webinar deck: gics vs. service providers: who is winning?

GICs vs. Service Providers: Who is Winning? December 12, 2012

Live Tweeting #GIC

Proprietary & Confidential. © 2012, Everest Global, Inc. 2

Introductions

H. Karthik Vice President [email protected]

Shyan Mukerjee Practice Director [email protected]

mailto:[email protected]�



Terminology | Global In-house Center (GIC) replacing “captives”

Context

Historically, the term “captives” has referred to service delivery operations in lower cost geographies, which are owned and operated by the same company receiving the services (i.e., not third-party outsourcing)

Although the term has become widely used, it has a perceived negative tone and is not self-explanatory, causing confusion for those new to the global services space

Furthermore, many organizations, for which “captives” is intended to describe, do not use the term themselves

What has changed Everest Group has adopted “Global In-house

Center” or “GIC” as the preferred term to replace “captives”

This will appear in all of our reports and content beginning in July 2012

Growing industry-wide shift Both NASSCOM (India) and BPAP (Philippines) are championing the change in terminology

http://www.prlog.org/10326486-bpap-logo.jpg�


Discussion points for today

Issues to consider in sourcing model strategy

Market context on sourcing models

Common myths related to sourcing models


The analysis and insights provided in this webinar are most relevant for large enterprises with multi-geographic businesses

Company size (Revenue)

Geographic coverage

Small (< US$5 billion)

Medium (US$5-10 billion)

Large (> US$10 billion)

Limited to one geography

Some geographies (2-3)

Multiple geographies (>3)

Most applicable Relevant Partially relevant

Relevance of analysis


Leading global enterprises are leveraging both GICs and service provider models

38%

6%

71%

83%

50%

17%

62%

94%

29%

17%

50%

83%

Sourcing mix for leading enterprises 1

2012, Percentage

Company 1

Company 5

Company 2

Company 4

Company 6

Company 3

18

7

8

5

5

8

#Offshore GIC centers #Leading service providers

4

8

9

6

7

5

Service provider GIC

1 The companies indicated here have offshore scale greater than 5,000 FTEs and revenue greater than US$10 billion


Enterprises face multiple sourcing model issues as they seek to enhance value from global services

How should I allocate work between sourcing

models?

Are there differences between the sourcing

models in terms of their employee value proposition?

How do I diversify my sourcing model

concentration risk?

What are the key considerations in sourcing

model design?

How should I compare costs between GICs and

service providers?

Can I outsource “complex” processes?

EXAMPLES


One way to think about sourcing models is as an expanded set of options for organization design

What sourcing model configuration best provides the organization which will most effectively meet the objectives?

Degree of centralization/decentralization

Ability to drive change Performance

Flexibility

Competencies

Incentives

Skills & expertise Culture


What is the biggest challenge faced by GICs?

19%

12%

44%

11%

11%

Cost competitiveness

Sustaining growth

Developing value beyond arbitrage

Talent development and retention

Increasing influence with parents

Source: Live polling conducted during the “GICs vs. Service Providers: Who is Winning?” webinar on December 12, 2012


32%

9%

12%

12%

23%

Enhancing credibility to deliver domain-intensive work

Sustaining growth

Developing higher intimacy with enterprises

Talent development and retention

Margin pressure

What is the biggest challenge faced by service providers?



Commonly perceived myths on sourcing models

Myth Reality

Service provider model is significantly gaining share compared to GICs

Both models continue to grow, particularly in areas that align with their “sweet spots”

1

GICs are always more expensive than service providers

In some cases, GICs provide lower costs and significant benefits to parents

2

Service providers are best leveraged only for transactional processes

Service providers have also built capabilities in many judgment-oriented processes

3

Clear segmentation between both models is always the most optimal sourcing model design

“One size does not fit all” – other sourcing model designs can also be appropriate

4


Myth #1: Service provider model is significantly gaining share compared to GICs

1

~90 ~120

~79% ~81%

~21% ~19%

2008 2012E

~3.0 ~3.8

Headcount (Million FTEs)

Revenue (US$ billion)

Reality: Both models continue to grow Marginal decrease in GIC headcount share, however, share in total revenue remains similar given GICs’

upshift towards complex/judgment-intensive work

Global services market size (2008-12) Service provider GIC

~77% ~77%

~23% ~23%

2008 2012E


GICs continue to have a significant share in certain industry verticals and functions

1

Function Sourcing mix in offshore headcount 2012; Percentage

IT - ADM 30-35% 65-70%

LEADING FINANCIAL SERVICES FIRMS

Note: Analysis based on eight leading financial services firms each with revenue greater than US$10 billion and offshore scale greater than 5,000 FTEs

Mostly leveraged from service providers given their significant capabilities in this space

Mostly delivered through GICs. Work often considered as “core” to business; e.g., IP/data protection

IT - IMS 20-25% 75-80%

BPO - Customer care 35-40% 60-65%

BPO - Non voice 50-55% 45-50%

KPO 80-85% 15-20%



Myth #2: GICs are always more expensive than service providers

Annualized Total Cost of Ownership (TCO) for parent/buyer US$ 000s per FTE per annum

2

Rate per FTE Transition & set-up cost

Governance & day-to-day operations cost

Relationship /account management cost

Productivity savings

Total cost of ownership

Additional costs incurred by buyer in setting-up, managing and governing the relationship

Billing rate charged by service provider and GIC

Savings on account of productivity benefits (e.g., process improvement, efficiency, and automation)

Important to take a TCO view rather than a billing rate view to understand the net financial impact


Myth #2: GICs are always more expensive than service providers

2

Comparison of GIC and service provider rate and TCO – Transaction process Indexed to service provider

100 100

126

107

Rate per FTE TCO per FTE

Comparison of GIC and service provider rate and TCO – Complex process Indexed to service provider

100 100 112

89

Rate per FTE TCO per FTE

SANITIZED EXAMPLE

In this example, TCO differential lower than rate differential, given higher productivity and lower governance costs for GICs relative to service providers. GIC’s better understanding of parent’s systems/processes, cultural context and domain knowledge are key drivers

For complex work, GIC TCO lower than service providers on account of relative advantages in accessing skills and shorter learning curve

The analysis should not be generalized and is dependent on multiple factors that impact TCO



Relative cost competitiveness is dependent on multiple factors

Factors specific to the work and where/how it is delivered

2

Factors specific to the relative attributes of the sourcing models

Scale

Type & complexity of work

Locations

Model maturity

Talent/resourcing model

Organization context & cultural affinity

Leverage of best practices

Approach to margins/gain-share

Talent/resourcing model

Organization context & cultural affinity

Leverage of best practices

Approach to margins/gain-share

GIC Service provider ?

TCO


Frequency of inclusion of F&A process over time Percentage

Judg

men

t-int

ensi

ve

Tran

sact

ion-

inte

nsiv

e

15%

28%

26%

61%

23%

25%

46%

73%

76%

80%

6%

19%

24%

50%

20%

24%

44%

71%

77%

82%

No major trend in inclusion of transaction-intensive processes

Significant increase in inclusion of judgment-intensive F&A processes (especially FP&A)

2007-2008 2010-2011

Internal Audit

Treasury and risk management

Regulatory reporting and compliance

Financial planning and analysis (FP&A)

Tax

Fixed assets

General accounting

Accounts receivable (AR)

Accounts payable (AP)

Payroll

Myth #3: Service providers are best leveraged only for transactional processes

Reality: Providers have also built capabilities in multiple judgment-oriented processes, traditionally considered “GIC sweet spots”

3


While most functions can be delivered from both models, some are best sourced from a specific model

ILLUSTRATIVE

Global In-house Centers (GICs)

Service providers

3

Functions where IP, insight/excellence from domain and intimacy are key considerations Examples: Product control Technology R&D Advanced quantitative

models

Functions where economies of scale and efficiency are key considerations Examples: Data entry Transaction processing Claims processing

Includes most functions spanning rule-based and judgment-based processes. Examples: IT ADM Testing IT helpdesk General accounting Accounts payables/receivables Management reporting Customer service Regulatory reporting Fraud monitoring and compliance


Segmented model

Clear segmentation of functions/work across models with limited overlap Designed to capture “best of breed” value Example: Source analytics work from GICs and BPO from service providers

Moderate/significant overlap in functional/work across models Designed to establish marketplace, diversify risks and enhance flexibility

Examples:

60% 50% 50% 33%

40% 50% 50% 67%

IT Non-voice BPO Collections Servicing

Service provider

GIC

Design optimized for flexibility Both models can work for most functions, best

fit determined for specific situations (e.g., capacity, business case, LOB preference)

Selectively “compete” work between models using champion-challenger approach

GICs used to “incubate” new areas and build comfort with business, some eventually outsourced

Role in Sourcing Portfolio

Claims processing (low complexity)

Claims – adjudication

Greenfield functions

Under-writing

Champion Tier II offshore BPO provider A

Offshore Tier I service provider

GIC (incubator)

GIC

Tier II offshore BPO provider B

Challenger Rural BPO provider GIC Offshore Tier I provider

Niche providers

Company A Company B Service provider

GIC

Myth #4: Clear segmentation of work between models is always the most optimal design

Mixed models


How do you expect global enterprises to leverage both sourcing models going forward?

8%

45%

48%

Predominantly compete both models for similar work

Predominantly complement models and deliver distinct work in each

Mix of compete and complement



Best practices to consider in sourcing model design and optimization

Be clear on overall sourcing objectives/desired value

Define a “target” sourcing model strategy/design

Drive structured decision making for incremental work packets

1

2

3

Strategic impact

Business impact

Direct-cost impact

C

B

A

Three levels of value Impact on a company’s… Typical result

Cost reduction Process efficiency

Direct-cost base Internal customers

Key processes or applications – Quality– Productivity

External customers

Business process improvement

Quality improvement

Tapping new markets Changing company-level

differentiation

Market differentiators Revenue stream

Criteria GIC Service provider

Scale

Demand variation

Sourcing req estimation

Degree of involvement with end user

Delivery locations

Costs

Domain capability

Process capability

Technology capability

Continuity leverage

Objective evaluation of trade-offs

Overall Score

Objective evaluation suggests third-party model better suited Low fit Moderate fit Excellent fit

Clearly define and articulate value drivers (e.g., efficiencies, scalability)

Align on economic model, investment considerations and risk appetite

Understand desired enhancements to current state

Profile demand (3-5 year view) Define GIC/service provider mix, model

design (e.g., segmented, mixed) and roles (e.g., champion-challenger)

Develop a decisioning framework to evaluate sourcing models for incremental work, aligned to the target end state

Need to apply framework consistently and objectively, to avoid stakeholder bias on decisions

Role in Sourcing Portfolio

Development –new apps

Development –existing apps enhancement Maintenance Testing Infrastructure

Champion Incumbent Tier I offshore service provider

GIC Incumbent Tier I offshore service provider

Incumbent Global Tier I service provider

GIC

Incumbent Global Tier I service providerIncumbent

Global Tier I service provider

GIC

Challenger Tier II / Tier III offshore service provider

Incumbent Tier I service provider

Tier II / Tier III offshore service provider

Tier I offshore service provider


Decision process guidelines for selecting portfolio model

How large is the potential enterprise “offshoreable” population?

Each function/BU approaches sourcing model in the manner their leadership believes value is best captured

Is there a strong culture/leadership for an international talent model?

Is there a proven history of enterprise-wide back office /technology operating models?

>2,500 FTEs

<2,500 FTEs Leverage only the outsourcing model (exception: if offshore domestic operations can already support other geographies)

Selectively use GIC model for functions/BUs to attain required differentiated talent; use outsourcing in other areas or to complement

No

Yes

Does the organization believe that global operating models are a natural part of the future business strategy?

No

Yes

Invest in GIC model as a strategic initiative to complement outsourcing

Outsourcing likely best fit, assess if internal GIC model provides incremental value in selective areas

Yes

No

1

2

3

4

5

If multiple GIC operations gain scale in offshore locations, some functions or BUs may elect to opt-in and migrate to model 1


Global In-house Center (GIC) Value Diagnostic Survey 2012

Are "parent" and "GIC" executives aligned in how they are looking to drive value beyond cost savings? Participate in Everest Group’s GIC Value Diagnostic Survey 2012 and share your perspectives. All participants will receive a complimentary copy of summary findings. Survey Link: surveys.everestgrp.com/s3/gic-survey-9

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For advice or research, please contact: – H. Karthik, [email protected] – Shyan Mukerjee, [email protected]

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About Everest Group

Everest Group is an advisor to business leaders on the next generation of global services with a worldwide reputation for helping Global 1000 firms dramatically improve their performance by optimizing their back- and middle-office business services. With a fact-based approach driving outcomes, Everest Group counsels organizations with complex challenges related to the use and delivery of global services in their pursuits to balance short-term needs with long-term goals. Through its practical consulting, original research, and industry resource services, Everest Group helps clients maximize value from delivery strategies, talent and sourcing models, technologies, and management approaches. Established in 1991, Everest Group serves users of global services, providers of services, country organizations, and private equity firms in six continents across all industry categories. For more information, please visit www.everestgrp.com and research.everestgrp.com.

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