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WSJ Article on "Shedding Their India Support Service Centers"

On June 8, 2009, the Wall Street Journal published an article entitled “Firms Shed India Center to Cut Costs ”.

There is an important distinction in this article that appears to be missed by many people. This is not a backlash to outsourcing; what these companies are discovering is that to run a captive center in India, or any location, is not just about a cost-effective solution for leveraging low-cost labor, it is also about performance.

First, the article discusses that several companies have “shut down” their captive organizations by selling them to outsource providers. Captive organizations are effectively offshore shared service organizations. The captive is part of the company; its employees are employees of the company; the company manages the work and hence, the results. As mentioned in the article, it has been proven that captive organizations are not in themselves cost-effective solutions; performance standards must also be set and managed. Both Forrester Research and TPI, Inc., have done studies to substantiate the fact that captives unto themselves are not cost-effective.

Second, the companies which are selling their captives are setting up long-term relationships with the outsource provider to whom they sold their captive. The jobs are not coming back to the US. As of today, it is still a) more cost-effective to get the work done in a low-cost labor market, and b) the outsourcing of non-core transaction work enables companies to focus on their core business.

We at CandidAdvisors believe that outsourcing of non-core work is here to stay, whether onshore or offshore. Companies are starting to increase their implementation of hybrid solutions, which are a combination of outsourcing and shared services. This approach, with the establishment of the right oversight and governance from a performance perspective, enables companies to manage the support service (i.e., non-core) areas efficiently and effectively, in providing cost-effective solutions that meet statutory requirements, provide key information for decision-making and meet key performance standards

We expect that the trend of leveraging the most cost-effective and efficient way to provide support services will continue and even escalate. But while cost is critical, companies must focus on managing integrated performance to provide better, more reliable information on a real-time basis. This performance point is critical, and will not be achieved by taking solely a cost-savings perspective.

We believe that the industry has reached an inflection point, and needs to start addressing their support services areas holistically, tightly coupling them to their retained organization (support services customers), in order to achieve the desired benefits and be positioned for the future.

A Disturbing Trend? By Bill Frech, CandidAdvisors Founding Partner

Outsourcing is here to stay whether it be onshore or offshore. Companies are in business to make a profit so they will always strive to have lower costs in parts of their business when they can. Today this may mean moving some work offshore to lower labor cost areas.

However, I have heard an idea expressed by a couple of people who were job hunting that is concerning. Given it is only two people it cannot be called a trend, but if I have stumbled on two people thinking this way there must be others.

Both these people expressed the thought that since they had lost there jobs and they have heard that jobs were moving to India that they should move to India to pursue their career. These were both people who had never been to India and sounded as though they had not done much traveling outside of the US.

One of the individuals was on a talk show phone in with the CEO of an Indian company. The CEO was basically explaining about the cost differential between US salaries and Indian salaries. He said that the Indian salaries although lower than the US salaries allowed the Indian employees to live at a comparable standard to how they would live in the US.

What concerns me is these two people, these two data points, seem to believe that living in India would be like living in the US. They have no understanding of the cultural differences, the differences in the standard of living for the majority of people in India, and/or what it would be like relocating to a foreign country.

Moving to India to find a job is not the solution for the vast majority of people. Maybe it would be a nice adventure if you are young, unmarried and have a desire to see the world and different cultures, but having lived overseas it is not a good solution for the average person, especially if they are venturing forth on their own with no safety net.

Shared Services, Outsourcing, Offshoring … Are Any of These the Right Solution for My Company? By Bill Frech

What do you do in this economic environment? There is pressure to cut costs and improve results. However, it is well known that cost cutting exercises alone do not have the desired long term impact without the associated transformation and process improvement.

Today there are so many options and many conflicting stories about problems and successes of the various approaches. However, the one thing you should not do is do nothing.

Rumors and studies abound.

• Companies are pulling their call centers out of India
• Captives are more expensive than Offshore Outsourcing
• Shared services and captives give you better cost savings results than outsourcing
• The budget the President presented will penalize companies for outsourcing

The bottom line is that, as in the past, companies need a business case as part of a strategic or business plan to understand the cost, risks and benefits for their strategy.

If part of the solution contains outsourcing, offshoring, a captive, shared services and/or improving the work in place then the company will need to ensure the goals, objectives, and costs are clearly documented. For any outsourcing initiative this is done in part through a contract with Service Level Agreements (SLAs), for internal initiative a similar but less formal contract should be implemented so there are clear measures for success. Even if your plan is to leave work locally, where it is today, there must be clear goals and objectives for improvement initiatives if they are to succeed.

Today, most companies are planning and implementing hybrid solutions which are a combination of the solutions options that are structured to best meet their goals while maintaining focus on core competencies. If we use a hypothetical company that wants to improve their Finance and Accounting area they may come up with a solution similar to the following:

• Accounts Payable – Offshore outsourced, simple repetitive work
• Accounts Receivable – Posting offshore outsourced, same logic as AP
• Billing – Stays local due to the need for customer interaction, but improve and simplify the process
• Credit – Sales force interfaces with credit group that is offshore outsourced
• General accounting – A combination of local and shared service because it is more complex, takes judgement that is not documented and may require account creation
• Fixed Assets – This company does a lot of capital projects so the fixed assets move to the shared service operation
• Financial analysis – A combination of local and shared service center operation with a stated goal and plan to move more to the shared service operation

In this example, you can see that the work being done using a combination of solutions that the client feels best meets their needs and goals while addressing any risks that they have identified.

Of course a business plan for the creation of a shared service center, the offshore outsourcing and the determination of what to leave local was created outlining costs, benefits, risks and vision and plan evaluated several viable solutions.

Another important point is that the plan you develop must be a living document. You must constantly reevaluate the solution in light of the process improvements that have been implemented, the economic situation, changes in the company goals, etc. As noted in the example above this company has a vision to move more analytical work into the shared service center to minimize the work required locally and to help standardize their analysis.

There is no one right answer for companies. Each company must look at their risk profile, the urgency of the need for improvement, their culture, and their ability to change to help determine the right solution.

Start With a Plan, By Bill Frech, Founding Partner CandidAdvisors

"If you don't know where you are going, any road will get you there." - Lewis Carroll, Alice in Wonderland

When you are undertaking a change initiative, no matter how large or small I am a firm believer that you must start with a plan.

If it is a small undertaking you may be able to use a simple project plan that includes the goals and objectives of the project (including benefits).

However if you are undertaking a larger improvement initiative which involves multiple processes, multiple functional areas, multiple departments, significant capital expenditure, a number of internal and/or external resources you will need a much more comprehensive business or strategic plan. The challenge with these larger initiatives are that they will probably involve more groups with many touch points but there is a high probability that there may be multiple possible solutions.

Given this complexity you can use the development of this business plan to:

• Involve the effected parties
• Build support and buy-in for the effort
• Clearly articulate the goals of the initiative
• Outline and understand potential solutions
• Select the optimal solution to meet your goals
• Identify gaps in your plan (e.g., resources, capital, etc.)
• Understand and document the risks and benefits of your improvement effort
• Develop a cost/benefit plan with a project timeline
• Communicate with senior management to ensure alignment and support
• Use as a communication vehicle to a broader audience

Another benefit of a plan of this nature is you are able to understand various solution options, understand their cost, benefit, risk, and acceptability to the company and ultimate narrow your options down to the approach supported by senior management.

For example, a client I was working with had two main goals reduce and stabilize there “back-office” costs while setting the stage for future expansion. After careful evaluation and involvement of most of the effected parties we were able to develop a plan that, although global, started with the United States operations and defined how each process would be handled (e.g., remain local, move to a shared service center, or outsource). We also developed a detailed plan for the next steps and a business case so they would understand the costs and benefits of moving forward.

This blog is a brief overview of what should be done to plan for a major change. I have been involved in many of these efforts with all types of companies (i.e., Retail, Entertainment, Pharmaceutical, Manufacturing, Energy, etc.) and have found it the best way to start large change initiatives. You can be sure everyone understands what you are proposing and you will understand the level of senior management support. Best of all, depending upon the scope of your change initiative and the level of detail your organization requires a plan of this nature can be completed in less than 3 months.