Experts in the global services terrain
The ideas are not new – for many years people have been sharing spare capacity or capabilities with each other, for example carpooling, holiday home swaps. etc. New channels, such as Airbnb, which enable sharing on a larger scale, have drawn the attention of governments, which in turn are looking for new ways to boost their economies. For example the UK’s Department for Business, Innovation & Skills (BIS) is currently running an independent review of the sharing economy led by Debbie Wosskow, CEO of Love Home Swap. I expect some aspects of the model to be deployed by BIS to help startups.
The question is can the sharing economy get a foot hold in the business-to-business (B2B) world? Other concepts such as e-commerce marketplaces have crossed the business-to-consumer (B2C) and the B2B divide. We have had sharing of resources and capabilities in the enterprise world for decades too, from shared service centers to shared office facilities. Cloud computing and the various “-as-a-service” models are also about sharing. What is different about the sharing economy is the many-to-many relationships. For example, through Airbnb many home owners offer rooms to many guests. While there will be some many-to-many examples of sharing in the enterprise too, the prevailing model in outsourcing is one-to-many, one service provider pooling its resources and capabilities to deliver services to many clients.
The sharing economy concept could lead to enterprises doing more sharing among themselves, offering their spare capacity and resources to each other. This could potentially reduce demand for outsourcing to service providers, in certain scenarios, for example sharing of resources for common business functions with partners. The trouble is that setting up such arrangements could be complicated and there would need to be solid governance procedures in place to ensure performance. It would be different if there were channels through which formal sharing arrangements could be made easily. This represents an opportunity for outsourcing service providers to augment their own services by providing such a channel.
There is already one operating in the UK: The Liberata owned Capacity Grid connects 140 local authorities in the UK to provide spare revenue and benefits processing capacity to each other. Liberata provides the network and the connectivity and charges a fee on the transactions performed. It also offers its own processing services to local authorities on or off the grid. It is looking to expand its Capacity Grid portfolio.
Looking at the company’s financials, it has got over a pension-liability black hole which dragged it down for a few years before it was acquired by Endless in 2011. Today it reports steady revenues of circa £90m per annum and an operating profit margin of 7% based on its 2012 and 2013 results. Capacity Grid has helped it maintain its revenues and Liberata is looking for complementary acquisitions that add to it. In September 2014 it acquired Trustmarque, a UK-based IT services provider. The additional IT capabilities are likely to boost Capacity Grid’s infrastructure. The acquisition also boosts Liberata’s public sector clients, including UK government and the National Health Service (NHS). There are many common services across swathes of the public sector, e.g. primary care administration in the NHS, where the enterprise sharing economy is likely to get more traction than in other sectors.
The Capacity Grid shows that a sharing channel can work in the government-to-government (G2G) setting where the parties are not in competition with each other. There are also many complementary businesses in the private sector, such as partnerships, where the model could work in a B2B setting. This could see large enterprises, or their global in-house centers, or new entrants create a marketplace for overflow business capacity. Many service providers already have the network connectivity and the platforms to enable this kind of capacity or resource sharing. The model could also open the market for services to small and medium companies that make up more than 90% of businesses.
The traditional outsourcing market is already under pressure from other disruptions such as the business process as a service model (BPaaS) and automation. Pricing and delivery models are already changing and the enterprise sharing economy could add an alternative to the mix.
With digital transformation helping an increasing number of portions of the economy better match demand with capacity through sharing mechanisms, it would appear to be only a matter of time before enterprises are applying this to some of their business needs.
Photo credit: Carlos Maya
It’s a sign of the times. Understandable and predictable. But unfortunate. The Massachusetts Democratic gubernatorial candidate and the media are hammering Republican opponent Charlie Baker for an outsourcing award presented in 2008 to Harvard Pilgrim Health Care and service provider Perot Systems. Baker was Harvard Pilgrim’s CEO at the time, and the turnaround from bankruptcy involved moving some jobs to India.
It’s a sign of the times that the highly populist agenda in North America and Europe increasingly dominates politics to the point that an award given to a company six years ago is now used to denigrate a politician.
In and of itself, this will not move public opinion or change policy. But the populist desire to at least soft play the moving of work to low-cost locations in other countries doesn’t bode well for the global services industry or immigration reform. The services industry needs to be aware that it is clearly operating in a much more sensitive and emotional environment.
Election times are always difficult. And outsourcing and global services is an easy dog to kick. I think service providers need to be aware of this and work to lower their profile in these difficult times and focus on investments that can help offset this growing populism.
Photo credit: Coralie Mercier
The broad picture
With both buyers and service providers increasingly understanding the benefits of tier-2 and 3 cities in their quest for greater cost savings and access to additional talent, these lower tier locations are witnessing significant growth in new set-ups and expansions.
Companies typically look for at least 10-15 percent additional cost savings over tier-1 cities to justify the business case for moving to tier-2/3 locations. But to achieve their goals, they must create a sustainable business case considering both benefits and trade-offs, e.g., a decrease in operating costs versus an increase in management overhead, and entering an established market late versus entering a relatively nascent market.
Some argue that additional cost savings over tier-1 cities can also be realized by expanding into peripheral areas within tier-1 locations (e.g., Pune/Hinjewadi and Mumbai/Navi Mumbai, versus Coimbatore, Ahmedabad, Jaipur, and Bhubaneswar) or in existing tier-1 locations through scale economies. But the “right” answer here is highly context-specific, and depends on an organization’s specific needs and priorities. For example, a company battling for talent in a tier-1 city will not benefit much by expanding to peripheral locations but can access to additional talent by setting up in tier-2/3 cities.
Central Eastern Europe (CEE) and Latin America (LATAM) both had more global services delivery set-ups in tier-2 cities than in tier-1 cities in 2012-2014 H1. Although increased activity in tier-2 locations is a relatively recent trend in Asia Pacific (APAC), it is fast catching up with the highest number of tier-2/3 set-ups among all three regions during 2012-2014 H1. Global in-house center (GIC) and service provider activity in APAC is concentrated in India, but distributed across multiple locations in CEE and LATAM. The above chart presents the top five tier-2 locations in each region.
India’s tier-2/3 city story
India continues to be an attractive offshore destination for global companies, given its unique combination of low cost, scalable talent pool, and breadth and depth of available skills. Tier-2/3 cities add to the value proposition by providing additional cost savings of 8 to 12 percent (for IT services), due to lower facilities and other operational costs.
With higher concentration risk in tier-1 cities, it is becoming increasingly important for enterprises and service providers to access talent from tier-2/3 cities.
For more information, download a complimentary preview of Everest Group’s recently released report, Tier-2/3 Locations in India for Offshore IT Services Delivery – Does Reality Meet the Hype?
Philippines: moving beyond Manila and Cebu as delivery locations
While the Philippines’ key tier-1 cities (especially Manila and Cebu) are becoming saturated, the proliferation of tier-2/3 cities offer a strong proposition. Emerging tier-2/3 cities – e.g., Dasmarinas, Malolos, Iloilo City, and Baguio – contribute 30 to 40 percent of the relevant graduate pool, and for IT-BPS offer a cost differential of 10 to 25 percent as compared to Metro Manila.
For more information, download a complimentary preview of Everest Group’s recently released report, Is Philippines Stepping Up to Lead the Industry into the Next Horizon of Global Services?
Dimensions for operationalizing a tier-2/3 delivery center
Operationalizing a center in tier-2/3 cities and successfully deriving the above-mentioned benefits requires a slightly different approach than in tier-1 locations:
Talent hiring strategy: Companies need effective talent strategies to meet the needs of experienced personnel who often need to be relocated. They also need appropriate employer branding to capture mindshare in local colleges and universities.
Client engagement and contract type: To optimize costs and improve profitability, tier-2/3 cities are likely better suited to deliver work for existing (rather than new) clients/modules.
Operating model:Tier-2/3 cities can serve as self-sufficient centers directly handling clients, and can also be structured as a spoke to tier-1 cities in certain cases.
Creating an ecosystem: Companies need to invest in infrastructure, the social living environment, and the delivery ecosystem in order to successfully operate a tier-2/3 city set-up.
Many tier-2/3 cities options with multiple benefits and opportunities are available across various regions and countries. But enterprises and service providers must take into consideration multiple associated challenges – e.g., scalability, lack of enabling environment, trade-offs with peripheral cities, and lesser breadth of skill sets – before setting up or expanding their operations in these locations. A commercial-driven business case may not be enough to evaluate these cities; what is needed is a risk-reward assessment!
Hope you enjoyed solving the India GIC landscape crossword we posted last week. Below is the answer key to it. (Download a printer-friendly version of the answer key.)
|Texas Instruments and GE were among the first entrants in the GIC landscape|
|None. GIC divestiture activity has seen a decline in recent years after peaking in 2011 and 2012|
|India has dominant share in the GIC market in terms of revenue (~50%), number of delivery centers and headcount|
|Mumbai has the least number of GICs among tier-1 cities in India|
|United States-headquarteredfirms have more than 60% share in the Indian GIC landscape|
|Share of United Kingdom-based firms setting up GICs in India has declined in the last 2-3 years|
|GICs were formerly known as captives|
|Telecom is the 2nd largest vertical after BFSI in terms of average headcount|
|BFSI is the largest vertical in terms of overall GIC headcount in India|
|Technology is the leading vertical in terms of number of GIC set-ups in India|
|Bangalore has the maximum number of GICs in India|
|Pune is the leading tier-2 city in terms of number of GICs and has seen lot of GIC activity in the recent past|
|Companies started GICs to capture cost arbitrage|
|Outsourcing to service providers in an alternative to the GIC model|
|Engineering services is the leading function delivered by GICs in India|
|Value beyond arbitrage|
|Within the Energy & Utilities vertical, Europe-based firms have highest share|
|ADM (Application Development & Maintenance) is the topmost sub-function within IT|
|Kochi is also seeing GIC activity among tier-2 cities in India|
|Cognizant acquired ValueSource NV, a subsidiary of KBC Group|
Photo credit: Taki Steve
Over the last 18 months, we have seen a significant shift in the global in-house center (GIC) location strategy of UK-based firms, with many more embracing Central and Eastern Europe (CEE) over offshore countries for their GICs.
Factors driving the growth in nearshore locations include:
- High attrition rates in offshore locations, and far more expensive talent in onshore regions, make nearshore locations a suitable alternative. Relatively lower-cost locations in CEE are equipped with skilled workforce with multi-lingual capabilities
- Nearshore locations offer cultural and geographical affinity, and a favorable time zone
- Concentration risk in offshore locations. Realizing the value of diversification, well-known companies such as Barclays, BP, HSBC, PwC, Rolls-Royce, and Vodafone have expanded their location portfolios beyond offshore in-house centers and established GICs in CEE
Some of the popular nearshore locations being leveraged for IT, F&A, and call center (CC) services are depicted in the diagram below:
While some companies are leveraging their existing nearshore offices and expanding them into GICs, others are setting up greenfield centers. Recent examples of new GIC set-ups by UK firms in nearshore locations include:
- Barclays opened a human resources service center in Lithuania
- Vodafone opened a new shared services center in Bucharest, Romania, to cater to Germany, Ireland, Italy, Spain, and UK-based clients. The center will also provide IT services for the Vodafone Group headquarters in London
- PwC opened a service center in Bratislava, Slovakia, to carry out its internal finance function for the CEE region
- Toumaz Group opened a software development center in Timisoara, Romania, to develop IT-based solutions for Toumaz and Frontier Silicon, a Toumaz division.
What are the implications of this trend? Are we saying offshore locations will lose their draw for UK-based buyers? Certainly not! Although the CEE region will continue to maintain its growth momentum, several factors will still drive GIC activity in offshore geographies among UK buyers:
- For first-time adopters of the GIC model, offshore locations (e.g., India, Philippines) offer a proven and established value proposition
- For companies highly focused on cost savings, the arbitrage offered by offshore geographies remains unbeatable
- Companies looking to set-up large scale centers (1,000+ FTEs) may not find many scalable options in nearshore regions, making offshore geographies more attractive
- Several offshore locations are also becoming attractive for their domestic market opportunities. Thus, some organizations are leveraging offshore centers for dual purposes; for their UK operations and to tap into local sales prospects
Beyond the traditional offshore locations, there is increasing acceptance of South Africa, Egypt, and Mauritius as delivery locations for UK and other European buyers due to accent similarity and strong cultural affinity. But the battleground is now definitely becoming hotter between nearshore and offshore locations.
For more insights into the GIC space, please see the following additional Everest Group research:
- GICs Creating Business Impact Beyond Cost Arbitrage
- Quantification of GIC Impact Accelerates Internal Value
- Global GIC Market Activity Heatmap
Photo credit: Charles Clegg