Trends in the outsourcing Industry - A Global Perspective

Rangan Mohan

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Agenda

• Introduction and Statistics• Classification of the Industry• Factors impacting the industry• Competitive landscape• People, Technology and Processes• Business Models, Pricing and Contracts• Trends – Picking the Winners• Conclusion

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Introduction and Statistics

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Introduction – Current Statistics

• Worldwide spend on Technology products and related services– US $1.6 Trillion in 2008– Growth of 5.6%

• Software Products, IT and Business Process Outsourcing (BPO)– US $967 Billion– Growth of 6.3%

• Indian software and BPO– Total - US $60 Billion (2009)– Exports - US $47.3 Billion– Exports (Projected) - US $60 Billion*

* Source - Nasscom Strategy Report 2009

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Introduction – Current Statistics

• BPO– Total - US $12.8 Billion– Domestic - US $ 2.0 Billion– Exports - US $10.8 Billion

• Exports (USA) - 60% (country)• BFSI - 41% (domain)• Telecom - 28% (domain)

– Worldwide offshored - US $26-29 Billion• Horizontal offerings - 70% (CIS, F&A and HR)*• Industry (vertical) specific - 25%*

* Source - Nasscom Everest Study

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IT Outsourcing – Addressable Market

Area Addressable Market* % Outsourced*Hardware / Software Maintenance, Network administration & Help Desk Services

70-85 2

Application Development and Maintenance 30-36 31

System Integration 36-39 5

Consulting 3-4 10

Research & Development 14-17 30

Total 147-148 11

* Source – McKInsey Quarterly 2006 No. 2 in US$ Billion

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BPO – Addressable Market

Area Addressable Market* % Outsourced*Retail Banking 35-40 6

Insurance 25-35 9

Travel & Hospitality 10-12 3

Auto & Manufacturing 10-12 9

Telecommunication 8-10 9

Pharmaceuticals 4-5 8

F&A, HR & horizontals 10-15 9

Others 20-25 9

Total 122-154 8

* Source – McKInsey Quarterly 2006 No. 2 in US$ Billion

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Introduction – Market for BPO

• Total BPO export market is expected to be US$ 220 Billion by 2012 – Vertical Services - US$ 145 Billion (~60%)– Horizontal Services - US $ 75 Billion (~40%)– BFSI and Manufacturing - US$ 160 Billion (~70%)– Technology, Telecom, Travel and Tourism - US$ 10 Billion– Back-office work - US$ 120 Billion– Front-office work - US$ 100 Billion– North America - US$ 155 Billion– Europe/Asia Pacific - US$ 45 Billion– Media & Publishing, Life Sciences, Pharmaceuticals and

Energy/Utilities are the new verticals– Domestic BPO is expected to be US$ 6 Billion

* Source - Nasscom Strategy Report 200910Rangan Mohan

Introduction – The India Story

• GDP – 3.5% “Hindu Rate of Growth” in the 80’s to 9.4% in FY2007 (source: Ministry of Statistics)

• 12th. Largest economy and 3rd. in Purchase Power Parity (source: Goldman Sachs)

• Rapid growth of the middle class – 50 million (now) – 583 million (2025)

• 5th. Largest consumer market by 2025• Rise in discretionary spend (as a % of private consumption)– 52% (now) to 70% (2025)

Bottom Line: CAGR potential for the domestic market will be 35% for the next 4 years

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Classification of the Industry

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IT & BPO Services

• Started with Information Technology services– Initially manpower onsite exports (a.k.a. “Bodyshopping”)– Next, offshore exports (a.k.a. “Bodyshopping”)– Projects Offshore– Projects Onsite– Products / Total outsourcing

• Business Process Outsourcing (BPO) – a later development– Voice-, and Data-based BPO– Front-, and Back-office based BPO– Evolution into KPO – Domain, Tools and People– New plays - LPO, MPO

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Factors impacting the Industry

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Factors affecting the Business

₋ Shortage of quality manpower (not just manpower)₋ High attrition rates₋ Fear of a demand slowdown₋ Emergence of other countries a potential alternatives₋ Erosion of margins due to

– Cost pressures and/or– All factors stated above

+ Quality investors onboard+ Presence across diversified geographies+ Mix of onshore, near-shore and multiple offshore delivery facilities, as

a key differentiator+ Identification of focus areas and ability to attain maturity of service

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Factors affecting the Business

₋ Declining demand due to₋ Slowdown in the primary markets of U.S. and Europe₋ Continuing political posturing₋ Economic conditions in the target markets

₋ Pessimistic scenario due to the malaise in the Financial sector

₋ Other factors include₋ Wage hike, due to competition/attrition₋ Base effect₋ Security and safety of data₋ Infrastructure

have come up in the discussions

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Competitive Landscape

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Global Competition Landscape

CanadaIT Services Exports (2003): $ 8BBPO Exports (2003): $ 7B

MexicoIT Services Exports (2003): $ 150MBPO Exports (2003): $ 80M

Czech RepublicIT Services Exports (2003): $ 26MBPO Exports (2003): $ 15M

HungaryIT Services Exports (2003): $ 22MBPO Exports (2003): $ 10M

PolandIT Services Exports (2003): $ 22MBPO Exports (2003): $ 10M

RussiaIT Services Exports (2003): $ 475M

PhilippinesIT Services Exports (2003): $ 300MBPO Exports (2003): $ 600M

ChinaIT Services Exports (2003): $ 700MBPO Exports (2003): $ 210M

IndiaIT Services Exports (2003): $ 9.5BBPO Exports (2003): $ 3.1B

Competitor LandscapeCountry Advantages Limitations

Philippines • understands the US culture, large scale technical training, software skills, voice work, low attrition, excellent telecom infrastructure

• Small talent pool – large ramp-ups are issues, no disaster recovery or multi-location facilities

Ireland • High understanding of the US; high-end skills, good brand equity in the US, excellent regulatory framework, quality standards

• High manpower costs (compared to India), lack of a large human resource pool

Australia • Large English-speaking population, favourable time-zone

• High manpower costs (compared to India), lack of a large human resource pool

Canada • Mature BPO industry, competitive pricing, near-shore capabilities, culture (similar to the US), good infrastructure

• High manpower costs (compared to India), lack of a large human resource pool

South Africa • Time-zone similar to Europe, easy accessibility to Europe, English-speaking population, 25% cost saving, good for niche work

• High manpower costs (compared to India), lack of a large human resource pool, skill shortage

Brazil / Mexico • 30% cheaper than the US, proximity to the US, huge investments in IT and telecom

• Skill levels are quite low (good only for low-end jobs), proficiency in English is poor, scalability

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Impact of Emerging competition

• India is still the destination of choice for off-shoring • Marginal increase (to 46%) in market share, of all offshore BPO

services globally- Several Supply-side factors impeding India’s leadership position

in the BPO industry- Shortage of employable personnel (biggest)- Increasing competition from 30 other low-cost countries for the

market share through significant incentives to the industry, including tax-breaks and better infrastructure

- India could lose up to ~10% of the current market share, especially to Philippines, China, Eastern Europe and emerging economies

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Impact of Emerging competition (contd.)

• Providers need to develop and nurture new business models to capture new markets and new business (BRIC, SMB etc.,)

• Industry needs new business models– 80% of the incremental growth will be from new, untapped

markets– Value proposition based on low-cost, labour-arbitrage will not be

sufficient to encourage adoption• India’s BPO industry could see revenue of up to US$ 150 Billion

by 2020 (source: NASSCOM “Perspective 2020”)

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India’s leadership – contributory factors

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Advantages of Skilled Manpower Lower Costs & Higher Productivity/Quality

• Second largest English-speaking workforce in the world (30 m)

• The largest higher-education system in the world, outside USA, with 250 universities and 12,000 colleges and research institutions

• Approximately 500,000+ employed in the BPO sector and 900,000+ in IT

• Productivity and quality levels are higher in indian outsourcing operations due to more educated profile of the employees, viewing IT/BPO as a long-time career

• Manpower costs are significantly lower than those in developed countries

Improvements in Telecom Infrastructure Favourable Government Policies

• Telecom costs have reduced drastically over the last 2 years

• Bandwidth availability has improved significantly

• Investment-friendly government policies such as tax concessions, infrastructure benefits and telecom deregulation

Mature Offshore Industry Strategic Location

• The indian outsourcing industry has grown rapidly, reflecting the increasing confidence of global corporations

• 300+ BPO service providers in India now

• Time-zone difference with Europe, USA and Asia Pacific region enables companies to create effectively a 24-hour support operation, reducing delivery lead times

Key Success Factors

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Knowledge Transfer Offshore Facility

• Team Build-up• Training• Knowledge retention

• Communication link• Replicate customer’s environment• Security

Concurrency Control Quality Management

• Visibility across sites• Configuration Management

• Define Processes• Implement-Review-Improve• CMM/COPC/eSCM

Project Control Productivity

• Project Management• Seamless communication• People Management

• Identify factors• Define metrics• Monitor and Improve

3 Legs of Control & Governance - Scope, Price, Service Levels• Customize metrics that measure what is important to the client (end-to-end)• Ensure a competitive process and a high-level price validation• Involve the service provider and client project executives in the transaction

structuring process

Indian locations – 4 stage development path

Leaders Challengers Followers Aspirants• Bangalore• Chennai• Hyderabad• Kolkatta• Mumbai• NCR*• Pune

• Ahmedabad**• Bhubaneshwar• Chandigarh***• Coimbatore• Indore• Jaipur• Kochi• Lucknow• Madurai• Mangalore• Nagpur• Thiruvananthapuram• Tiruchirappalli• Vadodara• Visakhapatnam

• Aurangabad• Bhopal• Goa• Gwalior• Hubli-Dharwad• Kanpur• Mysore• Nasik• Pondicherry• Salem• Surat• Vijayawada

• Allahabad• Dehradun• Durgapur• Gangtok• Guwahati• Ludhiana• Patna• Raipur• Ranchi• Shimla• Siliguri• Srinagar• Varanasi

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Requirements – Primary, Medium and Long-Term

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• Primary requirements to promote immediate industry growth1. Address key infrastructure and living environment issues

• Expansion of business centres beyond the current areas• Create radial infrastructure and satellite locations• Decongest traffic - improved local connectivity• Enhance power, hotel and airline capacity

2. Manage increasing labour costs and high attrition• Career growth plans, work-life balance, alternate

compensation structures

Requirements – Primary, Medium and Long-Term

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• Requirements for industry growth in the medium/long term3. Develop long-term positioning and promote location

• Mumbai can leverage its expertise in financial markets for a finance-oriented hub

4. Create clusters of learning and innovation through integration across sectors and stakeholders• Bangalore focussing on knowledge economy (IT, Bio-tech.)

5. Conducive application-oriented learning system that fosters innovation

6. Continuation of development of talent, upgrading social and living environment, to support sustained economic growth and continuous monitoring

People, Technology and Services

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Myths

• Outsourcing means hiring workers from another country to take jobs away from our workers on a permanent basis

• Only big businesses can afford to outsource

• Small organizations would not gain any benefits from the outsourcing practice

• Outsourcing is bad for America– McKinsey report states for every US$ 1 outsourced, US$ 0.67 is

saved and US $ 0.33 goes to the outsourcer, from which US$ 0.08 comes back to USA

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Outsourcing Process - Steps

• Evaluate the business processes• Identify outsourcing opportunities in the processes• Select Vendors/Suppliers/Partners• Negotiate successful contracts• Establish successful working relationships with vendors• Manage a multiple vendor relationship• Turnaround a failing vendor relationship or replace the vendor,

if required• Govern the vendor relationships on a day-to-day basis• Implement and track Service Level Agreements (SLAs)• Anticipate and avoid problems or solve them on arising• Ensure success

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Outsourcing – Major Benefits

• Increase sales opportunities• Improve corporate image and public relations• Prevent missed opportunities• Reduce annual costs, almost immediately• Enable business to focus on core competencies• Reduce or eliminate customer complaint• Increase customer loyalty• Lower the costs projects and events• Better the competition• Release resources and time

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Outsourcing – Transformational vs Traditional

• Business focus vs. Operational focus• Creating value vs. Cutting costs• Assistance in managing uncertainty vs. enhancing control• Alignment with changing business processes vs. existing ones• More on new set of network vendors vs. superior IT specialists• Emphasises on business costs and re-engineering to further

enhance cost reduction

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Outsourcing – Tactical vs Strategic

• Tactical is namely, – Generation of immediate cost savings– Elimination of the need for future investments– Realisation of cash infusion from the sale of assets– Relief from the transactional burden for the staff

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Reasons for Outsourcing

• Allows organizations to focus on core competencies• Allows greater efficiency without having to invest on technology

and people• Makes organizations more profitable, for an incremental cost• Leads to better and implementable Service Levels (internal

departments are less amenable)• Helps companies maintain competititve edge

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Trends – Picking the Winners

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Role of future BPO players

• Third-party providers– Global leaders – large, integrated, full-service multi-country

providers– BPO specialist – domain-driven transformational services in a

select vertical– Diversified BPO player – undifferentiated services for vertical and

horizontals offering opportunity– Segment specialists – end-to-end services for specific domains

• Captive BPO players– Global Centers of Excellence – deep domain and high-end work

for the parent organization– Innovation Incubators – driving innovation, using cutting-edge

tools and technologies– Low-cost aggregators – cost-competitive delivery units

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Future Trends

• Time to go lean– Tighter attrition management– Broader management spans – Increased utilization, tighter forecasting and scheduling– Transportation and telecommunication costs– Elimination of unnecessary (!!) expenses

• Focus on newer markets– Western Europe– Australia– Japan– Domestic market

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Future Trends – one more !

• Greater focus on mid-market opportunity• Cost arbitrage to value addition• Newer opportunities and services• Sale of captive units• Consolidation – the Gartner Report• Cloud sourcing and on-demand sourcing• End-to-end services – business processing integrated with other

services• Increased governance in outsourced contracts

– Financial– Security– Business continuity– Prior experience

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Trends driving outsourcing

• Significant Shift from – domestic to global economy– Manpower to techno-power– Company-led to customer-driven market forces– Industrial economy to knowledge econmoy

• Transformation of employer-employee relationship

• New relationships and governance concerning vendors and customers

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Offshoring – changing landscape

• Globalization and integration of labor markets & IT advancements will drive global outsourcing

• Offshore outsourcing will become more strategic, helping transformational change in organizations

• Offshoring to mature locations (like India) are no longer determined by the metrics like cost and quality

• Key drives henceforth will be – Continuous improvement– Speed to market– Time to market– Innovation– Flexibility– efficiency

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Offshoring – changing landscape (contd)

• “Beyond Cost” – new mantra of offshore BPO• Governed, earlier, by considerations like

– Cost savings– Labour arbitrage– Reduction of overheads

• Today, companies measure benefits by – Increase speed to market– Reduced defects or rework– Lower working capital requirement– New market opportunities

• Augmentation of labour pool, reduced investments in infrastructure and human resources, focus on core competencies, improved quality and productivity through focus

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Offshoring – changing landscape (not done yet)

• Transformational outsourcing .offshoring, - companies collaboratively outsource both critical and non-critical processes

• Critical processes are identified and handed over to specialist organization that leverages its expertise to assist the business to match the competition

• Based on the belief that skilled and motivated partner is likely to drive the change far more aggressively

• Three most important benefits driving outsourcing (cost aside)– Superior and efficient IT-enablement– Improved productivity– Increased control

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Mergers and Acquisitions trends – 2009

• Gartner’s prediction – 25% of firms in outsourcing would cease to exist by 2012

• Four types of firms would remain– IT players with BPO play– Pure play large BPO players– Specialist BPO players catering to a domain– Others – captives of MNCs, mid-sized BPO players and players not

clear on their direction• Viable size for a large BPO player would be 10,000 seats• Margins would be under pressure, leading to consolidation• MNC captives would sell their units and concentrate on their

core business

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Criteria for M&A in BPO space

• Commonality, size and profit profile of customer• Geographical presence for marketing or delivery• Availability of platform – SaaS• Acquisition of customer’s business• Ability to leverage a multi-delivery model• Focus industries like

– Healthcare– Media and Entertainment– Horizontals like Analytics, Cloud Sourcing and F & A

• Parties will focus on dispute resolution processes and remedy provisions

• Distressed M&A will be on the increase

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Questions ?

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