Tax Impact on India Heritage IT / ITES Provider Revenues

Over the last couple of years, there has been a considerable brouhaha about the Indian Government doing away with the tax SOPs for the IT & ITES industry. But. the actual impact on of the STPI scheme going away is about 7% of revenue though the worst case scenario calculation tends to put it around 13-15%. Here's how. Give or take a few % points, for every $1 earned by India Heritage players they spend about 30 cents on wages and 25 cents on infrastructure & other fixed costs thus getting an EBIDTA of about 45 cents or there about. Currently there is a Minimum Alternate Tax of 11% applicable on these earnings – so about 5 cents go towards tax and accounting for the other expenses the operating margin is about 23 cents (23%). The change in STPI scheme means two things as far as I can understand. There could be some 11% tax applicable on some of the non-wage costs. In the worst case scenario this means that Indian Heritage players would spend an extra 3 cents on the 25 cents towards on Infra & other fixed costs. More importantly the companies need to pay 35% tax on their profit from export revenues. Using the reduced EBIDTA of 42 cents as a basis (for worst case scenario) that is an additional 10 cents paid in taxes. So in the worst case scenario the operating margin is reduced to 10 cents (23-3-10) - a reduction of 13%. In reality, this impact is expected to be the much lower 6-7% given that even now, the companies service India market, deliver from SEZs (tax holiday for 10 yr beyond inception) etc. There are multiple ways to look at even this impact. For one, the reduced operating margin of 16-17% for Indian Heritage players would still be about twice the margin of the established global players. So while the share-holders may not like it, they still can swallow the hit. On the other hand Indian Heritage players, still operate at lower blended average hourly rates than most Global players. Even if they bump up the rates by 6-7%, the blended rates of Indian players would continue to be lower than the blended rates of the global players. Furthermore, traditionally Indian players have focused relatively less on reusability and automation than Global players. The margin pressures both in terms of taxes and wage inflation is driving and will continue to drive Indian players to rely less on tapping the vast pool of inexpensive programmers / operators and start automating / reusing components to a greater extent. Finally, the Indian Government may relent and extend the tax scheme as others have pointed out. Or maybe they will implement the suggestion made during the Nasscom leader-ship summit by one very vocal proponent of Indian BPO industry – take away the STPI benefits from the Indian IT providers / revenue but continue providing this benefit to the Indian ITES industry / revenue. After-all the Indian IT industry has existed for 30 odd years while the ITES industry is still a baby at 10 odd years. This post inspired by Phil Fersht's write-up on How severely will the expiration of India's STPI tax scheme impact the Indian outsourcing industry?

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Human Resource Outsourcing - Road to Success

HRO has seen its fare share of ups and downs. Here are my thoughts on why HRO may need some time before it becomes mainstream Most global organizations tend to have 'utilities' rather than applications to service their HR processing needs outside of major countries (US, UK et al). Not only there is no existing global system, but also the systems that exist are not up-to-date, given that HR tends to be fairly low on priority for technology upgrade budgets. This seems to preclude a lift, shift & fix approach to HRO unlike FAO. Most organizations seek either a concurrent lift & fix approach or a 'Fix & lift' approach. The former has its challenges & risks resulting in expectation mismatches and the later requires upfront investments which customers expect providers to subsidize. Given that a simultaneous IT & Process transformation will always have a far longer pay-back period than a mere process transitionl one way to make it more palatable is by addressing the low hanging fruits. This can either be done by taking a phased approach. One way is to do a more or less As-Is 'shifting' operations for certain countries while 'fixing' those at others. The other ways is to shift processes such as Work Force Administration support or Recruitment process support early on, since they can do with somewhat lesser or older technology. That view is somewhat contradictory to the fact that payroll processing and benefits administration (primarily for US & UK markets) outsourcing has taken a lead and is more or less stable. I believe that this has been driven by upfront technology investments by the providers. This has its own payback related challenges for vendors. The only way for a quick payback in such cases is to scale up fast - winning and delivering a high number of customers. It seems that providers are finding it relatively easier to win customers but difficult to deliver to them - especially from low cost locations. The problem is the lack of availability of knowledgeable associates. The scarcity of resources has meant a huge churn of associates and hence an inability to deliver consistently & effectively. Vendors thus need innovative models to recover their investments. Speculation abounds that in the case of payroll processing the profitability results are driven more by the cash management rather than by the transaction processing fees. Furthermore, there is a lack of a single effective integrated platform. There is at least one ERP in the market which allows multi-tenant model and multiple providers are trying to build their platform offering around it. However, while most ERPs no doubt have all relevant functionality, each HR sub-process- whether its performance management, compensation management or resourcing - has its own 'best-of-breed' application. Customers & Vendors quite often complicate issues by trying to build a mash-up application. All in all - I think HRO would be more successful if it continues to take baby steps for some more time before it attempts giant leaps. While customers should engage providers to deliver the whole span of HRO sub-processes, they need to break it down to process and geography specific SoWs and milestones to effectively pace the outsourcing. This post inspired by Phil Fersht's write-up on Can HRO rediscover its froth despite a 97% success rate?

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Building a Partnership with the ITES Provider

Building a partnership with a service provider requires extensive investments of time and management / planning effort on the customers part. It is no doubt possible for a buyer to continue demonstrating success in a model where the buyer is responsible for strategic & tactical management while provider is responsible for operations. While not the most healthy relationship - it is sustainable, or at least sustainable until external forces do not cause either the buyer or provider to change their business model. A more healthy relationship is a partnership approach, but this requires nurturing. It might however, be possible to couple the goals of the service provider with that of the buyer with somewhat lesser investment. Most mature buyers today hold annual IT planning summits where all their service providers are invited. The unit CIOs present their IT roadmap (and budgets) and the providers showcase capabilities and share best-practices. Among other things, this allows the buyers to benefit from the providers learning best practices from each other. Additionally, the providers make suggestions to improve the IT roadmap as they bid for components there-of. Unfortunately, given the longer term engagements in ITES / BPO - these annual summits by buyers may not apply. This actually moves the responsibly of conducting such summits to the service providers. No doubt the service providers have their own mechanisms to internalize and cross-share with other customers, the best practices that they discover with one customer. However, its possible to gain additional buy in to implement such best practices if the provider conducts a summit for all customers and perhaps for prospects. While the service provider contributes in terms of bringing in best practices - its for the buyer to share his plans & problem statements with the provider. It is the responsibility of the Contract Manager or the Sourcing Manager to mandate half-yearly / annual business review meetings requiring participation from the buyer CxO and the provider leadership & consulting team. It should be possible in such meetings to share strategic issues & imperatives - with the provider sharing their experience of resolving such issues. A few such business review meetings later -- there is automatically sufficient trust established at the management level to work in a win-win partnership mode rather than a provider-vendor mode. This post inspired by Phil Fersht's write-up on Is your outsourcing vendor really your partner?

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Organization Transformation - Does IT & Process Transformation need to be coupled?

In there attempts to be competitive, organizations continue to re-invent themselves. This transformation involves organizational changes as well as IT changes to support the organization change. The million dollar question is as to whether these two need to happen together or if they can be (and should be) decoupled. While coupling the IT initiative with an initiative to change the Organization could be an issue, more often than not the issue is the difference in priorities that the IT (CIOs) and Business has (COO). Having said that, it may not always be possible to de-couple the IT Initiatives from Organizational changes. A typical organization transformation project would involve process rationalization & process standardization. While it is possible to take baby steps towards rationalization & standardization without significant changes to the technology environment - it is easier to roll-out improvements / re-engineered processes if the various units / geographies are on a rationalized application system environment. The challenge in decoupling system rationalization from process rationalization and doing them sequentially is the length of time such a project might take. By the time you finish such a project - either the technology is obsolete or the business process no longer offers any unique advantage over competition. I am not advising a Big Bang transformation though. That typically ends up being more than one can chew - and a classic disaster. I do recommend dividing projects in phases based on functional / geographical areas rather than separating the business and IT changes. To ensure that the business users do not reject change - its important that they be involved through-out the life-cycle of the project. There are various means & methodologies to do so -- either use the 'agile techniques' or something like the Conference Room Pilots that the traditional ERP implementations had. The challenges are Define and finalize a scope that ensures short cycle time. Avoid scope creep. Ensure that all geographical / business unit are represented and deviations are accounted for -- else this becomes a never ending cycle Ensure representation from all levels of the organization. There could be a difference of opinion in the business operations team & the management team Most of these things are off course easier said than done. But if one addresses these issues - it is possible to undertake a successful transformation without feeling the need to decouple IT & Business Process change. The challenge is slightly different for an Organization that has standardized / rationalized its core applications and core processes. In such situations, the business typically seeks incremental improvements to help make better decisions. There are two types of challenges one sees in this environment The IT focuses only on "Keeping the lights on" and has no man-power / budget allocation to undertake the business initiatives The IT insists on 'standard' application set with its sweet implementation cycle instead of the quick & dirty utilities that the business demands. The business might be happy working on incremental VBA utilities but the IT wants its ESB & SOA and may-be a standardized ETL connecting to a data-mart in the central data-warehouse. It is in scenarios such as this - that the business demands should be decoupled from IT strategy. It might help to let the business have their quick & dirty utilities - thus allowing them to respond to the market sittuations in an agile fashion, so long as there is a defined plan to roll back these utilities into the standard environment.

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Technology Enablers for BPO Providers - II

A quick recap of what I said in the previous post - Barring some industry leaders – most BPO providers have not adapted to BPM / BAM / DMS / KM with SOA based implementation allowing for integration with customer / third-party systems easily Third-Party, Industry proven scalable systems rather than home-grown systems Multi-tenant / Shared Service implementation. One would expect that most providers have an effective & efficient end-to-end seamless Document Digitization & Management system which services global needs & integrates across customer systems. Unfortunately, not too many providers can boast about this. Some of the other systems that BPO providers across the spectrum have implemented, or, need to start implementing (or engage partners who do so) in a shared service model are discussed below. Knowledge Management Most providers do have an ability to define and store in standardized form SIPOC, SOPs / Desktop Procedures - at the very least they have a document repository system where these are stored. The challenge is to be able to provide a feature which allows for full-text-search in addition to meta-data search so that every time a new customer is on-boarded, previously created documented can be searched & leveraged. If technology could help providers compare the digitally captured process diagram (or SIPOC/COPIS) of one customer process vs. another of similar nature – it could also help identify inefficiencies. Expecting this feature is perhaps not so realistic though. Wikis, blogs and forums have long been the easiest and quickest (though not most accurate) ways of sharing knowledge & leveraging peer group strengths to resolve issues. BPO providers seem to be relatively reluctant to embark on using these – probably driven by the concerns around maintaining customer data confidentiality. It remains to be seen if the Groupware developers can work a model where it might be possible to leverage peer group strengths while retaining confidentiality. Work-flow & Case Management – These applications are ubiquitous in the BPO world. The challenges are the usual Flexibility to define new processes / case types, Flexibility to define exception handling conditions, Flexibility to assign / re-assign work-flow or case – and most importantly being able to do all this without a programmer Having a multi-tenant model that can be accessed by both providers & customers. Business Process Monitoring Tools Analyze – A good BPM tool is not limited to visually and graphically to represent "as-is" and "to-be" process scenarios but also allows providers to specify costs (monetary & otherwise) for each step to allow simulation / what-if analysis. Providers can work with Buyers to undertake a cost-benefit analysis of every change upfront. In the long term this should help providers to convince buyers to make changes more easily. Build – While the BPM tools focus has traditionally been on ‘eliminating the programmer’ in building the components; in the BPO world – its equally important for the tools to be able to interface with diverse & disparate Knowledge Management, workflow & data capture systems. This allows the provider to provide the same benefit to multiple buyers. Monitor – The user-friendly "dashboard" reporting features should be used to report on automatically calculated Service Level measures such TAT, QC data and depending on the process – perhaps potentially capture accuracy data as well. Web enabled reports with drill down capabilities can help both buyers and providers to do appropriate causal analysis. Manage & Operate - Process and rules engines that extends beyond capturing digitally the process diagrams, SIPOC / CPOIS etc captured in the knowledge to actually allowing the customers & providers a tighter control over the timelines & stages of a process. Apart from the above tool-sets, providers need to also start looking at Optical Character Recognition (OCR) / Intelligent Character Recognition (ICR) tools. Mature organizations in the western countries as well as mature BPO providers based out of these high-cost countries have already implemented these systems. Providers from low-cost countries seem to be slower in implementing these systems though – given that the cost of manual (even double entry) processing seems to still be lesser than the cost of processing with aid of these systems. However, the low cost country based providers might need to leverage these tools as they start addressing global customer needs – delivering from high cost locations.

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Technology Enablers for BPO Providers - I

Mature customers today expect way more than cost arbitrage in a Business Process Outsourcing. While (commitments to) increased productivity, innovation and transformation seem to be attracting more and more attention as a part of service provider evaluation – its equally important to ensure that the providers can assure and effective & efficient transition & subsequent delivery. Considerable attention has been paid to the transition phase with individuals specializing in just that task. Most providers have defined methodologies, use standard or custom project planning & scheduling toolsets and demonstrate means & mechanisms to effectively capture the process through utilities. However, lesser attention is perhaps paid to some of the technology enablers for ongoing effective delivery and continuous improvements. Workflow Management tools, Business Activity Monitoring (BAM), Business Process Management (BPM), Document Management Systems (DMS) and Knowledge Management (KM) tools have moved from the realm of being buzzwords and/or cutting edge technologies to being widely accepted and sometimes implemented technologies in the customer world. However, in the BPO environment not only are the BPM / BAM / KM toolsets not fully leveraged but also, whenever these are used – they are typically provided for by the customer. Barring some industry leaders – most BPO providers have not adapted to BPM / BAM / DMS / KM with SOA based implementation allowing for integration with customer / third-party systems easily Third-Party, Industry proven scalable systems rather than home-grown systems Multi-tenant / Shared Service implementation. BPO providers across the spectrum have other implemented or need to start implementing the following services (or engage partners who do so) in a shared service model thus providing the customers with greater assurance on an ability to provide ongoing improvements. Let’s start looking at something as simple as Document Digitization & Management Systems. Given that most of BPO (non-voice) essentially either simple or rule-based data entry from (digital images of) paper to the data capture systems - one would think that every service provider would have seamless systems to do so. Think again – How many service providers have a system (people, process & technology) which allows for Regional / Local centers present Globally - or at least in US, Canada, UK, Europe, Australia, Japan – to collate documents and scan / digitize them within stringent SLAs. No doubt, most providers provide such service in one country or other – in the primary geographies their address but as the global contracts are on rise – ability to provide such service globally is essential. Upload & Storage of scanned documents in a system from which they can be retrieved for further processing. While providers perhaps upload documents from their scanning centers to their DMS – the challenge more often than not occurs in scenarios such as HRO where the provider might be required to provide wide-spread access to customer employees (to perhaps upload some supporting documents). Ability to index documents, route them through an appropriate workflow, archive and retrieve them. Well obviously – even the home-grown DMS have an ability to do all that. The challenge though is to integrate all this with the ERP / Transaction system being used by the customer so that the customer can access the digital images, and address any workflow participation requirements through their existing systems. Most providers either depend on the customer to provide for the well integrated DMS or require the customer to log-in to the provider’s system to get digital images. A lot of provider home-grown systems also lack flexible & ad-hoc reporting as against canned standard or specific pre-developed customer specific reporting for the customer management. Finally there is the ability to extract the images and associated meta-data – if the customer decides to move on. The obvious challenge is identifying a standard form of providing this meta-data across providers so as to minimize cost of data migration. In a subsequent write-up, I intend to look at other technology enablers that BPO providers might be able to improve on. The fact remains that there is always a scope for improvement

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