Benefits of Telstra move hard to figure

Telstra's "definitely maybe" decision to hire an as-yet unnamed Indian information technology company to provide support services for one of the businesses for which it has high hopes underlines the idea that offshoring isn't a straightforward phenomenon: there are different models to choose from.

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