Trend | Manufacturing | 02.06.2015
Shared Services in India have the capability to spur growth and the Domestic BPO segment can witness tremendous volumes, the Government can spur the growth of shared services by adopting an innovative approach while addressing citizen service and talent availability challenges. It will also need to play an important enabling role in areas such as talent development and in establishing more favourable regulations for shared services and managed services.
Shared services are playing a big role globally, but adoption in India has been low. Going forward, shared services can become a significant force in India, as value propositions become compelling and India-specific models evolve.
The concept of shared services, whether captive or outsourced, started gaining credibility in the 1980s as a way for companies to optimize costs and improve quality of support functions. The growth of multinational corporations and rapid technological advances allowed companies to pull together business processes across global organizations. This led to the emergence of several capable service providers, first onshore and then offshore, and gave companies the ability to outsource an array of functions. Over the last decade, more complex activities such as analytics, pricing, and legal support began to be outsourced, requiring more collaboration between service users and providers. Moreover, with technology developments such as cloud computing, new trends have started gaining acceptance, including software as a service (SaaS), business process as a service (BPaaS), and platform-driven solutions.
Today, shared services have become a key part of operating models for many companies, with more and more organizations recognizing the need for standardizing, consolidating, and potentially outsourcing business processes. For example, about 85 percent of Fortune 100 companies globally have shared services centers.1
Simultaneously, service providers are enhancing the scale and scope of their services to give their clients more value. They have focused on driving lean operations through process excellence and accelerating revenue contributions through new value propositions. As a result, service providers have become indispensable partners for many of their clients.
India has been the destination of choice for offshored services for close to a decade. According to the A.T. Kearney Global Services Location Index 2011, India is the top pick based on three parameters: financial attractiveness, people skills and availability, and business environment.
However, the traditional, western concept of shared services and Managed Services has had lower adoption in India. The domestic BPO market as a proportion of GDP is still lower than the global average (see figure 1).2 India's ratio of domestic BPO revenue to IT revenue is less than half of the world average.3 This domestic BPO market has significant untapped potential.
Five factors have contributed to this slow adoption of shared services:
Even today, Indian companies beyond the top 100 have annual revenue of under $2 billion, whereas the corresponding figure for the United States is about $30 billion. An Indian firm with less than $2 billion in revenues would generally have limited staff across a range of G&A functions, not creating enough scale for services to be shared. This is particularly true of non-service sectors such as automotive and energy. As Indian companies gain scale and start expanding their global footprint, the shared services concept will gain traction.
The western shared services concept focused on cost reduction was accelerated by the offshore proposition of arbitrage and access to a differentiated talent pool. Gradually, as the shared services model matures, Indian businesses and service providers are focusing on other benefits, including efficiencies, process excellence, and faster time to market—factors that are more relevant in India. Figure 2 illustrates how drivers for shared services are different in India compared to western markets.
For example, Indian manufacturing and retail have had much lower uptake, driven by various factors, including higher proportion of unorganized players, lack of process evolution, and higher cost of technology (see figure 3). As these factors change, these verticals will lean toward adopting shared services. For example, organized retail, which currently contributes to 5 percent of the overall retail market, is projected to grow to 17 percent by 2020.
Over the past 20 years, the average GDP growth rate was 7 percent, compared to 4 percent over the previous 20 years.8 To maintain control and responsiveness in this environment, most activities were kept within business units. In addition, limited stability and process maturity have restricted the extent to which they can be shared. The lack of process maturity is evidenced by the fact that India trails in adopting standards and tools such as an Information Technology Infrastructure Library (ITIL), Capability Maturity Model (CMM), and Six Sigma. For example, India's ITIL adoption rate is 0.1 percent, compared to 40.9 percent in the United Kingdom and 19.7 percent in the United States.
When global growth started showing signs of waning, they shifted their focus to Indian companies. For example, a large service provider for banking, financial services, and insurance (BFSI) gained its first Indian client in 2008 despite being present in India for almost 10 years.
India is the managed services provider to the world. Domestic companies can leverage the competencies built by these service providers to create more effective, efficient operations. This will require a change in mindset to enhance the scale and scope of shared services along with greater collaboration with service providers, which must enhance their domestic focus and drive innovation to develop relevant local solutions.
The adoption of shared services in India has increased steadily and in the recent years at a faster rate than the export shared services (see figure 4).10 This demand for shared services in India was traditionally driven by the needs of large conglomerates and select verticals, including BFSI and telecom.
However, with the Indian economy poised for the next round of growth, adoption of shared services will be more secular. Wider adoption by large enterprises and newer verticals will continue to be a large contributor to the demand, which will also be bolstered greatly by a large and aspiring segment of small and medium-sized businesses, government initiatives, and rising expectations of urban and rural consumers. A vibrant ecosystem exists to support this growth. Mature and focused suppliers, world-class ICT infrastructure, disruptive technologies and alternative business models, and regulatory changes will all enable realization of a higher growth trajectory for shared services.
Given these market changes, the traditional shared services adoption is likely to grow at a far higher level than was seen over the past decade.
The definition of shared and managed services is fast changing in India, to include new engagement models that go beyond the scope of traditional BPO.
The need for low-cost, infrastructure constraints, and nascent evolution of multiple value chain components means that companies have to make considerable investments in developing these ecosystem elements. This is leading to the evolution of India-specific shared services models where companies from within or across sectors are coming together.
There are five key trends that will determine the pace and scope of the India-specific evolution of the shared services space. As organizations endeavour to expand the addressable market for their products and services through wider reach, they could collaborate with companies (including those from other sectors) that have an existing supply chain and sales and service networks.
The business drivers for Indian companies are different from their global peers, partly due to rapid growth and the difference in market and competitive dynamics. Indian companies are redefining their core competencies and go-to-market models—and in effect—sharing and outsourcing activities that in the past were considered to be strategic differentiators. For example, telecom sector has been witnessing intense competition and margin pressure for the past few years. In response to these challenges, the Telecom companies (incumbents and new entrants) responded by aggressively outsourcing and pushing the envelope on what was once considered core. The outsourcing scope today includes IT, customer service, G&A, NW services, billing and in some cases even product management (see figure 6).
The government is increasingly recognizing the need to elevate the quality of service provided to its citizens. With rising affluence, limitations on time, and global exposure, more Indians are expecting timely, reliable, and transparent service from government departments. Given the fiscal pressures, limited ability to attract quality talent, and a lack of access to best practices, government is increasingly demonstrating openness to engage the private sectors as an enabler to implement shared and managed services.
There have been several large-scale public projects such as UIDAI and e-governance projects in the recent past where external service providers have been involved in providing a significantly large scope of services. This trend is only likely to increase, with several components of the provisioning and tracking of public services becoming candidates for outsourcing. This can help bridge some of the gaps in the quantity and quality of teachers, doctors, and police personnel required to meet the needs of more than a billion people. For example, as per the UN, the number of police per 100,000 people in India is only 130, as opposed to a worldwide average of 350. To address gaps, the government would increasingly use technology such as GPS and support services such as call centres to improve their effectiveness. Adoption will be driven significantly by shared services.
Case studies demonstrate the increasing adoption of shared services by the Indian public sector (see figure 7 and figure 8).