Business Process Outsourcing (BPO): Emerging Scenario and Strategic Options for IT-enabled Services

Abstract

The paradigm shift that the Internet has brought about in communication has opened up a plethora of opportunities for outsourcing business processes (BPO) across continents. Success lessons in manufacturing sub-contracting are found to be relevant for under- standing the logic of BPO. Outsourcing involves transferring certain value contributing activities or processes to another firm to save costs and for the principal to focus on its areas of key competence. The possibilities of disaggregating value elements for the purpose of creating value in them at the sub-contractors‘ premises and final aggregation and synthesis at the parent organization are determined by the nature of industry, limitations of coordination and control, product maturity, and level of inter-firm competition. IT-enabled services (ITES) includes services that can be outsourced using the powers of IT; the extent to which this is possible depends on the industry, location, time, costs, and managerial perception of the risks involved. The Internet has facilitated execution of several activities, previously done within geographical proximity to the firm, from remote low-labour cost locations, drawing both transaction cost and production cost efficiencies. Some of the factors that come in the way of parents setting up their own operations in India and have significant implications for the growth trajectory of Indian BPOs are: direct cost of operations and scale economies long-term assessment of India as a low cost centre cost-benefit assessment of own vs rented possible loss of control over their transactions and confidentiality and security of the data if an outsider handles them brand implications of perceived drop in quality robustness of existing systems and processes. Many BPO firms do not seem to realize the possible exit barriers and strategies to manage exit, if necessary. What happened in the dot com era can very well happen in the BPO space also unless care is taken to manage this rapid growth while retaining productivity and quality. Two key capabilities required for success in ITES space are: capabilities to understand customer needs in the specific domains and acquiring business (BD capabilities) and capabilities to execute them efficiently (Ops capabilities). ITES firms are likely to bifurcate their firm into two parts based on these two critical success factors. The successful segregation of value elements in a number of processes has enabled value configuration in as many ways as required by customers, both in the case of product and service components of customer value. The current trend in outsourcing will go up when such analysis-synthesis becomes a routine. This will be accelerated also because the capabilities required to do so depend not only on technical skills and knowledge in a domain but also strong process capabilities. The trend of outsourcing is likely to continue to grow in the future despite temporary political protests because of the robust arguments outsourcing finds for itself in the economics literature, both in terms of transaction and production cost advantages. Sub- contractors need robust systems and processes along with adequate domain knowledge and assured physical infrastructure for this to happen. In any case, the Indian BPO firms have to consistently prove their capabilities to deliver and create near indispensable situation for the parent to survive without them. This will not only involve growing technical and domain expertise, but also refinement in systems and practices, while keeping costs under control. In essence, BPO firms have to manage their consolidation and growth challenges simultaneously.