Globalization, which swept the manufacturing field in the past, is now transforming the services sector. Decentralized production of information-intensive services for global markets — coupled with the international integration of labor markets via the Internet– has led to labor-intensive work moving across national borders to countries where it can be done efficiently. 


What began as a trickle in 1995 with a few multinational firms locating call centers in India and the Philippines has exploded into a phenomenon that spans not just call centers but also transaction processing, claims processing, data entry and transcription. More recently, processes that call for greater analytical skills — such as MIS reporting, cash-flow forecasting and yield analysis and risk calibration (in the insurance and credit-card industries) — have also begun to migrate offshore. A global supply-chain of information and expertise that stretches from Madras to Manhattan via places like Mauritius and Manila is being forged.


These trends have several implications. In order to explore them thoroughly, Knowledge at Wharton turned to Ravi Aron, a Wharton professor of operations and information management, who helped bring together a panel of experts representing different perspectives on business process outsourcing (BPO). Beginning with a set of statistics to set the stage, the panel — which Aron moderated — went on to discuss several issues, including:


1        What do these trends mean for the corporation?

2        Do any benefits — beyond cost — accrue to corporations that migrate these processes offshore?

3        Are corporations opening themselves to unacceptable downside risks and outsourcing their so-called core competence?

4        What is the optimal governance model that corporations should look to: Should they set up captive centers or enter into joint ventures or outsource their processes to a third-party player?



What the Numbers Show

Rebecca S. Scholl is a principal analyst in Gartner Research, a market research and consulting firm in Stamford, Conn. She worked with Wharton on the Gartner-Wharton BPO survey sponsored by the Wharton e-Business Initiative (WeBI). Aron spoke with her about the overall trends she sees in her research.


Aron: What volume of processes will be outsourced in 2003-04? How much of this will go offshore?


Scholl: Gartner estimates that the worldwide BPO market was worth $110 billion in 2002 and will grow to $173 billion in 2007, at a 9.5% compounded annual growth rate. Offshore BPO services — where work is sent to another country — will grow from $1.3 billion in 2002 to $24.3 billion in 2007 at an 80% CAGR. Offshore BPO will grow to represent 14% of the total BPO market in 2007.


Aron:  What are the leading destinations to which processes are being off-shored? Who are the emerging players?


Scholl: The leading destinations for offshore BPO today include India and the Philippines for contact-center outsourcing (where there are multiple providers serving multiple clients). Other initiatives appear promising in Canada, Mexico, the Caribbean, Costa Rica, South Africa, Eastern Europe (Hungary, Czech Republic, Poland), but mostly in an “insourcing” environment. By insourcing I mean a model where a company builds its own delivery center offshore. There is very minor work currently in China, particularly in the domain of data entry and data processing.


Aron: Smaller countries that are strategically located geographically, such as Mauritius and Singapore, could also emerge as niche players. Mauritius can offer spillover capacity and back-up facilities for large sites in India and in the Indian Ocean rim of countries, including South Africa. Singapore could emerge as a hub in a hub-and-spoke model that executes at the high-end of the global supply-chain in such areas as bio-informatics and equity research, while the spokes form the large service factories in India and the Philippines.


This brings us to a related issue. Which are the top industries that outsource their processes? How much of their work is moving overseas?


Scholl: Top industries for BPO include financial services, healthcare and manufacturing. High growth will come from the transportation, government, retail and telecom space.  With regards to offshore, top industries are financial services, healthcare and manufacturing. But as more horizontal processes such as HR and finance move offshore, there will be adoption in a wider range of industries.


Aron: Is the decision to migrate or outsource a process seen as a strategic (as opposed to tactical or operational) decision? Who makes this decision within the firm? CEOs, CFOs or CTOs?


Scholl: Key decision-makers for domestic BPO are the CFOs and the CEOS (in large enterprises the CFO plays a larger role and in smaller enterprises the CEO plays a larger role). CIOs and CTOs are rarely involved in the initial decision to outsource and typically get involved during the provider selection process. Most offshore BPO is highly tactical today (CIOs are more involved in offshore BPO as they are in domestic BPO).


Aron: My research on how risk plays a role in the choice of governance model also reflects this reality – that the senior managements of corporations are actively involved in making this decision. A related question: Are there factors that you think could slow or even reverse the off-shoring of processes?


Scholl: An economic upswing, non-tariff barriers, increase in attrition rates, geopolitical uncertainty, and high-profile failures could all contribute to reversing the process of off-shoring. However I believe the trends towards offshoring will continue despite these bumps in the road. Ultimately we should not be discussing onshore vs. offshore but the value of global delivery models.