Not a day goes by without the national papers reporting yet another back-office, or customer contact process, being outsourced to an offshore location. What was initially a trickle has now become a flood, with cost reduction being the primary driver. But where is the industry heading and will it all be ‘plain sailing’ in the next five years? To answer this question, a number of themes and issues need to be examined, and whilst these can be considered separately, they are all undoubtedly interlinked and inter-dependant.

Process migration
 
The type of activities offshored will continue to move up the value chain from basic data entry to more complex 'knowledge services', which will include risk modelling, data mining, actuarial services and audit. They will also include more technologically sophisticated tasks such as the provision of radiology interpretation services to American hospitals from Indian doctors, outsourcing of financial and equity research by investment banks, and R&D services being outsourced by multinational engineering firms.

One of the key challenges in offshoring will continue to be risk diversification. Diversifying risk by placing different processes with different vendors, in different countries, will continue but may result in disaggregating the end-to end process. Currently companies have offshored parts of processes for migration, rather than whole capabilities; this has resulted in process fragmentation and required greater management time and capability to re-integrate. The future will, therefore, need to see the migration of entire processes to achieve best practice; this will become increasingly feasible as the market matures.
 
Transformation

Offshore outsourcing deals will become more transformational in nature, as marketing of these deals becomes more sophisticated. This will require a greater knowledge of a customer’s business, their strategy and a deeper understanding of the drivers of shareholder value. The need for vendors with more sophisticated consulting skills will therefore increase and, as a result, many offshore vendors will look to acquire consultancies operating across a wide variety of industry verticals and domains in a bid to rapidly upgrade their technical skills and industry knowledge. The future will see vendor priorities continue to shift from a pure focus on cost reduction, to the enhancement of domain knowledge, management of change and transition issues, and the development of more sophisticated training and people management, which will become essential in an offshore environment characterised by rapidly growing staff attrition.
 
Governance, compliance and regulation
 
As the offshore vendor becomes an integral part of the customer's ‘extended organisation’, governance will emerge as a key issue in the future of offshoring. Companies will increasingly focus on governance as a way to increase productivity and maximise savings. This increased focus will ensure that demonstrable good practices are being followed. Compliance with regulatory requirements, such as the 2002 Sarbanes-Oxley Act, will highlight the responsibility of all company directors for the effectiveness of their company's outsourced control environment. It will become increasingly important for management to demonstrate that the enterprise has the necessary assurance mechanisms in place to monitor and mitigate potential risks in its network of relationships. Outsourcing relationships are already being increasingly managed by a combination of controls that include a raft of policies and guidelines, service level agreement definition, monitoring and control of the vendor, right to audit, third party reporting, and change and termination processes. This trend for increasingly demonstrable control will continue.
 
Human resources
 
As perhaps the pioneering offshore destination, India will face major staff retention and morale issues in the next five years. A huge pool of talented labour is entering the industry and all have ambitions to grow within the company, but prospects will be limited. A highly mobile workforce will further exacerbate attrition rates already approaching 50 to 60 per cent, creating major HR challenges for the large offshorers. The entry of multinational vendors paying a premium for quality staff will further exacerbate the problem. To hedge these risks, Indian vendors will outsource various work to China and other emerging players; South Africa and the Philippines will also be beneficiaries. One of the key challenges will continue to be achieving global capability where work can be ‘load-balanced’ across multiple locations. However, the ability of most BPO operations to undertake global load-balancing will be limited. The ability to offer contract flexibility will, therefore, be a unique selling point in the future.
 
Wage inflation in India has been high (20 -25 per cent) and is set to accelerate, particularly within middle management positions. Historically the depreciation of the rupee has compensated for this, but going forward this is less likely. Pricing within offshoring contracts will therefore be a key challenge for the industry as vendors' margins continue to come under pressure. Pricing in the future will increasingly be based on what is delivered. Risk and reward sharing agreements will also encourage vendors to make real bottom-line improvements for their clients.
 
Currently many business processes that are offshored are done so because of the perception that benefits (cost and operational efficiencies) will be immediate and no major change programs will be needed. But, as technology continues to advance, the rapid automation of processes will generate severe people redeployment issues, bringing a raft of complications. Advanced voice recognition software and other ‘high intelligence’ technology will reduce the need for human interaction in many of the more basic customer contact processes and end-to-end processing. The movement towards smarter technology will therefore see employment levels in the BPO market stabalise during the next five years. 
 
Emerging economies
 
India's domination in the offshoring sector will continue, as other countries with English-speaking labour find it difficult to compete with India's huge pool of talent, cutting edge technology, rapidly improving infrastructure, reducing telecoms costs, and superior process and project management skills. However, for commoditised standard processes, China will emerge as a worthy competitor to India during the next five years. Its pool of English-speaking workers will reach five million by 2006 and a thrust into this sector, backed by the government, will signal the arrival of a major force, but this may be too little too late. Other countries (the Philippines, South Africa, Mauritius, Barbados etc.) will be selected for specialist skills/languages, or because the outsourcer already has some connection or presence in that country. A multi–country strategy will continue to be followed by most outsourcers as business continuity and disaster recovery issues continue to be a concern.
 
Industry dynamics
 
Customers
 
The future will see a plethora of pilots turning into full-scale operations. However, this will take more organisational effort, focus, and investment, than many currently expect, understand or have planned for. Short-term projected cost savings for some of these operations may, therefore, not materialise, resulting in some questioning the move offshore. However, for the majority, a significant structural impact on their cost/income ratios will have been created; this, coupled with greater comfort provided by a maturing vendor market, a reduction in implementation costs due to reduced learning costs, and the completion of current expenditure/income management strategies, will create the necessary offshoring momentum for new entrants to come in. So, the near future will see smaller financial services organisations, SME’s, and those companies that failed to ramp up in the initial offshoring wave, consider the move offshore. In the short term, Build Operate Transfer (BOT) models will continue to grow in popularity and a few large players will build new, captive operations. Organisations, however, will remain unclear as to how the market will mature and will want to keep their options open. In addition they will recognise that processes need considerable reengineering and re-architecting to deliver the aspiration of a consistent customer experience, though many will not have yet worked out this new design.
 
Longer term, large organisations with global business intent will continue to operate captive models. Some of them will also see this as an entry point into new markets such as India, and as a way to expand their commercial interests there. Others will either not exercise their options to transfer their Build Operate Transfer (BOT) contracts, or sell their captive operations to vendors. However, the desire to re-allocate investment funds away from the back-office will not be realised in the short-term and will only be fully achieved when organisations are able to outsource into a mature market. Captive operations of international companies, particularly those of banks and insurers, will continue to grow at the expense of third party suppliers as issues of risk and management control come to the fore. Some of these captives, seeing an opportunity to leverage their own domain knowledge and offshoring expertise, will begin offering these services to third party customers, thereby turning their offshore processing operations from cost to profit centres. Some may succeed; others will be forced to re-evaluate their core competencies.
 
Suppliers

Offshore vendors will become acutely aware of the need to globalise and will make acquisitions in both the BPO and IT space in the US and UK. Global providers, however, will expand organically and where suitable targets are available, through acquisition of Indian and other offshore providers, into the offshore BPO space. Rapid consolidation in the industry will be inevitable and the plethora of today's suppliers will rapidly diminish. Four tiers will probably form, comprising some of the following companies:

• Tier 1 (International Players): IBM, Accenture, CapGemini, ACS, EDS, HP, CSC
• Tier 2 (Indian Players): TCS, Wipro Spectramind, ICICI OneSource, HCL,
• Tier 3 (Others): WNS, Xansa
• Tier 4 (Smaller Niche Players)
 
Other smaller players will operate in niches of the market, as they will not have the economies of scale and international marketing clout to grow the business appreciably. Indian vendors themselves will realise the importance of global sourcing of staff and will outsource parts of their workload to places such as China in order to diversify their pool of resources. Indian corporates will also begin outsourcing their own internal business processes. Indo-Rama Group's outsourcing contract with Accenture in India will be the first of many such deals. Offshoring will continue to gain momentum and at a much greater pace than most predict, though not all areas (e.g. outbound customer contact) processes will be successful and a number of offshore processes may well be brought back in-house. However, the vast majority of offshoring will deliver superior returns for clients, as the convergence of IT and BPO will deliver massive cost reductions and productivity gains for international companies.
 
Amit Badami
Director EMRG LTD