Frameworks for Analyzing A Country s Positioning And Strategy for Global Services Outsourcing April 2007 Supply constraints, rising wages and the buyer s strategy of de-risking offshore operations through global diversification are changing the competitive landscape of the world s outsourcing market. New entrants are joining and making a big impact, and small players are starting to challenge leaders like India. As a result, existing players need to re-visit their current global outsourcing services strategy and new entrants need to plan very cautiously. This publication contains copyrighted material. Please do not re-use or reprint anything within this document without written consent from Tholons, Inc.
Frameworks For Analyzing A Country s Positioning And Strategy for Global Services Outsourcing Introduction In this fiercely competitive environment, government and trade bodies should carefully position themselves in the global outsourcing market. This positioning should take into careful account supply factors such as resource pool, cost, and supporting infrastructure, as well as demand factors like growth potential and market size of the service segments. Each of these characteristics will vary by country, resulting in different positioning and standing in the market. It is important to understand this positioning and act accordingly in order to become an active market player in the coming years. Understanding the Positioning of the Global Outsourcing Nations In order to understand the current positioning of all the countries in the global outsourcing marketplace, they can be classified into four broad categories: Breadth of Services EVOLVERS NICHE GENERALISTS SUPER SPECIALISTS Percentage market share in the global outsourcing industry Source: Tholons This categorization is based on two key parameters: Breadth of Services - IT (ADM, Product Development etc.), BPO (Payroll Processing, Contact Centers, Claims processing etc.), KPO or Knowledge Services (Research, Analytics, R&D, Legal etc.) Percentage market share in the global outsourcing industry ( the ratio of the global outsourcing exports from a country to the total revenues of the global outsourcing industry) Niche Countries These are countries where approximately three-fourths of their global outsourcing export revenues come from not more than 2-3 global outsourcing related services. This implies that the countries might not have a huge market share in the entire global 2007 Tholons 2 of 9
outsourcing space. However, they trigger a very high recall in the buyer s mind for the services that they provide and are a preferred global outsourcing destination for these services. Key Characteristics of the Niche Countries Limited resource pool Outsourcing companies in the country focus on a few service lines and do not spread themselves too thin The limited resource pool is trained and refined in line with the focus segments of global outsourcing The growth starts off with an opportunity, but it is sustained only through a conscious effort of building scale in terms of resources and investing in supporting infrastructure for a few selected global outsourcing segments Possess high customer recall for available outsourcing services Super Specialists These are countries where a few service lines yield a high value of exports from global outsourcing. Typically, the services in which these countries excel have very high global outsourcing potential. India was a super specialist four to five years ago. During that time the country s global outsourcing revenues were mainly driven by IT Services (application maintenance and development) and low-end business process outsourcing. Subsequently backed up by the rich resource pool, it repositioned itself to provide services across the value chain and hence moved into the Generalist category. In the current context, none of the countries can be classified as a Super Specialist. Generalists These are the market leaders. They have a high market share and offer a wide breadth of services. Key Characteristics of Generalists Have a huge resource pool and excellent supporting infrastructure Serve as One-stop shop solutions for a wide breadth of global outsourcing services Global outsourcing is a matured industry, characterized by collaboration. Perceived as low-risk destinations Favorite destinations for captives and MNCs for setting up Global sourcing centers 2007 Tholons 3 of 9
Evolvers These are countries which offer a diverse portfolio of services, but do not have a significant market share in the global outsourcing industry. Key Characteristics of Evolvers Do not have a huge resource pool (bigger than the Niche players, but smaller than the Generalists ) Companies belonging to different global sourcing segments are present Face severe resource crunch from a scalability perspective because the limited resource pool is distributed across many service segments Usually companies in these countries find it more difficult to market themselves in direct competition with the Generalists and Niche because of a low customer recall Categorizations of some of the popular and emerging countries in the global outsourcing market have been shown in the table below: Key Services Main Advantages Challenges India (Generalist) End to end IT, BPO and KPO services Huge skill pool High Quality Low cost Established Brand Demand exceeds supply Pressure on urban infrastructure Wage inflation Philippines (Niche - specialized in voice and high recall) F&A BPO Animation English Speaking population Huge Graduate Pool Moving into other areas like KPO Building up talent pool Marketing services Canada (Generalist - Voice based services and Animation - big market share) IT, F&A BPO Animation Physical & cultural proximity to US High Quality High cost of service low economic advantage to buyers China (Evolver) IT Product Development IT infrastructure management Knowledge Services Low Cost Huge skilled talent pool Domestic market access IP threats English speaking abilities Marketing & Branding Upgrading service quality Sri Lanka (Niche) F&A - BPO & Knowledge Services Skilled talent pool Good understanding of UK accounting Scalability Political stability of region 2007 Tholons 4 of 9
Vietnam (Niche) IT ADM Huge pool of engineers and English speaking graduates French speaking capability Matching the leaders in Scalability Malaysia (Evolver) Czech Republic (Niche) Russia (Niche) Brazil (Evolver) Engineering Services (Telecom & Hardware) BPO Logistics and Contact Centers Knowledge Services IT Infra Management Multimedia IT Engineering Services and R&D Health care BPO and knowledge services IT Services ADM Excellent Infrastructure Government Support Large number of engineers Proximity to Europe cultural similarity Good quality of Engineers, Scientists and Doctors Availability of suitable skills Huge cost arbitrage Same time zone advantage Scalability Market reach Scalability Supportive government policies Scalability Difficulty in doing business Law & order Marketing & Branding Scalability of skill The global outsourcing market in 2010 can be estimated to be around 125 Bn USD 1. Market equilibrium will be characterized by India emerging as a clear leader with around 55% of the total market share. The Philippines is expected to capture around 9% of the market, largely driven by the BPO services. China will also witness strong growth and should capture a market share of around 5-6 %. Canada and Israel will witness a big dip in their market share because of work moving to low-cost destinations such as the Czech Republic, Vietnam, Mexico, Sri Lanka and Malaysia. The Evolvers provide services in more than 3-4 global outsourcing segments but do not have a leadership position (Top 3) in a majority of this service segments. These countries stand to lose scalability and face a dearth of resources in the long-run because of a distribution of limited 1 The numbers on total market size and IT/ITES export revenues from countries and have been estimated based on projections by trade bodies like Nasscom and BPAP and Tholons view of the market 2007 Tholons 5 of 9
resources into multiple outsourcing segments. Further, as a result of heightened competition, companies in these countries will experience increasing difficulties in marketing themselves against companies from Generalist and Niche countries. On the other hand, established Generalist and Niche countries will face strong competition from new entrants and Evolvers who will continue to be aggressive in expanding their market share. Both Generalists and Niche countries have their own unique challenges of continuously building the skill pool and enhancing their value proposition through improved quality and valueadded services in this competitive environment. How do Countries Succeed in this Competitive Environment? All countries must understand their unique positioning and carve a strategy roadmap to ensure success in the long-term. A broad view of this process is outlined in the schematic below: Assessment Country market standing and positioning assessment Parameters Breadth of Services Market share in the global outsourcing industry Outcome (Categorization of Country) Niche Super Specialist Evolver Generalist Define strategy road-map Category Key Drivers for Strategy Niche Continue to develop specialized skill pool through industry-aligned education, encourage companies to focus on the key 3-4 industry segments Super Specialist Hold the leadership position in the industry segment, cross sell by leveraging the faith of the customers and cautiously move to become a Generalist Evolver Develop competencies in order to emerge as a niche player or a Generalist in the long run based on the assessment of supply and demand factors Generalist Hold the leadership position by focusing on quality and developing a broader resource pool 2007 Tholons 6 of 9
Action Plan for the Evolvers The Evolvers must conduct an internal assessment of skill availability and demand factors and subsequently clearly position themselves as either a Generalist or Niche player to sustain in the marketplace. Internal assessment for the Evolvers A country needs to assess itself on the following parameters to define its strategy: Supply and internal factors Skills Assessment Map the number of skilled resources for an industry segment and benchmark its quality in comparison with the best in the industry. Supporting Infrastructure Ensure that the supporting infrastructure is in line with the expectation of the buyers. Current Positioning and standing in the global outsourcing market for each of the industry sub-segments Where does the country stand in relation to other countries providing services in the same outsourcing segment. Demand factors Global outsourcing potential of the industry segment Overall market perception of the strengths and weaknesses of the country for different industry segments Market size and the competitive landscape of the industry segment Subsequent to the internal assessment, the countries would have to carve out a strategy roadmap to achieve the desired standing and positioning in the global marketplace as outlined in the framework below: Breadth of Services EVOLVERS Precariously placed - Positioning not sustainable NICHE Reposition as Generalists Reposition as Niche Players Government - Jointly identify the focus areas with the Trade body and align education accordingly Trade Body - Develop consensus to focus on specific areas Companies - Develop competencies in the focus areas and ensure high quality standards How? GENERALISTS Government - Expand the resource pool (new educational institutes, industry aligned training), Tax exemptions, Branding Trade Body - Facilitate a collaborative work environment, liaison with the Government Companies - Match the quality standards of the leaders SUPER SPECIALISTS How? Percentage market share in the global outsourcing industry Source: Tholons 2007 Tholons 7 of 9
Action Plan for the Niche Players and Generalists Periodic Assessment - Conduct periodic assessment which should include: skills mapping, assessment of the competitive landscape, identification of new opportunities in emerging segments and analyzing positioning of the existing service segments. The outcome of this assessment should be a conscious effort by the government to enlarge the skill pool for some specific competencies by opening more educational institutes. The assessment could also lead to increased focus on some service segments and reduced focused on others. Implementation Government agencies, trade bodies and outsourcing companies should work together proactively in a synchronized fashion to move forward on key action points emerging from the assessment. Action Plan for the New Entrants Conduct an internal assessment Analyze the skill pool, conduct a gap analysis with respect to operational parameters, skill pool and supporting infrastructure to benchmark itself against the best in the industry Market Assessment Carefully assess the market to develop expertise in a few selected service segments Develop an ecosystem Carve out a trade body with clearly defined roles and responsibilities to serve as a liaison with the government and provide adequate support to the outsourcing companies Strategy Implementation Best Practice A common approach to drive strategy development and implementation is to leverage the expertise of external advisors with deep expertise in global outsourcing. This is critical to ensuring that the right kind of branding is done, thereby leading to global organizations investing in the country by setting up operations. Conclusion Organizations are moving towards centralizing functions in locations where they get the best price and quality. As a result, multiple locations for service delivery are emerging as viable options for sourcing. The challenge for the existing players is to consolidate their position while the new players face the challenge of matching the delivery standards of the leaders and creating a solid brand in the customer s mind. The key to overcoming these challenges is to invest in the process of understanding the rapidly changing market dynamics and quickly adapting to them. All the three key stakeholders The Government, the trade bodies and the organizations will have to come together to effectively overcome challenges and create a permanent place in the global outsourcing marketplace. 2007 Tholons 8 of 9
About Tholons Tholons is a Services Globalization and Investment Advisory firm that combines "Best of Breed" consulting experience with deep execution expertise and investment insights to deliver truly effective services to its clients. Tholons offers a detailed understanding of business processes and combines it with practical hands-on expertise in executing the strategy. Tholons draws upon the considerable experience of a handpicked team, which has successfully formulated and executed globalization strategies to unlock value for Global Fortune 1000 companies. Service providers leverage Tholons expertise to optimize their global delivery model. Tholons advisors engage with government bodies to build compelling strategies for making countries attractive destination for outsourcing. Author: Ankur Pawa Editor: Dr. Pradeep K Mukherji President & Managing Partner For more details about Tholons' Services Globalization and Investment Advisory capabilities, please visit our website at: www.tholons.com You may also contact: Jessica MacKenzie Director, Marketing and Public Relations jessica@tholons.com US: +1-646-290-9320 THOLONS Global Offices North America Office 3130 Fairview Park Drive, Suite 500 Falls Church, VA 22042, USA Phone: +1-646-290-9320 Fax: +1-646-349-3546 Europe Office 2 Crawfurd Farm, Ray Mill Road East Maidenhead, SL6 8SU Berkshire, UK Phone: +44-1628-566140 Asia Office 2/10, 2nd Floor, 80 Ft Road RMV Extension Stage II Bangalore 560 094, India Phone: +91-80-23519760 Philippines Office 46th Floor, Yuchengco Tower RCBC Plaza, 6819 Ayala Makati City 1200, Philippines Phone: +632-894-9493 2007 Tholons 9 of 9