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Greetings From Bangalore
Large Indian outsourcing firms that made their names in IT outsourcing are now targeting the U.S. HR outsourcing market. What will it mean for existing players?
The ranks of United States-based HR outsourcing firms such as Hewitt Associates, ACS, ADP and Accenture have been joined by several new players from a country that, while thousands of miles from the U.S. mainland, has become near-synonymous with outsourcing: India. According to Dallas-based Everest Research Institute, three large India-based outsourcing firms -- Infosys, Tata Consultancy Services and Wipro -- are either in the process of entering, or already have entered, the U.S. HRO market. These firms, which have traditionally been more closely associated with IT outsourcing, are building up their HRO capabilities with an eye toward capturing business from U.S.-based firms and drawing in new customers that wouldn't have otherwise considered HRO because of the cost. "We believe our experience in providing end-to-end IT outsourcing, plus our own record of providing outstanding HR service to our 70,000-plus employees and our track record in successfully delivering services to clients, along with the cost differential from providing these services from offshore, are key differentiators for us," says Prerna Tandon, vice president of HRO services at Bangalore, India-based Infosys. Clearly, the Indian firms will face an uphill battle. For starters, the U.S. HRO market is in flux, with firms such as Hewitt struggling to earn profits in the area while customer growth is flat. Meanwhile, providing HRO services is much different than ITO -- it requires a deep understanding not only of complicated rules and regulations, but also of a country's particular culture. Nevertheless, some observers say the Indian firms have a good shot at establishing themselves in the U.S. market, and may forever alter it. Key Selling Points
In sheer size and breadth, Infosys, TCS and Wipro dwarf most companies. Infosys, which was started in 1981 in India by seven people with a total of $250 (U.S.), today has 85,000 employees spread across 23 countries, doing everything from software design to technology consulting, IT outsourcing and product engineering. Wipro, which provides services similar to Infosys, has 72,000 employees providing services to 647 clients around the globe. TCS, with 74,000 employees, also provides IT outsourcing and technology consulting services to companies throughout the globe. At Infosys, the company is going all-out to raise the skill levels of its HRO staff, says Tandon. The company was the only one of the three that agreed to be interviewed for this story. As of now, Tandon says, Infosys' BPO subsidiary is providing HRO services to four U.S. companies (which she declined to name) as well as the U.S. division of a United Kingdom-based company. The clients are serviced by approximately 600 full-time employees based in India, along with staff from Infosys' 15 locations in the U.S. and 800 or so technology consultants. The company has been in the HRO business since 2002, she says. Currently, Infosys' HRO offerings run the gamut from recruitment (including resume scanning, sourcing and new-hire integration) to benefits administration, payroll, workforce management and call-center support. "We're intent on building HR professionals at this company who can clearly see a career in HR and add value to our HR services," she says. The company has partnered with the Indian Institute of Management to get more of its employees up to speed on basic HR principles and is also working with the Society for Human Resource Management to identify areas where it can get its employees certified and identify additional training opportunities and learning modules for its workforce, she says. Tandon says a key selling point for Infosys is its extensive experience in providing outsourcing services in other areas to clients. The company has mastered the complexities of breaking down a client's functions into different components, and then transferring those components to offshore facilities -- a process that other outsourcing firms, including those based in North America, are struggling to manage, she adds. Once they've been transferred, Infosys focuses on administering those functions while looking for new ways of doing them and identifying areas where efficiencies can be realized. "When you hand over responsibility for HR or any other function, regardless of whether it goes offshore or near-shore, it means a lot of effort must go into process redesign, which is something we have a lot of experience doing," says Tandon. "We have a transformation roadmap that's applicable to all our lines of business, not just HR." It's because of this experience, not to mention the cost of labor in India, that Infosys believes it can provide HRO and HR BPO services to U.S. clients more cheaply and efficiently than its competitors, she says. "We're in a global delivery environment for HR services, which has changed the game for a lot of HRO players," says Tandon. In terms of technology, Infosys has the capacity to continue using its clients' existing systems if they so desire, she says. The company has also developed its own standardized technology platform, built on PeopleSoft, for clients that prefer to go that route. With regard to one of the biggest concerns identified by industry observers -- how an offshore provider would familiarize itself with the complex laws and regulations governing HR processes in the United States, Tandon says Infosys is energetically tackling that issue. "We interface with the client, and then we use our own U.S. Infosys team for things like legal and payroll -- these teams have been based here for a long time," she says. "We are also in the process of finding partners who can help us with processing complex things like payroll. "We understand there's a need to have an on-site presence, and, at some point, we may even have our own people on-site providing certain services, but right now we're managing well at our present scale," says Tandon. A "Steep Learning Curve"
Jim Konieczny, Hewitt's division leader for multiprocess outsourcing, says that although his firm may be the largest and most-established HR BPO provider in the United States, it never underestimates any potential competitor. Nevertheless, he says, the Indian firms have their work cut out for them. "This is a very difficult and tough business, and we've all seen the North American providers struggle to find the right model to make it work -- not just the economic model, but the delivery model," he says. While Konieczny concedes that the Indian firms may be able to offer a pricing advantage, that advantage may not be enough to succeed. "There's a steep learning curve in figuring out how to do this right," he says. "It's not just about the right price point, but the delivery of the services, which is still evolving. We're redoing our own model as we speak. "There are some things that can be done in HRO that are transactional in nature that can be done via technology," he adds. "But when you get to the higher level, when employees phone in to a call center with questions about their benefits, you need to have a deep understanding of HR, our market and the environment in North America. And HRO is not the core business of Infosys, Wipro or TCS." That said, Hewitt itself does appear to have an appreciation of the cost savings available from using offshore delivery centers -- the firm has roughly 6,000 employees in India who perform primarily back-office functions for North American clients. Hewitt isn't alone: In 2006, EDS acquired a majority stake in Mphasis, a Bangalore-based BPO firm that will deliver some services for ExcellerateHRO, EDS' joint HRO venture with Towers Perrin. Bridging the Divide
Tom Weakland, vice president of outsourcing for Diamond Management and Technology in Chicago, predicts the Indian firms will eventually be successful in capturing a share of the North American HR BPO market. However, they'll face many hurdles. "No one's really figured out how to do BPO effectively so far," he says. "Most firms thought it was about cost reduction, but that's not the case." Then there's the fact that many HR BPO customers are none too happy with their providers. A survey of 185 BPO customers -- including HR BPO -- released last December by Diamond Management revealed that, of companies that have outsourced their HR functions to an offshore provider, only 18 percent expressed satisfaction with the service, compared with a 50-percent satisfaction rate among all buyers of BPO services. Why were so few offshore HR BPO clients satisfied? Weakland says it's because many offshore providers simply don't understand the nuances of providing BPO services to international customers. "You've really got to have deep industry and process expertise in order to do this right," he says. "We're still seeing a lot of offshore firms doing some learning on-the-job." Nevertheless, Weakland says he's certain the Indian firms will eventually win a sizable share of the U.S. HRO market. "I think their chances are good," he says. "They'll take on more of the technology and back-office type work and send the call-center stuff to places like the Philippines, which is much more culturally aligned with the U.S. than India." One potential concern North American firms might have about using an offshore HRO provider -- data security -- is overblown, says Weakland. "The Indian firms have been dealing with data-security management for decades now, and they have a pretty good track record," he says. "There have been some big security breaches over the last few years, but most of that has been attributable to disgruntled employees here in the U.S., not a lack of security overseas." However, Praful Mittal, a senior associate at McLean, Va.-based Booz Allen Hamilton, is doubtful the Indian firms will gain any traction in the North American HRO market. "Smaller buyers might represent a sweet spot for the Indians because, typically, the smaller the employee base, the less complex the benefit plans," he says. "But it'd be taking a big leap of faith that the Indians are better qualified than U.S. providers when it comes to health and welfare or HRIS." The complexity of the U.S. market -- the employer-based healthcare system, for example -- presents significant obstacles for an Indian firm, considering that the government-run healthcare system in India is far different from that in the U.S., says Mittal. "They'll get better at it eventually, but right now, the India-based people don't really grasp the concept of different plan designs, or the nuances between different levels of defined-benefit plans." Eric Simonson, managing principal at Everest Research Group, is also skeptical about their chances. "HR work requires a more relationship-oriented way of engaging with clients, and the skills and capabilities the Indian firms have acquired from doing systems-related work won't necessarily transfer to HRO," he says. However, Pat Dolan, president of BPO Management Services, an Anaheim, Calif.-based outsourcing and consulting firm, says Indian firms such as Wipro are "extremely well qualified" in terms of their commitment and corporate culture. "Yet, they also recognize the huge cultural divide they'll face in terms of providing HRO services [here], and will focus more on acquiring U.S.-based providers rather than delivering those services from India," he says. "Although at least 60 percent or more of HRO work can be done offshore, certain elements of it are very difficult to go offshore with, especially in the benefits-administration area," says Dolan. "When you have a benefits-related question, the last thing you want to deal with is someone with a funny accent. So I think the Indian companies will partner with vendors here in the U.S., while taking what they can offshore." Dolan believes the emergence of the Indian firms will "raise the bar for everyone in the HRO market. They will absolutely drive prices down," he says. "Mid-market companies will have a much greater selection to choose from when it comes to HRO."
March 16, 2008 Copyright 2008© LRP Publications |
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