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Namita Dahiya

Namita Dahiya is a Senior Analyst at Everest Group, located in our Gurgaon, India office.

Offshore Service Providers Embracing M&A to Regain Market Share from Global Counterparts | Blog

By | Blog, Digital Transformation

Offshore-heritage service providers’ cost arbitrage value proposition served them well in the outsourcing industry’s earlier days. But to gain competitive advantage in the digital age, clients’ expectations over the past several years have evolved to include value-add capabilities, innovation, industry-specific expertise and skill-sets, etc. In turn, offshore service providers increasingly lost market share to global service providers that made heavy inorganic M&A investments in these areas.

Following the global service providers’ lead, many offshore providers took the M&A path to growth. And the results have been astounding. In fact, our Q1 2019 Market Vista report shows that the offshore providers’ revenue grew by 8 percent in 2018, as compared to the global providers’ 2 percent growth.

Offshore heritage SPs increase their wallet share through acquisitions & aggressive pricing

Where have the offshore providers been investing their M&A dollars?

New technological capabilities

Because of clients’ digital-oriented mandate, the majority of offshore providers’ acquisitions have been to obtain new technological capabilities such as cloud, cybersecurity, analytics, and automation. For example, Wipro in 2018 acquired Cooper, a design consultancy firm, for US$8.5 million to expand its design and digital innovation capabilities in North America. And TCS acquired Bridgepoint Capital to expand its capabilities in the financial services and insurance domain, particularly in U.S. retirement services.

Offshore based service provider developments

Start-ups

Due to lack of skills and knowledge about these next-generation digital technologies in the general workforce, offshore service providers are acquiring niche start-ups to:

  • plug gaps in their portfolios
  • quickly enter domains where sizable language and cultural barriers exist
  • improve their agility/flexibility
  • reduce their costs
  • access stronger and better insights
  • improve processes.

In fact, our most recent Market Vista report showed that start-ups accounted for as many as 50 percent of offshore players’ acquisitions in Q4 2018, compared to 42 percent in Q3 2018.

For example, Cognizant acquired Mustache, a creative content agency start-up, to expand its digital content capabilities by leveraging Mustache’s innovative approach to planning, producing, and distributing compelling video content and programming. Infosys acquired Fluido, a Salesforce Cloud consultancy start-up, for US$76 million to help clients in digital transformation and strengthen its position as a Salesforce enterprise cloud service provider.

Talent

Because offshore-heritage service providers’ initial reskill/upskill approach left them far behind global service providers’ inorganic approach, they’ve taken the leap and started acquiring companies to obtain direct access to already-trained talent. For example, Wipro acquired Syfte, a design firm, to strengthen its design and innovation capabilities in Australia and Asia Pacific. Under the agreement, Syfte’s talent will join Designit, a subsidiary of Wipro, to enhance the transformation services offered by Wipro Digital. Similarly, Genpact acquired Barkawi, a supply chain management consultancy, to add talent with consulting and digital technology capabilities in supply chain management and aftermarket services.

To learn more offshore providers’ M&A strategies, key market trends, global locations activity, and service provider activity in Q4 2018, please see our Market VistaTM: Q1 2019 report.

Why Tier-2 and 3 Cities in Poland Should be on your Global Services Radar Screen | Sherpas in Blue Shirts

By | Blog

In the past several years, Poland has become the most prominent global services delivery destination in the European region. But, unlike other countries in which the lion’s share of digital services activity is in tier-1 cities – think India and the Philippines – Poland’s tier-2 and 3 cities have outpaced activity in its tier-1 cities since 2008.

Why? Everest Group research identified two key reasons:

  1. Increasing activity in tier-1 Polish cities, e.g., Krakow and Warsaw, has created intense competition for talent, driving higher attrition/turnover, longer hiring cycles, increased premiums for niche skills and seniority, and faster wage inflation
  2. Increasing maturity of tier-2/3 cities over the past five years has established a critical mass for global services delivery in these cities, leading to a higher degree of comfort in talent capabilities and the ease of scaling up operations in these cities.

Other factors, including less competition for talent, lower salaries and infrastructure costs, better quality of life, stronger government support, and the opportunity to leverage untapped talent pools, have also contributed to tier-2/3 Polish cities’ rise above tier-1 cities in the country.

To understand the full story, Everest Group evaluated multiple aspects of the tier-2 and 3 cities, including relative delivery scale/size, work complexity, extent of digital services delivery, and typical source markets supported.

Here are some of our findings.

Shift in nature of leverage

Historically, tier-2 Polish cities, such as Katowice, Łódź, Poznań, and Tri-city, and those in tier-3, including Bydgoszcz, Opole, Rzeszów, and Szczecin, were leveraged as small spokes to tier-1 city hubs. They were largely meant to accommodate “spill-over” growth, or to host more transactional work. But this is changing rapidly, as more companies, both in captive and outsourced arrangements, are establishing their delivery hubs in these cities.

Largely single functions to multi-functional delivery

While both Global In-house Centers (GICs) and service providers had previously been leveraging the tier 2- and 3 cities largely for IT services delivery, their increased confidence in the breadth of talent has prompted establishment of large, multi-functional centers in these locations.

Digital services CoEs

Most importantly, while where tier-1 cities in other delivery destinations like India and the Philippines account for more than 70 percent of all digital delivery centers, Poland’s tier-2/3 cities are brimming with digital services activity.

Tier 2-3 cities

Of course, any company’s selection of a tier-2 or 3 location in any country depends on its appetite for benefits versus trade-offs, including high cost savings versus low scalability, and early mover advantage versus relatively lower maturity. But Poland’s smaller cities certainly have a compelling digital services delivery proposition.

For a more detailed analysis of the value proposition of Polish tier-2/3 cities, and relative comparisons of these locations with tier-1 cities, please see our recently published report, “Poland Tier-2/3 Cities: Complementing Tier-1 Cities or Carving a Niche for Digital Services?

Is Mexico Losing its Luster as a Nearshore Delivery Location? | Sherpas in Blue Shirts

By | Blog, Onshoring

Over the years, Mexico has become an attractive nearshore delivery location for U.S. enterprises and service providers. But two significant potential challenges may impact its popularity.

NAFTA

To boost economic ties, Mexico, Canada, and the United States entered the North American Free Trade Agreement (NAFTA) in 1993. However, NAFTA critics argue that it has resulted in job losses and suppressed wages in the U.S., and encouraged illegal migration of workers from Mexico into the U.S. The Trump administration is considering withdrawing the U.S. from NAFTA due to ‘protectionist’ measures, i.e., those that are in the interest of U.S. domestic market.

The proposed outsourcing tax/Border Adjustment Tax (BAT)

To further promote and create jobs in the U.S., President Trump has proposed incentivizing companies to make goods domestically by adding a tax – an outsourcing, or border adjustment tax (BAT) – on companies that import goods and services from other countries. He has floated the idea of 20-30 percent BAT on imports.

While the actual impact of impending renegotiations on NAFTA and potential implementation of the BAT on Mexico as a nearshore service delivery location is yet to be seen, Everest Group conducted research to determine the likely short-term effect of these developments on the IT-BP industry in Mexico. Following are snapshot findings from our study.

everestnew1

 

Further, while there are multiple alternative locations in Latin America available to U.S. enterprises, very few offer a significantly better cost-talent proposition than Mexico. Thus, even in the likely scenario of NAFTA revocation, Mexico is not likely to lose its sheen as an attractive nearshore location for IT-BP service delivery for U.S.-based organizations.
Although there are no favorable indicators in the short-term, there have been no knee-jerk reactions from firms leveraging Mexico for service delivery. We believe the country’s medium- to long-term outlook continues to remain positive for IT-BP services delivery.

For more detailed findings, please read our report: “Mexico IT-BP Services Viewpoint.”

Should Your Global Service Delivery Locations Portfolio Include Western Europe? | Sherpas in Blue Shirts

By | Blog, Outsourcing

As enterprises move from an arbitrage-first to a digital-first model to gain business value beyond cost savings, and to lessen the impact of potential immigration-related issues, service delivery from locations that were traditionally considered “onshore” is gaining prominence.

Western Europe* is one region that has gained significant importance as a global/regional delivery geography over the last several years. Indeed, Everest Group’s research on the growth of back- and middle-office services delivery demonstrates a compellingly strong value proposition across all the countries in the region.

 

service delivery

* The Western European region is defined as Austria, Belgium, Denmark, France, Finland, Germany, Greece, Italy, Ireland, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and United Kingdom.

Yet, due to multiple misconceptions about the region, some readers may need to be convinced of its viability as a digital-first delivery location. Thus, here are some fallacy-busting facts from our recently-released report, “Emergence of Western Europe for Centralized Global Service Delivery to Europe”:

  • Myth 1: Western Europe is predominantly a source geography, not a delivery geography
  • Reality 1: Global in-house Center (GIC) setup activity has seen significant growth, with double the number of new setups in 2014-2016 compared to 2011-2013

service delivery

  • Myth 2: Western European cities cannot offer more than 10-20 percent savings
  • Reality 2: Contrary to popular belief, selected locations in Western Europe can offer cost savings up to 30-50 percent over tier-1 locations (e.g., London, Frankfurt, and Paris)
    • Barcelona, Belfast, and Lisbon offer the highest cost savings due to lower salaries and infrastructure costs

 

  • Myth 3: Western Europe is primarily leveraged by Western Europe-based enterprises for service delivery
  • Reality 3: In 2016, U.S-based enterprises established the largest percentage of new GICs in the region

 

service delivery

 

  • Myth 4: The value proposition offered by Western European locations is limited to support of European languages
  • Reality 4: Western Europe’s value proposition extends far beyond language to the availability of skilled talent, stable business/operating environment, cultural affinity, high maturity for certain niche services, and delivery of skill-intensive work. Multiple locations in Western Europe are particularly well suited for complex digital services (e.g., analytics, blockchain, and mobile development.)

Clearly, there are many reasons why Western European cities are playing a strong role in the delivery portfolio of a growing number of organizations that have highly advanced locations strategies.

Of course, there are multiple factors that could potentially alter the landscape of delivery from Western Europe. Issues global services leaders need to carefully consider include Brexit, adoption of digital technologies (e.g., social, mobile, analytics, and cloud), and likely changes driven by the General Data Protection Regulation (GDPR) and the European Central Bank (ECB.)

For a more detailed analysis of the value proposition of Western European cities, and relative comparisons of leading locations, please see our recent report, “Emergence of Western Europe for Centralized Global Service Delivery to Europe.”