Category: Outsourcing

Stepping Back from Globalization and Offshoring | Sherpas in Blue Shirts

A sea change is starting because of digital technologies. The impact as companies apply these technologies to their business will be massive – much bigger than the Industrial Revolution with the invention of the loom for manufacturing clothing and Ford inventing the production for manufacturing automobiles. Everyone has been talking for some time about how big an impact these technologies will have on the services industry. But there is a new factor now that makes the potential impact even more significant: the protectionist activities driving companies to step back or pause in globalization and offshoring. I think the services industry would be foolish to ignore the potential of this greater impact. Let’s look at where businesses are headed.

There can be no denying that the stakes have been raised and barriers are being put in place to make globalization and offshoring less acceptable and expensive. In Europe, it is evident with the Brexit bill and the UK opting to leave the EU. In the US, protectionist barriers are starting to be executed through proposed changes to immigration law and H-1B visas, tax reform and potential border tax implications, and reputational risks arising to companies from government entities or disgruntled employees and vocal press entities. The result: companies are paying more attention to how to do work onshore without suffering negative cost impacts.

By investing in digital technologies such as Robotic Process Automation (RPA), cognitive computing, automation and cloud, companies can drive cost improvement by dramatically improving the productivity of their workforce. In many cases, they can achieve cost improvement even greater through improved productivity than through labor arbitrage and thus offset impact of not sending their work offshore.

Of course, service providers also can use these technologies to improve their own workforce productivity to offset the potential of rising costs from immigration and H-1B visa reform in the US.

Our market data shows leading providers in the services industry have been looking at digital technologies and associated digital models well before this step back in globalization. Our tracking of service providers clearly shows the traditional services (labor arbitrage, offshore factory model, remote infrastructure management and asset-intensive infrastructure) grew by only .1 percent last year. Almost all the growth in the IT and business process services market came from new digital offerings – which are currently growing at over 18 percent a year.

Although the trend in digital services has already been growing, we believe the current climate discouraging globalization and offshoring will further accelerate the adoption of digital models. This will force the current shared-services structure. It also will force the provider community to fundamentally change their business models and the way they currently structure their business to deliver services.

Digital Models Change the Location of Call Center and Finance / Accounting Work | Sherpas in Blue Shirts

Leading companies are re-imagining their call centers and customer experience to integrate digital models into their voice models. Work volumes are shifting from voice call centers into new channels such as chat apps, email, tweets and other social channels. Companies are adopting these new ways of communicating with customers and integrating them into their customer service models. The digital model is disrupting the call center.

A recent Everest Group study showed that across a number of call center situations, companies eliminated 40 percent of the FTEs in their call centers – while improving customer service. They achieved this by applying Robotic Process Automation (RPA) technology.  Read more at Peter’s Forbes blog

Companies Face A Deal They Can’t Refuse | Sherpas in Blue Shirts

Just a month into 2017, the acceptability sentiment toward sending work offshore has changed. Companies are increasingly eager to explore ways to do work onshore which they would otherwise do offshore or is currently offshore. The question is how to do that without creating a negative cost impact.

A wide variety of factors are shifting the sentiment toward offshoring work, including …

Read more at Peter’s Forbes blog

Shedding Light on Proposed High-Wage Immigration Changes | Sherpas in Blue Shirts

Although US immigration reform is front and center in the media since the Trump administration took office, the US Congress has debated the need to change immigration legislation for years and has introduced significant proposals since 2013. An integral component is the H-1B work visas heavily used in the global services industry. Right now, the details of visa reform are a moving target, but there is a new angle in the shake-up – the proposed benefits are likely to benefit Global In-house Centers (GICs.

CNBC interviewed Congressman Darrell Issa (R-Calif.) this week about proposed policy changes and his discussions with President Trump. Issa stated that Trump believes foreign service providers are gaming the H-1B visa program, undermining the intent of the program.

He explained that Trump may be more favorable toward a policy capping the minimum H-1B salary at $135,000, as opposed to the current minimum salary of $60,000. Two other minimum salary proposals are on the table: $100,000 proposed by Issa and $132,000 proposed by Rep. Lofgren (D-Calif.). In essence, all three plans thus emphasize focus on allowing visas for high-skilled labor, and Issa affirmed that he expects Congress will pass bipartisan immigration reform dealing with high skills this year.

Two Greatest Impacts from Proposed Changes

It’s still unclear, but it’s likely that the changes won’t affect US providers and tech companies to the same degree as the third-party service providers in India. Changes aim to raise their onshore costs. This will significantly raise costs for H-1B-dependent providers such as Cognizant, Infosys and TCS. Although these firms currently enjoy a competitive advantage over Accenture, Capgemini and IBM, the advantage will narrow and potentially go away with the increased costs.

The second greatest impact from proposed changes is the GICs. Notably, the proposed legislation does not impact firms with GICs. In fact, it is likely to make the Indian GIC model (or captives) more attractive, thereby increasing employment opportunities in these Indian firms and giving these providers a greater share of the offshore pie. Why? Because reducing or restricting the available pool of H-1B talent when there is rising demand for US-based tech talent is likely to create wage inflation.

Although rising tech wages in the US will create a tailwind for all offshore models, GICs may benefit disproportionally because, unlike third-party providers, GICs don’t depend on the H-1B onshore model.

Digital Revolution Impact on Job Creation

Visa reform is not the only factor disrupting the labor arbitrage model. The emerging digital revolution holds the promise of significant productivity increases in the existing workforce – often as much as 30-60 percent. Coupled with US companies’ increasing risk of reputation damage for using offshore services, I believe the move to digital services will accelerate, as its value proposition includes the advantage of onshore delivery and relies less on service delivery based on the offshore labor arbitrage model.

H-1B-dependent service providers will likely use digital technologies and business models to offset the impact of rising wages. A short-term rise in employment is probable, given that it takes some time to implement digital productivity improvements.

No matter which side you’re on, the offshore labor arbitrage market is shifting. The US government definitely is moving aggressively in the direction of significant visa reform, especially focusing on high-skilled workers. However, the other items high on the loaded US policy agenda – especially repealing the Affordable Care Act and changing tax laws) could become a factor moving visa reform to a lower priority.

Don’t Overlook This Cost-Effective Alternative to Offshore Services | Sherpas in Blue Shirts

On a worldwide basis, companies are pausing efforts or taking a step back from globalization. In Europe, this is most evident in recent months with Brexit in the UK. In the United States, it is most evident in the proposals underway in Congress and the White House for H-1B visa reform, rising trade barriers, and potential changes to taxes that could change tax implications of offshoring. Although the extent of changes is not currently known, it is reasonable and probable that they will make offshoring more difficult and more expensive (for customers and their service providers) as well as less socially acceptable. Is your organization one of the many that are now seeking alternatives to sending work offshore to achieve cost reduction?

Read more at Peter’s Forbes blog

Cost Impact of Immigration and Visa Reform to US Customers Using Offshore Services | Sherpas in Blue Shirts

Most US organizations have substantially used offshore service providers in IT and business process outsourcing (BPO) to drive cost reduction. But there is currently a great deal of discussion in Congress and the Trump Administration – as well as actions taken by Executive Orders in the last seven days – about changing the H-1B and L1 visas. The changes affect the offshoring services provider as well as US enterprise customers that utilize offshored services. What are the impending impacts?

My company collaborates with Rod Bourgeois, head of research and consulting at DeepDive Equity Research, and together we have followed the proposed immigration and visa reform. Since 2013, I’ve blogged many times about the potential impacts. Rod’s January 25, 2017 report, “IT Services: Update on Visa-Reform Risks Facing Indian Outsourcers,” highlights recent proposals. The essence: it now looks like real change is on its way.

Read more at Peter’s Forbes blog

IT Future Shifts from Labor Arbitrage to Productivity | Sherpas in Blue Shirts

The labor arbitrage/offshoring model is powerful and relatively simple — compared to investing in productivity for U.S. workers over the past couple of decades. Perhaps your company is like most enterprises in America, having opted for this strategy to achieve cost savings. I believe it’s important to recognize that the arbitrage/offshoring model took companies’ attention away from investing in internal productivity improvements. But there are fewer opportunities now for the labor arbitrage model since it is maturing, and new barriers are arising for sending/maintaining U.S. work offshore.

Read more at Peter’s CIO online blog

Trump’s Visa Reforms: The Bitter Pill IT Needed | Sherpas in Blue Shirts

The Trump administration’s move to table H1-B visa bill in the house has led to a bloodbath for IT services stocks. While there appears to be near unanimity on the “absurdness” of the move, there is a silver lining most experts seem to have missed. I’ll explain this through two acts that have played out.

Act #1: Old Wine in New Bottle
In a November 2015 blog (“My Digital is Bigger Than Yours” and The Technology Pulp Fiction), I explained the rationale behind my cynicism for buzzwords that were driving the discourse on IT services. The story being told was that IT services was undergoing a paradigm shift in innovation. However, instead of witnessing a real shift in strategy, talent model, and offerings, what we have seen is a largely marketing driven illusion of change. Digital, cloud, automation, and cognitive are terms that are being thrown around without caution, giving an impression of disruption in services delivery. In reality, it’s just the natural course of progression in IT services getting embellished by these buzzwords. Analysts know it, service providers know it and – no prizes for guessing – buyers know it too.

As our January 2017 enterprise pulse report on buyer (Dis)satisfaction highlighted:

  1. Buyers are unhappy
  2. They aren’t enamored by these buzzwords
  3. While they consider their existing IT services mediocre, they are still hanging on to it.

Point 3 above is the reason why, as much as I would like to take service providers to task on this pretense of transformation, I believe that enterprise IT must take its fair share of the blame. They have been running mediocre, unimaginative, and long past use-by-date procurement practices. There are two primary reasons behind this inertia:

  • There aren’t any better services options at comparable current prices. Sure, they would love to get something like IBM Watson for infrastructure automation, but their annual IT budgets won’t allow for it. Pretty much a thought process like, “Why buy a Ferrari to run a NYC yellow cab?”
  • The opportunity cost of letting go of something that has been working fine for a decade and a half is huge. Enormous bureaucracies have been created around services procurement, and they are almost impossible to dismantle.

Net-net, labor arbitrage, offshoring, and time & materials still continue to drive the lion’s share of IT services. In the current scenario, despite all the “digital” and “cognitive” washing, there is no way this reality can be swept under the rug. Does this mean that services transformation is a lost cause?

Act #2: And then Trump happened….
All this is getting Trumped now. Visa regulations mean less access to the same cheap labor. Now, instead of paying lip service to service delivery automation, enterprise IT and providers will actually have to think about hyper-automation to keep the lights on and manage margin improvement expectations. Things will have to move faster towards autonomics and/or cognitive for service providers to stay afloat and enterprise IT to stay relevant for CFOs.

My message to the ecosystem to which I belong? – It’s time to put your money where your mouth is!

Is the Philippines More a Paper Tiger than a Real Tiger? | Sherpas in Blue Shirts

The Philippines has been in the news a lot lately, for a range of negative reasons. But is its risk profile becoming such that U.S. enterprises should stop evaluating it as a global sourcing destination, or that those already there should consider pulling out?

That depends on your perspective, especially when you look at both its risk and benefits profiles. I believe one can argue that the current dynamics in the Philippines are potentially a hidden positive for the global sourcing industry. Yes, this bad thing could actually be a good thing.

Before you tell me I’m off my rocker and should be put in a padded room, hear me out.

Among other things, Philippine President Rodrigo Duterte made statements regarding “separation from the U.S.” This understandably caused concerns among multiple global companies with one or another type of exposure to the Philippines. But the Philippine government subsequently tried to clarify that the statements were reflective of intent in foreign and military policy, not business ties. Although a general tilt in military and foreign policy away from the U.S. may eventually hamper business relations, there will probably be little impact in the near term.

That said, while the uncertainty and noise surrounding the Philippines will cause some companies to slow or moderate their exposure to the country’s labor market, a slowing of its offshoring industry growth could be incredibly helpful.

For example, with somewhat less demand for talent, attrition rates should decrease. With somewhat lower attrition rates, employees are likely to develop in their roles to a greater level of proficiency. Additionally, salary increases are also likely to moderate and, with likely less investment into the Philippines, the Filipino peso may weaken and lead to a more attractive cost base.

In other words, assuming that the actual work environment is not disrupted by the new posture, the labor pool should become more attractive – lower cost and more stable – for those organizations continuing to operate in the Philippines.

From an economic standpoint, despite President Duterte’s saber rattling and the unnerving optics, the ties between the two countries won’t be threatened any time soon. The IT and Business Process Association of the Philippines (IBPAP) reported that the IT-BPS industry represented revenue of US$22 billion to the Philippines, and employed ~ 1.2 million FTEs in the country in 2015. With those kinds of numbers, an economic split can’t happen.

Socially, there are very deep ties between the U.S. and the Philippines, much of which is rooted in the fact that English is one of the two official languages in the country. One of the strongest predictors of social ties is language, as the more easily you can communicate with each other, the easier it is to talk about family, share jokes, discuss vacations…topics that help forge bonds.

It’s true that the Philippines’ risk profile appears to be shifting, but largely in ways that seem unlikely to materially impact business ties. For enterprises willing to manage and continue to operate within that environment, it would appear that the benefits of more skilled, language- and culturally-aligned talent at lower prices could easily outweigh the perceived risks.

Of course, there are numerous things you and your location-scoping team should monitor when considering the Philippines as a sourcing destination. The top five are:

  • Trade agreements with the U.S.
  • Taxes and incentives for U.S. firms
  • Travel policies, including visa’s and travel advisories
  • Actions and sentiments of market participants
  • 2022 Philippines roadmap for IT-BPO; relative emphasis on the U.S.

Is your enterprise already offshoring to the Philippines, or in the process of evaluating it against other destinations? We’d love to hear your thoughts, perceptions, concerns, and experiences!

10 Golden Rules for Good Benchmarking | Sherpas in Blue Shirts

Originally posted on the National Outsourcing Association (NOA) blog


Insights from the NOA “Benchmarking” Special Interests Group with Everest Group

Benchmarking is a worthwhile endeavour. When conducted properly, the practice will give you a baseline indicator of where your business is currently, where it is headed on its current trajectory, where you need to be to maximise gains and how you can get there.

Benchmarking can also act as the catalyst for a more fruitful long-term outsourcing relationship, by highlight areas that must be focused on moving forward. On the other hand, it is not the solution to every problem that relationship might have. The term is frequently misunderstood and the practice is even more frequently misused.

At the NOA’s Special Interests Group on Benchmarking in association with Everest Group, benchmarking experts led a roundtable discussion on when benchmarking is necessary, how it is best carried out and what the practice does to help business relationships between clients and their providers.


 

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