It's not just about money

Business process outsourcing is not simply a question of saving money. It also allows airlines to overcome labour shortages, control headcount and get the job done better.

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By  Colin Baker Published  March 5, 2006

|~||~||~|It is, perhaps, not surprising that outsourcing has grabbed the attention of the airline industry. ‘Flexibility’, ‘focus on core business’ and ‘cost saving’ are the kind of terms that airline boardrooms like to hear, and business process outsourcing (BPO) promises to deliver on all three counts. Airlines have been moving back office tasks such as revenue accounting to offshore locations since the early 1990s, seeking to cut costs in the wake of the industry downturn of that era. Cost cutting is at least as high up the agenda as it was then, but BPO is increasingly seen as more than just a cost cutting exercise. “Airlines are taking a more subtle approach,“ says Robert Kane, product strategy manager at Dubai-based Mercator, a subsidiary of Emirates and one of a handful of companies around the world with specialist divisions focusing on the travel and transport sectors. “They are looking at outsourcing as a strategic tool, rather than just a cost saving measure. When they start moving processes to BPO, they ask themselves: What other tasks do we really not need to do here?” Other specialist providers include WNS, with offices in India, which started out as the offshore outsourcing arm of British Airways. WNS is majority-owned by US private equity firm Warburg Pincus. Kale Consultants, based in India, has also made a name for itself in this field, providing BPO and software solutions to carriers. This includes a number in the Middle East: Qatar Airways, Gulf Air, Oman and Kuwait Airlines are all customers. What are the advantages of BPO? Better quality and service levels, for one thing, says Vipul Jain, chief executive at Kale. “With a specialist, it is their core business. You would expect them to be more efficient and to have better technology.” As is the case with other industries ranging from banking to car insurance, airlines have been seeking to take advantage of globalisation by carrying out tasks in areas where labour costs are cheaper than in their home markets. In terms of the actual level of cost savings, it can vary. “It depends on where the customer is situated and the level of technology they are using; it is not just about people, it is also about efficient technology,” says Jain. “In terms of the cost arbitrage, it can be zero, but it can be as much as 30%, 40% or even 45%.” Kane reiterates the importance of geographical location. “Carriers in places such as Europe and Australia will benefit more than those in Central America or India,” he says. “There is a trade off between the labour intensity of the process and the amount of cost savings to be made by moving the process.” He estimates savings, on average, to be around 25%. “When you consider the risk factors involved, you need savings of this magnitude to make it worthwhile,” he says. Steve Dunning, chief executive of WNS Travel Services Unit, estimates that cost savings of 40-50% are possible, but stresses that it is important not just to focus on immediate cost savings. Other providers also point to benefits other than cost, one of which applies in particular to the Middle East. Jain points out that many carriers in the region have one thing in common. “They are growing very rapidly,” he says. “To maintain this speed, they want to focus on their core business.” He gives the example of Qatar Airways. “They came to us and said: We want revenue accounting to be done very well, with best practice standards. We don’t want management attention to go into that.” Carriers in start-up mode are increasingly looking towards BPO as well, says Kane, pointing out that Mercator has been involved with carriers launching in Singapore, Nigeria, Ghana and Europe. “We’ve found that if carriers have a low-cost model, they are more inclined to outsource. Whether they take certain processes back in house later on is another matter though.” Kane explains that the fact that BPO costs tend to be based on the number of coupons handled is an attraction for young carriers. “If you have a bad month, you will pay less. If you do it yourself, your costs will be fixed,” he warns. Indeed, with airlines around the world striving for more flexible business models, BPO is becoming harder for airline boardrooms to ignore. “It is primarily a fact that carriers are trying to move as far as possible from fixed to variable costs,” notes Dunning at WNS. “We can offer 24/7 working hours, quick turnaround times, the flexibility to respond to operational issues and, as we employ a graduate labour force, high quality. Clearly there are many attractions to BPO, but airlines do have some reservations — one of them being loss of control. “This is an issue, especially if the airline hasn’t been involved with BPO before,” says Kane. “The only thing to do is to involve them, and keep them involved all the time.” He points out that clients can have people on site for as long as they feel the need. The main tools for ensuring airline chiefs have piece of mind are service level agreements and performance bonuses, Kane notes. There should also be an exit strategy, he says, to avoid huge costs if processes are brought back in house. To this end, he stresses the importance of providing training to airline staff. “It is not just about looking at reports from afar,” he says. Kane notes that one of the advantages of this approach is that relationships develop based on teamwork. “If things go wrong, you have stakeholders on both sides,” he says. With a teamwork ethic, he says, “it is much less about a customer/supplier framework, and more about, let’s see how we can sort this out.” Jain at Kale also points to the importance of a shared outlook, and says that there should be a joint approach. “If you look at revenue accounting, what is actually outsourced is the revenue accounting process. It is the nuts and bolts!” He reiterates Kane’s point that service level agreements and quality audits can give airlines the reassurances they are after. In general, carriers are far more loathe to outsource aspects of the business that directly involve the customer, and therefore, the brand. As Jain points out, there are numerous issues when dealing directly with customers across the world, including different languages, knowledge of the product, and cultural nuances that may be difficult to manage through outsourcing. “Decisions on outsourcing really need to be taken on a process by process basis,” says Jain. Another worry for airlines is the issue of security. “This is a very valid issue,” admits Jain. “When selecting a vendor, it is very important that the customer looks at what systems and processes are in place to maintain information security.” This includes system/network security, and actual physical access to the buildings housing the BPO operations, he says. As far as Kale goes, Jain points to the company’s BS7799 standard as evidence of reliability on security matters. He also adds that the fact that Kale is an independent vendor, not owned by an airline, is an advantage when it comes to dealing with commercially sensitive information. Kane at Mercator points out that BPO providers will tend to have a number of different clients, so proper data segmentation is a must. In a similar vein, he says it is important to have each airline on a separate server. “We go to our customers, and say: What will it take to make you happy?’” Kane says. Dunning at WNS says: “We take clients through our security procedures. We show them what we do and how we do it, and we marry up their security requirements.” Looking ahead, there is general agreement that BPO will increasingly develop into “centres of excellence” with providers offering specialist knowledge in different industry fields. “It is not just a question of outsourcing. It is a question of outsourcing and transforming to best business practice,” says Jain. “Cost is important, but you also need the most efficient process. If you look at the airline industry, and where the cost savings are coming from, I think there are a lot of opportunities when it comes to transferring the underlying technology and business processes. There is so much legacy, and too many business processes that have not been re-engineered.” Kane at Mercator notes that BPO is very much an element of globalisation, where, “everyone is good at something” and adds that, “we will see more and more specialisation of processes.” India has, of course, developed a strong role in BPO based on a well educated graduate labour force and cheap labour costs. Jain at Kale points to this attraction. Looking at the Middle East in general, he says, “I think a big issue is skills. A lot of tasks have specialist knowledge, and in the Middle East, very often this involves people migrating to countries in the region with their skills. Rather than move the people, why not move the skills,” he asks. Mercator, with its Dubai base, does not have the same level of labour cost advantages of India, but Kane points to its expertise in automation as a compensating factor. “If you can automate, the advantage offered in India in terms of labour arbitrage is less significant,” he says. India is likely to face more competition as other countries develop their own BPO industries. “Mew markets are coming on board,“ says Kane, pointing to Eastern Europe, the Philippines and China in particular. “The competition will be good for the market and good for the customer.” Kane says that there is also much work being done to develop international BPO standards through the International Association of Outsourcing Professionals. The latter has also been carrying out education programmes for both service purchasers and providers. BPO has clearly evolved over the years, and will continue to do so. “Outsourcing is moving away from its origins when companies simply moved certain jobs outside of the company,” says Jain. “People have used offshore locations to take advantage of globalisation. Now, people are saying that’s all very good, but we want to increase process efficiency and we want to see efficiency gains year on year.” This demonstrates the changed attitude to BPO, with airlines looking to take advantage not just of the cost savings, but seeing BPO firms as specialist providers, in much the same way they would turn to a catering specialist to provide their onboard meals. With industry troughs and peaks still an occupational hazard, the flexibility on offer from outsourcing is also hard to ignore. No wonder airline BPO providers see plenty of opportunity for growth in the future.||**||

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