Tag: global services

Thumbs Up to Serco Acquiring Intelenet: Is 2011 BPO’s Year for Acquisitions? | Sherpas in Blue Shirts

Serco Group plc, a U.K.-based international services company with diverse interests in both the public and private sectors, yesterday signed an agreement to acquire Intelenet, a leading Indian BPO services company serving clients around the world and in the domestic Indian market, for up to £385 million (~US$635 million.)

This is the fourth big-ticket acquisition so far this year in the Indian ITes industry, following on the heels of iGATE-Patni, Genpact-Headstrong, and most recently EXL-OPI. I see two key forces driving this acquisition spree. First, and more relevant, is the need for service providers to expand scale and capabilities in an increasingly competitive market. Second is the potential attempt by private equity investors to exit their stakes in Indian ITes companies now that the valuations are attractive with the market bouncing back from the recession.

Serco’s acquisition of Intelenet is an outcome of both these factors in play simultaneously. On one hand, this move will add to Serco BPO’s scale and depth of capabilities, and provide access to attractive markets; and on the other hand, this marks a successful exit for Blackstone, which four years ago invested ~US$200 million to stage a management buy-out of Intelenet.

Interestingly, Serco’s entry into the Indian BPO market was through its acquisition of InfoVision towards the end of 2008, whereby it established Serco BPO. The acquisition of Intelenet marks a significant step change in its global capability and capacity in terms of:

  • Access to attractive markets –Intelenet has a strong customer base in the international markets and is a leader in the fast emerging domestic Indian BPO market. These markets are expected to grow at ~15 percent and ~20-25 percent per year, respectively. That a U.K.-based company has acquired BPO assets in India to target not only the international but also the domestic market underscores the growing importance of the domestic Indian BPO market. India has seen GDP increase by 7-8 percent per year over the last decade, with rising incomes driving demand from customers for services and increasing use of third parties to deliver them. In addition to this growth in the commercial BPO market, there is also emerging demand for process outsourcing within the Indian public services market.
  • Added scale and depth of capabilities – The combined BPO-related operations will have 40,000 employees (~32,000 coming from Intelenet) providing services across seven countries. While Serco BPO was previously a pure customer-centric BPO provider specializing in CRM support, the acquisition brings a wealth of expertise in a broad range of middle- and back-office services, including transactional, finance and accounting, and business transformation offerings. Serco will also benefit from Intelenet’s capabilities in the financial services, travel, and healthcare industries.

Intelenet’s scale and expertise, backed by Serco Group’s financial muscle, should create a formidable player in the third-party BPO space.

On a witty note, the year 2011 adds up to the number 4 (2+0+1+1=4) and we have already seen four major acquisitions this year. Will 2011 create history via more acquisitions, or will numerology play a spoilsport? Any guesses?

Will the U.S. Government “Arthur Andersen” Infosys? | Sherpas in Blue Shirts

US v Infosys

As is well-documented at this time, a whistle blower and current Infosys employee has brought suit against Infosys claiming that Infosys has criminally manipulated U.S. immigration law to allow it to bring large numbers of employees into the United States to do work under visas that do not allow such activities. This in turn led the U.S. Citizenship and Immigration Services to launch a criminal investigation of Infosys.

This brings to mind a notorious case in which the government’s criminal investigation of accounting firm Arthur Andersen related to its conduct at Enron created unintended consequences. Andersen was subsequently found not guilty; however, the government’s enthusiastic pursuit of the case and aggressive use of its position “to protect the public good” created an environment in which Arthur Andersen went out of business. The investigation and subsequent closing of Andersen caused massive disruption in the Anderson audit base, put tens of thousands out of work and destroyed the lives of thousands of Andersen partners.

Infosys is unlikely to be put out of business, but I think there is a warning which should be applied to this emerging, but eerily similar, situation. As the criminal probe progresses, one could imagine that the consular officials overseeing issuing visa’s in India cast a jaundiced eye over Infosys visa applications. If Infosys starts to be seen by these consular officials as a criminal organization, or at least practicing overly aggressive strategies in applying for visas, we could see increased scrutiny of Infosys’ visa applications, which could create a scenario that might impede Infosys’ normal operations. Such a scenario is not altogether unbelievable given the current political climate with 9 percent unemployment and the early stages of a presidential election brewing, which could drive populist rhetoric on such issues. Should this behavior indeed transpire in part or in whole, it would have a substantial effect on Infosys’ ability to conduct operations as normal in the United States. Costs would rise, knowledge transfer could be delayed or forgone and Infosys’ ability to find and capture new work could be impacted. No wonder Infosys stock price is down today.

The worst case scenario is that a more aggressive posture by U.S. immigration officials on top of an environment that is already unfriendly could spread to Indian heritage service providers and outsourcers in general. At this time it is too early know if what scenario will unfold, but the situation deserves close attention. Like the Arthur Andersen situation, we may find well-intentioned and vigilant public employees operating in a time of high political tension create unforeseen and negative consequences well beyond the intended scope of the investigation and without regard to what the actual resolution of the investigation turns out to be.

Note to All Healthcare Organizations: “When You Come to a Fork in the Road, Take It!” | Sherpas in Blue Shirts

American baseball great Yogi Berra’s second claim to fame is for being one of the most quoted figures in the sports world. Best known for his deceptively simplistic observation, “It ain’t over till it’s over,” his philosophy is plainspoken, down-to-earth, and honest. Stay humble. Trust your instincts. Most importantly, act, as in another of his famous quotes, “When you come to a fork in the road, take it.”

U.S. healthcare organizations are right now at the proverbial fork in the road with healthcare reform and the implications it will have, whatever form it finally takes. The magnitude 9.5 issue they are currently facing is compliance with the 2011, 2012 and 2013 deadlines for reimbursement – ICD-9 to ICD-10, and HIPAA 4010 – 5010 transformation. Compliance will significantly impact the majority of administrative and financial functions in healthcare provider and payer organizations, including substantial analysis and changes to pricing rules, policies to manage adjustments to old claims, and eligibility rules definitions. Claims and payment calculations will be altered based on changes in the contract and adjust rules. Charges for an expanded set of codes will require adjustment. Rule sets for defining high-risk patients will be expanded. And this is just a small sampling of all the challenges healthcare organizations will need to address.

A client recently asked me, “But what if the healthcare reform legislation is overturned?” The reality is that this set of rules has been legislated separately, we are out of ICD-9 codes, and the system, whether within a reform bill or not, will go forward. The client then asked if deadline extensions will be granted as we have seen in past reimbursement coding efforts from Diagnosis Related Groups (DRGs) to Universal Claim Form compliance. Another reality is the price any organization would have to pay for non-compliance, and the revenue disruption that will result, is not worth gambling on extension grants.

Unable to delay the looming deadlines, compliance with such massive scope regulations is forcing healthcare organizations to plan for extensive and costly internal and external resources, and most of the large onshore and offshore healthcare service providers are clamoring and competing for these $100 million+, multiple year projects. And each one claims to have a solution and multi-faceted approach.

Another reality: I have been working with both onshore and offshore service providers regarding the ICD-9 to 10 and 4010 – 5010 transformation since 2008. Healthcare payer and provider organizations have been slow to define the real issues, and service providers have been slow to develop the solutions. There is an interesting mix of service offerings including compliance programs, impact analysis, testing, crosswalk, and remediation automation programs, and a number of service providers have one stand out piece of the puzzle. But not one has emerged with the complete package of services, and as a result, buyers must take great care when researching and deciding on external support. In fact, their fork in the road answer may well be a combination of very carefully selected tool sets and provider companies.

Achieving Success in Continental Europe: Pitfalls of a Broad-Brush Approach to Global Services | Sherpas in Blue Shirts

Over the last few years, the outsourcing sector in Europe has been deeply impacted by the global economic downturn and the sovereign debt crisis in many countries. And as highlighted in Everest Group’s Market Vista report for Q1 2011, outsourcing transaction activity in Europe has been on the decline for the past several quarters, with transaction volumes in continental Europe dropping by 9 percent in the previous quarter alone.

At the same time, service providers have announced increased focus and commitment to Europe, with regional and global majors striving to maintain their stronghold. For example, IBM opened up new analytics centers in Europe, Atos merged with Siemens IT solutions to strengthen its position, and Capgemini made key acquisitions (Artesys and Avantias) in France. The offshore-centric Indian heritage providers are also not far behind their multinational counterparts in articulating the importance of Europe in their portfolio. These service providers have made investments in expanding their European operations, developing strong expertise in specific sectors, and exploring potential targets to achieve inorganic growth in the region – TCS announced its intent to expand operations in Europe in vertical sectors including healthcare, Infosys top management suggested the company is seeking acquisitions in Europe in areas such as cloud computing, and HCL is aiming to get one-third of its 2011 revenue from continental Europe.

This demand and supply dichotomy begs the questions: Have the service providers been too aggressive in their outlook toward Europe? Did the providers misread the demand environment? Will their investments turn out to be imprudent?

Our answer to all the above questions is “NO.” While the numbers for Europe in total indicate an uncertain demand environment, some specific countries within the European Union are registering healthy growth and stable demand for outsourcing services. For example, as highlighted in Everest Group’s report on Outsourcing and Service Provider Landscape in Germany, the number of outsourcing transactions in the country grew 31 percent year-over-year (Y-o-Y) in 2010. And our report Outsourcing Landscape in France: Global Sourcing and Service Provider Assessment suggests France’s outsourcing activity remained largely unaffected by the global recession.

These disparities can be attributed to the diverse cultural, political, social, business philosophy and economic landscapes among European countries. Thus, buyers and providers alike must gain a more nuanced understanding of the outsourcing environment in each, rather than applying a broad-brush characteristics profile to all. For example, take Germany and France. These two countries are distinctively dissimilar in the languages they speak (German is regarded as highly scientific, while French is more poetic), their respective business interests (Germany’s economy is mostly manufacturing driven, while France has the world’s third largest tourism income), and even in the way they play their football (Germany currently has a more agile team, while the French seem to be playing more fluidly these days). And let’s not forget Germany’s focus on precision, structure, and order, as compared to France’s flair, artfulness, and panache.

The two markets are also equally different in their outsourcing demand and supply profile. Stand-out points of distinction include:

France Germany chart1

France Germany chart2

The above dissimilarities between Germany and France illustrate the rule rather than the exception in Europe. Thus, it’s not surprising that the ~US$200 billon European outsourcing sector remains a conundrum for service providers. Will the significant investments made by service providers in Europe bear fruit? While only time will definitively tell, we believe every dollar spent wisely (with careful and informed evaluation of individual countries) will be more effective than any ten dollars squandered on uninformed pursuits. Starting with basics, service providers must avoid the pitfalls of a broad-brush approach to global services in Europe, and instead develop a laser sharp understanding of target countries based on robust facts and informed perspectives.

What Might Osama bin Laden’s Death in Pakistan Mean for Global Services? | Sherpas in Blue Shirts

With the announcement by Barack Obama that Osama bin Laden has been killed after a nearly 10-year hunt, the world seems to be on the path towards being a bit safer.

Hopefully that is what will happen.

Unfortunately, that may not be the implication — and, in particular, it may validate the lack of trust between India and Pakistan. The world will be watching carefully in the coming days to learn Pakistan’s true role in helping track-down bin Laden; who owned the compound in which bin Laden was staying; and the tone of the reactions of the governments and citizens of Pakistan, India, the United States, and other countries.

Having stayed at the Trident hotel in Mumbai just three days ago (one of the sites of the November 26, 2008 terror attack by a Pakistan-trained terror group against India), I can’t help but see this development as shining a bright light on Pakistan’s role in fighting terror.

Will Pakistan be seen as demonstrating courage and collaboration in fighting global terror or as a reluctant and superficial supporter?

Depending upon the answer to that question, the relationship between Pakistan and India may modestly advance one small step towards building trust — or the suspicion and divisiveness may further deepen. And the trend in the relationship between these two important South Asian countries can have big implications in the longer term for the global services market. Let’s hope it is a positive development.

Global services supporting information technology, finance, engineering, and other business processes has a very positive impact on the citizens of a country and helps form increasingly dependent bonds between countries. Unlike manufacturing-oriented trade, where countries simply just buy and sell to each other, in global services the citizens of countries actually work together — they must overcome differences and miscommunications, but they achieve goals together and develop a deeper understanding of the nuances of each other’s mindsets. And, in turn, understanding of others exposes the emptiness of hate and ridicule for other societies.

Across the global services sector, only about four million direct offshore jobs have been created thus far. Despite the significant apprehension about the impact on jobs around the world, this is still a fairly small amount, although it has helped accelerate economic and human capital development in many countries — India, the Philippines, and about 20 other destinations.

With a population of approximately 170 million (sixth largest country in the world) and many of the same legacy talent benefits as India (English language skills and quality education systems for some of its citizens), Pakistan certainly has the theoretical possibility to play a bigger role in global services. If Pakistan can be seen as helping fight global terror, many benefits can start to accrue through an improving relationship with India. These benefits would help both Pakistan and India address global concerns about regional security while also helping provide more opportunities for their citizens and also strengthening their economies.

I suspect most of you just laughed and thought I am being far too optimistic (and certainly naïve about the true motivations of South Asian politicians and military leaders). I politely suggest you might be overlooking what is already happening. First, remember that global sourcing is all about capturing a new profile of benefits in exchange for successfully managing a different profile or risks. Some will seek risk and carefully manage them to capture the benefits, while others will watch and follow. Those organizations which got things started in India 20-25 years ago were seen by others as taking too much risk.

Second, although most would not list Pakistan as a global services destination, it does host a limited number of service delivery centers supporting end users in North America and Europe. In the past 18 months, we have served two clients whom already had service delivery from Pakistan and are very happy with the level of talent available — but are naturally concerned about the risk profile.

Will more organizations set-up shop in Pakistan? Possibly, but not in significant numbers anytime soon. Might this be slightly accelerated if Pakistan begins to take fighting terrorism more seriously? Hopefully.

How Will the IT/BPO Industry Leaderboard Change? | Sherpas in Blue Shirts

This past weekend, many people were glued to their televisions watching the 2011 Masters Golf Tournament at Augusta National. As the days rolled by, the leaderboard changed in some surprising ways – the young McIlroy slid a long way from Number 1 on Day 1; Tiger Woods finally showed his old spark and stayed steadily within the top 5 throughout the game; and Charl Schwartzel jumped into the front-runner spot to take the Green Jacket.

While we now know the Masters winner, there is significant speculation on the changes in the IT services leaderboard, both today and going forward. The market is rife with questions on where Wipro and Cognizant will end up this season. The discussion on C-level changes at Infosys made a leading Indian newspaper speculate on issues it may be facing, with TCS speeding on and Cognizant being on steroids and catching up quickly. The next day, analysts said TCS would continue to outpace the other TWITCH majors as the quarterly results season starts.

We will know the answers to these questions in the next few weeks, after all companies report their numbers. But the more important long-term question is, what else will change in that leaderboard? Will we see more M&As, new entrants, or exits? And fundamentally, what will the future structure of the IT services industry be, and who will the winners be?

In a recent meeting, a CEO of an IT services company made an interesting point about there being steps at the US$500 million, $1 billion, $5 billion, and $10 billion marks, and that it is progressively challenging to get to the next level. It was clear he was thinking that some, including those in the $2+ billion scale, will struggle to reach the next level, and some will stabilize in their current or adjacent level.

The TWITCH discussion is interesting, but then there are the mid-tier IT players. We are just past the first quarter of 2011, and already three (iGate, Patni, and Headstrong) no longer exist, at least not in their original form. From all we hear or understand, several more may go before the end of 2011.

Then there are continuous speculations about pure play BPO players being shopped about. The rumor that Cognizant will take out Genpact has been around for ages. EXL is up for some action, and the market is abuzz with other speculations. As one of my colleagues recently blogged – will the Indian pure play BPO companies survive in the same shape and form past 2011 or 2012?

Net, net, here is the big picture. Some large Tier 1 players are struggling, mid-sized IT is not necessarily the best place to be, and pure play BPO companies are a vanishing tribe.

All this raises more questions: What is the future structure of the global services industry? Will Accenture, IBM, Dell, the Japanese majors, TCS and probably a few others become the super majors by 2015 or 2020, and will the rest need to find their own places under the sun? What other categories and groups of service providers will exist, and what will their characteristics be, for example, regional specialists, vertical specialists, etc.?

Irrespective of how the industry evolves, consolidation will continue, and the M&A juggernaut will roll. This business generates cash, and doesn’t require a lot to sustain it…so companies will invest in buying capabilities, assets, businesses, and people in attempts to win top spots on the leaderboard.

We certainly are headed for some interesting months ahead. Is anyone betting on who the winners will be at the end of 2011?

Indian Heritage Providers Are Achieving Differentiation | Sherpas in Blue Shirts

One of my partners recently returned from a conference remarking that he could randomly put any service provider’s logo on any of the collateral being distributed and nobody would notice.  Everyone’s message was essentially the same as their competitors. It is difficult to differentiate among the Indian heritage providers. Or at least it has been. Recently, three of the Tier 1 firms have emerged with highly divergent and (to date) successful differences at the strategic intent level.

Before we look at what these three firms are doing, let’s look at how the maturation of the global services industry is manifesting itself:

  • Clients are becoming progressively thoughtful about which providers they want in their portfolio, and are actively working through portfolio rationalization to achieve that mix
  • New logos are increasingly hard to come by and expensive to acquire; as a result, providers are focusing their efforts on growing business within existing clients – wallet share is king
  • The difference between ITO and BPO providers is blurring, and clients are increasingly looking for a provider that can deliver services across a wide range of areas
  • As client firms mature in their use of labor arbitrage, they are increasingly delegating decision making, giving rise to the purchasing function as a more influential player; this is starting to commoditize the offshore services market and is putting pressure on price
  • Simultaneous to the delegation of decision making, senior client firm executives are increasingly wondering and questioning what they should do next, specifically beyond arbitrage, to increase value.

These dynamics are challenging the Indian heritage Tier 1 providers to evolve their strategies and tactics in order to retain and grow their client bases, as well as secure new deals with a next generation flavor.

So how are three of the biggest addressing these issues per their strategic intent?

TCS’s strategic intent is “flawless execution.” TCS’s clients and the market are increasingly viewing TCS as a superb operator with a well-polished and effective talent management model.  Many view TCS as the leading example of how to deliver consistently high quality work at attractive prices. It invests significantly in becoming its clients’ strategic delivery partner, including focused initiatives to build relevant IP. TCS has been very thoughtful in segmenting the market and organizing its business by vertical industries. The multinational provider it is most similar to is IBM. Both have a large client base, are very deliberate in their strategies, are highly intentional in their investments, are very focused on deep and broad client relationships, and work consistently to identify and nurture them.

Infosys’ strategic intent is being a “transformation partner.”Infosys has invested considerably in building a large and impactful consulting organization in order to combine consulting with delivery to achieve transformation for its clients. That objective is being bolstered by its 3.0 co-creation strategy, which is a move further down the line of transformation. It is achieving many successes, and is considered a formidable player. The ongoing transition of senior leadership at Infosys seems to be well along its path with clear succession planning underway and significant investment to develop the next generation of management. Yet, Infosys is taking a challenging strategic intent route as it is squarely emulating Accenture’s strategy. The transformation hill is steep to climb because of the difficulties involved in combining consulting with delivery. Accenture has done well, but others have struggled to succeed along this path. Infosys’ ability to resolve the key conflicts between consulting and delivery will determine its long-term success.

Cognizant’s strategic intent is superb “client engagement.”Cognizant is simply the best at working with clients on business issues. Its secret sauce is an ability to engage with clients on problems and pull through consulting and delivery services. This is different than Accenture’s and Infosys’ transformation model in that Cognizant focuses on the client relationship and client engagement by working through the suite of problems currently on the client’s plate, as compared to game-changing transformation. Cognizant invests significantly in highly empowered onsite teams, and its delivery and consulting organizations are tuned to be responsive to the client engagement team. This overall model and strategy is quite different than any other Indian or multinational firm, and is achieving significant growth and profitability returns.

Each of these strategic intent approaches appear successful to date, and has moved each of these three firms to a superior level of performance. Indeed, as clients increasingly recognize the clear difference among these players, and other providers follow their lead to secure true differentiation, we will see a new Tier 1 emerge in the Indian heritage provider space.

Anticipating the Unexpected: Implications of the Egypt and Tunisia Crises on Global Sourcing | Sherpas in Blue Shirts

After spending most of Sunday evening watching the ongoing Egyptian crisis unfold on TV, our mailboxes were flooded with analyst perspectives and journalist queries on the impact it will have on Egypt’s information and communications technology (ICT) industry. While the recent turn of events is likely to hamper the brisk progress Egypt and Tunisia were making in global services, it may be too early to predict the impact on the future state of these outsourcing/offshoring destinations. As market participants in these countries try to weather the storm, and the concerned global sourcing community looks on, global investors and IT-BPO sector countries and industry organizations stand to learn important lessons from this situation.

Tunisia and, particularly, Egypt are among the emerging offshore services delivery locations that have in recent years significantly invested in growing their IT-BPO industries as they recognized this sector as a key driver of economic growth. Both countries have achieved considerable offshore scale (more than 8,000 in Tunisia, and 20,000+ in Egypt), and both have successfully attracted marquee companies including Vodafone, Stream, Teleperformance, Wipro, and Microsoft, to source services from these locations to fulfill language skills, cultural affinity, cost savings and geographic proximity needs. And until the last two weeks, both countries were considered relatively stable locations demonstrating rapid progress in embracing reforms and FDI inflows (endorsed by UNCTAD, and World Bank/IFC.)

This all raises two critical questions: did location decision makers misread the developments in these countries, or fall short in anticipating these scenarios? To some extent, as such incidents are unprecedented and almost impossible to predict, they would not result in a “no-go” decision in a location selection exercise. At the same time, this is not the first instance of a partial disruption or complete shutdown of offshore support operations in a country. Episodes in the recent past (e.g., the typhoons in the Philippines, the military coup in Thailand, the earthquakes in Chile, the Mumbai attacks, and the swine flu pandemic in Mexico) have unquestionably affected operations in global delivery locations. Thus, it is important to “anticipate the unexpected” in location selection decisions by planning ahead, and putting in place investments and robust blueprints to manage such risks. In well-prepared organizations, these types of events trigger implementation of well-crafted disaster recovery/business continuity plans.  For example, Infosys has a disaster recovery site in Mauritius where business critical processes can be swiftly migrated, and critical resources enabled to travel at immediate notice via a blanket visa agreement with the Mauritian government.

Amidst the crises in Egypt and Tunisia, single location sourcing buyers are undoubtedly hurting more than users of global delivery networks-based models, as global delivery portfolios built on a ‘plus one’ principle ensure redundancy. In building a global sourcing portfolio, a role-based delivery network designed to meet aggregate demand, and scenario-based work placement to fulfill business needs, provides flexibility and ensures talent sustainability while optimizing costs and minimizing risks. For example, most leading global financial services companies have a headcount cap in each location, and route overflows to alternative sites in their portfolio.

Such moments of crisis also provide an opportunity to revisit the frameworks governing location selection decisions. Mature users of global services approach location selection as a risk-reward tradeoff on a relative basis. And as potential investors assess locations across parameters of talent pool, cost structures and structural risks, this episode underscores the importance of adopting a risk-adjusted view to cost savings approach, and allocating higher weights to geo-political and macro-economic risk. For example, while Egypt offers 70 percent cost savings on support services compared to Tier-2 locations in the U.K. and the U.S., in a situation in which country stability indicators are no longer favorable, the risk-weighted cost savings are less attractive.

These are clearly trying times for IT-BPO investment promotion agencies and country/industry associations in these countries. Due to the Internet blackout in Egypt, their ability to communicate with the external world has been hampered. While the immediate objective is to sustain engagement with existing investors, and extend support to help them cope with the situation at hand, it is important to keep channels of communication open with potential investors and key influencers to ensure accurate information dissemination. The underlying theme here is the need for a disaster management and communication plan for country/industry organizations. Once the situation stabilizes, these countries will need to engage in a public relations initiative to restore confidence within the international global sourcing community. A country rebranding exercise may also be necessary, if investor perceptions about Egypt and Tunisia change dramatically.

While there’s no denying these events impact the investment/stability ratings of these countries in the immediate-term, the political and macro-economic developments will need to be closely monitored with a longer-term view. Things to watch out for include endorsement of political leadership from both internal and international quarters, recast country ratings/indicators from the likes of World Bank and WEF, country administration reiterating its commitment to the services industry (specifically the ICT sector), ability to maintain investment-friendly policies (e.g., tax breaks, incentives, foreign investment practices), and the collective response of global IT-BPO companies operating in these countries.

As close watchers and proponents of global services, we remain cautiously optimistic about the prospects of the IT-BPO sectors in Egypt and Tunisia. Only time will tell how the situation pans out, and how the global sourcing community responds to the now imminent damage control exercise expected from the country/industry associations. The learning for the location decision maker from this crisis is more pronounced: Anticipate the Unexpected.

Is 2011 the Year of “Next Gen” Global Services? | Sherpas in Blue Shirts

During our annual Predictions webinar on January 27, during which we outlined many of the key themes shaping the global services market going into 2011, we were pinged with throngs of questions from the audience. As the questions continued to pour in, it became abundantly clear that savvy buyers are thinking beyond price points, SLAs, and contracts, and are now keenly focused on how to drive better global services outcomes for their companies. Let’s take a look at our predictions and buyers’ top-of-mind issues and concerns.

A Sampling of Everest Group’s “Next Gen” Themes for 2011

It’s not all about new deals in traditional markets. Growth in the global services market is increasingly about organizations shifting more operational spend into outsourcing, shared services, and captive operations. These models for managing corporate operations have taken hold, and leaders around the globe are now exploring how to grow existing delivery models and expanding how they use them. For example, in the finance and accounting outsourcing (FAO) market, we predict that organic growth will match growth coming from new engagements in 2011, dollar for dollar.

It’s about expanding value. Global services operations focused on achieving the most competitive pricing at the sake of all other considerations are in a self-defeating cycle. Next-gen services are about balancing cost gains against gains in operational efficiency, process effectiveness, and intelligent process management. For example, we expect more organizations in 2011 to manage their global sourcing and delivery portfolio with an eye toward rationalizing service provider relationships, driving broader adoption across the organization, and better aligning delivery incentives.

Taking cloud services out of the fog. While cloud services continue to be shrouded in a fog of diverse approaches and service provider strategies, it’s clear that a future based on more leveraged and standardized access to technology and processes is imminent. We expect 2011 to move the market forward in clearing some of this fog as more compelling cloud offerings take shape through continued partnering among service providers, CIOs and the intermediaries supporting both.

Service providers continue to feel the heat. Being a service provider these days continues to be a tough job. They’re under increasing pressure to drive more value (as well as better prices) against client spend, they’re facing increasing competition in consolidating markets, and their clients are rationalizing and optimizing their service provider portfolios. In 2011, we expect to see offshore legacy Tier-1 service providers, especially in IT, make selective acquisitions to grow scale against shrinking margins, build onshore capacity, and expand capabilities in order to gain more share of individual client spend.

Now, onto some of the buyer questions we received during our Predictions webinar:

  • Given changing margin profiles, should I consider repatriating my IT services work, and using offshore only for my BPO work?
  • What type of outcome-oriented metrics do you find are gaining market acceptance?
  • What are the upcoming technology plays in FAO?

These clearly indicate service buyers are thinking deeply about how to evolve their current investments in global services, and how to position their organizations to optimize their services sourcing opportunities in the future.

There’s little question that “next gen” service recipients are here — is the market ready to move forward with them?


Access the recording of the Everest Group 2011 Market Predictions webinar.


Eleven in 2011: Everest Group’s Predictions for the Global Services Industry | Sherpas in Blue Shirts

The number 11 holds far-reaching significance in numerology, in the bible, among doomsday theorists, and in the dice game craps, to name just a few instances. What’s the significance of Everest Group’s 11 predictions for the global services industry in 2011? Let’s take a look.

 1. Unleashed discretionary spend that fueled the 2010 global services industry will fizzle out by the end of Q2 2011, resulting in market growth flattening.

While most forecasters suggest accelerated market growth through 2011, we predict a flattening of growth in the global sourcing market as companies work through pent up demand. Assuming economic forecasts hold, we expect to see continued increased activity fueled by the discretionary spend that began in 2010 to last through Q2, then drop back to its “natural” level consistent with the economy. Transformation agenda activity, precipitated by changes in the industry, will increase slightly in tandem with a slowly recovering economy. “Run and maintain” activity will also move in the direction of the economy.

2. Provider pricing power will not regain pre-recessionary traction in 2011.

We predict low and modest pricing power in the provider segment, or a return to pre-recessionary pricing levels. This will force them to continue to differentiate themselves by performance outcomes, rather than price. As a result, select providers will grow disproportionately, taking clients away from others.

3. Global companies will continue to channel efforts toward services portfolio rationalization and increased adoption of hybrid sourcing models.

While for the last decade the industry worked to understand, test and deploy models to capture value from labor arbitrage, organizations with mature global services portfolios are now focused on making them more effective and able to deliver end-to-end impact. The global services market has shifted accordingly, helping global companies extract value from third-party service providers, shared services organizations and combinations of both via hybrid models. At the same time, attractive new markets for labor arbitrage remain for mid-sized companies who are late adopters of more robust sourcing strategies or for portfolio extensions of mature clients.

4. More inflammatory dialogue on offshoring, driven by political posturing in a weak economy, will drive offshore companies to establish a greater onshore presence.

2011 may see more protectionist measures proposed by the United States and politicians due to the high level of continuing unemployment. Most of these measures will fail to gain traction and pass into law, and those that do will be difficult to implement and audit. Yet the increased negative press will drive the major offshore providers to increase their onshore delivery capabilities, a trend already well underway per their need to deepen relationships with clients and add more complex and intermit work to their offerings. The United Kingdom will also likely move in a similar direction with proposed quotas on non-EU immigration of skilled workers. While it’s very unlikely that U.S. politicians and legislative agendas will have a significant impact on the sourcing industry, these pressures will probably eliminate or significantly restrict new markets for offshoring with government buyers.

5. Strong sourcing market growth will be in geographies with strong economies, led by Brazil, China, India, and the Middle East.

Countries with strong economies represent big markets with big demand for transformational and discretionary spend activity. Consulting firms and service providers will focus efforts on reaching these robust markets.

6. Cloud computing will be the technological breakthrough causing the most disruption.

While it will take time for cloud computing to mature and for companies to adopt it on a widespread basis, it is currently creating significant discontent and disruption in delivery models, and will continue to do so in 2011. Expect to see service providers continue to push development of cloud solutions and, in some cases, acquire smaller players to gain intelligence and/or expand capability offerings.

7. Industry consolidation will pick up speed.

Industry consolidation will be driven by several factors: 1) Infrastructure hardware providers seeking to extend services; 2) Japanese service providers engaging in increased M&A activity as they continue to look to expand their global networks; 3) Buyer organizations’ continuing desire to have a smaller portfolio of service providers; and 4) service providers seeking diversified offering capabilities as they continue to see traditional growth areas slow.

8. Emerging low-cost destinations will increase their momentum.

 The new, emerging destinations such as South Africa, Egypt, and Argentina will continue their impressive rise as attractive locations for specialized services, providing an increasingly important complement to the mega destinations of India and the Philippines. This increased importance will drive substantial job growth and present increased demands on countries infrastructure and, in turn, command more support from governments in the form of increased investments in regulations that are more attractive and policies, and more proactive measures to attract and maintain inflows of work and investment.

9. Cities, Counties, States and Provinces will join the party.

Proactive government entities, such as cities and states that have traditionally outsourcing to other locations, will realize the untapped potential of becoming mini hubs of global services work. These innovative government entities will be able to make targeted investments that attract high paying services jobs into their jurisdictions, leveraging the under-employment of key skills combined with emerging work from home and telecommuting technologies and business models. Over time, these will enable a new class of complementary and compelling services offerings, further enriching global services portfolio options while greatly enhancing the standard of living and tax bases of the locations that  embrace this new model.

10. There will be rising dissatisfaction and pricing pressure on the traditional IT infrastructure market.

 HP’s move to take out a substantial portion of EDS’ cost structure has already set off a chain reaction as other IT infrastructure companies increasingly recognize the new competitive realities and strive to cut costs and match price. The primary vehicle for cost reduction will be to move a greater portion of the delivery staff offshore to low-cost destinations, primarily in India. This mass migration of work is and will further stretch offshore delivery capabilities, resulting in decreasing quality and communication problems. We expect these issues, combined with the rising expectations emanating from the emergence of new disruptive models such as cloud and Remote Infrastructure Management Outsourcing (RIMO), will amplify the already growing dissatisfaction in the buying community.

11. Arbitrage will increase.

We expect increased wage inflation in the low-cost destination countries, and increased fourfold pressures as currencies of developing countries increase relative to their nation currencies of the Euro and Dollar. Nevertheless, we still expect it will become cheaper for providers such as Infosys, Wipro, TCS and others in that class, to provide work out of their low-cost destination locations relative to the cost of delivering them onshore. This is not to say we expect pricing drops from these firms; indeed, they will likely be vocal in pointing to their rising costs as a strong rationale for pricing increases. This arbitrage increase will apply to the overall cost of delivering the work, and may be misunderstood at an individual person or job class level. The reason for this surprising and counter-intuitive prediction is that we believe the class of providers that has mastered talent factories will be able to apply lean process improvements, and continue down-shifting their work to more junior and cheaper resources, overall widening an already growing arbitrage gap. This downshifting of work, which has been under way for a number of years, will be accomplished without materially affecting the quality of the services delivered.

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