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outsourcing

Which Way are the Winds of Change Blowing in the Global Services Industry? | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

2016 will unquestionably be recorded in the history books as one of the most turbulent years in modern times. Geopolitical, socio-economic, and technological volatility hit global service providers and enterprises alike particularly hard, leaving them in a state of uncertainty never seen before in the services industry.

Everest Group’s recently-published Market Vista™ – 2016 Year in Review report took a deep-dive look at these and other key trends and drivers impacting GICs, offshore/nearshore locations, service providers, and outsourcing transactions.

Here’s a snapshot view into some of the most interesting developments of 2016:

Digital takes center stage in outsourcing deals

While the volume of BPO deals had surpassed that of traditional IT services (e.g., application development and infrastructure services) in the previous decade, the pendulum has swung back to IT – now in a digital form. Several factors are driving this change, including increasing maturity of traditional services, the need for a personalized customer strategy, the need for increasing operational efficiency, and the protectionism wave. Indeed, the number of inked digital deals increased by 175 percent between 2014 and 2016.

Outsourcing deal sizes are decreasing – but not for everyone!

Higher maturity and increasing customer expectations continue to drive comparatively smaller or unbundled deals, particularly in the U.K. and North America, where a significant portion of deals are incremental or outcome-based. However, many enterprises, are signing larger deals as they invest in infrastructure and supporting platforms in order to build digital capabilities in the near future.

New technology, but different implementation strategy

Although large buyers have the capabilities to insource digital services delivery, dearth of talent and investment size and complexity forced smaller buyers to outsource delivery of their digital services.

Concentration in leading geographies

With digital services talent availability increasing in some global services destinations, the share of activity is being redistributed. Share of top-10 locations increased from 60 percent in 2015 to 70 percent in 2016. Locations recording a >50 percent increase in activity in 2016 were Ireland, Malaysia, Poland, Romania, and Singapore.

Surging wave of protectionism

A growing set of countries, including the U.S., U.K., Australia, and Singapore are adopting an “our country first” stance. This has manifested into a series of inward looking protectionist steps and safeguarding regulations, such as Brexit, the recent change in visa regulations in Singapore and Australia, and proposed immigration changes in the U.S. While these had limited impact in 2016, as most of them came into effect in early 2017, it will be interesting to see how players’ location activity evolves going forward.

Following are the five key trends we believe will define the global services industry in 2017:

Global Services Outsourcing Deals in Market Vista

To learn more about Everest Group’s take on 2016’s key trends, developments, and associated drivers – and how these will impact what happens in the global services industry in 2017 – please refer to Everest Group’s report titled Market Vista™: 2016 Year in Review: Global Services Industry Facing “Winds of Change.”

How Donald Trump May Save the India-heritage Outsourcing Firms | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Over the past month or so, many of the India-heritage outsourcing firms have reacted to the current political climate to announce significant hiring goals for onshore (U.S.) hiring while scaling back applications for H-1B visas. There are numerous reports across the country of these announcements creating a frenzy of governors courting the companies to locate delivery centers in their states, with sweet incentives included.

Impact of the digital model

Notwithstanding the irony of taxpayers underwriting job growth for the same companies that are simultaneously being raked across the coals for stealing American jobs and moving them to India and other offshore locations, the shifts coming on the back of political jawboning may be setting the stage for a way to a longer-term turnaround of prosperity. Recent analysis of the organic growth of the top 20 outsourcing services providers by Everest Group and DeepDive shows a dramatic deceleration of these collective firms’ growth. Projections over the next couple of years indicate a continuation of this trend. Deeper in the numbers, however, is the startling fact that the 80 percent block of these firms’ revenue that is labor arbitrage-based is actually shrinking slightly! The remaining 20 percent – that which is generally considered “digital” (cloud, mobile, social, analytics, AI/robotics, etc.) is growing at an annual rate of over 20 percent.

Many of these “digital” activities require service delivery resources that are intimate with the consumers of the service. This is driving a push for a greater onsite (onshore) delivery mix to unlock the value inherent in these digital initiatives.

Now you see the punch line – Trump-driven reactions to increase the onshore presence aligns with what is required for success in the digital marketplace.

The digital transformation challenge

However, it is not a forgone conclusion that all the firms that shift their mix slightly will succeed in this fast-growing digital space. Digital success often requires a different business model that demands changes far beyond the location of service delivery staff. We see all elements of the business model shifting – locations, talent approach, innovation cycle, sales motions, organization models, funding processes, etc. – a transformation that is challenging for companies large and small (enterprises seeking to adopt digital solutions also have major transformational change requirements).

That said, actions in response to the U.S. administration’s stricter posture toward immigration, commitments to “hire American” and “buy American,” and rhetoric about trade reform (i.e., border taxes could position, if not encourage, service providers to increase their digital mix. The market revenue numbers suggest that customers want it, so those offshore-centric players who can navigate the business model changes required to do it at scale could end up thanking President Trump for the push into the digital pool.

Outsourcing firms thrown into digital model

Everest Group Warns ‘Wait and See’ Won’t Cut It in New World Disorder | Press Release

By | Press Releases

Everest Group and other global services experts convene to discuss challenges of managing in uncertain times 

Washington is a fitting if not symbolic location for Everest Group’s next On Point Summit – “New World [Dis]Order: Managing in Turbulent Markets.”  Everest Group experts and other global services executives will convene at The Watergate Hotel in the U.S. capital on May 17 and 18 to discuss the rapidly evolving landscapes of globalization, automation, immigration and digital transformation.

The two-day event exclusively for enterprise sourcing executives features a slate of renowned thought leaders:

  • Uri Dadush, former director of international trade for the World Bank, will deliver the keynote address, “Globalization: Curve or Cliff?”
  • Peter Bendor-Samuel, CEO of Everest Group, and Rod Bourgeois, head of research for DeepDive Equity Research, will present “Immigration: The Latest and What to Expect”
  • Bill Price, first worldwide vice president of customer service at Amazon, author of “The Best Service is No Service,” and partner at Antuit, will join a panel to discuss “Digital Disruption: Pain or Gain”
  • Everest Group’s Jimit Arora, partner, IT services research, and Sarthak Brahma, vice president, pricing assurance, will discuss “Outsourcing Market: Pricing Collapse and Shifting Provider Landscape”

Other speakers include senior executives at leading North American financial institutions, digital retailers, natural resources companies, and more.

“Times of uncertainty can be career inflection points for senior executives who are armed with actionable data and insights and able to offer wise strategies for navigating perilous waters,” said Eric Simonson, managing partner at Everest Group. “So at this gathering of global services executives, we will put the facts on the table, exchange war stories, and engage in provocative discussions. The goal is to equip and inspire these executives to provide invaluable leadership, helping their companies not only to survive but also to emerge from the disorder as successful market leaders.”

***Enterprise executives may apply to attend the event at http://www1.everestgrp.com/OnPointSummit-May2017.html. ***

Pharma BPO: What Justifies Premium Resource Pricing? | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

The global pharma industry, hit hard by the rise of generics and the patent cliff on branded drugs, has been in cost-cutting mode, especially since the beginning of this decade.

With the rising costs of R&D and new drug development, pharma corporations began looking at streamlining manufacturing operations through Contract Manufacturing Organizations (CMO) and de-risking their R&D efforts via Contract Research Organizations (CRO).

CROs, which were initially sought out by pharma companies to cope with ad hoc/transient requirements such as additional capacity, have now emerged to cater to a whole host of services in the pharma outsourcing construct. These include clinical trial management, clinical data management, medical/clinical writing, bio- statistical programming, pharmacovigilance, and regulatory report writing.

Offshoring has also gained considerable traction in the last few years. Indeed, many global pharma giants have increasingly looked to low-cost locations such as India, as evidenced by the establishment of various home-grown CROs and Indian arms of global CROs, and some Tier 1 Indian BPO providers’ scaling up their capabilities in this space.

Given their nature and complexity, pharma industry processes typically command a substantial FTE cost premium over judgment-based sub processes in functional areas. For example, the following chart compares Clinical Trial Management FTE costs within those in Financial Planning and Analysis and Procurement Outsourcing.

Typical price variation: FP&A, Sourcing and Clinical Trial Management services

Pharma BPOWhat’s behind these premium prices?

  • Skill profile: Even in the fairly early stages of outsourcing, pharma companies entrust some of their core work, such as clinical research, pre-clinical trial management, and certain activities in drug discovery, to their service providers. The necessary niche skill-sets typically require a background in clinical research, medicine, biotech, etc. Thus, the FTE rates are higher than those for even highly educated business analysts.
  • Nature of deals/projects: Pharma projects are relatively shorter in tenure than those in other BPO functions, especially deals involving medical writing and bio-statistical programming, where average tenure may range from four to eight months. Thus, the average utilization is significantly lower. This lower hour base to recover costs/margins leads to a higher hourly billing rate.
  • Service provider margins: While the highly mature and commoditized F&A, HR, and Procurement outsourcing markets have margins in the 10-20 percent range, pharma BPO is still relatively nascent and thus commands margins of25-50 percent.
  • Technology cost: In some deals, we’ve seen pharma BPO service providers bearing the cost of technology licensing, which further increases the FTE pricing.
    We expect that pharma BPO will likely continue commanding a premium pricing compared to other BPO functions for two key reasons.

First, pharma companies are gaining increased confidence from strengthening clinical and medical infrastructure and the stabilizing regulatory and business environment in India. This is resulting in outsourcing more core activities such as the entire spectrum of services pertaining to drug discovery and development. And second, Indian CROs and BPO providers are augmenting their capabilities to move beyond pharmacovigilance, bioequivalence, and bioavailability services, and challenging global CROs in areas such as end-to-end drug discovery and product development.

What’s your take on the premium pricing in the pharma BPO industry? Is it justified?

Accenture, Genpact and TCS Named Leaders in Everest Group PEAK Matrix™ Report on Supply Chain Management Service Providers | Press Release

By | Press Releases

Supply Chain Management sourcing market attracts favorable interest from buyers and service providers alike

The dynamic Supply Chain Management (SCM) sourcing market is highly fragmented, highly competitive and growing, according to Everest Group. In examining the capabilities and market success of the 11 leaders in the SCM sourcing industry, Everest Group reports a growing interest in SCM as buyers seem more open to outsourcing while providers are willing to make investments to expand their suite of services.

“Increasing complexity in supply chain and global cost pressures are driving buyers to look for service providers who can deliver end-to-end SCM solutions that go beyond the traditional boundaries of procurement, logistics, and inventory management,” explains Megan Weis, vice president at Everest Group. “Service providers have also realized that with maturing market and increasing competition in Finance and Accounting Outsourcing and Procurement Outsourcing, SCM is a lucrative market to tap into.”

Announcing the SCM Services Market Leaders

In its newly released report, “Supply Chain Management (SCM) – Service Provider Landscape with PEAK Matrix™ Assessment 2017”, Everest Group explores the delivery capabilities and market success of 11 SCM service providers. Everest Group has identified the following Leaders, Major Contenders and Aspirants:

  • Leaders: Accenture, Genpact and TCS
  • Major Contenders: Capgemini, GEP, HCL, Infosys, OnProcess and WNS
  • Aspirants: EXL and Wipro

***Download Complimentary PEAK Matrix™ Preview Here***

Highlights:

  • TCS, Accenture, Genpact and Infosys control over 50 percent of the SCM market
  • Traditional BPO providers dominate the SCM landscape; they have leveraged their existing finance and accounting outsourcing (FAO) and procurement outsourcing (PO) relationships to cross-sell and up-sell SCM services to clients.
  • Some providers, such as OnProcess, have leveraged their niche set of offerings to show high growth in the market.
  • The provider landscape varies significantly across geographies with different providers focusing on specific regions; Accenture and OnProcess lead in the Americas, TCS and Capgemeni excel in EMEA, and TCS and WND dominate in APAC.
  • The provider landscape is highly fragmented in terms of leadership in different buyer industries; for example, Accenture and Genpact excel in manufacturing, OnProcess and TCS command nearly half the market in hi-tech and telecom, Genpact represents nearly a quarter of the market in retail and consumer product goods, and WNS and EXL lead in travel and logistics.
  • The SCM adoption by the SMB segment is growing and represents significant opportunities. A few providers (namely, EXL and TCS) have followed a targeted approach to build clientele in the mid-market segment while WNS is the only provider that has carved out a niche in the small-buyers segment.

About the PEAK Matrix™

The Everest Group PEAK Matrix is a proprietary framework for assessing the relative market success and overall capability of service providers based on Performance, Experiences, Ability and Knowledge. Each service provider is comparatively assessed on two dimensions: market success and delivery capabilities. The resulting matrix categorizes service providers as Leaders, Major Contenders, and Aspirants. Companies that demonstrate strong upward movement in successive reports are recognized as Star Performers. Everest Group recently announced a recalibrated methodology, in which innovation, intellectual property and technology take center stage.

Modern Today, Legacy Tomorrow: The Nature of Fast-Changing Skill Demand in IT Services | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

It is no hidden fact that the outsourcing industry is on the cusp of change. While the labor arbitrage model and legacy ERP applications ruled the 1990s and 2000s, digital has become the heartthrob of the current decade, and you can see enterprises entering new forays to keep themselves relevant in this fast-changing business landscape.

In this context, even the demand for technical skills has changed tremendously over the past few years. Some skills that used to have the largest pull have become obsolete, and others are struggling to keep their hold in the IT services industry.

Specialist skills losing leverage against generic skills

Consider the case of SAP on-premise business solutions. Until recently, SAP as a skillset had been very attractive among fresh graduates and lateral hires alike. High market demand coupled with supply playing catch up meant higher wages and easy to switch options in the ever-competitive outsourcing market. But over the past few years, on-premise ERP and factory-led offshoring have matured to the extent that once premium technical skills such as ABAP or Basis no longer command the same leverage over generic skills such as Java, .NET, and COBOL. Even functional skills such as finance controller (FICO) or sales and distribution have seen their premium declining over the last few years.

Specialist skills such as Cognos, Informatica, and IBM Websphere are also facing the heat in large outsourcing deals, where high competition and enterprise awareness have forced service providers to utilize a common, generic rate card irrespective of the complexity or diversity of skills involved. Also, organizations such as NetSuite, Salesforce, SuccessFactors, and Workday provide a viable option with consumption-led pricing models, which make them highly attractive. The level of competition and clear buying trends are forcing even behemoths to come to the table with cloud-based, integrated business solutions. Think SAP with S/4 HANA, which is pushed aggressively by the company’s account sales teams.
With the change in the business landscape, there’s increasingly a clear preference for new age phenomena such as big data analytics, hyper-automation, and the Internet of Things (IoT).

The impact of IoT, digital technologies, and automation on skill demand

IoT is one area in which organizations are investing large sums for either cost optimization or revenue generation, depending on their business models. And it is one area in which hardware, firmware, mobility, cloud, and analytics specialists are in extremely high demand to address its hot growth. While the likes of Angular JS and Swift are being used to develop mobile applications, Hadoop and Spark are seeing a huge demand in data analytics. Even firmware and hardware engineers are being required to work in an agile fashion using DevOps methodology, a phenomenon never seen before in industrial manufacturing.

Another big area in which significant investment is being made is Service Delivery Automation (SDA). It is being looked at as a viable alternative to labor arbitrage. Enterprises are looking to automation to reduce costs and streamline business processes. Service providers and enterprises alike are scouting for Robotic Process Automation (RPA) developers and DevOps engineers for onshore/GIC/service provider operations to significantly downsize the low-level tasks performed offshore.

Overall, the current market is in a state of flux as digital takes precedence and legacy becomes less prominent. But the demand for digital services across enterprises is clear, regardless of existing market shares.

H-1B Visa Reform Impact on IT Outsourcing Deal TCV | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

In a recent blog entitled, “Is rising costs the only impact immigration reform bills will have on the services industry?” our colleagues wrote about a variety of potential effects Representative Zoe Lofgren’s (D-CA) “High-Skilled Integrity and Fairness Act of 2017” H1-B visa proposal would have on numerous parties.

Let’s look squarely at the potential impact of these changes on total contract value (TCV). Some of the key IT service providers, especially Cognizant, HCL, Infosys, TCS, and Wipro – all of which rely heavily on “landed” resources to provide IT services in the U.S. – would have some major decisions to make, ranging from tactical, such as recruitment strategy, to business strategy, such as margin cuts.

If passed, the bill would most likely take away the landed resources cost advantage. Having assessed numerous IT ADM contracts in the last 12 months, Everest Group conducted a simulation to represent a typical three-year IT AM deal, using industry standard offshoring, staffing pyramids, and local-to-landed resource ratios. Our simulation showed that the removal of the difference in pricing of local and landed resources alone would result in a 5-6 percent increase in TCV, not taking into account any auxiliary impact on service providers’ cost (recruitment, organizational restructuring, etc.)

H-1B Visa Reform impact on TCVAlready pressed for margins, IT service providers would try to pass the TCV impact on to their enterprise clients. As it is very unlikely clients would be willing to bear the cost increase, it would remain with the providers. As a margin decline of 500-700 basis points would significantly disrupt any company’s financial standing, the providers would need to deploy countermeasures to mitigate this impact.

To reduce the impact on margins, service providers could use levers such as degree of offshoring and staffing pyramids. Our simulation showed that increasing offshoring by about 2-3 percent resulted in a 50 percent decline in the impact of TCV (essentially lowering the increase from 5-7 percent to 2-3 percent) for a typical three-year ADM deal. While the impact on more complex deals might not be easy to mitigate, our simulation demonstrates there is hope for service providers who play smartly and are proactive in adopting strategies to counter the potential impact of any negative reforms.

Another way service providers can drive down their costs is through automation. For example, key aspects of onshore resources’ work include coordination with offshore resources for alignment of work and managing timelines and quality objectives. If automated, these aspects could significantly nullify the impact of onshore cost increases. And with 300-400 basis points at stake, providers might finally have the motivation to adopt automation at the enterprise level, rather than as a deal- or client-specific objective.

It will be very interesting to see if service providers are able to convince the enterprises to share some of the increased cost burden. What’s your guess?

BPO Industry Challenged: Outsourcing Giant India Losing to China, Small Countries | In the News

By | In The News

“For voice work, the Philippines has a better voice/accent environment even though it is at a cost disadvantage to India. For some kinds of work, close proximity and time zones advantage near shore locations is preferred over India,” said Peter Bendor Samuel, CEO of Everest Group, a Dallas-headquartered management consulting and research services firm.

Citing concentration risk as another reason, Samuel said some firms feel that they are overly concentrated in India creating increased risk in the event of natural disasters or large currency swings for these firms a more geographically dispersed location strategy makes sense.

“Although these alternate locations have taken some share from India such as Mexico, Costa Rica and for Europe, Poland, we believe that these share gains will level off as these alternative locations are priced higher than the low cost high skilled Indian labour pool,” Samuel said.

Read more at the Hindustan Times

Outsourcing Trend Faces Challenges | In the News

By | In The News

H. Karthik, a partner at management consulting company Everest Group and leader of its global sourcing practice, said Duterte’s comments about a separation from the United States altered risk perceptions.

“No companies have publicly stated any significant changes in their Philippines strategy, but many of them are adopting a wait-and-watch approach,” he said.
Karthik compared that wariness about the Philippines to developments in other outsourcing locations, such as the political unrest in the Ukraine, Egypt, and Tunisia, and recent widespread public protests in Romania.

Read more at Treasury and Risk

Is the Philippines More a Paper Tiger than a Real Tiger? | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

The Philippines has been in the news a lot lately, for a range of negative reasons. But is its risk profile becoming such that U.S. enterprises should stop evaluating it as a global sourcing destination, or that those already there should consider pulling out?

That depends on your perspective, especially when you look at both its risk and benefits profiles. I believe one can argue that the current dynamics in the Philippines are potentially a hidden positive for the global sourcing industry. Yes, this bad thing could actually be a good thing.

Before you tell me I’m off my rocker and should be put in a padded room, hear me out.

Among other things, Philippine President Rodrigo Duterte made statements regarding “separation from the U.S.” This understandably caused concerns among multiple global companies with one or another type of exposure to the Philippines. But the Philippine government subsequently tried to clarify that the statements were reflective of intent in foreign and military policy, not business ties. Although a general tilt in military and foreign policy away from the U.S. may eventually hamper business relations, there will probably be little impact in the near term.

That said, while the uncertainty and noise surrounding the Philippines will cause some companies to slow or moderate their exposure to the country’s labor market, a slowing of its offshoring industry growth could be incredibly helpful.

For example, with somewhat less demand for talent, attrition rates should decrease. With somewhat lower attrition rates, employees are likely to develop in their roles to a greater level of proficiency. Additionally, salary increases are also likely to moderate and, with likely less investment into the Philippines, the Filipino peso may weaken and lead to a more attractive cost base.

In other words, assuming that the actual work environment is not disrupted by the new posture, the labor pool should become more attractive – lower cost and more stable – for those organizations continuing to operate in the Philippines.

From an economic standpoint, despite President Duterte’s saber rattling and the unnerving optics, the ties between the two countries won’t be threatened any time soon. The IT and Business Process Association of the Philippines (IBPAP) reported that the IT-BPS industry represented revenue of US$22 billion to the Philippines, and employed ~ 1.2 million FTEs in the country in 2015. With those kinds of numbers, an economic split can’t happen.

Socially, there are very deep ties between the U.S. and the Philippines, much of which is rooted in the fact that English is one of the two official languages in the country. One of the strongest predictors of social ties is language, as the more easily you can communicate with each other, the easier it is to talk about family, share jokes, discuss vacations…topics that help forge bonds.

It’s true that the Philippines’ risk profile appears to be shifting, but largely in ways that seem unlikely to materially impact business ties. For enterprises willing to manage and continue to operate within that environment, it would appear that the benefits of more skilled, language- and culturally-aligned talent at lower prices could easily outweigh the perceived risks.

Of course, there are numerous things you and your location-scoping team should monitor when considering the Philippines as a sourcing destination. The top five are:

  • Trade agreements with the U.S.
  • Taxes and incentives for U.S. firms
  • Travel policies, including visa’s and travel advisories
  • Actions and sentiments of market participants
  • 2022 Philippines roadmap for IT-BPO; relative emphasis on the U.S.

Is your enterprise already offshoring to the Philippines, or in the process of evaluating it against other destinations? We’d love to hear your thoughts, perceptions, concerns, and experiences!