Business process outsourcing moves up the value-chain

Special Section: BPO, a global market for services, Knowledge at Wharton, 25 September 2003

Knowledge at Wharton has a special section on business process outsourcing. One of the most interesting articles in the section is about BPO moving up the value-chain.

Cutting costs is not the only reason why outsourcing such tasks makes sense for its clients; it’s also about higher quality of work, says Aggarwal. “Among the more unusual emerging developments is that business process offshoring is not merely a way to reduce cost by migrating core functions,” adds Spohr of A.T. Kearney. “It is also a strategic initiative to take advantage of technological advances and the human capital available offshore to fundamentally restructure an organization’s operating model.”

These new business models are necessary for the efficiency gains from new communications technologies to finally kick in.

An example of a BPO firm that has moved beyond call-centers and crunching code is Evalueserve with headquarters in Bermuda, a subsidiary in New Jersey and its main operating plant just outside of New Delhi.

Evalueserve provides services like patent writing, evaluation and assessment of their commercialization potential for law firms and entrepreneurs. Its market research services are aimed at top-rung financial services firms, to which it provides analysis of investment opportunities and business plans. Another major offering is multilingual services -- Evalueserve trains and qualifies employees to communicate in Chinese, Spanish, German, Japanese and Italian, among other languages. That skill set has opened market opportunities in Europe and elsewhere, especially with global corporations.

Dieter Ernst's work focuses on how outsourcing manufacturing influences the spread of knowledge around the world. Outsourcing services should have an even more dramatic effect, since transportation is even easier and cheaper. Also, outsourcing manufacturing seems to be mainly cost-driven, with companies in developed countries outsourcing to the developed and developing world. BPO - or service outsourcing more generally - can go in any direction. Globally competitive companies in Taiwan, India and Israel can get R&D from subsidiaries/joint-ventures/partners in Silicon Valley. The ultimate R&D outsourcing example is InnoCentive. High-end professional medical and legal services are already being outsourced by U.S. firms and governments.

So far, India is in the best position to take advantage of the BPO trend - and seems likely to keep it for some time.

The expansion of the labor force by more than 2 million new English-speaking college graduates each year will provide plenty of room for growth. Also, the labor arbitrage between India and the U.S. is so significant that it will take a long time for it to catch up. What’s more, any rise in wage costs is getting offset by declining telecommunication rates (some 30% over the last couple of years), thanks to improvements in infrastructure and technology.

Of course, others are competing to get into the business as well. China is one contender, although some say that a) it can't overcome the language barrier and b) the domestic market's service requirements will use up all the available talent. Mauritius wants to capitalize on its linguistic advantages and is getting help from India to catch up. A solid telecoms infrastructure, tax incentives, and compromises on visas and advance work permits should help. New Yorkers' parking tickets are processed in Ghana. VietnaPhilippineslipines, central European countries and many others are competing for part of the cross-border business that is expected to grow to $178.5 billion by 2005. Indian BPO companies themselves have started outsourcing as costs rise in their own country.

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