The real cost of outsourcing: turning over IT operations, call centers and network maintenance often involves more than service providers bargained for

America's Network, May 1, 2004 by Robert Clark

Will outsourcing cost me my job? Is it just a passing trend? Should I contract my IT back-office? Does it work? Should my company offer outsourced services?

If you haven't asked yourself any of these questions lately, you're probably not in the telecom service provisioning business.

Outsourcing or more exactly, offshoring, has become the fear of every IT engineer and call center agent in North America. The bleeding of jobs has seeped into the presidential election debate, sparking squabbles and promises over how to keep jobs here.

Outsourcing is hardly new. The U.S. initiated many contract manufacturing programs with Asian countries starting in the 1950s. Then there is the offshoring phenomenon, which has become synonymous with the loss of jobs to India.

RELYING ON IT

A survey by H.R. consultancy Hewitt Associates found IT is the biggest area of global sourcing, contracted by 67% of those companies that outsource, followed by customer relations (49%), manufacturing (42%) and supply-chain processes (41%).

The Hewitt survey of 500 corporations found 45% were either using a global sourcing model or planned to introduce one within three years. While IT would remain the biggest function to be outsourced in the coming three years, the study registered a growing interest in contracting out accounting, customer relations and human resources management.

Yet while 92% say cost was the biggest driver, the underlying management philosophy is at least as important. That is the notion of "core competence"--that corporations should concentrate on what they do best and hive off processes that are not central to those who can do them better and at lower cost.

C.K. Pralahad and Gary Hamel advanced that idea in their 1990 book, "The Core Competence of the Corporation". Michael Porter's "Comparative Advantage," written at about the same time, urged companies to play to their strengths in either cost or differentiation.

While the ideas are now conventional wisdom, they haven't been universally adopted. (G.E. is a spectacular exception to the rule.)

Traditionally, horizontally-integrated telcos also have straddled different sectors--fixed, data, mobile, IDD, cable, satellite and so on, each of which today has become a contestable segment in its own right. Most of them have spun off or separated out their wireless divisions at least, but telcos remain complex beasts. In addition to owning and operating networks, operators provide field maintenance, run IT departments, bill and care for millions of customers and carry a hefty corporate overhead.

CORE QUESTIONS

Outsourcing is just one of the latest solutions to the basic business questions: what business are we in, what do we want to be in, what is core?

Telcos are also major providers of outsourcing to large customers, most typically data networking and related services.

Global corporate network outsourcing was worth $3 billion last year, according to Gartner, which predicts that by 2010, 10% of enterprise communications in North America and Europe will be outsourced. Service providers could increase revenue from outsourcing by two or three times, thanks to the rise in fixed-to-mobile communications in particular, says Gartner.

However, the report warns of the threat from IT services providers, companies like IBM, EDS and HP that have their own global IP backbones and offer mobile and voice applications. These companies are also clients of telcos, providing IT back-end and data center services.

Carrier outsourcing generally divides into four categories: IT, call centers, network maintenance and, lately, the entire network operations.

Some outsourcing deals are more than just about cost-savings.

Sprint and IBM recently created a partnership aimed at saving Sprint $550 million. This involves IBM taking over some Sprint customer service functions, but also providing its SPDE service delivery platform. IBM will integrate Sprint's wireless services into its enterprise suite and also become a vendor for Sprint's wireless and wireline services.

ASIAN COMPARISON

It is worthwhile to make comparisons between the U.S.-outsourcing model and the practices of Asia-based telecom carriers. While Asian carriers are not yet widely taking advantage of outsourcing, it is a sensitive topic. Three of Hong Kong's six wireless carriers--Hutchison Telecom, New World Mobility and Sunday Communications--source functions outside the territory.

Hutchison uses outside entities for some IT and customer service functions (including a call center in Macau), while New World Mobility says the information is confidential.

Hong Kong's Sunday Communications says one-third of its 700 staff worked for fully-owned subsidiaries in neighboring Shenzhen. These handle customer service, IT back-end, finance functions and even some network engineering, a spokesperson says.

SingTel is understood to contract out a lot of its applications development work on China, but officials did not respond to requests for information.

John Sequeira, an outsourcing expert working for Bain and Co. based in Tokyo, warns that much depends on the arrangement with the vendor, especially in the case of major process like network operations. The key is to meet the service standards customers require.