Savings road leads to India. (Outsourcing Overseas).

A rapidly growing volume of routine back-office and software development work is being sent to low-cost venues like India, thanks to vendors that have sprung up to expand that pipeline

Working out of a modern office building in steamy Bangalore, India, a team of programmers and clerical

Nearby, workers in another building, working in round-the-clock teams, handle call-center duties for another American company, answering customer inquiries and even doing some cross-selling of a few financial services products.

Sometimes referred to as India's Silicon Valley, Bangalore has become a poster city for a mushrooming phenomenon: outsourcing routine data processing and clerical functions, including call center operations, from companies in the U.S. and Europe. As multinational companies scramble to wring still more out of parched budgets, the lure of cheaper skilled labor has become very powerful. A number of vendors, some of them with strong Indian connections, have emerged to pitch business, mostly to major corporations. Their principal appeal: a well-educated, courteous and English-speaking labor force and potential savings of 30 to 50 percent on processing and technology development costs.

To be sure, a number of companies have been sending work to India for years through their own arrangements; General Electric Co. and Oracle Corp. are often mentioned as leading lights in this movement. And India isn't the only location targeted.

Experts mention Ireland, Canada, Mexico and even the Philippines as countries to which foreign-based companies have turned for cheaper infrastructure and applications outsourcing. China is being held out as perhaps the El Diablo of outsourcing -- costs would be lower than anywhere in the world -- but there are concerns about the lack of infrastructure and the population's work experience and fluency in English.

Xansa, a British-based company with a specialty in business process outsourcing (BPO), has set up shop in four locations in India. The company bought a company there and has fully integrated it; workers in Delhi, for instance, are linked to others in England, working on the same projects with the same manager, says Judith Halkerston, Xansa's chief operating officer for North America.

"We started with IT development projects and applications management, moved into IT outsourcing and established ourselves as a leading player in business process management," she says. "We tie together business process improvement, technology; and applications development and optimization in our business process management offering." Xansa's programs in India chiefly involve outsourced work for retailers, utilities, financial companies and telecommunications; the company recently signed a seven-year contract with British Telecom valued at $350 million.

Xansa's approach echoes that of a number of other outsource specialists: It looks for cost-reduction and IT optimization opportunities, among them ways to transform core operations. "We look at the way the whole system is managed to try to realize big benefits early on," Halkerston says. "We're looking to improve efficiencies over the life of legacy and enterprise-wide systems. We often integrate new front-end applications, which make the systems more user-friendly. It's about savings as well as service improvement; it's never just one or the other."

Much of the interest in India stems from the experience of major financial institutions that sought to scale down the horrific cost estimates of converting their computer systems to Year 2000 specifications -- the so-called Y2K phenomenon. A good deal of that work was farmed out to programmers in India, and the experience was so good that they began looking to do more, says Jeroen Tas, president of MphasiS, an outsourcer with four locations in the U.S. and 18 in all around the world.

In fact, Tas and many of MphasiS' management team once worked at major banks like Citigroup. They saw an opportunity; especially in the call center area, in handling both inbound and outbound calls and doing cross-selling of financial products through centers in India. The company now has 500 "seats" filled in three separate shifts at centers in Bangalore and Pune.

But Tas says MphasiS "saw another stream of opportunity in BPO." Improvements in technology have made it easier to deliver more at lower cost; every year the cost of telecom networks drops by half, he says.

"Setting up the infrastructure is not really a major constraint. You need to see that the details are understood thoroughly. The technology really didn't allow this five or six years ago. A lot of this is relatively new," Tas adds. "The trick is not having a big infrastructure, and success comes from understanding the intricacies of the processes."

Cost savings clearly are the biggest draw, and estimates vary somewhat. Shiraz Fatel, senior vice president and general manager of the applications solutions division for OAO Technologies in Greenbelt, Md., puts them at 25-40 percent in India and up to 25 percent in Canada, where the company directs some of its IT "enhancement" work. Xansa's estimates range from 30 to 50 percent. No one talks about more than 50 percent, but Clarence Schmitz, chairman and CEO of Outsource Partners International Inc. (OPI), says that companies need to believe that they will get savings of at least 20 percent by outsourcing.

Schmitz is a true believer in the need for outsourcing finance and accounting functions. A board member of outsourcer itAccounts (see "Technology Tools," May 2002), he helped engineer the acquisition of KPMG LLP's BPO practice earlier this year. The combined company, with about 300 people, was renamed OPI and was given a broader scope.

While itAccounts had focused on smaller businesses, the KPMG practice had larger clients; Schmitz wants the new company to tackle both, and to leverage KPMG's contacts to mine the large-company market.

"A great deal of savings and profits come from taking advantage of the Indian labor arbitrage, and there's a certain [company] size below which that doesn't make sense," Schmitz says. "We're not focused on the small end of the market by any means -- in general, a company has to have 10 people in the accounting department beneath the controller for us to have a meaningful impact."

He adds: "The model we've chosen is a hybrid model -- it's most the appropriate for today's environment. We'll maintain higher-level accounting people on-site -- the controller, the accounts payable people. They're just down the hail, so it's not that big a leap for a CFO. The back-office clerical work will be handled in India through scanning and document management systems that are indexed."

OPI's Indian operations are in Bangalore, too -- it has a center that currently has 50 employees but could accommodate 300.

The vendors are quick to point out that for many customers, savings aren't the only benefit; quality also improves under the outsourced arrangements. "There's much more of a service orientation [in India], and the education is just as good as in the U.S.," Tas says. Adds Halkerston of Xansa's employees: "We have a talented and motivated workforce in India that delivers exceptional value to our clients."

Technology outsourcing does have some real heavyweights, companies like EDS Corp., IBM Corp., Accenture (formerly Andersen Consulting) and Affiliated Computer Services. And not all of that work, by any means, has been taken to India. But in general, their services have been pitched to very large companies where volume-based savings offer the most promise.

OAO Technologies partners with IBM and Accenture in the large-corporation market; there, "we walk in and talk about solutions. We can do that quickly and aggressively," says Patel. "That large market is conditioned by lots of consultants and competition.

"The middle market is where we're headed, but it's difficult to access," he adds. "Our strategy is to partner with ISVs [independent software vendors] that have a vertical niche -- in health care, for instance. We're seeking out companies that are selling to that market, then seeking out systems integrators that are vertically focused."

Patel adds: "We don't always pick what we get. We take on what the client does and look to do it faster and cheaper." Besides India, OAO uses programmers in Canada and Mexico, with Mexico offering some of the best features of India, with more proximity

OPI's Schmitz says that major corporations are often selective in choosing the scope of their outsourcing, however. "The large market has major corporations who have Tier 1 software systems like ERP (enterprise resource planning). They won't outsource the whole function, but maybe one to three discrete functions [such as] accounts payable or T&E."

In the middle market, on the other hand, OPI wants to do "full-scope finance and accounting," using a Lawson Software platform tied to document imaging and management tools, Schmitz says. Solutions are geared to migrate clients' multiple legacy systems into one standard platform. "We want to be their pathway to India," he says simply.

MphasiS' Tas says that the bright future of outsourcing overseas was a key reason for founding the company. "Twenty years from now, it's clear that a lot of the clerical and administrative work done by multinationals will be done in different places around the world," he says. "The opportunities are too attractive."

RELATED ARITCLE: Cendant Targets Relocation Market

While there is tremendous activity in moving work overseas, there is also a critical need in a global economy to move people in and out of overseas assignments and take care of the logistics -- housing, shipping of goods, tax planning, etc.

That's where Cendant Mobility Services Corp. has carved out a niche. The Danbury, Conn.-based firm, a unit of Cendant Corp., says it is the largest third-party manager of household goods shipments worldwide and assists some 128,000 employees a year. It claims nearly 2,100 clients globally -- some of them in Europe and Asia -- and assignments in 140 countries. Not surprisingly, many of Cendant Mobility's clients are multinationals, but it says that nearly 70 percent of its clients move fewer than 25 employees per year.

"Far and away the first objective" of corporations in this environment is cost savings on those relocations, says John Arcario, senior vice president and general manager at Cendant Mobility. "When you look at company mobility patterns, less than 5 percent of a company's employee base is typically moving on a sponsored basis. There's a heavy investment for small numbers, and those investments are very volatile."

One thing an outsourcer can bring, he notes, is an integration of the supplier chain and the ability to offer savings through volume-based pricing. Relocation requires a lot of fixed internal costs, he adds, without any capital investments to streamline the processes.

Many major corporations have people spread out over the world, but with the exception of "large repetitive locations," Arcario says, inconsistencies in services are common. For huge companies, in general, changing a program like overseas mobility is something like trying to change a tire on a car that's moving, and it can take a crisis to force change, he says. For smaller companies without that kind of infrastructure, a decision to outsource the process may be far easier.

Arcario says Cendant Mobility finds itself competing against major accounting firms (for whom tax planning is a core competency), traditional relocation firms and an eclectic mix of firms that might combine logistics with tax planning, for instance.

Cendant itself has aligned with a few major firms in the business processing outsourcing area, and considers its core strengths to be outsourcing, logistics management, training and consulting. As a result, it says, clients realize gains in productivity and free up human resource capacity, as well as improve budget forecasting and tracking.

Looking ahead, "All of the elements going with cost savings will be the first ones to be attacked," Arcario says. "Outsourcing globally is accelerating. There is an ability from a technology standpoint to help company workforces become more globally aware."

* Consultant Offers Notes of Caution *

Arc Partners, a consulting firm based in New York City and London, advises firms on broad outsourcing issues such as IT and shared services -- including such key issues as who they should contract with, the scope of those services and internal change management policies. Quite a few of those client companies -- chiefly in financial services - are looking to send work overseas, with that number picking up substantially in the past four to five months, say Managing Directors Andrew F. Mayer and Brendan O'Sullivan.

A good deal of second-guessing about outsourcing has surfaced in the past year, however, and more risk assessment is being done. Contracts have generally been smaller and for shorter durations, as well.

"There has to be a meaningful strategic reason for outsourcing," Mayer says. "Most of those that have done it for the cost savings have been disappointed." With that, more companies are seeking to incorporate metrics into their contracts to make sure that goals are achieved.

Besides India, O'Sullivan says, European countries are well represented in IT outsourcing. Ireland, a major outsourcing center for some years, has now "almost priced itself out of the market," he says; countries like Belgium and Luxembourg are coming on, even in the call-center arena.

Mayer mentions areas like Russia and the Philippines as outsourcing alternatives. Despite the "Wild West" mentality associated with the New Russia, "they have good teams and good people," he says, some of whom have come to the U.S. to work on IT projects. Programmers in the Philippines, he adds, have handled a lot of back-office work for Japanese companies in recent years.

Financial institutions in Europe are particularly interested in sending work to cheaper venues, and many are at least five years behind their U.S. counterparts on that score, Mayer says. But European labor laws are tougher than in the U.S., and it will be harder to contain costs simply by cutting the more expensive domestic workers and shifting that work elsewhere.