New Delhi: BPOs have the potential to reduce costs by 20-30 per cent, while the IT services companies have the potential to increase EBIT margins by 3-6 per cent, said a NASSCOM study on Thursday.
NASSCOM, the premier trade body and voice of the software and services industry in India, has released the independent study, "Operational Excellence: The Next Frontier in Offshoring" conducted by McKinsey & Company, the leading management consulting firm.
It is in continuation to the third NASSCOM-McKinsey Report, 2005 that highlighted India's potential to realise $60 billion in exports from these industries and operational excellence as one of the imperatives for achieving this potential.
Releasing the report, Founder and Chairman, Satyam Computer Services Ltd and NASSCOM Chairman Ramalingam Raju said, "While the study validates that customers are highly satisfied with remote centres, and as a result are ramping up operations in India, it is also clear that their expectations are rising. Frameworks like Process 360° and Project 360° that help companies to benchmark and improve their operating processes are vital for the continued growth of the sector."
Conducted over the last 12 months, the assessment involved working closely with leading companies to develop unique operational excellence frameworks - Process 360° for BPOs, and Project 360° for IT services companies.
These frameworks are one of the first operational excellence tools developed explicitly for offshore centers. They collate inputs from all stakeholders-clients from global corporations in the originating countries, engineers/ associates, operations managers and senior executives at remote centers.
Process 360° covered 162 processes and surveyed over 4,800 respondents across six groups – basic voice processes, specialised voice processes, basic data processes, specialised data processes, rules-based decisioning processes, knowledge services and, research and analytics.
Project 360° included 58 projects and garnered responses from about 400 respondents across three groups – application development, application maintenance, and packaged software and implementation support.
The data gathered from over 30 leading captives and third-party providers reveals three broad trends: (i) Clients are highly satisfied with their offshore experiences – over 80 per cent of customers are satisfied with the performance of their offshore units. (ii) Performance has been the result of capable people, not institutionalised practices. (iii) Rapidly evolving client focus will place increasing pressure on offshore units. Specific highlights of the study include:
Process 360° (for BPOs)
- Data operations are generally performing better than voice operations due primarily to higher retention rates resulting from effective training and employee engagement practices
- Third-party providers usually outperform captives in practices and metrics; but best-in-class captives show this gap can be bridged. The difference is a result of higher wage costs, lower span of control, and poor infrastructure procurement and utilisation
- Operating practices, rather than location, determine performance on key metrics such as cost and quality. For instance, a Mumbai-based provider has been able to deliver superior cost and quality performance compared to BPOs in cities like Chennai. Low attrition rates, an optimal skill and tenure mix among employees, and higher infrastructure utilisation have been the drivers of this outcome.
- There is a lack of consistent performance within and across companies. For example, a Bangalore-based centre engaged in rules-based decision-making and basic data processes delivers above-average performance on most metrics for the former service but lags behind in the latter. Low performance levels result from inappropriate recruiting practices, i.e., mismatch between skills and job profiles.
- While clients focus initially on cost and quality, their priorities shift rapidly to higher order benefits like innovation and productivity once offshore services are well established.
Project 360° (for IT services companies)
- Productivity improvements are evident across projects in which practices have been institutionalised, particularly application maintenance
- Despite excellent customer satisfaction scores and robust outcomes, significant variance exists across and within service providers on critical metrics like proportion of projects with cost over-runs and people fulfillment rate.
- Customers are increasingly looking for upstream services like requirements gathering and solution design. However, at present, these practices are not robust enough to meet their demands.
- An industrial mindset that encourages institutionalisation of practices separates average from leading performers. The latter are able to absorb 15-18 per cent annualised wage increases without impacting margins.
- The industry needs to focus on improving performance and consistency across six practice areas. These include requirements gathering, solution design, and training amongst others.
McKinsey and Company Partner Noshir Kaka said, "Focusing on operational excellence is critical for the industry to maintain its market leadership by capturing a disproportionate share of the $300 billion addressable market for offshore services. Our study suggests that in BPO, companies at which effective practices are at work, enjoy at least 20-30 per cent lower operating costs vis-à-vis their peers. In IT services, we have seen that this could translate into a 3-6 per cent EBIT improvement for average providers".
"It's not to say the industry doesn't have good practices at work. BPOs have achieved a degree of maturity in practices like relationship management with customers, institution of governance models and knowledge management, while IT services firms scored well on sales and account management, and overall project management. What's important to note is that rising customer expectations and a tightening talent environment are exerting additional pressure on potentially weak practices," McKinsey and Company Partner Vivek Pandit emphasised.
NASSCOM President Kiran Karnik concluded by saying, "India has clearly been the market leader with over 50 per cent of the global market in offshore services. As the market leader, it is imperative that we continue to set standards for the global industry. By focusing on operational excellence as the next frontier in offshoring we can realise our aspiration of achieving $60 billion in export revenues by 2010. As the report says – even greater things must lie beyond."