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
70-85 2
administration & Help Desk
Services

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 2009
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 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
offerings
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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

Poland
Canada IT Services Exports (2003): $ 22M China
IT Services Exports (2003): $ 8B BPO Exports (2003): $ 10M IT Services Exports (2003): $ 700M
BPO Exports (2003): $ 7B BPO Exports (2003): $ 210M
Mexico
IT Services Exports (2003): $ 150M
BPO Exports (2003): $ 80M

Philippines
IT Services Exports (2003): $ 300M
BPO Exports (2003): $ 600M

Czech Republic India

IT Services Exports (2003): $ 26M
BPO Exports (2003): $ 15M
Hungary
IT Services Exports (2003): $ 22M
BPO Exports (2003): $ 10M
IT Services Exports (2003): $ 9.5B
BPO Exports (2003): $ 3.1B
Russia
IT Services Exports (2003): $ 475M

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 Competitor Landscape
Country Advantages
Philippines • understands the US culture, large
scale technical training, software
skills, voice work, low attrition,
excellent telecom infrastructure
Ireland • High understanding of the US; high-
end skills, good brand equity in the
US, excellent regulatory framework,
quality standards
Australia • Large English-speaking population,
favourable time-zone
Canada • Mature BPO industry, competitive
pricing, near-shore capabilities,
culture (similar to the US), good
infrastructure
South Africa • Time-zone similar to Europe, easy
accessibility to Europe, English-
speaking population, 25% cost saving,
good for niche work
Brazil / Mexico • 30% cheaper than the US, proximity to
the US, huge investments in IT and
telecom
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Limitations
• Small talent pool – large ramp-ups
are issues, no disaster recovery or
multi-location facilities
• High manpower costs (compared
to India), lack of a large human
resource pool
• High manpower costs (compared
to India), lack of a large human
resource pool
• High manpower costs (compared
to India), lack of a large human
resource pool
• High manpower costs (compared
to India), lack of a large human
resource pool, skill shortage
• 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
Advantages of Skilled Manpower
• 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
Improvements in Telecom Infrastructure
• Telecom costs have reduced drastically over the
last 2 years
• Bandwidth availability has improved significantly
Mature Offshore Industry
• The indian outsourcing industry has grown
rapidly, reflecting the increasing confidence of
global corporations
• 300+ BPO service providers in India now
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Lower Costs & Higher Productivity/Quality
• 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
Favourable Government Policies
• Investment-friendly government policies such as
tax concessions, infrastructure benefits and
telecom deregulation
Strategic Location
• Time-zone difference with Europe, USA and Asia
Pacific region enables companies to create
effectively a 24-hour support operation, reducing
delivery lead times
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 Key Success Factors
Knowledge Transfer Offshore Facility
• Team Build-up • Communication link
• Training • Replicate customer’s environment
• Knowledge retention • Security
Concurrency Control Quality Management
• Visibility across sites • Define Processes
• Configuration Management • Implement-Review-Improve
• CMM/COPC/eSCM
Project Control Productivity
• Project Management • Identify factors
• Seamless communication • Define metrics
• People Management • 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
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 Indian locations – 4 stage development path
Leaders Challengers Followers Aspirants
• Bangalore • Ahmedabad** • Aurangabad • Allahabad
• Chennai • Bhubaneshwar • Bhopal • Dehradun
• Hyderabad • Chandigarh*** • Goa • Durgapur
• Kolkatta • Coimbatore • Gwalior • Gangtok
• Mumbai • Indore • Hubli-Dharwad • Guwahati
• NCR* • Jaipur • Kanpur • Ludhiana
• Pune • Kochi • Mysore • Patna
• Lucknow • Nasik • Raipur
• Madurai • Pondicherry • Ranchi
• Mangalore • Salem • Shimla
• Nagpur • Surat • Siliguri
• Thiruvananthapuram • Vijayawada • Srinagar
• Tiruchirappalli • Varanasi
• Vadodara
• Visakhapatnam

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Requirements – Primary, Medium and Long-Term

• Primary requirements to promote immediate industry

growth
1. 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

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Requirements – Primary, Medium and Long-Term

• Requirements for industry growth in the medium/long term

3. 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

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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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