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					               EXECUTIVE SUMMARY




               Next Generation Outsourcing: The
               Service Provider’s Perspective
               Results from the 2007 Service Provider Survey


                Presented by                                                    IAOP Outsourcing World
                                                                                               Summit,
                Dr. Arie Lewin (Duke University) and                                   Orlando, Florida
                                                                                      February 18, 2008
                Mahadeva Matt Mani (Booz Allen Hamilton)


This presentation may not be reproduced, cited, or distributed without the express written consent of both parties.




                                                                                                                      0
Offshoring Research Network
(ORN): History and Scope
 International multi-year research project:
 – Initiated in 2004 by Duke University CIBER, Fuqua School of Business
 – Annual surveys of buy side companies and service providers.
 – Complemented by focused surveys, participants workshops, case studies
 – Global data base consists of over 900 companies and service providers

 The Conference Board is Lead Collaborator for ORN U.S. Buy-side Survey (2007 - )

 Price Waterhouse Coopers is Lead Founder of ORN Best Practices Institute (ORN-BPI)
 and sponsor of ORN EU Survey
 – Past ORN Sponsors: Booz Allen Hamilton 2006, Archstone Consulting LLP in 2004 and
   2005

 Service Provider Survey Lead Sponsors: IAOP, 6th Sense Analytics, Archstone Consulting,
 Booz Allen Hamilton, Genpact, ITAA, NASSCOM, PriceWaterhouse Coopers, QuickStart
 Global, Sonnenschein Nath & Rosenthal LLP

 Service Provider Survey Affiliate Sponsors: Chronos Systems, ETelecare Global Solutions,
 Kirkland & Ellis LLP, Quest Global, Sayma, Symphony, TPI, WNS
 Affiliates:
 – International Association of Outsourcing Professionals; CIO Executive Council; Enterprise
    Software Roundtable; Software Information and Industry Association

                                                                                               1
Provider Survey Lead Supporters




   Provider Survey Affiliate Sponsors




                                        2
  2007 Service Provider Survey demographics and survey
  overview

           2007 Service Provider Survey                   Survey demographics and overview
          participants by size of company
                                                          Number of Respondents: 84 service providers
                                                          (280 total responses) across all geographies
                                         Large: >20,000
                                         employees        − Multiple service provider business units
                                                            surveyed
                                 21%
Small: <500                                               − Responses from operational, sales and
employees                                                   managerial staff

                                                          Years of Experience (median): 10

          48%                                             Major Survey Topics:
                                                          − Types of services provided
                                                          − Governance models
                                                          − Risks
                                   31%                    − Value creation
                                                          − Margins
                                                          − Delivery locations
                                                          − Future investments
                                Midsize: 500 –
                                20,000 employees          Business Processes Covered: IT, customer
                                                          service, F&A, procurement, HR, engineering,
                                                          marketing, R&D, new product development &
                                                          design, KPO


                                                                                                         3
Summary of 2007 Service Provider Survey key findings
                           BPO and ITO services are already highly commoditized - this trend will continue in the near future -
Traditional BPO and ITO
                           price points for these services are expected to decline
  Services are Rapidly
                           Serious investments in improving process efficiencies will be essential to the provider business
        Becoming
                           model
     Commoditized
                           M&A activity and acquisition of captives will likely increase as providers seek volume

    Innovation and         Innovation (new product development and design, engineering services, R&D) and knowledge
Knowledge Services are     services offer providers the highest profit margins and drive the highest savings for clients – a
 a Promising Growth        win-win for both service providers and clients
       Frontier            Innovation services are the second most frequent set of services offered by providers (after ITO) and
                           are also one of the fastest growing service lines

                           Small providers are out-executing large and mid-sized firms in the delivery of high-end,
Small Providers have an    innovation and knowledge services
Edge in Growth Areas of    – More nimble and capable of developing customized service offerings
       the Market          – More successful in attracting and retaining high end talent
                           Increasing acquisition of small firms by larger competitors is very likely. However, large firms
                           can expect serious challenges with duplicating the success of small providers

                           Globalization is impacting both clients and service providers – the race for talent is on
Global Race for Talent –   Providers are scrambling to expand their geographic footprint to meet client needs, as well as to
 Service Providers are     source skilled talent
      Scrambling           Managing talent is becoming the single biggest issue for clients and service providers in coming
                           years

                           Service providers and clients have not cracked code on delivering service quality as yet
 Providers and Clients     – Poor transitions and lack of effective client governance and change management are the
Have More Work to do to        chief culprits for outsourcing failures
Make Outsourcing Work      Making client specific investments leads to higher retention & growth rates and better savings
                           for the clients


                                                                                                                                   4
Table of Contents

  Survey highlights

  Opportunities in KPO and innovation services

  The small provider edge

  Impact of globalization on service providers

  What the future holds




                                                 5
The supply side of the outsourcing industry is growing rapidly -
fueled by small companies entering the market every year

                                                         Service Providers in the Market per Year by Percentage
                                                              of All Companies Responding to the Survey(1)
                                         100
                                                                                                                                         50% growth
                                                                                                                                          50% growth
    Percentage of service providers in




                                                                                                                                        rate in service
                                                                                                                                        rate in service
                                                                                                                                       providers since
       the survey offering services




                                          80                                                                                           providers since
                                                                                                                                            2000(1)
                                                                                                                                            2000(1)


                                          60
                                                                                                                                       Approximately
                                                                                                                                       Approximately
                                                                                                                                        75% of new
                                                                                                                                         75% of new
                                          40                                                                                            entrants are
                                                                                                                                        entrants are
                                                                                                                                       small service
                                                                                                                                        small service
                                                                                                                                        providers(1)
                                                                                                                                        providers(1)

                                          20



                                           0
                                           1980   1982   1984 1986   1988   1990   1992 1994   1996   1998   2000   2002 2004   2006

                                                                       Year in which services were started




(1) Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis
                                                                                                                                                          6
Surprisingly, a sizeable number of service providers operate with
hybrid and virtual-captive service delivery models…
                                                              Service Delivery Models Operated by Service Providers
                                                      100%     95%
             Percent of Service Providers Operating




                                                      90%
                                                                                       66% of service
                                                                                        66% of service
                 various Service Delivery Model




                                                      80%                             providers operate
                                                                                      providers operate
                                                                                      with hybrid and/or
                                                                                      with hybrid and/or
                                                      70%                               virtual captive
                                                                                        virtual captive
                                                                                          models(1)
                                                                                           models(1)
                                                      60%
                                                      50%
                                                                            41%
                                                      40%

                                                      30%                                   25%
                                                      20%
                                                      10%                                                   4%             3%             3%
                                                       0%
                                                                Fully     Hybrid(1)       Virtual(2)   Build-Operate- Joint venture   Mixed model
                                                             outsourced                                   Transfer

…This could indicate a new opportunity as the popularity of
captives declines
(1) Hybrid-captive (client company leases staff from outsourcer but manages staff in captive center)
(2) Virtual-captive (outsourcer manages payroll, space, hiring and other overhead for client)
Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis
                                                                                                                                                    7
Table of Contents

  Survey highlights

  Opportunities in KPO and innovation services

  The small provider edge

  Impact of globalization on service providers

  What the future holds




                                                 8
The number of service providers offering innovation services (new
product development and design, R&D, engineering services) are
growing rapidly – however, IT service offerings still dominate
                                                             Percentage of Service Providers Offering Categories of Services(1)
                                         80%
                                                       IT

                                                       Innovation Services (Product Dvlpmt., Engg., R&D)
Percentage of service providers in the
 survey offering classes of services




                                                       Call Center
                                         60%
                                                       Administrative Services (F&A, HR)                                                      95% growth
                                                                                                                                              95% growth
                                                                                                                                            rate in offering
                                                                                                                                            rate in offering
                                                       Procurement                                                                           of innovation
                                                                                                                                             of innovation
                                                                                                                                            services since
                                                                                                                                             services since
                                                       Knowledge / Analytical Services                                                           2000(1)
                                                                                                                                                 2000(1)
                                         40%
                                                       Marketing & Sales




                                         20%




                                         0%
                                               1980   1982    1984    1986    1988       1990   1992   1994   1996     1998   2000   2002      2004     2006
                                                                                 Year in which services were offered


(1) Source: Duke University Offshoring Research Network 2007 Service Provider Survey
                                                                                                                                                               9
Service providers report that traditional ITO(1) and BPO(2) services
are already commoditized and will become even more commoditized

                                                      Extent of Commoditization of Services – Today vs. Expected within 18-36 Months

                                                      100%
               Commoditization in Next 18-36 Months




                                                                                                                 Call Centers
                                                                              Finance and
                                                      75%                     Accounting
                                                                                                       Information
                                                                                                       Technology

                                                                                        Human
                                                      50%                              Resources
                                                              Procurement

                                                              Marketing          Engineering
                                                               & Sales    New Product
                                                                          Development
                                                      25%       Legal
                                                              Services
                                                               Knowledge/Analytical Services
                                                                   Research &
                                                                   Development
                                                       0%
                                                             0%                    25%                   50%                    75%        100%
                                                                                               Commoditization today
                                                                             Percentage of providers rating dimensions as high/very high


(1) Information Technology Outsourcing
(2) Business Process Outsourcing
Source: Duke University Offshoring Research Network 2007 Service Provider Survey.
                                                                                                                                                  10
Conversely, KPO(1) and Innovation services are the least
commoditized – but are also the most complex…

                                                     Complexity vs. Standardization of Service Offerings

                                 100%




                                 75%
               Standardization




                                                                 Human Resources                          Information Technology

                                 50%                                Call Centers                                         Engineering       Legal
                                                                                       Finance and Accounting                             Services
                                             Procurement                                                              Marketing & Sales


                                                                                                                Knowledge/Analytical
                                 25%                                                       New Product                                  Research &
                                                                                                                     Services
                                                                                           Development                                 Development



                                  0%
                                        0%                    25%                       50%                        75%                     100%

                                                                                   Complexity
                                                      Percentage of providers rating task dimensions as high/very high



(1) Knowledge Process Outsourcing
Source: Duke University Offshoring Research Network 2007 Service Provider Survey.
                                                                                                                                                     11
…And the most highly client specific – making it difficult to easily
expand these service offerings

                                                  Complexity vs. Client Specificity of Service Offerings

                                      100%
                                                                                                                                            Research &
                                                                                                                                           Development
                                                                                                               Engineering


                                      75%                                                                                                          Legal
                                                                                                         New Product                              Services
                Client Specificity*




                                                                                                         Development
                                                                                                                        Marketing & Sales
                                                                                Information Technology
                                      50%                                                                                                 Knowledge/
                                                                                    Human Resources                                   Analytical Services
                                                  Procurement                                                      Finance and Accounting
                                                                                 Call Centers


                                      25%




                                       0%
                                             0%             25%                        50%                          75%                           100%

                                                                              Complexity
                                                    Percentage of providers rating task dimensions as high/very high



* Combined measure: client-specific knowledge, involvement of client in performing tasks, interdependency with processes in client organization
Source: Duke University Offshoring Research Network 2007 Service Provider Survey.
                                                                                                                                                             12
KPO services offer the highest margins for service providers, as
well as highest savings for clients

                                                              Average Savings and Margins Generated by Service Offering

                                               40%


                                                                                                  Research &                                   Knowledge/
               Provider Margins (Percentage)




                                               35%                                                Development                               Analytical Services
                                                        New Product
                                                        Development              Engineering                               Legal Services
                                               30%
                                                                                                   Human Resources
                                                                                                    Call Centers
                                                                         Information Technology       Other
                                               25%

                                                                       Finance and Accounting
                                                                                                           Marketing & Sales
                                               20%
                                                                            Procurement

                                               15%
                                                  25%                 30%                 35%              40%                 45%                  50%

                                                                                  Client Savings (Percentage)




Source: Duke University Offshoring Research Network 2007 Service Provider Survey.
                                                                                                                                                                  13
Clients report significantly higher achieved savings than providers
claim from outsourcing innovation services such as engineering,
new product development and design and R&D

              Reported Saving by Service Providers and Clients from Outsourcing Specific Functions

                                                                                                34%
           Marketing & Sales                                                                            39%
                                                                                                      37%
                   Call Centre                                                                        37%
                                                                                                            41%
          Human Resources                                                                             37%
                                                                                                              42%
                            R&D                                                                   36%                       Client Claim

                                                                                      29%                                   Provider Claim
                               IT                                                                 36%
                                                                                                            41%
      Finance & Accounting                                                                        36%
                                                                                                                    46%
                 Engineering                                                                32%
                                                                                    27%
                 Procurement                                                              30%
                                                                                                            41%
    Product Development                                                               29%

                                    0%             10%                20%            30%               40%            50%
                                                   Client Savings Generated (Percent)


Source: Duke University Offshoring Research Network 2007 Service Provider Survey.
                                                                                                                                             14
However, the rate of deal renewals on innovation services is
significantly lower than traditional BPO and ITO services

                                                      Rate of Renewal of Deals by Service Offering

                    Finance & Accounting                                                                                          83%

                          Marketing & Sales                                                                                       83%

                                    Call Centre                                                                                  80%

            Knowledge/Analytical Services                                                                                   76%

                           Human Resources                                                                                 74%

                                Legal Services                                                                             74%
                                                                                                                                             Innovation
                                                                                                                                              Innovation
                     Information Technology                                                                            73%                 services deals
                                                                                                                                           services deals
                                                                                                                                        tend to be project //
                                                                                                                                         tend to be project
                                  Procurement                                                                         71%               task based vs. the
                                                                                                                                         task based vs. the
                                                                                                                                           outsourcing of
                                                                                                                                           outsourcing of
                                  Engineering                                                                        68%                  entire processes
                                                                                                                                          entire processes
              New Product Development                                                                          62%

                Research & Development                                                                        61%

                                                   0%                20%               40%               60%                80%         100%
                                                       Percentage of deals renewed at expiration of the first contract



Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis.
                                                                                                                                                                15
Implications of findings

                                      Service Providers
                                      Service Providers                           Implications for Clients
                                                                                   Implications for Clients

   Price Points for BPO     Increasing commoditization and
                             Increasing commoditization and                Providers expect better definition of
                                                                            Providers expect better definition of
   and ITO Services are     competition for traditional BPO and ITO
                             competition for traditional BPO and ITO       service scope and to better deliver to
                                                                            service scope and to better deliver to
   Likely to Continue to    services expected to pressure margins
                             services expected to pressure margins         letter of the contract
                                                                            letter of the contract
            Drop
                            End to end process re-engineering
                            End to end process re-engineering              Pricing re-negotiation and benchmarking
                                                                            Pricing re-negotiation and benchmarking
                            expected to be next frontier for helping
                            expected to be next frontier for helping       clauses need to be re-visited more
                                                                            clauses need to be re-visited more
                            clients increase efficiencies and for future
                            clients increase efficiencies and for future   frequently
                                                                            frequently
                            profitability and competitiveness
                            profitability and competitiveness              Clients cannot expect end to end
                                                                           Clients cannot expect end to end
                            Providers expect to improve capabilities
                             Providers expect to improve capabilities      process efficiency gains, without
                                                                           process efficiency gains, without
                            to deliver higher end services – requiring
                             to deliver higher end services – requiring    committing to supporting providers on
                                                                           committing to supporting providers on
                            more costly skill sets and more
                             more costly skill sets and more               process re-engineering task – don’t
                                                                           process re-engineering task – don’t
                            sophisticated talent management
                             sophisticated talent management               expect efficiency gains otherwise
                                                                           expect efficiency gains otherwise


                            Promise of KPO to deliver sticky,
                            Promise of KPO to deliver sticky,              KPO requires significant involvement by
                                                                           KPO requires significant involvement by
   KPO is a Promising
                            profitable revenue is real
                            profitable revenue is real                     clients to train the provider to get it right
                                                                           clients to train the provider to get it right
     Growth Area…If
   Providers Can Get it     KPO services require very different
                            KPO services require very different            KPO services requires more nuanced
                                                                           KPO services requires more nuanced
          Right             model from volume based BPO services
                            model from volume based BPO services           evaluation and selection models
                                                                           evaluation and selection models


   Growth in Innovation     Investments in expanding innovation
                             Investments in expanding innovation           Growing service provider capabilities in
                                                                            Growing service provider capabilities in
  Services Bodes Well for   services (engineering, new product
                             services (engineering, new product            delivering innovation services will provide
                                                                            delivering innovation services will provide
   Service Providers and    development & design, R&D) are likely
                             development & design, R&D) are likely         clients with new sources of savings and
                                                                            clients with new sources of savings and
          Clients           to yield high, long term returns
                             to yield high, long term returns              faster speed to market
                                                                            faster speed to market



                                                                                                                           16
Table of Contents

  Survey highlights

  Opportunities in KPO and innovation services

  The small provider edge

  Impact of globalization on service providers

  What the future holds




                                                 17
Small providers largely specialize in offering IT and new innovation
services

                                                      Services Offered by Size of Service Provider

                                                                                                             68%
                                      Information Technology
                                                                                                                      80%

                                                                                              44%
                                           Innovation services
                                                                                                    52%
          Service offering type




                                                                            16%
                                        Administrative Services
                                                                                                49%

                                                                       8%
                                  Knowledge/Analytical Services
                                                                                        37%
                                                                                                                            Small providers
                                                                       8%                                                   Large/mid-sized
                                                  Procurement                                                               providers
                                                                                              46%

                                                                       8%
                                         Call Centre/Help Desk
                                                                                                            66%

                                                                  0%        20%        40%            60%          80%            100%
                                                                             Percent of companies providing service



Source: Duke University Offshoring Research Network 2007 Service Provider Survey
                                                                                                                                              18
However, small providers are more aggressive in entering high end
service offerings such as innovation services


                             Percentage of Providers Planning New Services by Service Provider Size

                              Engineering                                                                      35%




                                                                                                 24%
                 Product Development
                                                                           11%
                                                                                                                    Small providers

                                                                                                                    Mid-size providers
                                                                                                 24%
                              Research &                                   11%                                      Large providers
                             Development
                                                                                   14%

                                                                             12%
                 Knowledge/Analytical                                                          22%
                            Services
                                                                                   14%

                                               0%         5%         10%           15%   20%    25%    30%    35%      40%
                                                                 Percent of companies planning new services


Source: Duke University Offshoring Research Network 2007 Service Provider Survey
                                                                                                                                         19
Also, small providers employ proportionally more specialized and
more highly educated staff than their larger competitors…

                                                              Proportion of Employee Degrees by Service Provider Size


                                        70%
                                                                              65%
                                                                                                                Small providers
                                                                                                                Small providers
 Proportion of Degrees in the Company




                                                                                    59%                       have proportionally
                                                                                                              have proportionally
                                        60%                                                                     more staff with
                                                                                                                 more staff with
                                                                                                               Master’s and PhD
                                                                                                               Master’s and PhD
                                                                                                                   degrees
                                                                                                                    degrees
                                        50%


                                        40%
                                                                                                  35%                                       Mid-sized/Large
                                                                                                                                            Providers
                                        30%                           28%
                                                                                            23%                                             Small Providers
                                        20%


                                        10%                                                                                                 8%
                                                                 5%                                                      5%         6%
                                                                                                                    3%
                                               0%      1%
                                        0%
                                               No formal        High School    Bachelor      Master                  PhD              Other
                                              qualification       Diploma                                                           Certification




Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis
                                                                                                                                                              20
...And are able to recruit these more specialized employees
much faster

                          Time to Recruit Employees (in weeks) by Employee Qualification and
                                                Service Provider Size

                                         1
       No formal qualification
                                                                                                            Small providers
                                                                                                             Small providers
                                                                                                            recruit Master’s
                                                                                                             recruit Master’s
                                                   2                                                             and PhD
                                                                                                                 and PhD
            Other Certification                                                                             candidates 60%
                                                                                                             candidates 60%
                                                          4
                                                                                                            faster than mid-
                                                                                                             faster than mid-
                                                                                                               sized // large
                                                                                                               sized large
                                                                          6                                     providers
                                                                                                                 providers
                             PhD
                                                                                                       14

                                                                  4
                          Master
                                                                                         9

                                                          4
                        Bachelor
                                                                      5                                              Mid-sized/Large
                                                                                                                     Providers
                                                2                                                                    Small Providers
         High School Diploma
                                               2

                                   0           2              4           6         8        10   12   14      16
                                                                              Number of Weeks


Source: Duke University Offshoring Research Network 2007 Service Provider Survey.
                                                                                                                                       21
Implications of findings

                                     Service Providers
                                     Service Providers                        Implications for Clients
                                                                               Implications for Clients

   Small Firms represent    Industry consolidation and growth and
                             Industry consolidation and growth and      Due diligence on small service provider is
                                                                        Due diligence on small service provider is
        acquisition         diversification through M&A can be
                             diversification through M&A can be         crucial
                                                                        crucial
     opportunities for      expected to increase
                             expected to increase                       – Ensure contracts protect services and
                                                                        – Ensure contracts protect services and
    Provider Expansion      – Small firms do a better job in key new      staff even post acquisition
                            – Small firms do a better job in key new      staff even post acquisition
                              highly profitable markets
                              highly profitable markets                 Buying into “me too” offerings from
                                                                         Buying into “me too” offerings from
                            – Small firms are faster in developing
                            – Small firms are faster in developing      large providers who have acquired
                                                                         large providers who have acquired
                              new services and new niches
                              new services and new niches               their way into a service offering
                                                                         their way into a service offering
                            Challenge is to maintain small firm         represents special risks
                                                                         represents special risks
                            Challenge is to maintain small firm
                            culture while scaling the business
                            culture while scaling the business



                            Consider building KPO as a separate
                             Consider building KPO as a separate        Consider small service providers for
                                                                         Consider small service providers for
  Small Service Providers
                            business // business unit vs.
                             business business unit vs.                 knowledge intensive and innovation
                                                                         knowledge intensive and innovation
   may be Better Bets for
                            integrating into larger service provider
                             integrating into larger service provider   intensive services
                                                                         intensive services
    KPO and Innovation
                            model
                             model
         Services                                                       – Small providers may offer better
                                                                        – Small providers may offer better
                            – Maintain flexibility and focus to
                            – Maintain flexibility and focus to           quality and speed of execution
                                                                          quality and speed of execution
                              compete for people and clients
                              compete for people and clients            – Small providers better suited to take
                                                                        – Small providers better suited to take
                                                                          on specific processes vs. large
                                                                          on specific processes vs. large
                                                                          provider that may rely on more
                                                                          provider that may rely on more
                                                                          standardized oferings
                                                                          standardized oferings




                                                                                                                     22
Table of Contents

  Survey highlights

  Opportunities in KPO and innovation services

  The small provider edge

  Impact of globalization on service providers

  What the future holds




                                                 23
  Though India continues as top location for delivery centers,
  providers are expanding their global footprint – US based firms are
  expanding offshore, while Indian firms are expanding nearshore
  capabilities close to US and European clients
                                Delivery Center Locations – All Providers                                                     Delivery Center Locations – US Based
                                                                                                                               Providers vs. India Based Providers
                                        India                                           54%                                                                             60%
                                                                                                                                    India
                                                                                                                                                                                     89%
               Western Europe                                    24%
                                                                                                     Western Europe                                            26%
                                                                                                                                                              22%
                                      China                    21%
                                                                                                                                                              24%
                                                                           Western
                                                                           Western                                                 China
                                                                                                                                                    11%
                               Latin America                   21%      Europe (not
                                                                         Europe (not                                                                          24%
                                                                        China) is the
                                                                        China) is the                       Eastern Europe
                      Eastern Europe                          19%                                                                                   11%
                                                                        top location
                                                                         top location
                                                                                                                                    USA                 24%
                                         USA                  19%         after India
                                                                          after India                                                                   22%
   Delivery Center Countries




                                                                                               Delivery Center Countries
                                      Canada               18%                                                                 Philippines             21%
                                                                                                                                                   11%                   US based provider
                                   Philippines          14%                                                                Latin America               21%
                                                                                                                                                   11%                   India based provider
                                   Other Asia           14%                                                                                            21%
                                                                                                                                  Canada
                                                                                                                                                     17%
                                      Mexico            13%                                                                                          17%
                                                                                                                                  Mexico           11%
                                       Russia     6%
                                                                                                                                                    14%
                                                                                                                              Other Asia              17%
                                        Africa    5%
                                                                                                                                   Russia          10%
                                  Middle East     5%                                                                                          0%
                                                  5%                                                                             Australia         7%
                                     Australia                                                                                                0%
                                             0%           20%            40%             60%                                                 0%         20%      40%   60%    80%      100%

                                      Percent of Providers with Facilities in Country                                                        Percent of Providers with Facilities in Country



Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis
                                                                                                                                                                                                24
Innovation services are primarily delivered from India, China and
Russia where key talent is available
                                                                                                                                           India
                                                   Location of Delivery Centers for Innovation Services
                                                                                                                                            5%
                                      India
                                      India                                                                               50%

                                     China
                                     China                                               28%
                                                                                                                                           95%
                                    Russia
                                    Russia                             15%                                        China

                                      USA                           13%
 Delivery Center Countries




                                                                                                            38%
                              Latin America                      11%
                                                                                                                      62%
                             Eastern Europe                      11%
                                                                                          Russia
                             Western Europe                   9%

                                Middle East                   9%

                                 Other Asia                7%                                                      Mid-sized/Large Providers
                                                                                          100%                     Small Providers
                                    Canada         2%

                                    Mexico         2%

                                              0%             10%           20%           30%          40%             50%            60%

                                                        Percentage of firms offering innovation services in country
Source: Duke University Offshoring Research Network 2007 Service Provider Survey
                                                                                                                                                   25
Global expansion is expected to continue - large providers rate
having a global presence and a diverse network of delivery centers
as among the most important factors to win new business

                                                             Top Reasons for Clients to Select a Service Provider –
                                                                   Large / Mid-sized Service Provider View
                                           80%        75%
    Percent of Respondents rating factor
     as “Important” or “Very Important”




                                           70%                          67%
                                                                                            61%
                                           60%                                                                 57%

                                           50%                                                                               46%

                                           40%

                                           30%

                                           20%

                                           10%

                                           0%
                                                 Global presence     Number of           Number of       Management team   Number of
                                                                   service delivery     certifications       turnover      employees
                                                                       centers

                                                                     Reasons influencing service provider selection


Source: Duke University Offshoring Research Network 2007 Service Provider Survey.
                                                                                                                                       26
Providers will continue expanding globally to keep labor costs low
and gain access to talent - the top drivers for outsourcing and
offshoring from both the client and service provider view
                                                  Top Drivers for Outsourcing and Offshoring
               Provider’s Perception(1)                                                          Companies Currently Offshoring(2)
                                                  87%                Labor Cost Savings          91%
                                             76%               Accessing Skilled Personnel             70%
                                            74%                       Other Cost Savings               72%
                                            74%                   Improving Service Levels                   53%
                                          68%                   Business Process Redesign                    50%
                                       62%                              Growth Strategy                68%
                                      61%                           Competitive Pressure                 61%
                                    55%                          Increasing Speed to Market                    47%
                                   52%                           Lacking Capability in-house                                      0
                                  51%                         Part of a Larger Global Strategy           61%
                               44%                               Accepted Industry Practice                     40%
                             40%                              Enhancing System Redundancy                             25%
                             39%                                    Differentiation Strategy                          26%
                          33%                                      Accessing New Markets                                   16%

         0%      20%      40%     60%      80% 100%                                              100% 80%    60%     40%    20%   0%
                                 Percentage of respondents rating driver as “important” or “very important”
(1) Source: Duke University Offshoring Research Network 2007 Service Provider Survey
(2) Source: Duke University / Booz Allen Hamilton Offshoring Research Network 2006 Survey
                                                                                                                                       27
However, service providers face the same challenge as clients –
service providers cite finding qualified talent as their most significant
talent related risk
                                  Talent and Employee Retention Related Risks Experienced by
                                                      Service Providers
    Availability of talent with managerial skills                                                                         85%
                                  Availability of talent                                                                 83%
                            Demonstrate career paths                                                                  82%
                               Financial compensation                                                                 81%
                           Providing challenging work                                                              77%
                     Prestige of working for company                                                            71%
     Establish and maintain identity with company                                                            67%
                       Job security concerns for staff                                                    65%
                    Competition from other providers                                                     63%
                                  Non-financial benefits                                               60%
    Ability to guarantee convenient working hours                                                  56%
   Competition from multinational captive centers                                                51%
                  Competition from local companies                                         44%
         Attitudes towards women in the workforce                                      39%

                                                             0%                20%   40%           60%             80%          100%
                                                          Percentage of Respondents rating risk as “important” or “very important”


Source: Duke University Offshoring Research Network 2007 Service Provider Survey
                                                                                                                                       28
Implications of findings
                               Implications for Service Providers
                                Implications for Service Providers                 Implications for Clients
                                                                                    Implications for Clients

       Delivery Center       Rising labor costs and appreciation of
                              Rising labor costs and appreciation of        Exploit opportunity to demand greater
                                                                            Exploit opportunity to demand greater
    Expansion in BRIC,       the rupee and the RMB drive expansion
                              the rupee and the RMB drive expansion         onshore and nearshore service delivery –
                                                                            onshore and nearshore service delivery –
   Latin America, Canada     of delivery footprint
                              of delivery footprint                         especially for high complexity services
                                                                            especially for high complexity services
          and Asia             – As complexity of services increases,
                               – As complexity of services increases,
                                 providers need to have greater onshore
                                  providers need to have greater onshore
                                 // nearshore presence
                                    nearshore presence
                               – Other Asian locations, Latin America
                               – Other Asian locations, Latin America
                                 and Canada now provide lower cost
                                  and Canada now provide lower cost
                                 location for service delivery
                                  location for service delivery

                             BRIC (Brazil, Russia, India, China)
                             BRIC (Brazil, Russia, India, China)            Select service provider on basis of
                                                                             Select service provider on basis of
                             countries are moving up the value chain
                             countries are moving up the value chain        management skills to take on
                                                                             management skills to take on
    The Globalization of
                             – BRIC countries offer critical skill sets     innovation and KPO services
                                                                             innovation and KPO services
   Innovation is a Reality   – BRIC countries offer critical skill sets
                             – Targeted investments in knowledge            – Management model that supports
                                                                            – Management model that supports
                             – Targeted investments in knowledge              and enforces collaboration
                               services (India), IT (Brazil, Russia) and
                                services (India), IT (Brazil, Russia) and     and enforces collaboration
                               innovation services (China and
                                innovation services (China and              Training the right global management
                                                                            Training the right global management
                               Russia)
                                Russia)                                     skills will be essential for success
                                                                            skills will be essential for success
                                                                            – Invest in appropriate global supplier
                                                                            – Invest in appropriate global supplier
                                                                              management organization
                                                                               management organization

                             Internal training and development is
                              Internal training and development is          Clients need to take a more active role
                                                                             Clients need to take a more active role
   War for Skilled Talent
                             becoming an important competitive edge
                              becoming an important competitive edge        in working with service providers to
                                                                             in working with service providers to
   Will be a Significant
                             as a driver for delivering higher value
                              as a driver for delivering higher value       manage attrition and develop talent
                                                                             manage attrition and develop talent
        Challenge
                             services
                              services                                      – Greater client engagement = greater
                                                                             – Greater client engagement = greater
                                                                                success
                                                                                success


                                                                                                                       29
Table of Contents

  Survey highlights

  Opportunities in KPO and innovation services

  The small provider edge

  Impact of globalization on service providers

  What the future holds




                                                 30
While service providers are investing in expanding capacity and
capability in IT, call center and innovation service offerings…
                             Percentage of Service Providers Planning to Expand Activities by Service Offering


                               IT                                                                                         92%


                 Call Centers                                                                                       85%

      Innovation Services
  (Product Development.,                                                                                71%
       Engineering., R&D)

    Administrative Services
     (F&A, HR, Marketing)                                                                            67%


         Knowledge Services                                                                    57%


                  Procurement                                                            44%

                                    0%                                             40%                        80%
                                             Percentage of All Service Providers Responding in the Survey


Source: Duke University Offshoring Research Network 2007 Service Provider Survey
                                                                                                                                31
…Delivering sufficient service quality continues to be a major
challenge – service providers need to focus on service quality
while investing in growth

                                                           Reason for Termination of Contract

                     Insufficient Service Quality                                                                            65%

                      Management Team Change                                                               42%

                      Change in Operating Model                                                       40%

                            Contract Disagreement                                                     39%

                       Cost Savings Not Achieved                                                     38%

                 Client Consolidation of Activities                                            31%

                  Services Not Needed Anymore                                                  31%

                           Change Order Conflicts                                              31%

                      Non Contract Disagreement                                                30%

                 Substitution with Other Contract                                          27%

               Client Establishes Captive Center                                         24%

               Competitor Lures Customer Away                                       20%

                                                         0%          10%           20%     30%       40%         50%   60%    70%

                                                    Percentage of Respondents rating risk as “important” or “very important”

Source: Duke University Offshoring Research Network 2007 Service Provider Survey
                                                                                                                                    32
In addition, both service providers and clients need to work harder
at successfully executing and managing outsourcing transitions

                                                 Reasons for Dissolution of Deals

                       Poor Planning/Transition                                                                           81%
                              Client Lacked Skills                                                                    75%
                    Inability to Deliver Services                                                                   71%
        Client Lacking Change Management                                                                      65%
       No Clear Client Outsourcing Strategy                                                                  63%
                   Unrealistic Client Expectations                                                           63%
                       Poor Account Management                                                         55%
         No Client Shared Services Experience                                                          55%
                   Inappropriate Pricing Structure                                                    53%
                       Poorly Negotiated Contract                                                 51%
                          High Employee Turnover                                                46%
                        Too Many Change Orders                                                  45%
                       Poor Procurement Process                                             42%
                                Poor Deal Structure                                         41%
                           No Outsourcing Advisor                                   29%

                                                          0%               20%            40%          60%            80%       100%

                                                        Percentage of Respondents rating risk as “important” or “very important”



Source: Duke University Offshoring Research Network 2007 Service Provider Survey.
                                                                                                                                       33
    Summary of key findings and implications

                                 Race for talent is on – service providers need strategies for entering the right
1                                geographies / cities to secure skilled talent
        Globalization will      – Nearshore and onshore locations likely to benefit from this expansion
    continue at a rapid pace    – Small firms broadening the marketplace – particularly in growing outsourcing markets
     in a race for talent and      such as Russia, Japan and Brazil
           market share
                                 Pace of acquisitions can be expected to increase
                                – Large, established service providers will accelerate acquisitions of small
                                   companies to build specific skills and service offerings
                                – Offshore service providers will continue to grow scale and scope of their services
                                   through M&A to secure higher deal volume

2
                                Knowledge and innovation services offer great opportunities for profitable revenue
         Knowledge and          growth. However, require greater client specific knowledge
       innovation services
    offer great opportunities    Small providers are better positioned in this market segment
       …for the right firms     – Better able to acquire and retain high end talent and tailor services to client needs



3                                The hand writing is on the wall - clients must recognize their responsibility for the
       New management            success / failure of their dealing with service providers and their outsourcing
       capabilities will be      programs
     crucial to both service    – Build capabilities in transition management and governance
       provider and client
            success             – Change management cannot be treated as a luxury
                                 Service providers require management structures and capabilities that can
                                 successfully handle globalization – this challenge is not exclusive to clients

                                                                                                                          34
Thank you!

                    For more information please contact:
           Dr. Arie Lewin at ayl3@duke.edu, 919.660.7654
                                                      or
            Matt Mani at Mani_M@bah.com, 703-622-6307
                                                      or
                    visit http://offshoring.fuqua.duke.edu




    This document is incomplete without the accompanying discussion; it is proprietary confidential and
             intended solely for the information and benefit of the recipients addressed herein.

                                                                                                          35
Appendix




    This document is incomplete without the accompanying discussion; it is proprietary confidential and
             intended solely for the information and benefit of the recipients addressed herein.

                                                                                                          36
Annual Buy-side Survey (2004- )
        Data collected in Scandinavia, Germany, Netherlands, Spain, UK, Belgium,
        France, Italy, Australia
        Tracks adoption of outsourcing-offshoring by specific implementation over
        time
        Includes companies that do and do not yet offshore
        Reports offshoring trends from recent to highly experienced adopters
        In-depth analyses across
          All administrative and technical business functions
          All countries - India, China, Latin America, Eastern and Western Europe
          All Offshoring delivery models: fully captive; fully outsourced; hybrid
          All business sectors: Manufacturing and services industries




      This document is incomplete without the accompanying discussion; it is proprietary confidential and
               intended solely for the information and benefit of the recipients addressed herein.

                                                                                                            37
Innovation services include…

 Engineering:                          NPD:                        Knowledge/analytical
                                                                   services include…
   Engineering support                   Prototype design
   Embedded systems development                                       Performance analysis
                                         Product development          Industry & company analysis
   Testing                               Systems design
   Re-engineering                                                     Market analysis
                                         Application development      Credit analysis
   Simulating                            Product development
   CAD drawing                                                        Data mining
                                         support services             Equity analysis
   Drafting & modeling
                                                                      Forecasting
                                                                      Risk management analysis
     R&D:                                                             Financial planning


        Programming
        Code development
        Development of software for managing
        processes and product design
        Development of new technologies
        Research on new materials and processes




                                                                                                    38

				
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