P2P delivery is offshore-centric, with half offshore, 30% nearshore, and the remainder onshore
P2P delivery is offshore-centric, with half offshore, 30% nearshore, and the remainder onshore
Leading contact center outsourcing (CCO) providers are more likely than other providers to be using a balanced mix of high-, medium-, and low-cost delivery regions
Offshoring continues to be the predominant delivery model for FAO, butservice providers are investing in onshore locations to balance the delivery model
Deals with some offshore/nearshore component are rising; more than half of those FTEs are based in India, just under a quarter in Southeast Asia, and the rest spread across Latin America, China, and Eastern Europe.
Some traditional providers are pioneering the offshore model of service delivery in Managed Service Provider (MSP), and the trend is likely to grow as new players (such as Recruitment Process Outsourcing (RPO) and Procurement Outsourcing (PO)) enter the market bringing delivery models they have used in other outsourcing areas.
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It’s the time of year when we turn our attention to reflecting on what happened over the the past 12 months and weigh the significance of the year’s events. I think we can showcase 2013 in five primary aspects.
1. Market growth
First let’s think about the market itself. We began the year expecting more robust growth, but I was disappointed in the first two quarters. The developing markets did not sustain their level of growth as in previous years, so we saw a drop-off in the developing markets space.
However, the market has gotten stronger over the year. So taken as a whole, I think it’s disappointing in light of our expectations, but we certainly are finishing with growing momentum. We’re seeing signs of growth in the United States, Canada, UK, Germany and the Nordics.
Net-net, 2013 brought a modestly positive level of growth but didn’t meet expectations.
2. Changing of the guard
This year the differences among the Indian heritage firms emerged more distinctly.
Due to these significant differences in both growth and product offerings, the industry players are no longer moving in lock-step.
Furthermore, the industry has almost uniformly taken an increased interest in building industry-oriented offers and verticals and has shifted down that path.
It has been a fairly quiet year for major acquisitions. Although there seems to be plenty of interest in inorganic growth, 2013 did not show big movements in that regard.
4. Impact of cloud
In the past 12 months we saw central enterprise organizations, CIO, CTO and shared service organizations taking tangible steps to embrace the cloud or next-gen models. Although that has had a very modest impact on revenue, it’s clear that they have moved from a “watch” to a “drive” posture. Where previously cloud was almost the exclusive providence of the business stakeholder units, 2013 showed that the enterprise is prepared to take a more active role in those decisions.
Although cloud had some modest impact on the industry in terms of growth, it foreshadows significant changes in the future.
5. Immigration and H-1B visa reform
Immigration reform and its associated H-1B visa reform raised its head and had a bigger impact than we anticipated. Service providers found that it was harder to move talent around globally. It became more difficult to get U.S. visas; and in the iGate-Royal Bank situation it became harder to get visas into Canada. Certainly the thresholds and scrutiny were raised around talent entering the UK and Europe.
The year brought the rising prospect of structural changes to immigration legislation; if enacted in the U.S., Canada and Europe, it would further complicate the free movement of labor. The net result is that it would not destroy the labor arbitrage model, but it would make it more expensive and lower the profit margins for some providers.
There is uncertainty and potential risk around the law, if enacted by Congress, raising further barriers for the movement of talent. Already we have seen two major developments in 2013.
First, the GICs (Global In-house Centers) or captives continue to solidify their situation and incrementally increase their influence in the industry. The industry experienced the normal handful of exits, but there were more than offset by new starts of GICs or captives.
More importantly the past year saw the GICs deepen their value proposition to their parents; they became more self-confident, extended their reach into more important functions and started taking over some third-party management functions that hitherto were executed out of the parents’ domestic operations.
A second aspect of industry change linked to immigration this past year is re-sourcing — moving work from low-cost locations into higher-cost locations. There has been a lot of talk about this. Although we saw little evidence that it happened in a material way in 2013, I think the prospect looms that at least some adjustments will be made.
As the industry matured and can better segment workloads, it is clear that the one-size-fits-all offshore talent factory does not fit every situation. Buyers are becoming more selective about what goes into those talent factories and what work is done domestically or in close proximity to the origination of the work.
The net result of that is, although 2013 did not bring a shrinking of work, we saw a reallocation of work. The actual numbers have continued to grow and increase, but buyers intentionally put more work into a right-sourcing model. So there was a modest overall impact on this in 2013, but it is something to watch in the future.
Of the five areas described, if I were to select the one that likely will have the greatest long-term impact on the industry and greatest impact in 2014, it would be immigration and H-1B visa reform. If Congress enacts the law, it could have a very significant impact on the industry. And if Senator Durban were to get his way with the H-1B visa provisions, it would go a long way toward leveling the cost advantage that the Indian heritage firms have over the MNCs.
Malaysia, which has been trying its fortunes in the global sourcing industry, has positioned itself as a destination for high-value services. On the back of strong government support, a skilled talent pool, sectoral expertise, first world infrastructure, and ease of travel, there has been an influx of MNCs setting up their back offices in the country in recent years.
The Malaysian IT-BPO industry is estimated to have grown at a CAGR of 15 percent in the last five years. Enterprises are predominantly leveraging centers based in Malaysia to serve their regional operations, and in some cases as part of their global business services portfolio. Shared services centers, or global in-house centers (GICs), are also a considerable component of the market, with marquee name companies such as AIG, GlaxoSmithKline, HSBC, Manulife, and Shell establishing their back offices in the country.
Following is a snapshot view of Malaysia’s GIC market:
It’s an attractive destination for multiple source markets including the United States, Europe, Asia, and the Middle East. Indeed, it is so appealing that firms such as OCBC and Pacnet, based in neighboring Singapore, have selected it for their back office delivery work
Financial services is the largest vertical in Malaysia in terms of scale, with more than 1,000 FTEs in a center (although typical center size is less than 500 resources.) Manufacturing and distribution and oil and gas firms also have noticeable presence in the country
F&A is the dominant function, as the majority of graduates have been trained in accounting/commerce and business administration-related disciplines. The second largest function is ADM services
The majority of activity is concentrated in the government-designated MSC zone, particularly in Klang Valley, which houses about 90 percent of the GICs in the country
So, what is Malaysia’s value proposition over credible, low-cost options such as India and the Philippines? Newer adopters of offshoring and those with mid-sized demand have a lower risk appetite and want a boutique experience. Thus, they are willing to pay a risk premium to avail themselves of differential advantages that Malaysia offers:
Multi-lingual competencies in Malay, English, Cantonese, Japanese, and Thai, stemming from a multi-cultural, multi-ethnic workforce
Lower costs than source markets and its Asian counterparts of Australia and Singapore
Strong support of organizations involved in development of IT-BP industry, such as the Multimedia Development Corporation (MDeC), which directs and oversees Malaysia’s National ICT initiative, and Outsourcing Malaysia/PIKOM
Overall macro-level factors such as a strong economy, political stability, good connectivity, and a well-developed infrastructure
Following are two key issues – and associated opportunities – Everest Group has identified about Malaysia’s shared services industry:
Scalability: Malaysia has a small labor pool. While most centers are within the 500 FTEs scale range, there is a limited evidence of back-offices with thousands of FTEs. The industry is struggling from a high level of attrition, with the average levels standing at approximately 15 percent. Indeed, one of our financial services clients is currently facing a churn rate of close to 25 percent
Opportunity to leverage untapped tier-2/3 cities: The current demand-supply imbalances in the labor market will propel firms to move to tier-2/3 cities from the highly penetrated Klang Valley. Besides controlling attrition, such a shift will also provide cost advantages and access to new pockets of talent. However, success will be dependent on creating a healthy ecosystem that is capable of providing sound physical and social infrastructure to support growth. Relevant industry associations are striving hard to attract investments by creating stable infrastructure, establishing training institutes, and providing incentives. We already see a shift in this direction with Frost and Sullivan’s recent establishment of a global innovation center in Nusajaya.
Talent retention: The sector’s biggest challenge is attracting and retaining top-notch talent, as perceived lack of defined career paths are driving top business school graduates to shun the shared services industry for the “Big Four.” Malaysian universities are not yet aware of the industry’s prospects and career opportunities.
Opportunity to move up the value chain from shared services to global business services: After proving their credentials, the next wave of growth for shared services lies in moving up the value chain by: 1) taking ownership of end-to-end delivery processes; 2) offering specialized/complex work such as financial planning and analysis, budgeting, forecasting, and reporting; and 3) creating a bench of local leaders capable of taking on roles beyond delivery.
While Malaysia is doing a good job of attracting the first wave of companies and delivering transactional processes and fair degree of application services, it needs to up its game by moving up the value chain and identifying niche pockets to build and own. Perhaps big data, analytics, social media, and supply chain BPO could be its new fortes?
For more detailed coverage on Malaysia’s GIC market, please refer to our recently released report, “Global In-house Center (GIC) Landscape in Malaysia and Trends in Offshore GIC Market.”
Photo credit: Muhd Amirull
The locations landscape in India for delivery of offshore BPO services has expanded considerably beyond the established tier-1 locations. India offers 20+ tier-2/3 locations for offshore BPO services delivery with some of them having significant market activity (e.g., Kochi, Trivandrum, Kolkata, Jaipur) while others (e.g., Ahmedabad, Indore, Vizag, Chandigarh) are at a nascent stage.
Adoption of tier-2/3 locations in India is consistent with observation in other mature geographies (e.g., U.S., Canada, Central and Eastern Europe). Although the motivation for adoption varies (e.g., expansionof customer base such as public sector in onshore locations, cost advantage in offshore locations).
In India, cost savings and access to talent are the key drivers for adoption of tier-2/3 locations. Lower salaries, real estate, and overheads result in lower cost of operations in tier-2/3 locations than tier-1.
Furthermore, leading tier-2/3 locations are typically centers of higher education within the region/state ensuring long-term talent sustainability. They also attract talent from nearby areas adding to the overall pool. Relatively lower competitive intensity in tier-2/3 locations also results in lower recruitment overheads and productivity ramp-up time. In addition, there are multiple other opportunities (access to niche talent, first mover advantage in newer locations, and higher skill delivery) offered by tier-2/3 locations. These advantages are likely to maintain the momentum in favor of tier-2/3 locations going forward.
At the same time, there are challenges in service delivery in tier-2/3 centers. Employability, scalability, and lack of managerial talent continues to be an area of concern. Consequently, service delivery from tier-2/3 locations is typically limited to transactional / rule based (e.g., AP, AR) work. Although there is evidence of movement towards complex (e.g., healthcare, pharma) and end-to-end (e.g., O2C, P2P)work in select areas, overall scalability remains small. Moreover, even though the operating environment has improved over the years, peripheral locations in tier-1 cities offer attractive alternatives to tier-2/3 locations both from cost and talent pool perspectives.
In conclusion, adoption of tier-2/3 locations for BPO service delivery is an established phenomenon. However, companies need to be mindful of the associated trade-offs (e.g., early mover advantage vs. relatively lesser evolved delivery environment) and carefully evaluate the role of tier-2/3 locations in delivery network.
Everest Group has released a global locations insight providing perspectives on tier-2/3 locations in India for delivery of offshore BPO services. The report discusses locations landscape and adoption trends, drivers for adoption, opportunities and challenges in BPO service delivery, and implications for stakeholders.
A whopping US$8.5 billion worth of IT and business process outsourcing deals are up for renewal in the next two and a half years, with 57 percent of this value up for grabs in 2013-14 (see the image below). This is a huge opportunity for service providers and buyers, as the oil and gas industry is going through a dynamic phase and both the sell-side and buy-side players are evolving their strategies and approach to IT and business process services delivery.
Oil and gas majors are facing declining profitability, while their revenues continue to grow. This indicates the significant cost pressures they are facing. Two possible reasons behind this are the rising cost (rising at a CAGR of 3 percent for the past several years) of converting new discoveries into production, and fluctuations in demand from large consumers. Other key challenges oil and gas firms are experiencing include:
These challenges, coupled with dynamic nature of the sector, have led to a shift in buyers’ approach to outsourcing. Early adopters of outsourcing are now rebalancing their sourcing portfolio and, hence, making a cautious move towards further outsourcing. Buyers’ expectations from service providers are also changing, and they are demanding non-linear models in their outsourcing relationships, i.e., gain-share mechanisms.
Service providers are also stepping up their game plan on several fronts in order to grab a bigger piece of the oil and gas pie. First, they are focusing on developing domain expertise in order to support the need for integration of operation technology with information technology in this sector, as buyers are looking for such an integrated approach to derive more output/performance from their assets. They are leveraging domain expertise to create cost-effective, plug and play solutions that reduce clients’ time-to-market. And they are using their domain expertise to build robust knowledge management systems, thereby tackling buyers’ aging workforce issue. While service providers have historically followed an inorganic approach (mergers, acquisitions, and alliances) to develop industry-specific knowledge and they continue to do so, many are also adopting an organic route. They are hiring talent (both entry-level and experienced) directly from the industry or relevant universities, and are investing in institutionalizing internal training programs.
Second, service providers are looking to serve oil and gas firms in their expansion into newer geographies, such as Latin America and the former Soviet Bloc, which are emerging as new oil fields and are looking to expand their footprint and language capabilities to serve client needs.
Third, service providers are embracing disruptive technologies, such as mobility, cloud, analytics, and social media in their solutions for the oil and gas sector. Buyers are demanding these to gain a competitive edge. These technical advancements present a big opportunity for service providers to create solutions and ready-to-use platforms for this sector.
Overall, it is an interesting time in the oil and gas industry, especially for service providers to unlock their potential. While we provide a short-term view of the outsourcing deals’ potential, providers must develop long-term strategies and make investments to capitalize on the opportunities that lie ahead. Yet, given the value at stake in the short-term, it is unlikely service providers will fail to recognize these undercurrents and miss the bus.
To learn more about this topic, please read our recently released report, “Outsourcing and Offshoring Trends in the Oil and Gas Sector.”