Business Process Outsourcing is the next big business, if it is not already. US companies spent US$119bil in outsourcing deals last year, 44% more than in the previous year, and research statistics suggest that such expenditure by European firms will nearly double from US$5.1bil to US$9.6bil by 2008. In the region, Malaysia is seen as the leader, with growth seen at 17% a year compounded between 2002 and 2007. STEPHEN BOEY spoke with industry experts for insights into a business taking the world by storm.
THE banking and financial sector in Malaysia has certainly provided leadership in initiating outsourcing activities, even as early back as in the 1990s, especially in information technology (IT) operations and support areas and, more recently, in business process operations (BPO).
Although there were a lot of push factors for a company to outsource its non-core operations, Malaysian companies in general, like their Asian counterparts, were not exactly rushing in to embrace outsourcing, said Woon Tai Hai, director, KPMG Business Advisory.
A number of conjectures have been raised to explain this, including reasons like:
·The cost of doing business in Malaysia is still relatively competitive;
·Lack of local outsourcing service providers with the right credentials and record;
·Will cost a lot initially;
·Regulation prohibiting such activities in the industry; and,
·Having heard too many “horror stories” on the subject matter.
“It would be correct to say that there is a lot of truth in every of those reasons given,” Woon commented.
Non-IT activities that can potentially be outsourced include construction, manufacturing, call centre operations, hospitality and health services, human resource management, insurance services, logistics and warehousing, legal services, marketing, welfare services, cleaning, building security, customer service and support, financial services and accounting, research and development-related analysis services, and the list goes on.
“Looking at the automobile industry today – and understanding how competitive this industry is – you will learn to appreciate the necessity of outsourcing, and how by only focusing on your core areas can you achieve the efficiency and becoming competitive in the industry,” said Woon; a view US-based global outsourcing giants Electronic Data Systems Corp (EDS) and IBM Corp articulate in pushing for outsourced business worldwide.
“Non-core functions such as seat belts, parts, tyres and alarm installations are not handled directly by the car manufacturer, but outsourced to third parties. Other industries today that are heavy users of the outsourcing model are airlines and the manufacturing sector.”
In terms of outsourcing business process operations, Malaysia was the leader in South-East Asia. The first contract was signed over two years ago, between EDS and Bumiputra-Commerce Bank (BCB).
Other countries in South-East Asia soon followed. “Singapore, within 12 months of BCB signing the contract, then Thailand,” noted Ayut M. Patel, president, Electronic Data Systems, IT Services (Malaysia) Sdn Bhd.
Following that landmark EDS win, Malayan Banking Bhd (Maybank) signed with leading e-procurement provider tx123 (M) Sdn Bhd in November 2002 for an Internet-based e-procurement solution to link the bank with its suppliers and vendors.
In September last year, Malaysia Airlines signed a 10-year agreement with IBM worth about RM440mil, under which IBM would operate and manage the airline's IT infrastructure, application maintenance and development.
EDS sees the Malaysian market as growing much faster than the rest of the region, and the region growing much faster than the rest of the world.
Patel said: “If you look at it from a numbers standpoint, (market research consultants) IDC said the outsourcing market in Malaysia would grow at about 17% compounded annual growth between 2002 and 2007, which is higher than for the region.”
The main drivers of growth for EDS Malaysia will be financial services and the Government – the Ministry of Finance as well as other departments such as inland revenue, customs and land administration.
“In fact, the common services where you would need to look at data,” added Patel.
Among the many reasons pushing organisations to consider outsourcing, regulatory requirements is one.
“This is especially true where the penalty for non-conformance is heavy, and a higher level of expertise is required to provide those outputs to the regulatory bodies,” KPMG's Woon said.
“For example, the quarterly reporting requirement for public listed companies imposed by Malaysia Securities Exchange Bhd may prompt organisations to consider this strategy, as this additional requirement will certainly put a lot of strain on their back office operations and systems.
“There's also the heavy penalty for wrong tax assessment under the tax self-assessment for companies.”
Thus the back office operations in accounting and financial management would be the obvious targets for outsourcing.
The drive to achieve efficiency is another compelling reason, especially in areas not considered the core business of the organisation. This is prevalent in the manufacturing industry where the non-core manufacturing activities are often sub-contracted to other vendors.
Even Government agencies have embarked on the outsourcing strategy to achieve efficiency, noted Woon.
The lack of skill sets, and problems attracting and retaining such expertise in-house, can be another reason why organisations outsource their operations. This is especially true in areas involving advanced and sophisticated technology and know-how.
“That is why companies find outsourcing such a wonderful benefit,” added Voon Seng Chuan, managing director of IBM Malaysia. “They don't have to deal with operations.”
“More often than not, what chief executive officers tend to like most about outsourcing is their ability to now spend time on the strategic value of IT, rather than dealing time on the operational matters of IT – printer not working, network not working, system slow or needs upgrade, virus attack, and etc.
“If you are running a bank or an airline, that is not your core competency. But, unfortunately, if you don't outsource, that becomes your problem.
“The second thing they get is, of course, financial benefits. How do we drive that? We drive it through efficiency, through critical mass,” he said.
The changing global economy and landscape, with emphasis on globalisation and the borderless market, has precipitated the trend towards outsourcing, said KPMG's Woon.
“The emergence of Internet technology also means that organisations today can seek out the lowest cost economy and structure to place their operations in – another catalyst for outsourcing.
“High set up capital cost and investment will also prompt some organisations to seek external parties to manage some of their operations. Typical of this are disaster recovery centres for the backup of the IT infrastructure and systems.”
Depending on the type of activities and functions outsourced, it is estimated that companies can save as much as 30% in the long term by outsourcing their non-core business activities to third party experts and specialists in their respective fields.
“The key word here,” emphasised KPMG's Woon, “is long-term savings through increased efficiency and specialisation; and the combination of these two drivers can potentially see an increase in revenue and profitability for an organisation.
“However, there is no guarantee that companies will achieve these savings and increased revenue as moving from in-house to outsource is dependent on many critical factors, including whom you choose to outsource to, designing your service level agreement, defining what are core and non-core business functions, and dealing with the human aspect of outsourcing.
“In short, it very much depends not only on the strategy you have in place. The implementation is just as critical in ensuring a return from such an exercise.”
While global players in this field can provide a wealth of best practices and latest innovations, including technology and know-how, they can also mean higher costs, lack of understanding of the local rules and legislation, may provide an overkill solution, and may not view the local market as strategic enough once they do not have adequate clientele.
A growing number of local service providers provide small-scale and less complex outsourcing functions such as accounting support, payroll processing, disaster recovery, help desk/call centre support, and web hosting.
Thus, it would be ideal to have outsourcing companies with strong presence in Malaysia that also have the necessary network and support globally.
Global players who are based in Malaysia can enjoy the relatively lower cost of conducting business, and support the outsourcing market around this region.
Selecting the Service Providers
Third party solution providers must at the minimum possess the following credentials:
Source: KPMG Business Advisory