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Emerging Business Models in Offshore Outsourcing
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Global shared services centers have significant advantages. First, they have guaranteed markets for their services and an established management hierarchy. They also alleviate some of the organizational issues such as control and politics that crop up when firms relocate back-office activities offshore with external vendors.
Global Shared Services Model in Action
In the early 1990s, American Express Travel Related Services had more than 46 transaction processing sites, each employing 20 to 40 employees. These sites processed credit card records and other financial transactions. They sprawled across North America, Latin America, EMEA (Europe, Middle East, and Africa), and APA (Asia Pacific and Australia). They were internally focused, geographically fragmented, inflexible, and legacy bound. Duplications and inconsistencies made these sites inefficient and costly.
To cut costs, American Express devised a shared services strategy that combined, standardized, and re-engineered scattered support activities. The corporation merged the 46 sites into three financial resource centers. These three shared services centers consolidate credit card authorization, accounts payable, general ledger, and other administrative services at one location serving a geographical area. They were designed to reduce costs, standardize business processes, leverage enabling technology, and produce economies of scale in transaction processing. They operate as cost centers with costs charged across the different business units. By treating them as cost centers rather than profit centers, there are significant tax advantages.
To distribute the workload, American Express selected Phoenix, Arizona, as the location to serve the Americas and Brighton, United Kingdom, as the location to serve Europe. After some review, American Express picked India as the location for the third center dedicated to handling Japan and APA. This center, called the Financial Center East (FCE), was established in Gurgaon, India, in 1994. Today, the Indian center has migrated from an Asia-focused center to a global shared services platform. The range of business processes conducted in this center is growing rapidly. The American Express case illustrates the growing trend towards global shared services models.
Build-Operate-Transfer Model
Some companies reject outsourcing to third-party vendors and instead opt to start their own foreign subsidiaries, a process that frequently is not as smooth as they expect. They face obstacles — legal, taxes, hiring, and management — from start to finish. While some eventually attain a steady state, others struggle, and a few even wind up shuttering their operations.
The failures of these captive subsidiaries have led to the evolution of a new business model in the offshore services industry called a build-operate-transfer (BOT). In this model, a firm contracts with an offshore partner to build a shared services or offshore development center and operate it for a fixed interim period. The logic behind the BOT model: the offshore partner can initiate operations and reach operating stability much faster than it can with an in-house effort.
A typical BOT is built and managed in three phases:
1. Build. The offshore partner provides clients with a complete solution for building a presence in a particular country. The clients receive their own office space and establish their own brand identity at a lower price than comparable offshoring arrangements. Vendors take care of all administrative and legal issues, from real estate, utilities, and permits, to computers, communications, and office supplies. The vendor also provides the professional support staff and operating licenses to run functions such as call centers.
2. Operate. The offshore partner provides a comprehensive set of operational management services, from HR and staffing, to accent training, accounting, payroll, legal, facilities, and security. The clients are able to focus their management time on their core business rather than on operational issues.
3. Option to Transfer. The offshore partner cannot lock in clients. The clients have the option to bring the operation in-house at any time. Typically, the outsourcing contract includes a clause that states the client has the option to buy the entire operation after a fixed period.
Building a subsidiary in a foreign country requires much knowledge and information about the country and culture, as well as the right personnel. Traditionally, the BOT model is usually found in the civil and construction engineering business, especially in the maintenance of highways and airports. Now the BOT model is becoming popular in the offshore outsourcing world. A BOT model provides customers with bottom-line enhancements and fully offloaded costs, risks, and ownership of the new venture. The risk of execution is minimized, and companies can spend their money on core functions. We expect the number of BOT contracts to increase.
BOT Model in Action
Struggling to reduce the development costs of new software products and to bring those products to market faster, J.D. Edwards signed a six-year contract with Covansys, a global consulting and technology services company, in February 2003 before it was acquired by PeopleSoft later that year. The maker of application enterprise software bet that 60 full-time Covansys developers devoted to quality assurance, testing, and maintenance of J.D. Edwards products would decrease the time it took for the company to deliver new products.
In hiring Covansys, J.D. Edwards freed up its internal testing and maintenance teams for strategic, new software development. By taking advantage of Covansys’ development operations in Chennai, India, J.D. Edwards reduced the initial expense of establishing a new offshore operation.
According to the six-year agreement, J.D. Edwards can increase the number of Covansys developers annually. It can also assume ownership of the infrastructure that Covansys created and even take over the physical lease for the Chennai facility held by Covansys. If it doesn’t work out quite the way J.D. Edwards intended, the company can walk away, an option that PeopleSoft may choose to exercise. Either way, the BOT arrangement minimizes the risk for J.D. Edwards.
Offshore Multisourcing: Hub-and-Spoke Model
Multisourcing is the practice of using multiple offshore suppliers to reduce the power that a single monopoly supplier might have. It also helps companies achieve the advantages of a best-of-breed strategy. Citibank and American Express both have used multisourcing approaches that resemble a classic hub-and-spoke model: They have offshore operations of their own, as well as three or four partners with whom they collaborate. This is an interesting model because the businesses actually get some of their offshore partners to work with them in their own hub centers, then they train them, and send their offshore partners back to the spoke center.
The rise of multisource deals could be a sign that companies are taking a more cautious, risk-averse approach to outsourcing, but multisourcing only works when organizations have the internal ability to manage and integrate multiple providers (products, projects, and services) to derive a single solution.
When should organizations choose full-service outsourcing (using one provider) over multisourcing? It depends on the maturity of the organization. Companies that are new to outsourcing tend to multisource until they become comfortable with the process. When they renegotiate contracts later, they tend to give more thought to using one provider. Often, to reduce complexity, very large businesses will look for one dominant provider, and that provider will then work with a big network of companies.
Offshore Multisourcing Model in Action
GE has long focused on four corporate initiatives — globalization, services, Six Sigma quality, and e-business. Of these, globalization is probably the most prominent. GE’s globalization initiative centers on a high-quality labor pool, low-cost suppliers, and engineering and manufacturing plants in less expensive countries such as Mexico, China, India, and Russia.
Consider the strategy in India. As of 2003, GE had 20,000-plus employees in India, 70% of whom support GE globally. The company’s activities in India can be grouped into six categories: 1) local market sales and services, 2) sourced software in global development and engineering centers, 3) GE-owned technology and software operations, 4) back-room services such as call centers and legal and accounting processes, 5) exports of components and products made by GE, and 6) sourcing of components from key suppliers for export to GE’s global manufacturing locations. In 2002, GE India’s revenues and orders exceeded $1 billion.
In India, GE has evolved from the model of outsourcing practiced by many of the new entrants to a more complex hub-and-spoke business model called multisourcing. Depending on the business need, GE is able to find the model that is most suitable for getting the job done quickly. Due to its complexity, the multisourcing model requires superb program management talent to oversee the many vendor relationships and execute effectively.
Conclusion
Offshore outsourcing has surfaced as both a strategic and tactical method of meeting new business demands. Similar to most business ventures, the challenge of offshore outsourcing lies not in envisioning it but in executing it. Selecting the appropriate business model is a crucial factor in ensuring offshoring success regardless of whether your company decides to outsource finance and accounting to an Irish vendor or to build a software development facility in China.
Marcia Robinson is the president of E-Business Strategies, a technology research and strategy consulting company. She coauthored the bestseller e-Business: Roadmap for Success, as well as e-Business 2.0: Roadmap for Success, M-Business: The Race to Mobility, Services Blueprint: Roadmap for Execution, and, most recently, Offshore Outsourcing: Business Models, ROI and Best Practices. She has extensive experience in outsourcing services delivery and customer relationship management. Marcia can be reached for article feedback at: marcia@ebstrategy.com
Ravi Kalakota, Ph.D., is the CEO of E-Business Strategies. A sought-after speaker and consultant on business technology trends and strategy, he has written eight pioneering books on e-commerce, e-business, m-business, e-services, and now offshore outsourcing. Two of his books are considered by Amazon.com to be "e-commerce classics." Ravi can be reached for article feedback at:
ravi@ebstrategy.com
 
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