Global Business Services Outsourcing Industry

JIAODA-DUKE CHINESE AMERICAN RESEARCH CENTER ON GLOBAL OUTSOURCING Global Business Services Outsourcing Industry Professor Arie Y. Lewin 乐文睿 Duke University, Fuqua School of Business Durham North Carolina 27708 ayl3@duke.edu July 29, 2014

Offshoring Research Network History and Scope Initiated in 2004 at Duke University CIBER, Fuqua School of Business ORN Buy-side Survey (2004-2013) includes over 2000 companies that do, do not, or are considering, covers all industries (e.g. financial services) all functions, (e.g. IT) all locations (e.g. Latin America), and all delivery models (e.g. captive, hybrid), tracks adoption over time by launch year, tracks adoption of offshoring strategies at corporate & function level ORN Service Provider Survey (2007-2013) includes over 900 participants 2

ORN University Research Partners UK: Manchester Business School, Professor Silvia Massini Scandinavia: Copenhagen Business School, Professor Bent Petersen Netherlands: RSM Erasmus University, Professor Henk Volberda Belgium: ULB Solvay Business School, Professor Carine Peeters Germany: WHU Otto Beisheim School of Management, Professor Thomas Hutzschenreuter Spain: IESE, Professor Joan E. Ricart Australia: University of Newcastle, Professor Stephen Chen; University of Western Sydney, Prof Oscar Hauptman Japan: University of Tokyo, Professor Takahiro Fujimoto and Professor Youngwon Park Korea: Kyung Hee University, Professor Geon-Cheol Shin Italy: Polytechnic University of Milan, Professor Lucia Piscitello France: EMLYON Business School, Professor Christiane Prange Brazil: UNISINOS RS BRASIL, Professor Yeda Swirski de Souza New Zealand: Victoria Management School, Professor Sally Davenport, Singapore: Singapore Management Uinversity, Professor Tan Wee-Liang China: Shanghai JiaoTong University, Antai College, Professor Yi Liu. 3

Sample of Recent ORN Practitioner Reports and Presentations February 2013, Assessing Sourcing Operational Effectiveness and Maturity, IAOP world summit, Phoenix, Arizona May 2012, Yeda Swirski de Souza Presentation, Growing Business Services Industry in Columbia, ANDI Outsourcing Summit, Columbia April 2012, Chris Disher Presentation, Sala de los Americas Congreso Internacional Business Process, Colombia April 2012 Financial Services Roundtable Briefing on Location and Country Risk March 2012, ORN Findings in Relation to American Competiveness, Globalization Leadership Council, New York February 2012, Global Sourcing of Business Services: Key Findings and Trends from ORN Research, IAOP 2012 Outsourcing World Summit, Florida December 2011 Financial Services Roundtable Briefing 2011 Corporate Client Survey Report, Organizational Flexibility: The Strategic Differentiator of Global Sourcing Effectiveness 2011 Service Provider Survey Report, The Ever Changing Global Service Provider Industry 2010 Corporate Client Survey Report, Taking Offshoring to the Next Level 2010 Service Provider Survey Report, Is the Global Outsourcing Industry in for a No-Holds-barred Competition? Financial Services Offshoring: Moving Toward Fewer Captives and Global Cost Competitiveness, The Conference Board - Offshoring Research Network Executive Action Series. 2010 Offshoring in High Tech and Telecom, March 2010 Offshoring in Retail and Consumer Goods, February 2010 Offshoring in the Manufacturing Industry, February 2010 4

ORN Recent Academic Publications Offshorability of Business Processes as Management Innovation: A Multi-level Framework, Academy of Management Review, (Under Review) The Underexplored Role of Managing Interdependencies Fit In Organization Design and Performance, Journal of Organization Design. Co-Evolution Of Global Sourcing: The Need To Understand The Underlying Mechanisms Of Firm-Decisions To Offshore, International Business Review, Special Issue Co-evolutionary Research on Global Sourcing: Implications for Globalization, International Strategies, and Organizational Designs Vol. 20, 3, June 2011, 241 251 Governance Modes for Offshoring of Support Functions; A comparison of US and German Firms, International Business Review, (2011) Vol 20 (3), June 2011, p291-313 The Stability of Offshore Outsourcing Relationships: The Role of Relation Specificity and Client Control, Management International Review(MIR), (2011), Vol. 51 (3), p381-406, The Growth of White-Collar Offshoring: Germany and the US from 1980 to 2006, European Management Journal, Aug. 2011, p245-259 Micro Foundations of Internal and External Absorptive Capacity Routines. Organization Science,22: 81-98, 2011. From Blind Spots to Hotspots: How Knowledge Services Clusters Develop and Attract Foreign Investment. Journal of International Management, Vol16(4), Dec.2010, p369-382 Conceptual Issues in Services Offshoring Research: A Multi-disciplinary Review, Group & Organization Management, February 2011, Vol36 (1) p70-102 Role of Corporate-wide Offshoring Strategy on Offshoring Drivers, Risks and Performance, Industry and Innovation, special issue on Offshoring of Intangibles. Vol17(4), 2010 p 337-371 5

In Billion USD Estimation of Global Services Market Size (ITO/BPO/ADM/SAUG, etc.)* 650 600 550 500 450 400 350 x Delloite Smith Street Solutions KPMG/HfS Research 300 250 BCG OECD 200 150 100 50 NASSCOM Size of the Chinese Market** 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year *Excluding In-house Expenditure **From various press releases; CAGR (2006-2013)=73.33% 6

Growth began to level off for most applications in 2010 50% 45% Innovation Services IT 40% 35% 30% 25% 20% 15% 10% 5% 0% Contact Centers Application Development & Maintenance Finance &Accounting Supply Chain & Facilities Marketing & Sales Knowledge/Analytical Services Other Legal Services 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: 2, 3, 4, 5, 6 Arie Y. Lewin 7

On Average 30% Decline in New Signed Deals Year on Year (Actual Contract Value 2013/2012) Source: ISG Global Outsourcing Index, 2Q13 8

Case of China: In 2009 State Council Designates 20 Cities as Hubs for Attracting Outsourcing Business Cities with Executed Contract Value (ECV) of Offshoring Outsourcing Services in 2009 (in USD Billion), with Percentage of ITO, BPO, KPO Services in Contract Value CITY ECV ITO BPO KPO Dalian 5.8 50% 30% 20% Shenzhen 4.7 89% 9.6% 1.6% Beijing 1.05 78% 17% 6% Nanjing 1 60% 20% 20% Hangzhou 0.91 83% 6% 10% Shanghai 0.88* 71% 23% 6% Suzhou 0.87 50% 40% 10% Wuxi 0.49* 57% 31% 12% Chongqing 0.35 Guangzhou 0.34 36% 59% 5% 2009 Total $B 14.0 2013 Total $B 50.0 Source: 15 2009 India Total $B 87.0 9

Competitive Pressures on Indian Providers Average margins by large international and Indian based providers Large International Providers 29% Indian Based Providers 30% 25% 20% 20% 17% 2007 2009 2010 10

Market for ITO and BPO is Saturated Most Forbes Global 2000 companies have implemented business services offshoring strategies. New Mega deals are rare Awards mainly involve renewal of Legacy IT Infrastructure, BPO and ADM Contracts Providers continue to experience pressure on margins for renewal of traditional commoditized IT infrastructure and ADM services. To achieve higher margins providers are trying to bundle client specific front-end business operations with traditional BPO contracts (e.g. F and A applications). 11

Core Dimensions of Global Sourcing Operational Effectiveness* Corporate-wide strategy Center of excellence Cost accounting Clear measurable objectives Formal process for allocating savings Formal vendor management program Defined process for implementing service delivery structure 12

Company Profiles of Global Sourcing Operational Effectiveness* Formal vendor management program Defined process for implementing service delivery structure Corporate-wide strategy 5 4 3 2 1 0 Clear measurable objectives Formal process for allocating savings *n=115 Group average Center of excellence Company with lowest overall score Cost accounting Company with highest overall score 13

Overall effectiveness score Most Companies not Managing Global Sourcing Very Effectively (By Company Size and Quintile)* 26 30 27 High 33 variance in 33 overall score 26 15 18 21 14 20 Lowest quintile 2nd quintile 8 11 11 9 3rd quintile 4th quintile Highest quintile * n=81 (>500) Medium companies (500-10,000 FTEs) Large companies (>10,000 FTEs) Total Scale: Lowest effectiveness = 7 Highest effectiveness = 35 14

New Management Attention to Effectiveness of Sourcing Organization Increased C-Level attention at Financial Services Companies on sourcing of business services New emphasis on simplification of organizational processes and on rationalizing number of providers New portfolio approach integrating intra company shared services and providers on and Offshore. Contrary to media hype few clients are considering inshoring work back to U.S. Visa reform could result in companies moving more work offshore.

Future Trends Mid cap companies future plans point to growing offshoring interests. But deal size much smaller which is a challenge for large global providers and an opportunity for smaller providers. Future growth in analytics, big data and mobile applications But no mega deals Providers report developing strategies that reinforce longterm client relationships. Examples of building joint equity in the relationship Make client specific investments to signal reinforced commitment to client success. Proactive focus on identifying and implementing client specific transformational initiatives Co-innovating with client new applications and process improvements 16

Implications and challenges for the Sourcing Industry in China Timing is everything. Chinese business service providers are entering the global industry at a time when growth rate is leveling off or even declining. Therefore, capturing market share much more challenging. Best opportunities are in applications and software development (ADM), analytics, big data and mobile. Mid cap market offers opportunities to enter markets in US and Europe. However, preliminary indications are that Chinese providers are targeting domestic market growth. 17

Implications and challenges for the Sourcing Industry in China (continued) Success, however, will involve a multi pronged strategy at the level of model city such as Shanghai, the industry and the individual company. Role of Model Cities such as Shanghai. Investment in training technical specialists and project managers. Much training is ineffective. Involve providers located in Shanghai and with companies considering locating in Shanghai. ISO Standards Incentivize and advocate that providers invest in training for compliance with ISO standards Consider adopting a formal role for certification of compliance prhaps in collaboration with ISO organization. Representative offices abroad In key US and European cities. To facilitate service providers marketing efforts to Mid cap companies Perhaps even offering to guarantee quality, reliability and security of service. 18

Implications and challenges for the Sourcing Industry in China (continued) English competency is a barrier to attracting business services outsourcing contracts. Model city governments, such as Shanghai, need to invest in new experiments. Maybe explore the Israel Ulpan School for teaching conversational Hebrew. High turnover rates indicate either tight labor markets and/or that service provider industry does not offer attractive careers. Providers in high costs cities such as in most model cities in China probably do not have real cost advantages. Therefore, Chinese service providers must learn to compete on the basis of execution excellence, reliability, zero error rates, timeliness, security and robust processes. The good news is that we know several world class service providers in China. Both US and Chinese Owned. 19

Thank You For More Information on the Offshoring Research Network Visit Our Website: http://offshoring.fuqua.duke.edu Visit ORN on Wikipedia: http://en.wikipedia.org/wiki/offshoring_research_network Join our groups on www.linkedin.com and www.xing.com! Contact us: Professor Arie Y. Lewin, Lead Principal Investigator ORN ayl3@duke.edu Jeff Russell, ORN Director of Research Operations jrussell@duke.edu, +1 919 660 4099 Dr. Keren Caspin-Wagner, ORN Senior Research Associate Keren.caspin@duke.edu 20