Business Operations within a Global Environment - Essay Example

Business Operations within a Global Environment An introduction to changing business environment Globalization of trade and economies has been instrumental in bringing the world closer through the exchange of goods and products, information, knowledge and culture. The pace of global integration has increased dramatically over the past few decades with rapid advancements in technology, communications, science, transport, and industry. This process of globalization has led to increasing inter-connectivity between individuals, groups, companies, and nations that is visible in rising global brands, international markets, increasing innovation in telecommunications and information technology. Technology has been a great enabler of change. With the advent and evolution of the Internet, new market opportunities and business models have emerged that has revolutionized the communications industry across the globe. Rapid changes are taking place in the way businesses are being conducted today. Widespread changes in communication and technology mediums have opened new vistas of commerce with immense potential that remains yet unexplored. “Far and away the largest external driver is the new economic world being formed around the Internet. This new economy began with business-to-consumer (B2C) retailing, commonly called e-tailing, which means selling over the World Wide Web.” (Barbara & Ralph 2002, Pg 6) This technological breakthrough has made a big impact on the global economy leading to the emergence of a global marketplace that is visible in the penetration of products and services in all nooks and corners targeting consumers across the globe. Even the smaller companies have a global reach owing to the Internet and E-commerce. Companies are re-defining their strategies to accommodate changes in the way businesses are communicating their message to the suppliers and consumers. The need for business process re-engineering has become vital to spearhead changes for greater efficiency of work processes and increased returns. One of the prominent consequences of this process is the rise in outsourcing of work processes and projects by multinational companies to other countries for achieving cost benefits on the production process. Outsourcing is defined as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources (Griffiths, 2001).” Outsourcing is a relatively new term but the practice of outsourcing textile processing to Asian countries dates back to the 1970s. Outsourcing of manufacturing processes in the 1980s and the Information Technology processing in the 1990s followed this. This trend has gained momentum ever since and the following observation in the “State of Outsourcing Industry, Report 2007” emphasizes this point. “Public sector agencies and corporations of all sizes and across all industries consider outsourcing as they continue to struggle and strive to maintain core enterprise competencies that support their businesses while minimizing the required investment in time, resources, capital and expertise (Outsourcing Report, 2007)”. The global outsourcing market is about a trillion dollars and this valuation is expected to reach almost 1.5 trillion dollars a year within the next few years. Countries like India accounts for nearly 4 percent of this value followed by China, Philippines, and South East Asia that together account for 3 percent of this industry value. The paper explains this growing phenomenon with help of Hong Kong and Shanghai Banking Corporation (HSBC) example that has ventured into new territories seeking the advantages of outsourcing and its relative economic benefits in terms of expanded market share and revenues. HSBC – the global bank HSBC is the world’s largest banking and financial services having a global presence across 8500 offices in 86 countries and territories in Europe, Asia-Pacific, Americas, Middle East and Africa. The organization has its headquarters in London and has adopted a growth strategy using the help of advanced technology and ecommerce tools. The company website states “Through an international network linked by advanced technology, including a rapidly growing ecommerce capability, HSBC provides a comprehensive range of financial services: personal financial services, commercial banking and markets, private banking; and other activities” (HSBC, 2009). The multinational banking institution has penetrated to the developing economies outsourcing their call centre and vital transaction processing work to ensure prompt work delivery and efficient management of different departments. This business model has proved very effective in implementing innovative methods to achieve business goals. Outsourcing of back end customer transactions processing has been highly effective in increasing operational efficiency. India is one of the countries that have provided the global enterprise with expanded scope for operational activities and the shift of major work processes of HSBC to India is largely accountable to the flourishing economy and increasing Information Technology skills in the country. “The digital revolution and the dramatic fall in international telecommunication costs have created unparalleled opportunities for businesses to take advantage of high skilled, low wage workers in emerging countries.” (Diana Farrell, 2005) Organizations are increasingly adopting the concept of transferring work processes to other nations in pursuit of lower cost of operations and increased scale of operations. The essential advantage that this strategic concept provides is the opportunity to cut costs and boost productivity. The availability of skilled labours at comparative lower wages in developing countries is the primary driver of outsourcing trends that has gained rapid popularity in the past few years. Countries like India, Malaysia, Philippines, and China have benefited greatly from this business trend in terms of employment, better wages, and improved standards of living. Organizations are now creating specialized units or departments to look into each aspect of the entire operations. These units have well-defined work strategies termed as work processes ensure the effective flow of information and data for enhanced productivity and greater efficiency. This break up of the entire operations ensures high quality of work with little room for errors and risks. Moreover, the entire team gets attuned to the specific work processes that enable better chance of improvisation and innovation in work techniques. These work processes contribute to the overall success of the entire operations. The benefits of outsourcing are realized in view of reduced operating costs owing to the comparative lower wages, enhanced productivity, efficient managing of resources, improved company focus, and access to world class management and staff. The outsourcing process involves the recognition of need for outsourcing work processes at the client’s end to the selection of an appropriate vendor till the signing of the service level agreements between the client and the vendor. The service level agreements are meant to define work-delivery parameters and improve the overall team performance for efficient completion of business processes. Indian economy overview The Indian subcontinent having population of over 1.1 billion, diverse cultures, religion, and languages has one of the largest and successfully running democracies in the world. Post independence it has been successful in eroding poverty and illiteracy to a great extent. The low per capita income combined with fewer manufacturing industries and a service sector at the base level had labelled the country as poor and underdeveloped. The economy was primarily agrarian and lack of facilities and infrastructure posed great difficulties in its progress. Initially the government controlled everything from banks to major industries. Facing such extreme situation the country has emerged as one of the fastest growing economies in the world with an annual growth rate of 8% in the last three years. It is also seen as the destination for information technology and global process outsourcing. Increased foreign investments and growth in real per capita income has transformed the economy largely over the last decade. Now India is a rapidly growing economy experiencing a fast growth rate in the past few years. The path of economic development and progress that India has taken is spectacular and has emerged the new market for the world with immense growth potential. Various economists have predicted that India will become a major economic power in the years to come. This is largely attributed to the rising Gross Domestic Product (GDP) of the countries and the major economic transformation that has taken place in the countries recently. The Indian economy had very poor growth rate post independence with a predominantly agrarian economy and underdeveloped manufacturing and service sectors. Rise in privatization of various sectors paved the way for economic progress in the subsequent years. The government sought to implement policies to ensure overall development of the manufacturing and service sectors. These measures brought about major changes in the industrial landscape and economic growth rate accelerated. The annual economic growth rate was 5.5% in the 1980s. Industrial growth rate was recorded at 6.6% annually and 3.6% in the agricultural sector. The 1990s witnessed a rapid change in the economic growth and development with the liberalization of the economy. A GDP growth of 9% was observed in the 2005-06 and 9.5% during 2006-07. With rising GDP and increased investment the economy is poised for enhanced growth rate. The economy was largely boosted by growth in tourism, financial sectors, and manufacturing industries. It is now the fourth largest economy in terms of purchasing power parity. Real GDP Growth Rate during 2003 to 2007 2003 2004 2005 2006 2007 4.30% 8.30% 6.20% 8.40% 9.20% The chart shows the real GDP growth rate in percentage during the period 2003 to 2007. (Data collected from economywatch.com) The current GDP of the country is at 9.2% per annum that is quite an impressive figure. Growth of merchandise exports and rise in exports of services has strengthened the foreign reserves of the country. The major destinations for exports are United States, United Arab Emirates, and the OPEC (Organization of Petroleum Exporting Countries). The active participation of India in international commerce has created enough opportunities for economic growth and development. The impressive growth rates and statistics predict the emergence of a strong economy in the coming future. Economists predict that the Indian economy will become a super economic power in the next two decades. The country has huge pools of talent constituting a large base of educated younger population. The superior IT skills and interest in technological know-how in addition to the ability to converse well in English language in these nations are the primary drivers of growth in this sector. India and China continue to dominate in terms of preferred location for outsourcing work processes. India is the most favoured destination owing to the “unbeatable mix of low costs, deep technical and language skills, mature vendors, and supportive government policies”. (AT Kearney Outsourcing report 2007) The growth of the outsourcing industry in India has boosted its economies and given it the competitive edge improving both performance in terms of business and living standards. India tops among the list of favoured destinations for IT outsourcing, particularly for companies in United States and United Kingdom. Dean Davison, Vice President of strategic outsourcing for Nautilus Advisors observes, “India is increasingly more adept at IP protection, providing resilient infrastructure and managing global relationships effectively (Computerworld, 2006).” India currently has a market share of approximately 80 to 90 percent of the outsourcing industry according to estimates from Gartner Research reports. The government policies in India have strengthened this industry considerably over the past two decades. The country clearly has a software advantage that makes it the most preferred destination for IT outsourcing. The abundance of highly skilled workforce coupled with comparative lower wages is the primary attraction for all outsourcing companies. The country provides 24 hours workday, high quality work delivery, and adherence to security guidelines. The high-speed Internet connectivity in the country has greatly facilitated this rapid growth and it promises huge market opportunities owing to the strong intellectual population base. However rising costs and wages in the country can act as a deterrent to this booming industry threatening its market dominance in the future. HSBC outsourcing business strategy in India The HSBC bank in India has opened a number of data processing and call centres in India across major cities and locations that have the strategic advantage of acquiring skilled professionals having a good command over the English language and who can be easily trained to handle customer queries and promote in-house product sales through telephonic calls or emails. These centres operate round the clock to ensure efficient customer service and fulfil operational requirements. The operational or middle management of these centres are handpicked from local areas to promote better employee relationships and provide an improved understanding of the labour issues typical of the country. The senior management is generally composed of foreign nationals and some Indians who are experts in their chosen field. This strategy has worked well in the country since it provides the locals with increased job opportunities and a chance to work with a multinational organization like HSBC. These centres are run as in-house processing divisions for various banking operations handling the back-end functions of the branches. An important aspect to managing a successful banking outsourcing business is governance that lays down the relationship between the vendor and the client in precise terms with no scope for ambiguity. The foundations of governing an outsourcing relationship are detailed in a contract and a significant item of this contract is the service level agreements (SLAs). These SLAs are used to measure the performance of the work delivered. This document spells out the responsibilities, performance requirements, penalties, bonuses, and quality standards in clear terms. A detailed document in this context is absolutely essential to avoid any kind of misconception or misunderstandings. These documents generally specify all the details with respect to when the specific milestones are to be delivered, to whom and in what manner. It also specifies the metrics on which the various stages of work will be evaluated, the compliance related issues and quality adherence checks. The service level agreements for the HSBC call centres and data processing centres are designed and drafted to provide excellent quality service and meet scheduled work processing standards. The organization has a distinctive quality assurance department that is responsible for ensuring that the various processes comply with the specified quality audits. Despite the advantages of presented by the outsourcing concept, there are major issues related to the functional aspect that has been bothering the outsourcers. Increased reliance on the outsourcing party for the success of the project is one of the primary reasons behind the dissatisfaction of the clients. The work of the service providers may not meet the desired expectations. Often terms and service needs defined in the service level agreements are misinterpreted that causes the outcome to suffer. Among other issues the strict adherence to quality guidelines may not be met and this can cause a lot of hassle to the client while dealing with the end customers. A major issue facing the outsourcing industry especially in the banking sector is the protection of data and information rights. Valuable customer data and information is passed on to the hands of the external service providers for the purpose of processing and query handling. There is lot of apprehension about the security of this data and with growing number of cases of fraud and data theft the companies are growing wary of outsourcing to outside agencies. Most banking customers are paranoid about divulging their personal information being accessed by individuals located in another part of the globe and they fear misuse or fraud. This is one of the most prominent challenges facing the outsourcing of work to different locations and it raises a concern with regards to security. Moreover, there are many customers who are paranoid about dealing with a faceless seller. To deal with such issues HSBC has a highly protected working environment with hidden cameras monitoring the activities of the employees on floor. The access to Internet is restricted with emails and social networking sites fire walled to prevent any leakage of vital customer information. Conclusion A report by the Information Technology Association of America states “due to low costs and high quality, using offshore resources in selected countries makes good economic sense. Beyond the cost incentive, global sourcing provides several other practical benefits including: the ability of multinational organizations to efficiently stage 24*7 operations; the opportunity to customize products and services to meet local needs; and the means of geographically deploying workers and facilities to succeed in globally dispersed, highly competitive markets.” The primary cost advantage provided by the outsourcing concept is slowly changing with increasing competition in the industry. The entry of many firms over the past few years into this sector has made the industry highly competitive. Attractive salaries offered by other companies are luring professionals to switch loyalties. This trend is catching on that is visible in the high attrition rates in the companies. Retaining employees over a longer period of time is a major challenge faced by the HR departments in this industry. Skilled professionals are in great demand in this country. Increasing opportunities and lure of better pay packages have forced the companies like HSBC to raise the salary levels considerably. Hence, it is no longer cheaper to outsource and outsourcers are re-thinking their business strategies to maintain their profit margins. This is one of the primary reasons behind the setup of HSBC outsourcing business in China and Philippines. Strategic advantages of outsourcing are seen in terms of the organization having increasing number of centres around the world, global presence and ensuring improved customer service through local centres and representatives speaking the local language. Moreover, large business enterprises cannot derive optimum work efficiency if the work processes are concentrated in one single office location. Shortage of skills and geographic coordination may become a serious limitation. Broader economic implications of this business trend is visible in the increasing employment opportunities and better standards of living made accessible to the developing economies like China, Malaysia, Philippines, and India. HSBC has provided a good example of outsourcing work to developing countries like India to gain market advantage, ensure operational efficiency and provide a global business model that focuses on improved productivity and increased revenues. References: 1. Review of the Economy 2007/2008 – Economic advisory council to the Prime Minister of India, New Delhi, January 2008 2. Economy watch. 2008. Indian economy overview. http://www.economywatch.com/indianeconomy/indian-economy-overview.html 3. Indian Economy. 2008. Section 1: Economy and Markets. http://www.bseindia.com/downloads/IndianEconomy.pdf 4. International Association of Outsourcing Professionals. 2009. http://www.outsourcingprofessional.org/content/23/154/1554/ 5. Minevich, Mark, Dr. Richter, FJ. 2005. 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