October 18th, 2008

Can the next President turn the USA into a competitive sourcing location

Posted by Phil Fersht @ 7:06 am

Categories: Business Process Outsourcing, IT Outsourcing / IT Services, Outsourcing & Politics, Outsourcing Locations

Tags: Fersht, Outsourcing, Obama, McCain

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
USA’s potential as a sourcing location.

With 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 USA locations for global services.  We have already seen leading offshore service providers significantly bolstering their onshore US 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 client-facing onshore services, however, with the onshore costs lowering and new (potential) government policies to encourage US business to keep jobs stateside, we could see the USA emerge as a highly attractive sourcing location for global services providers.

What is clear, is that shipping jobs offshore isn’t necessary very good for the US unemployment rate - the age-old argument of focusing US 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 clients, in addition to routine transaction work. For example, once you have your general ledger run from a 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 ownsand understands much of the revenue cycle of that client, 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 KPO 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 stopping that provider offering systems architecture work for their client, which is among the costliest onshore IT services?

We’ve now been sucked into a global employment war for sourcing services, and from what  Mr Obama ha stated this week, he intends to give US 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 for buyers, as opposed to the providers, to source work to onshore US 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 suppliers) in the region of 10-20% for 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 US locations for a low as $25K a year for back-office administrative work.  If you can reduce that further, to $22K a year as a result of tax incentives, and the cost of health-care is reduced/subsidized, the price differential with locations such as Lat-am and India is minimal.  IT, on the other hand, is significantly cheaper in locations such as India and China for all levels of services.

Here’s my take: 

For BPO services, the US is still in the game.  The issues surrounding client / employee contact still favor onshore services (even though offshore services are improving by the day), plus the fact that there is still a great supply of mid-level executives who will be anxious to keep their jobs in the forthcoming months.  With significant incentives to keep work onshore, I can see the US 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 the restructuring financial services industry is going to entail a delicate balance of onshore/offshore BPO work.  If the major financial services firms struggle to sell off their Indian captives, we may well see several of them scale-down their offshore dependence and seek onshore services as an alternative.

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 mainstream applications.  Even if US 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 onshore-related work.

June 18th, 2008

Outsourcing highlights for June

Posted by Phil Fersht @ 8:00 am

Categories: Business Process Outsourcing, Finance & Accounting Outsourcing, Human Resources Outsourcing, IT Outsourcing / IT Services, Infrastructure Management Outsourcing, Offshoring and Captives, Outsourcing Locations, Procurement Outsourcing, The Future of Outsourcing

Tags:

Click on these links for recent happenings in the outsourcing world:

A final word from India: moving beyond “old BPO”

Musings from abroad: Futuristic BPO

The Legacy of Global Sourcing – What is (Y)our Legacy?

NASSCOM dispatch: “We’re now past the era of BPO” (Pramod Bhasin)

How do you feel about Human Resource Professional Organizations?

Musings from abroad… dispatch #3… Indian drivers

BPO: It’s all about taking ownership to get results

IBM/Bristol-Meyers: a shot in the arm for HRO

Finance and Accounting BPO continues its growth path

HRO Redux: 8/10 buyers don’t look back, while the vendors look ahead

BPO partnerships are opportunistic, rarely strategic

Will the EDS acquisition spark a BPO feeding frenzy?

Can this Marriage Be Saved?

Bored? Look no further

HP/EDS redux

Whom do you trust for balanced outsourcing advice?

Is it time to dump the term “outsourcing”?

Are we reaching an inflection point of business globalization?

Quest for an Organic Approach to Offshore Outsourcing

Is the sub-prime lending crisis placing outsourcing engagements on the backburner, or providing an impetus to proceed faster?

Cost-cutting measures for troubled companies in these tough economic times

Blog-culture is ripping up the rule book for the outsourcing services and technology media industry

Taking control of your vendor relationship

Can outsourcing be a catalyst for driving down the cost of healthcare?

May 3rd, 2008

Are we reaching an inflection point of business globalization?

Posted by Phil Fersht @ 9:40 am

Categories: Business Process Outsourcing, IT Outsourcing / IT Services, Offshoring and Captives, Outsourcing Locations, The Future of Outsourcing

Tags:

Are we reaching an inflection point of business globalization?

March 6th, 2008

Indian outsourcing redux

Posted by Phil Fersht @ 2:39 pm

Categories: Business Process Outsourcing, IT Outsourcing / IT Services, Outsourcing Locations, The Future of Outsourcing

Tags: Forbes.com, Sramana Mitra, Phil Fersht, India, outsourcing

Feisty discussion on where Indian outsourcing industry is headed.  Is it dying, or maturing… what is your experience?

February 25th, 2008

Outsourcing in a downturn

Posted by Phil Fersht @ 11:22 am

Categories: Business Process Outsourcing, IT Outsourcing / IT Services, Offshoring and Captives, Outsourcing & Politics, Outsourcing Locations, The Future of Outsourcing

Tags: Phil Fersht, Outsourcing economic downturn, recession, IT outsourcing, eWeek

Podcast:  Outsourcing in a Downturn:  Yours’ truly discussing the potential ramifications of an economic downturn on outsourcing trends with AMR Research’s CEO Tony Friscia. 

February 19th, 2008

Outsourcing links for February

Posted by Phil Fersht @ 4:29 pm

Categories: Business Process Outsourcing, Human Resources Outsourcing, IT Outsourcing / IT Services, Infrastructure Management Outsourcing, Outsourcing & Politics, Outsourcing Locations, The Future of Outsourcing

Tags: Human Resources, Value, Outsourcing, Government, Strategy, It Operations, Business Operations, Outsourcing & Subcontracting, Management, Phil Fersht

Will China’s Internet purges inhibit their knowledge services industry? :  Interesting commentary on the fact that the Chinese government is working extremely hard to increase its level of censorship and keep the Chinese Internet-world sectioned off from the rest of the world.

Human Resources Outsourcing: Where’s the Value? :  Great insights on the purpose and value firms have experienced outsourcing their Human Resources function.

The NASSCOM 2008 Diaries: More Fog on the Windshield :  AMR Research’s legend, Bruce Richardson, on his experiences and takeaways from the recent NASSCOM event in India.

Renewal Strategies for ITO Relationships : Peter Allen, TPI’s thought-leader on all things outsourcing comes up with some interesting strategies for firms looking to get more value from renewing their relationships with their IT outsourcing provider.

February 16th, 2008

Should your firm offload its offshore operations to an outsourcing provider?

Posted by Phil Fersht @ 10:46 am

Categories: Offshoring and Captives, Outsourcing Locations, Shared Services Strategies, The Future of Outsourcing

Tags: Outsourcing Company, Outsourcing, It Operations, Business Operations, Outsourcing & Subcontracting, Phil Fersht

Some interesting debate going on regarding whether firms which have already established offshore service centers (termed as “captives”) are better off selling these centers to outsourcing providers.  It would be interesting to hear your views - especially if you work with offshore staff within your own firm - on whether you’d prefer to have these staff work directly for a service provider, where they are contracted to perform stipulated services, as opposed to being part of your organization.  The following 10 questions are posed to help firms understand what is the best option for them:

1) Is the work being performed in the captive truly core to our business, or could we move it over to a third party?

2) How much risk are we exposing to our business by transitioning the captive operations over to an outsourcer?  Can we work with the outsourcer to manage the transition process to ensure there is a smooth transition of people and operations?

3) By selling off our captive, how much can we save over a 5 year period?

4) What is our option-value in the future if we want to take some of these operations back in-house?

5) How severe is our attrition rate, and how does  this impact running costs and quality?

6) Is the captive truly a part of our global organization, or is it really a distant support center that doesn’t play a core role in day-to-day business operation?

7) How much management time, and how much cost, is spent flying senior executives over to offshore locations to oversee low-value processes such as accounts payable, help deck support etc.? 

8′) How much experience with offshoring do our firm’s senior executives currently have, or are they learning it by trial and error and substantial cost to our organization?

9) How complex is it to transfer knowledge from our parent operations over to our offshore operations?  Wouldn’t it be cleaner and easier to move the work to a third party outsourcer, who will take on the work they are contracted to do?

10) Is it worth keeping our captive, but re-locating it to a more appropriate location?  And what are the costs / benefits associated with doing that?

February 9th, 2008

Has Europe lost the offshore war?

Posted by Phil Fersht @ 10:58 am

Categories: IT Outsourcing / IT Services, Offshoring and Captives, Outsourcing Locations, The Future of Outsourcing

Tags: Chief Executive Magazine, Cognizant, Europe IT Services, India Offshore IT Services, Offshore strategies, Peter Schumacher, Phil Fersht, Value Leadership Group

Peter Schumacher, President and CEO of the Value Leadership Group sent me a very interesting article he wrote on the failure of the European IT services industry to compete effectively with the new wave of offshore outsourcing firms, and cites Cognizant’s recent growth surge (a 98% revenue increase for its European business in 2006) as a prime example of European’s IT services providers inability to cope with this competition.  This is not dissimilar to the failure of the US IT services incumbents to recognize the growth surge of Infosys, Wipro and TCS in the late ’90s.  The five key reasons discussed for this failure are:

European IT services firms…

1. Have failed to see the emerging competitive scenario

2. Face revenue deflation pressure from a smart arbitrage strategy

3. Have not addressed the holistic transformational challenges posed by offshore IT firms

4. Lack the financial resources to challenge offshore firms head-on, which are now driving the game

5. Will need to compete with powerful rule-breaker companies funded by private equity and venture capital firms

You can download the full article here.

The article has been sent courtesy of Chief Executive Magazine (thanks Steve)

January 6th, 2008

Maintaining a 25% profit margin in this crazy world of globalization

Posted by Phil Fersht @ 1:48 pm

Categories: Business Process Outsourcing, IT Outsourcing / IT Services, Outsourcing Locations, The Future of Outsourcing

Tags: India, Offshoring, Phil Fersht, S. Mahalingham, Steve Hamm, TCS, Outsourcing

I wanted to share some interesting discussion earlier last year between BusinessWeek’s Steve Hamm and Tata Consultancy Services’ (TCS) CFO S. Mahalingham, which reveals some fascinating insight into how TCS has managed to maintain profit margins at the 25% level, despite intense pressures from wage inflation, employee attrition, aggressive competition and rupee appreciation against the dollar and other leading currencies. Some key thoughts I took away from the dialog:

• Creating an environment for staff to develop their soft skills, technical expertise, and global experience is the answer to improving employee retention.  S. Mahalingham explains “There are points when a person decides to make a choice, perhaps in the first two to three years. They are look at their career aspirations and they might leave the company. But if we can cross that hump, and go beyond that period to say seven or eight years, we do find that people want to stay with the organization. At that point, if they do leave, they will become an executive in another organization”.  From my experiences working with suppliers, the key issue for them is employee retention in offshore locations (as discussed in some of the earlier posts here).  Some suppliers prefer to hire experienced staff, who are likely to be more settled and less likely to jump ship in a year or two - which has the drawback of higher wage costs; other suppliers - especially the ambitious offshore providers headquartered in India - prefer to hire college graduates and work on intensive programs to retain them through the early years of their career to a stage where they will be more likely to stay with their employer as a settled manager-level employee when they mature.  It is plainly apparent that the more successful offshore providers are those which have developed successful training programs for their new hires, in order to keep their wage costs at a minimum through lower attrition.  Moreover, an experienced outsourcing provider employee who has three years’ plus experience working with their firm will have far higher productivity than a brand new employee - due to the simple fact they are familiar with their company’s and clients’ processes.  Read the rest of this entry »

January 2nd, 2008

Is Bangalore no longer a cost-saving location?

Posted by Phil Fersht @ 10:29 am

Categories: Business Process Outsourcing, IT Outsourcing / IT Services, Offshoring and Captives, Outsourcing Locations

Tags: Apu Sengupta, Bangalore, IT Outsourcing, Offshoring, India, Phil Fersht, BPO

My good friend and former colleague at the Yankee Group, Arijit “Apu” Sengupta (pictured) - who is now CEO of outsourcing quality improvement software firm BeyondCore - alerted me to a startup that reverse-offshored its development team from Bangalore back to the US: 

“Bangalore wages have just been growing like crazy. To give you an example, there is an employee of ours who took the first 5 years of his career to get from 1% to 10% of his equivalent US counterpart. He then jumped from 10% to 20% of his US counterpart in the next 1 year. During his time with us (less than 2 years) he jumped to 55% of the US wage.  In the next few months we would have had to move him to 75% just to ‘keep him at market. Once the salary rises to 75% of US salaries, the overhead cost differences between India and the US would overwhelm the financial viability. Consider the additional overhead of managing two offices, flying between the two centers, dealing with the cultural differences.  The costs of having two offices, which are twelve time zones apart, is significant. People in both offices frequently had conference calls at 10pm and midnight every night (as a result the office in the US didn’t get started until noon sometimes or people rolled in tired). We were all traveling constantly. Development and communication moved slower due to the distance and teams.”

For more on Apu’s story, go to the CIO Magazine website