GIC Global Activity Heatmap 2015 | Market Insights™
March 30, 2015
Global In-house Center (GIC), or captive, Global Activity Heatmap
Global In-house Center (GIC), or captive, Global Activity Heatmap
Poland: A major delivery center for complex BFSI processes
Banking on Poland for complex BFSI processes. Focus on: talent availability, cost savings, cultural affinity, geographic proximity, and operating environment
“Good” attrition is the range of attrition that provides net financial benefit for the operation
Government incentives are an often-overlooked factor in location selection, yet they can have significant impact on overall costs and should be considered as part of a complete location analysis.
Although GICs are an integral component of the global services market with increasing adoption by buyers, there continue to be questions about their cost competitiveness. To obtain the facts, Everest Group conducted GIC cost competitiveness assessments with both source markets (North America and Europe) and service providers. Following are the key findings from our recently released report on the topic.
GICs offer sustainable arbitrage with source markets across locations/functions, and organizations have the potential to increase savings by fully leveraging efficiency levers
Despite sustainability concerns, our analysis indicates that GICs provide source markets with significant cost savings. Savings typically vary between 30 to 70 percent, across most locations and functions. More interesting is the finding related to change in cost arbitrage across successive years. In India’s case, favorable exchange rates, coupled with a less-than-anticipated impact of wage inflation, has strengthened cost arbitrage over the last two to three years. While the focus in recent years has naturally been on India, it’s important to acknowledge and remember that other leading locations, (i.e., Philippines, China, Mexico, and Poland), also continue to offer similar cost arbitrage compared to the last two to three years.
The report examines the sustainability of cost savings (measured by number of years) in detail by evaluating cost inflation (separate for wages and other cost elements) and forex movements in leading locations. Exhibit 1 provides a synthesized view of our analysis, indicating the sustainability of cost arbitrage for most locations/functions even under aggressive inflation and currency movement scenarios.
Exhibit 1
The sustainability analysis is based on labor arbitrage alone, and excludes the impact of efficiency-based levers such as reducing general and administrative expenses, moving to tier-2 locations, increasing capacity utilization, and increasing span of control and deskilling. While not all GICs have been able to fully leverage and exploit these levers, best-in-class GICs have been able to achieve an additional 10-12 percent savings beyond labor arbitrage.
Comparing GIC costs with service provider pricing is too simplistic; organizations need to evaluate the TCO to assess the relative cost difference
In our experience, most buyers compare GIC costs with service provider pricing to assess the relative cost difference between sourcing models. But this comparison often fails to capture the true financial impact of a sourcing decision. Mature buyers evaluate the Total Cost of Ownership (TCO) metric. In addition to hard costs (e.g., salaries, facilities, technology, and telecom), TCO incorporates the soft costs associated with transition, governance, and relationship/account management, along with net impact of productivity measures (see Exhibit 2).
Exhibit 2
Conducting a TCO analysis yields interesting results. Indeed, there are instances in which GICs have significantly lower TCO costs than service providers for certain kinds of work, even though the GICs’ operating costs would be higher than provider rates.
The relative cost competitiveness between sourcing models is dependent on multiple factors. There are those related specifically to the work and where/how it is delivered (e.g., relative scale, process maturity, nature of work, and domain expertise.) There are also company-specific factors driving differences, such as preferences for a more experienced pool, better pedigree talent, market positioning as an employer of choice, promotion of similar organizational culture, and approaches to gain share.
To truly gauge cost competitiveness of GICs with service providers, organizations need to conduct a TCO analysis that takes into account all hard and soft costs and unique requirements.
We are hosting a webinar on Thursday, November 20, that will discuss how GICs add strategic value to the parent organization and how they can quantify that value. Register here.
Photo credit: Tup Wanders
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Location maturity: breadth & depth of services offered; arbitrage: fully-loaded cost per FTE; potential: availability and quality of talent, and risk pool
Arbitrage is generally sustainable for most locations and functions, but timing varies
Capita has acquired SouthWestern Business Process Services Limited from private equity group Ion Equity, for €35m (£28m). SouthWestern provides customer relationship management, financial shared services, data processing and inspectorate services to private and public sector organizations. It has delivery centers in Ireland, the UK and Poland. Clients include the Department of Agriculture Food and Marine, Bord Gáis, the Department for Environment, Food and Rural Affairs, Bord Bia, Eircom and Failte Ireland.
SouthWestern is expecting revenues of €33.6m and an operating profit of €3.4m for 2014.
This is not the first Capita acquisition in Ireland. In 2011 it invested €33 million to acquire the international financial services business of Allied Irish Bank, AIBIFS. It integrated the acquired business with its own investor and banking services division, which at the time employed 2,000 people in Ireland, the rest of Europe, and India.
Capita already operates in Ireland, including as “servicer” to the National Asset Management Agency (NAMA) and contracts with Prudential International Assurance, St James’s Place International and Ireland’s Department of Communications, and Energy and Natural Resources to manage the delivery of a new postcode system across the country.
In 2013 it opened new offices in Dublin and at the time it had a target of employing circa 800 people in Ireland. That target has grown to 1600 since and SouthWetsern brings circa 1000 FTEs. These are mostly based in two sites at Co Cork, at Clonakilty and Little Island, as well as at smaller sites in Lodz, Poland, Dublin and Milton Keynes in the UK.
SouthWestern enhances Capita’s contact center capabilities. It offers multilingual customer services, supporting in up to 14 languages with 24/7 voice and multichannel services. Its other services, such as financial services administration, debt collection and risk management are a good fit to Capita’s existing but currently largely UK-focused services. SouthWestern also brings Capita a bigger presence in the Irish public sector market, which it will be able to expand fast given its long and successful experience in the UK public sector.
Capita’s plans for SouthWestern are ambitious. It is aiming to more than double SouthWestern’s operating profit to €7m and increase its revenue by 40% to €47m in 2016. An investment in SouthWestern’s IT systems in 2015 is to support this growth. Another factor to take into account is a strong pipeline of opportunities. In its H1 204 results, Capita indicated a pipeline of £5.7bn. These included 27 bids of which 90% relates to new business and 10% to contract renewals.
Both Capita and SouthWestern have delivery centers in Poland (Krakow and Lodz respectively). The Polish centers are likely to be consolidated but any additional capacity would help Capita with its plans for growth in Continental Europe. The move to expand into Europe was signaled by Capita’s acquisition of tricontes, a specialist customer management company based in Munich, Germany, for an undisclosed sum in July 2014.
While Capita has always been very acquisitive, a strategy for expansion beyond UK borders is emerging since the new head, Andy Parker, took over from long-term CEO Paul Pindar, this year. We will be watching this space to provide additional commentary in the future.
Photo credit: Charles Clegg
Applications outsourcing (AO) service delivery locations are expanding around the world, but Asia remains the most cost-effective option
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