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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 (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 BPO


Employment in BPO

% rate of growth


























768,000 (est)


Sources: Nasscom (2002-2010)

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 proces


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