Genpact: A Third Way to Offshore - Patrick Cogny and Andrew Groth

To get the best out of offshoring, companies need to source talent from multiple locations while retaining control. Genpact’s Patrick Cogny, European CEO, and Andrew Groth, European senior vice president of business development, tell Michael Jones of FDE about an alternative route to offshore.

FDE: Outsourcing has been advanced as a solution for meeting the shortage of skilled labour in Europe. How does it help?

Patrick Cogny: European corporations are facing major challenges, including a shortage of skilled workers, heightened global competition and increased demand for products and services. Higher life expectancy in Europe and growth in the global markets have spurred demand for products and services while decades of reduced birth rates combined with a retiring workforce have resulted in a shortage of skilled workers.

The demand-supply imbalance makes hiring local talent difficult. Not only does excess demand push up wages, but corporates will witness high attrition rates, as many companies vie for the same talent. Talent churn also increases training costs and results in knowledge loss, which can disrupt processes.

Sourcing services from talent-rich offshore locations, such as Eastern Europe, India and China, is the obvious answer. US-based corporations are already successfully offshoring multiple processes and Europe can benefit, too. Offshoring provides access to talent, cost savings and increased process productivity.

FDE: Many European corporates have been sourcing services from Eastern Europe for several years and are now facing wage escalation and attrition. Do you think outsourcing is a long-term solution to bridge the talent gap?

Andrew Groth: Global outsourcing is definitely a long-term solution to bridge the talent gap, and several European corporates are already sourcing services solely from Eastern Europe. However, the rapid increase of captive centres in such locations has resulted in wage escalation and increased attrition, which obviously reduces or even neutralises the effectiveness of offshoring.

‘It is important to create a global services value chain linking talent across several countries to tap into the best each location has to offer.’

Limiting yourself to Eastern Europe is not the best strategy. We believe corporates should have a comprehensive sourcing platform that can access talent all over the world. India and China are two locations that can be part of your outsourcing portfolio. India particularly has a vast talent pool.

A comprehensive outsourcing strategy must be composed of multiple components that provide an optimum solution. We believe that European companies should use Eastern Europe to meet specific language requirements and tap India for a cost-effective and deep talent pool. Attrition will continue to be an issue, but can be managed by selecting the right offshoring model.

FDE: What are the pros and cons of outsourcing to Eastern Europe vs. India or China?

AG: Firstly, the question is not about Eastern Europe vs. India or China. We believe that European companies must tap all these locations to implement a successful and comprehensive outsourcing initiative. The needs of European customers are unique. Even though India has a large talent pool, its services are in English, which does not effectively serve customers in non-English speaking countries.

European companies need an offshore model that can tap the deep talent pool in India and access Eastern European talent for specialised languages. India has a huge talent pool, with nearly 400,000 graduates added each year, and its metropolises and large and secondary cities have a ready talent base of more than 30 million people. English is widely used and the country is the largest democracy with a favourable business and tax environment. Senior talent is available at low cost and BPOs are valued for offering leading-edge careers.

Eastern Europe, on the other hand, has a fragmented talent pool of about three million, but has strong French, German, Italian and Spanish language skills. Business and tax environments are tougher and senior management talent is in short supply. Eastern Europe has very little experience in global service delivery as it is dominated by small captives with 50 to 500 employees.

Selecting just one location will limit the benefits of an outsourcing initiative. It is therefore important to create a global services value chain linking talent across several countries to tap into the best each location has to offer.

FDE: What are the different models corporations use to outsource offshore and which works best?

AG: Corporates take two different approaches to offshoring: they either set up a captive centre or partner with a third-party service provider. The captive offshoring model has a distinct disadvantage. It operates on a much smaller scale than third-party vendors, making it difficult to adopt a multi-country strategy. Companies tapping offshore talent must be able to source talent from wherever it is available around the world to mitigate the risk of wage escalation and attrition.

‘The Virtual Captive model takes the best of independent providers and captive centres and eliminates the drawbacks.’

Europe’s talent needs are different to those of US and UK companies because although countries such as India can provide services in English, they cannot meet the multi-language needs of European corporates. This essentially means that European companies must tap multiple locations to truly overcome the talent gap.

Since captives operate on a small scale, this is not the most effective model to source talent from several countries. Large third-party vendors are the best partners for implementing a multi-country sourcing initiative.

Third-party vendors cost less than captives and they continuously invest in talent and knowledge management to remain competitive and control attrition. Using a third party also means that buyers can eliminate fixed costs and exit the partnership if they are not satisfied.

However, since third-party vendors have numerous clients, they may not be committed to a single relationship or dedicate the best talent exclusively to a customer. Once buyers sign the dotted line, they may find vendors reluctant to invest in a governance model, resulting in limited control of the outsourcing initiative.

Captive centres provide better controllership, integrity with corporate culture and access to dedicated resources. However, corporations devote a lot of resources to running a captive. The lack of scale hampers investment in talent management and the ability to tap multi-country resources. Also, employees have limited growth opportunities as they are working for a single customer, which increases the risk of attrition. Serving a single customer means captives have limited access to global best practices.

Captives also find it more difficult than independent providers to roll out gain-sharing models for fear of distorting compensation structures within the organisation. Finally, being part of an organisation makes it difficult to exit a captive relationship.

FDE: Neither captives nor third-party vendors seem to provide the optimal solution. What model do you think works best?

PC: To provide customers with the flexibility and cost-effective talent access of third-party vendors while offering the control and other benefits of a captive, Genpact has launched the Virtual Captive™ model. This is a mature global sourcing model that takes the best of independent providers and captive centres and eliminates the drawbacks. Virtual Captives deliver best-in-class service through dedicated resources, such as people, buildings, technology, infrastructure and top management support.

A Virtual Captive managed by a third-party provider with global presence, such as Genpact, ensures that buyers need not worry about which country to outsource to. Genpact works closely with its clients to select outsourcing countries and talent, as well as which processes to outsource to specific countries.

FDE: So how exactly does a Virtual Captive work?

PC: Genpact currently manages virtual captives for customers including GE, GlaxoSmithKline, Penske and Wachovia.

Talent management is a cornerstone of the Virtual Captive and a key reason why European corporates want to outsource. To acquire and retain talent, Genpact uses a philosophy of hiring right, training right and rewarding right.

‘We believe corporates should have a comprehensive sourcing platform that can access talent all over the world.’

The other benefits of a Virtual Captive over third-party and captive vendors are reduced management effort, greater control, best practice implementation, gain sharing and goal alignment. A Virtual Captive reduces management effort using a robust governance structure that automates control of the sourcing initiative. Robust governance mechanisms and Six Sigma tools provide complete visibility and control of the outsourced processes.

Virtual Captives are well positioned to build best practices because they work with multiple customers across the globe. Gain sharing requires tools that accurately baseline and measure processes, which are possible with the complex measurement tools that Virtual Captives use.

Several third-party providers often promise gain sharing during the contracting phase of the relationship, but rarely deliver on this promise. Effective gain sharing acts an incentive for partners to improve productivity.

Using governance, buyers and their partners mutually align goals and share gains or punish providers based on performance.

FDE: Given the fact that wages do eventually rise, what is the secret of long-term outsourcing success?

PC: People in all countries aspire to improve their lives, and wages will rise to meet these aspirations. We believe that cost reduction alone is not the measure of success in outsourcing. Buyers should look at the total business impact that outsourcing provides through continuous process improvement, automation and productivity. Some of the benefits include higher revenues, customer acquisition and retention, penetrating new markets and improving cash management.

We believe that the close partnership that a Virtual Captive makes possible is the best platform to achieve continuous business impact – the secret of long-term outsourcing success.

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Patrick Cogny, European CEO of Genpact.
Andrew Groth, European senior vice president of business development, Genpact.
Figure 1. Europe's population by age groups, 1950-2050. The projections demonstrate the reason for companies like Genpact looking at alternative outsourcing destinations.
Case study: Virtual Captive helps GE Security improve processes.