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Insights
Plumbing a Cheaper Labor Pool: Substitution Can Save up to 80 Percent

Hays Sinks its Teeth into Document Processing

Case Studies Corner
Benefits Cures

Swan Saga

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One of the big selling points of business process outsourcing is its ability to substitute cheaper resources for more expensive ones. Is this a myth or a reality? Can an internal shared services center do the job as well?

Shared services center are effective. But BPO providers are more effective because they can tap into the leverage points that give them the ability to perform the process better, faster and cheaper. Companies turn to outsourcing providers to benefit from these leverage advantages they don't possess.

A key leverage point for BPO is the supplier's access to lower cost wages. There is a substantial arbitrage activity between the wages of qualified employees in North America and equally experienced talent in Asia, the Indian subcontinent, central and South American, and eastern Europe.

The Seminal Substitution Agreement: GM and Arthur Andersen

Companies with expensive and highly educated labor forces were the first to realize the sizable economic advantages of wage substitution. The seminal BPO arrangement between General Motors and Arthur Andersen proved the value of substituting lower paid workers for highly paid employees. Arthur Andersen moved GM's work to its Tempe, Arizona service center where quality was high but pay was lower.

The success of this arrangement led several BPO providers to set up shop in low cost areas. For example, PricewaterhouseCoopers opened a service center in Tulsa, Oklahoma. Exult did the same in Houston, Texas.

As BPO matured, providers realized there was still another level of wage substitution available. Increasingly, outsourcing vendors started calculating the potential savings resulting from the difference in wage scales in Chicago and Costa Rica.

Keane, an application outsourcing provider, opened a development center in Nova Scotia, Canada. Its buyers enjoyed a 30 percent arbitrage between U.S. and Canadian wages. Many providers are turning to India for IT programming. In these cases, the cost savings can reach 80 percent from Silicon Valley pay scales.

The new trend is for BPO providers to follow the lead of their IT cousins and search foreign soil for wage arbitrage. ACS, for example, is in the process of building a 1,000 person service center in Accra, the capital of Ghana.

On the surface, it looks easy for any company to take advantage of the benefits of substitution. However, the mistakes that can sabotage the process are many. Most individual companies have neither the skill nor the sophistication to take advantage of arbitrage opportunity. For those who attempt it on their own, the cost of establishing the infrastructure can erode the salary differential.

The Challenges of Substitution

But experienced outsourcing providers can preserve most of that value. BPO providers, already experienced at managing remote operations, know how to set up shared services centers. They already have a sophisticated account management mechanism which can service customer needs in an intimate fashion while overseeing the work being done around the globe.

They have the time, experience and capital to handle:

• Infrastructure issues. These include electricity, water, telephone connections, and air conditioning in the building on Sunday.
• Cultural issues. Language issues.
• Time zone headaches.
• Problems from afar.

These issues create a substantial learning curve for any company brave enough to attempt these rapids. But once they know where the white water holes are, they are able to take advantage of the significant savings.

Setting up foreign operations is an extremely difficult feat. Outsourcing suppliers have the ability, capital, time, talent and management attention to implement such a complicated enterprise. Few companies have experts in all these fields under one roof. It's seldom worth the time, money and risk for an individual company to try to master this learning curve.

Suppliers can afford to attract this talent and spend the necessary capital on such a difficult project because they can spread the costs over a number of clients using scale. Scale allows them to recoup their investment much quicker.

Optimizing Cash

This experience also helps slash cycle time. An outsourcing provider that has already gotten a shared services center up and running can repeat the process at an accelerated pace. First timers lose the speed-to-market edge because it can take up to three years to gain the experience necessary to get the operation humming smoothly. Today, time to market is becoming increasingly important as companies hurry to compete in Internet time.

Price is always a critical factor when buyers select an outsourcing suppliers. The suppliers know this and are always seeking the best way to provide top service at a lower price. Substitution is becoming an essential element in the outsourcing equation.

Lessons from the Outsourcing Primer: