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Demand for Next-Gen Services Defining Location Strategies | Blog

November 18, 2019

Regulatory uncertainty, technological disruption, talent challenges, and a host of other issues have all played significant roles in enterprises’ and service providers’ location strategies for global services delivery over the past couple of years.

The deep-dive analysis we conducted on enormous volumes of 2018 data to develop our Global Locations Annual Report 2019 made it clear that five key trends came into play in 2019, and will continue into 2020:

Increased focus on digital and R&D/engineering services
Increase in nearshoring
Slowdown in headcount growth
Increase in onshoring by service providers
Growth in emerging locations.

Here’s a quick look at each of these trends.

Digital and R&D/engineering services continue to dominate

Enterprise demand for digital services and the associated R&D/engineering services compelled most global service providers to set up innovation centers and COEs to keep up with the changes in the digital landscape. And there was a significant rise in the number of R&D/engineering and digital service delivery centers – especially in APAC and nearshore Europe – as providers vie to develop data-driven, intelligent, and robust systems using automation, cloud, and AI-based capabilities.

Global services delivery is increasingly being characterized by nearshoring

In a move to rebalance and optimize their existing locations portfolio and comply with data protection mandates, both enterprises and service providers are marginally shifting from offshore to nearshore locations. Nearshore Europe experienced the greatest increase in headcount and new center setups in 2018 due to the availability of complex skills, proximity to customers in Western Europe, increased regulatory oversight, and demand for multi-lingual support.

Poland, Ireland, and Scotland will continue to dominate the global services landscape in nearshore Europe, followed by Ukraine, the Czech Republic, and Romania.

Global services headcount continues to grow, but modestly

Increasing use of automation for low complexity, high volume services is having a considerable impact on the talent landscape. While growth in digital services will lead to newer job and skill profiles, the headcount required for newer digital jobs will be significantly lower than that required for low complexity jobs, and the growth will be slower due to technological advances and the shortage of talent for new-age technologies.

Service providers continue to grow in onshore geographies

Leading service providers have been continuously growing their presence in onshore geographies. This is in large part due to increasingly stringent data protection laws and mounting pressure from clients to have local delivery centers. The United States and continental Europe continue to remain the destination of choice for setup activity across onshore locations. The lion’s share of the work delivered from these onshore centers is in IT services.

We expect the United States to continue to grow in the wake of uncertainty around visa regulations and increased pressure from clients to have local delivery centers for ease of coordination, better alignment/training, and promoting customer intimacy. And, we also expect growth in digital services to push providers to continue to expand in other onshore locations – such as Belgium and Switzerland – due to availability of skilled talent and the ability for extensive collaboration with Europe-based clients.

Growth in emerging locations for global services delivery

While use of the traditional delivery locations continues to grow, other locations are picking up steam, including:

Jamaica continues to grow in setups for voice services
Ghana and Kenya are being leveraged to support the East and West Africa regions
Israel is growing significantly for delivery of R&D/engineering and high-end IT services
Lithuania is also growing as a destination for delivery of IT (largely digital) and R&D/engineering services.

To learn more about the dynamics shaping the global services locations landscape, please read our recently published report, “Global Locations Annual Report 2019: Demand for Next-Gen Services Defining Locations Strategies.” We developed the report based on deep-dive discussions with the regional investment promotion bodies, leading shared services centers, service providers, recruitment agencies, and other market participants.

Middle East and Africa: An Emerging Frontier for Global Services | Blog

November 15, 2019

Numerous locations in the Middle East and Africa (MEA) are emerging as upcoming destinations for global services delivery. Several multinational companies have set up their centers in the MEA region to deliver services to Europe and North America, and tech giants including Apple, Facebook, Google, Microsoft, and Uber are leveraging it for global services delivery.

What’s the appeal?

Availability and quality of talent pool

There’s been a consistent increase in the pool of entry-level talent and experienced professionals with domain-specific skills. Egypt is the leader in the region; due to various government measures to improve education quality and a significant rise in contact center operations in multiple languages, including English, French, and Arabic, the country posted an enormous 35 percent increase in the headcount for global services exports in 2018.

There’s also been a considerable rise in R&D centers and Centers of Excellence (COEs), where talented professionals with relevant and often advanced technological skill sets work to develop state-of-the-art solutions.

Less competition for talent

Because there’s a relatively large population base, limited jobs, and high unemployment rates throughout much of the region – for example, South Africa is at 27 percent and Nigeria is at 23 percent – organizations can procure talent easily and train the workers as per their specific business needs.

Cost arbitrage

Some of the countries in the MEA region offer highly attractive cost arbitrage compared to source geographies. For example, Egypt, Nigeria, and Kenya come in at 70-80 percent less (although Nigeria and Kenya are primarily leveraged to serve domestic markets), and South Africa (for non-voice F&A) and Morocco (for voice-based services) offer cost savings of 40-60 percent over source geographies.

Proximity to Europe

Proximity with various European countries is a big selling point of many African locations. For example, because Morocco offers both cultural and geographical proximity to France and Spain, companies are increasingly leveraging it for French and Spanish voice-based business process services. Because the English language was introduced by British colonists, and because there’s shared cultural affinity, South Africa is becoming a popular destination for voice-based services delivery for U.K. companies. Additionally, because most African countries share similar time zones with Europe, delivery and client teams are able to collaborate in real time, thereby, optimizing work in both the geographies.

The leading locations in the MEA region

The map below highlights key locations leveraged by global enterprises and service providers for global services delivery. While the emerging locations house 20,000 to 100,000 FTEs across global services, nascent locations employ less than 20,000 FTEs in this space.

A snapshot view of the top five global services delivery locations in MEA

Egypt: Offers the most attractive cost-talent proposition, with strong multilingual skills, especially in English, French, and Arabic languages. However, relatively higher operating environment risk with concerns around high inflation rates and repressive government policies
Morocco: Primarily leveraged for French and Arabic language voice-based BPS and IT services. Morocco offers moderate-high competitive intensity and strong government support (especially for the IT-BPS sector through financial, tax, and customs advantages)
South Africa: Characterized with large, high-quality talent pools and the highest maturity across functions, South Africa houses multiple organizations delivering voice and non-voice BPS, including complex processes. It has a stable geopolitical environment, well-developed infrastructure, high ease of doing business, strong government incentives for the IT-BPS sector, and limited safety and security concerns
Mauritius: It is leveraged for IT (both ADM and infrastructure), non-voice business process services, and R&D services to serve French and Canadian markets. It offers a favorable business environment, with government incentives for the IT-BPS sector, such as tax-free dividends and foreign tax credits
Israel: Leveraged for delivery of advanced IT (including IoT, ML, and AI) and R&D services, primarily to support the U.S. and Europe. Israel offers a highly favorable business environment with lower tax rates and conducive government incentives, such as low corporate tax and grants up to 20 percent of the amount of the investment.

For a detailed view of each of these locations, please read our latest Location Spotlight reports. Each report analyzes the individual country’s global sourcing profile, key opportunities, drivers, challenges, talent and skills availability, financial attractiveness, and environment risks.

Why Pharma Companies View their Indian Shared Services Centers as Growth Partners |Blog

October 8, 2019

India is clearly becoming the “it” destination for pharmaceutical companies’ shared services centers (SSC) – or Global In-House Center (GIC) – organizations. Why do we say this? Because global pharmas with headquarters in the U.S. and Europe employ more than 11,000 FTEs employees in their India-based shared services centers to deliver not only table stakes transactional finance and HR services but also highly complex processes across all stages of drug development, including drug R&D and clinical trials.

What’s India’s appeal? There are four factors.

Established/Mature Location for Global Pharma Services Delivery

India is a time-tested, proven GIC destination for a wide range of industries. Many of the world’s leading pharmaceutical companies started delivering their global services support operations from India back in early 1990s. Now, pharma majors like AstraZeneca, Eli Lilly, and Novartis are delivering complex, judgment-intensive services such as product R&D, biostatistics, and clinical trials site management from their India GICs. Hyderabad, Chennai, and Bangalore are the preferred locations, housing more than 80 percent of the pharmaceutical GIC talent.

Skilled Talent Pool

Talent availability, at scale, is one of India’s strongest value propositions. In recent years, many pharma companies have been able to successfully scale their delivery teams supporting diverse functions such as R&D, commercials, IT, and finance. For example, a leading pharma GIC houses 2,000+ resources providing IT services for various pharma functions. And multiple other pharma SSCs have scaled teams (400+ resources) that support R&D services, and dedicated resource groups comprised of doctors, PhDs, and biostatisticians, for complex drug R&D processes like development of computational solutions for analyzing clinical trials.

Opportunities for Cross-functional Collaboration

India’s availability of diverse talent profiles at scale allows India-based pharma SSCs to support multiple functions. And because many of them house IT resources with R&D and commercial business teams, they have multiple opportunities to collaborate on and insource IT work for drug R&D (e.g., to build IT platforms for drug development and IT services for lab support), and commercial operations (e.g., IT services for finance.) The value of this collaboration? Tighter integration of functions, better understanding of business requirements, and faster execution.

Mature Market for Digital Services Delivery

Leading India-based pharma GICs are working on digital initiatives including analytics and automation, and some are serving as global automation CoEs for their parent enterprises. Many are developing analytical tools for marketing & sales operations, competitive intelligence, and incentive planning. They are also investing heavily in automating less complex and high-volume transactional processes such as expense management, purchase order creation, offer letter generation, résumé screening, and management reporting, and deploying RPA bots to read files, extract data, and report adverse events. As part of the broader digital agenda, some centers have also started exploring the uses of artificial intelligence/machine learning to recruit patients and select sites for clinical trials, and for channel sequencing and optimization in their enterprise’s sales & marketing function.

Going forward, pharma companies not only expect their India SSCs to grow in scale and expand the scope of their process delivery, but also play a significant role in their digital transformation journeys by leading initiatives across all stages of the product R&D lifecycle. To satisfy these expectations, the GICs need to build deep domain capabilities and acquire or train talent to deliver increasingly complex, higher up the value chain services and next-generation digital initiatives.

To learn more about why pharma companies consider India their preferred service delivery destination, please read our recently published report, “Healthcare and Life Sciences – GICs in India Fast-tracking Enterprises’ Digital Agenda,” or connect directly with the report authors Anish Agarwal, Bharath M, and Rajeshwaran Pagalam.

HCL Acquires IBM Products – Desperation or Aspiration? | Sherpas in Blue Shirts

December 10, 2018

On December 6, 2018, HCL announced it had acquired seven IBM products across security, commerce, and marketing for a record US$1.8 billion. To provide a financial context to this acquisition: HCL, India’s third largest IT services provider, invested about 22 percent of its annual revenue to bolster its products and platforms portfolio – what it refers to as its Mode 3 portfolio – which barely contributes to 10 percent of its annual revenue.

Demystifying the Why

What strategic outcomes could HCL potentially derive from this deal?

Cross-sell opportunities: Access to the more than 5,000 enterprises currently using the acquired IBM products
Superior value proposition around as-a-service offerings: Integration of these products with HCL’s ADM, infrastructure, and digital services
Top-line growth due to recurring revenue streams and expanded EBIDTA margins
Fewer dependencies on external vendors: Improved capabilities to bundle internal IP with services can enable HCL to have greater control over outcomes, thereby enhancing its ability to deliver value at speed

Sounds good…Right?

At first glance, the acquisition may seem to be a strategic fit for HCL. But when we dug deeper, we observed that while some of the IP plugs gaps in HCL’s portfolio, others don’t necessarily enhance the company’s overall capabilities.

This analysis raises meaningful questions that indicate there are potential potholes that challenge its success:

Confusion around strategic choices: The product investments point to a strong proclivity towards IT modernization, rather than digital transformation. This acquisition of on-premise products comes at a time when inorganic investments by peers’ (recent examples include Infosys’ acquisition of Fluido and Cognizant’s acquisition of SaaSFocus) and enterprises’ preference are geared towards cloud-based products
Capability to drive innovation at speed on the tool stack: To address the digital needs of new and existing clients, as well as to deliver on the promise of as-a-service offerings, HCL needs to repurpose the products and make significant investments in modernizing legacy IP
Financial momentum sustenance: With an increasing number of clients moving away from on-premise environments to cloud, it remains to be seen if HCL can sustain the US$650 million annual revenue projection from these products
Customer apprehensions: Customers that have bundled these products as part of large outsourcing contracts built on the foundation of their relationships with IBM will likely be apprehensive about the products’ strategic direction, ongoing management, and integration challenges as their IT environments evolve
The illusion of cross-sell: It remains to be seen if HCL can succeed in cross-selling digital services for these legacy products, especially in the beginning of its relationship with the 5,000+ clients currently using the in-scope IBM products.

The Way Forward

The acquisition definitely is a bold move by HCL, which may seem meaningful from an overall financial investment and ROI perspective. However, the subdued investor confidence reflects poor market sentiment, at least at the start. Although this could be considered a short-term consequence, HCL’s investments in these legacy products is in stark contrast to the way the rest of industry is moving forward.

On the day of the acquisition, HCL’s stock price fell 7.8 percent, signaling negative market sentiments and thumbs down from analysts. In contrast, the market behaved differently in response to acquisitions by HCL’s peers in the recent past.

To prove the market wrong, HCL needs to focus its efforts on developing and innovating on top of these products; developing synergies with its ADM, infrastructure, and digital services; alleviating client apprehensions; and providing a well-defined roadmap on how it plans to sustain momentum leveraging these products over the long term.

What is your take on HCL’s acquisition of these IBM products? We would love to hear from you at [email protected] and [email protected].

The Big Four Accounting And Auditing Firms Are Becoming Challengers In Digital Transformation Services | Sherpas in Blue Shirts

November 14, 2018

The pivot of third-party services firms to digital is disrupting the entire services industry. Times of disruption always give rise to new competitors, and challengers among service providers can shift share. This is clearly happening now in the demand for digital transformation services. The Big 4 accounting and auditing firms – Deloitte E&Y, KPMG and PwC – are emerging as formidable challengers to Accenture, IBM and the Indian service providers. Here’s what’s happening and what it means for competitors and enterprise customers.

Trends And Disruptions In 2019 For Third-Party Services | Sherpas in Blue Shirts

November 8, 2018

I believe we’ll see significant changes in the third-party services industry in 2019. The coming year will bring some major movements and trends, along with disruptions and bumpy roads.

Bumpy Roads in Digital Transformation

This year has been a move from digital transformation pilots to programs, which led to a full-on wave of IT modernization to support transforming to digital operating models. The question we must examine going forward is whether this wave will survive a recession.

It seems likely that the global economy will slow and even the US economy will come down off its heavy heights. If this happens and the economy decelerates, less capital and less discretionary funding will be available to fund companies’ modernization goals. If this happens – and the question is not if it will happen but when – I think it’s likely that it will start to happen in 2019.

Services Prediction: More Mega Deals Coming | Sherpas in Blue Shirts

October 24, 2018

An interesting trend is developing in the services industry, reversing the trend we’ve seen for the past five years. I predict that this year, and for the next few years, we will see a modest rise in mega deals – deals with $500,000,000 or more in Total Contract Value (TCV). Where are those deals coming from?

At Everest Group, we watch services transactions closely. Over the last five years, the industry experienced a big move away from mega deals, preferring smaller and smaller transactions. This was then exacerbated by digital rotation where customers were interested in digital pilots – which are small deals. But this year we note a renewal of interest – in some specific situations – for large deals.

Here’s my take on three forces driving mega deals now.

Force #1: IP-Plus-Services Model

One force driving mega deals is where the service provider wraps services around the intellectual property (IP) platform the provider owns. TCS’s book of business of large deals is a good example of this. TCS has an IP platform around insurance and mega deals tied to that platform. The $2 billion-plus TCS transaction with Transamerica earlier this year is a good example. What makes the deal so large? The customer is modernizing its IT by jettisoning its legacy technology and transferring it to TCS for modernization through the TCS platform.

As the services industry pivots to digital models, IP ownership plays an increasingly important role. Automating work diminishes the importance of labor arbitrage, and the profit pool reconfigures around IP owners. The nature of the IP-plus-services model allows mega deals to happen. I expect more of this kind of deal to happen at TCS as well as at providers like Cognizant, which has a similar platform in the pharmaceutical healthcare space with TriZetto. Both TCS and Cognizant are using their investments in IP platforms to differentiate their offerings and capture large contracts.

Where service providers own important IP platforms, I see those as the basis for some very large deals.

Force #2: Leveraging the Balance Sheet

Another source for large deals is providers leveraging their balance sheet to finance a customer’s large-scale IT modernization. HCL and Wipro are good examples of providers using this approach to create very large deals. They use their balance sheets to fund expensive IT modernization deals, including taking over a customer’s legacy assets. This strategy accelerates a service provider’s growth, and I expect to see more mega deals using this strategy.

Force #3: Digital Transformation Programs

This year, we’ve seen digital transformation move out of the pilot phase into full-blown transformation programs. The amount of money customers spend on these transformations is staggering, often hundreds of millions of dollars. The large availability of enterprise funding for transformation is likely to encourage larger deals.

The net result of these three forces? I believe we will see a modest increase in mega deals, and in certain areas, larger deals for the remainder of this year and next year.

I’m not claiming the entire services market is moving to mega deals. In fact, two size-diminishing secular trends that were well underway continue: (1) decomposing the legacy, multi-tower deals to single towers and bidding those out (2) the move from managed services to systems integration and digital work. These trends will continue to create a fabric of smaller transactions.

However, some large deals are emerging. I believe the three forces I described are working against the well-established trends for smaller deals we saw during the last five years.

How To Purchase Services For Digital Transformation | Sherpas in Blue Shirts

October 22, 2018

Disruptive technologies enable dramatic new ways of doing work and delivering value to customers. Understandably, companies are rushing to implement disruptive technologies to change their business so that they can better serve their customers, employees, partners with new value and lower their total cost of ownership. Achieving this goal necessitates assembling a digital platform. However, few companies have the resources to build and maintain a platform alone, so they need to contract with third-party service providers. Here’s the problem: the classic procurement approach for third-party services doesn’t work with digital transformation.

How to Drive Alignment with Your Service Provider in Implementing Digital Technologies | Sherpas in Blue Shirts

September 28, 2018

Companies are on the horns of a dilemma. They signed long-term, managed service contracts for IT or business processes, which took advantage of the savings from labor arbitrage. But now they find that there is significant potential to leverage the new suite of digital technologies that promise improved performance and lower cost. The problem is that that their incumbent service providers often actively resist implementing these technologies, using delaying and obviation tactics, refusing to pass on the savings and/or demanding additional work or other concessions in return for complying. Now that I’ve identified this major issue that many companies face today, let’s look at how they handle this non-alignment situation.

The Evolution of Contracting Models in Testing Services | Sherpas in Blue Shirts

September 20, 2018

A large enterprise client recently asked us to confirm whether its belief that the majority of organizations have moved to output- and outcome-based contracting models for testing services was true.

What’s the Reality vs. this Perception?

Our analysis of deals in our extensive database over the last 18 months showed that more than 75 percent of buyers are still contracting for testing services on a fixed price basis. Of those, nearly 50 percent are managed services contracts, where performance is linked to key performance indicators (KPIs.) The other 50 percent are a combination of fixed price and Time and Materials (T&M) contracts. In these types of arrangements, the part of the contract where the scope is clear and well defined is fixed price, and the T&M is for the part of the contract where the requirements are unclear, like testing support during the UAT phase, for change requests, etc.

About 10-15 percent of the contracts in our set of deals from the last 18 months are purely T&M contracts where clients ask for specific testing resources.

Only the final remaining 10-15 percent of the contracts are based on output- and outcome- based models.

Deeper Look at Output- and Outcome-Based Contracting Models

While the current percentage of output- and outcome-based models is small – the model is well-suited for engagements where the majority of work is transactional in nature, the client wants pricing clarity and guarantees, and the service provider has no explicit motivation to improve performance beyond service levels.

In fact, we believe that the transition to these as-a-service models is both critical and inevitable for enterprises with engagements matching these criteria – which exceed 15 percent of our database. Why?

They ensure enterprises pay for deliverables, not for time
They are more closely tied to enterprises’ business activities, as they provide flexibility and visibility into the expected spend
They allow enterprises to remain engaged at a strategic level, without worrying about day-to-day responsibilities
Since the pricing is delinked from the underlying number of FTEs, process Improvements are driven by the service provider’s motivation to reduce internal costs and improve margins.

At the same time, output- and outcome-based models pose different types of challenges than other types of contracting options, and enterprises must be prepared to address them to achieve success. For example:

Due to their fairly complex structure, these contracting models require sophisticated governance and strong due diligence
They are not easily benchmarked, because to ensure an apples-to-apples comparison, the benchmarking exercise needs to normalize for all the underlying environment characteristics
In multi-vendor environments where there are more dependencies, moving to output- or outcome-based models may increase costs as providers bake the higher risk into their fees.

In our view, most enterprises going down the output- and outcome-based model path will be best served by phasing in the adoption. Doing so will not only help them reduce risks, but also enable them to appropriately update their systems to process output-based transactions, create and put in place sufficient governance mechanisms for the new contracting regime, etc.

Have you embraced an outcome- or output-based contracting model for your testing services? Are you considering it? Please share your experiences with us at [email protected].

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Category: Outsourcing