The Good, the Bad and the Ugly of Outsourcing Jagdish R. Dalal

The Good, the Bad and the Ugly of Outsourcing Monday, February 21, 2005 3:40 – 4:30 pm

Jagdish R. Dalal Principal JDalal Associates LLC

Jagdish Dalal is an internationally recognized consultant in the field of outsourcing – BPO and ITO, especially in the field of leveraging the off shore advantages. His unique background, both as a senior industry executive at companies like Carrier, Xerox, Unisys and as a founding Partner for BPO at PricewaterhouseCoopers, allows him to bring balanced perspectives to his clients.

Jag is a noted speaker and writes extensively on outsourcing, offshore outsourcing, shared services and information technology management. Jag’s series of lectures on BPO have been recognized as “pushing the envelope” in strategic thinking about outsourcing, while providing a practical framework for businesses- users and providers alike.

Experienced Buyer’s Track An overview of outsourcing experience JDalal Associates, LLC Outsourcing – Strategy, Implementation, Results™

Jagdish Dalal – credentials (outsourcing relevance)

As a Business Executive ¾ CIO, VP E-business, Carrier Corp (a $14B division of United Technologies), Implemented unique governance program for outsourced activities ¾ VP, Information Management, Xerox:. Developed strategy and executed then, largest outsourcing deal with EDS - $3.2 Billion (10 years) – now a Harvard Business School teaching case study on outsourcing and managing employee transition ¾ Director, MIS, Data General ($50M budget) Established off shore Applications development and maintenance facility in India in 1984. As a Service Provider ¾ Partner, PricewaterhouseCoopers. Joined as a founding partner at Price Waterhouse for Business Process Outsourcing practice ¾ Led the team that provided outsourced HR, Procurement and Accounts Payable services to Nortel Networks worldwide. Then it was the largest BPO deal - $650 million (5 years, 1200 employees, 11 countries) As a Consultant ¾ Helped businesses in developing outsourcing strategy as well as create and implement due diligence, transition and governance programs for Business Process and IT outsourcing Recognized as a writer and presenter on outsourcing and shared services strategies ¾ Award finalist for Outsourcing Achievement Award, 2002 ¾ Named “Sourcing Pros to know”, 2003

1 Outline

Where are we today? ¾ Industry ¾ Drivers and barriers ¾ Lessons learned Offshoring ¾ Market ¾ Lessons learned What do we have yet to learn?

Evolution of outsourcing

Mergers and Acquisitions ERP Pressure on Implementations Shareholder value Downsizing/rightsizing Profitability and recognition Y2K (and Offshoring) Control of SG&A

1980’s 1990’s 2000 2003-4

Business Process Select “Transformational” Outsourcing Early Adoption functional IT outsourcing Business Process Offshoring of Outsourcing Outsourcing Outsourcing – IT (e.g., Payroll, driven 401K, Cafeteria, IT)

2 The Industry today Globalization is the Driver Global sourcing has transcended Offshoring and is an imperative in most Global 2000 companies’ sourcing strategy – this is viewed as both outsourcing and creating captives. Cost (Commoditization) is the Economic Driver Competitive pressures (for both buyers and suppliers) has created a price-sensitive market and remains a key economic driver for all Offshoring decisions. Countries exploring opportunity Success of India and to some extent China, is motivating other Asian, Eastern European and some Latin American countries to explore the Offshoring business opportunities.

New Markets for Businesses Global marketing opportunity for products and services are creating business strategies for entering “low cost” locations as “revenue” targets and creating a foothold for “buying” services

Risks Continue Political (as well as life threatening events) instability (in supplier country) keeps concerns high, creating risk management a “major” qualifier and a decision criteria 4

The Industry today (cont’d)

Offshoring Model Changing to Outsourcing Model IT and especially in BPO world, business model is changing from “supplemental staffing” to “outsourcing” requiring offshore vendors to address previously unaddressed issues regarding customer staff and on site management of work effort.

“First Mover Advantage” Lost Some of the early movers (India, Philippines) are fast losing their early advantages to more traditional outsourcing providers who know BPO business, industry, domain and clients and have the investment capabilities to establish their own off shore entity

Failures Publicized Offshore failures, many as a result of poor governance and work transition management, are getting publicized. Lack of “domain” and “industry” experience has become a major roadblock for most offshore vendors.

Controversy Controversy, and the resulting media attention, surrounds offshoring sparked by election year posturing, more state and local legislations are restricting options for “government” work as well as various data related regulations are being considered. 5

3 Global outsourcing market

Worldwide Outsourcing Spending Forecast, 2000-2005 (Billions of U.S. Dollars) 500 450 $449 $406 400 350 $353 $306 ) 300

B $273

$ $248

( 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005

Source: Accenture 6

Reasons for outsourcing

Tactical Strategic Reduce or control Improve business focus operating costs Access to world class Make capital funds capabilities available Accelerate Cash infusion reengineering benefits Resources not available internally Share risks Function difficult to Free resources for other manage or out of control purposes

Source: Fortune Megazine advertising supplement Octobe 16, 1996

4 Drivers for outsourcing

Source: Accenture 8

Outsourcing – obstacles and drivers

Fear of managing process Cultural Differences

Employee Impact

Fear of loss of Changing the shape control of business

Lack of Internal Process Measures improvement

Reduction of investment

Cost Savings

Focus on core

5 Stages in outsourcing

• Optimize and reengineer the 9High business process 9Sustained BPO 9Differentiating • Adopt industry best practices 9P/E impact

• Look for labor and/or technology arbitrage Functional opportunity Outsourcing Transformational th d Impact a re B Transaction l Processing a n 9Low Outsourcing o 9Cost savings only ti c n u F Technical Richness • Renew / refresh technology • Simplify process and adopt quality tools

Business drivers for outsourcing

Re duced cost

10% Role Strategy transformation Strategy 30% Decision 30% Support Process redesign Decision Opportunity for Support Opportunity for 60% Integrated Outsourcing Transactions Outsourcing systems Transactions

Old paradigm New paradigm

Reduce total cost of operation Focus on strategic issues and planning and not on administration and transaction processing Invite service provider to redesign the processes and invest for higher productivity Consider increased outsourcing scope as a means to achieve the end result 11

6 Lessons Learned – to date Strategy Implementation Results

Lessons Learned – to date

Tactical outsourcing has a limited value and is best treated as a “commodity” buy Outsourcing implementation without encompassing business strategy generally leads to dissatisfaction and failure Strategy Generally, service providers do not participate in strategy formulation and are not good at it Business cases for outsourcing are “shallow” and lead to questioning value later on. Value propositions are only cost savings based Impact of outsourcing on people and systems is a key success factor in developing outsourcing strategy

7 What do customers buy ?

Value Proposition ¾ Emphasis is on “value” (economic basis) ¾ What they cannot do themselves ¾ Has inherent economic impact / benefit ¾ Long term Assurance (Risk coverage) ¾ Disruption ¾ Losing control over the process (function) ¾ Losing access to business knowledge ¾ Creating new legacy

Lessons Learned – to date

Too much importance is given to the “sourcing” process and not to the longer term impact of outsourcing (e.g. governance) Transition management of work effort is still an evolving methodology. Most service Implementation providers do not aggressively manage transition and depend heavily on “knowledge acquisition” Principles of governance are not considered a part of implementation Management focus towards outsourcing integration is not adequate for success

8 Governance – a model ©

Management Commitment

Relationship Operational Commitment Risk Foundation Delivery Compliance Management

Relentless Discipline

Lessons Learned – to date

Governance of outsourcing is focused only on delivery results and “dashboards” only reflect that Measurement of outsourcing results haven’t been indicators of satisfaction Methodology, processes and tools do Results not exist for effectively managinng multiple outsourcing engagements Some of recent legal requirements (privacy acts, Sarbanes-Oxley act, financial services regulations) are not well understood and there is a lack of consistent application

9 Governance dashboard

10 Relationship Foundation

1218 1224 1230 1236 1242 1248 1254 1260 1266 1272 1278 1284 1290 1296 1302 1308 14 Management Commitment 12 10

14 8

12 6

10 4

8 2

6 0 1218 1224 1230 1236 1242 1248 1254 1260 1266 1272 1278 1284 1290 1296 1302 1308 4

0 1218 1224 1230 1236 1242 1248 1254 1260 1266 1272 1278 1284 1290 1296 1302 1308

Operational Delivery

Relentless Discipline 14

14 12

12 10

10 8

8 6

6 4

4 2 14 2 0 12

0 1218 1224 1230 1236 1242 1248 1254 1260 1266 1272 1278 1284 1290 1296 1302 1308 10 1218 1224 1230 1236 1242 1248 1254 1260 1266 1272 1278 1284 1290 1296 1302 1308

0 1218 1224 1230 1236 1242 1248 1254 1260 1266 1272 1278 1284 1290 1296 1302 1308 Commitment Compliance

Risk Management 18

Outline

Where are we today? ¾ Industry ¾ Drivers and barriers ¾ Lessons learned Offshoring ¾ Market ¾ Lessons learned What do we have yet to learn?

10 Lessons Learned - Offshoring

90%+ of Offshoring work is still “staffing” based and not outsourcing based. Issues such as disposition of existing staff, integration of infrastructure, data privacy handling continue to be the major reasons As a result, cost comparison is the main basis for comparison and differentiation (further exacerbated by the success of Y2K work) Domain knowledge in the business processes (and therefore underlying IT applications architecture) still lacks the level of maturity for consideration by many businesses Transition management and governance of the Offshored work is more complex than work performed on shore and requires focused attention and investment Cultural, process assimilation and integration issues are generally under planned and therefore result in higher level of dissatisfaction

Offshoring – obstacles and drivers

Fear of managing process Cultural Differences

Employee Impact

Fear of loss of Competitive control pressures

Community Quality culture backlash insertion

Access to skills

Cost Savings

Technology

11 Asia marketplace for IT and BP outsourcing

Advantages:

Labor rates for qualified, skilled labor

Strong feeder educational system (and increasing)

Culturally suited for certain BPO work (quality training, rote compliance to processes)

MNC’s establishment of “beachfront” legitimizing the industry

Attractive market for products, driving outsourcing decision

Challenges:

Political environment (stability, trade orientation)

Economic environment (currency stability, tax holidays)

Not consistently knowledgeable about western business practices and principles (domain expertise)

English speaking workforce (access, training and size)

Legal system (Intellectual property rights, enforcement)

Stretched infrastructure (outside trade zones) 22

Asia – established and growing

CHINA IT Services Exports (2003): $700M BPO Exports (2003): $210M

INDIA IT Services Exports (2003): $9.5B BPO Exports (2003): $3.1B

Malayasia IT Services Exports (2003): $180M BPO Exports (2003): $100M

Other Emerging Nations PHILIPPINES Korea IT Services Exports (2003): $300M Taiwan BPO Exports (2003): $600M Vietnam Japan South Africa Ref: Industry sources 23

12 Europe marketplace for IT and BP outsourcing

Advantages:

Proximity to European marketplace and the strength of EU trading partnership

Multiple language capability

Western business principles are understood

Infrastructure is generally sound and available (in some countries)

(recently) government encouragement

Education feeder system growing

Challenges:

English language capability

Lack of pro-business (outsourcing) legal and labor practice systems

Lack of experience in outsourcing and established businesses (or entrepreneurs)

Lack of infrastructure (in some countries)

Size of qualified labor pool

Outline

Where are we today? ¾ Industry ¾ Drivers and barriers ¾ Lessons learned Offshoring ¾ Market ¾ Lessons learned What do we have yet to learn?

13 Future of outsourcing

Drivers: Continued pressure on profitability will continue to drive outsourcing alternative for business models Upward pressure on capital investment alternatives, encouraging outsourcing as a strategy Greater globalization of business encouraging viewing Offshoring locations as markets and revenue opportunity while leveraging lower costs will further drive Offshoring Successful outsourcing business models will encourage companies to evaluate the strategy and options and the higher “value selling” by service providers will address their business reasons Flexible workforce will remain (or become in some instances) a driver for outsourcing of lower level transaction processing (BPO) Challenges Greater debate over outsourcing as an “anti personnel” will continue to force businesses to be more cautious and in some cases, reluctant Some prominent company decisions to “reverse” outsourcing (and Offshoring) will create additional management scrutiny of outsourcing strategy and decisions. This will require greater diligence during the strategy phase. Continued “shrinking” of the wage gap in the Offshoring destination and US-Europe market (due to “westernization” of the countries) will challenge Offshoring Higher penetration of technological solutions disintermediation of current business processes and expertise offered through outsourcing (e.g. Call Center activities eliminated by the higher use of Web-based solutions) 26

Analyzing future needs What Clients Value in Outsourcing Relationships

Responsiveness and customer service

Meets guarantees and SLAs

Enable future business strategies

Expertise within your industry

Trusted, strategic relationship

Short implementation/transition period

Provisioning of best of breed technology

0% 20% 40% 60% 80% 100% % of respondents rating number one

Source: IDC , Microsoft Seminar

14 Jagdish Dalal JDalal Associates LLC Outsourcing – SIStrategy, Implementation, R esults

(860) 693- – 0464 Office (860) 614 –- 1404 Cell PO Box 15 [email protected] Unionville, CT 06085