Outsourcing Then , Now & Tomorrow

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Nov 6, 2013 (3 years and 9 months ago)

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Outsourcing


Then , Now & Tomorrow

May 2008

The information contained within this document is proprietary to Copal
Partners and it reserves the right to all information provided. The
recipient agrees not to distribute, share or use any part of the material
without express written permission of Copal Partners. The recipient
would treat this material as Confidential Information.


www.copalpartners.com

CONFIDENTIAL

Confidential and proprietary
-

Not to be distributed without the prior written consent of Copal Partners

2


The ‘Industrialization of Service’ represents one of the biggest trends in the technology and services sectors

INDUSTRIALIZATION OF SERVICES




Cheap

Transportation

(railroad)







Standardization

of parts / mass
customization


Cheap,

controllable energy

(steam power)

THEN



Internet / global
networking






Standardization of
processes


Computing power /


global labor pool

NOW

Industrial Revolution

Industrialized Services Revolution

Repeatability

Measurability (6
σ
)

Mass customization







Confidential and proprietary
-

Not to be distributed without the prior written consent of Copal Partners

3

HIGH COMPLEXITY GENERALLY MEANS MORE SAVINGS

Value Addition

Low

Medium

High


Increased
complexity can
lead to higher
savings with
potentially less
risk

RESEARCH &
ANALYTICS

(40
-
60%)

TRANSACTION
PROCESSING

(25
-
40%)

ACCOUNTING / CALL

CENTRES (35
-
40%)

IT SERVICES

(25
-
50%)

INSURANCE

(40
-
60%)

Confidential and proprietary
-

Not to be distributed without the prior written consent of Copal Partners

4

EVOLUTION TOWARDS MORE KNOWLEDGE INTENSIVE WORK AND THE “FRONT END”

KPO

Intellectual
arbitrage allows
outsourcing of core
processes

Repeat initial
successes by
developing robust
knowledge
management
methodologies for
KPO

BPO

Cost Arbitrage

Emergence of
Quality
certifications like
CPOC

Focus on business
domains

Focus on
developing robust
knowledge
management
methodologies

Multi
-
geography
strategies

ITO

Cost Arbitrage

Global Delivery
Model comes of
age with changing
telecom scenario

Emergence of
Quality
certifications (CMM,
ISO)

Focus on
knowledge
management

Focus on business
domains enabling
access to complex
business
-
facing IT
systems

Geographical
diversification by
setting up delivery
centres in multiple
locations

Evolve to provide
end
-
to
-
end
consulting services

Mid 80s

1990
-
1994

1995
-
1999

2000
-
2004

2004
-
2007

2008
-
2010

Infancy

Growth

Maturity

Source: KPMG, Knowledge Process Outsourcing, February 2008

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-

Not to be distributed without the prior written consent of Copal Partners

5

KPO


THE EMERGING WAVE

Source: KPMG, Knowledge Process Outsourcing, February 2008

High

Complexity

Moderate Complexity

Low Complexity

30
-
45

15
-
25

10
-
12

TIERI and II MBA, CA,
CFA, CPA, Post Graduates
(Finance & Accounting)

TIERII and III MBA, CA,
CPA, Graduates (Finance
& Accounting)

Finance & Accounting
Under Graduates

Billing Rate (USD per hour)

Skill Set Requirements

HIGH

LOW

HIGH

LOW

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-

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6

MOST FUNCTIONS CAN BE OUTSOURCED TODAY

Source: KPMG, Knowledge Process Outsourcing, February 2008

Offshoring
Scoping matrix

Retail Banking

Wealth management, life and
general insurance

Institutional, Investment &
business banking

IT, Infrastructure
and administration
support (ITO)


Core banking systems


Life policy systems maintenance and
application development


Loan accounting and equity / Fixed Income
trading systems


Application development and maintenance


Remote infrastructure management


Package implementation and support


Database administration, data mining and warehousing solutions


Middleware development and support

Product based
transaction
processing and
customer contact
centres (BPO)


Mortgage and personal loan origination,
processing and servicing collections


eDisputes processing


Credit card processing


Consumer finance


Cash management / Fund transfers and
reconciliations




Insurance claims administration and
payment


Policy underwriting


Insurance agency management


Fraud detection


Recoveries


Trial balance analysis


Brokerage operations


Commissions administration


Project finance documentation


Support FX, currency ops and derivatives
settlement


Trade finance and LCs


advice and
settlement


Corporate finance


Risk management


Securities processing


Custody operations and trade


Inbound/outbound contact center


Customer query handling


Data entry, indexing and content management


Customer background verification and finalization


Loyalty retention (customer care program)


Customer statement and other periodic reporting


Regulatory requirements/mandate related support and administration


Payment processing

Analytics
Outsourcing
activities (KPO)


Mortgage and personal loans


Portfolio pricing


Data warehousing


Data
-
mining


Marketing analytics


Fund performance analysis


Reporting and accounting


Actuarial support


Product pricing including Dynamic Financial
Analysis (DFA) models


Financial model validations


Equity research and M&A analytics support
(valuation and related financial modeling)


Credit proposal analysis, preparation and
documentation, portfolio analytics


Library services



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7

SERVICES OUTSOURCING


PITFALLS & PREVENTIVE MEASURES

SERVICES
OUTSOURCING

Absence of a Partnership Approach

Lack of Commitment and Consensus in the Client Organization

Lack of Effective Change Management in the Client Organization

Ineffective Governance Structure

Client’s Lack of Knowledge of its Processes

Measuring the Wrong Performance Aspects

Rigid, Inflexible Contract

Inadequate Security, Disaster
-
Recovery, and Business
-
Continuity
Plans

Communication Clarity with a partnership approach

C
-
level champion and sponsorship for the outsourcing initiative

Eliminate the practice of having “shadow personnel”

Create mechanisms and forums that facilitate an open exchange of
information and objective feedback

Developing a contractual obligation for both parties to commit
appropriate executive involvement

Create a summary process flow map and prevent micro
-
management

Regular review of SLAs as to their appropriateness

Contract must include provision for a fair exit process

Thorough testing of the disaster
-
recovery and business
-
continuity
processes

Lack of Effective Communication

PITFALLS

PREVENTIVE MEASURES

Source: Outsourcing Partners International

Confidential and proprietary
-

Not to be distributed without the prior written consent of Copal Partners

8

Source: Gartner 2007, Copal Analysis


One

of

the

biggest

challenges

in

an

outsourcing

contract

is

to

ensure

that

the

customer

continues

to

obtain

the

level

of

service

it

requires

at

a

competitive

price


Given

the

length

of

some

outsourcing

contracts,

what

starts

out

as

a

competitively

priced

contract

may

not

remain

the

same
.

Contracts

must

therefore

be

drafted

to

effectively

manage

this

risk


Given

the

dynamic

nature

of

business

requirements

and

the

time

taken

to

negotiate

an

outsourcing

contract,

a

signed

contract

may

not

reflect

all

of

the

customer’s

original

requirements

&

additional

ones


Therefore,

outsourcing

contracts

need

to

comprise

of

a

control

mechanism

which

would

contain

procedures

for

proposing

and

accepting

changes,

as

well

as

an

escalation

process

for

resolving

disputes



Data

protection

and

related

issues

of

security

have

always

been

areas

of

concern

for

companies

considering

outsourcing


Solutions

to

this

issue

include

negotiations

of

any

gaps

between

the

solution

offered

by

the

supplier

and

what

the

customer

believes

is

appropriate

security

for

its

needs



Both

parties

in

an

Outsourcing

contract

need

to

draft

an

effective

exit

strategy

to

avoid

the

possibility

of

being

tied

into

an

unfavorable

outsourcing

deal
.

Reasons

why

a

party

might

want

to

terminate

an

outsourcing

contract

include
:


Material

breach

by

the

other

party



Insolvency,

winding

up

or

change

of

control

of

the

other

party



Right

for

the

buyer

to

terminate

for

convenience,

where

there

is

no

fault

on

the

part

of

the

supplier

Competitive Pricing

Change Control

Data Protection

Termination

Transferring analytics business processes to an external provider is a complex process that involves transitioning high
-
value da
ta and
knowledge about a company's internal plans and objectives. For this reason, contractual issues relating to extensive due dili
gen
ce on privacy
laws pertaining to that country, security & confidentiality aspects, and planning & documentation of knowledge

transfer processes become
absolutely critical

SERVICES OUTSOURCING


CONTRACTUAL ISSUES

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-

Not to be distributed without the prior written consent of Copal Partners

9


The

global

KPO

business

is

expected

to

grow

to

USD

16
.
7
bn

by

2010

11

from

approx
.

USD

4
.
4
bn

in

2006

07
,

increasing

at

a

growth

rate

of

54
%


Indian

KPO

industry

is

expected

to

grow

to

approx
.

USD

11
.
2
bn

by

2010

11
,

up

from

USD

3
.
05
bn

in

2006

07
.

By

2010

11
,

the

industry

will

employ

approx
.

255
,
000

professionals,

increasing

from

75
,
400

in

2006

07


KPO

is

expected

to

contribute

around

1
.
8
%

to

the

Indian

service

sector

by

2010

11


India

is

the

leading

destination

for

offshoring

services,

followed

by

China

and

Malaysia


Businesses

outsource

a

growing

proportion

of

their

processes

to

India

as
:


India

has

a

large,

growing

and

highly

educated

English
-
speaking

workforce


Employee

costs

in

India

are

approx
.

15

20
%

of

the

US

costs


The

business

and

regulatory

environment

is

conducive

to

the

growth

of

the

outsourcing

industry

Source: A.T. Kearney, KPMG, Knowledge Process Outsourcing, February 2008

Country

Current
Availability of
Talent

Potential
Availability of
Talent

Compensation
Cost Savings

Infrastructure
Cost Savings

Potential Risk

Overall

India

BBB

Canada

AAA

Australia

AA

Singapore

AA

South Africa

A

Ireland

AAA

Wales

AAA


Parameter is most favorable

Parameter is least favorable

KPO Characteristics in Key Financial Services KPO Destinations

INDIA: CURRENTLY THE ONLY REAL PLAYER

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-

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10

KEY TREND: SHIFT FROM CAPTIVE TO 3
RD

PARTY


Initially,

most

companies

preferred

establishing

captive

centers

as

they

afforded

them

more

control
.

The

trend

has

shifted

recently,

with

companies

increasingly

opting

for

third
-
party

vendors



The

benefits

of

sourcing

work

from

a

third

party

vendor

include

low/no

upfront

investment,

lower

set

up

time,

low/no

exit

costs

and

reduced

management

time
.


Nonetheless,

a

captive

is

still

perceived

to

provide

better

data

security

and

more

control

over

operations
.


Country

Captive

Joint Venture

Third Party

Investment

Set
-
up Time

Perceived Level of Data Security

Control Over Operations

Management Time

Exit Costs


High Medium Low

Comparison of Sourcing Models

Source: PriceWaterhouseCoopers, Copal Analysis

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-

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11


There has been gradual shift in the sourcing model from establishment of captive units to joint ventures or third
party outsourcing


HCL Technologies, a member of the USD 740mn HCL Group, formed a joint venture with Deutsche Bank AG by
acquiring a 51% stake in the holding company of Deutsche Software, Deutsche Bank's IT services subsidiary in
India


The call center operations of AOL were recently acquired by Aegis BPO, the business process outsourcing
company of the USD 50bn Essar Group in India. Aegis BPO will take over customer service and technical support,
both voice
-
based and non
-
voice, for AOL s customers


The Genpact transition is the subject of considerable interest in the outsourcing world. The company moved to a
third party operation from a captive model. Genpact began in 1997 as the India
-
based business process services
operation for GE Capital. In 2004, GE Capital divested 60 per cent of its stake in its BPO arm to General Atlantic
and Oak Hill Capital Partners at an estimated price of USD 500mn


Source: Gartner 2007, Copal Analysis

KEY TREND: SHIFT FROM CAPTIVE TO 3
RD

PARTY (cont)

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12

Key M&A Transactions, 2006 & 2007

Acquirer

Type of Service Provider

Target (Merged Company)

EXL Services

BPO

Inductis (July 2006)

WNS

BPO

Marketics (October 2007)

Cognizant

CSI

MarketRx (October 2007)

Copal Partners

KPO

Exevo (May 2008)

KEY TREND: INCREASED M&A ACTIVITY AND CONSOLIDATION


There

have

been

a

number

of

recent

transactions

in

the

BPO

/

KPO

space


These

transactions

are

primarily

driven

by
:


BPO’s

needs

to

enter

the

KPO

space,

as

this

space

is

expected

to

have

higher

growth

and

margins

moving

forward


Need

to

achieve

greater

scale

by

current

KPO

providers


Need

to

develop

expertise

in

new

markets

/

segments