Benefits of Telstra move hard to figure
Last week, when QBE chief executive John Neal updated the market on his group's restructuring, he explained, for example, how QBE had opted to build, own and operate a "captive" overseas insurance service centre in Manila.
Telstra, on the other hand, will be offloading work to contractors if it hires Indian companies to provide "service delivery centres" for its Network Applications and Services business, which supplies communications packages for businesses and government.
Each model has advantages and drawbacks. QBE has management control over the creation of its overseas service centre, the people who work in it and the work it does, but the centre will have greater operational inertia than the model towards which Telstra is leaning. If the demand for its services moves significantly in either direction, it will take time for QBE to adjust. Telstra would have less management control, but a more rapid response time.
Telstra is expanding its Network Applications and Services (NAS) business in Australia and Asia and has high hopes for the business, which rates highly with corporate customers and boosted revenue by 10.6 per cent in the December half.
NAS increased employee numbers by 146 last year and is adding 350 more after winning a 6 year contract from the Australian Department of Defence in April.
It employs about 2700 people all up - but 260 jobs will go if negotiations with unnamed Indian service providers are sealed.
Telstra tried hard not to say so during a briefing yesterday, but cost is part of the equation, as it is for all groups that send work overseas, to countries such as India and the Philippines. The Indian groups that Telstra is talking to are drawing on a deep IT talent pool, but they do not pay Australian wages, and deliver the service for less.
The strategic equation is, however, that Telstra is prepared to risk yielding management control to gain scaling flexibility as NAS expands in Australia and Asia.
NAS has already won contracts in Asia with groups including Jetstar, Fitness First and Federal Express. If it maintains or increases its growth, an external service provider should be able to expand service levels more quickly than Telstra itself could. Telstra is willing to contemplate a model that trades management control for more flexible growth options because the business has a lumpy and potentially volatile growth profile - the Defence contract that will continue to be serviced from Australia is an example of how a single contract can move the dial - and because the operations it is looking to subcontract are generic in character.
The work QBE's John Neal is sending to Manila, on the other hand is less commodified, and, importantly, the Manila centre deals directly with external customers - insurance brokers around the world.
Earlier users of the captive strategy that QBE has chosen include ANZ , which established a technology shared services centre in the southern Indian city of Bangalore more than two decades ago, which now employs more than 5000.
There are, however, interesting strategic variations emerging in the offshoring of services that deal directly with customers.
Telstra already makes extensive use of call centres in the Philippines for example, and will probably send other jobs overseas this year as part of an already announced operational revamp. Its competitor, Vodafone has committed to using only Australian call centres in this market as it tries to rebuild customer relations under the leadership of Bill Morrow.
CBA chief executive Ian Narev says the bank has settled on an "Australia only" call centre strategy - and it is one of the groups Telstra chief executive David Thodey considers a benchmark as he tries to make Telstra more user-friendly.
Thodey believes, however, that it makes no sense for a company with headquarters in a multicultural country that is expanding in the Asia region to run an "Australian only" strategy. He also believes the era of the call centre is ending, as online help tools become more sophisticated.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Telstra is considering hiring unnamed Indian IT companies to provide support services for its Network Applications and Services (NAS) business. For investors, this matters because it signals a strategic trade-off: Telstra may give up some management control in order to gain scaling flexibility and lower operating costs as NAS expands in Australia and Asia.
NAS is rated highly by corporate customers and grew revenue by 10.6% in the December half. The business increased headcount by 146 last year and is adding another 350 employees after winning a six‑year Australian Department of Defence contract. Investors should watch NAS revenue growth, contract wins (like the Defence contract), and changes in employee numbers or outsourcing decisions that could affect margins.
Yes. NAS employs about 2,700 people and the article notes that around 260 jobs in Australia would be cut if negotiations with the unnamed Indian service providers are finalised. Investors should factor potential cost savings and reputational or operational impacts into their assessments.
Telstra would offload work to external contractors (Indian service providers), trading some management control for faster scaling and flexibility. QBE built, owns and operates a captive service centre in Manila, giving it tight management control over staff and operations but greater operational inertia when demand shifts. Each model has different impacts on costs, control and responsiveness.
Cost is an important part of the equation: Indian service providers draw on a deep IT talent pool and typically deliver services for less than Australian wages. Telstra acknowledged cost considerations alongside the desire for scaling flexibility as reasons for talking to overseas providers.
Telstra already uses call centres in the Philippines and may send more jobs overseas as part of an operational revamp. By contrast, Vodafone has committed to Australian-only call centres and CBA uses an 'Australia only' strategy. These differing approaches can influence customer experience, brand perception and operating costs—factors investors should monitor.
Telstra is looking to subcontract operations that are described as fairly generic in character, which makes them more suitable for external providers who can scale quickly. For investors, generic or commodified tasks are easier to offshore without harming specialised in‑house capabilities, potentially improving margins if executed well.
Yes. QBE created a captive insurance service centre in Manila, and ANZ established a technology shared services centre in Bangalore more than two decades ago that now employs over 5,000 staff. These examples show alternative offshore strategies that prioritize management control and direct customer handling.
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