Eastern Europe could soon become a favorite location for offshore outsourcing

Eastern Europe could soon become a favorite location for offshore outsourcing, with activity in the region estimated to triple between 2005 and 2008.

That’s according to consulting firm McKinsey, which predicts that the business process outsourcing (BPO) industry will support 130,000 jobs in the region by 2008.

McKinsey identifies three main advantages for companies locating BPO operations in Eastern Europe in the winter issue of McKinsey on IT.

The region offers low wage levels, comparable to India’s, with slow wage inflation looking likely to keep the region economically competitive for at least 15 years.

Also, compared with competing regions around the world, Eastern Europe is a relatively low-risk location for investing, due to the reliable infrastructure already in place.

The other benefit is the region’s geographical and cultural proximity to Western Europe, making the process of setting up offices much easier. There are also fewer language barriers compared with elsewhere, with German and French both being widely spoken.

Mortgage Lender Saves 50 Percent on Staffing by Outsourcing Rekeying to India

By John Harney, Business Writer In 2005 the housing market was hot. Mortgage lenders were almost getting more mortgage applications than they could handle. But in Miami they were not getting motivated, dependable, high-quality staff to process mortgage applications and the attendant materials that accompanies them. According to Hector Chomat, President, County Trust Mortgage Bankers in Miami, “You’d run an ad and get two or three applicants, and they spoke broken English, had a high school degree at best and a poor understanding of the housing market.”

Most of the tasks they were expected to perform had to do with rekeying data from one company system into another, a fairly redundant and boring task, so turnover was a problem too. That led to management headaches involved with constantly running ads and hiring and training new people as well as filling in for people who called in sick too often. Despite the fact that Chomat was paying $30,000 a year plus benefits for these positions, he couldn’t retain people, and the quality of work they were doing was shoddy.

In addition to turnover, too much of the rekeying and allocation was inaccurate.

Underachieving Staff and Legacy Infrastructure Create Problems

County Trust is a mortgage lender whose main business is funding mortgage loans for about 200 banks. They also do refinancing of mortgage rates for home loans as well as provide home equity loans and second mortgages.

The banks fax loan applications and related materials like W2s, pay stubs, and tax returns providing data on an applicant’s employer, salary, credit history, assets, and liabilities. County Trust receives the materials as images or PDFs at a central fax server. About 90 pages of materials accompany each loan and about four pages with 50 fields need to be rekeyed into the loan processing system called Genesis 2000. The system imports other materials automatically.

Chomat says all this data is then imported into a loan-tracking application called DataTrack that determines the loan program to be used, the interest rate the applicant locks into for the loan, the rate at which the company can sell the loan on the secondary market, the conditions for approving the loan, the conditions signed off on thus far, and so on. Various conditions could be employment verification; such documents have to be produced for the closing package, There’s also the schedule for the first mortgage payment.

Genesis 2000 stores the materials needed to process the loan while DataTrack determines and stores the results of the activities performed during the loan application process.

A third system, DocumentTrack, is the system that stores different classes of imaged documents that are related to the loan. Chomat says this is where file allocation occurs-basically forms are categorized and stored with like forms. Pay stubs are categorized with pay stubs, W2s with W2s, color pictures of homes and appraisals with appraisals, etc. This way, loan officers can easily find the type of information they’re looking for to approve the loan. Without DocumentTrack, loan processors’ jobs would be enormously more complicated because they are dealing with upwards of hundreds of loans at the same time.

In 2005 Country Trust processors had to rekey data from Genesis 2000 to DataTrack and then categorize different documents in the Document Track system. They prepped the components of the loan so loan officers could process them.

Scoring Big with Indian Offshoring

To simplify and expedite the process and eliminate mistakes, County Trust outsourced rekeying, allocation, and integration of some of the systems to Inuva, a specialist in offshore mortgage loan processing.

Country Trust still receives application information at the fax server, but all rekeying is done in India during the same business hours as County Trust operates in Miami. That means Inuva works at night while County Trust carries on business during conventional East Coast business hours. Chomat says, “Because they work the same hours, it’s like having staff down the hallway.” SabioIT, a third-party developer, installed Citrix Meta Frame Presentation Server, to enable Inuva personnel to access the three Country Trust applications remotely and manage the remote application.

Inuva also built a Web service that links Genesis 2000 to DataTrack so credit reports are automatically transferred from the first to the second system.

They also allocate all images into the correct categories in Document Track and send a notification to County Trust indicating which files have been categorized and are ready for the underwriters.

Finally, they produce a daily rate sheet for mortgages that tells County Trust the current interest rates from different loan programs, and County Trust e-mails them to different customer banks so they can offer the best rates for their loan customers.

A House Full of Benefits

Inuva’s core value proposition for Chomat is less expensive and more competent staff for less than two-thirds the cost of the salaries and benefits of the previous Miami rekeying staff. What’s more Chomat pays no benefits to the India staff-Inuva takes care of that.

Furthermore, the turnover problem has been solved. Chomat says employees are more dependable “because Inuva has a much larger pool of employees; so when we have spikes, they can allocate another individual without any additional cost.” In India, “When Inuva puts an ad in the paper, they get 100-200 resumes, and most of the applicants have a college degree,” he notes.

It also has eliminated management headaches associated with staff turnover-County Trust does not have to run ads or find employees and train them in a hurry to stay up with the workload.

Inuva also picks up the tab for all infrastructure required for remote work-anaging the Citrix application for remote work and providing phone lines, PCs, and other broadband infrastructure needed to transmit dense images.

County Trust also saves on office space for rekeying personnel-at $30/square foot. Chomat says that adds up.

The bottom line is that by eliminating all Miami rekeying staff, Chomat estimates County Trust cut its overall expenses by 50-75 percent. In addition, the company has cut time to process an application by about 75 percent–from three days to six hours. The result, says Chomat, is a much more efficient in-house mortgage loan process which results in more business for County Trust and vastly improved customer service because banks get loans processed faster and their customers get into their new homes quicker.

Lessons From The Outsourcing Journal:

• Using an offshore provider for loan processing saves the lender money on staff and eliminates management headaches like running ads for new hires and training them; the savings is due, in part, to a much larger labor pool abroad.
• In areas like Miami, data entry staff are in short supply, rarely have college degrees, and often speak broken English. Using Indian staff who are largely college educated and understand English solves the problem.
• Because offshore staff are more competent, loans get processed faster, which means the lender can do more business and achieve much better customer service.

Evaluating Success in an Outsourcing Relationship

By Kathleen Goolsby, Senior Writer All companies that experience successful outcomes in their outsourcing initiatives have two crucial foundational characteristics. First, the client company knows, and makes sure the service provider knows up front, exactly what outcomes the client wants to buy. Second, they govern the relationship on an ongoing basis to ensure the outcomes can continue to be achieved, and they periodically evaluate the relationship and outcomes to pinpoint what may need to change to meet the objectives.

At Outsourcing Center, where we study the world’s most successful relationships in our annual Outsourcing Excellence Awards program, both buyers and service providers continually cite these aspects as high on their list of keys to success. However, many industry studies year after year find that many companies continually make the mistake of not deploying these aspects in their outsourcing initiatives.

KB Home, the fifth largest builder in the United States, outsourced most of its IT infrastructure to Perot Systems in 2002. Its expertise in building quality homes extends to building a highly successful outsourcing relationship. This outsourcing relationship is a finalist in our 2007 awards program. Here’s a look at how they did all the right things to achieve success.

Achieving Outcomes Starts with Building a Firm Foundation

In 2002, KB Home began to examine its options for outsourcing its IT needs. The company had quickly expanded and did not have the resources internally to implement world-class infrastructure components that could scale quickly and economically to support growth.

“We had the model but not the internal resources needed to drive our IT standards all the way back through our systems and to take advantage of that strategy,” states Brian Bruce, CIO of KB Home. He says the company always strives to bring best practices into the organization.

The company also wanted a higher performance from the IT systems at a relatively lower cost while optimizing the infrastructure and applications in order to be more strategic in releasing new applications across the company.

With these goals in mind, KB Home worked with a third-party consultant who assisted with a six-month provider-selection process resulting in RFP bids. The company was looking for a provider that would meet the following criteria:

• Demonstrate best practices and a proven track record
• Possess not only IT infrastructure and applications management capabilities but also IT leadership that knew how to drive change at KB Home
• Have proven capabilities in efficiency and productivity gains that would reduce costs over time.

The key driver for provider selection was an outsourcer that would take a partnering approach to the relationship. Bruce says, “We did not want to outsource the service in a traditional manner. We were seeking a provider that we could partner with and develop an environment that would be collaborative and productive.”

KB Home selected Perot Systems, an outsourcing provider with a proven history of a strong partnering mind-set in relationships, and signed a seven-year contract.

One very important strategy was that KB Home’s business owners and IT met to agree on an overall transition plan, thus ensuring they would meet the needs of the business owners and end users. They then followed up with periodic reviews to address execution and feedback.

The companies worked together closely during the transition phase of their relationship and thus managed to avoid pitfalls. They successfully transitioned 28 KB Home IT employees to the provider’s team. Management from both companies met with all affected employees individually and discussed how the change would impact them. Perot Systems also had dedicated HR personnel at KB Home to better respond to individual concerns.

An early strategy was to eliminate all Perot Systems’ business cards and drive recognition as one organization–KB Home IT–regardless of which company is responsible for an IT function. Another tactic was to bring the team together by having the employees wear KB Home shirts. “We didn’t want a culture of us-versus-them and having our business stakeholders think they’re calling a third party for help,” explains Bruce.

Governance Structure

Their service level agreements (SLAs) also reflect a collaborative, partnering perspective. As Bruce explains, if an issue occurs, they put the penalty into a bank. As long as the provider makes a determined effort and meets the SLA in the following three months, it is absolved of that penalty and doesn’t pay the money to KB Home.

They have a joint IT leadership team that meets weekly. “The team prioritizes everything we do–whether it’s a request for system fixes, enhancements, a new application, or a request from an individual user to get help with a PC. Having a prioritization scheme and governance structure ensures we are doing the right work at the right time. It also ensures that all of our IT investments tie back to our common process model and that we are driving consistent IT direction.”

Making IT decisions from a jointly managed, collaborative approach eliminates finger-pointing and also removes the barrier between the two organizations, according to Bruce. “This has really helped outside of IT.”

Taking a best-practice approach, their governance structure facilitates making sure both companies’ interests stay aligned. Annually, they jointly revisit the KB Home annual technology plan, scope of services, and operational SLAs. “We review them to ensure alignment,” says Bruce.

They have a formal status review and scorecard tracking on a monthly basis. But this partnering team really shines when it comes to monitoring performance. “We have performance management processes down to the team and individual levels,” says Bruce. “We hold people accountable for their annual objectives.”

That accountability includes Bruce. One of his key mandates is to drive standardization and common system use. He says the governance structure in this relationship, mandating the way people funnel IT requests to the joint IT team–allows him to “evaluate if we are we doing the right things.”

The Gold Standard in Evaluating Relationship Effectiveness

Bruce, who was formerly a consultant with a major IT consulting and outsourcing firm before joining KB Home, describes the gold standard for evaluating relationship effectiveness. “If you ever have to go back to the contract, you know you have an issue with your client,” he says. “So I measure our relationship with Perot Systems by how well we get through the difficult things and how accommodating they are when we’re outside the strict letter of the contract.”

Bruce adds, “Frankly, if there are changes we want to make or if culturally things are different, we want to know that they’re going to take a partnering approach and not just hold us to a contract to maximize revenue.”

Bruce says that Perot Systems continually demonstrates this accommodation. “We have examples on a month-to-month basis where something will go wrong and they may not be contractually obligated but they clearly feel a broad sense of ownership for the performance of our department.” Furthermore, in their monthly SLA discussions, Bruce says they agree in deciding what to count based on what’s good for IT, not what’s good for Perot Systems.

The agreement gives KB Home the flexibility to scale services up and down. “The annual review gives us the flexibility to change and move people into the right buckets around our organization in order to deliver better service,” says Bruce.

Were there unexpected challenges that tested their outsourcing agreement’s flexibility? Definitely. But their collaborative, partnering approach and continual effort at aligning interests have paid off.

Bruce says a big challenge was the dramatic slowdown in the homebuilding industry the past few years. They had to shift from being in high-growth mode to one of weathering the storm and still beat the competition. That required making sure they kept costs low.

Another challenge arose when KB Home decided to expand its business model to include a strategic agreement to co-design homes with Martha Stewart as well as building condominiums and town homes in select cities.

“All of those business-model changes required us to go in and enhance the IT systems to be more flexible and support those changes. We got through it successfully together,” explains Bruce.

At every turn they exihibited teamwork and shared values–both in and out of the office. Functioning as KB Home IT, they have one organization chart. Team members rely on each other to come together and deliver quality work.

Outcomes Achieved

What else has the duo accomplished thus far in the relationship? Bruce says the benefits of outsourcing–using Perot Systems’ infrastructure and resources that are shared with other clients–allows KB Home to achieve higher system performance at a lower cost and have access to otherwise-unaffordable high-availability storage systems, back-up systems, virus management and spam detection, and other key infrastructure components.

KB Home also reduced the cost structure of key services by using leveraged offerings from Perot Systems.

Another key accomplishment was their effort in Sarbanes-Oxley compliance. The joint team reengineered core IT processes, documented workflows, implemented key controls, and consistently receives high marks from auditors.

Customer-satisfaction surveys yielded a 180-degree turnaround, Bruce comments. “IT went from a low-value, necessary-evil cost center to a department that is delivering services, value, productivity, integrity improvements, and new systems,” he says.

It’s more than just a matter of improving the image of IT at KB Home. Bruce says IT is now a service-oriented organization, as opposed to simply a necessary provider. “We now align our IT resources with key business initiatives. This alignment allows the company to focus better on delivering homes to buyers and on gaining market share.”

Commitment

As Bruce points out, every outsourcing client at some point needs to answer important questions: Do we want the relationship to continue? Did we get the value that we need in order to justify this relationship? Would we do it again or would we try something else?

He reports that KB Home is very pleased with Perot Systems’ services. “We feel they’ve been a valuable partner and helped us to achieve success that would not be as seamless had we done it ourselves.”

Both parties report that they share four critical values: integrity, respect, commitment, and trust. These values must be demonstrated at an individual level as well as a company level. They each act in a manner consistent with their shared belief that this partnership is critical to the success of both companies.

Bruce says their commitment to delivering great service is not just a principle and that it permeates all aspects of their environment. Twice a year they solicit feedback through a formal process and take concrete steps based on actionable responses.

One result of the process was establishing a cross-functional group to “gather input for a consistent coherent, articulated recognition program. “The program ties appropriate motivation and rewards to the strength of our team,” says Bruce. The group was structured on BUILD–an acronym for Best practices every day, Urgency in actions, Innovation in solutions, Leadership in decisions, and Dedication to teamwork and integrity.

“BUILD generated a great deal of enthusiasm at KB Home, and it also demonstrated commitment to our people,” says Bruce. “This would not have been possible without having shared values with Perot Systems. It’s a relationship built on mutual trust.”

When it comes to success in getting the outcomes the buyer wants to pay for in outsourcing, KB Home and Perot Systems know exactly what to do.

Lessons from Outsourcing Journal:

• Success in outsourcing starts with the buyer determining up front exactly what service outcomes it wants to buy and then making sure the service provider knows this.
• An effective governance structure is crucial to outsourcing success. The governance structure should include periodic evaluation of the relationship and outcomes to pinpoint what may need to change to meet the agreed-upon objectives.
• Outsourcing is an effective strategy for implementing world-class IT infrastructure that scales quickly and economically to support the client’s growth.
• Outsourcing is an effective strategy for ensuring not only world-class IT resources but also change-management ability to drive standards and best practices throughout the client’s organization.
• One strategy for establishing service level agreements (SLAs) that reflect a collaborative, partnering perspective is for the service to provider to put the penalty into a bank if there is an issue. As long as the provider makes a determined effort and meets the SLA within an agreed-upon time limit, the client absolves the provider of the penalty.

Hosted ERP Suites Improve Front- and Back-Office Operations, Yield Dramatic Cost Savings for Smaller Manufacturers

By John Harney, Business Writer Since installed ERP systems are expensive, complex to deploy, and require dedicated IT resources to maintain, cost-effectively automating mission-critical systems for small manufacturers is a challenge. Many small-to-medium (SMB) manufacturers instead make do with multiple applications run by different staff. Such was the case with ProSoap, a small manufacturer of industrial hand cleaner.

According to President Billy Self, his company relied on about 10 different applications, among them accounting, payroll, sales database, shipping and custom applications for activities like inventory management. The solution, of course, was costly but, as importantly, it was inefficient. Self says he was paying about $100,000 for an IT guy and $150,000 a year in software license fees and upgrades. Because upgrades interrupted his business for several days at a time, he says also that “we found ourselves concentrating so much on our servers that we couldn’t get on the phone enough to make sales calls.”

Furthermore, he says, “we didn’t have our manufacturing side talking to our sales side;” so sales, for instance, had to log into the inventory application to verify that it had enough product to fulfill an order on time. Orders, therefore, did not drive inventory, so ProSoap could not manufacture to demand to cut storage costs.

That all changed in 2002 when ProSoap leased nine seats of NetSuite’s hosted ERP suite comprised of fully integrated ERP, CRM, and e-Commerce services. The move replaced all other applications and eliminated IT staff and license fees.

The Benefits of an Integrated Application

Activities in one area of the suite automatically kick off those in another. For instance, using the CRM functionality, Self says, “the sales force knows exactly how much inventory in the ERP application is available now. Our production guy can be constantly updating what’s in our inventory, so when sales reps pull up a sales order they know immediately if we have that many items in stock in the ERP application.” Also, he adds, “We can ship any size order within 24 hours because our production guy knows instantly when an order comes in and, using the ERP application, our production line can make adjustments to get that order done.” Via the ERP integration, the order essentially indicates to the production floor the quantity of product required, types of containers, case sizes, and different labels for each shipment.

NetSuite also supports ProSoap’s Web site, which is integrated with CRM. So when customers provide information about themselves on the site, the sales department can access that data without re-entering it from one application into another and promptly can follow up on the lead. Self says, “We recently did an online campaign, which resulted in 100-50 leads from the site a day; and sales did not have to re-enter any information, which saved an enormous amount of time.”

ERP

While the three applications–ERP, CRM and e-Commerce–are integrated into one suite, there is functionality that is unique to each. ERP manages the company’s plant production process, which has three stages–raw materials, goods in process, and finished goods.

ProSoap uses 17 chemicals as ingredients for its soap as well as over 75 packaging components used to ship product in different quantities. Dashboards on PCs in the plant automatically prompt personnel when inventory for these items is low and they need to reorder. Upon ordering, the deduction for payment automatically occurs in accounting. By contrast, “it used to take us a full day to do a proper inventory and make adjustments in the books,” Self says.

ERP also tracks the order history with each supplier of ingredients so production knows which supplier has the necessary quantity at the lowest price. As a result, Self says the company is able to get 90 percent of its chemicals delivered within 24 hours of submitting a purchase order, which also drives customer order fulfillment.

The formula for the product is also stored in ERP, so the specific quantity and packaging information on each sales order determines both when a batch of goods in process is produced and the set-up of the line for packaging it as finished goods. ERP also tracks the quantity of raw materials in house, goods in process, and finished goods as well as the progress of the manufacturing process for a batch through those stages. Since customers’ orders drive production now, ProSoap manufactures to demand and carries much less inventory, resulting in lower storage costs.

ERP also handles all financials. It automatically corrects the books and, via a dashboard, gives Self an up-to-the-minute read-out of income, balance, cash-flow statements, and key performance indicators like profit for the accounting period and number of Web site orders for the month.

CRM

CRM, of course, also lets sales track prospects throughout the entire sales and service cycle. ProSoap markets through its telemarketing call center, via advertisements on relevant Web sites, and through mass e-mail campaigns. It uses NetSuite to create and send mass emails to its more than 60,000 customers when it runs specials. When customers call ProSoap’s telemarketing team to submit orders or for customer service, their caller IDs appear on the phone and reps can pull up their customer history before answering. This, of course, saves time but it also reinforces relationship selling.

Tracking leads from Web site information through pitching the prospect and making the sale then servicing the customer creates intimacy and promotes a higher sales conversion rate. On any call, for instance, the rep knows what the customer usually buys, sees any past customer-service problems, and can alert customers to sales specials to upsell them. In the past, Self says, “We had to use several systems to do this; it took a lot more time, which did not help customer service and sales.”

E-Commerce

NetSuite also supports the Prosoap.com Web site through which customers can buy product. Self says the site dramatically differentiates ProSoap from the competition–”no one else has the catalogue that we do or offers the simplicity of buying with our shopping cart.” Self actually maintains the site himself–he just adds digital content like product photos in minutes by simply filling out content templates. This is especially beneficial because, he’s the first to admit, “I’m not a Web site professional.”

NetSuite also does clickstream analysis, so Self knows key information about visitors’ site behavior–the pages they visited, the percentage of visitors who cancelled a potential order after filling their shopping cart, and the most popular products. This helps him optimize the site to better promote popular products.

The Bottom Line

ProSoap leases nine seats of NetSuite for about $1,000 a month, which totals about $48,000 in fees since 2002. But the company has saved $1 million during the same period on IT staff and software licenses alone for a phenomenal ROI. Of course, one application also radically simplifies IT management, and NetSuite improves sales, marketing, customer service, finance, and production processes.

Lessons from the Outsourcing Journal:

• Hosted ERP/CRM/e-Commerce suites let SMB manufacturers downsize IT staff, consolidate or eliminate installed applications, and save on license fees.
• The synergies of hosted ERP/CRM/e-Commerce components derive from front-office processes driving back-office ones so, for instance, Sales activities in CRM automatically kick off production line processes in ERP.
• The greatest benefit of hosted ERP/CRM/e-Commerce application suites, is better customer service–orders are processed faster and reps address customer needs better.