US onshore service delivery: Tier-2/3 US cities offer ~15-25% savings over tier-1 cities
US onshore service delivery: Tier-2/3 US cities offer ~15-25% savings over tier-1 cities
Although GICs are an integral component of the global services market with increasing adoption by buyers, there continue to be questions about their cost competitiveness. To obtain the facts, Everest Group conducted GIC cost competitiveness assessments with both source markets (North America and Europe) and service providers. Following are the key findings from our recently released report on the topic.
GICs offer sustainable arbitrage with source markets across locations/functions, and organizations have the potential to increase savings by fully leveraging efficiency levers
Despite sustainability concerns, our analysis indicates that GICs provide source markets with significant cost savings. Savings typically vary between 30 to 70 percent, across most locations and functions. More interesting is the finding related to change in cost arbitrage across successive years. In India’s case, favorable exchange rates, coupled with a less-than-anticipated impact of wage inflation, has strengthened cost arbitrage over the last two to three years. While the focus in recent years has naturally been on India, it’s important to acknowledge and remember that other leading locations, (i.e., Philippines, China, Mexico, and Poland), also continue to offer similar cost arbitrage compared to the last two to three years.
The report examines the sustainability of cost savings (measured by number of years) in detail by evaluating cost inflation (separate for wages and other cost elements) and forex movements in leading locations. Exhibit 1 provides a synthesized view of our analysis, indicating the sustainability of cost arbitrage for most locations/functions even under aggressive inflation and currency movement scenarios.
The sustainability analysis is based on labor arbitrage alone, and excludes the impact of efficiency-based levers such as reducing general and administrative expenses, moving to tier-2 locations, increasing capacity utilization, and increasing span of control and deskilling. While not all GICs have been able to fully leverage and exploit these levers, best-in-class GICs have been able to achieve an additional 10-12 percent savings beyond labor arbitrage.
Comparing GIC costs with service provider pricing is too simplistic; organizations need to evaluate the TCO to assess the relative cost difference
In our experience, most buyers compare GIC costs with service provider pricing to assess the relative cost difference between sourcing models. But this comparison often fails to capture the true financial impact of a sourcing decision. Mature buyers evaluate the Total Cost of Ownership (TCO) metric. In addition to hard costs (e.g., salaries, facilities, technology, and telecom), TCO incorporates the soft costs associated with transition, governance, and relationship/account management, along with net impact of productivity measures (see Exhibit 2).
Conducting a TCO analysis yields interesting results. Indeed, there are instances in which GICs have significantly lower TCO costs than service providers for certain kinds of work, even though the GICs’ operating costs would be higher than provider rates.
The relative cost competitiveness between sourcing models is dependent on multiple factors. There are those related specifically to the work and where/how it is delivered (e.g., relative scale, process maturity, nature of work, and domain expertise.) There are also company-specific factors driving differences, such as preferences for a more experienced pool, better pedigree talent, market positioning as an employer of choice, promotion of similar organizational culture, and approaches to gain share.
To truly gauge cost competitiveness of GICs with service providers, organizations need to conduct a TCO analysis that takes into account all hard and soft costs and unique requirements.
We are hosting a webinar on Thursday, November 20, that will discuss how GICs add strategic value to the parent organization and how they can quantify that value. Register here.
Photo credit: Tup Wanders
“Putting Canadians First” — the title on the document explaining changes to the nation’s Temporary Foreign Worker Program —makes the Canadian government’s intent clear. Canada is forging ahead with adjustment to its immigration policy. The result will increase costs for global service providers in two important dimensions.
At this point, it’s now very unlikely that meaningful immigration reform will happen for the next two years in the United States. But Canada is moving forward, and components of its reform will make it much more difficult for service providers to utilize temporary foreign workers.
Canada’s immigration reform will increase the cost of transitioning new work to the global services model, particularly for India-based firms.
Knowledge transfer. First, reform will raise the cost of knowledge transfer and effectively change the traditional knowledge transfer structure used by the Indian firms. Current practice is to send to Canada teams who will be doing the work to consult and learn from the existing teams and then return them back to India or other locations replete with sufficient knowledge to continue doing the work.
Consequently, they will have to rely on in-country resources, which will make the knowledge transfer slower and more complicated.
Landed model. Reform components will also increase the cost of the Indian heritage firms’ landed model — their employee base that resides in Canada. By making it harder to send Indian nationals to live in Canada, it will raise their cost of getting the visas, which will make it more likely that they will need to hire Canadian nationals to do the work.
Everest Group’s analysis is that it could increase their costs by up to 20 percent for their Canadian landed model.
Neither of these two factors will stop the process of sending temporary foreign workers into Canada. However, it will slow down the process and also be more expensive for service providers than their current structure.
The “Putting Canadians First” reform of the Temporary Foreign Workers Program will not stop the Indian service providers from competing effectively in the Canadian marketplace. But it will complicate their business and modestly raise their costs to compete in Canada.
We do not believe that these changes will materially affect the multinational service providers such as CGI, HP or IBM. They already have substantial presence in Canada and have large existing workforces there. In fact, the net result is that the Canadian-based multinationals’ competitive posture will be slightly improved due to these immigration changes.
Photo credit: Ian Alexander Martin
Romania’s ADM and non-voice business process FTEs are 60-75% less costly than tier-2 U.S. and UK cities’ workers
A significant trend in the services world is that margins are coming down, and there is a lot of discussion today among industry players about how to improve margins. In an effort to arrest or slow this margin pressure, some providers are moving into programs to address the falling margins. There are a significant number of levers available to service providers to lower their cost and maintain or raise margins. However, these are only short-term plays, and I think they may be overlooking a troubling long-term issue.
Moreover, the margin pressure is underpinned by a growing recognition in the customer base that providers do not need to sustain high margins.
As firms see their margins come under pressure, they pull such levers as reallocating locations, reworking their pyramid structures, using more aggressive visa-based strategies for their onshore landed populations or investing in power tools and productivity vehicles to make their operations more efficient. There are a significant number of levers to lower a provider’s cost and, in the short run, maintain or raise margins.
Many providers today are successfully slowing the trend, and it’s very impressive that they generate these programs and activities to recapture their margins.
But these improvement programs only slow the trend of falling margins; they don’t arrest or reverse the trend.
The troubling long-term issue
The overall story of services is that once the industry is in a race to the bottom, competitive forces pressure the providers to pass their margin improvements through to their customers. It’s an absolute necessity for providers to undertake margin improvement programs, but they are only short term in nature. Eventually providers end up having to give it back to customers in order to maintain wallet share.
A smart margin move
Interestingly, Cognizant and TCS got an early start on programs to improve their margins, but they were not short-sighted in their strategy. They used their surplus margins to invest in growth engines, further exacerbating the margin pressure on the rest of the industry players.
Photo credit: Marlon Malabanan
Its attractive cost arbitrage over Western Europe and established service delivery locations in Central and Eastern Europe (CEE), coupled with its large, high-quality pool of multi-lingual entry-level talent across both IT and BP services, make Bulgaria a land of opportunity for global services.
Comparative operating cost per FTE of Peru versus Tier-2 UK and U.S. cities
Global services operating costs: Focus on Central & Eastern Europe
GICs (shared services centers) have business impact beyond arbitrage, imporving cost savings, risk, and revenue