Wojick Draft 1

Dan Wojick
4/21/09
BPO: The Numbers Behind the Numbers

When the letters BPO are mentioned in a conversation, it usually causes one of two reactions. Most people either cringe at the thought or their complete look of confusion speaks for itself. BPO stands for business process outsourcing, commonly referred to as outsourcing for short. In 2009, one can hardly open a business periodical without finding countless columns, opinions and references to recent outsourcing. Outsourcing is not a new trend in business, but the media has a way of choosing when to bring it to light or when to save the story for a rainy day, a really rainy day. BPO is a topic that can touch a nerve very quickly for many people. It’s a topic that seems to be discussed in public only when necessary, yet if asked for their option on outsourcing jobs overseas, many individuals have a fairly strong opinion. There is no right or wrong answer to the three decade long issue of business outsourcing but facts are facts, and many opinions are based on emotion or without full knowledge of the facts.
The last time business process outsourcing made major news headlines was in 2003. The idea of outsourcing was not born in the early 2000s, but has been around since the early 80s and became really popular in the 90s. US companies were seeing the value in processing work overseas where it could be completed at a fraction of the cost. Outsourcing specialty companies like Infosys and The Sutherland Group were growing at incredible rates, completely under the radar. In 2001 the internet dot com boom was taking off and Americans were increasing their standard of living almost daily. There were water-cooler jokes floating around that were along the lines of: “Hey Bill I heard you got a new company laptop this morning, too bad it’s already out of date!” Companies that had 150 to 1 price to earnings ratios were soaring over 300 dollars a share in the technology sector. Efficiency was a useless topic of conversation in board meetings. Everyone felt they could hit it big with one good idea thanks to the internet revolution. Unemployment was low and nobody wanted to be bothered by doing “busy work”. People were lining up to try to get on the ground floor of the next big technology IPO so they could triple their stock portfolios in a matter of hours. Cash was being made hand over fist in America, so nobody really concerned themselves with much else.
Then everything stopped. Economic growth rates of 20 plus percent have never had long term sustainably at any point in history. The internet boom like many of its similar economic predecessors succumbed to a collapse. It was now damage control time. Everyone had overspent, overbuilt, overestimated. Stocks plummeted as reality set back in and investors wanted answers. Many of the fly-by-night dot com companies had no answers and declared bankruptcy. For the more established companies they needed a solution for their shareholders, and they needed it quickly. There are many factors to turning a profit in business. In its simplest form, a company’s annual profit is simply its revenues minus its expenses. During times of recession and pullback, revenues can be very difficult to increase. In order to maintain or increase profitability, firms must instead evaluate their expenses. It was time for these corporations to take a serious look at the relatively unknown industry of moving business processes and operations halfway across the globe.
Business outsourcing was started in the early 1980s. Blue Collar and manufacturing jobs had been sent overseas before but never had white collar, advanced degree work been done in a foreign country. Some forward thinking individuals realized that while countries like India and China were still considered third world emerging markets, they possessed great human resources that could be utilized for increased profits for companies in the western world. These resources could be utilized with the help of communications advances and the internet. As the internet increased in efficiency and decreased in cost, the ability to move data grew as well. One of the early pioneers of outsourcing, Dilip R. Vellodi, CEO of Sutherland Global Services, saw his opportunity. About the same time Vellodi was starting Sutherland another company named Infosys was being formed. Infosys is one of India’s most well known outsourcing companies. It was founded in 1981 and went public in 1993. It has received numerous awards and recognition for its incredible growth and quality business practice. These companies and a few others saw the competitive advantage that could be achieved by doing business processes thousands of miles away (McCue).
In the 1990s there were many players offering outsourcing services. Some were based solely on the internet and some had actual infrastructure in the States, India, or both. Many of the outsourcing companies have done extremely well since the 1990s but a few have risen to be elite. The Sutherland Group and Infosys are great examples of companies that have risen to the top of their industry. Nandan Nilekani, CEO of Infosys, first realized he could sell the cost aspect of outsourcing as a way to gain business. He then discovered to really grow his business he would need to differentiate his company from the hundreds that were popping up on the internet. These companies too were promising to supply low cost overseas labor. He would shift his focus from pure cost savings to also include quality. “Our selling pitch so far was, ‘We have a 100 Java engineers, and we can deliver for you from offshore, now tell us what you want us to do.’ Today that is being replaced with ‘We can give you a technical solution which can cut your inventory expenses by $100 million’”, said Nilekani (Outsource2india.com) Dilip Vellodi, in an interview, proclaimed his importance on delivering “measurable results” (Aron 2009). His company, The Sutherland Group based in upstate New York, sells outsourcing capacities based on these measurable results. He believed the classic way of evaluating service expenses included either manpower-based expenses, or time-based expenses. He revolutionized the market’s mindset much like Nilekani did. He instead provided solutions that were event-based expenses, transaction based expenses, and overall solution based expenses. These measureable numbers provided so much more information to customers. Providing detailed information was a major key to the success of The Sutherland Group.
Cost benefits are the primary reason for company outsourcing. Seldom is there ever a business decision that does not in some way factor cost into the equation. Numbers vary by industry but according to a publication from the internet outsourcing company Outsource2India.com, some businesses are saving up to 60% on their total costs. Companies are able to do this by utilizing India’s chief resource, their labor force. India adds nearly 200,000 engineers from its universities to its workforce each year. Every graduate from an Indian university is fluent in English. Companies use outsourcing to their advantage by moving non-core competencies offshore. Examples include services like data entry, call centers, software services, financial services, healthcare services, digital editing, internet and web based services, as well as different engineering services. Outsourcing companies can provide this work at a fraction of the cost, saving companies huge percentages in their overall costs.
Pie Chart 1: Global BPO Market by Industry

Source: PriceWaterhouseCoopers, 2005
Outsourcing in India has major advantages that go beyond cost effective services. Labor arbitrage is a great advantage, but it’s not a sustainable advantage (Aron 2009). In order to ensure success in India, outsourcing companies would have to look much deeper into the environment. They evaluated the labor pool, the infrastructure, and the economic and political states of the country. The Indian government is relatively stable. It’s growing on over 60 years of sustained democracy. Historians who’ve studied democracies in history have come across a noticeable pattern. They’ve noticed the average democracy has shown to last about 200 years and in each instance the nation underwent a pattern of very similar stages. The nation began in bondage, and usually through violence or war would work up to freedoms and liberty. This would be followed by a period of great growth, motivation, innovation and abundance. As people began to rely more and more on elected officials to provide them with necessities, the democracy would gradually revert back to a state of dependence. This ultimately would lead to the demise of the democracy as free markets would need to be government regulated once again.
Timeline 1: Democratic Stages Over 200 Years

Given India’s current economic and political state they could be categorized somewhere in the early middle stages of this lifecycle. They arguably fall somewhere right before the abundance stage. The abundance phase is similar to a country’s golden age, or time of great prosperity. India is currently heavily investing in technology and infrastructure. It has taken many steps towards increasing its foreign direct investment (FDI). They even allow 100% foreign equity in certain situations.
A major barrier to globalized economies in the past has been the most obvious one, location. India has turned that barrier into a distinct advantage for companies in the US. The flow of data has become almost instantaneous through the internet and through communication advancements in the last 30 years. But as information moved at the speed of light, the actual speed of light remained the same. This cleverly meaning the earth’s rotational pattern around the sun obviously did not change because the human race found an instantaneous way to move information. India being located about 12 time zones away gives them a time zone advantage in business. US companies that require data processing from India can submit their documentation before heading out to happy hour. By the time the coffee starts brewing the next morning, Indian organizations will have had an entire workday to prepare the deliverables to the United States. If the service required in India is a call center or help line service, Indian companies work night shifts at many locations to handle calls from across the globe. Most users don’t even realize the person on the other end is located in India. And almost all people won’t care whether or not the call center attendant is Indian or American, they just want their question answered as painless as possible (Stokes 2004).
Specialization is also a benefit of outsourcing. In addition to cheaper labor, companies that outsource are also getting superior business competency. Just like the companies that outsource have core competencies that they rely on to be profitable, the outsourcing companies have their own core competencies. Their core competencies are in the fields that are being outsourced. Fields like data processing or call centers are run with far greater efficiency and quality than could be provided by a small in-house branch of the original company. For example Unisoft Datatech, based in India, is an expert company in back office and medical record processing. They provide hospitals and medical centers with expert medical record processing at lower costs. This allows doctors to focus more resources on patient care. Any additional savings are passed along to the patient in reduced cost medical visits. (CNET News, 2002)
In the world of accounting, US wages and overhead costs are exceptionally high when compared to foreign counterparts. Outsourcing a staff accountant can save the firm up to $50,000 per person. By sending the bulk of the accounting processing overseas it allows CPAs to attend to their top 10 - 20% of clients. These clients generally account for 80-90% of the firms revenues. The firm gets the increased efficiency of having a specialized outsourcing firm in India. Being multinational also gives the CPA the ability to better manage peak season rushes in their country. They will also get the benefit of having the overseas firm do the necessary research into process improvements. Since the CPA no longer needs to invest to stay current with accounting techniques, it can focus more on marketing. With the additional help overseas the firm can also take on more clients. The bottom line for accounting is the same as health care and service industries; it allows firms to be more productive and more efficient. Most of these cost savings are then passed on to the customer, benefiting everyone involved (Strategic Application of Outsourcing in a CPA Practice)
As much as US companies can benefit from outsourcing the same holds true for India. India’s primary resource is their population, which is growing at a very fast rate. For every job created by business process outsourcing, five more jobs are created. Jobs in transportation, security, catering, and housekeeping sectors are some examples (Verghese, 2009). Almost 40% of India’s population lives off less than two dollars a day. Employees of outsourcing firms can earn between $5,200 and $36,000 a year. These salaries bring much needed paychecks to India’s middle class, allowing them to purchase homes and cars that were once out of reach (Thottam, 2003).
There is clear evidence that outsourcing can decrease a company’s costs, but as with any business venture it’s not without its share of risk and problems. For many businesses, perception and image is everything. This is especially true in today’s digital world where a negative event for a company can reach millions of people in a matter of minutes. Companies spend millions of dollars on athletes and celebrities to endorse their products and increase their brand name and recognition. The perceived problem with outsourcing is that it destroys jobs. The media, whom rarely misses any opportunity to broadcast a negative story, frequently publishes company’s decisions to send thousands of jobs to India. This can pose a problem for companies that need to keep a good standing image in the United States to stay in business.
In the US, from an economic standpoint outsourcing has many advantages. The cost of goods has decreased due to a lower cost of production. This in turn is passed on to consumers in the form of highly competitive prices. It’s especially beneficial to fixed lower income persons who can now afford a higher standard of living. It allows the country to best allocate resources from less productive to more productive. The more skilled and educated workforce can now be allocated better versus being forced to accomplish tasks they would normally be unwilling to do.
From a political standpoint outsourcing to India is seen as a negative concept. Few politicians want to appear as un-American, or supportive of domestic job losses. Most politicians understand how outsourcing actually improves the quality of life for the United States but due to political pressures are forced into protectionism. Protectionism is an enormous threat to outsourcing. If a company invests heavily into globalizing its operations, only to have the government limit trade or impose large tariffs, the company can incur big losses. There are also big risks due to political policies in India as well. India can use tactics like paying employees in non-convertible rupees in order to keep all the money in their country (Stokes 2004).
India’s government abolished the traditional caste system that existed prior to the democracy. However in many areas it is still being practiced. One of the theories behind why an increasing percentage of the population lives below the poverty level is the pressure from western countries. They are pushing agricultural goods on to India at cheap prices causing the rural population to fall into poverty. In response to this, many are teaching their youth about American culture and the English language. They are moving into cities and becoming educated. This in turn is provides a strong labor force that can meet the needs of these western companies. But care must be taken as the transition from the traditional caste system to modernized cities is very difficult. It increases exposure and risk to investment. Ninety percent of outsourcing infrastructure is located in the seven largest cities in India. Nasscom, the industry’s forum, has recently started urging companies to expand to an identified forty-three secondary cities. This would greatly help the poor whom can’t afford to move to one of India’s premier cities (Lakshmi 2008).
Dilip Vellodi stated the many things he considered before deciding on India for his outsourcing business. The political, economic and social states of the foreign country are just as big of roadblocks for a multi-national corporation. Just as the host country may implement protectionism, so might the foreign country. They may object to how much of an entity in their country can be foreign owned, as well as how much FDI they will allow into their economy. The economists tend to think in terms of utilitarian ethics. Meaning they look at free international trade as positive because of the positive-sum game. If a situation produces more positives than negatives its acceptable. They usually neglect the ethical issues that may arise from this free trade. For example, a call center in the United States in 2005 cost a company on average $19,000 a year. In India the average call center costs $7,500 annually (PriceWaterhouseCoopers 2005). However, because laws in India are not the same at the US the labor provided is provided at very questionable measures. The call center employee in America was maybe being paid $10 an hour, while the Indian equivalent is making 20 cents an hour. The company has moral obligations to everyone that works to produce a product. Yet others will argue that 20 cents an hour is 20 cents more than that individual was making before they had this job opportunity and is more than willing to work for that rate. Therefore if both parties are happy, and no laws are being broken, then it passes the ethical test. It is not an easy decision for any company to make.
Table 1: The Average Cost for Call Center Employee
Country Cost (USD/yr)
USA 19,000
Australia 17,000
Philippines 9,050
India 7,500

A typical outsourcing operation consists of sending secondary business processes overseas to be done. The core competencies of the business remain within the company at the host country. However to accomplish these secondary tasks, often a certain amount of classified or important data must be transmitted. This data is vulnerable to piracy and other forms of theft. Copyright and patent laws may be violated in a lesser regulated market. And the stolen material could be used in a form of competition on black markets or even re-bundled and sold legally. India is working very hard to create an image of safety and security. The image and reputation weighs heavily on the decisions of corporations before deciding to invest. In the 1960s and 70s Las Vegas was becoming a booming tourist attraction. It has been well documented that organized crime was largely in charge of operations there, yet Las Vegas had one of the country’s lowest murder rates. The outfits that ran Las Vegas understood that people needed to feel safe if they were going to visit and spend money at the casinos, so they made sure the cities image was one of safety, security and excitement. India parallels this concept. If a few individuals abuse the system, the whole system will collapse and everyone loses. India has done an excellent job of maintaining a relatively safe and secure business model. Ultimately the company will have to decide if it’s worth the risk to send sensitive data to be processed at a discount, or to pay a little more but have the added security of being able to keep the data in house. Managers must be comfortable in giving up a certain amount of control, yet maintaining strong relationships (Foryzewski).
With all of the risks involved over two thirds of fortune 500 companies still see great benefits in outsourcing. So how does the CIO decipher which company to use in an outsourcing decision? The largest companies have dedicated departments that oversee the investments. They own buildings. Install their own management and security, and have heavy financial investments in the operation. Other companies use middle men, like The Sutherland Group or Infosys to handle the operations for a fee. Finally companies have the option to go direct to the source, and hire a small vendor to run the process. This is the most risky, but in many cases needs the smallest amount of initial investment. There are sites similar to EBAY, where vendors can bid on projects and tout reviews from prior work. Effective CIO’s have been known to be quite ruthless when it comes to outsourcing evaluations. Many of the vendors are underdeveloped to handle the projects assigned. Some outsourcing firms fly to the United States only to have their bids rejected within minutes of meeting with a CIO. It’s up to the CIO to investigate every aspect of the process before investing large sums of capital investment. The old saying, measure twice cut once is very relevant to a company contemplating outsourcing. To get the maximum benefit from outsourcing with minimal issues it requires a company to think ahead, then think ahead again (Overby, 2003).
It is estimated that BPO industry has grown nearly 30 percent compounded annually since the mid 90’s. A majority of the articles and headlines have come in 2003 and 2009. Nobody seems to mind sending work overseas during times of great prosperity, but during recessionary periods it becomes a heavily debated topic. Nobody likes to let someone go because their work is now being done overseas. In 2002 the Dow Jones Industrials Average lost just over 16% of its value. 2003 was a big year for outsourcing, as firms looked to lower costs. In an article from TIME Magazine in 2003, a man named Sab Maglione was highlighted. He worked as a manager for a large insurance firm in New Jersey. He was introduced to Tata Consultancy Services, based in India. Within 2 years he managed a team of 5 Tata employees. A year later one of his Tata trainees was named manager, 70% of the project was moved to India, and Sab Maglione was unemployed. Stories like this one are very common practice. Experienced managers are literally training their replacements. For this reason outsourcing is kept very hush-hush in retail industries. In a survey of 1,000 firms by Gartner Research, 80% said the backlash from public opinion was not going to affect their outsourcing plans. Dick Taggart has gone with the age old philosophy, if you can’t beat ‘em, join ‘em. He used to work for JP Morgan in the financial industry. JP Morgan currently outsources nearly $300 million in back office work overseas. They work with Cognizant, TCS, and Accenture. JP Morgan even has its own captive centre in Mumbai (Mishra 2009). Before JP Morgan could move his position, he quit and took a job with Progeon, an affiliate of India’s Infosys outsourcing company. He currently works with securities firms on Wall Street, showing them outsourcing solutions in India. When he was asked about the feelings of workers who will be removed as a result of his consulting he responded, “It was the same thing when we moved from Wall Street to New Jersey and then to Dallas. Guess what? This is next.” (Thottam 2003).
The bottom line is outsourcing helps companies reduce costs, increase profits, and helps the overall economy. It increases the standard of living.

Stock Chart 1: Dow Jones Industrials Average Years 2002-03

Stock Chart 2: Dow Jones Industrials Average Years 2008-09

The Dow Jones Industrials Average took a heavy hit in 2002 after the dot com boom. It would recover in 2003 as companies scaled back expenses and increased efficiency.
Highs and lows in the economy are very natural. History shows they are virtually unpreventable. Outsourcing however remained a hot topic in 2003. The comparative advantage that outsourcing provides was one of the reasons the US economy was able to pull itself out of the recession in 2003. Politicians like to use anti-outsourcing campaigns to get elected in the promise of protectionism for their people. Companies delicately promote outsourcing to lower costs and appease the shareholders. All while being very mindful of the image they portray by laying off these loyal workers. Economists beg the nation to look beyond the immediate impact and look towards the overall health and wellbeing of the nation. Whose opinion is correct? Many of these issues are being heavily debated in the economic crisis in 2009.
In all the political and economic maneuvering in the media and Washington, one thing seems to be certain. Outsourcing is here to stay and so is its growth. Companies are outsourcing to grow, not merely to increase profits (Venkatesan 2008). The role of outsourcing is so prevalent now that most companies that outsource would not be profitable without it. An industry with over a 30% annual growth rate cannot be ignored.
Bar Graph 1: Size and Growth of BPO in India

Source: PriceWaterhouseCoopers, 2005
Bar Graph 1 shows that following the 2002 recession, outsourcing had nearly a sustained 50% growth rate for the next 3 years. The dollars spent on business process outsourcing nearly doubled from 2002 to 2005.
In 2006 America’s top companies had growth plans that included:
- IBM moving from 39,000 Indian employees to 55,000 within 2 years.
- Dell adding 10,000 additional Indian professionals by 2009, effectively doubling their workers there.
- Accenture adding 30,000 professions with the majority in India
- JP Morgan doubling their overseas workforce in 1 year
- Capgemini and Kanbay, an Indian IT company planning to add 23,000 jobs in 4 years.
Source: ValueNotes Database
In 2009 IBM laid off another 5,000 US jobs. They now have over 71% of their 400,000 employees overseas (Bulkeley 2009). WNS Global Services is a BPO company located in Mumbai, India. They were setup for British Airways in 1996. Between 2002 and 2008 they’ve grown from a $15 million dollar a year company to almost half a billion. Their employee base has grown from 1,300 people in 2002 to almost 23,000 in 2008. These numbers are absolutely staggering. Not only does the company outsource for British Airways but they now serve over 190 organizations worldwide (Beachey).
The future remains very bright for business process outsourcing. It has opened the door to new options like knowledge process outsourcing. KPO is being considered the possible next frontier for outsourcing. It focuses on primarily solving business needs versus moving business processes to lower cost locations. This way companies achieve more lean processes without downsizing or moving jobs overseas. The company eClerx is a specialist in KPO. Their primary focus is on business processes that need to be constantly redefined and researched. Rather than just focus on people, they work with technology, processes and people together. They aim to engineer solutions rather than provide fundamental services at low cost (Hobbs).
The Indian government still plays a major role in the economies education system. If that were to loosen up and allow private investment the sky could be the limit for the Indian economy. If the education system isn’t reformed it could lead to some issues for India. If India gets on a path of mass producing degrees without the necessary skills it will make India a less attractive option. Many of the rich can afford to send the best and brightest students overseas to be educated and many do not return. Political stability is another key issue. India needs to stay stable in order to keep their appeal. The backlash from losing jobs from the United States should be minimal. As long as there is qualified talent, US companies will continue to benefit and continue to demand the labor. So in the next decade look for one of these potential four outcomes from India. The education system worsens and the government has a low stability, the education system worsens but the government becomes highly stable, the education system improves but government stability is low, or the ideal situation, the education system improves and the government is highly stable (ValueNotes Database). If the education system is able to improve, the concept of study abroad will also benefit the US. Students will have the opportunity to save $30,000 to $150,000 on education costs by getting a degree overseas. The annual rate of tuition fee increase is far larger than the inflation rate. The savings would greatly help Americans begin their careers in far less debt than a typical domestic education (Nounou 2003). This next decade will be a very important one in the history of India; it also will bring about many changes in the United States. To what extent though, is clearly at the mercy of many factors indeed.

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