Six Common Mistakes Enterprises Make when Developing Service Delivery Location Business Cases | Sherpas in Blue Shirts
Everest Group regularly supports clients in developing fact-based business case models to assess all relevant costs and benefits associated with their service delivery portfolio and delivery location decisions.
Not surprisingly, we’ve seen an increase in this type of activity in the last several years due to technology disruptions, potential immigration reform laws, intensifying competition for talent, and macroeconomic and geopolitical uncertainties. We’ve also seen an increase in the number of faulty/incomplete business cases that, if unresolved, can result in unnecessarily high costs and less than expected benefits.
Six common mistakes enterprises make when creating their global service delivery location business cases.
#1 Clarity on the primary objective of the business case:
Establishing clarity on the key objectives of the business case for service delivery location selection is of utmost importance. Companies often include benefits of other initiatives (e.g., transformation) which may impact their overall locations footprint, but fail to include costs associated with these initiatives, resulting in a faulty business case. As business case assessment is typically done for long-term strategic decisions, it is critical to ensure clarity on the locations strategy and implementation roadmap under consideration.
#2 Underestimating the costs of “what it takes to get there”:
Companies often underestimate the costs associated with exiting their current location (e.g., lease termination and severance costs); disruption in their existing locations (e.g., loss of knowledge due to higher than expected attrition); migrations (e.g., employee relocation, technology migration, parallel/shadow run); and set-up of new centers (e.g., capex, cost of hiring and ramp-up, training costs, etc.)
Example: A global Financial Services company had a 12-month long shadow/parallel run to effectively complete knowledge transfer for high complexity processes. This negated most of the arbitrage-related benefits for the initial 12-18 months. In fact, the company incurred relatively higher total cost of operations (TCO) until steady state operations was achieved.
Example: In a recent engagement, the location selection for a Latin American client’s shared services center was greatly influenced by applicable withholding taxes (i.e., the Argentinean government levies a ~31.5% withholding tax on import of global services from certain locations such as Mexico). These factors significantly impacted the relative cost attractiveness of locations under consideration.
#3 Overestimating benefits:
Companies often plan multiple transformation and optimization initiatives in parallel with changes to their services delivery portfolio. In such cases, things seldom pan out as planned, and the savings achieved are significantly lower than expected in areas including:
- Headcount reduction from process improvements
- Delivery pyramid optimization
- Implementation of automation/technology solutions
- Economies of scale (in cases of location consolidation)
- Optimization of management and administrative overheads
Example: A BFSI firm changed its planned strategy midstream, as its initial plans to fund the business case for large scale service delivery location consolidation by reducing FTE headcount by ~ 6,000 could not be realistically achieved.
#4 Stakeholder misalignment:
A service delivery location decision must involve multiple stakeholders including onshore business leaders, offshore delivery leads, functional and GIC leaders, migrations and/or transformation teams, corporate real estate, and technology teams. Any lack of coordination among these stakeholders can pose challenges in alignment on data used, key assumptions, the roadmap for service delivery portfolio changes, and the plan for other transformation/optimization initiatives. All stakeholders must be kept in the loop from the beginning of the location evaluation, and they must periodically periodic sign-off on the approach.
#5 Industry benchmarks:
While it is important to leverage industry benchmarks, companies must contextualize information to their own unique situation. The specificity of operations or the role a location plays for the company can be different from the typical value proposition of that location/geography.
Example: A recent engagement for a global Financial Services client demonstrated that, despite industry benchmarks that indicated Location A offered ~20 percent cost savings over Location B for typical BPO processes, the client’s specific processes and talent needs reversed the cost attractiveness of the two locations.
#6 Talent competition in the local market:
Companies often underestimate the true extent of competition in the local talent market, and the impact of attrition on sustainability of their operations. This impacts a company’s ability to scale initially, retain talent, and back-fill lost staff.
Example: A global manufacturing company faced significant challenges in hiring language skills for its newly setup shared services center in the APAC region, resulting in significantly lower arbitrage savings than expected.
While developing business cases models can be a significant challenge, we believe that addressing the above-mentioned points can reduce chances of error significantly. Learn more about Everest Group’s Service Delivery Locations practice.
Trump Dump | Sherpas in Blue Shirts
In our Everest Group forecast for the services industry earlier this year, we predicted deceleration from 3.2 to 2.8 percent in the broader services market and deceleration from 7.1 to 6.8 in in the Indian market. We see no reason to change that prediction of deceleration now. But something notable has happened since we made the prediction: a deceleration in Accenture’s earnings in the consulting and systems integration areas. This is puzzling at first glance but highly significant of a major trend.
We would have expected that we would increase our earlier industry forecast, given two factors:
- Powerful new digital technologies now coming of age that are ready for adoption and should drive a wave of adoption and new spending
- A buoyant US and global economy that has increased consumer spending, further driving discretionary services spend
However, we see negative trends due to the insecurity caused by what I refer to as the “Trump Dump” in America and by Brexit in the UK. The Trump Dump is the politically difficult environment causing companies’ reticence or unwillingness to commit to large projects with offshore labor. We’re consistently seeing projects delayed, postponed or cancelled. This puts companies in a bind because there simply isn’t sufficient domestic talent to drive large initiatives.
The US represents almost 50 percent of the global services market. We believe the Trump Dump will have a negative effect on the broader services industry, creating impacts beyond just the Indian segment of the market. Therefore, we believe there are significant reasons for caution in forecasting market growth.
The Battle over Healthcare: Round One Ends with a Whimper and Uncertainty | Sherpas in Blue Shirts
Healthcare reform has become a political slugfest, casting a spell of ambiguity as the world’s largest healthcare economy attempts to fundamentally transform itself.
Consequently, the global services industry is waiting with baited breath to see how this upheaval pans out. For context, healthcare has been a saving grace, growing at three times the rate of the overall IT-BPO market, which is facing challenging times of its own.
On March 6, Republicans unveiled their plan to repeal the Affordable Care Act, or ACA, popularly known as Obamacare. The ACA, which was signed in March 2010 and came into effect during latter half of 2013, was the most significant regulatory overhaul to expand coverage since the passage of Medicare and Medicaid (Social Security Amendments) in 1965. One of the key highlights of President Trump’s campaign was to repeal and replace the ACA, which he dubbed “broken.” Soon after he took over the Oval Office, he realized that complete overhaul of the law would be a lengthy and complex process, contrary to his promise of quickly instituting a completely new health law. Despite the significant advantage of Republicans controlling both House and Senate, President Trump’s bid to replace the ACA with the American Health Care Act, or AHCA, (essentially a variant of Speaker of the House Paul Ryan’s health plan), failed to see the light of day, with Ryan conceding defeat on March 24.
What went wrong with the American Health Care Act
The principal problem with the AHCA was that it was nowhere close to the promised repeal and replacement of the ACA, but essentially a stop gap plan. It was a contentious bill, which lacked widespread appeal. Key stakeholders and their objections included:
- Almost all the large payers (except Anthem) were opposed to this law, as it would significantly reduce their enrollment base and, in turn, impact their top-line
- Healthcare provider associations (such as the AHA, AMA, and American Nurses Association) also opposed AHCA, as it would put extra pressure on providers who are already reeling with bottom-line and revenue problems
- Various consumer groups, including the American Association of Retired Persons (AARP), expressed concerns as the bill was not in favor of the sick and older populations that require healthcare services the most
- Conservative Republican lawmakers (i.e., The Freedom Caucus) dubbed it Obamacare-lite.
The uncertain future for healthcare payers, providers, consumers, and IT-BPO service providers
The currently regulatory limbo has a cascading impact on each stakeholder group.
Healthcare payers
Health insurance companies are left with little clarity on their participation in the healthcare exchanges, which have become value-dilutive, and appear even shakier given the current administration’s disdain of the ACA. Large payers, including such as Aetna, Anthem, Cigna, Humana, and UnitedHealth have threatened to pull out of the exchange markets if the uncertainty is not resolved soon. There are theories that the executive branch could act independently of Congress to improve functionality of the individual insurance exchanges.
Healthcare providers
Failure of passage of the AHCA resulted in an increase in some of the leading hospital networks’ stock prices. This was primarily driven by the fact that the decline in enrollment, especially around Medicaid patients, has been delayed. Most of these hospitals improved their bad debt when their respective states expanded Medicaid, as hospitals became eligible for payments for patients who could not afford healthcare. While providers are relieved right now, uncertainty remains. They have struggled with high operating costs, thin margins, and talent issues, and these are only going to intensify.
Healthcare consumers
With the June deadline for submittal of initial rates for exchange plan fast approaching, some consumers may be left with limited health plan options, as some of large payers are hedging on exchange participation. At the same time, ACA plans have witnessed a resurgence in popularity.
Healthcare IT-BPO service providers
Service providers will have to deal with spending decision delays from both payers and providers as they look towards the new healthcare bill. We have already seen leading vendors face revenue headwinds. For example, Cognizant’s healthcare revenue grew by just a mid-single digit in CY2016 after a stellar performance in CY2015. Any new decisions around outsourcing will most certainly be deferred for now, whereas existing keeping-the-lights-on spend is expected to continue. Deal renewals are expected to be for shorter duration as buyers (both payers and providers) wait for veil of uncertainty to be lifted.
The road ahead for healthcare and global services
After this initial bruising, the Republicans are unlikely to give up without a fight. Speaker Paul Ryan recently mentioned that House Republicans will resume work on healthcare reform, but offered no timeline. This will be easier said than done, as GOP leaders need to overcome the deep divisions that ultimately led to the failure of the bill.
Healthcare policy requires hard work, and rushing through a half-baked plan such as the AHCA just won’t cut it. Obama spent over a year on garnering support for the ACA, and the new administration’s heavy handed attempt reiterates that there are no real shortcuts to the process. The GOP should regroup and take a fresh look at the problem statement.
The outcomes might have even greater implications on the global services market. Until then, buyers are likely to twiddle their thumbs and delay key decisions amidst the tremendous uncertainty.
From Captive to Catalyst: The Next Milestone in the Global In-house Center Evolution Story | Sherpas in Blue Shirts
At a conference I attended recently on the role of global in-house centers (GICs) in digital and RPA, one of the speakers asked everyone to imagine what their organizations would look like in the future. The answers from a room full of enterprise and GIC leaders were varied and fascinating. My personal favorite was the one where robots will manage all forms of work while people relax on a beach, soaking up the sun, and sipping their piña coladas. Tempting as that sounds, I don’t expect it to happen anytime soon.
But what is happening now is a flurry of changes in the business environment globally. Amidst recent geopolitical developments in the U.S. and U.K., increasing talks of protectionist policies, the advancement of RPA and other service optimization technologies, and regulatory pressures affecting the global services sector, GICs and shared services centers find themselves at a crossroads. As the global services sector moves from an arbitrage first to a digital first delivery model, GICs have an opportunity to break away from the orthodox boundaries by taking the road less traveled, and enhance their role in enterprises’ global sourcing strategy.
Everest Group has seen first hand the evolving role of GICs, which has expanded beyond providing low- cost delivery to being agents of change – or catalysts – for enterprises’ back- and middle-office services.
Now, GICs are at an inflection point in their evolution journey, well positioned to take on this enhanced role driven by: increased endorsement from the enterprise and the shift towards insourcing; a strong foundation and ability to offer an insider’s view; tight integration with the existing core business; and strong adjacency with existing focus on driving efficiency and optimization.
What does the future of GICs look like?
To successfully undertake changes within their enterprises and redefine their role from captive to catalyst, GICs need to:
- Drive business impact and thought leadership
- Develop global leaders and talent/skills
- Play a pivotal role in the transformation of processes and service delivery
- Lead organizations through digital disruptions in global services.
Here are Everest Group’s recommendations on how GICs can capitalize on this opportunity:
- Redefine the art of the possible, and adopt a business outcome-oriented mindset, which is significantly different from the current delivery mindset
- Identify and prioritize investments, such as their choice of functional and technology segments, and the best approach to gaining more than just incremental growth
- Change their talent model (e.g., hire for learnability, strengthen culture of innovation) and operating model (e.g., different onshore-offshore collaboration models due to agile/DevOps) to catalyze the digital agenda.
Our newly renamed CatalystTM subscription research program (formerly known as Global Sourcing) provides GICs and enterprise clients with actionable insights to navigate through the evolutionary journey from captive to catalyst. Benefits of a Catalyst subscription include:
- Industry-leading research and viewpoints on multiple topics relevant to GIC market
- One-on-one briefings with Everest Group analysts and SMEs
- Exclusive invitations to GIC events – including webinars, roundtables, and virtual networking sessions – organized by Everest Group
Learn more about our work in the GIC space, and see details about our Catalyst research program.
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.
Ascender’s Acquisition of NGA’s ANZ Business: Consolidation in a Maturing Market | Sherpas in Blue Shirts
On 31 January 2017, Australia-based Ascender and NGA Human Resources announced that Ascender had acquired NGA’s Australia and New Zealand business. Part of the agreement is a partnership between the two companies to deliver payroll and HR services solutions for the ANZ region, ensuring a seamless solution for NGA HR’s global payroll and HR clients. The deal makes Ascender one of the largest HR and Payroll providers in the ANZ and APAC region.
What are the implications of the deal?
For NGA:
- Global deals with ANZ components will continue unaffected, as Ascender will serve as a partner provider in the region with no disruption to existing operations
- NGA will aim to use a partnership-based approach for multi-country deals originating in the ANZ region. It will no longer be active in the single country payroll market in ANZ.
For Ascender:
- Its single country capability and reach in the ANZ region will get a boost with the addition of NGA’s services delivery and technology capabilities, specifically the Preceda and PS Enterprise HCM platforms
- It will have access to a new set of clients in ANZ, with an opportunity to sell into other regions of APAC through the newly acquired client portfolio. This could potentially increase its multi country payroll outsourcing (MCPO) market penetration in the APAC region.
Of course, as with any deal of this type, there are numerous things those in the region should watch out for.
First, NGA and Ascender will be looking to forge a partnership in a way that is beneficial to both parties beyond the immediate operational need. The scope and extent of this new partnership will evolve and take shape as the dust settles. It remains to be seen what form it will take, especially in light of Ascender’s recent entry into the Europe-based Payroll Services Alliance, wherein eight major payroll service companies have bundled their services into a unified offering that consists of strong local expertise and services, supplemented by coordination and integration at an international level.
As far as technology is concerned, with NGA’s PS Enterprise and Preceda HCM platforms coming into Ascender’s fold as part of the acquisition, Ascender will likely seek to integrate the different system capabilities under one brand over time. As with a lot of private equity-backed acquisitions, since the focus will be on improving margins, we are likely to see more investment in consolidating and improving technology, driving automation, and increasing self-service functionality.
Although the APAC market continues to experience relatively high growth rates – 7-9% in single country payroll outsourcing and 23-25% in MCPO – the region is fairly complex, and each country requires a distinct strategy to ensure sustainable growth. For instance, while India requires a heavily price-sensitive services sales approach, a technology-driven approach works better in Australia.
With the APAC region requiring a great deal of management attention and local presence to drive continued success, global providers’ APAC arms tend to be private equity acquisition targets. Indeed, while Western economy-based global players don’t necessarily have the focus to negotiate the uniqueness of the APAC region’s HR services and payroll requirements, private equity can certainly help bring that focus to the table. For example, Ascender is backed by a private equity-led consortium, and just two years ago, private equity firm Everstone Capital bought out Aon Hewitt’s APAC business, (renamed Excelity Global).
While not all will be private equity-driven, we do anticipate more acquisitions and consolidation in this space in the APAC region as the market matures, particularly in geographic markets that are fragmented, with no clear leader in sight.
Outsourcing Trends to Watch in 2017 | In the News
This year, we saw outsourcing integration challenges multiply, production workloads and enterprise systems hit the cloud, and security hit the top of the agenda.
So what’s ahead for 2017? Uncertainty for one thing. Industry watchers expect a number of shifts in the IT and business process services space — not least of which will be the initiation of more flexible outsourcing terms as the world watches and waits to see what happens once president elect Donald Trump takes office and Brexit takes hold.
Asia Pacific Share of Global Delivery Center Set-ups Declines 2016 | Market Insights™
Although Asia Pac maintains the majority share of new center setups, its share has declined as other regions have grown
Asia Pacific Leads in New Delivery Center Set-ups 2016 | Market Insights™
Asia Pacific continues to lead in global new delivery center set-ups
India and the Philippines Lead Global Services Market Share | Market Insights™
India and the Philippines hold the lion’s share of the global services market
