Western companies are increasingly getting away from running their own offshoring operations, handing the jobs over to Indian tech-services specialists
A monumental shift in how Western corporations tap into Indian talent is taking place. Companies are moving away from running their own offshoring operations and handing at least some of those jobs to Indian tech-services specialists.
The most recent sign of the sea change came July 10, when British insurance giant Aviva (AV) said it sold a 5,000-strong South Asian outsourcing operation to WNS Global Services (WNS) of Mumbai. WNS paid $228 million for these so-called captive operations in Bangalore, Pune, Chennai, and Colombo, Sri Lanka. In return, Aviva agreed to pay up to $1 billion to WNS over more than eight years for handling customer service, account setup, accounting, and claims processing.
There has been a steady drumbeat of similar large deals in recent years, but industry executives and analysts say the pace is quickening—driven by currency swings, the increased costs of doing business in India, and the need for some Western financial services to raise cash to handle shortfalls elsewhere. "The writing is on the wall," says Sudin Apte, an analyst at market researcher Forrester Research (FORR). "This is not working anymore."
Labor Savings Aren't Enough
Apte estimates more than 150 companies have shifted in the past few years from running captive operations to using a mix of internally run and outsourced operations. He expects another 80 to 100 companies will make the move in the next year or so. In an April report, his survey of 59 corporate information technology executives showed 22% of them plan to stick with captive operations while 66% will use outsourcing companies in whole or part. That's a huge shift from the results of a survey at the end of 2005, when 55% of respondents said they'd run their own offshore operations.
A lot has changed since 2005. For one, many of the captive operations have swelled in size and have staffs numbering 3,000 to 6,000. Apte and other analysts believe offshoring outfits that large are hard for parent companies to operate efficiently. In many cases, it's better to hand the business to outsourcing firms that have even larger-scale operations and can move employees from one project to another as the needs of a large customer base shift. The other major change is that the rising costs of doing business in India mean it no longer makes sense to move work there just for the labor-cost reductions. To pay off big-time, these shifts must include gains in productivity through process improvements and innovation that the top Indian outsourcing companies have mastered.
Other notable handoffs include the 2007 Infosys acquisition of Philips Electronics' business process outsourcing (BPO) operations in India, Thailand, and Poland; and the 2006 joint venture formed between Tata Consulting Services (TCS.BO) and Britain insurer Pearl Group. General Electric (GE) gave the trend a lot of momentum in 2005 by spinning out its Indian back-shop operations as Genpact in 2005. WNS itself was formed six years ago as a spinout from British Airways (BAY.L).
Economies of Scale
The Aviva deal gives WNS a chance to get bigger fast. The BPO specialist now has 22,000 employees. WNS bested a handful of other bidders. "This is a very sizable piece of business that makes us a company of a different scale," says WNS chairman Ramesh Shah. "We understood the business, and we wanted to have a long-term relationship with them."
Aviva had pioneered the strategy of hiring Indian outsourcing specialists to set up and temporarily run operations and then pass them off to Aviva. It was new to the market and figured it could benefit from the expertise of local players. WNS was one of its partners. But last year it reviewed its options and decided to reverse the way it does things. In a time of volatile currency and salary shifts, Aviva sought more predictable costs. Also, it believes WNS can wring more costs from its operations. "These companies have been better than corporations at driving efficiencies because they're specialists in the area," says Cathryn Riley, chairman of Aviva Global Services. She says the company is as committed as ever to having much of its work done in India, in spite of rising costs.
One of the advantages the Indian firms bring is their sheer size. Infosys, for instance, now has nearly 100,000 employees and plans to hire another 10,000 this quarter alone. These companies have hundreds of customers they can serve from their large delivery centers, using standard technologies and business practices.
A wild card in the shift from captive offshoring operations is the problems of big Western banks. Hard up for funds as a result of their mismanagement of real estate finances, they need cash. But analysts and executives caution that these firms may not be able to get the kind of money they're looking for by selling Indian operations, mainly because the Indians typically drive a hard bargain. "Sometimes the price is too high for us," says Kris Gopalakrishnan, chief executive at Infosys, which is now looking at two potential banking deals.
But Forrester's Apte believes the banks may eventually be forced to sell out even if it means settling for less. "Their desperation is going to grow," he says.
Source : Click
A monumental shift in how Western corporations tap into Indian talent is taking place. Companies are moving away from running their own offshoring operations and handing at least some of those jobs to Indian tech-services specialists.
The most recent sign of the sea change came July 10, when British insurance giant Aviva (AV) said it sold a 5,000-strong South Asian outsourcing operation to WNS Global Services (WNS) of Mumbai. WNS paid $228 million for these so-called captive operations in Bangalore, Pune, Chennai, and Colombo, Sri Lanka. In return, Aviva agreed to pay up to $1 billion to WNS over more than eight years for handling customer service, account setup, accounting, and claims processing.
There has been a steady drumbeat of similar large deals in recent years, but industry executives and analysts say the pace is quickening—driven by currency swings, the increased costs of doing business in India, and the need for some Western financial services to raise cash to handle shortfalls elsewhere. "The writing is on the wall," says Sudin Apte, an analyst at market researcher Forrester Research (FORR). "This is not working anymore."
Labor Savings Aren't Enough
Apte estimates more than 150 companies have shifted in the past few years from running captive operations to using a mix of internally run and outsourced operations. He expects another 80 to 100 companies will make the move in the next year or so. In an April report, his survey of 59 corporate information technology executives showed 22% of them plan to stick with captive operations while 66% will use outsourcing companies in whole or part. That's a huge shift from the results of a survey at the end of 2005, when 55% of respondents said they'd run their own offshore operations.
A lot has changed since 2005. For one, many of the captive operations have swelled in size and have staffs numbering 3,000 to 6,000. Apte and other analysts believe offshoring outfits that large are hard for parent companies to operate efficiently. In many cases, it's better to hand the business to outsourcing firms that have even larger-scale operations and can move employees from one project to another as the needs of a large customer base shift. The other major change is that the rising costs of doing business in India mean it no longer makes sense to move work there just for the labor-cost reductions. To pay off big-time, these shifts must include gains in productivity through process improvements and innovation that the top Indian outsourcing companies have mastered.
Other notable handoffs include the 2007 Infosys acquisition of Philips Electronics' business process outsourcing (BPO) operations in India, Thailand, and Poland; and the 2006 joint venture formed between Tata Consulting Services (TCS.BO) and Britain insurer Pearl Group. General Electric (GE) gave the trend a lot of momentum in 2005 by spinning out its Indian back-shop operations as Genpact in 2005. WNS itself was formed six years ago as a spinout from British Airways (BAY.L).
Economies of Scale
The Aviva deal gives WNS a chance to get bigger fast. The BPO specialist now has 22,000 employees. WNS bested a handful of other bidders. "This is a very sizable piece of business that makes us a company of a different scale," says WNS chairman Ramesh Shah. "We understood the business, and we wanted to have a long-term relationship with them."
Aviva had pioneered the strategy of hiring Indian outsourcing specialists to set up and temporarily run operations and then pass them off to Aviva. It was new to the market and figured it could benefit from the expertise of local players. WNS was one of its partners. But last year it reviewed its options and decided to reverse the way it does things. In a time of volatile currency and salary shifts, Aviva sought more predictable costs. Also, it believes WNS can wring more costs from its operations. "These companies have been better than corporations at driving efficiencies because they're specialists in the area," says Cathryn Riley, chairman of Aviva Global Services. She says the company is as committed as ever to having much of its work done in India, in spite of rising costs.
One of the advantages the Indian firms bring is their sheer size. Infosys, for instance, now has nearly 100,000 employees and plans to hire another 10,000 this quarter alone. These companies have hundreds of customers they can serve from their large delivery centers, using standard technologies and business practices.
A wild card in the shift from captive offshoring operations is the problems of big Western banks. Hard up for funds as a result of their mismanagement of real estate finances, they need cash. But analysts and executives caution that these firms may not be able to get the kind of money they're looking for by selling Indian operations, mainly because the Indians typically drive a hard bargain. "Sometimes the price is too high for us," says Kris Gopalakrishnan, chief executive at Infosys, which is now looking at two potential banking deals.
But Forrester's Apte believes the banks may eventually be forced to sell out even if it means settling for less. "Their desperation is going to grow," he says.
Source : Click
