Truth, lies and outsourcing: offshoring may have created a political storm in some countries, but operators across the region are looking to outsource everything from IT and call centers to network maintenance and even network operations as they examine what their core business is

Telecom Asia, April, 2004 by Robert Clark

Will outsourcing cost my job? Is it just fad of the month? Should I contract my IT back-office? Does it work? Should my company offer outsource services?

If you haven't asked yourself any of these questions lately, you're probably not in the telecoms 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 US election cycle to become a highly emotive topic. In Asia it remains a business issue, though carriers in particular are clearly wary of discussing it.

Yet outsourcing is hardly new, especially in this part of the world. Starting with Japan in the 1950s, Asia's tiger economies have done very well out of contract manufacturing and the wholesale shift of factory work from the US and Europe.

Outsourcing is also more than offshoring. John Sequeira, a vice president at Bain & Co. in Tokyo, points out that a process can be contracted to an internal company source. For example, Asian branches of a multinational corporation might share a single data center. Or the function might be carried out locally, but by an external entity, as in the case of an operator contracting out network maintenance functions to a vendor.

Then there is the offshoring phenomenon, which has become synonymous with the loss of jobs to India.

A survey by HR 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 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.

Core competence

Yet while 92% said 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 the 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--GE is a spectacular exception to the rule, as is the Hutchison-Cheung Kong group headed by Hong Kong tycoon Li Kashing. Many Asian family-controlled conglomerates sprawl less successfully across multiple businesses.

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 mobile 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.

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?

For political reasons, we are not going to see Asia's remaining state-controlled integrated telcos--Chunghwa Telecom, SingTel and Telstra shucking off major parts of their operations. On the other hand, Telecom Corp of New Zealand, in private hands for more than a decade now, has become one of the pioneers. More on this later.

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, it 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. HP Hong Kong says carriers account for 30% of its enterprise services.

Sensitive topic

Carrier outsourcing divides into four main categories, says Bain's Sequeira: IT, call centers, network maintenance and, lately, the entire network operations.

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

In the US, Sprint and IBM have just concluded 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.