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Focus on Global Sourcing

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Title: Focus on Global Sourcing


1
Focus on Global Sourcing
  • The Analyst View

Stephanie Moore Vice President Forrester Research
2
Global Sourcing Trends
  • North American and Western European companies are
    more eager than ever to go offshore
  • CEO/MD/Board of Directors mandate
  • Existing offshore efforts are scaling rapidly
  • From an FTE perspective
  • From a service offering perspective
  • Infrastructure
  • BPO
  • Knowledge services

3
Global Sourcing Trends
  • Europes consumption of offshore" services will
    grow faster than North Americas
  • Remove historical cost structures to compete in
    the global economy
  • Executives view outsourcing as vital to compete
  • Growth lead by UK, but Germany, Switzerland,
    France, Austria and Nordic countries growing also
  • Labor laws make flexible capacity a requirement
  • Europe IT shops heavily dependent on contractors
  • Contractor expenses no longer supportable
  • Indian vendors focused on European market
  • Market is smaller

4
Labor costs dominate IT budgets offshoring is a
way to reduce these costs
5
Global Sourcing Trends
  • Many companies are still only looking for pure
    labor arbitrage
  • How low will the vendors go?
  • The smart ones are looking for intellectual
    arbitrage
  • How can I improve my processes?
  • How can I innovate?
  • How can I improve alignment between the business
    and IT?
  • Indian vendors challenged by growth and demand
  • Attrition, recruiting, and retention
  • The need to scale
  • Customer expectations
  • Accommodating customer processes
  • Wage inflation 12-16 range

6
Global Sourcing Trends (India)
  • Prices inflating, but not as rapidly as wages
  • Rates increase, if any in 5-10 range
  • Bands of pricing vs. one blended rate
  • Lower quality staff in return for stable/lower
    rates
  • MA in vendor space
  • Indians acquire US/Euro firms Cognizant, Satyam,
    Wipro. A western approach and vertical skills are
    critical to global success
  • Customers look for Indian alternatives, but often
    disappointed by reality
  • China, Brazil, Eastern and Central Europe,
    Vietnam, Malaysia
  • Still a portfolio approach is preferred
    especially by Europeans
  • Increase in captives and captives as clients
  • Underperforming captive organizations seek
    support

7
Global Sourcing Trends
  • Contract pricing
  • Clients ask Can I get the vendor to make
    creative rate concessions (different locations,
    skill sets, volume)?
  • Inflation clauses?
  • Service Level Agreements for attrition
  • HR practice audits
  • Vertical skills as a differentiator
  • Consultative support
  • Methodologies Lighter weight more agile

8
Global Sourcing Services Trends
9
Many services are offered the Indians have moved
up the value chain
Program Management
Consulting
Architecture, IT strategy, process, quality,
strategic sourcing
Application services
Testing, app dev, maintenance, prod support
Infrastructure services
Monitoring, server mgmt., DBA, DT mgmt.
Business process outsourcing
Contact centers, collection services, KPO
(research/analytics), mortgage processing, legal
services, tax preparation, claims processing
10
Europeans Offshoring Everything
11
European Global Sourcing Experiences and
Challenges
12
European Companies Offshore
  • UK companies are the largest consumers in Europe
  • Indian outsourcing is more difficult for
    continental Euro companies
  • English speaking skills required at commercial
    and delivery level
  • If English skills are not present at delivery
    level
  • Vendor must employ French/German/Italian/Swedish
    speakers
  • Heavy translation can be required
  • This can reduce savings, time to market, customer
    satisfaction
  • Eastern, Central Europe offer alternatives
  • But, labor shortages and language can/will still
    be a problem
  • EU entrants will have to adhere to more strict
    labor regulations
  • Lack of maturity in native vendor population

13
Low-Cost Service Delivery Drives Firms Decisions
To Go Offshore
14
Europeans Cut Back on Internal and Contractor
Staff
15
Offshore Providers Meet European Firms
Expectations
16
Trends in Offshore Destinations
17
Other geographies have merit, but cant compete
with India for scale or maturity
  • China
  • Large internal demand for IT service
    professionals
  • ITS 27 billion, but exports only totaled 633
    million
  • Indian vendors in China are supporting Western
    clients Chinese operations, South Korean
    clients, or Japanese clients.
  • IP laws and language issues still a problem
  • English speaking Chinese programmers are at least
    as expensive as Indian programmers
  • Philippines
  • Contact centers services dwarf software services
    (750 million vs. 186 million)
  • Central and Eastern Europe (Czech Republic,
    Hungary, Russia, and Poland)
  • Mexico
  • Brazil
  • The Caribbean
  • South Africa
  • Vietnam
  • Malaysia
  • Rural sourcing!

Source Services Outsourcing World Magazine,
February 2006
18
Learning from the Early Adopters
19
Next Generation Offshore Outsourcing
  • Allows companies to
  • Save money
  • Improve quality
  • Improve time to market
  • In addition it can foster
  • Innovation
  • talented internal resources redeployed on
    strategic projects
  • vendors support/lead innovation activities
  • Additional business value
  • Savings directed to strategic initiatives
  • Vendor partnerships offer new/expanded business
    opportunities

20
Next Generation Outsourcing Client
Participation Required
  • There are no silver bullets
  • If you want the benefits, you have to make the
    investment in changing the way your company
    operates today
  • New processes
  • IT
  • Internal customer management
  • Sourcing vendor management
  • Metrics and measurements measuring value
  • Organizational change management
  • Next generation IT organization to support
    outsourcing
  • New roles and responsibilities

21
Some companies do offshore outsourcing without
sufficient preparation
What are the offshore challenges?
0
20
40
60
Lesson Internal preparation is key to success!
Base 103 North American IT and business
executives
22
Organizational Change Management For Offshore
Outsourcing
  • These skills are vital to outsourcing success
  • IT Strategy and Architecture
  • Program management
  • Project management
  • Vendor management
  • Business analysts key to process optimization
    and outsourcing success
  • Technical writers
  • Technical leads
  • QA

23
A Note About Vendor Management
  • Some think this means managing contracts, but it
    means much more than that
  • For example
  • What percentage of freshers can you safely
    accommodate on a project?
  • As you scale/create more projects taking
    experienced vendor staff off of successful teams
    and having them establish the new teams is
    important
  • Pipeline management as you are ramping a project
    down, make sure you have work for your important
    vendor staff so that you dont lose them to other
    customers.
  • Filler work to enable pipeline management
  • Making the most of resources Have vendor write
    test cases with BAs so that BAs dont have to
    actually participate in testing
  • Training/career paths/incentives for vendor staff

24
Case study European Pharmaceutical Company
Without Process
  • Internal users are undisciplined (in the context
    of their interaction with IT) and dont know how
    to formally specify requirements
  • Business analysts are inexperienced or improperly
    trained
  • Vendor has been too timid to explain to client
    how negatively this lack of process can effect
    the outcomes or deliverables
  • Internal users reject code 60 of the time during
    UAT. Rejection is due to the fact that the
    deliverable does not meet their requirements.
    Root cause analysis shows that the initial
    requirements documents dont meet the end users
    requirements either
  • End users insist the vendor should intuit some
    of these requirements. We should not have to
    explicitly specify them
  • Regardless, client pays for the rework. This
    means that the 15-30 savings the client expected
    turns into a 30-45 loss.

25
Captive strategies are popular but ultimately not
practical . . .
  • Much of what you use an outsourcer for is absent
    from this approach
  • Flexible staffing
  • Specialist skills
  • Process maturity
  • It is expensive and difficult to set up a
    professional services organization in a foreign
    land
  • Set up costs
  • Recruitment and retention costs
  • Ongoing and large training investment
  • Substantial investment in process optimization
    just because you employ staff in China or India
    doesnt mean they use quality processes
  • Engagement management skills

26
Recommendations
  • Invest in internal preparation
  • Educate
  • Assess
  • Plan
  • Then, execute
  • Understand the market before you enter it
  • Manage your expectations
  • Select vendors that can accommodate your needs
    and your maturity level
  • If Euro language skills required
  • Explore alternate geographies (Vietnam, Russia,
    Poland, Czech Republic)
  • Require vendor to train staff in European
    languages

27
Thank you
Stephanie Moore 1 203/221 2859 smoore_at_forrester.c
om www.forrester.com
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