CASE 1
Two Giants Take the Offshore UPO Lead
GE Capital’s International Services unit, which provides everything from risk calculation to IT services and actuarial analysis for GE worldwide, has grown from 634 employees to 17,000 during the past five years. More than half of those workers are in India, and they are not being used for mindless data entry—in India every employee has a college degree, and more than 1,200 have Master’s degrees in Business Administration (MBAs).
Microsoft has about 200 employees developing software in Bangalore, where it opened its first non-U.S.-based product development center five years ago. In July 2003, the company announced it will be shifting more currently U.S.-based jobs to India as it seeks to lower technical support and development costs. Microsoft will increase its staff in India in the coming years, as the country continues to turn out tens of thousands of English-speaking engineers each year.
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CASE 2
AT&T Uses Team Approach to Outsource Its HR Function
When AT&T opted to outsource human resources, the telecommunications company signed a sevenyear comprehensive outsourcing agreement with Aon Consulting. A team of functional experts in AT&T’s human resource (HR) and finance departments orchestrated the outsourcing initiative. Each department challenged the other to prove the merits of the outsourcing strategy, resulting in a wellthought- out, appropriate, and cost-effective out- sourcing initiative. AT&T’s finance and HR departments also developed an atypical process for determining which HR activities would be best served by out- sourcing. Rather than ask respective managers to prove why their activity should be outsourced, the team asked them to provide evidence that their activity should continue to be retained in-house. In doing this, managers became more cognizant of the benefits of outsourcing, less adversarial and threatened by the strategy, and potential champions of it to the employee population. Ultimately, managers designated virtually every HR function for outsourcing. Aon Consulting now provides AT&T with HR administrative, transaction, and payroll services, including the oversight of existing benefit plan providers, for AT&T’s 70,000 U.S.-based employees.
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CASE 3
GE Real Estate Understands Total BPO Costs
Realizing cost savings from offshore outsourcing often takes years of effort and a huge up-front investment. For many companies, it simply may not be worth it. “Someone working for $10,000 a year in Hyderabad can end up costing an American company four to eight times that amount,” says Hank Zupnick, CIO of GE Real Estate. Yet, all too often, companies do not make the outlays required to make offshore outsourcing work.
“You have to bring people to America to learn your applications, and that takes time, particularly if you’re doing it with a new vendor for the first time,” explains Zupnick, who maintains a handful of three-year contracts with offshore vendors. In GE Real Estate’s case, the transition time for each vendor was up to a year in some cases, in addition to the money-draining vendor selection period of several months.
Zupnick, who has seven years of offshore experience, says most of his peers do not appreciate the time and money it takes to get a relationship up and running. “The vendors say you can throw it over the wall and start saving money right away. As a result, I have heard of CIOs who have tried to go the India or China route, and nine months later they pulled the plug because they were not saving money,”
Zupnick says. “You have to build in up to a year for knowledge transfer and ironing out cultural differences.”
At GE Real Estate, managing the offshore vendor is such a big task that Zupnick assigned someone to handle it on a half-time basis at a $50,000 salary. The individual makes sure projects move forward and develops and analyzes vendor proposals against the RFPs when it comes time to bid out new work.
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CASE 4
Informal Vendor Selection Leads to Disaster
A large and well-respected company had a vision in the early 1990s of becoming one of the leanest and most profitable manufacturers in the industry. The company’s CFO felt that the company could be much more efficient if it focused on what it was good at, as opposed to managing some of the larger support functions. After looking into its HR organization, the CFO determined that outsourcing this function would reduce a great deal of overhead and could fix several of the problems the company continually faced.
The CFO started the project by assigning himself to be the company’s BPO champion. (This was mistake number one.) Next, he contacted the ClO and explained how this new outsourcing effort would allow the company to make its numbers in the next year and that he should be excited about assuming the role of change agent.
Recognizing that he had no experience in BPO, the ClO decided to go outside the organization for assistance. The first problem he faced was who to call. The C1O had a relationship with a local consulting group that specialized in outsourcing wide area networks. The firm was invited to a meeting to ask if they were interested in handling the BPO project.
The consulting group explained how outsourcing was one of its service offerings. However, as understood by the consultant, the project could not be completed quickly or inexpensively. Nonetheless, the CFO accepted the consulting group’s statements and agreed to move forward. The following Monday morning, a three-hour kickoff meeting began between the ClO, CFO, and the eager consulting company. The consulting presentation covered outsourcing at a high level and the financial impact it could have on a company. This presentation certainly reaffirmed the CFO’s vision by capitalizing on the savings a company could anticipate. The unfortunate point was that no one in the room had any idea how complex this project was going to be.
The CFO created a project team by assigning several subject matter experts to the team on a part-time basis. With everyone working part-time one really took responsibility for the project and simply assumed that t consulting group would handle it. The consulting group did not really understand the HR department functions and, therefore, could not structure the new process flow. Because the consulting group was not set up to handle the HR back-office functions, it found itself trying to outsource the process to another consulting group This BPO project grew out of control within weeks. After wasting seven months and spending $800,000, the CFO became furious about the lack of progress. The ClO was fired for selecting the wrong consulting group, which apparently provided no added value, and the consulting group was released only to face a lawsuit.
This experience was a disappointment for the CFO, and he decided to revert back to the old way of operating the HR department. To this day the organization’s HR function is as ineffective as it was before the BPO project debacle.
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CASE 5
European Regulations Confusing to BPO Vendors
International regulations governing workers’ rights are going to play a role in the future of BPO. In fact, it is likely that workers and politicians will seek new regulations as more and more jobs are uprooted and moved about world. Compaq and France’s Atos Origin found themselves embroiled in an employment dispute stemming from employment protection laws that left1 60 IT support staff members facing the prospect of job loss. The outsource service providers became embroiled in the dispute because it was not clear which firm was responsible for employing 30 former Atos support staff members in the United Kingdom and another 30 overseas, following a decision by Lucent to transfer an outsourcing contract from Atos to Compaq. The dispute arose over confusion about Europe’s employment protection laws known as the Applied Rights Directive, and Britain’s Transfer of Undertaken Protection of Employment (TUPE) regulations. TUPE guarantees staff members employment under existing terms when their work is outsourced to a third party.
The dispute began when Lucent decided to end its outsourcing contract with Atos Origin and transfer the work solely to Compaq. Both suppliers had been contracted to provide desktop and network support services to Lucent in July 2000.
Under TUPE regulations, Atos staff in the United Kingdom, Netherlands, and Germany should automatically have transferred to Compaq, but Compaq blocked the move. Compaq e-mailed the Atos staff members affected, denying responsibility for their employment.
For its part, Compaq argued that TUPE rules do not apply because it plans to use a different operational model from Atos, service fewer users, and will provide services in fewer countries.
Employment lawyers say that the case highlights the confusion arising from conflicting TUPE case law and willpICe further pressure on the government to clarify the legislation.
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CASE 6
NYPH Managing tile BPO Transition: Four Years Later ( MR.L)
In November 1999, New York-Presbyterian Hospital (NYPH) announced a seven-year, $228-million IT outsourcing contract with First Consulting Group (FCG). The contract created a third entity, FCG Management Services, to perform the work—a step that included the hiring of more than 400 NYPH staff into the new unit.
NYPH wanted immediate benefits from the predictable costs, service levels, and outcomes offered by outsourcing. “The biggest issue a ClO faces after signing the contract is managing the performance objectives for the first six months,” said Diane Daniele, Interim ClO for NYPH.
NYPH’s office of the chief information officer (OCIO) designed a governance model to make IT a more effective investment tool by focusing on strategic planning and thinking, monitoring, governing partnerships, and change management. The OCIO is a champion of IT change at NYPH. “You must show people what the future looks like and restructure the business simultaneously,” said Guy Scalzi, NYPH’s former ClO and now the account manager for the New York outsource team.
The trench work of transition and change management continues each day at NYPH with core process improvement teams focused on everything from leadership training to wiring closet inspections. Sharing leadership roles with the OCIO speeds up integration.
Change in how people communicate is another benefit of outsourcing. Scalzi put high-potential managers into the applications areas and told them to break down the runtime performance barriers and open up the client communication channels. The outsourcing culture rewards leaders who collaborate and communicate and does not reward the information blockers, Daniele says.
Although they were initially skeptical about the outsourcing agreement’s impact on service aa46s of control, physicians, too, have experienced positive changes.
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CASE 7
WatchMark Corporation: How Not to Manage an RIF
As a 48-year-old senior engineer at WatchMark Corp., a Bellevue, Washington, software company, Myra Bronstein had spent three years searching for bugs in the company’s software. She knew that things were not going well; she had been asked to log 12- to 18-hour shifts frequently, her boss reiterating that the company’s success depended on her “hard work and efforts.” So when she received an e-mail in March 2003 instructing her to come to a meeting in the boardroom the next day, she began to worry.
Bronstein logged on to a Yahoo users’ group for WatchMark employees. There, in a post written by “Saddam Hussein,” was an ominous note stating: “For all the quality assurance engineers reading this, your jobs are gone.” At that very moment, it said, their replacements were on their way from India.
The next morning, a Friday, Bronstein and some 60 others were told that they were being terminated. Some left immediately; others, like Bronstein, were asked to stay on for several weeks to train the new folks. “Our severance and unemployment were contingent on training the replacements,” she says. And so the next week, Bronstein walked into a room to find her old coworkers on one side and the new group from India on the other. “It was like a sock hop where everyone is lined up against the wail blinking at each other,” she says. In an attempt to lighten the mood, her boss said she would like to introduce the old staff to the new staff, while the VP of engineering chimed in with familiar words.
“We’re depending on you to help this company succeed,” he said.
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CASE 8
Case Study on Avoiding Risk in International Outsourcing
While some state governments (“Tennessee Governor Curbs Outsourcing . . .“ 2004.) in the U.S. have been quick to ban limit international outsourcing of state government activities, other state governments have sought to take advantage of low cost opportunities that international outsourcing can offer. Such ad- vantages are not without risk. For example the state of New Mexico’s Labor Department hired TCSAmerica, an Indian outsourcing firm which is affiliated with Tata Consultancy Services of India (O’Hanlon 2004; Hicks 2004). According to the report by O’Hanlon (2004), TCS-America was hired to redo New Mexico’s unemployment compensation computer system. Hicks (2004) reporting on the same story revealed that while TCS-America completed work for other U.S. state governments, including Pennsylvania and New York, it had never worked on a unemployment compensation system. Also, New Mexico agreed to allow them to do all computer software work in India, apparently with insufficient monitoring of the progress completed by New Mexico officials responsible for the outsourcing project. The new system should have been completed in six months, which put the due date at December 2001. Unfortunately, things did not work out well. The initial system was delivered in December 2002, and as of September 2004 it was still not working. Also, the outsourcing project went way over the budget of $3.6 million up to $13 million. The warrantee for the system ended in 2003, leaving New Mexico with a situation of either suing TCS-America to complete the project (it was estimated at 80 percent complete, but New Mexico officials were not sure, since the work was still being done in India) or hiring someone else to fix it. TCS-America’s position is that they complied with the outsourcing agreement and were willing to continue fixing the system if they could receive additional compensation to justify additional work. Where this case will end is still uncertain as of the writing of this study.
Selected Questions Reflecting Distrust in the Client Firm Example
| Questions that might be raised
by a distrustful client firm of the Canadian outsource provider |
Possible consequences for the client firm
|
| Will the provider violate
Canadian laws? |
Increased expense for Canadian legal advice. |
| Will the provider violate U.S.
laws? |
Increased expense for U.S. legal advice. |
| Are the auditing reports from a
Canadian auditor accurate? |
Increased expense for auditing the auditors. |
| Will the provider cheat on
product quality? |
Increased expense for inspections and staff to monitor quality. |
| Will the provider meet the
delivery deadlines? |
Increased production quotas to maintain greater inventory levels.
This in turn increases the cost of capital in the investment in finished inventory, increases the cost for more inventory staff, accounting, taxes, etc. |
| Will the Canadian firm try to
steal the client firm’s business in the future? |
The Canadian firm signs a binding contract to prevent this from
hap- pening, resulting in added legal expenses for document preparation and possibly future litigation.
|
In July of 2004, the state of Nebraska signed an outsourcing agreement with TCS-America to develop a similar unemployment compensation computer system (O’Hanlon 2004). The difference in this international outsourcing agreement from the one New Mexico implemented shows the difference planning can make in avoiding international outsourcing risks. Before developing an outsourcing agreement, Nebraska officials interviewed New Mexico government employees who had worked with TCS-America to learn from their experience as to what to expect and what to include in the outsourcing agreement. From those interviews, Nebraska officials developed an agreement that sought to overcome prior problems. For example, Nebraska’s agreement required all work be performed in Nebraska, hiring at least 25 percent of employees performing the work locally.
This helps the Nebraska government officials mitigate some of the political risks of being perceived as outsourcing American or Nebraskan jobs to foreigners. In this case, outsourcing actually creates jobs in Nebraska, whereas other American outsourcing firms might have done the work out of state. Nebraska’s agreement allows a more realistic development other government systems dependent on the new system. The agreement also permits flexibility by anticipating additional costs above the $7.9 million stated in the contract. This way there can be no surprises on costs that might cause outsiders to perceive or claim the agreement is a failure. Again, this helps avoid a political risk. While TCSAmerica will bring twenty-one employees from India to Nebraska to do some of the work, sixteen employees will be hired locally for the project. Although somewhat uncertain, TCS-America claims that of the twenty- one employees from India, some might include American citizens presently working in India. This aspect of the agreement could also be used to point out the political disadvantages to being critical of international outsourcing. In addition, the local and state employees are to be trained by the Indian personnel during the development of the project to ensure that once work is completed by TCS-America, Nebraskan workers would be able to run the system without additional costs. This helps avoid risks of dependency on the outsourcer. Because Nebraska state employees will be intimately associated with all aspects of the project, they will be in an ideal situation to help avoid risks during system development and afterward.
While these precautions do not ensure Nebraska will receive the finished system exactly as they expect, their efforts to incorporate within the outsourcing agreement the flexibility, control, and benefits to the state will help reduce risks. As this chapter has pointed out, the planning steps leading to any international O-I agreement require a careful analysis considering risks in both achieving the advantages of outsourcing and avoiding disadvantages.
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