By Nick Heath
Monday, May 04 2009 11:58 AM
URL: http://www.zdnetasia.com/news/business/0,39044229,62053746,00.htm

U.K. multinationals have laid bare their sometimes rocky relationship with outsourcing and described how offshoring is helping them survive the recession.

Aviva Global Services (AGS), the business unit that provides back office and IT services to the financial services group Aviva, set up its first in-house, offshore operation, known as a captive, in 2003 with 2,500 staff.

By 2006, its offshore operations had grown to multiple captives based in India and Sri Lanka employing 6,000 staff and with responsibility for delivering a range of insurance processing and back office IT services.

Speaking at the FT Outsourcing and Offshoring Conference this week, AGS group CEO Steve Turpie said there had been problems with the scale of the initial growth: "When we first offshored we were learning. Like many organizations and we made some mistakes," he told the conference.

Describing Aviva's initial decision to offshore large parts of entire business processes as "probably a recipe for disaster", he said that over the past two years the company had reviewed all of the processes it outsourced.

AGS stepped back from running its own offshore operations last year, selling its five captives to Indian outsourcer WNS, which will use the captives to provide a range of insurance, accounting, customer and other support services to Aviva under a US$1 billion deal.

Turpie said that the decision to step away had been the right one: "The maturity of the BPO business is very different today, as is the way that we do business with our customers.

"For example when you renewed a car insurance policy five years ago most people would have done so by phone, whereas in today's world 50 percent of our customers renew over the Web, which is a very different business model for us.

"We made the decision on the basis of capability, cost and flexibility and given what has happened in the last nine to 10 months we feel that we made the right choice."

Turpie said that the deal with WNS had allowed Aviva to "accelerate what we are doing".

"It has helped dramatically improve efficiencies and customer experience.

"The cost of what we have offshored and outsourced is relatively small compared to the savings on taking 1 percent off of our claims costs, for example," he added.

He said that the transition of the captives to WNS had gone smoothly so far and would be almost complete this year.

International drinks manufacturer Diageo takes a very different approach to offshoring to Aviva.

Diageo relies on a hybrid offshoring model, where services are provided both from its own captive in Budapest in Hungary and a number of offshore centers run by outsourcer Accenture.

Its offshore operations started with the company setting up a captive in Budapest in 2002, initially acting as a European shared service center but later providing financial processing services to the United States, Mexico and Australia.

Diageo gradually shifted more financial support services from its offices in London to Budapest, such as the treasury function and centralized reporting.

Speaking at the FT conference Carolyn Isaacs, global shared services director of strategy and transition for Diageo, said: "We had got to a stage where we had proved we could make it work for a number of our markets around the globe but we realized that for markets such as those in Asia and Africa the costs did not work.

"That was where we looked at leveraging a partner to look at outsourcing as well."

About 15 months ago Diageo chose Accenture, which today runs centers in Madrid, Manila, Bucharest and Shanghai, handling a variety of IT services such as application development and support.

Isaacs said that bringing in an outsourcer brought numerous benefits, including mitigating the risk of relying on a single offshore site, access to more languages and ability to shift services between locations.

"We wanted to provide shared services that flex according to our business," she said.

"We will look at outsourcing other services where we believe we could get the same service and control but at a lower cost. We have moved some activities from captive to outsource but we always want to ensure the level of service at both.

"I would very much regard our future as about combining captive and outsourcing in a hybrid model."

Nick Heath of Silicon.com reported from London.