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November 2010 Vo lume 2 , I ssue 2

FEATURES

ARE YOU BEING SERVED?

by Ed NairNew rules for the services organization

10

23

STRONG CONTRACTRESTRUCTURING LEADS WEAK Q3by Sruthi RamakrishnanRestructuring of contracts heavily influenced the last three quar-ters, and will continue to influence Q4

25ARE ‘ON-DEMAND’ CALL CENTERS INDEMAND?by Vijay VenugopalanMore and more organizations are buying/exploring On-demand solu-tions, the economic situation has fuelled the desire to go on-demand

19

PROCUREMENTOUTSOURCING –CHINA'S MISSEDOPPORTUNITYby Pratibha VermaPO, which is still not mature in China, is growing at a slow pace.Due to this its capabilities are untapped by many companies

21THE IT OPPORTUNITY IN HEALTHCARELEGISLATION

by Sruthi RamakrishnanIT reforms are an important and integral part of the reformsplanned under the Patient Protection and Affordable Care Act

17THE SKY'S NOTFALLING ON THEINDIAN IT INDUSTRYby Sruthi RamakrishnanThere is more to the increase in MAT and expiry of STPI benefitsthan meets the eye and a deeper study shows that the situation isnot as dire as is being made out to be

8GLOBAL BANKS TO INVEST INCREATING FLEXIBLE PLATFORMS

by Ed NairEven as the short-term business prospects are bleak, global bankswill focus their technology services investments towards managingrisk and compliance, creating platforms for growth, and improvingcustomer analytics.

Releasing November 29thTo advertise or to participate

contact: Satish Gupta at [email protected]


ED NAIREditor

EDITOR’S NOTE

[email protected]

Obama’s selectiveglobalization logic andcozying up to businessis not going to impacttrends in services

globalization.

all it the ‘theory of convenience’, to be accorded to Barack Obama, Pres-ident of the United States of America.Outsourcing is a word to be used by Democrats ‘before’ elections

to highlight that American national interests should be protected in the so-called game of globalization; jobs should not move out of the US; compa-nies that offshore work to other countries should be taxed; countries like Indiaand companies from India exist to primarily render millions of Americansjobless and hence should be penalized through criticism, oppressive immi-gration rules, and threats of further regulation.If you win the elections, you keep the issue on the backburner and use it

selectively to rouse nationalistic fervor.If you lose the elections, you drop the word from your lexicon and instead

preach the benefits of globalization, where the term has a specific meaningsuitable to the context. Globalization nowmeans more jobs in the US throughincrease of US exports to countries like India. Like Obama’s recent trip to Indiawhere he announced deals worth $10 B and creation of 54,000 jobs—calculated to win brownie points back home.None of these arguments matter. Globalization in general and globaliza-

tion of services in particular are trends that are not reversed by political logicor even economic logic covered with political dough.American multinational corporations thoroughly understand globaliza-

tion and are doing the right things. Emerging countries like Brazil, China,and India too understand globalization in their national contexts and out-side. Obama’s selective globalization logic and cozying up to business is notgoing to impact trends in services globalization.The trends and practices in services arise out of the need to deliver value

back to the business. Mature companies who have been through several gen-erations of sourcing do this by looking at new rules of services delivery. Reada few dominant ideas in this issue’s cover story titled, ‘Are You BeingServed?’ (page 10) GS

C

The Theory ofConvenience

Releasing DecemberCase Studies are invited from service providers. For more detailscontact: Satish Gupta at [email protected] or visit:

www.globalservicesmedia.com/live


Industry Outlook

By Ed Nair

Even as the short-term business prospects are bleak, global banks will focustheir technology services investments towards managing risk and compliance,creating platforms for growth, and improving customer analytics.

Global Banks to Invest inCreating Flexible Platforms

IBM announced a deal with ABN AMRO (see Box) inOctober. The deal has been hailed as a mega-deal interms of its value at nearly $1.8 B. At a time when

such megadeals are on the decline, this deal embodiesmany of the trends in the large financial services industrysegment globally.In terms of market environment, the short to medium

term outlook for the industry is difficult for banks in the USand Western Europe. There is also quite a bit of social back-lash because of the financial crisis; customers believe that thebanking industry created the financial crisis that led to therecession.In terms of market regulation, the combination of in-

country regulations like Dodds-Frank bill in US, similar oth-ers in UK and Germany, as well as international regulationslike Basel III, and also the expectation that the IMF is goingto put together a fund to prevent systemic failures, are puttingnew pressures on financial services companies. Both of thesepresent a real challenge to profitability.Though the regulations have been watered down (Basel III

is much less draconian than what it was expected to be) andthe industry has been given a long time to create the capitalrequired for Basel III, the return on equity which used to be14 percent to 18 percent will fall below 10 percent in the nextcouple of years. When you compare this to the cost of capital,it looks very unattractive.Profit squeeze is being exacerbated in banks where invest-

ment banking was really driving the profitability in the past.Banks are being forced to shed hedge funds, proprietary trad-ing activity and such other engines of growth. Profitability isgoing to be considerably low in the coming few quarters. Sothe short-term picture is challenging.So, is it all gloom and doom? Hardly. In emerging markets

like China, India, Brazil, Middle East, the scale of opportuni-

ty is enormous. Even conservatively looking at the next five toten years, the global economy would grow at 5.8 percent to 6percent annual compounded. Says Likhit Wagle, GlobalIndustry Leader: Banking & Financial Markets, IBM GlobalBusiness Services, “That is significant amount of wealth beingcreated and this has to be disintermediated by the bankingindustry.”The emerging market opportunity is based on economic

growth in these geos as well as the proportion of population

Likhit WagleGlobal Industry Leader: Banking &Financial Markets, IBM Global

Business Services


Industry Outlook

ABN AMRO signed a contract to extend its services agreement with IBM. IBM will build and provide a newcomputing environment while integrating the existing infrastructure of ABN AMRO and the former FortisBank is an extension to the original contract. Next to that the infrastructure services for the former FortisBank Nederland will come in. Both banks legally merged on July 1, 2010. Systems development will con-tinue to be undertaken by a number of suppliers including Accenture, Infosys, and TCS.

On 1 September 2005 IBM announced that it signed a global contract with Dutch global bank ABNAMRO to implement an on-demand IT infrastructure that will enable the bank to more rapidly roll outadditional services while significantly reducing IT costs. The contract, worth about EURO 1.5 billion over5 years, supports ABN AMRO operations worldwide and represents the most extensive rollout of IBM'sdata center automation technology, called Universal Management Infrastructure.

Further information from Nelson-Hall reveals:

� Data center management, with IBM managing the IT infrastructure on ABN AMRO premises inAmsterdam. The existing data center infrastructure will be moved to a private cloud environment

� Desktop services. These services will retain a conventional desktop approach rather than moving to avirtualized environment, with a major emphasis on improving collaboration through use of commonemail infrastructure and community based collaboration utilizing web chat technology

� Service integration, with IBM taking overall responsibility for the roll-out of new systems on-time andon-budget. A single set of KPIs are being shared by IBM and the applications development suppliers.

Andy Efstathiou and John Wilmott, analysts from Nelson Hall opine, “ABN AMRO is seeking to simplifyits operating model to achieve a reduced cost:income ratio while also improving its ability to comply withthe regulatory environment and improve its time-to-market. The service integration role being undertakenby IBM is key to achieving these goals. The contract is also an early example of a major bank moving to aprivate cloud-based server infrastructure.”

IBM’s clients include Russia's largest bank, VTB, as well as Danske Bank in Denmark and Nordea inSweden – meanwhile a number of financial services companies in Europe are currently in negotiations withIBM for Services contracts. Worldwide, IBM’s clients inlcude Citi, VietinBank, one of the largest bankinginstitutions in Vietnam, the Agricultural Bank of China, Discover Financial Services, and the National Bankof Canada.

ABN AMRO extends Infrastructure ServicesAgreement with IBM

that is underserved— conservative estimates put it at 750 mil-lion upwards and a third of which includes people with risingincomes. This translates to growth rates of 25 percent or moreper year. So, the medium term view is very bullish.The IT services spend in the global financial services sec-

tor is largely marked towards three areas: a)getting the orga-nization ready in the area of risk and compliance b)creatingplatforms that are standardized and flexible and c) gettingcustomer analytics in place. Many of these new services arebeing provided using new technologies like cloud. SaysWagle, “The approach is to avoid either doing a wholesalerip-and-replace or a band-aid kind of quick fix. The objectiveis to simplify the operating model and the ABN-AMRO dealis a good example.”

Organizations are sitting with expensive legacy systemsand want to take costs out, not incremental costs, but wholeareas of costs. This involves rationalizing systems, reengineer-ing applications, and making the system more flexible. Itrequires creating a platform that is standard and flexible. Forinstance, in the ABN-AMRO deal, both ABN and Fortis willmigrate onto this platform that would in turn help them tobecome more customer-centric.From a strategic point of view, the traditional approach

at banks has been to free up more budget to run the bankas opposed to changing the bank. However, the balance isnow changing when banks are investing in applicationdevelopment, infrastructure refreshes, and process out-sourcing. GS


Are You Being Served? Special Report

By Ed Nair

The new rules for the services organization: consolidate and standard-ize delivery; balance internal, external, and virtual capabilities; andmanage services like a portfolio.

Are you being served? Special Report


Are You BeingServed?

If you are in global sourcing of ser-vices, talking with Cliff Justice isgreat investment in time, espe-

cially if the consultant’s clock is notticking. Cliff Justice is the NationalLeader, Shared Services andOutsourcing Advisory, KPMG. Hehas been advising companies on glob-alization, services delivery models,outsourcing, global sourcing andsuch for over 20 years. Cliff ’s workwith NeoIT, TPI, Equaterra- allreputed sourcing advisory compa-nies— where he either worked ormanaged partnerships, puts him as aleader in the sourcing advisory space.His insights are thorough and amaz-ing; his ideas are path-breaking andimpactful. Excerpts from a conversa-tion with Cliff Justice on the newrules and models of services delivery:

GS: We are just out of the recession.What are your clients asking you todo today? How’s it different fromyesterday?

CJ: In the last two years, clients havebeen demanding more from theirsourcing advisors in the area of valuecreation through optimization of sev-eral functions or their own internalservices organization and seekingmore value out of managing SG&Aareas.Whereas, ten years ago we were

brought in as advisors to help themcentralize shared services models oradvise them on the structuring ofoutsourcing contracts and helpingmake deals.Today it is much more around

enterprise services, enterprise trans-formation, and aligning that transfor-mation to drive competitive advan-tage to clients. More clients are ask-ing— how do I get competitiveadvantage through handling SG&A,through partners, through the way Imove services up the value chain,how do I access data and knowledgein a better way, how do I leverage thematurity of the services organization

Cliff Justice,National Leader, SharedServices and Outsourcing

Advisory, KPMG



that has been in place to really drivebetter business value. In the last twoyears, these were the dominant con-versations.The other important conversation

centered on managing risk. Back inthe day of pure outsourcing con-tracts, the risk question was a sidequestion. Now it is incorporated aspart of the value preservation discus-sion.

GS: Sourcing advisory as a businesshas been in turmoil. What is threat-ening a change there? How has itevolved?CJ: In the very early days, sayfrom 1997 to 2003, it wasreally about identifying theright outsourcing vendors,scoping out the outsourcingcontract, structuring the deal,putting in the governancemechanisms, and managingthe deal. From 2003 to 2007,it was all about optimizingthose relationships. From2008 onwards, we started hit-ting the rocky shores, it wasabout how do we really opti-mize and create value andcompetitive advantage out ofthe investments that we madeinto shared services and out-sourcing partnerships.Some industries are

approaching this for the firsttime and wondering how toleapfrog. For example, thepharma industry was late into thegame, but they are now incorporatingthings like pharmacovigilance into acentralized shared services model,some enabled by external parties,some not. The line between them isgetting blurrier. We are structuringthem in a very similar way whether itis provisioned internally or externally,we are seeing lot more hybrids thanwhat we ever had, and more maturecompanies are moving up the value

chain helping quantify value cre-ation.This requires going back to the

business and is a lot more challeng-ing; it requires lot more insight intothe business— more than just doinga base case analysis and measuringsavings of a transactional service.They are table stakes that have to bedone.

GS: This is like more business con-sulting work.CJ: We have always been doing that.There’s always a component of busi-

ness strategy that has to be aligned tosourcing strategy. It was being doneeven ten years ago, but it is more vis-ible now. There were larger dollarsattached to sourcing deals and a lot ofperceived external and internal valuein traditional sourcing advisory.We have a developed a platform

that is comprehensive and holistic. Ithelps a client look at a long-termroadmap, not just a tower or two, onhow you provision the function.

Sourcing advisory has to include peo-ple and change; process transforma-tion in all functional areas likefinance, HR, IT, supply chain; andenterprise risk management.Transactions services are fine; youhave to have those best-in-class. Butif clients really want the leverage, theyhave to think about service deliverymore organizationally, integrate withbusiness partners, and drive valueback to businesses.

GS: You mentioned about SG&A. Isit time to rewrite Porter’s value

chain? Are support functionsgetting to the core?CJ:What we are seeing is thattraditional support-orientedfunctions contain lot of dataand knowledge. There’s lot ofcost and expense to thosefunctions and there’s lot ofvalue that comes out of thosefunctions. Organizations thatcan think in terms of virtual-ization, in terms of harnessingthe capabilities that residewithin the company and har-ness those well, as well as har-nessing outsourcers and virtu-al platforms, SaaS, and cloudplatforms, can create a muchmore dynamic model that canaddress new questions to thebusiness, changes to the busi-ness faster than before. It is allsupport, but it is the newvalue that support can con-

tribute.The core is still the core, it is real-

ly about how your SG&A functionsare treated and addressed that theycan become a competitive advan-tage.These are not necessarily revenue

generators; some industries may hivethem out and create a profit center. Itis probably still not their core busi-ness, but it enables their core businessto become more competitive.

“The economy has causedslowdown in major transfor-mation investment, but that’schanging. Companies are look-ing at creating sustainableservices organization asopposed to chasing labor

arbitrage,”

Cliff JusticeNational Leader, SharedServices and Outsourcing

Advisory, KPMG

* Offer extended till November 10, 2010

Level 5 - IntegratedEx: Globally Integrated Services Portfolio withRational Balance of Outsourcing Relationships andStandardized and Integrated Delivery Centers and CoE’sEnterprise Services Portfolio Management andGovernance

Level 4 - OptimizedEx: Optimized Balance of Internal and ExternalDelivery Capabilities – Best of Breed Global SourcingCustomer focused Governance Organization thatManages CustomerValue

Level 2 - RationalizedEx: Single Function SSC with Tactical Onshore or OffshoreVendor RelationshipsLimited or Cost orientedVendor Management

Level 1 - Sub OptimizedEx: Decentralized and Duplicative FunctionsLittle Central Control over Business Support Services

Level 3 - StrategicEx:Traditional Outsourcing Relationship with GlobalDelivery, Non Integrated Internal (SSC) CapabilitiesFunctional Governance Organization that ManagesVendors and Contracts

The Service Delivery Maturity Curve

Extended GlobalEnterprise (EGE)

Traditional Outsourcingand Shared Services

Source: KPMG

Characteristics of a mature EGE• Integrated services portfolio consisting of

internal and external service providersoperating on a standard platform

• Central service portfolio managementcapability

• Common services architecture acrossfunctions

• Balance of virtual and physical capabilities• Rational mix of global service delivery

models• Services organization is focused on

beyond cost arbitrage and on sustainablecompetitive advantage

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GS: So what rules are you rewriting?CJ: The rewriting of the rule is—whether you can take these and man-age them to the lowest cost and oper-ate them purely on efficiency; or doyou put enterprise-wise strategic ini-tiatives in place to drive innovationsinto those services. That’s what we aretalking about.Drive the innovation, add a rea-

sonable cost, create a flexible model.The cloud discussion is bigger thantech; it is really a way of thinkingabout flexibility in business.Create an extended global enter-

prise with internal, external and vir-tual capabilities, many of which canbe provisioned quickly, as and whennew businesses are introduced intothe environment.One of the key things that we

talked about in the framework is howcompanies can take high value addservices that may be best in classwithin a business unit and create a

services organization that serves morebusiness units. These are centers ofexcellence for that service. For exam-ple, research centers combine massiveknowledge and data or take shippingcompanies that carry lot of data ontrends.

GS: Going back, you mentionedproper balance between internal andexternal capabilities. How does thatwork?CJ: The desire for control over theservices, the ability to control risk,the specificity of the function,understanding whether the service issomething that third party providershave the maturity in providing—these are the questions to be asked.It is not about the price you aregoing to pay; lot of things can bemoved out for a lower price, butproductivity could get impacted.Hence, we are saying that companiesshould look at optimizing internal

balance and external balance bymanaging services as a portfolio.Looking at internal provisioning andcomparing and benchmarkingagainst the external market is impor-tant. That’s what leading companiesdo. More importantly, what we see isthat services portfolio organizationacross the enterprise should have abroad view across the organization,cross the enterprise, helps the com-pany realize the services strategy.Drive and quantify the synergiesthat are sometimes not obviouswhen you go to an end-to-endprocess. That’s for a lot of companiesseeing true value. It is true for anend-to-end process like say procure-to-pay.This is hard to do because you are

breaking the traditional functionalstructure; it requires a lot of changein management. But there are somegood examples of companies outthere doing this.



GS: For many, shared services havebecome unwieldy. Why make whenyou can buy? Are shared services onthe decline?CJ: No. Not at all. It’s just the oppo-site. More companies are looking atshared services, but the blend in pro-visioning is changing.In the past, shared services and out-

sourcing were two distinct servicedelivery models. That distinction isgoing away; they are becoming highlyblended. A company provisions its ser-vices in a very centralized way andenables more or less through thirdparty. Some companies don’t even callit outsourcing. That is, provisioning ofservices through partners within sharedservices unit is certainly on the rise.You can see this growth at the ser-

vice provider’s end. Even in a downmarket, they are growing, theirpipelines are full.The economy has caused slow-

down in major transformation invest-ment, but that’s changing.Companies are looking at creatingsustainable services organization asopposed to chasing labor arbitrage.

GS:What’s this Extended Global

Enterprise model all about? Soundslike yet another consulting method-ology.CJ: Extended Global Enterprise isKPMG’s philosophy, framework,methodology, point of view or what-ever you call it; it’s a holistic view onservice delivery of enterprise ser-vices. It addresses companies that areboth very new to services as well asthose that are extremely mature inservices. It is a comprehensive set ofprinciples that we as a firm use toenable our partners, advisors,employees, to work with clients thatleverage the practices that we believewill drive value into their servicesorganization. It is a roadmap to cre-ating a long-term services strategyand the framework helps clientsdesign and implement a comprehen-sive services model that continues toevolve over time. It is agnostic toboth outsourcing and shared servicesin that it doesn’t recommend oneover the other.

GS: How do you compare this withthe other frameworks?CJ: I am not aware of any that issimilar. There are frameworks on

how to build a shared services orga-nization, how to build an outsourc-ing deal, how to manage shared ser-vices, how to manage outsourcingcontracts, and many others. EGEhelps companies approach their ser-vices in the way they want. It givesthem the enterprise capability thatgoes across functions and creates acommon way to access services.There are different degrees to thislike different levels in a maturitymodel. At the top is a completelyintegrated end-to-end services orga-nization with complete service port-folio management (SPM). TheSPM is a very simple interface torequest and manage services. Thegoal is to create an organizationalcapability that can interfacebetween a complex multi-tower ser-vice delivery organization and thebusiness and its customers. SPMhelps the adoption of services with-out worrying about different con-tracts, different pricing, differentSLAs— the SPM handles all thatand it constantly evolves and alignsall of the services to the servicesstrategy. GS

� It’s blind to the organizational structure and therefore immune to any limitation that such a struc-ture might impose. Driven by customer need and not organizational structure:

� One-size-fits-all service offerings have been replaced with a balanced portfolio of retained, out-sourced and centralized service offerings with tiered, tailored and bundled services across func-tions.

� The “set and forget” approach or simple vendor management has been replaced by a more sophis-ticated Services Portfolio Management organization.

� Business transformation is all about business simplification. It’s really a reduction in complexity–consolidating and standardizing services delivery and then simplifying those service delivery stan-dards. Instead of a siloed and redundant approach with fragmented planning – one services deliv-ery strategy for IT, another for HR, and so on – you’ll have a single, common strategy within a com-mon services delivery framework to achieve a common goal.

4 Principles of Extended Global Enterprise Model


IT Market Dynamics

Two things which have been making newsrecently and are projected to have graveimplications for the Indian IT industry arethe proposed extension of MAT to the hith-erto tax- free Special Economic Zones

(SEZs), and the expiry of the Software Technology Parks ofIndia (STPI) scheme in March 2011.The concern about both is that they will increase the

tax burden on the IT companies across the board, irre-spective of size, location or turnover. The truth is thatthere is more to these measures than meets the eye and adeeper study shows that the situation is not as dire as isbeing made out to be.

The MAT MathIt is not the increase in the tax itself, which actually comesto less than a percentage point, which is worrying. Most IT

companies, including those operating in SoftwareTechnology Parks, already pay this tax. The real cause ofworry is that firstly, it it is planned to be extended to theSEZs, and secondly, tax benefits will change from beingprofit-linked to investment-linked."For SEZ, the tax benefit is for a period of 15 years,"

says Raju Bhatnagar, VP, Government Relations and BPO,NASSCOM. "this is structured as a 100% tax benefitavailable only for the first five years, 50% tax benefit forthe next five years, and the last five years has a tax benefitof 50%, provided the profits are invested in certain pre-determined avenues. So after the tax holiday is there fromlets say 2006-10, you get 50% tax holiday, on the remain-ing 50% you have to pay full tax.For an organisation that is halfway in the SEZ benefits,

they are paying normal tax. So the normal tax paid versusthe computed MAT, whichever is higher is what would be

By Sruthi Ramakrishnan

There is more to the increase in MAT and expiry of STPI benefitsthan meets the eye and a deeper study shows that the situation isnot as dire as is being made out to be

The Sky’s Not Fallingon the Indian IT Industry


IT Market Dynamics

applied." Thus the MAT increase may not impact toomuch after the first 5 years of tax benefit is availed.So the real challenge seems to be the change from prof-

it-linked to investment-linked approach to tax benefits, asthe latter approach would benefit sectors with large capi-tal investments. "If there is a tax benefit that is beingallowed, let us say for the SEZ, and MAT is levied, uptotwo-thirds of the tax benefit gets nullified," saysBhatnagar.But this may not impact the big players like Infosys and

TCS significantly, who have multiple units in various stagesof operation in SEZs, besides subsidiaries operating outsideIndia. "There are several non-financial charges that they areable to take credit of which are allowed as per the IncomeTax law," he says. "Besides, they have subsidiaries operatingin foreign countries. So they pay tax in those countries forwhich they are eligible to claim credit in India. So whenyou talk of the effective rate of tax for a company which isa conglomerate, it is not sim-ple, there are multiple aspectsthat come into play."Where does that leave

smaller companies? "So far asthose companies which arenot in SEZs are concerned,they will have to in any casepay under normal income tax,and not get incentive deduc-tion. So they will not be affected by MAT," says Sunil Shah,a partner at Deloitte Haskins & Sells.Thus the proposed extension of MAT to SEZs doesn't

imply an uniform increase in taxes at one go, but a phasedincrease according to the age of each unit of a company.

Concern about STPIRegarding the other major concern about the expiry of theSTPI exemptions in March 2011, firstly, it is the benefitprovided by Section 10A of the income-tax law (100 percent deduction for 10 years of export profits derived byunits set up in any STPI, which is in accordance with thescheme notified by the Central Government) alone that iscoming to an end. "Under the STPI scheme there are mul-tiple benefits that are available, like the income tax benefit,bonded delivery center, duty free imports from withinIndia, etc. Of these benefits, one which is the income taxbenefit will expire. The rest remain open-ended, they don'thave a sunset date," says Bhatnagar.Besides, its end does not come as a surprise for the

industry. It was known from the inception of this schemethat this particular benefit has a ten-year horizon, whichwas later extended to 12.

Calling for extension of benefits is not wrong. Butbelieving that the Indian IT industry's USP is solely thetax sops and incentives offered by the government is.“Ourtax liability will go up to 25% next fiscal from around21% in the present fiscal on account of this,” VBalakrishnan, CFO, Infosys told Financial Express regard-ing the end of the STPI tax benefit. But a company ofInfosys' size and spread- across services, industry verticalsand geographies- can surely absorb the increase in tax out-flow. After all, it was none other than Infosys' Founder-Chairman Narayan Murthy who said that “Asking for taxexemption for 10s of years in my opinion is not thesmartest thing” and believes that IT and software sectorshould and are capable of paying taxes just like otherindustry sectors.Alternatively, they can shift operations to their delivery

centers outside India. That is one advantage the servicessector enjoys. "In services you can, pretty much at the drop

of a hat, pick up your servicedelivery center and shift it,"says Bhatnagar.Admittedly, this can work

both ways, and drive away for-eign companies with Indiansubsidiaries to countries offer-ing more tax benefits. Butwhat needs to be kept in mindis that the Indian IT industry

took the world by storm on the basis of its strong skill sets,talent pool and innovativeness and not solely low costs.The former, combined with India's rising status as an ITmarket, continue to propel India's IT story.

Survival of the FittestWith the partial loss of their protective cocoon, companieswill have to increase efficiency and become more compet-itive to retain customers. Smaller companies today alreadyunderstand that going niche is the way forward.Companies which are good at what they are doing, espe-cially if its specialized services, will always be in demandeven if they chose to marginally increase their prices.In short, the industry need not hassle itself over mea-

sures which will, at best, cause a marginal increase in theirtax outflow. While they will, in the short term, hit the"Infosys' and TCSs of the future which are still in theprocess of growing", as Bhatnagar puts it, expecting exten-sion of exemptions endlessly is unrealistic. In an industrywhere low cost is fast ceasing to be the deal clincher, allproviders will eventually have to depend on the efficiencyand quality of their work to survive. The sooner the Indianindustry admits and adapts to this, the better. GS

Believing that the Indian ITindustry's USP is solely the taxsops and incentives offered by

the government is wrong


BPO Market Dynamics

By Vijay Venugopalan, CRM Capability Lead, APAC, BT Global Services

On 4th Sep 1882, the world’s first power sta-tion started its operation in New YorkCity. 85 customers in lower Manhattanreceived enough power to light up 5000lamps and they paid US 5$ per Kilowatt-

hour in today’s dollar terms. Until then, people relied onexpensive battery powered ‘lighting bulb’. Power on-demand took over battery based power rapidly in its devel-opment cycle.That’s the history of electricity. Let’s look at computing;

Growth of computers was slow until IBM releasedMainframe systems in the mid-80s. Due to the size, com-plexity & cost of Mainframes, the ‘Digital Computing’ eraactually started as a hosted model - one centralized main-frame with ‘dumb’ terminals deployed across the enter-prise. Had we continued in this path, perhaps all of uswould be paying monthly PC usage bills like our powerbills – well, I wouldn’t have had the opportunity to writethis article!The point is many of what we use today such as tele-

phone, power (even cars and real estate!) have changedfrom ‘buy’ to ‘share’.The ‘Microprocessor’ generation which made

PCs/servers possible, fundamentally changed the trajecto-ry of ‘Digital Computing’. Long story short - mainstreamIT solutions moved to outright purchase as it made perfectbusiness sense from a Cost/Benefit perspective.Organizations invested on technology infrastructure toempower their businesses. IT assets were depreciated over3 – 5 years. Happy days!In my opinion this history sets the context for the

future of IT services.In the last 10 years, many global organizations have

realized that their IT assets are cumbersome and expensiveto manage. Some CFOs even claim that technology is one

of the single largest expenses and it makes their businessesless agile to change. What causes the shift in mindset?Unpredictable and escalating costs of IT operations, tech-nology obsolescence and changing customer demands!In the ‘credit crunched’ economy, a corporate executive

wants to improve efficiency, productivity and to maketheir business agile to ‘change’. Hence executives tend toinvest the scarce resource ‘dollars’ on core business func-tions such as R & D, product enhancements, emergingmarkets.On the other hand, consumers want to have personal-

More and more organizations are buying/exploring On-demand solutions,the economic situation has fuelled the desire to go on-demand

Are ‘On-Demand’ ContactCenters in Demand?

Vijay Venugopalan,CRM Capability Lead, APAC,

BT Global Services


BPO Market Dynamics

ized, timely service anytime anywhere via multi-channel.This trend has led to interesting survey results:“80 per cent of businesses think they deliver a superior

experience, yet only eight percent of customers agree”[Source: Frost and Sullivan]This ‘paradigm shift’ in expectations has paved the way

for ‘On-demand’ services.An on-demand contact centre meets these criteria,

combining hosted IP telephony and automated, voice-acti-vated software-as-a-service to deliver a package that isdeeply scalable and can be purchased in new and flexibleways, such as per concurrent agent and by the hour. Thisnew level of cost granularity will allow chief operating offi-cers and heads of customer service to measure the efficien-cy and cost of operation, unlock service improvements andadditional cost savings in thefuture and its needless to saythese fully managed serviceswill remove worries about riskof technology obsolescence.Some of the early net-

worked IT services providers[SPs] like BT Global Serviceshave invested quality time andeffort (and dollars!) on marketresearch, designed mar-ket/industry relevant packagedon-demand applications and created business models &return-on-investment tools around it and have acquiredcustomers.The first agent logged into BT’s contact center On-

demand platform back in 1999.Many global MNCs have changed their operating mod-

els to adapt to on-demand contact centers and have seenbenefits. More and more organizations are buy-ing/exploring On-demand solutions, the economic situa-tion has fuelled the desire to go on-demand.Comments I hear in Asia are ‘Are these on-demand con-

tact centers fit for purpose?’ or ‘On-demand contact cen-ters are only fit for short term deployments’. To get someclarity around this, let’s analyze the future of On-demandin 2 parts –Short & Long term.

Short termIn Asia, we are in the transition stage from outright pur-chase to On-demand services. While many organizationssee the benefits of On-demand contact centers, they haveconcerns around security, data privacy and some say – ‘Inthe long run hosted or cloud based contact center servicesare expensive’Global networked IT service providers like BT have

been providing network based on-demand services for overa decade and have addressed these concerns already.Optimized on-demand contact center services are availableat a global scale – these services have the unique ability tocollect the contact (not just calls!) from anywhere in theworld and deliver it to an agent with the right skills work-ing anywhere in the world – with secure platforms anddata privacy [It is mandatory for SPs who are registereddata controllers under the data protection act]Wondering how? The contact center services are hosted

on a very large voice and data network that spans across170+ countries.Just deciding a best on-demand platform alone is not

adequate. Organizations adapting to on-demand modelsshould be prepared for an internal transformation – to

make changes to their operat-ing model, process, gover-nance and people. Suchchanges will determine thesuccess factor of the on-demand deployment. If anorganization gets its internaltransformation right, on-demand platform will fit inlike a charm.In 2010, finding the right

technology partner to movecontact centres into the cloud, and the right commercialmodel to buy those services, will be vital.

Long termIf we take the long term view of the On-demand contactcenters, say 5- 10 years from now, many organizationswould have procured contact center applications as ashared service. We are talking about hundreds of thou-sands of agents using on-demand service which will invari-ably bring down the cost per agent.Business models will evolve to provide the service for

free as auxiliary revenue streams like network will make upfor it. After all, free is better than cheap if it results in awin-win deal for customers and partners.What's more, on-demand call centers will also be a

means to gain points on ‘Corporate Social Responsibility’as arguably, On-demand services will reduce carbon emis-sion compared to on-premise rivals. Hence, organizationswill evaluate which SP to choose rather than which tech-nology to choose and buy.On a long term perspective, it’s obvious that on-

demand contact center solutions are the way to go and itwill be very difficult to justify an outright purchase busi-ness case! GS

Organizations adapting to on-demand models should be pre-pared for an internal transfor-mation – to make changes to

their operating model, process,governance and people


IT Market Dynamics

The US healthcare reform bill, even beforebeing passed into law (the Patient Protectionand Affordable Care Act) in March 2010, wastouted to bring a huge boom for 3rd partyservice providers. But while the BPO oppor-

tunity is quite visible- in the form of increased customerservice, claims processing, etc- the IT aspect of it is lessobvious. Nevertheless, it is an even more important andintegral part of the planned reforms."There is going to be a need to invest more in IT sys-

tems to not only support alarger user base for goods andservices, but also to support theadministrative side of deliver-ing these services adhering tothe additional regulationscoming on board. It is going torequire more systems, greaterautomation and integration ofthe existing systems in order tobe able to support these ser-vices on a practical basis, andalso to achieve greater efficiency and effectiveness," StanLepeak, Managing Director of Research, EquaTerra hadsaid in a March 2010 podcast (What Effect Will HealthcareLegislation Have on IT Services and Outsourcing?) organisedby EquaTerra.Service providers in the IT space are well aware of the

opportunities that the legislation has brought. “From anapplication development perspective, we believe that theopportunity that lies for us is the requirement for newclaims administration application,” says Pradep Nair, VicePresident & Head – Global Life Sciences Practice, HCL."From infrastructure, there is an increased storage require-ment."He sees insurance as another segment with huge

potential for IT expansion. "There is the framework of

solutions on insurance exchange because we believe thereis a huge opportunity in trying to create an insuranceexchange. It constitutes essentially six buckets- productconfiguration; quoting engine; payment gateway; applica-tion processing; reporting certain tools which will inter-face with individuals and their families, employers, agents,payers, which will extend towards data migration; andautomated enrollment processes. That can be extended to,from an infrastructure perspective, to solutions in cloudcomputing."

The federal plan to launcha healthcare informationsuperhighway, the NationwideHealth Information Network(NHIN) also requires expand-ing and uphauling the existingIT infrastructure. Mark Boxer,Senior Vice President andGroup President of ACSGovernment HealthcareSolutions, now part of ACSXerox, says," For the EMR

(Electronic Medical Record) to be meaningful, it has to beaggregated and it has to be shared. We have got the dataassets, the aggregation engine to aggregate EMRs into EHRs(Electronic Health records). EHR cuts across hospital sys-tems, And then EHRs can be shared on a HealthInformation Exchange, which would be filled by states.In addition to all the stuff that build the infrastructure,

we also have critical rules engines that sit on top of thehealth exchanges that prospectively identify patients thatare at risk of getting diabetes, heart disease, etc. So this canhelp physicians take action before it becomes a critical issue.That is the promise of the healthcare reform."So there is a lot of potential for growth for the service

providers. For healthcare providers and payers, there is amajor incentive to increase outsourcing to them- cost ben-


IT reforms are an important and integral part of the reforms plannedunder the Patient Protection and Affordable Care Act

The IT Opportunity inHealthcare Legislation

The federal plan to launch theNationwide Health Information

Network (NHIN) requires expand-ing and overhauling the existing

IT infrastructure


IT Market Dynamics

efit. "For firms, particularly the smaller to mid-size organi-zations, the equation has changed as to what is the fullyloaded cost of an employee, and that's going to change theequation of whether it makes sense to add that next personor to invest in technology to automate that activity or relyon third parties," says Stan Lepeak.Besides IT systems, another resource which will be

equally in demand are the IT personnel skilled to manand maintain the systems, for whom there is already aglaring shortage. According to a College of HealthcareInformation Management Executives survey of 182healthcare CIOs, there is already a 71 percent shortage ofclinical support implementation and support personnel.There are 44 percent vacancies for infrastructure vacan-

cies, and 43 percent vacancies for business software imple-mentation and support personnel. These figures are onlyset to grow as the country begins implementing theHealth IT Workforce Development Program, leadingmore agencies to look at outsourcing as a way out. "Whilein some cases firms may make the investments themselvesand deploy management systems, in many cases they aregoing to look outside to the IT experts, so that they canconcentrate on their piece of healthcare and let third par-ties manage the back office IT systems," says Lepeak.Thus for the country's healthcare system to meet the

huge targets set by the Federal govt in the next few years, ITwill have a big role to play, and in that third party providerswill have a dominant say. GS

Top Enterprise Healthcare IT VendorsCerner Corporation Healthland

CPSI Keane Healthcare Services

Eclipsys Corporation McKesson Provider Technologies

Epic Systems Corporation Medical Information Technology

GE Healthcare QuadraMed Corporation

Healthcare ManagementSystems

Siemens Healthcare

Niche Vendors

Vendor Specialty EnvironmentADP payroll services

Kronos time and attendance systems

Lawson Software enterprise resource planning

Mediware pharmacy, blood bank

Oracle Corp./PeopleSoft enterprise resource planning

Philips Healthcare intensive care systems, cardiology informationsystems, PACS systems for both radiology andcardiology, and obstetrical systems

Picis/MSM operating room management, emergencydepartment, and intensive care unit (ICU)applications

SCC Soft Computer laboratory, radiology, pharmacy

Sunquest Information Systems laboratory and radiology

Surgical Information Systems operating room management

3M Health InformationSystems

encoding, dictation, transcription, and HIMmanagement applications

Unibased Systems Architecture enterprise scheduling

Key Vendors in US IT Hospital Market

Source: Executive summary of HIMSS Anaytics Report ‘Essentials of the U.S. Hospital IT Market’ 5th edition.

Top Consulting Firms for HospitalsAccenture

ACS (acquired by Xerox)

Beacon Partners

BearingPoint

Cerner Corporation

Courtyard Group

CSC

Deloitte

Encore Health Resources

Hayes Management

IBM

McKesson Provider Technologies

Perot Systems Corporation (acquired by Dell)

Siemens Healthcare

Top Firms Providing OutsourcingServices to HospitalsACS

CareTech Solutions, Inc.

Cerner Corporation

CSC

Eclipsys Corporation

IBM

McKesson Provider Technologies

Perot Systems Corporation (acquired by Dell)

Siemens Medical Solutions


Procurement Outsourcing

China’s role as the global hub for manufacturing andprocurement has not translated into leadership posi-tion in procurement outsourcing. It’s like the top

medical school not having any hospitals around.Is this a missed opportunity for China? Is the tide slowly

shifting in China’s favor? Will China make it big in procure-ment outsourcing?

Difficulties of the China WayChina is a complex place for foreign businesses. Regulationsare sometimes unclear, and often nothelpful. Contract enforcement can betricky. Its business culture differs fromthat of India or Philippines. And mostimportantly, language is a critical barrier.The European Union has recently

turned up the growing international pres-sure on China to give foreign companiesaccess to its national procurement deals.EU Trade Commissioner Karel De

Gucht said, “China needs to improveinvestment opportunities for foreign com-panies, as European businesses are raising"serious questions" about China's pro-curement policies. Many companies haveexpressed concern that recently draftedpolicies will discriminate against foreign

companies in favor of domestic suppliers with "indigenousinnovation," according to The Wall Street Journal.De Gucht also expressed concern on behalf of EU compa-

nies that are becoming increasingly agitated about the lack ofprotection for intellectual property in China."There's so much discussion about China's indigenous

innovation policy, because it forces European companies toregister as a Chinese company to get access to private pro-curement markets, he says."Saurabh Gupta, Analyst, Everest, says, “The biggest issue

with China is that there is a lack of serviceculture. Chinese Government philosophyis based on producing cheapest andworld- class goods unlike India whosephilosophy is to provide best services atlow cost. The mindset is different. You geta lot of benefit if you open a shop in Indiabut you don't get them in China. Lack ofgovernment support and language alsodeter companies from investing in PO.”When it comes to Procure-to-Pay

process, which is transactional in nature,China is not the attractive destination todo that. The value proposition comes inonly when you deal with the country forlow cost country sourcing. It is difficult toset up a center in China. People want to

By Pratibha Verma

The potential for China tomake it big in procurement outsourcing is huge.Though lot of ground needs to be covered, there’s ample reason for hope.

ProcurementOutsourcing:China’s MissedOpportunity


Procurement Outsourcing

set up shop in China and buy from local Chinese manufac-turers, but only a few large service providers have delivery cen-ters in China.

Change in Procurement PracticesMichael Rehkopf, Analyst, TPI says, “In procurement out-sourcing, direct activities like buying raw material are huge,and often it's done in-house. When we look around, we see afew firms doing one or two key grand deals but nobody woulddo 20 or 50 in numbers. Procurement outsourcing revenue inChina is sort of going slowly but spend control is slowly beingshifted to China.”As organizations become more comfortable to see where

they want to locate their control for their spend, they move tothe region where they have got the manufacturing facilities.In the past, MNCs in China were focusing on their top-

line growth and the spends wererelatively small. There has beena rapid change in that area. Forsuppliers, PO base is slowlybecoming strong. Organizationsare starting to shift their focusnot only to increasing theirspend but also to do PO workmore efficiently and effectively.Rehkopf says, “We have wit-

nessed two trends. The first oneis the movement of that activityfrom Europe and NorthAmerica to the region wherethings are being procured andthe second one is the decisionon whether they should be donein-house or outsourced. We are seeing both the things hap-pening simultaneously.”One of the biggest differentiators for China is language.

China is perceived as a very good destination for people whodeal in Chinese, Japanese or Korean.Rehkopf says, “Local companies in China believe that they

can do everything themselves and at a cheaper rate. But whatwe see in the coming years is that they would no longer havesufficient data and robust quality processes. Then they mightstart depending on outsourcing not only for cost benefits butalso for overall benefits.”“A lot of MNCs have been controlling their spends from

other parts of the world. I anticipate that there is significantuptick in this kind of outsourcing in the next four-five years.People have now stated thinking that outsourcing makes sense.”

Service Providers Troop InSome suppliers have set up their centers in China and are

dealing with a number of clients but none of them have hugeclients. They are all getting themselves positioned for anupcoming wave of procurement outsourcing.Accenture started its procurement delivery hub to serve

multi-national clients in 2002 in Dalian and established itselfas a strong procurement service provider over a period of 8years.David Conte, Senior Executive, Accenture's procurement

BPO services group says, “China not only provides access toa large, highly skilled talent base of procurement professionalsbut, just as importantly, it provides access to local suppliersand low cost services.”He opines that China's cost competitiveness will remain a

key differentiator for multi-national clients.Conte also says that with other markets, there will be new

opportunities for growth in China as the supply base contin-ues to mature and expand intonew segments. Additionally,China will continue to be animportant location for helpingclients manage and balance sup-plier risk. More generally, wealso expect to see continueddemand from clients to helpthem add value and analyticalinsight from their BPO engage-ments back into their business.Gupta says, “PO is growing

in China but I haven't seen toomany suppliers from Chineseorigin coming into play. Theyare all global suppliers. There isthis value proposition that

country operates on low cost country model. That is distinc-tive and unique about China and no other geography cansupport this.”Nearly 10 to 15% of all PO deals signed in the last 3 years

have China as a delivery location. The key locations in Chinafrom a PO perspective are Dalian, Guangzhou, Shenzhen,and Shanghai.Everest classifies 20+ PO suppliers into emerging sup-

pliers, leaders and major contenders based on a compre-hensive assessment of capabilities and market success.Nearly a third of all these PO suppliers have presence inChina. However, it is interesting to note that while all POleaders have a China-based presence, only 25% major con-tenders have delivery capabilities in China and none of theemerging players is present in China. So it is evident thatChina is an important cog in the overall delivery strategyfor established PO suppliers and is emerging as a differen-tiator. GS

“Local companies in Chinabelieve that they can do every-thing themselves and at a cheap-er rate. But what we see in thecoming years is that they wouldno longer have sufficient dataand robust quality processes.”

Michael Rehkopf, Analyst TPI


Market analysis

TheTPI Q3 analysis shows that a pause in the marketrecovery has dampened year-to-date momentum (seeFig.1), but data and service provider feedback suggest

that a more active 4Q10 is underway.Restructuring of contracts has heavily influenced how the

last quarter, and in fact the annual TCV (Total ContractValue), have shaped up. “In the 1st quarter of this year therewas an unprecedented 42% of global TCV which wererestructuring related. At thattime we anticipated morerenewals were on the way. InQ3 they make 48% of globalTCV,” said John Keppel,Partner & ManagingDirector, TPI Research,Analytics and Intelligence atThe TPI Index webinar.“Restructuring TCV repre-sents about 34% of the globalmarket, compared to the 20%we’ve typically seen over thepast 3 years.”The past quarter saw some

large restructurings- GeneralMotors, Bank of Ireland,ABN Amro, etc. In fact, six ofthis year’s nine mega-dealswere restructurings.One of the reasons for this extent of restructuring activity

is the change in the timing of renewals. “Some of the 7- 10year contracts rewarded in the early part of the decade are upfor renewal. At the same time, some of the recent 3-5 yearcontracts. As a result, there were more contracts being restruc-tured simultaneously,” said Keppel.Another reason is that larger economic difficulties still

cover outsourcing adoption. “In North America especially,CIOs and CFOs are returning to a restraining posture that

they initially took at the start of the recession. Projects involv-ing new scope and budget approval are once again beingdelayed. Restructuring which bring quicker and potentiallyeasier returns to bottom lines tend to move forward unim-peded,” said Keppel.In numbers, restructuring constituted 20% of the market

for both ITO and BPO and about 1/3rd of TCV. The relativestrengthening of BPO contract restructuring shows the

maturing of the BPO marketas some of the larger oppor-tunities awarded in the mid-dle of the decade come up forrenewal.On the other hand, new

scope activities were down,not just in terms of globalmarket share but also byabsolute TCV numbers. Newscope TCV was down signifi-cantly, by about 50% QoQand YoY. Clearly, new trans-actions are not entering themarket as quickly as theyused to in previous years.This is being attributed atleast partly to the recessionand delay in new projects.

Industry- wiseFor ITO, which has seen consistent performance since 2006,a huge Q1 followed by two weaker quarters has resulted in aflat year. Most of the ITO mega-deals awarded have bundledInfrastructure and ADM together. Much of the activity in thisspace was restructuring related.While BPO TCV is typically comprised mostly of new

scope, an increasing amount is restructurings. The traditionalBPO strengths- contact centers, FSO, HRO, F&A generally


Restructuring of contracts heavily influenced the last three quarters,and will continue to influence Q4

Strong Contract RestructuringLeads Weak Q3

“Some of the 7- 10 yearcontracts rewarded in the earlypart of the decade are up for

renewal. At the same time, someof the recent 3-5 year contracts.As a result, there were morecontracts being restructured

simultaneously,”John Keppel, Partner & Managing

Director, TPI Research


Market analysis

trended downwards and have been lower that their 2006 lev-els, while there was some pickup in HRO and FSO. Morethan half the activity in multi-process BPO was restructuringrelated. The emerging R&D KPO activity is picking up involume and contracts.

Region-wiseThe Americas experienced a decline in both the number andTCV of contracts in the past quarter. This is important espe-cially since the Americas, and the US IT market in particularhave been leading the market recovery which began in 3Q lastyear. Despite this, TCV for this year is high because ofextremely strong first half performance and this makes theAmericas the largest buyer of outsourcing services so far thisyear. “The US, which is traditionally the dominant force inthe Americas region, has improved its share of the global mar-ket from 36% to 44& YoY to date. The Americas is expectedto end this year on the upside,” said Duncan Aitchison,Partner & President, TPI EMEA.More contracts were granted in EMEA than Americas

this quarter, but this region is still lagging behind Americasin both metrics. Within EMEA, there seems to be a lot ofactivity in less mature markets. The Nordic region, the sec-

ond largest outsourcing market in the world in 2010, andthe Dutch market provided strength in Europe. The resultsin both geographies have been heavily influenced by largerestructurings signed during the first nine months of thisyear.Geographically, APAC has shown the most fluctuation, at

49%, due to a few large deals.

Vertical-wiseThe Financial Services sector has grown the most this year,supported by large mega-deal restructurings. Driven mainlyby EMEA region, the growth in this sector has been support-ed by megadeal restructurings in the region, like that of ABNAmro. Manufacturing has not improved on the same lines,though the Americas saw activity in this space.Retail, travel and transport, and hospitality sectors have

adopted outsourcing at an increasing pace over the last year.Retailers, still experiencing top line pressure, are looking atoutsourcing to help reduce costs. Hospitality, travel and trans-port have nearly doubled their contract values.Looking at the number of deals coming up for renewal,

2011 again looks like it will be very active on the restructur-ing front, though not as much as 2010. GS

3Q10 and YTD Headlines

Restructurings include renegotiations, renewals, extensionsSource: The TPI Index: An Informed View of the State of the Global Commercial Outsourcing MarketThird Quarter 2010

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