Moving back-office operations to India from Washington, D.C. a year ago let the World Bank kill three birds with one stone.


First, the Bank slashed its costs by 15% in the lower-wage country. Second, the organization chopped down a backlog of accounts receivable and expense forms from hundreds of items to just a handful. And finally, the Indian accountants have helped the Bank get smarter even as they slogged through the work, says Chuck McDonough, director of the World Bank s accounting department.


“You say,  While you are doing this, why don t you think about how we can do the process better? ” McDonough says. “You get to clean out the backlog and you also get to reengineer the business.”


The World Bank s shift is part of a growing practice of sending back-office work from developed nations to developing countries. Thanks to a growing willingness to outsource operations, lower labor costs and technology improvements, firms are deciding to ship tasks such as customer contact, bill processing, medical transcription and even animation to countries such as India, the Philippines and Jamaica. Major corporations such as General Electric and British Airways pioneered this tactic with off-shore operations. But in recent years, a flurry of independent companies offering call center or other services have sprung up, and now prominent Indian information technology companies are jumping into the market.


So far, however, only a small portion of call center work and the like has actually crossed overseas. A survey last October by market research firm Gartner found that just 5% of U.S. corporations with revenues ranging from $100 million to $4 billion outsourced, or had the intention of outsourcing, portions of their back-office offshore. Concerns over security, the viability of providers and service quality were the main objections, Gartner found. There are other hurdles, not least of which is criticism from labor advocates that the trend amounts to eliminating decent-paying jobs in the U.S. while workers overseas are exploited. What s more, infrastructure isn t always reliable in the developing world, foreign accents over the phone can turn off U.S. consumers, and the very notion of moving work across the globe can unnerve potential clients. The extent to which back offices will move out of the office altogether and overseas remains unclear.

Gartner analyst Rebecca Scholl predicts off-shore business process outsourcing probably will not pick up significantly for the next two years. And the experience of current business-process outsourcing (BPO) clients will play a crucial role in determining the future of the practice. “It will take several successes to increase adoption,” she says. “But it will take one big splash to slow it down.”


If early adopters manage to avoid a messy failure, the prize is significant. Gartner pegged the global market for business process outsourcing in 2001 at $123.6 billion, and expects the market to reach $178.5 billion in 2005.


Moving business operations off-shore has precedents in the industrial and IT fields. Decades ago, manufacturers moved their factories overseas or entrusted their production needs to third-party outfits. The same general shift has occurred in information technology in the past several years. Firms based in countries such as Slovenia and India emerged to take on programming and application management tasks for U.S. companies at a fraction of the cost of paying in-house techies or hiring a firm with domestic coders.


General Electric is widely regarded as taking this globalization push to the back office. Several years ago, GE s financial services unit began operations in India; its headcount in the country has now reached 12,000 employees. GE Capital also has “Global Processing Centers” in China and Mexico, and the facilities provide around-the-clock in-bound and out-bound call centers, accounting services, IT help desks, document storage and software implementation. The Mexican facility alone processes more than 3.5 million documents a day, with turnaround times of as little as eight minutes.


British Airways also established a back-office presence in India with World Network Services, a data management unit. In April, the airline signed an agreement to sell 70% of the business to investment firm Warburg Pincus. Financial services firm Conseco is another big hitter to move back offices overseas. The Indianapolis-based company has operations in Jamaica and India, where it bought business process outsourcing firm When Conseco acquired Exl last April, it announced plans to move 2,000 jobs to India within roughly 21 months. The company has since scaled back the goal to a total of 1,500 jobs by the end of 2003, and so far, Exl has about 1,100 workers focused on Conseco tasks. Software giant Oracle also has plans to set up a 70-person unit in India to handle back-office work including payroll, human resources management and accounting.


With major corporations setting a precedent, independent BPOs have emerged to offer their services. And now India s information technology services industry is muscling into the market. Infosys Technologies, whose clients include Johnson Controls, Toshiba and Aetna, launched Progeon in April. Billed as a “business process management” subsidiary, Progeon received a $5 million investment from Infosys and a $20 million infusion from Citigroup Investments. Wipro is another Indian IT services firm to ramp up in back-office business process outsourcing. On August 1, Wipro said it acquired a 66% stake in Indian BPO Spectramind e-Services, raising its overall ownership in Spectramind to about 90%. Spectramind has about 3,100 employees serving seven clients with offerings including back-office processing and customer contact services.


Although much of the press on back-office operations overseas has focused on India, it isn t the only game in town. According to Gartner, other countries with business-process outsourcing facilities include the Philippines, Czechoslovakia and Hungary. Affiliated Computer Services (ACS), a Dallas-based IT and business process outsourcing firm, has operations in Jamaica, the Dominican Republic, Barbados, Mexico and Ghana.


As Gartner sees it, firms like ACS will lead the way when it comes to expanding the overseas back-office industry. Given the newness of the market, “In 2002, U.S. clients will prefer to contract with U.S.-based BPO providers, even if they in turn deliver their services offshore  with their own facility or though partnerships,” Gartner wrote in January.


The back-office tasks that can be done overseas vary widely. At the simpler end of the scale are functions such as data entry and expense form processing. Then there are contact centers, which can include inbound or outbound calls, email responses, and tech support. At the higher end are duties such as processing insurance policy applications or suggesting improvements to existing procedures.


Why are companies sending these tasks overseas? One factor is the general willingness, or even imperative, of corporations to focus on their “core competency.” Gartner s survey of corporations with revenues of $100 million to $4 billion showed that 25-30% of the firms were outsourcing to U.S. based firms. Cost then looms large. Contact centers in India can result in 30-40% cost savings, says Vail Dutto, CEO of San Ramon, Calif.-based InTelegy. InTelegy has focused on managing call centers onsite for clients, but in June forged a partnership with HCL Technologies of India. InTelegy now can offer clients use of a 400-seat call center in New Delhi at a billable rate of $18 an hour per Indian worker, vs. $30 to $35 an hour for their U.S. counterparts. “It s just really expensive to do business here in the U.S., particularly from a customer support standpoint,” Dutto says.


The cost benefits go beyond wages alone, Dutto says. Turnover at U.S. call centers can run at 100% and absenteeism can reach 14%, Dutto says. But those drop drastically in India, she suggests, partly because of door-to-door transport services for workers. Prestige also may play a role. Dutto says while call center jobs in the U.S. might be on par with fast-food work, in India they are equivalent to accountant or computer programmer positions. All employees at the InTelegy-HCL Technologies facility have a college degree.


The high level of employee education possible overseas figures into a second reason to locate back-office operations there: quality of work. Wharton operations and information management professor Ravi Aron argues that Indian employees drawn to back-office outfits perform the jobs at a better-than-expected level, and also tend to offer suggestions for improving the business process. “Companies start out for cost, stay on for quality, and then realize that they get a lot of managerial initiative,” he says. (See interview,  Business Processes Are Moving from the West to Other Parts of the World. )


Conseco and the World Bank support Aron s points. Since it began moving functions such as customer service and data processing to Exl, Conseco has found its operations in India meet or exceed service level standards 95% of the time, says Ruth Fattori, Conseco executive vice president, process and productivity. She suggests that enhancing business tactics almost comes naturally with migrating back-office work overseas. “You expose all the problems you had in the U.S.,” she says. “It really gives you an opportunity to stand back and look at a process and how you might improve it.”


The World Bank consciously chose to enlist its Indian employees in process improvement work, such as data mining. That s why the Bank s cost cutting was just 15%, McDonough says.


The World Bank started with 80 employees at its Chennai, India, facility, and now has 110. Although built before the Sept. 11 attacks, the facility has since provided an unexpected benefit: disaster preparation. “In terms of developing a business continuity plan, it has helped tremendously,” McDonough says. “If something happens in Chennai, we can run business out of Washington, and vice-versa.”


Also behind the offshore back-office trend are technological advances. Most if not all back-office work happens electronically, which means paper documents such as invoices have to be scanned into computers. Imaging technology has come so far that smudges on documents and signs of forgery now can be detected, McDonough says. Dutto suggests that improvements in networks and voice-over-Internet-Protocol have helped make global call center operations cost-effective and reliable. “Three years ago, you just couldn t do it,” she says.


Still, companies may question whether they want to do it. In the first place, transferring back-office operations overseas is a controversial tactic from a labor standpoint. During a time of economic uncertainty and anger at corporations, slashing U.S. jobs to hire abroad can raise eyebrows if not harsh criticism. There are concerns on the overseas end as well. Labor rights may not be honored in other countries, facilities can be cramped by U.S. standards and they can operate as data sweatshops, given that not all are air-conditioned.


Offshore back-office advocates respond that overseas workplaces and benefits can be world class. Advocates also suggest globalization may cost lower-skill jobs in the U.S. but prod more developed countries to create higher-level positions.


Other problems are cited. Infrastructure in India remains below developed-world standards, Fattori points out. Conseco has had trouble with its land-line telecommunications connection, and Fattori estimates the service is down 4-5% of the time. To get around the problem, Conseco uses satellite service for its India-based voice operations. “Anyone going to India would have to think of redundancy in terms of their telecom,” she says.


Customers also may ask how secure their precious customer data is, especially given concerns about the privacy of medical records and other personal information. Prasanna Keth, an Indian native who is launching a U.S.-based BPO named Dynamics, says those fears can be addressed by organizations such as the Customer Operations Performance Center, which certifies that contact centers have achieved an industry standard.


But even if the foreign operation can be trusted, what about threats from guerilla groups, or the lingering conflict between Pakistan and India over Kashmir? “(The) issue of nuclear warfare tends to frighten people way,” Dutto admits. The fear, though, is overblown, Keth says, because business process outsourcing facilities are located away from the hotspot. “India is a vast country, and the conflict is somewhere else,” he says.


Still, U.S. and European firms looking for a BPO overseas may worry their partner won t be around a year from now. Observers have suggested a glut of companies are rushing into the market, and not all will be able to make a profit. And despite evidence of top-quality work done overseas, not all offshore BPOs seem ready to deliver quality service. Dutto took a tour of 20 facilities in India earlier this year before selecting HCL Technologies, and noticed a “major difference” between well-funded operations and what she described as opportunistic ones.


Then there are cultural and societal differences, and client concerns about the resulting competency of foreign workers. In other words, if call center workers have never transferred balances between credit cards or shopped online, how can they help Americans do those things? Clients grill Dutto on this issue. “The main objection is,  Will they be able to understand enough of the U.S. culture to trouble-shoot? ” she asks.


The answer, advocates say, is setting up systems smartly and training, training, training. Indian-based BPO Daksh, for example, might spend three to four weeks training an employee to handle a simple process, and up to three months preparing a worker for a more complex task, says Arijit Sengupta, the company s director of business development.


Training also is seen as a solution to another cultural hurdle: foreign accents. Fattori says research shows that people on the U.S. east and west coasts don t mind the sound of a foreign voice, but other parts of the country are less tolerant. So Conseco s Indian call center workers are trained in “accent neutralization.” “Really, what we look for first is for them to slow down in their speech,” she says.


Daksh also pushes for “accent neutralization.” “They re not trying to imitate an American accent,” Sengupta says. “They re trying to speak in a neutral and clear way.”


Changing Indian accents to please American consumers might strike some as offensive. But companies trying to boost the offshore back-office approach seem more focused on expanding the business. So far InTelegy has two customers using its India call center, but Dutto admits it has been a “pretty tough” sell. A common response to her pitch, she says, is this: “It s 10,000 miles away and it s a third-world country, and you re talking about my customers.”


There may also be limits to how much a company wants to move its back-office operations overseas. Firms ought to maintain an understanding of how their business works, if only to avoid being dependent on one outsourcer, Fattori suggests. “If you completely give a process to a third party, and you give up your knowledge, then the cost to switch could be much higher later on,” she says.


So there are many cautions and hurdles, along with the possibility one well-publicized flop could put the brakes on shifting back-office operations overseas. But one Conseco problem in India speaks to the way the industry is growing for now. Exl employees are very desirable to new and expanding back-office operations, Fattori says. “We get people trained,” she says, “and then [another company] steals them from us.”