offshoring to vietnam - sourcing interest group forum

Viet Ho, Chief Procurement Officer

A low-cost alternative.Vietnam - the new offshore location.

OCTOBER 2014

About Russell Investments*

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What we’ve done

Who we are

Every step matters. Russell is a global asset manager that provides multi-assetsolutions, including strategic advice, implementation services, and globalperformance benchmarks.

Outcomes that matter. As of June 30, 2014, Russell has approximately$280 billion in assets under management and works with institutional clients,independent distribution partners and individual investors globally. Assetsbenchmarked to the Russell Index family surpass $5.2 trillion — more than allother U.S. equity indexes combined.

What we do

Headquartered in Seattle, Russell has approximately 1800 associates in 21offices around the world. Russell’s Global Sourcing & Procurement (“GSP”)team is currently comprised of 30 FTEs responsible for approximately $1billion in spend.

*Source: http://www.russell.com/us/about-russell/default.page

Today’s key objectives & takeaways

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Part Two: Review

• Overview of the offshore marketand its challenges

• Offshore opportunities in Vietnam

• Case study by Russell• Next steps to take

Part One: Discussion

Offshore Market and Its Challenges - Discussion

Offshore outsourcing – A brief history*

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20yearsago

Today

10yearsago

15yearsago

5yearsago

The beginning of theOffshore/Outsourcingphenomenon

The improvement intelecommunication andthe Y2K challengescreated opportunities toshift technology work tolow-cost countries

India, with its large poolof English speaking andtechnically proficientmanpower, was at thecenter of the offshorestory

Other outsourcingcountries such as China,Philippines, Mexico,Poland, Ireland, CostaRica, and Argentina cameinto the mix

The ITO/BPO global outsourcing market is estimated at$180B annually, with India capturing 50% of the market

* Source: Nasscom - Association for the Indian software industry

Emerging challenges in offshoring (focusing on ITO)

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Profile* Volume Challenges

Large Offshorer > 1000 FTEs

• Supplier fragmentation with at least 4-5 suppliers• Offshore rates are comparable across most suppliers• Onshore/niche consulting spend is significant• Business units have their preferred suppliers which

lead to a lack of competition

Medium Offshorer 300-1000 FTEs

• In addition to the above ...• Cost pressure as contracts are renewed• Service quality deteriorating (less focus from major

suppliers as they chase new business)• High turnover and visa issues are cropping up and

are impacting operations

Small Offshorer < 300 FTEs• In addition to the above ...• Too small for major suppliers, end up with Tier 2 or 3

providers

* Russell segmentation - for discussion purposes only

Some key considerations* for potential and/orexisting offshorers

Risk Management

• Security and dataprivacy

• Intellectual property• Resource risk

Service Levels

• Knowledge transfer• Quality control• Account

management• Capability

FinancialConsiderations

• Total cost• Inflation differential• FOREX

Long-termviability

• Capacity• Innovation• Regulation• Political stability

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Outside of procurement process, four areas are worthy of additional review:

* Russell framework - for discussion purpose only

Russell’s journey to fix the category

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1. Strategic Review of the Offshore Outsourcing Category

Conducted a total cost analysis (labor, IT, market data, leverage ratio)

Evaluated current suppliers for capability

Evaluated current service level

2. Develop Options and Obtain Executive Support

Alternative India provider or other location

Near-shore locations

US locations

3. Complete Strategic Assessment

Russell’s search for another low-cost supplier

• Talk with industryanalysts (Gartner,Forrester)

• Internet and peerresearch

• Conduct RFI

Step One

Conducted market andsupplier search

• Eastern Europe• Latin America• Asia (incl. India, China)

Step Two

Evaluated differentgeographic locations

• Philippines• Malaysia

• Vietnam

Step Three

Detailed look at thefollowing three

short-listed locations

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Conclusion from assessment for Russell

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› Bring some of the scope with higher costs and low service levelsback in-house

› Compliance

› Reporting

› Identify another low cost location for some of our needs

› Explore Vietnam for ITO services

› Introduce more competition to current supplier base using a newsupplier

Why Russell prefers Vietnam

› Financial attractiveness of Vietnam is significant – 30% to 50%lower cost than India (it helps to reset the clock back 10 years)

› Political, social and economic stability are attractive

› For ITO, Vietnam is a comparable alternative to India acrossmultiple areas

› Availability of high-quality skilled resources is attractive

› ‘Strategic partnership’ focus from Vietnam companies is betteraligned to meet both short and long-term needs of companieslike Russell

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Opportunities in Vietnam – Discussion

Vietnam – A new destination for outsourcing

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“Vietnam remains one of the most competitive options in the

world for software outsourcing due to its competitive laborcosts and other business costs.” (2013)

Vietnam is ranked as the 12 most attractive location in the 2014A.T. Kearny Global Services Location Index TM

“ Low labor cost in Vietnam is attracting many Japanesecompanies in outsourcing their software developmentservices.” (2014)

“Ho Chi Minh City to watch as a location for the nextoutsourcing boom.”

Top 100 Outsourcing Destinations - The de facto ranking ofoutsourcing cities around the world (2014)-Ho Chi Minh City is ranked at 17th above Kuala Lumpur-Hanoi is ranked at 22nd

Why Vietnam?*

› Population of 92M people with 65% younger than 35

› One of the fastest growing economies in South East Asia

› Politically stable with strong government support for the IT industry

› 290 universities/colleges offering IT and communication training

› English is the second language

› Highly skilled and motivated labor force

› Rates are 30% to 50% lower than India or China

› Quickly becoming the major manufacturing alternative to China(“China +1” strategy)

› Has the potential to be the ITO/BPO alternative to India (“India +1”strategy)

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*Sources: General Statistics Office of Vietnam; www.fpt.com; http://www.vietnamoutsource.org/vno-outsource-foundation.html;http://www.tmasolutions.com/whyvn.aspx

The TRANS-PACIFIC PARTNERSHIP (TPP) willchange the game for Vietnam*

Objectives Timeline Countries Involved

• The TPP intends to enhance trade andinvestment among the TPP partner countries,promote innovation, economic growth anddevelopment, and support the creation andretention of jobs.

• All signatory countries will be required toconform their domestic laws and policies tothe provisions of the Agreement, which willfollow international standard in areas such ascross-border service supply, financial service,E-commerce, investment, intellectualproperty, government procurement,employment, environment, state-ownedenterprises.

• Started in 2005 and isslated to wrap upnegotiations by end2014.

• It is one of the keyforeign policy objectiveof President Obama.

• United States• Vietnam• Australia• Brunei• Canada• Chile• Japan• Malaysia• Mexico• New Zealand• Peru• Singapore

The TPP would create a free-trade zone from Australia to Peru with $28 trillion in economic output, or 39 percent of the global total. The deal isa major part of President Barack Obama’s effort to bolster U.S. influence in Asia as China flexes its economic and military muscle across theregion. Talks around the agreement are entering a critical phase as the Obama presidency nears its final two years.

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Some areas of outsourcing in Vietnam

ITO

› Product engineering

› Application development

› QA & testing

› Maintenance & supporting

› Porting & migration

› IT managed services

› R&D

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BPO/KPO – Non-voice BPO

› Data entry & conversion

› Digitization

› Document processing

› Online catalog/image processing

› Loans & mortgage processing

› Title insurance processing

› Procurement, accounting, and finance

Sources: http://www.fpt.com.vn/en/products_and_services/software/; http://www.tmasolutions.com/services.aspx; Gartner

Some key considerations* for potential and/orexisting offshorer looking at Vietnam

Risk Management

• Review certificationlevel of your supplier(eg. CMMI, ISO)

• Ensure you arecomfortable withsecurity arrangementssuch as secured zones,secured network, codestay in the US

• Contract with US entityif possible

Service Levels

• Plan for sufficientknowledge transfertime/resources (there isenough savings toallow you to do thisproperly)

• Plan to have either yourpeople in Vietnam orthe VN team membersspending significanttime at your location

• Make sure QC metricsare identified andtracked

• Push your supplier toenhance the accountmanagement portion ofthe contract

FinancialConsiderations

• Benchmark your costfor both India andVietnam

• Model your cost 3-5years out (Vietnam ispaid in USD)

• Look at the total cost ofthe engagementincluding leveragefactor, IT costs, travel,data

Long-termviability

• Does your supplierhave the capacity orwilling to makeinvestment in yourscope?

• Does your supplierservice roadmap fit intoyour long term plan?

• Vietnam relationshipwith the US isstrengthening and isexpected to continue

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Things to consider when outsourcing to Vietnam:

* For discussion purposes only

Notable outsourcing companies in Vietnam

• 25 years old• ~5,000 engineers• Client List: DirecTV, Freescale, Boeing,

Deutsch Bank, RamQuest, Old RepublicTitle, Corsource Technology Group,Halliburton, Ambient

• 17 years old• ~2,000 engineers• Client list: Alcatel-Lucent, Avaya, Shoretel,

Genband, IBM, Brightstar, Amdocs,Prudential, ANZ, NTT, Toshiba, NEC, Hitachi

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› Best in Class Processes: achieved certification as SEI CMMI Level 5; ISO9001:2008; and ISO/ TS 16949

› Security Standards: implemented the ISO 27001:2005 (formerly BS 7799 -2:2002)standard for Information Security Management System

› Agile software development methodology adopted widely as industry standard

› Serve niche markets: Custom application development, mobility, telecom, Frenchmarket focus, Japanese market focus, and non-voice BPO

1. An IT/Telecom Leader ($1.4B) 2. A Private ITO focus leader

Russell Case Study:

A Review (For Discussion Purposes Only)

Russell case study – MS App. Dev. RFP*

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• Application development and support for MS IT projects with $3M inprojected spend.

ScopeScope

• Global Sourcing and Procurement engaged IT to discuss options forapplication development and IT support. IT was concerned about thelow service level provided by the current suppliers and was receptiveto consolidating the supply base.

• The project executive sponsor is the CIO.

EngagementEngagement

• Russell currently uses six providers (4 US and 2 India) and would liketo consolidate the supply base to leverage the spend and reducethe complexity of supplier management.

• Control costs. Applications development and support costs haveincreased 15% annually from 2011 to 2013.

• Identify MS certified providers that have the scale and skills tosupport Russell’s applications development and support needs forthe short and long term.

GoalsGoals

• GSP conducted an RFP with active participation from IT to define thescope, requirements, and evaluation criteria.

• The RFP was sent to 14 suppliers and10 responses were received.Based on price and scoring of responses, 6 suppliers were invited toon-site presentations.

SourcingSourcing

Final ResultRussell consolidated the MSApplications Developmentproviders to 2 providers. Onelocated in Vietnam and onelocated in the US. Therecommendation was based onthe selected providers havingstrong service delivery and lowercosts. Vietnam providers’ costsare 40% below India and 80%below US providers.


Next Steps

Vietnam as a solution to strategic challenges*

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Profile Volume Challenges Solutions

Large> 1000FTEs

• Supplier fragmentation with at least 4-5 suppliers

• Offshore rates are comparable acrossmost suppliers

• Onshore/niche consulting spend issignificant

• Business units have their preferredsuppliers which lead to a lack ofcompetition

• Strategic: Develop a Vietnam supplier in thisspace, start with a pilot in their sweet spot,then help to position your new partner as acompetitor to your incumbents as the partnerbecome more knowledgeable (this apply toboth India providers as well as US consultingsuppliers)

Medium300-1000

FTEs

• Cost pressure as contracts arerenewed

• Service quality deteriorating (lessfocus from major suppliers)

• Turnover/Visa issues are cropping upand are impacting operations

• Strategic: Leverage a Vietnam supplier insome sizeable projects, provide competitionto your incumbents

• Tactical: Use Vietnam resources to augmentyour weaken areas, shift more as you feelmore comfortable

Small< 300FTEs

• Too small for major suppliers, end-upwith Tier 2 or 3 providers

• Evaluate Vietnam suppliers as alternative toyour incumbents

• Transition over to the new supplier once youare comfortable


Opportunistic steps to get started in Vietnam to testand confirm the value proposition*

For the budgetconstrained...

• Surprise your IT Leaderswith a little year-endpresent – Identify smallproject(s) that could notbe done due to high cost.You may be able to get itdone with Vietnamesesuppliers

Just need some leverage...

• Small pilot / Proof ofConcept – Start with asmall project in a genericskill set area; use theopportunity to “push” yourincumbent

Need to mitigate countryrisk...

• Qualify Vietnam as a newsupplier to use as riskmitigation for your CIO;Create an “India +1”option

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Rate benchmark* - Complimentary

p.25* For discussion purposes only

Assessment of your Offshore rates:

› The blended offshore rates are high (4th quartile), in particular some of the niche skills rates arehigher than your peers. A job specific analysis will help

› The blended onshore rates for India suppliers are not competitive

› Your India blended offshore rates are 42% higher than Vietnam suppliers, the range is between 34%-55%. Your onshore rates are 60% higher than Vietnam suppliers

› Your ITO scope can be covered by two Vietnam suppliers (further detail analysis required)

Discuss opportunities:

› Conduct a job specific benchmark analysis to determine rate negotiation strategy – Immediate

› Evaluate Vietnam suppliers for some of the lower risk scope (QA testing, migration support) andproject scope (MobileApp, Microsoft App dev, workflow optimization)

www.russell.com“Russell,” “Russell Investments,” “Russell 1000,” “Russell 2000,” and “Russell 3000”are registered trademarks of the Frank Russell Company.

Contact information

Viet Ho

Russell Investments

[email protected]

PH: 206.321.5540


Thank you


Theopinions expressed in this material arenot necessarily thoseheld byRussellInvestment Group, itsaffiliates orsubsidiaries. Whileall material is deemed tobereliable, accuracy and completeness cannot beguaranteed. Theinformation, analysis, andopinions expressed herein are for general informationonlyand arenot intended toprovide specific advice or recommendations for anyindividual or entity.

Russell Investment Group isaWashington, USAcorporation, whichoperatesthroughsubsidiaries worldwide, including Russell Investments, and isasubsidiary of TheNorthwestern Mutual Life Insurance Company.