Globalization Trends and Futures in Business and IT Services Stan Lepeak Vice President Professional Services Strategies Stan.lepeak@metagroup.com
Business and Technology Scenario Offshore footprint is expanding from ADM to: Application management Enterprise application configuration Business process outsourcing Blur: Domestic service providers and pure-play offshore vendors Various misperceptions still remain around offshore cost savings and maturity Geopolitical risks and antioffshore rhetoric continues to grow The onshore vs. offshore debate with give way to global services provisioning Swimmers To Date, Offshore Watching/ Wondering Testing the Waters Has Meant ADM* Status Deep Divers % F1000 55% 33% 8% 4% % of IT Offshore 0% 5% 10%-30% 40%-50% *Application Development and Maintenance (a fancy name for code factories) The The Russian Russian business business and and IT IT services services market market has has the the potential potential to to become become a key key front front in in the the global global services services marketplace, marketplace, but but it it faces faces challenges challenges 2
Shore Enough: Worldwide Sites Abound Also: South Dakota, Arkansas, Arizona, Romania, Russia, Morocco India still has 85% of this market Elsewhere ADM Costs/Rates Programmer Pay $ Hourly Rate (ADM) Russia $5,000 $9,000 $20 $40 Vietnam $3,000 $6,000 $15 $25 Ireland $23,000 $36,000 $40 $80 Canada $20,000 $40,000 $40 $80 India $5,000 $9,000 $20 $40 Offshore Mexico China Philippines Singapore $7,000 $3,000 $5,000 $9,000 $12,000 $7,000 $9,000 $20,000 $20 $15 $20 $30 $35 $25 $40 $60 Nearshore Best Shore Your Shore Any Shore Neighbor Shore 3
Market Perspectives on Russia Strengths Challenges Worker quality Education system Education levels Engineering expertise Cost Labor pool Motivation Legal, business and investment environments Language University channel Marketing, brand and awareness Size of local providers Infrastructure Government support Real Real and and perceived perceived economic economic transparency transparency as as well well as as active active direct direct government government support support are are key key to to growing growing on on business business and and IT IT services services industry industry 4
Defining Real Costs is Critical to Determining Real Offshore Benefits Onshore Hourly Rate $75.00 Annual Hour Cap 2080 OffShore Hourly Rate $25.00 Resource Cost 1st Yr 2nd Yr 3rd Yr Outsourced ADM Headcount 100 100 100 Onshore Mix of vendor staff 20% 20 20 20 Offshore Mix of vendor staff 80% 80 80 80 Onshore Utilization 80% 1,664 1,664 1,664 Offshore Utilization 90% 1,872 1,872 1,872 Contracted Service Months 12 12 12 Onshore Cost 40% $2,496,000 $2,496,000 $2,496,000 Offshore Cost 60% $3,744,000 $3,744,000 $3,744,000 Total Resource Cost $6,240,000 $6,240,000 $6,240,000 Transition Costs Procurement $100,000 Transition Time (Months) 2 Resource Cost $1,040,000 Severance -80 staff incl Cobra $2,300,000 @ $60K annual Total Transition Costs $3,440,000 Associated Costs Travel 2% $49,920 $49,920 $49,920 VPN Network $6,000 $6,000 $6,000 Software Image $20,000 $20,000 $20,000 Total Associated Costs $75,920 $75,920 $75,920 Variable (Hidden Costs) Software costs 2.00% Best $124,800 5% Worst $312,000 Turnover 1.00% $62,400 3% $187,200 Communications 1.50% $93,600 3% $187,200 Process Change 3.00% $187,200 5% $312,000 Vendor Governance 5.00% $312,000 10% $624,000 Variable (Hidden Costs) 12.50% $780,000 26.00% $1,622,400 Total 1st Year Total Ongoing Best Worst Best Worst On/offshore $10,535,920 $11,378,320 $7,095,920 $7,938,320 Standard $8,450,000 $8,450,000 $8,450,000 $8,450,000 -$2,085,920 -$2,928,320 $1,354,080 $511,680 In-house staff costs Salary $65,000 Benefits $13,000 20% Infrastructure $6,500 10% Total $84,500 Hourly equivalent $45 1872 Total Cost $8,450,000 Development centers must operate with process at least CMM Level 3 Average ratio of on-site/ offshore spend is 20/80, but ratio determines savings Travel, communications, vendor governance, and transition costs often surprise IT organization (ITO) 5
Offshore BPO Scenario Offshore goes upscale BPO Application management R&D ADM Embedded technology systems Enterprise application implementations But many BPO challenges Business process knowledge Vertical industry knowledge Global delivery models Global resource models Geopolitical angst Pure-play channel immaturity Outsourcing Continuum Complexity/Risk Business Process Outsourcing Divestiture/ Vertical Disintegration Transformational Full Process Shared/ Co-Managed Functional IT Outsourcing Full-process offshore BPO is still largely immature and risky 6
Provider Globalization Service providers must become global, not multi-national, to support G2000 client needs Infrastructure to support must be equally global Capability to define Where to develop resources centers Where to source client work & why Managing sourcing locales over time Partner vs. Build it depends Capabilities & resources Cost of capital & opportunity costs Core competencies Ensuring minimal service levels Risk tolerance/aversion Services Globalization Global resource management models Global service delivery processes & methodologies Global operating processes Inorganic Growth IBM & Daksh Citigroup & e-serve Wipro & AMS utilities CGI & AMS The onshore/offshore approach will give way global services provisioning 7
Geopolitical Scenario Geopolitical (e.g., Iraq war, terrorism) and related (e.g., SARS) events are impacting offshore costs and risks Job losses are moving from lowerskilled blue-collar to higher-skilled white-collar jobs It s an election year in the U.S. Sell-side and related advocates are largely mute A Company That Will Go to the Ends of the Earth for Its People Will Find It Can Hire Them for About 10% the Cost of Americans 8
Economic Evolution 1700 1800 1900 2000 Industrial Revolution Begins 1811 Luddite Riots 1942: 32% US Workforce in Mfg. US Population 5.2M, 90% in Agriculture 1945: Western US GDP/Person: $1,400 (1996 $) 1837: Charles Babbage s Analytical Engine India Vegetable Products Formed 1975: 1st PC 1947: 1st Computer Bug Ford River Rouge Coal In, Cars Out 1900: 20% Women in Workforce US GDP: $4,100 US Population 282M, <2% in Agriculture, 13% Manufacturing India GDP: $2,600 Russia GDP: $8,350 US GDP: $36,400 9
Compliance Implications on Outsourcing Sarbanes-Oxley (SOX), Basel II, various privacy acts, etc. impact business and IT outsourcing Business and IT services providers are becoming effectively regulated Global sourcing will respond to regulatory inconsistencies SOX issues Does not differentiate between insourced and outsourced processes SAS 70 audits not good enough? Regulator clarification late: 2H04 Short-term hindrance, long-term driver for outsourcing Outsourcing the Joy of SOX? Key Issues Visibility? Transparency? SAS 70? Adequate documentation? Auditor role? Client role? Outsourcer role? Compliance mandate create serious challenges and increases risk levels for offshore outsourcing 10
Doing Offshore Right Organizations must understand what should and should not go offshore: Consider IP risks, data access/ privacy laws, compliance regulations, other legal issues Organizations must enable adequate processes for: Supplier vetting and selection Supplier relationship management Multiprocess management Governance Organizations must determine how to adequately manage: Distributed/outsourced global business processes Geopolitical risk Vetting and Selection Relationship Processes Contract Processes Governance Technical Processes Performance Processes Supplier Relationship Management 11
Summary Learning to Love or at Least Live With Offshore Offshore realities Offshore outsourcing is part of a natural, ongoing economic evolution Viewed holistically, offshore s overall benefits are unassailable The offshore market is maturing rapidly but is still immature The future is global services provisioning Business process and vertical industry expertise will grow in importance Offshore options and processes must be well understood As users mature in their offshore capabilities, they become more viable as well as challenging clientele Alignment of maturity levels fosters success Russia offers solid opportunities as a growing offshore market But more concerted efforts to foster and promote capabilities are required 12