Outsourcing can help lift a company’s share price by up to 10 per cent if the commercial benefits are explained clearly to the markets, a study has found. The research, commissioned by LogicaCMG, the IT consultancy and outsourcing services group, compared the share price of companies that had announced outsourcing deals with that of others in their sector. It found the shares of those that had contracted out part of their business activity on average performed 1.7 per cent better than their peers that kept everything in house a month after the outsourcing deal was announced.
Archive for June, 2005
After two rounds of layoffs, Ellen Wagner still had a job — training the programmers brought in from India to replace her co-workers. But frustrated and tired of resisting the changes, Wagner decided to take a bold step.
She outsourced herself.
She quit her job in Seattle and took another paying half as much. She sold her house and traded it for a split-level overlooking a pasture, for a third what it would cost in the frenzy she left behind.
She piled into an SUV with her golden retriever, Ginger, and two cats, and turned away from the offshoring trend that has siphoned thousands of white-collar jobs from the U.S. economy.
The journey took Wagner to this town of 1,435 — a self-dubbed “oasis on the western horizon,” nearly 50 miles from the closest traffic light — and a job in an office fashioned out of an old John Deere tractor dealership. The company Wagner works for, Eagan-based CrossUSA, is one of a handful of mostly smaller firms trying this blend of business plan and social experiment.
The slate blue cubicles around hers, decorated with pictures of faraway skylines, include programmers from Chicago, Pittsburgh and Jacksonville, Fla.
“I’ve been here six weeks,” says Larry Cross, who migrated from Halifax, Nova Scotia, after his last job was shifted to India. “And from the door of the office, I’ve already seen three antelope and five deer.”
Watford City will never be mistaken for Bangalore, the nucleus of India’s thriving outsourcing industry. But some U.S. workers and companies are looking to places like this for a way to if not beat offshoring then at least compete on similar terms.
They’re betting that by doing business in cheaper locations, and paying workers much less than their big-city counterparts, they can secure jobs that might otherwise go offshore.
It’s still not as cheap as India. But companies tell customers they’ll be doing business with workers who better understand their needs, in a time zone within an hour of their own. They pitch workers on a less chaotic, more affordable lifestyle.
But will it work? As skilled labor becomes a global commodity and economic realities keep shifting, neither the workers nor their companies can be sure.
Most companies have chosen locations less remote than Watford City, in the rolling grasslands of far western North Dakota. All believe they’ve found a foothold against foreign competition.
In Jonesboro, Ark., and Portales, N.M., startup Rural Sourcing Inc. has opened programming centers staffed by fresh graduates of nearby universities, working for less to stay close to home. The company also is setting up in North Carolina and West Virginia.
“There is talent in areas that have a low cost of living and have no knowledge-work,” says Kathy Brittain White, Rural Sourcing’s founder and president.
In Oklahoma City, Ciber Inc., a computer consulting firm with $840 million in annual sales, opened its first low-cost programming site this year in a vacated call center, using the work stations and telephone operators that were left behind.
Computer work “is going to go somewhere else cheaper, and it can either go to Bangalore or it can go to Oklahoma City,” says Tim Boehm, the executive in charge of Ciber’s low-cost initiative. The company plans five or six centers in the next two years, all in mid-sized cities.
Other companies are trying to work the fringes of large metropolitan areas, including Chicago, Pittsburgh and Silicon Valley, away from the premium office space and an easy draw for workers who live even farther out.
Pay varies. But at CrossUSA’s North Dakota site, programmers make about $40,000 a year. Some of those who have moved to Watford City from metropolitan areas say they used to earn twice that or more.
“I look at my check and I’m crying,” says Gerald Williams, a programmer from Chicago.
Still, workers have good reasons for coming here. Many are in their 50s and say they were being pushed from jobs because of age, or were having trouble finding new positions. Some came for a lifestyle change, tired of long commutes and expensive housing. Others had simply run out of choices.
Jim Near, 59, lost his last job when his Minneapolis company was sold and 500 mainframe programmers were sent home. About the same time, other area employers cast another 1,500 information technology workers into the job market. Near went for two years without work and lost his family’s home to foreclosure. When CrossUSA called last year to ask if he’d consider a move to North Dakota, he grabbed the lifeline.
“My wife wanted to get into a smaller town,” he recalls. “I said, ‘How small do you want to go?’ ”
Wagner, also 59, felt secure in her job, but she’d long mulled moving closer to her Wisconsin birthplace and a grandson in Minnesota. When her company let go many of her fellow programmers, she found herself doing the work of four people and snapping at the Indian programmers brought over for training.
“The people I worked with from India… were concerned about people from China taking their jobs and I was like, excuse me guys, aren’t you taking our jobs?” Wagner says.
CrossUSA’s center represents efforts by both the company and the town to reinvent themselves. Watford City, long dependent on oil drilling and cattle ranching, installed broadband Internet service a few years ago to attract other businesses. CrossUSA set up shop after winning a contract to do computer work for the state government.
Not long after, the company’s primary customer, Eagan-based Northwest Airlines, canceled work after the 9/11 terrorist attacks. Then the state contract was pulled, and CrossUSA closed its center. It reopened last year, when the company was hired by a New York insurance firm to help program its mainframe system.
CrossUSA’s operation here is small — about 20 programmers. But the firm recently landed a contract with a second large insurer. That will require adding 25 to 30 more workers by summer’s end, and a similar number at the company’s Minnesota site, a former carpet warehouse. The company also plans to open another center in rural Montana.
“My dream is to have five centers like this, distributed and networked (across rural areas), because it doesn’t matter where you are anymore,” the company’s CEO, Nick DeBronsky said.
Experience has persuaded more of his employees to buy into that vision.
“What I like about this company is they’ve figured out a way to compete with the outsourcing,” Cross said. The workday over, he takes a swig from the prized special order of Labatt beer, and gazes across an endless vista of gray-green buttes and open sky.
“The only thing that gets me is, it’s 47 miles to McDonald’s.”
A host of questions on NiSource’s massive outsourcing of jobs to IBM was answered last week when the utility company announced details of its $1.6 million deal with the computer giant.
At NiSource operations spread across nine states, 572 white collar and technical workers were told they will start working for IBM July 1 or shortly after. Another 445 were told they will be let go by the end of 2006.
Workers at the Northern Indiana Public Service Co. call center in Merrillville were told their jobs are safe — for now.
One question remains: Will it work?
That question gains added urgency because NIPSCO has ranked at the bottom of J.D. Power and Associates annual utility industry customer satisfaction surveys for the past several years. It also has battled consumer groups over the closing of service and maintenance hubs.
“Obviously both they and IBM are over a barrel; they need to show an improvement in how things are done,” said Jeff Kaplan, managing director at consulting firm THINKstrategies. “And it’s in both their best interests to do so.”
NiSource’s effort in managing the relationship with IBM will be the key to getting the job done right, Kaplan said.
Kaplan has written on a trend dubbed “backsourcing,” a process where companies outsource services, become dissatisfied with the result, and bring the work back to their company.
One of the most prominent instances of backsourcing was JPMorgan Chase’s canceling of a $5 billion outsourcing contract with IBM last year. In May, Sears Roebuck said it had ended a $1.6 billion technology services contract with Computer Sciences Corp.
In the utility industry, the wholesale outsourcing of business processes, such as was done by NiSource last week, has a shorter track record, Kaplan said. The biggest deal so far is Dallas-based TXU Energy’s outsourcing of 2,700 jobs to Capgemini.
In one utility outsourcing snafu, Tennessee natural gas distributor Atmos Energy two weeks ago was fined $40,000 by state regulators for a subcontractor’s failure to read customers’ natural gas meters. At NIPSCO, that work still will be handled by its own employees.
Some analysts see a slowdown in outsourcing in the industry as a whole, but most agree there will be more outsourcing in the utility industry.
“You will definitely see more of these outsourcing deals, despite these little foobahs, because it’s the easiest, quickest way to cut costs.” said Rodney White, an associate editor at Platts’ Gas Daily.
NiSource estimates it will save $530 million over 10 years in operating and capital costs.
So far, TXU reports its outsourcing deal is going well.
NiSource officials say the same will be true of their outsourcing deal with IBM.
The utility company, with headquarters in Merrillville, will spend $5 million per year to manage the contract with IBM.
“We continue to manage our company, and we manage the collaboration with IBM,” NiSource spokeswoman Kris Falzone said Tuesday, when the outsourcing deal was announced.
“We still maintain control over strategy, policy-making and decision-making around all our activities.”
The Citizens Action Coalition, the state’s largest grass-roots consumer group, thinks controversy over NIPSCO service and rates may have influenced NiSource’s outsourcing decision.
“I think they went a little softer on NIPSCO, because of public anger at the whole situation up there in Northwest Indiana,” said Grant Smith, Citizens Action Coalition Executive Director.
He pointed in particular to NiSource’s decision to keep the NIPSCO call center in Merrillville. Other NiSource call centers will be consolidated to a call center in Pennsylvania.
NIPSCO officials say their utility has a unique profile among NiSource’s family of companies, because it serves both gas and electric customers. That is one reason the call center will be kept where it is, according to Colleen Reilly, a company spokeswoman.
NiSource officials long had said call center jobs and others where employees interact directly with customers would not be shipped overseas.
On Tuesday, they stuck to that pledge while confirming “a small portion” of the overall outsourced work will be done overseas.
Overseas outsourcing stirs passions in Northwest Indiana, a region battered by foreign competition in steel and other industries. White said there is nothing to stop utilities from shipping some types of work overseas to cut costs.
“If the job requires customer interface where someone has to answer questions in English and know the nuances of the language, then it will stay here,” White said. “But if it can be done digitally, it’s going far, far away.”
The Sun newspaper reported Thursday that a reporter posing as a businessman purchased the bank account details of 1,000 Britons — including customers of some of Britain’s best-known banks — for about $5.50 each.
The worker who allegedly sold the information bragged to the undercover reporter that he could “sell as many as 200,000 account details a month” and declared that “technology is made by man and it can be broken by man,” according to the newspaper. The Sun said the worker received the information from “a web of contacts who work in call centers.”
The newspaper’s report, which was widely covered in the Indian news media, has renewed criticism that outsourcing firms have failed to erect adequate protections against fraud in their zeal to take advantage of the booming demand from foreign companies seeking to lower costs by shifting some office operations abroad.
The incident also has played into the hands of workers and politicians in Britain, the United States and other developed countries who see the outsourcing phenomenon as a threat to employment and prosperity at home and are eager to find ways to discredit it.
The report comes on the heels of another scandal in which several Indian outsourcing workers in the western city of Pune are alleged to have used their positions to steal $426,000 from New York-based customers of Citibank.
“This is California” during the Gold Rush, said Shankkar Aiyar, a business journalist and senior editor at India Today magazine who has written widely on outsourcing. “Everybody who sees an opportunity sets up shop. They want to start fast, they’ve got a contract in hand, and some of them are taking shortcuts.”
India has no monopoly on such fraud. This month, MasterCard International Inc. announced that more than 40 million credit card numbers belonging to U.S. consumers were accessed by a computer hacker who breached security at a processing center operated by another company in Tuscon.
India’s National Association of Software and Service Companies, known as NASSCOM, has said the industry was already taking a number of steps to promote better security, including the development of a national registry of outsourcing workers that will help screen out potential criminals. Outsourcing companies in India typically bar workers from downloading or printing information, and often from carrying cell phones or even pens into their work areas.
“The problem is not unique to any single nation,” the group said in a statement Thursday. “It is one that can affect any country, and each of us has a responsibility to take on the criminals.”
The Sun identified the outsourcing worker at the center of its sting as Kkaran Bahree, 24, a computer expert and college graduate who lives with his parents in New Delhi. It said he provided the newspaper’s reporter, Oliver Harvey, with “account holders’ secret passwords, addresses, phone numbers and details of their credit cards, passports and driving licenses.” The newspaper said that some of the information was contained on a CD and that Harvey’s three meetings with Bahree had been secretly recorded and filmed.
The Sun said that Bahree “gathers supposedly secret information from corrupt call center workers in Delhi” and that it had verified the authenticity of the information with “a security expert.” The newspaper said it had given investigation details to the City of London police.
Bahree could not be reached for comment Friday. But in an interview with the BBC on Thursday, he denied any wrongdoing, saying he had been asked by an associate to give a CD to the Sun’s reporter, did not know what it contained and had not received any payment.
The newspaper said Bahree had worked for several years at Daksh eServices, now a subsidiary of IBM, and currently works for an outsourcing company called Infinity eSearch in the fast-growing New Delhi suburb of Gurgaon.
At a news conference Friday, Infinity’s managing director, Rahul Dutt, said the firm had no banking clients in Britain and did not handle financial information for clients, according to the Press Trust of India news service. Dutt said Bahree has worked at the company for about three months and had been given until 5:30 p.m. Friday to give an explanation “about his alleged role in the scam.” Calls to the company’s Gurgaon office went unanswered late Friday afternoon.
India’s outsourcing industry performs a range of customer-service and other back-office functions for Western and multinational firms in areas such as banking, insurance and health care. The industry is creating jobs at the rate of nearly 100,000 a year, and its revenue is growing at more than 40 percent annually, according to NASSCOM. But analysts warn that the industry’s rapid growth has stretched the supply of educated English speakers, prompting some companies to lower their hiring standards.
Indian BPO is safer than UK’s: Brit firms
Twenty-four hours after a British tabloid sting apparently clouded prospects for India’s sunshine BPO industry, the UK’s leading data protection experts and lawyers masterminding data transfer contracts between British companies and Indian call centres have stepped in to the row and defended India.
Tim Pullan an IT & Outsourcing partner at London law firm Lawrence Graham LLP told TOI on Friday that his clients, who signed some of the biggest outsourcing contracts with India over the last two years, were eminently satisfied with the security standards in place in call centres across Delhi, Mumbai, Bangalore and elsewhere in India.
Though Pullan would not name names, his law firm’s clients are understood to be some of the biggest British banks and telecommunications companies to set the outsourcing trend going with India. Pullan admitted his firm had overseen seven of the biggest deals in the last 24 months.
Pullan said at the time his clients were finalising rigorous data transfer contractual terms with Indian call centres, the Indian companies had been willing and able to prove they compied with ISO1799, which are internationally recognised security standards, and BS7799, the British equivalent of the ISO.
He said, in stringent and possibly unexpected defence of India’s furiously-growing call centre industry, that data security standards were actually more rigorous in India than in British call centres.
“We’ve found the Indians more focussed on such issues,” Pullan pointed out, adding that Britain’s leading government regulatory body, the Financial Services Authority (FSA) had recently issued a similar report giving the thumbs-up to Indian call centre security standards. Leading British lawyers said, sotto-voce that The Sun tabloid’s sting operation and reporting of an Indian call centre worker’s crookedness smacked of “racist overtones”.
Pullan agreed that “The Indian outsourcing industry is an easy target because of popular fears about the transfer of jobs overseas.”
But carping critics said the defence of India’s call centres did not tally with their recollection of the FSA’s May report, which was written after its inspectors toured Indian call centres and assessed security standards.
Financial experts said the FSA report, as they recalled it, had warned that overseas calls centres posed “a material risk” to its goals of cutting financial crime, protecting consumers and retaining confidence in Britain’s financial markets.
But Pullan insisted the FSA gave a clean chit to India. He added that Indian call centres were, in any case, under tremendous pressure to comply with strict data protection rules commonly observed within the UK and the European Union. The Indians, he said, agreed to sign up to “highly enforceable” contractual terms.
These included the right for a British client to take “immediate action” such as “switching off” the outsourced job without a time lag. He said the legal action signed up to by Indian call centres, put them legally and financially at huge risk if they failed to comply with stringent security standards.
“The financial consequences for the Indians could be costly, they are unlimited and without a financial cap,” he said.
Pullan added that most Indian call centres “potentially huge liabilities under data transfer contracts which are set up between banks and the outsourcing companies.
“These companies have a lot more to lose than their reputation, as reflected through their tight security measures.” In an attempt to calm some of the hysteria over the alleged sale to a British reporter of 1,000 British customers’ financial details, Pullan pointed out that “Corruption is a risk inherent in the financial services business, but rotten eggs are no more likely in India than they are here.”
He insisted that “when it comes to security and rigorous data protection compliance controls, in our experience the Indian call centres are often streaks ahead of their UK counterparts.”
India won’t look into outsourcing scandal
British police sought help from Interpol on Friday, after a newspaper reported that one of its undercover reporters bought personal data on 1,000 British customers from an Indian call-center employee.
Karan Bahree, an employee at Infinity eSearch, a Web designing company in Gurgaon, a New Delhi suburb that has become a hub of outsourcing companies, did not report to work Friday but denied any wrongdoing.
Bahree “says he is innocent … he told us that he was only trying to make a presentation to someone,” said Deepak Masih, lawyer for Infinity eSearch. The company said that it had nothing to do with the scandal and that it had given Bahree, on probation for three months in the company, until Friday evening to formally explain his role.
“We face (a) jurisdiction issue,” London Police spokeswoman Orna Joseph told the private NDTV news channel. “We cannot charge anybody in India. So we are working through the Interpol so that Indian police can speak to the people involved.”
India’s information technology minister said the government would not intervene.
“It is a matter between a company and its employees. It is also a subject matter between the call-center company and the company which has given this contract,” Communications and IT Minister Dayanidhi Maran told reporters.
The allegations have put India’s money-spinning outsourcing industry – with the largest share of call center business in the world – into a corner over whether the customer data to which it has access is safe.
The Sun newspaper said it paid 3.00 pounds ($5.40) each for details on the Britons’ bank accounts, credit cards, passports and drivers’ licenses, including numbers and pass codes. Addresses and phone numbers were also included, the tabloid said.
Scores of Western firms farm out office functions such as telemarketing, call-center operations, payroll accounting, and credit-card processing to companies in countries such as India, where wages are low and skilled professionals are abundant.
FACTBOX – Details of India’s call centre, outsourcing sector
London police are investigating reports Indian call centre workers illegally sold British bank customer details.Following are some facts about India’s outsourcing-driven back-office industry:
- Industry has grown more than 50 percent a year since 2001/02 (April-March).
- Exports are expected by industry to touch $7.3 billion in the year to March, 2006, double those of 2003/04.
- The sector employs 350,000, mainly low-cost, English-speaking workers earning a fifth of their Western counterparts.
- Western unions oppose outsourcing and further transfer of jobs. Controversy figured in U.S. presidential elections.
- Companies use India-based independent firms or their own Indian units to carry out work such as credit card sales, helpdesks and insurance claims processing.
- Indian police are investigating a $400,000 credit card fraud involving MphasiS BFL workers.
- India’s software and service industry body plans a worker registry to help background checks and tighten controls.
The paper reported that its investigator was able to buy financial details of 1,000 people for only £3 a time.
There are fears that such freely available details could be used by criminals to clone credit cards, buy goods over the internet or clear out customers’ bank accounts.
National Outsourcing Association (NOA) chairman Martyn Hart said, “What the Sun investigation reveals is that Indian employees are no less errant than employees in the UK or anywhere else in the world.
“What banks and offshore companies must do is ensure that they have the right security procedures in place to defend against fraudulent employees, and that offshore operations are managed carefully.
“There is always an element of risk where sensitive data is stored, and companies must do their utmost to reduce this risk and provide the tightest security procedures possible.”
Donal Casey, a consultant at Diagonal Security, a division of IT services group Morse, said, “It’s shocking to see that one individual could get their hands on such complete, confidential information.
“Quite simply, this should not be possible. Banks have multiple layers of security, and they should be tracking and auditing who within both their organisation and the outsourcer has access to and is using confidential customer data.
“This should enable them to spot any suspicious behaviour. It shouldn’t be possible for one individual to collect this level of detail on thousands of customers. Something clearly has gone wrong in this instance.”
The company did not disclose the scope of the deal but industry sources believe it to be worth several million dollars for the Ra’anana-based company.
GECIS, a GE Capital affiliate, is a remote processing organization and one of the largest shared-services providers in India. The company’s services include finance and accounting services, insurance services, customer fulfillment activities and processes and managed IT services.
The NICE Perform solution had replaced a competitor’s existing system, Nice said.
“The outsourcing industry is choosing NICE Perform because it allows the enterprise to impact directly on the bottom line and significantly improve business processes,” said Doron Ben Sira, president of NICE APAC, the company’s Asia and Pacific division.
SummitHR Worldwide, a US-based human resource business process outsourcing (HR BPO) firm, is one such company that makes out pay cheques from Chennai for thousands of American employees. It processes a million US pay cheques a year, about 22,000 a week, amounting to about $500 million of payroll, according to the company’s Chairman, Ranjan Sinha. “We plan to double the number of pay cheques processed by the end of the current year,” he told Business Line.
The company provides day-to-day support to over 25,000 employees across the US. It provides end-to-end HR outsourcing services, including payroll processing, contingent staffing (temporary staffing), recruitment process outsourcing, benefits administration and finance and accounting. The company has about 190 employees in Chennai, including chartered accountants, and plans to double the number by the year-end, he said.
SummitHR, through its outsourcing partners in the US, services Cisco, AON, Wells Fargo, Sun Microsystems, Komag, Lockheed Martin, Loral Aerospace, Synopsys, KLA-Tencor, LSI Logic, United Technology and Stanford University, he said. The clients range from a three-person office of doctors to a large firm of 1,400 employees. The company has its own end-user clients, and also partners with US-based HR outsourcing firms and does work offshore, he said.
In the US, the size of the HR outsourcing in the mid-market (less than 10,000 employees) is about $30 billion, payroll processing is about $80 billion and benefit administration is about $40 billion. However, the US-based firms have been outsourcing HR-related services within the US, and offshoring is still at a nascent stage. SummitHR, however, has migrated to Chennai from the US about six HR outsourcing contracts, he said.
SummitHR has on its advisory board Larry Pressler, Senator; Romi Malhotra, CEO, Dell India; Chris Casciato, COO – Global Investment Banking, Goldman Sachs; and Anupam Prakash, Managing Partner, Hewitt India out-location services.
It handles over 700 benefits, including health and vision and disability of its clients. It also takes fiduciary responsibility in filing federal and state taxes to the tune of over $125 million.
In the process, it has achieved the same level of productivity as its US counterparts, he said.
According to Sinha, mid market companies in the US spend around $4,000 per employee per year on administration. SummitHR enables over 50 per cent expense reduction in key HR services, including payroll, staffing HR information system and benefits administration.
Jeff DeLouch, President and CEO, US Personnel, a $300 million US-based company and one of SummitHR’s outsourcing partners, said that the company looked at SummitHR mainly for the quality of work, and not just cost. “If it were a pure cost-based decision, we would not done have offshored work,” he said.