Buying or Building Outsourcing

Deloitte in a survey in 2003 predicted that 75% of Global financial institutions worldwide are increasingly interested in sending IT work to lower cost countries.  That was the key finding of a new Deloitte Research study, which surveyed 27 global financial institutions including 11 of the top 20, based on their market capitalization about outsourcing.

The report says 33 percent of the respondents told Deloitte that they already have sent IT work offshore and 75 percent said they will have work offshore within the next 24 months, and thus there was a great potential for outsourcing in 2003 for outsourcing destinations like India.

Prime reasons behind outsourcing were intense cost pressures, lower share prices of publicly traded companies and the general economic downturn.  In summary, the fundamental principle behind outsourcing was to increase profit and reduce operational cost.  What does outsourcing mean to end customers? Ultimately, it will keep costs down for end-users

Deloitte had estimated the average saving out of outsourcing was in the range of 39 – 50%.  The crux of the outsourcing is that if you do not outsource you will face a big competitive disadvantage even though you don’t achieve a big competitive advantage by outsourcing.

Deloitte further envisaged two business models.  One where the company fully owns up the outsourcing center and the second where a third party manages the operations and the entity holds control over the outsourcing process.  The entity may own the facility and hire the people.  The outsourcing service provider runs the operation and owns 55 percent of the venture.  

Now, eight years have passed since the above survey and  predictions.  Global economies have undergone ups and downs, and the market witnessed a major recession.  Outsourcing business model drastically changed.  Now, there evolved a new outsourcing model.  Market accepted that you need not keep your liabilities in India to make the outsourcing process happens.  If you invest heavily for outsourcing it is not savings but an additional cost.  Deloitte which started fully owned outsourcing center in India in the year 2000 now proposes to start a University.  This will cost Deloitte an additional investment of $.8 – $1billion.  This investment is to impart training to meet for its outsourcing needs.  Unlike other major outsourcing outfit, scouting for talent turned out to be a major challenge for the Deloitte which got stuck in Hyderabad. Whereas Accenture, Fidelity and other firms operated in multiple locations, Deloitte chose to stay back in Hyderabad which ended up the accounting firm to think in terms of opening University.


Meanwhile, the companies like GE which invested heavily in setting up outsourcing in India has come out of its investment in the beginning itself.  GE Capital Services which set up its back office in 1997 had sold its BPO for $500 million in 2004, after reaching a staff strength of 12,000 people in eight sites in India in.  Later, the outsourcing entity was known as Genpact. Citigroup's captive BPO arm Citigroup Global Services (CGSL) was sold to Tata Consultancy Services (TCS) for $505 million.  This deal marked as another largest buyout of a foreign captive BPO in India.  Prior to that WNS's took over Aviva BPO for $230 million.  Wipro Ltd had acquired Citi Technology Services Ltd, Citigroup Inc.’s technology arm in India, for $127 million in 2008. Cognizant acquired UBS’s India Service Center subsidiary for $75 million.  UBS had developed KPO, BPO and IT Outsourcing services through 2,000 staff from its Hyderabad offices.  UBS admitted that it had decided to opt for a buy rather than build strategy for its outsourcing needs, to improve efficiency, reduce costs and increase flexibility.  This was an open admission of outsourcing strategy by a financial giant.  Now, it is the question of buying outsourcing or building outsourcing, which concept will prevail in the market in the coming years.  

If you are going to buy outsourcing your profit can be calculated from Day One. You can dictate terms to the provider and can always look for a profit band of 50% – 60% from outsourcing.  Small and medium outsourcing firms are a good option for company’s which look for outsourcing with the above targeted line.  The first step is to have a proper agreement on non-competition and data security.  Then next is imparting training to staff members.  Rest will be taken by the local outsourcing provider.  Initial cost of discussion, training and the annual inspection cost are your additional cost.  Video conferencing and discussion on weekly basis will ensure that the outsourcing wheel is running smoothly.   This would help the company to really reap the benefit of outsourcing.