globalization trends and futures in business and it …russoft.org/downloads/o16064-08.pdf ·...

Globalization Trends and Futures in Business and IT Services

Globalization Trends and Futures in Business and IT Services

Stan LepeakVice PresidentProfessional Services [email protected]

2© 2004 META Group, Inc., Stamford, CT-USA, +1 (203) 973-6700, metagroup.com

Business and Technology Scenario

To Date, Offshore Has Meant ADM*

Offshore footprint is expanding from ADM to:

Application managementEnterprise application configurationBusiness process outsourcing

Blur: Domestic service providers and pure-play offshore vendorsVarious misperceptions still remain around offshore cost savings and maturityGeopolitical risks and anti-offshore rhetoric continues to growThe “onshore” vs. “offshore” debate with give way to global services provisioning

10%-30%8%Swimmers

40%-50%4%Deep Divers

5%33%Testing the Waters

0%55%Watching/Wondering

% of IT Offshore

%F1000Status

*Application Development and Maintenance (a fancy name for code

factories)

The Russian business and IT services market has the

potential to become a key front in the global services marketplace, but it faces

challenges

The Russian business and IT services market has the

potential to become a key front in the global services marketplace, but it faces

challenges


Shore Enough: Worldwide Sites Abound

Also: South Dakota, Arkansas, Arizona, Romania, Russia, Morocco …India still has 85% of this market

OffshoreNearshoreBest ShoreYour ShoreAny Shore

Neighbor Shore$60$30$20,000$9,000Singapore

$40$20$9,000$5,000Philippines

$25$15$7,000$3,000China

$35$20$12,000$7,000Mexico

$40$20$9,000$5,000India

$80$40$40,000$20,000Canada

$80$40$36,000$23,000Ireland

$25$15$6,000$3,000Vietnam

$40$20$9,000$5,000Russia

Hourly Rate (ADM)Programmer Pay $

“Elsewhere” ADM Costs/Rates


Market Perspectives on Russia

Strengths

Worker qualityEducation systemEducation levelsEngineering expertiseCostLabor poolMotivation

Challenges

Legal, business and investment environmentsLanguageUniversity channelMarketing, brand and awarenessSize of local providersInfrastructureGovernment support

Real and perceived economic transparency as well as active direct

government support are key to growing on

business and IT services industry

Real and perceived economic transparency as well as active direct

government support are key to growing on

business and IT services industry


Defining Real Costs is Critical to Determining Real Offshore Benefits

Onshore Hourly Rate $75.00 2080OffShore Hourly Rate $25.00

Resource Cost 1st Yr 2nd Yr 3rd YrOutsourced ADM Headcount 100 100 100Onshore Mix of vendor staff 20% 20 20 20Offshore Mix of vendor staff 80% 80 80 80Onshore Utilization 80% 1,664 1,664 1,664Offshore Utilization 90% 1,872 1,872 1,872Contracted Service Months 12 12 12Onshore Cost 40% $2,496,000 $2,496,000 $2,496,000Offshore Cost 60% $3,744,000 $3,744,000 $3,744,000Total Resource Cost $6,240,000 $6,240,000 $6,240,000

Transition CostsProcurement $100,000Transition Time (Months) 2Resource Cost $1,040,000Severance -80 staff incl Cobra $2,300,000 @ $60K annualTotal Transition Costs $3,440,000

Associated CostsTravel 2% $49,920 $49,920 $49,920VPN Network $6,000 $6,000 $6,000Software Image $20,000 $20,000 $20,000Total Associated Costs $75,920 $75,920 $75,920

Variable (Hidden Costs)Software costs 2.00% $124,800 5% $312,000Turnover 1.00% $62,400 3% $187,200Communications 1.50% $93,600 3% $187,200Process Change 3.00% $187,200 5% $312,000Vendor Governance 5.00% $312,000 10% $624,000Variable (Hidden Costs) 12.50% $780,000 26.00% $1,622,400

Annual Hour Cap

Best Worst

Best Worst Best WorstOn/offshore $10,535,920 $11,378,320 $7,095,920 $7,938,320Standard $8,450,000 $8,450,000 $8,450,000 $8,450,000

-$2,085,920 -$2,928,320 $1,354,080 $511,680

Total OngoingTotal 1st Year

In-house staff costsSalary $65,000Benefits $13,000 20%Infrastructure $6,500 10%

Total $84,500Hourly equivalent $45 1872Total Cost $8,450,000

Development centers must operate with process — at least CMM Level 3Average ratio of on-site/ offshore spend is 20/80, but ratio determines savingsTravel, communications, vendor governance, and transition costs often surprise IT organization (ITO)


Offshore BPO ScenarioOutsourcing ContinuumOffshore goes upscale

BPOApplication managementR&DADMEmbedded technology systemsEnterprise application implementations

But many BPO challengesBusiness process knowledgeVertical industry knowledgeGlobal delivery modelsGlobal resource modelsGeopolitical angstPure-play channel immaturity

Transformational

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IT Outsourcing

Divestiture/Vertical

Disintegration

Functional

Full-process offshore BPO is still largely immature and risky


Provider Globalization

Service providers must become global, not multi-national, to support G2000 client needsInfrastructure to support must be equally “global”Capability to define

Where to develop resources centersWhere to source client work & whyManaging sourcing locales over time

Partner vs. Build – it dependsCapabilities & resourcesCost of capital & opportunity costsCore competenciesEnsuring minimal service levelsRisk tolerance/aversion

Services Globalization

• Global resource management models• Global service delivery processes & methodologies• Global operating processes

• IBM & Daksh• Citigroup & e-Serve• Wipro & AMS’ utilities• CGI & AMS

Inorganic Growth

The onshore/offshore approach will give way global services provisioning


Geopolitical ScenarioGeopolitical (e.g., Iraq war, terrorism) and related (e.g., SARS) events are impacting offshore costs and risksJob losses are moving from lower-skilled blue-collar to higher-skilled white-collar jobsIt’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


Economic Evolution

1700 1800 1900 2000

Industrial Revolution Begins

1811Luddite Riots

1942: 32% US Workforce in Mfg.

1975: 1st PCUS Population 5.2M,90% in Agriculture 1945: Western

India Vegetable Products Formed

US Population 282M,<2% in Agriculture,13% Manufacturing

US GDP/Person: $1,400(1996 $)

1947: 1st Computer “Bug”

1837: Charles Babbage’s Analytical Engine

Ford River RougeCoal In, Cars Out

India GDP: $2,600Russia GDP: $8,350

US GDP: $36,400

1900: 20% Women in Workforce

US GDP: $4,100


Compliance Implications on Outsourcing

Outsourcing the Joy of SOX?

Sarbanes-Oxley (SOX), Basel II, various privacy acts, etc. impact business and IT outsourcingBusiness and IT services providers are becoming effectively regulatedGlobal sourcing will respond to regulatory inconsistenciesSOX issues

Does not differentiate between insourced and outsourced processesSAS 70 audits not good enough? Regulator clarification late: 2H04

Short-term hindrance, long-term driver for outsourcing

Key IssuesVisibility?

Transparency?SAS 70?

Adequate documentation?

Auditor role?Client role?

Outsourcer role?

Compliance mandate create serious challenges and increases risk levels for offshore outsourcing


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 selectionSupplier relationship managementMultiprocess managementGovernance

Organizations must determine how to adequately manage:

Distributed/outsourced global business processesGeopolitical risk

Vetting and Selection

RelationshipProcesses

Governance

TechnicalProcesses

ContractProcesses

PerformanceProcesses

Supplier RelationshipManagement


Learning to Love or at Least Live With Offshore

Summary

Offshore realitiesOffshore outsourcing is part of a natural, ongoing economic evolutionViewed holistically, offshore’s overall benefits are unassailable

The offshore market is maturing rapidly but is still immatureThe future is global services provisioningBusiness process and vertical industry expertise will grow in importance

Offshore options and processes must be well understoodAs users mature in their offshore capabilities, they become more viable as well as challenging clienteleAlignment 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

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