Tag: onshoring

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.

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.

The Less than Great Divide: Onshoring Gaining Ground | Sherpas in Blue Shirts

When conducting outsourcing cost/benefit analyses for clients, a typical comparison includes the existing internal total cost of process ownership and the hypothetical future state cost structure, consisting of retained sub-processes, governance overlays, and externally provided services. The externally provided services often assume a certain offshore component, as labor arbitrage has historically been one of the most powerful cost optimization strategies. But this is no longer necessarily true. In fact, our clients are increasingly asking us to analyze domestic labor arbitrage opportunities, and there are cases in which we advise a client heavily leaning toward an offshore solution to take a closer look at onshoring or nearshoring options, as they may reveal healthy cost savings potential without any change in risk exposure.

For example, here are a few of my recent client engagements:

Call center operations of a Canadian client – relocation of its operations from the Greater Toronto area to New Brunswick or Prince Edward Island may deliver as much as 20 percent savings on the basis of the fully loaded FTE cost.

IT applications maintenance and development – a risk-averse Chicago-based client can reduce its blended operating cost per FTE from ~$140,000 to $110,000 annually by relocating its IT support to Springfield, IL or Sioux Falls, SD. In these alternative locations it will still maintain access to a four-digit annual pool of college graduates with relevant degrees.

F&A functional support for the Brazilian operations of a large international conglomerate – offshoring of selective F&A functions from Sao Paolo to, say, Monterrey, Mexico, can generate 50 percent savings per fully loaded FTE cost. However, as the import of services in Brazil is subject to draconian duties, the entire cost savings potential is essentially eroded. However, relocation of its operations to low cost cities in northern Brazil, such as Belo Horizonte or Belem, can generate almost equal savings

I attribute all this increased interest in onshoring to a number of factors.

First, geopolitical/location risks have substantially increased in the last couple of years…think Arab Spring, drug trade-driven violence in Mexico, and numerous natural disasters in Latin America and Southeast Asia. Changed perceptions and realities require a more sophisticated risk mitigation strategy, which obviously adds to the governance cost in traditional offshore delivery models.

Second, most global firms have already addressed their secondary, non-critical processes via some outsourcing and/or offshoring frameworks. However, continuous cost pressures and increased levels of competition are forcing them to look at their retained cost components, which typically include more critical processes, and that’s where domestic labor arbitrage reveals its full potential.

Third, increased regulatory requirements in banking, healthcare, and other industries have imposed incremental solution constraints, making internal/domestic scenarios more attractive.

Fourth, fast growing economic centers are now facing talent pool shortages, with demand exceeding supply due to the extreme concentration of business activity in a single geography. As such, establishing a regional presence in such cities as Sao Paolo, Shanghai, or Moscow comes at a two to five times cost premium compared to other cities in their parent countries.

Finally, the overall slowdown of the world economy is positively contributing to domestic labor arbitrage trends. Offshoring to India or Philippines has been historically driven not only by ultra low cost opportunities but also by the abundance of local labor resources. And although there is interdependency between the cost of resources and their availability, increased unemployment rates have pushed the resource pools in various low cost domestic locations above the minimally required size, justifying a more detailed location analysis.

All in all, onshoring is evolving as a viable sourcing option, and along with traditional offshoring scenarios – externally sourced or captive – should be included in any location analysis.

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