How many consultants do you know who just give up their life of first class travel, champagne lunches, and arrival by helicopter to luxury golf courses to slum it in the back streets of Shanghai?
Yes folks, KPMG’s Gary Nowak had it all . . . but his love of Yoga, meditation, and people-watching just got the better of him and off he went. So, without further ado, let’s learn more about KPMG’s Gary Nowak and what he’s learned having lived in China the last few years . . .
Phil Fersht, CEO, HfS Research: So good evening, Gary Nowak. Thank you for spending some time today with HfS. I know we’ve met in the past, but I’d like for you to give a little introduction to our audience. Tell us a bit about yourself, your history in the industry, and how you’ve ended up leading a practice for KPMG in China.
Gary Nowak, Partner, KPMG China:
Sure. Thanks, Phil. I appreciate the invitation. I’ve been in China since January 2013. In the summer of 2012, I took a trip to China in connection with a client I had taken globally—to Eastern Europe, India, and eventually China. I was very impressed with China, specifically Dalian China, a city with a high concentration of outsourcing, located in Northern China. After that visit, I requested, through KPMG, to be sent to China, specifically Shanghai, because shared services was—and still is—a very hot topic. During the preceding five years, there had been a lot of government attention and support for outsourcing, where the government specifically identified over 28 cities that could support shared services. So, my client visit in 2012 and the impressive infrastructure in China is what brought me here. Prior to my time in China, I worked in shared services in the United States, Europe, and Singapore with Arthur Andersen and, EquaTerra. And now, KPMG. These companies have filled out my over 17 years of experience in the industry. The move to China has provided me with a perspective of a dynamic, fast paced, and quickly growing country. Overall, China has been a tremendous experience both personally and professionally.
Ironically, back in 2004, I was in Singapore for about 10 months to set up a shared service center for the Asia-Pacific region, something that I just did in Europe. While in Singapore, I remember going to China and recognizing how complex business was in this country. More than 10 years later, business is still complex. In addition to business complexity, language and culture are also significant considerations when working in China. Mandarin is the main language, with only the higher-level executives comfortable doing business in English. A majority, if not all, of my clients prefer to do business in Mandarin. Once a project is sold, the day-to-day delivery is conducted in Mandarin, and I will debrief and receive consistent updates in English from my team.
So, that’s a brief history of my involvement in the shared service industry during the last 17 years—setting up shared services in different regions.
My time with EquaTerra and KPMG have given me valuable experience with outsourcing relationships. I’ve been involved in 13 different deals across the world with Fortune 500 multinational companies, where our clients wanted to outsource specific functions to various service providers. Eight of those deals were successful, and I was involved in every step of the process from identification of the service providers to the RFP creation and finally, the contracting process. Two of those thirteen deals took place since my arrival in China, and I’m in the process of supporting a third deal. There is a trend in China for companies to focus on internal captive centers rather than outsourcing; however, in the upcoming years I see the trending moving toward outsourcing since captives are extremely hard to maintain, and the employment costs continue to go higher and higher.
So globally, outsourcing is much more prevalent. And within China, the discussions are centered around internal shared services and captives. Notably, 90 percent of my client discussions have something to do with setting up China-for-China captive centers. As I talk to multinational clients, I get these kinds of questions: “What are my options for China? How do you handle the Asia-Pacific region? Do I need a center in China and also outside of China?” My perspectives have been shaped through speaking to probably more than 45 different companies that conduct business in China. My overall opinion is that if you have a China presence, you need a China shared service center. A China shared service center can service the rest of Asia-Pacific countries. However, handling China outside of China is extremely difficult. There are very few companies that do it, but it does happen on the rarest of occasions. As an example, I’ve spoken with Indian service providers about delivering work from their centers in India, and basically due to the things that I’ve mentioned—complexity and language—this isn’t possible.
Phil: Interesting! So when we look at China’s role in IT business operations sourcing, it’s clearly very, very different from the role it played in the growth of manufacturing over the years. Where do you think it is today in terms of capability and its role in the global sourcing marketplace?
Prior to my arrival in China, KPMG conducted a study on outsourcing in China. The study identified over 22,000 service providers in China; 22,000—that’s a big number. These service providers were predominantly focused on IT outsourcing. I do think there is a need for this in China. I think that business is growing. I don’t see China as a major competitor for other regions like, say India, based solely on the competency of the resources here and the rising salaries in China. India has always been a lower-cost location for outsourcing, and I don’t see that trend changing anytime soon. There are companies I’ve spoken with that deliver IT services for the globe, from China; but, this is rare.
China has 6,000,000 to 7,000,000 graduates per year. My perspective is that the government is looking to support an industry where these graduates can gain employment. Shared services has been one of those industries where the government has provided incentives. Now, whether IT outsourcing can support a significant number of these graduates remains to be seen. Regarding the IT outsourcing industry specifically, I’ve had conversations with many Indian service providers—Infosys, Tech Mahindra, WNS, Wipro, Cognizant—and they all had expected to make a greater impact in the IT outsourcing market. They viewed China not as a competitor, but as a country where they could support the growth of their business. Several years later, the Indian service providers have been disappointed with the lack of China growth. NASSCOM hired KPMG to conduct a study as to why the Indian providers haven’t gained more traction in this market. The fundamental conclusion was the Chinese companies aren’t ready to outsource functions.
Phil: I think we’ve got to hand it to India for really taking hold of their traditional IT maintenance services business: app testing, app development for broad-scale enterprise, bread and butter apps. They’ve done a fantastic job. But we’re now going into a new era of more complex technology needs, such as testing around digital technology, mobile device platforms, BPaaS platforms—more niche applications and things like that. Do you think this is the opportunity for Chinese capabilities to step out and focus on some specialized areas that will involve new apps—new needs and capabilities? Or do you think this is still India’s game to play as they evolve in this disruptive economy we’re looking at?
I think that question centers around one thing and it’s the leadership capabilities within shared services in China. If you had strong leaders in China who recognized there is a niche for these specialized areas. The struggle I see with Chinese companies is the lack of shared services leadership—those that have experience in this area and understand the fundamental value. The concept of taking higher value or specialized work is not easy to instill in Chinese executives. For example: I visited a Fortune 100 company at their Guangzhou shared service center. The center leader was a gentleman brought in from Germany; he and I spoke at a recent conference about the China Shared Services. So, I went to visit his center and they had 200 people, and I asked him, “Why aren’t you moving things in from other parts of the world, like Manila or your other locations?” He said, “Two reasons. One, it’s been done very well in the current locations. So all I can do is mess it up. Secondly, the costs are getting higher and higher here in China.”
So, he has 200 people responding to social media information. Rather than trying to take over work from their existing centers, he basically took on a new scope of work. So what he did was—he hired people to do that. And the other interesting thing about the leadership is—I think I met him on a Thursday, and during that week he took 25 members of his team to an off-site location to discuss strategic thinking on how to think more outside the box. To get back to your original question, for China to think outside the box is a bit outside the normal comfort zone of traditional leadership here.
I think that specialized IT outsourcing clearly sits with India to go up the value chain. If anything, India has pushed some of the lower value work into China. However, the problem with that is India in the foreseeable future is likely to be the cheapest delivery location. So moving from India to China isn’t going to create a positive business case. It’s going to be very difficult. Some Indian providers are thinking about using China as a disaster recovery/business continuity planning location. However, that is still a perspective to be fully recognized.
Phil: For multinational Fortune 500 enterprises setting up Pan-Asian headquarters, we’ve traditionally seen Hong Kong and then Singapore becoming popular. Are more companies shifting to Shanghai and some of the Chinese areas to run Pan-Asia operations, or is China becoming its own area?
I absolutely think it’s in the conversation these days. Multinationals are setting up in and around Shanghai. If you start talking to centers of excellence (CoEs) and where they should set up, then you start having conversations about Hong Kong. Maybe you start having conversations about Singapore. But the real value and what I see in China that I don’t see in other parts of the world is coupling your corporate headquarters with your shared service center in the same location. This concept seems to make a lot more sense in China. So, basically your CoE and your shared service center coexist in the same location. Why? As I’ve learned through conducting several shared service roundtable events, Chinese employees want to feel integrated with the companies rather than isolated in a smaller Tier 2 or Tier 3 city performing shared services functions. It’s difficult to make those employees feel like they’re part of something while they are in a remote location. I think companies have had a lot more success here with combining their shared services and corporate headquarters.
You can immediately start reading the downside to this model: it’s a higher cost location, and it’s more expensive resources. But the upside is your attrition is more manageable the skill set to work between a CoE and shared services is something that, when combined, is more likely to help the CoE, like a tax and the treasury function with resources who have supported the company through your shared service center.
I run roundtable discussions here in Shanghai with multinational leaders and shared service center management team members. As we start talking about shared services in Shanghai, talent management is always a topic that generates significant attention. I can’t run a roundtable without talking about how to get good talent, how to retain talent, how to develop talent, how to manage attrition, how to keep the good people . . . so, I think a viable option for a lot of companies is to leverage their shared service center to be close to the corporate headquarters. So as you hire people, hire them through your shared service center. Work them for two or three years and then push them out to your organization, whether it’s a position locally, or as a business partner, or in the CoE. The concept is to leverage your shared service center as a training ground for future employees throughout your organization. In fact, KPMG is currently doing this with our shared service center in Foshan, and we believe it creates loyalty.
We have our own captive shared service center in Foshan, which is in the southern part of China about an hour outside of Guangzhou. We established the center about two years ago. For the employees who have been working there for two years now, they have the option to apply for positions within China in our Tax, Advisory, or Audit practices. We feel it’s a great incentive for people who start out in a support function and learn about KPMG and its culture. Essentially, when we want to hire resources, we can tap into this pool. It’s basically a two-year interview session. I feel that is a great way to address issues in China, which are around managing, developing, and retaining good talent.
Phil: So there is a bit of nervousness regarding the potential over?inflation of Chinese stock valuations and whether this could lead to a correction. What’s the mood in China right now in terms of the health of the economy and a potential cyclical downturn?
I don’t see it on a day-to-day basis. As you could imagine, in China people don’t talk politics or the stock market all that much. There are discussions with other US partners, but I don’t know that by and large the majority of the people are playing in the stock market. Regarding the cyclical downturn, the younger generation is not afraid of losing their jobs. They’re not afraid to quit their position without having something else lined up. They don’t have a fear in them about the poor economy, high unemployment, or any type of downturn that would cause them to lose their jobs.
At a recent roundtable discussion for the financial services industry the participants agreed that they’ll get a candidate, extend an offer to them, and two days before their proposed start date the candidate will turn down the offer they just accepted. There was an example of a resource coming in, working for a week and then quitting because they got a better offer. So when you look at the economy it becomes apparent that the younger generation has never been affected negatively by the economy. They haven’t known unemployment. They have only known, “I can get a job anytime I want.”
Phil: Yeah. I remember that during hypergrowth times. That’s not necessarily a good thing now, is it? It makes it hard to keep things under control and build long-term business plans. What’s your take?
Gary: Unless there is a crisis in the market, which isn’t good for anyone, this younger generation won’t comprehend the impact of unemployment or a bad economy. They haven’t experienced anything different. What’s happening in the United States with the downturn, people have a different perspective about the value of a job and the idea of working. In China, they’ve just seen very high growth in many areas. You go around Shanghai or any Chinese city and you see buildings go up all over the place. China is sponsoring some 30 different cities for shared services. Where they’ve built buildings, they’ve built infrastructure—very good, solid infrastructure. They’re just really encouraging companies to go set up shared services in these cities. Shared services is very much a top-down-driven strategy, and China is trying to pull companies into their cities. Pulling a company toward shared services is difficult even with incentives. Under the best circumstances, implementing shared services is challenging let alone when leadership was brought into the opportunity for the sole purpose of saving money.
Phil: From my time in Asia, I remember it was “in vogue” for ambitious younger Chinese workers to learn English. Is this still the case, or is that fading a little bit these days?
Gary: I think so. People I work with definitely started learning English at a lower level. My view is that learning English will significantly enhance individual careers. I attend a lot of KPMG events with interns, graduates, and students, and I really enjoy talking to them about their careers. They are speaking more English now than they did when I first arrived in China. Also, as I previously mentioned, they have no fear about finding a job upon graduation. They just try to determine their best option. Some KPMG managers may not be as comfortable in English, but I don’t see any fresh graduates or any of our junior levels not feeling pretty comfortable speaking English. Many of our recent hires have been educated in Europe or the United States. Recently, we hired two great candidates who were born in Shanghai, educated in the United States and who worked in the United States and now want to return home to continue their career. One thing I’ve learned about working in China is that eventually people want to make their way back to their homeland.
Phil: Do you have the same kind of feverish discussion around disruptive technology, automation, and things like that in China—like we are having over in the States?
It’s not getting a lot of traction here with clients because China is fundamentally on the low end of the shared service maturity spectrum. My view is that if China waits so long to implement shared services, so that when robotics and technology are more prevalent, companies can “leap frog” over the better, faster, cheaper lean six sigma model straight to leveraging technology to capture savings. In this case lagging has its advantages. The caveat there is companies still need to do the hard work of standardizing their policies and processes and move toward standardization.
Getting everybody on the same page from a process and policy perspective can in itself be a challenging task. Robotics and technology won’t eliminate or magically solve these types of complexities. In trying to formulate my strategic thinking about China, I think that companies should standardize as much of their operations as possible and look to leverage technology either internally or externally through outsourcing. Service providers are already starting to build in technology as part of their solution to be more competitive moving forward. Once service providers offer a strongly competitive price that’s less expensive than what companies are incurring today, outsourcing will begin to take off.
Phil: Thanks. So one final question, Gary. If you were to look out five years—what do you think it’s going to be like in China?
Gary: So I would say, just based on that last topic, I think technology is huge and if service providers can leverage technology to create a more compelling price for Chinese companies, they’re going to jump to outsourcing. Two things are going to happen: One is what I just mentioned—with outsource providers coming through with a technology solution that reduces costs. The second is if overall costs— specifically, salary costs—continue to rise, then alternatives need to be considered. If these two things happen, outsourcing will be very viable here, and of course if there is a crisis with control, compliance, regulatory or general business pressure, the executives need to address these issues and shared services offers a highly viable solution.
Phil: Gary, this has been great. I appreciate you taking the time from across the world to join us here on the blog!
Gary: My pleasure, Phil.
Gary Nowak is Partner, KPMG China. You can view his profile here.