Transcript Outsourcing – Then , Now & Tomorrow

CONFIDENTIAL
Outsourcing – Then , Now & Tomorrow
May 2008
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INDUSTRIALIZATION OF SERVICES

The ‘Industrialization of Service’ represents one of the biggest trends in the technology and services sectors
Industrial Revolution
Industrialized Services Revolution
Cheap,
controllable energy
(steam power)
Computing power /
global labor pool
THEN
Cheap
Transportation
(railroad)
NOW
Standardization
of parts / mass
customization
Repeatability
 Measurability (6σ)
Internet / global
networking
Standardization of
processes
 Mass customization
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2
HIGH COMPLEXITY GENERALLY MEANS MORE SAVINGS
Value Addition
Low
Medium
High
RESEARCH &
ANALYTICS
(40-60%)
INSURANCE
(40-60%)
IT SERVICES
(25-50%)
• Increased
complexity can
lead to higher
savings with
potentially less
risk
ACCOUNTING / CALL
CENTRES (35-40%)
TRANSACTION
PROCESSING
(25-40%)
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EVOLUTION TOWARDS MORE KNOWLEDGE INTENSIVE WORK AND THE “FRONT END”
Intellectual
arbitrage allows
outsourcing of core
processes
Repeat initial
successes by
developing robust
knowledge
management
methodologies for
KPO
Emergence of
Quality
certifications like
CPOC
Focus on business
domains
Multi-geography
strategies
Focus on business
domains enabling
access to complex
business-facing IT
systems
Geographical
diversification by
setting up delivery
centres in multiple
locations
KPO
Cost Arbitrage
BPO
ITO
Cost Arbitrage
Global Delivery
Model comes of
age with changing
telecom scenario
Emergence of
Quality
certifications (CMM,
ISO)
Focus on
developing robust
knowledge
management
methodologies
Evolve to provide
end-to-end
consulting services
Focus on
knowledge
management
Mid 80s
1990-1994
Infancy
1995-1999
2000-2004
Growth
2004-2007
2008-2010
Maturity
Source: KPMG, Knowledge Process Outsourcing, February 2008
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KPO – THE EMERGING WAVE
HIGH
HIGH
30-45
High
Complexity
Moderate Complexity
TIERII and III MBA, CA,
CPA, Graduates (Finance
& Accounting)
Finance & Accounting
Under Graduates
10-12
Skill Set Requirements
Billing Rate (USD per hour)
15-25
TIERI and II MBA, CA,
CFA, CPA, Post Graduates
(Finance & Accounting)
Low Complexity
LOW
LOW
Source: KPMG, Knowledge Process Outsourcing, February 2008
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MOST FUNCTIONS CAN BE OUTSOURCED TODAY
Offshoring
Scoping matrix
IT, Infrastructure
and administration
support (ITO)
 Core banking systems

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Product based
transaction
processing and
customer contact
centres (BPO)
Analytics
Outsourcing
activities (KPO)
Wealth management, life and
general insurance
Retail Banking
 Life policy systems maintenance and
application development
Institutional, Investment &
business banking
 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
 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


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
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

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


Mortgage and personal loans
Portfolio pricing
Data warehousing
Data-mining
Marketing analytics

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

Fund performance analysis
Reporting and accounting
Actuarial support
Product pricing including Dynamic Financial
Analysis (DFA) models
 Financial model validations
 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
 Equity research and M&A analytics support
(valuation and related financial modeling)
 Credit proposal analysis, preparation and
documentation, portfolio analytics
 Library services
Source: KPMG, Knowledge Process Outsourcing, February 2008
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SERVICES OUTSOURCING – PITFALLS & PREVENTIVE MEASURES
SERVICES
OUTSOURCING
PITFALLS
PREVENTIVE MEASURES
Absence of a Partnership Approach
Communication Clarity with a partnership approach
Lack of Commitment and Consensus in the Client Organization
C-level champion and sponsorship for the outsourcing initiative
Lack of Effective Change Management in the Client Organization
Eliminate the practice of having “shadow personnel”
Lack of Effective Communication
Create mechanisms and forums that facilitate an open exchange of
information and objective feedback
Ineffective Governance Structure
Developing a contractual obligation for both parties to commit
appropriate executive involvement
Client’s Lack of Knowledge of its Processes
Create a summary process flow map and prevent micromanagement
Measuring the Wrong Performance Aspects
Regular review of SLAs as to their appropriateness
Rigid, Inflexible Contract
Contract must include provision for a fair exit process
Inadequate Security, Disaster-Recovery, and Business-Continuity
Plans
Thorough testing of the disaster-recovery and business-continuity
processes
Source: Outsourcing Partners International
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SERVICES OUTSOURCING – CONTRACTUAL ISSUES
Transferring analytics business processes to an external provider is a complex process that involves transitioning high-value data and
knowledge about a company's internal plans and objectives. For this reason, contractual issues relating to extensive due diligence on privacy
laws pertaining to that country, security & confidentiality aspects, and planning & documentation of knowledge–transfer processes become
absolutely critical
Competitive Pricing
Change Control
 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 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
– 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
– 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
 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
Termination
 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
Source: Gartner 2007, Copal Analysis
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INDIA: CURRENTLY THE ONLY REAL PLAYER
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The global KPO business is expected to grow to USD 16.7bn by
2010–11 from approx. USD 4.4bn in 2006–07, increasing at a
growth rate of 54%

India is the leading destination for offshoring services, followed by
China and Malaysia

Businesses outsource a growing proportion of their processes to
India as:
Indian KPO industry is expected to grow to approx. USD 11.2bn by
2010–11, up from USD 3.05bn 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 has a large, growing and highly educated Englishspeaking 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
KPO Characteristics in Key Financial Services KPO Destinations
Country
Current
Availability of
Talent
Potential
Availability of
Talent
Compensation
Cost Savings
Infrastructure
Cost Savings
Potential Risk
India
BBB
Canada
AAA
Australia
AA
Singapore
AA
South Africa
Overall
A
Ireland
AAA
Wales
AAA
Parameter is most favorable
Parameter is least favorable
Source: A.T. Kearney, KPMG, Knowledge Process Outsourcing, February 2008
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KEY TREND: SHIFT FROM CAPTIVE TO 3RD 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.
Comparison of Sourcing Models
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
Source: PriceWaterhouseCoopers, Copal Analysis
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KEY TREND: SHIFT FROM CAPTIVE TO 3RD PARTY (cont)
 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
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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
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)
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