ites & bpo- opportunity to move up the value chain

ITES/BPO – Opportunity to move up the value chain?ITES/BPO – Opportunity to move up the value chain?

January 13, 2004January 13, 2004

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

Presentation at iTECH 2004Presentation at iTECH 2004

20030520DL-ZXE332(ITES, Board Pres.)(JS)-7

2Source: Gartner; Dataquest; Aberdeen group; McKinsey analysis

Supply-side enablersSupply-side enablers

• Telecom costs down by 90% in the last 3 years; world-class reliability

• Over 2.5 million low-cost talented workers in countries such as India and Philippines

• Emergence of a credible vendor community

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

E

BPO total revenues- India example*$ billion

CONTEXT: BUSINESS PROCESS OFFSHORING HAS EXPLODED IN THE LAST FEW YEARS…

• Encouraging track record of early movers

• Demanding U.S market environment

• Successful track record of I/T offshoring

Demand side forcesDemand side forces


3

“Tech jobs leave U.S. for India, Russia. Who’s to blame?”

– July 2003

“Is your job next?”– February 2003

…BUT HAS ALSO CREATED GREAT ANXIETY IN PRIMARY MARKETS

“American legislators are accusing India of stealing jobs”

– June 2003

“America’s pain, India’s gain”– January 2003

“3.3 million U.S. service jobs to go offshore by 2015”

– November 2002

“Can America Lose These Jobs and Still Prosper?”

– July 2003

U.S. House Sub-business Committee


4

IN THIS CONTEXT, SEVERAL DOUBTS HAVE ARISEN ABOUT THE FUNDAMENTAL LONGEVITY AND EVOLUTION OF BPO AS AN INDUSTRY

• Will the BPO phenomenon plateau out in the next few years?

• Even if it survives, moving up the value chain will be difficult and will take several years?

• Value chain moves will be the domain of captives because the trust required is too high?


5






6

0.33

*Estimate based on historical U.S. reemployment trends

Source:McKinsey Global Institute

1. OFFSHORING ACTUALLY GENERATES GREATER VALUE FOR THE GLOBAL ECONOMY

• Taxes ($0.04)• Revenues

($0.20)• Local suppliers

($0.09)

. . . deliversvalue to India . . .

0.67

• Cost savings ($0.58)

• Goods sold ($0.05)

• Profits from Indian ventures ($0.04)

. . . brings returnsto U.S. . . .

1.45-1.47

. . . and makes the global pie that much bigger

0.45-0.47

. . . creates new value from re-employing U.S. labor*

. . .

$1 previouslyspent in U.S.,now offshored to India . . .

$1.00


7

0.03

0.33

0.10

0.09

0.10

0.01

Profits retained in India

INDIA CAPTURES 33 CENTS FROM EACH DOLLAR OF SPEND OFFSHORED BY THE U.S.

Value accrued from $1 of U.S. spend offshored1

Dollars; 2002

Central govern-ment3

State govern-ment4

Total value accrued to India

Labor Suppliers2

Offshoring sector1 Estimated using the India offshored services industry case

2Includes revenue accrued to the supplier industries less sales taxes, income taxes to employees and corporate taxes 3Includes income tax from labor employed in the offshored services sector and the supplier industries and corporate tax on the supplier industries4 Includes sales tax on the supplier industries and revenue from the sale of power to offshored service providers Source: McKinsey Global Institute


8

JOBS OFFSHORED WILL BE A SMALL FRACTION OF THE SHORTAGE IN ELIGIBLE WORKERS

Number of workers

Millions, 2000-2015

Source: U.S. Census; McKinsey Global Institute

Jobs projected to go offshore

Decline in working population due to aging


9

JOBS OFFSHORED ARE A FRACTION OF ALL MASS LAYOFFS

1Bureau of labor statistics defines mass layoffs as job loss actions leading to the displacement of 50 or more workers by a given establishment during a 5-week period

2Average 1996-99

3Average 1989-2000

4Average 2003-13

Source:NBER; BLS; Kletzer; McKinsey Global Institute

Average annual mass layoffs1

Millions

All mass layoffs2

Offshoring projection4

Trade-related layoffs3


10

Economic value of off-shoring real

• Off-shoring creates 40-50% greater value for the global economy

• India captures 33% of every off-shored dollar while the US retains 67% and the incremental 40-50% value creation

• Off-shored jobs small fraction of expected retirements/lay-offs

THEREFORE, BUSINESS LOGIC WOULD INDICATE THAT BPO HERE TO STAY … BUT WILL REQUIRE HANDLING CUSTOMER CONCERNS WITH COMPASSION

Negative emotional impact at the customer equally real

• Real people and communities are effected

• Re-training takes time

• Manufacturing hang-over still felt


11






12

Completed the first round of off-shoring successfully

• Built substantial scale in operations in India

• Penetrated 1-2 businesses in depth

• Started capturing labour cost savings

Base

A: “Accelerate, extend breadth and depth”

• Increase breadth and depth of services

• Strengthen and stabilize architecture

– Insource-outsource, onshore-offshore architecture

–Global hub architecture

–Strategic outsourcing

B: “Re-engineer”

• Drive towards operational improvement

–Task level and process level reengineering

–Consolidation and aggregation of functions

• Leverage low cost position to start offering new services to customers and improve competitive position in home markets

C: “Externalize”

• Take robust platforms external and create value out of the shared services utility

–Specialized service bureau

–Generic third party BPO provider

D: Tackle to

ugh (but la

rge) industrie

s

D: Tackle to

ugh (but la

rge) industrie

s

FOUR POSSIBLE VALUE CHAIN MOVES POSSIBLE


13

Simple, standardized activities

Advanced technical skill and

some judgment required

Extensive judgment and analytical

skill required

A. MOVES UP THE VALUE CHAIN ALREADY HAPPENING IN TERMS OF BREADTH AND DEPTH OF PROCESSES OFF-SHORED

AXA• Insurance claims processing

Citibank• Check processing, account

application processing, loan processing by a subsidiary (e-Serve)

HSBC• Account opening and

closing, retail loan processing, mortgage processing

American Express• Live brokerage advice from

qualified agents through a vendor in the Philippines (eTelecare)

• Extensive offshoring of credit card services (including risk modeling and credit evaluation)

• Extensive financial analyses

GE Capital Business Solutions• Risk modeling, actuarial

services, underwriting

Citibank• Credit card processing,

collection calls, inbound and outbound service centers

HSBC• Inbound customer service

center for mortgage

Capital One• Inbound customer service

center, outbound telemarketing (MSourcE)

Citibank• Finance and accounting

GE Capital• Insurance claims processing • Outbound telemarketing,

inbound customer serviceMBNA• Processing of online

applications (TransWorks)

GE Capital• Payroll accounting• Invoice and payment processing

McKinsey & Company• Research and knowledge

management for world-wide offices in Gurgaon

GE Capital• Risk analysis, strategic planning

and forecasting• Financial statement analysis

Examples of sector-specific (“vertical”) processes

Examples of corporate center (“horizontal”) processes

GE• UK auto applications data entry


14

IN FIs, VENDORS AT POINT OF SERVICING THE WHOLE RANGE OF CORE BANKING AND SUPPORT PROCESSES

Source:Vendor interviews, literature searches, vendor websites, McKinsey analysis

Sample processes

• Telesales• Customer service• Technical support help desk

• E-mail support• Fax responses• Live interaction (chat

room customer service)

Customerfacing

Voice

Non-voice

Inbound

Outbound• Telemarketing • Collections (bucket one)

Business process off-shoring services

• Benefits administration• Payroll processing

• Retail banking (account maintenance, opening, check processing)

• Fund administration• Reference data management

• Claims processing

• Database integration & analytical services

• Secondary research

• A/R and A/P management• Reconciliation

Back office

Core business

Support

HR/ Admin

Consumer banking

Wholesale banking

Insurance

Research

Finance & Acctg.

Illustrative vendors


15

B. REENGINEERING AND PROCESS IMPROVEMENT CAN PROVIDE ADDITIONAL GAINS OF 30-40%

100

Original costbase

Factorcostsavings

Additi-onal telecom & manag-ement costs

Off-shore location cost

Consoli-dation, standar-dization & superior skills

Taskreengi-neering

Econo-mies of scale

Process reengine-ering

New cost base

60-65

10-15 45-55 8-135-7 3-5 15

30-35

Does notinclude gains from revenue

enhancement

Task aggregation and process level improvement

Task migrationTask level

improvement

Factor cost benefits (45-55% savings)

Additional benefits (30-40% savings)


16

Productivity and process re-engineering

Economies of scale

• Aggregated cheque order processing tasks and bought-in cross-trained agents, which has significantly increased staff utilisation

• Decreased time taken for month-end closing from 5 to 2 days by modifying and eliminating tasks

Re-engineering (end-to-end)

IN FACT, OVER TIME COMPANIES HAVE CAPTURED ADDITIONAL PRODUCTIVITY GAINS

• Reduced 40 FTEs by digitising the ‘back lining’ process in the contact centre

Technology application

Efficiency

Source:Expert interviews; literature searches

• Reduced average call centre talk time from 180 to 100 seconds through use of more qualified agents

• Improved total customer satisfaction score from 85% to 92% after offshoring call centre services to India

Better talent and training

Efficiency

• Increased first time resolution rates from US benchmark of 59% to 74% resulting in reduction in repeat support calls and on-site dispatch calls leading to savings of ~$2 million per annum


17

C. F-1000 INSTITUTIONS HAVE INCREASINGLY BEGUN TO REALISE OPPORTUNITIES FOR REVENUE ENHANCEMENT

• Live brokerage advice for mass affluent customers from Series 7 qualified agents through vendor in the Philippines (eTelecare)

• £50 million/year gained through revenue audits – interline, agent, and used tickets

• Ability to price insurance policies at significantly below competition leading to 5-7% market share improvement in home markets

• Research platform to service customers for a fee – offer customized research for strategic customers

• Develop modeling platform to provide fee-based analytical capabilities to SME financial services customers– offer customized services to large financial institutions

• Offer trade finance services to SME customers that are otherwise uneconomical to serve

• Offshore R&D (pharma, chemicals) using collaborations

• Knowledge on call services for core clients – customized research and analytics

Revenue opportunities created through offshoringPotential ideas for F-1000 institutions

• Customised research for global customers – potential to create platform to service other banks


18

• Columbia Bank & Trust (later Synovus) transitions internal credit-card processing business into third-party company (1982)

• CB&T sells 19% of company in IPO (1983)

• TSYS grows to become the second largest processor in

the world

SIGNIFICANT VALUE CAN BE CAPTURED BY TRANSFORMING INTERNAL CAPABILITIES INTO THIRD-PARTY BUSINESSES

• AmEx transitions internal processing unit into third-party company (FDR) and sells off majority ownership stake (1992)

• FDR merges with largest competitor and grows to become global leader in transaction processing

Parent

New business

Transition

*March 1, 2002

Sources: Hoovers; analyst reports; McKinsey analysis

• Management buyout of Midland Bank processing unit following merger with First Bank System (1984)

• IPO in 1986• Grown to become leading

provider of technology and processing services for financial institutions

Midland Bank

• $5 billion in market cap*, growing at 5% CAGR in the last 5 years



Value creation U.S. $ billion


19

D. NEW INDUSTRIES THAT HAVE PLAYED “WAIT AND WATCH” GAME TRADITIONALLY NOW ACTIVELY EXPLORING AND COMMENCING OFFSHORING – PHARMACEUTICAL EXAMPLE

Area

IT offshoring

Support functions

Attitude towards outsourcing/offshoring Key factors driving increasing momentum

• “Wait and watch” towards offshoring until late 2001

• Significantly higher acceptance in 2002• “Triggers pulled” in 2003 by several

players including BMS, Novartis, Abbott

• Mainstreaming of IT offshoring and emergence of credible success stories on cost and quality improvements

• Solid vendor base (e.g., Infosys, Satyam, TCS) with proven track record

• Observed actions of competing players!

• “Wait and watch” towards outsourcing of business process through 2002 and early 2003

• Numerous ongoing discussions in 2003 with vendors on finance & accounting and HR offshoring

• Increasing focus on rationalizing support function costs

• Emergence of credible success stories and vendors for F&A and HR

• Observed actions of competing players• Many companies articulating “overall

aspiration” cutting across numerous opportunities such as IT, BPO, R&D

R&D • Concerns around IP and quality of medical infrastructure

• Positive experience of first movers in addressing concerns and benefiting significantly e.g., AZ and BMS in R&D; Pfizer & Eli Lily in clinical development; Novartis & Pfizer in data management

• Improved medical infrastructure and favorable regulatory environment


20

OPPORTUNITIES FOR OFFSHORING EXIST ACROSS THE PHARMACEUTICAL VALUE CHAIN

R&D Support FunctionsIndustrial Operations

• Strategic and commercial busi-ness planning (pre-launch)

• Product development and life cycle management

• Pricing and health economics

• Market a product (new and legacy)

• Customer relationship management

• Customer and consumer services

• Sales management

• Logistics & distribution

• After sales services

• Finance & Accounting

• Information Technology

• Human resources

• Legal– Legal counseling

advocacy and litigation– Intellectual property

counseling

• Sales force support

• Target identification & validation

• Lead generation & optimization

• Preclinical/ Toxicology

• Clinical Development & Trials

• Data Management

• New production development

• Procurement

• Planning and manufacturing– Plant

maintenance– Quality

management– Process

control

• Supply chain management

• Performance monitoring and control

Commercial Operations

Source: Interviews; McKinsey analysis

Focus of documentOffshore potential


21

RECENT ACTIVITY POINTS TO GROWING INTEREST OF PHARMACOS IN OFFSHORING – DATA MANAGEMENT EXAMPLE

Source:Interviews

Global statistical operations business system

• Savings of around 40-60% vis-à-vis global CROs within first year

• Targeting 80-100 global trials in 2003

• Plans to start related areas of filing and report writing, efficacy reporting and statistical design for Phase IV studies

• Entering into Phase I reporting for complex oncology trials and traditionally outsourced, Phase IV trials

Statistical study design

Statistical programming

Document management

Database locking

Report writing and filing to medical authorities

Operations in India

• Started operations in 2001

• Approximately 30 statisticians out of global team of 250 located in India

• Focus on standard safety reporting for Phase II and III trials

• Reports focused on US FDA and EMEA

• Over 40 global trials supported in first year of operation

• Supporting 2 mega trials of over 10,000 patient records each

• Conduct several short turn-around analyses for clinical pharmacology studies

NOVARTIS EXAMPLE


22

OFFSHORING CAN RAPIDLY MOVE UP THE PHARMA VALUE CHAIN

Support functions

• Finance and accounting

• Information technology

• Human resources

R&D

• Clinical development

• Data management, including bio-stats

Contract manufacturing

• Drug manufacturing (TBD)

• Formulations development

• Custom chemical synthesis

R&D

• Bio-informatics

• Analog generation

Support functions

• Sales force support

Contract manufacturing

• New product development

R&D

• Lead generation and optimisation

Phase 1: “Early wins”

Phase 2: Minimal risk move

Phase 3: High-end activities

Rationale• Significant experience

across other industries

• Strong vendor base

• Pharmas already doing it

• Significant bottom line impact potential visible

• Emerging vendor base

• IPR issues need to be clarified

• Comfort around Asia needs to be established

Opportunity123

45


23






24

IN THE END STATE, LARGE INSTITUTIONS WILL USE A COMBINATION OF CAPTIVE AND VENDOR FACILITIES

ExamplesExamples • Started off handling all processes in-house

• Now outsources call centre services to multiple third party vendors

• Started offshoring operations by outsourcing

• In addition to outsourcing, now also runs a captive centre

JV/ Alliance

Indian best-of-

breed vendor

Delay

Outsource to Global

brand

Captive

JV/ Alliance

Indian best-of-

breed vendor

Delay Captive

From primarily captive… …to hybrid model

Feasibility of outsourc-ing the process

Cross-border operation sophistication

Outsource to Global

brand


25

IN FACT, MATURE OFFSHORERS HAVE DEVELOPED AN INTEGRATED ARCHITECTURE OVER TIME

• Started with 150 person completely captive unit in 1994 primarily for back end processing• Entry into knowledge intensive activities in 2000-01• Significant expansion of head count and service line in 2001• Geographical diversification into Philippines in 2001

Model

• Third party – Philippines – Reduces country risk – Provides BCP

• Third party – India – Exclusive support to AMEX– Creates scale with minimal

investment– Diversifies risk – Competes with captive and

provides BCP

• Captive operations – Leverages brand, – Important for regulatory

issues – Preserves proprietary

process knowledge

% of total off shored services

• 700 FTEs• Voice based customer support for credit card

operations

• Over 2000 FTEs across vendors such as Spectramind, Daksh, EFunds

• Voice based customer support for credit card operations

• Over 1600 FTEs • Involved in high-end and low-medium-end,

proprietary/non proprietary services (e.g., A/C reconciliation,A/C opening and closing, Ledger activities for credit cards, A/C planning and forecasting, Fraud and risk modeling)

Scale, scope and management model

30%

50%

20%


26

DELETED PAGES


27

Rigorous analytic approach Sponsor-led approachOutside-in approach

F-1000 PLAYERS HAVE ADOPTED THREE APPROACHES TO SELECT PROCESSES FOR OFFSHORING

Detailed analysis to identify high potential processes, percent

• Identify processes for offshoring based on simple criteria– Sponsorship from process

owner (e.g., inside Group Ops. in LTSB)

– Least organizational resistance (e.g., overflow work)

– Low reputation/service quality risk

• Use external benchmarks (activities and phasing) to identify and prio-ritize the corresponding candidate process in your organization

• Use benchmark information on off-shore-onshore split and internal FTE mapping (for identified candidate processes) to size the opportunity

Filter activities by offshorability

Identify processes/ activities offshored by existing players

• 'Build and they will come' – allow other parts of the organization to decide on offshoring at their own pace


28

Retail banking

– Merchant acquiring

Financial services sectors with high potential for offshoring*

• Retail banking

• Mortgages

– Servicing

– Origination

• Life and health

– Personal

– Group and health

• Property and casualty

– Deposit products

– Consumer loans

• Credit cards

– Card issuance & servicing

• Investment banking

– Research

7-11

10-15

8-15

7-12

5-10

10-20

5-10

5-12

5-12

8-15

Per cent of cost base offshorable

15-20

20-25

25-30

20-25

10-15

30-40

10-15

20-30

20-25

25-30

THIS HAS PRIMARILY BEEN DRIVEN BY THE SIGNIFICANT 35-50% COST SAVINGS OPPORTUNITY

* Asset management module including retail brokerage to be completed ** Does not include potential cost savings from offshoring IT and corporate center processes*** Non-interest expense - operating cost only, excluding interest expense, advertising, and corporate G&A where separable; assumes

institution is a “pure-player”

Potential institution-wide savings**

35-50% savings in off-shored activitiesWholesale

banking

Insurance

Per cent of total NIE***


29

VENDOR LANDSCAPE IS CONSOLIDATING AND MATURING

BPO start-ups

BPO arms of Indian IT services players

BPO arms of large financial institutions

Global BPO companies

• Call center, technical help desks and email based help desks

• Call center, Techmail help desk

• Call center, Insurance claims processing, airline revenue accounting

• Inbound call center and financial services

• Call centers, technical help desks and email based help desks – dedicated centers for BankofAmerica, Amex

• Mortgage processing (Greenpoint) and financial services

Service line focusEmployeesLeading players

• Call center and financial services (payments, card processing)

• Customer care, financial and accounting, payments

• Customer care (largely inbound)

• Call center, technical help desk, loan processing


30

SELL OUTS HAVE BEEN WITNESSED IN THE RECENT PAST

Source: McKinsey, Nasscom, press articles

20021996

• In April 2002, Warburg Pincus, leading private equity investor acquired 70% majority stake

• Strategy requires investment to fully exploit growing third party client base

• Allotted $3 million to set up third business process outsourcing (BPO) centre by 2003

Key events • Set up captive center in 1996 as wholly owned subsidiary to reduce the airline's operating cost

• Processed about 80% of BA’s backend operations

• Largely focused on airline clients

• 16.0 (FY2001)Revenue(USD mil.)

• 8.9 (FY1999)

• 1,700 (FY2001)

Employees • Unavailable

Offshored activities

• Customer complaints • Passenger/agent claims • Tracking cargo

• Customer Care / CRM• Loyalty program support• Revenue Accounting• Marketing program

development and management

2002

• Conseco fully exited by selling out stake to Oakhill Partners by Nov 2002; however it has continued outsourcing its transaction processing

• EXL Services named largest 3rd party IT-enabled service company in India in revenue terms

2001

• Conseco acquired EXL in 2001 for about $ 52.6 million

• ~60• 25 (FY2001)

• 3,500 (FY2002)

• 300 (FY2000)

• Internet and voice customer services

• Critical Back Office Operations

• Transaction processing• Collections

Rationale for sell-out

• Conseco was in financial distress due to diminishing core business and sold out captive center to raise funds

• BA sold out captive center to improve diversity of talent

3rd party provider 3rd party provider

BA set up captive BA set up captive BA sold captive to BA sold captive to Warbug Pincus Warbug Pincus

Conseco acquired Conseco acquired EXL Services as EXL Services as captive centercaptive center

Conseco sold Conseco sold EXLServices to EXLServices to Oakhill PartnersOakhill Partners

EXAMPLES

ites & bpo- opportunity to move up the value chain

Documents