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CONFIDENTIAL

Outsourcing Then , Now & Tomorrow


May 2008

The information contained within this document is proprietary to Copal


Partners and it reserves the right to all information provided. The
recipient agrees not to distribute, share or use any part of the material
without express written permission of Copal Partners. The recipient
would treat this material as Confidential Information.
www.copalpartners.com

INDUSTRIALIZATION OF SERVICES

The Industrialization of Service represents one of the biggest trends in the technology and services sectors
Industrial Revolution

Industrialized Services Revolution

Cheap,
controllable energy
(steam power)

Computing power /
global labor pool

THEN

Cheap
Transportation
(railroad)

NOW

Standardization
of parts / mass
customization

Repeatability

Measurability (6)

Internet / global
networking

Standardization of
processes

Mass customization

Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners

HIGH COMPLEXITY GENERALLY MEANS MORE SAVINGS


Value Addition
Low

Medium

High
RESEARCH &
ANALYTICS
(40-60%)

INSURANCE
(40-60%)

IT SERVICES
(25-50%)

ACCOUNTING / CALL
CENTRES (35-40%)

C
IN

SE
A
E
R

S
G
N
VI
A
S

Increased
complexity can
lead to higher
savings with
potentially less
risk

TRANSACTION
PROCESSING
(25-40%)
Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners

EVOLUTION TOWARDS MORE KNOWLEDGE INTENSIVE WORK AND THE FRONT END
KPO

Cost Arbitrage

BPO

ITO

Cost Arbitrage

Global Delivery
Model comes of
age with changing
telecom scenario

Emergence of
Quality
certifications (CMM,
ISO)

Intellectual
arbitrage allows
outsourcing of core
processes

Repeat initial
successes by
developing robust
knowledge
management
methodologies for
KPO

Emergence of
Quality
certifications like
CPOC

Focus on business
domains

Multi-geography
strategies

Focus on business
domains enabling
access to complex
business-facing IT
systems

Geographical
diversification by
setting up delivery
centres in multiple
locations

Focus on
developing robust
knowledge
management
methodologies
Evolve to provide
end-to-end
consulting services

Focus on
knowledge
management

Mid 80s

1990-1994
Infancy

1995-1999

2000-2004

Growth

2004-2007

2008-2010

Maturity

Source: KPMG, Knowledge Process Outsourcing, February 2008

Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners

KPO THE EMERGING WAVE

HIGH

HIGH

30-45

High
Complexity

Moderate Complexity

10-12

TIERII and III MBA, CA,


CPA, Graduates (Finance
& Accounting)

Finance & Accounting


Under Graduates

Skill Set Requirements

Billing Rate (USD per hour)

15-25

TIERI and II MBA, CA,


CFA, CPA, Post
Graduates (Finance &
Accounting)

Low Complexity

LOW

LOW

Source: KPMG, Knowledge Process Outsourcing, February 2008

Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners

MOST FUNCTIONS CAN BE OUTSOURCED TODAY


Offshoring
Scoping matrix
IT, Infrastructure
and administration
support (ITO)

Core banking systems

Product based
transaction
processing and
customer contact
centres (BPO)

Analytics
Outsourcing
activities (KPO)

Wealth management, life and


general insurance

Retail Banking

Life policy systems maintenance and


application development

Institutional, Investment &


business banking
Loan accounting and equity / Fixed Income
trading systems

Application development and maintenance


Remote infrastructure management
Package implementation and support
Database administration, data mining and warehousing solutions
Middleware development and support

Mortgage and personal loan origination,


processing and servicing collections
eDisputes processing
Credit card processing
Consumer finance
Cash management / Fund transfers and
reconciliations

Insurance claims administration and


payment
Policy underwriting
Insurance agency management
Fraud detection
Recoveries
Trial balance analysis
Brokerage operations
Commissions administration

Inbound/outbound contact center


Customer query handling
Data entry, indexing and content management
Customer background verification and finalization
Loyalty retention (customer care program)
Customer statement and other periodic reporting
Regulatory requirements/mandate related support and administration
Payment processing

Mortgage and personal loans


Portfolio pricing
Data warehousing
Data-mining
Marketing analytics

Fund performance analysis


Reporting and accounting
Actuarial support
Product pricing including Dynamic Financial
Analysis (DFA) models
Financial model validations

Project finance documentation


Support FX, currency ops and derivatives
settlement
Trade finance and LCs advice and
settlement
Corporate finance
Risk management
Securities processing
Custody operations and trade

Equity research and M&A analytics support


(valuation and related financial modeling)
Credit proposal analysis, preparation and
documentation, portfolio analytics
Library services

Source: KPMG, Knowledge Process Outsourcing, February 2008

Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners

SERVICES OUTSOURCING PITFALLS & PREVENTIVE MEASURES


SERVICES
OUTSOURCING
PITFALLS

PREVENTIVE MEASURES

Absence of a Partnership Approach

Communication Clarity with a partnership approach

Lack of Commitment and Consensus in the Client Organization

C-level champion and sponsorship for the outsourcing initiative

Lack of Effective Change Management in the Client Organization

Eliminate the practice of having shadow personnel

Lack of Effective Communication

Create mechanisms and forums that facilitate an open exchange


of information and objective feedback

Ineffective Governance Structure

Developing a contractual obligation for both parties to commit


appropriate executive involvement

Clients Lack of Knowledge of its Processes

Create a summary process flow map and prevent micromanagement

Measuring the Wrong Performance Aspects

Regular review of SLAs as to their appropriateness

Rigid, Inflexible Contract

Contract must include provision for a fair exit process

Inadequate Security, Disaster-Recovery, and Business-Continuity


Plans

Thorough testing of the disaster-recovery and business-continuity


processes

Source: Outsourcing Partners International

Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners

SERVICES OUTSOURCING CONTRACTUAL ISSUES


Transferring analytics business processes to an external provider is a complex process that involves transitioning high-value data and
knowledge about a company's internal plans and objectives. For this reason, contractual issues relating to extensive due diligence on privacy
laws pertaining to that country, security & confidentiality aspects, and planning & documentation of knowledgetransfer processes become
absolutely critical
Competitive Pricing

Change Control

One of the biggest challenges in an outsourcing contract is to ensure


that the customer continues to obtain the level of service it requires at
a competitive price

Given the dynamic nature of business requirements and the time


taken to negotiate an outsourcing contract, a signed contract may not
reflect all of the customers original requirements & additional ones

Given the length of some outsourcing contracts, what starts out


as a competitively priced contract may not remain the same.
Contracts must therefore be drafted to effectively manage this risk

Therefore, outsourcing contracts need to comprise of a control


mechanism which would contain procedures for proposing and
accepting changes, as well as an escalation process for resolving
disputes

Data Protection
Data protection and related issues of security have always been areas
of concern for companies considering outsourcing
Solutions to this issue include negotiations of any gaps between
the solution offered by the supplier and what the customer
believes is appropriate security for its needs

Termination
Both parties in an Outsourcing contract need to draft an effective exit
strategy to avoid the possibility of being tied into an unfavorable
outsourcing deal. Reasons why a party might want to terminate an
outsourcing contract include:
Material breach by the other party
Insolvency, winding up or change of control of the other party
Right for the buyer to terminate for convenience, where there is
no fault on the part of the supplier

Source: Gartner 2007, Copal Analysis

Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners

INDIA: CURRENTLY THE ONLY REAL PLAYER

The global KPO business is expected to grow to USD 16.7bn by


201011 from approx. USD 4.4bn in 200607, increasing at a
growth rate of 54%

India is the leading destination for offshoring services, followed by


China and Malaysia

Businesses outsource a growing proportion of their processes to


India as:

Indian KPO industry is expected to grow to approx. USD 11.2bn by


201011, up from USD 3.05bn in 200607. By 201011, the
industry will employ approx. 255,000 professionals, increasing
from 75,400 in 200607
KPO is expected to contribute around 1.8% to the Indian service
sector by 201011

India has a large, growing and highly educated Englishspeaking workforce

Employee costs in India are approx. 1520% of the US costs

The business and regulatory environment is conducive to the


growth of the outsourcing industry

KPO Characteristics in Key Financial Services KPO Destinations

Country

Current
Availability of
Talent

Potential
Availability of
Talent

Compensation
Cost Savings

Infrastructure
Cost Savings

Potential Risk

India

BBB

Canada

AAA

Australia

AA

Singapore

AA

South Africa

Overall

Ireland

AAA

Wales

AAA
Parameter is most favorable

Parameter is least favorable

Source: A.T. Kearney, KPMG, Knowledge Process Outsourcing, February 2008

Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners

KEY TREND: SHIFT FROM CAPTIVE TO 3RD PARTY


Initially, most companies preferred establishing captive centers as they afforded them more control. The trend
has shifted recently, with companies increasingly opting for third-party vendors
The benefits of sourcing work from a third party vendor include low/no upfront investment, lower set up
time, low/no exit costs and reduced management time.
Nonetheless, a captive is still perceived to provide better data security and more control over operations.

Comparison of Sourcing Models

Country

Captive

Joint Venture

Third Party

Investment
Set-up Time
Perceived Level of Data Security
Control Over Operations
Management Time
Exit Costs
High

Medium

Low

Source: PriceWaterhouseCoopers, Copal Analysis

Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners

KEY TREND: SHIFT FROM CAPTIVE TO 3RD PARTY (cont)


There has been gradual shift in the sourcing model from establishment of captive units to joint ventures or third
party outsourcing
HCL Technologies, a member of the USD 740mn HCL Group, formed a joint venture with Deutsche Bank AG by
acquiring a 51% stake in the holding company of Deutsche Software, Deutsche Bank's IT services subsidiary in
India
The call center operations of AOL were recently acquired by Aegis BPO, the business process outsourcing
company of the USD 50bn Essar Group in India. Aegis BPO will take over customer service and technical
support, both voice-based and non-voice, for AOL s customers
The Genpact transition is the subject of considerable interest in the outsourcing world. The company moved to a
third party operation from a captive model. Genpact began in 1997 as the India-based business process services
operation for GE Capital. In 2004, GE Capital divested 60 per cent of its stake in its BPO arm to General Atlantic
and Oak Hill Capital Partners at an estimated price of USD 500mn

Source: Gartner 2007, Copal Analysis

Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners

KEY TREND: INCREASED M&A ACTIVITY AND CONSOLIDATION


There have been a number of recent transactions in the BPO / KPO space
These transactions are primarily driven by:
BPOs needs to enter the KPO space, as this space is expected to have higher growth and margins
moving forward
Need to achieve greater scale by current KPO providers
Need to develop expertise in new markets / segments

Key M&A Transactions, 2006 & 2007

Acquirer

Type of Service Provider

Target (Merged Company)

EXL Services

BPO

Inductis (July 2006)

WNS

BPO

Marketics (October 2007)

Cognizant

CSI

MarketRx (October 2007)

Copal Partners

KPO

Exevo (May 2008)

Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners