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Governance Tools Can be a Game Changer p. 27

F&A Outsourcing Regroups in 2008 p. 30

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with all Great Achievements you find

Passion

Building on Our Global Heritage

Working Together: IT-Enabled BPO

The Taj Mahal is acclaimed as a masterpiece of architecture and of the heart — an enduring testament to the power of love and a builder’s passion for creating beauty. At Genpact, we too, are passionate about our work and see beauty in managing and simplifying business processes for companies around the world. Our 31,700+ associates span 9 countries are united by a passion for excellence and commitment to work as a team. By combining our passion for excellence with teamwork, Genpact redefines what is possible, expanding from service to one company, GE, to more than 35 global enterprises in less than three years.

Enterprises are searching for ways to continuously improve what they do. An emerging trend is the integration of Business Process Outsourcing (BPO) with Information Technology Outsourcing (ITO) to create even greater value. Genpact’s propriety technology tools, coupled with domain knowledge in major industry verticals, transforms client cost structures while reducing complexity and risk.

Cultivating Quality: Lean and Six Sigma As companies wrestle with growing global complexity and competition, they look to Lean Six Sigma and Reengineering methods to ensure consistently high levels of performance and service delivery. As part of their efforts to sustain customer and shareholder value, global leaders search for partners whose dedication to process excellence is part of their DNA. Like other great builders, Genpact has the culture and tools to get it right the first time. Our building blocks are the deep industry domain knowledge, technology know-how and multi-shore delivery that we combine with Lean Six Sigma to ensure process excellence with every customer engagement.

A Passion for Excellence. At Genpact we’re passionate about our customers, our people and the communities we serve. Our passion is a special energy that defines us and constantly raises the bar on what we can achieve as we strive to exceed customer expectations and drive business impact. Our dedication to this principle drives us to be the Employer of Choice wherever we operate. We recruit top talent, train and reward them to be their best and create an environment of learning, openness and respect. This passion for excellence is part of Genpact’s DNA, rooted in our GE heritage and fervent belief that the customer comes first.

visit us at genpact.com and learn how we can work together to make the impossible possible New York +1 646 624 5900 • London +44 (0)20 7535 5400 • Gurgaon +91 124 402 2000 • Shanghai +86 21 6133 3555 • Tokyo +81 3 3543 1816

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The gateway to the global sourcing of IT and BPO services

Vision

A CYBERMEDIA PUBLICATION

The gateway to the global sourcing of IT and BPO services

DIRECTORY OF SERVICES

SALES & MARKETING

MANAGEMENT Shyam Malhotra Raman Roy Hoshie Ghaswalla

Satish Gupta Head-Sales & Marketing [email protected] 91 987-199-7785

EDITORIAL

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The monthly magazine dedicated to the buyers of IT and BPO services focuses on bringing high-quality content to its audience. Our credible content comes from a network of highly experienced writers and industry insiders. e-Magazine

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Now, enjoy reading and downloading the entire issue from the digital version of Global Services magazine at www.globalservicesmedia.com

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PRINT SERVICES

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This portal on global sourcing gives you news, features, blogs, and unique tools to search for providers, deals and events.

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The Global Services 100

The annual survey conducted by Global Services and neoIT, an outsourcing advisory firm, brings out the list of top 100 innovative IT and BPO service providers. http://www.globalservicesmedia.com/content/ globalservices100.asp

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Subscriptions: One year (12 issues): free to qualifying subscribers, or US $95, Canada $125. International subscriptions (other than India): US$177 for one year.

Letters to the Editor

Send letters to [email protected], or to any of our writers. We reserve the right to edit all letters. Postings submitted to our blogs and letters to the editor may be published in our magazine or Website. In the Next Issue

Revisiting Global Sourcing in an Uncertain Economy: A compilation of thought-provoking articles from sourcing experts on how to handle the economy.

www.globalservicesmedia.com

GlobalServices 3

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N o v e m b e r 2 0 0 8 Vo l u m e 0 3 , I s s u e 3 4

The gateway to the global sourcing of IT and BPO services

FEATURES

18 By Jolie Newman Understand the essential nature of innovation in outsourcing engagements

GLOBALIZATION: 8 RETHINKING 27 FUTURE PROOFING GLOBAL SERVICES GOVERNANCE TOOLS CAN BE A GAME CHANGER By Mike Beals By Eugene Kublanov, CEO, neoIT So should we, those in the outsourcing and offshoring industry, still think that we are insulated from adverse changes in the future? Yes. The need of the hour is to re-think your globalization, offshoring and outsourcing strategy and ensure that it is adequately “future-proofed”

A successful outsourcing initiative requires the implementation of a disciplined outsourcing lifecycle methodology. To make this methodology work, both the customer and the service provider must together design an approach to govern the relationship using the right governance tools and guidelines

34 SAFEGUARDING LIFE INSURANCE By Imrana Khan

30 F&A OUTSOURCING REGROUPS IN 2008 By John Willmott, CEO, NelsonHall Improved Business Analytics Delivery in 2009 & 2010 4 GlobalServices

Apart from $5 million saving a year, the six year old application outsourcing led to 100 percent system availability, improvement in system turnaround times and productivity. The project also helped create a lot of tools that automated many processes and improved SLA compliance to 100 percent consistently

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November 2008

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24X7

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SEASON FOR BUYOUTS By Imrana Khan Crisis in the global economy is driving a trend of Mergers and Acquisitions (M&As) in the services industry. Interestingly, despite the credit crunch and economic slowdown, some companies still have the cash to see M&As through.

11

CSC, EDS: MANAGED & PROFESSIONAL SERVICES LEADERS By Keerthi Nair

ACTIVITIES 14 M&A SPEED UP IN ECONOMIC SLOWDOWN By Tholons

IMPACT OF WALL 15 NO STREET CRISIS ON THE JOBS CUT By Namita Goel

TO 16 OUTSOURCING TUNISIA By Pratibha Verma

COLUMNISTS SHYAMANUJA DAS

Shyamanuja pioneered outsourcing journalism in India in 1998 with bpOrbit, a newsletter for the domestic Indian BPO industry. He is now Editor, Dataquest magazine, Cybermedia.

UNCERTAIN 12 THE GLOBAL ECONOMY

ALLAN SCHWEYER

By Imrana Khan

Allan is the President and Executive Director of the Human Capital Institute and author of Talent Management Systems. PHIL FERSHT

17

NO. OF LONG-TERM OUTSOURCING DEALS SURGES IN SEPT. ’08 By Datamonitor

Phil is Research Director, Business Process Outsourcing, offshoring and IT sourcing, for leading industry analyst firm AMR Research, Inc.

EXPERT VIEWS

36

38

40

KNOWING THE UNKNOWN: THE VALUE OF ASSUMPTION MANAGEMENT By Jennifer Harnett-Bullen, Michael Latchford, and Nick Mathisen, PA Consulting Group

THE NEW OUTSOURCING OPTION By Ben Bauer, HP Outsourcing Services

WILL THE U.S. TURN INTO A COMPETITIVE SOURCING LOCATION? By Phil Fersht, AMR Research

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45

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THE ROI IN ENTERPRISE WEB 2.0 AND CORPORATE SOCIAL NETWORKING By Allan Schweyer, HCI

DEFINING STRATEGIES FOR OFFSHORE HYBRID CAPTIVES By Brian Smith, TPI and Sid Pai, TPI India

IN DEFENSE OF GLOBALIZATION, STILL By Shyamanuja Das, CyberMedia

November 2008

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EDITOR’S NOTE

The FUD Factor

T ED NAIR Editor [email protected]

No doubt, there are opportunities amidst the chaos, but an overall sentiment of fear, uncertainty, and doubt has set in.

6 GlobalServices

he last two months have sunk the U.S. economy into an abyss and its impact could be felt on the global financial markets. The recession is now official, and it could take on a severe form and last a protracted term. Economists say that recovery would begin several quarters later and would be slow. The global services industry, which had put up a brave front till now, even had two of the best quarters ever in its history. But now the tremors of the economic quake are being felt. According to TPI’s Q3 Index and outlook, there were fewer mega-contracts in Q3, significant decline in contract values in Europe, and a dramatic drop in IT contract value. The outlook points toward much more than a temporary “softness” in global outsourcing. Though a spot survey of financial institutions (by AMR Research) revealed an encouraging future for outsourcing, it may not translate to outsourcing project awards at current market values. The large service providers are redrawing their strategies and marking down their revenue estimates. No doubt, there are opportunities amidst the chaos, but an overall sentiment of fear, uncertainty, and doubt has set in. The period will shake up the industry, force companies to innovate, and adopt new practices. The industry will be quite different when it will emerge out of the current recession. Meanwhile, we will celebrate the heroes of 2008. The Global Services 100 Survey is now available on our website: www.globalservicesmedia.com. I invite all service providers to fill up the online survey and participate. GS

www.globalservicesmedia.com

November 2008

The gateway to the global sourcing of IT and BPO services

The New Frontier Financial Services - Multilingual Capabilities Application Development and Maintenance - Knowledge Based Outsourcing THE SUMMIT WILL HIGHLIGHTS ISSUES SUCH AS: • • • • • • •

What are the major outsourcing trends and what expertise are African countries offering? What is the size and composition of the talent pool available in the African continent? What are the key differentiators of African nations from countries such as India? How are African countries carving a space for themselves in the globally competitive outsourcing market? Which processes are natural and suitable for outsourcing to Africa? Is the regulatory and political environment suitable for large companies setting up significant centres in Africa? How do the countries in Africa compare with each other in the league tables?

SPEAKER HIGHLIGHTS Hon Asraf Dullul

Hon Samuel Poghisio

Dr Mohan Kaul

Minister of Information & Communication, Mauritius

Minister of Information & Communication, Kenya

Director-General, Commonwealth Business Council

Crispin Lyden-Cowan

Mark Kobayashi-Hillary

Dr Titi Banjoko

Principal Adviser KPMG

National Outsourcing Association

Chair, AfricaRecruit

Anwar Versi

Vijay Kumar

Editor African Business

Director Africa Payment Gateway

Other speakers include: Vijay Amliwala, Director, CBC Technology David Smith, Head of Marketing, Zippcard Marianne Nganunu, Permanent Secretary, Ministry of Communications, Science & Technology

FOR SPONSORSHIP ENQUIRIES AND TO REGISTER ONLINE FOR A 10% DISCOUNT VISIT www.cbcglobal.org

Government of Kenya

Government of Mauritius

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Rethinking

Globalization Future Proofing Global Services Should we, those in the outsourcing and offshoring industry, still think that we are insulated from adverse changes in the future? Yes. The need of the hour is to re-think your globalization, offshoring and outsourcing strategy and ensure that it is adequately “future-proofed”

By Eugene Kublanov, CEO, neoIT The Changing Cost Dynamic

In 2003, an organization that engaged with an offshore third-party service provider for its Application Development and Maintenance (ADM) initiatives could reasonably expect to notch up savings of 45 to 50 percent. Today, this number is in the 25 to 30 percent range. What has changed? In 2003, an organization that set up a captive center in India for its back office functions could reasonably expect to save 30 to 35 percent on its operating costs. In 2008, the savings are often less than half that percentage. And in some cases, the savings are negligible forcing companies to put up their captives for sale. What has changed? Wages, to start with. At an average 13 to 15 percent year over year growth rate, wage inflation in India has forced third-party service providers to steadily increase prices to maintain the attractive profit margins which have made them the darlings of Wall Street. And just when the wage growth rate dropped a bit in anticipation of waning demand for IT and BPO services in the U.S., the inflation rate in India — reflecting higher global prices for everything from food to gas — hit 11 percent, effectively setting the floor for salary hikes in the coming year. Currency appreciation has also been a contributing factor to the diminishing cost advantage of offshoring. Although in recent months, the Rupee has eased against the U.S. dollar, it is still roughly four percent ahead of the 2003 levels, and there’s uncertainty about what is to come. What’s the Total Cost of Offshoring? If we look only at wage growth, it would take India another 20 years to achieve wage parity with the U.S. But can that be the sole factor for determining the cost advantage? No. Enter Total Cost of Offshoring (TCO). Let’s look at the 8 GlobalServices

changes that have impacted the other cost-line items during the past five years. Consider travel costs. Consider real estate and infrastructure costs. Everything is on the rise. This is true, not just of India, but of many countries that are both existing and new entrants to the services globalization marketplace. As cost increases for everything from wages to travel to infrastructure and technology, we are looking at a dramatic shift where organizations will find offshoring cost savings in the next five years. The Changing Labor Pool Dynamic

Indian firms have made in training, benefits and other retention tools. Although retention costs do not impact the customer directly, the increase in the service providers’ cost base will ultimately affect the end user organization. Captive centers, on the other hand, also face similar attrition and retention issues as third party providers do, but don’t have the same luxury. Escalating wages and rising retention costs have forced many organizations to reevaluate their captive strategy. Philips and Citi are recent examples of companies that have sold their captives to Indian service providers, Infosys and TCS respectively, as part of a captive strategy revamp. Others are outsourcing their low-end processes to providers, while moving the high-end processes from high cost locations to their offshore captive centers. While India’s labor pool issues have been accelerating in the past five years, many other markets have entered the offshoring realm to provide alternatives to buyers. Countries such as the Philippines, Romania, Brazil, Vietnam, Costa Rica, South Africa and Mexico now provide highly qualified resources at reasonable price points without the high attrition rates of India. This results in greater labor stability, con-

www.globalservicesmedia.com

November 2008

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Ask Ed

tinuity and higher productivity. At home, the U.S. economic slowdown has contributed to the global labor pool shake up. With U.S. unemployment hovering at over six percent — a five year high — employers now can consider hiring IT and back office talent, from their own backyards. The Changing Political Dynamic

Although political risk has been long factored into organizations’ decision-making around offshoring, outsourcing and globalization, it is only recently that developments around the world have brought this risk to the forefront. Political risk has been notoriously difficult to assess and can have broad ranging affects on the offshoring industry. It is also not just limited to emerging markets where government stability, and in worst cases armed conflict, come into play. Political risk also exists in developed countries that buy services and ranges from major policy shifts to elections to changing popular sentiment. Today, as in no other time during the past five years, we are faced with political winds that have the potential to sweep in drastic effects on the offshoring industry. Visas will be affected, for one. And there is a perceived future risk. Future-Proofing the Offshoring Model

As organizations digest the myriad trends, forces and developments that impact the future of globalization or offshoring efforts, it will be incumbent on them to put in place strategies that can effectively deal with impending risks, uncertainty and generate the value which is still very much inherent to the practice. “Global players have to regularly update and revise their global sourcing strategy, have a sense of urgency to develop and maintain a global delivery model which is so critical to being successful in today’s competitive marketplace,” added Oliver Bussmann, CIO, Allianz. Both buying organizations and service providers need to be keenly aware of developments that may change the face of services globalization and respond accordingly. What should CIOs and CFOs be Asking Themselves Today? l Is our IT strategy aligned with where the business is heading? Where our industry is heading? l Is our IT and back office cost structure aligned with how our business will perform in the next two years? l Do we have a clearly defined 3 to 5 year strategy for services globalization? l Have we designed a diversified portfolio that includes the right operating model(s), location(s), provider(s)?

November 2008

l Is our global services portfolio sufficiently insulated from changes in global cost structures? l Is our global services portfolio capable of quickly scaling down to adjust to a revenue downturn? l Have we fully thought through the impact of geopolitical events on our globalization efforts? l What impact will an unexpected currency fluctuation have on our global services portfolio? l Is our organization prepared for a Democratic administration and the resulting impact on our offshoring initiatives? l Have we recently assessed our TCO to ensure we continue to meet our business objectives? l What is our U.S. low cost strategy? l What is our Nearshore strategy? l How do we proactively assess and mitigate risks? Future proofing a global services portfolio typically involves a structured approach: Step 1: Assess ITO/BPO Portfolio Alignment: Determine whether your company’s ITO/BPO portfolio is aligned to your overall business strategy, to industry conditions and to the macro economic environment. Step 2: Develop A Re-Alignment Roadmap: After assessing portfolio alignment and identifying critical areas that require management attention the next step is to develop a roadmap to bring the global services portfolio back into alignment. Step 3: Implement A Portfolio Management Approach: Ensuring that a global services portfolio remains aligned to dynamic company, industry and economic conditions can be challenging. Most organizations have by now realized that proper governance is instrumental to offshoring/globalization success, but few companies have taken the next leap – to manage their services value chain as a portfolio.

Adapting to Uncertainty

So, is this the death of offshoring? Is this the death of India as the darling ITO/BPO destination for U.S. and European companies? Does this mean mass return of IT jobs to the U.S.? Does it mark the emergence of a new region as an IT services powerhouse? No, no and no. So what does it all mean? It means that we are on the threshold of major change in the services globalization arena. It is the time now to consider our efforts to date, take a lesson from the high-tech manufacturing sector, and prepare for an uncertain future where an agile, cost effective and diversified global services portfolio will be your competitive advantage. Welcome to the new era of services globalization. GS

www.globalservicesmedia.com

GlobalServices 9

Comprehensive evaluation of the

domestic contact

Dataquest Nov 15, 2008 Issue

centre business

/CMIL/09/08

Dataquest is featuring an analysis of the domestic customer interaction services market in India with an in-depth analysis of the market. NEW Also, get to know who’s who in the domestic Contact Centre industry.

SOA Status Report A first-ever look at on-the-ground deployment of SOA across industries The HCM Advantage Deployment, trends & challenges of India’s Human Capital Management Special Report: Hyderabad Round-up of Hyderabad’s IT industry To advertise in this issue, contact [email protected]

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x 4 7 2

Season for Buyouts BY IMRANA KHAN

T

he crisis in the global economy is driving a trend of Mergers and Acquisitions (M&As) in the services industry. Interestingly, despite the credit crunch and economic slowdown, some companies still have the cash to see M&As through. Valuations are cheap and beleaguered financial companies need to raise capital. The buyout of Citigroup Global Services, the acquisition of Cambridge Solutions, the buyout of Axon, and the expected sale of Lehman Brothers’ captive BPO are some of those strategic developments in a turbulent economy. Most recent development is the British consultancy Axon’s board’s unanimity over its acquisition. A higher bid by Indian IT-services company, HCL Technologies, helped the company buy Axon — “On Sept. 26th, 2008, HCL announced the terms of a cash offer to acquire the entire issue at a price of 650 pence in cash per Axon share and then issue a share capital of Axon at approximately $772.778 million. Within a week, Axon showed interest in HCL’s offer. The acquisition now will be formalized in the fourth quarter of 2008.” Similarly, TCS acquired Citigroup’s stake in Citigroup Global Services (CGS) for $505 million under a packaged $250 million, 9.5year outsourcing deal to provide backoffice services. These global consolidations — whether with established players or

November 2008

vulnerable companies — are also a shortcut to increase global presence, strengthen service delivery and achieve business goals. Smart firms are using the downturn to strengthen their horizontal and vertical focused services. Abid Ali Neemuchwala, Global Head of Process Excellence, TCS spoke to Global Services , “The acquisition will provide three dimensional benefits to TCS. First, it strengthens our relationship with one of our major clients, Citigroup. TCS is already the biggest supplier of IT and IT-enabled services to Citigroup, and with this buyout we will become the largest provider of back-office services to the client. Second, it kicks off a new market that doesn’t exist today for providing process-led back-office services. It will also add up to our ability to provide BPO platform to small and midsized banks, which are still untapped. Third, the deal sets up TCS into a new BPO segment, which is domain-led transaction-processing services.” In another, acquisition Xchanging acquired 75 percent shares of Cambridge Solutions. David Andrews, CEO, Xchanging, while explaining the reasons behind the acquisition, said to Global Services, “In the current phase of globalization, large companies like ours, need companies like Cambridge, with a large talent pool, to fit the bill. After U.K. we now want to move to the U.S. market. GS With additional inputs from Namita Goel www.globalservicesmedia.com

Outsourcing to Tunisia p. 12

CSC, EDS: Managed & Professional Services Leaders BY KEERTHI NAIR

A

T&T, BT Global Services, CSC, EDS and IBM Global Technology Services are Managed and Professional Network Services (MPNS) providers, according to Magic Quadrant report released by IT research and advisory firm, Gartner. The leader companies have been selected among those 14 companies that made to the “Magic Quadrant” this time. All in all, Gartner points out that the “Leaders” have significant network management and outsourcing experience and understand the dynamics needed to deliver network-centric IT services successfully. The providers are further categorizd into “Challengers”, “Visionaries” and “Niche Players.” It is also important for the providers, reviewed in this report, to have automated fault detection and remediation and performance management tools, with varying degrees of success and effectiveness. Gartner evaluates providers on the basis of whether they had to directly provide IT-management services in support of customer WAN environments, develop and maintain their own remote management platform, provide, directly or through partners, IT services in support of LAN and serve clients globally, along with some financial criteria. GS

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Financial Crises

The Uncertain Global Economy

BY IMRANA KHAN

Q

3 ’08 wasn't easy for the global business world, and Q4 ’08 seems no different. The financial turmoil has spread far and wide. Every business sector is assessing the impact of the global meltdown meticulously. Assessments vary highly. They differ in the outsourcing sector as well. Some conclude that the current state of the market presents an opportunity while others conclude the opposite. We look at some viewpoints on the impact of the current financial crisis. The AMR Research Survey

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A recent survey conducted by AMR Research with support from Global Services reveals that outsourcing sector will see minimal impact of the financial turmoil. Of 44 participants from the financial sector, only 16 percent financial institutions plan to chop their outsourcing expenditure. Interestingly, 45 percent plan to stick to their existing sourcing strategies while 39 percent plan to strategize for increasing their sourcing spending. Further analysis uncovered that, of the banking, finance and insurance

12 GlobalServices

sectors, about half (48 percent) of the participants from the banking industry will increase their sourcing expenditure. The sector will continue to not only source its IT-infrastructure, application, finance & accounting, and banking BPO services but it also IMPACT ON OUTSOURCING EXPENDITURE (%) Over the last month, has your firm been looking to increase/decrease your expenditure on outsourcing services (IT and BPO)?

Other 43 Financial 29 Services 29

41 Banks 48

10 60

Insurance Companies 20

20 No change Increase Decrease

www.globalservicesmedia.com

plans to increase the outsourcing of such services. Advisers’ Speak: “Think Twice. Go Slow.”

“Companies with large outsourcing engagements are going ahead and still seeing costs saving benefits. However, project-level outsourcing decisions are going slow and are noticing slow cash flows,” said Eric Smith, Managing Director, Alsbridge Private Equity. “The market will remain good for service providers with good balance sheets, strong global presence and robust delivery records,” he added. If small providers need to gather wins in the current market, then they need to brush up their consulting skills. For the existing deals, they need to be able to showcase their delivery capabilities in order to win deal extensions. For expected deals, most of them may need to look out for the help of intermediaries in order to roll out good outsourcing deals. Service providers would need to convince clients by brushing up their consulting skills.

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“It is critical for vendors to teach the client about their capabilities to deliver clients’ requirements. If the small companies bring in consulting skills, they can actually compete with big counterparts even in the hard conditions,” said Bob Randolph, CFO and BPO Lead, Avasant. “There might be a slowdown in contract signing at this point of time. But we expect a big pick up ahead and many new outsourcing engagements in the next six months, said Andy Efstathiou, NelsonHall. “In order to deal with the large fluctuations, service providers need to be able to deal with the volume. Providers with 60 to 70 percent revenues coming from financial companies are in big trouble. Concentration on an individual sector is the biggest problem.” “What we are seeing in the third quarter and year-to-date metrics represents the results of outsourcing initiatives begun in more stable times — compared to the anxiety of recent weeks,” stated Brian Smith, Partner and Managing Director, Financial Services Operations, TPI North America, in a press statement. “The continued softness of those numbers reflect early recessionary indicators seen in the beginning of the year. But the uncertainty and unrest of

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today’s global economic climate has yet to fully affect the outsourcing industry that serves the financialservices sector.” Buyers’ Take: “Financial Turmoil to Have Nominal Impact on Outsourcing in 2009”

“Opportunities are still there. Providers — large or boutique — need to have a knack for getting them. The demand of outsourcing services is still hot. However, the chances are bright for the large providers. Small and mid-sized firms may have a hard time to prove their delivery capability” said a Fortune 500 banking company that is involved in captive as well as third-party driven outsourcing practices. The company’s mortgage and banking activities are being sourced from 100 countries worldwide. Buyers, especially from the financial sector, are now carefully scrutinizing providers’ performance abilities as the current market situation is pushing them to derive maximum output from the existing relationships to go slow about engaging in new ones. Buyers are even forced to hold on to their future outsourcing strategies as they figure out whether their companies are buying or being bought. In addition, buyers are

required to cut costs today and plan for tomorrow. Providers: “A Big Storm Ahead”

The provider companies see a major impact of slowdown on their revenues. AMR Research and Global Services survey revealed something similar. With the plunging economy, the participants from the vendor community eye slowdown in the outsourcing industry too. Expected Annual Reading: “Nominal Impact on Outsourcing in 2009”

Despite a slowdown and softness in Q3 ’08, “the 2008 year-to-date numbers and values of outsourcing contract awards are exceeding metrics of 2007. Compared with last year at this point, the number of contracts awarded has risen almost 5 percent. TCV of those contracts has grown nearly 19 percent, and their ACV has climbed 27 percent. The full year 2008 looks to be on course for a strong overall result. While TPI anticipates strong fourth quarter award values, the company believes that current unrest and realignment in the global financial-services industry, and related impact on other industry segments, is likely to introduce softness in outsourcing contract awards entering 2009,” TPI anticipates. GS

BANKS: SPENDING INTENTIONS ON OUTSOURCING SERVICES LINES (%) n=29 HR outsourcing

HR outsourcing

IT staff-augmentation projects

IT staff-augmentation projects

Mortage BPO services

Mortage BPO services

Banking BPO services

Finance & Accounting outsourcing

Finance & Accounting outsourcing IT infrastructure outsourcing

banking BPO services

Application outsourcing

Banking BPO services

0 Short-term Increase

November 2008

50

100

Short-term Decrease

3 0

Medium-term Increase

www.globalservicesmedia.com

50

100

Medium-term Decrease

GlobalServices 13

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M&A Activities Speed up in Economic BY NISHANT VERMA, PRINCIPAL, AND AVINASH VASHISTHA, CEO, THOLONS MEGA M&As OF SEPT. '08 Acquirer l HCL

Technologies

l Telvent l Red

Git Sa

Hat

l Open

Text

Deal size ($ mn)

Axon Group

IT consultancy

731.12

DTN Holding

Business intelligence 445

Qumranet

IT software

107

Captaris

IT software

106.79

IT software

90.67

Netpro Computing

IT software

78.7

Tamale Software

IT software

70.1

l Eclipsys

Medinotes

IT software

45

l Constellation

Justice Education & Asset Solutions Businesses

IT solutions

40

l Quest

Partners

Software

l Advent

Software

Software l Phase

Forward

Clarix

IT software

40

l Vector

Capital

Pharsight

IT software

38.92

l Standard

Vebnet Holdings

IT software

37.89

l Synchronoss

Life

Wisor Telecom

IT software

18

l Secure

Securify

IT software

15

l Basware

Computing

Contempus

IT software

14.88

l Netgear

Cp Secure

IT software

14

l Azkoyen

Primion Technology

IT software

9.34

l Cegid

Vcs Timeless

IT software

5.67

Cl Solutions China

IT services

3.03

Ipcas

IT services

2.71

R2 Technologies

IT solutions

2

Halifax Computer Services

BPO

1.68

l Healthaxis

BPO Management Services

BPO

1.57

l Park

Prescient Applied Intelligen

IT solutions

1.37

Redstone Software

IT software

0.88

Group

l Grand-Flo l Data

Solution

Respons

l Csp l Sky

High City Group

l Testplant l Norman

Norman Shark

IT software

0.88

l Ultima

Jcs Computing Solutions

IT software

0.5

Networks

l Broadcaster

Lamplighter Studios

IT services

0.29

l Adex

Bay Harbor Marketing

IT services

0.29

l Qhr

Media

Technologies

l Roper

Industries

l Riverside l Integrity

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Area

Aconex

l Francisco

4

Target

Interactive

Clinicvault

IT services

0.14

Horizon Software Internation

IT services

—

Healthcarefirst

IT services

—

Software Impressions

IT software

—

l Datatec

Inflow Technologies

IT services

—

l Ordina

E-Chain Management

IT consultancy

—

l 4C

Zahra Technology

IT services

—

IT software

—

Controls

T

he overall global market crash caused only a slight slowdown in Merger & Acquisition (M&A) activities in the IT Outsourcing (ITO) and Business Process Outsourcing (BPO) industries, which stood at 59 transactions for a total deal value of over $2.1 billion in Sept. ’08, unlike the previous month, which witnessed around 71 transactions totaling to $2.85 billion. The average deal size was $36 million, slightly below the average deal value of $40 million in August. The bitter winds of economic crisis spanning across major client geographies have affected the stakeholders of the global outsourcing industry. The current chaos may hinder the M&As in the space temporarily. “Wait and watch” would be a good strategy adopted by most firms looking for inorganic growth. However, a few cash rich firms may undertake inorganic investments expecting bargain deals in this low valuation and tight liquidity scenario. The melting stock prices have drastically lowered the market valuations and hence the timing is ideal for the companies looking for deals to grow. Amid such downturn, targets looking for higher valuations need to offer sustainable value proposition in terms of high-end capabilities and clientele to differentiate oneself from the peer group. HowevDEAL VALUE BY ACQUIRER COUNTRY (%)

l Trilogy

Inc/Austin

Ecora Software

l Adobe

Systems

Yawah

IT software

—

Netpriva

IT software

—

l Spectris

Acuity Cimatrix

IT services

—

U.K.: 2

India: 34

l Wolters

Addison Software Und Service IT software

—

Others: 10

Spain: 21

U.S.: 25

Canada: 7

l Expand

Networks Kluwer

To see the full table, visit www.globalservicesmedia.com SOURCE: THOLONS

14 GlobalServices

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SOURCE: THOLONS

November 2008

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Slowdown DEAL VALUE BY TARGET COUNTRY (%)

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Jobscut

No Impact of Wall Street Crisis on the Jobs Cut BY NAMITA GOEL

U.S.: 44 U.K.: 40

SOURCE: THOLONS

er, we believe the targets will not be willing to sell in this market situation unless they are desperately looking to sell out due to liquidity or other concerns. Already a few companies are backing out from the block. The largest acquisition announcement of the month was by HCL Technologies bidding to acquire Axon Group. HCL placed close to $800 million bid for Axon against Infosys’ bid of $750 million, i.e. 8.3 percent higher than Infosys bid. In terms of per share bids, HCL bid for Axon at 650 pence against 600 pence by Infosys. In the second largest acquisition of the month, Telvent, a Spanish IT-services provider acquired DTN, the U.S.-based provider of real-time information services for a total deal value of $445 million. The acquisition is expected to strengthen the market position of the acquirer in the U.S. Another large deal was $107 million domestic acquisition of Qumranet by the U.S.based Red Hat, the global Linux services provider. The target offers enterprise software to enable independent computing from a virtual infrastructure. In another similar sized acquisition, Canada-based Open Text acquired the U.S.-based Captaris, a provider of electronic information exchange solutions. GS November 2008

www.globalservicesmedia.com

MONTH BY MONTH TOTALS Month l June l July l August l September

2008 81,755 103,312 88,736 95,094

2007 55,726 42,897 79,459 71,739

BY INDUSTRY (YEAR TO DATE) Month l Financial l Automotive l Government/ Non-Profit l Transportation l Retail

2008 111,201 94,918 66,847

2007 129,927 46,237 29,167

61,972 51,321

16,905 38,857

ACTION POINT TO IMPROVE MARKET SITUATION Just like earlier this year in April, Congress has again passed a bill on Sept. 28 to flow in $700 billion to stabilize the market conditions, particularly the financial institutions that might improve the job situation, as market condition is directly proportional to jobs cut.

“

The employment report provides further evidence of the need for the House of Representatives to pass an economic rescue package today, before it adjourns, which will protect Main Street America and mitigate further job loss — Elaine L. Chao, U.S. Secretary of Labor

5

SOURCE: CHALLENGER, GRAY & CHRISTMAS

Health care industry continues to hire. Among all the states, Calif. claims the highest number of jobs cut. GS GlobalServices 15

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Australia: 4 Germany: 1 Others: 11

ept. 15th ’08, a date that has made its place in the history of market crashes, surprisingly didn’t cause much damage to the already drowning jobs market. The month of Sept. took away 95,054 jobs, which is seven percent higher than last month’s number, as reported by Challenger, Gray & Christmas. The number this month is third highest in this year after May and July, where the number had surpassed the one million limit. Automotive and financial services sector continue to claim the maximum number of position losses. “It may take several weeks or months for the fallout from Sept.’s Wall Street turmoil to hit the employment numbers,” said John A. Challenger, CEO of Challenger, Gray & Christmas. “In the case of Merrill Lynch, for example, Bank of America will now decide how many of the investment firm’s approximately 64,000 employees to keep. For Lehman Brothers, the picture is even less clear since it is being sold off to multiple bidders. In the case of Freddie Mac and Fannie Mae, the government bail out is no guarantee that jobs will be saved.” Outsourcing, which was for the last two months posed as one of the least important reasons for jobs cut, has moved up the table and claimed 1,225 jobs this month. The drastic change was that Mergers & Acquisitions have taken the No. 1 position and Market Conditions has moved to No.3 as the reason for jobs cut this month. Apart from the Wall Street trauma, HP and EDS merger have also made it to the black list of the month. The merger might do some good to the companies, but it has single-handedly given out over 24,000 pink slips.

“

S

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Destination

Outsourcing to Fiveplaces to visit Tunis The capital city of Tunisia, Tunis, is a centre of commercial activity and is famous for its scents, colors, leather, filigree and tiny crafts work. Medina, a UNESCO World Heritage Site, suburbs of Carthage, La Marsa, and Sidi Bou Said are some visiting sites. Sousse The city is known for its processed food, olive oil, textiles, transport equipments and monuments. Its nightclubs, casinos, beaches, museums allures many filmmakers. Complex of Port El Kantaoui is a diversified tourist zone. Kairouan Kairouan, also known as Kirwan, is ranked after Mecca, Medina and Jerusalem as a place of pilgrimage. The city is mainly famous for its pastries, carpets, vases and goods made of leather. City's main attraction is the Great Mosque of Sidi-Uqba. Bizerte With diversified economy, this city is known for its manufacturing industry (textile, auto parts, cookware). Its fruits, vegetables, wheat and fish are popular world over. It is liked for its beaches — Sidi Salem, La Grotte and Rasenjela.

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6

Ajim Ajim is a fishing port city located in the Island of Djerba. It is also closest to the African continent. Its major attractions are Obi-Wan Kenobi's house, the Mos Eisley Cantina.

Compiled by Pratibha Verma

16 GlobalServices

TUNISIA

BY PRATIBHA VERMA

A

small north African country, Tunisia, has become a favored destination for foreign direct investment over a few years now. It is its modern infrastructure, stable government, strong economy, accessible location and most importantly, the availability of high tech professionals at low costs, which make it ideal market for the investors. Many European IT firms have set up operations here, as the cost of a Tunisian engineer is about 80 percent lower than that in Europe. Tunisia's thriving economy creates an attractive atmosphere for investors from the European Countries, Japan and the U.S. Around 2,600 foreign firms have invested in the country and few chose Tunisia for its close proximity and preferential trading relations with the European Community and the Arab Maghreb Union, as well as for the Investment Code, which offers foreign investors considerable incentives and exemptions. Tunisia seeks to attract 2,000 new outsourcing jobs this year to minimize its double-digit jobless rate. A.T. Kearney’s recent study has ranked Tunisia amongst the world’s top-50 competitive “offshore locations” for outsourcing company services abroad. The Kearney index also noted that French-speaking

countries like Tunisia, involve in the outsourcing of their company services by serving francophone markets with stronger business environments contending with lower costs. Many reports rate Tunisia as a leader in Africa and in the Arab World for its excellent performance worldwide. World Economic Forum’s Africa Competitiveness Report, 2007 identifies it as the first most competitive economy in Africa and 29th in the world. World Economic Forum’s Global Information Technology Report, 2006-2007 ranks it first in Africa and in the Maghreb, and 35th in the world in the field of “global information technology”, and A.T. Kearney’s Global Services Location Index, 2007 gives it 26th position in the world in terms of “labor cost advantages”. Tunisia, with a population of 10.3 million attracted foreign direct investment of $3.270 million in 2008. Furthermore, despite the intensification of the world debt problem, Tunisia managed to reduce its total debt burden. Software Technology Parks with state-of-the-art IT infrastructure and telecom facilities have helped Tunisia emerge as a prominent outsourcing hub. GS

SOURCES: LookLex, Offshore Box, FIPA-TUNISIA, Investintunisia, Outsource2tunisia

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ITdeals

No. of Long-term Outsourcing Deals Surges in Sept. ’08

D

espite the worsening economic situation, the global outsourcing market remained on course during September, with a number of providers signing major, long-term deals. Of the 10 biggest deals signed in September, just one had a duration of less than five years. The overall trend, in recent years, has been for outsourcing contract lengths to become shorter, due to customer wariness of being trapped in a long-term deal. However, six of September’s biggest deals had a duration of 10 years, with two more set to last for five years and one (HP’s deal with BT Group) set to last seven-and-a-half years. U.S. defense giant SAIC secured the biggest contract of the month — one of the biggest deals of the year to date — when it was awarded a 10-year, $5.2 billion mega-deal by the National Cancer Institute. The win capped a stellar first nine months of 2008 for SAIC, which has seen it secure 55 contracts with a total value of $10.9 billion. SAIC has also been one of the major beneficiaries of the expansion in the U.S. public sector outsourcing in 2008. There

was further evidence of this trend in September: Alongside the National Cancer Institute contract, four deals with a total value of $1.7 billion were awarded by the U.S. Marine Corps, the Defense Threat Reduction Agency, the NASA and the Federal Aviation Administration. These deals were spread around four different providers, with lesser-known names like Technology Associates International and Stinger Ghaffarian Technologies winning major deals alongside more established players — Lockheed Martin and Raytheon. In addition to the large public sector deals, September also saw some significant movement in the private sector, including a number of extensions to existing contracts. For example, HP secured a seven-and-a-half year extension from BT Group, while ACS secured a 10-year extension from industrial firm Ingersoll-Rand to provide services around the customer’s existing data-center and network requirements as well as support global data centers providing mainframe GS and midrange processing.

THE TEN LARGEST IT SERVICES DEALS IN SEPT. 2008 Provider

Engagement(s)

Value ($ mn)

Duration (yrs)

National Cancer Institute SAIC

Consulting, support

5,200

10

BT Group

HP

Infrastructure mgmt.

660

7.5

Ingersoll-Rand

ACS

Data-center outsourcing, network mgmt.

551

10

Bristol-Myers Squibb

Accenture

ADM

550

10

US Marine Corps

Technology Associates International

Support

500

10

Defense Threat Reduction Lockheed Martin Agency

Infrastructure mgmt.

475

10

Hanoi Telecom

Ericsson

Systems integration

450

3

Max New York Life

IBM

Infrastructure mgmt.

450

10

Federal Aviation Admn.

Raytheon

Training services

437

5

NASA

Stinger Ghaffarian Techologies

Application mgmt.

300

5

7

SOURCE: DATAMONITOR IT SERVICES CONTRACTS DATABASE

November 2008

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Understand the essential nature of innovation in outsourcing engagements

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By Jolie Newman

T

HE DEFINITION OF INNOVATION, according to www.dictionary.com, is “Something new or different introduced.” The American Heritage Dictionary’s definition is, “The act of introducing something new.” And the Merriam-Webster dictionary defines innovation as, “The introduction of something new.” You don’t get more similar than that. Yet ask 19 different people their definition of innovation in global services delivery (we did), and you’ll get 19 different answers. For example, Kaushik Bhaumik, Head of Cognizant’s Business Technology and Consulting Practice, said, “Innovation in the global services delivery context refers to improvements in outcome or value (around a particular process or activity), that is above and beyond what would normally be achieved through continuous improvement, Six Sigma and other process improvement programs.” Roger Turnham, Oracle’s Director of the Program Management Office for Business Process Outsourcing (BPO), cited innovation as being those things you do to further one or more of the corporation’s objectives, i.e. the three bullet points you find in the CEO’s letter in an annual report. Luis Cuellar, Director of Process Improvement and Compliance for Mexico-based IT services provider Softtek, defines innovation as the introduction or improvement of a service, process or product that ultimately translates into value for its customers. And Peter Allen, Partner and Managing Director at sourcing advisory firm TPI, noted, “The customer must

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the provision of products and/or services that deliver additional benefit over and above the market leaders by utilizing novel or inventive approaches.” While the above definitions of innovation in global services — and others we encountered — do have similarities, there are some interesting permutations that point to lack of clarity and/or disconnects among the different constituencies in the global sourcing industry. That said, it was heartening to hear a variety of common intersection points including that innovation is not radical or big bang, but rather, incremental steps; the parties must jointly define innovation; there must be a high degree of collaboration; it must be a partnership-oriented relationship; and innovation happens when an idea is turned into reality. For the purpose of this article, which aims to present a true pulse on the current state, perceived or real, of innovation in global services delivery, we’ll operate under the context of the following base-level definition: 1) Constant, ongoing quality improvement; 2) constant, ongoing cost reduction through efficiencies; 3) constant technology improvements; and 4) delivery of business benefits, all of which are intended to enable

accrue benefit as a result of the relationship with the service provider that is outside the box of the scope the provider is under contract to deliver.” Other definitions of innovation in global services delivery include that of Vijay Kumar, Chief Technology Officer (CTO) of Wipro, who said, “[It] is about continuous value creation. It’s about partnering with customers to enable them to solve their business problem. Innovation is moving from a differentiator to business enabler in services industry.” Ramesh Krish, Director in the Global Strategic Sourcing Group at NASDAQ-listed human therapeutics manufacturer Amgen, using the term “applied innovation,” referred to it as what you can do to improve the current delivery of services to make them better, cheaper, or more value-add by deliberately and thoughtfully applying a certain principle in a very simple context. Rob Addy, Research Director of Outsourcing and IT Services at industry research firm Gartner, said, “At a theoretical level, innovation can be thought of as a relative measure of the preparedness of an organization to go beyond the conventional norms of their sector or discipline in order to differentiate themselves from their peers through

Figure 1

OPTIMAL SOURCING APPROACH The Optimal sourcing approach must emphasize collaboration and partnership to drive solutions with innovative transformation dynamics that will evolve over the length of the contract. Benchmarking

The Journey to World-Class

Collaborative Transformational Approach

Transformation Roadmap The Hackett Valur GridTM High

Target Future State

Transformation

Collaborative Solution Design

1D 1Q

World-class EFFICIENCY

Initial ”Lift and Shift”

EFFECTIVENESS

Partnership

World-class World-class EFFECTIVENESS

Low

High 1Q 1D EFFICIENCY SOURCE: THE HACKETT GROUP

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the customer to achieve its desired future state. Most agree employing collaborative transformational sourcing is the approach that will most effectively guide companies on their journey down the innovation path. The Hackett Group’s depiction of this approach is depicted in Figure 1.

Applied Innovation improves the current delivery of services by thoughtfully applying a certain principle in a very simple context

Impediments to and Solutions for Achieving Innovation

While the components of our above baseline definition should perhaps be inherent expectations and deliverables in an outsourcing engagement, most outside the service provider community don’t believe they are yet being achieved in most cases. Why is this? There is a confluence of factors, which Mark Hodges, Chairman of sourcing advisory firm EquaTerra calls “stability at all costs,” that make lack of innovation the norm, not the exception. These factors include: Discarding the most important provider selection criteria once the deal is signed – confidence in the provider achieving the desired state and chemistry/cultural fit with the service delivery team – and replacing them with a focus on cost savings and “noise reduction;” “soft” change management and communications initiatives; compensation formulas for service delivery executives which are geared toward ensuring all KPIs are green; the wrong composition of skills in customer relationship management and governance teams; capacity/supply constraints of BPO service providers; and poorly structured contracts that don’t encourage or even allow for the possibility of innovation. Innovation is also lacking at the pre-contract stage. For example, John Moran, VP Strategic Sourcing at Scotiabank, one of North America's leading financial institutions and Canada's international bank, recently issued an RFI to 19 service providers for outsourcing a simple, commoditized finance process. Not one of the 15 providers who responded cited any semblance of innovation into its response. All that Scotiabank received was a labor arbitrage play. Moran cites, “What I would have liked to have seen is a provider actually having already made a bet on a horse to win the race. So, for instance, rather than asking what systems we currently have and offering to run on those same systems for a lower price, I would have thought at least one would have said, ‘We’ve done an analysis on the market, we’ve decided this software package is the best for doing that particular process and we’re now doing that for 20 other customers’.” The good news is there are techniques, as depicted in Figure 2, which can be employed to garner innovation from an outsourcing engagement. There are additional techniques for achieving outsourcing innovation. Many of those we spoke with recommended having a team of people devoted to innovation. For example, Amgen’s Krish suggested that the business development people could perform this role. Seeing a need for people with different vantage points or mind sets, November 2008

— Ramesh Krish, Director Global Strategic Sourcing Group, Amgan

Innovation counsel should be built into the contract to force a mindset to jointly create, deliver and measure innovation during the lifecycle — Vijay Kumar, CTO, Wipro

Emphasis on negative terms during the contracting phase inhibits the types of discussions that can lead to innovation — Tim Cummins, President and CEO, International Association for Contract and Commercial Management (IACCM)

Factors can be baked into a sourcing agreement to facilitate innovation — allocation of specific budgetary pools and pilot projects, and the implementation of systemized processes — Rob Addy, Research Director of Outsourcing and IT Services, Gartner

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TECHNIQUES FOR ACHIEVING INNOVATION Innovation Reviews l Annual or Quarterly Innovation Reviews (also know as “Innovation Boards”) l Topics include: State of the market, industry trends and relevant information, technology updates, solution demonstrations, site visits, to name a few l Use peer groups to understand what is happening in your industry, outsourcing and other industries. Benchmarking should always activate their benchmarking clauses l Focus on best practice and comparators of innovation, not just cost comparisons l Benchmark both functional excellence and outsourced environments. l Customers

Satisfaction Surveys monthly, quarterly and annual customer satisfaction surveys l 360 degrees – all internal and external stakeholders l Satisfaction measures should include innovation. l Perform

Be a True Partner your provider into your annual planning sessions l Brief them on your strategic and business objectives and ask them to brief you on how they can help you achieve your business objectives l Ask/demand innovation from your provider l Do not let the account team “go tactical”– get them to think and act above tactical delivery. l Allow/invite

Financial Base Case your financial base case has sufficient funding in the out years to pay for innovation l Funds must be set aside for business case investigation, evaluation and development l Create a pseudo “R&D” budget. l Ensure

Gainsharing and Incentives l Use a gain sharing mechanism, on a case-by-case basis, to pay for business case development l A “license-to-sell” innovation to the customer by the provider is as important as a gain-sharing mechanism l Include mutual rewards for both the customer organization and service provider. Service Levels SLAs must be tied to innovation or it will not happen l Project milestones, “go-live” events, and pilots are tangible measures of innovation l Other measures include accuracy, customer satisfaction, productivity, Six Sigma (defects), work elimination, and such. l Some

Governance and Relationship Management customer governance team should have a transformation or innovation owner l The governance team should have sufficient staff and budget to help drive innovation l The governance team must hold the provider accountable for innovation l Reassure the provider that the relationship is long-term; otherwise, they will be inclined to disinvest in the relationship l The customer must retain process management expertise at a level where they can clearly articulate future state requirements, evaluate proposals brought forward by SPs and work with the customer organization to get the business case for change agreed. l The

Executive Visibility and Support senior service provider visibility — steering committees, visiting their HQ, joint speaking engagements, regularly scheduled calls, quarterly and annual briefings l Foster/facilitate meetings and face time between customer senior execs and provider senior execs. This can’t be done too often. l Ensure

Behavior/Communication/Culture prepared to invest in and encourage “change” — share the risk and eventual reward with your provider l Communicate you aspirations early l Transformation requires a “partnership” mindset, not a transactional one l Innovation is often not brought to bear because customers do not: Ask for it; define what they mean by it; motivate the provider to deliver it or put restrictions around it l Customers rarely help the provider to understand what is important to them l Can the sacred cows be targeted? l Can the recalcitrants be reassigned or moved out? l Be

The Contract l Transformation,

and its associated innovation, must be a definable project in the contract; otherwise, it will not be funded and will not be implemented l Build a fair cost structure into the contract that allows for innovation l Distinguish between what is in the base fees vs. what is charged a “fee for transformation or enhancement” l Transactional contracts that only focus on operational cost savings and not broader-based business outcomes and benefits are a barrier to innovation.

SOURCE: EquaTerra

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EquaTerra’s Hodges suggested partners from management consultancies or ex-pats or “big thinkers” who have been trained by ex-pats to understand the intricacies of different geographies. And TPI’s Allen pointed to the need for an innovation team within the provider organization which has the knowledge and expertise to ensure its ability to commit to achieving the innovation goals of the customer. And Vivek Wadwha, a Harvard Fellow and Professor at Duke University, emphasized per a research paper he coauthored entitled, How the Disciple Became the Guru, that a significant amount of innovation is now coming out of India, in particular via its retooled education system. He stated India has adapted and perfected western practices in workforce training and development, and now takes workers with poor education and weak technical skills and turns them into highly productive technical specialists and managers to be able to compete on the world stage.

Customer must accrue benefit as a result of the relationship with the service provider — Peter Allen, Partner and Managing Director, TPI

Innovation is elimination of repeated failure and workload that is delivered manually, instead of automatically

Innovation in Today’s Marketplace

Following are a wide range of cited examples of innovation in services delivery. Whether they actually constitute true innovation or not is subject to individuals’ perceptions. Martin Mcphee, Partner at Accenture, noted one of the top-of-mind things at Accenture is the overall green agenda. Thus, one of its newer offerings is a health check to gauge a customer’s green “maturity.” He also cited another specific example in which a global financial institution’s definition of innovation was elimination of repeated failure and workload being delivered manually that could be delivered automatically. Accenture developed what is now a patent pending tool and process, and embedded them into the global delivery environment. Over 12 months, it has achieved an overall 20 percent improvement in service quality and a 26 percent reduction in service cost for its customer. Another Accenture innovation, cited by Scotiabank’s Moran (although not utilized by the bank) is the development of a model bank that demonstrated Accenture’s view of the components and operations of an ideal bank. Dr. Robert Lee, Chairman and CEO of Achievo, a software outsourcing and IT-services provider which operates on a model employing a local front-end with the back-end services provided in China, pointed to a newly signed deal with Danish pharmaceutical firm Nycomed, via which it will provide design, operation and maintenance services for the company’s validation management process for implementing a drug safety solution. Lee also cited development of major components of the public address system at the Bird’s Nest stadium at the recent Beijing Olympics, as well as development of PA systems for many large airports in China. Phil Fersht, Research Director, Global Services and Outsourcing at AMR Research, pointed to breaking down barriers and leveraging synergies by bundling IT applications and the business processes supported by those applications under a single service provider as one form of innovation. The examNovember 2008

— Martin Mcphee, Partner, Accenture

Taking a smart initiative is the first step toward innovation — John Moran, VP, Strategic Sourcing, Scotiabank

ple he cited was that of Bristol-Myers Squibb, which recently bundled its HR applications and processes in an outsourcing deal with IBM, and shortly thereafter signed a similar agreement with Accenture for its F&A applications and financial-support services. Capgemini deploys a component of its go-to-market model, “business insights,” to create a hypothesis around its client’s customers processes, put them through filters, and identify areas for process improvement. David Poole, Capgemini’s Head of North American BPO, described an example in which it had a hypothesis that when its client’s customers phoned to check the rate plan on their electricity bill or slowed up their payment process, those customers were likely to move their electric service to a competitor. When Capgemini’s analysis demonstrated the customer might move its service, the client would offer the customer a special rate or send them a free gift to assist in customer retention, thus contributing to the client’s top line. Capgemini is also planning on launching next year accelerated solutions environments for groups of its customers. The goal is to get the customers to bounce ideas and challenges off of each other so that Capgemini can design innovative solutions around the identified needs.

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Cognizant has worked with a leading healthcare payer organization to dramatically re-invent its provider credentialing, a standard process most healthcare insurers have to conduct to get regular updates on the qualifications, experiences and procedures of the physicians who participate in their plans. The customer previously had a highly manual, paper-based process for provider credentialing that cost over $100/file. By moving key activities to lower cost centers and introducing new workflow and work segmentation technologies and processes, Cognizant was not only able to reduce the cost to $35/file, but also attain significant improvements in the quality and volume of credentialing activities. Softtek’s Cuellar cited a $50 billion, Fortune 100 customer – one of the world’s leading providers of essential technologies to developed, developing and emerging countries – that wanted to develop a global center of excellence as a centralized solution for application support to ameliorate the impact of its highly fragmented processes, tools, customer service and costs. After conducting a comprehensive assessment, Softtek recommended a simplified organizational structure and implemented a solution that resulted in a reduction of the

number of application defects through continuous root cause analysis, freeing up of resources to increase the number of applications supported by the team, attaining a near shore leverage of 96 percent, and saving the customer nearly $3 million dollars in the first year of operation. Ananth Krishnan, VP and CTO at TCS, emphasized his company’s utilization of “disruptive innovation” – based on the same concept founded by Professor Clayton Christensen, who sits on TCS’ board – and its Co-Innovation Network to enable its customers to access potentially game-changing and/or new market business models. For example, one of its U.K. customers was looking at exploiting the social networks world to further its business. TCS partnered with the customer, several U.K. universities, and several of TCS’ research labs, built a lot of prototypes, and piloted it in the U.K. Those candidates are now being seriously considered by the customer because the pilots were quite successful. TPI’s Allen cited a global network services contract, signed in early 2007, between Credit Suisse and British Telecom. Credit Suisse wanted new capabilities brought into the relationship, to expand the reach, capacity and quality of serFigure 3

CONTRACTING STRUCTURE AND PROCESS A Framework for Collaboration — A Mechanism for Innovation and Value Customer

External Market Intelligence

Manufacturing/ Services

External Business Intelligence

Commitment Management Competency

Marketing and Sales

Realizing innovation and value improvement possibilities

Supplier

SOURCE: INTERNATIONAL ASSOCIATION FOR CONTRACT AND COMMERCIAL MANAGEMENT (IACCM)

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vice in its network, over and above what might be under contract. Thus, a governance structure was put in place to motivate the service provider to bring ideas to a defined group of innovation managers, one from the provider, one from the customer, both of whom were not burdened with the day-to-day management of service. Vijay Kumar, Wipro’s CTO, cited an example in which a customer with 64 divisions spread across different geographies, with more than 80 development instances and 12 production/staging instances, wanted to develop a shared service support center. Employing collaborative innovation, Wipro was able to achieve for the customer 30 to 40 percent cost savings, 5to 10 percent productivity year on year, an average of 10 percent incident reduction on an annual basis, and improvement in first call resolution. Kumar also runs an innovation council in which 12 CIOs meet twice a year, exchange ideas, and share knowledge and experiences to assist each in driving innovation initiatives. Contracting for Innovation — The Great Divide We encountered quite a bit of disagreement on whether or not innovation can actually be written into an outsourcing contract. On the naysayer side, Anish Nanavaty, CEO of WNS’ Knowledge Services group, said, “It is a truly collaborative effort and it cannot be written into a contract. The customer and the service provider have to be engaged in deep communication and both must be willing and free to experiment with the variables to deliver innovation.” Arkadiy Dobkin, President and CEO of EPAM, a leading global software engineering and IT consulting provider with delivery centers throughout Central and Eastern Europe, said, “Shared risk/reward stipulated in the contract could be a stimulating factor, but I do believe that contractual agreements are not the most efficient motivator to achieve innovation.” And Scotiabank’s Moran stated, “We’ve tried to contract for innovation in outsourcing and it doesn’t really happen no matter what you put into the contract. The provider is either going to come forward with an innovative program, or not. You get a lot of baggage ideas as opposed to true innovation when you go down the contracting route trying to force it.” In the middle-of-the-road camp, Wipro’s Kumar stated, “Since collaboration is fluid in nature, everything shouldn’t be nailed down in a contract. However, innovation counsel and reward structures should be built into the contract to ensure it forces a mindset to jointly create, deliver and measure innovation during the lifecycle of the engagement.” And Garner’s Addy noted some factors can be baked into a sourcing agreement to facilitate innovation, such as the allocation of specific budgetary pools to finance proofs of technology and pilot projects, and the implementation of systemized processes for enhancement suggestion capture, periodic process reviews, employee education and technology awareness sessions. On the positive side, Accenture’s Mcphee emphasized that by changing focus from inputs to outputs and outcomes, you November 2008

Enable customers to access potentially gamechanging and/or new market business models, i.e. prototypes and pilots, to come out with new ideas — Ananth Krishnan, VP and CTO, TCS

Get customers to bounce ideas and challenges off of each other so that innovative solutions are designed around the identified needs — David Poole, Head of North American BPO, Capgemini

can actually start to define innovation into the structure and framework of the contract. But this calls for a more mature contract structure, which provides the flexibility and agility to enable innovation to drive change. And AMR’s Fersht added that a new contractual element, called Business Service Level Agreements, can account for adding in a given number of innovation consulting hours per month. Tim Cummins, President and CEO of the International Association for Contract and Commercial Management (IACCM) cited the need to radically rethink global services delivery contracts. Cummins says, “We’re trying to coordinate something that is incredibly complex. And while there must be a strong level of discipline, there must not be rigidity. Both sides use the contract as a vehicle to try and manufacture certainty where there is none.” Cummins noted an emphasis on negative terms during the contracting phase inhibits the types of discussions that can lead to innovation. Thus, he encourages a focus on the desired outcomes from the outsourcing engagement when crafting the contract, as well as building in more carrots and less sticks. Figure 3 depicts IACCM’s recommended innovation-driving contracting structure and process. The Future of Innovation in Global Services Delivery So how will innovation in global services delivery evolve, and what will it look like, in the relative near-term? A variety of the experts we spoke with cited “open innovation” – topics and ideas are put out on the Internet to gain the “wisdom

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WORDS TO THE WISE The thought leaders with whom we spoke for this article offered the following words of advice to the provider and customer communities on how to position, ratchet-up and achieve innovation in global services delivery PROVIDERS l David Poole from Capgemini: Create formal processes and report mechanisms for innovation that involve everyone within your own organization and your customer’s organization to ensure the ideas get implemented. l Kaushik Bhaumik from Cognizant: Innovation is a continuous pursuit, not a one-time event. It requires a focus on investment in new processes and technologies, some of which can be very forward leaning, in order to be able to deliver them to customers. In addition, approaching innovation in a part-time manner won't yield meaningful results. l Mark Hodges from EquaTerra: The burden of proof is on the provider, not the customer. l Rob Addy from Gartner: Invest in people, and recognize and celebrate those that question the status quo. Only by challenging the accepted norms of today will tomorrow’s innovative best practices be developed. l Anish Nanavaty from WNS: If you don’t know the business issues that keep your customers up at night, you aren’t going to be in a position to help them innovate.

l Rob

Addy from Gartner: Recognize innovation won’t just happen. It needs to be encouraged and developed over time, and that takes investment. Time and resources (as well as cold hard cash) are needed to help new ideas become reality. Customers who expect their providers to burden these costs are likely to be disappointed with the level of innovation they experience. l John Moran from Scotiabank: Don’t get too hung up on sourcing for innovation. l Anish Nanavaty from WNS: Understand how the levers of innovation link back into processes that reside within a global services relationship. Service providers need to be exposed to how those levers can move the needle for your organization so that they can eliminate the artificial constraints set by contracts.

CUSTOMERS Fersht from AMR: Don’t go over the top with multisourcing ... multisource sensibly. And take maximum advantage of your contract negotiation or renegotiation to bring the innovation discussion into play. l Kaushik Bhaumik from Cognizant: Don't underestimate the internal change management required to successfully reap the benefits of innovation. Organizational lines may need to shift, processes simplified and role/responsibilities fundamentally changed in order to get the full benefits of innovation. Our experience indicates that successful change management is the difference between true value-adding innovation and academic exercises. l Phil

of the crowds” and will be funded if a provider sees viable, scalable value in the response – as well as social computing and social networking to drive innovation. On a more pragmatic level, WNS’ Nanavaty stated global services will bring varied, low-cost resources in large quantities that can be deployed in specially-crafted processes in an anywhere, anytime model. And Gartner’s Addy thinks we’ll be able to create the environments, processes and service deliv26 GlobalServices

ery team templates that foster and encourage innovation. TPI’s Allen added the final caution, noting that left unaddressed, we’re headed for a definition of outsourcing that is entirely within the box, it’s entirely commodity-oriented, the margin expansion opportunities for the providers will be severely limited and the customer receptivity to these relationships in the context of adding more value down the road is going to erode. GS

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GOVERNANCE TOOLS CAN BE A GAME CHANGER A successful outsourcing initiative requires the implementation of a disciplined outsourcing lifecycle methodology. To make this methodology work, both the customer and the service provider must together design an approach to govern the relationship using the right governance tools and guidelines

By Mike Beals

T

HE TOUGHER THE ECONOMY, the better the case you can make for outsourcing in a traditional or shared services environment. But there’s a problem. As organizations scale up their use of outsourcing, it becomes more difficult to monitor, manage, measure and report on those oftencomplicated relationships. As a result more than a few CIOs and other C-suite executives live in fear of some very simple questions: Where do we stand? What is outsourcing really doing for us? What are the numbers? And let’s not forget the big one: How can we optimize this multiprovider service delivery model? It’s an age-old dilemma, and today it’s haunting most IT

November 2008

and business-process organizations that have outsourced: If you can’t measure it and/or provide aggregated reports on it, how are you supposed to know whether it can be improved? When more than half your services are delivered by multiple external parties, how can you provide cogent end-to-end performance, consumption and chargeback reports to your internal customers? And if you can’t prove outsourcing’s value, why should your organization consider expanding it — or even supporting it? Why indeed. Failure to quantify the value of your business services, whether delivered via outsourcing or otherwise, may lead to internal constituents pushing back, defunding or various units freelancing their own outsourcing

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Management

relationships. This could mean chaos — a possibility that keep executives up at night. What You Don't Know Can Hurt You Badly

You already know that the complexity of outsourcing methodologies makes finding and fixing errors difficult. Too much governance team time is spent verifying invoices — by recalculating Additional Resource Charges/Reduced Resource Credits (ARCs/RRCs), service-level penalties, earnbacks and chargebacks — using different rate tables for each country and currency. A recent study by EquaTerra, a global business advisory firm, found invoicing error rates run at about nine percent on average across IT Outsourcing (ITO) and Business Process Outsourcing (BPO) deals globally. And yet, fast verification is the key because you probably only have 30 days to dispute an invoice and 60 days to recover fees. Of course not all of those errors will be resolved in your favor, but the more outsourcing relationships you have and the higher the dollar volume, the more money you have at risk.

Even organizations that have instituted disciplined governance solutions around outsourcing find themselves inundated with information, most in formats unusable or difficult to share, like spreadsheets. End-to-end service levels and financials become difficult to obtain and use. Management of providers takes too long, leaving precious little time for collaboration and change management. Determining acceptable parameters for key performance indicators becomes near impossible. How can managers quickly focus on key pieces of data that fall outside acceptable parameters? In addition, it’s not likely that any of the governance team members will stay for the term of a deal lasting five or 10 years. So do you have any process/solution that will serve as a knowledge repository for how the contract has evolved or how issues have been resolved? Having a good governance director — or even two — doesn’t address the problem because heroes don’t scale. In fact, too many outsourcing deals succeed or fail based on the capabilities of one individual. So it’s time to take it up a notch; maybe three. A Holistic Viewpoint

The Evolution

For most organizations, outsourcing has occurred in an ad hoc fashion, and now, unfortunately, most of the processes around governing outsourcing are inconsistent or nonexistent. While some organizations under-staff governance activities, others use overqualified resources for routine lowvalue activities. Today about 50 percent of the work of governance is routine, and thus ripe for automation.

Should You Consider Managing Your Outsourcing Relationships as a Portfolio? Probably so, if: l The

percentage of services delivered by external resources is growing, or over 50 percent l You are blending multiple providers in different geographies, or within a function l You're unable to determine which throat to choke when there is a problem l It's difficult understanding the respective role of each provider from an end-to-end service perspective, as well as how they interface (or overlap) with other providers l It's difficult to calculate and report on chargebacks to the business units l End-to-end performance reporting takes too long, or is labor intensive l You do not have service catalogs to communicate your services, and charges to internal customers l You expend more than one full-time resource in the analysis, consolidation and reporting of financial, consumption, and performance data.

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With the right portfolio governance management tools, organizations can streamline their outsourcing processes, saving money and time; automate transactional governance activities with built-in calculations tied to the agreements and associated business cases; and mitigate risk through compliance and audit management. Bottom line, organizations that approach outsourcing properly can appreciate savings of 2 to 5 percent of total contract value through improved operational efficiency. The goal is to aggregate data in ways that provide meaningful information and get it into a system that makes sense so people will start using it. The only way that’s going to happen on a consistent basis is if it’s guided by a framework supported by the right kind of tools. You’ve heard about something being simple but not easy, right? This is the other way around: Really knowing your outsourcing performance will never be simple, but it can become much easier with the right governance tools and guidelines. And don’t discount collaborative capabilities. Collaboration between multiple providers and governance — and governance and business — is critical for most ITO and BPO deals. The Four Phases of Governance Progression

No matter where you are, the idea is to build a solid foundation, and then move up to the next step. l Basic governance: You’re addressing the acquisition of commodity products and services and have some basic governance in place in an attempt to manage contracts, pay invoices, and such. l More sophisticated relationship management: You’re starting to transform the business by leveraging your outsourcing partners to provide more value. This requires estab-

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lishment of a different kind of relationship with service providers, one in which they understand your business drivers so they can provide expertise, not just commodity services. Because this is a much more collaborative relationship, it requires more sophisticated management. l Managing multiple outsourcing relationships as a portfolio: These organizations are moving up the ladder, but too much work is being done ad hoc, which is wasteful. The missing link is a framework. Frameworks provide consistency and process, and from there you build the ability to benchmark. Organizations at this stage develop “governance centers of expertise,” which consolidate leveragable governance activities like invoice verification, contract administration, financial and performance reporting. l The power of tools: This is the step that many organizations need to take. The right tools liberate information that can optimize the service delivery environment. In too many cases, service providers plunk inch-thick binders down on CIOs’ desks. Are most of the answers there? Sure. Does the CIO have the time to dig them out and interpret them and can he share that information easily? Not a chance, unless you want to hire a staff of spreadsheet jockeys. Therefore, the information is useless, and it’s impossible to optimize the outsourcing environment. What To Look For in a Solution

Find a comprehensive, fully scalable buy-side tool that automates the transactional components of governance and provides decision-making support for more strategic work. As an example, Governance WorkPlace, an outsourcing portfolio-management tool by EquaTerra, is designed for teams that manage outsourced or blended sourcing relationships in traditional and shared services organizations. That’s fortunate because they’re often the ones struggling to effectively manage internal and outsourcing relationships. Must-have Features l Scalability: Find a tool or solution that can assist not only at an individual deal level, but can also scale across multiple back-office functions, multiple providers, and globally. l A simple dashboard: This makes it easy to organize and display key performance indicators and supporting data. KPIs quickly focus management on problem areas so decisions will be faster and better. l Quick-turn analysis: A useful business-intelligence platform provides easy-to-use export charts, graphs, data on multiple dimensions like business unit, geography, provider, to name a few. l Automation: True portfolio-wide solutions will automate complex outsourcing methodologies and governance processes via workflow. This helps institutionalize the work of governance and gets away from hero-led deals. l Maintainability: Make sure you get the administrative tools necessary for the governance team members to main-

November 2008

Carrots You Can Reasonably Anticipate When it comes to solutions that enable outsourcing portfolio — style management, you'll find many claims, some stretching the boundaries of logic. Here are some realistic rewards for finding the right solution and partner: l Reduced

labor cost of governance: Expect to save some 18 percent annually l Reduced fees: You should realize 1 to 2 percent savings by catching invoice errors l Easier identification of service level credit calculation errors (1 to 5 percent of fees) l Significant cost avoidance: Reduce excess spending due to uncontrolled consumption, minimize the need for additional staff and get easy access to contract to minimize change orders l ROI typically one year or less l Ongoing cost reductions l Creation of additional value: Get more time for joint planning and collaboration l Enhanced project approval: Log, approve and track new projects and initiatives l Enhanced communication and collaboration: You'll be able to keep better relationships and priorities aligned with providers and business.

tain the solution as the deal changes over time. l Collaboration: You’ll need a simple, workable collaborative environment to facilitate communication, joint planning, change management between providers, governance, the retained organization and the business units. l Knowledge management: This is too often forgotten. Make sure your solution provides the ability to capture the “tribal knowledge” of the deal in terms of contract amendments, issue resolutions, and discussion areas each leveraging version control and full-text search. The Competitive Edge

It’s clear that we can stipulate the advantages to outsourcing and shared services environments. The only remaining questions are how fast to move and to build support in your organization. Armed with the right information — data delivered with right portfolio governance tools — you’ll move your organization further up the evolutionary ladder of outsourcing, enhancing efficiencies and building a competitive edge over organizations that fail to grasp the importance of governance and enabling tools. GS Mike Beals brings more than 20 years of HR, IT, and outsourcing governance experience to EquaTerra. He is responsible for EquaTerra’s enabling technology platform called Governance WorkPlace (GWP), and has assisted customer in all four stages of the outsourcing lifecycle, with primary emphasis on “source” and “manage” stages.

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F&A OUTSOURCING

Regroups in 2008 Improved Business Analytics Delivery in 2009 & 2010 By John Willmott, CEO, NelsonHall

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Processes: Finance and Accounting

T

HE VALUE OF Finance and Account Outsourcing (FAO) contract activity in the 12 months ending September 2008 was notably lower than those in the 12 months ending September 2007, and indeed lower than any similar 12-month period in the past five years. So why was this and what are the prospects for the FAO market in 2009 and beyond? There are a number of reasons for this. Firstly, 2007 was the peak of FAO activity in the past five years and so represented a golden year for FAO. Accordingly, it was going to be a difficult year for 2008 to beat. In 2007, there were landmark contracts for FAO including: l Infosys’ $250 million multiprocess FAO contract with Philips. This was a particularly significant deal as it reflected November 2008

the outsourcing of a major in-house shared service environment, which now not only needed to partner both to invest and re-energize service delivery but also to relocate shared services centers into key “growth” economies. l BT’s renewal of a $250 million FAO contract with Steria was a significant reaffirmation of one of the earliest major F&A outsources. BT also reaffirmed its commitment to FAO by extending the scope of its FAO beyond the transactional services carried out through Steria with the outsourcing of record-to-report functions to Accenture. l Microsoft’s expansion of its FAO activity to a more global level with the award of a $185 million F&A and procurement outsourcing contract covering 92 countries to Accenture. l Capgemini’s award of FAO contracts by NXP Semiconductors and SKF.

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contract with Kimberly-Clark. So, 2007 demonstrated a number of trends in FAO including the globalization of F&A support for International markets and a greater emphasis on record-toreport service delivery. This globalization of FAO continued in 2008, notably with Capgemini being awarded a seven-year contract to support Unilever’s businesses in Latin America. However, despite this latter contract, HP’s contract with Tribune Publishing and the recent award of an FAO contract renewal to ACS by UTC, the scale of FAO contract activity seen in 2007 has not been repeated in 2008. Nonetheless, the broad trends in FAO continued. Key trends in FAO in 2008 included an extension of both delivery locations and markets served with marked extension of delivery capability into Central Europe and Latin America, with the latter not only acting as a nearshore location to serve North America, but also increasingly serving the important growth markets of Latin America itself. It is likely in 2009 that the delivery capability will develop in further regions with, for example Northern Africa, being utilized to serve both English-speaking and French-speaking markets. In addition to the benefits of labor arbitrage largely being achieved from FAO, there was a marked increase in the trend to apply increased automation to FAO. For example, HP has been increasingly emphasizing the use of technologies such as e-invoicing, which the company claims can achieve 15,000 to 20,000 invoices per full-time employee, and auto-reconciliation. Some of these technologies are still at an early stage of deployment, and this trend will continue in 2009 and 2010. Compliance is another major theme in 2008 with Capgemini notably launching a SOX-compliancy service in support of its FAO capability, and the need for improved compliance is certainly one of the strengthening drivers behind FAO in these difficult times. This was accompanied by the continuing move into record-to-report and analytical functions with many providers aiming to obviate concerns regarding changes in dollar-rupee exchange rates by enhancing their analytical capabilities in support of F&A. Finally, there was a move to take advantage of the initially booming market for SAP implementation services with, for example Infosys and HCL, battling to takeover Axon. HCL appears to have won this particular acquisition but has done so at just the point that the credit crunch has put a freeze on the purchasing of SAP software. This freeze will

undoubtedly thaw, but may take a while to do so as the credit crunch increasingly bites into the manufacturing sector which is one of the major purchasers of FAO. The second factor behind the reduced level of FAO activity in 2008 is the impact of the credit crunch itself. Indeed, the credit crunch has a double effect on FAO, which takes its impact beyond that on other functions and explains why FAO has been impacted more than the outsourcing of other business functions by the credit crunch. So, what impact did the credit crunch have on FAO? The first impact of the credit crunch has been to reduce the overall level of FAO contract activity. The credit crunch has had the short-term impact of freezing the sourcing strategies of many organizations with the result that the overall level of new Business Process Outsourcig (BPO) contract signings in the second quarter of 2008, not just those in FAO, showed a significant decline. This is because a major change in the economic environment necessitates a major organizational rethink, with existing strategies put on hold while this strategic review takes place. Some organizations have also experienced a change in senior management, but even those where the upheaval has been less dramatic have almost certainly been undertaking major reviews to determine their response to the credit crunch. So, sourcing has slowed while organizations undertake more fundamental strategic reviews, which take time to ripple down to the sourcing level. Indeed, depending on the level and timing of the impact of the credit crunch on the sector and organization, more drastic strategies than outsourcing may be called for. Clearly, saving 40 percent of 1 to 2 percent of your cost base via FAO is insufficient to save a Lehman or Northern Rock, where immediate liquidity of many tens of billions of dollars is required. In these instances, and the most extreme cases where organizations are seeking to save themselves from bankruptcy, outsourcing is unlikely to work as a short-term fix and organizations are looking for investors or acquirers with deep pockets, possibly coupled with a need for major lay-offs and restructuring. So, organizations typically need to have stabilized themselves financially and strategically prior to outsourcing, and anyway outsourcers no longer want to take on customers potentially facing major financial problems. So, the current credit crunch can generate a pause in FAO activity while organizations address the shape of their business and the strategies required to position over the next 12 to 18 months. The greater the impact of the credit crunch on the business, the longer it may take to revise its

WHILE ORGANIZATIONS HAVE BEEN FROZEN IN THE GLARE OF THE CREDIT CRUNCH IN THE FIRST HALF OF 2008, THE CREDIT CRUNCH WILL EVENTUALLY LEAD TO INCREASED BPO USAGE INCLUDING FAO ACTIVITY.

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sourcing strategies and begin to evaluate BPO opportunities including FAO. So, in the short-term, the organizations that drive FAO contract activity are likely to be those that have existing sourcing strategies in place and have not been severely impacted overall by the credit crunch. However, as the credit crunch begins to impact the wider economy than the banking sector, these organizations are becoming ever harder to find. And, in the case of FAO there is a further consideration. F&A is the major source of financial control and financial information within an organization, and so organizations will be reluctant to undergo a disruption to this function, however temporary, at a time when they are monitoring their financial controls more closely than at any time for decades. This latter factor clearly came into play early in the credit crunch, and is likely to remain for some time yet. Although, organizations typically do recognize that the F&A function is potentially an area of major cost savings, and the majority of U.S. corporates feel this way, they are unlikely to outsource F&A function during a period of great financial uncertainty because of the potential disruption this would cause to their financial monitoring and controls. The principal reason to outsource during such a period would be to achieve access to improved financial control, that cannot be achieved inhouse. So, over the next year, improved analytics and financial control, rather than cost reduction, will be the driving forces for FAO. However, while organizations have been frozen in the glare of the credit crunch in the first half of 2008, the credit crunch will eventually lead to increased BPO usage including FAO activity, though the latter may take longer to recover than BPO services for above reasons. Once the FAO market does recover in say, the second half of 2009 or even 2010, then the nature of services and contract approaches will have evolved to meet the needs of the new economic environment. In particular, the goals of credit crunch-impacted F&A sourcing strategies are likely to become more ambitious, featuring: l An emphasis on improved accounting effectiveness, including improved accounting close times, improved comparability across geographies and business units, and improved analytics for identifying emerging trends and driving the business more responsively. l A need to transfer volume risk, which implies organizations becoming more willing to adopt a transactional pric-

ing approach than previously. There are still challenges in adopting transactional pricing since organizations frequently struggle to establish in-house baseline costs per transaction and providers will remain reluctant to price against an unverified cost base. Nonetheless, changes in transaction volume remains one of the fundamental drivers of outsourcing and mitigation of volume risk will be a major driver of FAO in the uncertain times that lie ahead over the next 18 months. l A need to achieve greater cost reduction, which implies a more transformational end-to-end approach to BPO, which in turn implies an increase in the scope, length and value of FAO contracts, possibly leading to a greater emphasis on source-to-pay as well as end-to-end accounting processes so that savings can be achieved in purchased goods and services and not just in F&A process costs. Another increasingly common response to the credit crunch will be to accelerate expansion strategies within emerging “growth” economies. Here, organizations face two main drivers for the use of BPO and FAO — rapid changes in volumes (this time upwards) and a lack of local expertise. BPO can be used not only to support rapid entry into new markets, but also to minimize the risk of new market entry by providing a cost-effective exit strategy should one be needed. In addition, customers will still be seeking to minimize their own investment in change. It seems that organizations will focus on the use of FAO to achieve cost reduction with minimum investment and maximum protection from volume-related risks. Accordingly, both the scope and the nature of pricing within these contracts is likely to shift as organizations seek to achieve significant cost savings and changes in operating model and reduce their exposure to underlying fluctuations in business volumes. The net impact of this may mean that the FAO market will be more adversely impacted by the credit crunch than other BPO markets in the short-term and will be slower to recover. However, when it does so, it will re-emerge with a greater process scope, with much greater emphasis on analytics and business support, and a wider cost reduction agenda. Twenty-percent of 1-percent cost reduction has a minor impact on organizations in the light of a potential recession, while the ability to make the right financial decisions and move into new markets may save the organization and ensure future success. GS

ORGANIZATIONS WILL BE RELUCTANT TO UNDERGO A DISRUPTION TO THIS F&A FUNCTION, HOWEVER TEMPORARY, AT A TIME WHEN THEY ARE MONITORING THEIR FINANCIAL CONTROLS MORE CLOSELY THAN AT ANY TIME FOR DECADES — A FACTOR CLEARLY THAT CAME INTO PLAY EARLY IN THE CREDIT CRUNCH.

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SAFEGUARDING

LIFE INSURANCE Apart from $5 million saving a year, the six-year old application outsourcing project led to 100 percent system availability, improvement in system turnaround times and productivity. The project also helped create a lot of tools that automated many processes and improved SLA compliance to 100 percent consistently

By Imrana Khan

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he Year 2002: A Fortune 100 global insurance company (reluctant to reveal its identity) based in the U.S. had an in-house IT team responsible for the management of several IT applications, which handled its life-insurance business. For the company with 150 years of experience of providing a wide array of banking, insurance and asset-management services in over 50 countries with over 120,000 employees who serve a broad customer base — individuals, families, small businesses, large corporations, institutions and governments — it was difficult to manage the internal IT requirements and to run its growing global business. Moreover, the company was using old technology to manage its gigantic insurance business. “We did an analysis of the work being done and determined that it was using old technology, had many repeatable tasks, which were not core to the business we do. We were mainly facing work capacity problems in terms of training and hiring new people and the transition of a business from the West coast to the East coast,” said the company’s spokesperson. At the same time, being a leading provider of retirement services and life insurance in the U.S. and a top property and casualty insurer in Canada, it was necessary for the company to maintain, and gear up, its position in the market. With the massively growing business and rapidly increasing competition, it was necessary to explore the new business model. Thus, the conglomerate evaluated the options of outsourcing the IT applications, since the existing team was unable to meet the increasingly stiff servicelevel agreements driven by the changing nature of the business and increased competition. Between 2002 and 2003: The company opted for multisourcing model of offshoring and outsourced a big chunk

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of its IT services to its one of the prime contractors NIIT Technologies, an India-based technology company. The provider set up a dedicated offshore development center to handle all the applications for the customer’s life insurance business. The contract was no less challenging for NIIT. “Availability of resources with skills in the customer’s technology area was scarce — in the market and within the organization. We overcame these challenges through our knowledge-management and competency-development frameworks,” said Ritu Gupta, Practice Leader, BFSI (Banking, Financial Services and Insurance) Vertical, NIIT Technologies. Initially, NIIT dedicated 20 employees to this relationship. This number has now grown to 200. The team of 200 workers supports the set of applications 24x7, handles all kinds of enhancements to their mission critical systems, and supports re-engineering and decommissioning initiatives in these areas. These enhancements are being taken up time-totime based on requests from business users to align the systems with the changing needs of business and customers. In order to track these enhancements and to streamline the entire process of rolling out these changes to the production systems, NIIT Technologies mapped a workflow with the customer, which was implemented online through “MATRIX,” the provider’s knowledge portal. The customer also has complete access to the status of the requested enhancements. The MATRIX knowledge portal is being used for: Requesting enhancements; allocating tasks; tracking the status of open requests/tasks; tracking productivity and other relevant metrics; besides being an ever evolving repository of systems, processes and domain knowledge and also an e-learning portal for ensuring competent and certified individuals service the account.

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Case Study

ENHANCEMENT REQUEST STATUS TRACKING Using the Web-based MATRIX portal, the customers can keep track of all enhancement requests. The status of a requested enhancement can be known through "Maintenance Request" based combination on all or any of the following criteria: l Maintenance

request ID: ID with which the requirement is created (e.g. TA/06/03/06) l Priority: Priority of task l Reported date (from and to): Date on which task was assigned to offshore l Reported by: Name of person task was assigned by l Assigned to: Name of person task was assigned to l Status: Status of task l Closed date (from and to): Date on which task was closed l Reviewed by: Name of person who reviewed the task l Reviewed date (from and to): Date on which task was reviewed.

The Structure and Workflow of Offshore Team

For the customer, NIIT planned a dual shore model of operation. As part of the model, its onsite personnel interacted with the business users to discuss their enhancement requirements, and accordingly initiated a maintenance request, which was then assigned to the offshore team. Details of the initiated task are added to “Task — Aces” Community on portal. The offshore team leader in turn assigns these tasks to respective offshore technical specialists within the team based on their skills and expertise. A reviewer is also assigned for each task. Upon completion, each task within the enhancement request is reviewed thoroughly. If approved, the corresponding status in the workflow system is updated to “CONS-UT Complete.” All supporting test cases, review and defect logs and relevant artifacts are also uploaded. “Task” Community is updated with task completion details along with reviewed checklist for the task. Updates Till Now …

The offshoring engagement led to tangible benefits for the customer’s life-insurance business, which accrued to the customer’s bottom line directly. The system availability improved from 94.5 to 100 percent. In fact, a lot of November 2008

improvement was also noticed in the system turnaround times. The maintenance team size came down significantly. There was a marked increase in the productivity numbers of the team as well as the processes with the effort required per enhancement request reduced significantly by over 66 percent and with the number of projects, which were being handled by team, was also increased. The engagement also led to the creation of several tools, which helped in automation of a lot of processes and the engagement achieved 100 percent on all Service-level Agreement (SLA) compliances, with 100 percent for all systems for the past five years starting fifth month of engagement and with 100 percent for all quarter-end SLA from inception. “Our knowledge-management framework that effectively reduced the risk of knowledge loss due to any discontinuity of resources, along with our competency-development framework — that ensures skilled resource availability — has been instrumental in the growth of our relationship. Our passion for value creation has resulted in savings of about $5 million per annum,” added Ritu. In the end, “We treat each other as partners and are not afraid to discuss problems and solutions. It’s all about how to make everything work better,” said the insurance GS giant’s spokesperson.

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xperts E Knowing the Unknown

The Value of Assumption Management Interestingly enough, the major cause of disagreements between the customers and providers is not talent or skill, but rather assumptions. Putting a governance structure in place ensures a project’s success By Jennifer Harnett-Bullen, Michael Latchford, and Nick Mathisen

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n the outsourcing journey, from the initial request for proposals to fullservice delivery, a provider is required to make many assumptions about a customer in order to develop a solution. These assumptions will range from broad brush to being specific in their detail, and will be used by a provider to design, price, schedule, and staff a solution that they believe, meets the customer’s needs at the lowest cost. Although assumptions are identified, they are not always well documented or — in many cases — agreed with the customer. The reasons for keeping the customer in the dark vary, but usually a provider wants to appear an expert in his field, and fears that revealing assumptions may show weakness or vulnerability. In addition, a provider might not truly understand the repercussions of an assumption proven false and that could have dangerous consequences. In our experience, being up-front and honest about assumptions with a customer gives the project, and the relationship, the best chance for success. By sharing assumptions and validating them with the customer, a provider can: 36 GlobalServices

l Demonstrate expertise and experience l Show respect for the customer’s input l Anticipate potential risks l Make allowances for contingency. Assumptions are just another component of a project to manage — along with issues and risks — and therefore require planning and management. Customer and provider can avoid disagreements and project delays by jointly developing, managing and agreeing a comprehensive set of robust assumptions that form the sole source of legitimate contract change requests. There are three aspects to assumption management: l Define and agree robust assumptions l Actively manage assumptions l Integrate assumptions and change management.

DEVELOP A ROBUST ASSUMPTION SET Assumptions essentially bound the scope of a solution in unknown areas and allow detailed definition of the solution to occur. A well-crafted assumption www.globalservicesmedia.com

is one with clear intent to unambiguously address specific technical, process, people or financial issues. “Bad” assumptions can have a disproportionate effect on the success of future transition and contract implementation. Without that clear intent, the assumption can become confusing, misinterpreted or meaningless, especially when revisited some time after originally made. Bad assumptions are the ones that lead to change requests — and usually conflict — and should be avoided. However, just making an assumption is not enough. Making assumptions without the agreement of all parties is a useless exercise as neither party will be able to point to an assumption when suddenly it is proven to be incorrect. To ensure that assumptions are accurate and relevant, it is key that all assumptions are validated by affected parties. This validation will be much improved if each assumption includes the impact of it being proved false. A side benefit of requiring assumptions to have clear intent and the impact will be to avoid “assumption overload” and ensure only relevant assumptions are made. The final piece to developing a November 2008

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robust assumption set is to ensure that assumptions are captured from all parties. For example, a customer should document assumptions about the services it will receive from a provider and give the provider the opportunity to validate them. This multiparty approach will result in a more complete set of assumptions.

ACTIVELY MANAGE ASSUMPTIONS As assumptions are made to document the unknown, it is easy to make many assumptions and rapidly lose sight of what is important, especially after the contract has been signed. Also, an assumption is most critical at two points: First, when originally made to allow solution definition, and second when proved false. Active assumption management will allow much more efficient and effective assessment of change when this occurs. Once the assumptions are defined and agreed, ensure that they are documented and readily available to all parties. The assumptions, along with issues and risks, ought to be managed on a regular basis during the lifetime of the contract. Simple steps such as prioritizing which assumptions to document in greater levels of detail, assigning owners and documenting them in the contract in logical groupings, can make this task much more effective, particularly in the complex situation where an assumption could be built on another assumption.

INTEGRATE ASSUMPTIONS AND CHANGE MANAGEMENT Undocumented assumptions are a primary cause of dispute between the provider and the customer as they represent decisions made by one party that the other never had a chance to validate. In an ideal world, there would be a prior contractual agreement that only documented assumptions could be used as the basis for contract change management. Clearly, however, it is unrealistic to expect all potential scenarios to be anticipated and covered by November 2008

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assumptions in advance. Therefore, establishing a governance structure and mechanisms to deal with new information and changes to known assumptions is paramount to ensure that the project continues without undue delay. Therefore, in conjunction with this agreement, a workable dispute resolution process must be in place that allows missing, incomplete or inaccurate assumptions to be addressed jointly by both parties. Without an agreed dispute resolution in place at the onset, both parties would not be willing to meet and determine a joint

A collaborative approach to assumptions, from both sides, will help drive the right behaviors in defining, documenting, validating and agreeing the complete set of assumptions to meet the business needs. solution in the instance of one party objecting to a potential impact imposed on them resulting from new information or a change.

ENSURING VALUE FROM THE START The goal of a successful outsourcing arrangement is a true partnership between the customer and the provider. Why then should customer and providers alike shy away from forming this partnership — a collaborative environment — earlier on in the process? If established early on, a collaborative approach to assumptions will www.globalservicesmedia.com

help drive the right behaviors in defining, documenting, validating and agreeing the complete set of assumptions that are deemed relevant by both sides for the contracted solution to meet the business needs. Similarly, a well defined and early established governance model provides both parties with the necessary mediums to mitigate the impact of changes to known assumptions and, more importantly, the impact on unknown or undocumented assumptions. That said, a collaborative environment will only go so far when changes arise that impact the cost of delivery. Therefore, from the onset of the outsourcing journey itself, the customer and service provider can come to agreement to the affect that any assumptions not documented and shared with the other, will not impact the solution outright if proven incorrect, but the impact of those documented and shared with the other and proven false, will be split equally by both parties. Such an agreement will kick start the process of assumption management in such a manner that both parties will validate assumptions known to have a potential impact to the other party so that the other party is known regardless if proven correct or incorrect. In the end, the value of any project will be determined against its objectives, its timeline and its budget. Therefore, proper assumption management can only further increase the likelihood of a project’s success or, at a minimum, not be the source of a project's delay or worse, its downfall. GS Jennifer Hartnett-Bullen is a principal consultant in PA Consulting Group's IT Consulting practice. She specializes in project and program management and custom software development. Michael Latchford is a principal consultant in PA Consulting Group's IT Consulting practice and is a specialist in delivering complex outsourcing solutions. Nick Mathisen is a principal consultant in PA Consulting Group's IT Consulting practice, specializing in the design, analysis and architecture of IT systems. GlobalServices 37

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xperts

By Ben Bauer

The New Outsourcing Option Developing, operating and managing volumes of information as well as maintaining mission-critical applications in order to sustain business growth and remain cost-effective, is a challenge faced by most organizations. That’s when infrastructure as a service comes to the rescue

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oday, CIOs are challenged in more ways than one to support business growth and bring out new initiatives, integrate acquired businesses quickly, as well as roll out new products and services rapidly. With aging facilities, and hardware and growing management costs, traditional methods of managing the data center can easily hinder, rather than sustain business growth. People in enterprise technology are facing similar problems in improving performance, maximizing financial return for the business and minimizing risk. From CIOs to IT managers, all are trying to address these challenges by aligning business and technology goals, which at times can be contradictory. Overall, the managing enterprise technology seems like a never-ending cycle of adjustment, crisis, and then adjustment again. Modernizing and transforming infrastructure technology into more agile, energy-efficient and cost-effective assets that drive business growth, is not an easy task. Enterprise applications such as Microsoft Exchange Server and Systems Applications and Products (SAP) — and the infrastructure they run on — are the lifeblood of a business. But running outdated or multiple versions of critical applications on older technologies can hold a business back. So what should a CIO do?

INFRASTRUCTURE AS A SERVICE The CIO must change the way products and services are purchased, 38 GlobalServices

deployed, delivered, managed and measured. Until now, CIOs either updated their technology environment inhouse or outsourced the management of their infrastructure to a service provider. And for accomplishing that, they also required hardware and software updates in every three to five years on an average. Today, there is a new alternative. Technology service providers are beginning to offer new ways to outsource, which will dramatically reduce the time, cost, complexity, disruption and risks associated with creating dynamic data centers and updating existing applications. One example is HP’s new approach called Adaptive Infrastructure as a Service, which is also referred to in the industry as “infrastructure as a service” or “infrastructure utility services.” Instead of investing capital dollars in new or upgraded data-center facilities and the systems that populate them (as with traditional outsourcing approaches), companies can access their missioncritical applications as a service, delivered from state-of-the-art data centers owned and professionally managed by a technology service provider. In this article, I will call the emerging model by the generic term, “infrastructure as a service.” With infrastructure as a service, the CIOs can quickly leapfrog their current, outdated environment and tap into a service provider’s state-of-the-art data center, which is continuously maintained and updated with the latwww.globalservicesmedia.com

est hardware, software and services. With this new model, companies can tap into a pre-built infrastructure delivered as a service, which provides a platform for Microsoft Exchange, SAP, and other critical business applications. These state-of-the-art data centers: l Use the latest blade servers; power and cooling technology l Run at maximum energy efficiency l Use standards-based, modular components and tools l Are virtualized, and built and managed with best-practice and policybased processes. Because the assets are owned and managed by a service provider, companies have more flexibility as they convert capital investment normally associated with a traditional infrastructure into an operating expense. At the same time, they realize improved service levels and quickly adjust the size of their environment and pay for what they need, based on the changing needs of the business. In addition, outsourcing these functions reduces capital investment via a pay-per-use model while lowering costs and energy consumption. A recent survey of 75 CEOs and 75 CIOs worldwide showed that more than one-third of CEOs and CIOs believe that, in two to five years, their data centers will be incapable of dealing with the rapidly growing demand for services and applications (Penn, Schoen & Berland Associates, March 2008). To meet that challenge, infrastructure as a service will help companies: November 2008

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l Gain a quicker, less complex path to a predictable, low-cost operating expense financial model l Meet immediate infrastructure modernization needs l Eliminate high-cost, disparate, heterogeneous environments that require extensive technology upgrades and low utilization rates l Quickly scale computing power within a matter of hours or days. Consider, for example, the needs of a large financial institution, which is under pressure to manage a growing volume of information, as well as maintain its 24/7 mission-critical applications. It relies upon the processing power to keep operations running smoothly. If the company factors in cost of energy and time for upkeep, along with overall operations cost, why wouldn’t it simply pay for all or part of its processing work to be run by an outsourcing partner? This would avoid investment of additional time, money and effort to keep an infrastructure up and running internally. Companies are constantly looking for ways to lower costs through operations, HR and technology. In order to compete with more agile firms, they are looking at how they pay for technology and services — as an operating expense versus a capital expense. Companies need to be prepared for changes in business needs and have the ability to adapt more quickly, while keeping costs down. With transformation time shortened, these institutions can freeup capital for innovative new services that will help accelerate growth for the business.

HOW TO MAKE THE SWITCH Whether starting from a traditional outsourcing engagement or managing data centers in-house, the transition to infrastructure as a service, involves considerations around people, process and technology. While the move is considerably less complex with an infrastructure as a service model, it is still necessary to have a well-planned and well-executed transition as a proven way to avoid problems, such as November 2008

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poor management of HR, business disruptions and delayed implementation of new processes. Taking a page from the traditional outsourcing playbook, guiding a smooth, effective transition to any kind of outsourced environment is required for the relationship to live up to its potential. A critical success factor in transitioning and transforming the data center is to have an integrated and structured approach, which is done in three phases — planning, transition and transformation. l The first step is to carefully assess how the current infrastructure technology environment is performing in relation to business goals. A due dili-

Instead of investing capital dollars in new data-center facilities and systems, companies can access their mission-critical applications as a service, delivered from data centers professionally managed by a technology service provider. gence review need to be performed, including a review of culture and values. Then a proposal should be prepared, which includes high-level task, staffing and milestone plans for enhancing the infrastructure. The proposal should take into consideration these needs at the worldwide, regional, and country levels. With a defined plan in place, IT managers can choose how best to outsource software assets such as Microsoft Exchange or SAP to take advantage of the new infrastructure utility services. This allows flexibility to on-board applications immediately or in an accelwww.globalservicesmedia.com

erated, phased approach to a transformed infrastructure. This plan of action will show the CEO the approach and how it affects the organization’s bottom line. l Once the CIO has a buy-off from the CEO, the company can move into the transition stage — actually moving applications over to a technology services company. Understanding the company culture, as well as employees’ talents and strengths helps in making this smooth transition. The service provider should have a skilled transition team with best practices across people, processes, tools, technologies and assets. The in-house team working with the service provider will be responsible for a well-coordinated and tested implementation of the project. l As an added bonus, transition and transformation can happen in tandem. As the technology infrastructure is transitioned over to the selected service provider, the software can be updated and new programs can be implemented. Since it is so important to be agile in this new technology environment, transforming applications quickly will allow companies to react to market changes faster. Once the transformation is complete, companies can focus beyond technology requirements to meet critical business objectives. With infrastructure as a service, companies will reduce the time taken to transition to a new, standardized environment, while reaping the benefits of improved service levels. It’s also designed to lessen the disruptions of an enterprise’s core business and allows for better use of HR and improved processes. In addition, companies can enjoy more financial flexibility as they convert capital investment, normally associated with a traditional infrastructure, into an on-going operating expense. GS Ben Bauer is the worldwide Marketing Manager for HP Outsourcing Services and is responsible for all aspects of marketing, with particular emphasis on using emerging infrastructure technology as a service delivery model. GlobalServices 39

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By Phil Fersht

Will The U.S. Turn Into a Competitive Sourcing Location? We're in the final throes of the most enthralling and contentious election in years and John McCain or Barack Obama will likely have a very different impact on the U.S.'s potential as a sourcing location. So, is the U.S. in a position to step up as a serious BPO or ITO location?

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ITH THE FINANCIAL CRISIS upon us and a troubled economic period in store for the medium-term, higher unemployment, a weak dollar and lower labor costs are combining to increase the attractiveness of low-cost U.S. locations for global services. We have already seen leading offshore service providers significantly bolstering their onshore U.S. presence, with, for example, TCS establishing a major service delivery facility in Cincinnati, Infosys in New Jersey, Wipro in Atlanta and Cognizant in Phoenix. Offshore services must be augmented with customer-facing onshore services, however, with the onshore costs lowering and new (potential) government policies to encourage the U.S. business to keep jobs stateside, we could see the U.S. emerge as a highly attractive sourcing location for global services providers. What is clear, is that shipping jobs offshore isn’t necessarily very good for the U.S. unemployment rate — the age-old argument of focusing U.S. staff on “higher-value” work is wearing a bit thin these days. What’s more, many offshore service providers are now focused on taking on more higher-value work activities for their customers, in addition to routine transaction work. For example, once you have your general ledger run from a 40 GlobalServices

Even if the U.S. wage rates for programming work in IT services come down significantly, there is also a major issue that the quality of many IT services delivered from offshore locations is now consistent. service provider in, say Chennai, what is now stopping that provider taking on higher-value accounting services, such as budgeting/forecasting and business intelligence? That provider basically owns and understands much of the revenue cycle of that customer, hence, the natural next step is to move up the process value chain. And if your current provider won’t move up the value-chain, there is a proliferation of knowledge-process outsourcing providers willing and ready to take on higher-value offshore work. Moreover, while a firm may have been enjoying good quality COBOL programming from Brazil, what’s stopwww.globalservicesmedia.com

ping that provider from offering systems architecture work to their customers, which is among the costliest onshore IT services? We’ve now been sucked into a global employment war for sourcing services, and from what Sen. Obama has stated last month, he intends to give the U.S. firms tax-breaks to source work onshore. While he hasn’t yet outlined exactly how he plans to do this, it is likely that he initially plans to provide benefits to customers, as opposed to providers, to source work to onshore U.S. locations. This is the opposite strategy of the Indian government’s STPI (Software Technology Parks of India) tax scheme, which gives tax-breaks to new Indian organizations (mainly providers) in the region of 10 to 20 percent during their first 10 years of inception, designed primarily to bolster its software industry, but also directly applies to its service providers. Look at it this way, you can hire staff in low-cost U.S. locations for as low as $25,000 a year for back-office administrative work. If you can reduce that further, to $22,000 a year as a result of tax incentives, and the cost of health-care is reduced/subsidized, the price differential with locations such as Latin America and India is minimal. IT, on the other hand, is significantly cheaper in locations such as India and China for all levels of services. November 2008

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Here's My Take

For Business Process Outsourcing (BPO) services, the U.S. is still in the game. The issues surrounding customer/employee contract still favors onshore services (even though offshore services are improving by the day), plus the fact that there is still a great supply of midlevel executives who will be anxious to keep their jobs in the forthcoming months. With significant incentives to keep work onshore, I can see the U.S. stepping up as a serious BPO location. Not a bad thing for the BPO industry, as long as the service providers invest wisely in attaining the right onshore/offshore balance within their delivery infrastructures. Moreover, the onus on sourcing we’re going to see from restructuring financial services industry is going to entail a delicate balance of onshore/offshore BPO work. If the major financial-services November 2008

The core battle is with services needed from business-process architects and staff with deep industryspecific expertise. firms struggle to sell off their Indian captives, several of them may scaledown their offshore dependence and alternatively seek onshore services. For IT services, it’s looking a bit late to pull much of this back. In India, for example, IT services have become the life-blood of the country’s economy, and the skills in basic programming are widely available for www.globalservicesmedia.com

mainstream applications. Even if the U.S. wage rates for programming work come down significantly, there is also a major issue with the fact that the quality of many IT services delivered from offshore locations is now consistent. The core battle is with services needed from business-process architects and staff with deep industry-specific expertise. We have seen many of the leading offshore providers invest in their onshore deliver centers over the last year — and we can expect to see continued significant competition between the incumbents and offshore providers in the coming months for GS onshore-related work. Phil is Research Director, Global Services and Outsourcing, for leading industry analyst AMR Research, Inc. He also authors the popular blog “Horses for Sources” which can be accessed at http://www.fersht.typepad.com GlobalServices 41

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xperts

By Allan Schweyer

The ROI in Enterprise Web 2.0 and Corporate Social Networking How do organizations find creative ways to recruit, engage and retain Gen Y, and facilitate strategic knowledge sharing across the enterprise? The answer lies with Web 2.0 collaboration tools in organizational social networking and knowledgesharing

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ever, neither is there a generally accepted model for its implementation, nor who should own it in the organization. In an attempt to uncover emerging practices and early indications of the value of corporate Web 2.0 and CSN tools, the Human Capital Institute (HCI) and Cornerstone OnDemand, a talent-management suite provider, conducted a survey of HCI’s senior HR membership on leveraging social networking and Web 2.0 collaboration tools in various enterprises. The main objective of the survey and subsequent interviews was to understand the role and impact of Web 2.0 collaboration tools in organizational social networking and knowledge sharing. At this stage, in the development and implementation of corporate Web 2.0 collaborative tools, users can still be labeled early adopters. And, just as early adopters of online job boards reaped benefits and competitive advantage a dozen years ago or so,

We have been able to eliminate physical office space through the use of online collaboration technology. Smart use of collaboration technology has enabled us to produce and deliver training programs that have a 20 X + ROI in terms of the impact on business performance.

“

The main challenge is time ... our users will need to have a bit of a culture shift and be educated on what the tools are and how to use them. People are already so overwhelmed, they’re not sure they have the time to engage in this type of activity.

“

— Survey Respondent

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organizations that implement and master Web 2.0 tools today, including CSN, can expect to gain similar, if not even greater advantages. In most cases, however, it is safe to say that the Web 2.0 tools being used remain outside the corporate firewall. Nevertheless they are being put to business purposes also. Facebook, for example, allows for the creation of private networks and LinkedIn has proven to be a powerful recruiting tool. In neither case, is it necessary to license and install any application. From our results, it would appear that corporate Web 2.0 and CSN tools are still experimental in most of the organizations that report their use. As above, most of that use falls outside formal practice and certainly outside “the firewall”. The three greatest barriers to using Web 2.0 tools, according to our respondents, are user adoption, other priorities taking precedence and the difficulty in building a

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ew social phenomena of the past decade have rivaled social networking and Web 2.0. web sites such as LinkedIn, MySpace, Facebook, Wikipedia, and in India, Orkut has attracted millions of users of all ages and backgrounds. For “social” networking and public information sharing, these tools have been spectacularly successful. It only stands to reason then, that the technology might be used for professional or corporate use; for networking and knowledge sharing — behind the firewall, so to speak. Corporate Social Networking (CSN) is the most common term being applied to the rising use of professional networks inside organizations. Blogs, Wikis, threaded discussion boards and other Web 2.0 tools have made their way onto Intranets for corporate use in knowledge sharing. Best practice in CSN and Web 2.0 technology does not exist yet. How-

— Survey Respondent

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compelling business case for their use. Time will address the first barrier as more young people who have grown up using the tools enter the workforce and this, in turn, should move Web 2.0 tool adoption up on the priority list. The third main barrier — making the business case — was the focus of our research. To do that, proponents of the technologies need to demonstrate Return on Investment (ROI). There, clearly remains much work to be done in identifying the ways and methods to determine ROI and the tangible value from corporate Web 2.0 and CSN investments. And very little research has been done to quantify the ROI in CSN and corporate Web 2.0 — that which does exist is compelling — as in the statements of value in Web 2.0 made by so many of our survey respondents. Our respondents believe that Web 2.0 tools will finally allow them to access the rich content and corporate memory that proves so elusive in most companies. Respondents believe that this information, including tacit knowledge, can benefit the organization significantly. Our survey results show that the decision to use social networking and/or other Web 2.0 tools now or in future is greatly influenced (84 percent) by the demographics of the workforce. As the typical workforce is spread more and more around the globe, organizations are looking for tools to keep teams together “virtual-

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As workforce is spread more and more around the globe, organizations are looking for tools to keep teams together “virtually” so that physical distance does not affect performance and learning. ly.” Their goal is that performance and learning should not suffer because of physical distances between the various members of the team. Not surprisingly, our research reveals a gap between the promise of corporate Web 2.0 and CSN tools and the current reality. But organizations can’t expect overnight revolutions. The new technologies and processes can confer advantage only when they are given sufficient thought and the necessary support prior to and following implementation. Despite some skepticism, Web 2.0 tools are likely to be among the high demand applications of the next generation of employees. Our research showed a significant difference in Web

2.0 adoption and perceived benefit — personal and for business — between younger and older workers. But organizations are already reporting the benefits from corporate Web 2.0 and CSN applications. Better internal as well as external communication, connecting and engaging employees and faster and more effective knowledge transfer are the most articulated benefits at this early stage in the adoption of the tools. Clearly, the tools will play a critical future role in HR and talent management. They can provide a common communications platform for employees, allowing them to share information, knowledge, ideas and collaborate online. Moreover, the tools are likely to become essential in attracting, onboarding, developing and keeping the next generation of talent. Many organizations are already moving from an experimental use of corporate Web 2.0 tools to more formal uses, and this is largely being driven by the HR department. The majority of organizations that are not yet using the tools are impressed with their potential and are planning to implement them in the near future; only a small minority appears to have looked at the tools, assessed their potential and rejected them for corporate use. GS Allan is President and Executive Director, Human Capital Institute.

Global Sourcing in an Uncertain Economy A compilation of thought-provoking articles from sourcing experts on how to handle the economy.

Find out in Dec. ’08 issue! For advertising opportunities, contact Satish Gupta at [email protected]

November 2008

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www.osourcebook.com The OSourceBook 2008 Web edition is now live. Search for global outsourcing providers by name, location, industry, services, and more at your fingertips.

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xperts Defining Strategies for Offshore Hybrid Captives

By Brian Smith and Sid Pai

What’s the ideal approach for optimizing offshoring strategy — one that improves efficiency ratio and uses fixed overheads better or one that facilitates partnerships with fewer risks? Here’s an insight into creating a successful collaborative model

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lobal organizations typically offshore a broad range of business tasks and processes ranging from very simple to very complex. To optimize their resources, early adopters, particularly those in the financial-services industry (Citibank and Standard Chartered Bank, as examples), established their own wholly owned and operated offshore business units, called “captive centers.” While many firms continue to use third-party providers for such units, other later entrants to offshoring established various forms of “hybrid captive” models as a means to strike a balance between the benefits and risks of owning a captive and utilizing third parties. During the past few years, a number of management models have mushroomed. As a result, the market is seeing an emergence of some best practices — and

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Comparison of captives and third-party provider Cost/FTE

100 79 67

factory.” However, because many captives never attain critical mass, they eventually lack the efficiency that parent entities want and ultimately become a liability instead of an asset.

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WEIGHING CAPTIVE EFFICIENCY VS. THIRD-PARTY UTILIZATION

Captive- Service Service CaptiveMedian Provider- Provider- Best-inMedian Best-in- Class Class

Normalized using median captive = 100 SOURCE: TPI

some available practices as well. Operating a captive in a country such as India, is a complex undertaking, and many such units are established with a grand vision of creating a super-efficient, low-cost “operations and technology

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TPI research has shown that captives are more frequently less efficient than equivalent third-party service provider arrangements from a cost perspective. The respective cost structures differ because of factors such as compensation, workforce, the ratio of associates to team managers, more support staff, corporate allocations, and the spend on business continuity planning/disaster recovery planning driven by corporate policy. A minority of captives or “best-inclass” captives, however, can attain cost performance gains better than those of the third-party service providers.

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OVERVIEW OF STRATEGIC ALTERNATIVES FOR AN EVOLVED CAPTIVE l Best-in-class captive has reached the scale and operating efficiency of large, third-party units

4 3 2 1 Super Captive

4

4

3

3

Captive

2

2

i2i

1 Hybrid Captive

1 Evolved Captive

4 3 2 1 Reverse BOT - Third Party/PE

Captive units that do not reach critical scale are often 30 to 50 percent more expensive than the median third parties and generally evolve in common ways. First, the parent company either invests in revitalizing the captive, creating a viable player with costs at an acceptable premium, or the captive atrophies to a point that the business is eventually bought out by third parties. Alternatively, parent companies are increasingly evolving toward a hybrid captive model, with strategic

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l Serves as global servicing arm of the enterprise, driving standardization and consolidation and re-engineering.

l The “strategic captive” houses higherend/KPO work/PMO and the VMO to source lower-end work via “hub and spoke” model l Entity performing low-end work with people and assets transferring to a third party/domestic contracting for people (and assets).

l With slowing growth, cost arbitrage stops and enterprise does not see captive activities as “core.” With stable operations, captive represents a monetization opportunity l People and asset transfer at premium to ensure operational stability, transfer to a third party or third party/PE combination.

core employees being retained while the commodity work is spun off to third parties.

HYBRID CAPTIVE MODELS As customer organizations continue to reset their sourcing strategies on the basis of the assessment, a number of different structures are emerging in the marketplace. A “hybrid captive” model is defined as a captive that has evolved to become the local hub of a network of third-party providers.

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Instead of making piecemeal, unitoriented decisions to outsource or offshore, hybrid captive models are implemented as a result of systematically assessing applications and processes. As customer organizations consider their options, the assessment first focuses on determining processes or functions that should be executed via the following options: l Retained by on-site customer personnel l Carried out in onshore shared

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service centers l Sourced from the offshore captive unit l Sourced from third parties (whether onshore or offshore). A hybrid captive structure is intended to create value by leveraging the investment, management team, and infrastructure of a captive to become a local prime contractor and the hub for obtaining services as needed from third parties. This can provide value in several ways. In the first instance, the captive management can examine its own book of business to determine what activities are core and non-core, and then outsource non-core activities to third parties (see Hybrid model A in the diagram). This will free up space to enable the captive to take on more work from the parent without an increase in infrastructure investment, or even allow an improvement in seat utilization by enabling the third party to use the captive’s own infrastructure during the periods when it is not being used by captive employees. This approach also enables captive management to utilize a service provider’s ability to ramp up and ramp down staff so as to help the captive handle volume fluctuations and special projects without hiring and increasing headcount — an important consideration in today’s economic environment. An alternative approach is, when the captive has more space than it requires or when it needs to enable speedy connectivity into an internal network that uses third parties but requires them to locate their staff at the

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captive’s premises (see Hybrid model C in the diagram). This is an alternative to the often-seen sourcing model of captive staff operating in designated zones from within the service provider’s premises (see Hybrid model B).

provider. It also gives the provider a much-reduced risk profile, encouraging creativity in order to tackle more complex and less easily defined objectives and/or processes.

THE SYNTHETIC CAPTIVE MODEL BENEFITS OF ADOPTING A HYBRID CAPTIVE STRATEGY A hybrid captive model of leveraging the captive’s premises improves its efficiency ratio, makes better use of fixed overhead, and can be perceived as reducing risk. It also lowers the cost of thirdparty resources, since the service provider does not need to provide infrastructure, secured space, and other resources that the captive possesses. Finally, by extending the scope of the captive’s management team, these jobs become more interesting and challenging, which enables individual growth and mitigates career advancement issues that could be a significant problem for captives — especially the smaller ones. When captive management is running a business, they have control over the supply of resources and therefore can generate more value for their parent. They can take on more work — perhaps outside of their initial core competency — and distribute that work to provide a more robust and resilient environment by utilizing one or more service providers. The hybrid captive concept has emerged as a means of structuring a relationship that gives the buyer of services a significant degree of transparency and management oversight over operations carried out offshore by a service

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The “synthetic captive” sourcing concept attempts to emulate the benefits of having a captive without all the risks of creating an offshore center in conjunction with a service provider. In a synthetic model, a service provider provides all the physical infrastructure and supporting functions like recruitment, general training, financial reporting, while the customer may own and manage some operational delivery, product training, and quality assurance. Synthetic captive arrangements are focused around a commercial outsourcing contract with pricing and governance provisions that enable the sharing of management responsibilities and decision-making. This helps some customers feel more comfortable with the risks of offshoring, which enables them to achieve some of the benefits of having a captive without the significant set-up costs and risks.

BENEFITS OF ADOPTING A SYNTHETIC CAPTIVE STRATEGY For service providers, the synthetic structure facilitates increased partnership where they are taking fewer risks and can rely on their customer to participate in the evolution of services, provide staff and expertise, and help the provider learn the customer’s business. This, in turn, can position the service provider to

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HYBRID OPERATING MODELS Transition from Captive 1.0 to Captive 2.0 Hybrid Model

Offshore service delivery was either through a service provider(s), a captive unit or both in some cases l Captive unit and service provider did not interact with each other. l

Company Service Provider Offshore Captive

enter a business segment and leverage the capabilities developed with its synthetic captive customer. Both parties can gain from this type of arrangement, which has made it an increasingly popular option. However, this model is not without its own set of challenges. The sourcing strategy is subject to the changing views of the management teams of the two parties over time, and great care is needed to ensure that the objectives of the two parties remain aligned. Interestingly, the transparency that underlies these captive relationships can have unintended consequences, causing managers in both organizations to attempt to micro-manage costs at a line-item level, missing the point of the broader relationship. When an organi-

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Hybrid Model

A B C Offshore service delivery happens through a hub and spoke model with the captive unit acting as the hub l The captive unit and service provider can be in different locations; captive unit may be operating from a service provider location or service provider may be operating from the captive location. l

zation establishes a captive, it has a sense of ownership that drives it to ensure that sufficient work is moved there to make it effective. However, this can cause problems in distributed organizations where individual business units may believe that they have a right or obligation to look for cheaper, commercially viable solutions. Such scanning of alternatives increases the number of providers and reduces the captive’s value proposition. Although the same can happen with a hybrid captive, scanning can have the effect of souring the synthetic captive relationship, as the alternate service providers will inevitably be competitors of the synthetic captive provider. Increasingly, as firms move to secondgeneration offshoring, it is necessary to

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look beyond labor arbitrage as a means to increase capability and variable capacity that helps achieve previously unattainable value. After thorough evaluation of your organization’s strengths, carefully analyze which combination of the approaches described here can help optimize your offshoring strategy. In doing so, you just may unlock value; not seen in your previous or current labor arbitrage experience. GS Brian Smith is TPI’s Partner & Managing Director, FSO Services North America. He advises financial institutions of all aspects for outsourcing and offshoring. Sid Pai, Partner & Managing Director, Global India, TPI, provides expert sourcing solutions for IT processes and Business Process Outsourcing (BPO), with special focus on offshore operations.

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Handshakes, Eyeballs Readers & Viewers Empowering the Knowledge Nation

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xperts

By Shyamanuja Das

In Defense of Globalization, Still Year 2008 witnessed a temporary blip and its impact went beyond the financial markets and affected many other businesses. Nevertheless, the Indian and Chinese domestic markets could yet provide to be the resuscitating agents that keep alive the globalization dream

T

he 1997 Asian economic crisis that started in Thailand but ultimately affected many Asian economies did not impact the Indian economy too much, as India was economically not too integrated with the ASEAN countries. At that time, in hindsight, many celebrated that isolation. Year 2008 is different. Not only is India more globalized, with its servicesled economy, but also more closely integrated with the developed economies, especially U.S. and U.K. Also, unlike the Asian economic crisis, the impact of U.S. slowdown on the world goes beyond financial markets and affects many other businesses — IT Outsourcing (ITO) and Business Process Outsourcing (BPO) services, for example. Yes, this sector had witnessed another big slowdown in 1999 to 2000, but its impact beyond tech sector was limited. This time, not only have most sectors in the U.S. and Europe been affected by this crisis, but for India’s IT and BPO industry, the immediate impact on business is immense. Take, for example, the mortgage business. Not long back, many Indian BPO firms thought this was the most fashionable business to serve. They were the first to be impacted, when the meltdown happened. Then came the Lehman bankruptcy. Again, while the analysts are still trying to explain how the global financial markets will be impacted because of that, the direct loss 50 GlobalServices

The domestic markets in India and China have the potential of dragging ahead the world economy, so far been pulled by the U.S., Europe, Japan and Asia. to providers serving Lehman is direct and immediate. And at least three of the top five large IT companies in India do business with Lehman. Many of us are busy analyzing what would have happened if Indian companies would have lesser business in financial services, or with the U.S. and so on. These analyses are not just hypothetical, they are meaningless as no one knows the future. What if this slowdown would have happened in pharma or telecom sector? In fact, when the dollar was weakening, many declared that focusing more on Europe was the path to salvation. Then, the rupee strengthened against other currencies too. And now, the dollar has strengthened significantly against major currencies, including the rupee. We cannot run away from the realities of globalization. As we are getting increasingly globalized and are reaping the rewards of it, we will have to live www.globalservicesmedia.com

with its risks. Risk demands mitigation strategy for sure. But that is not the same as completely avoiding risk. In fact, if anything, at this juncture, India could play a far more important role. Friedman (and Clyde Prestowitz and others) talked of a world where countries like India and China are increasingly competing as equals with the developed world and have some advantages over the latter in some areas, such as talented and well-trained professionals. They all argue that there has been a power shift in favor of India and China because of this flattening of the world. Power brings with it more responsibility. Apart from their services and manufacturing strengths respectively, India and China are huge markets. In fact, the domestic markets in these countries have the potential of dragging ahead the world economy, which has so far been pulled by the U.S., Europe and Japan, with a little participation from Asia in last few years. That can change dramatically, if India and China start thinking that they can do that. Call it globalization 4.0 or by any fancy name. But I do not think it is just wishful thinking anymore. India and China can surely lead globalization from now on. Maybe, the U.S. crisis has presented them with such an opportunity. They must grab it. GS Shyamanuja CyberMedia.

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