Focus on Global Sourcing

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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
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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

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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

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Global Sourcing Services Trends
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Many services are offered the Indians have moved
up the value chain
Program Management
Consulting
Architecture, IT strategy, process, quality,
strategic sourcing
Applicationservices
Testing, app dev, maintenance, prod support
Infrastructureservices
Monitoring, server mgmt., DBA, DT mgmt.
Businessprocess outsourcing
Contact centers, collection services, KPO
(research/analytics), mortgage processing, legal
services, tax preparation, claims processing
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Europeans Offshoring Everything
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European Global Sourcing Experiences and
Challenges
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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

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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
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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
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Learning from the Early Adopters
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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

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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

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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
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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

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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

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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.

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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

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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

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