Tuesday, December 30, 2003
The backoffice moves
Okay, so articles on offshoring are the flavour of the year and the Economist joins in with a long-ish article. The Economist remains gung-ho about the positive effects of offshoring, quoting from McKinsey study that predicts a benefit of $1.12-$1.14 per USD spent going offshore. Stephen Roach of course, manages to remain pessimistic :)
The offshoring business remains predominantly English-speaking. It is dominated by American and British companies outsourcing their internal operations to third parties in places such as Ireland, Canada and South Africa, but most of all in India. The fact that America and Britain have relatively liberal employment laws has also been influential in the shift of business overseas. If offshoring is, as McKinsey claims, a “win-win� formula for both sides, the process is set to give English-speaking countries a significant competitive advantage.
India looks likely to remain the most attractive offshoring destination for some time. It sees its main competitors as China and Malaysia. But Sanjukta Pal, a consultant with PricewaterhouseCoopers, says that the cost of operations in India is currently 37% lower than in China and 17% lower than in Malaysia.
For the future, offshoring promises to diminish the effects of the demographic crunch in countries where the ratio of the working population to the total is set to fall. HSBC reckons that America would require an extra 8.6m workers to maintain the ratio at its 2000 level for 20 years. Countries that are reluctant to allow in immigrant workers to do their unfilled jobs now have the option of sending some of those jobs out to the workers, before they even think of emigrating.
Despite all the advantages of offshoring, there are also disadvantages. With voice services—such as directory enquiries, for example—local knowledge is often important. So too are accents and culture.
Whatever the truth of the matter, there is no doubt that customers with complex queries requiring local understanding do not respond well to far-off operators repeating parrot-fashion a series of learned responses. Convergys, one of the world's biggest providers of “contact-centre services�, advises companies to shift simple queries offshore while retaining the more complex ones on the same shore as the caller. It calls this process “rightshoring�, and estimates that about 80% of the companies that it is working with in Britain are planning to split their call-centre operations in this way.
Still the tip of the iceberg?
Many companies have not yet taken anything like full advantage of offshoring. Harris Miller, president of the Information Technology Association of America (ITAA), a lobby group, says that offshore locations have so far captured just 3-4% of all American companies' outsourcing. The bulk remains onshore in the hands of big firms such as Accenture, CSC, EDS and IBM. A report by Forrester released at the beginning of this week says that 60% of Fortune 1,000 companies are doing nothing, or are only just beginning to investigate the potential of offshoring (see chart 2). Mr Harris says some big companies have told him that up to 40% of their outsourcing business could end up offshore. That suggests the industry still has a long way to grow.
The threat to India's dominance of the business faces a threat, according to the article.
firms such as AT&T are working on speech-recognition software that might, says Hossein Eslambolchi, AT&T's chief technology officer, soon be good enough to replace a lot of the routine inquiries currently handled in call centres. Indian call-centre employees, in other words, might soon find themselves competing with “offshore� computers in New Jersey, and Indian doctors currently providing remote diagnosis of patients in other countries might find themselves undercut by a supercomputer's analysis of, say, digital mammograms and dental records.
The offshoring business remains predominantly English-speaking. It is dominated by American and British companies outsourcing their internal operations to third parties in places such as Ireland, Canada and South Africa, but most of all in India. The fact that America and Britain have relatively liberal employment laws has also been influential in the shift of business overseas. If offshoring is, as McKinsey claims, a “win-win� formula for both sides, the process is set to give English-speaking countries a significant competitive advantage.
India looks likely to remain the most attractive offshoring destination for some time. It sees its main competitors as China and Malaysia. But Sanjukta Pal, a consultant with PricewaterhouseCoopers, says that the cost of operations in India is currently 37% lower than in China and 17% lower than in Malaysia.
For the future, offshoring promises to diminish the effects of the demographic crunch in countries where the ratio of the working population to the total is set to fall. HSBC reckons that America would require an extra 8.6m workers to maintain the ratio at its 2000 level for 20 years. Countries that are reluctant to allow in immigrant workers to do their unfilled jobs now have the option of sending some of those jobs out to the workers, before they even think of emigrating.
Despite all the advantages of offshoring, there are also disadvantages. With voice services—such as directory enquiries, for example—local knowledge is often important. So too are accents and culture.
Whatever the truth of the matter, there is no doubt that customers with complex queries requiring local understanding do not respond well to far-off operators repeating parrot-fashion a series of learned responses. Convergys, one of the world's biggest providers of “contact-centre services�, advises companies to shift simple queries offshore while retaining the more complex ones on the same shore as the caller. It calls this process “rightshoring�, and estimates that about 80% of the companies that it is working with in Britain are planning to split their call-centre operations in this way.
Still the tip of the iceberg?
Many companies have not yet taken anything like full advantage of offshoring. Harris Miller, president of the Information Technology Association of America (ITAA), a lobby group, says that offshore locations have so far captured just 3-4% of all American companies' outsourcing. The bulk remains onshore in the hands of big firms such as Accenture, CSC, EDS and IBM. A report by Forrester released at the beginning of this week says that 60% of Fortune 1,000 companies are doing nothing, or are only just beginning to investigate the potential of offshoring (see chart 2). Mr Harris says some big companies have told him that up to 40% of their outsourcing business could end up offshore. That suggests the industry still has a long way to grow.
The threat to India's dominance of the business faces a threat, according to the article.
firms such as AT&T are working on speech-recognition software that might, says Hossein Eslambolchi, AT&T's chief technology officer, soon be good enough to replace a lot of the routine inquiries currently handled in call centres. Indian call-centre employees, in other words, might soon find themselves competing with “offshore� computers in New Jersey, and Indian doctors currently providing remote diagnosis of patients in other countries might find themselves undercut by a supercomputer's analysis of, say, digital mammograms and dental records.
