The Hindu Business Line : The inside story

Indian companies are yet to realise the real benefits of outsourcing; they need to learn from Americans to outsource non-core competency and concentrate on core strengths.

Try a search of the word "outsourcing" in Google. Over 1.41 crore results, varying from an outsourcing institute to outsourcing in Russia, and a few stories on outsourcing itself, would pop up in less than 0.15 seconds. That's an indication of how prominent outsourcing has become in the recent past, the world over.

In the US, outsourcing is a dirty word, but it is just the opposite in India. Thanks to the low-cost labour advantage, more US companies want to outsource work — right from hi-tech work to low-cost ones like attending telephone calls — to India.

The National Association of Software and Services Companies (Nasscom), which represents the country's information technology (IT) and IT-related firms, estimates that the Indian outsourcing sector will be a $15-billion industry by 2008, up by a staggering $12 billion compared to current earnings of $3 billion. It also estimates that the banking and financial services sector in the US made savings of $8 billion in the last four years by outsourcing to India.

But the above facts are all centred on the US and what India offers American companies. The level of outsourcing within India is very negligible, says an industry expert on outsourcing. Indian companies are yet to realise the real benefits of outsourcing, and have not started to look beyond the boardroom.

"We need to learn from Americans on outsourcing. They outsource their non-core competency, and concentrate on what they are strong in. This improves the company's revenues and profits," he adds.

The Indian perspective

So far, outsourcing within India has been mainly in the human resources (HR) space and to a large extent in the manufacturing sector. For instance, large companies have started outsourcing employees for less critical work — such as administration, maintenance and in retail chain stores. For instance, a large Indian telecom firm, which has retail stores across the country, has sourced most of its staff at the store from a recruitment firm. In other words, the staff would be on the payroll of the recruitment firm, but would work for the telecom firm.

Under temporary staffing, Ma Foi Consultants, a Chennai-based recruitment firm, is placing over 2,000 people a month in various sectors — 35 per cent of them in IT-enabled services. The company is targeting 3,000 a month, and in the next few months the number is expected to go up to 10,000, says a company official.

Ajit Isac of Adecoo Peopleone Consulting, a Bangalore-based recruitment firm, says that the organised labour market in India accounts for 7 per cent or 28 million of India's 440-million workforce. The Indian job market has almost doubled in each of the last two years and is expected to grow further as the economy continues to expand. According to Ranjit Pisharoty of Lason India, a BPO firm, real outsourcing in India is in the manufacturing sector. The booming ancillary industry is feeding the manufacturing assembly lines. However, beyond this, companies have really not thought of outsourcing (say in BPO), due to security concerns. Essentially, outsourcing of business processes, in most domestic businesses, is still in its infancy — very minuscule, indeed. The reason is not the lack of cost consciousness or competitive hunger, but a lack of appetite for a changed way of doing business. Also, there is still a perception that the profit margin is not good enough in domestic outsourcing to make it worthwhile. This is a complete myth, and soon Indian companies will realise, like their western counterparts, that cost arbitrage is only a small part of outsourcing benefits. The larger benefits lie, practically, in free re-engineering and re-design of processes for continual improvement, which is a win-win for both parties.

Outsourcing is process-specific

IT services, including software applications development, customisation of packages and systems integration, have traditionally been considered niche enough for specialist help. Front office management and customer contact administration have also been one of the earliest outsourcing targets. However, it is the BFSI (banking, financial services and insurance) segment that has been leading this change, by sheer volumes. When it comes to some of the `marginally core, but support' functions, the top of the outsourcing heap surely is "payroll and benefits" administration. The next in line would be IT maintenance, as it is difficult to maintain in-house IT departments. And in the past few years, the trend has been to outsource the entire HR administration, including staffing and training. Non-core financial services such as billing, invoicing, accounts payable and receivables and administration are on the list, but only larger companies go beyond that to internal auditing (not statutory) or financial analyses. Market research and analysis has shifted out of the typical marketing department's purview, says Pisharoty.

"I do not believe outsourcing is sector-specific. It is process-specific and some sectors are more amenable to certain processes," he adds. For example, a customer contact centre is the crying need for the banking, credit card or insurance segments. But the first step in e-governance also has to be an excellent help desk. This is true for all industries where service delivery to a client is paramount. Similarly, HR services outsourcing or financial services outsourcing or back-office transaction processing of any kind is industry transparent. Wherever there exists large requirement for digitisation and processing of data for end-results, outsourcing to specialists will be the key. Today, the BFSI segment is in the forefront. Tomorrow, like in the West, all industries will follow.

Talking about outsourcing in manufacturing, a Chennai-based FMCG company has been highly successful thanks to outsourcing its manufacturing function. It retained its core strengths — research and development, and sales and marketing, while outsourcing the entire manufacturing to a third party. "We need not worry about labour issues or maintaining a factory. We need to concentrate on our R&D, and give the formula to our vendor. They will give the finished product for us to market," says a company official.

What does the future hold for domestic outsourcing, say in the next five years? Pisharoty of Lason India gives an example. The company's clientele includes four of the top five medical insurance companies in the US. Due to the Indian talent, re-engineered systems and world-class delivery standards, the US companies enjoy about 50-70 per cent savings in cost per transaction.

"We offered the same processes to a domestic multi-crore company, with a guaranteed minimum 20 per cent saving. The spirit was willing but the flesh was weak. Who would bell the productivity and efficiency improvement cat, leading to old time retainers being rendered unviable? I do not see many legacy companies moving to the "outsourcing" mode. Yes, some MNCs... but that is just a drop in the minimum $10 billion external export pool," he says.

Picture by Bijoy Ghosh

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