India, having captured 46 percent of the global business-process-offshoring (BPO) market, is the leading offshore destination and will probably remain so for some time. But competition is intensifying there (and in other popular offshore destinations) as more companies compete to supply such services. This crowded field is driving down billing rates, while the rising demand for talent is boosting the labor costs of India's BPO sector by up to 15 percent annually. Both factors are combining to threaten profit margins. At the same time, clients are now more demanding: having captured the benefits of lower labor costs, they want better quality and higher productivity. If offshore service providers—captives as well as third-party ones—are to remain cost competitive while meeting these rising expectations, they will need to innovate and to measure and improve their performance.

Until recently, there was no methodology to benchmark the performance of remote-delivery centers. To address this need, in late 2005 McKinsey and India's National Association of Software and Service Companies (Nasscom) launched a Web-based benchmarking survey to research the performance of the BPO providers. The effort, which we call Process 360: Operational Excellence, classifies operational processes into five key categories: costs, quality, speed and flexibility, productivity...