IndusFusion’s Outsourcing Blog

When the US domestic voice outsourcing industry began to evolve beyond the borders, we first saw several near-shore location options such as Canada. The motivation and value proposition was primarily staffing. Several US cities had become saturated with centers, staff turnover was high, and the staffing pool skill sets diminishing. Canada offered a viable option with a good skill set of available, highly dedicated representatives and a close proximity to most US locations. Given the exchange rate at the time, Canada offered slight cost reductions (but not significant commercial economies).

Next up was a few limited Caribbean and Latin market countries. They were really the first locations to offer reduced sourcing costs for US companies. However, the options were limited, the scalability small, and the companies mostly limited in management and staff experience.

Then came Asia and the sub-Asian continent and with it ushering the true Global Outsourcing Industry. The first applications were mostly technology related development and programming along with low-end back office and data entry type processes - however voice was soon to follow. As the technology and telephony infrastructure capabilities of countries like India and the Philippine Islands expanded, with it came rapid expansion and a continued growth of process applications being sourced. India, in particular, has seen amazing growth in the last decade. The India based sourcing providers offer the staff skill sets, educational backgrounds, quality of management, and true scalability required all coupled with a costing structure that is perhaps half that of domestic providers offering similar services.

Now that the Global Sourcing industry is in full swing, the list of countries with companies offering sourcing services continues to expand. The Caribbean and Latin markets have several viable options: Mexico, the Dominican Republic, Panama, Costa Rica, Argentina, Columbia, among many others. European locations like Northern Ireland offer a higher end solution. China seems to be on everyone’s list of upcoming locations (though whether they will be able to offer an integrated voice solution is doubtful). Eastern Europe has several options including a growing Russian and ex Soviet Bloc base of providers. The African continent is also not without options in South Africa and even countries like Kenya (yes, political unrest aside – joining the Pakistan conversation in sourcing).

Each of these locations has varying degrees of viability related to the overall value proposition based on the application being sourced. Typically, the primary considerations when looking offshore are: skill set of staff, management experience, corporate resources, scalability, travel distance, voice enunciation (relative to US accents), and, of course, costing. Finding the ‘perfect mix’ is no easy task for any process. While each company will, of course, vary, we can generally say some locations may offer highly educated staff, scale ability, good costing, but less than desirable accents. Others may offer a closer proximity, fair cost models, a better US cultural understanding but have limited ability to scale. Others may fit every need but the costing is significantly higher than most.

All of these considerations make choosing the perfect offshore souring provider for one’s application quite challenging. One IndusFusion team member described the perfect Sourcing Partner this way: “I want the staff educational background, scalability and costing from India (or costing from Argentina). I want the US cultural understanding and sales service orientation of the Philippines. I want the bi-lingual ability of Mexico, the easy flight to The Dominican, the location site visit of Panama or Costa Rica, the technology head for my process to be from Northern Ireland, and Canadian team supervisors for my staff. And we would add that you could plug in 3 or 4 countries for each of these needs/desires.”

The net of the above comment is – to put it casually – it isn’t gonna’ happen. So what we are left with is finding the best mix of all. Those country locations, and companies within, that offer as close to the best of each consideration as is possible. At IndusFusion, we think we have found the next potentially great one – Egypt, and in particular a company called Xceed. As many of our friends and clients know, we do work currently all over the globe, and we have a credible understanding of ‘what best fits where’. Given this, the Medetranian-North Africa (MENA) market, with companies like Xceed, seem to fit the bill well for a wide variety of applications. The staff skills sets are high, the costing is very favorable, the accents neutral, the management experienced, and it’s hard to beat a trip to Egypt and experience the culture and history during those ‘non working hours’. So to those ends, some members of the IndusFusion team has partnered up with Xceed (the leading MENA region entity) to bring this solution to our other partners and US clients seeking that ‘perfect mix’. Please review the linked Datamonitor report for detailed information on the MENA region. You can also review Xceed’s corporate brochure, or give us a ring to discuss more and see if Xceed may be a fit for your sourcing needs.

Until next time, we will be out there seeking out and partnering up with the best in BPO and Shared Services Industry.

REPORT

XCEED BROCHURE

As most of our current Delivery Partners (DP’s) and Associated Marketing Partners (AMP’s) are aware, IndusFusion is focused on Strategic Ventures in the BPO space. However, we are also a highly opportunistic firm, with the capabilities, resources and experience to successfully execute most any outsourced business or knowledge process required – regardless of scale, scope or application. To those ends, we thought we would share a few ‘real world’ examples of situations where a call to IndusFusion could be an ideal solution.

Click here for details on how we may be of benefit.

Here we go … Let the Politics of Offshore Outsourcing begin anew – or shall we say continue. Ms. Hilary Clinton gave a ‘satellite speech’ to the IIT (India Institute of Technology) alumni last week.

Among her comments were:

“I am concerned that trade is becoming a zero-sum game, instead of being a means to lift up all who participate”

“If globalization pushes down US wages, other countries will be affected.

“Workers in the U.S. are concerned about outsourcing, as I’m sure you know. And I think they have a right go be,”

Our take is like the current immigration ‘conversation’, outsourcing will be one of the political rhetoric whipping boys over the next year. Typically epitomizing another topic where the politicians fully understand the big picture, yet will placate speech to the masses with a nationalistic focus. If you take these comments to heart, you could be lead to believe that the New York Senator is sounding an alarm to the future of protection-free global sourcing. Thankfully (or hopefully) we all know better.

This year, like all election years, will bring even more anti-outsourcing bills and protectionist talk to congress. Hilary’s not alone, Obama’s opposition talk about outsourcing is even worse, and the Republican candidates are not free from negative rhetoric either. So we know the talk is coming, let’s just continue to assume that also like most years it fades into obscurity like it always does post election.

An IndusFusion friend and business associate discusses the topic of global sourcing’s influence on private equity in a new report published by NeoIT. The report discusses how increasingly, private equity firms are leveraging global sourcing to drive additional returns from their investments. Global sourcing can be a strong asset for firms looking to improve savings and enhance company value as well as streamline the operating model. The benefits of global sourcing, from predictable cash flows and the ability to finance the investment, make it an attractive management tool for private equity portfolio companies, particularly during the divestiture phase. While global sourcing has inherent risks, with sufficient planning, the risk can be calculated and managed.

Please click image (or here) for the full article.

About the Author:

Ravi Narayanan, Vice President, Platinum Equity
Ravi helps portfolio companies improve operational productivity through process optimization and outsourcing. He brings in two decades of global experience in Outsourcing, Business Development and Information Technology.

An excellent editorial by Investor’s Business Daily. A good follow up for our recent post on Alarmist Protectionism. IndusFusion would have enjoyed adding even more evidence for the editor’s story line.

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Outsourcing Myths

By INVESTOR’S BUSINESS DAILY | Posted Tuesday, June 19, 2007 4:20 PM PT

Journalism: America’s companies are shutting down factories and offices, and shipping jobs wholesale overseas. That’s how the media have portrayed it. In reality, outsourcing has created more, better-paying jobs here.

Beyond The Bias: Sixth In A Series
More on this series
(more…)

Alan Blinder a professor of economics at Princeton University, vice chairman of Promontory Interfinancial Network and vice chairman of the G7 Group recently penned a Washington Post article raising another Lou Dobbsesque ‘the coming tragic effects of offshore outsourcing to the US economy’ alarm. While Mr. Blinder’s piece (I’ll avoid the pun reference as I am sure he has had well enough) supplies some depth to the more relevant issue (what needs be done), he, like most of the rest, falls short on what we believe should be the conversation: How does the US best take advantage of the inevitability? Turning what we believe already to be actually good news for the US, into an even greater success story.

Some points we feel not represented in the story

(and we won’t even speak to the altruistic values unrepresented as always)

1. With the possible exception of China, most economist agree the other large and expanding offshore outsourcing markets will evolve into huge surplus trading partners with the US.

2. If US corporations are unable to leverage the costing economies of outsourcing to these geographies, it will not be long until their market share and competitiveness against like Japanese and European entities who do outsource will soon fade. The end customers will migrate to lower cost products and services offered by the foreign competitor entities, the US companies will cut jobs, stock prices drop, stock holders lose money… we are not Princeton economist but I think we see the potential negative impact here beyond just jobs.

3. Will somebody please do a study that shows the impact of jobs and capital coming back into the states directly attributed to these offshore service providers!? Our bet is offshore outsourcing is pretty effect neutral with this contribution alone.

4. ‘Time to market’ - the reference always used as to why US corporations utilize offshore resources is always “lower cost than US equivalent staff”. This simply is not true. For example: it is very common, from tech based startups to Fortune class firms, to have a development need arise that requires lots of staff in a short period of time to complete a current project. Going out and quickly hiring a large US based team with high end development skills in short order just is not feasible in many cases. Again, perhaps Mr Blinder can share the economic effect if ManilaSoftwareServices Inc. gets their Microsoft Vista equivalent product to market first? (I know that’s a stretch example, but the point remains).

5. Many sourced efforts are not ‘jobs’ at all. They are simply short term project needs. Would we prefer to develop a societal class of temporary employee’s?

6. It is typical in sourced IT projects that what is offshored is the more mundane, lower end activities. This leaves the true IP class development for the US employees. Thereby leading to a more skilled employee stateside as their efforts are focused on the true sunrise activities versus (his words) “sunset” ones. It is these sunrise teams that allow for the US’s continued leadership position in creating and bringing to market new technologies and industries.

Does the VCR evolutionary cycle ring a bell? Remember when the alarm went off when we had developed a new technology but it was the East who were reaping all the rewards by selling the players? Yet in the end, the low cost players ended up spawning hundred’s-of-thousands of new US jobs based on the growth in related and new industries because of the mass availability of the players.

7. We would also ask that Mr Blinder share some of his expertise as to the effect to the US economy if, for example, consumers have to pay $1800 for their new laptop versus $1400 because Dell, Microsoft, HP, etc have to move out of India and replace those roles with higher cost, greater benefit US employees?

We of course could go on and on. But our objective to comment on the piece is to encourage the conversation be directed toward taking advantage of the marketplace realities versus the same old alarmist propaganda. The article offers a couple of excellent thoughts to that direction: “rethink our educational system”, “invest in our capital markets to keep them strong” “directing future educational activities toward roles that cannot be sourced”, etc.

There are surely a lot more ways to leverage the opportunity, many that even the most protectionist commentators could agree on. For starters, how about more US investment in these growing markets? The bottom line is the conversation needs to change. Leveraging the ever changing global marketplace has been a US forte’, let’s keep it that way, and at the same time enjoy and appreciate the contribution outsourcing provides - both abroad and domestically.

Tags: Outsourcing Washington Post India Offshore

Please see IndusFusion comments below article

Grassley, Durbin Ask for Details on Companies’ Use of H-1B Visas

Monday, May 14, 2007

WASHINGTON - Senators Chuck Grassley and Richard Durbin today asked the top nine foreign based companies in 2006 that used nearly 20,000 of the available H-1B visas to disclose further details about their workforce and their use of the special visa program.

“More and more it appears that companies are using H-1B visas to displace qualified, American workers,” Grassley said. “Now, as we move closer to debate on an immigration bill, I continue to hear how people want to increase the number of H-1B visas that are available to companies. Considering the high amount of fraud and abuse in the visa program, we need to take a good, hard look at the employers who are using H-1B visas and how they are using them.”

“Supporters claim the goal of the H-1B program is to help the American economy by allowing U.S. companies to hire needed foreign workers. The reality is that too many H-1B visas are being used to facilitate the outsourcing of American jobs to other countries,” Durbin said. “We have to look at the system that generates these visas and the way they are used. This legislation will help protect American workers first by stopping H-1Bs from being exploited and used as outsourcing visas.”

The letters are part of an effort to determine if the H-1B program is being used for its intended purpose which is to fill a worker shortage for a temporary time period. He said that he expects the companies to cooperate and answer his questions to ensure that accurate information is being used as Congress begins debate on new immigration policy.

Grassley and Durbin recently introduced legislation that would overhaul the H-1B and L-1 visa programs to give priority to American workers and crack down on unscrupulous employers who deprive qualified Americans of high-skill jobs.

A copy of one of the letters appears below:

May 14, 2007

Mr. Nanden M. Nilekani
Chief Executive Officer
Infosys Technologies Limited
6607 Kaiser Drive
Fremont, California 94555

Dear Mr. Nilekani:

As members of the Senate Judiciary Committee Subcommittee on Immigration, Border Security and Refugees, we have a responsibility to oversee and evaluate our country’s visa policies. We have been concerned about reported fraud and abuse of the H-1B and L visa programs, and their impact on American workers. We are also concerned that the program is not being used as Congress intended.

While some Members of Congress have focused on increasing the annual cap of the H-1B program, we believe it is important to understand how H-1B visas are being used by companies in the United States. We have received helpful data from the U.S. Citizenship and Immigration Service with regard to H-1B visa approvals in 2006 for the top 200 participating companies. Your company was one of the top companies on the list. Therefore, we are requesting your cooperation in providing additional statistics and information on your use of H-1B visa workers.

First, some groups, such as the Programmers Guild, have analyzed the wages paid to H-1B visa holders. They have found that the average annual salary of foreign workers is significantly lower than that of new U.S. graduates.

Second, a number of consulting firms reportedly recruit foreign workers and then outsource the individuals to other job sites or companies. Many of the top 20 companies that used H-1B visas in 2006 are firms, such as yours, that specialize in offshore outsourcing.

Third, a number of firms have allegedly laid off American workers while continuing to employ H-1B visa holders. The American people are concerned about such lay offs at a time when the demand for visa issuances and the recruitment of foreign workers appear to be increasing.

Because of these concerns, we seek your cooperation in answering the following questions:

NUMBERS

# How many United States citizens do you employ in the United States?
# Is your company an H-1B dependent employer?
# How many visa petitions did you submit to the Citizenship and Immigration Service for Fiscal Year 2007?
# Of the total number of petitions requested, how many have been approved for Fiscal Year 2007, if known?
# How many H-1B visa holders is your company currently employing? What percentage of your total workforce are H-1B visa holders?
# What is the average age of the H-1B visa holders that your company currently employs?
# What is the average number of years of experience of your employed H-1B visa holders?
# Please describe your efforts to recruit Americans for the positions for which you employ H-1B workers.

WAGES

# What is the average wage of your company’s H-1B visa holders? What is the median wage? What is the highest and the lowest salaries for those H-1B visa holders currently employed by your company?
# What is the average wage of your company’s workers who are United States citizens in the same occupations?

OUTSOURCING

# Of the 4,908 visas your company received in 2006, how many of those workers are currently employed and paid by Infosys Technologies Limited?
# Of the 4,908 visas your company received in 2006, how many were outsourced to other companies and how many employees’ salaries were paid for by a firm other than Infosys Technologies Limited?

LAY OFFS

# Has your company experienced any layoffs in the United States in the past year? Any lay offs in 2005? If so, how many people lost their jobs?
# If your company has laid off workers in the United States, what job positions were part of that lay off?
# If your company has laid off workers in the United States, how many of those workers were H-1B visa holders?
# If your company has laid off workers in the United States, did any H-1B visa holders replace those dislocated workers, or take over any of the laid off employee’s job responsibilities?

We appreciate your cooperation, and respectfully request that you respond to our questions no later than May 29, 2007.

Sincerely,
Charles E. Grassley
United States Senator

Richard J. Durbin
United States Senator

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This has IndusFusion’s attention, as it should all groups engaged in outsourcing - in particular any India based groups. We will track this story as it develops, but you can be assured that this will have an impact on the large India based BPO groups with US offices (take a look at the list they reference, all India based groups). Without question, there has long been some social and political negativism related to offshore outsourcing. However for the most part when the ‘whole story’ is recognized, the many acknowledged advantages and benefits come to light and the stories blow over. We feel this one will not.

There are several questions from the Senators letter that will prove a challenge to the groups, and three in particular stand out:

1. How many United States citizens do you employ in the United States?
2. Please describe your efforts to recruit Americans for the positions for which you employ H-1B workers.
3. Of the 4,908 visas your company received in 2006, how many were outsourced to other companies and how many employees’ salaries were paid for by a firm other than Infosys Technologies Limited?

To the first question; anyone who has dealt with the domestic offices of the larger groups knows this number (as a percentage basis) will be low. The fact is (and it effects the other two questions as well) that it is far easier and more economical for the groups to bring in younger graduates, set them up housing and compensate with wages somewhere in between India and US rates. The companies get a known quantity in the employee, likely better experience, and an overall lower cost than if they were to hire US citizens.

As for “effort to recruit Americans”, this too will be a challenge. While surely there are efforts, any answer that will appease these politicians would at best have to be feigned in rhetoric more than practice.

The last question is the death nail. Unless someone can share with us different, the number there will likely be 100%. With little exception, all the sourcing groups listed bring in the staff to work on the client projects - based on the skill set required. This will then have the Senators circling back to question two with “what did you do to look domestically to staff that role”.

We will add more thoughts on this story as it evolves. However suffice to say, that one cause-and-effect we project is that there will be increased M&A activities in the US for these firms. We are also likely to see tie-up’s with groups where some of the visa requests can be diverted. If I as a leading business house acquire a US based entity, then when I have to answer the “how many US citizens” type questions, it gets a lot easier…

THE below article from the Hindu Business Line discusses India based BPO employee attitudes toward long term employment within the space. The authors seem to find the referenced percentages as high, while we find them not at all outside reasonable expectations and go forward assumptions. More enlightening would be to illustrate the differences in captive units versus contracted providers, voice versus non voice, night positions versus day, (if voice) service versus sales orientation, etc.

Equally relevant is the age factor. It’s just not uncommon (regardless of geography) to assume a twenty something year old to respond to any question posed about their long term career plans with some form of “this will be short term for me”. More relevant to us would be questions focused on “how long do you plan on being here?”

Students still see BPO jobs as a stop-gap

Moumita Bakshi Chatterjee

New Delhi , Sept. 19

EVEN as the business process outsourcing industry in India has attained a $5.2-billion size employing 3.50 lakh professionals, a majority of students across India still consider working in BPOs as a `stop-gap’ employment option.

According to a survey by market research company Hansa Research, about 66 per cent of student respondents felt that joining a BPO company is a short-term employment option.

The perception is particularly strong among students in Chennai and Mumbai, although bulk of students in Bangalore did not subscribe to this view.

As many as 61 per cent of the student respondents in Delhi, 77 per cent of the respondents in Mumbai, 70 per cent in Kolkata and a whopping 89 per cent in Chennai said that BPO was a stop-gap employment option while they decided what to do next.

In contrast, close to 65 per cent of students in Bangalore considered BPO as a long-term career option.

Overall, 71 per cent of the students covered in the survey said that working with a BPO company is considered fashionable among their friends.

The survey covered over 1,000 students across the country, including Bangalore, Mumbai, Delhi, Kolkata, Hyderabad, Chennai, Coimbatore and Pune. An overwhelming majority of students saw BPO jobs as a “quick opportunity to make money,” but almost an equal number said that BPO jobs allowed them to have fun and earn money at the same time.

When contacted, the Vice-President of the National Association of Software and Service Companies (Nasscom), Mr Sunil Mehta, admitted that the latest findings were in line with the association’s own surveys on the perception of BPO jobs conducted about six months ago.

“The main reason for this perception is that the BPO segment is seen as a relatively new industry and hence, people are not sure how it would grow. Also, the high growth witnessed by the industry in the past, may raise fears of a boom-and-bust phase. Moreover, there are people who feel it is impossible to work on night shifts for years at a stretch,” he said.

Mr Mehta said that Nasscom is taking measures to change the perception. “Captives constitute 60-70 per cent of the industry and people are beginning to realise that these well-known names are here to stay.

“We are also encouraging BPO players to reduce their exposure to voice-related activities, as it would enable them to offer flexible hours to employees.

“In addition, companies are implementing a high level of training for their employees to give them knowledge in specific domains,” he said.

We have not reviewed the referenced study, however our informal conversations point to a similar conclusion.

Alsbridge Study Finds Leading Outsourcing Providers Optimistic About Buyer Interest in Outsourcing
— According to a just released report by Alsbridge, the leading outsourcing providers expect to increase sales in both information technology (ITO) and business process outsourcing (BPO) throughout the rest of 2007. These multinational providers, with annual revenues greater than $1 billion indicate that their typical ITO deal size is more than $50 million while BPO deals tend to be smaller, but still in the in the multi- million dollar range.

We of course are not in the business of making stock recommendations. However, being in the BPO business we can’t help but ponder the recent hits some of the public BPO / Call Center firms have taken. ICT Group (ICTG) has a recent 50% drop in value, PeopleSupport (PSPT) likewise shaves 50% plus, and yesterday APAC (APAC) shares take a tumble.

Again, stock picking is not our gig, but you have to take a look at TeleTech (TTEC) now and wonder if they are about to give back some of that huge run up they have had over the last couple of years? Let’s see… it’s up 4X plus, has a current P/E of 51X (siting at about $38 a share as I write this), main shareholder is selling, and all against the backdrop of similar stocks taking a huge hit as of late. Can you say hmmmmm?

Any other thoughts and insights - we would appreciate your comments.