Accenture (NYSE:ACN) has a center of excellence (CoE) dedicated to Oracle in Bangalore, India. The center employs more than 2000 professionals and aims to be a powerhouse of Oracle skills and innovation globally. Accenture’s innovation center is a cluster of CoEs built around key strategic functions like communications, electronics, high tech and media.

The services of Infosys (Nasdaq: INFY) are similarly organized around CoEs for testing, technology, R&D, etc while Wipro has a CoE for PeopleSoft. More and more outsourcing companies are aligning their delivery operations along centers of excellence - building and leveraging specialized skills within their organizations.

The concept of a CoE came into focus as businesses started to get more and more global. The objective was primarily to facilitate knowledge sharing and capability building in niche areas such as pharmaceuticals, automobile, telecom or for specific functions like innovation, technology, R&D, testing, etc. The adoption of CoEs by outsourcing companies has been a recent phenomenon, but is rapidly gaining traction. The model is offering service providers much-needed flexibility, productivity, cost and resource efficiency in managing their increasingly global businesses. It is also finding better acceptance among buyers. For instance, Infosys Technologies and Triumph Group, an aerospace systems company, signed a 3-year CoE agreement to utilize Infosys’ aerospace engineering services capabilities and manage its engineering resources more effectively.

Insurance company Aviva initiated a build-operate-transfer (BOT) arrangement with three leading BPO vendors in India with proven expertise in financial services offshoring – 24/7 Customer, WNS Global Services and EXL Service. The three companies worked in partnership to set up, manage, and hand-over in 2007, a Finance and Accounting Center of Excellence (CoE) for Aviva’s global insurance business units. The CoE served to centralize resources, standardize processes, share strategic knowledge and more importantly, put in place a roadmap to sustain and develop operational excellence.  The choice of locations was strategic - India allowed rapid scalability from an abundant manpower pool (the CoE in India employs close to 8,000 people), while Sri Lanka was chosen for the large number of UK certified accounting professionals.

Changing roles in global sourcing
The service provider is being increasingly seen in the role of a “strategic partner”, aligned with the buyer’s business objectives such as cost reduction, efficiency improvement, process re-engineering, innovation and business continuity. Contract sizes have been reducing and the large “mega-deals” of the past are getting restructured into smaller contracts to multiple vendors, often to specialized service providers who are best-in-breed. Vendors are expected to be able to provide services from multiple locations around the world and at times, expected to partner with competitors, acting as active participants in the clients’ business, rather than mere executors of contracts.

Going Forward
While broadly, it sounds like a win-win situation for the client and the vendor, there are several challenges in operating a successful center of excellence, mostly related to implementation and sustainability. Setting up a CoE can be highly cost-intensive and necessitates a comprehensive business plan for the longer term, to transform the CoE from a cost center to a profitable unit. Consequently, skeptics question the capability of an excellence center to succeed in the absence of broader organizational maturity.

For now at least, the large-scale acceptance suggests that the concept is likely to witness rapid growth over the next few years. A large number of buyers and suppliers will organize their activities around CoEs to gain from economies of scale and to leverage other strategic advantages.

ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities.

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