Of all the business processes that are moving to the developing world, one of the fastest-growing areas is human resources. Functions such as payroll, benefits administration and even recruiting have been outsourced for years; what is new now is that companies have begun to farm out a wide range of HR related activities — covering the entire employment cycle — to captive shared service centers or third-party providers in other countries.
A recent Knowledge at Wharton article written in collaboration with Aon cited a Conference Board survey in which more than 75% of the respondents noted that they already outsource (or plan to outsource) a major human resource function. The reasons for the explosion in HR outsourcing are easy to fathom. In part, the reason is the growing complexity of HR regulation, which drives up the costs of compliance. Companies recognize that HR administrative functions don’t generate revenues, but they can lower costs if outsourced. In addition, technology is now available that allows work to be done in low-wage countries, something that didn’t exist in the past. As a result, according to Dataquest, HR business-process outsourcing (BPO) is expected to grow to a $58.5 billion industry in the U.S. by 2005 from $21.7 billion in 2000.
As demand for HR outsourcing has grown, the field has attracted established consulting firms as well as fledgling entrepreneurs eager to tap emerging opportunities. Starting and sustaining a BPO services firm is no cakewalk in the current competitive environment. The challenges are even more daunting when the BPO operations are based in India, which has a long tradition of regulatory control, as Knowledge at Wharton discovered when it interviewed Manish Sabharwal, managing director of India Life Hewitt, India’s first and largest HR BPO provider.
India Life Hewitt recently took over Embrace, an HR services firm in Singapore. Earlier this year, India Life Hewitt was itself acquired by Hewitt Associates, the Illinois-based global HR consulting firm, which increased its stake to 100% from 40%. In the nine-month period ended June 30, 2003, Hewitt had gross revenues of $1.4 billion and net income of $65 million.
Sabharwal, who obtained his MBA degree at Wharton in 1996, spoke recently with Knowledge at Wharton about the challenges of managing an organization with some 400 clients spanning 12 locations in the Asia-Pacific region and on his strategy for growing India Life Hewitt.
Knowledge at Wharton: You have said in the past that your business ideas were inspired by classes at Wharton. Could you tell us about that?
Sabharwal: India Life wouldn’t be around were it not for Wharton and a class I took with Olivia S. Mitchell, a professor of insurance and risk management and director of the school’s Pension Research Council. The idea got seeded when Olivia was talking about the impact of pension reforms around the world. I was looking for opportunities at that time, and things came together. Our company started with pension management but the venture has greatly evolved over time.
I think VCs who started incubators got it wrong; business schools like Wharton are the best incubators in the world. I milked the school’s ecosystem. India Life was my final project in six classes. Many professors helped me think things through, and I had a group of first-year students do a field application project. I used the summer between the two years to travel to India and refine the plan, and then moved back to India straight after school.
I guess it would make a better story if I said all my professors gave me bad grades for my business plan. But they didn’t; they thought it would do well. In retrospect, entrepreneurship is like hypothesis testing. You can never prove anything right, but you have to prove it wrong. Wharton helped me eliminate many potential false starts. Olivia and her class were brilliant. They laid out a roadmap for pension reform that has played out just as she said it would. It was a movie I hadn’t seen before, and having a vision for how it would end gave me unique leverage.
Knowledge at Wharton: What opportunity led you to start India Life?
Sabharwal: When I returned to India in 1996 I was focused on pension management. But it started raining prime ministers, and pension reform got politically tangled. In fact, it still hasn’t happened today. But luckily all the CFOs I met said their problem was not pension management but pension administration. If we wanted to do one, we had to do the other — “love me, love my dog.” We thought we’d make an interim detour pending reform, and that led to payroll, benefits, self-service and finally full HR outsourcing. So we abandoned the original plan, and here we are today.
Knowledge at Wharton: What could India Life bring to the table that others couldn’t?
Sabharwal: For ages, we were the only game in town. Global investors were intimidated by the overly complex Indian and Asian regulatory systems, labor laws and multiple languages. We did many things wrong, but I think we got a few things right.
The first was deciding to stay vertical. Early on, we got religious about being an inch wide and a mile deep, rather than being a mile wide and an inch deep. We decided to do only HR and nothing else. The next was our big technology leap. We aggressively embraced employee self-service, live chat, email response, interactive voice response (IVR), call centers, etc. All these were commonplace in advanced markets but not available in India and Asia.
We also thought differently about our location than other companies sometimes do. Everybody looks at India as a production base, we looked at India as a market — and in doing that, we inhabited a different thought-world. Because we built our business in India, we were able to leapfrog rapidly into Asia — into countries like Singapore.
For me, the question as a start-up – I had raised a teeny $2 million in venture capital from the View Group – was whether to move back to the U.S. and compete with the big boys or to do it here in India. I decided that it would be good for us to learn in India and expand outside later.
Knowledge at Wharton: How did Hewitt get involved with India Life?
Sabharwal: We kicked their teeth in for three years! They had an operation in India that had 40 customers in three years, and we had 300 customers after four years.
Of course, I’m just kidding. I guess they were attracted to our vertical focus, technology, management team and client base.
As multinationals re-organize from geographic kingdoms to product kingdoms, shared services get huge traction. That is what lifted our boat in Asia. It was obviously helped by the fact that Asia is a big place, but every country is very small and the diverse regulatory environments, languages, etc., make captive or in-house shared services a lot less viable.
Hewitt bought 40% of India Life two years ago, and earlier this year raised it to 100%. Hewitt wanted to buy us fully in the first stage but our VC didn’t agree. The last two years have been a bloody lesson in how the theoretical elegance of co-existence of financial and strategic investors is difficult to implement in practice. They have different time horizons, agendas, DNA, etc. Being integrated with Hewitt as the industry matures allows us to focus on the right variables.
Knowledge at Wharton: What competition did you face in India when you decided to offer HR BPO services?
Sabharwal: As I said earlier, we didn’t have much competition; there were only a few small popcorn stands in each city. There was no regional player with our kind of technology. We offered full service on the web, disaster recovery, employee self-service, business continuity, etc. We created a major outsourcing company that could have been anywhere in the world; it just happened to be in India.
Knowledge at Wharton: But India is a very cost-sensitive market. How did you penetrate this market with your cost-intensive technology?
Sabharwal: By offering a regional and world-class solution. We were leveraging across India and Asia, and didn’t have the outdated concept of “export quality.” Clients found the single window attractive, which is why 75% of our client base is multinational. Local players in most Asian markets haven’t taken a bite yet. I think they’re getting there, but they haven’t taken the leap.
Knowledge at Wharton: Why not?
Sabharwal: The biggest challenge we face with Asian companies centers around redeployment of their existing people. I am not a great believer in the brownfield outsourcing model that involves taking on their people, systems, infrastructure, etc. I’ve always said that our model is greenfield. We will use our systems and our people but not the other way round.
The main reason for their resistance to outsourcing is they don’t want to make the hard people decisions. This issue is common across Asia. The approach of these companies is less clinical and numbers-based. But the situation is changing quite rapidly. The economics of outsourcing are now so compelling that attitudes are changing among Asian companies.
Knowledge at Wharton: You mean, heavily staffed companies are now willing to undergo the pain of laying off workers?
Sabharwal: Until the bone is reached, there’s a lot of fat. Once you reach the bone, a survival instinct kicks in and hard decisions get made. Unfortunately, this often happens as part of a crisis. But it is much more effective if done proactively as a positive decision to improve processes, induct technology or increase employee satisfaction.
Knowledge at Wharton: BPO providers often argue that they can slash costs by 40% to 60% by moving back-office operations to low-cost countries like India. Is this true in the HR field?
Sabharwal: Absolutely. But the major challenge is getting the client to agree to what their fully loaded in-house costs are. Companies are better at capturing the costs of products than processes, but obviously I would say that.
But using India or the costs of any offshore destination to sell is very dangerous. If pricing is your only differentiator, it quickly becomes a race to the bottom. Even if you win the rat race, you are still a rat — and we have seen that quickly become a rate race.
If I were to do this again, I would acquire an overseas front end early on. Having multiple delivery centers shifts the argument from offshore outsourcing to out-locating. That is exactly what we did when we acquired Embrace in Singapore. We now deliver our services from multiple centres in Asia as locals, and do some heavy plumbing in India.
Knowledge at Wharton: Could you explain your strategy further? You’ve spoken about your company having a front-end in Singapore and a back-end in India. How does that model work?
Sabharwal: After we acquired Embrace, we hollowed it out. We took the IT operations of Embrace in the first phase back to India, and now we’re moving operations too. The client services and marketing operations remain in Singapore, but the plumbing and the heavy push-ups get done in India. Singapore is the thin layer on top of everything else.
But anything for which the client doesn’t need a warm body, goes to India. In IT, this includes development, maintenance, database administration, contact centers, etc. In processing, it’s everything from gross to net in payroll, claims processing, flex-plan administration. In short, anything that doesn’t require you to sit in front of the customer can go to India. As I said earlier, Asia is a big place but every country is very small. So any regional offering without centralized offshore delivery is unviable, to my mind.
Knowledge at Wharton: How do you manage the interface between what happens in Singapore and India?
Sabharwal: Our experience in HR shows that employee questions are high in emotion and frequency, but their answers generally are straightforward rather than sophisticated. These answers can be pre-formatted. We direct employees to our suite of self-service operations: 24-hour email response, web log-in, live web chat, call-center support, etc.
But the employers’ world is different. Questions you get from employers are low in frequency but high in sophistication. You can’t pre-format these responses. So we handle employees out of India, and have our relationship managers handle employers out of Singapore.
There are obviously some transmission losses, but we are trying to minimize those.
This process just gets better with time. You can’t write the best process without some hiccups and a few bloody noses.
Knowledge at Wharton: What specific advantage does having the front-end based in Singapore or Hong Kong have that you wouldn’t have had in India?
Sabharwal: The biggest objection to outsourcing in general is that you lose the intimacy of an in-house operation. Offshore outsourcing involves a bigger leap. Being local allows us to counter those objections and also be more effective at business development. Every country is unique and we will always need somebody local. Could I do away with these people and do everything from India? Possibly, if the customers allow me to do that, but I don’t think that is going to happen. And it doesn’t bother me.
Knowledge at Wharton: One major challenge with cross-border outsourcing appears to be the reluctance of companies to give up control. How have you dealt with that?
Sabharwal: That was my primary motivation for doing the Hewitt deal. Every business development and operational challenge is surmountable; there are process, people or technology solutions. But there is a touchy-feely factor called counter-party risk. That is the risk to your reputation if the company to which you have outsourced work doesn’t come through. That was the biggest challenge for India Life, because we were a start-up and our brand was hardly known.
One of the biggest neutralizers of that objection was the gift-wrapping that came with our becoming part of Hewitt. We now have $1.8 billion in revenues, we handle 16 million employees globally, and have an annual IT spend of $350 million. When our customers or prospects hear that, they realize there is much more at stake than their contract.
In our business people don’t have patience for slick presentations. Prospects just want the phone number of one of our clients – say, the HR head of Phillips or HP — to talk to them and check how the process worked.
Knowledge at Wharton: The gift-wrapping of the Hewitt deal is undoubtedly a great asset. But that comes with its own baggage, doesn’t it? How do you navigate those challenges?
Sabharwal: Absolutely. Gift-wrapping doesn’t come without strings, right? I think every company and every industry goes through an evolution, and BPO is moving to the next level of evolution. The bureaucratization that is inevitable in a big organization also lends it some predictability. But it’s certainly a challenge. You’re riding a horse, and suddenly someone puts a cart behind you.
It was different for India Life before Hewitt came in. But I am clear that the skill-set needed for India Life now — handling 350,000 employees in 400 companies in many different countries — is very different from our instincts of the past.
I guess Hewitt and I have very different approaches. The impulse of preservation is very different from that of creation. I keep telling Hewitt that the removal of resource constraints, which was one of my biggest attractions, does not compensate for the cholesterol that comes with becoming part of a big organization. But I guess each company has to go through different stages, and if you don’t make that move into a more structured phase, you fall far back. You need deep pockets in this business. God has switched sides in BPO. She is no longer on the side of the best shots; she is with the biggest armies.
Knowledge at Wharton: In this process of evolving into a large company, how do you maintain agility and customer satisfaction?
Sabharwal: I don’t have much experience with big companies – this is my first. But I think a good way to run a big company is to have many small companies inside it – though I’m still testing that model. The best way to organize is around clients. Finger-pointing or falling between the chairs is kept to a minimum level. The accountability sacrifice is the biggest one you make in the evolution from a small to a big company.
On the positive side, the resource constraints are also off. Even at this stage of Hewittization, I think it’s a net gain. A water pistol won’t get you very far if you want to meet customer expectations. In HR, the technology treadmill is becoming so hard for companies to stay on. For us it would have been impossible without Hewitt.
I think it’s very dangerous to build a BPO service on somebody else’s software. Shared services software has to be configurable, reusable, interoperable — and that is a different world. Could we have built India Life Hewitt on Peoplesoft? I think not. In any services company, outsourcing IT operations is a very vulnerable position. For us, that was an important factor in joining hands with Hewitt.
Knowledge at Wharton: In addition to resources and branding, how else do you benefit by being part of Hewitt?
Sabharwal: The organizational software that comes with it. They’ve seen the movie before, having been in the business for 25 years. I am picking low-hanging fruit from their processes, technology, and so much else. The problems of HR outsourcing in Asia are not very different from those in other parts of the world.
Knowledge at Wharton: You have been quoted as saying you plan to pan out to other Asia-Pacific countries such as the Philippines and Thailand. Would you consider these low-cost locations for your back-end or front-end operations?
Sabharwal: Right now the strategy is to do all the plumbing in India.
Knowledge at Wharton: So these new locations won’t offer any competition to India in terms of back-end processes?
Sabharwal: I’m agnostic about that, but I don’t think these locations can match what India can offer at this stage.
Knowledge at Wharton: You’re also said to be looking at Australia and New Zealand…
Sabharwal: These locations would also be serviced out of India.
Knowledge at Wharton: No company that aims to gain a dominant global position can afford to ignore China. How does China fit into your Asia-Pacific strategy?
Sabharwal: China is a difficult market; its labor laws differ from province to province. China is a puzzle we haven’t cracked yet. We’re working on it. I hope that we will be able to service that market out of India. But it looks like we may have to set up a processing center just for China, probably next year. It’s not something we have a full handle on right now.
Knowledge at Wharton: Are any more alliances or acquisitions in the pipeline?
Sabharwal: Hewitt recently bought a company called Cyborg which has a large Asia-Pacific operation that we are integrating into Embrace.
Knowledge at Wharton: What about payroll major ADP? What kind of competition does it offer?
Sabharwal: ADP, Exult etc. are all potential players. But they don’t have the integrated business model and offshore back-office that Asia needs.
Knowledge at Wharton: Would you look at alliances with them?
Sabharwal: Of course not; we’ll eat their lunch. Most global players are hesitant about setting up operations in Asia because of its complexity. But coming from India, we didn’t have a problem because that is the most complex location of all. So Asia didn’t intimidate us.
Knowledge at Wharton: As globalization gathers pace, the cost differential between developed countries and developing countries will shrink. This is already happening in the case of call-centers. How will India Life Hewitt grapple with this potential challenge?
Sabharwal: We know that for now our cost structure is a competitive advantage but selling on price is a slippery slope. People come to India Life for our domain knowledge, proven track record of execution, re-engineering capabilities and so much else. Obviously price is a ticket to entry that you have to get right but there is much more to the decision.
My sense is that commoditization occurs in every business, and you’ve got to rip up the road behind you. That is why we moved from payroll to HR management, recruitment administration, performance management, training administration and other types of activities.
I’m also not sure that India’s competitive advantage will go away in a hurry. We compared the Philippines and China, and India’s price performance equation for our business is not going away anytime soon. The Indian mind is quite agile and there is an ecosystem and hinterland that is hard to replicate. I now live in efficient Singapore and believe that one of the upsides of India’s messiness and problems is creativity, questioning and a hunger for jobs.
Knowledge at Wharton: Where do you see your company going in the next three years?
Sabharwal: Our agenda is to be Mr. Asia. Nobody gets fired for giving business to Hewitt. When you’re the standard, you are so far ahead that it’s difficult for others to keep up. Once we’ve done that, we have to provide a competitive edge to Hewitt globally. We’ve already begun to migrate some of Hewitt’s operations to India. That’s only going to accelerate in the future.
Knowledge at Wharton: Has there been resistance to the migration of Hewitt operations from the U.S. to India?
Sabharwal: Originally, Hewitt was hesitant to move out operations when it owned only 40% of India Life, but now, with 100% ownership, that has changed.
Knowledge at Wharton: What about the larger question posed by critics of the BPO phenomenon — the charge that they are stealing good service-sector jobs from the West and moving them overseas? In several states in the U.S. there’s a backlash, with legislators looking at some sort of ban on such outsourcing.
Sabharwal: A lot of it is unfair whining. It’s a logical culmination of the globalization of labor markets. More importantly, people are doing this because they have to. Pricing power is dead and productivity and technology will only get you so far. Hewitt and the world are not offshoring operations because it is a nice thing to do; it’s about survival and competitive advantage. An ability to offshore could be your gun in this knife fight.
Knowledge at Wharton: Some of the opposition to BPO stems from the fact that the practices of providers aren’t always above board. What do you think?
Sabharwal: It may be true that some offshore players haven’t been above board or long-term players, but drunk driving is never an argument against cars. This is a gold rush, and the market has begun to separate the men from the boys. Quality players are floating to the top and the rest are out of money, customers and runway.
It would be also be useful to highlight what some Indians are calling the Wimbledon effect. Just as Wimbledon is played in England but no Britisher ever wins it, almost every successful BPO operation is owned by somebody from overseas. This doesn’t include the value captured as customers.
Many of us in emerging markets like India, who vigorously fought to deregulate and break down our own walls, feel badly let down by the attempt to now build walls against us. Good economics is not always good politics — but I have faith that this too shall pass. The economics of offshoring are irresistible. The offshoring wave may be delayed, but it is unstoppable.
Knowledge at Wharton: One last question. Do you plan to remain vertical – that is, focus exclusively on HR?
Sabharwal: Absolutely. That’s the only way we can avoid commoditization. Some potential clients say that they will only give us HR if we also take travel and other operations. But that is unacceptable. It would corrupt our DNA. That is why the opportunist or generalist BPO company is dead.