Innovative Express

"Improving effectiveness by making the complex simple and making the simple work!"

March 2008

In this issue:

Getting Banglored, a relatively new expression, refers to people who have been laid off because their job has been moved offshore.

Infosys, one of the pioneering companies of the outsourcing phenomenon, calls itself a "flat world" company. Its 2006-2007 Annual Report titled Think Flat, talks about four trends that are changing the business landscape:

  1. The emergence of developing economies creating new markets and accessible talent pools
  2. A global shift in demographics, driving companies to tap young and skilled talent pools
  3. The ongoing adoption of ubiquitous technology, connecting people and information
  4. The new regulatory environment driving greater accountability and transparency

In this issue, I explore the evolution, promises, potential disasters, and my personal experiences related to this global outsourcing phenomenon.

Inspired to agree, disagree, or otherwise comment? Have an interesting or humorous story to share? I hope that you will let me know your thoughts.

Abhay Padgaonkar
President, Innovative Solutions Consulting, LLC

Quick Update: Pressing Issues

In the last few weeks, I have had a hectic schedule of press interviews with several reporters and journalists from publications such as The Wall Street Journal, HR Magazine, SHRM, MSNBC.Com, The London Free Press, and The Journal News on a variety of topics including outsourcing.

  • I was interviewed and quoted in a story in The Wall Street Journal online on “How Googlies Could Save Your Meeting” discussing the role of sports in bridging the cultural divide in international business settings.
  • I was interviewed by HR Magazine, Society of Human Resource Management's (SHRM) flagship publication, for a feature article on HR's role in strategic planning.
  • I was quoted extensively in a SHRM Online column on project-based billing.
  • I was interviewed by MSNBC.com Careers columnist for a story on "How job seekers can get their foot in the door."
  • I was interviewed and quoted in an investigative report titled "Inquiry sought into days off issue" in The London Free Press on high absenteeism rates for city employees. (That's London, Ontario in Canada).
  • And last but not least, I had a closing quote in a business report "Plant closings in Putnam part of offshoring trend" in The Journal News on offshoring trend and its impact on loss of local jobs in New York's Lower Hudson Valley.

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Getting Bangalored

Outsourcing may be a new word, but the concept is not new. Getting someone else to do something they can do better, cheaper, faster is hardly new. Until a couple of decades ago, however, there were many practical barriers to outsourcing. These barriers included:

  1. Closed economic policies by the BRIC (Brazil, Russia, India, China) countries
  2. Lack of proper commercial, technical, and human infrastructure in these countries
  3. Organizational, social, and political obstacles on both sides

With more than a billion people each, the developing nations like China and India realized the latent assets they were sitting on. First in China and then in India, the economic liberalization process began. They began focusing on developing the necessary commercial, technical, and industrialized infrastructure. Although infrastructure still lagged, it was good enough to get the job done. At the same time, the competitive pressures were responsible for making the organizational, social, and political obstacles to melt away slowly in corporations

Is the party over?

The host countries were able to offer similar quality for a fraction of the cost. This was too compelling a temptation for cost-conscious multinational companies to resist. The wage arbitrage was just too much for them to ignore. Companies such as GE and American Express set up shops in India. Companies such as TCS, Wipro, and Infosys in India realized the potential and started developing the necessary competencies. Soon there was an onslaught of offshoring in every imaginable industry from manufacturing to software development to call centers to pharmaceutical. There was a tremendous rush to upgrade the infrastructure and many companies benefited from this boom. It allowed these companies to become powerhouses and their founders to become one of the richest people. Of the top 10 richest people in the world, four are from India

Some of the latest data, however, makes you wonder if the party is about to be over. Dustin Walling writing in InformationWeek says, "But something is going wrong, because brand India's bravado-bordering-on-hubris isn't borne out by current trends." He refers to 20 percent of the InformationWeek 500 pulling offshore work back in-house in the year prior to November 2007. Walling quotes a recent survey by the Washington Information Technology Alliance of venture firms, 71 percent of whom predict no significant use of offshoring in the coming quarter by portfolio companies. The top three reasons by those who cancelled offshore projects in a Robert Half Technology survey of 1,400 CIOs were: Need for excessive management/oversight, unrealized savings, and work quality

Foregone Conclusion

As you may have guessed, I am not surprised. I was part of an outsourcing evaluation team back in 2000 and saw firsthand the root causes that lead to the major concerns mentioned above.

My client had hired a highfaluting, outside consulting firm to lead the process. Ironically, it was loaded with smart kids from India with MBAs from top schools, but very little real-life experience. That was not the biggest problem either! The consultants were outsiders, but not necessarily independent. They had already accepted a mandate from top management to "make it work" within a two year timeframe. The second problem was that they were charging obscenely high hourly rates and were easily burning $50-75K per week with basic fees for several needless consultants, extra hours, analytical and graphics support, and globe-trotting travel. They were hired by an internal organization specifically formed to manage the offshoring project. Without offshoring, they had no reason to exist.

To justify such extravagant fees and to serve their immediate masters' existence, the consultants were willing to say and do anything. (This is very typical problem with insiders that they cannot and do not stand up for their own beliefs thereby succumbing to pressure from the top. But it was disheartening to see people in my own honored profession sell their souls.) The CEO had said that he wanted to look at implementing everything in two years, and if it wasn't possible to let him know why. Lo and behold, the consultants came back with projections that showed everything being done in two years with eye-popping savings worth hundreds of millions of dollars! They were obsessed with meeting a predetermined, totally unrealistic goal, rather than looking at the reality of the situation. Any resistor was immediately labeled as trouble-maker and reported to the higher-ups. These so-called consultants had no intention of hanging around during implementation or finding out if the savings were actually realized.

Inconvenient Truths

This dysfunctional and intimidating environment leads to convenient yet erroneous assumptions that are never questioned. Oh, these consultants had built elaborate models and flashy presentations that took into account every imaginable cost item and source of savings. But the devil is in the detail. Their analysis was fraught with many fatal assumptions that were neither clearly documented nor justified. Let me give a few examples to illustrate the point:

  • Although this kind of unscripted, complex, US-specific call center work had never been done in India, the consultants assumed that thousands of qualified employees would be available, trained, and fully productive in India in a matter of months. The approach allowed 90 days for pilot testing and reviewing the pilot results immediately followed by a steep ramp-up of thousands of people in the next 12-18 months.
  • They made recommendations on moving functions overseas without any regard for which functions needed to be physically together. Thousands of employees in the US were based in hundreds of sites for many business, client, process, and system-related reasons. While consolidating them into a single operation would have yielded great efficiencies, it would have been a huge project in the US itself. The consultants, however, assumed that it could be done by simply moving the work to India.
  • The infrastructure in India was seriously lacking in every imaginable aspect, but sites in India were labeled as "already prepared" when they hadn't even been visited.
  • The timeframes were grossly inadequate for building preparation, negotiation with government and regulatory agencies, paperwork lead-time for regulatory exemptions, purchase and shipping of equipment, lease arrangements with vendors and telecommunications setup.
  • The benchmarking data was used very generously. Other companies may have had a customer service operation, but with a much different customer/product portfolio or they may have only been in operation for a few months. Yet they were already termed a "successful operations" so as to create a herd mentality. The fact that there were no outsourcing vendors with established history or any long-term experience in inbound phone operation was consistently underplayed.

The whole exercise was being stage-managed to demonstrate a high return on investment to overeager management—reality be damned! I battled on and forced many of the issues with the result that the business unit I was representing was "disqualified" from receiving corporate funding! Phew!

Easier Said Than Done

None of this is to suggest that there is no benefit at all to outsourcing. The wage arbitrage is still great enough, but to gain desired benefits you cannot count the chickens before the eggs are hatched. Here are some key questions to ponder:

What is my core business and what am I outsourcing? Is what I am outsourcing properly defined? Outsourcing a mission-critical function as opposed to a peripheral one needs to be approached with very different mindsets. Oftentimes, existing problem or simply greed causes businesses to consider outsourcing in a hurry, but rarely can one outsource their inherent problems. It is extremely important to document service, coverage, location, staff levels/numbers, knowledge, skills, experience, training, quality, cost, support resource, account management, productivity, system, technology infrastructure, reporting, data privacy, confidentiality, legal, business continuity. If you fail to plan, you plan to fail.

How will I integrate the outsourced work into the existing business processes and work environment? Outsourcing is the easy part; integrating the work is not always that easy. For any established business, the boundaries of work are defined over time. By taking a chunk of work overseas, those boundaries have to be redefined. Don't underestimate the challenges in the work being done half way around the globe for the first time in an environment that is culturally very different.

Who will I do business with? Define your own decision-making criteria and do your own supplier capability evaluation systematically for your own business. Know well beforehand how you will judge and monitor success on an ongoing basis. If nobody is fully qualified, don't push the issue. Don't put the cart before the horse. Evaluate the vendors without looking at the cost savings. Allow sufficient time to form a cross-functional team, develop a comprehensive RFP, distribute the RFP to vendors, handle vendor clarifying questions and answers, develop a RFP evaluation framework, identify RFP evaluation and decision-making criteria, schedule site visits, develop site visit interview guides, and conduct final vendor capability evaluations

How will I measure performance? Recognize and communicate that the work has just begun when the deal is signed. Establish a relationship management governance structure that clearly defines day-to-day vs. commercial/SLA vs. executive ownership of the relationship and escalation protocols. Define a clear plan for daily, weekly, monthly, quarterly reviews. Establish internal and external mechanisms to assess quality delivery of service. Conduct ongoing financial tracking and reporting. Document and establish an annual check-up process to benchmark performance and ensure that business is being actually enabled rather than encumbered!

What is my exit plan? Nothing is forever and all relationships can eventually end. Define ahead of time how you will get out of the relationship when the time comes. While it is important to have a proper agreement with proper safeguards in place from a legal perspective, it is equally important to create a well-defined exit plan from a business perspective and to keep it updated. Oftentimes, existing employees are alienated and laid off resulting in the loss of internal capability.

Anecdotal Evidence

As you can probably see, outsourcing is easier said than done. Here are a couple of real-life anecdotes

From Fire to a Frying Pan: A small business owner outsourced a mission-critical function to India because the in-house approach was causing too many headaches. The company he outsourced the work to realized the criticality of the service and started to "hold him hostage" despite his own poor performance. The poor performance resulted in a severe hit to the revenues. But because he hadn't created a well-defined exit plan, the headaches now were now magnified many times over compared to when the work was being done in-house!

You get what you pay for: A small business owner who manufactured a popular consumer product that was carried by large discount retailers outsourced a critical product component to China for cost reasons without doing proper testing. The product started causing fires in a few cases and resulted in being recalled by the consumer safety commission. The owner had to ultimately sell the business at a fire sale price.

Companies have found out that there isn't a pot of gold at the end of the rainbow! When they take into start-up costs, difficulty of integration, language and cultural issues, difficulty in coordination because of time differences, increased oversight, travel costs, difficulty in ensuring quality control, and most importantly, the loss of control that comes with outsourcing, they are having to take off their rose-colored glasses.

The Bottom Line: Having said that, I expect the trend to continue because as long as significant difference in wage rates, unsatisfactory work, and skill shortages exist, companies will find a way to get that work done somewhere else.

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Personally Speaking...

My friend Jim Barry alerted me to a delightful, indie movie called Outsourced.

Outsourced is a modern-day comedy of cross-cultural conflict and romance. Todd Anderson (Josh Hamilton) spends his days managing a customer call center in Seattle until his job, along with those of the entire office, are outsourced to India. Adding insult to injury, Todd must travel to India to train his new replacement.

You can see various clips from this charming movie as well as buy a DVD (also available on Netflix) directly from the website below

Outsourced - The Movie

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Disclaimer: "This written advice is absolutely intended to be used, and if used under expert supervision is known to improve organizational and individual effectiveness substantially."

© Abhay Padgaonkar 2007. All Rights Reserved.