (2002) claimed that GE had achieved annual savings of $340 million from its Indian operations.

The earliest offshoring involved in-house - or captive operations as they are known in India - centred mainly on the financial services ‘vertical’, but including companies such as Dell and Hewlett Packard. However, the complexion of the industry and the specific impetus for offshoring changed thereafter. Indian third-parties such as EXL, Daksh (taken over by IBM), 24/7, Mphasis, WNS, Spectramind (acquired by Wipro), and Infosys-Progeon increasingly attracted U.S. work

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(and then later UK processes) in the wake of the post dot.com downturn which intensified sectoral competition and focused boardrooms on the need to cut costs. In these conditions remote location took off. Subsequently, multinational service providers (IBM, Convergys, Accenture) entered the Indian BPO space, sometimes acquiring local suppliers, and, in turn, significantly accelerated offshoring and sharpened competition in the Indian BPO marketplace. Combining the roles of both service vendor and consultants in the developed economies, these firms possessed ‘domain’ knowledge and could now promise the same service quality at much lower cost through extending its global supply chain. For many clients, the leap into the global unknown was seen as less perilous if it was being undertaken by an IBM or Convergys as opposed to a relatively unknown Indian company.

Despite predictions that Indian third-party suppliers would be dwarfed, taken over or squeezed by these largely US-based MNC providers, ‘pure play’ companies (such as EXL) demonstrated an unanticipated resilience. They continued to expand steadily during the first decade of the millennium, developing a maturity and expertise in specific domains, such as EXL in financial services and market geographies. The ambition of these companies is reflected in the fact that several became global BPO players themselves, following in the wake of GE Capital as it metamorphosed from captive to global third-party vendor, Genpact.

Perhaps the easiest way to demonstrate the increasing significance of India as a BPO destination is by charting the growth of employment (see Table 1). As can be seen, the growth rates in the early to mid years of the decade were frenetic. As discussed more fully below this rapid pace of expansion created a range of problems, particularly in relation to HR factors (recruitment, retention, training, attrition) and labour supply, which had a profound impact on the character of the industry and which still remain important influences on companies’ operations and should serve to inform locational decisions. The legacy of overheating in labour markets in Tier 1 and indeed some Tier II cities and, more concretely, specific concentrations within these cities, still impacts on companies’ operational capability, particularly in relation to issues of overall cost, labour cost, labour supply and attrition (see sections 5 and 6 below).

Table 1: Growth of Employment in Indian BPOYear Employment in

BPO% rate of growth

2002 107,000 n/a2003 171,000 59.82004 216,000 26.32005 316,000 46.32006 409,000 29.42007 553,000 35.22008 704,000 27.32009 738,000 4.62010 768,000 (est) 4.1

Sources: Nasscom (2002-2010)

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The importance of financial services to the Indian IT-BPO sector has been evident since inception. Nasscom has demonstrated consistently in its reports the importance of the BFSI (Banking Financial Services Insurance) ‘vertical’ to the BPO industry and, more specifically, has identified retail banking and insurance as the two largest sub-sectors of BFSI activity. Financial services accounted for as much as two-thirds of the volume and value of offshored activity undertaken in India in 2003. Following greater sectoral diversification (telecommunication, technology, manufacturing, retail, healthcare, utilities, travel and transportation and so on), the proportion of BFSI across the Indian BPO sector financial services has declined in relative terms, although of course it continued to grow significantly in absolute terms.

Even today the BFSI ‘vertical’ remains clearly the most important aspect of offshored business service activity in India. Nasscom (2010: 97) calculates that BFSI accounts for 50.3 per cent of BPO activity, notwithstanding the impact of the recession. It follows that in an increasingly mature Indian BPO industry, the deepest experience and greatest concentrations of domain expertise are to be found amongst the captives and the third-party companies specializing in banking and insurance voice and back-office activity. As far as RBS’ projected offshoring initiative is concerned, Nasscom’s recent verdict on the most mature segment of India’s BPO industry is pertinent (2010: 99).

Customer Interaction and Support (CIS) services (refers to the set of IT-enabled customer relationship management services including general query handling, voice or non voice services support, sales and marketing services) were one of the earliest BPO services delivered from India, and are the most mature service segment of the Indian BPO sector today.

2. Global Service Delivery

As the scale, diversity and complexity of ITES-BPO subject to migration have grown, so too has the breadth of geographical reach. The increasing use of the term global service delivery by the multinational corporations providing business services is not mere rhetoric, but reflects a rapidly evolving material change in the geography of sourcing and service supply chains. Until recently business services relocation was conceived principally of one-to-one migratory flows between organisations in the developed countries and remote operations in a particular developing country, for the purposes of this report from the UK to India. Admittedly, this might mean the companies making offshoring decisions using more than one supplier (e.g. Aviva to EXL, 24/7 and WNS in 2003-4), but the debate was almost exclusively framed in terms of offshoring to specific individual geographies, notably India.

What increasingly have emerged are multi-locational, multi-site strategies from both demand and supply sides, which seek to capitalise on the differing combinations of available skills and resources accessible in diverse locations and which may serve different geographical markets or customer segments. For example, a firm seeking lower-cost solutions may simultaneously source English-speaking voice services from India or the Philippines, Spanish language services from Mexico or elsewhere in Latin America, various IT, technical and multi-lingual requirements from Eastern Europe, data processing from China and so on. Consultants’ reports articulate what

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global service delivery entails. For example, Kearney (2007: 12-13) recommends that larger companies should develop ‘cluster’ footprints where the aim is to have one primary location supported by one or more secondary locations. The rationale is as follows.

By staggering functions in multiple locations, companies can make cost benefit trade-offs and adjust the functional mix over time as costs and availability of people vary…centres for low-end business transactions may be pure cost plays, while those for higher-end activities will depend on the quality and availability of the workforce. Similarly, certain functions will be sensitive to service disruptions so should not be placed in high risk areas. Language needs, time zones, cultures and regional coverage should also be factors in the decision…These locations should realise the best economies of scale…this model is flexible so tasks and functions can flow between centres over time as cost and talent situations change.

While the advantages that follow from such a multi-site strategy may be realised on a global scale across multiple geographies, the logic of such a multi-site perspective utlising the same or different vendors might be seen to apply when locating to different sites within a single geographic (i.e. national) entity.

Scale and volume are salient aspects as, from the perspective of client demand, it is only the largest companies that can pursue these strategies, and that for companies seeking modest offshoring a single country strategy may be all that is needed. At least, from the perspective of RBS’ UK insurance activities, it may be that single country delivery (i.e. India) is the most appropriate strategy, given that the insurance services in question form a relatively discrete vertical segment. Best fit should be the watchword when offshoring decisions are being contemplated. Put another way organizations need to consider the best combinations of onshore, nearshore and offshore delivery that are consistent with their requirements. A populist way of making the same point is to use the expression ‘horses for courses’.

3. India and Alternative Destinations

To repeat the observation made above, the emergence of newer geographies has not spelt the end of India’s dominance. Global sourcing does not imply a level global playing field. Second after India in the global league table of offshore destinations is the Philippines which has captured perhaps 15 per cent of the global offshored market (Kearney, 2009: 10). One recent calculation by an industry body in the Philippines is that a total of 376,000 are employed in BPO with no fewer than 227,000 in call centre services (BPAP, 2009). However, the 2010 totals will unquestionably demonstrate a significant increase on these figures. There is no doubting that Philippines’ recent growth is remarkable given that at the most a mere 30,000 were employed in BPO as late as 2003.

Evidence from Indian industry sources suggests that the proportion of call centre work in India has declined, as the Philippines has demonstrated a recent comparative (cost and quality) advantage in this area. Rohit Kapoor (the CEO of EXL) has claimed that in India during the early years of the BPO industry around 50 per cent of BPO work was in voice. Primary research by this author demonstrates that the proportion in voice in Indian BPO may even have been higher than this,

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perhaps peaking at around two-thirds (Taylor and Bain, 2003; 2006). However, the trend highlighted by Kapoor is undeniable and it is clear that the Philippines has grown largely in terms of voice services in recent years.

However, it must be acknowledged that the Philippines engages overwhelmingly with the United States market given historical ties and cultural empathy. The Americanized accents of its contact centre workforce are held to contribute to a close affinity and Kapoor’s estimate that 75 per cent of the Philippines BPO workforce are involved in voice work (The Economic Times, 20 January 2010) would seem to be a reasonable estimate. Of course, there UK voice workflows have migrated to the Philippines (e.g. T-Mobile, Barclays) but the US market does remain dominant. It is certainly true that the majority of Indian third-party BPO vendors have established call centre operations in the Philippines, many of significant scale, in order to provide a complementary if not alternative source. Nasscom summarises the situation as follows, ‘India has consolidated its position as an IT and non-voice hub while Philippines is focusing on voice services’ (2010: 50). Of course, this does not mean that India does not continue to play an important role in sourcing call centre work. A major part of the most mature segment of the CIS (Customer Interaction and Support) services category, as indicated above, is call centre activity, notwithstanding some repatriation of call centre work back to the UK and the US (see below).

Another location for English-language services has been South Africa. One study projected that it would have 940 contact centres by 2008, nearly double the number estimated for 2003 (Kearney, 2007). Datamonitor (2006a: 41) presented a more conservative estimate of the country’s development. It would appear that South Africa has not fulfilled the expectation that, on the basis of its similar time zone and arguably closer linguistic compatibility to the UK, it would emerge as a credible alternative to India notwithstanding its higher cost base. It is interesting that in primary research conducted by the author in 2003, and to a lesser extent 2006, the senior management of organizations believed that South Africa was the most important credible alternative to India (Taylor and Bain, 2003; 2006) but by 2008 (Taylor and Anderson, 2008) it had not fulfilled this promise, displaced by other destinations. For what it is worth, South Africa has certainly fallen continuously in Kearney’s global rankings (discussed below) standing at 39th in the latest index (Kearney, 2009: 123)

What is striking about the global landscape is the sheer range of locations that are now considered as offshored destinations. The relative attractiveness of diverse locations on a range of criteria is provided by consultant A.T. Kearney in its ‘Global Services Index’ (2007; 2009), which ranks the top 50 locations worldwide for ‘IT services and support, contact centres and back-office support’. Kearney’s reports have proved influential for firms as they consider the relative advantages of a number of geographies as locations for their facilities.

To this author, it is problematic that Kearney’s reports have often been received uncritically. Great care must be taken in ascribing literal meaning to Kearney’s numeric rankings, which at best are generally indicative of certain global trends and far from definitive. For example, Kearney’s metrics conflate IT and software services with BPO activities, when what companies most oftenh need when contemplating offshoring is an accurate audit of the specific attributes of a potential location. A country - or even more precisely a region or a city or district - that might have skilled

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resources for certain back office or IT services may be deficient in the linguistic and cultural skills required for voice services. Kearney’s Index, therefore, is a blunt instrument as indeed other consultants’ reports often are. In addition, the rankings do not demonstrate relative importance in the scale of markets, workforce size, industry maturity, specific linguistic capability, scalability and so on, detailed criteria which should form part of an organisation’s locational decision making.

To make the point concretely; in 2009 Kearney ranked Thailand as number 8 and the Philippines as number 7 in its global index, a quite bizarre comparison given the increasing global significance of the latter and the limited scale and immaturity of the former (Kearney, 2009: 2). RBS should also be aware of the problem of consultants’ privileging or advocating certain destinations for commercial reasons. It is important that as an objective evaluation of potential locations as possible is conducted.

Nevertheless, with all the appropriate qualifications and caveats, Kearney’s rankings do provide some insight into the changing trends in the global services market. The five main Latin American destinations have risen in the rankings over time, reflecting their emergence as increasingly important locations. Stimulated by India’s example, state policies have promoted service exports, both nearshore to North America and remotely to Spain. Brazil’s development is notable with one survey (Datamonitor, 2006a) estimating 153,000 agent positions in outsourced call centres, albeit largely for domestic markets.

The recent history of the states of Central and Eastern European provide a salutary warning for those relying upon superficial impressions of a country’s capabilities rather than solid evidence. Half a decade ago the established CEE countries of the Czech Republic, Slovakia, Poland and Hungary were being hailed as potential if not actual global leaders (see Kearney, 2004). And of course there is no question that MNC services companies and Indian third party providers (e.g. Genpact, FirstSource) have opened facilities in, for example, Prague, Budapest and Lodz. However, this author always regarded such claims for Central and Eastern Europe as greatly exaggerated, for while undoubtedly pools of available technological skill and multilingual capacity have existed, questions have also arisen over scalability, depth of labour pool for the highest-end skills, rates of attrition of the most advanced resource and so on. By 2009, Kearney revealed that these four countries had fallen precipitously in their rankings (2009: 11-12) with the Czech Republic plummeting from 4th to 32nd, largely due to rising costs which impacts upon competitiveness for standardized activities.

The Middle East and North Africa has certainly grown in importance as a region attracting inward investment in remote business services. Egypt has emerged as by far the most significant destination providing both high-skilled and low-end services at low cost in both voice and diverse back offices for clients in both the developed countries and the region. Of all the emerging geographies, Egypt is the one that most justifies the hype surrounding its BPO industry and capability (ITIDA, 2009).

At the same time Kearney seems to be repeating its past mistakes of hyperbole in relation to other Eastern European states (Bulgaria and Romania) which it refers to as the ‘new offshoring stars in Europe’ (2009: 12). At the best these countries provide niche markets of limited scale and cannot

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deliver the end-to-end and scale solutions required of many companies. To have them 13 th and 19th

in the rankings ahead of say Canada (28th) as a near-shore destination or even the UK (31st) as an onshore location is at best misleading. The same critique is true of the Baltic States. Kearney ranks Lithuania as 21st globally, yet the evidence for the Baltic States’ markets indicates small scale operations. Datamonitor (2006b) estimated agent position numbers for call centres for Estonia, Latvia and Lithuania in 2007 at only 9,000, 1,000 and 2,000 respectively. So much for the great strides made by the last of these when Kearney admits that Lithuania only has 3,000 employed providing services to Europe in English, German, Russian and Polish.

The case for many of these ‘emerging’ locations for which great claims are made is non-proven and their capacity is infinitesimal in comparison to India or the Philippines. The general point for RBS as it considers the relocation of its insurance channels is that the potential of many countries should not be confused with their actuality. The ability to provide quality services at a certain scale remain key criteria in relation to the potential for successful offshoring and, against these criteria the overwhelming majority of locations frequently fail the test. In sum, there is often a lot of noise about newer destinations but much less substance. A key theme of this report is that the number of credible low cost destinations for BPO is far less than claimed.

India is the undoubted leader in all leading global location indices and will remain so in the short, medium and long term. As Kearney - in this case correctly argued in 2007 - India still offered ‘an unbeatable mix of low costs, deep technical and language skills, mature vendors and supportive government policies’ despite a 30 per cent increase in compensation costs in the previous 12 months. In their most recent report, Kearney could declare with equal accuracy.

In just one decade India has transformed and reinvented the outsourcing industry several times over, staying ahead of all the trends. India started as a low-cost destination that provided routine tasks for American IT companies and it still retains a comprehensive advantage in this area. At the same time, it has moved up the value chain. Today, virtually any offshoring service can be performed in India and new are constantly being invented. These services include routine data entry, finance and accounting, customer-facing functions, and higher-end outsourcing such as knowledge management and legal processes (Kearney, 2009: 7-8).

In terms of scalability, maturity and expertise, overall costs, particularly labour costs, depth of the skilled labour pool and in the crucial areas of linguistic capability and cultural compatibility, India remains the key location for offshored UK work (see Nasscom, 2010: 176-186 attached for a helpful summary of the industry body’s own interpretation of India’s country advantages).

4. Linguistic Capability and Cultural Compatibility

When mapping global re-location to developing countries it is necessary to stress a vital point, that offshoring largely follows the contours of linguistic and cultural compatibility, often the legacy of empire and colonialism. Thus, the largest proportion of all relocated services is in the English language. Significantly, the English-speaking Indian BPO industry derives around 60 per cent of its revenues from the U.S. (Nasscom, 2009). This represents a relative or proportionate decline from an estimated 85 per cent in 2002 (Nasscom, 2002), suggesting faster rates of relocation

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Nasscom (2009) estimated 22 per cent of Indian BPO revenues came from the U.K., a relative increase from the 20 per cent of Indian BPO revenues that were calculated as deriving from Western Europe in 2005 (Nasscom, 2005b). Although other European states over time have increased the extent to which they have utilized sourcing from India, the scale of activity has been negligible in comparison to the contribution of the U.K. As mentioned above, clients and customers from the US dominate the Philippines BPO industry. The Business Process Association of the Philippines recently suggested that 90-95 per cent of its industry ‘faced’ the U.S. market.

The limited French offshoring has been to the francophone countries - Morocco, Tunisia, Mauritius and Senegal (Datamonitor, 2006: 23-40). Services from Spain have migrated to Latin America, which also serves Spanish speaking North American customers. According to Datamonitor (2006) the Czech Republic, Hungary and Poland are the most important destinations for German speaking services. Wherever language capability exists in the developing countries, companies based in the developed countries will attempt to leverage cost advantages through relocation. Even small pockets are sourced. Dalian, a city in north-east China, serves as a hub for Japanese markets because, for reasons of historical geography, it has around 100,000 Japanese speakers.

In contrast to ‘globalised’ manufacturing, the linguistic abilities of workers in relocated business services are key to the success of the project, particularly in voice services. However, it is necessary to draw the distinction between call centres which interact with customers in the ‘home’ geographies and many back-office processes which do not. Of course, linguistic competencies are important for the latter since they require employees to read, interpret and communicate in written-English but the importance of sophisticated language skills is far greater for voice services (Taylor and Bain, 2005).

The conclusion that ITES-BPO cannot be located just anywhere is even more true for voice than it is for back office work. If finding the lowest-costs was the sole criteria driving the global location of BPO (and more specifically of call centres) then China, Vietnam, Thailand and other states with costs even lower than India would be the preferred destinations for English-language services. While China certainly does deliver some data processing for overseas markets, international call centre services hardly register on its radar. Datamonitor (2006) estimated only 7,600 outsourced agent positions, largely for Japanese clients. Despite rapidly expanding numbers of English-speakers the relocation of voice services to China is not a viable proposition quite simply because linguistic capability and cultural empathy are extremely important skill attributes. All BPO, but particularly voice services, are highly sensitive to the availability of advanced linguistic competence. English language services for the overseas market are a non-starter in China for the foreseeable future.

It has been argued that globalization and the global relocation of business processes represents a ‘race to the bottom’. This baldness of this assertion is inaccurate. It would be truer to say that the global relocation of business services represents a highly qualified race. It is an ensemble of factors (including infrastructure, connectivity, telecom costs, regulatory environment, skills, educational levels, managerial knowledge, linguistic capability, cultural empathy, the capabilities

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of supply firms, political stability and security) combined with the lowest possible costs that provides the basis of comparison between places and informs locational decisions. According to this reasoning, BPO offshoring contradicts the received wisdom of the so-called ‘hyperglobalisers’ that companies can be entirely footloose and helps explain why it is that, notwithstanding the dramatic expansion in global sourcing, many business services will retain some services at ‘home’ or may glolocalize them to nearshore destinations. Of course, the desire to leverage lower costs remains the principal economic driver behind the relocation, however much other factors (quality, temporal flexibility etc.) are part of the equation.

Commensurate with this understanding, the distinction between call centres and non-customer facing processes is important, since the latter appear to be less susceptible to linguistic sensitivities and arguably can be more readily relocated. The importance of this distinction will be discussed below in relation to the UK financial services industry. In the rapidly changing global landscape, the emerging trend appears to be that non-voice processes are being offshored to a greater extent and will be going forward at a faster rate than voice services.

5. Indian BPO Market Dynamics

The rapid growth of the Indian BPO industry was of course stimulated by cost savings, largely labour cost arbitrage (see section 7 below). However, cost arbitrage per se is meaningless without India’s other principal attribute, its workforce’s facility with the English language. In this respect a factor of considerable importance has often been overlooked in commentary on offshoring. Contrary to widespread belief, India does not have an inexhaustible supply of labour, capable of being readily employed in the BPO industry. It is certainly true that its international facing call centres and back offices are staffed with university graduates who have been schooled in English It cannot be assumed that 15 years of education in English necessarily equips these graduates with the sufficient depth of cultural understanding and linguistic capability to serve customers in the developed countries, to standards deemed acceptable by service providers and their clients.

Nasscom-McKinsey estimated in 2005 that only 10-15 per cent of graduates have the skills to be employed in the BPO industry. Even more striking is the statistic from the same year than only 3-5 per cent of those who applied for a job in the BPO industry were actually engaged (Nasscom, 2005b). Thus, for many years the industry has face enormous recruitment challenges, exacerbated by the stresses imposed by growth. In their influential report, Nasscom-McKinsey (2005: 17) predicted severe manpower shortages, leading to a shortfall of 0.5 million employees by 2008. This was graphically represented (Graph 1).

This has perhaps been the most salient aspect of the Indian BPO industry, creating enormous HR challenges that organisations have wrested to control. If recruitment has been an enormous and ongoing problematic so too has been that of training the ever-expanding workforce. Much has been written on cultural and linguistic training – the accent neutralization, the emulation of the accents of the customer base – although less on the technical and product knowledge skills and

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emotional and social competencies that are certainly required for voice processes. Suffice to say that they remain deep challenges.

Graph 1: Excess of Demand Over Supply of Labour

However, of all the profound HR challenges that have confronted employers in the Indian BPO industry over the years those relating to labour turnover have been the most acute. For many years, attrition levels were officially cited as running at 30–40 per cent (Budhwar et al 2006; Nasscom 2005a, 2005b, 2006). However, the author undertook painstaking research into the phenomenon and concluded that for 2006 the real annual average for 2006 was 65–75 per cent (Taylor and Bain 2006a). It was not uncommon for labour turnover to exceed 100 per cent in certain companies, in certain locations (see Section 6) and on particular processes (voice attrition was always higher than for the back office and the US was higher than the UK). Undoubtedly, the ‘push’ of pressurized, if not stressful, working conditions has contributed to high levels of turnover, but probably of greater importance have the ‘pull” factors’ of job hopping, the lure of better pay in overheated labour markets. It really is difficult to exaggerate how significant an issue this has been in the Indian context and has impacted negatively on UK employers’ experiences.

What might be the relevance of these profound HR challenges of a few years ago for RBS in 2010 as it contemplates offshoring? It might be thought that the hiatus in the growth of Indian BPO during late 2008 and 2009 in the wake of the financial crisis might have put an end to industry concerns regarding attrition. Primary evidence collected by the author did indeed indicate that

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rates of attrition fell markedly in 2009 as there quite simply were no available jobs to hop to. However, as 2010 progresses there are signs that the problems of attrition did not disappear but merely went into abeyance. In Nassocom’s Strategic Review, there is a telling passage that refers to the fact that ‘while India has an ample supply of talent, it is largely trainable and not employable’ (2010: 178). Such a reprise of the concerns of 2005-2007 are amplified when Nasscom refers to the consequences of ‘the incremental training costs and increased downtime for the industry’. The ultimate problem of this continued problem of an insufficient supply of directly employable labour is, of course, an expected rise in labour costs (see below).

The final piece of evidence must be treated in strictest confidence. The author has it on good authority that one of the UK’s major insurance companies with extensive offshore facilities in India has attrition rates of 80-90 per cent per annum. Merely to ensure the maintenance of its current staffing level requires an enormous commitment of resources and expenditure, with as many as 20,000 employees per year being interviewed. Such information should serve as a cautionary reminder for RBS that although meaningful cost savings can still be realised from offshoring to India, the subtitutability of service provision is far from straightforward. Moving to India means being confronted by a series of HR challenges and labour utilization problems.

6. Locations Within India

The question of the appropriateness of location is not just relevant at national scale, but also in terms of region, city and district within a particular country. While India has competitive and comparative advantages as a country, these advantages may differentially exist in different places across the country.

As the industry developed, the overwhelming bulk of BPO came to be concentrated in five leading cities, which the industry dubbed Tier I locations; Banaglore (now Bengaluru), Mumbai, NCR (the National Capital Region around Delhi which includes Gurgaon and Noida), Hyderabad and Chennai. To these places, another two Kolkota and Pune, the latter described as a Tier II locations, are now included in this list of leading locations. These concentrations of growth, or more specifically, the consequences arising from the intense clustering of activities, have long provoked concerns among industry bodies, BPO vendors and customers, captive organizations and government (both central and state). These concerns should be regarded seriously by organizations such as RBS that are proposing to migrate to India of BPO work and may be considering the relative merits of different locations.

By the mid-2000s it was clear to the industry that serious problems were developing in the Tier I locations. The breakneck pace of growth had led to a rapid rise in the demand for labour, growing attrition, rising labour costs and an enormous strain being place upon the cities’ infrastructure, most obviously in respect of roads and transportation. The traffic jams at BPO rush came to assume legendary status in the industry and had a real impact on operational efficiencies – extending employees’ travel times, adding to work pressures and so on. The

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combined effects of this rapid growth and infrastructural strain were captured in the word ‘overheating’.

The problems were exacerbated by the fact that rapid growth occurred in concentrated areas within these major conurbations. Thus, some of the densest clusters have developed in Electronic City on the Hosur Road and in Whitefield in Bengaluru (Picture1), in High Tech City in the hills on the outskirts of Hyderabad and are in Gurgaon and Noida (NCR), just outside the New Delhi city boundaries. The scale of development is Whitefield and Gurgaon is quite breathtaking.

Picture 1: International Tech Park, Whitefield Bengaluru

In Mumbai, while developments have grown in scattered locations in the sprawling suburbs and in Nowai Mumbai, two notable concentrations are in Powai (25 miles northwards from downtown Mumbai) and in the western suburb of Malad. In Powai there is the remarkable Hiranandani Gardens complex where major call centre and BPO companies have sited sizable operations since 2003. For example, this is where the Prudential located its UK-facing Indian operations. (Picture 2)

Equally dramatic in the pace of development, has been the ‘Mindspace’ project in Malad. Within the space of six months or so in 2006 as many as 30,000 BPO employees commenced work ‘in this quarter mile space’; Countywide, Convergys, ICICI OneSource, Citibank, E-Funds, Intelenet, EDS, JP Morgan. The catchment area for call centre and BPO labour was the western strip of Mumbai, a largely middle class area. The English-speaking, educated children of middle-

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class families form the potential labour force. Notwithstanding the size of these residential areas and the relatively large numbers of graduates falling into the trainable if not ‘employable’ category, the expansion the rapid expansion produced rising labour costs and high levels of attrition. The dynamics of growth, recruitment and attrition in Malad and its environs provides a fascinating example of local specificity, where demographic, economic, labour market and spatial influences intersect to produce the sorts of conditions of overheating that has contributed to decisions to move to new locations in Tier II, Tier III and even beyond to Tier IV cities.

Picture 2: Hiranandani Gardens, Powai, Mumbai

The main reasons companies have chosen to site facilities in Tier II and Tier III cities are effectively summarised effectively in this paragraph from a 2005 Nasscom report.

To counter the supply gap, companies are tapping the talent available in smaller hubs outside the traditional hubs of IT-ITES activity. Besides the access to a supplemental talent pool these ‘Tier II’ cities also enable companies setting up their operations to support lower cost structures as people costs and facility costs – comprising nearly 60% of the cost base – are actually lower in these locations. (Nasscom, 2005a: 230)

By 2005 the situation in the Tier I cities was regarded by Nasscom-McKinsey as potentially calamitous. Indeed, the report remarkably even included some Tier II cities because, given the pace of development, they too had become overheated in a matter of only a few years. Although BPO operations had only commenced in Pune in 2003, this Tier II city quickly came to exhibit much of the overheating of the Tier I cities, from which it was supposed to represent an escape. Astute Indian industry leaders conceded in debates that this was the case.

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I do agree with you that Pune now resembles more a Tier 1 city particularly if you don’t really have a cost advantage. (Pramod Bhasin, President and CEO of Genpac)

However, Nasscom-McKinsey (2005: 16) maintained that there were advantages in locating in entirely new business districts outside of Tier I and Tier II cities, particularly when established cities were ‘at a breaking point’.

The cost of operations in Tier II and Tier III cities is typically at least 15-20% lower than that in metro cities due to lower labour and rental costs. Given the cost pressures on IT and BPO companies, most companies are either already expanding or planning operations in Tier II and Tier III cities. Another advantage these cities offer is lower attrition. (2005: 105-6)

In addition to these principal drivers, situating in Tier II and Tier III cities was stimulated by factors including companies’ desire to reduce risk by spreading operations over several locations and by the ability to take advantage of available subsidies and other forms of assistance provided by state governments.

The expansion of operations beyond the established cities and into satellite towns and other cities certainly does constitute a remarkable development. Pune was the first Tier II city to emerge as a major location for BPO as companies such as Convergys, WNS, Progeon, EXL and MphasiS established operations there. Following the example of Pune, newer locations and the companies who have situated these operations in them included; Mangalore (Mphasis); Vizag (Satyam, Wipro, TCS, HSBC); Madurai (Honeywell); Nagpur (Krishna Group); Chandigarh (Infosys, IBM-Daksh; Dell); Jaipur (GE); Kochi (Wipro, OPI); Thiruvananthapuram (Infosys). (Nasscom, 2006: 94). Even cities such as Kolkota, which had been regarded as a ‘no-go’ area for the BPO industry because of the Communist state government of West Bengal and the reputed frequency of bandhs (strikes), became an acceptable destination following the government’s decision to become business friendly and to welcome FDI.

However, in 2008, Nasscom felt compelled to continue to argue the case for geographical diversification with even greater urgency alongside the publication of a report by A.T. Kearney, which estimated that of the 2m total employment in the IT-BPO industries ’over ith% is captured by the 7 leading locations of Banaglore, Mumbai, NCR, Hyderabad, Pune, Chennai and Kolkota’ (Nasscom, 2008: 18), It concluded that rapid growth in this concentrated form was still causing ‘rising real estate costs, increased attrition and saturated infrastructure’. Kearney contended that ‘non-leader cities typically have about 30% lower operating costs as compared to Leader cities’ (Nasscom, 2008:23). Consequently, it was imperative that Tier III and Tier IV cities be opened up. Kearney categorised potential locations as ‘Challengers’, ‘Followers’ and ‘Aspirants’. Once again the industry and consultants were calling for a massive and coordinated ‘public private partnership’ to develop the infrastructure, change the educational curricula and re-orientate the built infrastructure and communities towards the BPO industry. Since similar proposals in the form of creating integrated townships had been included in the 2005 Nasscom-McKinsey report as key objectives it is clear that there had been a failure to have them implemented.

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By 2010, the perspective appears to remains the same. The Nassom-McKinsey 2020 Report re-iterates these long-held concerns and Nasscom make the point bluntly in its 2010 Strategic Review.

Currently, over 90 per cent of total revenues are generated from the seven Tier-1 locations, which are nearing peak capacities in terms of infrastructure support. India has to quickly develop other delivery locations to achieve its 2020 vision. (2010: 8-9)

Notwithstanding the impact of the travails of the global economy in 2009 and the slowdown in the BPO industry in India, clearly the legacy of tightened labour markets in the Tier I locations remains a major challenge from the point of supply and that of companies seeking to source BPO services from India.

From the perspective of RBS on the verge of undertaking a significant offshoring programme, an assessment of the current locational situation is clearly important? Might a Tier II (or beyond) be preferable to an established Tier I location? How do we make sense of the obvious contradiction, that the case has been made for many years for diversifying beyond Tier I locations, yet the established metropolitan areas are still proving to be the most attractive locations for organizations looking to offshore?

As has been indicated the case for situating facilities in Tier II and Tier III cities rests almost exclusively on the ability to gain cost savings and to capitalize on the existence of previously untapped sources of labour. Pramod Bhasin, CEO of Genpact put forward a position shared by much of BPO industry and certainly executed by his company.

Cost management, particularly labour costs, is a huge issue and costs are going up faster than in the smaller cities. Very often the training courses, the training times in those cities are going to be longer. Often the calibre of people you are picking up on the ground from the universities of the smaller cities is going to be different. So you learn and adjust, but our experience has been fantastic. Our attrition is half. Costs are 15-20% lower. Lifestyle is terrific.

At the same time there is a group of companies that have remained in established areas although aware of potential benefits of moving. These organisations remain undecided that the advantages of situating in Tier II or Tier III cities sufficiently outweigh the benefits of continuing to remain in the established locations. Expressed another way, it could be said that the disadvantages of staying in Mumbai, Bengaluru, NCR etc have not proved sufficiently powerful as to justify taking a decision to locate elsewhere. For some companies, going to Tier II or Tier III cities is not seen as automatically delivering unmitigated benefits. Critical voices see location in these places as providing, at best, temporary relief. Others, more emphatically, have seen location to Tier II or Tier III cities as a tactical response that fails to deal with some of the deeper problems of the industry, notably the issues of training, development and retention. .

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There has been discussion about moving to Tier 2 or Tier 3 cities, because attrition was too high and companies are looking for other resources. I don’t think that addresses the problem. The problem is really a problem for the company; what is the company’s own HR practices, what is their own ability to attract and retain staff. That is step one. Before you do anything else as an industry mechanism and find a magical solution for the industry an individual company needs to look at its own practices. What is a company doing to make its own environment, its work practices, its HR practices attract, retain and develop the best.

Other senior management interviewees have emphasized that there can be a limited labour pool in smaller cities. A senior manager from the one of the biggest Indian BPOs indicated that a place like Jaipur could only support one or at the very most two sizable BPO companies. The problem of having a limited talent pool is compounded by the fact that cities of this stature are less likely to attract graduate migrants from other cities or from their hinterlands, than when compared to the gravitational pull of Tier I cities. This reluctance to move to Tier II cities is even more true for management, a fact that was recognized several years ago and remains true today.

We went to Pune about a year and a half ago and my biggest problem was moving people out of Noida, to move people out of the NCR and ask them to go to Pune. Moving the experienced people was a very tough job. You really do have to recruit new talent and build them up to speed if you want any success. (Vikram Talwar, CEO EXL, speech 7 June 2005)

In other words the depth of the labour pool, especially in relation to the highest levels of voice and technical skill, will always be problematic in the smaller cities. While Tier II cities can serve as a valuable complement for companies and be a valuable location for domestic BPO, Tier I locations will have the best talent and can demonstrate scalability even if there is a price to be paid for these advantages. Managerial interviewees expressed their reservations regarding Tier II cities.

We have gone against the trend of moving to 2nd tier cities by building our new centres in Mumbai. Organisations moved to these locations on the assumption that labour would cost far less, they could pay well and they [employees] would then stay. People believed that attrition rates would be much lower. But it hasn’t necessarily worked out like this. Attrition in Pune is high because the labour pool is smaller. Cochin and Chennai are not the first preference for accents, but they can still support voice services because the labour pool is large enough.

We are limited by the places where quality management is prepared to work and live. That means 7-8 cities. I doubt whether it will be that easy for a financial services focused BPO to be able to go anywhere outside the top cities in the next couple of years.

More recently, Raman Roy, regarded as the founder father of Indian BPO and currently CEO of Quattro, and a perceptive observer of the Indian BPO industry acknowledged in March 2010 some of the problems with the non-Tier I locations.

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Quality suffers because of the lack of proper educational and training platforms in Tier II and III towns. And productivity comes down when agents are given thin incentives for making successful sales calls.

Distinctions are frequently drawn between the potential skills base available in these cities and differentiation according to the suitability of language skills and accent. For example, Chennai is widely regarded as being an appropriate location for back-office processes but not for call centre services due to the prominent influence on accent of the mother tongue and regional dialect.

In sum, the business case does not universally support the case for locating offshored services in a Tier II or Tier III location, despite the apparent advantages and despite the legacy of overheating in the Tier I locations. There may be a cost differential, although not as great as might be claimed but, more importantly from the perspective of quality, skill of human resources, depth of labour pool, scalability and so on the established Tier I locations have a demonstrable advantage. This is especially valid when the nature of the services that RBS is proposing to offshore is considered. This author would consider Noida to be an appropriate location, given the additional need to be risk averse.

A final observation is that it is no coincidence that an influential recent survey included the six leading Indian cities among the top eight global destinations for the outsourcing of services. The 4th Global Services-Tholons Top 50 emerging outsourcing destinations survey included Bangalore, Delhi NCR, Mumbai, Chennai, Hyderabad and Pune. Avinash Vashistha, CEO of Tholons, reinforced the important point that for a company looking to offshore, finding a centre of excellence was not merely about ‘lower cost’. ‘It must consider location, risk mitigation for business, cultural affinity and scalability of the skilled workforce’. (The Economic Times, 21 October 2009).

7. Cost Differentials Between India and the UK

It goes without saying that the level of cost savings that can be realised through offshoring is a central consideration for organizations, including RBS, as they consider whether to offshore, what to offshore and where to offshore. In evaluating the advantages vis-à-vis the disadvantages of the relocation of services, the extent of realisable cost savings are the fundamental driver, notwithstanding diverse and important quality, infrastructural and regulatory considerations. Nevertheless, it is important to acknowledge that the actual savings that companies derive from the migration of services has often departed from those expected in advance or indeed those that have been claimed for a location or by a vendor or a consultant.

There are several reasons for these difficulties. Firstly, as organizations have consistently reported to us, start-up costs are often greater than those anticipated in advance. There are many examples that could be used to illustrate this potential problem, such as the suitably anonymised case study given in Box 1. Greater than expected costs apply not only to labour costs, but also additionally to technological and infrastructural costs. Secondly, the costs involved in the actual migration processes have frequently exceeded those budgeted for. Organisations have reported that successful knowledge transfer has required the commitment of greater managerial and/or technical

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support and resource from the UK than planned. Thirdly, and obviously, any delay in scaling up operations to full capacity has postponed the ability to capitalise fully on cost savings. Fourthly, there is the obvious fact that those bodies with an interest in attracting offshored activity and investment (consultants, industry bodies, inward investment agencies and vendors) may talk up the amount of cost savings that can be leveraged.

Box 1: Case Study – Difference Between Anticipated and Start-Up Costs

One major UK-based financial services company took a decision to offshore 3,000 jobs. Rather than increasing the complement of staff in India gradually, the strategy adopted was to use an Indian supplier and once the preparatory phase was completed to ramp-up quickly. Labour cost calculations were based upon FTE costs prevailing at the time of the signing of the contract with the local vendor. No increase was projected for the 12 months between contract agreement and start-up.

Between the signing of the contract and operational start-up, there had been a boom in BPO with around 5,000 jobs being created in one business district in Mumbai. The local labour market had become overheated and the cost of labour had risen by as much as 25 per cent p.a. The contract entailed that the UK company rather than the supplier bore the rise in the cost of labour. Apart from the obvious lessons regarding contractual detail, this case indicates the importance of acquiring in-depth and finely grained knowledge changes in local labour markets and their consequences.

An additional salient point is the difficulty of providing a single, stand alone percentage figure for the cost savings that can be achieved. Considerable variation exists in the extent of cost savings that can be leveraged for different processes. Clearly, it is not possible to cite a single citable figure to capture the diversity of services provided and the differences that might exist between them.

Many factors impact on the level of achievable savings including specifically:-

- the nature of process, whether voice or non-voice- the degree of complexity- the scale and volume of activity- the nature and terms of contract (including pricing

policy)- the stage of the migratory cycle (costs are higher during

start-up than once a process has bedded in)- the precise location, which can vary not only within a

national geography (city to city, region to region) but between districts within a city or a region)

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The actual costs of offshoring and the extent of cost savings realizable in practice are perhaps the most important pieces of intelligence required by any organization, such as RBS, that is embarking on an offshoring initiative. However, reliable data is hard to obtain given commercial and contractual confidentiality and additional sensitivities.

The remainder of this section provides evidence from three sources that should assist the RBS in evaluating its offshoring proposition. First, there is the limited confidential information given to the author in the course of primary research conducted between 2005 and 2010 consisting of interviews with senior managers of UK financial service companies. For reasons of commercial confidentiality and research ethics these companies are anonymised. Second, evidence comes from official Nasscom and consultants documentation. Thirdly, information is derived from debates at Nasscom conferences, at which presentation and discussions were recorded and transcribed.

1) UK financial service companies’ cost savings.

The first claimed (in 2006) that after two years it was achieving reductions of up to 40 per cent, but that the amount differed according to the nature of the process. Back office processes (largely of a routinised kind) were delivering higher savings than inbound customer call centre services. At the same time, it was not possible in every case to draw a strict comparison between the UK and India because the company was provide a range of new services from India that were not previously delivered from the UK. Delivering these services from the UK would have been cost prohibitive and only became feasible because of the much lower cost base in India. The second, an insurance company, stated in an internal document in 2005.

Naturally there will be set up costs at the outset, but we calculate the project to pay back on its set up costs within 2¼ years in fact. After that, we calculate that the sustainable cost saving will be in the order of 40%-50% of comparable costs in the UK…

However, in a follow-up interview conducted in 2008, senior management reported that savings of this order had not been realised in practice and that savings of around 30 per cent were closer to the mark. For this company, this percentage figure was perfectly acceptable for it was being realised on scale across a range of standardized customer service interactions and back office processes. The third company, another leading UK insurance provider, reported in 2006 savings in the range of 25 to 35 per cent with higher levels of savings being realised on more standardized volume processes compared to lower levels on more complex, lower volume and in the words of the Director of Overseas Operations ‘fragmented’ processes.

2) Nasscom and consultant’s reports.

For many years Nasscom has provided figures for cost savings that could be achieved from offshoring BPO to India, although Nasscom does not always disaggregate savings that might be achieved in BPO from those deriving from IT and software services. In 2002 and 2003 Nasscom (2002; 2003) was quoting savings in the range of 40 to 60 per cent. In 2004 and for three years thereafter, Nasscom claimed that 40 to 50 per cent savings were achievable when business processes were offshored to India (Nasscom, 2004: 64; 2005a;b; 2006). It is interesting that the

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top-line figure of 50 per cent itself from 2004 represented a reduction from that of 60 per cent that was being quoted until 2003.

In the context of rising costs acroos the industry from around 2005 onwards, caused largely by shortages of skilled labour in tight labour markets, high levels of attrition and ‘wage drift’, Nasscom was less forthright in declaring the level of overall savings that could be obtained. Somewhat contradictorily in the light of Nasscom’s consistently stated 40-50 per cent range of savings, the Nasscom-McKinsey report makes reference to the 30-40 per cent cost savings that could be realised (2005: 16).

Evidence from 2008 was provided by research consultants Everest who conducted a detailed analysis of companies’ reported cost savings. Naturally, some allowance must be taken regarding the degree of candour with which companies were reporting their savings, so the overall picture should be regarded as indicative and not definitive. Everest found that 54 per cent of companies were realizing savings of less than 40 per cent, with 13 per cent of companies stating that their savings were less than 30 per cent.

The main component of the cost differential between the UK and India of course is and has been labour costs, and it is in this respect that the country’s cost base has most obviously risen. Nasscom indicated that in this 2005-2008 period that labour costs were rising at a rate of 10-15 per cent per annum (e.g. Nasscom, 2006: 74)) due largely to wage inflation, driven by shortages and attrition, in tight labour markets. From evidence accumulated from other source, this 10-15 per cent range would appear to have been an underestimation of the overall extent of rising labour costs in this period. The Nasscom-Hewitt Total Rewards Study indicated that BPO professionals were receiving average annual increases of 18 per cent.

Against this, it was widely argued that several factors combined to compensate for this trend of rising labour costs. Notably, companies were able to exploit the continued decline in telecoms, telephony and other costs. In fact, contributors at Nasscom conferences over the years have insisted that any rise in labour costs and potential decline in margins has been offset by the sustained decline in telecommunications costs. In addition, it is argued that increases in productivity and the benefits deriving from economies of scale have served to sustain overall cost arbitrage. Nasscom summarised these developments.

Over the past eighteen months, the global press and other forms of media have driven a high degree of attention towards the rising wage inflation in India and have questioned the sustainability of the India cost-advantage. Although personnel costs have been rising steadily over the last few years, Indian-based units have maintained their low-cost proposition by offsetting the increases in wage costs against the significant decline in telecom costs, lower depreciation and other infrastructure costs, improvements in productivity and utilisation, and scale economies (2006: 180).

By 2009 and 2010, Nasscom was suggesting that overall savings of ~30 per cent could be made. Although Nasscom has not made specific estimates, it has justifiably claimed that the stalling of the growth in the BPO industry from late 2008 and throughout most of 2009, as a result of the

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global financial crisis and recession and reduced demand, has counteracted any upward rise in the rate of salary increases. This evidence concurs with primary research (interviews with senior HR managers, team leaders and front-line staff) conducted by the author in 2009 and early 2010. From all sides it was reported that pay levels had been frozen, and in some cases there had been pay cuts. Furthermore, for many front line staff, bonuses and additional payments had been cut back leaving only the core salaries. This is not to say there have not been exceptions, for at the highest levels of skill and for the best talent and in the most prestigious companies, premia have still been paid. However, the general trend of stable pay levels over the last 18 months is incontrovertible. Nasscom (2010: 178) succinctly summarises the situation.

…the industry issued specific actions for cost reduction with respect to reworking hiring strategy to match real-time needs, enhanced utilization of the bench, low to negligible wage hikes, stronger thrust on performance

In other words, the changed labour market conditions have given employers the opportunity to take action at company level to introduce pay restraint as part of integrated labour utilization strategies that have included drives to increase productivity and efficiency. In overall terms, the labour cost situation may have become more rather than less favourable in the most recent period up to the present. 3) Evidence from Nasscom conferences

Providers of ‘quasi-official’ statistics, particularly McKinsey Consulting which has a particularly close relationship with the industry, confirmed the extent of wage cost inflation as indicated above.

Finally, the picture of wage inflation is quite clear. Of course, we are starting from a very low base and it will take a long time before our wage rates catch up. However, you can see (refers to presentation slide) just how much, on an indexed basis in dollar terms, Indian wages have grown…in terms of actual salary inflation, today in certain segments of the market, it is more like 20+%. (Noshir Kaka speech, 8 February 2006)

It was evident also that rising labour cost and hence the potential implication for cost savings has not been uniform across India. Labour costs for the period up to 2008 surged ahead in particular cities, and within them in particular localised labour markets, and the problem is more accentuated on certain processes. Of equal importance was the fact that management costs rose just as fast, perhaps faster, than general employee costs. Many commentators and industry leaders indicated that shortages of labour supply and costs are even more acute for all grades of management. For example,

The one that is tough to manage is management costs. That’s where the real scarcity is. (Neeraj Bhargava, Group CEO, WNS speech, 7 June 2005)

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The evidence of the extent to which the recessionary context, changed labour market and company action has had the same dampening down effect on the remuneration packages of managerial grades remains has yet to be made manifest.

To-reiterate, for many commentators and industry leaders, Nasscom’s long repeated overall figures of 40-50 per cent represented an optimistic interpretation of the actual cost savings that could be had for the bulk of call centre and back office processes. For example, Genpact calculated that for ‘Transaction Processing’ savings would be in the 25-40% range and ‘Contact Centre Services’ in the 30-40% range (cited in Nasscom, 2006: 179). Edge Zarella (Head of Global IRM, KPMG, speech, 12 February 2008) and a reliable commentator on industry development stated, ‘In India you can still get a 35 per cent reduction in costs’. The use of the word ‘still’ was interesting, suggesting both that this figure represents a decline in the level of cost reduction over time, and that this is the greatest amount of savings that can be realised.

One final point of interest relates to the relative savings that can be made as related to the complexity of process. According to most industry leaders greater savings can be realised on more complex, KPO (Knowledge Process Outsourcing)-type activities, than on more standardised processes whether voice or non-voice. However, the scale of activity is far less in these more complex areas as the Indian BPO industry undoubtedly remains dominated by the more standardised processes, whether these are in call centre services or various kinds of back-office process.

Summary

Synthesising a mass of evidence and drawing on inside industry knowledge of offshoring from both the host and destination sides, it is evident that in less than a decade there has been a reduction in the overall level of savings that companies have been able to gain through offshoring BPO to India from the developed economies. While it is not possible to provide a single, ‘magic bullet’ figure for all of the reasons indicated above, it seems reasonable for RBS to work on the assumption that cost savings of the order of 30 per cent are in all likelihood attainable for the range of scalable processes that the company is considering to migrate, although some slippage below this level would not be unexpected. The universal experience is that the fullest benefits of scale can only be realised over time and once operational efficiencies have been implemented.

As commentators have observed, many companies either have unrealistic expectations of the level of savings that can be achieved, or have failed to develop the intelligence of what they are actually saving. Forrester Research in a study of companies’ evaluation of the cost benefits from offshoring, found that while 7% perceived savings to be greater than expected, only 13% were actually on target with projected savings and 38% had achieved fewer savings than expected, and no fewer than 42% of companies who had migrated BPO could not state whether they were saving money. The problem is that,

User companies go into offshore outsourcing and they think that they are going to save 60% immediately. They don’t realise that there is a tremendous amount of overhead cost

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with outsourcing, with severance, with organisational change management that need to be factored in.

It is important for RBS to be realistic regarding the level of achievable savings. It is helpful that the company is not making its migratory moves in the sort of headlong rush that characterized the first wave of offshoring undertaken by insurance companies and other financial sector companies (post-2002), some of which lacked preparatory rigour. This realism can come from careful planning, projection, due diligence and risk monitoring and, of course, the mitigation of risk through contractual prudence. Furthermore, control over the actual migratory process and close monitoring thereafter will make for a transparency that will lead to the fulfillment of expectations and mean that there are ‘no surprises’.

In conclusion, some important issues should be highlighted. Firstly, it hardly needs to be stated as it is such an obvious point, that the economic crisis has re-emphasised the importance of cost savings and access to talent via outsourcing and offshoring (Nasscom, 2010: 43). The primacy of achieving cost savings is now central to corporate agendas.

Secondly, the evidence is that from the end of 2009 the BPO industry in India expanded again as, following the post-recession hiatus, the volume of work offshored by companies principally in the US and the UK increased. In this context, it is interesting to observe that Nasscom, a body that is acutely aware of the industry’s recent history of tight labour markets and rising labour costs, is predicting that ‘costs are expected to rise with inflation and increased attrition’ (2008: 178). In other words, costs, particularly labour costs are susceptible to even relatively modest upward changes in labour markets, which the improved situation may bring. Put concretely, the stabilization of wage costs that has occurred over the past 18 months cannot be regarded as a permanent condition, even though currently there is no real evidence of a return to the highest attrition levels and large wake hikes of 2007. Consequently, for RBS the question of timing is apposite and it may be advisable to consider earlier rather than later migration given that the likely direction of change.

Thirdly, it is important that the consequences wage rises that are comparably higher than in the UK are placed in some context. Since base pay rates are so much lower in India then even a considerable percentage pay increase in India will not neceessarily erode the cost differences between India and UK. Of course, these are the kind of calculations and projections that could be conducted by RBS as part of the case for offshoring. Put another way, so great is the labour cost differential between the UK and India, that even substantial wage hikes in India will not ceteris paribus substantially undermine the attractiveness of India’s cost base going forward.

8. The Experience of Offshoring by UK Financial Service Companies With Particular Reference to the Insurance Sector

Origins and Drivers

It is significant that companies in the financial services sector were responsible for the bulk of processes initially offshored to India from the UK (see Taylor and Bain, 2003). For the purposes

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of this report it is even more pertinent to note that of these financial services companies those operating in the insurance sector were amongst the most prominent. In this respect the decision taken by the Prudential in 2002 to relocate a significant part of its operations to Powai in Mumbai was regarded as a watershed decision in the industry.

The Prudential decision was followed shortly afterwards by decisions taken by many others including Aviva, Axa, Esure, Zurich, Royal and Sun Alliance. (Prior to being acquired by the RBS Churchill had offshored operations in India). The evidence is compelling that the bulk of the services that were initially offshored consisted of the most standardised and transactional of call centre workflows and back office processes (Taylor and Bain, 2003). There was a clear relationship between the size of operations in the UK/Scotland and decisions taken to offshore. As repeatedly evidenced the services migrated came from the largest centres where economies of scale operated. It appeared also that some of the constraints that appeared to inhibit banking organizations (e.g. RBS, HBOS) from offshoring exercised less restraint upon insurance companies.

Although early commentary on offshoring was dominated by the call centre, it soon became clear that much more than voice services was being migrated overseas; for example, in November 2003 when Aviva announced that 2,300 posts were to be created in India, the majority were in the back-office.

It hardly needs stating that the principal driver was and has been subsequently the reality or perception that relocation would deliver cost savings and increase profits. This has been consistently and emphatically reported by firms (Taylor and Bain, 2003: 55; 2006: 149; Taylor and Anderson, 2008). The evidence in this section comes from this primary research conducted by the author. Initial attempts at reducing costs domestically through technological innovation1, work intensification (Taylor et al, 2005) and/or domestic outsourcing could not generate savings on the scale promised by offshoring. The underlying importance of sectoral competition was summarised by this operations manager of a major insurer.

We took back office work to India predominantly for reasons of cost. This was also true for the front office as well, but there are limitations in the front office. What lay behind the need to offshore was the competitive nature of the insurance industry and its regulations. The effect was to really squeeze the margins, which means that if you are going to exist and thrive in this sort of business the cost of your organization becomes absolutely key. And that is why you’ll see a lot of financial services companies going to India… (Taylor and Bain, 2006: 150)

Arguably, this intensive competitive cycle led to a ‘herd’ mentality as shareholder pressure profoundly influenced corporate decisions to offshore. It was not always clear that offhsoring had

1 The late-1990s saw increases in efficiency-enhancing technologies aimed at ‘pushing through as many calls as possible’ (DTI, 2004b: 140).

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been given the careful strategic consideration that was required, as some companies acted with a sense of urgency fearing that they might lose out in the competitive race.

Related to the fundamental cost-cutting and profit-maximising imperatives was the closely related factor of accessing supplies of skilled labour. Other motivations cited by employers included the need to expand a company’s global operations, to extend operational flexibility and to do work that would be economically prohibitive in the U.K. Others reported their desire to escape tight labour markets and to overcome labour retention problems.

Organisations have also emphasised the salience of other factors, often relating to quality (e.g. of process or customer service), or issues of flexibility (e.g. operational or labour). However, these should be regarded as factors subordinate to, or indeed intimately bound up with, cost savings, which should thus be regarded as the sine qua non of service migration. Clearly, the underlying imperative driving cost reduction derives from the highly competitive nature of the financial services markets in which the companies operate. This is not to deny the fact that, once overseas operations have become established, several of the secondary factors can assume a greater importance to become an essential part of the continued rationale for offshoring. Notwithstanding a frequent reticence to declare explicitly that cost reduction was and is a central motive, several senior management interviewees from insurance companies responded with candour.

It is essential that we reduce our expense ratio and offshoring offers huge potential in reducing our cost base. This will help us successfully ride the insurance profit cycle and so help us maintain our position against other competitors, like the NU, AXA and Zurich, who already outsource many jobs. Historically offshoring has been primarily driven as a tool for cost reduction. This remains an important factor but there are now additional key drivers that make offhsoring to our subsidiary attractive.

Of all our respondents no one articulated the pressures stemming from the competitive dynamics of the insurance sector more clearly than this senior manager.

We went to India predominantly for reasons of cost. In the back office there was a whole argument around the calibre of people we would have doing the work. This was also true for the front office as well, but there are limitations in the front office. What lay behind the need to offshore was the competitive nature of the insurance market and the regulations of the insurance industry. The effect of these was to really squeeze the margins which means that if you are going to exist and thrive in this sort of business the cost of your organization becomes absolutely key. And that is why you’ll see a lot of financial services companies going to India because basically everyone is squeezing margins. If we are able to squeeze the margin more that Standard Life or Norwich Union or others, they have to find some other way they can compete with us on cost. So the nature of the business is fiercely competitive.

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Closely related to the drive for cost reduction was the opportunity that offshoring gave to re-engineer processes and to restructure work across the organization. This other insurance company made it clear that their Indian operations gave the business

…the opportunity to centralise processes and that ‘the principal driver has been economies of scale when moving both the simple and the complex work offshore.

Experience of Offshoring – Complexity of Call Centre Work

Inevitably there has been variation in the scale of offshoring undertaken by different companies, related mostly to the size of the company and to the scale of its UK operations. There is variation to regarding the extent of voice offshoring vis-à-vis the back office. As a general observation for the UK insurance sector as a whole, it appears that the back office has grown proportionately over time, although voice services still remain significant. To take Aviva Global Services Now operated by WNS) as a concrete example, one current estimate put the number of employees engaged in back office processes at 70 per cent, as compared to the 30 per cent for call centre services.

Consistent with the evidence regarding the scale of the offshoring of voice processes, differentiation can be seen in the nature of the call centre work that has been migrated overseas. The call centre workflows offshored range in complexity from the most simple and routinised to the less straightforward. However, it is clear that the bulk fall into the former category.

What prompted the initial offshoring was the experience of sales which was not economical in the UK. If we achieved a 2½% sales conversion rate in India then it was worth our while given what we pay there. This was followed by an out-of-ours claims service. These have been followed this some ‘first notification of claims’ work and case management work which is more about process, rather than content. To be brutal, it is a very simple process. Half of the work in another section is what is called ‘granny line’ work – for the over 50s and 60s – which is relatively low in terms of complexity. To some extent contrasting in terms of complexity, there is a helpline for IFAs to phone for information regarding projections (e.g. what will a policy be worth in 5 years time?) which requires agents to make calculations on spreadsheets.

All sorts of call centre processes have been offshored – claims, pensions, life…Most of the call are at the simple end of the spectrum, but some are not. There are clusters of work which are more complex. For example, there is diary management, working with engineers, interacting with people who deal with the public, like brokers and there is a range of internal customers.

When I say ‘complex’ I’m not talking about jobs that are absolutely complex, but relatively so. We have recently had a look at the work that we do and it divides into four ‘buckets’. (As we see below the most simplified of all these buckets includes basic data entry functions). Then [in the second bucket] there are voice skills and those involve any job that requires our employees to speak to the external customer. So it could be typical

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inbound voice calls [for the UK] and…outbound collections. There is a difference bank customer servicing calls and an outbound collection call, but they are still calls.

The call centre jobs are inbound service calls involving various products and various complexity, to be honest. It is very difficult in our business to segregate simple from complex calls. We have done some cross-skilling programmes so a lot of agents can cross skill on more than one product so that agents could be able to handle life products and pension products.

One insurance company reported that the creation of a ‘virtual centre’ with calls randomly distributed to waiting operators wherever they were geographically located, whether in the UK or in India. However, this did not mean that Mumbai could equally handle calls of all levels of complexity. More complex calls would escalated or ‘bounced back’ to be dealt with in the UK. centres.

There’s no way that you can say beforehand whether this or that call coming in is going to be easy. I’m up to a point, which is 90%, as happy they get handled in India as in the UK. There are issues with 10% of calls; ‘hands off’ is what we call it and these calls generally come back to the UK.

Typically, the job descriptions are Customer Service Advisors and Account Managers. They will also involve the first notification of claims. The services require typical customer handling skills and a good solid technical basis. A good claims handler would need to know the Highway Code, the repair centre network, basic road law etc. Underwriting means providing quotes on the basis of screen-based systems and claims involves following similar on-screen protocols. Cross-selling is done in India but the process means a hand-off back to the UK. We have used India to pick off the unsocial hours, such as evenings in the UK.

The voice jobs were in customer service, insurance claims etc and the work was simple and script driven.

Call centre services in another insurance company included the following; pursuing the admission of liabilities by third-party insurers; obtaining payment details for the renewal of policies followed by credit or debit card payments; outbound calls in a process dubbed ‘welcome calling’ evaluation of satisfaction levels and answering queries of new customers; outbound data capture. Elsewhere, the company emphasised that,

Initially, the projects are involving tasks such as data entry and straightforward inbound and outbound calls. The jobs we are transferring offshore are those that are difficult and expensive to fill and are in areas of the business where there is a high staff turnover. In addition, some of the work planned are jobs not currently being carried out in the company and is cost effective only if done from a low cost base, such as India. (Internal document)

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The evidence here confirms the importance of customer segmentation. Even where the technological integration between UK and Indian centres is regarded as seamless, the tendency is for the mass market to be offshored exclusively, while higher value customer segments have been retained on-shore.

We have moved fairly rapidly up the value chain. However the company segments the market into two, into the mass market and premier customers. Call from the latter are not diverted to India, which indicates a limitation in terms of the export of voice services.

It is evident that many organisations initially offshored the most simplified and tightly scripted of processes. As offshoring has grown in scale, it is clear that the bulk of what has been migrated remains standardised services. In insurance this has involved inbound (and outbound) sales, the first notification of claims, basic underwriting, policy renewals and so on. At the same time, some organisations have reported some increase in complexity as, for example, with the IFA helplines or where some cross selling takes place. However, to the extent that an increase in complexity has occurred, this is often a matter or relative and not absolute complexity, and most callflows appear to be closer to the simplified end of the spectrum.

In addition, organisations reported that they had a default position, whereby calls which exceed a level of complexity that can be satisfactorily provided from India are returned to the UK. Senior management referred to this practice as ‘hands off’ and believed that up to 10% of calls fell into this category. This is an important insight, for it seems that no matter how rigorous are attempts to stream calls in advance according to their complexity, a proportion of calls gets through the filters of switches and IVR. The fact that calls are ‘bounced back’, to quote another more derogatory term used to describe the practice may have implications for perceptions of service quality and customer satisfaction regarding sourcing from India.

The most recent audit of the Scottish contact centre market (Taylor and Anderson, 2008) provides considerable evidence that callflows are often bifurcated according to a complexity that is related to the central questions of linguistic fluency and cultural empathy. Put concretely, there is general confidence that India is capable of delivering generally standardized calls where CSRs largely follow prescribed scripts. At the same time, widespread doubts have been expressed about the ability of Indian call centre agents to ‘delve deeply into the customer experience’. A call centre manager with direct experience of using call centre services in India used the metaphor of a ‘pint of Guinness’ to illustrate the difference between the depth of the service that can be provided from India as opposed to the UK.

Offshoring may be good for some very mundane calls, but as soon as calls require greater complexity beyond the script there are problems. If it was easier for calls to be ‘bounced back’ from India then offshoring might work better, but even then it would only work for simpler calls. Multi-skilling is happening in offshoring and outsourcing but agents do not have the depth of knowledge to be able to effectively handle these different types of calls. I use the Guinness analogy of the white head and the black body. Agents can deal with the froth but cannot go deep into the call. I used to work for xxx and have some

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knowledge of a process that was offshored to India…There was a real problem with understanding what the customers’ needs were which did impact upon service quality.

RBS needs to take into consideration concerns regarding the capacity of India to deliver more complex service delivery when planning it offshoring programme. Of course, the fact that many that contact centre services in the insurance space are generally standardised does mean that they can be delivered from India, but the company needs to be aware that the trend across the contact centre ‘sector’ is for companies to retain many of the more complex and higher-valued added services onshore.

Experience of Offshoring – Complexity of Back Office Work

Similar to our observations regarding voice services, there is the observable variation in relation to scale. At one extreme, one company has offshored upwards of 5,000 processing from the UK. At the other extreme, some organizations have migrated quite modest numbers of jobs. Certain insurance companies have either offshored only back office processes, or have migrated very large proportions of processing roles. jobs offshored.

Insofar as relevant comparisons can be made between call centre services and back office processes, the evidence demonstrates that the latter appear to encompass a greater range of complexity than the former. At one extreme, are those very elementary data entry and basic processing roles while, at the other extreme, are higher order finance jobs which involve a far greater degree of complexity and even, in some cases, professional accreditation.

Several companies’ managers conceded that they had offshored only simple back office processes. However, in general, there has been a progression over time from migrating simple to more complex work. Notwithstanding the distinctive complexity of certain processes, the bulk of the work offshored still remains clustered towards the more simplified end of the spectrum.

In one insurance company all back office jobs in the three main areas of the business have been allocated to three categories; simple, medium and complex. It is a ‘three box’ model. In the early days the most obviously simple processes were offshored, so that now,

There are very few simple back-office processes left in the U.K. Where they do exist there are specific reasons. In the last three years we have begun to suck up the medium work – perhaps now 60% to 70% of this medium work has now been offshored.

These include the back office component underpinning the IFA helplines, which gave the company the confidence to offshore the customer-facing segment. To date, though, ‘probably relatively little complex work’ has been migrated. Nevertheless some of the more complex roles to have been offshored have been and continue to be in the area of finance and administration, part of the process of migration of shared services.

The migration of back office work commenced at the same time as call centre processes, and has involved all sorts of processes in life, pensions and general, including simple

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stuff like change of address, new business set-up and all aspects of general insurance. However, there is more complex work such as some pensions calculations and some health care work, which is done at z, who are back office experts.

Senior management of another company provided concrete examples of the more complex jobs that they have relocated to India. A description is provided of medical underwriting, as follows.

If you apply for a life insurance product with x [one of our subsidiaries] you’ll answer a set of medical questions. If one of the answers to these questions is ‘no’ then you get doctor’s records back. Part of what we then have to do is to say ‘should we offer you a policy at all, if we should, should it be on standard terms or should we raise the premium’. In the UK there’s a bunch of people who become medical experts, generally not doctors who do this, and we pay a significant amount of money for it. In India you can get the same job done, potentially better quality, our quality is the same just now, they’ve only been doing it for a while, at significantly lower cost.

One other insurance company with significant offshored operations in India reported the following.

The back office involves customer service jobs, about 500 of which are a mix of support areas (about 100) and pure back office customer facing jobs (400). There is a variety of processes; producing pre-sales registrations, new business applications, updating customer records, changes of address, offering quotes, looking up pensions payments. The job titles are Insurance Associates or Insurance Executives.

Interestingly, we started with the simple jobs and it’s much easier to decide what is and what is not a simple job in a paper environment. You can examine the process. So we started with what we could identify as the simple work and now, I would say, we have work of simple to medium complexity. The more complex stuff is handled in the UK. But as knowledge grows and the processes are embedded, we would expect hands-off to decline.

In sum, the bulk of back office offshoring consists of relatively routine processes and, in some cases, the most standardised and transactional of these. However, over time, there has been an increase in the level of complexity as more challenging types of work have followed. Perhaps the best description is that these workflows constitute a medium level of complexity. Yet, as multiple sources reveal, in both the UK and India, a smaller volume of this work is genuinely complex, involving professional services such as actuarial and analytical work, as well as underwriting. These processes may be genuinely regarded as KPO (Knowledge Process Outsouring.

Recently Rohit Kapor Kapoor suggests that offshoring the back office has shifted from being large scale, bulk and standardized to smaller more fragmented processes, that are more complex and harder to outsource. Kapoor argues that even in insurance – in policy administration and claims – EXL has moved to actuarial and underwriting support work that are of mush higher complexity.

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Advantages from Offshoring – Call Centres and Back Offices

Some of the advantages that the finance service companies have claimed from the offshoring of both call centres and back office work are laid out below are not directly related to cost savings as might be expected but are indirect consequences.

We have a multiplicity of sites in the UK which, historically, have huge variations in practice. Offshoring has enabled us to standardise and to exercise greater control over the process. It has allowed our guys in the UK to concentrate on the technical detail of the claim because we are no longer overwhelmed by the sheer volume associated with the notification of loss, which has now been offshored.

Company documentation further illustrates the importance of this point, where it stated that ‘..the UK roles that people are being re-deployed into have become more technical with upskill training provided’. The benefits that had resulted from the migration of back office work were seen to be somewhat different from those that had come from voice services.

Although it is slightly stereotypical to say it, quality is generally higher in India because of the educational level of the people working on the process. Also, turnaround times are good.

Another company has seen several distinct benefits deriving from the offshoring of call centre services, beginning with the key advantage of cost reduction.

Cost is obviously important, and we are saving considerably (particularly in General Insurance) but in a real sense it cannot be separated out as a single factor, particularly from customer service. The other main advantage is that offshoring leads to a thorough shake-up of the company’s entire operations and processes. As a result it leads to more defined levels of service. It is well known that customers do not like call centres and like them even less when they are located abroad. At the same time customers do want contact from a company which leads them to having an improved service. We can now do reminder calls from abroad which amounts to 5 million letters. Now we can set up a dedicated call centre in India to deal with the calls that arise from this distribution. Because of offshoring, we can do things that otherwise we could not have done. We are looking to improve our customer service by better blending offshoring and technical and product services from the UK. We are also looking to make the job content more interesting in the jobs that remain.

The biggest benefit, of course, is the cost savings which are significant. Also, offshoring provides opportunities for our staff [in India and elsewhere in global operations] to move, enabling us to develop our management from developed countries. Also, we are able to

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take care of different time zones, do work in off periods, do work faster, put more manpower in.

Yet another company has stressed the importance of cost savings.

Clearly cost. I think we’ve learned that the quality of the staff is an advantage if you train them properly and motivate them properly. There is a differential in service but we’ve got the raw material in India for better service, but we’ve not seen that because we are too early into the process.

The other reported significant advantage is process accuracy, which is true for both back office and telephone services.

On the telephones we get broadly the same number of complaints for call taking in India and the UK. In the UK the complaints are more about employees failing to do what they had said they would do, or otherwise making mistakes. In India, they are primarily ‘I couldn’t understand what they were saying, or they couldn’t understand me’. Process accuracy in India very quickly hits UK levels.

Several companies have claimed that they have been able, through offshoring, to place greater emphasis on upskilled customer service delivery from the UK.

We have been able to allow our customer-facing staff to get involve in value added, customer work. As part of a programme to put increased emphasis on the customer we have taken away IVR so customers come straight through to a live agent. Moving to India has increased the possibility of upskilling. This emphasis on upskilling and the customer has enabled staff to resolve difficult questions from customers, to prevent repeat calls and to overcome the customer satisfaction that we were experiencing previously. ‘Resolution at first contact’ is a key element in our strategic thinking.

One other advantage reported stated has been the ability to achieve scale in new business processing capability in a short timescale, which could not have been achieved in the UK because of limited resource pool.

To summarise, although organisations place different emphasis on a range of benefits they believe to have resulted from offshoring, there are a number of common themes. Virtually all of the organisations claim that they have realised the central stated objective of reducing costs, the essential raison d’etre of offshoring. Nevertheless, it is difficult to ascertain, in overall terms, whether the hoped for cost savings have been achieved, given many companies reluctance to declare such confidential data. It would seem that several factors have contributed to mitigate the full financial benefits for some organisations; start-up and transfer costs have sometimes proved to higher than expected; full savings are often not achievable until full scale has been migrated and so on.

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The ability to rationalise and re-organise operations, is seen as a major advantage. There are several aspects to this, including the reported ability to hive-off the more mundane and routinised processes overseas, whilst enhancing and upskilling the customer contact and sales activities that remain in the UK. In addition, there are the reported improvements in the quality of delivery of back office work from India which are manifest also in improved turnaround times.

Disadvantages from Offshoring – Call Centres and Back Offices

Making allowance for some reluctance on the part of companies that have offshored to report fully on the problem experienced, the evidence is sufficient to enable us again to identify a number of common themes from the evidence.

Problems in the quality of service delivered from India, associated with difficulties in cultural and linguistic understanding, or product knowledge, has emerged as the most commonly reported disadvantage (Taylor and Bain, 2003; 2005; Taylor and Anderson, 2008). In one insurance company problems with the quality of voice services in India meant that calls had to be re-routed from India. The company was compelled to set up a specialist team in one of their UK sites to deal with customers who had refused to have their calls handled from India. This reported difficulty of linguistic comprehension is consistent with the discussion in Section 5 above. A senior manager from an insurance company that has embarked on a major offshoring programme presented a sophisticated take on the problem that went beyond lack of linguistic comprehension.

We developed a matrix of complexity where we concluded that not everything is suitable for offshoring. To me the most important aspect of complexity is not related to the degree of technical complexity, but in relation to the issue of cultural complexity. The process or the content may be not be that complex, but the importance of cultural (and linguistic) empathy is the most important dimension to complexity. For example, if agents have to talk to Financial Advisors then this can be a complex interaction. Everyone has heard the stories, like someone making a claim on their motor insurance policy reporting that they had run over a sleeping policeman and the Indian agent understanding this literally! To me the debate over complexity often lacks the appropriate focus as cultural nuance and understanding, even in the most standardised of processes in technical and content terms, are essentially the most complex aspects.

This problem was related in senior managers’ eyes with problems regarding customer perceptions of service quality. The manager responsible for offshoring of this insurance company reported.

One disadvantage that jumps into my head is customer perception of offshoring. There is a view that somehow India is bad. I think it is formed by press reports and by the personal experience of customers of companies who are only there for the cost and do it badly…We did do some customer research to try and tease out what the key issues are, which were data security, customer service, the treatment of UK workers, the treatment of third-world workers.

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The second most frequently reported difficulty has consistently been in relation to governance and the problems of exercising control remotely at such distance.

Although the quality is generally good [from India], there is a huge weakness at team leader or junior manager level. You cannot get quality middle managers who can manage the daily workload, manage the monthly workload and prioritise as middle managers need to. There are definite recruitment challenges here.

Operating through a third-party supplier creates challenges of control and risk, which means that the operations need to be actively managed. There is also the potential reputational damage due to others’ views of offshoring.

The labour market situation, and in particular rising costs and attrition, have until recently been seen as a major disadvantage, negatively impacting on the quality of service provision and on companies’ operations.

It’s tough. It takes time to train somebody up, particularly in call centre work. In many locations you have got very high turnover so you are making quite an investment in training people. Like if you are in Bangalore you can walk across the street and get a 20% salary increase.

We try to minimise attrition in a number of ways. We have been careful in our choice of suppliers. We also try very hard to manage peoples’ expectations. The reality, though, is that people on voice do leave…Turnover rates do vary between locations in India. Pune in the recent past has been particularly volatile because of the number of companies who have opened there in a short period of time. If you are not managing morale carefully, you can have half a team leave together which can have serious consequences.

There is no doubt that attrition is higher in India than in the UK. The elasticity is there because more companies arrive and grow, people jump ship the loyalty isn’t there. It’s an issue but we have to manage it. The expectations of the people are so high. They have incredible thirst for knowledge and for progress. Incredible. It’s amazing when you are there but it’s horrific to manage, everyone’s expectations are so high, it’s hard to manage. And that leads to attrition actually. And there’s a thirst for growth as well as well. It’s an operation that they want to see grow – not just themselves individually but the whole thing. If we say we have got 1,000 jobs they want us to have 1,500 or 2,000. And that again is a symptom of the expectation because they think ‘there are less avenues for me now’ within the company. This also leads to attrition.

Finally, companies have reported the negative impact on the morale of the UK workforce that has accompanied or has followed the overseas migration of services.

9. From Captive to Third-Party

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As has been indicated throughout this report a range of possible contractual relationships exists between the company doing the offshoring and the delivery of services from India. A number of possibilities exist along the spectrum of delivery from pure captive operations (offshored but in-house) to pure third party provider (offshored and fully outsourced). The variation can be captured by a simple graphical representation (Diagram 1) of the possible engagement models below. Diagram 1: Offshoring Engagement Models

The two quadrants at the right hand side of the diagram indicate the contours of the potential relationships. In the upper quadrant it is suggested that a the third-party relationship can lead to the shortest time for transition and requires the least investment. B-O-T (Build-Operate-Transfer) requires similar levels of investment but involves a longer period of transfer. The Joint Venture model (JV) requires more investment than either of these two but can be transitioned quickly. Finally, the captive model in the top right square of the quadrant requires both higher investment and takes a longer transition period.

In the lower quadrant, the dimensions are control and value control. It is suggested that the offshoring company will have lesser control over the operation if it uses a third-party dedicated centre and will be in a weaker position for capturing value. The B-O-T model enables the exercise of greater control although value capture will be low. While a JV can lead to higher value capture the level of control will be low. Finally, the captive model obviously sees a high degree of control and high value capture.

Bearing in mind that this is a heuristic device for considering the options available to companies engaging in offshoring, what has been the experience of UK insurance companies? Given that this knowledge is well known in the UK industry, the discussion here will confine itself to

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overall trends regarding contractual relationships between UK insurers and Indian supply. The first observation is that the captive model proved attractive to a number of early offshorers, notably the Prudential and Axa. At the same time, it should be acknowledged that this was not the only model. Aviva utilised the B-O-T model, selecting three suppliers (24/7, EXL and WNS) in three locations originally to undertake different operations. WNS took responsibility for non-voice back-office operations and 24/7 and EXL for largely voice operations, although EXL did do some call centre work. B-O-T. The undertaking between the parties was that after an agreed period of time the operations would be taken in-house by Aviva in the name of Aviva Global Services (AGS). Of course, the early models also included third-party models such as for the Royal and Sun Alliance.

One of the more significant longer-term trends in the industry has been the growing attractiveness of third-party models at the expense of captive operations. The clearest signal in the Indian industry was GE Capital’s transformation into a third-party supplier Genpact. More widely across the BPO space was the widespread conviction, based on evidence, that captive operations tended to be more expensive largely because they were not subjected to the perpetual benchmarking that came from market. For some offshoring organisations this greater expense was tolerated because of the opportunity a captive gave to exercise direct control (as indicated in the diagram above). However, over time, as the perceptions of risk associated with outsourcing to a third party were reduced as third-party vendors demonstrated their reliability and maturity, the advantages of the captive model became less obvious. Thus organisations using the captive model, having became more cost sensitive, opened up to the possibility of shifting to the third-party model.

Without going into the detail of all the cases of UK insurance, it should be mentioned that the Prudential in Mumbai switched to using the UK outsourced provider, Capita, in 2008. In 2009, Axa followed suit transferring operations in Bengaluru and Pune also to Capita. Although Aviva operations transferred to AGS control as part of the B-O-T transfer, different suppliers were used until in 2009, AGS made WNS its sole supplier. These moves are reflective of a still developing trend in global offshoring away from captives towards outsourcing providers. For example, Citibank sold its Indian captive operations to TCS in October 2008 and, if anything, the economic recession has further accelerated moves in this direction because of the primacy of cost containment and reduction.

Finally, the response of EXL to losing out to WNS in acquiring Aviva’s captive operations has been interesting. The President and CEO of EXL (Rohit Kapoor) stated.

We would have liked to have kept it but we feel good about our financial prudence in not having paid a price for it. It has also taught us never to do a BOT (Build-Operate-Transfer) model. We are very allergic to it.

In conclusion, if RBS is considering the outsourcing model then it is certainly consistent with trends in the BPO sector generally and in the offshoring of financial services and insurance from the UK to India.

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10. Some Current Market Trends in India

Many observers have argued that normalcy is returning to the BPO industry in India and clients are now approving projects in a way that has not been the case over the last two years leading to renewed hiring after a two year lull (Business Standard, 28 April 2010). A report by BDO one of the US’s leading accounting and consulting organisations has indicated that outsourcing and offshoring will revive in 2010 (Global Services Media, 23 March 2010). Nasscom expects that net hiring in FY 2011 will grow to 150,000. Reports ‘from the bottom-up’ would certainly seem to confirm such generalisations. It has been reported that Infosys Technologies plans to hire almost 30,000 this financial year as does Tata Consultancy Services across IT and BPO. HCL plans to hire 5,000 freshers in 2010. Despite this revival, hiring levels are nowhere near the historic peak of 2007, nor indeed are wage rates and net wages have fallen because entry levels are low.

There have been several announcements of growth by companies specialising in the financial services and, often, specifically the insurance domain. Intelenet has announced its intention to hire 7,000 personnel across the country according to CEO Susir Kumar (One India, 3 May 2010). EXL is planning to recruit 3,800 professionals by December 2010, having already hired 1,200 in the first three months of the year. CEO Rohit Kapoor has stated that the new employees would be recruited for their two new delivery centres in Noida and Jaipur (Business Technology, 10 May 2010). The new facilities are located in Special Economic Zones, because the cost and tax structures would help sustain EXL’s competitiveness in the global market. EXL would have 16 delivery centres in ten locations across six countries.

It is essential for EXL to provide our clients with a world class infrastructure that meets their multi-shore global service delivery requirements. The expanded service delivery will effectively sustain our leadership position while creating new value propositions for our clients. Noida and Jaipur are strategic locations because both these regions offer rich talent pools, robust support infrastructure and are in close proximity to several other EXL delivery centres. (Rohit Kapoor, President and CEO of EXL, Economic Times, 8 March 2010).

EXL which prefers to hire people with one year’s experience had a headcount of 10,700 on December 31 2009. The new Noida facility will have a capacity of over 800 seats spread over 100,000 square feet in the first phase and another 1,400 over 120,000 in the second phase. Noida is home to six delivery centres. The Jaipur facility will be EXL’s first centre in a Tier II location and will have a capacity of 500 seats.

Sutherland Global Services, a pure BPO company with 25,000 employees (10,000 in India), is close to acquiring Adventity, a financial services BPO provider with 4,000 employees. Sutherland is building a campus in Chennai that will support 10,000 people.

11. Conclusions

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Following the recession, the author devised a simple matrix to illustrate the main options available to UK organizations operating contact centres and back office operations as they were compelled to adopt cost cutting measures. Specifically, the concern was with financial sector companies. The four quadrants are self-explanatory. All embedded within the broader context of downsizing, organisations could choose to adopt one or more of these approaches. It is important to stress that these approaches are not mutually exclusive, so that, for example, the adoption of intensification and lean approached could be accommodated within an offshoring strategy. Indeed the very adoption of an offshoring strategy would in all likelihood involve a re-engineering that would drive the adoption of efficiencies through lean and performance management.

Digram 2: Possible Cost Reduction Measures

Nevertheless, it can be argued that offshoring can deliver the single most achievable savings ‘at a stroke’. It was the primacy of the need to cut costs that drove the first major wave of offshoring from the UK to India in the wake of the crash of the dot.com boom and the intensified competition that prevailed in many sectors, including financial services. For some organisations, the significant cost savings that were needed or desired could not be realised by productivity gains in the UK, or indeed from domestic outsourcing. Hence offshoring strategies were adopted, including those undertaken by UK insurance companies.

In 2010 with more intensified cost pressures from a deeper recession, offshoring is now on the agenda for companies, such as RBS, that previously eschewed it. Compared to the first wave of UK insurance offshoring, there are now many more destinations for remote sourcing. However, the world is not flat as Thomas Friedman (2005) would contend and India remains the most credible destination offshored BPO by UK companies. There is a maturity among certain third-party vendors that is evident after several years’ experience of sourcing to UK clients and customers.

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Nevertheless, no UK company should undertake an offshoring initiative such as that proposed by the RBS without careful consideration of the range of factors that could impact on the cost and quality of the services to be delivered. This report has not touched upon the pricing models that might be included in any contractual agreements between the RBS and an Indian supplier. It is more than clear that the experience of offshoring has led to an emphasis being placed upon seen labour utilisation and performance improvements, rather than on the old cost arbitrage models (Nasscom, 2010: 64) that were FTE based. New pricing models that reflect the increasing importance of innovation and efficiency should be a prerequisite. Fixed price contracts, that allow vendors to re-engineer and develop innovative operating models, now account for a third of all new contacts. It is extremely important that within these new models that the quality for the end customer is not sacrificed for the sake of cost improvements alone.

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