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Although India remained the front-runner in offshore activity among leading service providers and company Global In-House Centers (GICs), Romania, the Republic of Ireland, and Singapore experienced a significant increase in delivery center setups
Traditional versus emerging MSP market dynamics
This week we heard that Capita and Xchanging had agreed on the terms of a recommended cash offer of 160 pence per share. The offer values Xchanging at approximately £412m. If it goes ahead, the acquisition would be Capita’s largest ever; it is 260% bigger than its previous largest acquisition, that of avocis for £157m in February 2015.
Capita’s newly found appetite for larger acquisitions marks a noticeable change in approach between the current CEO, Andy Parker, and his predecessor, Paul Pindar. While Pindar went for niche acquisitions, Parker is going for accelerated inorganic growth.
If this bid goes through, it will impact Capita’s business in the following ways:
Significant leg-up in Insurance BPO: Xchanging is something of a jewel in the insurance sector due to its golden relationship with Lloyds of London as well as insurance sector specific technologies such as Xuber. Insurance services accounts for the larger part of revenue at circa 60%. For some time now Capita has been talking about growth in the insurance sector, setting the scene for more of its M&A activity. It has previously stated, “Where premium growth remains modest, (insurance) firms are focused on improving operational efficiency and organisational flexibility, areas Capita is well placed to help them address.” Before it made the offer for Xchanging, Capita had expanded its insurance capabilities through the acquisition of SouthWestern. This brought it 700 skilled, multi-lingual FTEs at two sites, Krakow and Lodz, providing services to insurance, finance and legal administration, and customer management across Northern Europe. Another relevant and recent acquisition was that of tricontes in 2014. The £6.2m acquisition of the Munich-based company in June 2014 brought Capita specialist contact centre services for various sectors including the insurance sector in Germany.
Bigger play in the private sector business: The split between Capita’s public and private sector business has always stayed roughly around 50:50 with annual variations of plus or minus 5%. In 2014 Capita’s private sector business was £2273.6 and accounted for 52% of revenues. With revenues of £406.8m in 2014, Xchanging could boost Capita’s private sector business by as much as 18% – a significant growth.
Entry into potentially lucrative BPO segments: Xchanging has good capabilities in the fast growing Procurement Outsourcing (PO) and Capital Markets BPO. Our analysis shows that both market segments are growing upwards of 10% CAGR. Further, these are specialized BPO segments and hence less prone to commoditization. However, to fully capitalize on the potential, Capita would have to address recent issues with Xchanging’s PO business.
Geographic diversification: This acquisition would help Capita expand its market presence beyond the UK. Some of the key countries where it could help Capita are Italy, Germany, and the U.S. While the scale may not be big, it can provide Capita a base upon which to build its international business. Further, continental Europe is a specialized market, which may not be the easiest to penetrate for an external service provider. Xchanging, with its multiple contracts in Germany, can help Capita in its entry in that geography.
Greater global sourcing leverage: Capita has around 5,000-6,000 FTEs in offshore location. This acquisition offers the potential of increasing this number by 20-25% primarily in India.
Clearly, this acquisition can help accelerate Capita’ growth and capabilities in multiple ways. However, as with any acquisition, successful integration will be key to harness the potential including effectively addressing recent issues.
Capita is not the only service provider to be eying growth in the insurance sector. With this bid, Capita’s acquisitive culture is set to give it an edge over the others.
For our previous coverage of Capita’s growth strategy see “Capita’s German Gambit.”
I was introduced to the Philippines about two years back when I started working in the global services sector. And frankly, I was a bit startled by how little I knew about this giant of the contact center services market – I always thought India was the world’s largest contact center market. But its colonial heritage, accent neutrality, cultural affinity with the west, and BPS-conducive environment puts the Philippines at an altogether different level.
I began following the Philippines IT-BPS markets more regularly as I worked on this location for several client engagements. I observed how this country is a perfect example of the “playing on your strengths” approach. It is incredible how the government, iBPAP, and other partner associations have worked together to achieve the growth potential we highlighted in the Roadmap we developed in association with then BPAP and Outsource2Philippines back in 2009. Indeed, the market has doubled in size in less than six years. Today, the Philippines employs over a million FTEs, and is the second largest offshore services delivery location, next only to India.
While voice-based services have always been Philippines’ strength, it has experienced remarkable success in other areas, such as IT services, which grew at ~25 percent CAGR since 2010, and now accounts for ~10 percent share of country’s entire offshore market. While service providers have been key drivers of the growth in IT, Global In-house Centers (GICs) have pushed for growth in FAO and banking services. Several global banking companies, such as American Express, ANZ, Citibank, Deutsche Bank, HSBC, ING Group, JP Morgan Chase, and Wells Fargo, have established sizable centers in the country. Even though Bank of America has exited the country (it shut down its shop in 2014 as part of a global GIC restructuring), and JP Morgan Chase is scaling down owing to global cost cutting, overall outlook remains positive. The country has also made good use of its strong nursing talent—the largest pool of U.S.-licensed nurses outside of the U.S.—and is now the largest healthcare services provider to the U.S. The healthcare BPS sector has grown at over 40 percent YoY since 2012.
Another success area for the Philippines has been its ability to attract global companies. Over 100 have set up their GICs in the country, and close to one-fourth of them are on the Fortune 500. These GICs are expanding their Philippines strategy beyond cost arbitrage, and establishing regional hubs/HQs/CoEs. The U.S. remains the leading buyer market, with ~70 percent total demand. However, demand from Asian markets has been increasing steadily, with several Japanese and Australian companies establishing their captive centers in the metro Manila region.
With increasing emphasis on adoption of digital globally, government agencies (such as iBPAP and PSIA) are making proactive efforts to ensure that the Philippines stays ahead of the curve. It is already investing in building capabilities – from teaching the right curriculum at the universities to supporting companies’ development of required infrastructure to setting up training labs at colleges and universities – to deliver mobility, analytics and cloud-based services. We have seen some evidence of companies already delivering mobility (focused application development services for mobile) from the Philippines in the last year or so. Digital has been the buzzword in the majority of our interactions with our clients looking into the Philippines lately.
Having done well so far, I am intrigued to see how the Philippines will sustain its growth in the evolving IT-BPS ecosystem. It needs to adapt to rapidly changing consumer needs, e.g., the adoption of digital, development of multi-channel delivery systems, and a multi-skilled labor force. It also needs to ensure continuous growth in other service lines, such as banking BPS, FAO, HRO services, animation and gaming, and creative services, by leveraging its interpersonal, voice-based, and strong domain-specific skills to build scale.
It will be interesting to watch what lies ahead in the years to come. Can the Philippines continue shaping its own destiny in the global services market?
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Proportion of onshore delivery center set-ups nearly doubled from 2012 to H1 2014
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Global services players increasingly leveraging tier-2/3 locations as technology and infrastructure developments, and market saturation/competition in tier-1 cities, make these locations attractive
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Global services market leading delivery locations in Latin America and the Caribbean (LAC), Nearshore Europe, Africa, and Asia Pacific (APAC)
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.
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 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?
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?
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!
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.)
| Across | |
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Texas Instruments and GE were among the first entrants in the GIC landscape |
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None. GIC divestiture activity has seen a decline in recent years after peaking in 2011 and 2012 |
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India has dominant share in the GIC market in terms of revenue (~50%), number of delivery centers and headcount |
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Mumbai has the least number of GICs among tier-1 cities in India |
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United States-headquarteredfirms have more than 60% share in the Indian GIC landscape |
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Share of United Kingdom-based firms setting up GICs in India has declined in the last 2-3 years |
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GICs were formerly known as captives |
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Telecom is the 2nd largest vertical after BFSI in terms of average headcount |
| Down | |
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BFSI is the largest vertical in terms of overall GIC headcount in India |
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Technology is the leading vertical in terms of number of GIC set-ups in India |
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Bangalore has the maximum number of GICs in India |
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Pune is the leading tier-2 city in terms of number of GICs and has seen lot of GIC activity in the recent past |
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Companies started GICs to capture cost arbitrage |
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Outsourcing to service providers in an alternative to the GIC model |
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Engineering services is the leading function delivered by GICs in India |
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Value beyond arbitrage |
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Within the Energy & Utilities vertical, Europe-based firms have highest share |
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ADM (Application Development & Maintenance) is the topmost sub-function within IT |
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Kochi is also seeing GIC activity among tier-2 cities in India |
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Cognizant acquired ValueSource NV, a subsidiary of KBC Group |
Photo credit: Taki Steve
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.
Factors driving the growth in nearshore locations include:
Some of the popular nearshore locations being leveraged for IT, F&A, and call center (CC) services are depicted in the diagram below:
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:
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:
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:
Photo credit: Charles Clegg
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