Tag: global services

The Three Foundational Elements of Cost Benchmarking | Sherpas in Blue Shirts

In the global services industry, cost benchmarking is a method enterprises use to compare their outsourcing cost competitiveness against those of similar organizations. Yet, in Everest Group’s experience and observations, businesses all too often erroneously view salary benchmarking as indicative of overall expenditures.

While salaries constitute the biggest component (60-70 percent) of operating costs, salary benchmarks fall short of providing the requisite insights, as higher salaries don’t necessarily mean higher overall costs. There are multiple other factors driving costs. The top three factors driving outsourcing operating costs, other than salaries, are:

  • Pyramid and talent model
  • Scope of work
  • Non-compensation cost

These factors are specific to companies’ context and typically depend on their positioning. In addition, there are market-driven forces impacting costs, such as attrition, wage inflation, and the exchange rate in different countries.

A typical benchmarking exercise takes all these factors, and others, into consideration.

Following are three cost benchmarking best practices.

Best practices of cost benchmarking

Take a holistic view

Cost benchmarking should consider a comprehensive set of factors effecting cost. Everest Group classifies these components into three broad buckets:

  • Compensation-linked costs (e.g., salaries, benefits)
  • Non-compensation costs (e.g., real estate, technology, support staff, transportation, recruitment, and training)
  • Policy levers (e.g., delivery pyramid, support staff leverage, and space usage)

An ideal cost benchmarking takes a holistic view across all three categories.

Identify underlying cost drivers

By definition, cost benchmarking determines differences within the market. However, on their own, these differences offer limited insights. To discover opportunity areas for cost optimization and subsequent calibration, enterprises need to identify the underlying drivers of differences.

For example, if an organization’s real estate costs are higher than the market average, benchmarking should identify whether it is due to rentals, space per seat, seat utilization, or a combination of these factors. Similarly, for companies with higher support staff costs, benchmarking should identify if it is driven by higher support staff salaries, skewed support staff ratios, or both. There are multiple such costs elements (e.g., transportation, recruitment, training) for which benchmarking could help identify the underlying drivers for calibration.

Normalize data

Even in situations where cost drivers are identified, it is critical to ensure like-to-like comparisons in order to derive meaningful conclusions. For illustration, in the real estate example above, economies of scale can result in different real estate costs for a 100 seat center and a 1,000 seat center.

Thus, organizations should normalize data along key dimensions impacting the cost. Typical dimensions to normalize include:

  • Locations (e.g., onshore/offshore, Tier-I/II/III)
  • Scope of work (e.g., ITO/BPO, front office, back office)
  • Nature of work (e.g., transactional, complex)
  • Player type (e.g., GIC, service provider, specialist)
  • Scale (e.g., mid-size, large scale)

Cost benchmarking is not an easy, close your eyes and toss the dart exercise. Benchmarking that fails to take a comprehensive view of cost, identify underlying drivers, and normalize data runs the risk of making misleading comparisons that may lead to flawed results.

Is It Time to Sing “Happy Days Are Here Again?” | Sherpas in Blue Shirts

After several years of believing that discretionary spend would come back into the marketplace, it appears that we are, in fact, experiencing an uptick. This increase in demand is definitely welcome after recent years of suppressed demand.

The question is: How long will this trend continue and will we move back to the heady growth of days of yore?

The answer is yes and no. Yes, the growth trend is likely to continue. We seem to have an improving economic condition in both North America and Europe for both structural outsourcing as well as discretionary spend. I think we can look forward to modestly improved growth rates.

However, we need to remember that we’re at a very different level of market saturation for outsourcing services than we were five years ago. It seems unlikely that the market will return to the 20+ percent growth rates. I think what we’re looking at today is a small increase in growth, not a large one.

Having said that, let’s take what we can get and celebrate! As the French Mardi Gras saying goes, let the good times roll — but not to the point that we wake up with a reality hangover.

Why We are Changing to “Global In-house Center” (GIC) over “Captive” | Sherpas in Blue Shirts

Related: See our latest thought leadership on GICs

When we began conducting webinars for Market Vista when it was launched in 2008, one of the most common questions we received during webinars was “what is a captive?” I even recall one attendee leaving me a voicemail within 10 minutes of a webinar concluding that basically said, “You guys suck because I can’t understand what you mean by ‘captive’ – isn’t it just a shared service center?”

In recent times, I am less frequently asked to explain what “captive” means and, in fact, generally find that most industry insiders all understand and use the term clearly.

So what explains our decision to stop using “captive” and instead use “Global In-house Center” or “GIC”?

Have bath salt-inspired zombies eaten our brains? Do we strangely enjoy having to invest 5 minutes defining terms simply so that people can understand what we are talking about? Or are we just desperate for topics for our blogs?

Nope. None of those.

We did it for the children. (Insert ohhhh and ahhhh here.)

The image of the slide below explains the full rationale for the change and you should be prepared to see it A LOT – in webinars, reports, conference presentations, etc.

GIC Terminology Change

Yes, we know that “captive” is easy to write and say. It has many things going for it.

However, it is a poor word. Quite simply, does anyone associated with a “captive” want to refer to it as a “captive”? Does any bright-eyed recent college graduate run home excitedly yelling “Mom and Dad – I got a job at the captive!” Does the word “captive” inspire anyone, or is it a negative-tinged and off-putting word? Is this really a helpful word to be using 5, 10, or 20 years from now?

As we were contemplating this potential change, I asked a number of my contacts how their organizations refer to internal delivery center organizations. None of them use the term “captive.” Further, all found that they had to explain what “captive” meant to new business users becoming more involved with global services. It is simply not a term that was widely adopted by the people it is intended to describe. In my mind, clearly it is a poor word.

The only arguments for keeping it are inertia and laziness. If we want to find something better, we have to get started at some point, and we agree with Nasscom (India) and BPAP (Philippines) that point is now. And tomorrow. And next month. And next quarter. And next year. And…well, you get the idea.

So we enter a long and painful process of using and advocating for Global In-house Center (or GIC – “Gee-Eye-Sea”) to replace captive. And it will be a journey with lots of opportunity to annoy and “correct” people.

Is “Global In-House Center” (GIC) any better? My view is that it is a good alternative simply because it does not try to go beyond the facts while also being clear. It avoids the temptation to “judge” these centers by referring to them as “innovation hubs,” “Centers-of Excellence,” or other terms that may match intent in some cases but are not clearly and universally true. Global In-house Center is largely self-defining – “in-house” pretty much gets the point across.  “Global” hints at geography but gives room to expand the application (All business units? All locations?).

But we do have to learn a new acronym – GIC. Global In-house Center is a mouthful and will have to be regularly shortened to GIC. But we are all pretty good at learning acronyms…so add it to the list. GIC…and ERP, O2C, ITO, BPO, FAO, HRO, CRM, SCM, ITIL, COLA, CAGR, ROI, TCO, MSA, SOW, and more…

Full of Sound and Fury: The Irrelevance of the U.S. Election Offshore Rhetoric | Sherpas in Blue Shirts

In our last Market Vista webinar, we asked the audience to share its perspective on what is likely to happen with offshore demand as the election season in the United States concludes. As shown in the poll results below, few expect much to change after the election season – the votes are tightly clustered around slight change or no change.

Offshoring Poll

Although the results are consistent with my own personal view, it is certainly in contrast to the number of times I am asked about this topic by the media and other industry observers.

So why is there more noise than substance? Why does the global services market see the political rhetoric as largely irrelevant?

Three fundamental facts largely explain it:

  1. The U.S. government is much more concerned about offshore manufacturing than offshore services. Not surprisingly, politicians play fast and loose with terminology in their public speeches – does anyone recall a politician accurately using the terms offshoring and outsourcing? They are happy to publicly paint with a broad brush criticizing “offshoring.” But offshore services are continuing to grow and the business case remains strong. In contrast, the reality is that the economics of offshore manufacturing are more complex (for example, the cost of energy and transportation continue to increase), and there is a good business case for moving some types of manufacturing back onshore. Check out the Obama administration’s report on insourcing released at the January 11, 2012, insourcing forum to see just how much of the focus is actually on manufacturing and not services (or read this update). China is mentioned 17 times, India only once. For offshore services, the business case is simply too attractive (in most cases) for the government to push hard for broad-scale onshoring.
  2. The United States has a shortage of information technology talent. Despite the very real concern about broad-based unemployment, technology jobs are still hard to fill. This is why so many organizations have sought to increase their access to these skills either through offshore resources and immigration from other countries. Given the obvious strategic value for the United States to be strong in information technology-intensive industries, it must avoid hindering access to the skills and resources required to allow these portions of the economy to flourish. Of course the politicians cannot easily acknowledge this in public.
  3. The United States has to be a member of the global economy. Although the United States has lost and will lose jobs due to offshoring of services, it also gains much from global services and strong participation in the global economy. It is well understood that U.S. companies benefit from selling products around the world – these range from consumer devices to movies to industrial goods. However, it is less well understood that the United States also exports many services in addition to importing services. Engineering firms, law firms, architecture firms, and many other professions are serving global customers and often by providing high-end services. Next time you are on a plane flying to Asia, ask others traveling with you about their business interests and whether they derive benefit from global trade. In the past two years of trekking to India, I have come across a guide specializing in personalized nature tours of India, a machining engineer helping Harley Davidson enter India to sell its goods, a doctor providing specialized training, and even a dancer for Lady Gaga in route to film a video. They (and many others) are all traveling to Asia to satisfy global demand for their services. There is no realistic choice other than to participate in the global economy and focus on relative strengths.

Stepping back, we must bear in mind that politicians are typically speaking to their audience through mass media and messaging accordingly. In other words, what we hear is dumbed down and intended to grab emotions and headlines. However, outside of the noisy rhetoric, top politicians and policy makers do understand the fundamental forces shaping the U.S. and global economies and are unlikely to meaningfully influence the evolution of global services and associated offshoring – regardless of whether Obama or Romney wins the U.S. presidential election.

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