Offshoring by Industry Leaders

Each of the companies profiled below has taken a different approach to offshoring, but one universal lesson can be learned from each: the key to offshore success lies in employing innovative deal structures to complement a deliberate, well-developed global sourcing strategy…and thereby remain or become a leading player in your industry.

HI TECH: DELL

As of January 2004, approximately 52% of Dell’s 46,000 employees were located outside the US, and that percentage is increasing. Of the roughly 7,000 jobs Dell added in 2003, only 1,000 were in the U.S; and since January 2004, they have added approximately 4,000 employees in India alone. Dell intends to further increase its presence in India and China, and has a self-described policy of "all-shoring" wherever the right skills are to meet the needs of its global business.

Dell International Services, the support and services division of the company, is now present in India, Panama, China, Morocco, Ireland, Denmark, Slovakia and the Czech Republic. Additionally, Dell has outsourced some of its customer support to 3rd party providers such as eTelecare International in the Philippines.

In India, Dell has captive centers in Bangalore, Hyderabad, and Chandigarh providing global customer support as well as back office functions. Together, these three captive centers employ a conservatively estimated 8,000 persons. Although Dell rerouted tech support for corporate customers of certain products back to the U.S. after receiving service complaints, they have not scaled back their operations in India. Rather, since February 2004 they have been recruiting in India at the reported rate of about 350 persons per month. Further, the head of the Uttar Pradesh Development Council (UPDC), Amar Singh has affirmed that Dell Computers will soon be signing a MoU with the Uttar Pradesh Government in India to set up its BPO facility in that state. Dell has already proposed a plan for starting a back-office center there in Luck now with an approximate 15,000-seat capability.

In December 2004, Dell also announced their plans to open a campus in Hyderabad. The new campus, which will be Dell’s third in India, is expected to be completed by March 2005 and employ 300 staff at the outset. Hyderabad has been home to a Dell customer contact center since March of 2003, and the company plans to move its entire customer support team from its current leased premises to the new campus. The new campus is to be built on 6.6 acres of land in the Hitec City, and will offer multiple services to include: sales, customer care, technical support, email support, and shared services with more functions to be added as needed in the future.

In China, Dell currently has a call center in Dalian staffed with approximately 450 employees serving customers in Japan and South Korea. The Dalian center is expected to employ 2,000 people by mid-2006. On September 9, 2004, they revealed the opening of their first Enterprise Command Center in China. From the call center, in the southern Chinese coastal town of Xiamen, Dell staffers can monitor local conditions such as traffic and weather and coordinate logistics accordingly. Dell officials say the center will help the company and its customers overcome China's notoriously poor transportation infrastructure. The center is staffed around-the-clock by 40 to 50 Dell employees who track service calls. Dell says it plans to open Enterprise Command Centers in Limerick, Ireland and Japan later this year with another to follow in the Asia-Pacific region in early 2005. Further development in the Asia-Pacific region, includes the movement of their accounts payable division from Limerick, Ireland to Malaysia.

Additional offshore expansion for Dell includes the July 2004 announcement of their plans to hire 750 employees for a new call center in Edmonton, Canada. They are also increasing the staff of their Nordic Business Center in Denmark by 50 persons. The Dell Business Centers handle Finance, Accounting, and Marketing functions in addition to providing local language support.

Dell describes their “all-shoring” strategy as an intention to “provide jobs in every country in which they move.” Specifically, they plan to accelerate growth in Japan and China, which they see as key strategic countries.

FINANCIAL SERVICES: LEHMAN BROTHERS

Lehman Brothers took an open-minded approach to the offshore outsourcing process. In mid 2002, they began a pilot, prove and move program that featured nearly 80 offshoring projects being performed by roughly 20 vendors. Although much of the work was located in India, they contracted with Canadian and Russian vendors as well.

Armed with the results of the pilot program, Lehman began forging relationships with providers based in China, India, Ireland and the Philippines, eventually deciding upon India as their offshore location-of-choice. In early 2003, Lehman entered into a three-year contract with two of the larger Indian providers - Wipro and TCS - and began offshoring back office, help desk, and engineering functions as well as general application development to approximately 450 people spread across the two providers.

In December 2003, Lehman withdrew its outsourced call center from Wipro; and as was the case with Dell, the move was viewed as a reversal of its progressive position on offshoring. However, a closer look reveals that the help desk function constituted a mere 5 percent of the total work done for Lehman by Wipro at the time; and further, the withdrawal had no effect on Lehman’s outsourced relationship with TCS.

On the contrary, Lehman has been ramping up its offshore initiatives of late. Jon Beyman, Lehman’s CIO and a member of its outsourcing steering committee, estimates that about 20 percent of the firm's aggregate IT staff currently comes through Indian providers. Although their offshore outsourcing initially entailed some large layoffs at Lehman Brothers, Beyman stresses that the firm now employs more people in IT today than it did before outsourcing to India, due to investments in other businesses.

Now the firm plans on turning its efforts toward offshore BPO, and announced in December 2004 its plans to set up an outsourcing center in Mumbai with the intent to engage a staff numbering in the hundreds. Exhibiting Lehman’s confidence in the developing BPO capabilities in India, the enterprise-wide operation will handle high-end BPO work such as: mortgage origination, equity research as well as software product development. The difference being that this time around, the business process functions will be provided via a captive service center rather than a 3rd party provider. Industry sources note that this follows the growing trend in the financial services industry to offshore through captive operations, which allow firms to achieve lower costs without compromising control.

Lehman’s commitment to offshore outsourcing is evidenced by the creation of an internal five-person project management office (PMO) paired with an outsourcing steering committee to handle governance. Charlie Cortese, managing director of IT and head of outsourcing at Lehman Brothers, runs the PMO and handles the contract, setting up the infrastructure in India, training Lehman’s and the providers’ employees, and managing the growth of the outsourcing. Additionally, the PMO has two people stationed full time in India - one at each of the vendor sites. Lehman’s aforementioned CIO, Jon Beyman, plays an active role in the outsourcing steering committee.

The results of Lehman Brothers’ offshoring effort have been nothing short of dramatic according to Peter Nag, the New York-based vice president at Lehman Brothers and member of the PMO. Our goal was to save a certain amount and we have achieved many more times that amount," he says. The company expected to save 50 cents on the dollar from its offshoring venture and it now expects to see a steady increase in those savings to a projected 70% savings by the end of the three-year project.

"When you go in, you have to go into it in the spirit of partnership," says Cortese. That's the bottom line when it comes to a successful offshore-outsourcing relationship, he says.

AIRLINE: BRITISH AIRWAYS

According to the Airline IT Trends Survey 2004 by industry body SITA and Airline Business magazine, the number of airlines outsourcing the majority of their IT systems will double by 2006 to more than 20 percent. Similarly, the outsourcing of general business applications is seen as a high growth area and is set to increase by 23 percent in the next two years.

British Airways has been at the forefront of the trend with a fully matured offshoring strategy that continues to expand and refine their business operations. Referencing the recent overall drop in IT spending in the industry, Paul Colby, British Airways’ CIO, states that “it's not how much you spend, it's what you do with IT that matters. Aligning IT spending tightly to strategic business objectives is the only way to ensure that IT delivers the returns the airline industry demands.”

In 1996, BA began offshoring customer relations functions and revenue accounting to a captive center in Mumbai, India. The offshoring effort initially yielded nearly $23 million per year in savings (a 40-60% reduction in cost), reduced delays in responding to customer complaint letters, and an overall improvement in the quality of work. Further, the center soon became so efficient that it began to produce an additional revenue stream for BA by providing revenue accounting to as many as nine other airlines. The aforementioned center began in 1996 with a staff of 12 people and by 2002 there were over 1600 staff working in India. In April of the same year, BA sold the captive center to venture capitalists, but retained a 30% share in World Network Services, as the new company is known. British Airways continues to be served by WNS and, as of 2004, accounted for about 40% of the new company’s business.

Not focused solely on India, in 2000, British Airways began offshoring work to a data center in Germany owned by Amadeus, a Spanish IT services provider. The services outsourced included, among others, the booking system and the fare quote system. BA has secured annual savings of over 20% on its IT operating and support costs, and will avoid the need for substantial investments in systems development. Equally importantly, BA replaced high fixed costs with a variable cost based on the number of transactions processed, allowing them to accommodate both future expansions and periods of lower demand.

In 2004, British Airways extended and expanded its relationship with Astron, a global BPO provider, by executing a three-year £45m contract to supply BA with all of its corporate communications and marketing materials. Under the contract, Astron, a private company that provides services such as document outsourcing and call centers, will handle BA's boarding cards, customer service manuals, frequent flier documents and other printed materials. The deal is expected to deliver £11m in savings to the airline.

British Airways recognized that, with the advent of low cost airlines, their business model must undergo radical change; BA met this challenge in dramatic fashion and is now reaping the rewards. Since beginning its offshoring efforts eight years ago, British Airways is currently seeing improved service levels coupled with overall cost reductions in the range of 70-75%.

IN CLOSING

Top companies in a variety of industries are embracing offshoring as a means to focus on their core business while receiving services faster, cheaper, and better than before. Sourcing strategies are not “one size fits all.” Nevertheless, whether it’s Lehman Brothers’ “pilot, prove and move” strategy, British Airways’ “redefine the business model” approach, or Dell’s pursuit of “all-shoring”, each of these organizations is using offshoring to lead the way in its respective industry.

No matter what industry your organization is in, a global sourcing strategy is now a necessity for retaining and enhancing your position. There is no set path for going offshore, but there is a lesson to be learned: an organization should conduct a thorough, deliberative assessment of each sourcing model and location available and then pursue the chosen strategy with wholehearted enthusiasm.