Global Sourcing Archives - Page 7 Of 7

Increasing Globalization of Global Services: Next Global Sourcing Frontier – Africa? | Sherpas in Blue Shirts

September 8, 2011

The mandate of Everest Group’s Location Optimization practice is to assist clients with data, insights, and advice on which global sourcing practitioners can rely to make their most critical decisions related to global locations. As we go about conducting our day to day business, three questions underpin the discussions with global sourcing practitioners nine out of 10 times.

What are the key locations for global services delivery?

Which regions are attracting attention and interest to meet the next wave of global services requirements?

How do the key global services stakeholders (buyers and service providers) perceive the next frontier(s) for global sourcing?

In order to build awareness on the trends we are observing across the global locations space at the highest level, we will attempt to provide the answers to these three questions.

First, let’s look at the key regions for global services delivery today. Exhibit 1 depicts our Market Vista Locations Maturity Heatmap, which tracks and compares the level of market activity across global locations. Asia remains the dominant location of the global services installed base by a large margin. This should come as no surprise as the global sourcing story has been pioneered and successfully played out in Asia – India provided the proof of concept for building industrial scale in global services, and the Philippines has rapidly adopted this successful model and opportunity to become a world leader in customer service. The success seen by India and the Philippines has encouraged other locations in Asia to concoct their individual recipes for succeeding in the attractive global services space. For example, China has emerged as a credible option for sourcing R&D and engineering services (read more in Everest Group’s “What is the True Maturity of China’s Offshore Services Market?”) while Malaysia is making concerted efforts to carve out a niche in the shared services space.

Exhibit 1 – Market Vista Locations Maturity Heatmap

Central and Eastern Europe (CEE) and Latin America are the next set of regions beyond Asia in terms of installed base of global delivery. These regions experienced waves of expansion, especially as companies strive to put in place a global portfolio of delivery locations for purposes, such as risk diversification, leveraging technical/language skill sets, 24×7 coverage, regional support, etc. There are more than 10 locations in both these regions with credible evidence of global services activity. Poland (in CEE) and Brazil (in Latin America) are the two large locations that have built credible scale in global services delivery and are recognized as mature locations on our Market Vista Location Maturity Heatmap. Poland has carved out a niche as a nearshore location for servicing Europe in non-voice business processing and IT, while Brazil is recognized for IT talent and an attractive domestic market, in addition to its proximity as a nearshore location for global services. (Read more about Brazil in Everest Group’s “Perspectives on the Maturity of Brazil’s Offshore Services Market.”)

Africa is a relatively new entrant in the global services locations landscape and has three or four locations with nascent global services activity. It presents specific and, at times, niche propositions and opportunities. And its value proposition is now being slowly understood by global investors.

Next, and before we discuss Africa in greater detail, let’s look at the set of locations attracting interest from buyers and service providers to meet the next wave of global services expansion. Exhibit 2 is based on Everest Group’s comprehensive survey of key global services stakeholders and compares regions that buyers and service providers are planning to leverage for setting up new centers. (Read the Everest Group Location Insights detailing buyers’ and service providers’ location-related plans and perceptions).

Exhibit 2: Location Expansion Plans of Buyers and Service Providers

As is clear, Asia figures prominently in the plans of buyers and service providers for setting up new centers. Asia continues to attract interest from buyers and service providers, despite the high installed base of current activity. The Asian locations witnessing sustained interest include India, the Philippines, China, and Malaysia.

The survey results also give a big “thumbs-up” to Latin America. This is corroborated by recent market activity trends that show the region is experiencing activity in establishment of both captives and supplier delivery centers. Key countries that are witnessing increased interest include Brazil, Argentina, Chile, and Mexico.

Let’s go now to one of the most interesting findings from the survey – Africa! Indeed, as many as 20 percent of all respondents from the service provider segment indicated plans to add new countries in Africa to their global delivery portfolio. South Africa seems to be especially popular with service providers, with 10 percent of all respondents disclosing plans to set up a center there. Egypt also figures into the list of leading choices for locating a new delivery center.

So what are the reasons behind this emergence of Africa countries as the next frontier of global locations, especially for service providers?

They provide a capable (although nascent) low-cost alternative to CEE locations
They offer scalable language skills and cultural affinity with the developed world. South Africa and Morocco have strong cultural similarity with the United Kingdom and France, respectively. Egypt offers the opportunity to cater to the lucrative Middle East market.
A foothold in the African region gives service providers the ability to serve domestic African markets, e.g., South Africa for sub-Saharan regions, and Egypt and Morocco for North African markets. Business from local firms and especially MNCs operating in the region present a lucrative opportunity for service providers looking for the next set of clients

In addition to the above value propositions offered by African locations, we can contextualize the motivations for location portfolio expansion from both the buyer and service provider standpoints. Buyers set up captive centers or influence service providers to provide support from new locations primarily to complement their current global locations portfolio in terms of access to specific talent pools for language skills, time zone proximity, to support international business expansion, etc. At the same time, buyers are also sensitive to the complexities associated with a wider geography footprint and, hence, are looking to find the optimum balance of value capture and risk mitigation from global services programs.

On the other hand, Tier 1 service providers usually have a wider frame of reference due to their servicing of multiple clients, and hence are typically more globalized than buyers. In addition, service providers are more open to moving into hitherto unexplored territories due to incessant cost pressures and the need for differentiation. Most of the Tier 1 service providers are already well penetrated in all the major global services theatres and are now looking to explore the African continent.

Although it remains to be seen how much of this enthusiasm will ultimately get converted to any action, the sheer level of interest itself should excite countries in the African continent – South Africa, Egypt, Morocco, and Mauritius – to develop the global services capabilities in their individual countries, sharpen the articulation of their value proposition and differentiation theme, and craft effective marketing strategies to attract global investors.

Moving to the Other Side of BPO – When the Destination Becomes a Source | Sherpas in Blue Shirts

August 5, 2011

Until recently, my discussions with clients about the Asia Pacific region or Latin America countries were, by default, around leveraging them to provide cost-efficient BPO services to the western markets. However, with a growing number of organizations looking to enter or expand in these rapidly growing economies, they are starting to emerge as notable source geographies for BPO services. Hence, it is becoming increasingly important to pre-qualify statements related to these regions to specify the context – i.e., BPO source geography or BPO service delivery geography. With that, let’s take a closer look at these regions from a source geography perspective.

Interestingly, traditional offshore service delivery strongholds such as India, China, and Brazil are also among the most prominent new frontiers of the BPO buyer market. Everest Group’s recent study on the non-voice Indian BPO market clearly shows that the domestic Indian market, although on a smaller base, grew by more than 85 percent in the last two years.

From a functional perspective, the BPO adoption is broad-based in these markets and increasingly includes non-voice transactional services beyond call center work. Some of the key segments that are showing rapid growth include Finance and Accounting Outsourcing (FAO), Procurement Outsourcing (PO), Human Resources Outsourcing (HRO), and industry-specific outsourcing. Also, while buyers primarily outsourced one functional area to start off with, we are now seeing large multi-tower deals as well. The recent multi-tower BPO deal between Brazilian conglomerate Algar and Capgemini illustrates the growing adoption and increasing market maturity.

So, what is driving the adoption in these countries? While cost savings is important, our research shows that the BPO value proposition here is driven more by the need to manage rapid growth and realize operational effectiveness. With the GDP growing by at least 7 percent in recent times in these countries, companies are increasingly evaluating BPO to capitalize on service providers’ existing scale of operations and the resultant flexibility to support growth. Other key consideration include improving operational effectiveness via best practices in business process management and process improvement opportunities through standardization and automation. The fact that buyers in these markets are more aware of the outsourcing concept – due to the vibrant offshoring market – compared to other newer markets is also helping accelerate adoption.

However, serving these markets is not easy. There is a near absence of labor arbitrage, and price points are low compared to the western markets. Hence, service providers need to put in place a different strategy and operational structure. For example:

Different margin expectations. Providers can’t expect to realize the same level of profit margins as with their North American and European businesses because of the reasons cited above. Their margin consideration should reflect the practical realities of these markets.
A long-term consideration. Providers will have to take a long-term view tied to the future growth and the potential of these markets. Providers with short-term profit mind sets will be disappointed here.
A low-cost operating model. Service providers will need to apply multiple levers to achieve a low-cost operating model, including rational investments in infrastructure (lower spend on office infrastructure, facilities, IT, telecommunications, etc.) compared to the infrastructure spend for global client. Further, they will have to expand their delivery network beyond Tier-1 cities to include Tier-2 and -3 cities that offer a much lower operating cost. Additionally, a standardized one-to-many model where people and technology resources can be shared across customers will be important to fully realize the economies of scale benefits.
Innovative pricing structures. Beyond a simple FTE-based pricing structure, providers could get into innovative pricing structures such as gain sharing, e.g., tying their fee to the clients’ business growth (which could very well work with organizations in high-growth industries). There are already some success stories in the more mature IT outsourcing space in these markets such as the Bharti-IBM IT outsourcing deal in India.

Clearly, these new BPO markets represent significant potential. With a focused and differentiated strategy, coupled with robust execution, it is possible to realize the potential.

Captivating Clarifications: Don’t Make the Wrong Comparison | Sherpas in Blue Shirts

July 11, 2011

This is the second in a series of thought leadership articles by Eric Simonson on the continuing role of captives in the global services landscape.

Building upon a May blog post, we recently published a report on the health of the offshore captive model entitled “Captives are Staying Alive.” The report was in partnership with Tesco HSC, a Bangalore-based captive with more than 5,000 employees providing IT, business, and finance services to the rest of the global retailer’s organization. CIO magazine picked up on the report and asked some additional questions for its coverage of our analysis.

In the course of providing additional input to Stephanie Overby (the author of the magazine article), I realized that one critical question was not highlighted strongly enough in our analysis: can you compare the captive sourcing model with the third-party outsourcing model?

On first glance, the obvious answer is “yes.” And indeed, many of us have spent time picking apart the ways in which to compare the costs of both models, plus the merits of outsourcing lowering time to implement and reducing up-front investments (see our deepest, off-the-shelf assessment from almost four years ago).

Any effort to develop a global services strategy that includes a meaningful thought process on the optimal mix of sourcing models will have to sort through how the various strengths and limitations of both models align with a particular organization’s needs and objectives.

But is that really the whole story? Is a one-to-one comparison of models going to provide the right insights to inform a strategy?

First, let me caution that captives require a commitment to scale in order to be successful. Many of the reported failures of the offshore model (bringing jobs back onshore because offshore is too expensive or complicated) are actually caused by lack of scale and associated commitment to manage these issues properly to reduce or eliminate their impact. In others words, do not use the captive model on a whim – only do so if you are deeply committed to ensuring it attains sufficient scale in total headcount and in size and quality of the leadership team. It requires both enough people (say 500-750 minimum for most types of work delivered from “farshore” locations) and enough leaders.

Scale issues aside, there are two fundamental differences in the captive model that need to be considered to understand its potential role in a global services portfolio:

Additional scope of services
Ability to re-leverage human capital investments

Both of these factors are often overlooked because they are second-order implications that derive from successfully building a captive delivery model; as a result, they are not commonly considered a first-order benefit in the target business case.

Additional scope of services

In an outsourced model, scope is primarily defined in terms of process responsibility and number of FTEs completing various tasks. This is also true in the captive model, but captives can further act like offshore corporate centers and take on work that: 1) is not easy to define; and 2) stretches across the front, middle, and back offices. This opens up the ability to deliver from offshore almost any work that doesn’t require close proximity to the end customer. It also helps explain why captives tend to outgrow their initial real estate plans quickly, and with significant “other bucket” work.

Examples of advanced roles I have seen in captives include product management, pricing strategy, corporate communications, talent management strategy, operations research and optimization, and IT standards and security architecture. While these are not normally outsource-able activities, the captive model provides the opportunity to deliver more scope from offshore – it is simply about adding offshore employees in sales, marketing, or other functions to the global team, not signing SOWs with negotiated pricing and service levels.

In short, a captive enables the option to add lots of additional activities that are not initially planned and that do not lend themselves to the outsourcing model. For organizations seeking to manage themselves in a truly global manner, this is an important consideration and can provide value in a wide range of ways.

Ability to re-leverage human capital investments

The process of fully bringing an offshore resource up to speed to complete a job is critical, and takes longer than most like to admit. In an outsourced model, once the time has been invested to make an individual fully functional in understanding all the nuances of a system or the business’ needs, he or she may be promoted within the client service account, or may leave the account to work for another client. (And organizations do benefit by receiving talent from other accounts as the associates do possess certain forms of expertise, although they lack organizational context, which takes time to cultivate.)

In the captive model, fully functional associates remain in the organization and advance to related roles, or may be moved to other locations to cross-pollinate or further deepen their skills. This ability to retain and enhance the understanding of organizational context is an important factor in capturing value from human capital investments in a captive model.

If you’re creating a global talent model, resources gaining experience with your enterprise in an offshore location can prove to be very valuable for the rest of your organization – you have greater ability to predict success in new roles, they inherently understand your organization from multiple angles, etc. Net-net, specific skills can be developed in both the outsourced and captive models, but deep organizational context is best cultivated in the captive model.

Large organizations must continue to optimize their global services strategies, and the external versus internal sourcing mix debate will continue to be emotional. Emotion is fine; but just be sure you are framing the right comparisons, and don’t forget the real, yet hard to value and compare in a business case, second-order benefits of the captive model.

What unexpected benefits have you seen from internal service delivery in captives? Can those benefits be valued?

CIO: The Captive Model for Offshoring Is Thriving, Says Research Firm

Report: Captives are Staying Alive

Report: Comparison of Outsourced and Captive Solutions for Capturing Value from Offshoring

Captivated by India Shining | Sherpas in Blue Shirts

June 10, 2011

The land of lush green plains and abundant forests, formidable high mountains and long rivers, and an ethnic cultural diversity unparalleled globally — this is how many of us Indians would describe the uniqueness that is our country.

However, when a client asked us the other day, “What is unique about India as an offshore location for captives?” – we knew he was looking for domain-specific answers.

India has always had the reputation of being a cost-effective offshore location. Further, per NASSCOM, the annual tertiary graduate pool in India is expected to hit 4 million this year, almost one-fifths the population of Australia.

However, cost and talent form only one part of this large and growing story. Large scale, specialized (or “exotic”) talent, mature positioning in the global services landscape, and a large and growing domestic market add to India’s aura.

With almost 700,000 technically qualified people graduating annually, India is the ideal location for any company looking to establish its design and engineering captive centers. In fact, global aerospace majors Boeing and Airbus are in process of setting up units in India focused on simulation, analysis and virtual manufacturing. While Airbus intends to make India a hub of unique offerings not provided elsewhere within the global organization, Boeing plans to develop critical technologies through collaborations with top tier research institutes including the Indian Institute of Science.

Additionally, given that India is one of the largest and most mature locations in the global services space, it is only logical that the country is considered a strategic destination to locate offshore Centers of Excellence (CoE) for global sourcing. In fact, many financial services firms are scaling up their captive presence in India to leverage the advantages of locating their sourcing CoEs in close proximity to service providers.

Interestingly, computer maker Lenovo has emerged as a pioneer in offshoring its global marketing and communication activities – which are generally considered country- and culture-specific, non-offshorable activities – by leveraging India for:

Talent availability — a creative and experienced marketing team with a drive to running operations from the India hub
Third-party vendor willingness — an advertising partner prepared to synthesize its team in India

Finally, and most importantly, India is in the midst of an economic boom and a resultant consumer revolution. It is a period in which low-cost mobile technology in rural areas is as popular and far reaching as iPads and iPhones in the metro cities. It should thus come as little surprise that the same companies that looked at India as a services delivery destination a decade ago are now making every effort to develop customized products and solutions for this “demand hub.” Take, for instance, GE Healthcare, which launched a revolutionary $1,000 portable ECG device for rural India designed, developed and assembled in GE’s R&D center in Bangalore.

Given these domain-specific advantages that India offers, not to mention the beautiful surroundings and rich cultural heritage (a source of continuous attraction), we are left with little doubt about India as a unique and highly compelling offshore location.

The “Waking Giant” Sequel: How Mid-Market HRO is Emerging as a True Growth Platform | Sherpas in Blue Shirts

June 3, 2011

Is it wrong to plagiarize yourself? In 2008, Everest Group published a report entitled “Understanding the Waking Giant: The Mid-Market and FAO” highlighting how mid-market companies had turned the corner from point solutions in finance and accounting outsourcing (FAO) to adoption of more robust and integrated multi-process FAO solutions. In turning to HR outsourcing (HRO), the mid-market has traditionally been a big consumer of various point solutions including payroll, 401K administration, contingent labor, etc. But today we see clear evidence that mid-market companies have brought the same approach to their HR function, noticeably increasing their adoption of robust and integrated multi-process HR outsourcing (MPHRO) and Benefits Administration Outsourcing (BAO.) In fact, this client segment is quickly becoming the growth platform for many of the market leading HR service providers.

In our ongoing research into both the HRO and BAO spaces, the share of new contracts signed by mid-market companies (3,000-15,000 employees) continues to grow. In fact, mid-market MPHRO deals represented roughly 61 percent of all the deals inked in 2010. We saw the same upward tick in the BAO market, with 71 percent of all BAO deals involving mid-market clients. As a result, service providers are really taking notice and making moves specifically to target this growing opportunity.

What’s driving the mid-market in this direction? Take your pick of factors:

By consolidating with fewer service providers, companies can reduce the cost of managing their HR processes and gain benefits from increased integration and analytics
Regulatory changes affecting health and welfare (H&W) benefits are driving many companies to seek support in figuring out what needs to be done and how to do it
HR technology isn’t a strategic investment area for most firms. Leveraging technology owned or developed by service providers is seen as a plus for both short- and long-term cost savings and business impact
The choice of mid-market MPHRO and BAO solutions are more attractive now than ever before

Two important delivery model changes have also increased the appeal of MPHRO and BAO for mid-market companies. In both areas, use of global sourcing has gained traction. First, and not surprisingly, this has come at a time when mid-market companies continue to be under immense pressures to further reduce operating costs while simultaneously optimizing the overall effectiveness of their HR operations. Centralization and integration through offshore delivery centers align with such drivers.

Second, many service providers’ increasing focus around building leveraged and repeatable technology-driven components to their HR offerings, be it SaaS, Cloud, or platforms, is proving to be a justifiable investment. In 2010, about 70 percent of all new MPHRO deals signed involved some type of platform solution, and 71 percent of those involved mid-market buyers.

The strategy to focus on mid-market clients is paying off for some service providers. Three of Everest Group’s five MPHRO 2011 Star Performers – ADP, NorthgateArinso, and Infosys – drive significant portions of their MPHRO business from mid-market clients. Further, each of these providers grew their share of the overall MPHRO market in 2009-2010.

Both ADP and Mercer, major players in the MPHRO and BAO markets respectively, have successfully deployed mid-market strategies, although they are very different in nature. In fact, each firm, as we heard during their recent annual analyst events, continue to invest in sales programs, service offerings, and relationship models specifically targeting this growth opportunity. Mercer leveraged its acquisition of IPA to open doors with mid-market clients, and to align its delivery model with the specific needs of this segment. ADP, which has always had significant payroll offering success in the mid-market, has successfully expanded its footprint with some of these clients into the MPHRO space.

To successfully tap into this segment, HR service providers will need to be on top of the rapidly changing mid-market competitive landscape, delivery requirements, technology solutions, and sales engagement models. With all this going on, dare I say the mid-market will prove to be the “Waking Giant” for the evolving MPHRO and BAO markets?

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

June 1, 2011

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?

The Risky Side of Offshore Growth: Operational Challenges with Indian Majors? | Sherpas in Blue Shirts

May 25, 2011

In my May 3 blog entitled “Size Does Matter – The Real Pecking Order of Indian IT Service Providers” – I commented on the rapid growth achieved by the Top 5 Indian IT majors or WITCH (Wipro, Infosys, TCS, Cognizant, and HCL) in the last few quarters. Last week as we were rounding up our latest service provider risk assessments, I couldn’t but help notice that this very growth has taken its toll on some of these providers, with buyers increasingly highlighting service delivery concerns especially as it relates to the quality (or lack thereof) of resources deployed on their engagements.

Since the Satyam crisis in early 2009, Everest Group has been tracking global and offshore majors across a number of dimensions to analyze patterns that indicate deviation from “ideal” behavior, and thereby highlight risks to service delivery. Based on analysis of 1Q 2011, our risk dashboard for the WITCH majors required a change in operational parameters from “No Risk” to “Marginal Risk.” While individual, provider-specific rating changes are common, this is the first occurrence of a collective group rating change since we started our assessment over two years ago.

At the core of these operational challenges is the strain on the labor model of the offshore majors that are “blessed” with an environment of hyper growth. With attrition levels at a three-year high, service providers are being forced to meet the commitments for new logos/projects by rotating employees out of existing accounts, especially smaller ones. This practice of robbing Peter to pay Paul is eroding service quality and creating concerns for clients. Further, the hiring freezes and cutbacks at the peak of the economic crisis in late 2008 and most of 2009 created an imbalance in the labor model. Service providers are now having to back-fill for attrition through relatively junior and less-experienced resources than those to which clients were typically accustomed.

Attrition Trend for WITCH

To clarify, this is not a “WITCH hunt” and should not be read as propaganda against offshoring, India, or the WITCH majors. I firmly believe in the fundamentals of offshore growth, India’s delivery competitiveness, and the capabilities of WITCH majors’ management to navigate what we hope are merely short-term hiccups. The issue, however, reinforces the need for a more robust approach to global sourcing risk management in which being proactive is key to staying ahead of the game. While a proactive approach does not guarantee prediction of the next major crisis (e.g., Satyam), our experience suggests that a focused and consistent approach can deliver early warning signals to buyers, who can then use them to potentially undertake mitigation or course correction strategies. After all, as the old saying goes forewarned is forearmed!

In a complimentary Breaking Viewpoint released earlier this week, I shared additional information on this topic, and provide perspectives to better manage the current set of offshore delivery challenges. Download the complimentary Breaking Viewpoint.

Captivating Clarifications: Captive Centers and the Erroneously Published Obituary | Sherpas in Blue Shirts

May 17, 2011

This is one in a series of thought leadership articles by Eric Simonson on the continuing role of captives in the global services landscape.

______________________________________________________________

Most major news outlets write obituaries about the famous far in advance of their demise so they can publish within moments of official verification of the unhappy event. The tactic works well, except when the obit is published but the death didn’t actually occur . . . as is the case with captive centers.

In the 2006 – 2008 timeframe, considerable “research” and speculation was tolling the death knell for the captive model. But the reality is, captives are not only still alive and kicking (e.g., NASSCOM in March 2011 held its first-ever captive enclave), but also growing and maturing to form a different and more important component of their organizations’ global sourcing model.

So how did this disconnect come about?

First, the divestiture of some captives gave the global services media and the market in general something provocative to talk about. What they missed was that these captives weren’t sold because they were failing. Quite the opposite. Rather, third-party service providers — e.g., Genpact, WNS and EXL — wanted to buy them to gain distinctive capabilities they couldn’t develop themselves that would enable accelerated delivery prowess and differentiation in the marketplace. Looked at from this perspective, it’s not at all an indictment of the model’s failure to deliver services, but instead a validation that some captives had been done quite well.

Second, in that timeframe, there were many rumors of captives being up for sale. Some of them did get bought/sold, and others didn’t. But the rumor mill fueled the doomsday fire, even though most that were divested were for strategic reasons — e.g., a need to generate cash during the height of the financial crisis, diminished interest in operating in certain geographies, or the decision to handle a specific skill set in a different manner.

Third, after captives became more common, many companies just jumped into the fray. But they established their captives at too low a scale, with too few resources, insufficient commitment from their parent organization, and inability to invest in making the talent model work to obtain the right leadership and front line employees. Many of those captives struggled, and ultimately their operations were either outsourced or brought back in-house.

By contrast, the captives with more commitment and more volume started optimizing the model by outsourcing portions of their operations, in some cases to conserve capital and in others to create career paths. This was not because the captive model wasn’t working, but instead because the way to leverage a hybrid delivery model for optimum value was becoming clearer.

Today’s captives are moving even further along the optimization continuum. Many are outsourcing the commodity transactional work to third parties, while assuming responsibility for higher-skilled work such as complex analytics, R&D, and high-end judgment processes…the work you might have expected to see in a corporate campus rather than an AP center in Knoxville, Tennessee or any other Tier 2 city in the U.S.

At the end of the day, captives are neither good nor bad; they are just different. And for organizations that have the commitment and scale, they are likely to be an important, integral part of the overall global services model, in tandem with outsourcing.

For more insights on the evolution of offshore captives, check out our newly published report, Captives are Staying Alive: The Rumors of My Death have been Greatly Exaggerated.

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

May 11, 2011

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:

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.

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

February 1, 2011

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.

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Tag: global sourcing