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Rs. 250

Final cover_India.qxp 7/21/2008 11:00 PM

Building on Our Global Heritage

The Taj Mahal is acclaimed as a masterpiece of architecture and of the heart—an enduring testament to the power of love and a builder’s passion for creating beauty. At Genpact, we too, are passionate about our work and see beauty in managing and simplifying business processes for companies around the world.Our 31,700+ associates span 9 countries are united by a passion for excellence and commitment to work as a team. By combining our passion for excellence with teamwork, Genpact redefines what is possible, expanding from service to one company, GE,to more than 35 global enterprises in less than three years.

Cultivating Quality: Lean and Six Sigma

As companies wrestle with growing global complexity and competition, they look to Lean Six Sigma and Reengineering methods to ensure consistently high levels of performance and service delivery. As part of their efforts to sustain customer and shareholder value, global leaders search for partners whose dedication to process excellence is part of their DNA. Like other great builders, Genpact has the culture and tools to get it right the first time. Our building blocks are the deep industry domain knowledge, technology know-how and multi-shore delivery that we combine with Lean Six Sigma to ensure process excellence with every customer engagement.

Working Together: IT-Enabled BPO

Enterprises are searching for ways to continuously improve what they do. An emerging trend is the integration of Business Process Outsourcing (BPO) with Information Technology Outsourcing (ITO) to create even greater value. Genpact’s propriety technology tools, coupled with domain knowledge in major industry verticals, transforms client cost structures while reducing complexity and risk.

A Passion for Excellence.

At Genpact we’re passionate about our customers, our people and the communities we serve. Our passion is a special energy that defines us and constantly raises the bar on what we can achieve as we strive to exceed customer expectations and drive business impact. Our dedication to this principle drives us to be the Employer of Choice wherever we operate. We recruit top talent, train and reward them to be their best and create an environment of learning, openness and respect. This passion for excellence is part of Genpact’s DNA, rooted in our GE heritage and fervent belief that the customer comes first.

visit us at genpact.com and learn how we can work together to make the impossible possibleNew York +1 646 624 5900 • London +44 (0)20 7535 5400 • Gurgaon +91 124 402 2000 • Shanghai +86 21 6133 3555 • Tokyo +81 3 3543 1816

with all Great Achievements you find

Passion

ISG.qxp 12/20/2007 1:23 PM Page 15

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l Global Services’ Definitive Survey of Sourcing Advisory Firms.l Find out key trends, vendor positioning, recent dealsand legal firms in LPO.

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FEATURES

By Imrana Khan

16

August 2008 Vo lume 03, I ssue 31

4 GlobalServices www.globalservicesmedia.com August 2008

THE HR LANDSCAPEIN HURRICANESEASONBy Lowell Williams,EquaTerraToday, every industry is feeling thepinch due to lack of liquidity, marginpressure, low U.S. dollar exchangerates and accelerating inflation, led byenergy costs. It is against this back-drop of competing trends that weneed to measure some of the largerdevelopments in HR outsourcing

30SOURCING CATALYSTSBy Namita GoelThe downturn has supposedly worked well for the vendor-manage-ment tools providers as companies are increasingly opting for theseperformance-management and monitoring tools to manage complexmultilevel and multivendor relationships

26

IK_contents_KN_fin.qxp 7/21/2008 9:46 PM

LISA ROSSLisa is the CEO andfounder of FAO Research,an independent researchfirm focused exclusivelyon the FAO and procure-ment outsourcing mar-kets. As a leading analystin the outsourcing indus-

try for more than 12 years, she works closelywith customers, advisors and suppliers ofoutsourcing services.

SHYAMANUJA DASShyamanuja pioneeredoutsourcing journalism in India in1998 with bpOrbit, anewsletter for the domestic Indian BPOindustry. He is nowEditor, Dataquest magazine, Cybermedia.

LORI BLACKMAN Lori is the Founder andPresident of DNLGlobal. DNL Globaloffers solutions acrossthe entire lifecycle of tal-ent management.

ALLAN SCHWEYERAllan is the President and Executive Director of the Human CapitalInstitute and author ofTalent ManagementSystems.

24X7 COLUMNISTS

BOOK REVIEW: THEQUEST FOR GLOBALDOMINANCEBy Keerthi Nair

8

46THE DIFFERENCEBETWEEN OBAMA &KERRY By Shyamanuja Das, CyberMedia

47CHOOSING THE BEST OUTSOURCINGAPPROACHBy Lisa Ross, CEO, FAOResearch

48DODGING THEOUTSOURCINGLANDMINESBy Phil Fersht, AMRResearch

50COMPETITIVENESS OFRICH COUNTRIES’WORKERS IN DECLINEBy Allan Schweyer, HCI and Lori Blackman, DNL Global

34A COMPREHENSIVE TALENT STRATEGYBy Pravesh Mehra and Navnit Singh,Heidrick & Struggles International

38THE BATTLE OFAVERAGESBy Jedd Fowers, EDS, andScott Feuless, Compass

44STRATEGICSOURCING FORINDIRECT SPENDBy Paul Clayton, ProcServe


EXPERT VIEWS

U.S. FEDERAL GOVT.AGENCIES AWARD 3LARGE DEALS IN MAY ’08By Datamonitor

8

34% MORE FAOCONTRACTS TO BEINKED IN 2008By Imrana Khan

11

OFFSHORINGTO TALLINNBy Namita Goel

14

INDIA’S LARGESTCAPTIVE BUYOUTAviva Global Services, Finally, Sold!

By Imrana Khan

7

NO. OF DEALS GOES10-YR HIGH IN H1 ’08By TPI

7

EVALUESERVE: TOPPATENT-SERVICESPROVIDER IN INDIABy Imrana Khan

12

BPO IN EASTERNEUROPE TAKES OFFBy Imrana Khan

13

Q2 ’08 POSTS 275,292JOBS CUTBy Imrana Khan

15

BPM TOOLS = SPEEDBOOSTERS + BIZVALUE CREATORSBy Imrana Khan

8

JUNE ’08: THEMONTH OFCONSOLIDATIONWITH 40 M&AsBy Tholons

10

A SHIFT FROM KPO TO MARKETING &CUSTOMERINFORMATICSBy Imrana Khan

8

IK_contents_KN_fin.qxp 7/21/2008 9:46 PM

ED NAIREditor

EDITOR’S NOTE

[email protected]

America on the otherhand is more

sophisticated; theleading trend here is

that it has been movingaway from umbrelladeals by farming out

smaller chunks ofspecialized activity.

he global outsourcing industry has had a record performance in thefirst half of 2008, both in terms of Total Contract Value (TCV) andAnnualized Contract Value (ACV). It has been the best year ever since

2000. And, analysts find no reason to believe that the trajectory would reversein the second half of the year. According to TPI’s Q2 ’08 and H1 ’08 index,the broader outsourcing market grew by 7 percent in terms of the numberof contracts — 24 percent in terms of TCV, and 36 percent in terms of ACV.Good show.

The last three quarters send a strong signal of Europe being the new cen-ter of gravity in large outsourcing deals. The region has seen an unbroken trendof strong contract activity quarter over quarter. And this is happening on itsown; it’s not that America’s fall is Europe’s lead. The primary reason for thisgrowth story is that Europe is in a different time and phase on the outsourcingcurve than America is and, in many ways, it lags the trend that America fol-lows. European contracts are larger in size, broader in scope, and have muchto do with the management of IT and network infrastructure. And this trendis symptomatic of a shift from a shared services model that Europe has beenfollowing for years. America, on the other hand, is more sophisticated; theleading trend here is that it has been moving away from umbrella deals byfarming out smaller chunks of specialized activity.

All of this might suggest that the economic slowdown and the financialcrisis in the U.S. have had no impact on the global outsourcing industry. Forsure, the U.S. market has been exhibiting some softness. In H1, deals in tele-com and manufacturing segments found favor while the financial-services seg-ment in the U.S., especially the capital market, remained subdued. But in thebroader context, U.S. corporations have been slow in taking up new out-sourcing activity at the same clip as before. Perhaps that explains the alarmistposture adopted by and doomsday outlook given by some of the large Indi-an providers recently. But, given the overall strength of the outsourcing mar-ket, I would rather agree with TPI’s Peter Allen (www.considerthesource-blog.com) that there’s a lot of expectation management going on. GS


TPast the Half Way Mark

editors note_KN_fin.qxp 7/21/2008 11:17 PM

After grabbing immense mediaattention for the past four years

due to its Build-Operate-Transfer(BOT) program, Aviva Global Ser-vices (AGS), the U.K.-based insurancegiant, Aviva’s offshore unit, is againmaking headlines with its acquisitionannouncement. The company hasbeen sold to WNS, an India-basedBusiness Process Outsourcing (BPO)company. This is India’s largest captivebuyout so far.

The total purchase considerationpaid to Aviva for the transaction isapproximately $228 million, subjectto adjustments for cash and debt.WNS funded the transactionthrough a combination of cash anda bank loan facility of approximate-ly $200 million credit from ICICIBank and $30 million in equitycontribution from a buyout firmWarburg Pincus, which owns amajority of WNS’ stakes.

Besides, WNS has also been select-ed as AGS’ prime BPO servicesprovider to provide life and generalinsurance processing functions ser-vices worth $1 billion for AGS’ Cana-dian and U.K. operations for a dura-tion of eight years and four months.Other providers will be capped onnumbers and duration as per theirexisting contracts.

“This [acquisition] bolsters ourcapabilities, not only across all ourbusinesses, but also in every segmentof the insurance industry including

property and casualty, life, annuitiesand health. The deal gives us end-to-end process capabilities,” says NeerajBhargava, CEO, WNS.

Following the agreement, WNShas provided revised guidance for thefiscal year ending March 31st, 2009.The company’s revenueless repair pay-ments for fiscal 2009 is expected to bebetween $425 million and $435 mil-lion, up from the company’s previousguidance of $373 million to $378million. Even the net income (exclud-ing amortization of intangible assets,share-based compensation and relat-ed fringe benefit taxes,) for fiscal2009 is expected to be between $46million and $49 million, up from thecompany’s previous guidance of $44million to $46 million.

AGS has four operations in India(Bangalore, Pune, Noida and Chennai) and one in Sri Lanka(Colombo). In July ’07, WNS-man-aged Colombo BOT was transferredto Aviva. This was AGS’ secondBOT transfer after the handover ofthe first one (at Bangalore, India) by 24/7 Customer. AGS’ third BOTfacility, which was being build by EXL Services (at Pune), had just got finished a week before theacquisition’s announcement.

Now for the Chennai and Punefacilities, AGS has issued transfernotices to the third-party providers tohandover them to the company with-in 30 days. GS

4x7India’s Largest Captive BuyoutAviva Global Services, Finally, Sold!

2

August 2008 www.globalservicesmedia.com GlobalServices 7 24x 7

1

According to latest TPI Indexreleased by TPI, a sourcing advisory

firm, the global outsourcing industry fin-ished the strongest first halves in morethan a decade. This is attributed to the282 contracts valued at nearly $49 bil-lion in Total Contract Value (TCV), andnearly $10 billion in Annualized Con-tract Value (ACV). These were awardedin the first half of 2008, yielding a briskyear-over-year increase of 24 percent byTCV and 36 percent in ACV.

Additionally, each of the past threequarters has topped the $20 billionTCV mark — the best three-consecutivequarter performance ever. The TPIanalysis also reveals high number of “newscope” contract awards that factor outrestructurings that reflect adjustments toexisting relationships. The new scopeincreased in TCV and ACV at roughly26 percent and 43 percent, respectively.

While the America and Asia Pacificregions did not have an appreciableincrease in market activity, Europe, theMiddle East and Africa (EMEA) expe-rienced 58 percent more TCV in H1 ’08as compared to H1 ’07. This was due togreater average contract size in EMEA,rather than a surge in the number ofcontracts. In fact, 10 of the 13 megadeals — contracts in which the TCV is$1 billion or greater — awarded in H1’08 were awarded to EMEA, along with16 of the 24 mega relationships. GS

BY IMRANA KHAN

BY TPI

Offshoring to Tallinn pp.. 1122

No. of DealsGoes 10-yrHigh in H1 ’08

24x7_ik_KN-fin.qxp 7/21/2008 9:58 PM

8 GlobalServices www.globalservicesmedia.com August 200824x 7

2

The largest deal of the month wassigned between Bombardier Transportationand CSC. As per the terms of the dealworth $1,200 million, CSC will provide arange of infrastructure outsourcing services,including desktop and service-desk man-agement.

The win is CSC’s first worth over$1,000 million since Sept. ’06. The year

ITdealsU.S. Federal Govt.Agencies Award 3Large Deals inMay ’08BY DATAMONITOR

BY KEERTHI NAIR

As soon as you read the first few para-graphs of the book, “The Quest For

Global Dominance” by Anil K. Gupta,Vijay Govindarajan and Haiyan Wang, theextent of globalization sneaks up on you.You will be enchanted with the thought-provoking ideologies of the authors —Anil K Gupta, a world-renowned scholaron global strategy; Vijay Govindarajan, theEarl C. Daum 1924 professor of Interna-tional Business at Tuck School; and HaiyanWang, the managing partner of ChinaIndia Institute, and the speaker on smartglobalization in the age of China andIndia — as they charm you through thelanes of globalization fundamentals —the knowledge, skills and experience to nav-igate the company in a global environment— and the six major issues that a compa-

Quest for GlobalDominance

BookreviewTools&technologies

With cost savings still one ofthe biggest factors behind

offshoring, customers of outsourcingservices now expect quicker services.Thus, they are increasingly adoptingsolutions such as Business ProcessManagement (BPM) to re-engineer,streamline and automate their busi-ness processes.

“Companies are spending bil-lions to renovate enterprise applica-tions, especially to align companybusiness processes with ERP appli-cation software. BPM software andservices align an organization’s inter-nal and external processes, whileintegrating with its existing IT sys-tems,” said Santanu Paul, SeniorVice President and Head, Global

Delivery Operations, Virtusa Cor-poration, an IT solutions and servicesprovider with expertise in BPM.

However, BPM, like any othertechnology, should be used with careand good judgment. “Choice is usu-ally good when those making choic-es are knowledgeable,” cited Paul.

There was a time when compa-nies implemented IT systems simplyto achieve efficiencies by cuttingoperational costs. While that needwill always remain, the focus is mov-ing today on building businessesthat can adapt rapidly to changingbusiness conditions as market oppor-tunities rise and fall. Speed is nowjust as critical as cost savings. That'swhere BPM comes in. GS

BPM Tools = Speed Boosters+ Business Value CreatorsBY IMRANA KHAN

News

Dexterity, an Indian IT andKnowledge Process Outsourc-

ing (KPO) services provider to glob-al market-research firms, is nowshifting its focus toward rapidlygrowing marketing and customerinformatics market. To tap the mar-ket, the company is now set to pro-vide demand-side business processesthrough its business solutions —marketing and customer-data man-agement, analytics, insight deliveryand market research outsourcing.

“We are utilizing our research andanalytics expertise to increase our

hold on the marketing and cus-tomer informatics segment,” saysAnantha R. Krishnan, Chairmanand CEO, Dexterity.

“We are also planning to set upoffices in the U.S. and Europe. Atpresent our 65 percent revenuescome from the U.S., 30 percentfrom Europe and the rest from theAsia-Pacific region. And, we expectthe share of Europe and Asia Pacificgoing up with 10 percent and 5 per-cent, respectively. We also see a lot ofopportunities coming out of theIndian domestic market.” GS

A Shift from KPO to Mktg.& Customer InformaticsBY IMRANA KHAN

24x7_ik_KN-fin.qxp 7/21/2008 9:58 PM

24x 7

3


2008 has seen it pick up 10 dealsworth $100 million or more in the firstsix months of the year.

The month also saw the formal-ization of another mega deal betweenChina Mobile and Alcatel-Lucent.The French network-services providerwas chosen by China Mobile to pro-vide mobile communication equip-ment and services, as well as attemptsto improve its network capacity andperformance.

A couple of other network servicesproviders announced significant con-tract wins this month. BT Global Ser-vices was not only awarded a five-yeardeal worth $650 million to provideLAN and WAN management servicesto Procter & Gamble’s operations in82 countries, but was also chosen tothe Nationwide Building Society to

consolidate its multiple networksonto one global network.

Meanwhile, Cable & Wirelesssecured a $400 million deal withScotiabank in Jamaica to replace thebank’s existing telephony infrastruc-

ture with an IP-based service. Avayawill provide the hardware for thenew system.

Interestingly, three of the 10 biggestdeals in June ’08 were awarded by U.S.Federal Government Agencies. GS

THE TEN LARGEST IT SERVICES DEALS IN JUNE 2008

Customer Provider Engagement(s) Value Duration($ mn) (yrs)

Bombardier Transportation CSC Infrastructure mgmt. 1,200 7

China Mobile Alcatel-Lucent Network mgmt. 1,000 —

NASA Abacus Technology Network mgmt. 898 9

Procter & Gamble BT Group Infrastructure mgmt., 650 5network mgmt.

Sunrise Alcatel-Lucent Network mgmt. 527 7

General Services Admn. SAIC Maintenance/support 454 5

Scotiabank Cable & Wireless Network mgmt. 400 5

Bristol-Myers Squibb IBM Business process outsourcing 324 10

Nationwide Building Society BT Group Network mgmt. 318 7

Department of Defense BearingPoint Consulting 255 5

SOURCE: DATAMONITOR IT SERVICES CONTRACTS DATABASE

ny should consider in order to embark onthe road to globalization. The flow ofthought is lucid and one tends to getengrossed in the concept. The authorsgraphically explain the terms “simpleglobalization” of yesterday and “complexglobalization” of today’s world and clev-erly weave complex globalization withdigital technologies.

The journey continues with an exten-sive study of Wal-Mart’s global expansionand its global presence and this makes fora memorable read. An equally thoroughstudy is presented on how a company can“convert global presence into global com-petitive advantage.” The authors’ stress oncreating a global mindset and how acompany can inculcate a global mindset

— “intelligent … at observing and inter-preting the dynamic world in which itoperates” — makes an interesting read.

The topics smoothly take you fromhere on — how a firm can overcome thechallenge of diversity and social ecology,and mobilize “… new knowledge fasterand more efficiently than competitors”;how firms can operate “across borders”and embrace the “multidimensional per-spective” in order to become a GlobalBusiness Team (GBT); and how “anincreasing number of young ventures” cango global “early in their lives and increasethe odds of success.” With self-explana-tory charts and graphs at the appropriateplaces, the concepts emerge crystal clear.

Last, but not the least, the authors ana-lyze the rise of China and India, and offerguidelines on how companies can get“their China and India strategies right.”

A very informative book; the best partbeing the practical approach adoptedand supported with real-life examplesfrom companies around the world. Thereis hardly any book in the market that can

give you a clear lowdown on the funda-mentals of globalization and the reasonswhy globalization has to be at the fore-front to build a foundation for lastingbusiness. The focus is not only for start-up ventures and the world leaders, butalso for companies who wish to reworktheir business strategies and managerialstyles. You get the feeling of the rigorousresearch that has gone into the compila-tion of this book from the perfectsequence of topics. With a smart coverand a good type font, this book will trans-form the way you think about globaldominance — a must have in your col-lection.

Coupled with examples, suggestions,guidelines, summary, a comprehensiveindex, extensive reference library, surveyresults and a more confident analysis foreach chapter along with a list of questionsto make your organization move towardsa global mindset, the authors take theextra effort to present the world as an oys-ter and ensure that you have the right forkin your hand to savor it. GS

AAuutthhoorrss:: Anil K. Gupta,Vijay Govindarajan andHaiyan WangPPaaggeess:: 320PPrriiccee:: $22.02PPuubblliisshheerr:: Jossey-Bass;2 edition PPuubblliisshheedd iinn:: Mar ‘08

24x7_ik_KN-fin.qxp 7/21/2008 9:58 PM

SOURCE: THOLONS

TOTAL DEAL VOLUMEBY ACQUIRER COUNTRY (%)


4

June ’08: The Month of Consolidation with

Amidst the turmoil in the global eco-nomic conditions, the global IT and

Business Process Outsourcing (BPO) indus-try witnessed over 40 Mergers and Acquisi-tions (M&A) transactions in the month ofJune ’08 indicating no slow down in consol-idation. The month witnessed $1.3 billion ofdeals from 40 transactions as against $1.8 bil-lion of deals from 33 deals in May ’08(excluding the HP-EDS deal). Though thetotal deal volume for the month is 18 percenthigher than the previous month, the total dealvalue is 28 percent lower. The average dealsize in June ’08 is around $32.5 millionagainst the $53 million, which supports theargument that the acquirers are targeting thesmaller firms mostly catering to a nichemarket segment.

In June ’08, there was only one transac-tion exceeding $200 million, i.e. GeneralDynamics Information Technology acquiringVIPs, Inc., the U.S.-based provider of health-care IT services for $225 million. This is adomestic deal initiated by the acquirer todiversify, penetrate and reach customers in theU.S. health-care market space. There are fiveother deals in the health-care sector, wheretarget firms offer revenue-cycle management

MEGA M&As OF APR. '08

Acquirer Target Area Deal size($ mn)

l General Dynamics VIPs IT software 225Information Technology

l Progress Software IO15 Technologies IT software 162

l FTI Consulting Attenex IT software 88

l Alcatel-Lucent Motive IT software 67.8

l AEA Technology Project Performance IT consulting 65

l Ultra Electronics Holdings ProLogic IT services 50

l Sonic Healthcare GLP Medical IT software 47

l Blackbaud Kintera IT services 45

l Dassault Systèmes (DS) Engineous Software IT software 40

l Torex Hospitality Sol. Alphameric Hospitality IT software 33.8

l NetSuite OpenAir IT software 26

l TIBCO Software Insightful KPO* 25

l Tanla Mobile Asia Pacific Openbit IT software 15.81

l Deloitte Consulting Solbourne Computer IT solutions —

l Electronic Arts ThreeSF Internet —

l N. Harris Computer Municipal Solutions IT solutions —

l Tiger Tech Holdings Coral –Tell Internet —

l Tooltech Group Ideteknik Engg. services —

l Tooltech Group Aspinova Engg. services —

l TechTeam Global Onvaio BPO —

l Cognizant Technology Sol. Strategic Vision Consulting IT consulting —

l LexisNexis LAWbase IT software —

l WNS Business Applications IT solutions —Associates

l SAP Visiprise IT software —

l Microsoft Navic Networks Internet —

l Decision Resources ManhattanResearch KPO* —

l CDC Software Dynamic Business IT Software —Consultants (DBC)

l Bond International Team Spirit Software and IT Software —Software Headcount Services

l PharmaLinkFHI Matrix KPO* —

l Protus GOT IT services —

l Proofpoint Fortiva IT software —

l MSC.Software MacNeal Group (tMG) Engg. services —

l Globant ACCENDRA NETWORKS IT software —

l MBB Industries DTS Systeme IT services —

l Analysys Mason OSS Observer KPO* —

l Ecologic Leasing Sol. Captara IT software —

l Hexagon Viewserve IT software —

l CheckPoint Systems OATSystems IT software —

l Oracle Skywire Software IT software —

l Integreon Managed Sol. Datum Legal KPO* —

*Knowledge Process Outsourcing; SOURCE: THOLONS

BY NISHANT VERMA, PRINCIPAL, AND AVINASH VASHISTHA, CEO, THOLONS

Sweden: 33

France: 55

Argentina: 33

Germany: 55

India: 99

China: 33

U.K.: 1122Canada: 55

U.S.: 5522Australia: 33

24x7_ik_KN-fin.qxp 7/21/2008 9:59 PM

August 2008 www.globalservicesmedia.com GlobalServices 11 24x 7

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40 M&As

solutions, business-process management solu-tions, health-care research and clinical servicesbased out of geographies such as the U.S., theU.K. and Germany.

The U.S.-based firms have continuedacquiring firms for their inorganic growthstrategy. The acquirers based in the U.K.made two domestic and three U.S. acquisi-tions, unlike India where all the four dealswere cross border. Cognizant, the U.S.-basedIT-services provider, acquired Strategic VisionConsulting, the U.S.-based provider of con-sulting and systems implementation ser-vices, for an undisclosed deal value. Thisacquisition is expected to complement CTS’smedia and entertainment vertical by adding60 employees with expertise in loyalty man-agement, online data analytics and onlineadvertisement operations.

The U.S. was the main target destina-tion for the acquisitions in June ’08. Thefirms targeted in the U.S. were mainly intoIT software and Knowledge Process Out-sourcing (KPO) services. The second mosttargeted acquisition destination was theU.K. with four transactions, followed bySweden and Germany. GS

TOTAL DEAL VOLUMEBY TARGET COUNTRY (%)

HRO: 33

IT solutions: 33

BPO: 33

Internet: 33

High-tech: 4

Gaming: 77

IT services.: 99IT software: 33

IT services.: 5599IT software: 33

IT software: 33

34% More FAO Contracts to Be Inked in 2008BY IMRANA KHAN

SOURCE: THOLONS

NUMBER OF FAO CONTRACTS, 2004 – 08e (% increase)

SOURCE: FAO RESEARCH

The year 2008 will witness consid-erable growth in the global Finance

& Accounting Outsourcing (FAO) mar-ket activity. According to a recentlyreleased study by FAO Research, anFAO market research and consultingfirm, the market will notice 146 FAOcontracts (up by 34 percent from the lastyear when the market posted 109 FAOdeals) inking new deals, renewals, add-ons and negotiations by the end of 2008.

Nearly 25 percent of all FAO con-tracts that are set to expire “will be putout to re-bid and / or undergo some typeof benchmarking exercise to ensurecompetitive pricing and alignment ofservice levels to the market,” finds theresearch report.

FAO Research’s study also reveals thatby the end of this year, the global FAOmarket will engage in an estimated 456multiprocess, three plus year FAO deals,with a Compound Annual Growth Rate(CAGR) of 30.7 percent — CAGRstood at 28 percent in 2007 and 29 per-cent in 2006. The study also predictsthat U.S. companies and governments

will continue to drive FAO marketdemand, with a noticable increment inthe U.K. and other countries in the EU.

The research report also suggeststhat as the demand for FAO activitiesincreased in the health-care industry,gaining industry expertise and processknowledge will be a top priority for theFAO services providers.

“We are convinced that 2008 willgenerate the strongest growth of FAOcontracts in any single year yet,” says LisaRoss, CEO, FAO Research. “Within ourchallenging economic climate, morecompanies than in any previous year arebeing driven to outsource finance func-tions to third-party suppliers to achievegreater cost savings, access better tech-nology, gain industry best practices andfacilitate global expansion.”

However, attrition and retentionwill continue to challenge global service providers, especially Indian.Thus, to ensure the customer com-munity’s confidence in their teams,providers’ strategies for minimizingturnover and increasing tenure will beused as differentiators. GS

2004 2005 2006 2007 2008e

50 66 85 109 146

34%increase

34%

28%increase

29%increase32%

increase

24x7_ik_KN-fin.qxp 7/21/2008 9:59 PM


Eastern Europe is one of the favorite out-sourcing destinations for IT services

across the globe. It’s also been countedamong the toppers for a while now. Whenevaluating the region to source from, out-sourcing services such as Business ProcessOutsourcing (BPO) is something to watchout for. Especially, for the Western Euro-pean companies’ BPO services require-ments, the region throws up good optionsin terms of cost savings, cultural affinity,language skills, talent availability and more.However, the price rise in some EasternEuropean countries is drawing concerns.

With a full-time employee base of20,000 to 30,000, the $1 billion BPOindustry in Eastern Europe is expected togrow at a rate of approximately 35 percentor more per annum. This is according to arecently released research report, BPODelivery from Eastern Europe, conducted byTechnology Business Research, a Hampton-headquartered high-tech market researchand consulting firm. Since there are sever-al opportunities for the BPO serviceprovider in the region, many global com-panies, especially Indians, are fast setting uptheir BPO delivery centers there.

The region houses several captives ofmany MNCs. Other findings of the studyalso reveal that even though outsourcingplayers have realized the benefits of deliv-ering nearshore BPO services from EasternEurope, many companies have also estab-lished their captive setups, which are knownto be better paymasters in the region. Cap-tives pay 50 percent higher salaries than thethird-party providers. “As a result, there arecaptive groups for sale in the region thatwere not able to deliver the expected ben-efits. Failed captives are likely to be con-solidated through acquisitions and / or thetaking over of contracts and employees bythird-party providers.

Companies such as Proctor & Gamble(P&G), UPS, Volve, Lufthansa have their

BPO in BY IMRANA KHAN

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Evalueserve: Top Patent-Services Provider in IndiaBY IMRANA KHAN

The $46 million Indian patent-services offshoring industry is set

to bag a big share of the $2.2 billionglobal patent-services market in thenext five years. It is expected to touch$206 million mark by 2012, accordingto a recently released study conductedby ValueNotes Research, a businessintelligence and research firm.

At present, there are 50 offshorepatent-services providers in India withan employee base of 1,550 people. Thisnumber is expected to increase to6,950 in the coming five years, cites theresearch report. In the current scenario,the third-party service providersaccount for 75 percent of the industry,while captives form the rest of the 40percent. The research also names thetop five providers in the Indian off-shore patent-services industry of whichEvalueserve wins the top rug, followedby Pangea3, CPA Global, Lexadigmand Cliarvolex.

The fundamental driver that affectsthe expansion of the Indian patent-ser-vices offshoring industry — generallypatent searches, patent illustration,proofreading, patent drafting, patentanalysis, patent asset management,patent litigation support and consulting— is the growth of the worldwidepatent market. In 2007, more than 1.8million applications were filed world-wide accounting for filing costs equiva-lent to $30 billion. The patent offshoreof the U.S., Japan, China, Republic ofKorea and Europe accounted for 83 per-cent of worldwide patent filing. TheAmerican companies form the largestcustomer base (nearly 60 percent) forIndian service providers.

Other drivers that boost the off-shore patent-services industry in Indiainclude increased offshoring of R&Dactivity, lack of manpower and theimpact of the U.S. Patent ReformAct, 2007. GS

INDIAN PATENT-SERVICES PROVIDERS' DASHBOARD

Rank Player Rationale for high growth

1 Evalueserve l An established KPOl Largest provider in terms of manpowerl Well formed senior and mid-level management teaml Significant specialization within the patents segmentl Multigeography delivery and marketing centers.

2 Pangea3 l Backed by Sequoia Capitall An established provider with significant scale in IP servicesl Teams with specific domain expertise in patentsl High-end services form the majority of their work.

3 CPA Global l Early mover in the IP outsourcing industryl Established on-shore presencel Demonstrates capability to scale.

4 Lexadigm l Established legal services providerl Involves several American attorneys in their mgmt. teaml Establishes affiliate relationships with experienced IP

practitioners in most major, global jurisdictionsl Several onshore delivery centers and sales officesl Aggressive growth plans.

5 Clairvolex l Backed by established law firm, LexOrbis and Agnesl Holdingsl Has financial strength to scalel Aggressive growth plans.

SOURCE: VALUENOTES RESEARCH

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captive setups in Poland, DHL, Exxon-Mobil, Siemens, Johnson & Johnson,Honeywell, InBev, Lufthansa, SAP in theCzech Republic, Dell, Kone, BASF,Checkpoint, KraftFoods, Checkpoint,Austrian Airlines, AT&T, Allianz in SlovakRepublic, Avis, GE, Morgan Stanley,Nokia in Hungary, and Intel, Freescale,Microsoft, GE in Romania. Third-partyproviders such as Accenture (CzechRepublic, Hungary, Poland and Romania),Genpact (Hungary and Romania), HP(Poland and Romania), IBM (Hungaryand Poland), Infosys (Czech Republicand Poland), TCS (Hungary) and Wipro(Romania) also have their operations in the region.

In high-demand countries such asCzech republic and Hungary, manyproviders including EDS, Capgemini aresetting up small centers with less than 500

employees to avoid the risk associatedwith the maintenance of a large work-force. “Additionally, smaller workforces aremore aligned to the smaller labor supplyin tier-2 cities, which has added benefitsof lower labor and facilities costs that canmore than offset any benefits of scale incapital cities. EDS, for example, maintainsoperations in both the capital city and sec-ondary cities in Hungary. Budapest isleveraged for higher-value work, whilelower-level processing is accomplished insecondary locations that offer much lowercosts and extremely lower attrition,” citesTBR’s study.

Interestingly, all these providers givemultilingual BPO services. Typical oper-ations can cover 10 to 15 different lan-guages, according to the study. For exam-ple, Ariba provides BPO services in 19languages, ExxonMobil, Icon and Info-

sys in 16 languages each, Accentrue andSymbol in 14 languages each, andLufthansa and Schneider Logistics in 12languages each.

The study points out that Poland andHungary have the highest number ofBPO employees working for third-partyproviders followed by the Czech and Slovak Republics. “Romania is seeing fair amount of growth, and islikely to have levels similar to othercountries within a short time,” says theresearch report.

Lower salaries are the main driver forglobal BPOs to establish and expand theirservices in the region of Eastern Europe.The salaries in the region are 40 to 60 per-cent lower than the Western Europe con-tinent. The study finds that Hungary, theCzech Republic and Poland have thehighest average salaries while, Romaniaand Slovak Republic have relatively loweraverage salary levels.

The study also reveals that the EasternEuropean region is a good source ofFinance and Accounting Outsourcing(FAO) services such as accounts, payable,accounts receivable, credit and collec-tions, general ledger and payroll. Besidesthese services, human resource, procure-ment, customer-care and business-supportservices are in high demand.

Indeed, the BPO industry is fast gear-ing up in Eastern Europe. GS

Metrics

SOURCE: TBR

Note: Only includes headcount for companies included in this study

BPO EMPLOYEES IN EASTERN EUROPE BY COUNTRY

3,000

2,000

1,000

0 Czec

h Re

publ

ic

Em

plo

yees

of

maj

or

pro

vid

ers

Hung

ary

Pola

nd

Rom

ania

Slov

ak R

epub

lic

SOURCE: TBR

Note: Size of bubble represents total Eastern European BPO headcount

SCOPE, SCALE AND MATURITY OF EASTERN EUROPE BPO PROVIDERS

Wipro TCS

Capgemini

EDS

Accenture IBM

Infosys

Genpact

HP

Po

rtfo

lio b

read

th

Total years in Eastern Europe (sum of years at all locations)0 5 10 15 20 25 30

SOURCE: TBR

EASTERN EUROPE — BPO SALARIES BY POSITION

Hungary

Slovakia

Romania

Czech Republic

Poland

Entry level Team lead Project manager

Eastern Europe Takes Off

24x7_ik_KN-fin.qxp 7/21/2008 9:59 PM

1 The Old TownThis is a prosperous

center of medieval trade.The Town Hall, Raekojaplats, and the landmarkof Tallinn, the sky-highSt. Olaf´s Church areamong the most popular tourist attractions.

2 Alexander Nevsky Cathedral

This cathedral is the largestand grandest cupola cathe-dral in Tallinn, built between1894 and 1900 when Estoniawas still a part of the RussianEmpire. The cathedral is atopthe Toompea, a limestone hill that once was thecenter of Tallinn.

3 Kadriorg Palace Build in 1718, tsar

Peter-I named this out-standing summer palaceCatherinenthal after hiswife. This red and whiteadorned palace is home tothe foreign art collection of the Estonian ArtMuseum. The palace has a lovely and splendid gar-den. Just across the flourishing garden is the officeof the Estonian president.

4The Cathedral of Saint Mary

Though this originally woodenchurch on Toompea Hill survivedthe first wave of Reformation, itcould not survive the fire thatconsumed the whole town ofToompea in June 1684. Thecathedral was rebuilt. Today thecathedral — known as Dome Church — has abaroque spire, and the numerous gravestones andnobles' shield epitaphs speak about the aboundinghistory of the region.

5Estonian Open-Air Museum

The museum presents aunique collection of farmbuildings, water mills,windmills and much morefrom all over Estonia. TheEstonian Open-Air museum, situated outside thecity, is a perfect place for picnics. This museum isnot only home for celebrating folk holidays in aconventional style, but also a stage for traditionalfolk dance performances.

Fiveplaces to visit

The capital and the largest city inEstonia, Tallinn is also evolving

fastest in technical capabilities amongcities in the European Union. Host toleading telecommunication compa-nies such as Nokia and Elcoteq, Tallinnis one of the most important researchcenters in telecom.

Tallinn’s gradual climb to becomingan important research outfit is remark-able. Skype entered the city in 2005when Tallinn was nowhere positionedon the software and IT map. No soon-er than Skype happened, the Tallinnairport was flooded with investors.The city used Internet to its advantageand attracted companies to set upmanufacturing units that developedproducts. Companies such as Playtech,designed software for online gamblingservices. That’s how 2005 witnessed thegrowth of IT sector in Tallinn.

Last year, Tallinn was part of therankings in the study, titled Top 50Emerging Outsourcing Cities, conduct-ed by Global Services and Tholon.

On May 16th, 2008, at theBroadband Economy Conferenceheld in New York, Tallinn was hon-ored the Intelligent CommunityAwards (awarded to the world’s topseven communities) for the secondtime in a row. The city has also beenacknowledged for its e-services envi-ronment and for the development ofspecific operational applications. InfDi’s report on European Cities &Regions of the Future 2008/09, Tallinnappeared among the “Top 50 Euro-peans Cities” and the “Top 10 Best

Economic Potential categories.”Though the city is also home to

many universities such as Tallinn Uni-versity of Technology, Estonian Busi-ness School and Estonian IT College,Estonia annually produces less than100,000 grads, as per Tholons. How-ever to increase the number, the imple-mentation of e-school application at allTallinn schools has been given specialemphasis by the local government.

On the downside, the wages in thecity saw a 20 percent increase in ashort span of one year. Confirmingthis fact, Estonia has been rankedamong the most expensive cities, interms of labor costs, in the Central &Eastern Europe as per the study titledCentral & Eastern Europe IT Out-sourcing Review 2007, conducted byUkrainian Hi-Tech Initiative withthe support of information portalITO News.eu, Baltic OutsourcingAssociation (Lithuania), Employers’Association of the Software and Ser-vices Industry (Romania) and JNNConsult (Bulgaria).

To tackle the labor-cost disadvan-tage, Tallinn is focusing on producinghigh-end technology to attract theattention of companies. The govern-ment has been upgrading its IT infra-structure periodically, which has beencritical in attracting several U.S.-basedorganizations in the city. The local gov-ernment too plays an active role in thetechnical development of the city bytaking regular feedbacks from the peo-ple who are actively involved in thedevelopment process. GS

BY NAMITA GOEL

Compiled by By Namita Goel


8

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As predicted in the last issue, Q2 ’08registered a large number of layoffs

(more than 75,236) in the U.S. than theprevious quarter. The number of jobs cutincreased to 275,292 in Q2 ’08 from200,656 in Q1 ’08, according to Challenger, Gray &Christmas, a global out-placement consultancyfirm. Since 1999, this isthe fifth biggest loss with585,188 jobs cut in Q4’01; 478,905 in Q1’02;426,435 in Q4 ’02; and315,415 in Q4 ’04.

While the jobs cut inJune ’08 was 47 percenthigher than the 55,726job losses of June ’07,June ’08 downsizing(81,755 layoffs) itself was21 percent higher thanMay ’08 (when jobs cutreached a 29-month highof 103,522).

Even though the sub-prime mortgagecrisis bugged the real estate and financialsectors only in the second half of last year, jobs cut remained mod-erate throughout the year averaging to62,461 layoffs. However, the impact ofthis crisis is now becoming more visible due to the increasing number of jobs cut. As of now, companies haveannounced 475,948 jobs cut year to date.

“Many people were expecting

a surge in jobs cut beginning last Augustas the housing collapse and financial cri-sis began. However, while jobs cut did surge in the financial sector, mostother industries remained stable and, inmany cases, were on the decline,” says

John A. Challenger,CEO, Challenger, Gray& Christmas.

Further analysis sug-gests that the financialindustry went undermaximum downsizing.The industry registered19,227 job losses fol-lowed by the government/ non-profit sector(10,797), telecom(10,797), transportation(7,942), defense (7,043)and retail (4,973) toname a few. The auto-motive industry regis-tered just 2,356 jobs cut,which stood at 30,011

in May ’08. Interestingly, outsourcing was one of

the last five reasons behind 390 jobs cutin June ’08 — 39 percent down fromMay ’08 when 641 employees werelaid off.

The company also analyzed thatCEOs’ departures during the monthincreased to 126 from 115 in May ’08— up by 9.5 percent. The departureswere even higher than June ’07 with 105CEO exits. GS

Q2 ’08 Posts 275,292 Jobs CutBY IMRANA KHAN

Jobscut MONTH BY MONTH TOTALSMonth 2008 2007l March 53,579 48,997l April 90,015 70,672l May 103,522 71,115l June 81,755 55,726

Month 2008 2007l March 4,112 4,838l April 21,145 2,505l May 15,505 3,948l June 18,936 3,713

JUNE '08 JOBS CUT REASONS

MORTAGAGE / SUB-PRIME LAYOFFS

Reasons Number of layoffs

l Market conditions 37,363l Cost-cutting 21,213l Mergers & acquisitions 7,811l Restructuring 3,896l Closing 3,414l Fluctuating sales 3,372l Demand downturn 1,768l No clear reason 1,084l Legal trouble 520l Reorganization /

consolidation 420l Outsourcing 390l Bankruptcy 313l Order cancellation/

reduction 122l Voluntary severance 58l Firing 11

Total 81,755

SOURCE: CHALLENGER, GRAY & CHRISTMAS

“The overall economy could continue to experience net losses for several months to come as largeindustries continue to shed workers amid rising costs and lower consumer spending. These lossesprobably will not match the number of jobs lost in the previous recession due to the fact that com-

panies were more cautious when it came to hiring after the dot.com collapse. If this most recentperiod of job growth had matched the growth of the late 1990s, we would most definitely be seeing

much heavier job-cutting now.”

OUTSOURCINGWAS ONE OF THE

LAST FIVE REASONS BEHIND390 JOBS CUT IN

JUNE ’08 — 39PERCENT DOWNFROM MAY ’08

WHEN 641EMPLOYEES WERE

LAID OFF.

SOURCE: CHALLENGER, GRAY & CHRISTMAS

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FIFTEEN YEARS AGO, AN international shipping companyselected ACS, the U.S.-based technology company, to provideimaging and data capture on billing information. ACSbunched up 25 employees in Utah to work on this project.Things went well for some time, but then the customer’sdemands gradually increased. A flourishing international ship-ping industry necessitated a solution that processed documentsas fast and accurately, as they delivered the packages. So, tomeet the customer’s increasing global document processingneeds ACS chose what is now called a Global Delivery Model(GDM) — multiple document types in various languages tobe turned around in record time. ACS’ multicountry strategywith 1,600 employees across the U.S., Mexico, India, Afr-ica, Guatemala and the Philippines dramatically improved thecycle time from six-hour turnaround time to a seven min-ute turnaround.

Even though ACS’ outsourcing relationship with this cus-tomer started a decade and a half ago, the trend of GDMcaught up just a few years back. Currently, service providerssuch as IBM, Infosys, TCS, Satyam, ACS, CSC, Accenture,Genpact and Wipro are increasing their global presence todeliver services under GDM.

“If you were to look at it five years ago, typically it wouldbe an onshore or offshore model where you may have num-ber of people onsite or in the country itself. Or may be 30to 70 percent of the work being farmed out to an offshorelocation depending on the type of processes. Today, whenyou look at the situation, you are not looking at it for thehigher percentage of work shifting overseas. You look at itfrom the ‘multicountry sourcing strategy’ where one par-ticular process doesn’t necessarily have to be confined to onecountry. So, you might have a call center being based in thePhilippines, you might have some of the back-office, ana-lytics, application or support work coming out of India, ormight have infrastructure services coming out of Malaysia,”said T. J. Singh, Research Director, Gartner Research.

Is multicountry sourcing strategy feasible for all? Howare such projects managed? How are the resources allocat-ed? What are benefits? An inside look at such globally distributed projects.

Allocating Resources on a Global ScaleFor IT and related services, India is the hub of GDM

resources for onshore and offshore service providers.Therefore, by the end of last year, Accenture had 63 percentof resources based in India; Infosys and Wipro had 98 per-cent; TCS had 96 percent; IBM and EDS had 80 percentand 78 percent respectively, according to the companies’reports and Forrester analysis 2007.

Thus, in order to tap the Indian talent pool, the globaltech giants such as IBM and Accenture are fast scaling uptheir capabilities in India to pose immense competition toother firms — such as T-Systems, Atos Origin and Fujitsu— which have made huge investment to ramp up their off-shore capabilities. Even as Indian services providers such asInfosys, Wipro, TCS and Satyam are heading to multiplegeographies, especially to Latin America and Eastern Europeto reduce the increasing pressure on the workforce and tostay competitive, traditional global players such as EDS andCSC seem to be on an acquisition spree to expand theirGDM capabilities. Other Indian players such as NIIT andiGATE are also forced to redevelop their strategies to facethe increasing competition.

Even the GDM equation seems to be shifting now.Between 2000 and 2005, it was based on the availability ofcheap labor. Now, GDM is more inclined toward the avail-ability and the quality of processes. And by 2015 it is expect-ed to be based on value-added intellectual property, accord-ing to Forrester Research.

As the service activities and the provider investments inglobal delivery centers increase, the way providers allocateresources globally would also change dramatically. At pre-sent, the process-driven approach of resource allocation ispredominant across the globe while the location-driven (city— same country but different cities or multicountry) distri-bution of resources is the norm. In the case of voice-basedBusiness Process Outsourcing (BPO) companies, language-based resource allocation takes precedence.

Generally, a process-driven relationship starts with one ora few processes from one or two site delivery model.Gradually, it spreads across multiple geographies. Even ACS’example follows this trend.

Infosys BPO also works the same way. “Most of our cus-tomers start with maybe a particular process or a set ofprocesses. Actually, a GDM relationship doesn’t start being

Special Report


By Imrana Khan

THE SHIFTING GDM VALUE EQUATION (%)

2000 2005 2010* 2015*

Cheap Labor Process Value-added IP

85 65 30 15

1030 50

35

5 5 20 50

* FORRESTER ESTIMATE; SOURCE: FORRESTER RESEARCH


globally distributed. When the customer’s comfort is therein terms of the way we work, we start expanding to otherglobal delivery centers. For most of our customers, we deliv-er services from our six centers outside India — in Mexico,the Czech Republic, Poland, the Philippines, Bangkok andChina,” says S. Vaitheeswaran, Head, Order ManagementPractice and Manufacturing Unit, Infosys BPO.

IBM had been managing Unilever’s procurement oper-ations in North America, Asia, the Middle East andTurkey. The deal got extended in 2007 to serve Unileverfrom multiple geographies. Under the terms of the extend-ed deal, IBM is now also providing the services to Unileverfrom its global delivery center in Hortoliana, Brazil.

Many companies engage in relationships wherein theysign multicountry-based contracts at thefirst go. This is a far complex way ofengaging in a GDM engagement becausein such engagements, the providers neverhave the advantage of replicating theknowledge of doing the process from onesite to another site — that’s when thecomplexity comes in. In such cases, thecompanies start with multiple geogra-phies, and simultaneously expect them toperform at a particular process to meetservice–level engagement within a speci-fied period of time. So it is necessary tobalance how two or three sites, withoutany prior learning curve, are going tocome up in terms of performance expec-tations within the same period of time.

Depending on the customers’needs, the providers choose theapproach they would want to followfor the execution of their projects. So itis possible that a provider works on allthree waysof delivering services global-ly — process-driven, location-drivenand language-driven program — at atime for different customers.

Currently, for example, 24/7 Customer, a Calif.-head-quartered BPO company, is working on all the threeapproaches of global delivery. “For a telecom and mediacompany, 24/7 Customer provides customer services andtech support from two Indian cities — Hyderabad andBangalore — while for an $8 to 10 billion software com-pany, it provides services in 10 languages from three dif-ferent countries,” says V. Bharathwaj, Chief MarketingOfficer, 24/7 Customer, a BPO firm. The company’s 11global delivery centers are located in eight locations —four in India (Bangalore, Chennai, Gurgaon andHyderabad), one in the Philippines (Manila) andGuatemala (Guatemala City), China (Shanghai) andNorthern Ireland (Belfast) each.

Building a Multilevel Governance ModelIt’s necessary to establish a governance model for each level

of a global delivery relationship with business outcome basedservice-level agreements defining metrics, gainsharing /risksharing, costs savings, and such. But then the biggestquestion “who should manage what” comes into reckoning.The customer is required to manage both the contract andthe provider, while the provider needs to focus on the cus-tomer as well as its expectations. Similarly, the former isrequired to audit the provider’s performance time-to-time,and the latter is expected to educate the customer how theprocesses are being executed.

“From a management perspective, governanceis the key requirement. So put in a governance

structure, it reflects the customer’s expec-tations on one hand and on the other welook at how seamlessly can we puttogether the information. Let’s say, youhave workflow giving you managementreports. So it really doesn’t matter if thereis some work getting out of Guangzhouand some out of Bangalore. We are stillable to get real-time stats giving youmanagement reports. However, having agood governance model is one of thebiggest challenges, apart from the prob-lems related to culture and people, andthe cost structure. At Infosys, we have a‘Global Client Operating Head’ who isa one-point contact with the customerand who plans the governance structure.So, in general, we ask our customers totell us their requirements and leave it onus where we deliver it from. To a cus-tomer it really doesn’t matter where wedeliver from. But there is always a chal-lenge of a similar scale of delivery at different centers,” exhorted InfosysBPO’s Vaitheeswaran.

Wipro’s GDM model is run and managed as a virtualone with a single point of contact. Internally, the compa-ny calls it “Virtual Delivery Model” — a virtual way ofdelivering services across multiple geographies. “Thisenables Wipro to address changing business requirements,especially in the case of large global projects,” says JethinChandran, General Manager, Wipro Technologies. “Thegovernance is well established to take care of interfaces, andcommunication and coordination. Large projects, whichwould need working on multiple products, would alsoinvolve integrated working of customer and multiplepartners. The customer also plays a role here being at theapex of the management structure with sub-managementroles defined for each partner. The steering of the projectis done by a team with members from each partner / design


Special Report

NOW, GDM IS MOREINCLINED TOWARDTHE AVAILABILITYAND THE QUALITY

OF PROCESSES. ANDBY 2015 IT IS

EXPECTED TO BEBASED ON VALUE-

ADDED INTELLECTU-AL PROPERTY.


center. The steering is done at both technical and man-agement levels.”

“As we practice at Genpact, a business outcome-based ser-vice-level agreement is a good tool of measuring the actual ser-vices delivered during the tenure of a GDM project. And, Ibelieve, technology is another way of managing such engage-ments without slipping and making them successful. The usageof technology will increase in the coming future. At Genpact,we already use such tools, and are focusing on increasing theusage,” said Shantanu Ghosh, SVP and Business Leader, Gen-pact, a global BPO and IT-solutions firm.

Case I: A Dutch banking giant, ABN Amro, with 3,000branches in 60 countries needed a comprehensive outsourc-ing strategy that would capture inefficiencies and would mit-igate risk. It had already outsourced some of its IT functions,but was seeking to take it to another level by engaging mul-tiple tier-1 providers for application management, applicationdevelopment, infrastructure and other tasks. The bank select-ed TCS to be a central player in this strategy due to its abili-ty to provide tailored services to its local business units andstandardized services globally.

More than 1,400 TCS professionals are delivering appli-cation development, maintenance, testing, production sup-port, process and quality consulting, and re-engineering andmigration services to ABN Amro from Brazil, the U.S., theU.K., Switzerland, Luxembourg, Netherlands, France, Ger-many, Hong Kong and India. These teams work with ABNAmro’s other providers to ensure success — performing taskswithin the bank’s operational-level agreement framework andthe RACI matrix. Through partnership, the customer achievedtop-quartile IT cost efficiency, compared with peer banks, on-time account-level critical deliverables, large-scale transitionin all business units done by or before deadline and savings andproductivity improvements gained by leveraging TCS Inno-vation Labs methodologies.

TCS worked on a strong governance model to deliver themassive services from 15 countries. The company set up infra-structure including facilities, communications and operationalprocedures setup in record time, and hired consistent hiringand induction practices across the globe.

So in this case, some of the delivery benefits that the cus-tomer drew from the deal were: Business impact through inte-grated BPO and IT outsourcing services; improved “BankRecs” process with better productivity; collaboratively with thecustomer’s IT team; providing knowledge services (from Gen-pact, Bangalore) out to improve employee productivity andreduce overall costs.

Case II: American Airlines, the world’s largest airline, select-ed EDS to enable its major business functions, such as enter-prise data, HR, finance, business operations, business toemployee systems, reservations, loyalty programs, marketingsystems, and maintenance and engineering. The customerdecided that shifting support for some of these applicationsoffshore would reduce the support costs. The airline targeted

select business applications for transitioning into the EDSGDM in Q4 ’05 and Q1 ’06. The plan focused on migrat-ing work into the Latin America region where EDS providesapplications services from its centers in Brazil and Argentina.

To structure the global services transition, EDS establisheda migration process and a plan that emphasized knowledgetransfer. The team from Latin America came to the U.S. toreceive system orientation and training for American’s busi-ness applications. The U.S.-based American Airlines and EDSteams initially faced communication challenges across conti-nents and languages. A lesson-learning session identified com-munication techniques that were added to each team’s com-munication plan, providing the means to ensure knowledgecould flow across a globally diverse team.

Next, American Airlines and EDS extended the successfulglobal support model across the customer’s enterprise portfolioof business applications. EDS proposed an enterprise assess-ment framework to determine the readiness of each businessapplication and associated work effort that could be transi-


Special Report

Established in 2007, an Indian outsourcing setup calledAnantara Solutions works as a virtual company. Backed byinternational venture capitalists including Helion VenturePartners, Walden International, The Silicon Valley BankGroup, Christian Wedell, a former senior Microsoft execu-tive and venture capitalist, the company has geared up witha vision of radical transformation of the First GenerationOutsourcing (FGO) model. It sees the implementation ofSecond Generation Outsourcing (SGO) — based on a part-ner-enabled global delivery model — across the globe. Thismodel is now also getting attention in international forums.If it works out well, this could enforce the Indian hotshots tochange the way they execute their global deliveries. GlobalServices’ Imrana Khan looks into the way this virtual com-pany and its global delivery model runs

With a customer base of 50 companies in 15 coun-tries, Anantara works as an interface between itsglobal partners from its ecosystem, “Anantara

Ecosystem,” and customers. Anantara Solutions’ ecosystemhas partners with various generalized and specialized out-sourcing firms from various geographies. Anantara evalu-ates and chooses among its global partners.

Being the prime contractor, it provides a businessimprovement solution — business strategy, process, IT per-formance, and change management — to its customers andensures customers’ satisfaction by integration, programmanagement and business value delivery. In partner-enabled model, Anantara gets paid for value receivedinstead of charging for a fixed cost burdens of wages, real

A Budding


tioned into the EDS GDM. EDS conducted the enterprise-level assessment in Q1 and Q2 of 2006. EDS established anassessment process that brought together the customer andEDS teams for each business area. The process evaluated thebusiness applications in terms of complexity, technologiesimplemented, resource skill sets and experience levels. The datacollected during the assessment process provided the customera view into additional business applications that EDS couldtransition into the GDM, so American could further reducecosts. Based on migrating the initially selected business appli-cations into the EDS GDM, EDS helped American reduceits IT spend, and the airline was able to realize these benefitsthroughout 2006. The global model has introduced a “built-in” means of providing cost-efficient services, and Americanhas a proven methodology that’s ready for future outsourcing.

Delivering Excellence“Traditionally services delivery has been done using Off-

shore Delivery Center (ODC) Model, wherein the ODC Net-

work is physically / logically separated within a location. It hadinherent inability to address issues like skills mismatch in loca-tions — quality resources not available at ODC location at ashort notice and scarcity of skilled resources at a particular loca-tion. GDM 2.0 removes the physical boundaries, and let peo-ple work in a virtual environment with all security controls anda right mix of collaborative technology at the same space. Ina large project, it is critical to be efficient and also have depen-dency on expertise of various kinds. This comes out very wellin the GDM — use the best resources available wherever theyare and take advantage of the cost of the various centers,”Wipro’s Chandran added.

Case I: For a Fortune 50 company, Genpact provided var-ious services ranging from finance and accounting, IT, ana-lytics services and content support from multiple geographies.In this form of engagement, Genpact had to tackle lots of com-plexities. The customer’s different ERP systems across geo-graphies, leading to nonstandard processes across countries,was one of them. It also had nonstandard measurement sys-


Special Report

estate, and such, as it happens in the case of establishedIndian firms such as Infosys, TCS and Wipro. So it works onvalue-based pricing and risk-reward based pricing.

“Our business paradigm radically improves FGO, whichis primarily based on cost arbitrage. So we provide busi-ness solutions to our customers to draw business value,and have a vision of transforming FGO soles to SGO,” saysG. B. Prabhat, Founder and CEO, AnantaraSolutions. “Apart from providing innovativevalue-based pricing and complete businesssolutions, we also help our customers migratefrom data management to knowledge man-agement capitalizing on business-specificorganizational knowledge.”

To study the advantages and the capabili-ties, we studied some real-life cases whereinAnantara has been the prime contractor.

In the first case, Anantara works for a HongKong-based garment-manufacturing con-glomerate. The manufacturer was facing chal-lenges due to declining productivity and surging costs ofprocurement, particularly from the company’s supplychain partners in mainland China. Anantara’s SGO wasapplied to solve the customer’s problem. Anantara deliv-ered its business solution while other services were dis-tributed among its partners from its ecosystem.Significant parts of the procurement portal were out-sourced and bought from a Chinese company and testingservices were bought from a specialized Indian firm. Toallocate the resources, Anantara also mapped out detailed

workflow and distribution of resources to keep some partin-house and distribute the rest among the chosen part-ners. However, the company faced the challenge whileorchestrating a global supply chain of companies to pro-vide the customer with a seamless experience and tightlyfocus on business improvement not merely high quality IT.This model markedly improved the productivity and

reduced the cost of procurement. In the second case, a leading Indian inte-

grated multimodal supply chain providerchose Anantara to improve its productivityand reduce in errors at customer warehouse.An immense increase in business volume wasalso required. For delivering a business solu-tion for this problem, Anantara and its India-based partner were responsible for solutiondesign and integration of client ERP with EDIwhile the Canadian partner supplied EDI-related services. And as expected, theimprovement was noticed in productivity and

the errors were also reduced. It is certain that if this model taps the world’s attention,

it will enforce the tier-1 Indian outsourcing companies tothink over the way they work. Even the customers willthink over it twice before choosing partners from the FGOand SGO lots. However, at this initial phase, this model mayalso fetch challenges to Anantara in terms of establishingcredibility among prospect customers in terms of assuringits partners’ ability to deliver services and managing a vastecosystem of partners from various geographies.

G. B. Prabhat,Founder and CEO,

Anantara Solutions

Global Delivery Model



tems and criteria, and was facing complexities in statutoryrequirements and languages.

To begin with, Genpact partnered with the customer forshared services and moved work from Continental Europe intothe overall shared services umbrella. A few processes movedto the company’s captive center in Ireland and others movedto Genpact. These transitions were timed along with the Ora-cle implementation in the respective countries. Genpactleveraged its operations centers in Romania for all non-Eng-lish work. For Asia and Australia, Genpact helped this com-pany build their captive center in China. Both the company’sand Genpact’s shared services co-exist in China servicing Aus-tralia, New Zealand and Japan. Genpact is currently workingon “rest-of-the-world” strategy to move finance and account-ing processes under shared service. Joint initiatives aroundglobal process standardization and process optimization arebeing driven.

Case II: When Ecuador’s largest private bank, Banco Pich-incha, with operations across six countries, 1.5 million cus-tomers, 235 branches, $2.7 billion assets and $1.5 billion loans,initiated its outsourcing relationship with TCS, the bank hadextremely high cost structure, and required a strategic con-sultation to improve its efficiency ratio and to change the busi-ness and operational model. In just two years, the bank’s ROEsurged to 20.4 percent in 2005 from 11 percent in 2003, reg-istering $50 million of annual gains in efficiency.

However, the bank was also burdened with manualprocesses and poor time-to-market for products and channels.Re-engineering was required of certain systematic limitationsmostly in IT and operation areas. At the same time, compet-itive pressure from global banks in LatAm also increased the

need to improve efficiency index through cost reduction. Thebank also decided to focus on core business and product devel-opment to achieve its international expansion plans.

Under the five-year $140 million comprehensive out-sourcing deal signed in Jan. ’07, TCS is responsible for theestablishment of a new center with 500 employees in Quito,Ecuador, implementation of a new core banking solution,BPO services — back office, clearing, cash management, checkprocessing, finance and accounting, customer care — data cen-ters, application services, help-desk and infrastructure services.For the customer, this consulting-led engagement with TCSproved to be a huge cost savings tool.

What's in Future?“The adoption of and investment in a low-cost global deliv-

ery model (GDM) has accelerated over the past 36 months.We’ve arrived at the “hub-and-spoke” stage, where even themultinational corporations such as IBM, Accenture, CSC andCapgemini use India as the main center for innovation, withother locations following its lead. This second phase in thedevelopment of a global delivery model won’t focus on hiringhuge legions of programmers. Instead, it will emphasize thedeployment of consistent processes to stitch together a bur-geoning network of centers and the creation of a pool of solu-tion accelerators that optimize the scarce managementresources in locations such as India,” concluded JohnMcCarthy, Vice President and Principal Analyst, ForresterResearch, and the author of the study The State Of Develop-ment Of The IT Services Global Delivery Model.

(For feedback on the story, please contact Imrana Khan [email protected]). GS

India

China

Philippines

EasternEurope

LatinAmerica

1980–2002: Point-to-point offshore model

2002–2010: Hub-and-spoke regional delivery model

2010 and beyond: Full global delivery model

THE THREE STAGES OF GDM DEVELOPMENT

SOURCE: FORRESTER RESEARCH



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about global Services eventsThe customers of IT and BPO sourcing services reckon Global Services Events as the conclave of thought-leaders — technology leaders and line-of-business managers of large and mid-sized corporations in the U.S.

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nCounter is an event series that connects 10 to 15 buyers of outsourcing services to five service providers in order to facilitate global outsourcing relationships. It is a closed room discussion where the providers present their perspectives on a pre-defined subject.

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The annual Global Services Conference offers sessions, peer discussions, workshops, and real-life case studies that highlight the latest outsourcing strategies, new and emerging technologies that enable seamless global services, and best practices. It is full-day event with parallel track sessions.

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The downturn has supposedly worked well for the vendor-man-agement tools providers as companies are increasingly optingfor these performance-management and monitoring tools tomanage complex multilevel and multivendor relationships

SourcingCatalysts

IK_feature-VendorMngt.qxp 7/21/2008 10:26 PM

By Namita Goel

THE PROCESS OF OUTSOURCING mightbegin with choosing the right vendor; but thechallenge is in managing the ongoing relation-ship with the vendor. And it continues till thegoals of the projects are achieved. What tran-

spires in between is the subject of the dynamics of success inoutsourcing relationships and is driven by data. Data such asservice levels, call volume, average-call handling time, attri-tion and likewise, are required to be maintained by both theproviders and customers to evaluate the progress and resolvedisputes. Traditionally, providers and cutomers used spread-sheets and documents for data storage, but maintainingthem gets extremely tedious and sometimes untenable.

Automating this process using vendor-management toolsis the way out. Tools in the form of point products andproduct suites comprise functionalities such as service cata-log, eProcurement, service-level agreement and contractmanagement to name a few. But do these tools increase pro-ductivity and mitigate project risk? That’s the moot questionthat we will seek to answer by looking at the way these toolsare used in some cases.

Reasons for AcceptabilityVendor-management tools providers have seen an

upward trend in the last six months. What may be the rea-sons? “Maybe it’s because of the maturity of the vendor andcutomers. I have observed, more and more companies whenthey start to outsource are asking for the tools to be part ofthe decision process from the very beginning,” said VinayGupta, CEO, Janeeva, the U.S.-based provider of softwarefor outsourcing relationship management.

Maturity is definitely one of the reasons — be it maturi-ty of the providers and customers, or be it maturity of therelationship between the two. “The outsourcing processitself has become lot more sophisticated over the last twoyears. And people are not managing the processes just with-in the IT department. So overall the processes and the peo-ple have matured,” further confirmed Erik Hille, Director,Product Management, Oblicore, a provider of service-levelmanagement software and service-level agreement solutions.

Visibility is another reason as per Tom Schaefer,Executive Vice President, Marketing, Digital Fuel, a service-management software provider. These tools can easilydemonstrate the process and show that how the two partiesare performing. Schaefer’s viewpoint is further supported by

Greg Burnell, CEO, 6th Sense Analytics, an automatedmetrics solutions provider, “Visibility, transparency and abil-ity to make decisions with real data as compared to fake datais one of the advantages offered by these tools.”

“We see it as a trend by the enterprises — corporationsglobally, government agencies and commercial serviceproviders. There is acceleration in the maturity of theseenterprises. There is maturity in the way these enterprisesthink about running these services for their customers as abusiness. To manage these services offered by the vendorwith more discipline is the reason why the adaptability ofthe vendor-management tools has risen,” added Schaefer.


Tools & Technologies

CASE STUDY - ICustomers: Blue Cross Blue Shield of Rhode Island(BCBSRI) and Perot Systems

Provider: Janeeva

Challenges: The partnership between BCBSRI andPerot Systems presents all the complex challengesthat go with outsourcing an entire ensemble of ITfunctions, including the crucial function of claimsprocessing, and the associated suite of large-scaleenterprise-wide software applications. The key con-cerns are performance management, financial over-sight, contract administration and amendment, andissue management and dispute resolution.

Solution: Janeeva Assurance provides a convenientmechanism for adding and modifying contractamendments, and submitting them for approval. Thismakes the process of managing contract changesfully transparent to stakeholders on both sides.Janeeva's Contract Amendment Tracker supportsstructured version management and amendmentarchiving, to manage multiple contract iterations andthe institutional memory of the interests behindthem. The party requesting the change enters all therelevant parameters, along with descriptions of theadditional resources needed, and the associatedcharges are automatically calculated. The workflowengine routes the request to the right stakeholdersdepending on the towers affected and the amountsinvolved, for their comments and decisions. “Withthis ready visibility, we can maintain a consistencyand discipline in all our processes that otherwisewould be very difficult to achieve,” stated KristineKlinger, Assistant Vice President, InitiativesManagement Office, BCBSRI.


The economic downturn is also one of the reasons sug-gested by T. Sivakumar, Group Director, India & South EastAsia, Ariba. A slowing economy has accelerated the scope ofoutsourcing, and along with it has increased the importanceof automation to monitor the vendor performance moreaccurately. “Sourcing and procurement process are no morea transaction job, it is more of a strategic job,” he added.

The ScopeThe need for automation has increased with the number

of global delivery projects. Unlike a couple of years back,when providers had only one or two delivery centers fromwhere they would operate customers’ processes, in the recenttimes the providers have to move to numerous locations tobe able to provide cost-effective solutions. So for instance if“A” outsources its HR process to provider “B,” then B willfurther divide the process into sub-sections and send it to its“x” number of locations.

Automating the process, controls the manual interven-tion and gives a clear picture to the customers. “Instead ofspending 90 percent of the time in discussing the figures andmoving data back and forth, these vendor-managementtools help the customers and providers to spend only 10 per-cent time in data analysis and utilize the rest in strategizingfor better productivity,” said Gupta of Janeeva.

Take the case of Siemens Business Services (SBS); it hasentered into a $1 billion contract with a U.K.-based firm.The larger the contract, the greater the complexities. Thus,the customer had very strict guidelines related to service lev-els. SBS decided to opt for Digital Fuel’s ServiceFlow soft-ware to manage the performance-related metrics.

In the case, the benefits that this overall automation pro-vided to the sourcing relationship were:

l Predicting the financial viability of the deal in terms ofprofitability

l Enhancing the service delivery quality as the softwarecould determine the impact of the service level on the busi-ness and finances

l Giving more time for the customer and provider tobond and discuss the steps for higher productivity, instead ofpointing out the data discrepancies.

These three points mentioned above illustrates thescope of service-level management tools. Here, in the caseof SBS, the automation made more sense as it was a largedeal, but the size of the deal alone does not determine therelevance of these tools. Along with automation comesaccuracy, reality and time-saving. “The need to under-stand whether the vendors are actually as good as they areon paper has increased. The need to have some measure-ment of the vendor objectives to understand whether thevendor is meeting expectations has also increased. Thesetools help in determining that. They also assist the buyerin deciding whether the contract merits renewal.”explained Hille of Oblicore.



CASE STUDY - IICustomer: Siemens Business Services (SBS)

Provider: Digital Fuel

Challenges: SBS entered into an IT outsourcing con-tract in the U.K. that required a large staff transferfrom the customer. The challenge for SBS was tomanage all the outsourcer's obligations as recordedin the complex multilevel contract.

Solution: SBS chose to use Digital Fuel's ServiceFlowsoftware to:

l Provide a single portal view into more than 450separate service measures of IT, communications,applications, and compliance

l Develop templates to capture all the needed infor-mation (including metrics), required service-levelperformance, data sources, reporting frequency, andfinancial impact for each contractual commitment

l Document all shared assumptions. Both firms can-then sign off the final interpretation of each mea-sure

l Enter all contracted service levels, deliverables,thresholds for penalties or bonuses, audit require-ments, and likewise into the ServiceFlow system

l Use the system for reporting and control, and thencomparing the current performance to the contract-ed obligations so that ServiceFlow can generateWeb-enabled business, service-level management,and financial dashboards and reports on perfor-mance and compliance with obligations.

RANGE OF VMO RESPONSIBILITIES

Precontract (prenup)

SOURCE: FORRESTER

Post-contract (marriage)

Strategy

Compliance

Research

Spend

analysis

Supplier

scorecards

Vendor

tiering

Processrationali-

zation

Risk manage-

ment

ContractingRequire-ments

gathering

ManageRFP

process


The LimitationsThere are two limitations. First, these tools cannot be a

substitute for face-to-face interactions; it can only serve tomonitor expectations that have been mutually agreed upon.Second, the tools are still evolving, and there is a learningcurve and an adaptation curve associated with them.

Faced with the downhill industry trend in the U.S. autoindustry, a leading Detroit-based auto company, decided toget tighter in managing its provider. The provider had beenmonth-after-month painting extremely positive pictures inthe reports to the company, however the overall perfor-mance of the company didn’t seem to reflect those positiveeffects. The company’s management decided to automatethe process and go ahead with Oblicore’s product, OblicoreGuarantee, to monitor the vendor performance. “One inter-esting thing we found right away is that providers are notperforming at the levels they claimed. They, honestly, haddifferent interpretations on how the metrics were calculated.The benefit of using the tool is that once you have system-atized, automated the calculations, there is really no debateon how to calculate it. You don’t have to debate everymonth,” said Performance Manager, Sourcing Managementand Governance Team of the automobile company. Thecompany also points out further expectation from the tools,which Oblicore’s tools currently lack. “The time to get it upand running was not as fast as I would have liked it to be.Today in the auto industry, one or two months to get theproduct running is too long. A perfect scenario will be,something that is so flexible that it gets up and running in acouple of weeks instead of a couple of months.”

Apart from the functional limitations of the tools,Sivakumar of Ariba points out three non-technical limitingfactors for these tools:

l They increase the transparency between the customerand provider relationship that might become a challenge

l Today providers don’t want to measure inefficiencies.Unless one measures inefficiencies today, you can’t talkabout the improvements tomorrow

l The basic knowhow of these tools is the next factor.Sometimes when you approach the providers or customers,they cannot understand the benefits offered by these tools.

These tools can be of great help for the new contracts orat the time of taking decisions related to contract renewal.But to include them in an existing relationship is a very dif-ficult decision. Many long-term sourcing contracts that arealready underway still use manual data. Moving to suchtools midway would require tremendous effort and readinessto accept the kind of transparency these tools offer.Questions Sivakumar, “Are the provider and customer readyfor it or they are happy with the fact that “ignorance issometimes bliss?”. The answers have to come from the cus-tomer and service provider themselves.

(For feedback, contact Namita [email protected])

GS



CASE STUDY - IIICustomers: A leading automobile manufacturer

Provider: Oblicore

Challenges: The U.S.-based automobile manufac-turer had been receiving the traditional spread-sheets of data from the providers showing theservice levels. The data always showed a veryrosy picture and people lost faith in the numbers.Last year, they started talking to Oblicore but thecontract was not signed until April this year.“About a year ago, our company went through lotof cost pressure, obviously being in the automo-tive industry lot of stuff is going on. Our scope ofoutsourcing tripled in size so when it comes todepending on a tool such as Oblicore, the decisiontook a lot of time,” explained PerformanceManager, Sourcing Management and GovernanceTeam of the customer.

Solution “We have had past experiences whereeverything is always green, everything is alwaysperfect. So with these tools we wanted to own thequality of data when it comes to SLA perfor-mance. Our vision with Oblicore was to maintainthe standard way across all service providers, toreport the data and it would give back to our peo-ple the confidence in numbers,” added thePerformance Manager. Since the contract withOblicore to use Oblicore Guarantee was signed inApr. ’08, the product specifications were revealedafter the signing. It took the manager and histeam about two months to launch the product asper company’s specifications. It is too early forthem to comment on the performance, but theexperience till date has been quite fruitful. “Whenwe flowed the data that we had received in theform of manual sheets from the provider inOblicore’s software, we found that everything wasnot perfect as it was in the manual state,” saidthe company’s source.



The Human Resources Landscape in Hurricane Season

“Gimme Shelter”“Gimme Shelter”

IK_feature-HRO.qxp 7/22/2008 3:39 PM

HR OUTSOURCING (HRO) IS an integralpart of the overall business-process out-sourcing landscape. Practically, every dailyheadline in the business pages reinforcesthe need to operate at maximum efficiency,

control selling, general and administrative costs, andrationalize resources.

We are seeing accelerating interest in assessments andHRO evaluations as customer companies begin exploringhow the service model works and who the providers arein the marketplace. Companies are looking for rapidstudies of the “size of the prize,” i.e. what can be savedthrough HRO and where they can realize the mostimmediate savings.

Not surprising in this economic turmoil, there is a focus on cost savings. The turbulence is also creating a need to spinoff assets. Many of the companies spun off to private-equity firms are being forced into “shotgun marriages” with outsourcing providers. Private-equity firms understand the benefits of outsourcing andwant to ensure they never have an internal payroll department, an accounts payable service center or internal benefits administration.

Dynamics of the HRO MarketThe two hottest customer-side areas of focus for the

first half of 2008 are recruitment and learning — content,administration, delivery and fulfillment of course materi-als. Different segments of a company often have their own

training budgets, with corporate HR leading only one seg-ment of the total activity. In recruiting, many companiesstill use numerous contingency fee recruiters, so in onerespect the function is already outsourced. The overarch-ing question becomes whether one new provider coulddeliver better service at a lower cost. The answer is oftenyes. Service providers are delivering excellent learningadministration services, with some content, and they canalso deliver excellent hiring results when measured bytime to hire, cost to hire and quality of hires.

Simultaneous to this burgeoning interest in sourcedservices, the provider landscape is undergoing rapid con-solidation and contraction, plus new entrants are comingto market with HR services. Clearly, there has been aperiod of overexpansion and thin or non-existent marginsduring the period from 2002 to fall of 2007. HewittAssociates took on the early HRO contracts signed byExult, and has been in the process of rationalizing thosecontracts and trying to get to solid profitability. This hasled to the contraction of HRO services and outlook outside the U.S., notably in the Glasgow (Scotland) andKrakow (Poland) service centers.

Other providers have not been able to deliver on theirearly promise, and recent management changes atExcellerate HRO indicate some internal margin andgrowth problems in this joint venture between TowersPerrin and EDS. The fact HP has acquired EDS makesthat issue even tougher because HP is itself in the payrolldelivery business and has recently undertaken to provide

By Lowell Williams


Processes: HR outsourcing services

Today, every industry is feeling the pinch due to lack of liquidity, margin pressure,low U.S. dollar exchange rates and accelerating inflation, led by energy costs. It isagainst this backdrop of competing trends that we need to measure some of thelarger developments in HRO


some other HR services directly.In spite of this contraction and consolidation, there is

still a broad spectrum of providers active in the market-place offering services to companies of all sizes and in allprice ranges:

l Accenture l Arinsol IBM l Fidelityl Convergys l Savistal ACS l ADP.There are more than 20 providers that bill themselves

as “full-service HRO providers” so the above list is notexhaustive. Instead, it is a list of major providers withextensive history in servicing different segments of theHRO market.

Additionally, India-basedHexaware’s CaliberPoint and TCS,which were previously providing con-tract services to North American andEuropean providers, have begunoffering services directly to theEuropean and U.S. markets. Theadvent of the Indian providers has ledsome analysts to predict a “race to thebottom” in terms of pricing or a com-moditization of services and prices.But there is no reason to believe thatcompeting on price is in the bestinterests of the Indian-basedproviders. Not only do they have tobuild out their service delivery capac-ity, they also recognize that many HRservices require experienced employ-ees and very complex technology.

It should be noted that India-basedproviders often bring very strong sys-tems and system-integration skills totheir service delivery model. Several ofthe Indian providers have been sup-plying applications development, full number upgrades,enhancements and other IT-related services to the U.S.and European customers for a number of years.Consequently, Indian providers typically have deep ITbenches with programmers who are expert at PeopleSoft,SAP HR, GEAC, Lawson and Oracle HR systems. Thiswill be a substantial ongoing advantage for many of theseproviders as they expand into HR services within the U.S.and European markets.

HR systems are fundamentally important to bothclients and providers, and we see a steady migrationtoward two major enterprise suites — SAP and Oracle.

SAP HR has been booming since Oracle purchasedPeopleSoft, mainly due to Oracle’s initial announcementthat it did not plan to support the installed base ofPeopleSoft systems. Oracle has since then changed

course, but it lost ground to SAP HR in the process.Meanwhile, new systems entered the HRIT marketplace.Workday, the newest one-to-many HR platform, hasalready captured some major clients. Of course, the pro-ductivity and performance of existing, smaller HR sys-tems such as GEAC, Lawson, Tesseract should not be dis-counted.

The DriversSo what can be used to chart a course through this con-fusing maelstrom of critical needs, complex HR systemsand shifting provider landscape? Several things are becom-ing clear:

l The earth is flattening. Morecompanies are building their ownoperations where it costs less to oper-ate, enabling them to deliver HR ser-vices more efficiently. India, Chinaand the Philippines are all locationswith significant labor-cost advantagesand substantial abilities to deliverquality services. Both companies andservice providers should maximize theuse of services from these areas.

l Companies are under increasingpressure to reduce costs in this turbu-lent economy. Whether they out-source parts of HR or perform theservices themselves, companies shouldlook at the portion of every dollar ofcost that is attributable to cost-advan-taged service areas. This portion ofdollar of spend is called the“Advantaged Service Cost Ratio.”Every major company should strive tohave at least one-third of its total costscoming from lower-cost areas.

l Many customers will continuetheir existing pattern of multi-sourcing, either becausethey’ve deliberately chosen a multiprovider strategy, orinadvertently because they are unaware of how many HRservice providers are in place. Either way, effective man-agement of multiple providers requires automation,aggressive service-level management and tailored overallperformance tools.

Unfortunately, many HR executives do not have thewell-developed skill sets needed to manage multipleproviders, especially in a global setting. To overcomethese issues, many companies will capitalize on the nat-ural alliance between their HR and procurement groups.

l Multisourcing reduces the risk of large systems orservice failure by one outsourced service provider. But theapparent advantage may be offset by the problem of mul-tiple hand offs between providers addressing the same



CLEARLY, HRO ISCHANGING. THE

RETIREMENT OF THEBABY BOOMERS WILLDRAMATICALLY SHIFT

CUSTOMER NEEDS.


employee lifecycle event. The result is that service-leveltracking becomes more difficult and complex.

l Companies will increasingly opt not to own theirown HR systems. The costs and resources attendant withowning the system, overseeing enhancements andupgrades, the constant cycle of investment and deprecia-tion and the risk of systems failure are shifting to serviceproviders. Companies will also leave the choice of whichsystem to use to the provider as they adopt software as aservice and ASP models.

l A byproduct of the current wave of consolidation isthe emergence of a more standardized approach to scopeand services. Providers have often taken projects requir-ing high levels of complexity and iterative aspects of HRprocesses they cannot service well. Expatriate administra-tion, for example, takes a number of iterations and inter-actions in both home and host country to get right, andis something that should not have been handed over toHR service providers.

l Overseas providers will gravitate to provider lists forRFP as they demonstrate service capacity and sustainedservices from multiple continents. Many of theseproviders will have a very high “Advantaged Service CostRatio” right from the beginning, while other existingproviders will have to work hard to increase the percent-age of non-U.S. service costs to overall service costs.

l Call centers will not be moved out of North Americain HRO to the same extent as invoice processing or ITapplications. The HR community remains protective ofits pool of retiree populations whose cultural affinity forphone service — despite diminished hearing and prob-lems understanding accents — will militate for HRO callcenters to remain in North America.

l Finally, with respect to European data-privacy laws,the only “safe harbor” will be the safe-harbor regulationswe have in the U.S.

Clearly, HRO is changing. The retirement of the BabyBoomers will dramatically shift customer needs. Thechallenges associated with choosing service providers andsystems are formidable. Still, a number of ships are cross-ing the seas in spite of high waves and hurricanes. Morethan 100 companies have transitioned comprehensiveHR services to providers and most of these companies areon track toward completing their HRO goals. So whilethere are risks, there are also substantial rewards, and anumber of companies are learning to live with, and prof-it from, this dynamic marketplace. GS



Lowell Williams is the Executive Director of HR outsourcing and insourc-ing practice at EquaTerra. He has more than 26 years of internation-al HR outsourcing expertise, including account management, contractmanagement and executive-level HR project management. He hasadvised companies such as British Petroleum, General Motors, Goodyear,Marriott, Whirlpool and TXU.


oday, for many of largemultinationals, strategicglobal sourcing of serviceshas become a major deter-minant of financial perfor-

mance, customer service and marketpenetration. Many have set up theirown offshore operations as captivecenters, and are hiring their ownworkers. At the same time, all themajor IT-services companies, includ-ing Accenture, Capgemini, IBM,Infosys and Wipro, have one or moredelivery centers offshore. Businessprocess outsourcing has also flour-ished offshore, with the Philippines,China and Russia joining India in thecompetition for market share. As aresult of this rapid growth, an intensewar for talent has developed through-out the outsourcing industry. Ulti-mately, the practitioners face signifi-cant challenges across a broadspectrum of human-capital issues:

l Performance challenges exist atevery level. The acute talent shortageis not only a shortage of people, butalso a shortage of employees who havethe key competencies and subsets ofthose skills to fill positions throughoutoutsourcing operations — from seniorexecutives, to managers and team lead-ers, to individual employees. For

instance, senior executives may lackexperience managing growth or businesses over $50 million in rev-enues, evaluating and developing talent, creating high-performanceorganizations, and managing in amatrix environment.

l Critical leadership competencieswill take time to develop. The leadersof outsourcing organizations mustcreate a cadre of top executives, as wellas the next tiers of executives and pro-fessionals, with the right competenciesto succeed in complex and challengingbusiness environments. The Heidrick& Struggles competency model, a

proprietary tool validated by the firm’sexperience of assessing thousands ofexecutives around the world againstthe requirements of senior-level posi-tions, typifies the competencies valuedby global multinational companies.However, in many of the regionswhere outsourcing operations arelocated, some of the most importantof those competencies — such asvisionary leadership, the ability tocreate organizational buy-in, customerorientation and results orientation —are the hardest to find.

n Recruiting problems have led tohigh turnover. Many outsourcing

T

As of result of the fast growing strategic sourcing, outsourced servicesoperations in India, China, and other developing countries face a war fortalent that will ultimately determine their competitiveness. Savvyoutsourcing operations can win this crucial contest by pursuing acomprehensive talent-management strategy

A Comprehensive Talent Strategy


By Pravesh Mehra and Navnit Singh, Heidrick & Struggles International

Experts

COMPETENCY MODEL

SOURCE: HEIDRICK & STRUGGLES INTERNATIONAL

Less important

Eas

ier

to f

ind

Har

de

r to

fin

d

More important

l Best practice perspectivel Team leadershipl Creative thinkingl Openness of communicationl Managing innovationl External awarenessl People development

l Analytical thinkingl Conceptual thinkingl Internal awareness

l Driving resultsl Customer orientationl Visionary leadershipl Organizational buy-inl Modeling key valuesl Delegating and empowering

l Analytical thinkingl Conceptual thinkingl Internal awareness

IK_experts lead_KN_fin.qxp 7/21/2008 9:17 PM

operations lack sophisticated, scientificassessment processes. Moreover, due tocultural differences and attitudes, it isoften difficult to obtain reliable refer-ences. Nevertheless, because of theshortage of talent, many people arehired and promoted into positionsthat are beyond their capabilities.Recruiting problems often result insevere mismatches of candidates andjobs, leading to high turnover eitherbecause frustrated employees leave orthe company terminates them due topoor performance.

n Cultural and company differ-ences hinder the assimilation ofsenior-level executives into a newcompany. Such differences at an exec-utive’s previous employer often makeit difficult for senior executives toacclimate. Our research on leadershipin China indicates that when someonetakes a new job at a new company theprobability that he or she will stay formore than two years is about 50 per-cent, but when someone who hasbeen at one company for 10 yearstakes a new job at a new company theprobability of staying for more thantwo years plummets to 20 percent.Moreover, when an existing team getsa new manager, only 20 percent of theteam will stay after two years.

The “employer of choice” criterionvaries by country. Due to significantdifferences in cultures and values fromcountry to country, some outsourcingoperations, particularly captive ones,may have difficulty understanding thekind of company culture that is like-ly to attract employees at all levels. Forexample, American owners accus-tomed to an aggressive, action-orient-ed culture can unwittingly try toduplicate that culture in an offshore,captive operation in a locale that val-ues humility and obedience, and there-by falls far short of becoming theemployer of choice there.

l Compensation continues toescalate unreasonably. In the desper-ate search for talent, many companiesare over-titling positions and increas-ingly offering extremely high com-

pensation. In India, for example, com-pensation has been rising at the rate of16 percent annually in the IT-ser-vices industry. These large annualincreases in employee compensationhave forced companies to pay more forless value and to face an uphill battlefor retaining employees who may belured away by competitors offeringeven more money.

With competition for talent amongoutsourcing providers increasing, theseconditions will only worsen thus,intensifying the already daunting chal-lenges of human capital.

AA CCOOMMPPRREEHHEENNSSIIVVEE TTAALLEENNTT--MMAANNAAGGEEMMEENNTT SSTTRRAATTEEGGYY

This wide-spread talent-manage-ment strategy consists of five provenprinciples intended to address thespecific challenges of the services out-sourcing industry. These are:

l Build a result-oriented, perfor-mance culture. An organization’s leaders must do three things to drive results:

n Define strategies and adjust themover time

n Ensure that these strategies aretranslated into goals and tasks forindividuals, and

n Promote alignment and account-ability to continue to generate resultseven under changing conditions.

In defining strategies, the bestresults in an emerging, volatile marketalmost always come from open andactive debates among a group of individuals that include people with a wide range of relevant experienceand expertise.

The next step — translating strate-gies into goals and tasks for individu-als — is even more challengingbecause in order to translate largerplans into specific tasks, employeesmust apply judgment to determinewhat tasks will get the desired results.Developing plans demand real effortand dialogue, not simply handingdown instructions from above. Insteadof micro managing, it is more effectiveto communicate big-picture objec-tives relentlessly.

At the same time, however, leadersmust set clear, measurable goals tied tothose objectives and delegate respon-sibility for achieving them. To keepeveryone aligned and accountable,leaders need to model the requiredbehaviors visibly and communicatethem exhaustively, recognize andreward behaviors that matter most inthe business, and align compensationwith results.

l Manage the talent pool actively.The cornerstone of a successful talentstrategy is to identify the underlyingcapabilities that are most important


CRITICAL LEADERSHIP SKILLS TRANSITION POINTS

Major market player

Truly global business

SOURCE: HEIDRICK & STRUGGLES INTERNATIONAL

Strategicinvestor

Marketentry

l Sales backgroundl Pragmatic entrepreneuriall Expand/build relationships

l Technical + generalmanagement background

l Local market experiencel Manage large organiza-

tions, people

l General management +global experience

l Local political experiencel Effective communications,

matrix management

International Multinational Transnational



for success (such as intelligence, flex-ibility and willingness to learn, moti-vation), as well as skills needed to dojobs immediately (such as Englishlanguage ability, knowledge of keyprocesses, technical skill). Thestrongest companies have articulatedthe capabilities they need and have cre-ated rigorous screening processes toensure that they find them, and thusavoid mismatches of personnel andtasks. Leaders can also make a con-scious strategic choice about how toacquire the talent they need and pre-pare to invest significantly — eitherthrough developing it internally or hir-ing from other companies.

During a talent crisis, any approachto retention needs to address both,employees as a group and employeeswho show promise as leaders, to ensurethat there is talent to lead the compa-ny in the future. For example, talentreviews can be used to track the careergoals and development of high-poten-tial leaders and provide career guid-ance to strong performers.

Leaders need to develop approach-es for more important business and“soft” skills for their organizations.Skills such as effective communication,systematic thinking, taking owner-ship and project management are like-ly to be part of the agenda.

Many organizations seek to lever-age the distinct capabilities ofreturnees and native talent. In eithercase, management teams should beassembled carefully, with an eye toensure that executives with responsi-bility for operations are capable of

building a result-oriented culture. Inmany cases, the ideal managementteam may include returnees in rolesthat are significantly linked to theworld economy. The best leadershipteams have some productive tension inviewpoint and experience, and com-bine natives and returnees is one wayto achieve this mix.

l Rethink classic organizationalmodels. Instead of adapting the talentto the organization, adapt the organi-zation to the talent. Because preciselythe right mix of competencies in indi-viduals may be in short supply for fill-ing roles in classic, functionally struc-tured organizations, innovativecompanies can combine business unitsand functions in ways that fully lever-age the competencies that those indi-viduals possess. In addition, roles andresponsibilities can also be combinedto provide exceptional opportunitiesfor personal development.

Outsourcing organizations can alsoaddress the talent shortage by doingsome outsourcing of their own by having non-core or non-market fac-ing functions performed in othercountries in the region. Staff located inother nearby countries where the tal-ent situation is less competitive maybest fill basic research and develop-ment, IT, finance, and other func-tional roles that require advanced edu-cation and technical skills.

l Innovate the HR function.Working with companies of all kindsin regions where talent is in short sup-ply, it was found that the most suc-cessful organizations elevate the HRfunction to the highest level. Even, topleaders devote far more time to talentissues than ever before.

Strong HR leadership can alsoreduce the executional risk for orga-nizations by bringing rigor, consis-tency and quality to processes such asrecruiting, training, succession plan-ning and compensation that are essen-tial to effective talent strategies. Further, leading companies customizethese essential HR processes to alignwith their business objectives and create a results-oriented performanceculture. As with every other functionin such a culture, they hold HR leaders accountable for results anddon’t hesitate to leverage outside help,if necessary.

l Constantly evaluate capabilitiesof the CEO and the leadership teamat every stage. As the outsourcingindustry and individual companiesgrow, companies face difficult deci-


sions about what kind of leadershiptheir operations require for their stageof growth. At one time, such opera-tions evolved with the evolution ofglobalization itself — often movingalmost naturally from international tomultinational to transnational opera-tions as global trade was gradually lib-eralized. Now, after more than twodecades of globalization, outsourcingproviders could find themselves atany of those stages of evolution and besaddled with leadership that is moreappropriate to a different stage. Con-sequently, it is necessary to understandthe evolutionary stage of the operationand ensure that a CEO with rightskills for that stage is hired. Companiesthat fail to make those distinctions andhire accordingly can find themselvesfalling behind in one of the world’sfastest growing industries.

At the early or international stage ofdevelopment, when the goal is oftensimply to establish a beachhead in agiven region or strategically investthere, the name of the game is sales.Outsourcing organizations at this stageof development quite rightly assumethat they need a leader with a strongsales background in a similar market.Such leaders are pragmatic and entre-preneurial, with an ability to expandand build relationships. However, thequestion some companies often fail toconsider is whether a candidate’s trackrecord of success was built at a com-pany that was at a similar stage ofdevelopment. Someone who success-fully led a company at the moreadvanced multinational or transna-

tional stage of operations is not auto-matically well suited to run a compa-ny at the earlier, international stage.

As the operation makes the transi-tion from strategic investment tomajor market player, the leadershipfocus shifts to technical expertise, gen-eral management skills, and the abil-ity to manage large organizations withmany employees. Similarly, when theoperation is at the truly transnationalstage — as part of a seamless globalorganization — leaders should possessgeneral management and global expe-rience, local political skill, ability tocommunicate across cultures, and theability to operate effectively in amatrixed organization.

In fact, it is crucial to evaluate theCEO and the leadership team fre-quently and carefully, and undertake adisciplined, systematic search for tal-ented leaders not just for outsourcing

operations, but also for the particularstage of those operations.

In the end, companies in the out-sourcing space need to integrate localtalent aggressively into their global tal-ent-management processes to ensurethat key employees are considered forglobal assignments that could helpthem develop the skills they will need.Leaders of domestic companies, as wellas multinational companies, will need tofocus even more attention on managingtalent, adapting global practices forrecruitment, development and retentionto changing economic and culturalconditions.

Above all, senior business leadersshould ensure that they are acceleratingthe development of rising generation ofprofessionals — these are the mid-levelmanagers and the team leaders, who aremobile, scarce, and may not have theskills that are required to drive results.The success of the outsourced servicessector may ultimately lie in the outcomeof this generational story. GS


Pravesh is the Managing Partner of Heidrick& Struggles International, a premier providerof senior-level executive search and leadershipconsulting services. He has more than 20years of experience in management consult-ing, and has a proven track record of man-aging and growing businesses.

Navnit is the Partner India of Heidrick &Struggles International. He has over 20years of experience in HR, administrationand facilities management, IT, legal, com-pliance, corporate communications and man-aging large firms.

Co.s need to integratelocal talent aggressive-

ly into their global talent-managementprocesses to ensure

that key employees areconsidered for global

assignments that couldhelp them develop theskills they will need.


Which way do you go when benchmarking your provider’s pricing? Global Services presents a point and a counterpoint on whether theaverage quartile is the right benchmark

xperts

The Battle of Averages

t’s a common human trait: No onewants to be an average. Customers ofoutsourcing services are also no dif-ferent. They want better than averageservices for less than average rates. Yet

when it comes to pricing for IT services,making that better-than-average dis-tinction is more challenging than itmay seem for firms who measure it.

As it turns out, outsourcing cus-tomers, service providers and third-party experts have changed the wayprice benchmarking is conducted inthe outsourcing deals. These changesinvolve the realization that some formerbenchmarking practices, including thelimited use of “top quartile” or “lowestquartile” pricing standards (i.e. best 25percent), are not feasible in practice.Today’s improved methods allow for bet-ter, more accurate measures of an out-sourcing deal’s price competitiveness.

First, it’s helpful to understand howwe reached the current situation.

BBEENNCCHHMMAARRKKIINNGG HHIISSTTOORRYYPrice benchmarking of outsourced

IT services began in the late 1990s. Cus-tomers were signing long-term dealsbut were concerned that prices theyagreed to today might later becomedecoupled from market rates, especiallyas technology advanced and drove downcosts. To ensure long-term, competitiverates, customers began requesting theright to conduct periodic market-priceassessments to ensure the outsourcercontinued to deliver value for money.These contractual rights became knownas a contract’s benchmarking clause, aprovision giving the customer the rightto engage a third party to compare theprovider’s current prices against those inthe prevailing market. If discrepancieswere found, the provider might modifyits rates to better align with the market.

Often, a benchmarking clause willstipulate the level at which the pricecomparison should occur. As an exam-

ple, a benchmarker will typically selectfour similar contracts, or peers, as a basisfor the comparison. After “normalizing”the peers’ prices to adjust for inherentdifferences, the benchmarker calculatesthe average of the peers’ adjusted pricesto produce a market-competitive level.This simple average calculation is thebasis for the comparison and is theindustry-standard approach.

TTHHEE PPRROOBBLLEEMMEarly on, a few customers request-

ed better than average pricing in theirbenchmarking clauses. Statistical con-cepts such as “top quartile” or even“top decile” made their way into con-tracts’ benchmarking wording. Someoutsourcers and customers agreed tothese more stringent comparisonswithout a good understanding of theinherent limitations imposed by suchmeasures. In some cases, actual bench-marking results using quartile-

I


By Jedd Fowers, Senior Benchmarking Consultant, EDS

Average — the New Quartile

IK_experts_quartile_KN_fin.qxp 7/21/2008 10:40 PM

type comparisons showed radical andunexplainable discrepancies betweenan outsourcer’s price and the market;so different, in fact, that both the out-sourcer and the customer agreed thatsomething must be wrong. Thiscaused frustration — even lawsuits — as the parties debated over confusing and unworkable bench-marking outcomes.

WWHHAATT WWEENNTT WWRROONNGGSince it is mathematically impossible

for “all” customers to receive better thanaverage rates, benchmarkers and indus-try thought leaders realized that a mis-application of statistical norms was the

main cause of confusion.Statisticians agree that for calcula-

tions such as quartiles to have statisticalsignificance, the number of underlyingobservations (or peers) must meet someminimum. Most statisticians, accordingto the study titled Formal Benchmarkingin Outsourcing Contracts, by TechnologyPartners International (TPI), the indus-try’s preeminent outsourcing advisor, inMar. ’07, conclude that 60 or moreobservations are necessary to obtain asolid, robust result.

Herein lies the problem: Mostbenchmarkers only use four to six peersin their benchmarking studies. Theserelatively small peer groups are a func-

tion of most benchmarkers’ modestdatabase sizes, as well as the complexi-ty and variation inherent in modernoutsourcing deals. Indeed, it is rare fora benchmarker to find six contracts inits database that share enough similar-ities with the target contract for a rea-sonable comparison to take place.

Since benchmarkers could not pro-duce a statistically significant number ofpeers, a top quartile benchmarking resultfrom a small group (say, four peers) oftendictated that the outsourcer simplymatch the lowest-priced peer in thegroup. This statistically flawed approachoften led to disagreements.

Not only that, according to the saidstudy, because the benchmarking processinvolves sampling — an attempt toderive the qualities of a populationthrough a subset of that population —there is always some margin of errorimplicit in the result (a reasonable mar-gin of error is plus or minus 10 to 15percent). That margin of error is com-pounded when the results are furthersliced through quartiling attempts froma small group of observations.

In short, if statistical calculationsare used, statistical norms must apply.That wasn’t occurring in the past — aproblem that caused more than onesticky situation for customers and out-sourcers. These challenges would con-tinue without some course correction.

TTHHEE SSOOLLUUTTIIOONNModern price benchmarking prac-

tices have coalesced around a workablecomparison standard, one which is equi-table to both parties. Leading bench-markers’ price comparison products no



Handshakes, EyeballsReaders & Viewers

Empowering the Knowledge Nation

ad_strip_1.qxp 7/15/2008 4:08 PM Page 20

longer include quartiling (or other percentiling) approaches.Instead, benchmarkers use the normalized average (or mean)price of a group of peers as the optimal comparison level.

TPI supports this approach and also points to the need forrecognizing a margin of error in the outcome. Effectively, thisprocess produces a reasonable price range within which theoutsourcer’s price should fall.

Does this mean that the post-benchmark customers arebound to get mediocre pricing and services? No! In fact, quitethe opposite can occur. If done right, a benchmark can pro-vide a good measure of the “right” price for the specific ser-vice in question, especially when the benchmarker uses peerdata from outstanding outsourcing contracts. Also, pricing is

just one of the many factors that determine the overall healthand competitiveness of an IT outsourcing deal. Customerscould also consider broader questions such as “do we have thebest operational solution for our needs?” and “how does ouroutsourcing governance practice compare to others?”

Viewing and benchmarking a deal holistically — consid-ering the “overall” value from a price, performance and rela-tionship perspective — is the best path to achieving “best prac-tice” outsourcing success.

Jedd is a senior benchmarking consultant with EDS and a veteran of theIT-services industry for 13 years. He has consulted over 300 clients onbenchmarking and pricing matters.


By Scott Feuless, Senior Consultant, Compass

Average isn’t a Good Enough Quartile

enchmark analyses of out-sourced IT services are acommonly accepted methodto assess the value deliveredby a provider. Typically man-

dated by contractual clauses in theagreement, and executed periodicallythroughout the contract term, bench-mark reviews measure and evaluatewhether services are being delivered fora fair market price and at the appro-priate level of quality. Conducted in thecontext of prevailing industry stan-dards, benchmarks can help manage thecomplexities and challenges of out-sourcing contracts by providing amuch-needed reality check in a rapid-ly changing environment.

One longstanding point of con-tention in the benchmarking process ishow best to define the measurementstandard for the analysis. Specifically,should the contract in question becompared against a blended average ofsimilar agreements? Or should a high-performing group of peer organi-zations constitute the point of reference in assessing the value of services delivered?

Some recent reports argue that, fora variety of reasons, average levels ofperformance are the most appropriatemeasure to apply to a benchmarkingexercise. One recent article in Global

Services states that it’s “mathematicallyimpossible” for all outsourced cus-tomers to receive above average rates.But should customer organizationsreally be expected to invest significantresources in an outsourcing relationshipjust to achieve “average” performance?And how many providers would cite astheir value proposition the ability todeliver only average pricing and servicequality over the long term?

A more specific problem with usingaverages as a comparative standard isthat the deals that are benchmarked bythird parties are often problematic tobegin with. As such, using the averageof a pool of benchmarked contracts islike saying that the average behavior ofall the kids sent to the principal’soffice should be used to define the

standard for behavior of students at anelementary school.

Some have also argued that bench-markers use only a handful of peer con-tracts (four to six in most cases) todefine a comparative reference group,and that such a small sample is a sta-tistically inaccurate way to define topperformers – specifically, “top quartile”or “top decile” peers.

That’s a bit misleading. When “topquartile” is a contractual requirement,a benchmark applies “all” available andappropriate data for the particular ser-

vice or operation being analyzed todefine the category of top performance.So, depending on the specific opera-tion, this might be, say, between 20 and100 data points. All of those points areused to determine what qualifies as “topquartile” (or whatever criterion is spec-ified in the contract). Once that isdetermined, four to six points areselected within the top performingrange so that statistically meaningfulaverage values can be extracted.

An effective benchmarking analysisrecognizes that it is unrealistic andcounterproductive to expect everybenchmarked function to fall withinthe “top quartile” or “top decile” cate-gory. In a real-world environment,high performance in one area is oftenoffset by higher costs in another. Forthis reason, a big picture perspective isessential — a benchmark process thatfocuses too much on narrowly definedfunctional areas risks missing the forestfor the proverbial trees.

Ultimately, the debate over how to

B


define categories of performance inquartiles, deciles, or other measures isof secondary importance. If the pur-pose of the benchmark exercise is toassess the value of existing services, thencomparison against above average per-formers and leading practitioners —however defined — provides a clearerpicture of performance, and, moreimportantly, of how to establish goalsand priorities for improvement.

The fact is, unit costs for technolo-gy products and services are continuallychanging. Top performers use bench-mark results to adjust deals according-ly over time, while below average per-formers fail to keep pace with therapid change of industry standards.

EELLEEMMEENNTTSS OOFF AANN EEFFFFEECCTTIIVVEEBBEENNCCHHMMAARRKK

It’s true that outsourcers, customers,and third-party benchmarkers areevolving in their approach to managingthe measurement and evaluationprocess, with the overriding objective ofusing the initiative to enhance strategicvalue. Compass has defined the fol-lowing criteria as essential to an effec-tive benchmark exercise.

Database or reference group:Establishing an apples-to-apples contextfor the comparison is critical. Specifi-cally, the environments the customer iscompared against should be reasonablycomparable in terms of size, scope,complexity, and other factors.

Adjustments: Even when the orga-

nizations comprising the comparativereference group are very similar to thecustomer organization, some normal-ization of scope, quality, and pricing ofservices will be required. These adjust-ment calculations can be based eitheron prices extracted from existing out-sourcing contracts, or on costs incurredby internally managed organizations,but a database of costs that is granularto the functional level is an absoluterequirement for use as a basis for accu-rate adjustments.

Transparency: Both the providerand customer organization should haveaccess to information regarding thereference group and the nature of anyadjustments. Specifically, all partiesmust have a clear understanding of howpricing targets are defined, what goes

into the calculation of those prices, andif and how adjustments are made.However, as both parties must be will-ing to accept the benchmarker’s cus-tomer confidentiality requirements,transparency has limits.

Profit motive: Customers mustrecognize that providers must make aprofit for the relationship to be suc-cessful. This means that a providerwho can deliver services for signifi-cantly less than prevailing market ratesshould reap the benefits. For example,if $10 per call constitutes a fair mar-ket price for help-desk services, then acustomer should agree to pay thatrate — even if a provider is able todeliver services for $5 per call withcompetitive quality. This type of stip-ulation is essential to motivateproviders to support benchmarkinginitiatives and to invest in innovation.

The ultimate objective of a bench-mark initiative should be strategic andconstructive, and not merely an oppor-tunity to knock 10 percent off prevail-ing prices. The focus should be on howto deliver best value, maintain com-petitiveness, and identify new oppor-tunities to innovate. With these objec-tives in mind, customers should neversettle for “average,” because “average”can always be improved.

Scott is a senior consultant with Compass, aglobal management consulting firm that pro-vides third-party benchmark analyses of out-sourcing agreements.

GS


One recent article ofGlobal Services statesthat it’s “mathemati-cally impossible” for

clients to receiveabove average costs.But should clients beexpected to invest in

outsourcing to achieveaverage results?

Best Sourcing Advisory FirmWhat value do the sourcing advisory firms bring? What roles do they

play? How important are they to the success of a sourcing deal?

For advertising opportunities, contact Satish Gupta at [email protected]

Find out in Sept. '08 issue!


B

www.osourcebook.com

The OSourceBook 2008 Web edition is now live. Search for global outsourcing providers by name, location, industry, services, and more at your fingertips.

Despite a significant investment in eProcurement, eSourcing and such,not many organizations have been able to draw cost and efficiencybenefits in indirect supply chains. However, as such systems become moresophisticated, how people use these systems to support their businessprocess will also evolve

xperts

Strategic Sourcing for Indirect Spend

trategic sourcing can deliversignificant cost and efficiencybenefits in both direct andindirect supply chains. Whilstmany organizations have

achieved this for their direct supplychains, they failed to do so for theirindirect goods and materials. Why didthat happen?

This is primarily because organiza-tions are unaware about what theyspend, with whom, when or how. Thisis despite the fact that significant invest-ments have been made in eProcure-ment, eSourcing and spend analysis /management tools. So what has gonewrong?

In our work with organizations, inboth the government and private sectors, the common theme that runsis their eProcurement environmentsthat are not able to deliver the basic data required to use a strategic sourcing approach.

The provision of accurate content ina timely fashion linked with the use ofelectronic transactions for all parts ofthe procurement process are the keys todelivering this data. We believe that on-demand supply chain infrastructuresare best placed to deliver this data, pro-viding quick-win benefits and enablingstrategic sourcing approaches for indi-rect supply chains.

CCOONNTTEENNTT ((AANNDD CCOONNNNEECCTTIIVVIITTYY)) IISS KKIINNGG

Motor manufacturers were usingstrategic sourcing years ago for theirdirect supply chains; in fact many peo-

ple claim that General Motors startedthe whole approach in the 80s. The rea-son they could use this approach wasthat they knew exactly how many wid-gets went into a car, where they boughtthem from and at what price; they hadbig manufacturing and MaterialsResource Planning (MRP) systems thatheld the information. However, eventoday, whilst these companies can tellyou how many washers they buy, theycannot tell you how many PCs they buy.

The fundamental building blockfor employing a strategic sourcingapproach to any commodity is data.You have to know what you buy, fromwhom, when and at what price, beforeyou can even begin to think aboutemploying this approach.

A properly implemented eProcure-ment environment can help achievethis, but only if it has the capability todeliver this basic data. The componentsneeded to achieve this are:

l A purchase-to-pay tool to captureyour demand

l A correctly coded catalogue ofgoods and services

l Integration to your providers for electronic purchase orders andinvoices

l A data warehouse for managementinformation.

The two most difficult to achieveare properly coded catalogues andprovider integration into the procure-ment process.

PPRROOVVIIDDEERR AADDAAPPTTAATTIIOONNThat’s not a mistype. Provider adop-

tion is hard work, and there is no silverbullet to the process. For provideradoption to be successful, providers andtheir customers have to learn to adapt.

The first thing to remember is thatproviders are businesses too with theirown system and processes. The intro-duction of any new IT system to anorganization can be a painful experi-ence, but today providers are receivingan increasing number of requests toprovide electronic catalogues and inte-grate their back-office systems to theircustomers’ eProcurement systems.They, like you, have limited IT bud-gets and have to prioritize their activ-ities to suit.

eMarketplaces have received somebad press over the years, but ultimate-ly they represent the only long-termoption for provider integration for indirect expenditure. They providepre-populated environments withproviders pre-enabled and — depend-ing upon the commercial model chosen— offer the least cost and fastest routeto adopt new providers as they are morelikely to integrate with something thathas the potential to connect them tomany customers rather than just one.There are obvious parallels in the directsupply chain, where the EDI Value-added Network providers still dominaterather than every customer andprovider directly interconnecting theirsystems. At the end of the day, it comesdown to working with your providersto help them adapt to electronic trading and make sure that they getbenefits too.

S


By Paul Clayton, ProcServe

IK_experts_PAConsulting_KN_fin.qxp 7/21/2008 9:20 PM

CCOODDIINNGG –– HHOOWW LLOOWW DDOOYYOOUU GGOO??

The coding of products and servicesis important in two areas. Primarily itensures that the management infor-mation is useable. Additionally, itmakes these products and services com-parable by the users making the pur-chasing decisions. However, codingcatalogues for an eProcurement systemis, to be polite, problematic.

Firstly, you need to decide on a cod-ing scheme / standard that is capable ofmeeting your needs in terms of breadthand depth, i.e. it covers a broad enoughrange of products / services to a suffi-cient level of granularity. Secondly,you have to get the items in your cata-logues coded. You can ask your providerto do this or do it yourself, either waythis is a significant piece of work,which, in our experience, is actuallybest left to the providers — they willknow more about their products / ser-vices than you.

Finally, you must decide to whatlevel of granularity you want the prod-ucts and services coded. This is a diffi-cult balancing act between the need tohave sufficient granularity to makemeaningful and beneficial sourcingand procurement decisions versus theeffort that it will take to code theproducts/services. For most organiza-tions, the granularity required will varybetween product groups.

EESSOOUURRCCIINNGG —— AA DDAANNGGEERROOUUSSHHAABBIITT??

It is important to note that when we

talk about an eProcurement environ-ment to enable strategic sourcing, weneither mention anything abouteSourcing (eTendering, eAuction andeEvaluation) nor spend analysis / man-agement tools. These tools can, withoutdoubt, provide obvious cost benefitsand process efficiencies — everyoneloves to watch the prices plummetingon a reverse auction (particularly theFinance Director). However, they canlead to complacency. For example,spend analysis and management toolscan only provide you with educatedguesses at what you should spend yourmoney on, if the basic data is notthere. There is no doubt, however,that once a properly implemented Pur-chase-to-Pay environment is in place,they can provide substantial benefits tothe sourcing process.

PPRROOVVIIDDEERR PPEERRFFOORRMMAANNCCEEFinally, there is the underutilized

contract-management system. Mostorganizations today are using thesesophisticated tools as a documentrepository for Ts & Cs and the closestthey get to contract management isenabling you to work out how muchof a rebate a provider owes you fromthe amount you have spend with them(this data normally being extractedfrom the general ledger). An ePro-curement environment whereproviders are fully integrated canunlock the potential of contract man-agement tools as it is easy to track:

l What you ordered (purchaseorder)

l What the provider agreed to sendyou and when (purchase orderresponse / fulfillment advice)

l What you actually received andwhen (goods receipt note)

l What you were charged (invoice) l When you paid and how much

(remittance advice / credit note). Managing a contract will not gen-

erate benefits. On the other hand,using contract management to helpimprove provider performance will.

TTHHEE FFUUTTUURREE IISS BBRRIIGGHHTTAs eProcurement systems, and in

particular eMarketplaces, becomemore sophisticated, how people usethese systems to support their businessprocess will also evolve. Today, we arealready seeing a small number of userslooking at how eProcurement systemscan be used to change their core business processes.

The graphic represents how we areseeing this evolve. Starting on the leftwith basic procurement-process work-flow, moving through the more complex provider integration of today’s more advanced eMarketplacesthrough to genuinely differentiatingbusiness processes underpinned withsophisticated eProcurement andeCommerce infrastructures. GS


Paul is the head of business development forProcServe, an electronic trading and eProcure-ment Service Provider. ProcServe provides fast,flexible and secure managed services to help cus-tomers and providers trade more effectively witheach other.

EPROCUREMENT

SOURCE: PROCSERVE

eProcurement eMarketplaceProvider integration

Supply chainintegration

Advanced supply chain

Purchase-to-pay workflow

only

Some electron-ic content,transactionsby email andfax

Full electroniccontent andtransactionsfor procure-ment

Integration ofall supply chainsystems includ-ing procure-ment, ware-house, ERP andfinance

Inter-market-place infra-structure, notouch fulfill-ment, BPOsupport ser-vices

IK_experts_PAConsulting_KN_fin.qxp 7/21/2008 9:20 PM

xperts

While Kerry was more vocal about offshoring, Obama has somereal plans for creating jobs in America. That way he has a muchbetter chance of making it to the White House. The outsourcingfraternity should plan for an Obama regime, rather thancountering anti-offshoring slogans, as it did last time around

The Difference Between Obama & Kerry

o far, Barack Obama has pro-jected the fact that he is anoutsider, and has played it tohis advantage. So, while toe-ing the age-old democratic

lines, he has given a fresh perspective onmany of those issues, arguing themcogently, which has appealed to thecommon people and intellectuals alike.While he has intermittently referred tooffshoring — or more correctly Amer-icans losing jobs — he is yet to take itto the center stage.

While many in the outsourcingindustry like to believe that this indi-cates he has no plans to make it amajor election issue the way the 2004presidential candidate John Kerry did,one believes that is too simplistic anargument. There are two reasons whyit has not figured prominently in hiselections speech so far. One, of courseis, so far, his agenda was to differenti-ate himself as much from the Repub-licans as from senator Clinton. Theother, unlike Kerry in 2004, Obama istaking on a much more unpopularRepublican regime, which has failedon all fronts. So his list of issues tohighlight is much longer than Kerry’s.In fact, in 2004, even in an issue suchas Iraq, the opinion of America wasstill divided.

So, I think it is safe to assume thatoffshoring will get less attention thanit did in 2004. But to believe thatObama has a fundamentally differentviewpoint on offshoring would benaïve. One can safely conclude that

from his limited but not sparse com-ments about American job loss.

Apart from the changed external cir-cumstances, where Obama is funda-mentally different from Kerry is that hehas demonstrated an urge and ability tologically argue his viewpoints, ratherthan resorting to jingoism. Kerry, likemost politicians in most democracies,took to jingoism.

So, if and when Obama raises off-shoring as an issue, it is safe to assumethat he will ask fundamental questions,which are not taken from Lou Dobbs’show. The question is: Is the corporateAmerica ready with those answers? Forexample, quite a few businesses havetaken to outsourcing to impress the ana-lysts. They themselves do not under-stand anything beyond the wage of anAmerican worker and an Indian work-er. It will be difficult for them to explainwhy in the long term, outsourcing is agood idea, and why they need to goglobal. Obama could ask that.

Obama, the democratic presidentialcandidate, however, has little time to askthose questions. (By this time in 2004,

even Kerry was tired of these issues.)Barack Obama, the President of theU.S., will have no such time constraints.

He has already outlined how hewants to tackle the issue of job loss.Instead of jingoistic slogans againstoffshoring, Obama has advocated taxand other incentives for corporationswho create jobs in America. In fact, thereason he has refrained from too radi-cal stances on many issues is because heknows he has a much better chance ofmaking it to the White House thanKerry had. That is another differencebetween him and John Kerry.

While McCain as president willcarry on with the policies of Bush,Obama as president will start afresh. Ifhe introduces tax incentives for creat-ing jobs in the U.S., outsourcing per sewill not be affected, but the econom-ics of offshoring will change. Yes, formany reasons (including even cost)corporations will still offshore, butbusinesses of certain size and in certainsectors, will have to reassess their offshoring strategy.

In India, the association of IT-ser-vices firms, Nasscom, has said that itdoes not expect the U.S. elections toaffect the IT business that comes toIndia. One tends to agree.

Elections will not affect the business too much. Can we say thesame about the policies of the newU.S. president? GS

S


Shyamanuja is Editor, Dataquest, CyberMedia.

By Shyamanuja Das

While McCain asPresident will carry on

with the policies of Bush,Obama as President will

start afresh.

IK_expert-shyamanauja_KN_fin.qxp 7/21/2008 9:22 PM

xperts

One of the latest trends in finance outsourcing is that CFOs areseeking an integrated service delivery approach to outsourcing,instead of a piecemeal approach, to gain greater efficiency,effectiveness, and control and compliance of their finance andaccounting (F&A) business process

Choosing the Best Outsourcing Approach

or the purpose of this article – sothat readers could get a sense ofthe current “best” approach tooutsourcing – I sought the opin-ions of two global outsourcing

service provider executives who dealregularly with CFO issues. I interviewedFAO Research clients Krishna Nacha,Chief Sales & Marketing Office of EXLService, and “Tiger” Tyagarajan, Execu-tive VP of Genpact. Both subject mat-ter experts have daily interactions in arelated landscape with CFOs and othersourcing decision makers seekingimprovements in their operations.

My EXL colleague, Nacha, believesthat the next step jump in FAO is byintegrating transformational F&A ser-vices with transactions outsourcing.Today, the transactions offshoringapproach provides economies of scalethat enable cost reduction. It enablesintegration with a set of uniquelydefined finance function-transforma-tional services, such as risk advisory,process excellence, research and analyt-ics. The key to this approach is the abil-ity to bring to the customer an Inte-grated Transformational Outsourcingmodel, through one contract, one set ofSLAs, one program management andgovernance mechanism, and eventuallyone integrated blended price.

Why does he believe that EXL’s inte-grated approach has worked for its CFOcustomers better than just the standard,labor arbitrage only model?

l Process excellence is embeddedinto all stages of the process outsourcing

l Don’t have to wait to “fix” a processbefore you can engage in outsourcing /offshoring

l Knowledge sharing across the “con-sultants” and “operations” is inherent

l Single point of responsibility foroperations, ongoing improvements andtransformation

l Dual-shore global delivery modelfollow the sun model for integratedservices.

In my discussion with Genpact,Tiger believes that rather than transfor-mation being a one-time, “Big T” event,it should be comprised instead of a seriesof “little t’s.” A multiyear roadmap withmilestones of transformation has a bet-ter chance for success. By taking thisapproach, buyers could look at theirbusinesses down the road and think,“Gosh, we really have changed things!”This latter model to FAO lowers risk,accelerates payback and delivers cer-tainty of transformation.

He believes that transformation

should be a continuous journey, one thatGenpact has taken with its customersgiven that 80 to 85 percent of its growthcomes from existing customers. His phi-losophy is that if an outsourcing serviceprovider builds a successful relation-ship with its customers, then the cus-tomers are likely to continue to handover additional responsibilities to theprovider. When the provider has own-ership of a larger process, it can “connectthe dots” and help the customer achievebusiness impact. He believes that themore you undertake (as a serviceprovider) – “to completely encircle thecustomer” – the more you can bring realvalue over time.

My overall conclusion is that thereis no one, “best” approach to out-sourcing. Companies have differentcultures, operating environments andindustry requirements to warrant stan-dards as related to the FAO lifecycle.Especially in an economically con-strained environment, companiesshould strive for the best transforma-tion via outsourcing in which theypartner with a provider who sharescommon driven goals. The provider-customer relationship should always beviewed as a journey. GS

F


Lisa is the CEO and founder of FAOResearch, an independent research firmfocused exclusively on the FAO and procure-ment outsourcing markets. As a leading ana-lyst in the outsourcing industry for more than12 years, she works closely with customers,advisors and providers of outsourcing services.

By Lisa Ross, CEO, FAO Research

Companies shouldstrive for the besttransformation via

outsourcing in whichthey partner with aprovider who sharescommon driven goals

expert-Lisa Ross_KN_fin.qxp 7/21/2008 9:25 PM

Execs managing outsourcing relationships have never been facedwith more challenges. With growing reliance on their providers todeliver, greater scrutiny by boards and their auditors, and such,driving change deep into firms, execs governing outsourcingrelationships have become a lightning rod for criticism

xperts

Dodging the Outsourcing Landmines

he following recommenda-tions provide a guide fortoday’s corporate executiveto avoid multiple landmines,when considering or manag-

ing outsourcing environments:Make the board a stakeholder before

outsourcing. Corporate Governance ison the mind of every CEO and boardchairman. Audit committees are probingever deeper into day-to-day operationsand they are directing external auditorsto increase scrutiny of controls. It would,therefore, seem ludicrous that seniorexecutives fail to stakeholder boardmembers before large outsourcing dealsare executed, but many do.

Once you have developed a strongcase for implementing an outsourcinginitiative, getting board-level buy-in isnormally a straight-forward process.Building advocacy of outsourcing longin advance of outsourcing a depart-ment, is a best practice because out-sourcing is truly about acquiring corecompetencies and building competitiveadvantage in pursuit of the strategic cor-porate agenda. Asking for forgivenessfrom a board that is angry about beingexcluded is certainly a risky proposition

Manage your customers. An out-sourced department services can haveeither internal customers, external cus-tomers, or both. Executives routinely failto communicate outsourcing eventseffectively to key customers with suffi-cient detail to set and manage expecta-tions. While it’s certainly not alwaysessential to manage all external cus-tomers’ expectations, managing the

expectations of key customers is vital.Almost as important, great executivesremember that perception is reality, andthey check-in with key customers on aregular basis.

Constantly measure your progressagainst the initial outsourcing objec-tives. Whether intentional or not, manyexecutives fail to track results against out-sourcing objectives. This could be theresult of failing to have concrete, mea-surable goals, or simply avoiding theeffort. Managing an outsourcing rela-tionship to achieve accountable goals isa tremendously arduous challengebecause many forces work against exec-utives, namely expensive change ordersare often necessary to adapt to new busi-ness processes; providers continuouslyseek opportunities to increase pricing;and companies become frighteninglyreliant on providers after knowledgecapital has migrated to the provider.

Successful executives have clear, mea-surable goals. They regularly measureagainst the outsourcing relationshipand they manage their goals. Whengoals need to be changed, you shouldhave formal, documented procedures formanaging this change, which frequent-ly requires you to build board or cus-tomer support.

Hands-on provider management isimperative. Many executives are com-fortable managing employees. Seniorexecutives are familiar with delegatingresponsibility to a subordinate whoseown subordinates will work hard toachieve the stated business objectives.Progress against these tasks is easy to

obtain and measure. Well, managingproviders is an entirely different, incred-ibly more complex proposition becausethe provider, although they would sug-gest otherwise, works for himself, andtherefore has his own priorities, whichmay not be identical to yours’. Chang-ing priorities now require change ordersand lawyers. Progress cannot be easilymeasured, and significant challengesexist in gauging compliance with con-tracts, because the provider may operatefrom a foreign country.

Executives who fail to employ hands-on provider management are likely to besurprised when service levels are notachieved, security lags, and objectives arenot met. You must recognize the chal-lenge and assemble a team of knowl-edgeable, experienced provider man-agers whose sole objective is to ensure theproviders achieve their goals. And if youdon’t have the right people to do this foryou, you must go out and hire them.

Be wary of the low-cost countrybandwagon. The number of providersand countries touting the “next greatoutsourcing destination” can becomeoverwhelming. What started off inCanada, moved to India and traveled tothe Philippines and Costa Rica. Eachcountry has experienced movementfrom “tier-1” cities to “tier-3” cities ascompetition for low-cost labor acceler-ates attrition and salaries. Argentina,Brazil, China, Eastern Europe, the Mid-dle East, and a variety of developingcompanies now loudly tout their highunemployment, skilled labor and taxincentives. Remember, they, too, will

T


By Phil Fersht

ik_experts_phil fersht_KN_fin.qxp 7/21/2008 9:50 PM

experience similar cost increases andmigrations to lesser-known cities.

Constantly chasing incremental costsavings may be enticing, but the hiddencosts of transitioning to new countrieswith the same or a different providerhave bitten many outsourcing executivesin the past. Also, to start-up providerfees, training costs and travel expenses,service is likely to lag behind current lev-els due to learning curves. The costs ofall these elements can often eliminatemost of the first couple of years’ of sav-ings — at which point your new coun-try may experience the same problems asyour last country and price increases willeliminate your future savings.

Make sure you have obtained exhaus-tive customer references and conducteddiligent research over a period of timebefore moving services to new loca-tions. And remember, outsourcing is alonger-term proposition, and not simplya series of quick cost-savings hits everytime a cheaper locale comes along.

Remind yourself everyday that yourprovider is not really your partner. Yes,you have to develop deep relationshipswith them, but, like it or not, providersare not partners. Developing a trustedlong-term relationship is extremelyimportant to the success of your out-sourcing engagement, but ultimatelytheir employees are loyal to their ownmanagement, not yours. Highly incen-tivized salespeople actively seek oppor-tunities to deepen relationships in anattempt to head-off competitive RFPs bygrowing business “organically.” Manyproviders have dedicated contract nego-tiation teams and use specialized outsidelaw firms in an attempt to maximizetheir profitability and minimize risk.

Ultimately, you are buying a servicethe provider sells and a good executivenever forgets that. No matter how wella provider performs or ingratiates itself,the only thing that matters is that thecustomer is receiving consistently highquality service provided with a smile.

Negotiate contracts effectively andconsider using a third-party adviser.Naïve executives fail to understand thecomplexity of outsourcing contracts.Under the pressure to “get the deal

done,” many executives focus on keyprice terms, but neglect rest of the deal.

Providers, on the other hand, nego-tiate outsourcing agreements for a livingand their standard contracts (the onesthey hand to you to start a relationship)are seldom written in the spirit of “part-nership.” Provider sales executives arewell-trained masters of creating negoti-ation leverage. Good sales teams math-ematically predict the probability ofwinning a deal — that’s how experiencedproviders really are. Even more worryingare executives’ procurement and legalteams who are probably inexperiencedwith complex contract negotiations.Make sure you are properly equipped tonegotiate these contracts.Engage a third-party adviser that spe-cializes in negotiating complex out-sourcing deals if you do not have theinhouse expertise or legal counsel to dothis for you. Even if you are sole-sourc-ing an outsourcing engagement, a third-party adviser can help negotiation servicelevels that help drive quality, lower costand higher performance into a contract,and not simply squeeze down theprovider’s costs.

Focus on driving value from yourprovider at every opportunity. Whileinnovation is frequently a loosely usedterm, outsourcing does provide anopportunity to develop a long-termtraining ground for your company toaccess and acquire new skills, accessprocess acumen and better technology,in addition to driving out cost on anongoing basis.

However, you must use the tools atyour disposal to ensure your provider isconstantly keeping your costs at a min-imum and adding real business value toyour outsourced department by upgrad-ing your technology regularly andadding rigor to your business processes.This includes guarantees that they willdevote Six Sigma black belts to yourengagement, focus on refining processflows over the duration of the contract,and work with your staff to drive outcosts and eliminate inefficiencies. Ensurethey are keeping your technology appli-cations and tools upgraded on a regularbasis. As mentioned above, this is not

going to happen simply through thespirit of partnership.

Get key people on board your trainacross the enterprise. The impact of out-sourcing reaches all corners of yourorganization. However, in an effort tomaintain the confidentiality of an out-sourcing initiative, many executives failto communicate to key internal teams,including IT departments, HR depart-ments, corporate communications, andpublic affairs. The result is that theseteams are frequently left with insufficienttime to support the initiative. Experi-enced executives assemble a small teamof key resources to manage media rela-tions, communicate with governmentofficials and agencies, and determinelegally defensible methods of selectingemployees who will be impacted by out-sourcing — and to manage their transi-tion or severance packages. The bestexecutives communicate with peers andkey employees in order to seek oppor-tunities to place key employees withinother departments.

Take your time to get this right.There is little doubt that today’s com-panies place a premium on achievingresults quickly. Many outsourcing exec-utives who seek quick cost saving oppor-tunities will rush through the key assess-ment, provider selection, negotiationand implementation tasks. Invariably,implementations go awry and providerrelationships sour. The reason is simple:Outsourcing is too complex, has toomany stakeholders, and relies on toomany resources within a company andthe provider to skip tasks or avoiddetailed analysis, planning, and testing.Conducting a business case to find cost-savings is the easy part — executing onachieving this end state, a reality, isanother challenge altogether and it isyour job to do that. GS


Phil is Director of Research for BPO, off-shoring and IT sourcing at AMR Researchwhere he advises tbe buy-side clients on out-sourcing strategy and vendor selection. In thepast, he has worked with Deloitte Consult-ing as Senior Executive for OutsourcingAdvisory Services, where he led numeroussourcing relationships with Fortune 500s.

ik_experts_phil fersht_KN_fin.qxp 7/21/2008 9:50 PM

There has been an ongoing notion that outsourcingcauses dearth of employment opportunities for citizens in rich countries. They are becoming less productive andless educated than workforces in developing nations. Howtrue is this fact? Let's find out

he latest debate in the Econ-omist magazine’s on the“Future of Work” starts likethis: “A spectre is hauntingthe Western world. The spec-

tre of fear. Fear that the middle classes arelosing out, and while their economiesmay still be growing, the rising tide nolonger lifts the majority of boats.” —Jacon Funk Kirkegaard, Peterson Insti-tute for International Economics.According to Kirkegaard, the sky isfalling on talent in the West. We costmore, are less productive and are becom-ing less educated than the workforces indeveloping nations. For reasons thatare less than clear, he believes that “therecently freed markets of the East (name-ly Russia, China and India) are morethan a match for those in the West:”“…the world economy is finally trulyglobal and the implicit protection forWestern workers from the self-imposedeconomic exile of billions of potentialcompetitors is irreversibly gone”.

I wasn’t aware that we ever neededprotection. In this line of reasoning,wouldn’t the UK economy have con-tracted after Eastern European countriesjoined the EU? Or Canada and the USafter NAFTA? As everyone knows, theopposite occurred in both cases.

The proposition that globalizationand the “offshoring” of work to devel-oping countries is harming workers indeveloped “rich” economies is patentlyfalse. Employment levels in the UK,

North America and Australia, for exam-ple, have been higher ever since “glob-alization”. And, while wage rates havebeen mostly flat in many rich countries,buying power, mainly due to the avail-ability of cheap manufactured goodsfrom China and elsewhere, has grown.

Workers in rich countries, particu-larly “knowledge workers” and skilledtechnical workers, have remained com-petitive despite more than two decadesof globalization and inter-continentalfree trade agreements. Their competi-tiveness lie largely in the advantages richcountries enjoy in language, infrastruc-ture, technology, innovation, creativity,and in most cases, productivity.

Since the modern services offshoringindustry began in about 1997, unem-ployment rates for knowledge workers inthe US have hovered between 2 to 3 per-cent, well below what economists defineas “full employment”. Employers fromDallas to Manchester to Auckland haverepeatedly and consistently bemoaned

the lack of domestic talent — despitehigher post-secondary enrolment ratesthan ever — even during the post 9/11economic downturn. For skilled tech-nicians and tradespersons, simple demo-graphics in rich countries have drivendown their supply, increased demand fortheir services and greatly acceleratedtheir wages. Even for lower-skilled work-ers in the services industry, employmentopportunities abound — it is difficult,after all, to offshore bartending services!

Ironically, today’s spiraling cost ofenergy is creating a reversal in the for-tunes of rich nations’ manufacturing sec-tors. The manufacturing that hasremained in rich countries has createdcompetitive advantages through automa-tion, resulting in more highly skilledcompetitive workers, by focusing onhigher end manufacturing.

Perhaps the best evidence to close thisargument once and for all is the fact thatthe US, Canada, the UK and other rich,Western European countries themselvesrank among the top 40 worldwide des-tinations for offshore work — the US is11th on the list according to a 2005 eval-uation by A.T. Kearny.

To join the debate, please visit:http://blog.thetalenteconomy.com/. Com-ments are always welcome. GS

xperts

Proposition: Competitiveness of RichCountries’ Workers in Decline

T


Lori is Founder and President, DNL Global,a talent-management solutions provider. Allanis President and Executive Director, HumanCapital Institute.

By Lori Blackman and Allan Schweyer

Ironically, today’s spiraling cost of

energy is creating areversal in the for-

tunes of rich nations’manufacturing sectors

expert_optimizers_KN_fin.qxp 7/21/2008 9:52 PM


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