Equinox : In the past two years, many companies have jumped into offshore outsourcing. What are their initial satisfaction levels? Arie Lewin & Chris Disher: Our research says that on an average most of the companies are satisfied with what they have achieved through outsourcing & offshoring in the first year itself. In our survey we look at it in terms of both cost saving and service levels. Survey suggests that about 30% of the companies achieved higher savings than expected, the average saving through offshoring initiative stand at 40% and in terms of service levels, most of the companies achieved the desired service level within the first year of implementation and they expect the service level to continue to increase in next 18 to 36 months. So, on an average satisfaction stands at high levels. The most successful companies are those which invest considerable time and management resources to make it happen. So, companies that believe that they can hand over the whole process to a service provider and expect success without their engagement will have to face the bad weather. We see lot of media taking about various dissatisfaction levels, we don’t completely disagree with them. But point of the matter is that the labor arbitrage is huge.   Equinox : How can vendors & customers define & measure the value achieved through outsourcing & offshoring? What Benchmarking tools can be used to measure the performance? Arie Lewin & Chris Disher : In one of our survey we asked the customers how they were measuring the value. Up front there is the dominance of interest in economies in this case. This seems to be primary toll to decide whether to go for offshoring. After the deal is signed the most frequently used tool to measure the value is service level agreement (SLA). They tend to focus on achieving the SLA and loose interest in overall economic analysis. We have seen that some companies have problems in adapting to new performance measurement tools and matrices, some time they believe that their old measurement systems would deliver the desired results in the new offshore environment. This is not encouraging and can lead to skewed information on offshoring performance. It is a very critical aspect; second important thing is to measure the satisfaction level of both internal & external clients, as internal clients collaborate with external clients. The other perspective to notice is cost before and after the transaction.   Equinox : One of the critical aspects of successful outsourcing project is Transition/ Migration, what according to you should be best practices in Transition management? There are some companies who look forward for process re-design along with outsourcing solutions, what are your thought on this? Arie Lewin & Chris Disher : The trend which we see is that companies first offshore it and then decide on process re-design. Companies collaborate with vendors for process redesign. Some vendors don’t have capabilities for process re-engineering so companies have to face high risk of process failure or they are forced to run it without re-engineering it. We have noticed that its very rare wherein companies first re-design the process and then offshore it, which eventually is the best way to move forward. We see an intent of process re-design but some how its not happening. For this to happen there has to be lot of discussion internally and with the vendor. High level of involvement from senior management and a project plan is must for this transitional decision.   Equinox : To summarize, Process excellence is one of the most important value propositions of outsourcing. Do you see a trend where lot of companies are focusing more on cost advantage, as opposed to focusing on process excellence? Arie Lewin & Chris Disher : Our survey suggests that most of the companies understand and acknowledge that process excellence is an important aspect, but we are not sure why they are not implementing it in their engagement with vendors. Our study says that there are some companies which are not willing to listen to their vendors on how vendors can help them to re-design their processes. Some companies find it hard to believe that some one from outside can actually re-design their processes successfully. In US we have seen that it takes longer for a company to offshore, one of the main reasons being non documentation of the existing processes. We think German and Japanese companies have better control over their processes and have better documented knowledge.   Equinox : What are your thoughts on vertically focused BPO companies particularly in financial services? Do you see a trend wherein bigger companies are outsourcing their processes to smaller shops with singular domain expertise and experience? Arie Lewin & Chris Disher : It depends upon customers’ objectives, I am witnessing that offshoring companies are segmenting into niche areas. Traditional outsourcing model lays emphasis on bigger vendors which can provide services under any function. Now companies are looking for vendors that will suit a particular process. We will see lot of processes around turnkey solutions with specific focus on particular industry. So a number of different models will be implemented with different objectives. We will see companies coming up with strong domain expertise and vertical competencies. we see this happening in financial services, we are early on this transition. It also depends on customers’ sophistication and strategy. and requires a set of capabilities as compared to bits and pieces of transaction process.   Equinox : We have seen vendors combining their BPO and ITO units and extending them as a better value proposition. Lot of large IT companies in India with their BPO business are jointly pitching to big corporates in US. What are your thoughts on this? Arie Lewin & Chris Disher : We have been looking at different things in this regard. We have asked companies what their plans for expansion of offshoring applications and for new offshoring initiatives are. In terms of expansion of the current application which has the highest growth rate for the IT and in terms of new implementation it comes from BPO largely for Human resources and finance process. Our data doesn’t say whether it goes to the same vendor or customers look for new vendors for BPO. There are two trends, the larger vendors will integrate their ITO & BPO operations but there will be new breed of smaller companies specializing in certain areas that will surely come up and will do well. Human resources for example is one function which is captured by vertical players, highest percentage of the new offshoring is in HR domain. But the best benefit can be derived by giving both technology and process to the vendor. We don’t see much of it now but this trend might gear up. It also has to do with fundamental alignment of the business line with application architecture which makes the job much easier.   Equinox : Next important topic is pricing, we see a shift towards transaction pricing model as opposed to hourly billing. What does the study suggest on this trend? Arie Lewin & Chris Disher : We are evolving more towards the pricing model based on unit transaction but today we see lot of big contracts based on fixed prices and gradually we are moving towards transactional pricing. We also see a trend in the duration of the contracts. Some companies are moving from long term contracts to short term contracts. But the transition will be very challenging.