It is early evening in Bangalore and several thousand minibuses and ‘corporate taxis’ are navigating the crowded streets – as they do every night – collecting young graduates from their homes and ferrying them to the start of their working day.
Until two – in some cases five – in the morning, the workers will be faux-Americans or faux-Brits, taking customer calls from all over the US or the UK – answering account enquiries, dealing with mortgage applications, troubleshooting computer glitches and a host of other call centre functions.
They are highly motivated – with annual salaries of £1,200 to £2,500 (10 to 20 times the national average salary in India), free food and drinks specially selected to suit night-time working, and the knowledge that their positions as call centre agents and managers are regarded as among the most prestigious in the Indian job market. Indeed, operators of such centres (and there are around 100 in India today employing 100,000 people) talk of receiving applications at a rate of a 100 or more a day.
In the last two years, their numbers have grown exponentially, mostly in India, but also in the Philippines, China, Panama, Mexico and Eastern Europe (see graph). Across almost all industries – but especially in financial services, telecommunications and airlines – the list of companies ‘offshoring’
their call centres is building: Prudential, Standard Chartered Bank, General Electric, British Airways, Microsoft, Aviva, Delta Airlines, Lehman Brothers, American Express, Sony, Reebok, HSBC, Nortel, Ford and Citigroup are just a cross-section. In fact several academic studies show that around 80% of the world’s 500 largest companies have already outsourced select parts of their activities to India.
In the view of many analysts, call centres are just the start – the testing ground for the offshoring of many other IT-intensive, IT-enabled business processes. Companies are now looking to outsource distinct, back- and front-office functions including R&D in pharmaceuticals and software, insurance claims processing, bill processing, records management, credit card services and mail management, payroll management, mortgage applications, IT help desk services. Indeed, according to outsourcing consultancy TPI, already one-quarter of all contracts being placed offshore are business processing outsourcing (BPO) deals rather than traditional offshore activities, such as applications development and maintenance.
In many ways, call centres have been treated as the proof of concept and represent only a small subset of the potential BPO market. In 2002 in India, the call centre market was worth $237.7 million and that will triple over the next half dozen years to $737.7 million, according to research house Frost &Sullivan. But with the BPO market (both onshore and offshore) worth $122 billion in 2002 and doubling to $234 billion by 2005, there is a huge opportunity for countries like India to take a much larger slice.
To put the size of the opportunity into perspective, Nasscom, the Indian software and services forum, and management consultancy McKinsey estimate that BPO is likely to contribute around 3% of India’s gross domestic product by 2008.
The confidence with which large companies in the West place key business processes offshore will be drawn from the lessons learnt from that first wave of IT-intensive BPO, call centres – the economic models, the organisational structures and mechanisms for collaboration, the communications networks and the technology infrastructure.
And suppliers of such services are frantically gearing up their capacity in key business process ‘domains’ so they can take advantage of what one analyst predicts will be a “stampede” as Western organisations start to use BPO offshoring as a matter of course.
At US-headquartered call centre and billing services company Convergys, almost all of its activities in India today are centred around call centres. In the two years since it made its move to provide offshore services, it has built up a workforce of 4,000 agents and managers in New Delhi and Bangalore. It is opening two further centres in India this year and two others in the Philippines. Call centres may be the focus today, but it has set a strategic direction to deliver end-to-end processing for specific industry niches.
The ambition is similar at ICICI OneSource (I-OneSource), the subsidiary of Indian bank ICICI, that runs contact and processing centres for nine major UK organisations, including the insurance company Prudential, through its 3,500 agents in India. “Over time, the bulk of our business will come from areas where we are handling the complete process of our clients, such as credit card processing and the management of mutual funds,” says Matthew Vallence, European regional director for I-OneSource.
The notion that the offshore BPO market is something of an iceberg is backed by Stephen Peattie, managing partner with change management company Kinetic, a specialist in offshore call centre consultancy. “Currently, a lot of companies are involved in pilot operations, seeing how to make them work well. At the same time, in order to avoid any negative PR, they are keeping these pilots quiet until they are ready to move the whole business process out there,” says Peattie.
“Companies know that there is a cost saving element to be had, but many don’t know what kind of quality can be delivered, how easy it is to manage the operation out there, and how well outsourcing companies can handle complex applications,” says Peattie. “There is going to be a stampede at some point.”
Halved cost base
Potential cost savings are certainly what gets the board’s attention. “Instead of making small incremental changes to their cost base, organisations can actually make step-changes,” says Vallence.
But gauging those potential savings is not as simple as a straightforward labour cost to labour cost comparison. Base salaries at Indian call centres are one-tenth to one-fifth less than in the UK, but several related costs have to be loaded in.
Only when infrastructure overheads, the cost of employee training and benefits, the global telecoms cost, the additional management overhead for both the client and the supplier, and, of course, the margin of the outsourcing company are factored in can the real bottom line be determined.
The outcome will clearly depend on the complexity of the business process being outsourced. But in the case of call centres, says Vallence, the operational saving over running an equivalent UK centre should be about 40%.
That calculation is echoed elsewhere. “If you go offshore, you divide your cost base by two,” says Jean-Marc Hauducoeur, senior VP of international operations at Convergys. The range is 25% and 50%, concurs Fred Shadding, former VP for offshore solutions for call centre specialist Sitel, but 40% is typical.
The cheaper labour pool is reflected in the overall running costs. According to Kinetic, staff costs account for 65% of a UK-based call centre’s overall spending, while in India that cost runs at just 21%.
The employee-related overheads are also hardly insubstantial. To give an idea of the scale of the logistics involved in simply getting workers to their desks, Hauducoeur says Convergys employs around 600 drivers, a fleet which logged 1.2 million miles last year.
Why the need? “With India five and a half hours ahead of the UK and ten and a half ahead of the US, we are mostly operating at night. Public transport is not an option and there are laws governing the transportation of women. Basically you collect and deliver people from where they live,” says Hauducoeur. “This is a real competency outsourcers have to develop and a significant cost of doing business.”
With agents working through the night, I-OneSource also provides other facilities, including a concierge service to help employees take care of tasks they might not be able to manage during the day, a counselling service for those having difficulties with night working, and specially prepared meals to suit the night-time metabolism, says Vallence.
But BPO offshoring is not just about cutting costs. The quality of the labour pool willing to work in call centres and back office functions in countries like India is much higher than in the West.
“Organisations are accessing a labour pool that is not just cheaper but is also more highly qualified and highly motivated,” says Vallence.
Kinetic cites some stunning numbers. The average call centre salary in the UK is £13,000, in India it is £1,200. Around 25 million people in India are educated to degree level, yet unemployment among graduates is 60% to 70%, and an additional two million fresh graduates hit the job market every year. “The pool is vast,” says Peattie, “and they see working in a call centre as a graduate career.”
That shows in turnover. “If you take markets like the UK or the US, call centre turnover is generally pretty high and motivation pretty low. The opposite is true in India and there are plenty of metrics that show that client satisfaction is also higher, says Hauducoeur.
And the complexity of the work being undertaken is growing. While offshore BPO has been largely centred around manual-intensive back-office paper processing activities, during the last 18 months there has been a push to the front office, says Peattie. The questions organisations are now asking themselves: can the offshore company handle complex processes?
Many UK outsourcers suggest that India-based facilities are only capable of handling low-value functions such as balance enquiries, says Peattie. But that is not what Kinetic has been observing: “What we are seeing is people selling mortgages, mobile phones and other products that involve fairly complex processes and a large amount of skill. And they do it very well, the success rates are very high.”
The end of distance
A key reason for the increased confidence in the capabilities of offshore outsourcers has been the radical improvements in supporting technology and communications – above all the falling prices and reliability of private leased circuits in and out of India, the rise in the quality of IP telephony, and the availability of bandwidth to support remote processing.
“Technology is the lifeblood of what we are doing. In the early days, there wasn’t much availability in terms of the communications routes we could take, and the cost of that bandwidth was very expensive,” says Vallence of I-OneSource. The company has established a network which covers all of its sites in India as well as points of presence in the UK and US. Importantly, it can make use of different physical telecoms routes, notably one that runs through the Middle East and Europe, and another round the southern tip of Africa. “That means if there is a disturbance, such as the recent earthquake in Algeria, the service delivery can be rerouted onto a different path,” he says.
The price of high-speed telecoms has come down by almost a factor of three over the past two years, while reliability has risen. That has meant problems associated with early systems – which used satellite communications – are a thing of the past, says Harducoeur.
At the same time, companies have been able to employ systems architectures that ensure the call centres can deliver a service that appears local to the caller. In most cases the system itself – the servers, the application, the data – resides in the home country, with agents accessing these as remote users, taking calls over a voice over IP system.
That remote processing helps from a number of perspectives, not least of all in terms of the data protection issues, says Vallence. “Clients are much more comfortable if the servers are run and hosted locally to them rather than transferring large amounts of data to and from India,” he says.
If the application is a ‘green screen’ mainframe application, which is not uncommon, the system will use a protocol such as Telnet to access the data. For more graphical applications, companies typically use Citrix or another thin client/host-centric system, so that, effectively, all that is being transmitted across the network are keystrokes.
The system also needs to be able to work both ways. Clients want to track the level of service through daily reports fed back to the host organisation or reports they can generate on the fly. Plus they have the facility to listen in, unheard, to any live call – day or night.
But systems are not the only piece of the infrastructure that need to be in place to ensure reliability. BPO offshore companies also need to have the ability to generate their own electricity and maintain back-up systems. Many have to install water filtration systems to ensure the staff have clean drinking available.
But all these safeguards can come undone if cultural aspects are not addressed.
“The big challenge for any outsourcer is to understand the client’s brand and to effectively communicate that to the customer – in this case by individuals who have been born and brought up 5,000 miles away from the market in which the product is being sold,” says Vallence.
The learning curve for that will inevitably be longer than in the home country, he says. Every person I-OneSource hires goes through a four-week training programme that covers the background of the company they are going to be working with, and orientation towards the target country. Over and above training in the specific business processes of the client, that training includes getting used to understanding different regional accents, ‘neutralising’ their Indian accent, and understanding the cultural context in which UK or US customers are living.
“There is also constant cultural orientation,” says Hauducoeur, “about the interests of the people agents are talking to, what these people might do at the weekend, what is in the newspapers, on web sites, on TV.”
Downsides and pitfalls
Despite such efforts, there are still plenty of areas where the offshore outsourcer can get it wrong.
“It is a very significant investment to go there,” says Harducoeur. While staffing costs are much lower offshore, the management costs involved in dealing with a remote team will inevitably be higher. According to Kinetic, in the UK around 12% of a call centre expenses are absorbed by management costs. In an Indian contract that percentage stands at 20%
“What is often overlooked is the management overhead. And although Indian companies have invested heavily in management, there is a tendency in India to say ‘yes’ to a request,” says Peattie. He knows of three large blue-chip companies in the UK that are having major problems because they chose outsourcers that stated they had a certain capability but failed to deliver.
Most organisations also want to lower their exposure by using a mix of both offshore and onshore processing. Financial services giant Aviva, for example, intends to have 1,000 people in a new Bangalore call centre by the end of 2003, but will retain 2,000 in the UK.
“It is not all or nothing. A lot of clients take that cautious approach, especially in what are still reasonably early days,” says Harducoeur. He also suggests that organisations are looking to use different offshore locations to reduce risk. “I don’t think you can put all your eggs in one basket,” says Hauducoeur. “People are wanting to balance their commitments in India by adding South Africa or the Philippines to the mix, as well as keeping a domestic capacity.”
And there is always risk. When India and Pakistan were threatening each other with war in 2002, Convergys had to evacuate many of its US and European workers from India who were there training and overseeing pilot contracts. “Most offshore locations may be democracies but they are hardly as stable [politically] as the UK or US,” says Hauducoeur. “This is not a proposition with absolutely zero risk,” he adds.
Nevertheless, the opportunity in almost every case outweighs the risk. “Before taking the step of offshoring, any company goes through a lot of soul-searching,” says Vallence. “We can show them the art of the possible, but the real proof are the adopters who are not just showing that it can be done, but that it can be ramped up hugely.”