Global Sourcing & Delivery - The Three Models

This CEO Topic is the last of our three part series on offshoring in which we examine the various models of offshoring and provide examples of GA portfolio companies that have either successfully implemented such programs or those that are providers of offshoring capabilities (e.g. Genpact, Hexaware and Patni).

There are three major models of offshoring: a Captive, a Third Party Provider (TPP) or a Build-Operate-Transfer (BOT) model. Experience and knowledge of the offshore location and its regulatory framework is helpful since it is essential that you understand the contractual and legal complexities around each model in making your selection. These models differ from each other along the following parameters:

• Extent of management control
• Investment and operating costs
• Management effort including governance models
• Operational risk
• Scalability
• Internal organizational dynamics

A Captive is under the direct management control of the parent organization and therefore requires high management effort in setting up and running it. It also involves higher initial investment and operating costs. Since it is solely dependent on the parent for its business, a capitve has limited scalability and low operating risks in terms of data privacy, data confidentiality, etc. This model is ideally suited for critical and core processes of the parent. Genpact was a captive for several GE divisions until its spinoff in 2005. GA’s additional portfolio companies with captive operations include Eclipsys, Xchanging, Intec and IHS.

Offshoring to an Outsourced Third Party Provider (TPP) requires the parent to relinquish operational control (though there could be variants to this arrangement through a virtual captive – e.g. Wachovia has one with Genpact) and hence requires far less management effort and initial investment. Management control is retained through the metrics in the Service Level Agreements (SLAs). Moreover, the supply side issues are dealt with by the TPP. This model therefore has more scalability, but has additional operating risks associated with it. While this was earlier ideally suited for non-core, structured and people-intensive processes, it has now been extended to specialized and critical activities such as analytics and research. Most of the IT offshoring has been done using this model, including GA portfolio companies such as Liberata and Hewitt.

In a Build, Operate & Transfer (BOT) model, the initial investment and set-up of the delivery center is entrusted to a TPP with a proven track record of offshoring. The parent company retains the option to regain management control of the center once it has been established and is operational, thereby reducing its initial investment and risks. Once the transfer is complete, it becomes a captive model. PeopleSoft is an example of a BOT, that was set up by Hexaware. Others include AIG and Hewitt (again by Hexaware).

Other models include Joint Ventures between the overseas parent company and an Indian partner/service provider, and hybrid models involving both a captive and one or more TPPs. The latter requires effective offshore management programs within the parent organization to extract maximum value.

Establishing and adhering to a plan for governance of the processes sent offshore, post this migration, is key to sustain the benefit gained, and therefore it is important for the organization to think through this aspect as well. This will vary depending on which organizational model is for offshoring.

Finally, it is important to realize the crucial role of technology in implementing an offshore strategy. Involvement of the technology function early in the planning phase can help avoid some of the operational issues related to offshoring.

The role of external consultants and the offshore service providers / suppliers is critical in conceptualizing and implementing a successful offshore strategy. Today, offshoring has evolved to the extent that firms such as TPI, Everest, BCG and McKinsey have established specialized consulting practices to focus on offshoring. These firms can help organizations establish their strategic offshoring goals, develop the transition and governance plan, identify and re-engineer the specific processes to be sent offshore, establish the baseline metrics and assess the risks associated with offshoring, ultimately helping select the appropriate model and provider. In fact, some of these firms can help in the actual process of governance as well (e.g. Ernst & Young).

Some of the larger service providers such as Genpact, Xchanging, Hexaware and Patni (all part of the GA portfolio in India) have set up consulting practices which help potential customers achieve similar objectives, thereby assisting them in their planning and initial phases of execution. These global service providers can help in defining processes and training personnel as part of their overall solution as well.

Basically, these service providers bring the following value to the table:

• Best practices overall
• Operational discipline and improvements through the use of quality tools
• Scale-driven cost reduction because of:
  • centralization/standardization of processes and
  • use of new and standardized technology across all processes in business units, group companies and geographies
  • process transformation through continuous improvement

As the organization gains experience in the offshoring process, it will reorganize itself to manage the ongoing transitions as a normal business process, and may also move onto more evolved variations involving multi-location global delivery and combinations of different organization models across different locations. However, the approach adopted and issues faced will be similar and success will depend on getting it right the first time, or at least learning from the experience. For more information on global sourcing and delivery, contact Kaushik Mazumdar or your deal team.