Tag: global sourcing

Service Providers Versus GICs: the Age-old Debate | Sherpas in Blue Shirts

The debate on whether outsourcing or global in-house centers (GICs) is the better service delivery option for today’s enterprises has again been ignited by multiple divestitures in 2012. While there are solid arguments in favor of both models, the truth is that companies have to change their sourcing decisions from time-to-time to maximize value from global services.

Let us examine how the market has moved over the last few years. For a long while, Everest Group has affirmed that GICs are here to stay and we still maintain that view. However, GICs have become more mature in terms of their services portfolios and have upshifted toward delivery of more complex work such as analytics. Buyers have become more intentional about what work to source from which model, e.g., complex work from GICs and transactional work from service providers.

The chart below is an analysis from Everest Group’s GIC database, and is a testimony to the above stated scenario. During 2009-2011, the GIC market continued to witness new set-ups on a sustained basis. The model’s stability was evident in the decreasing number of divestitures in that period. And the stark shift from business processes and IT to R&D/engineering was clear.

Global In-house Center (GIC) set-ups

However, the market saw a bit of a shift from January-September, 2012, with a declining number of new set-ups and rising number of divestitures. There were five major divestitures during that period, (compared to just two in 2011), and the acquirer was a service provider in each case. Four of these key GIC divestitures are listed below:

What is leading this shift? Is the overall market really moving away from the GIC model to an outsourcing model? Our answer is unequivocally NO. Here is why:

  • If you look at the new GIC set-ups during 2012, there is an indication of a dip… but the story is not the same across all industry verticals/functions. For instance, activity picked up during the year within emerging verticals such as professional services. Besides, R&D activity was also largely stable within some verticals such as telecommunications and technology
  • All the divestitures were organization- and situation-specific considerations. For example:
    • ANZ-Capgemini: As part of ANZ’s broad technology roadmap, the bank needed change for ~800 applications and more than 280 projects at a pace it could not achieve alone. So, the bank moved to a hybrid technology delivery model by transferring 360 jobs to Capgemini
    • Hutchison Global Services-Tech Mahindra: This was a part of Hutchison’s broader strategy to exit the Indian market (similar to its exit from India’s telecommunications business). For Tech Mahindra, the acquisition added further capabilities to its already strong telecommunications vertical

Interestingly, some companies have made the reverse decision and are insourcing work that was previously outsourced. An example is the recent in-housing decision made by the new CIO of General Motors (GM), via which the company expects to see long-term cost savings by bringing technology development under its roof. While HP had been GM’s main IT vendor per a US$2 billion contract awarded to the service provider in 2010, it will now provide only a few services to the automaker.

So, which model is better? Which one is winning? Obviously, the decision is complex and dependent on multiple organization-specific factors. Everest Group’s December 12, 2012 webinar, Global In-house Centers vs. Service Providers: Who is Winning?, will provide fact-based insights on this topic, and recommendations on how enterprises can compare and evaluate both options for their own unique requirements. We hope you’ll be able to join us!

Leverage Points in Global Services for India, China, and Philippines | Sherpas in Blue Shirts

India, China, and Philippines are often lumped together in regard to their roles in global services delivery. The reasons are not hard to fathom – these three geographies are consistently featured as leading locations for global services delivery (both new centers and expansions). In addition, their common availability of large talent pools coupled with low-cost operations make them highly relevant in global services delivery discussions.

However, a deeper analysis of the source markets served by these countries reveals some country-specific findings that are relevant for incumbents as well as new players with plans for these geographies. The chart below provides the distribution of IT-BPO services revenue in these countries in terms of source geographies served.

IT BPO Services Revenue

More than four-fifths of the global services delivery in China is focused on the domestic market with a limited scale of global delivery to North America and Europe. The availability of an English-speaking workforce continues to be a concern for global organizations as are perceptions related to IP / data protection regulations. There is a distinct value proposition for China to serve  its regional markets (e.g., Japan and South Korea) given factors such as time zone similarity, cultural affinity, and language availability.

In contrast, the Philippines is almost exclusively leveraged to serve the United States. Voice BPO has been the traditional growth engine for the Philippines, given cultural affinity and a large English-speaking workforce. However, of late, the Philippines market has also seen traction in BPO functions (particularly industry-specific non-voice BPO) and IT services, indicating diversification of service portfolio beyond voice.

And lastly, India has a distinctive value proposition around serving both the domestic and global markets. Leading players have multi-function scaled operations for global delivery to North America and Europe. In addition, India also sees large demand from the domestic market, particularly for technology and voice operation, and players typically leverage multiple cities within the country (including tier-2/3 cities) for serving this demand. However, unlike China, a very small proportion of service delivery from India is targeted towards the Asia Pacific market primarily due to the constraints around East Asian languages.

Global adopters are increasingly accepting a multi-location approach towards building their portfolios. As they think about their location strategy for Asia, they would be wise to consider roles for India, China, and Philippines based on their unique factors related to source markets and functions for delivery.

Determining Today’s Value of Global In-house Centers (GICs): GIC – Value Diagnostic Survey 2012 | Sherpas in Blue Shirts

In 2007, Everest Group conducted a value diagnostic survey among GICs (previously called “captives”) and their parent organizations to understand the alignment on expectations and perceptions of value delivered by GICs to parent organizations (Download results of the 2007 survey). A whopping 42% executives from parent organizations stated that the GIC should focus only on delivering cost savings. Interestingly,

  • 58% of these responses came from executives in parent organizations of early stage GICs (<2 years of age)
  • Lack of requisite capabilities and offshoring of only limited part of work were cited as the top two reasons for the belief that GIC should focus on cost savings only

GIC Value Diagnostic

Fast forward five years: Has the expectation of parent organizations from their GICs changed? Have the GICs evolved and matured in their approach to serve parent organizations? Have the GICs developed the capability gaps unearthed by the 2007 survey?

To help answer these questions and also take a fresh view of the GIC-parent model from cost-savings vs. value delivered perspective, Everest Group is re-launching the survey . The results will help the industry understand the progress GICs are making and help companies learn if their approaches to GICs are similar or different than others.

If you are an industry stakeholder with first-hand experience with GICs, we invite you to take the survey.

All survey participants will receive a complimentary copy of the summary findings. If you wish to get a customized benchmarking for your organization to compare expectation and perception of value delivered between parent and GIC, please contact us, and we will get back to you with next steps.

What the Supreme Court Ruling Means for Global Sourcing in Healthcare | Sherpas in Blue Shirts

On June 28, 2012, the United States Supreme Court provided its much awaited ruling on the Patient Protection and Affordable Care Act. In what is considered a surprise judgment by many quarters, the Court upheld almost all provisions of the law passed in 2010.

Here is how the court ruled on the two key provisions that generated the most debate – the “individual mandate” and the challenge by the states for the expansion of Medicaid program:

  • Treating the provisions of the individual mandate as a tax versus a penalty, the Court confirmed the validity under Congress’ constitutional authority
  • Regarding the expansion of Medicaid, the court ruled that the federal government cannot place sanctions on the states’ existing Medicaid funding if the states decline to go along with the Medicaid expansion

So, what impact will the Supreme Court ruling have on the outsourcing / global sourcing activity in the healthcare vertical? Will we see a surge in demand and see activity accelerate now that the uncertainty surrounding the law is now over? Three reasons why we believe that the Supreme Court ruling does not suggest any short-term (i.e., in 2012) acceleration in outsourcing activity in the healthcare vertical:

  1. Obama versus Romney: GOP candidate Mitt Romney’s assertion – “What the court did not do on its last day in session, I will do on my first day if elected president of the United States. And that is I will act to repeal ObamaCare” – makes it clear that until the outcome of the Presidential election is known, uncertainty will continue to shroud the healthcare law
  2. Next major milestone – 2014: A number of new milestones under the law, including the establishments of health insurance exchanges and the individual mandate, do not come into effect until 2014. Healthcare companies are likely to wait until the outcome of the elections is known before making deep investments in these areas
  3. Big payers adhering – come what may: Select large payers such as UHG, Aetna, and Humana have pledged to adhere to certain provisions of the reform irrespective of the future. These payers have already implemented some of these changes (e.g., MLR mandates) and thus the technology impact of some of these changes is likely limited in the short term.

The above is not to suggest that outsourcing / technology innovation activity in the healthcare vertical has reached its peak. If President Obama wins the election, we are likely to see a surge of activity as companies prepare for the 2014 initiatives. Even a number of current bystanders will jump in the fray to ensure compliance with regulatory reform. On the other hand, a repeal could significantly alter outsourcing activity and potentially even jeopardize existing initiatives if Mitt Romney is successful!

As it pertains to uncertainty in the healthcare markets, is this the beginning of the end, or the end of the beginning? Only time, and the results of the presidential election will tell….

Philippines: From Voice Services to a Broad-based Global Sourcing Destination? | Sherpas in Blue Shirts

The Philippines, which is already giving competition in voice-based services to the leading offshoring destinations in Asia, is now eyeing to further up the ante. The country continues to see robust growth in its voice segment and credible activity in non-voice services.

Several positives…

With its sizeable graduate pool, low-cost of operations, and English language advantage, the Philippines offers an attractive proposition for organizations looking for destinations to offshore services. The Philippines IT-BPO industry registered US$11 billion in 2011 on the back of successful expansion in services and increased geographic diversity. The sector is generating 640,000 direct jobs and another 1.5 million indirect jobs. Given the robust growth, the Philippines is likely to achieve its target of US$25 billion in revenues and generate 1.3 million direct by 2016 as per the IT-BPO Road Map 2016 developed by Everest Group.

The country is also seeing an increase in the share of non-voice work (including IT/ESO) which now contributes about 30% to the industry and there is evidence of credible activity in complex processes, e.g., legal, analytics, although their scale remains small. This is largely because buyers are now looking to diversify their delivery operations beyond established markets and are witnessing satisfactory experience from country’s non-voice services. Geographic diversification beyond the United States is also gaining traction and focus on multi-lingual services is increasing.

Philippines IT-BPO Services Revenue by Service Segments

One of the key reasons behind this success is government’s commitment to the sector which is working to position the country as an attractive destination for diversified services with the target to double share of revenue from other service lines. Continuing in this direction, the government and BPAP are initiating steps to enhance country’s value proposition at segment level (e.g., ESO, animation), with a significant attention on non-voice services.

…however, some concerns remain

Activity in Next Wave CitiesTM is evolving at slow pace. Analysis of the delivery location pattern of top 20 service providers and Forbes 2000 companies reveals that of the 35 centers set-up in the Philippines in last three years, only three were located outside Metro Manila and Cebu. Clearly, Philippines has its task cut out in order to position these cities as alternative locations beyond Metro Manila and Cebu and widen the talent base to ease the supply of talent and address high attrition.

Location Distribution of Centers Set-up in the Philippines

Moreover, ITO and Engineering Services are still not prevalent. The country also needs to continue to increase its alignment towards the United Kingdom and Europe, which are the biggest growth markets after United States. In addition, the country has a high risk of natural disasters. The most recent example is the typhoon activity in 2011, which led to power cuts and disruption of daily activity in Manila. Companies are, therefore, mindful of business continuity plans when they evaluate the Philippines for expansion of their delivery network.

While the government and industry associations are striving to enhance the attractiveness of Philippines IT-BPO sector, it remains to be seen how much the country can get players to think of itself for considerations beyond the arbitrage in voice-based services and more as a broad-based global sourcing destination.

For more details on the Philippines global sourcing market, refer to the recently released reports by Everest Group:

Indian “Strategic” Outsourcing Deals: Can the elephants dance when the music changes? | Sherpas in Blue Shirts

Time and again, we come across press releases from India’s biggest corporate houses announcing deals with large providers that are labeled “strategic” or “total outsourcing” partnerships. The hallmark of a typical strategic deal is a long-duration sole-source partnership with one large provider for infrastructure and/or applications. The provider is then made responsible for evolving a medium- to long- term technology roadmap for the buyer, and managing the execution of the roadmap through itself or other vendors.

Some of these partnerships are truly “strategic,” wherein providers genuinely share risks and rewards of the implementation, while many others are simply monikers for large, long-duration asset heavy deals with straightforward delivery objectives. Yet both cases seem to go counter to the trends in the mature sourcing markets, where buyers have long since abandoned such heavy-duty contracts.

There seems to be an interesting pattern among these buyers. They are typically telecoms or financial services companies that are trying to gain a foothold in newly deregulated or traditionally underserved markets with suddenly lowered entry barriers. These were large markets for basic, standardized products and services with low margins, where only a few would ultimately survive. In their race to be the “kings of the hill,” companies could afford to be customer-agnostic, as long as they got their basic services and sales models right. There are two important technology implications for companies in this phase:

  1. With heavy investments into sales and marketing, they start looking to other departments such as IT for investment avoidance. There is a tendency to put in place a leaner internal IT group, which is not equipped to handle a large set of provider relationships. Further, under budgetary pressures, they tend to view ideas on outsourced asset ownership and control more favorably.
  2. Facing haphazard and chaotic growth, management typically struggles to match capacity with demand. They increasingly look for partners that can bring predictability to their operations, with plug and play set-ups at service levels that are just about acceptable to end users.

Large IT providers that hear these management challenges when pitching are in a position to strike these large long-duration deals. And with well-structured contracts, the partnership may actually work very well…for at least the initial few years.

Problems in these deals start to manifest when companies are faced with two inflection point challenges:

Inflection in strategy: Sooner or later, slowing industry growth will bring the companies to re-evaluate their businesses. As already seen in the Indian telecoms industry, intense competition causes price points to steeply fall close to marginal costs, and companies then begin to shift their focus from chasing growth to profitability. This is the point at which companies typically start to pay attention to their customers and try strategies for differentiation – either through price skimming for value-added services or by offering adjacent products and services. This may involve following their profitable customers across their lifecycle at non-traditional touch points to fulfill unmet needs. At the other end, consumerization of technology will offer disruptive opportunities to reach customers and offer commoditized services at throwaway prices with minimal service costs.

To execute these strategies, companies will find they need to play in an ecosystem of alliances with partners requiring seamless transition of customer data to facilitate these decisions. Additionally, as they move towards customer-centric models, they will find a need to revisit their one-size-fits-all standard service models for technology and process infrastructure.

Inflection in technology: Buyers in strategic IT deals also implicitly assume that a seasoned IT partner will automatically bring cutting-edge innovative solutions as technology evolves. There are three important behavioral reasons for challenging this assumption:

  1. First, when there is a disruption in the underlying technology itself, it often arrives loaded with a lot of skepticism and lack of perceived commercial value right until the point it disrupts. Incumbent providers (with no better ability than buyers to foresee the end states) are likely to under-estimate comparative benefits of these disruptions in their assessments.
  2. Second, even in cases where the end states are clear, IT partners may suffer from conflicts of interest that prevent them from evaluating competing organizations or technologies for innovative solutions.
  3. Third, in the specific context of the account, the provider account organization tends to get settled into a well-oiled machine. With rising costs, it is motivated to scale down its “strategic thinking” on the account, and push more and more work under the factory mode.

No matter how “strategic” the relationship, IT partners often tend to advise or shape outcomes that are directionally well-guided by their contract clauses. When the buyer is grappling with strategic or technological inflection points that have not been foreseen at the time of contract inking, the partner is likely to default to choices that are limited by its own publicly held worldviews, capabilities and vested interests. While the choices may not necessarily be wrong, they do not benefit from a cross-pollination of ideas and approaches that the buyer would have had access to in a more open relationship. As Indian consumer markets and technologies rapidly develop, buyers may find this limitation increasingly unacceptable.

Is the Arbitrage of Your Offshore Locations Sustainable? | Webinar

Tuesday, October 18, 2011 | 9:00 AM CDT

Global sourcing is a well established phenomenon. The industry has witnessed rapid growth over the past decade, and has now exceeded US$110 billion in annual revenues. The key growth drivers have predominantly been the opportunity for labor arbitrage and the availability of skilled talent pools in offshore locations.

However, given increasing cost pressures in leading offshore markets, such as India and the Philippines, companies are questioning the sustainability of the offshore proposition. In addition, fluctuating currencies are posing challenges to the predictability of arbitrage in many locations, such as Poland and Brazil.

With these dramatic changes in market dynamics, global organizations must take an integrated, multi-location portfolio view in assessing the sustainability of their global services programs.

Everest Group invites you to join us for an insightful, one-hour webinar that will answer the following questions:

  • How should companies assess the sustainability of offshore locations?
  • How sustainable are the major offshore locations? Are there real risks of arbitrage eroding?
  • What implications are companies facing in setting their global services strategies?
  • Eric Simonson, Managing Partner – Research, Everest Group
  • H. Karthik, Vice President, Everest Group

Webinar attendees will receive a complimentary arbitrage sustainability diagnostic assessment for three countries from an extensive list including Brazil, China, India, the Philippines, South Africa and more.  Please select your preferred countries during the registration process. An Everest Group analyst will supply you with your individualized assessment within two weeks of the webinar. You must attend the event to receive the complimentary assessment.

No Crystal Ball for Service Delivery Location Risk, so Plan for Your own Appetite | Sherpas in Blue Shirts

Rapid evolution of global sourcing has allowed multinational corporations to gain access to a much broader pool of resources and to maximize the benefits of service delivery from low-cost locations. However, these incremental benefits have come at certain intangible cost, as now the overall value chain for any global industry is much more vulnerable to a variety of global risks. As increased pressures for cost containment are forcing large corporations to accept the risks associated with delivery from low-cost offshore sites, the focus is shifting from risk avoidance to risk mitigation. Generally, global companies approach risk mitigation in three ways:

  • Rigorous location selection/optimization analyses are conducted simultaneously with the sourcing decision so the business case typically captures not only cost savings benefits but also the probability of various risk factors associated with each location option
  • Risk monitoring frameworks are constantly refined so that even a slight shift in risk exposure is identified very early on, ideally providing the opportunity for some proactive measures rather than reactive responses
  • Disaster recovery and business continuity plans are developed to minimize disruptive consequences if risk situations materialize

Given Fortune 1000 companies’ magnitude of global sourcing activity and the fact that a worst-case scenario may entail billion dollar losses, it is not surprising to see rising interest in development and use of risk monitoring tools. There is no doubt that this activity, if conducted properly, can add considerable value to the overall risk mitigation process. However, in the recent months I have seen multiple attempts and claims to push these measures to unrealistic levels of event forecasting based on some early indicators. To be fair, these attempts are primarily limited to political types of risk, as conventional science is not able to predict natural disasters such as earthquakes or tsunamis. However, even for political risks, some “experts” believe that proper interpretation of early signs of threat can allow global firms to relocate their delivery hubs to safer locations.

For example, these experts point to the “Jasmine Revolution” in Tunisia, which began in December 2010, and now in hindsight they claim it was obvious that the Tunisian revolution would trigger a chain reaction across the entire region. So, per these experts, only completely oblivious companies didn’t pull out from Egypt ahead of time. Really?! In the same mindset, all global firms should have pulled out of India and shut down their Indian captives in 2008 after the Mumbai bombing. Similarly, the 2009 spike in criminal activity on the Mexican border due to the drug wars should have led to an immediate assumption that the danger would spread throughout the country driving an immediate need to relocate operations to a safer location.

Tracking risk changes is quite feasible, but 100 percent accurate prediction of major political disruptions is a complete utopia, and I believe that such wishful thinking may work to an organization’s detriment by creating a false feeling of security in believing it possesses a universal prediction tool. The reality is that a reliable crystal ball has yet to be invented, a shift in risk distribution still leaves multiple scenarios possible, and all that can be done is perform an accurate probability analysis.

Then, as probability of risk is just an input, actual interpretation of and decisions made per that input must be based on each specific organization’s risk appetite. For example, one company may choose to ignore a very high probability of a catastrophic event because it views doing so as a “better off” scenario than the prohibitive cost of relocating a mission-critical process. On the other hand, even a slight increase in hypothetical risk exposure may force a risk-sensitive client to take some proactive measures. The right approach for every organization is the establishment of a comprehensive set of risk thresholds and predetermined measures. For example,  if the probability of major disruption reaches, say, 25 percent, the firm should keep passports and invitation letters ready for business continuity staff. If the probability of disruption increased to 75 percent, then the company must relocate 50 percent of its business continuity staff to the extraction location.

I do believe there is significant benefit in tracking risk, performing scenario analyses and constantly refining your mitigation approach, but accurate prediction of the future is impossible. Think about it this way: had there been a reliable framework to forecast the wave of revolutions around the Arab world, I am sure that all dictators would have identified this risk at the very early stage and attempted to preempt it.

Eyes Wide Open – What Are the Risks of Global Services? | Sherpas in Blue Shirts

Over the last decade, we have been witness to a world that is logically shrinking in size and expanding in its ability to provide options in global services. The phenomenon is being driven by the increased integration of technology and the sudden emergence of service delivery capabilities in new geographies, thus allowing organizations to tap into global resources at a rapidly increasing rate.

The utilization of a global services delivery model is allowing organizations, regardless of their size, to:

  • Realize cost savings through labour arbitrage
  • Access skill sets and capabilities on a more dynamic level
  • Manage a continuous 24-hour service and support model
  • Adapt cost structures to facilitate focus on core businesses

Sounds great, so what’s the catch?

The catch is that organizations with global and diverse service delivery models face new and ever changing risks. Some of the triggers of global risk include socio-geo political tension, pandemic crisis, financial events, terrorist events, natural disasters, civil turbulence, and infrastructure disruptions.

When risks manifest into reality for an organization that is using a global delivery model, they can occur at significant speeds and at magnitudes of impact that have not been seen before. This is because most global delivery models are heavily intertwined and have interdependencies that are often overlooked. The ripple effect of a risk event and the complexities of demand on resources for recovery are often not realized until it is too late.

Organizations with a global delivery model require a disciplined approach to successfully manage global risk triggers. To do so, they can implement a comprehensive risk framework to proactively monitor and mitigate perils in their global environment. Two key components of the risk framework are:

Risk monitoring by location

  • Develop a baseline risk profile for all targeted cities/countries as part of the decision-making process on delivery centre locations
  • Monitor all selected locations on an ongoing basis to assess the change in risk levels
  • Develop risk profiles for each city/country that contain location dashboards of key risk indicators to allow for a quick assessment of the change in risk levels from the baseline risk profile against the current risk profile
  • Examples of location risk indicators include:
    • Strategic risks that assess the city/country risk, including the likelihood of political, social, and economic inefficiencies and stability, inadequate legal system or regulatory pressures, and natural disasters, etc.
    • Tactical risks that reflect market-related changes and dynamics, cost of inflation, flexibility of the labour market, availability and quality of the infrastructure, and medical/health events

City-Down and Country-Down analyses

  • Identify and understand the impact to the organization and its network of services as a result of a city-wide or country-wide service disruption
  • Understand the changing requirements of the organization’s recovery plans by continually monitoring and assessing the impact and the conflict in recovery activities, e.g., competition for infrastructure and labour resources among the organization and all of its service providers that impacts the organization’s service recovery capabilities

The nature of the risk events that are monitored, managed, and prepared for vary greatly. Most naturally occurring events have very little, if any, lead-time. However, there are planned risk events that provide a much greater window into the timing of their occurrence. When an organization is properly monitoring and managing its risks, it should not only have the necessary processes in place to address all types of risk events but also to minimize the impact of each. A few recent examples of risk events are listed in the table below:

Risk Events


As we embrace global service delivery models with open arms, how well prepared is your organization to manage and mitigate the risks in this new and highly integrated world?

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