Welcome Off Shoring & Review

Jonathan D. Wareham j.wareham@esade.edu

Business Process Outsourcing

“ BPO is the delegation of one or more IT-intensive business processes to an external provider who, in turn, owns, administrates and manages the selected process(es), based upon defined and measurable performance metrics.”

Gartner Dataquest

Industry Trends for Application Outsourcing

• IT application outsourcing – Inevitable – One step in a broader evolution – Related to infrastructure outsourcing and business process outsourcing (BPO), but different • Who makes the app outsourcing decisions?

• What gets outsourced and why?

CIO

Application Outsourcing is in the cards

PORTFOLIO HYPE SERVICE LVLS CEO COMPLIANCE GOVERNANCE KNOWLEDGE IT DEPT.

Look at application outsourcing as another tool in the taming of IT

Significant Growth in BPO Insurance Overall Cost Savings (%) Banking/ Finance Pharmaceuticals Telecom Automotive 5.0-6.5

5.0-6.5

5.0-6.5

8.0-12.0

40-60% cost saving EBIDTA increase (times) 10.0-15.0

3.5 x 1.5 x 1.3 x 1.1 x 1.1 x Key opportunity areas

•

Back office processing

•

Call Center operations

•

Back office processing

•

Call Center operations

•

Research and Development

•

Call Center operations

•

Billing

•

Engineering & design Airlines 5.0-6.5

1.2 x

•

Call Center operations

•

Frequent flyer programs * Estimates based on specific representative companies ** Non interest expenses Source: McKinsey analysis; Interviews

BPO Forecast ...

(US $bn) Total Business Process Outsourcing Market Percentage Offshored to Countries such as India, Ireland, etc.

Offshored BPO Market India ITES Exports 2001 127 2005 234 2008 310 5% 6.4

1.5

15% 35.1

9.5

20% 62.0

21 Source: NASSCOM Mckinsey Study 2002 and, Gartner

Rapid growth in global BPO market to continue Gartner estimates* 91 2000 CAGR 14.7% 157 2004 181 2005 $ Bn IDC estimates** 109 2000 CAGR 13.1% 177 2004 202 2005 $ Bn

* Excludes logistics and manufacturing outsourcing to show addressable market ** Includes transaction processing

Source: Gartner; IDC

Simplify, Streamline, Consolidate

4 Low cost location 1

Scale

3 2

100.00

90.00

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00

Europe East Europe India China

High cost location 1 Moving to an outsourced environment brings efficiency gains – thru scale, technology & expertise 2 3 4 Moving to lower cost environments brings reduced cost of inputs – Labour Arbitrage Global, centre based distributed delivery brings further economies of scale & process efficiency Further Technology best practice leverage

Drivers for Adoption of BPO

• Controlling cost and integrity are top issues

Organisations embark on BPO for cost savings, and then achieve business optimisation &process standardisation

Ratings of “likely to provide best-in-class application management services”

IBM Global Services EDS Hewlett Packard Oracle PeopleSoft Accenture SAP CSC Perot Systems JD Edwards Keane Deloitte Consulting BearingPoint (was KPMG) CGI 3.26

3.26

3.25

3.21

3.18

3.14

3.10

3.09

2.97

3.08

3.49

3.43

3.40

3.89

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

Source: 2003 META Group Application Management Multiclient Study

Similarly to leadership perceptions, Top-tier Outsourcers face App. Vendors as principal competitors

BPO Value Proposition



40-60% cost reduction for offshored process



Labour cost arbitrage, the reason for cost savings, likely to exist for next 20-30 years Cost



Faster turnaround time



Time zone difference



24 x 7 service



Learning curve effect



Established methodologies and processes for better performance



Well defined quantifiable quality and process metrics



Access to highly qualified skill pool Source: McKinsey-Nasscom

Top 5 Outsourcing Objectives Focus on Core Activity Reduced Costs 91% 85% Improved Operational Quality Achieve high productivity 35% 29% De-risk the business 12% 0% 20% 40% 60% % Respondents 80% 100% Source Gartner

Decide Scope

Traditional as-is Outsourcing

• Targeting cost reduction in smooth running areas • Accessing best practice and economies of scale • Shedding non-core services

“Sweating assets”

Problem-solving Outsourcing

• Targeting operational fixes in problem areas • Delivering cost reduction and operational performance improvement

Operational performance improvement

Transformational Outsourcing

• Delivering step change in performance • Enabling transformation & re-transformation capability • Deep, broad and enduring partnership

Changing the model

BPO What??

• Commodities: IT Enterprise applications and infrastructure, IT support • Mature Markets: HR – payroll, benefits, admin. HR training, finance services and analysis, call center, customer service • Growth markets: Accounting, Corp. finance, check processing, claims processing, Legal & Medical Records management & transcription, telemarketing • Early Adoption: tax planning, budgeting & reporting, risk management, operations planning, scheduling

Making the App Outsourcing Decisions

31% 27% CEO CFO CTO CIO Sales VP/Director/Manager Service VP/Director/Manager Marketing VP/Director/Manager LOB VP/Director/Manager Other non-IT management Other IT professionals Application strategy team (internal) 3rd party assessment service (external) Other (specify) 4% 0% 1% 0% 5% 2% 9% 4% 3% 0% 5% 4% 8% 0% 10% 18% 17% 21% Involved 20% 26% 29% 30% 40% Final decision maker 40% 42% 50% 58% 58% 60% 70% Source: 2003 META Group Application Management Multiclient Study

Involve the right management – both business and IT – to select the best application outsourcing candidates

BPO Advantage Source: Mckinsey & Co.

A Mckinsey study shows that when processes are outsourced to India, companies not only get the advantage of low cost but also experience improvement in productivity and Quality

.

BPO Leaders Survey respondents shows the following outsourcing destination: India China Mexico Ireland Canada Malaysia Philippines Russia Singapore 38% 6% 5% 5% 5% 4% 4% 4% 4% India has transformed into the global outsourcing center of choice.

It employs world class technology and efficient delivery mechanisms to ensure that clients get cost effective solutions for all their BPO needs.

India's dominance

Top Drivers for Outsourcing to India

          

Two million graduates each year (Existing Pool: over 25 million) 120,000 Engineers every year vs. 63000 in US English speaking and IT savvy workforce Cost reduction up to 50% Government support for IT and BPO industry Improving telecom infrastructure Lower infrastructure costs Favorable time lag: 12 hours with US & 5 hours with Europe Overnight turnarounds possible Resources with experience of financial and legal systems similar to the west Strong domestic IT services industry to support IT led BPO

Political backlash

Indian Outsourcing American Backlash

• Highly visible issue due to steady American unemployment levels • Campaign issue for Presidential Candidates • Rise in anti-Outsourcing websites – http://nojobsforindia.com

– – http://yourjobisgoingtoindia.com

http://www.nomoreh1b.com

• Consultants predict large numbers of varied Professional jobs to be outsourced as well as Information Technology jobs

Managing Indian Resources

• Cross-Cultural Difficulties – Indians use the word “Yes” to acknowledge understanding – Indian employees rarely disagree • Knowledge Transfer – Most difficult aspect of offshoring – Western employees often reluctant to participate fully

Indian Outsourcing Worldspan Experience

• Pilot project involved two Indian Quality Assurance Engineers • Communication is largest problem • Two hours of overlapping schedules between Indian employee and Atlanta headquarters • Tendency to not ask questions even when there is incomplete understanding

Location, Location, Location…

• Offshore = Offsite – Geography is but one variable to consider – Distance = complexity • Location-related issues – Intellectual property laws – Legal jurisdiction – Regulatory compliance • EU Data Privacy Initiative • Patriot Act • more to follow

Offshore, Near Shore, Best Shore, No Shore, The right mix of polygeographic resources enables application outsourcing strategy(ies)

Rationales and Risks

• Reduce costs: Are we just outsourcing a broken process?

• Focus on Core Competencies : Do we outsource something that is critical if controls breakdown?

• Introduce market discipline: do bad practices become right if we just move them outside the company? • Improve Flexibility: costs?

Are we really eliminating fixed • Improve Technology: Will the applications and processes need fixing anyway?

BPO Failure: Bargain Shopping

• Find highest quality provider- go after lowest cost from them • More difficult: highest quality from cheapest provider • Due Diligence: references, employee churn, financial health, security procedures, Int Prop protection,

BPO Failure: Security

• Political and economic stability: – Canada and Ireland, high – Russia, China, India, Brazil, Philippines, low • Stability of government, asset nationalization, threat of war, strikes, terrorism, medical outbreaks • Disaster recovery procedures, reliability of infrastructure, security procedures

BPO Failure: Poor planning

• Outsource processes, not strategy • Management of expectations • SLAs: – Start and end date for service – Schedule for reviewing performance – Documentation & metrics to be used for measuring performance – Penalties and procedure for underperformance – Procedures for conflict resolution

BPO Failure: Internal Communication

• Focus on your own employees!!

• Unhappy employees can wreck BPO transition process • Outsourcing treated like a dark secret: fear and distrust • Tell them what, why and how • Consider extra compensation for employees that train offshore counterparts.

BPO Failure: Poor transition Management

• Most difficult stage, taking 3 months to 1 year.

• Detailed, knowledge transfer and documentation of all tasks, technologies, workflows and functions • Motivating current employees to share knowledge • May include legal obligations, licenses, infrastructure and assets

BPO Processes..

1. Scoping

Business objectives Participants Key issues Initial scope and constraints HR implications High level service requirements

2. Feasibility

Refinement of scope Benefits case Commercial framework Risk management HR approach Service parameters

3. Preparation

Due Diligence Service definition HR preparations Contract preparation Agreed budget Business case update

4. Transition

Service consolidation Transfers of: - staff - responsibilities - assets New service start-up

5. Delivery

Service management and reporting Benefits realisation Continuous improvement

Typical 1. Scoping

2 months

2. Feasibility

2 months 6 months to contract signature

3. Preparation

2 months

Fast-track 1. Scoping

2 weeks

2. Feasibility

2 weeks 8 weeks to contract signature

3.Preparation

4 weeks

4. Transition

3 months

4. Transition

6 months

5. Delivery

Ongoing

5. Delivery

Ongoing

Final Exam

• Permitted:1 page, 2 sides, something to write with • Not Permitted: anything else • 6-8 questions, open-ended • Use diagrams, tables, bullets, organize your information…