The Hindu Business Line : Measure for measure

When does most value come at least cost? Today's BPO players are getting their business metrics right by applying Value Engineering — a discipline born out of the ashes of World War II.

WHEN the world went to war for the second time in 25 years following Germany's invasion of Poland in September 1939, the fierce battles that followed in the ensuing six years could not have offered a more gruesome setting for an innovation that would revolutionise 21st century productivity.

Larry Miles — who would later come to be known as the father of Value Engineering — was a procurement officer for low-military-priority materials in General Electric when the US entered World War II.

His mandate was to procure military-related materials amid war-triggered shortage of labour, components and materials.

Unable to obtain the parts he needed through traditional means, Miles began looking for effective substitutes. These substitutes, he found, often reduced costs, or improved the product. At times, both.

Thus rising from the ashes of the deadliest war was a new discipline, `value engineering' that could be applied to any business or economic sectors in years to come.

Simply put, value engineering or VE helped to find new and better ways of doing things, by examining each component of an undertaking. Since then, the method has effectively been used in building highways, constructing factories or even for museum plans.

Now the $5.8-billion Indian BPO industry is reaping rich dividends by implementing the concept across its processes, and reducing costs considerably.

Tapping VE the BPO way

Consider this: HCL BPO has a separate Value Engineering cell that analyses costs after breaking them into components and suggests ways by which the same function could be performed at a lower cost.

"Typically, BPOs are characterised by multi-year contracts, many of them are projects spanning 5-7 years that come at a fixed price. It is, therefore, imperative for companies to manage their costs," says Ranjit Narasimhan, President and CEO, HCL BPO, which has 9,000 employees.

The problem of keeping the cost under control is further compounded by the Rupee appreciation. Add to that the rapid increase in wages, and you have a situation where margins are low, the income is in depreciating dollars, and there is a year-on-year escalation in costs.

"The BPO industry's cost arbitrage model has evolved to deliver improved quality and flexibility to the clients.

Continued cost inflation, higher wages and a talent crunch threaten India's global sourcing competitiveness. This will allow lower-cost countries to grab market share from India. To sustain competitive edge, BPO companies should not only innovatively cut costs but also deliver higher value to customers. Classical Value Engineering aims to improve performance, reliability, quality, safety, and life-cycle costs," says Genpact's President and CEO, Pramod Bhasin.

Value is a ratio of Function to Cost. Value can, therefore, be increased by either improving the function (output) or reducing the cost (input), and the BPO companies are striving to do both."

Genpact cuts costs by identifying and eliminating redundant steps in a process. This reduces the manpower needed to execute the process. The process consequently runs more efficiently, which increases output.

Process excellence is a continuous journey and is largely attributable to Genpact's discipline of Six Sigma. "Continuous Value Augmentation through process innovation is key to our growth and leadership," Bhasin says.

Trimming transport, power bills

HCL BPO, on the other hand, is implementing the Value Engineering tool in allied functions such as transportation and communications.

For BPO operations, transport happens to be a major cost, typically working out to a sum of about Rs 36,000 per employee per year. Roughly put, this translates into 20 per cent of the cost per team member.

"Earlier we would hire cabs for transporting employees on a mix of fixed hourly charge and a variable charge. We found that these cabs used to remain idle for most part of the day. We then changed to a completely variable model by paying only on per km basis. However, we soon found that controlling the kilometres became a challenge," Narasimhan recounts.

Without the required skill sets to monitor logistics, the BPO company began searching for an effective alternative.

"We zeroed-in on a cost-per-employee model. When we rolled out this model, we found that the transport agencies tried to optimise the routing of vehicles," he says.

By re-orienting the payment model, the company reduced its cost of transportation by an average 15-20 per cent. The saving in its centres in Noida was about 13 per cent, whereas the Chennai centres grossed savings of close to 20 per cent.

The company did the same for electricity charges — a move that pruned its monthly electricity bill by Rs 1.5 lakh per month.

"We use the value engineering concept to reduce electricity charges, as well. The electricity charges are a combination of fixed and variable component where fixed component is the maximum demand charges on connected load, and variable charge depends on the actual consumption," says Narasimhan.

For its Chennai centre, HCL BPO had opted for a connected load of 1000 KVA, but soon realised that the maximum demand requirement for the facility was substantially low.

"By the nature of the industry, bulk of the operations would take place at night when the air-conditioning load was considerably lower, as compared to day time requirement. The air-conditioning load is typically the largest component of the total electricity consumption, but since we operated at night, the electricity consumption was lower. The maximum demand worked out to a mere 435 KVA," he says.

HCL BPO immediately brought down the connected load from 1000 KVA to 500 KVA and although it had to pay a hefty one-time charge, the move still translated into substantial savings for the company in its electricity billing.

Some smart utilisation

For some companies, one of the key areas of cost reduction has been in the form of seat utilisation across all shifts. At WNS, the largest third-party BPO firm, the current seat utilisation is as high as 3.2 times against the industry average of 2.2.

The company feels that while costs such as infrastructure, transport (buses), etc, remain the same as they ply the same routes, an optimal utilisation of the seat can offer a reduction in overhead costs as well as an opportunity to service more clients.

"Thus costs get shared between more than one client, leading to overall cost benefits for WNS and clients too. At WNS, this is value engineering for us," says a company spokesperson.

Agrees Vipul Doshi, CEO of Interglobe Technologies, which has been striving to increase its seat utilisation while optimising bandwidth usage.

"Once you install bandwidth, then it is an opportunity cost in how much you use it. The more the bandwidth is used in 24 hours, the better off we are.

So, if we are running voice processes at night for US customers, then during the day we run either processes for those clients located in non-US geographies (such as the UK and Australia) or do back-office work that allows us to use the same telecom and physical infrastructure," he says.

Equally critical for the company is managing routes for its employees to and from the workplace.

"We try to group people from the same location together and put them on similar type of work. In fact, as a company policy, we also check on a prospective candidate's residential location at the time of hiring. We try not to hire fresh recruits who reside far away from common points of pick-up," says Doshi.

Cost benchmarks help

HCL BPO has gone a step ahead and created cost benchmarks for regular inventory items such as furniture and computer terminals. It registers the lowest cost at which an item was procured, and uses that as a benchmark against any further purchase decisions in the same category.

"We have completely benchmarked all the costs and created a reference benchmark for minute things — such as the cost of carpeting per square footor the cost of air-conditioner.

When we get a quotation for a new centre, we check it against the existing benchmark, and negotiate a lower rate. This lower rate becomes the new benchmark for subsequent transactions," Narasimhan reveals.

The reference benchmarking exercise has enabled the company to bring down the cost of equipment such as the voice logger by more than half from the original cost of $950!

Increased utilisation through optimum occupancy/trip usage, and routing using technology such as Global Positioning System cut transportation costs. Facilities consolidation and new technologies such as Voice over Internet Protocol (VoIP) have also cut costs. "In the last three years, Genpact reduced its input costs by 8-10 per cent, year on year," says Bhasin.

Business impact - the final goal

But Genpact believes that generating `Business Impact' goes beyond cost-cutting, and involves assisting customers to increase revenues, penetrate new markets, and better cash flows.

"In the final analysis, just cost reduction will not do. Indian BPOs have to move to the next level of maturity and deliver business impact.

Dedicated Six Sigma, Lean and Reengineering teams continuously spot and improve processes for Genpact as well as its customers. Supported by 500-plus Six Sigma Black Belts and Master Black Belts, 150 Lean Coaches, these teams have implemented 400-plus breakthrough improvements, 3,000-plus Kaizen improvements that enhanced productivity by 6-8 per cent year-on-year. Genpact shares these benefits with customers," says Bhasin.

For one of its customers consolidating operations from multiple centres to one, offshoring the processes and Six Sigma initiatives delivered a productivity benefit of $300 million, he says.

According to S. Nagarajan, Founder and Chief Operating Officer of 24/7Customer, value engineering is a means of value creation more than cost reduction.

"If our clients are spending their dollars with a specific cost of service metric, we outperform that by delivering higher business returns through better performance for the same dollar value.

Today, in over 70 per cent of our relationships, we are better than the best centre of our customers, and achieve more than the targeted Service Level Agreements. This translates into higher value at the same cost," says Nagarajan.

VE is the journey, not destination

But although companies across the board are busy implementing value engineering in multiple areas such as generating business impact, eliminating waste, investing in domain expertise, improving customer processes and increasing customer stickiness, they realise that value engineering is a journey. Not the destination.

"Cost reduction is just part of the equation. Several countries will soon be able to provide services at costs lower than India's. While costs have to be reduced, it is important that BPO companies deliver business impact through process excellence to stay competitive," says Bhasin of Genpact.

That, he hopes, will extend the cliché — They came for cost, stayed for quality, but really settled for measurable business value.

moumita@thehindu.co.in

Photos: Bijoy Ghosh

Infographics: K. Balaa