Offshore relocation of service centres is tempting but the decision should be based on more than cost. Ashleigh Lezard reports.

Everyone is doing it. Even Microsoft, the most American of companies is doing it. Moving offshore is cost effective and, in these difficult economic times, even the richest companies in the world want to save money.

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Microsoft recently announced that it plans to expand its operations in India. The company, whose Windows operating system and Office desktop software run on more than 90% of the world’s PCs, has a small software development centre in Hyderabad. On its website, Microsoft lists a large number of vacancies, many requiring five years’ experience, understanding of multiple computer languages and degrees in computer science. It now plans to develop a customer support centre in Bangalore. It is reported that initially it will hire 150 people but the centre can easily be scaled up to 1000-strong in the next two years.

Like manufacturing before it, services are going global. Due to ever-improving telecommunication links, standardised technology and common management processes, corporations are transferring customer service functions, IT development and back office activities to emerging country locations. It is this expansion of technology coupled with the need to cut costs that has led to the globalisation of the services.

Also like manufacturing plants and factories, contact centres are labour-intensive operations with wages accounting for 65% of cost. Moving operations to a location that has a low-cost labour force makes sense, therefore.

According to research carried out by Deloitte Consulting, the world’s top 100 financial institutions will make annual cost savings of $138bn in the next five years by moving operations to offshore locations. In the survey of 27 of the world’s largest financial institutions, it was found that 30% of these institutions already have offshore operations. Deloitte Consulting estimates that this will climb to 75% in the next two years. Christopher Gentle, a director at Deloitte and Touche, says: “Offshoring is gaining momentum at a rapid pace and getting offshoring experience as soon as possible translates into greater benefits – from higher cost reductions to more business processes being handled by the low-cost centres.”

Reasons for staying

David Grimes, director of legal and real estate, EMEA for Sykes Enterprises, a customer management solutions and services company, agrees that “everyone is moving offshore” but he emphasises that there are plenty of reasons not to go offshore. He recommends that any projects involving high tech knowledge should probably not move.

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A benchmark study, The Kinetic Guide to Outsourcers in India 2003, compiled by consultancy Kinetic, suggests several reasons why a company should not make the move offshore without thinking it through. Managing partner Graham Hoskins says: “Those call-handling operations that we would advise against going offshore include: any operation that is not in a ‘steady state’; any operation that is experiencing difficulties (do not outsource a problem); activities that involve long-term one-to-one relationship building, particularly B2B; those that depend heavily on the ability of the agent to understand and respond to cultural considerations; and those that rely on intricate and lengthy integration with other core business units at all times.”

It is better to keep these types of operations close to the main company’s base or move operations to so-called ‘near shore’ locations.

Mr Gentle agrees that some functions that require specialist knowledge may be better off in a different location. “It has to be part of the selection criteria: match the location to the skills,” he says. Some companies that have gone to offshore locations have moved too quickly without proper planning and implementation, he says. They have invariably not expanded in the chosen location and some have even moved back. Withdrawal from offshore locations seems to be commonplace: several people interviewed by fDI knew of companies that had relocated back to the country of origin or elsewhere.

Stuart Mclaughlin, director of outsourcing at Accenture in Dublin, says it is vital that a “blended model” is used when approaching the outsourcing of operations. “It depends on the types of skills the client requires but we usually recommend an onshore/ nearshore/offshore approach,” he says. Some areas are suited to certain skills sets, he says, for example Accenture in Dublin focuses on Java skills while in Spain and India the company focuses on SAP applications.

High standards

Mr Mclaughlin insists that the offshore markets have matured and offer high standards. But this maturity has also led to rising wages and higher staff turnover; and easy retention of workers is regarded as an important benefit in a location.

“Indian wages have increased and the cream of the crop go to the big companies so it can be difficult to find the most skilled staff,” says Paul Smith, managing director software development and outsourcing at Harvey Nash, an IT recruitment and software development company. Mr Smith sees Russia as having a cheap and highly qualified labour force, particularly in the mathematics discipline. “Wages for a software developer in Russia are approximately $50 per day, which is the same as in India. This is 60% cheaper than what would be paid for the same position in the UK,” he says.

At a recent conference on the future of outsourcing to offshore locations, Russian software developer and outsourcing services provider EPAM was recognised by IT research firm Gartner as “a key player in the global outsourcing services market”. Ernst&Young estimates the Russian IT market is worth $7.3bn and growing. According to Mr Grimes, technical permeation in a country is vital if it is to dominate this sector.

Russia is also a fast-growing consumer market, so companies want to get a foothold there. A Siemens spokesman says the company has set up a pilot project for shared services in the Russian city of Voronezh. Also, Intel has set up the Russia Software Development Centre in Nizhny Novgorod, employing 150 software developers.

Figures for shared service centres’ and customer relationship management (CRM) centres’ investments for Q2 2002 to end Q1 2003 show that India has the highest number of investments but Canada, Ireland and the UK have been locations for a substantial number of projects. This indicates that companies are still looking close to home.

Gillian Campbell, director of contact centre services for Thus, a Glasgow-based outsourcing company that collaborated with Kinetic in its benchmark research, says that the UK is still strong in terms of competition. Languages skills are important with operators speaking up to nine different language in the companies’ centres in Scotland, she says.

The automation factor

Another factor that could alter the offshore/nearshore trend, according to Ken Hills, director of business services and human resources at Thus, is the emergence of new technology. “Savings will be made by improvements in the UK system like automated services, moving CRM functions onto the web and voice recognition technology.”

In India and some other offshore locations, the language skills are limited to English therefore appealing to the UK and US markets. Research from IBM International Plant Location shows that most pan-European service centres are located in the UK, Ireland and the Netherlands (see graph 1). The data also shows a growing trend in the emergence of sub-regional service centres that serve a particular region (see graph 2). This “reduces headcount requirements, language needs, recruitment and retention risks and allows for alternative locations”, according to the research. Locations that are popular for this type of investment include Scandinavia and Spain, which offer language skills and similar cultural backgrounds to the markets that are to be served.

Roel Spee, director of IBM Business Consulting Services, says many countries and regions are marketing themselves to attract such investment. Northern Ireland is particularly active, as well as Hungary, Barcelona and Lisbon-Portugal, he says.

Competition

Mr Mclaughlin agrees that locations like Northern Ireland are capable of competing with successful European locations, such as Eire. “There is growth and significant investment from the UK government to develop the private sector. There have also been cross-border agreements with southern Ireland [Eire] in some sectors”.

Although cost efficiency is important, it has to be considered alongside many other factors. “The cost issue will depend on the specific client situation. However, it is possible to find outsourcers in the UK charging as little as Ł13 per agent hour”, says Mr Hoskins. “If there are significant set up costs for an Indian outsourcer, then the costs benefit may be reduced from a potential 40% to 10% or 15%. The commercial cost becomes far harder to argue then, when balanced with the risk and effort required.”

Backlash begins

Shared service centres and call centres epitomise free trade by allowing the unfettered movement of services around the globe – the aim of neo-liberals worldwide. Improvements in communications and technology effectively mean that any job can be done anywhere at anytime. When moving the location of the services saves costs, companies will take advantage of it.

Forrester Research estimates that US employers will transfer about 3.3 million white-collar service jobs and $136bn in wages to low-cost countries by 2015. Research also shows that companies in the US and Europe will spend 28% of their IT budgets on overseas work in the next two years.

Workers in high-cost locations are starting to worry as the economic downturn continues and they have more chance of losing their jobs. There have been protests in the US and the UK against moving operations offshore.

Consumer concerns

It is not just workers who are voicing complaints: consumers have expressed concern about calls being handled by operators thousands of miles away and the security of giving personal banking details over the phone.

Mr Hills, from Thus, does not think that this backlash will have an affect on the service industry moving offshore. “The same thing happened when manufacturing moved offshore but companies have to remain competitive in the global market. As far as consumer worries are concerned you have to ask them if they would prefer a rise in insurance rates or to deal with an operator in an offshore centre.”

Paradoxically the free trade movement has led to protectionists in emerging countries like India worrying that trade liberalisation would lead to exploitation of markets and loss of jobs. The Indian market, however, is benefiting from the free flow of services; it is the US and other Western markets that are adopting measures like the New Jersey bill and restrictions on visas to Indian workers entering the US in an attempt to protect the sector from competition. To complete the turn of events, the Indian government plans to take up the issue with the World Trade Organization.

Case Study: BT Gemini, Warrington

The next generation of call centre is large, bright and spacious, with huge screens hanging from the walls showing important information about the company and smaller screens showing MTV music videos to entertain workers.

Contrary to popular belief there is not row upon row of call operators labouring under the watchful eye of a stern supervisor. Partitioned sections divide the 750 or so workers into small units corresponding to function. This creates more of a team atmosphere, according to John Thornhill, regional director, BT Warrington and North East. There is a “chill out” lounge with internet access and canteen facilities; there are even Stars in their Eyes entertainment evenings at which the host of the UK television programme comes to judge contestants on their performances.

BT appears to focus a lot of attention on the happiness of its employees. In north-west England, where the market is fairly well saturated, attrition from the Warrington centre is low. The company offers comprehensive career progression with the option of taking further qualifications.

Carol Borghesi, director of the customer contact centre, emphasises that investment in the work environment and intellectual capital is a major part of the company’s long-term strategy. BT is investing Ł108m in call centres in the UK, including new technology and facility improvement.

The first step was rationalising the company’s 104 exchange centre sites down to 30 sites – all based on the same model. Whereas the old sites had individual functions, each of the new centres is multifunctional. This is seen as beneficial to employees because they learn a range of functions and, according to Mr Thornhill, it is better for trainers because they can be located on-site rather than travelling around the country.

The strategy also focuses on improving customer service and cost efficiency. “The old system was not cost effective and not good for CRM,” says Ms Borghesi.

Although there may be a particular area of focus – for example, the Warrington centre focuses mainly on new connections – there is back-up at every centre in case something goes wrong in another part of the country. This model has been researched thoroughly and is “anchored on providing high value customer service and is tailored to customer needs”, says Ms Borghesi.

The utmost control seems to be exercised across all levels of call centre operations in BT. While fDI was visiting the centre, several messages flashed up on the screen from Ms Borghesi in the London headquarters, informing the workers about company business. Ms Borghesi appears to be determined to hold on to this control and is adamant that decisions to move operations offshore will somehow mean loss of this control and therefore the failure to provide quality customer service.

“Our mixture of employee profiles reflects the communities in which they live, therefore improving the whole customer experience,” she says. She believes that moving more complex operations is a mistake unless it is planned properly. “Do not worship at the alter of cost reduction only,” she says.

BT has recently come under fire from the Communications Workers Union in the UK for expanding its operations in India. Ms Borghesi says that BT had to move some functions offshore to maintain competitiveness but these are of a “different profile, calling directory enquiries does not involve the same interaction; you are simply calling to get a number”. It is not realistic in cost terms for this type of operation to remain in the UK, she argues.

Other functions that have been moved offshore include welcome calls to new customers subscribing to broadband services and calls to remind customers to pay their bills.

Contrary to press coverage showing protests, BT call centre workers in Warrington appear to be unconcerned about the offshore threat. It is apparent that the company is investing in them.

Ms Borghesi says that she is committed to the investment in the UK. So why has the company chosen certain locations above others? “It depends on the size and scale of the centre already there and the local conditions; incentives are not that important,” she says.

She offers some advice to the UK regions in their efforts to attract call centre investment: in her opinion, the approach is too fragmented with regions competing with each other. “The sector should join up in order to attract investment,” she says.

Rising Stars: Gauteng, South Africa

South Africa is classed as “an attractive off-shore market”, according to the Deloitte Consulting research report on financial services moving abroad. Paul Smith, managing director software development and outsourcing at Harvey Nash, also identified it as a strong player due to the cost competitiveness provided by a low exchange rate.

Angela Keys, general manager of the Gauteng Economic Development Agency (GEDA), is quick to insist that the province and country is not seeking to compete with India. “We are a different value proposition; we have developed domestically and then over the last 12 months have started looking at the international market.”

The strengths of South Africa lie in the fact that it has a similar working culture as that of its target markets, the US and the UK, it is in the same time zones as the UK, and has high levels of advanced technical capabilities and an excellent telecommunications infrastructure. Ms Keys emphasises that in other low-cost locations there may be “teething problems, connectivity problems and a different working culture”.

Another fundamental benefit is that, due to good education levels, there is a middle management level already available in the country, which is sometimes lacking in other low-cost locations.

Gauteng is something of an economic hub with business operations there accounting for 9% of Africa’s GDP. Ms Keys says that there are many large projects coming into Gauteng, particularly from the financial services sector.

Sykes and Lufthansa are some of the big names with operations already located there. The Lufthansa contact centre was used for disaster recovery after September 11 when all calls were diverted from the US.

Gary Tonjes, president of Albuquerque Economic Development Inc, talks to fDi

Can you tell fDi more about shared service centre investment in Albuquerque?

The largest shared service centres are Cardinal Health’s and Gap’s. Twenty-five other companies, including Blue Cross Blue Shield and Yum Brands (which owns Kentucky Fried Chicken, Pizza Hut and Taco Bell), operate back office operations in the metropolitan area. Collectively, these companies employ about 13,000 people.

Cardinal’s Shared Services operation employs 450 people. Its vice-president and general manager is Kevin Smith. Cardinal, which is headquartered in Dublin, Ohio, employs more than 49,000 people on five continents and has annual revenues of more than $40bn. Its office in Albuquerque has been open since 1989.

Gap’s offices opened two years ago in downtown Albuquerque, where it employs 325 people. Gap’s Shared Services office soon became one of the most talked-about employers in New Mexico, with excellent job growth potential.

What are the main advantages of the city?

Our principal advantages for most companies are related to the availability of highly educated but underemployed professionals, a business climate that is winning national acclaim and the ability of corporations to attract the talent they need. They find less competition for employees in this growing community, where they can be a premier employer. Additionally, about one-third of our population speaks Spanish, and that is attractive to many companies.

Can you give some details about In Plant Training support?

The In Plant Training Program provides partial wage reimbursement to companies for the new jobs it creates, without the frustrating and burdensome requirements that so many other states’ training programmes are saddled with. The State of New Mexico will pay a company for one half of its all new eligable employees’ wages for up to six months of work. In Gap’s case, the company received an estimated $2.7m in cash reimbursement for more than 300 new professionals it hired for its Albuquerque offices. The state has $18m dedicated to the programme because it is eager to support more companies expanding into New Mexico.

Do you think that is what made Gap move its back office services to the region?

Because of labour availability and wage pressures in the San Francisco Bay area, the company searched the country for the ideal city to relocate this business unit. Albuquerque won out over more than 50 cities because it met the company’s financial objectives while

providing a location attractive for the local recruitment of professional staff as well as for the relocation of its 35 key employees moving from the Bay. The company’s first year savings from the move to Albuquerque were found to be about $8m.

Do you think that incentives have a big role to play in attracting large investments such as this one?

I believe that incentive programmes typically serve as the tie-breaker between finalist cities competing for projects. Incentives are usually secured after all of the other location factors have been analysed to the point that the company has narrowed its search to a few select cities, where it is confident that it will be successful. Because of the strength of this and other incentive programmes, we usually prevail once we enter the tie-breaker phase of the deal.

Have you ever lost an investment to an offshore location? Who do you consider to be your greatest competitors?

While we are aware of the success that many foreign countries are having in the recruitment of back-office operations, we have not yet competed with one on a specific project.

I expect that this will change, and that we will add a few such locations to our list of competitors that now includes Tucson, Oklahoma City, Colorado Springs and Las Vegas.

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