As a conference in India on business process outsourcing heard recently, the relationship between company and service provider has evolved, to the benefit of both sides. Kala Rao explains.
Mitchell Habib, CIO for North America consumer at Citigroup, made a startling proposition to the chief executives of Indian business process outsourcing (BPO) companies recently.
Addressing them at the Indian IT industry’s annual meeting in Mumbai in February, he said: “So much IT intellectual property (IP) is created in India for other companies. It is time you trained your staff to recognise IP opportunities, engage us, your customer, if you think it has market value and let’s work together to harvest it.”
Not the usual pitch
Coming as this did from one of the prized customers for IT services and business process outsourcing companies worldwide, it made Indian CEOs in the audience sit up and pay attention. “What we are looking for is not someone who will take costs out of our back office but a partner whose innovation will help us bring new products to the market,” Mr Habib added. IP will be the catalyst for a value shift for the IT services industry, he said in the course of a 35-minute presentation, which made no reference to the usual pitch that outsourcing offshore equals cost savings.
While past concerns over job losses and security issues related to offshore BPO were discussed only cursorily, the central theme of discussions at this year’s meeting were about making the move from a vendor towards becoming a partner.
Scott McKay, CIO of Genworth Financial, an insurance company from the General Electric group, says the goal has changed from labour arbitrage (the point where outsourcing began) to “business process globalisation”. Genworth has moved into “longer and deeper relationships” with its BPO providers, typically over seven years, that involve a much greater level of operational integration, he adds.
Good fit needed
A mega-deal – such as the IT services contract that ABN AMRO signed with multiple service providers last year – requires not just a good fit between the companies but also clear rules for collaboration between providers.
In selecting a team of five vendors for the five-year, multi-billion dollar contract, ABN AMRO picked the ‘strategic partners’ that would help the bank to innovate and deliver new banking products rapidly. “We know the top management and culture of these organisations; they fit with ours,” says Louis Rosenthal, executive vice-president at ABN AMRO.
The team comprises Accenture, IBM and three Indian companies: Tata Consultancy Services (TCS), Patni Computers and Infosys. “Infrastructure sits behind every application and collaboration between providers is part of solving any problem,” says N Chandrasekaran, head of global operations at TCS, the application maintenance provider in the ABN deal.
IBM, the infrastructure vendor, was chosen by ABN to play the role of a guardian, and key interactions between vendors were contractually defined by cross-vendor agreements, says Mr Rosenthal.
For BPO companies, the partnership model evolved as they moved closer to their client’s businesses. “If a product is not doing well, that information is first received by our customer service centres,” said Ananda Mukerji, CEO of ICICI OneSource, an Indian BPO company that handles call-centre work for several banks, including the UK’s Lloyds TSB.
The company was initially contracted in March 2004 to handle call centre and transaction processing work for Lloyds’ insurance and mortgage businesses on a build-operate-transfer basis. Last year, Lloyds TSB extended its relationship with OneSource for a further five years.
Better processes
“The earlier business model was a linear one; to grow the business you put more people and technology into it. You changed processes by working off the client’s platform; today we are looking to build a new platform to deliver better processes,” says Mr Mukerji.
“Where earlier we handled bits and pieces of a process, our customers are now comfortable moving end-to-end processes offshore,” says Shyam Sundar, who heads Equinox, a BPO company that services mortgage institutions, auto financers and credit card companies acquired by i-flex solutions, an Indian IT company.
“From replicating the client’s processes here we have moved to a more collaborative relationship where we may change those processes,” says Anupam Ahuja, vice-president, marketing, at Office Tiger, which provides financial management, research and advisory and legal services to companies.
As the dynamic changes from vendor to partner, a sense of loss of control or loss of skill sets in the client company could pose a challenge to the relationship. And this could become a potential source of conflict, particularly if it involves the creation of IP. While acknowledging there is “a lot of angst” around the issue of IP, Mr Habib sees no reason why it should become a source of conflict.
“Partners protect each other. You become a partner when you measure your success by mine,” he says.
As the “shelf life of IP” in banking products continues to diminish rapidly, the need to accelerate the creation of new products will drive the partnership, he adds. It does, however, mean that banks and their service providers need to align their business goals and management structures much more closely.
As goals change, and contracts lengthen, the governance and commercial structure of BPO contracts have become tighter. Barclays, for instance, has three members on the board and a risk and governance officer deployed at Intelenet, a Mumbai-based joint venture BPO company owned equally by Intelenet and HDFC, an Indian mortgage lender.
“It’s not just about meeting performance benchmarks in the service level agreement; our internal governance standards are set by our clients’ expectations,” says Susir Kumar, CEO of Intelenet. As the preferred Indian vendor for Barclays, Intelenet will make significant investments over the next three years to support its client. Barclays, in turn, has committed that it will provide Intelenet outsourcing business that will account for 33% of Intelenet’s revenues, from about 7% or 8% today.
A key reason behind why offshoring deals fall through is that the commercial structure of the contract does match the governance model adopted, said Bill Alexander, chairman at Xansa, a BPO company. Kevin Campbell of Accenture, another BPO company, pointed out that pricing for business outcomes rather than effort is where the industry is headed. Call-centre work, for instance, is largely charged by the hour, which is roughly the cost of infrastructure, technology and people divided by the number of billable hours over which the service is provided so that the provider gets the benefits from any gain in productivity.
Mutual gains
As the terms of engagement are renegotiated, project-based contracts are likely to be replaced by annuity-based ones and changing the pricing from a per hour basis to per unit of work completed helps both partners harvest the gains of cost productivity, says Citigroup’s Mr Habib.
Banks that move their work offshore to India or elsewhere have had to choose between either setting up their own shop (a captive) or outsourcing to an independent provider, but in fact banks are doing both, even though they may have divergent ways in which they do it. For instance, both Citigroup and ABN AMRO have their own captive companies in India and outsource to independent providers as well.
“A captive works only when we cannot get a partner to work within a margin. I am not a huge fan of captives; the partnership model works better,” says Mr Habib. However, he adds that this was his personal view, not necessarily that of Citigroup.
He also prefers to “bundle processes” to a few partners, rather than picking providers in niche areas because dealing with multiple companies involves “process waste”. “The more providers you have, the greater the risk. Also, the smaller the relationship, the less there is to share,” he adds.
ABN AMRO chose to have multiple vendors because, says Mr Rosenthal, the bank felt it was inappropriate to “give all work to a single vendor” and because each of them brought unique ‘best of breed’ skills. As equal partners, banks and their service providers are likely to find their relationship more challenging than in the past.
