BPO Backlash

[acharya]

SPECIAL OUT SOURCING


Special Section: The Rush to Send Back-Office Business Overseas - Part 1 and 2
Earlier this summer, newspapers reported that New York processes its parking tickets in an unusual manner. Instead of dealing with them in a municipal office in the city, officials ship the job to Ghana, where it can be done more cost-effectively. The work was done in India until New York found that Africa was less expensive.
Welcome to the world of global back-office operations, or as it is often called, cross-border business-process outsourcing. While companies have long outsourced manufacturing operations and other tasks such as IT maintenance or software development, the trend has now expanded to include other kinds of business processes such as customer contact, bill processing and medical transcription. Companies are moving such work to locations in India, the Philippines and Jamaica, arguing that they can cut costs by 20% to 40%. As a result, cross-border business process outsourcing has grown into a massive market. Consulting firm Gartner estimates that cross-border business process outsourcing will grow into a $178.5 billion business by 2005 from $123.6 billion in 2001. New deals are announced almost every week. On October 8, Delta Airlines said it would move part of its customer reservations work to BPO centers in India and the Philippines.
Knowledge@Wharton presents a two-part special report examining this phenomenon. In the first part, we look at the pros and cons of business process outsourcing arrangements, examine some human resources issues, and also present some findings from a Wharton research project led by professors Ravi Aron and Jitendra Singh. The second part, which appears below under the title "Managing the Extended Organization: Handling the Risks of BPO Relationships," explores management and financial issues in BPO transactions."

Special Section: The Rush to Send Back-Office Business Overseas - Part 1

The Case For, and Against, Shifting Back-office Operations Overseas
Moving back-office operations to India from Washington, D.C. a year ago let the World Bank kill three birds with one stone.
First, the Bank slashed its costs by 15% in the lower-wage country. Second, the organization chopped down a backlog of accounts receivable and expense forms from hundreds of items to just a handful. And finally, the Indian accountants have helped the Bank get smarter even as they slogged through the work, says Chuck McDonough, director of the World Bank’s accounting department.
"You say, ’While you are doing this, why don’t you think about how we can do the process better?’" McDonough says. "You get to clean out the backlog and you also get to reengineer the business."
The World Bank’s shift is part of a growing practice of sending back-office work from developed nations to developing countries. Thanks to a growing willingness to outsource operations, lower labor costs and technology improvements, firms are deciding to ship tasks such as customer contact, bill processing, medical transcription and even animation to countries such as India, the Philippines and Jamaica. Major corporations such as General Electric and British Airways pioneered this tactic with off-shore operations. But in recent years, a flurry of independent companies offering call center or other services have sprung up, and now prominent Indian information technology companies are jumping into the market.
So far, however, only a small portion of call center work and the like has actually crossed overseas. A survey last October by market research firm Gartner found that just 5% of U.S. corporations with revenues ranging from $100 million to $4 billion outsourced, or had the intention of outsourcing, portions of their back-office offshore. Concerns over security, the viability of providers and service quality were the main objections, Gartner found. There are other hurdles, not least of which is criticism from labor advocates that the trend amounts to eliminating decent-paying jobs in the U.S. while workers overseas are exploited. What’s more, infrastructure isn’t always reliable in the developing world, foreign accents over the phone can turn off U.S. consumers, and the very notion of moving work across the globe can unnerve potential clients. The extent to which back offices will move out of the office altogether and overseas remains unclear.
Gartner analyst Rebecca Scholl predicts off-shore business process outsourcing probably will not pick up significantly for the next two years. And the experience of current business-process outsourcing (BPO) clients will play a crucial role in determining the future of the practice. "It will take several successes to increase adoption," she says. "But it will take one big splash to slow it down."
If early adopters manage to avoid a messy failure, the prize is significant. Gartner pegged the global market for business process outsourcing in 2001 at $123.6 billion, and expects the market to reach $178.5 billion in 2005.
Moving business operations off-shore has precedents in the industrial and IT fields. Decades ago, manufacturers moved their factories overseas or entrusted their production needs to third-party outfits. The same general shift has occurred in information technology in the past several years. Firms based in countries such as Slovenia and India emerged to take on programming and application management tasks for U.S. companies at a fraction of the cost of paying in-house techies or hiring a firm with domestic coders.
General Electric is widely regarded as taking this globalization push to the back office. Several years ago, GE’s financial services unit began operations in India; its headcount in the country has now reached 12,000 employees. GE Capital also has "Global Processing Centers" in China and Mexico, and the facilities provide around-the-clock in-bound and out-bound call centers, accounting services, IT help desks, document storage and software implementation. The Mexican facility alone processes more than 3.5 million documents a day, with turnaround times of as little as eight minutes.
British Airways also established a back-office presence in India with World Network Services, a data management unit. In April, the airline signed an agreement to sell 70% of the business to investment firm Warburg Pincus. Financial services firm Conseco is another big hitter to move back offices overseas. The Indianapolis-based company has operations in Jamaica and India, where it bought business process outsourcing firm Exlservice.com. When Conseco acquired Exl last April, it announced plans to move 2,000 jobs to India within roughly 21 months. The company has since scaled back the goal to a total of 1,500 jobs by the end of 2003, and so far, Exl has about 1,100 workers focused on Conseco tasks. Software giant Oracle also has plans to set up a 70-person unit in India to handle back-office work including payroll, human resources management and accounting.
With major corporations setting a precedent, independent BPOs have emerged to offer their services. And now India’s information technology services industry is muscling into the market. Infosys Technologies, whose clients include Johnson Controls, Toshiba and Aetna, launched Progeon in April. Billed as a "business process management" subsidiary, Progeon received a $5 million investment from Infosys and a $20 million infusion from Citigroup Investments. Wipro is another Indian IT services firm to ramp up in back-office business process outsourcing. On August 1, Wipro said it acquired a 66% stake in Indian BPO Spectramind e-Services, raising its overall ownership in Spectramind to about 90%. Spectramind has about 3,100 employees serving seven clients with offerings including back-office processing and customer contact services.
Although much of the press on back-office operations overseas has focused on India, it isn’t the only game in town. According to Gartner, other countries with business-process outsourcing facilities include the Philippines, Czechoslovakia and Hungary. Affiliated Computer Services (ACS), a Dallas-based IT and business process outsourcing firm, has operations in Jamaica, the Dominican Republic, Barbados, Mexico and Ghana.
As Gartner sees it, firms like ACS will lead the way when it comes to expanding the overseas back-office industry. Given the newness of the market, "In 2002, U.S. clients will prefer to contract with U.S.-based BPO providers, even if they in turn deliver their services offshore – with their own facility or though partnerships," Gartner wrote in January.
The back-office tasks that can be done overseas vary widely. At the simpler end of the scale are functions such as data entry and expense form processing. Then there are contact centers, which can include inbound or outbound calls, email responses, and tech support. At the higher end are duties such as processing insurance policy applications or suggesting improvements to existing procedures.
Why are companies sending these tasks overseas? One factor is the general willingness, or even imperative, of corporations to focus on their "core competency." Gartner’s survey of corporations with revenues of $100 million to $4 billion showed that 25-30% of the firms were outsourcing to U.S. based firms. Cost then looms large. Contact centers in India can result in 30-40% cost savings, says Vail Dutto, CEO of San Ramon, Calif.-based InTelegy. InTelegy has focused on managing call centers onsite for clients, but in June forged a partnership with HCL Technologies of India. InTelegy now can offer clients use of a 400-seat call center in New Delhi at a billable rate of $18 an hour per Indian worker, vs. $30 to $35 an hour for their U.S. counterparts. "It’s just really expensive to do business here in the U.S., particularly from a customer support standpoint," Dutto says.
The cost benefits go beyond wages alone, Dutto says. Turnover at U.S. call centers can run at 100% and absenteeism can reach 14%, Dutto says. But those drop drastically in India, she suggests, partly because of door-to-door transport services for workers. Prestige also may play a role. Dutto says while call center jobs in the U.S. might be on par with fast-food work, in India they are equivalent to accountant or computer programmer positions. All employees at the InTelegy-HCL Technologies facility have a college degree.
The high level of employee education possible overseas figures into a second reason to locate back-office operations there: quality of work. Wharton operations and information management professor Ravi Aron argues that Indian employees drawn to back-office outfits perform the jobs at a better-than-expected level, and also tend to offer suggestions for improving the business process. "Companies start out for cost, stay on for quality, and then realize that they get a lot of managerial initiative," he says. (See interview, “Business Processes Are Moving from the West to Other Parts of the World.”)
Conseco and the World Bank support Aron’s points. Since it began moving functions such as customer service and data processing to Exl, Conseco has found its operations in India meet or exceed service level standards 95% of the time, says Ruth Fattori, Conseco executive vice president, process and productivity. She suggests that enhancing business tactics almost comes naturally with migrating back-office work overseas. "You expose all the problems you had in the U.S.," she says. "It really gives you an opportunity to stand back and look at a process and how you might improve it."
The World Bank consciously chose to enlist its Indian employees in process improvement work, such as data mining. That’s why the Bank’s cost cutting was just 15%, McDonough says.
The World Bank started with 80 employees at its Chennai, India, facility, and now has 110. Although built before the Sept. 11 attacks, the facility has since provided an unexpected benefit: disaster preparation. "In terms of developing a business continuity plan, it has helped tremendously," McDonough says. "If something happens in Chennai, we can run business out of Washington, and vice-versa."
Also behind the offshore back-office trend are technological advances. Most if not all back-office work happens electronically, which means paper documents such as invoices have to be scanned into computers. Imaging technology has come so far that smudges on documents and signs of forgery now can be detected, McDonough says. Dutto suggests that improvements in networks and voice-over-Internet-Protocol have helped make global call center operations cost-effective and reliable. "Three years ago, you just couldn’t do it," she says.
Still, companies may question whether they want to do it. In the first place, transferring back-office operations overseas is a controversial tactic from a labor standpoint. During a time of economic uncertainty and anger at corporations, slashing U.S. jobs to hire abroad can raise eyebrows if not harsh criticism. There are concerns on the overseas end as well. Labor rights may not be honored in other countries, facilities can be cramped by U.S. standards and they can operate as data sweatshops, given that not all are air-conditioned.
Offshore back-office advocates respond that overseas workplaces and benefits can be world class. Advocates also suggest globalization may cost lower-skill jobs in the U.S. but prod more developed countries to create higher-level positions.
Other problems are cited. Infrastructure in India remains below developed-world standards, Fattori points out. Conseco has had trouble with its land-line telecommunications connection, and Fattori estimates the service is down 4-5% of the time. To get around the problem, Conseco uses satellite service for its India-based voice operations. "Anyone going to India would have to think of redundancy in terms of their telecom," she says.
Customers also may ask how secure their precious customer data is, especially given concerns about the privacy of medical records and other personal information. Prasanna Keth, an Indian native who is launching a U.S.-based BPO named Dynamics, says those fears can be addressed by organizations such as the Customer Operations Performance Center, which certifies that contact centers have achieved an industry standard.
But even if the foreign operation can be trusted, what about threats from guerilla groups, or the lingering conflict between Pakistan and India over Kashmir? "(The) issue of nuclear warfare tends to frighten people way," Dutto admits. The fear, though, is overblown, Keth says, because business process outsourcing facilities are located away from the hotspot. "India is a vast country, and the conflict is somewhere else," he says.
Still, U.S. and European firms looking for a BPO overseas may worry their partner won’t be around a year from now. Observers have suggested a glut of companies are rushing into the market, and not all will be able to make a profit. And despite evidence of top-quality work done overseas, not all offshore BPOs seem ready to deliver quality service. Dutto took a tour of 20 facilities in India earlier this year before selecting HCL Technologies, and noticed a "major difference" between well-funded operations and what she described as opportunistic ones.
Then there are cultural and societal differences, and client concerns about the resulting competency of foreign workers. In other words, if call center workers have never transferred balances between credit cards or shopped online, how can they help Americans do those things? Clients grill Dutto on this issue. "The main objection is, ’Will they be able to understand enough of the U.S. culture to trouble-shoot?’" she asks.
The answer, advocates say, is setting up systems smartly and training, training, training. Indian-based BPO Daksh, for example, might spend three to four weeks training an employee to handle a simple process, and up to three months preparing a worker for a more complex task, says Arijit Sengupta, the company’s director of business development.
Training also is seen as a solution to another cultural hurdle: foreign accents. Fattori says research shows that people on the U.S. east and west coasts don’t mind the sound of a foreign voice, but other parts of the country are less tolerant. So Conseco’s Indian call center workers are trained in "accent neutralization." "Really, what we look for first is for them to slow down in their speech," she says.
Daksh also pushes for "accent neutralization." "They’re not trying to imitate an American accent," Sengupta says. "They’re trying to speak in a neutral and clear way."
Changing Indian accents to please American consumers might strike some as offensive. But companies trying to boost the offshore back-office approach seem more focused on expanding the business. So far InTelegy has two customers using its India call center, but Dutto admits it has been a "pretty tough" sell. A common response to her pitch, she says, is this: "It’s 10,000 miles away and it’s a third-world country, and you’re talking about my customers."
There may also be limits to how much a company wants to move its back-office operations overseas. Firms ought to maintain an understanding of how their business works, if only to avoid being dependent on one outsourcer, Fattori suggests. "If you completely give a process to a third party, and you give up your knowledge, then the cost to switch could be much higher later on," she says.
So there are many cautions and hurdles, along with the possibility one well-publicized flop could put the brakes on shifting back-office operations overseas. But one Conseco problem in India speaks to the way the industry is growing for now. Exl employees are very desirable to new and expanding back-office operations, Fattori says. "We get people trained," she says, "and then [another company] steals them from us."


Special Section: The Rush to Send Back-Office Business Overseas - Part 1

“Business Processes Are Moving from the West to Other Parts of the World”
Long before he became a professor of information and operations management at the Wharton School of the University of Pennsylvania, Ravi Aron worked in the product development group of Citicorp in New Delhi. Memorably, his boss at the time told him to forget what he had learned about marketing at the Indian Institute of Management, Bangalore – because “in a highly service intensive industry like ours, marketing basically means information management.” Aron realized he was right: Almost everyone at Citicorp was busy collecting, analyzing, aggregating and disseminating information. “I realized that information was our stock-in-trade – our input and our output,” Aron recalls. “I began to look for emerging themes, and realized that service essentially means collecting information about the context of the buyer.”
That realization, coupled with a desire to understand it more deeply, prompted Aron – who has worked as a consultant in Malaysia – to pursue a Ph.D. degree at New York University’s Stern Business School. Since joining Wharton in 1999 his research has focused on various aspects of information management, including the pricing of information-rich services and the efficiency of business-to-business markets and online auctions.
These days Aron, in collaboration with Jitendra Singh, a professor of management at Wharton, is studying the outsourcing of business processes such as call centers from the U.S. and other Western countries to India and other parts of the world. Despite the general slowdown that dogs the tech industry, business process outsourcing (or BPO) continues to be regarded as a hot market. Gartner, a tech consulting firm, reckons that the global BPO market will be worth more than $240 billion by 2005. In a recent conversation with Knowledge@Wharton, Aron discussed his findings about the potential and risks of this emerging phenomenon. Wharton's Mack Center for Technological Innovation and the Wharton e-Business Initiative (WeBI) have helped support this research.
Knowledge@Wharton:You have been studying the outsourcing of services such as call centers to India. What have you found so far?
Aron: I am studying the supply chain of expertise; call centers are one aspect of that phenomenon. A call center can be driven by the fact that the cost of human labor intervention is much lower in India than in the U.S. and other Western countries. The orders of magnitude are one-eighth, one-tenth or one-twelfth, depending on the kind of work. But call centers represent just the most visible component. In three to four years, you will see that the supply chain of expertise that connects the West to India, the Philippines, Brazil or Malaysia will not be about call centers but about other things.
Knowledge@Wharton:What do you mean by the supply chain of expertise?
Aron: Many things that are done inside firms are labor intensive. I’m not referring to physical assembly-line labor; I mean the kind of work where human beings have to intervene in a process and use decision-making skills – such as interpretation, validation, translation, transliteration or transformation. For example, when a dealer is given an 8.5% rebate, does that mean 8.5% of the package price or the promotional price? Computers can’t make such decisions. Computers are good at sorting and manipulating large data sets and executing instructions. But when it comes to making judgment calls, you need people. Human beings are good at making meaning out of one medium and translating it into terms that computers can understand. Such processes are called back-office processes, and they are rapidly migrating from the U.S. and other Western countries to India, Singapore, Brazil and other parts of the world.
Consider some examples. In the call-center industry, companies like Daksh (which has the Amazon account), Spectramind (which works for Dell), and Tracmail provide call-center support and telemarketing services to clients. But that is just the beginning. British Airways has moved its back offices to India, as has the World Bank. At these offices people have to look at vouchers and other documents, make decisions about what they mean, and convert information into a format that can be aggregated or manipulated by computer – which is typical of back-office work. From a research standpoint, what is interesting is that things that were once internal to a firm are no longer so. The boundary of the firm in some ways is being compressed, while in other ways it is being expanded.
Knowledge@Wharton:How does this happen?
Aron: When Dell tells Spectramind to handle certain services in exchange for a fee, it means what was once being handled inside the firm has now become a market transaction. As a result, the boundary of the firm is compacted. But a different phenomenon also is underway. An extended organizational form is emerging in which firms relinquish control in return for monitoring.
For instance, let’s say I have a company and I move my back office to Chennai. I stop exercising control; I don’t tell an employee, “I want you to be in the office at 8:30 a.m.” But I do look at the number of errors per 1,000 documents processed and control that quality. In addition, I randomly sample phone calls to monitor the quality of the marketing. Consider DirectTV, whose call center has gone live in New Delhi. If someone were to do telemarketing for me from that call center, I would not tell them how to do their jobs, but we would agree on the outcomes and I would pay them depending on the number of deals they closed for me. So the extended organizational form is one in which you relinquish local control – it is another firm that actually hires the employees – but you monitor those employees.
This is a very different model from traditional supply chains. A company like Johnson Controls might supply automobile components to GM, but there’s no question of control or monitoring by GM – these employees are Johnson Controls employees.
There’s a big difference between the supply of materials and the supply of expertise. This is because IT enables deep linkages to be established between organizations. These linkages are much richer than when you are supplying car seats or windshields. It is reasonable to expect that DirectTV’s customer service (or telemarketing) representatives have to be able to see the same version of customer information in Delhi as those at DirectTV’s headquarters. This establishes very deep information-based linkages between the two outfits. So at one level, these are two companies engaged in a market-based transaction, but at another level you could view this as an extended organization.
Knowledge@Wharton:How have such extended organizations – and business process outsourcing in general – evolved?
Aron: Business process outsourcing began with the setting up of captive service centers by large transnational corporations. These centers, such as the ones set up by Citicorp and American Express in India, began by executing enterprise-wide operations that involved the conversion of data from one medium (such as documents) to another (digitized data in corporate databases). Companies such as American Express and Citicorp started moving more and more of their information extraction and reporting tasks overseas. Two factors that made this possible was the convergence in corporate computing platforms and the rapid advances made in communications technology. As corporations standardized a few enterprise wide platforms (such as Relational Databases, networking standards etc.) and with the availability of software tools that made it easy to port large data sets between dispersed information systems, the flow of data and information between geographically dispersed branches of the same corporation became a viable and nearly costless option.
Knowledge@Wharton:What difference did this change make?
Aron: As the flow of data between computers that talked to each other increased, so did the extent of human intervention and the degree of expertise required of the information worker to transform data into information. As a result, the costs of providing accurate and timely information to support middle management decision making increased by orders of magnitude. Corporations were faced with a two-pronged cost escalation – they had to hire more information workers and at the same time ramp up the expertise levels of existing information workers who provided operational support to the managers. The move to a centralized operations factory in a lower-cost labor regime was an obvious response to the cost frontier faced by these corporations. Hong Kong Shanghai Bank Corp., for instance, has an office in India handling back-office work which employs about 1,000 information workers, and HSBC plans to triple this office size in the near future. America Online’s customer service operations are supported from India. Initial reports suggest that some firms benefit to the tune of up to 60% cost savings in these lower wage markets.
Knowledge@Wharton:On what specific aspects of this phenomenon does your research focus?
Aron: I’m studying at least three issues. Let’s place this in its theoretical context – there are two theories that broadly explain the existence of the firm: the transaction cost and the principal-agent theories. If you look at the extended organizational form, you can argue that people are sending work out to places like India for cost gains. But that also increases the transaction cost. What if the firm behaves opportunistically? So one of the things I’m studying is, what kind of information is shared between organizations?
Secondly, I’m looking at questions such as, what tradeoffs take place between monitoring and control; what are the metrics of performance and who agrees on them; what is efficiency and effectiveness and how are these measured; and how do you align the incentives of firms that ship out the work with those to whom it is sent? In addition, I am studying the so-called KIF problem or the knowledge-intensive firm. These include firms in industries such as insurance, banking, financial services, brokerage, health care – these are now huge and sprawling organizations. Firms have no reason to be that big, and they are starting to unravel to some extent. Ford Motor realized back in 1915 that there was no reason for it to own rubber plantations in the Amazon so that it could make its own tires; someone else could make the tires. In the same way, health care firms, insurance firms and brokerages are beginning to recognize that they don’t need to have all these back-end processes going on within their organizations. That expertise could be acquired much better and cheaper from someone else.
The third issue I’m studying is pricing: contracts, fee systems, etc. Also, I’m looking into whether pricing defines the employees’ behavior in some way. If you take your back office and make it someone else’s front office, what sort of pricing structures do you use? Out of 50 or 60 things that you can study, these are the three I’m focusing on.
Knowledge@Wharton:Have you reached any preliminary conclusions?
Aron: I’m looking closely at these relationships in the financial services industry. Early results show that initially, as the process of organizational unraveling begins, firms look at the most easily definable tasks such as document reconciliation or call centers. After that, they look at a factor I call revenue distance.
The concept of revenue distance is simple: The point at which a financial services firm captures revenue – where a customer works through its doors and agrees to buy a credit card or another service – is the point at which its revenue distance is zero. It is a final and visible process that leads to the sale, but supporting that is a series of processes that run behind it. If you take one step back, before you call a customer to sell him a credit card or another service, you may have looked at his profile, your existing relationship with him, and so on. You may have sifted through a list of 10,000 people and found 1,500 potential prospects. That’s a back-end process. If you take yet another step back, you may have acquired that list of 10,000 names from a credit rating company or some other vendor. As you take more steps away from the point of revenue capture, your revenue distance increases.
Initially companies ship out back-end processes that have really long revenue distance. At that point, their main motivation is cost. But by the time the relationship starts deepening, they realize that costs are relatively unimportant. Many back-end jobs in the U.S. are manned by people who are under-qualified and bored. Attrition rates in call centers in the U.S. range from 70% to 120%. It takes a month and a half to train a person so that he or she can hit the ground running, and then three months later that person is gone.
In contrast, in India, at its worst, the attrition rate is between 12% and 35%. A back-end job in the U.S. is a serious job for someone in India because it pays serious money. This applies all the more as you move away from call centers into other back office processes in financial services and other industries. Pentamedia Graphics is a great example. It is a large animation shop, which also has a U.S. office that does business development. Just as you can find talented engineers and software writers in India you can find talented animators. So you can argue that initially U.S. companies outsource operations to India for cost reasons, but by the time the relationship deepens, it’s driven by anything but costs.
Knowledge@Wharton:What are the main drivers in addition to costs?
Aron: Cost benefits usually just open the doors. You may start by saying that your call center or back office operations are very expensive, and you want to look for other options. Thereafter you discover some interesting things. Consider quality. You might believe that if you are willing to throw money at quality in the U.S., you will get it. That’s not true. You’ll have to pay anything from a 40% to 80% cost premium (in direct wages alone) to get the kind of quality you could get in India. Inaltus, a processes outsourcing company based in Britain which specializes in F&A services (Finance and Accounting), estimates that premium in Britain to be upwards of 80%. In many cases, they point out that the quality is simply not available in the labor pool that competes for these positions in the UK (and several other Western countries). Many of the people in the U.S. who have talent and education don’t want to do back office jobs. In the U.S. there is a serious mismatch between the kind of skills and temperament that delivers quality and the kind of people that are needed to deliver them. That mismatch doesn’t exist in India. So even though a company may enter into a relationship with an Indian firm because of costs, it discovers that it gets much better quality than it had expected.
Moreover, companies that outsource back-office operations to India discover other intangible benefits. At one financial services firm, the back office in India started making suggestions about how processes could be streamlined in Europe and the U.S. That not only led to productivity gains, but also made for much faster customer processing and proximity. Earlier, if you wanted to cross-sell an insurance product to someone who had already bought a credit card or mortgage, it took six to 12 days to turn that around. You can now do that in 24 hours. You can find really smart people who are willing to make a career of this in India.
So companies start out for cost, stay on for quality, and then realize that they get a lot of managerial initiative. It takes a lot of headaches off their hands and allows them to stay focused on their core competence – and to remain close to their ideal customers and serve them.
Knowledge@Wharton:What are the implications of your research for developing countries to which the supply chain of expertise extends?
Aron: Initially many companies looked at setting up back-office operations in Ireland and Canada; now the cost advantages have gone away in those markets. Ireland has a small population, and back-office operations are a sunset industry there. Malaysia and Singapore are trying to get in on the action. They have the infrastructure, unlike India. Getting your telecom infrastructure set up in India is like a doing a root canal without Novocain. You don’t have this problem in Singapore; it’s amazingly agile. In 48 hours you can get full connectivity.
You might also see hybrid situations where more skill- and labor-intensive jobs might migrate to India and parts of Malaysia, and and as a second tier, jobs which carry higher managerial content – which require more Western management techniques and human GUI (graphics user interface) and more of a professional touch – such as offshore CRM services - those might migrate to Singapore.
Knowledge@Wharton:Have you seen any examples so far?
Aron: Architecture offers a good example. There’s a large firm which does a lot of work in Indonesia, but this is how it works: the Australian firm ships out part of its work to Singapore, where the cost differential is very high (in fact, they have many Indian architects working there), and this relationship is managed out of the Sydney office. This allows the firm to be in the region and yet not part of the same cost regime. So you might find middle offices move to countries like Singapore, Thailand or the Philippines. The single biggest advantage India has over these countries is the existence of a large, math-friendly, English-speaking population.
Knowledge@Wharton:What about risks? How should companies deal with the risk of intellectual property being poached as a result of outsourcing arrangements?
Aron: The principal risks are what my Wharton colleague Eric Clemons calls PSOR – poaching, shirking and opportunistic renegotiation. These are very early days, and so most of the time you find companies under-committing and over-delivering. These risks can come up when the market matures, but right now it’s still in the expansion phase.
Still, you have to be careful in a couple of areas. First, if the firm to which you have outsourced work takes ownership of your customer information, that greatly increases its bargaining leverage. Outsourcing firms that have this information can start renegotiating prices or contracts.
Secondly, there is the issue of lock in. When people think about lock in, they usually think about information technology. This is a minor part of lock-in; in fact, there is a great deal of standardization with web services. The greater risk is process-level lock-in. If employees get used to seeing the same screens and doing the same things while someone supports them from a back office, it’s a tremendous bargaining advantage for outsourcing companies (the providers) vis-à-vis the principals (the users). Even if the outsourcing firm increases its fees, it becomes difficult for the principal to discontinue operations or change the way things are done. The human level lock-in – of the person, the process, and the information manipulating system – is much more dangerous and costly. Disruption of those processes is usually unaffordable; and that gives the outsourcing firms tremendous advantages.
There are of course ways to guard against these risks. One is to distribute risk. The other is to have a dummy standby mechanism for every process. And going back to the notion of revenue distance, as you come closer and closer to the point where revenue is captured, for those processes you should keep a skeleton back up, which might let you operate for two weeks without interruption if your supply is disrupted. That skeleton backup is enough because it changes your bargaining power.
Knowledge@Wharton:What opportunities do you see in health care? Medical transcription is being outsourced, but do you see other opportunities as well?
Aron: In the next four to eight years, the U.S. is going to see three important trends in health care. One is boutique medical care: For those who are able to pay, there will be a level of service that goes beyond what is now provided by medical care firms. Every time you hear the term, “high quality service,” it means there is a great deal of information manipulation. So boutique medical care is likely to take off – and this will aim at providing health services priced at $60,000 a year to $400,000 a year. There are more than 1 million millionaires in the U.S., so this is not a tiny market.
Since not everyone is going to get the same suite of health care services, other parts of the industry will segment themselves into groups that make more intelligent use of customer information. In the U.S., some of this will be aimed at better capacity utilization. If, for example, a hospital such as the Columbia Presbyterian Hospital is accepted by 20 health care providers, you might want to make the case that it should be accepted by 200 of them. You can do several levels of fine segmentation, and decide how those costs are going to be covered among the providers.
The finer you price your services, the better it is for people at the lower end. If someone who costs $500 a month to service pays a premium of $250, and someone who costs $50 a month to service also pays a premium of $250, if you can make the premium reflect the risk status a little better, you might be able to reduce the number of the 40 million uninsured in the U.S. Finer segmentation means faster information throughput and movement in the back office. Two very large players in the health care business are already looking for outsourcing opportunities in this area. Special Section: The Rush to Send Back-Office Business Overseas - Part 1

When Back-Office Work Moves Overseas, What Happens to Workers
It may be good for business owners to shift back-office operations overseas, but is it good for workers?
Advocates of the off-shore strategy say yes. Contact centers and transaction-processing facilities in places like India and Mexico can provide good jobs to poorer countries, they argue, adding that U.S. employees who lose work may eventually find higher-skilled positions. Critics, though, don’t buy that version of globalization. They say workers in the developing world can be exploited, and U.S. clerks, accountants and call center workers are by no means guaranteed a decent-paying replacement job. Especially given the slow pace of economic growth compared to a few years ago, moving back-office work overseas will hurt the most vulnerable Americans, suggests Jeff Faux, economist with the Economic Policy Institute. "It’s going to have an impact on opportunities for people to rise up the economic ladder in the U.S.," he says.
The debate isn’t exactly new. It follows disputes over the loss of manufacturing jobs and, more recently, information technology work to lower-wage nations. In contrast to those earlier controversies, though, the labor issues involved in sending back-office operations overseas haven’t boiled over much into the public arena. Perhaps that’s because a relatively small amount of back-office work has been transferred away from the U.S. Last October, research firm Gartner found that just 5% of U.S. corporations with revenues ranging from $100 million to $4 billion outsourced, or had the intention of outsourcing, portions of their back-office offshore. And although major names like General Electric, American Express and Conseco have established their own back-office facilities in countries such as India, China, Mexico and Jamaica, many smaller organizations have not jumped on the bandwagon.
But they may soon. The logic behind going global with accounting, data entry and customer-service tasks is compelling. While call center workers in the U.S. can make in the high $30,000 range or more a year, their Indian counterparts might earn $4,000, or up to $7,000 for a management-level post. Including other expenses, total cost savings of 30% to 40% are possible in moving back-office tasks overseas. What’s more, the quality of the work can surpass expectations. While clerical and call center jobs in the U.S. often are seen as mediocre-paying dead-ends, the same work is a relatively high-paying, high-status job in a developing country. That can translate into better-educated, more-motivated employees halfway around the globe. Betting that more and more U.S. and European-based companies will see this light, business process outsourcing outfits are springing up in India especially.
India’s National Association of Software & Services Companies (Nasscom) says the country’s call center and BPO industry – what it calls IT-enabled services – grew by 70% during the 2001-2002 period to a total of $1.46 billion in revenues. And Nasscom has a bullish outlook as well. Indian revenues in IT-enabled services should jump to $16.94 billion by 2008, capturing more than 10% of the global market, Nasscom predicts. Indian employment in the field, Nasscom says, could rise from roughly 100,000 to 1.1 million people.
A study last year by London-based consulting firm Ovum found that call center capacity worldwide will nearly double within five years, growing from 7.3 million seats in 2001 to over 13 million early in 2006. Ovum also saw the call center industry growing particularly fast in Central and Eastern Europe and in South and Central America (including the Caribbean). Both of these regions’ share of global call center capacity will jump from 2% of worldwide call center seats in 2001 to 7% in 2006 (a combined increase to 14% from 4%), according to Ovum.
But it’s not clear the back-office overseas switch is ideal for workers in developing countries. Not all Indian facilities are air conditioned, notes Vail Dutto, CEO of a U.S.-based contact center outsourcing firm. Dutto toured 20 Indian sites earlier this year while seeking an Indian partner for her firm InTelegy. In India’s tropical climates, lack of air conditioning all but guarantees a "data sweatshop" atmosphere. What’s more, some back-office facilities in India have smaller personal work space standards than offices in the U.S., says Chuck McDonough, director of accounting for the World Bank, which moved some back office operations to Chennai, India last year.
Besides the prospect of hot, cramped offices, another concern is the ability of workers in poorer countries to organize independent unions, suggests Candice Johnson, spokeswoman for the Communication Workers of America union. For example, she says, labor leaders in Mexico have been fired and beaten up. "It’s still a very difficult thing to do to exercise your rights to organize as a worker," Johnson says.
Gartner analyst Rebecca Scholl toured Philippine call centers and wondered about the toll taken on workers with late-night hours. Many employees lacked their own transportation, she said, which led them to stay several extra hours onsite until public transportation service began. Even though sleep rooms and karaoke entertainment were available, Scholl questions the long-term impact of the schedule: "You can just work at night so long before you burn out."
On the other hand, Scholl says the facilities she visited were "world class" in terms of comfort, ergonomics and cafeteria services. Other organizations with overseas back-office operations also say they treat workers properly. The World Bank, for example, used its Washington, D.C. offices as the standard for workspace size at its transaction-processing facility in India, which now employs 110 people. Each Indian worker gets about 90 square feet of room. Dutto, whose firm InTelegy has formed a partnership with Indian-based HCL Technologies, says the 400-seat call center in New Delhi used to serve her clients is air conditioned and provides transportation for workers.
Daksh, an Indian-based business process outsourcing firm, has imported office equipment to make sure its workspaces are ergonomically correct. Its roughly 2,300 employees work in air-conditioned offices, get transportation to and from work, and are given breaks from sometimes-tedious call center duties to take on other roles such as company librarian. Employees also are eligible for stock options.
So are the workers of Spectramind, another major Indian business process outsourcer. Now 90%-owned by Indian information technology firm Wipro, Spectramind’s nearly 3,100 employees also enjoy air conditioning, as well as transportation services and health insurance benefits.
Daksh and Spectramind may treat their workers as well as the top American firms do, but what about those U.S. employees whose jobs are sent to India and elsewhere? The displacement already has begun. Last April, financial services firm Conseco said it planned to move 2,000 jobs to India within 21 months, though it has trimmed the goal to a total of roughly 1,500 jobs by the end of 2003. So far, about 1,100 workers are dedicated to Conseco operations at its Indian subsidiary Exlservice.com. The World Bank, meanwhile, axed 40 jobs from its Washington headquarters when it shifted some back-office operations to India.
Such lay-offs are likely to become increasingly touchy given the possibility of a double-dip recession and the slow pace of job growth in the U.S. In July, for example, the U.S. economy produced a tepid 6,000 net new non-farm payroll jobs and the unemployment rate remained at 5.9%. Meanwhile, the American public has grown enraged at corporate greed in the wake of scandals at firms such as Enron, Tyco International and WorldCom.
"If U.S. process support personnel are seen to be losing jobs to cheaper white-collar workers in India and the Philippines, it is likely to become a serious political and public relations issue for enterprises considering offshore sourcing," Gartner wrote in a July report. Gartner suggests a wise approach may include using U.S.-based outsourcers with global operations and offering redeployment plans for affected workers.
Jeff Faux, though, suggests redeployment training is only a band-aid to the bigger wound of job exportation. As he sees it, corporations have misled Americans by saying only low-skilled work would be transferred abroad. Higher-skilled jobs also have moved overseas given the ability of people elsewhere to be trained, he says. Indeed, some of InTelegy’s Indian call center workers are handling customer support for software firm Oracle’s small business program, work which requires technical know-how.
Faux also disputes the logic that call center jobs in the U.S. are inherently undesirable. If the jobs weren’t being transferred to India and other countries, the U.S. workers would have opportunities for more training and benefits, he says. "It’s a vicious circle," Faux argues. "You’re creating more ’dead-endness’ to these jobs."
Faux’s point is supported in part by the experience of the CWA, which represents workers at firms including Verizon Communications, AT&T and SBC Communications. Thanks to joint union-management efforts, CWA-represented employees can take a variety of training programs, including Cisco Systems technology certification courses. In addition, CWA-represented call center employees can make up to $40,000 to $45,000 a year doing customer service work, Johnson says.
Faux says that to generate jobs, state governments and the federal government ought to be able to limit overseas outsourcing. He points to a case where New Jersey welfare recipients calling with benefits questions were helped by agents located in India. When the situation came to light earlier this year, it prompted outrage that the jobs weren’t located in the U.S. Faux suggests, though, that free trade legislation may erode the ability of government bodies to prevent privatization and the transfer of jobs overseas. "If you can’t allow the state of New Jersey the freedom to create opportunities in the public sector for its poor and unemployed, it’s unlikely you’re ever going to be (able to) do anything about GE sending its back-office operations to the far east," Faux says.
Off-shore advocates don’t share Faux’s slippery slope vision of job exportation. Organizations, they suggest, are likely to keep a chunk of their back-office operations in the U.S. to avoid becoming beholden to outsourcers and to prepare for disaster situations. What’s more, advocates defend moving back-office work off-shore as good for average Americans in the long run. InTelegy’s Dutto says call center jobs going abroad can prod the U.S. workforce to raise its skill levels. "We become the knowledge workers," she says. "The hourly rate, lower-paying jobs are going to be done where they best can be done."
David Lewis, associate vice president of business development in North America for Spectramind, says helping ailing U.S. companies save money will allow them to earn more and eventually reinvest in more jobs. "It’s in no one’s best interest for U.S.-based companies to suffer the way they are right now," he says. Lewis suggests wages rates eventually will balance out, with poorer countries’ labor standards rising rather than U.S. standards falling.
The World Bank pursued that goal when it moved operations to India. The Bank chose to pay employees an above-average wage - at the 75th percentile – as it hired its Indian staff. And "many, many" affected workers in Washington found other jobs at the Bank, McDonough says. In any event, if some U.S. workers lost jobs while those in a poorer country benefited, the net result is still good, he suggests. "Our mission is to rid the world of poverty," he says. "We’re increasing the standard of living in the Special Section: The Rush to Send Back-Office Business Overseas - Part 1

Call-Center Workers Straddle Two Continents and Cultures
Outside, the street lights blink to life as people make their way home. Inside one particular office, however, every corner is abuzz with sound. Indian actress Aishwarya Rai and American pop diva Britney Spears jostle for pin-up space on the poster boards. Computer screens glow on every desk and soft lounge music weaves a surreal atmosphere.
A young girl in a blue salwar kameez dress sits at her desk staring at the screen. The screen lights up, and she strikes her keyboard. “Hi. This is Jessie. Happy Independence Day, Mrs. Lucas. How may I help you?” At another table, a dark-haired young man who calls himself Murphy is on the phone. “No Problem, Mr. Farelly. We’ll give you a new lawn mower.” At another desk, a shy girl speaks: “Hi, Mr. Brown. This is Nicole from BigBucks Cards. I would like to remind you about your overdue payment, sir.” Meanwhile, a colleague, Randy, portrays an aggressive credit-card salesman. “This would be a great deal, Mr....”
Jessie, Nicole, Murphy, Randy – they all live in Mumbai (formerly Bombay) on India’s Western coast. Most have never been to America and when they step out of their offices, they are Jayanti, Madhuri, Mahesh and Randhir. They often live in the far-flung suburbs of Mumbai, and America has been a dream destination since they were knee-high. Welcome to Youth Online: India’s latest export to the world. They work to American time, try to speak like Americans, and sport attitudes that their peers in New York or San Francisco would find familiar. From Jayanti, Mahesh and Madhuri, they become Jessie, Murphy or Nicole with practiced ease every day for nearly 10-12 hours.
More than 100,000 young men and women, aged between 20 and 23, work for call centers across India, estimates the National Association of Software and Service Companies (Nasscom), an association of software and IT-enabled services companies. They sell everything from cars to travel packages; they nudge tardy customers into paying their credit card bills; they warn customers about overdrafts and staff the helpdesks for shopping malls and offices all over the U.S.
Jessie, whose real name is Jayanti Rao, lives in Dombivili, a suburb of Mumbai. “I work at least 10 to 12 hours a day,” she says. “It’s a tough job, but it’s not bad once you learn to juggle your time well.” She doesn’t just juggle her time; she has also had to learn her Indian and American personae. Jayanti, 23, went to a convent-run school in Dombivili and then attended college in Bandra, another Mumbai suburb. She wears her hair in a long plait and her clothes are Indian. But once she enters a company online chatroom or is on the phone, she morphs into her work persona of Jessie, a white, blonde woman who probably wears shorts to work.
Jessie’s day begins at 5:30 in the evening, Indian time, when she hits the "floor." The floor is a large area where customer service representatives, or e-service personnel, work on their projects. Each representative has a nickname (or "nick") that becomes a part of their personalities. Some use their nicks as e-mail identities or even as second names and some use it among friends.
Jayanti says that she has to be friendly, helpful and appreciative of every customer. Most customers approach her if they want to find out about the delivery of a product purchased from an online mall or want to return something that they had put in their shopping carts. Her challenge is to convince customers against returning goods that they bought and make sure that they come back to the mall.
She fields more than 100 calls a day and not once can she let the mask slip. If it does, it is immediately noticed by her supervisors because every call she makes and every online chat she handles is monitored. There are QCIs, or quality control inspectors, who keep an eye on the spellings, the language, the tone and the attitude of each employee. Says Randhir, who works as a e-service representative with a call center, “At the end of the day, I am told where my mistakes were. It helps me correct spelling mistakes and improve my performance.”
The QCI, everybody is keen to point out, is more a friend than a policeman. He steps in when a customer gets abusive or if a caller is too difficult. “We are told by the client that we can quit the call if the customer or caller gets personal. So we make sure that our representatives are not hassled unduly by such people,” says one supervisor. Supervisors monitor calls to check on the tone, accent and approach of the representatives. While call center employees may not necessarily be penalized, they are reprimanded for missing opportunities or helped to see how to handle a call better, says a supervisor.
“We have to be gracious, pleasant and aggressive at the same time,” says Jayanti. “This is quite different from what I used to be. But now I find that I have become more patient and I listen to my friends and parents a lot more than I used to. I also appreciate things much more.” She says that she finds Americans quick with their praise. They thank her for her help and are understanding about a lot of things.
How does she cope with the unusual work hours? Usually these don’t pose a problem. The office has a lively atmosphere, and everyone has so much fun that she loves working the graveyard shift, she says.
Call center employees typically work long hours. Work begins around 5:30 p.m. in India when it is 8 a.m. in America. Some 100 to 120 people work on a project, depending on its size and nature. They work in two shifts – with the second one starting around midnight. The late shift is the most stressful, but companies say that employees are well compensated through incentives.
Like Jayanti, her colleagues on the floor are very young. They are happy to work at a snazzy office where their take-home pay usually doubles in a year or two. They start at around Rs 8,000-10,000 a month ($166 to $208 a month) and this goes up substantially if they stay on with the organization. Companies offer attractive incentives to employees who agree to work nights and holidays, says a 22-year-old who moved from Delhi to Mumbai in search of a job. He says he is happy working on holidays, even though his office would let him stay home if he chose to. He prefers to work because he can earn much more on these days.
In addition to rapidly rising salaries, office parties offer another attraction to call-center workers. Every month there are picnics, movies, Hawaiian Nights and Rain Dances and other parties that keep the place rocking and enthusiasm levels high. “We are always going out to discos and restaurants together,” says one agent who has been with a call center for two years.
Most of them have no social life outside the office. Their friends are colleagues in other call centers. Also, since most social engagements are around dinner in India, they miss out on such opportunities. The office more than makes up for this, says one young woman. “We have so many parties here that we don’t really need anything else.”
Quite a few find their husbands or wives on the floor too. Most companies are neutral bystanders to these workplace romances but, says a senior representative with a call center, marriage almost always leads to one partner leaving the job.
The other problem is that the initial enthusiasm fades out when working odd and long hours. And for that there are frequent de-stressing programs, yoga and meditation camps that help employees cope with the pressures. Convincing parents about unconventional work hours is another problem. Everywhere employees are encouraged to bring their parents to the office and show them around. This helps a lot, especially with the women. Most call-centers in Mumbai hire college Graduates, preferably those who have taken courses in business or commerce.
Most offices see a constant stream of applicants all through the year, and even though the turnover rate is high, supply far outstrips demand. The tribe of Jessies, Nicoles, Randys and Murphys is on the rise.
The Making of a Call-Center Agent
One of India’s major advantages over other countries trying to enter the BPO market is its large pool of manpower. According to an ICICI Securities report, India has some three million students who Graduate every year outside the engineering and medicine disciplines. And they all speak English – albeit with different regional Indian accents. The makeover is not easy, even for someone who is born and bred in cosmopolitan Mumbai where Western brands, movies and trends are a way of life.
Arjun Vaznaik, COO of Tracmail, a Mumbai-based provider of call center services that has several U.S-based, Fortune 100 clients in the IT, banking and telecom industries, says it takes several months of grooming to get Indian workers ready to deal with Western customers. On the floor call-center workers start as “agents” – or people who are at the front line of answering or making customer calls to the U.S. Some two years later, they may become supervisors and then team leaders and finally center managers. It can take nearly five years for a call-center worker to go from being an agent to center manager.
Training is integral to every stage of this development, and so are the trainers who earn between Rs 15,000-18,000 a month ($315 to $375 a month) initially and nearly Rs 45,000-50,000 a month ($950 to $1,000 a month) after two years on the job. Each company develops its own training module. Vijay Rao, managing director and CEO of Epicenter Technologies, a provider of call-center services in Mumbai, says “the module is proprietary and the trainer can’t use it elsewhere.”
The first step is to recruit right. “While India has a large population of English-speaking people, the dialect and accents of English spoken in several parts of the country may not be completely suitable,” says Prakash Gurbaxani, CEO, TransWorks Information Services, a leading outsourcing company offering transaction processing, financial accounting and HR-related services to international clients. While the accent and voice are important, they are not the only criteria for selection. “We have to look for people who understand that this is a high stress, challenging job and this is the way it is always going to be,” says Vaznaik. Among other things, Tracmail runs a technical help desk and handles voice, chat, and e-mail responses on behalf of clients.
After joining the company, employees are put through an induction program. This lasts about 15 days for a web-based function and a month for voice-based services. This is to help employees become familiar with the ethics and goals of the organization. The next stage has three or four components depending on the project and the client. Here employees go through training programs for their voice, accent, language, domain, process behavior and attitude. Sometimes the client is a part of this training program, but that depends on the project.
“The training is completely non-threatening, and the employees are encouraged to give feedback every step of the way,” says a trainer. Training modules are usually created with the client and have two broad categories. The first deals with the technical and systemic details of the tasks the employee must perform. For instance, an agent with a web-based shopping mall must know the various processes within the mall, the services offered and the tools that he can access on his screen when dealing with a customer. The second module is aimed at helping employees understand the way Americans use the English language. They do this by watching movies, baseball games and TV shows. For example, Indian employees may be unfamiliar with expressions such as “taking a raincheck” or “ballpark estimate.” They soon find out. In one office, every new worker is asked to watch CNN and BBC News regularly to get the accent and tone right. “They watch BBC News, not BBC comedies,” says the trainer.
During the training, employees also le