So Much Labor, So Little Skills

It's a common refrain from those locating backroom offices in the Philippines. Lots of college graduates, not enough qualified. WNS , whose clients include T-Mobile, Intercontinental Hotels and SITA, complains that its hit rate in hiring is 10%.
That "skills gap" will disappear. The BPO industry is growing at such a rate and to such a critical mass that its gravitational pull will bring more and more of Philippines into its orbit; schools and society will respond. But maybe not as fast as employers wish.

Keshav R. Murugesh, group chief executive officer of BPO firm WNS Philippines Inc., told reporters in a briefing on Friday the employability rate in the country needs to be improved.

"In our case, we get only one out of 10 applicants," he said.

Mr. Murugesh said his office has been closely coordinating with the Business Processing Association of the Philippines (BPAP) to conduct training and special courses.

"However, the challenge is to produce skilled graduates who are employable once they apply for the job. It should be that when there are 10 applicants, all 10 get accepted," he said.

Converging on the Mall

Somebody forgot to give the folks at Convergys the memo about the global economic slowdown. OK, so maybe the decision to build the outsourcing company's biggest facility in the Philippines was made in better times. But now CVG's got room to add another 2,050 employees when it already is one of the largest BPO employers in the country.

And it goes to show that the outsourcing model remains intact: serve First World companies' needs using labor from Third World countries. But the modern day equivalent of the sweatshop involves having your workers report for work at one of the country's swankiest malls.

Convergys Corp., a customer relationship management company, will open its 12th and the largest facility in the Philippines.

President Gloria Arroyo will lead the dedication of the new facility on Thursday, Oct. 22. The facility encompasses over 17,000 square meters located in Glorietta 5 along Ayala Avenue in Makati City and can hold 2,050 employees.

It is the first Convergys site to offer the convenience of a shopping mall on its lower floors and includes executive and administrative offices, training rooms, conference rooms, and employee lounges.

Convergys has experienced an unprecedented growth in its six years of operations in the Philippines. From 200 employees upon opening just six years ago, it now counts over 17,500 employees on sites across Metro Manila, Cebu, Bacolod and Sta. Rosa, Laguna.

Convergys employs more than 70,000 people across its facilities.

Convergys is now the largest BPO provider in Cebu City with over 3,300 employees throughout three contact center facilities.

Within five years, Convergys has established 12 contact centers in the Philippines - seven located in Metro Manila, three in Cebu City, one in Bacolod City, and one in Santa Rosa, Laguna.

Dispersing to the Periphery

One thousand new jobs in a city of 12 million may not be too exciting. One thousand jobs in a city of half a million is something to write home about. In the Philippines' Visayas region, Iloilo is fast becoming a favored destination. It's no surprise that a city with six universities and thousands of fresh graduates a year would become a viable location for outsourcing companies. Other wannabee cities looking to boost development need remember that besides the available labor pool, another ingredient is necessary -- reliable telecommunication links to the rest of the world -- before they prepare the powerpoint presentations to lure companies to their neck of the woods.

Transcom, touted to be Europe's largest business process outsourcing (BPO) firm, will open a call center in Iloilo in 2009, and will hire from 1,000 to 2,000 employees.

The investment is expected to cement the city's place among the top new wave international BPO sites.

Iloilo City Mayor Jerry Treñas said Transcom has set the hiring of around 1,060 employees in October. It is planning to double its work force after it starts its operations, according to Treñas.

Transcom has 75 sites in 29 countries worldwide and has expertise in various industries including telecommunications, the financial industry, travel and leisure, utilities and retail/consumer goods. It has around 20,000 employees serving over 120 major clients in more than 30 languages.

The investment has also affirmed the city as among the top new BPO investment sites in the world.

The city already hosts nine BPOs with more than 4,000 workers. These include Teletech, ePLDT Ventus, Callbox Customer Contact Center, Global Mega Communications Inc., Techno Call Corp., Interactive Voice Call Center, Medlink Trans Services, Eversun Software Philippines Corp., and Savant Technologies.

BPO Slowdown

The red-hot BPO industry is declaring that 2009 will be a slower growth year after the torrid expansion in the past few years. The blame is put not just on the global recession but the rising protectionist sentiment in the U.S., the Philippines' largest market.

Half-full-glass analysts will tell you this is the welcome pause that refreshes. No industry can sustain big jumps in production without bumping up against constraints. And for the longest time, the constraint has not been external demand. The problem has been mostly internal: the country's ability to provide labor. Or rather, we should say labor is not a problem, as any recruiting agency will tell you; it's the limited supply of labor with the right skills that has limited growth.

Now that external demand is slackening, the industry can turn more attention to those internal problems, those what managers will call "variables we can control." There's nothing we can do to influence the U.S. recession; there's everything we can do to make sure Philippine schools are turning out qualified graduates, training seminars are truly training employees, and programs to upgrade technical skills are implemented.

CICT Commissioner Monchito Ibrahim said that despite the setback, the industry is still expecting 30-percent growth this year to some $8 billion, and plans to increase the number of new jobs by a fifth or 75,000 jobs. He said the BPO industry ended 2008 with 372,000 jobs.

The revenue projection was taken from the Business Processing Association of the Philippines (Bpap) Roadmap 2010, a three-year plan that aims to double the country’s worldwide market share and achieve $13 billion in revenues, as well as provide direct employment to 1 million people.

Ibrahim said the slowdown was due to a number of factors, including the global financial crisis which has hurt the US, the country’s only major partner in the BPO industry. The lack of workers with necessary skills was also a key constraint.

Truth and Xinhua

Every so often, the show falters. An assistant presses the wrong button, and we get a glimpse of the reality behind the curtain.

BEIJING, Sept. 25 (UPI) -- China's state-run news agency made a gaffe Thursday when it published an "in space" conversation among the Chinese astronauts even before they left Earth.

Xinhua news agency posted the story on its Web site well before the launch of the Shenzhou VII space craft, The Times of London reported.

The story, which was headlined "Sleepless Night on the Pacific, Sidelights on the Observation and Control of the 30th Lap of the Shenzhou 7 Spaceship," was removed from the Xinhua Web site and was described as a technical error.

Medical Fallout

There's always a downside. Here's one view of the human cost not carried on the balance sheets of India's mighty BPO industry.

There's mounting medical evidence that if people are forced to stay up night after night their biorhythms are disrupted and they are liable to pay a cost in terms of both physical and psychological health. Elevated pay isn't sufficient compensation for a heart attack brought on at 30. We can't drive young people into the BPO industry by painting a superficially alluring image of its rewards, then shrug and turn away when they face serious health issues. Experts are concerned that the brewing crisis could undermine India's economic boom, which has been driven to a large extent by the services sector. A study by the Indian Council for Research on International Economic Relations estimated that heart diseases, strokes and diabetes cost India $9 billion in lost productivity in 2005. They forecast this figure to grow to a whopping $200 billion in the next decade, with the IT sector predicted to be among the hardest-hit.

I won't be a pied piper singing the praises of the capitalism system, but the long-term view argues for us to have faith. When an industry's health woes become a big enough problem, the solutions will come. If entrepreneurs have set up bars catering to the graveyard shift workers -- blackened windows to simulate night even though it's noontime -- why can't a whole city be transformed? Interiors of buildings are now made to follow the daylight hours of countries halfway around the globe; why can't the district where the building belongs also follow those same hours? If the human body can't evolve to cope with altered circadian rhythms, why the environment will have to be reshaped. If we all live on borrowed time, why can't we advance that clock +12 hours?

ePLDT's SPI Making Deals in India

Here's another little tidbit on the globalization front. SPI, a Philippine BPO owned by the nation's largest telecommunications company, is looking to buy Indian companies as it expands its presence in the subcontinent. In the meantime, Indian companies are scouting in SPI's backyard for suitable acquisition candidates in the race to bulk up and develop a full service line. Now which of the many BPO companies around today will become the household name in 2020?

Global healthcare, legal and publishing business process outsourcing company SPi is looking out for suitable acquisitions in India. Ernest L Cu, president and chief executive officer of the Philippines-headquartered Spi, said the company has allocated $50 million for mergers and acquisitions. The company is in talks with investment bankers and is considering several proposals, Cu said while addressing the media here on Wednesday. According to Cu, SPi plans to move its medical billing work to India from the US. He said the setting up of new delivery centre in Chennai and the cost differential between the US and India has made the company favour shifting of medical billing business to Chennai in eight months. The business has the potential to create 150 new jobs. SPi Technologies inaugurated its new 17,000 sq ft facility in the city on Wednesday. The 1,100-seat facility will house the company's publishing and healthcare business operations. The new centre will be the company's fourth in the country after Pondicherry, Coimbatore and New Delhi. Cu said the Indian company would increase its headcount by 700 by the end of this year. In 2003, SPi through its wholly owned Indian subsidiary SPi Technologies Private Ltd
acquired the Pondicherry-based Kolam Information Services Private Ltd, a book
publishing BPO. Two years later, it acquired the medical transcriptions business
of KG Information Services and Technologies Private Ltd in Coimbatore.

Bagging The Citi

Would you buy a business from a bank? Would you buy a business that is solely dependent on that bank? Citibank is close to a sale of its captive BPO, according to Indian press reports. The information asymmetry seems to favor Citibank, since who better knows the bank's prospects -- and the outsourcing potential going forward -- than itself.


If you're a buyer, it makes sense to pay the reported $1.2 billion price if you're confident you can cut costs in the unit faster or deeper than Citi thinks, and if you can use the Citibank BPO as a platform to acquire other bank customers. What better calling card than to say to future customers, "The largest bank in the world outsources to me."

Citigroup's BPO arm, Citigroup Global Services, is likely to find a new owner in a week. Surprisingly, big names like IBM, Infosys, TCS and Blackstone, which were in the race for the BPO firm, have fallen by the wayside, citing expensive valuations. The fight is now between half a dozen suitors comprising Genpact, First Source, WNS, 3i and a couple of private equity investors. Citigroup's BPO arm was recently put on the block and is likely to be valued around $1.2 billion. "The multiples are going to be pretty high here.

That means the buyers require to cough up anything up to $1.2 billion. Third party BPO firms in India are yet to have such deep pockets. Again, sinking large chunks of money upfront on a non-core cause may not be the right option for domestic IT services providers. That clearly leaves the game with big boys like IBM and monied PE guys who are willing to wait for ROI and capable of taking risk,'' says Pari Natarajan, CEO, Zinnov, a Silicon Valley-based offshore research and consulting firm.
For Genpact, the former captive unit of GE, this acquisition would reaffirm its leadership position in the country, while for WNS, acquiring Citigroup Global would give it a presence in the financial services sector. WNS, a legal service and financial services company, has made a few unsuccessful attempts to add financial services to its portfolio and is looking to make a splash by bagging this deal.First Source, on the other hand, is already a specialised player in the banking and insurance sector and the addition of the Citigroup's captive unit will bring them practices that banks usually don't outsource to third party players.

Half a Million Jobs

The Contact Center Association of the Philippines (CCAP) has a target: 500,000 gainfully employed in the industry by 2010. If this target is achieved, what will it do to the ecosystem that serves this industry? More Manila bars, open at noon, with dark curtains to shield the sun, so that graveyard shift workers can still feel like they're going out at night? More 7-11 and Ministop convenience stores with dine in facilities? More "We will give your accent an American twang" ESL (English as second language) centers? More healthcare workers trained to diagnose and treat "graveyard disease"?

Raffy David, CCAP director, said in a phone interview that industry estimates peg the total current industry workforce at around 200,000 workers.

Since call centers began setting up around the early part of the decade, the industry has been doubling its workforce annually but has tapered off in recent years due to concerns in the supply of skilled labor.

This is one of the perennial issues CCAP wants to address in an industry roadmap currently in development. CCAP plans to unveil this roadmap, basically detailing a strategy for the industry until 2010, in its annual conference this July.

"Since 2001, we've been trying to address perennial issues like HR, including poaching of agents, and promoting the Philippines abroad," said David, who also serves as CCAP director for membership.

Manila's Construction Boom

There was a time when property developers had to rely on a "build it, and they will come" strategy. Now the world has turned -- all the big boys with capital and spare land are being approached by BPOs, i.e. "we have come, please build it." The larger BPOs are ready, willing, and eager to take up entire buildings and sign long-term leases in their rush to expand. Which goes to show that the constraint for the Philippine economy's growth engine isn't the ability to sell its services abroad. BPOs with U.S.-facing businesses are so confident of demand that they are snapping up any sizeable office space that comes onto the market. What's holding back the boom are domestic capacity constraints, be it buildings with the right cabling, or qualified managers to manage the pell-mell growth. But have faith -- the capitalist system is responding to remove those constraints . . .

SM Investments Corporation, one of the Philippines’ largest conglomerates, broke ground on its latest built-to-suit project in Makati City.
The firm disclosed to the Philippine Stock Exchange (PSE) yesterday that the project, to be called SM Makati Cybezone, is a 4- storey building at Sen. Gil Puyat Avenue, due for completion in Q2 2008. Located at the heart of the Metro’s business district, SM Makati Cyberzone will have a gross floor area of 18,700 square meters and will be occupied by eTelecare Global Solutions, Inc.
"With the growing presence of the BPO industry comes also the growing need for spaces and integrated office facilities," said SMIC vice chairman Henry Sy, Jr.
He added that "the SM Group is more than prepared to answer those needs, as we have aligned with the market demands of this growing industry to provide well-planned and integrated office facilities to BPOs and Contact Centers in strategic locations.". . . .SMIC also broke ground for its second business process outsourcing (BPO) building for PeopleSupport at the SM Baguio Cyberzone recently.

Boom

The first quarter GDP figures for the Philippine economy came in last week. And as the Philippines does every so often, the figures surprised everyone: GDP 6.9 percent higher in the first quarter versus the same period a year before. It was the fastest growth in 17 years, and no professional economist or business forecaster saw it coming. This is a country that some refer to as the "Sick Man of Asia"; most people you talk to believe in keeping a portion of their savings in dollars "in case there's a devaluation." Expectations are still low; just like any brand it will take awhile for "Philippines" to become synonymous with rapid growth. Well, with an economic engine revved up by BPOs expanding faster than you can say "English language proficiency," expect several more quarters of upside.

While the economists may have to ratchet up their forecasts, anyone on the ground can tell you that deals are getting done. The stock market is ahead of things, moving to record highs. As we've argued in this blog, this is a multi-year economic boom. Banks are shaking off their trepidation at lending. Capital is flowing into the economy. It's nowhere near a China frenzy: we are simply at the end of the beginning of a powerful expansion wave.

If Citi Can Do It, So Can HSBC

HSBC , according to this press report, will add a few thousand more jobs in the Philippines to serve its US and UK customers. As more and more financial bigwigs such as AIG and Citibank cluster their in-house operations in the Philippines, you can say the Philippines is becoming the center of backroom operations -- the contradictory terms intended.

...the visiting bank official said HSBC is committed to the country in terms of expanding its banking services and its support group by increasing its Business
Processing Outsourcing (BPO) operations.
A third BPO is scheduled to open this coming year, which will increase the total employees of the bank on a consolidated basis to roughly 11,000, disclosed HSBC Philippines Chief Executive Officer Mark Watkinson. Specifically, its banking operations employs a total of 2,500 and 5,500 for BPOs.
At present, the bank has a couple of BPOs, one in Ayala-Alabang and another in PBCom Tower at the heart of the Central Makati Business District. These two service HSBC’s clients in the United States and United Kingdom.
It was explained the Philippines has an edge to service the bank’s US and UK customer base because of the natural talent of locals to speak English as a second language.

300? No 3,000

With money in the bank after selling shares to the public for the first time, eTelecare says it's busy adding capacity in the Philippines with plans to open a new 13,000 square meter site, its 13th office, in a few months. Triskaidekaphobians need not apply for any of the new jobs opening up, which will boost eTelecare's Philippine headcount past 10,000.

eTelecare Global Solutions, Inc. (NASDAQ:ETEL), a leading provider of business process outsourcing solutions, today announced it will invest in its sixth delivery center in the Philippines. The new center, located in the Annex@Shaw facility in Mandaluyong City, Metro Manila, will open in the third quarter of 2007 and employ more than 3,000 employees when fully deployed.
Funding for the new center comes from eTelecare’s recently completed initial public offering of American Depository Shares.
eTelecare is the first Philippine-incorporated business process outsourcing (BPO) company, and the second Filipino company overall, to trade on the NASDAQ stock exchange.
“Our successful U.S. IPO affirms that the Philippines is one of the top outsourcing delivery locations in the world, and that there is strong market demand for a high-quality multi-shore provider such as eTelecare,” says John Harris, eTelecare President and Chief Executive Officer.
“We plan to invest a significant portion of the proceeds from our IPO in further expansion in the Philippines,” added Fred Ayala, Chairman of eTelecare.

WaMu Chooses Cebu

Washington Mutual (stock symbol: WM) is putting in a captive operation in Cebu, the Philippines' second-largest metropolitan area.

Joel Mari Yu, Cebu Investment Promotions Center managing director, announced the entry of Washington Mutual Inc., one of US’ leading retailers of financial services catering to consumers and small business banks. He said WaMu will be among the locators of a 12-story building that will be constructed in the Asiatown IT Park (AITP).

While WaMu's entry into the Philippines will mean an addition of 1,500 jobs to the country's burgeoning BPO industry, what happens to PeopleSupport?

A Low Attrition Rate for BPO

Pop quiz. Genpact, which had US$613 million of revenue in 2006, had what attrition rate that year?

A. 15%
B. 24%
C. 32%
D. 43%
E. 55%
F. 61%

Before you answer, let's hear from Genpact, which is planning to sell shares to the public for the first time. Genpact's DNA comes from General Electric, the company that gave us Jack Welch and the mantra to either be No. 1 or No. 2 industry or get out, i.e. it was a "captive" serving the needs of GE Capital before becoming an independent company. Excerpts from its draft prospectus filed with U.S. regulators:

We have an experienced and cohesive leadership team and a culture that emphasizes teamwork, constant improvement of our processes and, most importantly, dedication to the client. Many members of our leadership team developed their management skills working within GE and many of them were involved in the founding of our business. As of March 31, 2007, we have more than 28,000 employees including over 5,500 Six Sigma trained green-belts, 300 Six Sigma trained black-belts and 60 Six Sigma trained master black-belts, as well as more than 4,500 Lean trained employees.

A key determinant of our success, especially as we continue to increase the scale of our business, is our ability to attract, train and retain employees in highly competitive labor markets. We manage this challenge through innovative human resources practices. These include broadening the employee pool by opening Delivery Centers in diverse locations, using creative recruiting techniques to attract the best talent, emphasizing ongoing training, instilling a vibrant and distinctive culture and providing well-defined long term career paths. We monitor and manage our attrition rate very closely, and believe our attrition rate is one of the lowest in the industry.

Ready?

The answer is C.

More info from Genpact:

Our attrition rate for all employees who have been employed by us for one day or more was 32% in 2006. A number of our competitors calculate employee attrition rates for their Indian employees who have been employed for six months or more. On this basis our Indian employee attrition rate for 2006 was approximately 21%, which we believe is relatively low for our industry based on statistics published by third parties such as NASSCOM. We attribute this low attrition rate to a number of factors including our effective recruiting measures, our extensive training and our strong culture.

New Growth Areas

Say you have a corporate lawyer friend, who is so successful at what he does that he is the go-to guy whenever some corporation needs his services. He is featured on the cover of business magazines. His law firm is the top in the field, charging the highest rates per hour -- with no shortage of clients.

What if one day he says he is looking for "new areas of growth" and that he will begin practicing medicine. Your head will snap from shock.

It's the same shock that comes with the announcement of San Miguel Corp., the Philippines' largest food and beverage company, that it will get into power generation.

In a preliminary information statement filed with the Securities and Exchange Commission, SMC said its board of directors has approved a plan authorizing the company to invest in new businesses such as power generation or transmission, water and other utilities, mining and infrastructure.
The recommendation to venture into new businesses was made by SMC's financial adviser, Goldman Sachs.
SMC's board said it was timely to "actively consider developing new engines of growth" to further augment the gains realized from nurturing its current core businesses. SMC is the market leader in the Philippine food, beverage and packaging sectors. Philippine Daily Inquirer sources estimated that SMC would need about $2 billion to be a formidable player in the power industry, which includes generation, distribution and transmission. The sources said SMC could raise this amount by reviving a hybrid debt issue that it earlier shelved, or by other capital-raising options it was currently studying.

Power generation may offer more lucrative returns than making snacks and drinks. And you may argue that a conglomerate such as San Miguel is already in far more businesses than just making good beer and tasty meats. There's the logistics side -- a trucking fleet to bring produce to the country's 7,101 islands; there's the information technology side to track its sprawling assets; there's property development to house its offices and suppliers; and there's even some connection to the power industry. Those sprawling plants consumer a lot of electricity, right, so why not get into the act?

Yet there's no escaping the whiplash when someone strays far from his competency.

Texas at Clark: Philippines Lands a Biggie

Texas Instruments chose the Philippines over China for a new 800,000 square foot (74,000 square meter) plant. The world's largest maker of chips for mobile phones will spend US$1 billion over 10 years to build out the factory. The plant will be located at Clark, a former U.S. airbase about an hour's drive north of the Philippine capital, and will employ 3,000 people by end of 2008.

"We have broken the myth of China here," said Ernie Santiago, executive director of the Semiconductor and Electronics Industry in the Philippines, Inc. (SEIPI). "It seemed before all roads are going to China, but we have made a point here that the Philippines is also a smart choice for investment. It will be a magnet, we expect other companies would follow," he said.
The Philippines supplies about 10 percent of the world's semiconductor manufacturing services, including mobile phone chips and microprocessors. Texas Instruments and Intel Corp are two of the biggest companies with manufacturing plants in the country.
Once the new TI plant comes onstream at the end of next year, Philippine electronics exports could jump by $3-4 billion per year, Santiago said.

The Bloomberg take was that human capital, and not cheap costs, was the deciding factor for TI choosing the Philippines over the perennial favorite China:

Texas Instruments in recent years has implemented a strategy of making about 80 percent of its chips and outsourcing the rest to reduce production quickly when demand weakens. The company's current management in the Philippines, where it has had a factory since 1979, gave that country the deciding edge over undisclosed locations in China, (TI's) Silcott said.
``We got a really experienced team, and we wanted to quickly bring up the factory,'' he said.

The Wall Street Journal had a similar take, arguing that the overall cost of doing business in China, especially taking into account rapid increases in wages for skilled labor, are no longer as cheap as they used to be:

Texas Instruments' executives visiting Manila Thursday said the highly skilled workers at its existing chip plant in the Philippines persuaded the company to open a second plant there, despite intense competition to attract Texas Instruments' investment from other Asian nations.

While China continues to be a major draw for technology companies -- Intel Corp. in March said it was planning a $2.5 billion chip-wafer manufacturing facility there -- Texas Instruments' decision to build another semiconductor testing and assembly plant in the Philippines may also reflect how rising costs in China are encouraging investors to consider other locations.

On Thursday, Kevin Ritchie, Texas Instruments' senior vice president of technology, said the Philippines' pool of educated, English-speaking workers tipped the company's decision. The new plant is expected to provide jobs for around 3,000 people.

Powering the Expansion

For the Philippine economy to grow at the 7-8% clip, it needs to continue to attract investments in manufacturing, preferably in sunrise industries. The BPO engine, while significant, won't always be able to pull the wagon.

Here's one kind of industry -- manufacturing solar cells -- that the Philippines would do well to create a cluster around. The interesting portion of the article is the last line -- that as big-scale manufacturers discover the Philippines as a production site , they also discover it as a BPO destination.

Greg Reichow, SunPower Philippines Manufacturing Ltd plant manager, said in the report that the U.S.-based company's expansion was underway, with the first phase scheduled to be completed by Q3 of this year. He said that the capacity of the SunPower plant in the country would be increased from 110mW to 400mW worth of solar cells within the year, and that workforce will also increase from 1,400 to 3,400 by 2008.
The company's production plant in the Philippines serves as its "hub of high-tech manufacturing," with the solar cells produced in the facility exported to the U.S., Europe and Japan. Reichow said that the new plant will produce solar cells for the export market but may also produce for local market if there will be enough domestic demand.
The SunPower official explained that the company chose the archipelago as location
for its plant because of the investment climate and available workforce. He said that the country has a strong engineering industry infrastructure, manufacturing 20 percent of the world's semiconductors. Another factor is having a low-cost but highly educated labor pool. According to Reichow, most SunPower employees in the country are engineers or other degree-holders that is why the company hired Filipinos not only for its plant but also for its back-office functions and R&D.

Philippine-centered backroom operations for multinationals, called "captives" in the preferred jargon of the industry, arleady include such names as oil companies Chevron Texaco and Shell; financial heavyweights AIG, Citibank, Deutsche Bank, HSBC, Henkel and Manulife; techies AOL, Dell and Hewlett Packard; plus other biggies such as Proctor & Gamble, Fluor Daniel, and Watson Wyatt.

The First Gram is Always Free

There's a study out by Compact Management Consulting on how IT and BPO outsourcers deliver cost savings in the first year, and then ratchet up their prices in successive years, making them the costlier option for a company than if it kept the service in-house.

The research, based on an analysis of 240 deals worth more than £20m, found that outsourcing providers were pricing contracts to produce savings of up 18% compared with in-house costs in the first year. But costs then began to escalate, reaching 36% above comparable top quartile internal operations by year three. . . .

Simon Scarrott, head of business development and marketing at Compass, said: “With those figures, it is easy to see why the claim that all outsourcing will save money is a myth. There can be sound strategic reasons for outsourcing but saving money over the long term is not one of them.”

He added: “Outsourcing providers are not that different from an in-house operation. Indeed, they often use the same people as the in-house operation after the deal is signed and outsourcers cannot perform alchemy on a business process and turn an operation into gold.”

Hold on. There are significant savings involved if the business model is to arbitrage the labor costs between an expensive developed country's workers and the cheaper rates available in a developing country. So even if you are still using the same number of IT programmers, clerks, project managers, and customer representatives, there's no doubt the correct outsourcer can do it, cheaper.

Then again, even if you, the chief information officer of a fast-growing company, take the Compass study as gospel truth, you can always choose what Aviva has done -- get an outsourcer to build it for you so you can enjoy the first and second-year savings, and then take over the facility.

The previous month, Aviva transferred 1,600 employees in Bangalore from an outsourcing vendor, 24/7 Customer, to Aviva Global Services. It was the first move of its kind and size in the Indian business processing outsourcing industry, NASSCOM said.

When a vendor creates a call center for a company, runs it for a certain period of time, then hands the operation over to the company, it's called the build-operate-transfer (BOT) model. Typically, a company moving operations to India would build the operation from scratch, or subcontract the operation to an outsourcing vendor, or some combination of the two.

The BOT approach lets a company get going in India faster, Aviva executives said at the ceremony in Mumbai. That helps Aviva, and its Norwich Union insurance subsidiary, adapt to change, [Executive Director Patrick] Snowball said when he accepted the award.

"Our excellent operations in India are critical for us to ensure we maintain a competitive advantage," he said. Aviva has worked with three vendors under the BOT model: EXL, WNS and 24/7 Customer. Over the course of the year, 5,000 employees will be transferred from those vendors to Aviva's own offshore division. The Bangalore facility was just the first to be transferred. Later this year, the company will transfer facilities in Sri Lanka to its control, and in Pune.

73% Attrition

Can any business survive if three-fourths of its workers leave every year?

India's Economic Times has an article saying Wipro's worker attrition rate is 73% per year. Now the way Wipro calculates its "attrition rate" may inflate the headline number; the company includes persons the company had made a job offer but declined to join.

Even if the true figure is 25% a year, i.e. one out of every four jobs has a new face each year, it still speaks to the operational problems facing Wipro, and the rest of India's A-Team BPOs. Anyone care to be the HR director in an Indian BPO?

The business processing unit of IT bellwether Wipro has seen an annualised attrition rate of 73 per cent for 2006-07, a top company executive said today. The attrition rate included those who were given the offer letter for a job but did not join the organisation, Wipro BPO's Chief Executive T K Kurien told reporters after Wipro announced its financial results here. The annualised figures were calculated on the basis of 16.9 per cent in the fourth quarter of the fiscal 2006-07. During the quarter, voluntary attrition rate was 15.7 per cent. "Though the attrition rate has slowed down, a lot is still needs to be done on this aspect," he said. Outlining the reasons for attrition, he said one-third of those who dropped out were because of offers by competitors while another one-third quit to pursue higher studies. "One-third of those who left were those who had quit the industry as a whole. Women form a large part of this segment," Kurien said. The late night shift was a possible reason for women dropping out, he added. He said the company has started several programmes, including one-on-one meetings with employees to reduce the attrition of employees. Commenting on the high figure of 73 per cent as compared to rival figures, Kurien said it was because the measurement of attrition varied from company to company. Wipro BPO considered attrition right after the offer letter was handed over to the individual quitting the job, he said.