“It’s odd that you can get so anesthetized by your own pain or your own problem that you don’t quite fully share the hell of someone close to you.” — Lady Bird Johnson
If a pound of carrots doesn’t drive outsourcing vendor performance, maybe a little pain will? Read on to learn how to structure service level credits to incent vendor performance.
Do you wonder if contractual performance incentives work? These are the “bonuses” vendors get for exceeding service level agreement (SLA) performance targets or achieving certain milestones earlier than expected.
We do, too. Take the poll survey, view the results, and read our nine suggestions on how to make the best use of contract incentives.
One year from today, March 31, 2009, the Software Technology Parks of India tax scheme will sunset. When this happens, Indian companies will find their taxes increased from 10% to 20%. Depending on your specific contract terms addressing taxes, material changes, or other sections (talk with your legal team), vendor managers may be confronted with higher rates. What can you do to manage this?
First, some background information. STPI was created in 1991 to create tax incentives to stimulate India’s then-fledgling software export industry. It provides a combination of incentives, but the big incentive is the 10-year corporate tax exception granted to new organizations (Indian companies consistently create new organizations to restart the 10-year clock). Today, 95% of India’s software and BPO exports are subjective to this incentive. Exports are the services you are buying if you or one of your vendors outsourced work to a foreign country. Indian companies have been unsuccessfully lobbying the Indian government to extend STPI, but one never knows.
Whether it is next year or further in the future, the Indian government, given the social pressures of the country’s government faces, is clearly looking to cash-in on the enormous industry. This year, they introduces a Minimum Alternate Tax. They have also established Special Economic Zones (SEZs) that will will give tax incentives for fifteen years (100%, 50%, and up to 50% exceptions for each consecutive five year period). However, not ever Indian company operates in a SEZ, and it is unlikely will when STPI expires.
“If” is not the question, but “when” is. When it does, one thing is sure: the Indian outsourcing industry’s tax burdens will increase and they will undoubtedly look for you to pick-up the bill. More to the point, almost every country with significant ITO and BPO industries have similar tax incentive programs, and these governments will be carefully watching how India’s mature industry is monetized.
Here’s what you can do to mitigate your risk:
Other ideas? Other information about STPI or other incentives? Please share it by posting a comment!
“It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” — Adam Smith, The Wealth of Nations, 1776
We find ourselves in uncertain times caused by globalism and the talk of self-preservation. Where the Western world once sat behind the wheel, driving technology and automation into our businesses and personal lives, poorer countries are now poised to operate, maintain, and improve the technology the West created. Adam Smith’s great “Invisible Handle” metaphor contains a balancing paradox. The West’s businesspeople moved factories and service operations to foreign countries to take advantage of low wages. These wages improved, creating new economies in once poor countries. Over time, an equilibrium will be found and will persist until new entrepreneurs drive innovation, which will again make certain countries mighty until these innovations are outsourced or imported to other countries for the poor countries’ benefit.
And so the seesaw rocks back and forth.
One of the great frustrations of those who see the pattern of globalization is the extent to which the normal, non-entrepreneurs will go to protect their world from change. Like a great freighter’s anchor, the protectionists will dig deep to prevent natural change rather than hoisting anchor and going with the natural flow. The natural flow is unstoppable, because unnatural barriers to change will cause catastrophic disasters.
Your only choice is preservation of self-interest - to become rich and wealthy through innovation.
In the outsourcing world, which started in manufacturing, moved to information technology, and now is squarely focused on services, the challenge is innovation. Driven by economic pressures, more often than not, a company outsources XYZ and takes the entire savings to the bottom line. The savings is just temporary, as the labor arbitrage or a vendor contract negotiation will find equilibrium again. Consequently, outsourcing critics speak truthfully about the impact of outsourcing to local jobs, although most see only the short term impact.
A company that outsources and does not invest in innovation or transformation misses the great value of that could be created by infusing the freed capital back into its operations. The long term impact of the failure to innovate is devastating because competition will, eventually, find balance again.
The problem with outsourcing critics is that the laws they seek to enact are noting more than the proverbial finger in a dam’s leak. Eventually, innovation will be exported and the competitive equilibrium will bypass the very communities the critics wish to preserve. Halting globalism is simply impossible.
The critics need to focus on innovation, not preservation. Thomas Friedman’s “The World is Flat” was not so astounding for its exposure of the extent of outsourcing. Rather, the exclamation point of Friedman’s book was the last few chapters that explained the souring of Western education, the very fuel of innovation.
Companies who take outsourcing savings to the bottom line are no less at fault than our governments and societies. Companies that outsource and do not gain great competitive advantages through their partnerships also are at fault. Communities and politicians who expect protectionist measures to work are at fault, too.
In this global environment, the winners are those who realize their self-interest is tied to creation, not preservation.
Jamaican hurricanes, Costa Rican volcanoes, Philippine political coups, Indian taxi strikes, Chinese government-operated firewalls, Canadian blizzards, and the legendary American backhoe operating behind your data center are dangers to your business when you outsource to offshore locations.
Realistically speaking, geologic, social, political and weather-related disasters his every city of every country. Granted, some events are more or less likely in certain locations, but the unexpected can strike you when you least expect it. What would you do? Do you have a business continuity plan or a disaster recovery plan?
As related to us by a reader.
Picture this: Your company has outsourced customer service for some products, but not all products. You have a single vendor with over 1,000 seats dedicated to your operation. These seats are located in several centers located in the USA (for reasons not important to this story).
Your vendor management team is made-up of a single person. This person coordinates five different programs, handles contractual issues, reviews invoices, schedules training, manages quality, and sets the direction of the five programs. Needless to say, this person is very busy and, quite honestly, overwhelmed. No single person could perform this job.
One day, an internal customer service group who did not outsource their operations planned a team lunch to celebrate February birthdays. However, 12pm-1pm is also the time when customer service team receives the highest call volumes. As the team all wanted to celebrate together, they needed someone to cover the phones while they ate cake and ice cream. Driven by hunger or the love of a celebration, the team made a fatal decision.
A few minutes before noon, after the cake and ice cream were set-up in a nearby conference room, the team’s workforce manager flipped a switch that redirected the calls to the vendor. The phones went silent and the team rushed into conference room. They sang happy birthday so loudly that other people in the building could hear them. They took the time to also observed a company tradition of sharing what they liked about each of their February birthday team members. It was a great party.
Meanwhile, someplace else in the country, the vendors’ call center was completely inundated. Service levels fell to 4%, abandonment reach 85%, and the workforce team was struggling to understand the reason for the high call volumes. Worse yet, these weren’t their calls. They had no training on these calls. So, following standard procedure, once they recognized that a caller was in the wrong queue, the vendor’s agents would cold transfer the call into the right queue…which promptly routed the call back into the vendor’s queue. Customers were irate. The team director tried to call the vendor manager, but the vendor manager was in meetings and was unreachable.
Back at the client’s center, the happy agents returned to their desks and once everyone was ready, the workforce manager flipped the switch back.
Do you have a story to tell about vendor management gone bad? Let us know.
CNN is running a video story about the manufacture of US Passports, which as been outsourced to European firms who manufacture the passports in Thailand. Here’s the story from the Washington Times in case you cannot view CNN’s video.
Most of the concerns surround security, which raises these questions: Does the place of manufacture create more or less security than how it is managed? How do you ensure your company and customers’ information is secure?
A funny story told to us by an employee of a major US company (which we’ll call XYZ) with thousands of outsourced call center seats (domestic and international):
XYZ has two call center programs. One is a major inbound customer service program and the other is a small (about 45 agents) complex inbound/outbound marketing programs that focus on driving customer loyalty and create a significant revenue lift.
XYZ’s marketing and customer service organizations feud regularly about vendor management. Customer service insists on “owning” the vendor relationships and requires the marketing organization to liaise with the vendors through customer service’s vendor management team, which was insufficiently staffed and generally lacks vendor management experience. This inadequacy led the marketing team to circumvent the customer service vendor management team and they began to manage the vendors directly. The vendor management team became irate and the resulting seething rift between the two organizations was/is palpable.
Then came Christmas, the busiest 60 days of the year for XYZ. The customer service vendor management team made a significant forecasting error and found themselves delivering a 3% service level over several weeks. Yes, that meant that they answered 3% of calls in 45 seconds, which is terrible. XYZ is a major company. This was a nightmare.
Meanwhile, the marketing program was hitting on all cylinders. It was creating a record ROI and the vendor and the vendor agents were ecstatic. Attrition was a minuscule 10% annually.
This is when things got personal. Jealous by the success of the marketing program, the customer service team ordered the vendor to immediately put all of the marketing program’s’ agents in the customer service queues. They didn’t notify the marketing program.
We should point out for those less knowledgeable on the subject that a program that has thousands of seats is not going to create a meaningful lift in service level by adding a mere 45 agents. This decision was almost entirely political, and was also poorly calculated.
In this case, XYZ sacrificed a successful marketing program and gained nothing, as all but 9 of the agents left within two weeks of joining the customer service queues. Furthermore, XYZ squandered the returns they were creating in the marketing program - about $1M.
Funnier yet, the marketing program didn’t notice that their program had stopped until one week later…their success had less to do with their own vendor management capabilities than the vendor’s awesome execution. Dumb luck?
Can’t we all get along?
Phil Fersht recently joined AMR as their outsourcing analyst. In Phil’s own words, analysts are “McKinsey by the drink”, meaning you get significant thought leadership without the need for an expensive 3-6 week project.
Phil has just published a research paper on Ten Things to Look for in an Outsourcing Advisor. There’s also a couple of long threads on Phil’s blog on this topic.
Also, Vinnie provides some insights on at Deal Architect.
Oh, and Phil, check out the usage rules around “Adviser” versus “Advisor“. A UK vs USA rhetorical feud won by the Brits finally?
The Philippines has been an outstanding outsourcing location over recent years. It has an American heritage with close proximity to Hong Kong, Singapore, Taiwan, Korea, and Japan. There is a reasonably robust telecommunications infrastructure and there has been extensive capital infusions from China and many other countries. For foreigners, travel and accommodations in the Philippines is easy. Probably the most impressive opportunity is the abundant, well-educated, and friendly English-speaking labor force. Any outsourcing executive who has traveled to India, China, or Costa Rica instantly finds the Philippine people irresistible.
Despite the never-ending flow of positives clients, vendors, advisory firms, and the Philippine government use to describe the Philippine outsourcing market, the present day reality is much different. The Philippines actually poses a significant future risk to your operations. Here’s why:
Essentially, the Philippines of today is the India of 3-4 years ago. There is no reason to expect a different outcome.
However, while there are challenges, sophisticated vendor managers can mitigate every one of these challenges if they focus on strategic, long term issues that accompany outsourcing efforts. Vendor managers who focus solely on day-to-day issues will run into profound problems if they don’t diversify locations, manage financial currency risk, or seek creative ways of bridging the middle management talent gap. If managed effectively, the promise of the Philippines is definitely positive.
