Tag: Global In-house Center

How Cost Competitive are Global In-house Centers (GICs)? | Sherpas in Blue Shirts

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.

GIC Cost Competitiness I1
Exhibit 1

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).

Annualized TCO for parent/buyer
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

Tier-2/3 Cities’ Growing Attractiveness as Promising Locations to Deliver Global Services – Can Runners Up Be Winners as Well? | Sherpas in Blue Shirts

The broad picture

With both buyers and service providers increasingly understanding the benefits of tier-2 and 3 cities in their quest for greater cost savings and access to additional talent, these lower tier locations are witnessing significant growth in new set-ups and expansions.

Companies typically look for at least 10-15 percent additional cost savings over tier-1 cities to justify the business case for moving to tier-2/3 locations. But to achieve their goals, they must create a sustainable business case considering both benefits and trade-offs, e.g., a decrease in operating costs versus an increase in management overhead, and entering an established market late versus entering a relatively nascent market.

Some argue that additional cost savings over tier-1 cities can also be realized by expanding into peripheral areas within tier-1 locations (e.g., Pune/Hinjewadi and Mumbai/Navi Mumbai, versus Coimbatore, Ahmedabad, Jaipur, and Bhubaneswar) or in existing tier-1 locations through scale economies. But the “right” answer here is highly context-specific, and depends on an organization’s specific needs and priorities. For example, a company battling for talent in a tier-1 city will not benefit much by expanding to peripheral locations but can access to additional talent by setting up in tier-2/3 cities.

Distribution of set-ups by Tier-1 and 2 cities

Central Eastern Europe (CEE) and Latin America (LATAM) both had more global services delivery set-ups in tier-2 cities than in tier-1 cities in 2012-2014 H1. Although increased activity in tier-2 locations is a relatively recent trend in Asia Pacific (APAC), it is fast catching up with the highest number of tier-2/3 set-ups among all three regions during 2012-2014 H1. Global in-house center (GIC) and service provider activity in APAC is concentrated in India, but distributed across multiple locations in CEE and LATAM. The above chart presents the top five tier-2 locations in each region.

India’s tier-2/3 city story

India continues to be an attractive offshore destination for global companies, given its unique combination of low cost, scalable talent pool, and breadth and depth of available skills. Tier-2/3 cities add to the value proposition by providing additional cost savings of 8 to 12 percent (for IT services), due to lower facilities and other operational costs.

With higher concentration risk in tier-1 cities, it is becoming increasingly important for enterprises and service providers to access talent from tier-2/3 cities.

For more information, download a complimentary preview of Everest Group’s recently released report, Tier-2/3 Locations in India for Offshore IT Services Delivery – Does Reality Meet the Hype?

Philippines: moving beyond Manila and Cebu as delivery locations

While the Philippines’ key tier-1 cities (especially Manila and Cebu) are becoming saturated, the proliferation of tier-2/3 cities offer a strong proposition. Emerging tier-2/3 cities – e.g., Dasmarinas, Malolos, Iloilo City, and Baguio – contribute 30 to 40 percent of the relevant graduate pool, and for IT-BPS offer a cost differential of 10 to 25 percent as compared to Metro Manila.

For more information, download a complimentary preview of Everest Group’s recently released report, Is Philippines Stepping Up to Lead the Industry into the Next Horizon of Global Services?

Dimensions for operationalizing a tier-2/3 delivery center

Operationalizing a center in tier-2/3 cities and successfully deriving the above-mentioned benefits requires a slightly different approach than in tier-1 locations:

Talent hiring strategy: Companies need effective talent strategies to meet the needs of experienced personnel who often need to be relocated. They also need appropriate employer branding to capture mindshare in local colleges and universities.

Client engagement and contract type: To optimize costs and improve profitability, tier-2/3 cities are likely better suited to deliver work for existing (rather than new) clients/modules.

Operating model:Tier-2/3 cities can serve as self-sufficient centers directly handling clients, and can also be structured as a spoke to tier-1 cities in certain cases.

Creating an ecosystem: Companies need to invest in infrastructure, the social living environment, and the delivery ecosystem in order to successfully operate a tier-2/3 city set-up.

Many tier-2/3 cities options with multiple benefits and opportunities are available across various regions and countries. But enterprises and service providers must take into consideration multiple associated challenges – e.g., scalability, lack of enabling environment, trade-offs with peripheral cities, and lesser breadth of skill sets – before setting up or expanding their operations in these locations. A commercial-driven business case may not be enough to evaluate these cities; what is needed is a risk-reward assessment!

Here’s the Answer Key: India GIC Landscape Crossword Puzzle | Sherpas in Blue Shirts

Hope you enjoyed solving the India GIC landscape crossword we posted last week. Below is the answer key to it. (Download a printer-friendly version of the answer key.)

Everest Group India GIC Crossword Answer Key

Across  
  1. One of the first entrants in the India GIC landscape
Texas Instruments and GE were among the first entrants in the GIC landscape
  1. Number of GIC divestitures in first half of 2014
None. GIC divestiture activity has seen a decline in recent years after peaking in 2011 and 2012
  1. Numero uno country in worldwide GIC market
India has dominant share in the GIC market in terms of revenue (~50%), number of delivery centers and headcount
  1. Tier-1 city with least number of GICs
Mumbai has the least number of GICs among tier-1 cities in India
  1. Buyer geography with maximum number of companies setting up GIC in India
United States-headquarteredfirms have more than 60% share in the Indian GIC landscape
  1. Buyer geography showing decline in GIC activity in India
Share of United Kingdom-based firms setting up GICs in India has declined in the last 2-3 years
  1. _______ a.k.a GIC
GICs were formerly known as captives
  1. Vertical with 2nd largest average headcount in GIC
Telecom is the 2nd largest vertical after BFSI in terms of average headcount
 
Down  
  1. Top vertical by GIC headcount
BFSI is the largest vertical in terms of overall GIC headcount in India
  1. Top vertical by number of GICs
Technology is the leading vertical in terms of number of GIC set-ups in India
  1. Tier-1 city with highest share in number of GICs
Bangalore has the maximum number of GICs in India
  1. Leading tier-2 city for GIC set-ups
Pune  is the leading tier-2 city in terms of number of GICs and has seen lot of GIC activity in the recent past
  1. Why companies started GICs?
Companies started GICs to capture cost arbitrage
  1. Alternative to the GIC model
Outsourcing to service providers in an alternative to the GIC model
  1. Number one function that GICs in India are delivering
Engineering services is the leading function delivered by GICs in India
  1. __________ beyond arbitrage
Value beyond arbitrage
  1. Energy & Utilities GICs firms headquartered here have high share
Within the Energy & Utilities vertical, Europe-based firms have highest share
  1. Sub-function within IT with highest adoption
ADM (Application Development & Maintenance) is the topmost sub-function within IT
  1. Another leading tier-2 city for GIC set-ups
Kochi is also seeing GIC activity among tier-2 cities in India
  1. Cognizant acquired this GIC in 2013
Cognizant acquired ValueSource NV, a subsidiary of KBC Group

Photo credit: Taki Steve

Nearshored GICs Experiencing Significant Growth among UK-based Buyers | Sherpas in Blue Shirts

Over the last 18 months, we have seen a significant shift in the global in-house center (GIC) location strategy of UK-based firms, with many more embracing Central and Eastern Europe (CEE) over offshore countries for their GICs.

GIC delivery footprint of UK based buyers

Factors driving the growth in nearshore locations include:

  • High attrition rates in offshore locations, and far more expensive talent in onshore regions, make nearshore locations a suitable alternative. Relatively lower-cost locations in CEE are equipped with skilled workforce with multi-lingual capabilities
  • Nearshore locations offer cultural and geographical affinity, and a favorable time zone
  • Concentration risk in offshore locations. Realizing the value of diversification, well-known companies such as Barclays, BP, HSBC, PwC, Rolls-Royce, and Vodafone have expanded their location portfolios beyond offshore in-house centers and established GICs in CEE

Some of the popular nearshore locations being leveraged for IT, F&A, and call center (CC) services are depicted in the diagram below:

Key nearshore locations by functions

While some companies are leveraging their existing nearshore offices and expanding them into GICs, others are setting up greenfield centers. Recent examples of new GIC set-ups by UK firms in nearshore locations include:

  • Barclays opened a human resources service center in Lithuania
  • Vodafone opened a new shared services center in Bucharest, Romania, to cater to Germany, Ireland, Italy, Spain, and UK-based clients. The center will also provide IT services for the Vodafone Group headquarters in London
  • PwC opened a service center in Bratislava, Slovakia, to carry out its internal finance function for the CEE region
  • Toumaz Group opened a software development center in Timisoara, Romania, to develop IT-based solutions for Toumaz and Frontier Silicon, a Toumaz division.

What are the implications of this trend? Are we saying offshore locations will lose their draw for UK-based buyers? Certainly not! Although the CEE region will continue to maintain its growth momentum, several factors will still drive GIC activity in offshore geographies among UK buyers:

  • For first-time adopters of the GIC model, offshore locations (e.g., India, Philippines) offer a proven and established value proposition
  • For companies highly focused on cost savings, the arbitrage offered by offshore geographies remains unbeatable
  • Companies looking to set-up large scale centers (1,000+ FTEs) may not find many scalable options in nearshore regions, making offshore geographies more attractive
  • Several offshore locations are also becoming attractive for their domestic market opportunities. Thus, some organizations are leveraging offshore centers for dual purposes; for their UK operations and to tap into local sales prospects

Beyond the traditional offshore locations, there is increasing acceptance of South Africa, Egypt, and Mauritius as delivery locations for UK and other European buyers due to accent similarity and strong cultural affinity. But the battleground is now definitely becoming hotter between nearshore and offshore locations.

For more insights into the GIC space, please see the following additional Everest Group research:

  1. GICs Creating Business Impact Beyond Cost Arbitrage
  2. Quantification of GIC Impact Accelerates Internal Value
  3. Global GIC Market Activity Heatmap

Photo credit: Charles Clegg

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