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Eric Simonson

Is Amazon’s HQ2 Strategy Viable? | Sherpas in Blue Shirts

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Unique, bold, unprecedented…those are just some of the words that describe Amazon’s announcement to establish a second headquarters in North America, with an end-state over the course of 10-15 years of 50,000 employees with an average salary exceeding $100,000.

The intent is exciting, both for potential employees and the cities that Amazon identified as location contenders. But is Amazon’s strategy viable? We believe it’s realistic to the extent that Amazon can keep its mojo going over such a long period of time.

Four factors driving Amazon’s HQ2 location selection

Scalability of talent

For Amazon to be able to amass 50,000 employees in 15 years, it will need to add 3,000 to 5,000 employees per year. These employees will have to be a mix of recent college grads and mid-management-level workers. So Amazon will have to take into account how many local universities and businesses there are in the selected location and the city’s relocation attractiveness.

Business mix

This is all about what Amazon intends HQ2’s business concentration to be. For example, will it have a retail focus like its Seattle headquarters? Does it intend to grow its advertising business in its new location? Will its focus be on the government sector, shipping/transportation/ logistics, or Latin American market growth? Whatever its intent, the new location will have to be a hot-bed of activity.

Time zone

If Amazon wants its second headquarters to help lead its international growth or manage suppliers based in Europe or Asia, the time zone overlaps of a location in the eastern or central U.S. time zone will be a huge business advantage.

Physical proximity

This relates to how easy it is to get to other geographical markets of interest. For example, if Europe is a target, a site in the northeast or central U.S. makes sense. But if Mexico, Central America, and Latin America are on the radar screen, a major city in the southeastern U.S. would be a good option.

Of these four, the biggest issue and most important consideration is: can Amazon get the volume and quality of talent it needs to fulfill its HQ2 vision? As we said above, the company will need to add up to 5,000 employees each year to get to 50,000 strong in 15 years. That’s a massive hiring agenda. For comparison purposes, when we’ve worked with other leading brand name organizations that are scaling new IT shops, they’ve typically been able to hire 200-350 people per year.

Can Amazon do it, or might it ultimately revert to a hubbed model, first establishing HQ2, and several years later HQ2.5? Only time will tell.

The six cities on our short list

Although Amazon recently winnowed its options down to 20 cities, we think only six of those are truly viable. Here, in alphabetical order, is a quick look at our short list:

Atlanta is a diverse economy, with UPS and Delta-driven strength in shipping and transportation, and Home Depot in retail. There’s a lot of impressive university talent available, in Georgia as well as the neighboring states of Alabama, Florida, and South Carolina

Boston is a great education center, and is known for large, corporate innovation. It would be a wonderful place for Amazon to build on what its been doing with Siri there, and to continue its growth in the high tech space. It’s also an airline hub with comparatively short flights to Europe.

Chicago is strong in the consumer and retail industries, and that obviously overlaps nicely with Amazon. It also has good connectivity to Europe, Seattle, and, to a reasonable extent, Asia.

Dallas has a good history of relocating companies’ operations and a strong tech talent pool and ability to pull talent in from universities in the region. One unique aspect in favor of Dallas is Amazon’s AWS business. As that matures, we expect it will need to increase the sophistication of how it sells to enterprises. And because Dallas is considered the original home of outsourcing enterprise IT services in North America, Amazon could find a lot of sales, marketing, and other talent in the area that wouldn’t be as common in the other cities.

New York City is by far the largest labor market, and Amazon could attract a lot of talent. If the company is trying to really increase its advertising business, the Big Apple would be a good choice. And because of the city’s diversity, Amazon wouldn’t be too limited in any one direction.

Washington, D.C. has a fairly large labor pool with a lot of high tech, much of it government-oriented, which may be both a pro and a con, depending upon Amazon’s mission. It’s well connected internationally, and is a fairly interesting place to try to establish a large corporate.

To learn more about our take on the viability of Amazon’s HQ2 strategy, please read our viewpoint, and listen to a discussion I recently had Ryan Takeo, host of KING-TV’s The Sound Podcast, called, “Talent, not incentives, most important in HQ2 search.”

What Is the Investment Profile of Your Service Provider? | Sherpas in Blue Shirts

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Like many financial investors over the past decade, my portfolio resembles a buoy floating on ocean swells. Most of the “ups” have been offset by painful “downs,” and the real growth has come simply from saving more money. At this point, I often wonder if I am actually investing, or just riding out a storm and hoping for the best. I fear the same is true of many organizations and the relationships they are continuing with their service providers.

Those of you who attended last week’s Market Vista webinar will recall that we spent some time looking at the service provider landscape in banking applications outsourcing. One of the key takeaways from our assessment of this competitive landscape (one of the largest outsourcing markets, with over US$6 billion in annual revenue) is that the players most improving relative to their peers have targeted their investments on technology (e.g., HCL with Capital Stream, Polaris with Intellect, and TCS with Bancs).

At the risk of sounding like a broken record, the market must find ways of creating more value beyond just labor arbitrage. First, yesterdays or today’s successes get no credit next year – competitive pressures require moving forward. Second, the arbitrage-centric model is okay, but not great. Maintaining satisfaction – let alone improving it – is elusive. Quite simply, it is too dependent upon too many people, and people are not as reliable and consistent as we would like to believe. Think about it: do you prefer a switchboard operator or your personal contacts directory in your smart phone?

My strong, strong belief is that users of third-party outsourcing services need to pay increasingly close attention to the investments their service providers are making, and re-align their relationships accordingly. This applies primarily to technology-related capabilities, but also to other areas such of geographic scope, domain knowledge, partnerships, and others.

But haven’t we been investing already?

While there have been some investments, many of the hard-dollar investments to date have really just been in creating fungible scale – seating, recruiting pipelines, sales organizations, and training for resources that could be used in multiple ways. They were largely about how to expand the existing business into new, but roughly similar markets. Few of the “investments” were hard choices between one or more options to create meaningfully different and new types of value. For example, having a building for employees to work in is only a question of estimating demand and therefore size of the space, not whether a building is required.

Other than a few acquisitions of Global In-house Centers (GICs or captives), such as Citi’s by TCS and UBS’ by Cognizant, there have been few larger scale bets on enhancing capabilities. Many service providers have been incrementally optimizing capabilities with an extra million dollars here and there. Occasionally, a firm has bought a technology capability for tens of millions of dollars. HCL’s acquisition of Axon, (£440 million), is the largest capability expansion that comes to mind in the past five years – and it was a bet on combining two different, but seemingly complementary, types of value propositions (Note: I consider HP’s mammoth acquisition of EDS to be industry consolidation, not fundamental capability enhancement. The pending US$2.6 billion acquisition of Logica by CGI is both consolidation and capability enhancement).

Overall, the investments have been very tightly aligned to expected revenue streams that could create fairly quick pay-off, and often just mimicking what others were already doing rather than boldly breaking the mold or venturing into truly unknown territory.

What can break the mold, and how it changes everything

If service providers continue to largely mirror each other’s capabilities, we will continue to end up with 10, 20, or more service providers that largely do the same thing, and are not particularly differentiated. To create true and sustainable differentiation, an organization must be able to do things that others simply can’t do (i.e., it’s not a question of “getting the right team”).

Technology is the strongest lever for creating defensible differentiation, but it tends to be a big and sustained bet. Done correctly, leveraging investments in technology across multiple clients generates powerful economic returns not only for a service provider but also for its clients who can ride a rising tide of capability as network effects take hold and more investment is added to the solution.

I don’t want to suggest that big bets on technology will be appropriate in all areas. However, technology investments in areas in which they will make a difference will in turn drive a radical alteration in the service provider landscape. So instead of 10 or 20 service providers, we’ll be down to two or five – far fewer of these types of investments will be able to create a positive ROI, so there will be fewer providers that try, and fewer that are successful. Quite simply, the world does not need 20 service providers building and maintaining a core banking platform or 10 running a global payroll system. Further, when considering big bets on technology, the world suddenly breaks into hundreds of possibilities, and no service provider can afford to pursue and sustain more than a handful of them.

The implications of technology investments for clients will be that some of their service providers will look increasingly dissimilar, and no longer considered interchangeable. This is both a good and a bad thing. Clients will be able to gain greater value and have more types of solution models to choose from, but they will have fewer choices within the higher value solution models. The fundamental economics of investments dictate that any high investment service will naturally restrict the service provider landscape.

Client implication #1: be thorough in your understanding of how service providers are investing, and in what type of solution you want now and ideally in the future.

Client implication #2: implication #1 applies both to your existing service providers and others you may not be using – are you aligned with the providers investing in the direction in which you want to go for your priority services?

Client implication #3: implication #1 also applies to your existing providers’ service delivery areas that you are not currently using – is your industry or function receiving priority investment, or is it an after-thought?

If you want the extra value, it will require extra investment by service providers; and that will lead to less choice within a particular solution type. This means we will move from a sea of service provider options to lots of smaller ponds tightly organized around well-defined service delivery capabilities.

Post Captive Global In-house Center Webinar Musings: Change is Not as Hard or as Quick as You Might Think | Sherpas in Blue Shirts

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Last Wednesday, we hosted a webinar on the cost competitiveness of global in-house centers and were privileged to have Kush Kamra (SVP of Global Operations for MetLife) and Charlie Roberson (Head of Enterprise Expense Management and Offshoring for Wells Fargo) join us as guest panelists. The analysis presented came from a joint study between Everest Group and NASSCOM earlier in 2012.

The webinar featured extensive discussion (thanks to our wonderful panelists) and got me thinking about two points in the aftermath of the webinar.

First, as those who attended know, the term “captive” is being replaced by “global in-house center” or “GIC.” In all honestly, I have been reluctant to confidently adopt this because change is hard (is it really worth it?) and “captive” is so simple to use in our reports (a mere seven characters!).

What suprised me is that in the two days after the webinar, three different individuals (two at the FSO event in NY, one during a phone interview) proactively corrected themselves after they said “captive” and replaced it with “global in-house center.” We laughed about it, but the point is that people are open to change and the word can get around pretty quickly. And not to be underestimated, it is much easier to replace a REALLY BAD idea when something better is consistently introduced into the market.

The second point that that I wanted to share is about labor arbitrage. As those familiar with the analysis we presented will recall, we analyzed the relative cost structure of offshore delivery vs. onshore and the sustainability of it under a range of scenarios. In many ways, the analysis simply helps rigorously document what those already close to situation know in their hearts – labor arbitrage is alive and well and not in danger of going anywhere soon.

The day after the webinar, the same topic came up in conversation with a senior solution design executive from a leading service provider. The individual mentioned that entry level positions continue to join at roughly the same salary level as five years ago and wage inflation is not nearly as dramatic as it may seem. However, she pointed out that the price for leadership is going up rapidly (luckily, this is a small sub-segment of the cost structure).

This underscores an important fundamental: supply and demand and how small changes in both can have big impacts. In short, demand for offshore resources is growing at a slower rate at exactly the same time that education systems are producing increasing amounts of resources. Further, training efforts aimed at increasing employability of graduates are slowly demonstrating impact. My prediction is that with the combined impact of slowing growth in demand and increasing supply of resources, we will see very little increase in the cost structure from offshore locations over the next 5 years (and this is before considering the impact of exchange rates). Yes, leaders (scarce resources – completely different supply-demand curves) will continue to become more and more expensive, but much of the cost structure will stay roughly the same.

Looking at this another way, the entire offshore/nearshore delivery ecosystem providing export services (India, China, Philippines, Mexico, Malaysia, Poland, etc. serving the United States, United Kingdom,  Netherlands, Australia, etc.) is only a little over 4 million people on a global basis. In the grand scheme of things, this is a really small labor pool and the ability to create excess supply from the 6 billion humans across Asia, Latin America, and Africa is tremendous – we are not in a supply constrained situation, but rather a demand-constrained scenario. SaaS, cloud, BPaaS, etc. only further suggest the potential for moderated demand for offshore resources.

I understand why people are concerned about cost increases and indeed some costs are increasing and some have increased significantly, but we are a long, long, long way from fundamental shifts in cost structures.

Is 10% Salary Inflation Too High? A Perspective on the Offshore Wage Increases | Sherpas in Blue Shirts

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For those tracking the global service market, reports of 10-15% salary increases in low-cost countries is almost expected. For executive management not familiar with the offshoring of services, seeing these headlines in the business press is unnerving.

But should it be?

I am not arguing that wage inflation in low-cost countries is equal or lower to high-cost countries, but it is clear to me that those in high-cost countries significantly lack perspective on how to interpret these numbers.

(For a more comprehensive perspective, checkout our webinar on labor arbitrage sustainability or our recent joint study with NASSCOM on Global In-house Center (GIC) cost competitiveness.)

Let’s start with a simple exercise (yes, you can count this towards your daily mental fitness goals).

First, recall your starting salary out of college.

Second, recall your salary in the fifth year of being in the work force (the fifth year is fourth salary increase if you received increases annually). If your salary changed currencies or you jumped to business school, you are disqualified from further playing this game.

Two numbers…now divide the fifth year salary by the first year to get a ratio (this should be greater than 1.0 and generally less than 3.0).

Now compare against the table below to get the annual percent increase in your salary across those five years. For example, if the ratio is 1.5, then the average annual increase was 10.7%.

Ratio Annual % increase
1.00 0%
1.25 5.7%
1.50 10.7%
1.75 15.0%
2.00 18.9%
2.25 22.5%
2.50 25.7%


Most people find the annual percent to be higher than they expected. And often surprisingly close to the typical reported increase in offshore salaries.

Why? The perspective that most people miss is that the growth in salary for an individual is different than pure salary inflation. Salary growth of an individual reflects both pure salary inflation (what an entry-level developer will earn) and the impact of their career progression (being able to deliver more value). In other words, salary growth also reflects being paid more for playing a slightly more valuable role – even if that does not include a formal promotion.

This picture becomes even more skewed if you consider total compensation (salary and bonus), which tends to grow even faster early in a career.

Many of you are probably now thinking, “Wait, my salary has not been growing that fast recently!”

True – and salary growth in percentage terms slows as individuals reach 10, 15, and 20 years into their careers. Much of the growth in salary in the early portions of the career is due to steady progression in being able to play a more valuable role – taking greater ownership, requiring less quality review, increasing domain knowledge, and other factors. But the benefit of further increasing these skills diminishes beyond a certain point, and salary growth is then predicated on other factors such as impact, leadership, and overall labor market rates for fully developed skills.

These same things are at play in offshore labor markets and much of the labor force is in the first 5-10 years of their careers due to the labor pyramid – so much of the workforce should be seeing “high” salary increases. At more senior roles, salary increases tend to moderate on a percentage basis.

Give this exercise to others – and potentially to that executive who feels 10% salary inflation is far different than what happens in the United States.

An Early Peek… the Results from the Shared Services and Outsourcing Survey | Sherpas in Blue Shirts

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Summary report now available | Download

As you may recall, in December Everest Group announced that we were partnering with Shared Services & Outsourcing Network (SSON) to launch the industry’s first-ever survey to investigate Vertical Industry-specific Strategies for Shared Services and Outsourcing (or “VISSSO” for those who like acronyms that hiss like a snake).

The survey covered not only traditional horizontal functions like F&A, HR, and IT, but also industry-specific functions like order management in hi-tech, merchandising analytics in retail, and loan and mortgage servicing in banking. In total, it addressed 164 vertical functions and 8 horizontal functions. Scope, sourcing model, technology strategy, organization model, improvement initiatives…all that stuff for each function across 28 industries.

Quite simply, it was a huge effort, and we are just now climbing out from underneath the avalanche of data.

Starting tomorrow at the North America Shared Services & Outsourcing Week in Orlando, we will begin unveiling the findings. We will follow with similar sessions in other SSOW events around the world, plus release the summary report later in March.

Enough about what is to come, let’s jump into some of the insights we have uncovered.

Looking across the 164 vertical functions, the responses reveal that services industries like financial services, transportation, and healthcare (in comparison to product-oriented industries like manufacturing and energy) include over twice as many vertical functions in their shared services and outsourcing strategies. Why? To over-simplify, the mid-office of services industries is simply larger and more important than that of product-oriented industries.

This means the mid-office is more closely tied to the financial processes typically at the heart of both shared services and outsourcing efforts. Or as we have hypothesized in our earlier research, “operational finance” processes of services industries are a critical component of value delivery and due to their linkage with other finance process, they are most commonly aggregated into the more general finance activities.

We also broke apart the data based upon the organizational maturity for delivering services (see the graph below). Interestingly, mature organizations are twice as likely to use end-to-end models for delivering F&A services. Further, mature groups are somewhat less focused on consolidation (and re-engineering – not shown), but more focused on increasing collaboration with their user groups. Further, they believe they are more than four times as successful in implementing change.

Mature organizations increasingly look for value beyond process improvement

What does this tell us? Our belief is that shared services and outsourcing professionals are segmenting into two groups. One has been successful in creating change for their organizations, plus implementing and optimizing a new delivery model. The second has not only implemented a new model, but is actively trying to create ongoing change by engaging their users and seeing change as a day-to-day competency instead of a painful and one-time transition.

Consolidation and process re-engineering will not quickly go out of style, but they are far from the end of the story. And, by the way, the more mature group reports greater focus on cost savings, greater ability to meet financial targets, and more increased inclusion of non-cost value drivers in their business cases.

There are many other findings that will be featured in our summary report; some additional interesting factoids in the interim include:

  • Of all sectors, public sector is most focused on cost savings (tax payers rejoice!)
  • Not surprising, the hi-tech industry has much more aggressive plans to pursue Saas/cloud solutions
  • More mature organizations are largely focused on soft factors like user engagement and change management, but they are not more inclined to implement new tools, adopt analytics, or prioritize Saas strategies

All for now…looking forward to sharing more as we work through additional analysis. Please don’t hesitate to contact me if you have questions or wish to debate the findings.

Vertical Industry Strategies – Getting Serious about Value and Investments | Sherpas in Blue Shirts

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With the maturation of legacy service delivery models, everyone is looking for the next lever to pull.

And the first-ever survey into how shared services and outsourcing models are maturing by industry – being jointly conducted by Everest Group and the Shared Services and Outsourcing Network (SSON) – will finally yield definitive insights from buyers, providers and consultants alike on the abundantly clear next lever…industry-specific strategies. Take the survey now.

For the first time, we will be able to look at how shared services and outsourcing models are maturing for functions specific to more than 25 industries, such as claims management in insurance, order management in telecommunications, and loyalty program management in hospitality and tourism.

The responses from the Vertical Industries Strategies for Shared Services and Outsourcing survey will enable us to document the current role of shared services and outsourcing, degree of centralization, expected optimization initiatives, technology strategies, and other factors relating to more than 150 functions across all the covered industries. We’ll then be able to arm you with both the broad themes and the detailed nuances that are relevant to you and your business.

Why is a view of vertical industry strategies important?

First, we are receiving an abundance of these questions. We are increasingly asked to help organizations calibrate their approaches based upon factors unique to their businesses. For example, although sometimes collectively referred to as “Energy and Resources”, oil & gas, utilities, and mining are very different industries, and the location of businesses requiring support, the role and degree of centralization, and the tolerance for operating shared services in “non-traditional” geographies vary tremendously. And SSON is hearing the same thing from its members –industry-specific content and networking are increasing in prominence.

Second, solutions specific to vertical industry strategies drive more complex economics, especially as they relate to technology. As the functions being supported more closely touch the business, the potential impact on revenue and cost increases…as does the potential for greater value. However, the unique nature of each function complicates the technology options. Make-buy decisions become more complicated and fewer options exist. Further, service providers must carefully assess whether they have the stomach to invest in and maintain more narrow solutions with fewer potential clients across which to spread their investments. As illustrated below, service providers must think carefully about where to draw the line in making technology investments to serve unique industry needs. Further, their clients must make a corresponding commitment to a technology model.

Increasing level of industry specificity

Third, organization models are under attack and will be shaped by the answer. Traditional shared services models were initially defined around the scope being impacted by ERP implementations. The scope for offshore outsourcing and captives was largely shaped around roles that could be delivered remotely with lower cost labor. Neither was fundamentally designed around what best enabled the business. As shared services and outsourcing initiatives mature and expand, they are challenging existing organizing philosophies, and the degree and type of industry-specific services will fundamentally set the stage for the next generation in global services.

Oh yes, this is an important topic.

The survey, which will launch in early January 2012, will include relevant questions for enterprises, service providers, and consultant/analysts. If you have any questions or comments before you participate in it, please contact me at [email protected].

Musings and Pontifications after Infosys’s BPO Event | Sherpas in Blue Shirts

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Infosys’s BPO Colloquium late last week, in Boca Raton, Florida, was a good event and a nice chance to catch-up with old friends. A couple of day’s worth of sessions covering a wide range of forward-looking topics yielded several standouts for me. They are not necessarily new trends but, rather, greater progress on key themes that used to seem further away.

First, the overall level of conversation is so much more advanced than even three years ago. The state of the art for global services has clearly advanced, and almost everyone is now focusing on how to take things to a new level. Questions and strategies are more multi-layered, with less of an underlying hope or expectation that there is a single, simple, optimal-for-all answer. True services strategies with enterprise-wide thinking are no longer the rare exception – the “sign a deal and save some money quick” mentality has matured into a more thoughtful and strategic mindset.

Second, the march of technology into BPO is both unavoidable and a force that will create significant variation and differentiation among BPO solutions and service providers – and not just three to five variations but hundreds. While labor arbitrage continues to be an anchor of business cases, technology is what provides the opportunity to change the equation and better respond to business needs. And technology is going to take many, many forms – tools with which to suck value from data or plug gaps in existing functionality, service integration platforms, small-scale platforms (five-30 users), large scale platforms (SaaS), industry-specific platforms, mobility capabilities, etc.

Quite simply, many of today’s technology plays require more meaningful investment (not to mention new skills and management disciplines) than has been true in legacy BPO. And service providers – none of which can be, if they ever really were, everything to everyone – will have to pick and choose where they invest, which in turn will guide the areas in which they become distinctive and higher value-add. So what started more than a decade ago as a fairly universal proposition around cheap, skilled, and abundant labor is being quickly redefined by technology, leading to much greater variation in competencies than we have seen to date.

Finally, it is good to see Infosys putting more definition and precision around its Infosys 3.0 vision. This has advanced a fair bit in the last three to four months and will continue to do so as it works through the implications of increasing its focus on platform-type business models and more closely linking its consulting and systems integration businesses. From my perspective, the key thing to watch with Infosys (and every other service provider) is what significant investments it makes, in which areas, and how those are intended to advance the business model – industry focus, client segmentation, role of technologies, end-to-end process approach, pricing and service structures, etc.

The next level of investments is becoming far more differentiating than the ramp-up investments of several years ago, which focused on setting up centers in the right places to support FTE volume growth. Most of the emerging investments will naturally benefit some clients (those to whom the solution applies), while providing little, if any, value to other clients (e.g., does a retailer care if a new banking platform is receiving investment?).Overall, a lot to look forward to as BPO settles into the next phase of maturity. The rapid growth of BPO was led by the fairly universal pursuit of labor arbitrage, but the real innovation is just now getting started (not to mention the need to continue changing!).

Overall, a lot to look forward to as BPO settles into the next phase of maturity. The rapid growth of BPO was led by the fairly universal pursuit of labor arbitrage but the real innovation is just now getting started (not to mention the need to continue changing!)

What Might Osama bin Laden’s Death in Pakistan Mean for Global Services? | Sherpas in Blue Shirts

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With the announcement by Barack Obama that Osama bin Laden has been killed after a nearly 10-year hunt, the world seems to be on the path towards being a bit safer.

Hopefully that is what will happen.

Unfortunately, that may not be the implication — and, in particular, it may validate the lack of trust between India and Pakistan. The world will be watching carefully in the coming days to learn Pakistan’s true role in helping track-down bin Laden; who owned the compound in which bin Laden was staying; and the tone of the reactions of the governments and citizens of Pakistan, India, the United States, and other countries.

Having stayed at the Trident hotel in Mumbai just three days ago (one of the sites of the November 26, 2008 terror attack by a Pakistan-trained terror group against India), I can’t help but see this development as shining a bright light on Pakistan’s role in fighting terror.

Will Pakistan be seen as demonstrating courage and collaboration in fighting global terror or as a reluctant and superficial supporter?

Depending upon the answer to that question, the relationship between Pakistan and India may modestly advance one small step towards building trust — or the suspicion and divisiveness may further deepen. And the trend in the relationship between these two important South Asian countries can have big implications in the longer term for the global services market. Let’s hope it is a positive development.

Global services supporting information technology, finance, engineering, and other business processes has a very positive impact on the citizens of a country and helps form increasingly dependent bonds between countries. Unlike manufacturing-oriented trade, where countries simply just buy and sell to each other, in global services the citizens of countries actually work together — they must overcome differences and miscommunications, but they achieve goals together and develop a deeper understanding of the nuances of each other’s mindsets. And, in turn, understanding of others exposes the emptiness of hate and ridicule for other societies.

Across the global services sector, only about four million direct offshore jobs have been created thus far. Despite the significant apprehension about the impact on jobs around the world, this is still a fairly small amount, although it has helped accelerate economic and human capital development in many countries — India, the Philippines, and about 20 other destinations.

With a population of approximately 170 million (sixth largest country in the world) and many of the same legacy talent benefits as India (English language skills and quality education systems for some of its citizens), Pakistan certainly has the theoretical possibility to play a bigger role in global services. If Pakistan can be seen as helping fight global terror, many benefits can start to accrue through an improving relationship with India. These benefits would help both Pakistan and India address global concerns about regional security while also helping provide more opportunities for their citizens and also strengthening their economies.

I suspect most of you just laughed and thought I am being far too optimistic (and certainly naïve about the true motivations of South Asian politicians and military leaders). I politely suggest you might be overlooking what is already happening. First, remember that global sourcing is all about capturing a new profile of benefits in exchange for successfully managing a different profile or risks. Some will seek risk and carefully manage them to capture the benefits, while others will watch and follow. Those organizations which got things started in India 20-25 years ago were seen by others as taking too much risk.

Second, although most would not list Pakistan as a global services destination, it does host a limited number of service delivery centers supporting end users in North America and Europe. In the past 18 months, we have served two clients whom already had service delivery from Pakistan and are very happy with the level of talent available — but are naturally concerned about the risk profile.

Will more organizations set-up shop in Pakistan? Possibly, but not in significant numbers anytime soon. Might this be slightly accelerated if Pakistan begins to take fighting terrorism more seriously? Hopefully.

A Deeper Dive Analysis of iGATE’s Acquisition of Patni | Sherpas in Blue Shirts

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The IT services industry has been abuzz since iGATE’s January 10, 2011 announcement of its definitive agreement to acquire Patni. And we, along with all those who felt they had at least two cents to share, chimed in with their initial reactions to the announcement (see our January 10, 2011 blog, “On and Off is Finally On…iGATE to Acquire Patni.” )

But to gain deeper dive insights into the acquisition, we tasked our research team to analyze the implications of the acquisition. Here goes:

The acquisition will help iGATE shed the “small provider” moniker and catapult it into the mainstream of the Indian IT service provider landscape. This is particularly important in an environment in which buyers want/need to rationalize their provider portfolio, and a threshold of US$1 billion in revenues is fast becoming table stakes for consideration in large deals. The increased scale, enhanced talent pool, client base, and breadth of capability should enable the combined entity to qualify for larger deals that were previously out of reach. Further, limited client overlap and a broader suite of industry experiences give the combined entity a renewed opportunity to capture additional volumes from existing clients, and the new financial partners (let’s talk Royal Bank of Canada and Apax Partners) could potentially help drive new business.

However, while the acquisition creates a more credible, scaled and potentially hungrier competitor, it does not create a fundamentally differentiated service provider or alter the pecking order in the Indian IT services landscape. Indeed, as depicted in the graphic below, the combined entity retains Patni’s original position behind MphasiS, per revenue reports as of the 12 months ended September  2010. Further, inexperience in large deal pursuits (which will be especially pronounced versus the larger and more sophisticated competition) and the distractions related to the complex integration could be inhibitors in kick-starting growth in the early years.


As it relates to the future of the Tier-2 Indian IT service provider landscape, the iGATE-Patni deal provides a glimpse (see graphic below.) Sustained growth in this segment lies in the ability to create a differentiated market focus that extends beyond the previous generalist approach adopted by most Indian service providers. If the two acquisitions in this segment (Hitachi Consulting acquired Sierra Atlantic on January 4) in just the first ten days of 2011 are anything to go by, we are witnessing the beginning of a consolidation wave that will sweep the Tier-2 IT services landscape in the near future.


For more details and analysis of the iGATE-Patni merger and the Indian IT services market, please see Everest Research Institute’s: “iGATE Acquires Patni, Finally!

On and Off is Finally On…iGATE to Acquire Patni | Sherpas in Blue Shirts

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After more than a year of “will it happen, and who will it be?” speculation, Patni Computers is finally being scooped up…by iGATE Corporation. On January 10, 2011, iGATE announced the signing of a definitive agreement to acquire up to an 83 percent stake in Patni. At a transaction value of US$1.22 billion, it is the largest acquisition in the Indian IT services market.

This acquisition bodes well for iGATE, Patni (which will continue to operate as an independently listed company) and the buyer market, which is increasingly questing for service provider portfolio rationalization, enhanced quality, risk mitigation (post the Satyam crisis) and larger service providers. But one of the biggest hurdles the new company must surmount from the starting line and consistently jump is presentation of competitive differentiation against global majors, Tier-1 and Tier-2 Indian service providers. For insights, please see our complimentary November 2010 report, “Survival of the Differentiated: The New Mantra of Success for Tier-2 Service Providers.”

While we’ll scrutinize this deal in detail in the next several days, its shape, flavor and underlying market and buyer drivers are largely in line with our Patni acquisition analysis, available in our free and downloadable report, “Patni: What if Ownership Changes are Afoot?”, published in December 2009.