The Hindu Business Line : Intellectual arbitrage

In a recent interview in Strategy+Business magazine with Paul Fielding, Francisco D'Souza, Chief Operating Officer, Cognizant Technology Solutions, articulated the idea of "intellectual arbitrage". This idea intrigued us and eWorld caught up with him during his recent trip to Chennai to comprehend and demystify how this may be the next wave of innovative transformation for IT companies.

Excerpts from the interview:

Of late, Cognizant has been talking about intellectual arbitrage as the next big opportunity. How is intellectual arbitrage different from labour arbitrage?

In some respects, intellectual arbitrage and labour arbitrage can be seen as two sides of the same coin. It's really the mindset that's different. The historical thought in our industry has been, "How do I do what I am doing today at a lower price?" This is a clear labour arbitrage mindset. With intellectual arbitrage, from the client's perspective, the idea is "How do I get a far better outcome for the same price?" That's the basic concept and the mindset shift.

I was with one of our forward thinking clients recently. We were talking about a fairly large-sized opportunity and the client said to me, "Whoever I select as a partner, labour arbitrage will be a step function, the first piece of the benefit. What's going to test the relationship is which partner can innovate on a continuous basis and provide me the continuous stream of benefits."

If you think about things that way, particularly when in BPO (business process outsourcing) and KPO (knowledge process outsourcing), it's all about how one achieves a dramatic business outcome that wasn't previously possible by leveraging the talent, not just in India but around the world. You can then start having some very interesting conversations with the client. What I am discovering is that clients do business in a certain way, and provide services or products to their end clients in a certain way because of the constraints that they have historically operated in — constraints such as the talent pool that was available, price points for the different types of talent, and so on.

Historically, the labour arbitrage way of thinking about it is, "this is the way I have been doing business, and how can I do it more cheaply in different parts of the world?" Nobody has stepped back and asked, "Why do I do business this way? Why are my business processes done this way? Why is it that I do these kinds of things?"

Can you give an example?

This is not a Cognizant experience but something I read about sometime ago. It's about a credit card company's experience with call centres. This credit card company had moved its delinquent bill payments/collections to India. The company had a couple of call centres in the US that were doing this work and they subsequently set up operations in India to do the same thing. Initially they came to India because it was be cheaper to do it in India. Within six months they found out that on all the metrics their Indian call centre was far better than their US call centres. Their collection and recovery rates were much higher.

What they discovered was that, on an average, in the US, they were hiring high school graduates in call centres whereas in India they were getting graduates and degree holders. Because of that, for the same price or for a little lower price, they were getting far higher skill and performance. They took a step backward and said, "What else can I do to achieve a different business outcome?" This precisely is intellectual arbitrage.

Similarly, across a lot of clients that we work with, particularly the business processes that they have established have become ossified over the years based on the way the company does business, based on the talent pool that has been historically available to that company. And they have not taken a step back and questioned why they did business that way and that if they had higher skills at different points in the service value chain, could they achieve a very different and much superior business outcome.

Another example is a very recent one. I was sitting with the CEO of a Health Plan in the US. He is someone very passionate about reforming healthcare in the US. It is widely acknowledged that there are structural issues with Health Plans in the US because of which healthcare has become very transactional.

Unlike other parts of the world where patients tend to establish long-term relationships with their medical providers and doctors, in the US, there is no long-term relationship that is established.

He said that he wished he could find a way to re-establish this dialogue. His concern was when members call a call centre, because the people hired were at very junior levels, at best they could take the call and answer basic questions such as when their claim will be paid. They were not qualified to give them any advice. We thought why not put a qualified doctor or even an MD at the other end. That threw open a whole new discussion about having a new range of products and services for members.

That is the idea of intellectual arbitrage, where instead of focusing on the denominator, the focus is on the numerator of our clients.

Looking at the context of Genpact or SCOPE, these captive players have now become third-party vendors. Their ability to tap the market is enormous and it gives them significant leverage when compared to IT service companies getting into BPO. In this context, for IT companies, is intellectual arbitrage about moving up or down the value chain? Which will be more valuable?

Clearly it's moving up the value chain. In the market place today, there are a couple of different flavours of BPOs. If we look at the horizontal players — those doing human resources, financial accounting, and so on — what they are trying to do is standardisation. It's mostly a cost inefficiency play there. Their posture is `because we are standardised, we have the scale, repeatability and higher efficiencies through which we can drive common processes across corporations." Seen from a client's perspective, the focus is on the denominator — doing it more efficiently and more productively, thereby helping save through automation and so on. A good value proposition, but it's one kind of a play.

When we talk about the KPO industry in India, it's no more than offshoring of higher knowledge processes such as mortgage processing, equity research, etc. Essentially, higher knowledge value services are being moved to a lower cost location. This is another class of BPO in which companies like Cognizant are actively involved.

Intellectual arbitrage is more than this. These two categories of BPOs are about existing processes that the client is already doing and what happens is just transfer of work to different parts of the world for better, cheaper and faster benefits.

How a healthcare service could get executed across different geographies depending on specialisation.

The idea of intellectual arbitrage is one step ahead. It's about "Can we enable things that clients are not doing today, do dramatically new things that clients couldn't consider today because they cannot afford to do them because of the talent pool available to do it, and because services and products do not exist today at that price point?"

Here is one thing we did with a client in the healthcare space recently. This client offers services to other health insurance firms. One of the services they provide is claims processing and subrogation of claims. They had a rule that any claim that was, say, under $500, they auto adjudicated them because the amount was too small in their scheme of things. They did so because it is cheaper and it's easier to make round decisions. It's playing the law of large numbers game.

We said if we could apply intellect even against those smaller claims, it would be terrific. We asked the client, "Is there a service that you can take to the market that you couldn't before even with much smaller claims?" The answer was a resounding `yes'. So, using intellectual arbitrage, we helped them take a new service to the market, created a new market opportunity for them in an area of their strength, which they couldn't do before.

Are there examples of this in other industries?

A parallel is a typical manufacturing situation. You produce a product based on the raw materials you have and the raw material prices ultimately affect the final cost of the product itself. All of a sudden, if you have a major shift in your input prices, what you achieve on your output side changes dramatically. It's the same thing here. But nobody seems to have thought about it this way — that we do certain things this way because of the constraints that we operate in.

Even if you look at software professionals in the US, they are an input to a client's product or service; the price of different categories of labour is an input to a service. If you look at it from a labour arbitrage perspective, if people are cheaper, then the cost of operations comes down. But there is another way to look at it: "If I had cheaper inputs could I produce better services?"

It's an extension of this idea. Particularly in service-intensive business, the ultimate value delivered to a client is some service/experience. There are a series of steps that happen to produce that service/experience. Just as we have a manufacturing value chain, we have a services value chain-a series of activities that happen to produce the end service.

The idea is, "Can we look at each piece of the services value chain, dissect it, and for each step along the way identify which is the best place in the world to do it, leveraging the optimal talent pool?" A simple example is, 10 years ago clients would say the most logical way to do software maintenance is in Bangalore. Today, Bangalore doesn't appear to be a logical choice to move software maintenance work. So the map of where in the world one could do certain types of services changes.

Why doesn't Bangalore seem a logical place for software maintenance work?

Because the demand and supply equation for talent in Bangalore is different. And so are other factors such as infrastructure, redundancy, robustness, and so on. Recently, for a specific reason, one of our clients said, "We do significant work in India but we would like to do production support in the same time zone, even though I know I can do it in India. I am thinking of going to Brazil to do my production support work so that I can pick up the phone in my time zone and call somebody in my time zone, and it is not someone working in night shifts."

Likewise, we see companies focusing on BPO to establish good presence in Eastern Europe because of language aspects. This talent map, across multiple processes and offerings - application maintenance, application development, systems integration, IT infrastructure services and different categories of BPO - creates an interesting talent map around the world.

I recently heard that Belgium is the hub of cartoon creativity and is one of the leading locations to do cartoon-related work, although a lot of cartoon work also happens in India. Belgium has one of the leading cartoon schools in the world. We see this kind of specialisation around the world and a logical outcome of this is that the services value chain will get dissected more and more finely and get parcelled out around the world. This will potentially get passed between suppliers as well.

Not everyone will do everything. Cognizant might do a piece of one part of the process in India, while some other vendor in Brazil might do another part of the process, and so on. These processes will get assembled and delivered in real-time and they will be done faster. It's somewhat futuristic but there are early signs of it happening.

Think of health claim as an example. From the time a patient makes a claim to the time the patient gets the payment, it's largely a virtual cycle. By the time the payment is made, that claim would have moved through perhaps 10 or 20 countries around the world for processing. It could get scanned in the US or Mexico or Canada, data entered into in China, data analysed and adjudicated in Chennai, reviewed back in the US, and if the patient is Spanish, it may go to a call centre in Brazil or Mexico, before the payment is made.

The claim, which is nothing more than a set of bits and bytes, could move across any number of geographies before it actually gets paid. In the process, it may go through several different providers. This is something we will increasingly see across many processes. (see flow chart).

maverick@thehindu.co.in

To be concluded

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