Consider the Source

Changing the Game in HRO

Today's blog on the need for HRO comes from Peter Allen, Partner and Managing Director, TPI.

The outsourcing roadside is littered with HRO deals that have hit the ditch.  Why then would some of the top India-heritage providers be trying to catch this falling knife?  As one executive told me, “Because there’s market need and we can do this work.”

Uncertainty is driving outsourcing demand, and fast-growing India-heritage service providers are making considerable investments to play in the HRO game. They are not intimidated by the failings of their predecessors and they blame focus on process over service as the reason for the early stumbles. 

Rather than asserting theoretical best practices for the HR functions of recruiting, learning, workforce administration, and payroll, this new breed of providers are turning their operational practices into marketable services.

Theory or Practice?

Today's blog on principal-agent theory comes from Peter Allen, Partner and Managing Director, TPI.

Corporate executives immersed in sourcing decision-making constantly face information and interest asymmetry. Academics call this principal-agent theory, a framework for analysis of tension over alignment and power, but few executives pay close attention. The insightful people from academia I found myself in a conversation with this past week agree with me: that’s gotta change.

Principal-agent theorists study the behavior of the employee or contractor (agent) vis-à-vis the principal (employer) when there’s an information or interest gap between the two.  They observe that in the absence of costly monitoring of agents the problem cannot be completely solved, which may undermine the premise of outsourcing.

But the outsourcing industry, oddly enough, hasn’t yet adequately addressed the inherent concern over such misalignments. 

What’s a Private Equity Owner Gonna Do?

Today's blog on private equity firms comes from Peter Allen, Partner and Managing Director, TPI.

Doing nothing is not an option.  With a cloudy horizon for IPO activity of size, outsourcing and offshoring seem to be gaining favor as tangible courses of action for the active investor to insist upon.

Outsourcing and offshoring were often seen as a transformation of back-office functions that require a protracted program of change. They were never an area of focus for private equity firms looking to reintroduce their portfolio companies to public markets. That paradigm is now long-gone.

In the good old days, a private equity firm would buy a company with an eye towards giving management the runway to make structural changes. Without the burden or scrutiny that comes through public disclosures, acquired companies were “flipped,” often possessing a very different cost profile or set of products/services.

Deadband Hiccups

James Effinger of TPI’s Financial Analysis Services Group will be "blogging about the bottom line" this week.

Deadbands are most often used to reduce administrative work.  Conceptually, it’s appealing. Practically, it doesn’t always work out to be easier.

Deadbands are generally defined as a small range around a contracted baseline volume against which no price adjustments (ARC/RRCs) are made.  For example, a given volume is 1,000 and the deadband is given as 5 percent.  Thus, for any volumes between 950 and 1,050, there are no price adjustments.

But chargeback can become problematic due to fluctuating unit prices around the upper and lower limits of the deadband.  Using the example above, assume the base charges for the contract volume of 1,000 is $1,000,000 (or $1,000 per unit). 

1. The effective unit rate at the upper limit (1,050 units) is $952. 
2. The effective unit rate at the lower limit (950 units) is $1,053.

This creates a difference in the effective unit rate between the upper and lower limit of approximately 10 percent. So when does it make sense to implement deadbands?

Questioning India’s Dominance

Today’s guest blog on India's domination of the offshoring market comes from Dinesh Goel, Project Director, TPI.

In the wake of exogenous and endogenous developments, is India challenged as a dominant offshore destination? Probably not. It is arguable if India’s dominance is a foregone conclusion. Almost certainly, India is likely to lose some market share though.

Endogenous factors that raise a question mark on the dominance of India include talent shortage, creaking infrastructure, unyielding bureaucracy, and rising cost structure on the back of rupee appreciation (though recently rupee has succumbed to dollar by circa 5%). Exogenous factors, on the other hand, encompass diversity and resilience requirements of the buyer community beyond India, incentives offered by various governments to offer competition to India, and the frantic pace at which English is being taught in China et al.

Despite the constraints and inhibiting factors, India is, likely to remain the most attractive destination for delivery of offshore services in the medium to long term. Here’s the rationale:

Owning Without Managing

Kevin Garten of TPI’s Financial Analysis Services Group will be "blogging about the bottom line" this week.

Does asset ownership dictate who performs asset management? Not anymore. In the days of yore, asset management in an outsourcing contract was made on the basis of ownership. Today, it’s based on configuration.

Originally, asset management was in reference to logging, tagging and tracking of the physical asset itself from cradle (purchase) to grave (disposal).  When it came to providing asset management in an outsourcing contract (be it an ITO or BPO sourcing arrangement) the decision was made on the basis of asset ownership.