Gargi Verma, Author at Everest Group

The Dichotomy of Current and Future Offshore/Nearshore Delivery Locations | Sherpas in Blue Shirts

By | Blog, Onshoring

An interesting offshore/nearshore locations strategy dichotomy is emerging for today’s major third-party service providers and enterprise firms, as well as their GICs. On one hand, they are continuing to set up delivery centers in new and unexplored locations due to increasing competition, business continuity planning, and risk diversification. On the other hand, the pressure of new disruptive technologies, changing consumer demands, and need to maintain points of parity with competitors is pushing them to consolidate their footprint in the top 10 locations.

Growing Oligopoly of Offshore/Nearshore Locations Driven by the “Digital Winds of Change”

 

Offshore, NearShore

Top-10 offshore/nearshore locations include – India, Poland, Republic of Ireland, the Philippines, Costa Rica, Singapore, Romania, Malaysia, Mexico, and China

In the past few quarters, new center setups in the top-10 locations have jumped by ~10 percent, from 60 percent in 2015 to 70 percent in 2016. The key driver of this change has been availability of talent; only selective locations currently have the capability to support complex digital services. Thus, both external providers and GICs are leveraging these locations for digital services centers and setting up relevant centers of excellence. While several other non-top-10 locations are also investing in building digital talent, they are still not considered a viable option for digital delivery.

  • The major gainers from this shift have been India, Poland, Singapore, the Republic of Ireland, Romania, and Costa Rica. Analytics and cloud are the leading digital services segments in these offshore locations, primarily core software-based analytics. Both types of providers are also building centers in these locations for mobility, social, IoT, and cyber security.
  • The major losers from this shift towards digital have been China and Brazil, given providers’ caution around language constraints and political uncertainty, respectively.

Going Forward, Concentration and Diversification

While most firms are investing in the emerging technologies/digital space, they are still in the nascent stages of building capability. As they mature, they will start diversifying and distinctively leveraging different locations for supporting elements of digital, thus driving a uniform distribution amongst top-10 locations in the next three to six years.

Following are highlights of our research on the future of digital services delivery destinations:

  • India and Singapore will be large scale offshore hubs. Analytics, cloud, and mobility will continue to hold strong, while other technologies, (e.g., IoT, cybersecurity, and blockchain,) will, ultimately, be broadly and deeply supported
  • Nearshore locations such as Ireland, Poland, Mexico, and Costa Rica will support real-time innovation and product development, and provide multilingual service delivery for social media and mobility services
  • Offshore locations such as Tel Aviv, Cairo, and the Baltic states are currently the ”dark horses” in the race towards the top-10, and will gain momentum in the future. Look for them to deliver regional content contextualization, especially for mobility and social and interactive segments. Some of them will deliver digital technology R&D as well.

To learn how locations activity spanned in 2016, please refer to Everest Group’s report titled Market Vista™: 2016 Year in Review: Global Services Industry Facing “Winds of Change.”

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

By | Blog, Outsourcing

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.”

The Curious Case of Currency Trends and Cost Competitiveness | Sherpas in Blue Shirts

By | Blog

While cost arbitrage for global services delivery is impacted by numerous factors, e.g., wage and rental cost inflation, currency fluctuations are often the ignored wild card.

Most currencies have varied significantly in the past few years (see the graphic below). For example, in Asia-Pacific, the Indian rupee has depreciated considerably compared to the U.S. dollar, with an average yearly decline of 5.4 percent in the last three years. On the other hand, the Philippine peso has appreciated substantially against the dollar, recently reaching a four-year high. The currencies from major outsourcing locations in Latin America and Europe have also been volatile in recent months.

Currency Trends

While one would have expected the large currency variations to have a big impact on delivery costs, a closer analysis reveals that the relative cost rankings of locations in 2013 have remained nearly the same as in 2010 (see the graphic below). This counter-intuitive result is because the currencies in most global services delivery destinations have depreciated over the last few years. In addition, all these locations have experienced moderate-to-high wage inflation, thus having a similar net impact on cost across locations.

Cost Rankings

Further, the interplay of wage inflation and exchange rates is leading to interesting trends in absolute value of operating costs among locations. Let’s look at two extreme examples to understand this phenomenon:

  • The cost differential for customer service operations between Argentina and Colombia has decreased given the interplay of wage inflation and exchange rates resulting in comparable rankings (see the graphic above)
  • India and the Philippines are competing locations for most transactional processes. While the costs for English voice services in these two countries were quite similar in 2010, costs in the Philippines are now 18-20 percent higher than in India (see the graphic below). This significant cost differential was driven by a combination of moderate wage inflation (10-15 percent per year) and the appreciation of the peso.

Operating Cost Gap

It is important to note that these cost changes among competing locations for similar type of work has not resulted in changes in work distribution. For example, India has not gained greater share of contact center voice work relative to the Philippines. This is because while cost is an important factor, location selection and work placement decisions are dependent on several other factors, e.g., talent availability and scalability, niche skills, risk considerations, and the organization’s existing footprint. Short-term currency changes may result in companies optimizing some work among locations in their portfolio, but this alone is not likely to significantly change the role and standing of locations in their portfolio.

Leverage Points in Global Services for India, China, and Philippines | Sherpas in Blue Shirts

By | Blog

India, China, and Philippines are often lumped together in regard to their roles in global services delivery. The reasons are not hard to fathom – these three geographies are consistently featured as leading locations for global services delivery (both new centers and expansions). In addition, their common availability of large talent pools coupled with low-cost operations make them highly relevant in global services delivery discussions.

However, a deeper analysis of the source markets served by these countries reveals some country-specific findings that are relevant for incumbents as well as new players with plans for these geographies. The chart below provides the distribution of IT-BPO services revenue in these countries in terms of source geographies served.

IT BPO Services Revenue

More than four-fifths of the global services delivery in China is focused on the domestic market with a limited scale of global delivery to North America and Europe. The availability of an English-speaking workforce continues to be a concern for global organizations as are perceptions related to IP / data protection regulations. There is a distinct value proposition for China to serve  its regional markets (e.g., Japan and South Korea) given factors such as time zone similarity, cultural affinity, and language availability.

In contrast, the Philippines is almost exclusively leveraged to serve the United States. Voice BPO has been the traditional growth engine for the Philippines, given cultural affinity and a large English-speaking workforce. However, of late, the Philippines market has also seen traction in BPO functions (particularly industry-specific non-voice BPO) and IT services, indicating diversification of service portfolio beyond voice.

And lastly, India has a distinctive value proposition around serving both the domestic and global markets. Leading players have multi-function scaled operations for global delivery to North America and Europe. In addition, India also sees large demand from the domestic market, particularly for technology and voice operation, and players typically leverage multiple cities within the country (including tier-2/3 cities) for serving this demand. However, unlike China, a very small proportion of service delivery from India is targeted towards the Asia Pacific market primarily due to the constraints around East Asian languages.

Global adopters are increasingly accepting a multi-location approach towards building their portfolios. As they think about their location strategy for Asia, they would be wise to consider roles for India, China, and Philippines based on their unique factors related to source markets and functions for delivery.