Labor Arbitrage Archives - Page 4 Of 5

A Modest Proposal for Infosys | Sherpas in Blue Shirts

July 24, 2014

Much like Jonathan Swift proposed an outrageous, over-the-top suggestion that the Irish eat their children as a way to accommodate themselves in famine and over-population, I have a modest proposal for Infosys. It’s over the top, but it’s intended to highlight an issue.

My modest proposal is that Infosys keep its platform IP business, sell its labor arbitrage business and use the proceeds to buy IP and software and further develop it.

I understand that this sounds beyond the pale that Infosys would ever sell its arbitrage business. But think about this: they already split the company into two. They recognized that the arbitrage outsourcing business is maturing and is going to be in a mature state.

They already clearly bet the future of Infosys on its ability to jump on the next S curve in terms of IP. I say go ahead and go whole hog. In the words of the country and western song, sell the truck while it’s still running.

Why not sell it while they can get a huge premium? The Infosys arbitrage business is the jewel of the industry. Great people, great clients and extremely high-quality work. It would fetch a very high multiple. Any competitor would be proud to own it.

Infosys could then deploy its capital into its IP business. The strategy goes along with already having hired a CEO from SAP who understands products and IP, and it would free management from the complications of having to manage two business models at the same time.

My modest proposal illustrates the underlying issue that faces the offshore services industry. It contemplates the maturing of the space and the complications of jumping to a new high-growth market segment. If you want to look at other similar situations, consider IBM, which recently sold its transactional BPO and voice BPO services.

It would be a breathtaking move. But, with my apologies to Jonathan Swift, it’s certainly food for thought.

Photo credit: “Jonathan Swift by Charles Jervas detail” by Charles Jervas

Infosys Divides in Two — a Bold Move | Sherpas in Blue Shirts

June 19, 2014

Infosys made headlines recently, announcing the separation of its products, platforms and solutions (PPS) business into a subsidiary called Edgeverve Systems. It’s a bold move, but in many respects it makes sense. Here’s my take on the implications and potential net result of the spinout strategy.

As I explained in an article in The Times of India, Infosys’ PPS business — platforms, cloud products, and other digital services — are fundamentally a different kind of business than the firm’s historical labor arbitrage, skills-based business. The two models have different value propositions, selling maneuvers, adoption patterns and investment profiles.

Separating the two kinds of business allows Infosys management to keep the focus unconfused and allows Infosys to become masters of both business models. It allows them time and investment to develop its Edge series digital products in anticipation of demand, rather than focusing on revenue from the PPS business (historically only 5.2 percent of Infosys’ business).

It also allows management to continue focusing on the labor arbitrage business while revenue grows over time from the new-generation offerings of the Edgeverve subsidiary. Cognizant, TCS and other providers have demonstrated that there is still plenty of room left for growth in the labor arbitrage model. Although the growth is slowing, it is growing faster than the overall services industry.

Infosys recognizes that growth in its labor arbitrage business will be harder and not like the good old days; but at the same time, they recognize that they can do better. By separating the two business models of Infosys, Infosys acknowledges that they can and should go faster in the labor arbitrage, skills-based space. And this is coupled with a focus on going after larger transactions.

Two notable potential outcomes

If Infosys executes this spinout strategy successfully, I think it will result in better growth than they would otherwise get. The net result hopefully will be faster growth in both areas and more focused and nuanced value propositions for serving their clients.

As I said at the beginning of this blog: it’s a bold move, but it makes a lot of sense. So if it’s successful, I think it could lead the way for other service providers to separate their historical businesses and new-generation digital businesses.

Impact of Incremental Arbitrage & Efficiency Grows as GIC Matures | Market Insights™

May 21, 2014

As the GIC (shared services) model evolves, the impact of incremental arbitrage (beyond cost arbitrage) and efficiency value drivers grows exponentially.

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Business Process Outsourcing or Operations or Management or Services? What’s with the Name? | Sherpas in Blue Shirts

May 13, 2014

Nomenclature for third-party provision of business process related services (typically called BPO or Business Process Outsourcing) has stirred up quite a debate in the industry. Is it just a marketing exercise or a step in the maturation of the industry? Clients have to feel the difference before they are willing to adopt a new name; otherwise it is purely marketing.

Most of the conversation is about replacing the letter “O” in BPO. Accenture retained the “O” but are calling it “Operations.” Nasscom along with several other service providers started calling it BPM (Business Process Management). Several industry stakeholders have asked for Everest Group’s opinion, so here’s my list of different acronyms (in ascending order of my personal preference):

BPM (M=Management)	My least favorite. The name should at least convey what it means. BPM tends to confuse the BP? industry with workflows and process management tools and technologies that enable BP? delivery but are not truly representative of it. With BPM, I tend to think more Appian and Newgen rather than Genpact, TCS, and Accenture.
BPO (O=Outsourcing)	It accurately describes the market, but I can understand why people do not want to associate the industry with just outsourcing which often connotes commoditized offerings providing cost reduction through arbitrage. It also has a certain social and political stigma associated with it. A word of caution though – outsourcing is not the same as offshoring but is a superset that may include offshore, nearshore, and/or onshore delivery.
BPO (O=Operations)	Nice play of words but again seems to imply “operational” value creation and not the “transformational” capability of BP? in terms of value creation.
BPS (S=Services)	My current favorite as essentially BP? is an industry where a third-party provides enterprises with services across horizontal business processes (order-to-cash, procure-to-pay, hire-to-retire) and industry-specific business processes (mortgage processing, claims management, meter-to-cash). Service delivery requires people expertise, process excellence, and technology capabilities, and service performance can be measured across efficiency, effectiveness, and business outcomes.

The industry is desperately seeking ways to go beyond the cost reduction mindset and evolve into a cost+ value proposition. Changing the name of the industry will not be of much use unless the underlying behavior (both buying and selling), solutions, contracts, and performance of the industry change.

However, I fear the industry is just trying to change the name versus actually working on the value, which will leave it open to criticisms. It’s just like putting a new coat of paint on an old car that needs an engine replacement!

So let’s try and go beyond this “name game” and focus on things that really matter.

Photo credit: Quinn Dombrowski

CCO Buyers Seeking Added Value | Market Insights™

April 17, 2014

As CCO matures, buyers demand more than labor arbitrage, resulting in changing solution characteristics

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GICs Improve Cost Savings, Risk, Revenue | Market Insights™

February 21, 2014

GICs (shared services centers) have business impact beyond arbitrage, imporving cost savings, risk, and revenue

Why, What, How, and Who of BPO is Changing – And for the Better! | Sherpas in Blue Shirts

February 11, 2014

Originally posted on Global Services Media

How the BPO industry is evolving and what industry stakeholders can expect in 2014 and beyond?

The turn of the century witnessed an explosive growth in Business Process Outsourcing (BPO) as a powerful arbitrage-led value proposition took center-stage.

Today, arbitrage is table stakes and clients are expecting more. The BPO service provider landscape has also undergone a metamorphosis. Competitive intensity is at an all-time high, constantly pushing providers to innovate and create differentiated BPO solutions.

This demand-supply push and pull has brought the BPO industry to an interesting inflexion point. In this article, we describe how the BPO industry is evolving and what industry stakeholders can expect in 2014 and beyond (see exhibit below).

1. Why BPO? Driving Cost+ impact
In a recent Everest Group survey, three-quarters of enterprise respondents said their outsourcing and/or shared services initiatives met financial objectives.

Surprisingly, almost 90% reported that they now include sources of value other than cost in their business cases. A cost+ value proposition for BPO is emerging that lays greater focus on driving organizational agility, business impact, and topline-growth beyond cost reduction and greater efficiency. As a result the definition of BPO, the underlying solutions, and the service provider landscape are also evolving

2. What is BPO? Holistic definition and scope
BPO is not one market – it is an amalgamation of several horizontal (such as F&A, HR, procurement) and industry-specific (such as mortgage servicing, insurance claims processing, fund administration, clinical trials) market segments. Each BPO segment has unique characteristics in terms of value creation, solution characteristics, and service provider landscape. A cookie-cutter approach to BPO no longer works.

U.S.-to-Mexico Cost Arbitrage Favorable into the Future | Market Insights™

February 5, 2014

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Is There Anything Providers Can Do to Change the Growth Trajectory of the Labor Arbitrage Industry? | Sherpas in Blue Shirts

November 5, 2013

There is an inconvenient truth in the global services industry: The growth rates in labor-arbitrage-based businesses are diminishing.

Tied to that fact is an even more inconvenient truth: Service providers have overreached in moving to outcome-based platform models to compensate for the drop in arbitrage growth rates.

Labor arbitrage is not going away. But it’s so well established that much of the work that would go into a labor arbitrage model has already moved, so the growth rates are dropping in this business. This has caused the provider community to run helter-skelter for new growth ventures. Many have developed IP and deliver multi-tenant or multi-use software in “outcome-based” or “non-linear platforms” — only to discover two more inconvenient truths:

Although these models sound great and there are signs that the market seeks to adopt them, the unpleasant fact is that the size of the market for these types of offerings is small compared to the labor arbitrage market.
Providers have invested in these platforms and cloud offerings for future growth, but the hoped-for growth kick is slow in coming.

The net result is we now see them focusing back on the labor arbitrage talent-based space. The good news is that, although the growth rates here are slowing, the market is huge. Furthermore, providers in this market have a differentiated or compelling position.

Why isn’t the hoped-for growth kicking in?

The providers’ strategy is troubled in several dimensions. A prime reason why their strategy based on the new models has not been successful is that they don’t understand the new models. They try to scale them, assuming a move from experimentation to hyper-growth, before they thoroughly think through how to work with the different sales model and adoption trends. They also tend to use their existing pricing structures for new models. As a result, they struggle with wide-scale customer adoption.

These are small markets, and the offerings in these new models tend to be focused by industry or by function. Therefore, for each offering the market is much smaller than the arbitrage-based market. So even when providers succeed in gaining new business, they only succeed in small numbers.

So that’s the problem.

What’s the solution to this dilemma?

Is there anything we can do to change the growth trajectory of the arbitrage industry? The simple fact is no, there isn’t anything we can do. The truth is the arbitrage-based market will continue to slow. The new models and markets are nascent and immature and not large enough to offset the declining growth in traditional, bigger arbitrage businesses.

When the industry has slowing growth rates in a market, it becomes more and more difficult for providers to grow fast in that space. In the short run, I think the answer is the providers must stay focused on their arbitrage base, as this market is large and they have secure, robust positions. I think it is a mistake to run too fast after the new models while patiently nurturing the new offerings in hopes that someday they will mature into the high-growth business they so desperately want. Our observation is that overly strong focus on the new offerings results in distracting the organizations from their core businesses.

Today the arbitrage-based market is really the only game in town for the providers that built their business on this model, and for at least the foreseeable future, they must reconcile themselves to the slowing growth rates. Even so, there is good news: It’s a huge market that still presents growth possibilities for the providers that focus on capturing it.

Post Captive Global In-house Center Webinar Musings: Change is Not as Hard or as Quick as You Might Think | Sherpas in Blue Shirts

June 11, 2012

Last Wednesday, we hosted a webinar on the cost competitiveness of global in-house centers and were privileged to have Kush Kamra (SVP of Global Operations for MetLife) and Charlie Roberson (Head of Enterprise Expense Management and Offshoring for Wells Fargo) join us as guest panelists. The analysis presented came from a joint study between Everest Group and NASSCOM earlier in 2012.

The webinar featured extensive discussion (thanks to our wonderful panelists) and got me thinking about two points in the aftermath of the webinar.

First, as those who attended know, the term “captive” is being replaced by “global in-house center” or “GIC.” In all honestly, I have been reluctant to confidently adopt this because change is hard (is it really worth it?) and “captive” is so simple to use in our reports (a mere seven characters!).

What suprised me is that in the two days after the webinar, three different individuals (two at the FSO event in NY, one during a phone interview) proactively corrected themselves after they said “captive” and replaced it with “global in-house center.” We laughed about it, but the point is that people are open to change and the word can get around pretty quickly. And not to be underestimated, it is much easier to replace a REALLY BAD idea when something better is consistently introduced into the market.

The second point that that I wanted to share is about labor arbitrage. As those familiar with the analysis we presented will recall, we analyzed the relative cost structure of offshore delivery vs. onshore and the sustainability of it under a range of scenarios. In many ways, the analysis simply helps rigorously document what those already close to situation know in their hearts – labor arbitrage is alive and well and not in danger of going anywhere soon.

The day after the webinar, the same topic came up in conversation with a senior solution design executive from a leading service provider. The individual mentioned that entry level positions continue to join at roughly the same salary level as five years ago and wage inflation is not nearly as dramatic as it may seem. However, she pointed out that the price for leadership is going up rapidly (luckily, this is a small sub-segment of the cost structure).

This underscores an important fundamental: supply and demand and how small changes in both can have big impacts. In short, demand for offshore resources is growing at a slower rate at exactly the same time that education systems are producing increasing amounts of resources. Further, training efforts aimed at increasing employability of graduates are slowly demonstrating impact. My prediction is that with the combined impact of slowing growth in demand and increasing supply of resources, we will see very little increase in the cost structure from offshore locations over the next 5 years (and this is before considering the impact of exchange rates). Yes, leaders (scarce resources – completely different supply-demand curves) will continue to become more and more expensive, but much of the cost structure will stay roughly the same.

Looking at this another way, the entire offshore/nearshore delivery ecosystem providing export services (India, China, Philippines, Mexico, Malaysia, Poland, etc. serving the United States, United Kingdom, Netherlands, Australia, etc.) is only a little over 4 million people on a global basis. In the grand scheme of things, this is a really small labor pool and the ability to create excess supply from the 6 billion humans across Asia, Latin America, and Africa is tremendous – we are not in a supply constrained situation, but rather a demand-constrained scenario. SaaS, cloud, BPaaS, etc. only further suggest the potential for moderated demand for offshore resources.

I understand why people are concerned about cost increases and indeed some costs are increasing and some have increased significantly, but we are a long, long, long way from fundamental shifts in cost structures.

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Tag: labor arbitrage