Category: Outsourcing

What the Global Services Industry Can Learn from 17th Century Firefighters | Sherpas in Blue Shirts

A couple of weeks ago, several of us from Everest Group hosted a roundtable for sourcing executives in the U.K. The event was held in London’s Moorgate area – Moorgate is the name of the northernmost gate in the old city wall, and everything to the south and west was destroyed by the 17th century Great Fire of London – so I decided to orient my discussion on benchmarking by drawing parallels between the fire and digital disruption in the global services industry.

For context, the Great Fire started shortly after midnight on 2 September 1666 in a bakery on Pudding Lane. Over the next three days, the fire gutted the medieval City of London inside the old Roman city wall, and consumed 13,200 houses, 87 parish churches, St. Paul’s cathedral, and most of the buildings of the City authorities.

As we’re just several weeks shy of the 351st anniversary of the Great Fire, let’s all have some fun by casting today’s enterprises and two different types of outsourcing service providers as the entities trying to find a solution to stop the fire from spreading.

service providers

 

First, as there was no city-run fire brigade, the householders – read, the enterprises – attempted to put out the fire themselves, as it engulfed their own buildings. But their two capabilities, dousing buildings with water despite the inadequacies of the pipe network and pulling burning material from structures with bill hooks, were reactive and futile. Theirs was a sub-optimal process.

With the fire quickly spreading, the city authorities realized that a more coordinated approach was required. The city militia – read, service providers that deliver “traditional” services – was called in, and concentrated its efforts on pulling down houses that stood in the fire’s path. While this was an optimized process, it only minimally delayed the spread of the fire, and certainly was not popular with the householders/enterprises.

Finally, the garrison at the Tower of London – read, a provider that offers transformative, digitally-based solutions – offered a solution that was conceptually challenging: the creation of effective firebreaks by using gunpowder to demolish entire streets. This genuinely transformed process rescued the city by leveraging a highly disruptive technology (gunpowder).

The immediate outcome was prevention of further fire spread. Problem solved! But the solution also resulted in two unforeseen, and highly beneficial outcomes: the end of the bubonic plague outbreak that had ravaged London since 1665, and, because of the huge anticipated cost of rebuilding the city, a financial imperative to end the Anglo-Dutch war. The eradication of disease meant that London was immediately a safer place to live, so both economic and intellectual capital returned to the city. Peace with Holland created conditions for trade to thrive, insurance against risk took off (Lloyds appeared as an insurer just 22 years later in 1688,) and London’s emergence as a global city began…extraordinary value-add.

How does this connect with service providers today?

The moral to this entertaining (and historical fact-filled) exercise? Today’s enterprises are facing multiple, unprecedented forces. In order the stop the spread of the fire – or gain and maintain a competitive foothold – they likely need to partner with  service providers that embrace innovative, disruptive, digital solutions.

Enterprises can always insist that service providers find better ways to prevent the spread of fire, and to optimize processes by taking a rounded, contextualized approach to reviewing the detail of an existing arrangement. In our experience, this can account for value improvements of between 18 and 24 percent of the total cost. But by insisting that service providers themselves start thinking innovatively and imaginatively, that improvement can often be doubled. While some of the consequences will be unintended, many of them will deliver benefit far beyond their intention.

 

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

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.”

Signs of Structure in a Disordered Global Services World? | Sherpas in Blue Shirts

The global services market is in upheaval, and disorder seems to be the new world order. Geopolitical developments, macroeconomic pressures, and unprecedented pace of changes in technology have resulted in huge disruptions to the usual ways of doing business. However, despite the turmoil, the global services market continues to grow, albeit at a much slower pace compared to previous years.

eg5

When developing our Global Locations Annual Report 2017, Everest Group spent considerable time and effort analyzing the underlying data to determine if there are some signs of structure amidst the disorder. Here are some patterns and trends visible from our analysis:

Pervasive rotation of delivery capability toward digital

There has been significant increase in both number and share of new centers focusing on delivery of digital services. Between 2013 and 2016, the number of such centers grew by ~177 percent.

  • Regions: Most of this growth was concentrated in Asia Pacific and nearshore Europe
  • Segments: Cloud, Internet of Things, and Big Data witnessed the highest adoption rates
  • Sourcing model: While the lion’s share of the growth was with the in-house model, service providers also reoriented their delivery portfolios

Greater leverage of nearshore locations

Both service providers and global in-house centers are growing faster in nearshore locations, such as central and eastern Europe, Latin America, and the Caribbean, compared to traditionally offshore locations (such as Asia Pacific.) This is driven by multiple factors, most prominently the drive towards digitalization and the different talent demands this imposes. The chart below shows the increasing share of nearshore regions in new delivery center setups:

eg4

Complementary growth in onshore locations

There has been a rapid surge in large enterprises’ and service providers’ service delivery footprint in locations traditionally considered onshore. While firms either retained or reduced the pace of growth in offshore/nearshore locations, they ramped up presence significantly in the United States and continental Europe (see the following chart for new onshore delivery center setups of top-20 IT-BPO service providers.)

eg31  20 leading service providers across IT and BPS that Everest Group uses as “Index” providers to gauge market trends

This is largely driven by enterprises’ desire to deliver complex services coupled with the advantages of customer intimacy. However, for many providers, this is in anticipation of strict work visa issuance guidelines which may make it imperative for them to have a foothold in the onshore market for hiring talent

While there’s some “method to the madness” in these pervasive trends, there are many operational risks that are likely to add to the disorder. These include:

  • Increased safety and security risks (terrorism and border issues) in Indonesia, Malaysia, and Thailand, and high crime rates in Guatemala and Jamaica
  • Continuing conflict between Russia and Ukraine
  • Frequent changes in political leadership in Egypt
  • Macroeconomic instability in Brazil and Argentina.

For more such trends and analyses on the value propositions of different locations through Everest Group’s MAP MatrixTM, which will help you frame your global services location strategy, please refer to our report, “Global Locations Annual Report 2017: Signs of Structure in a Disordered World.”

The Wide-Ranging Impacts of a Single Payer Healthcare System | Sherpas in Blue Shirts

On June 1, 2017, the California state senate passed the “Healthy California Act (HCA.)” The bill (SB 562), which is now in the state assembly for further action, aims to replace all private/government insurance plans in the state with a single, government-run insurance plan.

There are numerous reasons the bill will likely not pass. For example, the California state government would need to spend US$400 billion per year (more than twice the current spend) to fund the proposals in the bill, in turn requiring a massive increase in taxes, including a 15 percent payroll tax increase (source: California Senate Appropriations Committee). There’s limited political support for the bill, even among Democrats. There’s also minimal popular support, per a Pew Research Center poll, which concluded that only 30 percent of California residents prefer having the government be the sole payer. Previous similar attempts at a single, state-run payer system have failed due to the expense involved.

On the other hand, there are voices of support for a single payer system, including Bernie Sanders, the longest serving independent in U.S. congressional history, and Mark Bertolini, Aetna’s CEO, who in May 2017 asked the nation to ponder such an arrangement.

If a single payer system were ever implemented, sweeping changes would impact multiple parties.

How would a single payer system look if it were ever implemented?

Healthcare Payers:

  • If the government was the sole provider of health insurance, commercial payers would get absorbed into the government-run business
  • If the government expanded Medicare coverage to all citizens, commercial payers would die out due to strong competition from government plans
  • If the government sublet to a single commercial payer to handle the insurance market, there would be large-scale consolidation in the payer market

While there are many ways in which this could play out, a move to a single payer system would in most cases be a bane for the payers.

Healthcare Providers:

  • A commercial payer-controlled single payer system would severely undermine providers’ negotiating power. However, a government-controlled single payer system would give them some negotiating leverage
  • They would experience significantly reduced administration costs, as everything would be sponsored by the single payer

Thus, healthcare providers would experience positives as well as negatives in a single payer system.

Outsourcing Service Providers:

A single payer system would bring many opportunities to outsourcing service providers. For example:

  • Payer consolidation would require third-party support across system integration, consulting, process expertise, BPO, and many other areas
  • A government-run consolidation would lead to new areas of investments, similar to the Medicaid Management Information System (MMIS) that the states currently run
  • Integration of everything, including clinical data, under one umbrella payer would enable service providers to develop much more powerful analytics and insights

Single payer system’s governmental requirement for service providers

Of course, not all would be rosy. As a single payer system would require service providers to work with the government instead of commercial entities, they would likely face slower processing, a smaller appetite for innovation, and bureaucratic red tape. Additionally, payer consolidation would lead to outsourcing industry consolidation, likely putting some service providers out of business.

We don’t mean to spook outsourcing service providers with our views. Nor are we encouraging them to start investing in expanding their offerings. But we are recommending they keep an eye on the progress of the HCA and other similar acts around the country. Doing so might just save them from the same fate Nokia suffered at the hands of Google and Apple.

Capital Markets BPO: Provider Selection Pricing Considerations | Sherpas in Blue Shirts

Capital markets BPO (Business Process Outsourcing) is one of the fastest growing industry-specific verticals within the BFSI segment, with a market size of over $2 billion in 2016. Investment banking is the largest line of business within the capital markets BPO. Asset management, custody and fund administration, and brokerage are the other key lines of business in this space.

Enterprises typically look to partner with third-party pureplay service providers such as Cognizant, EXL, Genpact, Infosys, and TCS to remain competitive in the marketplace, and simultaneously manage their regulatory, risk, and cost concerns. But the BPO majors are facing stiff competition from specialist capital markets BPO providers such as Avaloq, eClerx, and Xchanging, which are more focused and have deeper domain expertise.

Against this backdrop, what pricing considerations should enterprises take into account when selecting a specialist or a pureplay Business Process Outsourcing provider?

What to consider when selecting a Business Process Outsourcing provider

  • Specialists come at a premium: Specialist providers typically charge a premium price. The premium is nominal for low complexity processes such as static and dynamic data management, client onboarding, low value reconciliations, trade capture, and exception matching. Yet, it rises considerably for high complexity capital markets BPO processes such as OTC derivatives, syndicated loans, and alternative investments. Specialist capitalist providers’ expertise in niche and complex services gives them significant pricing power leverage over pureplay BPO providers.
    BPO-Business-Process-Outsourcing
  • Pureplay BPO providers on the move: However, pureplay BPO providers over the last couple of years have moved swiftly, and gained meaningful ground in terms of building competence in high value services. This increased, more head-on competition has reduced the pricing differential to some extent.
  • Pricing model induced rate differential: FTE-based pricing is most common in capital markets BPO contracts, closely followed by the transaction-based model. Typically, contracts with transaction pricing have a higher Annual Contract Value (ACV) per FTE, as the service provider agrees to share some of the buyer’s risk, and thus bakes the risk premium into the pricing. Additionally, the scope of work for capital markets BPO deals with transaction-based pricing is usually higher value and more complex, pushing up the average ACV per FTE further.

Pureplay BPO providers VS. specialists

Net-net, specialist providers, which at least as of today handle more high-value services, come at a higher price than their pureplay BPO peers. And, at least as of today, buyers appear ready and willing to pay this premium.

Enterprises in this space typically tend to value and favor specialists when it comes to finding a partner for their capital markets BPO operations. And they tend to be particularly selective, as most service providers –  both pureplay and specialist— do not play in all the segments, but instead focus on building deep capabilities around one or two of the four key business lines.

Are you working with a pureplay or specialist provider in the capital markets BPO space? To what extent did pricing play into your provider selection? Do you think specialists have an edge over pureplay BPO providers in terms of capabilities?

 

Are Offshore-heritage Service Providers “H-1B Visa Abusers” or “Sitting Ducks”? | Sherpas in Blue Shirts

Recently, an official from the Trump administration accused Indian IT providers of abusing the H-1B visa process by “flooding” the lottery system with applications, giving them an unfair lottery draw advantage. The statement again spotlighted the issue of importing foreign IT services workers to the U.S., thereby limiting job opportunities for domestic candidates. It also underscored the huge extent of outsourcing being done by U.S. corporations, especially to offshore-heritage providers. What it didn’t discuss was other types of companies’ usage of the H-1B program to import skilled talent into the country.

Everest Group conducted a quick analysis on the Labor Condition Applications (LCAs) employers filed to obtain H-1B visas in the last few years. We classified the employers into several categories:

  • Offshore-heritage service providers, such as Cognizant, Infosys, and TCS
  • Multinational service providers, such as Accenture, Capgemini, and IBM
  • Professional services firms, such as Deloitte, EY, and PwC
  • Product companies, such as Apple, Cisco, and Oracle
  • All other companies

Our findings?

  • While the total number of certified positions increased at a CAGR of 11 percent between FY 2011 and FY 2016, offshore-heritage providers’ share has dropped significantly, from 74 percent in FY 2011 to 40 percent in FY 2016
  • The biggest share grabbers are professional services firms, which are increasingly competing with traditional IT services players across deals. Their share in H1-B visas has increased from 7 percent in FY 2011 to 37 percent in FY 2016. On an absolute basis, that’s an almost ten-fold increase
  • The top 25 employers contribute ~50 percent to the total positions certified, which implies that offshore-heritage providers have only a 20 percent share of the total positions certified for H-1B visas by the Department of Labor between FY 2011 and FY 2016.

(For the uninitiated, a certified LCA (ETA Form 9035), is a prerequisite to H-1B approval. The LCA must be certified by the Department of Labor (DOL) before the H-1B petition (Form I-129) is submitted to USCIS. The LCA contains basic wage and location information about the proposed H1B employment. Please note that a certified LCA does not guarantee H-1B visa approval, however, certified position trends are good indicators of H-1B visa usage. Also, note that the data below includes positions certified for new H-1B visa applications as well as renewal and transfer of H-1B visa.)

H-1B visa and offshore service providers

One of the Trump administration’s suggested reforms is to increase the minimum wage for H-1B visas from US$60,000 to US$130,000. But as this minimum wage recommendation is applicable to companies that are “H-1B dependent” – and most offshore-heritage providers fall into this category – the required increase in minimum wage, whatever it ultimately is, will likely affect offshore-heritage providers more than any other type of organization.

At the same time professional services firms have quietly increased their leverage of the visa-led model, offshore-heritage providers have been the unfortunate recipients of far greater scrutiny and negative limelight. In order to successfully compete, offshore-heritage providers have no choice other than to prepare now for the impact of visa policy changes. As the old saying goes, “better safe than sorry.”

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

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

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

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

Digital takes center stage in outsourcing deals

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

Outsourcing deal sizes are decreasing – but not for everyone!

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

New technology, but different implementation strategy

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

Concentration in leading geographies

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

Surging wave of protectionism

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

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

Global Services Outsourcing Deals in Market Vista

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

Reimagining Global Engineering Services – a Hierarchy of Needs | Sherpas in Blue Shirts

The engineering services industry is one of the most interesting segments in the global services landscape today.

Compared to IT and business process services, the global engineering services market is much smaller, at approximately US$ 90 billion. It is also growing much faster, at approximately 15 percent per year.

The bulk of the growth is going to be driven by a need to reimagine global sourcing of engineering services, in line with the progression of enterprise digitalization strategies.

Everest Group believes there are four distinct objectives behind digital engineering strategies:

Hierarchy of Digital Engineering Services Demand

Global Sourcing of Digital Engineering Services

  1. Crushing spend: Arguably, there’s nothing new about leveraging a global sourcing model to reduce spend. However, the optimization levers go well beyond arbitrage, extending into the realms of analytics, the IoT, and automation. We are beginning to see enterprises contracting not just for cost savings, but for specific details around how cost savings are being achieved (e.g., success of automation projects, and ongoing commitment for automation.) Digitalization can often achieve breakthrough spend reduction outcomes (e.g., maintenance of oil refineries leveraging IoT technologies), well beyond the traditional arbitrage levers.
  2. Transforming experience in plants or mines: The experience is typically optimized across a bunch of typical considerations such as safety and accessibility, speed, and convenience. For instance, using design thinking principles in plant assembly line design, IoT implementation in mines for health and safety related use cases and medical device companies are using digitally reimagined techniques to create improved patient care outcomes.
  3. Accelerating product innovation: Sophisticated enterprises realize they can’t do it well enough or fast enough unless they embrace a broader innovation ecosystem. Globalization is a major driver of demand, as is the need to accelerate and contextualize cross-industry innovation. For instance, automotive OEMs realize they need to embrace a broader ecosystem of talent and technology providers to create differentiated infotainment offerings.</>li
  4. Disrupting the business model: Business model disruption comes about as a natural progression through the first three levels of the hierarchy, coupled with a disruptive idea. For instance, automotive companies the world over are waking up to the potential of a new business model that is built on asset sharing as opposed to asset ownership. Utility companies are creating parallel energy sharing models using blockchain. Medical diagnostic companies are reimagining their business model by experimenting to service-led, as-a-service models.

Everest Group recommends enterprises follow a “3E” approach to shaping their engineering services global sourcing strategy:

  • Evaluate the current state of your digital engineering journey against the strategic objectives of efficiency, experience, innovation, or disruption. The way you measure success in the short term should derive from where you are, and your longer-term strategy should stem from a broader industry vision.
  • Evolve the ER&D sourcing model in line with your aspirations. If you are trying to drive strategic business impact at the higher reaches of digital engineering maturity, you should be able to use objective data to benchmark the impact on business processes. For instance, your ER&D sourcing models should be linked with improvements in supply chain metrics, experience, accelerated time to market, or an increase in digital-led revenues.
  • Enrich the sources of engineering and R&D innovation by engaging with service providers, start-ups, academia, designers, social scientists, etc. Such an ecosystem should transcend the traditional enterprise-partner model, and requires a central orchestration function for scalability.

Visit our engineering services page for more insights on engineering services global sourcing strategies.

Marginal Margin Impact from H1-B Visa Reforms? Maybe Not | Sherpas in Blue Shirts

On 25 April 2017, U.S. President Donald Trump moved one step closer to instituting new regulations for granting H-1B visas. At the same time, many IT service providers – especially those of Indian-heritage –moved one step closer to realizing their worst fears! The threat of visa reforms became real when President Trump ordered an inter-departmental review of the H-1B visa program, which would ensure formulation of regulations for hiring only the most skilled or the most highly-paid professionals and “would never replace American jobs.”

While it is universally acknowledged that a stricter visa regime will negatively impact most service providers’ onshore margins, particularly the offshore-centric providers that follow the “landed” resource model (i.e., a delivery model that hires resources from offshore centers to work in the U.S.,) it is important to examine the true nature of this impact. The exhibit below indicates the possible impact on onshore margins under various visa reform scenarios.

Scenario-based H1-B visa reform impact assessment on onshore (U.S.) margins

H1-B Visa Reform impacts onshore and offshore margins

Even in a situation where the visa reforms do not translate into full-fledged regulation (the most ideal scenario for Indian-heritage service providers) we expect far greater scrutiny of H1-B visa applications, leading to fewer visa grants. Even in this scenario, we expect more onshore hiring by IT service providers to meet their talent requirements, leading to reduction of service provider margins by 2-4 percentage points.

The probability of the above happening has become more dubious, given recent developments, and it is highly likely that visas will be granted based on either skills/merit or minimum wage requirements of US$130,000. In either case, service providers will need to hire a much higher share of local resources. This further complicates the situation for Indian-heritage providers, as they have a smaller foothold in the U.S. talent market than do the global providers. Whether Indian-heritage or global, hiring landed resources at some/all levels of the delivery pyramid at the minimum salary levels of US$130,000 could drop service provider margins by as much as 14-16 percentage points, resulting in negative returns on onshore deals, at least in the short-term.

While none of the scenarios paint a rosy picture for service providers, the impending visa reforms may act as a catalyst for them to develop more automation solutions and front-end technology products and restructure their talent hiring and value proposition. Interestingly, while onshore resources will increase in U.S.-based contracts, the overall portfolio-level offshore ratios may also marginally increase with providers pushing the offshoring lever to protect their overall margins.

Everest Group has simulated the potential impact on onshore margins using key input variables around existing cost structures, rate cards, staffing pyramid, and onshore-offshore resource mix. Please see our viewpoint on the above topic: “Impact of Changes to H-1B Visa Program on Service Provider Margins” for more details.

Trump-type Protectionism Threatening Global Services in APAC | Sherpas in Blue Shirts

On April 18, President Trump signed an executive order for interdepartmental review of the H1-B visa program, a move largely aimed at curbing the allotment of H1-B visas to entry level IT professionals from other countries. While it took months for him to officially make a move, his protectionism agenda seems to be spreading far and wide, with several countries in the Asia Pacific region embracing similar protectionist stances to address unemployment.

Australia pulled the plug on its most popular temporary work visa, the 457 visa program. This program allowed companies based in Australia to employ foreign workers, for a period of up to four years, wherever they faced a shortage of skilled workers in the domestic market. It was largely used by global IT companies to source workforce from other countries, mainly India. The Australian government has stated that it will replace the 457 visa program with two temporary visas for skilled professionals. Certain IT skills (e.g., web developer) have been already removed from the list of ~200 occupations that qualify for these visa programs.

In a similar event, the Singapore government restricted the number of visas that can be issued to foreign IT professionals. This has impacted both new visa applicants and those seeking a renewal.

And two weeks ago, the New Zealand government announced plans to tighten access to skilled work visas in a “Kiwi-first” approach to immigration.

Crackdown on visas to skilled foreign workers a threat to global service delivery models

Policy changes that restrict movement of skilled professionals across borders can cause several operational challenges for the prevailing global delivery models of almost all major service providers. The regional delivery centers of leading global and Indian IT service providers based in these APAC countries are likely to face the biggest challenge, as the restrictions against importing talent will make them reliant on local, expensive talent. This, in turn, might negatively impact their margins.

In the short term, enterprises’ and services providers’ cost of operations might witness a spike due to limited availability of landed resources in the onshore workforce. Typically, the difference in cost between a landed and a local resource in most geographies is 10-15 percent. And, based on recently completed research, we estimate that service providers’ margins from onshore operations could drop by up to 16 percent due to the proposed changes to the H1-B visa program. This will likely require service providers to recalibrate their pricing strategy and/or revisit their onshore-offshore delivery mix.

In the long term, service providers are likely to push towards offshoring as a lever to protect their overall margin. And there might be increased instances of even complex work being delivered from offshore locations to reduce dependence on work-visas for onshore locations, in turn requiring increased training and upskilling of employees in offshore locations.

Do you have or run global services operations in APAC? Have you and your teammates formulated an immigration issue mitigation plan? Our readers would love to know how you’re addressing this challenge!

Learn more about Everest Group’s Locations Optimization practice.

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