Our recent research on Latin America’s emerging sourcing presence has generated a lot of buzz – not to mention a huge number of downloads. Today’s piece in CIO – “IT Outsourcing in Latin America: 9 Things Your Vendor Won’t Tell You” – sparked some further thinking from HfS analyst Esteban Herrera, who has lived and breathed the LatAm experience. Over to you, Esteban…
Esteban Herrera, Chief Operating Officer, HfS Research (click for bio)
The truth about Latin American outsourcing
Market activity and our recent research have created quite a bit of buzz around Latin America. In my view, it’s about time we have the debate and expose the pros and cons of nearshore destinations. Today’s CIO.com piece, for which I was interviewed, is a good example and accurately portrays some of the challenges of outsourcing in Latin America. However, I find myself, for the first time ever, empathizing with politicians and celebrities who claim to be “quoted out of context.”
The article does reflect some of my statements, but not all of them, and I find myself in disagreement with some of the headlines and conclusions. So allow me to clarify a couple of thoughts, lest people think I woke up yesterday and changed my mind about the vast services potential of the Latin American region.
While more follow-up is often required (by American standards) I’ve always found the total time-to-deliverable in LatAm to actually be shorter than with India, because the wheels of productivity are greased by cultural understanding and proximity, and the fact that when people talk neither party is half asleep.
I don’t know that prices have risen fast. If anything, our research indicates they rose far slower than in India. But small populations of desirable talent invariably lead to wage pressure. The good news is that in those places (like Chile and Costa Rica) we’ve seen pretty much the top of the market.
Saying no is a good thing! For my 10 years as an advisor, my catch phrase to clients was “pick the provider that says no.” Saying “no, we can’t do that,” is an indication of honesty, transparency, and true partnership.
I don’t buy the physical security argument. Baltimore is a more dangerous city than Sao Paulo. Detroit has more murders per capita than any Central American capital. I don’t see anyone refusing to visit GM’s headquarters based on security concerns.
Like any destination, Latin America has its challenges. But at HfS, we’ve come to see the region as a highly desirable component of a global services portfolio, whether you are a buyer or seller.
Stephanie Overby and CIO.com did us all a favor by increasing awareness and highlighting the challenges of the region, which are real. I am seizing the opportunity to highlight that the advantages are real too!
So, armed with that info, HfS VP of Marketing Mark Reed-Edwards got together with Esteban Herrera, HfS COO, and Euan Davis, Managing Director of our European Research Practice, to discuss the region and its development in the global sourcing industry.
Listen to the podcast:
[podcast]http://www.horsesforsources.com/wp-content/uploads/2011/03/LatAm-Podcast.mp3[/podcast]
And while you’re about it, why not browse some of our recent research on the LatAm region…
Just when you thought you’d had enough sensational news for April 1st, Esteban Herrera, who covers Energy and Utilities industries for HfS, shares his thoughts on Wipro’s big acquisition today…
Wipro CEO, TK Kurien, and his new best friend
Today’s news that Wipro is acquiring SAIC’s Oil & Gas Technology practice for $150M appears to be another complementary addition by the Indian ITES industry’s most aggressive acquirer, provided it’s not a great April fool’s joke. In fact, the funny thing here is that SAIC, long positioned as a leader in this space, has a practice that is only worth $150M. Either SAIC has been excellent at marketing itself as a bigger presence than it was, or Wipro got a steal of a deal.
The motive for the purchase is not difficult to speculate: Upstream Oil & Gas is notoriously conservative and very challenging to penetrate as a new provider. Even if they outsourced their entire back office, that spend is a rounding error compared to their capital and operating budgets for pulling valuable stuff out of the ground and moving it to where their downstream friends can get it to you and me. In addition, Big Oil & Gas has been relatively slow in its embrace of offshore, in part, again, because the savings just aren’t a big enough percentage of the whole pie to get very excited about. Add to that a typically insular, homogeneous and long-tenured workforce and you get one of the toughest walls for offshore firms to climb.
SAIC’s long-term relationships with Tier 1 and mostly Tier 2 upstream Oil & Gas companies and predominantly Western presence, will give a balance and a good entry point to Wipro’s vertical. Wipro will have to work hard to reassure suspicious existing customers to avoid losing them through change of control clauses or non-renewals. The typical challenges of all acquisitions will still apply (culture, financial integration etc.). It is not clear how much of the SAIC portfolio is IT infrastructure business, but at that valuation, it cannot be huge, so we suspect there is more consulting capability and domain expertise than a contribution to Wipro’s effort to win India’s Big 3’s race to win in that space.
We doubt that SAIC customers will see much of a change, other than perhaps some more frequent visits from their friendly Wipro sales reps. Wipro’s customers will gain access to a lot of specialized expertise that may not have been there before.
Esteban Herrera covers Energy & Utilities industries for HfS Research (click for bio)
SAIC employees will probably see the biggest changes, and this is something buyers need to look out for—the last thing you want is to be paying for a provider that spends his or her time looking for a new job or is otherwise distracted with M&A concerns. Wipro paid over USD $100,000 per employee in this transaction with no guarantee that most of them will stay (or that Wipro will want them). One has to wonder what would have happened if it had instead raised industry base salaries by USD $33k and gone out and recruited 1000-1500 industry pros. The customer base might not have come with the investment, but it certainly could have captured the best talent in the business and built a formidable, and perhaps more sustainable, Oil & Gas business.
Esteban Herrera (pictured here) is Chief Operating Officer for HfS Research, who overseas HfS’ coverage of Energy and Utilities markets. You can read our new reports on the Oil and Gas and Utilities industries later this month
At HfS, we’ve had enough of service providers and their clients raving about how bloody wonderful they all are.
“We have a world-class global delivery operation that guarantees our clients first transformation, then innovation”, said one provider. Yep – we were actually told that!
“Our experience with XXXXX was amazing. They were so responsive and helped us transform our global processes in a way we could never have dreamt when we started out”, said the CFO of a Fortune 1000 outsourcing client. You have to wonder where his next job is being primed…
“We have this incredible culture of driving value to our clients, by making our employees feel empowered to find new thresholds of performance for our clients everyday.” Don’t these guys have the worst attrition in the business?
Meanwhile, one SVP of sourcing (after a few bevvies) did confess to us recently, “I have 5 providers and they’re all c**p. They all oversell and under-deliver. I have given up on any of them doing anything close to what I want them to do, so spend my time squeezing their rates. If they’re going to deliver c**p, we might was well pay them c**p.” Well said, old chap! Another pint?
And other buyer (this one actually sober) stated “If my account rep turns up one more time in my office trying to sell me something, I am going to get his entry card to our building taken away”. Uh, oh…
Yes, folks, it’s time to separate the puff from reality, so HfS Research has finally come up with a spectacular new methodology that – once and for all – will expose this behaviour to industry in all its naked glory…
Introducing the HfS Research Painsharing Paradox
Yes, forget gainsharing folks, this is all about painsharing. We’ve deployed an air-tight methodology for placing those pesky providers in their true position in industry, based on their acumen to serve up fluffy puff, correlated by their expertise in messing up all their client engagements:
The Painsharing Paradox Methodology
A Painsharing Paradox (PP) starts its life with a market definition and inclusion criteria. It’s proposed to our group of chief analysts, who are in charge of determining what markets are PP-worthy, whether or not the market is defined in a reasonable way, and so forth. In other words, analysts can’t decide to arbitrarily write a PP, and there’s oversight and a planning process, and an editorial calendar that lays out PP publication schedules for the entire year.
The rest is simple. We figure out which providers have the biggest budgets, and then produce a draft PP – the bigger the marketing budget, the further they are positioned over to the upper-right corner of the grid. Then the bidding process starts. Depending on how much we like them, how many first class boondoggles we’ve been treated to, and how much hard cash they’re prepared to pony up, we’ll maneuver them down the grid towards that hallowed lower-left quadrant, where everyone wants to be.
However, if we feel the provider hasn’t done enough to make us feel special, or once subjected us to two horrible days in a Red Roof Inn in New Jersey (which stays long in the memory), or – heaven forbid – didn’t stump up a nice sum of dough for our coffers, we may decide to leave them stranded in that dreaded right hand corner – sharing the pain of humiliation, with the pain they have subjected on their clients.
And that’s the Paradox… stay tuned for our first one, coming soon. And providers, we have a special PayPal account set up especially for your generation donations – simply email us at [email protected] to get started. Happy painsharing, folks 🙂
Oh, and by the way….
Please tell us you didn't fall for it again?
And while we’re reminiscing about falling for April Fools’ gags, here is 2010’s classic:
For those of you who’ve been close to the volatile world of HR Outsourcing, since it leapt into life in 1999 when BP and Exult tied the knot with “E-Enabled HR” (ahem) – there haven’t been too many constants.
I can barely recollect all the providers which dipped their toe in the market before either running for the exits kicking and screaming, or selling off dismally-performing business units. I can also barely recall the number of people who came, saw, conquered, and subsequently disappeared from the face of the earth, after dabbling in one of the most contentious areas of outsourcing we’ve witnessed to-date. I also struggle to remember the number of executives whose careers were either made or broken by doubling-down on that wonderful HRO value-proposition.
However, one face that has been ever-truly consistent – and constantly smiling – during this entire roller-coaster of HR navel-gazing… has been Keith Strodtman, who has been the face of global HRO provider Ceridian through so much of this market volatility.
Yes, HRO’s smoothest man has become part of the HfS analyst family to embark upon a brave mission to define, analyze and expound upon the Future of Work, and how HR service delivery needs to rise up the the challenges of a fast-changing global work environment. Of course, that is when he’s not predisposed to feeding the elks at his Dad’s farm… So without further ado, let’s hear from HfS’ new Research Fellow for HR Services and the Future of Work, Keith Strodtman himself…
The Future of Work – Who Will Lead?
For the past several years I have been thinking a lot about the future of work. Then, when Phil Fersht and I started talking about me joining the HfS Research team as a Research Fellow, I figured this was a great opportunity to start a bigger conversation on the topic and its impact on HR departments, service providers, and employers more broadly.
While most of us frequently think about the future, for me, I never really sat back and thought, beyond the obvious, about how or why the world of work was changing. That changed in 2004 when we invited Thomas W. Malone, the Patrick J. McGovern Professor of Management at the MIT Sloan School of Management to give a presentation on the Future of Work at a customer forum. Tom had just released his new book, The Future of Work, which examines the how new technologies enable companies to unleash the creativity and innovation of the people in their organization.
The key technology outcome that Malone was talking about is the falling cost of communication. Just as the lower cost of communication, think the printing press, helped enable the development of decentralized, democratic governments and markets over the past few centuries; today’s technology is lowering the cost of communication and collaboration in business. Companies are deploying technology that makes it easier for employees, customers, and partners to share information and ideas.
Just sharing ideas and information will not produce success. Companies must organize effectively to capture the innovations that come from the improved flow of information and ideas. They must enable workers to make important decisions, respond to customers, and quickly develop products that meet customer needs. Malone argues that a more decentralized organization, or at least decentralized decision-making, supported by technology, is better able to do respond to customers needs more quickly. It seems like a logical argument to me and there are good examples of companies who are doing this today.
Again, many companies are well down the path of evolving the future of work. The outsourcing industry would not be what it is today without technologies that allow us to move information around the world quickly and at low costs. Many companies use social media to promote their products and get customer feedback. Some have even implemented internal social tools to make it easier for employees to find and share information and ideas. Frank D’Souza, CEO of Cognizant, in his recent interview with Phil Fersht, gave an example of a mobile solution that Cognizant developed for a global consumer product company to allow their delivery people to collect competitive information as they delivered products to retail outlets.
Keith Strodtman, HfS Research Fellow for HR Services (Click for bio)
Okay, so I think we can all see how technology can enable changes in the future of work but there are many other drivers of the future of work. Big macro factors like:
Globalization of the world economy
The speed of change
The aging of the workforce
Millennials in the workforce
Flexible work arrangement, free agents, crowdsourcing, etc.
An increased focus on corporate responsibility
And so on.
Each of these topics alone could and have been the topic of many blog posts. Maybe I’ll get to that later. None-the-less, I believe that visionary leaders who organize and engage their companies to take advantage of these factors will become the “company of the future”. The most successful companies will organize in ways that enables them to capture the best information about their customer’s desired outcomes and unleash the innovative talents of their employees and partners to meet those desired outcomes. Today’s technology makes it a lot easier to deploy such and organization.
So what’s next? Companies need leaders to start thinking about the future of work as part of their business planning processes. Given my background in the HR services industry, I am hopeful that HR leaders will play a big role in this thinking. They are well positioned to understand the capability and talent of the organization. They also have access to more enabling technology they ever before to help engage the entire workforce in creating the future of work at their companies. Maybe your HR service providers help you? If HR doesn’t step up, then maybe someone from finance or procurement will (smile).
Keith Strodtman is Research Fellow for HfS Research, with specific focus on the HR services industry and the critical factors that are shaping the future of workforce development in today’s environment. Before joining HfS Research, Keith spent 8 years as the leader of the HR Outsourcing business at Ceridian, one of the largest HR service providers in the world. Prior that he was director of HRO solutions at PricewaterhouseCoopers and was at Fidelity Investments during the launch of their HRO business. You can access Keith’s full bio here and contact him here.
Everywhere we go lately, we encounter Outsource Magazine editor Jamie Liddell, as the newly-launched publication looks to get serious in the US and European markets.
Most recently, we saw him at SIG’s summit on Amelia Island in Florida, where he successfully flooded the event with copies of his publication before disappearing to the bar, where the real business was conducted. I, personally, have enjoyed reading Jamie’s stuff over the years – he’s one of the few commentators in our industry who injects personality and humor into his craft, and avoids the dry, passionless, jargon-laden and nauseating verbiage to which we are so often subjected.
So, we’re happy to announce that we’ll be seeing even more of each other now: HfS and Outsource Magazine have formed a research-media partnership.
Jamie Liddell, Editor, Outsource Magazine
Here’s how it will work:
Outsource will feature key HfS research and insight in the magazine. In fact, you can see our first contributions right here;
Jamie will contribute a monthly industry column for HfS. “Liddell lifts the Lid” will, in Jamie’s inimitable style, uncover things you might not have thought of. Look for this coming soon. We coined the title, so lids will get lifted…
Outsource Magazine will promote HfS’ key “State of the Outsourcing Industry” survey to its readership;
Outsourcing Magazine team to treat the HfS analyst team to a round of drinks next time we see them;
We probably agreed to some other stuff as well, but these are the main things.
We’re excited to inaugurate this partnership with Outsource and look forward to opening up a dialog with Outsource Magazine subscribers. And we’re anxiously awaiting Jamie’s lid-lifting contributions to HfS Research…
We watched this little movie during the “HfS 25” get-together this week in Dallas… sometimes we have to think a bit more laterally about motivating staff – it’s not only about metrics and money. Enjoy.
If you can achieve a smattering of these elements, you might actually return home thinking “that wasn’t such a waste of time and money, now, was it?”
So we were excited to attend the SIG Summit last week–our first event since we signed our partnership. Esteban Herrera, HfS COO, collected his thoughts on how the SIG Summit compared with typical industry shows. Take it away, Esteban…
The SIG Summit in Review
As you might guess, in the analyst world we attend a lot of industry events, but only last week did I get to attend a SIG summit for the first time, to celebrate and introduce our exciting new partnership. I was absolutely not prepared for what I saw. SIG is a true membership organization, whose members are both serious and proud. The “non-commercial” commitment is honored by all attendees. The summit is fun, but real work gets done.
The differences between the typical outsourcing convention and SIG’s Summits are so stark I had to put them in a table:
Typical Industry Show
SIG Summit
Trade show atmosphere with booths, and untold environmental damage caused by hundreds of thousands of pages of brochures nobody will ever read
No booths, no brochures, no selling. Even the event agenda and information is available as an iPhone App—death to the paper program!
Attendees want business, or a new job
Delegates want knowledge and they like their job
Sessions led by salesmen and publicity-seekers
Sessions led by experts
Attendees skip most sessions because there is so little to learn
Delegates plan on attending almost every session, and are genuinely disappointed about the ones they miss
80% Sellers and 20% buyers. Oh, who am I kidding, its more like 97/3, and the 3% buyers are all there because they are speakers (or looking for a new job)
At least 75% of Delegates were buyers
Sometimes I leave these shows feeling dirty
I left feeling enlightened
Sponsorship is King
Content is King
Inevitably, someone on the conference organizer’s staff has a Charlie Sheen-style meltdown
Dawn Tiura Evans and her world-class staff are composed, helpful and run a simply flawless event
Evenings and networking tend to be—ahem—adult oriented
A family-friendly event through and through
Entertainment consists of seeing which young provider sales person will get drunk enough to put his foot in his mouth first
Entertainment consists of a Brian Olsen painting a portrait of John Lennon to his music in real time (as well as Marilyn, Ray Charles and more…) and then raising over $15,000 for a worthwhile charity by auctioning them off
I have to confess it was fun, also, to have so many delegates approach me about getting their hands on our research, the recently published Latin America report in particular. SIG members now get all our behind-the-firewall research as part of their membership.
Whether you are a buyer or provider of outsourcing services, if you appreciate what we do here at HfS Research, you owe it to yourself to check out a SIG membership as well.
We’re going to release our 2011 Finance and Accounting Outsourcing (FAO) industry landscape next week, and one dynamic that has really stood-out over the last three years, is the different competitive strategies going on at the high-end of the market versus the smaller engagements.
Most striking, are the divergent strategies of the market leaders, Accenture and IBM. While Accenture has consolidated its commanding presence with the large-scale enterprise customers, IBM has determinedly gone after the mid-market.
You may recall we highlighted, back in January, that the average FAO engagement fell below $20m TCV for the first time last year, we also pointed out that those providers with scale and flexibility of delivery resources are those best-positioned to pick up the smaller engagements:
Scaling a global BPO business based on multiple small client engagements is wearing on resources – and profit margins, and the providers scrapping for their share of the smaller business, are faced with a simple choice: Either stick with it and view this as a 10-year journey, or if you simply don’t have the patience or appetite to put in the investment, then get out and refocus your services on other activities. For those who stay the course (and we expect most will), they need to keep putting in the grind to win small engagements, and attempt to scale their BPO delivery resources, while trying to turn some sort of profit.
Our deeper-dive analysis shows that exactly this scenario is happening with several providers over the last three years. Let’s contrast both the enterprise-level market performances (engagements over $25m in TCV) and the mid-market (engagements below $25m TCV).
Accenture has developed a commanding position with enterprise engagements, while IBM has gained a lot of ground winning smaller-scale and mid-market clients. As these market share graphs illustrate, all the FAO engagements signed since the beginning of 2008 that have a Total Contract Value (TCV) of more than $25 million, dominate 80% of the total market, with a total expenditure of close to $8 billion. Accenture has been dominant in retaining and developing its client base of enterprise-level engagements, with Capgemini, IBM and Genpact providing the main competition with enterprise-level engagements.
The FAO newcomers, over recent years, have struggled to win many (or, in some cases, any) enterprise-level deals, and have sought to grow their respective market footprints by taking on smaller-sized engagements – many of which fall into the sub-$5m TCV category. The following graphic illustrates the service provider shares of the smaller-scale FAO engagements signed since the beginning of 2008, where the one notable market-mover in the mid-market segment has been IBM, winning the lion’s share of business with a commanding 25% market share.
The onshore order-to-cash specialist, Vengroff Williams and Associates (VWA), also performs strongly in this segment, while there has been a relatively even-spread of business across all the major service providers, such as TCS, WNS, InfosysBPO and Cognizant, in addition to the FAO pure-plays, WNS and EXL. Genpact has proven the most consistent at developing a balanced portfolio of enterprise and mid-market clients over the last three years.
So what do these competitive dynamics mean for the future of the FAO industry?
Essentially, the FAO industry is readying itself for life beyond the simple “lift and shift” deal, where margins were made off labor-scale being shifted offshore. Labor-arbitrage doesn’t amount to nearly as much, when you’re dealing with, for example, a 30 employee transition. What’s more, most of these providers need to start scaling their resources across multiple clients, or face a depressing race to the bottom, where their only real differentiator is their ability to provide low-cost labor. Having scale and flex from ingesting several large-scale clients is extremely valuable for providers, but only if they can leverage those resources to new clients as they take them on, in order to optimize their margins on the new business and remain cost-competitive.
Our take is that providers need a good balance of both large and mid-scale engagements, whereby they can allocate delivery resources and process acumen across their customers in order to develop repeatable process flows with application wrappers to enable them. While small-scale engagements can struggle to be profitable, they do force the provider to develop a utility model that keeps then in the black. Clearly, we’re in a highly-competitive market situation, and this isn’t a market for the faint-hearted.
Latin America really is emerging as a nearshore powerhouse for both IT services and BPO, and we thought it high-time an analyst firm actually took a close-up look at the region. The result is a broad-ranging study, the results of which were distributed by Softtek today.
We’ve got a quick glimpse a the study’s six key findings:
Global IT delivery strategies more frequently include Latin America: The power of a well-crafted global delivery strategy lies beyond labor arbitrage and low-cost offshoring from India. Although most projects featuring a global delivery strategy stick to application development work, there are opportunities for more advanced relationships beyond staff augmentation and software engineering services. New remote infrastructure management offerings and service offerings that focus on niche areas of application expertise now see global delivery locations spread beyond India into Latin America. The region is vast and offers the ingredients to make any nearshore move successful: it has a thriving technology economy, it brings competitive software development rates, it can demonstrate industry innovation, and with vast human capital it has the potential to scale.
Latin American strategies underpin global delivery with increasingly mature services: Firms investigating service delivery from the region like the cultural familiarity bred by the influence of the US and Europe. Customer interviews reveal how distance and time-zone repeatedly offer real-time collaboration opportunities and reduce the burden of oversight and resourcing through physical proximity and better resource alignment. The region continues to offer coding, testing and other IT support but this paper uncovers US firms sourcing niche application services for specific industries (e-banking/gaming), analytics (retail), and bilingual back office support services (finance and accounting). Buyer choice continues to grow as a diverse set of providers continue to invest in new locations in Latin America and customers find more opportunity to realize value as client/vendor relationships develop over time. HfS has developed a location scorecard tool to help buyers assess each country in Latin America as a global delivery destination.
The region offers buyers three routes to value:
Specific skills at lower costs than onshore in the US or Europe. The region still offers labor arbitrage for desirable skills.
Reducing the risk for immature processes. Portfolios of applications that demand more interactions between onsite and offshore teams or that have highly interactive methodologies in play require more oversight especially if their internal processes are weak.
Supporting a broader market move into the region. Engaging with local providers and using local resources demonstrates a broader commitment to the region.
Calculate the true TCO and measure risk: This report finds that rate cards for services don’t tell the whole story. Although the region offers labor arbitrage for desirable skills, it’s fading just as quickly as anywhere else. Pure labor rate comparisons must factor in costs for staffing levels (onsite, offshore, nearshore) during different phases of the relationship, such as knowledge transfer and transition. Clients attest to lower attrition levels and fewer site visits, and when they were required, these site visits as part of the governance were much easier to do—these and other soft factors impact the total cost of ownership. Taking work to Latin America does not guarantee success or drive instant savings however—any move nearshore needs careful consideration against the type of work that needs to be done, the maturity of the internal processes and the challenges it creates for corporate culture.
Build the business case with care—resource levels need careful consideration: Quantifying resource levels on a typical nearshore engagement and comparing this to an offshore engagement from India is difficult to do when firms have to factor in that the number of resources flexes depending on the stakeholders involved and the IT process maturity in play. Highly leveraged offshore relationships may demand the provider lands resources onsite with the client to make the deal work—the net effect could be that highly leveraged offshore relationship costs more when landed resources at the client site are factored into the cost rather than blending of going 90% offshore to India rather than nearshore to Latin America.
Local providers must play the global delivery card too: Outsourcing in Latin America will continue to grow because the region can serve many different types of demand. The business services industry is at a stage of globalization, which means for buyers that it’s really going to be a competition between different providers rather than different countries. This paper recommends buyers conduct due diligence and check what path their prospective providers are following. Do they offer the opportunity (i.e., tools, methodologies, best practices) for more advanced relationships beyond simple staff augmentation services? Local Latin American service providers must operate their own service operations with service delivery mechanisms and capabilities to support their customers as they enter into emerging markets beyond Latin America such as China or Russia.
As customers mature in how they buy their services from providers in the region, so too does the suite of services on offer. As a result, firms can tap into more sophisticated functionality from their nearshore partners—the study found finance transformation and outcome based relationships superseding low-cost staff augmentation.
To give you a further glimpse of the report, this figure provides a profile of the projected growth in sourcing services spending by major service category in Latin America from 2009 and 2014. The report also includes forecasts for each region within Latin America.
Click to enlarge
Discover How Latin America Powers Global IT Delivery:
