Offshore Outsourcing

Offshore Outsourcing:
A Primer
Dr. Kevin D. Stringer
June 7, 2011
1
Agenda
What is offshore outsourcing?
Why offshoring?
Offshoring strategies and business approach
Sample locations – India, Poland, the
Philippines
Directed questions
2
SECTION 1
What is Offshore Outsourcing?
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What is offshore outsourcing?
♦ Outsourcing refers to the transfer of business processes from inside an organization to
outside an organization. The people who conduct the business processes change from
internal employees to professionals outside the organization.
♦ Offshore Outsourcing refers to the cross-border transfer of business processes to a
provider located outside a firm’s home country of operations and typically in a location
with greater available talent and lower cost.
Joint
♦ Other terms: Nearshoring, Bestshoring, Backshoring
Venture
Captive
♦ There are 4 general types of offshoring models:
12%
2%
– External company (vendor)
Hybrid
49%
– Internal team of employees (captive)
– Hybrid (mixture of vendor and captive models)
Vendor
37%
– New legal entity between a vendor and
captive (Joint venture)
Financial Institutions
Breakdown 2009
4
Sourcing (out, in, off, near)
Company
Operations
5
The original outsourcing gurus
Adam Smith
David Ricardo
6
Outsourcing based on competitive
(dis)-advantage considerations
Competitive Disadvantage
Production costs
Procure from Market
7
In-house production
77
Another guru
Ronald Coase,
Nobel Prize in Economics, 1991
8
Outsourcing based upon competitive
advantage and transaction costs
Outsourcing losses
Transaction costs
Production costs
Procure from Market
In-house production
9
Examples of transaction costs (1)
Resources spent on guarding
against opportunistic behaviour
by vendors
Finding reliable vendors
Drafting contracts
Enforcing contracts
Dispute resolution
Monitoring mechanisms
10
Examples of transaction costs (2)
Resources
spent on managing
transitioning, and interactions with
a (remote) vendor that would have
occurred “naturally” in-house
Travel
(Tele) communications
Coordination mistakes
Knowledge acquisition and transfer
11
3 main types of offshoring
Business Process
Offshoring
(BPO)
♦ BPO is the offshoring of a specific business process task, which often
involves executing standardized and transactional processes
♦ Sample BPO functions includes back-office work, billing, purchasing,
payroll and administration, trade processing (OTC, FX, securities, etc)
♦ KPO is the offshoring of processes that demand research, analytical and
Knowledge Process
decision-making / judgement skills.
Offshoring
♦ Sample KPO work includes MIS reporting, data mining, equity and fixed
(KPO)
income business research, data analysis and financial modelling / analysis
IT Offshoring
(ITO)
♦ ITO is the offshoring of IT applications and infrastructure functions
♦ Sample ITO work includes application development, prototyping, testing
and maintenance
BPO, KPO and ITO are the three most established types of offshoring in the
industry
12
Activities being offshored (complexity)
Research Services
High
•
•
•
Content development
Product design services
CAD / CAM services
Knowledge Services
•
•
•
•
Customer analytics
Portfolio & risk management
Equity research
Wealth management research
Medium
Complexity
Back Office
• Fin. & Acctg., HR, Procurement
shared services
• Technology support
• Operational transaction processing
Contact Services
•
•
Inbound customer relations &
helpdesk Outbound telemarketing
Collections
Low
Data Processing
13
•
•
•
Basic data entry
Transaction processing
Document management
13
13
Headlines on industry trends
KPO industry is expected to grow at 45% a year and to top $17 billion by
2010.
Onshore, Nearshore, Offshore:
Unsure, 2010
The global BPO industry, currently estimated at $26-29 billion, has grown at
35 per cent over the last few years and will be worth $450 billion by 2012.
The banking, capital insurance and manufacturing verticals will constitute 70
per cent of this global BPO market.
Everest Group, 2008
In 2008, the ITO market was estimated to be worth $250 billion, with annual
growth rates of 6-9%.
LSE Outsourcing Unit
Report, 2009
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What are the preferred locations?
Canada
Ireland
Eastern
Europe
China
Russia
Moscow
Near shore
Dublin
Toronto
Warsaw
Budapest
Shanghai
Malaysia
Mexico
Delhi
Mexico
City
Mumbai
Hyderabad
Bangalore
Location
% of
companies
with
offshore
presence
Share of
offshore
headcount
India
100%
72%
Philippines
19%
3%
China
16%
4%
Near shore
13%
2%
Ireland
9%
1%
India
Chennai
Manila
Kuala
Lumpur
Singapore
Philippines
Sydney
Singapore
Australia
Respondents allowed multiple choice
Source: Deloitte and Gartner
15
Ireland – a pioneer
16
SECTION 2
Why Outsource to Offshore
locations?
17
Potential benefits of offshoring
A wide variety of benefits may make offshoring appropriate in several
business situations
Reduce costs
Address open positions/
skill shortages to grow
Access to a large
pool of qualified
employees at a lower
cost
Follow the sun operations
(up to 7 x 24 h)
Extend working hours
Offer additional service
Enhance quality and
controls
Focus on client service
18
Why are banks offshoring?
Cost reduction is still a main driver to move offshore
Achieve Cost Savings
Improve Quality
Improve Time to Market
Gain Technical Skillsets
Forced Strategy
Cost Predictability
Penetrate Market
Gain Industry Experience
0
10
20
30
40
50
60
70
80
% of respondents
Source: Ventoro – Offshore 2007 and Gartner, 2008-09
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And the broader industry sample set?
For CFOs and CIOs, access to skill-sets seems to be more important
Business transformation
Focus on core business
Impact competitive advantage
Gain 3rd party expertise
Free internal resources
Access innovation
Cost reduction
Access Skill sets
0
10
20
30
40
50
60
70
80
% of respondents
Source: Cognizant and Warwick Business School Research, 2009
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SECTION 3
Offshoring strategy and business
approach
21
What should an offshoring strategy do?
Create differentiation
Create greater business value
Reconfigure value chain or contribute to
value shop development
Cost savings alone is not sustainable!
Imitating competitors is dangerous!
22
Which approach to offshoring?
Company culture and politics………..
Centralized
Top down targets
No exceptions
Holistic view to the
company operating
model
Company leverage
towards vendors and
scale and scope
increases
Desire to change
business model
Decentralized
Sub-units define targets
Lots of exceptions
No firm-wide view
Fragmented leverage
Vendor’s gain arbitrage
opportunities
Cost savings is often
main catalyst
..will have a big impact on the approach taken23
Example: DB Global Transaction
Banking
NY
LO
FRA
Competence Centers
Dublin
Frankfurt
Bangalore
Processing Centers
24
SECTION 4
Sample locations – India, Poland,
the Philippines
25
Gross cost comparisons: India - Europe
Personnel
Ongoing infrastructure costs
Total onshore cost
Business Process Offshoring (BPO)
Knowledge Process Offshoring (KPO)
Thousands
Thousands
300
300
250
250
200
200
150
150
100
300
100
150
50
50
22
15
0
Onshore
0
Offshore
Onshore
75% overall savings
E.g., back-office work, administration etc.
24
38
Off shore
79% overall savings
E.g., research and other tasks requiring specialist
knowledge
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Ex. Goldman Sachs in Bangalore
Goldman Sachs offshoring research to India
♦ Small Cap research team was created to assist in
completing the initial research work required to
cover companies. This significantly increased the
amount of companies covered by the Equity
Research Dept.
♦ Offshore Quantum team (team of 12,
compensation between ~8,500 USD and 27,000
USD p.a. per person) reduced number of onshore
contracted Grant Thornton accountants saving
approximately 4.5 million dollars on a 12 million
dollar contract
Bangalore
♦ Portfolio Business Analyst (compensation was
~27,000 USD p.a.) took on a project usually
outsourced to Grant Thornton accountants that
cost 28,000 USD per quarter
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But consider the risks in India
Inequality within a rising population
Water shortages
High oil prices
Global protectionism
Climate change
Infectious diseases
Source: Victor Mallet, “The utopian myth of India’s double dividend,” FT, December 6, 2007
28
Social instability
India has a small part of the
population with the GDP of
Mexico and the rest with a
GDP of sub-Saharan Africa
Home-grown Maoists
(Naxalites) have exploited
resentment over official
corruption and the widening
gap between rich and poor
to control large swaths of
rural India.
Maoist insurgency in 172 of
India’s 600 districts
29
Social issues
As Palaniappan Chidambaram, erstwhile Indian
trade minister noted in a conversation with Financial
Times,
“Do you know what the population of Finland is, “ he
asked? “5 million. We have 5 million blind people in
India alone.”
Source: Gideon Rachman, “For nations, small is beautiful,” Financial Times, Dec 4, 2007, 13.
30
GINI Coefficient Report 2009
This is the most commonly used
measure of inequality. The
coefficient varies between 0, which
reflects complete equality and 1,
which indicates complete inequality
(one person has all the income or
consumption, all others have none)
31
GINI Coefficient Report 2009
32
Resource scarcity
India imports 70% of its oil
from the Middle East and
has no strategic reserves
The Indian government
subsidy on food, oil, and
fertilizer is equivalent to the
entire collection on income
tax
India has 18% of the world’s
population but only 4% of its
freshwater and just over 2%
of its land area
33
Numbers can be deceiving
With a population of 1.1
billion India has the highest
absolute numbers of people
receiving hardly any
education
Literacy rate is a low 61%
About 2% of India’s existing
workforce has skills training
compared to 96% in Korea,
75% in Germany, and 68%
in the USA
Source: Goldman Sachs Global Economics Paper, 169, June 16, 2008 and India’s Borderless Workforce, Manpower, 2008
34
Talent is not always at the same level
Only 13 percent of the university graduates
from 28 low-wage nations are suitable for
jobs in most multinational companies.
Regionally, the differences are more marked.
So while 50% of the engineers in Hungary or
Poland could work for multinational
companies, only 10 % and 25 % of those in
China and India, respectively could do so.
Source: Diana Farrell, ed. Offshoring: Understanding the Emerging Global Labor Market, McKinsey Global Institute 2006.
35
Poland
36
Poland’s talent pool
♦Largest working population in Central Europe and
one of the youngest populations on the continent
– 50% of the Polish society is under the age of 34
– 35% is below the age of 25
♦Over 2 million students enrolled at universities
POLAND
– Almost 400,000 graduates/year
♦126 higher education academies, including 35
universities
♦Foreign language skills: English, German, French,
Italian, Spanish, Russian
37
University graduates per year in Poland
25 000
21 000
14 000
30 000
76 000
33 000
27 000
44 000
20 000
41 000
34 000
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Poland cost comparisons
Typical onshore/offshore salary cost comparison 2010
Business Process Offshoring (BPO)
Knowledge Process Offshoring (KPO)
Thousands
Thousands
300
250
200
150
100
50
0
300
250
200
150
100
50
0
150
33
Onshore
Poland
e.g. Back-office work, Administration etc.
275
45
Onshore
Poland
e.g. Research and other tasks requiring specialist
knowledge
Ca. 60% overall savings
Ca. 83% overall savings
Source: Grafton Recruitment, 2010.
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BPO
Gdansk
Olsztyn
Szczecin
Warszawa
Poznan
Lodz
Lublin
Wroclaw
Czestochowa
Katowice
Krakow
Bielsko
– Biala
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IT or Call Centers
Gdansk
Olsztyn
Szczecin
Bydgoszcz
Warszawa
Poznan
Lodz
Wroclaw
Kielce
Katowice
Krakow
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Fewer risks
European Union member
NATO member
Closely connected to US and Europe
Cultural fit
Nevertheless…….
42
Corruption Index 2010
Rank (09)
1 (1)
8 (5)
20 (17)
22 (19)
25 (24)
41 (49)
78 (79)
87 (84)
178 (178)
Country
New Zealand
Switzerland
United Kingdom
United States
France
Poland
China
India
Somalia
Score
9.3
8.7
7.6
7.1
6.8
5.3
3.5
3.3
1.1
Source: Transparency International, Corruption Index 2010
43
Case: State Street in Poland
Challenges:
Increased demand for fund services
Competition (BONY, Northern Trust)
Limited capacity in existing locations (Luxembourg,Ireland)
Solution:
Krakow captive – culture, quality, value proposition
Krakow costs when benchmarked across Europe at an 8%
salary spiral take ca. 20 years to reach average
But, not as productive as other European locations. Needs
2 years or more.
India was not a choice…….Why?
44
Case: State Street in Poland (2)
Focused business - fund accounting
Top Management targets, support, and buyin
Goal to move the Poland operation up the
value chain from simple to complex funds
administration
When does it just become another European office?
45
The Philippines
46
Philippine IT-BPO: excellence in voice
/ growing non-voice capability
47
Growth Business
One of the fastest-growing industries in the country
Major contact centers in the Philippines: 218
Total full-time employees: 280,000
Estimated revenues in 2009: US$5 billion
Revenue growth from 2008: 30%
Key Players in the Country
Third-party providers: Convergys, TeleTech, Stream Global
Services, Sykes Asia, Aegis PeopleSupport, Teleperformance,
Sitel, CyberCity Teleservices, Telus, ePLDT Ventus, Sutherland,
ACS, HTMT, IBM Daksh, KGB, Transcomm, ePerformax,
Link2Support, Genpact
Captives: HSBC, Dell, Shell, AIG, Siemens, Verizon, Citigroup,
Six Continents–Intercon Hotels, Henkel Financial Services, GE
Money, Trend Micro, Oracle Technology, Western Union, Ford
(Percepta), DHL
2009 Offshoring
Destination
of the Year
National
Outsourcing
Association, UK
48
The Philippine value proposition
Comparison of direct operating cost1 per FTE for transactional F&A work
2008; US$ thousand per annum
75-85
~75% savings
65-75
~70% savings
40-45
34-39
19-21
18-20
1 Operating cost includes salary, facilities, equipment, telecom, training, and attrition cost
Source: Everest Research Institute (2008) and BPAP (Manila costs)
49
Qualitative challenges & solutions
There are a number of challenges which are typically faced when
working with offshore teams
Challenges
Solution
Work with different
cultures
♦ Cultural training
♦ Personal interaction through visits
Maintaining high quality
standards
♦
♦
♦
♦
Efficiently utilizing
capacity
♦ Involve offshore managers in departmental resource allocation meetings
♦ Clearly designed process for assigning work offshore
Managing different time
zones (US)
♦ Ensure overlap
Retaining Staff
♦ Integration into onshore team
♦ Onshore travel
♦ Clearly defined career path
Onshore training for team leads
Coaching
"Shadow" key outputs in both locations in initial phase
Regular structured feedback both ways
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SECTION 5
Directed Questions and Answers –
The Larger Offshoring Challenge
51
Concerns
Economic
Social
Issues
Political
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Directed large group questions
♦
For developed countries, how do you maintain a
comparative advantage?
♦
How do you reengineer your work force or industries
in countries like Switzerland, Germany, USA, UK,
etc.?
♦
For offshore locations how do you address the
asymmetric economic and social development
problem?
♦
What do you do about the cross-border issue of
client data and overall reputational risks?
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Last thoughts!
Offshoring is one tool among many. It needs to be
evaluated carefully.
There are successes, but cross-sector, every 5th
firm reverses an offshoring project after 2 years.
Very few managers are trained to lead and manage
offshore and onshore organizations well.
Beware consultants with offshore operational units.
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Selected Further Reading
Outsourcing, Understanding the Emerging Global
Labor Market, Farrell, 2006
Why Are Companies Offshoring Innovation? The
Emerging Global Race for Talent, Lewin, Massini,
Peters, 2008
Globalization of White Collar Work, Duke/BAH
report, 2006
Offshore Nation, Strategies for Success in Global
Outsourcing and Offshoring, Vashistha and
Vashistha, 2006
“India and China May Not be the Answer,” Strategy
+Business, Stringer, 2010
55
Summary and Discussion
Your views and takeaways!
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