Tag: outsourcing

Will the Fed’s New Posture Have a Material Impact on the Global Services Industry? | Sherpas in Blue Shirts

After many years of reviewing and thinking through the implications, the Federal Reserve last week issued guidance to banks about the extent of their use of outsourcing. As The Wall Street Journal reported, the Fed raised red flags about state banks and bank holding companies using third-party service providers for information technology and bank operations.

The Fed’s warning stated that “the guidance does not discourage financial institutions from outsourcing activities to service providers, but says firms should be aware of the potential risks.” The warning cited reputational risks as well as legal risks. And it follows on the heels of a similar warning issued to national banks by the Office of the Comptroller of the Currency.

At Everest Group we are already aware of a number of large financial institutions that were already taking steps to reevaluate the degree to which they use third parties, and we believe this new regulatory guidance will push them further down that path.

Where will the work go?

We don’t believe that there will be a mass movement of work from India back to the United States and Europe. However, we believe that much of this work will move into already existing GICs (Global In-house Centers).

Beyond the regulatory pressure, we see a number of reasons for banks moving their work to GICs.  Most notably, many banks now feel it’s easier to drive increased productivity when they own the resources rather than third-party providers owning them. They also experienced control issues in outsourcing relationships.

Extent of the impact

With the Fed’s warning about risks coming at a time when banks were taking a step back from outsourcing because of productivity and control issues, we believe it will drive other financial institutions to join the trend of reevaluating their use of outsourcing.

Given that the financial services segment is the largest and most profitable segment for the third-party providers, we believe this Fed warning could become quite significant in importance and impact on the services industry.

Infosys Moves On, But There Are Chilling Immigration Reform Implications for Others in the Industry | Sherpas in Blue Shirts

The U.S. federal government this week announced a settlement agreement with Infosys with a record fine of $34 million — a penalty Infosys agreed to pay in settlement of the investigation related to its I-9 paperwork errors and H1-B and B-1 visa matters. There is both good news and bad news in this settlement. The bad news reaches beyond the Indian heritage firms and affects the entire industry, including multinationals as well as firms that hold GICs, or captives, or have international work.

The good news

From an Infosys perspective the settlement is good news. It allows Infosys to move on, and undoubtedly its management and stockholders are breathing a deep sigh of relief at finally being able to get beyond these immigration issues overhanging operations during the ongoing investigation. There were no criminal charges nor an admission to criminal activity as to the way it brought foreign nationals into the United States to perform work for customers,  but Infosys agreed that it failed to maintain accurate I-9 records for many of its foreign nationals in the United States in 2010 and 2011 as required by law.

The settlement involves putting audits and other compliance proofs in place. These measures and the agreement finding no criminal wrongdoing will help Infosys to move on and will help resolve concerns of customers, especially those in the financial services space, which are very gun-shy of attracting any more regulatory scrutiny.

Although the $34 million penalty is a record fine, Infosys can be pleased that it is small compared to its earnings and will be largely immaterial on earnings.

The bad news

On the downside, I think the picture for the broader industry is clouded and even chilling. While Infosys is able to move on, the hoped-for relaxing of visa reform has not arrived. Instead, this settlement indicates that a more intense regulatory environment awaits industry players.

The record fine foreshadows ongoing scrutiny of the visas in general and indicates that the immigration authorities are taking, and in the future, will likely take a very narrow view of how service providers can use visas.

It’s interesting to note that the language currently governing the visas is quite ambiguous, and reasonable people could easily differ in their interpretation. But this settlement and record fine signals that a very narrow interpretation will be used going forward and that the government will use penalties to enforce the regulations.

The forceful, negative response of Congress and Senator Grassley’s reaction (“It’s time that the administration and Congress do more to rein in the fraud and abuse to ensure that both American and foreign workers are protected.”) to the settlement is another indicator of bad news for companies that utilize talent outside the U.S. Rather than celebrating a victory for compliance and the significant enforcement of of law, they are dissatisfied with the outcome and are calling for further regulation.

The Congressional reaction is ominous. It does not bode bode well for future legislation and certainly encourages the bureaucrats in the immigration service to take a very narrow view of visas going forward.

India’s Tier 2-3 Locations Becoming Hot For Offshore BPO | Sherpas in Blue Shirts

Originally posted on Global Services Media

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.

The Three Foundational Elements of Cost Benchmarking | Sherpas in Blue Shirts

In the global services industry, cost benchmarking is a method enterprises use to compare their outsourcing cost competitiveness against those of similar organizations. Yet, in Everest Group’s experience and observations, businesses all too often erroneously view salary benchmarking as indicative of overall expenditures.

While salaries constitute the biggest component (60-70 percent) of operating costs, salary benchmarks fall short of providing the requisite insights, as higher salaries don’t necessarily mean higher overall costs. There are multiple other factors driving costs. The top three factors driving outsourcing operating costs, other than salaries, are:

  • Pyramid and talent model
  • Scope of work
  • Non-compensation cost

These factors are specific to companies’ context and typically depend on their positioning. In addition, there are market-driven forces impacting costs, such as attrition, wage inflation, and the exchange rate in different countries.

A typical benchmarking exercise takes all these factors, and others, into consideration.

Following are three cost benchmarking best practices.

Best practices of cost benchmarking

Take a holistic view

Cost benchmarking should consider a comprehensive set of factors effecting cost. Everest Group classifies these components into three broad buckets:

  • Compensation-linked costs (e.g., salaries, benefits)
  • Non-compensation costs (e.g., real estate, technology, support staff, transportation, recruitment, and training)
  • Policy levers (e.g., delivery pyramid, support staff leverage, and space usage)

An ideal cost benchmarking takes a holistic view across all three categories.

Identify underlying cost drivers

By definition, cost benchmarking determines differences within the market. However, on their own, these differences offer limited insights. To discover opportunity areas for cost optimization and subsequent calibration, enterprises need to identify the underlying drivers of differences.

For example, if an organization’s real estate costs are higher than the market average, benchmarking should identify whether it is due to rentals, space per seat, seat utilization, or a combination of these factors. Similarly, for companies with higher support staff costs, benchmarking should identify if it is driven by higher support staff salaries, skewed support staff ratios, or both. There are multiple such costs elements (e.g., transportation, recruitment, training) for which benchmarking could help identify the underlying drivers for calibration.

Normalize data

Even in situations where cost drivers are identified, it is critical to ensure like-to-like comparisons in order to derive meaningful conclusions. For illustration, in the real estate example above, economies of scale can result in different real estate costs for a 100 seat center and a 1,000 seat center.

Thus, organizations should normalize data along key dimensions impacting the cost. Typical dimensions to normalize include:

  • Locations (e.g., onshore/offshore, Tier-I/II/III)
  • Scope of work (e.g., ITO/BPO, front office, back office)
  • Nature of work (e.g., transactional, complex)
  • Player type (e.g., GIC, service provider, specialist)
  • Scale (e.g., mid-size, large scale)

Cost benchmarking is not an easy, close your eyes and toss the dart exercise. Benchmarking that fails to take a comprehensive view of cost, identify underlying drivers, and normalize data runs the risk of making misleading comparisons that may lead to flawed results.

Accenture + Procurian = a Hard to Beat Procurement Outsourcing Capability | Sherpas in Blue Shirts

When Accenture completes its acquisition of Procurian, (announced October 3, 2013, and expected to close by end of 2013), the firm will hold a formidable one-third of the procurement outsourcing (PO) outsourcing marketplace.

For non-regular followers of the PO space, Procurian was incepted in 2000 per its own acquisition of Accenture’s ePValue e-procurement venture. The somewhat latent PO market finally found its footing, with a US$1.7 billion and a five-year CAGR of 13 percent in 2013.

While the PO marketplace has become increasingly competitive in the past several years, as evidenced by numerous acquisitions by Xchanging, IBM, Infosys, and GEP, Accenture’s acquisition of Procurian represents a game changer in the PO space, and has far-reaching implications for providers and buyers alike.

The new dynamics in PO?

  • IBM and Genpact will be impacted, as IBM will no longer be the number one provider of PO providers, and Genpact will lose footing in its strategic partnerships via Procurian relationships with clients such as Zurich, Hertz, and Kimberly Clarke
  • The PO market will become more concentrated with the two top players – Accenture + Procurian and IBM – accounting for nearly 60 percent of the PO market.

Bottom line, given the combined capabilities of Accenture and its come-back-home compatriot Procurian, this new PO powerhouse should make other global service providers step back and think about their PO service capabilities.

For more details on the Accenture/Procurian acquisition, and Everest Group’s insights on it, please go to: Accenture + Procurian = One-Third of the Procurement Outsourcing Market viewpoint.

Is It Time to Sing “Happy Days Are Here Again?” | Sherpas in Blue Shirts

After several years of believing that discretionary spend would come back into the marketplace, it appears that we are, in fact, experiencing an uptick. This increase in demand is definitely welcome after recent years of suppressed demand.

The question is: How long will this trend continue and will we move back to the heady growth of days of yore?

The answer is yes and no. Yes, the growth trend is likely to continue. We seem to have an improving economic condition in both North America and Europe for both structural outsourcing as well as discretionary spend. I think we can look forward to modestly improved growth rates.

However, we need to remember that we’re at a very different level of market saturation for outsourcing services than we were five years ago. It seems unlikely that the market will return to the 20+ percent growth rates. I think what we’re looking at today is a small increase in growth, not a large one.

Having said that, let’s take what we can get and celebrate! As the French Mardi Gras saying goes, let the good times roll — but not to the point that we wake up with a reality hangover.

There’s Heat to the Tune of Nearly US$9 Billion in the Oil and Gas Outsourcing Market | Sherpas in Blue Shirts

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.

ITO BPO Contracts Nearing End of Term

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:

  • An aging workforce, which is leading to the scarcity of skills in this sector and knowledge management issues
  • Increasing operational efficiency to combat growing cost pressures
  • Deriving greater output from their assets by leveraging technology

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.”

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.

The Changing Pecking Order and Emerging Irrelevance of the WITCH Group Term | Sherpas in Blue Shirts

As most in the global services industry know, the acronym WITCH stemmed from the fact that the large, India-based, offshore-centric service providers – Wipro, Infosys, TCS, Cognizant, and HCL Technologies – had quite similar delivery models, sales strategies, risk appetite, and growth trajectories, which essentially placed them in a single bucket.

However, Everest Group’s recently released annual assessment, “The Changing Pecking Order of the Indian IT Service Provider Landscape, revealed that the relevance of the collective term WITCH is fast diminishing as market conditions are forcing differentiation among these players.

Indeed, stark divergence among this group, as evidenced by Cognizant’s capture of the number two spot away from Infosys (see chart below), is clearly emerging.

WITCH ranking

Per the latest financial results released by these offshore majors (ending March 31, 2013), TCS and Cognizant continued to outgrow their peers on a yearly basis – both in terms of size and growth – by adding revenue that was higher than, or almost at par with, the cumulative incremental revenue of Infosys, Wipro, and HCL. Their clear vision and strategic bets, as compared to the prevailing internal confusion of the other WITCH players, is paying off.

What is leading to this segregation within the WITCH group?

  • TCS is continuing to excel on the back of its broad-based growth and aggressive penetration in the European market
  • Cognizant’s approach of keeping margins lower via a higher investment in sales and marketing spend is fetching  benefits
  • HCL is capitalizing well on the ongoing churn in the industry, and is exploiting the anti-incumbency against the traditional service providers. While this makes HCL’s growth narrow and focused largely on infrastructure services, it’s paying off for a short-term strategy
  • Infosys and Wipro are struggling with their internal, company-specific issues, (i.e., strategic confusion, weakening brand recognition, legal issues, and senior level exits).

The ultimate questions are:

  • Will the irrelevance of the collective WITCH term become more visible in the future? Will the different strategic gambles of each service provider lead to huge variances in their success rates?
  • Will the return of Infosys’ retired co-founder and former chairman Narayana Murthy help it make a comeback to the levels of TCS and Cognizant?
  • To what extent will the ongoing challenges of a few of the WITCH group players create opportunities for mid-sized players – such as Genpact, one of the key players in the FAO space, and Tech Mahindra (the combined entity) which has credible enterprise applications and infrastructure management offerings – to capitalize on their niche capabilities?

We expect to witness further changes over the next few years in the pecking order in the overall industry, and the formation of new groups cannot be ruled out. This is likely to be driven by inorganic growth, key strategic investments, service provider consolidation, and aggressive sales strategies.

For drill-down data and insights into pecking order changes in the Indian IT Service Provider Landscape by size, verticals, and geographies, please see Everest Group’s newly released viewpoint, “The Changing Pecking Order of the Indian IT Service Provider Landscape.”

Today’s Global In-House Centers (GIC) are Exceeding Expectations, and Impacting Enterprises’ Use of Third-Party Outsourcing | Sherpas in Blue Shirts

While the upsides and downsides of outsourcing and offshoring as sourcing models tend to grab the lion’s share of press coverage, global in-house centers (GIC), formerly called captive centers, have made quieter, yet significant, advances. Indeed, parent companies’ rankings of their GICs’ savings and service level performance were considerably higher in Everest Group’s 2012 GIC Value Diagnostic survey than in its 2007 survey (see Figure 1).

Figure 1

GIC Savings and Servce Level Performance

As a result, it comes as no surprise that both GIC and parent company stakeholders reported that the GIC model will affect their use of third party providers going forward (see Figure 2). Most of these stakeholders are mature adopters of the GIC model.

Figure 2

GIC Strategy

There are numerous reasons GICs are gaining traction and status. First, as they mature, they are better able to serve their enterprises across a variety of dimensions including scale achieved, scope of services managed, complexity of work delivered, and level of ownership demonstrated. GICs have not only grown significantly but have also expanded their portfolio to serve multiple lines of business and business units within their parent organization. They are evolving to become extensions of the enterprise, rather than just being a provider of services to it.

Second, GICs’ ability to offer multiple benefits beyond savings, (e.g., process improvement, process transformation, center of excellence-orientation, etc.), to parent stakeholders adds to the compelling proposition of the model. GICs have built process re-engineering, process excellence and technology capabilities in the context of the enterprise. Further, access to tribal knowledge positions them well to serve the parent organization more effectively.

Third, other factors such as need for increased control, minimization of portfolio concentration with third party service providers, and risk diversification may also lead to sourcing decisions in favor of GICs.

Will the pendulum swing toward GICs? As sourcing model selection is a highly complex decision and there is no one size fits all approach, Everest Group believes both the GIC and the third party models will continue to play their own parts, complementing each other in some shape and fashion.

To get your complimentary copy of summary of 2012 survey findings, please write to saksh[email protected].

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