Tag: offshoring

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.

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

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.

A Clear Sign of Maturation: A Third of All ADM Headcount Serving U.S. Companies Is Now in Offshore Locations | Sherpas in Blue Shirts

Just how mature is the offshore market today? Let’s look at overall headcount worldwide serving the Unites States’ ADM requirements as a gauge.

In 2007, approximately 2.2 million IT staff were delivering ADM services to U.S. companies from offshore locations. In 2008, the sub-prime crisis hit and the economy went into a downward spiral. Discretionary spending on fresh custom application development, consulting services, and large transformational IT projects came to a screeching halt. The mantra was one of survival, yet backed by a readiness to accelerate hard when the economy rebounded. While a full bounce-back is arguably yet to happen, 2010 and 2011 witnessed a partial uptick in corporate fortunes in America, and ADM spending picked up again. However, procurement executives were cautious in their approach, and were mandated to make sure no opportunities for further cost reduction were left untapped. Offshore providers’ margins came under attack, and innovative, client-friendly pricing models replaced old ones that buyers simply would have nothing to do with anymore. Since offshore locations offer lower billing rates courtesy of labor arbitrage, many fence sitters on the topic of offshoring quickly became adopters. Clients already offshoring increased their exposures to lower cost destinations like India. As a result, while the overall IT market had almost negligible growth since 2008, the offshore providers kept growing, albeit at a lower rate compared to pre-crisis days.

Composition of Worldwide ADM Resources Serving U.S. Enterprises 2011

In 2011, the headcount serving U.S. ADM scope stood at close to 2.6 million. Just under half (~1.25 million) account for in-house employees of U.S. corporations, and 10 percent of these are actually in offshore shared services centers. Approximately 1.3 million FTEs of third party service providers serve U.S. ADM scope. More than half of these are employed in offshore locations such as India and the Philippines. In 2007, about 45 percent of third party ADM resources were in offshore locations. So there has been a nine percentage point increase in offshoring penetration in third party ADM resources serving the U.S. since 2007. Approximately 850,000 of these FTEs supporting U.S. organizations were in offshore locations in 2011, resulting in an overall offshore penetration of ~33 percent of all headcount serving American companies for ADM scope. I expect offshoring penetration to keep increasing, at least for the time being.

With the advent of cloud computing, software-as-a-service (SaaS) has grown exponentially in prominence. Many argue that SaaS is likely to cannibalize custom application development and commercial off the shelf (COTS) software sales, thereby impacting third party providers’ revenues accruing from ADM services. While this may indeed turn out to be true in cases in which clients need very limited customization, for all other situations, custom development is still the only approach. With SaaS necessitating development of multi-tenant applications on emerging cloud platforms, and wrapping pay-per-use pricing and remote access layer around them, it certainly seems like scope for custom application development will increase, this time conducted in-house by software vendors. We may also end up witnessing a host of independent software vendors shipping their internal development work to offshore destinations.

Net-net, SaaS may be a threat to overall application outsourcing, but it is unlikely to erode offshore headcounts, namely programmers who sit and develop, debug and maintain programs in places like India. If anything, developments such as SaaS, cloud infrastructure, big data, analytics, RIMO and the uncertain economy spell opportunities for offshore destinations.

Note: ADM services in the context of this blog include application development, maintenance, the custom development portion of system integration projects, and testing, validation and assurance services.

Recognizing and Reducing Offshore Location Selection Risks | Sherpas in Blue Shirts

A recent article in BusinessWeek, Argentina Tries the Chavez Way, triggered my thinking about the increased role of geopolitical risk in location selection and overall risk mitigation. In the last decade, Argentina became the “darling” of global services given considerably lower resource prices than in neighboring Brazil, a stable society with deeply rooted democratic principles, etc. But the country’s geopolitical risk profile substantially changed recently. Its economy has stagnated from defaulting on its national debt, pseudo-populist movement groups are promising “quick and easy” fixes to the existing problems, and the trend of nationalizing privately owned businesses is expected to continue, given the views of the current political leadership. None of this yet puts Argentina’s geopolitical risk profile outside of the acceptable range. But we’ve seen from examples around the world that, in the absence of more efficient measures, it may be very tempting for a government to divert public attention from internal problems to some newly introduced external threat. For instance, consider what would happen to the country’s business environment if something similar to the almost forgotten conflict over the Falkland Islands suddenly escalated.

Now think about Colombia, whose geopolitical risk is moving in the opposite direction. While 15 years ago it couldn’t have bought a place on the global services location map, for the last two years its stock market gained an impressive ~50 percent due to various successful measures against FARC, drug cartels and other instability factors. Now, BPO and IT delivery centers are mushrooming in Colombia, driven by an abundance of relatively inexpensive but highly qualified labor resources. Given the large size of the young population in Colombia, as well as steady adherence to open market principles, it is believed the country will continue gaining attractiveness as a global services hub. And it is already considered the second largest IT services market in Latin America.

The point of this blog is not to discuss specific country’s risk profiles, but rather to remind readers that such wild swings must be factored into location analyses, similar to how attorneys approach terms and conditions from a worst-case scenario.

Although labor arbitrage was the primary driver – and continues to be important – in offshoring location decisions, typical global firms are becoming increasingly ready to exploit economies of scale. If a company’s offshore delivery is currently split among several locations – say, Argentina, Philippines, and Romania, each serving a respective region – it is quite tempting to consider some consolidation initiative through formation of a mega-large shared services center, and that’s where increased exposure to specific location risk kicks in as a decision factor.

Obviously, increased volatility in geopolitical risk is just one of many aspects an organization should factor into cost/benefit analysis, and the analysis must be tailored to each organization’s specific situation. That said, here are several general thoughts to consider:

  • There’s no question that it’s very difficult to walk away from an opportunity to reduce your annual cost by, say, US$20-50 million through aggressive optimization of your delivery footprint. But all those savings could get wiped out by billion dollar losses if something goes wrong and disruptions cascade throughout the entire value chain. Therefore, it makes sense to “hedge” such optimization opportunities by developing a customized risk mitigation framework that includes maintaining some “cold” and “warm” alternative sites, and a relocation strategy.
  • Level of acceptable location selection risk varies from company to company, and depends in part on whether the goal is just to achieve cost parity with industry peers, or if a lighter cost structure is expected to become the source of competitive advantage. But remember that any company implementing a low cost competitive strategy must take on some degree of risk.
  • You can reduce some of your risk by using a reputable third party service provider instead of building your offshore presence from scratch, as managing location risk is one of providers’ core competencies, and global providers operate multiple delivery centers across the globe. With properly structured terms and conditions, your outsourcing provider will monitor and proactively manage your risk exposure, including geopolitical concerns.

Is 10% Salary Inflation Too High? A Perspective on the Offshore Wage Increases | Sherpas in Blue Shirts

For those tracking the global service market, reports of 10-15% salary increases in low-cost countries is almost expected. For executive management not familiar with the offshoring of services, seeing these headlines in the business press is unnerving.

But should it be?

I am not arguing that wage inflation in low-cost countries is equal or lower to high-cost countries, but it is clear to me that those in high-cost countries significantly lack perspective on how to interpret these numbers.

(For a more comprehensive perspective, checkout our webinar on labor arbitrage sustainability or our recent joint study with NASSCOM on Global In-house Center (GIC) cost competitiveness.)

Let’s start with a simple exercise (yes, you can count this towards your daily mental fitness goals).

First, recall your starting salary out of college.

Second, recall your salary in the fifth year of being in the work force (the fifth year is fourth salary increase if you received increases annually). If your salary changed currencies or you jumped to business school, you are disqualified from further playing this game.

Two numbers…now divide the fifth year salary by the first year to get a ratio (this should be greater than 1.0 and generally less than 3.0).

Now compare against the table below to get the annual percent increase in your salary across those five years. For example, if the ratio is 1.5, then the average annual increase was 10.7%.

Ratio Annual % increase
1.00 0%
1.25 5.7%
1.50 10.7%
1.75 15.0%
2.00 18.9%
2.25 22.5%
2.50 25.7%


Most people find the annual percent to be higher than they expected. And often surprisingly close to the typical reported increase in offshore salaries.

Why? The perspective that most people miss is that the growth in salary for an individual is different than pure salary inflation. Salary growth of an individual reflects both pure salary inflation (what an entry-level developer will earn) and the impact of their career progression (being able to deliver more value). In other words, salary growth also reflects being paid more for playing a slightly more valuable role – even if that does not include a formal promotion.

This picture becomes even more skewed if you consider total compensation (salary and bonus), which tends to grow even faster early in a career.

Many of you are probably now thinking, “Wait, my salary has not been growing that fast recently!”

True – and salary growth in percentage terms slows as individuals reach 10, 15, and 20 years into their careers. Much of the growth in salary in the early portions of the career is due to steady progression in being able to play a more valuable role – taking greater ownership, requiring less quality review, increasing domain knowledge, and other factors. But the benefit of further increasing these skills diminishes beyond a certain point, and salary growth is then predicated on other factors such as impact, leadership, and overall labor market rates for fully developed skills.

These same things are at play in offshore labor markets and much of the labor force is in the first 5-10 years of their careers due to the labor pyramid – so much of the workforce should be seeing “high” salary increases. At more senior roles, salary increases tend to moderate on a percentage basis.

Give this exercise to others – and potentially to that executive who feels 10% salary inflation is far different than what happens in the United States.

Successful Captives: Thinking Beyond Implementation | Sherpas in Blue Shirts

Setting up a captive in India is much easier now than it was ever before. While an abundant and diverse talent pool, appropriate real estate, and much-needed regulatory support and incentive structure have contributed in no small measure to this, a robust ecosystem of recruiters, consultants, transition specialists and law firms have been able to sustain the momentum thus far.

Precedents and learnings from third-party outsourcing and captive units over the decade have ensured that key elements such as talent, governance, communication and change management are tabled as part of the set-up discussions. The how-tos of a captive set-up largely revolve around following a transition methodology that attempts to create and stabilize the offshore organization. As part of this, the project management and transition teams also strive to cover many minute elements including team structure design, work-force estimation, adherence to scope of work and ongoing collaboration with onshore teams, amongst other things.

As much as the how-tos are necessary to ensure a transition, without having a clear idea of the captive’s objectives, these implementation specifics may not suffice in creating and sustaining a successful organization.

From this perspective, there are a few key questions that need to be thought about and solved for before plunging into the details of setting up a captive.

What is the captive’s vision?

The type of value added by a captive for its parent can be across three impact levels – cost, business and strategic. An extension could be a low-cost offshore office that impacts the direct cost base of its parent and improves process efficiency. On the other hand, a Shared Service Center aimed at creating business and strategic impact may result in business process and quality improvement and may even lead on to expansion into new markets. Whether we want the captive to be a cost reduction center or grow into a Center of Excellence (CoE) will emerge directly from the vision of the captive. The vision in turn drives a number of implementation issues including work-force estimation in terms of number of FTEs, type of talent, specialized skill-sets, leadership positions etc.

What is the business-case in favor of setting up the captive?

The answer to this drives directly from the vision. Whether the captive is an extension or aims to evolve into a CoE, we need to think about multiple investments. That makes a business case essential. There have been many cases in which a decision has been made to set up a captive in a best-cost location and the implementation begun. It is only at that point that stakeholders start wondering what returns they might achieve from it. Choices around scale, size, and investment in new capabilities are crucial to offset against the value we aim to derive from the captive. For instance, if we envisage an organization that evolves into a CoE, our business case needs to reflect investments along those lines so that the right planning can be done from day one.

How should the organization be structured?

We have faced this question frequently across our captive transition engagements. And, frankly, there is no “one-size-fits-all” answer here. No rule book states that the structure of the captive should mirror the parent’s organization. Similarly, nowhere is it suggested that the captive organization needs to be structured based on the nature of processes executed there. Reporting structures, level of control residing with the captive, the transition process and similar considerations play significant roles in deciding whether a horizontal-functions-based or a vertical-industry based or a hybrid model work best for the captive organization. The structure in turn is vital in solving many of our implementation issues around team structures and governance models.

While these may not be an exhaustive list of concerns one needs to think about while setting up a captive, answers to these necessary questions go a long way in sustaining the captive and making it a success story.

Cross-Shore M&A in the Healthcare Sector: Can You Make It Work Well? | Sherpas in Blue Shirts

On September 5, 2011, the Business Standard (one of the leading Indian business dailies) reported that offshore BPO player Firstsource was planning to sell U.S.-based MedAssist, a healthcare revenue cycle management-focused BPO provider it acquired in 2007 for US$330 million, at a reported premium valuation of more than 12x EBITDA. The idea behind the acquisition was to merge the payer business (Firstsource had multiple Fortune 100 health insurance clients) and the provider business (MedAssist’s main business) into one comprehensive organization.

In 2005, Apollo Health Street, formed in 1999 by Apollo Hospitals Enterprises, acquired U.S.-based BPO provider Zavata (a revenue cycle management firm) for US$170 million. According to the Financial Chronicle, some of Zavata’s key clients jumped ship after the acquisition. There have also been reports that Apollo Hospitals wants to exit non-core businesses including the BPO business. Apollo Hospitals tried to IPO Apollo Health Street in 2008, but the global economic crisis put an end to that.

The two above cases have several factors in common:

  • The acquisitions were focused on entering/building on the emerging healthcare services space
  • The acquisitions occurred in the heady days before the 2008 financial crisis, the onset of which likely contributed to derailing business growth plans to some extent
  • Client access was one of the value drivers behind the acquisitions that perhaps didn’t work out as well as was envisioned

So why is it difficult for offshore BPO providers to make acquisitions successful in the onshore healthcare space? There are certain services that simply don’t lend themselves to offshore delivery. Additionally, many healthcare industry-unique issues that relate to the execution and integration of acquired companies exist.

Think about some of these challenges:

  • Healthcare domain knowledge – in the examples above, the targets were onshore-based players with domain skills that were stronger than the acquirer. With that, the agenda was perhaps being driven by the target rather than the acquirer, which could have led to difficulties in driving synergies and adding value
  • Fragmented market – most healthcare-focused onshore BPOs are small players with limited scale, especially those serving the provider market. As the clients are not overly dependent on these suppliers, it makes it hard to leverage client access for cross-selling opportunities. (Note, the largest hospital chain in the United States is HCA with revenues of US$33 billion, while the rest are much smaller. For example, the third largest, HealthSouth, is 15 times smaller than HCA.)
  • Buyer preferences – Hospital chains are very sensitive to protection of patient data and are uncomfortable having sensitive data taken offshore. Most prefer to work with small onshore players and already have deep relationships with them.
  • Local understanding and social intimacy – Hospitals typically tend to build a networked community of people working around them. Most patients and service provider personnel are part of one large social network, making it difficult to take jobs offshore.
  • Offshoreability – Healthcare has generally lagged other industries in terms of adopting outsourcing and offshoring. The above-mentioned factors have further contributed to this.

We believe offshore providers must take into account two key considerations before considering acquisition of an onshore business:

  1. Access to clients: Understand the target’s client base, i.e., multiple small clients that rely heavily on it, or a few large ones that only depend on it to some extent. This will help determine leverage, access, and cross-sell opportunities.
  2. Ownership of business/rationale for acquisition: If the acquirer is entering a new business, the agenda will be driven by the target company’s management due to the acquirer’s lack of familiarity with the territory.

These two factors, in addition to others, will help drive the buy or goodbye decision.

A Case of Selective Hearing? | Sherpas in Blue Shirts

A colleague and I recently hosted a roundtable for the leaders of captive centers (i.e., offshore operations not belonging to third-party ITO or BPO suppliers) in the Philippines. In attendance were leaders from more than 15 organizations with operations at varying degrees of maturity. So what do you think their reactions were to the discussion?

On one level, most participants could have felt good. Makati City is bustling (and far better organized than, say, Gurgaon or Bangalore). Most operations are growing well, and are perhaps a key factor in the Philippines’ overtaking India in voice BPO. Everyone around the table is facing the same operating issues around attrition, wage increases, staffing for night shifts, and the constant traffic of visitors from the parent company coming to kick the tires and bond with the associates serving internal or external customers halfway around the globe. The issues would have been worrying for the leaders if they weren’t all dealing with the same stuff.

At another level, the leaders should be worried. After all, it’s easy to be absorbed by the operating issues of trying to keep a few thousand people engaged and focused on customer service and attendance, and making sure they’re happy and well-fed in their 24×7 operations. But the world is changing. Parent companies have gotten a lot smarter in what work they send where, and to whom. Third-party providers are the ones renting out a majority of new office space in Manila, and they are eager to grab what market share they can from the captive pie. Many of these third-party operations are led by Indian managers who are perhaps a bit tired of things in Gurgaon or Bangalore and have come to the Philippines to get their next kick in life.

So why does this matter? On one hand, things can continue as-is; after all, life is good as long as headcount in the captive center keeps increasing, isn’t it? On the other hand, status quo can relegate these operations to becoming a mere spoke in the global supply chain of their parent organizations. Decisions that shape their future will continue to be made by the leaders back home, or worse, by peers in these organizations’ centers in India or other locations.

It’s time for the leaders of the Philippines captives to face the fact that business as usual is not going to last as long as the third parties are coming and parent companies are getting more discerning. More importantly, they need to make themselves heard by demonstrating leadership capabilities beyond day-to-day delivery, and taking charge of the offshoring agenda, or at least starting to shape it.

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

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.

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