Vision for Shared Services and Outsourcing Asia
Bharat Sampat, CFO of Development Credit Bank reflects on how shared services are evolving throughout Asia and considers how the current economic climate in Europe and North America could affect the shared services sector there.
SSON: Who is driving Shared Services and Outsourcing growth in the Asian Continent - large Western multinationals, Asian Governments or local Asian firms?
Bharat Sampat: I would like to answer that in three parts.
In the past, Shared Services was being driven by large Western multinationals who wanted to lower their cost base. These Shared Service centers have matured over a period of time and have started offering higher value-add services, for some of which, the skillset required is not available in the home countries.
Secondly, the coming together of various services in a separate specialized Shared Service Center has resulted in synergies which are not possible to obtain in home locations, e.g. product control is a very specialized activity specific to the banking sector. The function is a critical risk management function which was performed by small teams in home locations. Even within such a small team, individual members specialize in different products. These skill sets are difficult to replace in home countries. As compared, the activity performed in a Shared Services Center diminishes this risk as the concentration of activity for different geographies into fewer locations provides critical mass of skill sets. Thus higher value-add services and availability of specialized skillsets will continue to attract large Western multinational organizations to the Asian continent.
Asian governments of emerging economies like India do not have resources available to deliver the superior services which are being increasingly demanded. To give one example, in my home city of Mumbai, college admission was a manually intensive process which required paper applications being lodged where students wanted to apply for admissions. This resulted in a mad rush for application forms and a concentrated crisscross commute across the city to lodge them within announced timelines during the peak monsoon season. At the end results were sub-optimal. In my own case, three months after the close of the 1996 admission cycle I discovered that my eldest daughter could have been admitted to a different college which was higher in her order of preference. But we lived with a sub-optimal choice. For the last two years, the process has been outsourced to a private vendor. After initial hiccups last year, the process is running fairly smoothly this year (my younger daughter is seeking admission, so I speak from first-hand experience). This is a demonstration of the effects of successful service delivery - a demand from a population exposed to superior service via exposure overseas with media scoops highlighting wastage and poor services etc. are driving Federal and State governments in India to embrace technology like never before. The scale is breathtaking in terms of volume as well as diversity. The challenge is in the last-mile delivery to a diverse population with different access and exposure to technology. It’s a great opportunity in the making.
I do not think local Asian firms will drive growth in outsourcing. They have access to the same talent pool as the Western multinationals and local governments - at the same cost. Thus, there is neither a cost saving opportunity nor any compulsion to seek another resource pool. Instead, they will selectively poach talent from Shared and Outsourced Service providers to fill their skill gaps. They can afford to pay a small premium to the right resources unlike Shared and Outsourced Service providers who would need to maintain a degree of wage parity across their internal larger teams.
SSON: So are we creating sub-employment or opportunities for the development of local citizens?
BS: In my opinion, we are creating a huge opportunity for local citizens to obtain gainful employment and improve their skills. As mentioned above, these skillsets are permeating into local businesses which tap into this talent pool. While there appears to be a big pool of local citizens engaged in repetitive low skill requirement tasks, there is a steady growth up the value chain as mentioned in response to your prior question. As offshore centers gain critical mass, convergence of activities of different divisions from various geographies into a single center initially provides scale and growth opportunities, so a team member of geography A can be the next team leader for a similar process coming from geography B.
At the next level, and here, the senior management has a critical role to play, linkages at hand-off points across various functions can generate synergies for businesses and opportunities for growth. Inter-entity reconciliations is a head office based finance activity which has a high level of dependence on local finance functions across the globe. With significant convergence of accounting activity from across the globe into a single center, inter-entity reconciliation can be efficiently delivered from the offshore center.
The scaling up of individual functions and integration of diverse functions creates tremendous growth opportunities for local citizens. In my team, I have had employees moving up from the accounts payable staff to Basel II analysis and reporting functions in a short period of time.
SSON: Given the current economic climate and volatility in the European and North American markets, what are some of the factors that will lead to growth in the Asian shared services and outsourcing landscape?
BS: Consumer demand is likely to remain muted for an extended period across the European and North American markets. Pace of withdrawal of stimulus, expiry of unemployment benefits and fragile growth will continue to generate volatility in this already muted demand. These conditions will, to some extent, reduce the wage gap between these markets and Asia. Higher growth rates in Asia will also contribute to this. Local political compulsions will result in direct and indirect barriers to offshoring. The recent increase in H1B visa fees by the USA is an example.
On the positive side, reduced purchasing power in the hands of customers will fuel the demand for delivering goods and services at a much lower cost. Frugal engineering practices of Asia in the manufacturing sector and the ability to deliver efficient low cost services on a large scale will intensify the need for European and North American markets to seek lower cost bases. While there will be ups and downs, on a secular basis, this will lead to very strong growth of the Shared Services and Outsourcing industry in Asia.
SSON: How do you see Shared Services and Outsourcing evolving and what can we expect from the sector over the next decade or so?
BS: Shared Services and Outsourcing is fast evolving into an industry with a global outlook driving business and a local cost delivery base fulfilling the business promise. Economies of scale and cross functional integration will continue to provide significant business leverage on the service delivery side. Over the last few years the industry has exposed local leaders to global cultures and best practices. It is this generation of leaders, who are as comfortable working with, say a consensus based business culture of Amsterdam, as they are with a direct business approach of Americans.
Local economies are also growing at a very fast pace. These will compete with offshore talent for a scarce resource pool. Offshore centers which are able to provide internal growth opportunities will be the winners.
SSON: In what way will cloud computing change the face of the Shared Services and Outsourcing sector in Asia and can you identify some current examples?
BS: Cloud computing will generate direct service opportunities to the IT sector. In addition, these will offer offshore IT centers to provide SAAS opportunities. Service providers will spread across wider geographies more easily. This will enable offshore centers to expand to cheaper locations and tap an expanded labor pool driving further cost efficiencies.
SSON: What are some of the key challenges that you see the Shared Services industry facing in the short term?
BS: Direct and indirect barriers to offshoring driven by local political compulsions is the biggest challenge in the immediate future.
Ability to retain key staff at an affordable salary will be the next big challenge as growth of local economies and expansion of local government services into the outsourced space will be drivers of attrition and wage inflation.
Global restructuring of international businesses by way of mergers, demergers and business unit sell offs will continue until Western economies stabilize – this could take years. Service providers who are able to manage these transitions well will generate significant brand equity. Value of this capability was blindsided in the years of growth but has been in focus over the past couple of years.
SSON: On that point, as China and India become more affluent, where do you see the next outsourcing hotspot?
BS: I feel both these countries still have enough resources to compete successfully in offshore markets in the foreseeable future. Speaking as an accountant, I see Sri Lanka as the next outsourcing hotspot in Asia. It has a good number of qualified accountants, it can attract managerial talent from India to complement local resources to quickly scale up. It also has size to generate sufficiently large offshore centers.
From a distance, Malaysia seems to be focused on the IT sector, but I see it having huge potential in the business processing segment as well. It is in an unique position to attract core talent from both – India and China.
Bharat Sampat will be a panelist at the 13th Annual Shared Services & Outsourcing Week Asia, Singapore, 20-23 September, 2010. For more information on the conference visit www.ssweekasia.com.