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Welcome. Strategies of Network Companies Jonathan D. Wareham wareham@acm.org. Agenda. Business Process Outsourcing. Business Process Outsourcing.

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  1. Welcome Strategies of Network Companies Jonathan D. Wareham wareham@acm.org

  2. Agenda Business Process Outsourcing

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

  4. SERVICE LVLS OFFSHORE COMPLIANCE CIO CEO PORTFOLIO KNOWLEDGE HYPE IT DEPT. GOVERNANCE Industry Trends for Application Outsourcing Application Outsourcing is in the cards • IT application outsourcing • Inevitable • One step in a broader evolution • Related to infrastructure outsourcing and business process outsourcing (BPO), but different • Who makes the app outsourcing decisions? • What gets outsourced and why? Look at application outsourcing as another tool in the taming of IT

  5. Significant Growth in BPO EBIDTA increase (times) Overall Cost Savings (%) Key opportunity areas Insurance 3.5 x 1.5 x 1.3 x 1.1 x 1.1 x 1.2 x • Back office processing • Call Center operations 10.0-15.0 Banking/ Finance • Back office processing • Call Center operations 8.0-12.0 • Research and Development Pharmaceuticals 5.0-6.5 Telecom • Call Center operations • Billing 5.0-6.5 40-60% cost saving Automotive 5.0-6.5 • Engineering & design • Call Center operations • Frequent flyer programs Airlines 5.0-6.5 * Estimates based on specific representative companies ** Non interest expenses Source: McKinsey analysis; Interviews

  6. BPO Forecast ... Source: NASSCOM Mckinsey Study 2002 and, Gartner

  7. Rapid growth in global BPO marketto continue Gartner estimates* IDC estimates** $ Bn $ Bn CAGR13.1% CAGR14.7% 202 181 177 157 109 91 2005 2005 2004 2004 2000 2000 * Excludes logistics and manufacturing outsourcing to show addressable market ** Includes transaction processing Source: Gartner; IDC

  8. 1 3 The cost of inefficiency 4 2 Low cost location Scale High cost location Simplify, Streamline, Consolidate Moving to an outsourced environment brings efficiency gains – thru scale, technology & expertise 1 Moving to lower cost environments brings reduced cost of inputs – Labour Arbitrage 2 Global, centre based distributed delivery brings further economies of scale & process efficiency 3 Further Technology best practice leverage 4

  9. Drivers for Adoption of BPO Controlling cost and integrity are top issues Organisations embark on BPO for cost savings, and then achieve business optimisation &process standardisation

  10. 3.89 IBM Global Services EDS 3.49 3.43 Hewlett Packard Oracle 3.40 PeopleSoft 3.26 Accenture 3.26 SAP 3.25 3.21 CSC Perot Systems 3.18 3.14 JD Edwards Keane 3.10 Deloitte Consulting 3.09 BearingPoint (was KPMG) 3.08 CGI 2.97 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 Ratings of “likely to provide best-in-class application management services” Source: 2003 META Group Application Management Multiclient Study Similarly to leadership perceptions, Top-tier Outsourcers face App. Vendors as principal competitors

  11. BPO Value Proposition • 40-60% cost reduction for offshored process • Labour cost arbitrage, the reason for cost savings, likely to exist for next 20-30 years Cost Productivity • Faster turnaround time • Time zone difference • 24 x 7 service • Learning curve effect Quality • Established methodologies and processes for better performance • Well defined quantifiable quality and process metrics • Access to highly qualified skill pool Source: McKinsey-Nasscom

  12. Top 5 Outsourcing Objectives Source Gartner

  13. Decide Scope Transformational Outsourcing Problem-solving Outsourcing • Delivering step change in performance • Enabling transformation & re-transformation capability • Deep, broad and enduring partnership Traditional as-isOutsourcing • Targeting operational fixes in problem areas • Delivering cost reduction and operational performance improvement • Targeting cost reduction in smooth running areas • Accessing best practice and economies of scale • Shedding non-core services Changing the model Operational performance improvement “Sweating assets”

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

  15. 31% CEO 27% 42% CFO 4% 26% CTO 9% 58% CIO 40% 18% Sales VP/Director/Manager 0% 21% Service VP/Director/Manager 1% 17% Marketing VP/Director/Manager 0% 32% LOB VP/Director/Manager 5% 34% Other non-IT management 2% 58% Other IT professionals 4% 29% Application strategy team (internal) 3% Involved Final decision maker 8% 3rd party assessment service (external) 0% 5% Other (specify) 4% 0% 10% 20% 30% 40% 50% 60% 70% Making the App Outsourcing Decisions Source: 2003 META Group Application Management Multiclient Study Involve the right management – both business and IT – to select the best application outsourcing candidates

  16. BPO Advantage Source: Mckinsey & Co. A Mckinsey study shows that when processes are outsourced to India, companies not only get the advantage of low cost but also experience improvement in productivity and Quality.

  17. BPO Leaders Survey respondents shows the following outsourcing destination: India has transformed into the global outsourcing center of choice. It employs world class technology and efficient delivery mechanisms to ensure that clients get cost effective solutions for all their BPO needs. Source: Computer world and InterUnity Group Inc., Concord And more ………

  18. India's dominance

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

  20. Political backlash

  21. Indian Outsourcing American Backlash • Highly visible issue due to steady American unemployment levels • Campaign issue for Presidential Candidates • Rise in anti-Outsourcing websites • http://nojobsforindia.com • http://yourjobisgoingtoindia.com • http://www.nomoreh1b.com • Consultants predict large numbers of varied Professional jobs to be outsourced as well as Information Technology jobs

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

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

  24. Location, Location, Location… • Offshore = Offsite • Geography is but one variable to consider • Distance = complexity • Location-related issues • Intellectual property laws • Legal jurisdiction • Regulatory compliance • EU Data Privacy Initiative • Patriot Act • more to follow Offshore, Near Shore, Best Shore, No Shore, The right mix of polygeographic resources enables application outsourcing strategy(ies)

  25. Rationales and Risks • Reduce costs: Are we just outsourcing a broken process? • Focus on Core Competencies: Do we outsource something that is critical if controls breakdown? • Introduce market discipline: do bad practices become right if we just move them outside the company? • Improve Flexibility: Are we really eliminating fixed costs? • Improve Technology: Will the applications and processes need fixing anyway?

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

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

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

  29. BPO Failure: Internal Communication • Focus on your own employees!! • Unhappy employees can wreck BPO transition process • Outsourcing treated like a dark secret: fear and distrust • Tell them what, why and how • Consider extra compensation for employees that train offshore counterparts.

  30. BPO Failure: Poor transition Management • Most difficult stage, taking 3 months to 1 year. • Detailed, knowledge transfer and documentation of all tasks, technologies, workflows and functions • Motivating current employees to share knowledge • May include legal obligations, licenses, infrastructure and assets

  31. 2. Feasibility 3. Preparation 4. Transition 5. Delivery BPO Processes.. 1. Scoping Business objectives Participants Key issues Initial scope and constraints HR implications High level service requirements Refinement of scope Benefits case Commercial framework Risk management HR approach Service parameters Due Diligence Service definition HR preparations Contract preparation Agreed budget Business case update Service consolidation Transfers of: - staff - responsibilities - assets New service start-up Service management and reporting Benefits realisation Continuous improvement Typical 1. Scoping 2. Feasibility 3. Preparation 4. Transition 5. Delivery 2 months 2 months 2 months 6 months Ongoing 6 months to contract signature Fast-track 1. Scoping 2. Feasibility 3.Preparation 4. Transition 5. Delivery 2 weeks 2 weeks 4 weeks 3 months Ongoing 8 weeks to contract signature

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