Airlines are finding the costs savings from offshore outsourcing hard to ignore as they look for more flexibility in the business model
Offshore outsourcing is not a new concept for the airline industry. Airlines have been moving back office functions to locations such as India since the early 1990s. What is new is the extent to which it is figuring in airline strategic thinking, with business process outsourcing (BPO) providers predicting that the sector will take off over the next few years.
For instance, WNS Global Services, the world's largest airline BPO provider, expects to double its airline and transport division's 3,000 headcount over the next couple of years. And many predict this growth will continue as the unrelenting pressure to cut costs makes the rule-of-thumb 40-50% savings on offer from Indian BPO providers hard to ignore.
Indian BPO provider Kale Consultants estimates that the potential industry savings in revenue accounting, one of the back-office functions that airlines have been transferring, is around $1.4 billion. Airlines seem to agree, with Kale estimating that over the next few years, 50% of carriers will outsource revenue accounting, saving $710 million a year. This alone would take a significant chunk out of the massive losses still being racked up by the industry. Some feel there is plenty more potential to chip away at the industry's cost base.
"We are just scratching the surface at the moment," says Steve Dunning, managing director of WNS. In addition to lower costs, he points out that the growth of BPO is enabling providers to take on jobs that would simply have been too big a few years ago. And the range of tasks is also increasing, even taking in activities such as auditing expense claims.
The airline industry is, by and large, still in dire straits, and Dunning believes that carriers will be forced, perhaps by shareholders, to more radical cost-cutting in the future. "Something has got to give."
He says that while carriers were more concerned with survival in the wake of the September 2001 terrorist attacks, they are now in a better position to take a more strategic view. "A lot of people treat BPO tactically, whereas in reality it is a strategic issue," says Dunning. "Decisions are signed off at a senior level." Gareth Pritchard, managing director at Lufthansa Process Management, agrees. "Maximum rewards will be realised by positioning BPO as a strategic directive at the highest levels of the company," he says.
Dunning points out that in many ways little had changed since WNS was started in 1996 as the offshore outsourcing arm of British Airways. The carrier's then chief executive, Bob Ayling, set up the company as part of a cost-cutting exercise. Lufthansa moved its revenue accounting to India in 1994, operated by Lufthansa Process Management, which is part of wholly owned IT subsidiary Lufthansa Systems. Again, this was in part a response to the troubled times in the aviation industry.
Internal debate
Cost savings of 40-50% may sound like a no-brainer, but airlines have some concerns that need to be met. The first issue that airline managements normally scrutinise is the loss of control. "This is a healthy debate," says Dunning. "If a service is essential, it should probably be kept in-house anyway. But many airlines do not have this internal debate." When they start tackling this question, Dunning says that carriers usually find tasks that were thought to be core are no longer crucial. "Important, maybe, but not core. At that point, you are really looking at the business," he says.
This strategic debate is not just about cost cutting, he says. "Airlines are trying to move from fixed costs towards more variable costs. BPO gives them that flexibility." Kashmira Irani, senior vice-president market development at Kale Consultants, also says it is not only about being cheap. "It is not just about the cost savings which are standard for Indian outsourcing operations," she says. "It is about process optimisation."
For instance, she says that a sales audit from Kale's staff, who are trained to IATA standards, will enable airlines to significantly reduce revenue leakage at an affordable cost. With a full audit (ie every single coupon audited) she says, airlines will be able to see whether travel agents are obeying ticketing guidelines, and bring transgressors into line. This revenue would otherwise be lost to the airlines, she notes. "This revenue goes straight on the bottom line. It is money the airlines have lost," Irani says.
While they may want the flexibility, airlines are anxious that this should not be at the cost of security. BPO providers are conscious of this fear, making great efforts to prove to airlines that they have nothing to worry about. Kale, for instance, stresses that it has been awarded UK standard BS7799 for its business processes and is ready for the US equivalent, SAS 70.
Labour issues
Internal political issues are also high on the agenda. Labour forces often view outsourcing with suspicion, particularly with when it comes to possible job losses. Pritchard at Lufthansa stresses the need for a clear communication policy, warning that valuable staff could be lost if they are not kept informed about the airline's strategic direction and their individual roles. This explains why airlines are often reluctant to talk about BPO, seeing it as a topic that has the potential to create some unwelcome publicity. Irani at Kale reports that US carriers showed little enthusiasm for the subject in the run up to the US elections.
Looking ahead, Dunning predicts that the airline BPO sector will develop centres of excellence in different functions, such as revenue accounting, etc. He adds that with more and more business being pushed online, this is generating other issues. "With the increase in use of e-mails, people's expectations of response times has gone up dramatically," he says. As some processes become more automated, Dunning admits that some BPO jobs will be lost, but with many more functions being outsourced, this will be more than compensated for, as the growth rates predicted by BPO providers would suggest.
As more mainline carriers go down the offshore BPO route, Dunning speculates that low-cost carriers may well follow suit. Although many budget start-ups outsource a number of services from the off, their focus in the early stages tends to be on growth. Dunning predicts, however, that they will become involved in offshore BPO over time.
The transition to offshore BPO providers is clearly a major decision for airlines, but one they may find increasingly hard to ignore. With potential savings measuring billions of dollars worldwide, the potential of BPO to transform the business model in terms of cost, flexibility and, ultimately, profitability, should offer encouragement to even the most battle-weary boardrooms, and to shareholders.
The Lufthansa Process Management guide to offshore outsourcing
1. Make sure the project gets the right mandate
Maximum rewards will be realised by positioning offshore
business process outsourcing (BPO) as a strategic directive
at the highest levels of the company.
2. Define your sourcing strategy
What is success? Cost savings, fulfilment of service level
agreements (SLAs), good relationships, better processes,
process control?
3. Give every deal project management status
A BPO deal must be be treated as an individual project,
managed by someone with exceptional skills.
4. Be prepared for a long-term relationship
There must be give-and-take to ensure a win-win situation for both parties
over an extended period of time. Conflict resolution procedures must be clear.
5. Communication, communication, communication
Any BPO deal is likely to cause insecurity for the staff involved. There should be a
clear communication policy. Your most valuable staff could be lost if they are not
kept informed of your strategic direction and their individual roles.
6. Prepare early for the period after transition
Remember that the first BPO project is unlikely to be the last. Make sure that
demotivation does not jeopardise current operations. Use "process champions"
from the customer organisation to create a positive view of BPO and maximise co-operation.
7. "If you can't measure it, you can't manage it"
Establish clearly defined SLAs, including appropriate penalties/bonuses. Stipulate
conditions that might affect SLAs.
8. Anticipate change and be flexible
The deal you sign today will have only rudimentary relevance in five years time.
Create the technological, legal and cultural framework to be able to adapt to change.
9. Understand the value proposition of the provider
It is too easy to focus on the cheapest provider. Understand exactly what services,
costs and benefits each proposal contains. Do not underestimate the role of IT.
You need the right infrastructure, with back-up.
10. Help the customer to "loosen their reins"
Customers must accept they will need only a small residual team to monitor, supervise
and deal with changes. Providers should ensure that customers are kept well informed.
11. Establish a solid governance model
Hold quarterly (or more frequent) governance meetings. Follow a fixed agenda with
the following topics: finance/budget; volumes; quality; productivity; human resources; other business.
12. Be aware of cultural differences
Key players in BPO projects must have full confidence in the basic idea of BPO; genuine
respect for other cultures; an open mind; willingness to listen and learn; excellent communication skills;
tact, diplomacy and intuition - the ability to see a frown developing on a face that is 5,000km (3,100 miles) away.
Source: Gareth Pritchard, managing director of Lufthansa Process Management, a subsidiary of Lufthansa Systems.
Source: Airline Business
