Offshore Insights Market Report Series

February 2005

www.neoIT.com

Volume 3, Issue 2

RESEARCH SUMMARY: HR Challenges with Offshore Captive Centers

By neoIT

What human resources factors do we need to monitor in order to achieve success in our offshore captive centers?

Global innovators such as GE, AMEX and HSBC, have achieved great success in launching, managing and scaling global ITO/BPO operations. Other organizations are quickly following their example and as offshoring gains maturity in volume and complexity, we foresee an exponential rise in captive centers both in terms of number and scale. Still, many captive centers have experienced difficulty in achieving their objectives in terms of scale, scope and cost savings. While this setback can be attributed to many factors, Human Resources (HR) is one of the first major hurdles for setting up a successful captive center. Companies that underestimate this step typically suffer scaling issues coupled with a lack of productivity and savings. This paper identifies and addresses key HR challenges in both setting up and achieving efficient operations in an offshore captive center. Key issue: What are the common HR challenges for offshore captive centers? What are the potential risks if these challenges are not addressed? How can I proactively mitigate the risks?

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HR Challenges with Captive BPO Operations

Introduction
Global companies have explored various ways to leverage the talent pool and low cost structures in developing countries. What started as primarily staff augmentation matured into partnerships with offshore service providers, and now the management of wholly owned delivery centers in places like India, the Philippines, and other low cost markets such as China, Mexico, Poland and Costa Rica. Global innovators such as GE, AMEX and HSBC, have achieved great success in launching, managing and scaling global ITO/BPO operations. Other organizations are quickly following their example and as offshoring gains maturity in volume and complexity, we foresee an exponential rise in captive centers both in terms of number and scale. While the bulk of the offshore activity continues to go to third-party suppliers, many organizations are realizing the value of owing global delivery centers for their ability to: Conduct and manage high-value projects and processes Mitigate internal resistance to sharing sensitive data and intellectual property Standardize processes and standards company-wide Achieve higher cost savings Retain company knowledge Maintain control over higher risk processes Avoid creating competitors in low cost markets

After reviewing some of the advantages of a captive center, it may seem to be an easy alternative to outsourcing to a third-party. However, it is important to understand that with these opportunities, there are also significant challenges. Most companies that setup captive centers do so because they think it is the right way to manage risks and control the operations. In general the captive offshore phenomenon presents significant challenges to management, including the key impacts of managing the organizational, processes, and finances of an enterprise. The impacts are often felt in the initial stages of setup, and, if mismanaged, the centers need to be prepared for long cycles of adjustments and stabilization. In this white paper, we will discuss potential organizational impacts to global captive operations, and specifically human resource impacts. Offshore HR strategy has to differ considerably from the parent, for various reasons. Human resource departments will need to become more adept at managing disparate work forces and incorporating stylistic and cultural differences in communication and problem solving. Management will need to develop policies and practices to incorporate a more flexible approach to labor allocation. Regulatory and legal issues will be important as countries deal with the political issues that offshore sourcing is rising. Management structure will need to support relationships with offshore operations and assure that objectives, contracts, delivery models, and measurement are well integrated and aligned. Failure to recognize these differences in onshore versus offshore Human Resources will ultimately impact your organizations ability to achieve business and operational goals, customer satisfaction and cost benefits.

2603 Camino Ramon, Ste. 200 San Ramon, CA 94583 (925) 355-0557 Fax (925) 355-0558 www.neoIT.com Copyright 2005 neoIT, All Rights Reserved

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HR Challenges with Captive BPO Operations

HR Challenges
The common areas of oversight in managing global resources can be summarized into seven key areas:

Risks

Responsibility Overlap HR Functional Area

CULTURAL DIFFERENCES
In any offshore engagement, cultural integration often takes a backseat to process implementation. Generally, companies believe if the processes are well defined with a strong transition plan, cultural issues will not impede delivery. This often leads to an organizational structure that mimics the parent organization. However, by not carefully considering the cultural differences and integration issues between the parent and the offshore captive, companies are actually adding to costs and delays. By ignoring cultural differences, onshore employees are frequently unable to transition the onshore process flow and knowledge to the offshore location. This can create the need for frequent visits from senior executives and/or program managers to the offshore location for hands on supervision and troubleshooting. The additional visits contribute to longer transition time, delayed savings, decreased quality and lower productivity.

ORGANIZATIONAL STRUCTURE
Typically decision-making in large corporations is centralized and captive units are only responsible for decisions related to operations. On average, global companies are most comfortable operating in an organizational structure that leaves only the functional heads reporting directly to the onshore operation. With only a few decision-makers, issues requiring immediate attention can be overlooked. Captive centers need to be empowered with the ability to make decisions

2603 Camino Ramon, Ste. 200 San Ramon, CA 94583 (925) 355-0557 Fax (925) 355-0558 www.neoIT.com Copyright 2005 neoIT, All Rights Reserved

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HR Challenges with Captive BPO Operations

related to HR, facilities, local connectivity and infrastructure. As an example, procuring a technology component may take couple of days onshore, as opposed to a few weeks offshore. This seemingly simple decision could then delay setup and maintenance of the technology infrastructure, in turn hurting operations. By creating an organizational structure that lacks transparency across levels, companies risk losing visibility into the effectiveness of the operation, impede the ability to scale, lack the ability to quickly identify top performers, and create power centers rather than collaborative environments.

MARKET POSITIONING
Leveraging local positioning to drive recruiting efforts is an important aspect of obtaining the right talent in an offshore captive center, yet it is also an area commonly overlooked. Since most captive centers are internally positioned as cost centers of the back office operations, they do not obtain the same level of attention that a profit center would receive. Frequently captive centers position themselves as opportunities for top-level salaries, but potential employees are looking for more than just a paycheck. Often candidates are driven by factors such as opportunities for a clear career growth path, international management experience and social responsibility. Many employees at captive centers quickly lose the pride factor of working for the company because the employers ignore these key areas.

RECRUITING
When recruiting for local captive centers, organizations need to understand that the education and psychological profile of people vary across geographies. Global companies regularly fail to correctly map the educational requirements of onshore resources to the country of offshore operations, and hence begin recruiting profiles similar to those required in the parent country. For example, while a typical call center employee in the USA has a 2-year college degree, the ideal profile in many Asian countries would be a bachelor degree and over 50% would have masters degrees. Market pressures cause captive centers to hire middle- and top-level management at a fast pace. Other recruiting is primarily driven by the need for warm bodies. With these two high-pressure factors in mind, it is no wonder that quality is sacrificed. While skills are taken care of, soft issues such as attitude and culture are often overlooked. As a result captive centers can create a distinct culture compared to the parent. Without careful attention to recruiting, captive centers risk higher hiring costs, weak and/or mismatched culture compared to the parent organization, poor quality employees and low retention.

TRAINING & DEVELOPMENT

Companies often try to mirror training programs at captive centers with those at the parent organization. The rationale is that if the processes are the same, with similar quality expectations, then the programs should be the same. In many cases, even the training material used is the same. However, the differences in profile, education, experience and culture of offshore employees are often overlooked, resulting in difficulties in acquiring the new skills needed to execute on their jobs. Captive centers also consistently ignore the necessity to provide managers with crossfunctional opportunities and avenues to take on larger roles in the overall organization.

2603 Camino Ramon, Ste. 200 San Ramon, CA 94583 (925) 355-0557 Fax (925) 355-0558 www.neoIT.com Copyright 2005 neoIT, All Rights Reserved

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HR Challenges with Captive BPO Operations

By restricting development to managing operations, middle and top management become discouraged and begin looking at other long-term options.

COMPENSATION & BENEFITS

Compensation and benefits expectations will vary in different countries. So, why do so many companies try to replicate their onsite compensation and benefits structure to their offshore captive centers? Each offshore destination comes with vastly different tax systems and related regulations. So, it is essential that companies build flexibility into compensation structure to recognize and reward, as well as to promote healthy savings for an individual. It is also important to pay close attention to top management and middle management compensation structures and develop programs that enable loyalty and retention. Along the same lines, the expectations for benefits also vary greatly from location to location. It is necessary for captive centers to adopt their structure to local operating needs. Benefits could include things such as lunch services, pickup and drop car services, higher education sponsorship and housing and vehicle allowances.

RETENTION
One of the bigger challenges captive centers face is retaining middle management and lower level executives. Primarily this issue is isolated to captive centers that are not expanding. Employees at these centers are bogged down by monotonous work and little opportunity to learn cross-functional skills. And, they struggle to provide key employees with global exposure. Instead these centers are fast becoming training grounds for third-party suppliers for learning domain specific or process specific expertise. Captive centers such as GE and AMEX have successfully retained key executives and managers by focusing on their HR policy, compensation structures, career growth paths, learning opportunities and job satisfaction.

2603 Camino Ramon, Ste. 200 San Ramon, CA 94583 (925) 355-0557 Fax (925) 355-0558 www.neoIT.com Copyright 2005 neoIT, All Rights Reserved

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HR Challenges with Captive BPO Operations

HR Issues Where it Hurts

Overlooking the seven critical HR areas in managing captive centers can create a number of short-term and long-term issues. A summary of these issues is provided in the table below.

Common Oversight Lack of cultural sensitivity

Result Cost increases Increased time required from senior Integration, productivity and quality take
longer to establish executives to understand and resolve issues

Cultural Differences

and/or cultural training programs

Organizational Structure

Parent-centric reporting Non transparent reporting

structure

Decisions delayed that are critical to operations Disruption of services Create power centers Inability to recognize decision makers, leaders and key performers early

Positioning

No positioning plan with

recruiting in mind Lack of social programs

Failure to attract the right talent Companys image becomes a labor pool
compared to socially responsible organizations

Recruiting

No university recruiting program Unspecific job descriptions

Higher cost of hiring Low conversion rate from application to

interview to selection

Longer time to recruit right talent

Long training cycle Inability to establish consistent corporate values Internal growth impeded Increased need for additional middle- and senior-level positions Lack of nurturing management from within

Training & Development

Non-specific training program No development program

Inadequate attention to pay

Compensation & Benefits

structure

Key employee friendly benefits

overlooked

Executive rewards not tied to

corporate success

High cost to company Mismatched expectations Lack of drive and commitment

Retention

Monotonous work No avenue of global exposure Lack of lateral growth

opportunities

Loss of trained workforce Employees view captives as training grounds Inability to retain middle and top management

2603 Camino Ramon, Ste. 200 San Ramon, CA 94583 (925) 355-0557 Fax (925) 355-0558 www.neoIT.com Copyright 2005 neoIT, All Rights Reserved

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HR Challenges with Captive BPO Operations

Recommendations
When a captive center is created as a mechanism of lowering cost alone, the future opportunities to develop and contribute to other aspects of the corporation are stunted. Therefore, it is essential to develop and nurture captive centers with long-term growth visions, not as a short-term contributor to the bottom-line. Companies must also remember that one of the basic building blocks of the new captive center is human capital. In an offshore environment where labor is abundant, and the primary focus is on numbers and cost reduction, HR is too often taken for granted. The table below provides specific recommendations for each of the seven critical HR areas. Companies that focus on these areas as throughout the lifecycle of the captive will develop into best of breed facilities. Provide cultural training to both offshore and onshore resources at different levels in the
organization to help cross cultural teams better understand each other.

Cultural Differences

Create opportunities of physical interaction between onshore and offshore managers Encourage direct communication at various levels across geographies to discuss and resolve
issues

Become familiar with potential barriers or challenges for particular cultural groups Document cultural differences and frequently address specific issues and roadblocks
Create organization structure where transparency and visibility of activities is available Do not dilute information by creating too many hierarchies across the organization Allow all levels of organization to interact with the offshore center Develop programs to recognize decision makers, leaders and key performers early Build an organization where performance can be easily recognized and need not be announced Do not create power centers - allow competency centers within a group to grow Map education and psychological profile of the available workforce with onshore counterparts Build relationships with educational institutions and industry bodies Institute process for campus recruitment and orientation Explore option of building a training school if recruiting numbers are high Anticipate and plan for growth early enough avoid bulk recruitment at higher levels and create home-grown managers Do not market yourself only as good pay masters stress opportunities for growth and learning Position the captive center as part of the corporation, not just a delivery unit Internally, implement a vision of growth for captive center to develop into a profit center Make social responsibility an integral part of your companys culture Include cultural training as integral part of all training and orientation programs Customize training programs to local needs; benchmark with leading local firms Aspire to develop every employee to take up diverse and higher responsibility in the organization Identify opportunities to develop global managers

Organizational Structure

Recruiting

Positioning

Training & Development

Create compensation structures that allows maximum benefit to employees within the local tax Compensation Build allowances, incentives and perks inline with the local needs and practices Include stock options encourage executives to contribute to growth Benchmark compensation with local firms avoid high cost to company
Provide transparency of performance and recognition at the corporate level Create path and opportunity for lateral growth Encourage cross functional responsibility at middle and top management levels Institute provision for onsite/global visits for top and middle management framework

Retention

2603 Camino Ramon, Ste. 200 San Ramon, CA 94583 (925) 355-0557 Fax (925) 355-0558 www.neoIT.com Copyright 2005 neoIT, All Rights Reserved

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HR Challenges with Captive BPO Operations

More information about the offshore outsourcing industry can be found within neoITs research center at www.neoOffshore.com. For more details about neoITs offshore advisory and management services, please contact:

Contributors
Suresh Gundappa Director Nishant Verma Advisor

Allisson Butler Marketing Director San Ramon, California allisson@neoIT.com

925-355-0557 www.neoIT.com

Editors
Atul Vashistha CEO Avinash Vashistha Managing Partner Allisson Butler Marketing Director

No part of this report may be reprinted/reproduced without prior permission from neoIT.

neoIT Global Offices

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2603 Camino Ramon, Ste. 200 San Ramon, CA 94583 (925) 355-0557 Fax (925) 355-0558 www.neoIT.com Copyright 2005 neoIT, All Rights Reserved