Tag: offshoring

Immigration and H-1B Visa Reform — Dead on Arrival, or Alive and Kicking? | Sherpas in Blue Shirts

I’ve blogged before about the impending immigration reform, with its accompanying H-1B visa reform and onerous provisions that will reshape the global services industry. Congress is now halfway down the path to deciding on immigration reform.

The scuttlebutt in the global services industry is that immigration reform is dead and there’s no need to worry about H-1B visa reform any longer. But we think it’s too early to take that position.

Let’s review where we are. The Senate passed its version of the bill, and all the onerous H-1B provisions that are unfavorable to the global services industry remained intact. The bill is running into opposition in the House. But that doesn’t mean it’s dead.

The Republican-controlled House is taking an approach of dealing with immigration issues in a series of separate bills rather than one large piece of immigration reform. If these indeed make their way through the House, its cumulative version will have a substantially different structure than the Senate version.

It remains to be seen whether or not the bill will pass. But there is tremendous pressure on Congress and on the Republicans to break their deadlock and get something done, especially immigration reform. We think it’s a mistake for the services industry to underestimate the extremely strong political pressure.

At this point there is still a significant likelihood that the legislation will move through the House in a piecemeal fashion. The contentious issues such as border control and path to citizenship, which are central issues for Republicans, likely will be dominate the House version of the legislation.

If the House manages to get to a politically acceptable position regarding border control and path to citizenship, we believe they will will have little political support or interest in confronting the Senate on the H-1B visa reform issues. As mentioned in our earlier blogs on visa reform, no constituency is vocal in lobbying against the scalding provisions targeting the Indian service providers whose business models heavily depend on H-1B visas.

Therefore, if the House passes its version, we think there is a distinct possibility that the onerous provisions in the Senate’s version of H-1B visa reform will slip through, unopposed, into the eventual legislation.

This is potentially the worst scenario for those who are against the onerous visa reform scenarios.

We believe these provisions still have a strong pulse and the targeted Indian service providers should still be concerned and look at potential mitigation strategies.

Analyzing Risk-Mitigation Strategies for Indian Service Providers’ Impact from U.S. Immigration Reform | Sherpas in Blue Shirts

The U.S. Congress took steps last week that bring proposed immigration reform — and associated H-1B visa reform — even closer to passing into law. The Senate Judiciary Committee passed the full bill on a bipartisan vote of 13-5. They also agreed to key compromises that, if passed, raise the annual cap on H-1B visas from 65,000 to 115,000 and remove the provision requiring recruiting American workers before foreigners. It gives a green light to Silicon Valley giants and other U.S. tech firms and squelches the hopes of the large Indian service providers that the language in the reform provisions might be softened. The tech companies now seek to influence six GOP senators to vote to pass the bill out of the full Senate with a large majority, which would increase the odds for it passing in the House.

Although expectations that the legislation will pass are now drifting slightly higher than 50-50 odds, it’s still unclear how onerous the language in the visa reform provisions will be. Our first two posts in this blog series on visa reform (Critical Impacts on the Global Services Industry Due to Upcoming Immigration Reform and A Detailed Look at How the U.S. Immigration Reform Will Impact Indian Service Providers and Their Customers) provide background on the impacts to the various global services providers and their customers.

In addition to the potential impacts we outlined in those blog posts, Senator Hatch last week added an amendment that brings L-1 visas into the net for reform and prevents Indian firms from using L-1s to dodge the troubling aspects of H-1B visa reform. For employers with 15 percent or more U.S. employees on L-1 visas, the amendment states they will be prevented from placing those workers at client worksites. Further, they will be unable to assign L-1 visa holders to “labor for hire” arrangements.

Unless the trends reverse, the legislation will uproot the business models of the large heritage Indian service providers. At stake: increased costs and margin hits along with constraints in placing H-1B and L-1 visa holders on site in U.S. clients’ locations.

Aside from praying that the proposed legislation falls apart in the House, there’s no “silver bullet” for eliminating the negative impacts to the Indian providers. So in this third post in our series on H-1B visa reform we present risk-mitigation strategies and our analysis of the likelihood of those strategies succeeding. We worked closely with Rod Bourgeois of Bernstein Research and Jeff Lande of The Lande Group in developing the thinking in this analysis, which also draws heavily on Rod’s presentation at his 10th annual equity analyst conference. We sincerely thank Rod and Jeff for their insights in this analysis.

What mitigation strategies are available?

Our analysis breaks down the H-1B reform provisions into six major aspects (shown in the blue rectangles in Exhibit 1). With the exception of two aspects, we suggest one or more mitigation strategies (green rectangles) for the impacts to the Indian service providers.

Exhibit 1

Immigration Reform Impacts and Possible Mitigation Strategies

Let’s look at the likelihood of the above mitigation strategies. This is not an exhaustive analysis, but these factors are the primary ones of concern for the Indian firms.

U.S. clients lobby. It is possible that the big U.S. clients of Indian providers might lobby Congress to change the language of the 15 percent ratio of H-1B holders to U.S. employees due to their concerns about significant disruption to their operations and talent access. However, our research indicates this has not happened to date, and we don’t believe it will occur.

Political factors. India’s government could eliminate its protectionist policies limiting the sale of U.S. tech products in India with the hope that, in turn, this strategy would influence Congress to water down the 15 percent ratio provision. However, there is currently no U.S. political force stepping up to help the Indian firms.

In fact, our observance is that it may be more important politically to pass comprehensive immigration reform than it is to avoid bilateral issues with India.

Although the U.S. tech firms were allies of the Indian firms initially in the visa reform debates in order to increase the “pie” of available visas, this is no longer the case. Presumably the reason for their about-face in support is that the proposed higher cap on available visas and greater share of the “pie” of visas going to U.S. firms meets their visa desires. We have observed statements by such tech firms as Microsoft and IBM in support of the Senate’s visa reform provisions and in support of putting pressure on India to change its protectionist policies.

Staffing  model alterations. The proposed ban on eligibility to apply for new visas (triggered by a 75 percent ratio of H-1B or L1 visa holders to U.S. employees, with the ratio dropping to 50 percent after FY 2016) limits the access of Indian firms to new visa holders.

If these restrictions become law, Indian firms could respond by increasing their offshore staff or increasing their nearshore staff in locations such as Canada or in U.S. rural areas and low-cost states (e.g., Louisiana, Mississippi, Alabama). We believe their offshore staffing mix is already at optimal levels.

Alternatively, they could hire subcontractors from companies that primarily operate in the United States that are below the visa headcount threshold ratio.

Or they could acquire businesses with high levels of U.S. staff and rebadge them. However, there are well-known risks in achieving return on investment in acquisitions of services firms. But let’s assume Indian firms decide to take this risk. At what point does an acquisition clearly make sense for an Indian IT firm? Where is the break-even point for low-margin work with high headcount? Would it break up the business of some firms into sub-businesses?

We also note that the proposed legislation includes language stating that if 90 percent of an employer’s visa holders have applied for Green Cards, they would be removed from the visa headcount ratio calculation. However, we do not believe this mitigating factor is feasible to pursue.

Higher wages. The proposed reforms require that, for new visa holders, employers pay higher wages for H-1B workers than they currently pay. We assume this also will necessitate higher wages to existing workers, especially since they have more tenure and relevant experience. The only mitigating factor we see for this provision is for the House to draft wage requirements lower than the Senate’s proposed requirements.

Increased application fees. The legislation also increases visa application fees to $10,000 per visa for employers with 50 or more employees if more than 50 percent are H-1B or L1 employees. As a point of reference, a fee of $10,000 on 5,000 visa applications ($50 million) equates to 3.2 percent of Cognizant’s current operating income. Note that 5,000 applications are fewer than Cognizant’s FY2012 level but similar tot FY 2011. The Indian firms could mitigate the expense impact by using fewer new visas.

Another mitigating factor is that the language in this provision could be watered down in the House and/or during conference. However, we believe it will remain in the legislation because Congress needs to raise funds to ensure the bill is cost neutral.

Pass costs through to clients. Another strategy for mitigating the financial impact from visa reform is for the Indian firms to try to pass the costs onto clients by renegotiating contracts and/or raising prices. For reasons detailed in our second blog post in the series, we do not believe this strategy would succeed.    

Although the Indian firms will likely need to consider all of the above mitigation strategies; however, as shown in Exhibit 2, we believe the tactics with the highest viability are the tactics for staffing alteration.

Exhibit 2

Most Likely Mitigation Strategies

Fortunately the top Indian firms have substantial inventories of visas that they can use to mitigate the short/medium-term impact if Congress passes the immigration/visa reform into law.

The BPO side

We believe that building U.S.-based platforms for vertical-specific BPO markets is a viable strategy for growth among the Indian firms as this would add U.S. headcount that would help lower the ratio for visa holders vs. U.S. employees.

In addition, many of the BPO players are in the position to rebadge their clients’ staffs in order to drive a higher ratio of U.S. staff. It’s fairly easy to transfer a visa to another employer; thus the Indian firms could transfer their visa workers to their clients or even to other services firms.

Possibility of joint ventures

We believe an interesting and creative mitigating strategy is for large U.S. or multinational service providers to create joint venture structures with the Indian players. This would ensure that current U.S. clients of Indian firms would not experience major service disruption. It would also enable the U.S. players to organically capture market share that the Indians otherwise would lose due to visa restrictions.

Bottom line

Due to the contentious issue of undocumented immigrants, the comprehensive immigration reform and related visa reform might not be passed into law. Even if enacted, there is still a possibility that the House’s version of the legislation will water down the restrictions in the Senate’s version. However, if it passes into law at close to its current version, the visa reform provisions will cause a seismic shake-up among the Indian service providers that are aggressive users of visa workers.

Stay tuned. We’ll keep you apprised of significant changes in visa reform impact to providers and customers in the global services industry.


Check out Peter’s other blogs on immigration reform here and here.

Global IT Services – Irrelevance of Capability or Celebration of Mediocrity? | Sherpas in Blue Shirts

Recent discussions with buyers of technology solutions and services make it clear the demarcation lines between global multinational company (MNC) service providers and offshore-centric players are increasingly blurring. Yet, they continue to have lingering questions, concerns, and perceptions about both categories of providers:

The global MNC service providers

  • Is their service delivery model sub-optimized, at least for commoditized work?
  • Would they have rationalized their price of services and delivery model if the offshore players had not disrupted the market?
  • Did/do they deploy “high-skill and high-cost” experts who were/are not always required?

The offshore players

  • They are focused on “cheap labor” that is trained on buyer’s money and are unable to deliver high value services
  • They promise unrealistic deal constructs and face challenges in meeting them
  • Buyers have few, if any, alternatives, even if they are dissatisfied with service delivery and normally continue with offshore players as the MNCs cannot match the low price points

With these issues in their minds, buyers themselves have created a cost versus capabilities and high-value versus low- value conundrum, rather than thinking about their end objectives. Moreover, they are surprisingly unaware of the critical role they played in this race to the bottom for pricing in global services. They fail to understand that any provider will be willing and able to serve them regardless of the delivery location, if they are willing to pay a suitable price. Indeed, in response to buyer desires for cost containment, global MNCs are expanding to low-cost locations to reduce their cost of services – not necessarily for capabilities. And offshore providers are expanding to near-client/high-cost centers, often for project-specific or political reasons – again, not necessarily for capabilities. Most of these providers are also reducing the average age of resources performing service delivery, indicating rationalization of experienced staff for further cost management. Although some type of work does require client proximity and typically higher cost resources, providers today are trying to optimize this as much as possible.

All this raises the question, “Do IT buyers care anymore about strong capabilities, or are they fine with a mediocre solution as long as it comes with a significantly low price tag?”

The fundamental discussion in this debate should be around inherent misplaced assumptions that a solution that provides higher value must carry a higher price tag and capable resources can rarely be in global delivery locations. Nevertheless, the realities are that buyers are accepting the offshore delivery model, irrespective of the type of service provider leveraging it, and service providers are investing in skilled talent and increasing the portfolio of services they deliver through offshore locations. At the same time, it is undeniable that the biggest “value” provided by a global delivery network is cost savings. Had it not been for the cost differential, service providers would have had little incentive to create global delivery networks.

Everest Group finds buyers’ response to this situation very interesting. Today, they are compartmentalizing their services landscape into “best-in-class” and “good enough.” They are willing to work with different types of service providers and delivery models as long as their objectives are met. For best-in-class, they value a service provider that can partner with them, and present and deliver on a future state blueprint. Despite the above faulty perceptions, this provider can be either a global MNC or an offshore-centric provider. For good enough, the type of provider is also irrelevant, as long as the price point is appreciably low.

Of course, buyers will not leverage a service provider that lacks capability. However, the definition of capability varies based on the type of work being outsourced. For services perceived as “high value,” they require a provider that truly understands their business, has the ability to work in tandem with them to achieve greater competitive advantage, and charges a price commensurate with their comfort zone. For “good-enough” solutions, the cost savings offered is indeed the “capability” of the provider.

The Changing Delivery Location Landscape of the UK Contact Center Market | Sherpas in Blue Shirts

To participants in and watchers of the UK contact center market, it’s obvious there are many changes afoot. These include the third-party service provider landscape, the nature of outsourcing deals, and the maturity of buyers.

One of the key changes Everest Group is seeing is in the locations UK buyers are leveraging for their contact center activities. Let’s examine the contributing elements.

Offshoring

UK companies only offshore 10-15 percent of their contact center work, which in actual job numbers equates to 70,000 to 90,000. Consider this quantity in contrast to the U.S., which offshores greater than 25 percent/400,000 to 500,000 contact center jobs – a comparison we make given English as the common delivery language – and the fact that offshore locations offer 70-80 percent cost arbitrage advantage over locations in the UK There are two clear reasons for the limited share of contact center offshoring from the UK:

  • Increasing buyer maturity often leads to increasing openness to move from outsourcing to offshoring. But as adoption of outsourcing in the UK has been relatively narrow due to comparatively lower buyer maturity levels, offshoring uptake has also been limited.
  • UK buyers place heavy emphasis on cultural and accent similarity, and native English language speakers. Although the U.S. has comfort level with the Philippines as a key go-to destination for contact center delivery, the UK has not yet found its “Philippines.” Indeed, while India still has the majority of offshored UK contact center jobs, pure voice delivery has decreased over the years, with buyers increasingly leveraging the country’s capabilities for non-voice contact center services such as website, e-mail, and chat support.

UK contact centers

However, the forward-looking view on offshore locations for the UK contact center market is much more promising. There is increasing acceptance of South Africa as a delivery location for voice-based and domain specific delivery (e.g., insurance), due to accent similarity and strong cultural affinity. Recent market activity, such as the Serco-Shop Direct deal, WNS’ acquisition of Fusion, and Capita’s purchase of Full Circle are indicators of this affinity. We expect India to continue its uptake of non-voice contact center services from the UK.

Onshoring/Nearshoring

Contact center work within the UK is moving to low-cost locations in Northern England and to other areas such as Scotland and Northern Ireland. While there is still a higher concentration of contact centers in Southern England (the Greater Thames region), this is more of a legacy effect rather than the result of new or recent activity. The new/greenfield activity is largely moving contact center work up north to Liverpool, Leeds, Manchester, and Newcastle-Gateshead in England, Glasgow, Edinburgh, and Kilmarnock in Scotland, and Belfast and Londonderry in Northern Ireland, driven by:

  • Lower operating cost
    • Salary: Locations in Northern England (e.g., Liverpool) offer 5-10 percent savings over established locations in Southern England (e.g., Twickenham), and locations in Scotland and Northern Ireland (e.g., Glasgow and Belfast) offer 10-15 percent savings
    • Real estate cost: Real estate rentals in the northeast (e.g., Newcastle) and northwest (e.g., Liverpool) are 10 percent lower than in the south of England (e.g., Twickenham); and rentals in Northern Ireland are 30-50 percent lower than locations in England
  • Sizeable agent pool: Birmingham and Leeds, for example, have considerable talent pools (40,000-70,000 experienced contact center agents)
  • Lower attrition and unemployment: Established locations (e.g., south of England) have higher contact center attrition and unemployment rates relative to other regions in the UK, thus influencing movement to areas north of England
  • Government incentives: Most less-established locations in the UK offer multiple incentives programs, such as employment and training grants, for contact centers. This makes their value proposition competitive, especially for greenfield operations. For example, Northern Ireland provides a one-time incentive of GBP 3,000-7,000 per job created in this sector

UK Locations leveraged by leading service providers

UK contact center locations

Everest Group believes that while onshore/nearshore delivery of UK contact center services will continue to remain the predominant model over the next three to five years, offshoring will grow faster. Buyers’ comfort with the offshore model, particularly with alternatives to India, such as South Africa, for voice-based services is likely to increase. Cost pressures are liable to propel buyers to adopt offshoring and other low-cost delivery alternatives, such as less expensive locations within the UK Finally, the market movement toward multi-channel contact center delivery capabilities, resulting in higher usage of web, chat, and e-mail customer support, will further support the growth of offshore 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.

Remote Infrastructure Management – “Gearing Up for the Big Leagues” | Sherpas in Blue Shirts

Everest Group’s just released research on Remote Infrastructure Management (RIM) services shows that the overall infrastructure services market, which was already undergoing significant changes due to various factors, is being further disrupted as RIM adoption takes center stage.

Let’s take a step back before we talk about RIM’s current state. Over the years, our RIM-focused research analyzed the growing challenges offshore providers, who pioneered RIM industry, faced in offering services that went beyond typical low-cost infrastructure monitoring. As their aspirations grew, and more buyers became willing to engage, those providers began offering newer RIM services, such as delivering from offshore locations those infrastructure services typically provided at onshore by competitors. Yet, the core value remained remote low-cost helpdesk and status quo monitoring of infrastructure assets, which experienced a significant growth across buyer landscape.

However, now we are witnessing substantial growth in the adoption of offshore infrastructure services that are moving beyond the typical RIM offerings. Our discussions with various buyers have revealed a clear evolution in the delivery and market messages of offshore infrastructure providers. Most of them are marketing and selling their portfolio of infrastructure offerings as “new service X,” “new service Y,” and “RIM,” unlike earlier years when they solely focused on RIM as a generic brand for all infrastructure offerings. This messaging effort is backed by changes in delivery model, engagement terms, transitioning process, investment in tools/automation, and various other related initiatives.

One example of this strategy is the willingness displayed by large offshore providers to open nearshore and onshore delivery centers to serve bigger customers. The typical 100 percent offshore ratio in RIM is dropping to around 80-85 percent as the providers offer higher value-added services that are normally delivered from client locations.

Remote Infrastructure Management Services

We are now seeing RIM providers gearing up to enter this new, big league. While cost savings is still the core tenet, their strategy is to move up the value chain, grab larger market share, and create more “downstream” opportunities for pure RIM services.

Traditional infrastructure and managed service providers that were already facing challenges due to stagnation in their core market and reduction in mega size, multi-towers, multi-years deals, are getting further squeezed by RIM providers. RIM providers are squarely part of this disruption, and are tweaking their delivery model, market messages, buyer engagement strategy, and investment focus to exploit this opportunity.

Poland GIC Sector Growth: Unique or “Way-to-Go”? | Sherpas in Blue Shirts

Everest Group recently published a report focusing on the Global In-house Center (GIC – our new term for captive center) market in Poland. During our analysis, we came across a very interesting fact: more than 40 percent of all GICs in Poland are based in Tier-2 and Tier-3 cities, while globally, the share of Tier-2 and 3 cities with GICs is only around 20 percent! This immediately raises some compelling questions:

  1. What does Poland’s GIC landscape look like? Where does most of the demand come from?
  2. What cities are we talking about? What companies are venturing / have ventured into Tier-2 and 3 cities?
  3. What factors make Tier-2 and 3 cities enticing to enterprises?

Let’s look at each of these questions individually to shed some light on what may be behind the Poland’s unusually high share of Tier-2 and -3 city-based GICs.

  1. Enterprises based in Western Europe and European subsidiaries of U.S. enterprises dominate the Polish GIC landscape. In terms of industry verticals, manufacturing leads with ~40 percent share, followed by banking and technology.

    Although Poland was initially leveraged primarily as an F&A BPO/shared services destination, the IT and engineering services / R&D functions have experienced a notable uptick. In fact, Poles’ aptitude for complex skills and cutting-edge technology is now well-known in global sourcing circles.

  2. The figure below depicts Poland’s GIC growth story. As you can see, numerous Forbes 2000 organizations (e.g., Citigroup, GE, Microsoft, Samsung, and Unilever) have set up GICs in Tier-2 and 3 cities in the country.

    Poland GICs
    Click on image to expand
  3. A number of factors have led to the high share of Tier-2 and 3 cities in the Poland GIC market:

    • Congestion and resulting high occupancy rates in Tier-1 cities sent office space and other operating costs soaring. Tier-2 and 3 cities provide ample office space, are not as congested as Tier-1’s, and  costs tend to be lower
    • High competition for talent in Tier-1 cities means higher attrition and wage inflation, while salaries and wage inflation levels in Tier 2 and 3 cities are comparatively lower
    • Most Tier-2 and 3 cities are home to large universities that offer large pools of graduates. The presence of universities also allows companies to hire students as part-time employees, offering additional flexibility
    • Most Tier-2 and 3 cities in Poland are well-connected by air, road, and rail, not just to its own Tier-1 cities, but also to the major business centers throughout Europe

The chart below provides a comparison of operating costs in Tier-1 and Tier-2 Polish cities. The presented cost savings do not account for any subsidies / financial incentives that governments at the city/state/federal level might be offering to investors.

Poland T1 T2 Operating Costs
Click on image to expand

However, we must here give perspective to a couple of points:

  • Although Tier-2 and 3 cities are less congested, they may present lower scalability as compared to Tier-1 cities due to lower overall maturity and a smaller pool of experienced professionals. The average scale of GICs in Tier-1 cities is around 600 FTEs, as compared to approximately 300 FTEs in Tier-2 and 3 cities
  • Each location offers a unique set of skills, e.g., Lodz is attractive for back office business processes, but is not scalable for IT

All this brings us to a profound question: is the Poland market model way ahead of others’ time? In other words, is this how other markets could operate if enabling conditions in Tier-2 and 3 cities were ideal? Or is Poland’s model just a result of a unique combination of factors/situations?

We’ll continue to provide our insights on this topic, but welcome our readers to weigh-in with their thoughts and perspectives!

For more information on Poland’s GIC landscape, please read our “Global Offshore Global In-house Center (GIC) Landscape and Trends: Focus Geography – Poland” report, and our newsletter edition,  “Global Location Insights: October 2011 – Perspectives on Global Services Market in Poland.”

Photo by jaime.silva

Full of Sound and Fury: The Irrelevance of the U.S. Election Offshore Rhetoric | Sherpas in Blue Shirts

In our last Market Vista webinar, we asked the audience to share its perspective on what is likely to happen with offshore demand as the election season in the United States concludes. As shown in the poll results below, few expect much to change after the election season – the votes are tightly clustered around slight change or no change.

Offshoring Poll

Although the results are consistent with my own personal view, it is certainly in contrast to the number of times I am asked about this topic by the media and other industry observers.

So why is there more noise than substance? Why does the global services market see the political rhetoric as largely irrelevant?

Three fundamental facts largely explain it:

  1. The U.S. government is much more concerned about offshore manufacturing than offshore services. Not surprisingly, politicians play fast and loose with terminology in their public speeches – does anyone recall a politician accurately using the terms offshoring and outsourcing? They are happy to publicly paint with a broad brush criticizing “offshoring.” But offshore services are continuing to grow and the business case remains strong. In contrast, the reality is that the economics of offshore manufacturing are more complex (for example, the cost of energy and transportation continue to increase), and there is a good business case for moving some types of manufacturing back onshore. Check out the Obama administration’s report on insourcing released at the January 11, 2012, insourcing forum to see just how much of the focus is actually on manufacturing and not services (or read this update). China is mentioned 17 times, India only once. For offshore services, the business case is simply too attractive (in most cases) for the government to push hard for broad-scale onshoring.
  2. The United States has a shortage of information technology talent. Despite the very real concern about broad-based unemployment, technology jobs are still hard to fill. This is why so many organizations have sought to increase their access to these skills either through offshore resources and immigration from other countries. Given the obvious strategic value for the United States to be strong in information technology-intensive industries, it must avoid hindering access to the skills and resources required to allow these portions of the economy to flourish. Of course the politicians cannot easily acknowledge this in public.
  3. The United States has to be a member of the global economy. Although the United States has lost and will lose jobs due to offshoring of services, it also gains much from global services and strong participation in the global economy. It is well understood that U.S. companies benefit from selling products around the world – these range from consumer devices to movies to industrial goods. However, it is less well understood that the United States also exports many services in addition to importing services. Engineering firms, law firms, architecture firms, and many other professions are serving global customers and often by providing high-end services. Next time you are on a plane flying to Asia, ask others traveling with you about their business interests and whether they derive benefit from global trade. In the past two years of trekking to India, I have come across a guide specializing in personalized nature tours of India, a machining engineer helping Harley Davidson enter India to sell its goods, a doctor providing specialized training, and even a dancer for Lady Gaga in route to film a video. They (and many others) are all traveling to Asia to satisfy global demand for their services. There is no realistic choice other than to participate in the global economy and focus on relative strengths.

Stepping back, we must bear in mind that politicians are typically speaking to their audience through mass media and messaging accordingly. In other words, what we hear is dumbed down and intended to grab emotions and headlines. However, outside of the noisy rhetoric, top politicians and policy makers do understand the fundamental forces shaping the U.S. and global economies and are unlikely to meaningfully influence the evolution of global services and associated offshoring – regardless of whether Obama or Romney wins the U.S. presidential election.

General Motors’ Drive to Insource most of its Outsourced IT Scope by 2015: Prospects of an “against the tide” success story? A recipe for disaster? A populist political play? | Sherpas in Blue Shirts

Ever since GM acquired EDS in 1984, the company has been on a roller-coaster ride with its global sourcing strategy. As a part of GM, EDS did progress and had many government bodies and enterprises in more than 20 countries as clients. However, GM decided to spin off EDS as an independent company in 1996, ending their 12-year association. Part of the divorce terms included a 10-year relationship with business guarantee from GM.

Meanwhile, the United States auto sector was experiencing a major downturn in fortunes all the way into the new millennium. GM suffered significantly at the hands of dwindling consumer confidence, resulting in more than US$8 billion in losses during 2005. At that time, Ralph Szygenda was leading GM’s IT. When the 10-year period for GM’s promised sourcing relationship with EDS ended in 2006, Szygenda put together a massive transformation blueprint with a $15 billion ticket value. Multiple outsourcing providers, including IBM, HP, EDS, Capgemini, and Wipro, were beneficiaries of the initial solution framework. HP and GM renewed a US $2 billion contract in 2010; Capgemini and GM also renewed. All this led to the reasonable assumption that GM was very serious about its sourcing strategy and confident of the advantages of the solution.

Fast forward to mid-July 2012, when current CIO Randall (Randy) D. Mott announced that GM will bring down the outsourced IT scope from 90 percent of total IT scope, with a goal to reduce the number to 10 percent by 2015. So what can we make of this announcement?

On one hand, Mott argued this will lead to better productivity and increased agility of IT in responding to business changes, given that new initiatives will be channeled into action instead of disappearing into procurement due diligence and contract negotiations. Another implication is around GM being able to extract scale advantages (a typical outsourcing value lever), given its large size of operation across multiple geographies. Also, keeping IT largely in-house will allow GM to adopt solutions tailored specifically for the manufacturing, supply chain, and sales channel challenges inherent in the auto industry.

On another hand, this change in sourcing strategy sounds like a great local employment opportunity for engineering graduates, especially in GM’s operation centers… potentially tens of thousands in “created” jobs.

Nevertheless, speculation is rife that this move is proving beneficial for the prospects of President Barack Obama’s campaign this election year, given the overall developing negative sentiment against offshoring. Not very long ago, in 2009, GM received a fat financial bailout package from the U.S. government; is this perhaps a showing of GM’s return of favors?

The outsourcing model has been around for multiple decades, and has matured over time. Outsourcing buyers around the globe have had problems similar to GM, and have historically adopted other measures such as vendor consolidation, scope rationalization, and standardization. With that, it sure does feel like GM is throwing out the baby with the bath water. And if its insourcing move doesn’t go well, that may be the only way to sum up its decision.

The jury is still out on whether this was a populist move by a recipient of political benevolence, and the world will watch closely the results of this massive, ambitious project. Even a minor deviation from stated goals will be scrutinized, considering that most major service providers are landing on the losing side of this deal. Net-net, Randy Mott will need all the help and luck he can get to pull this one off. Should he succeed, murmurs of blueprint replication in other corporations are bound to reach fever pitch.

What are your thoughts on GM’s insourcing strategy? Please post them in the comments section. I look forward to hearing from you!

Offshore Providers and the Cloud – No Datacenter Is Not a Choice! | Gaining Altitude in the Cloud

As large IT services buyers increasingly embrace cloud-based delivery, offshore IT services providers are being forced to innovate beyond their traditional strengths of labor arbitrage, process excellence, and delivery maturity. Indeed, as these providers witness their application services reaching wallet share saturation in the large buyer market, there is growing perception in the industry that if they do not offer “next generation” services they risk losing even their traditional business.

Granted, these providers are not sitting idle. They have created “cloud advisory” teams and executed multiple application migration/porting engagements as part of their global services contracts. But the crux of cloud opportunity lies in the transformational nature of these engagements, which invariably involves owning IT infrastructure.

Our discussions with enterprise IT services buyers point to three types of roles for offshore providers, which extend beyond typical SaaS implementation and integration. These roles will also require services related to consulting, architecture, application migration, etc.

Cloud Offshore Providers

Offshore providers possess varying degrees of competence for these roles, but to remain relevant, they must continue to invest in newer capabilities. Today, a select few are investing in areas such as cloud management platforms, consulting services, readiness assessments, and migration services to move beyond simplistic cloud engagements. However, most lack a comprehensive datacenter-driven cloud infrastructure service, which is needed to drive transformational engagements.

One of the key findings in Everest Group’s recently released Cloud Vista research study was that more than 50 percent of large cloud-related engagements – and even most application transformation deals – contain a significant amount of infrastructure transformation, but offshore providers have scant presence in these engagements.

Cloud Adoption Drivers

It is becoming abundantly clear that offshore providers need to swiftly tackle the area of cloud infrastructure services. One of the biggest challenges they must overcome is their lack of willingness to invest in owning datacenters, instead opting to relegate core datacenter operations to the partners. Many buyers convey their disappointment with this type of partnership model, believing it can at best support running IT operations, but that it is not appropriate for enterprise class cloud infrastructure services that can assist them to variabilize their costs and access self-service, consumption-linked infrastructure.

Given their general reluctance to own large scale datacenters, offshore providers may at least evaluate “white labeling” hosting providers’ datacenters so that they can offer cloud infrastructure services which will allow them to calibrate their investments while simultaneously serving their buyers. Given that white labeling of datacenters is an accepted practice and even large scale datacenter service providers white label datacenters from other core datacenter operators (e.g., Equinix), this model will find acceptance with the buyers.

Offshore providers need to understand that for a game changing paradigm such as cloud, there always will be a risk associated with investments. The days of cherry picking attractive contracts are over, and they can no longer walk away from complex deals that do not meet their sweet spot. Therefore, they must inculcate a culture of risk taking, and invest in areas outside their comfort zone, especially in cloud infrastructure services. The cloud is changing buyers’ sourcing strategies, and offshore providers that fail to change accordingly risk losing their relevance and even their traditional business.

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