We've been talking a lot about consolidation in the outsourcing industry and when/how/if it will happen. We can debate for hours the strategic benefits of service providers of adding niche competences, industry specialization, process acumen and global scale, and whether they should merge, acquire captives, or grow organically through client acquisition to achieve this. However, the financial crisis is creating a compelling event to accelerate M&A between service providers.
The amount of consolidation we're seeing in the financial sector, which is likely to have knock-on effects into other industries, will drive new client needs for global sourcing models. Many clients are worried about making large initial capital investments in outsourcing engagements – especially ones which have complex transition and transformational needs, hence those service providers which can help streamline these costs over the course of a contract will be successful. Complexity, disruption and increased globalization drive change, and outsourcing is one vehicle that can help many companies reach a global support infrastructure quickly. Hence, those service providers with the global scale, competency and financial resources to deliver this quickly will be the winners in this market.
While this industry has ramped-up beyond the wildest expectations over the last 5 years,
the healthy demand for outsourced services has held back a lot of M&A between larger providers, for the simple fact that there has been enough business to go round to enable many service providers to remain independent. The recent haggling over Axon Global by both HCL and Infosys is a signal of the increased stakes for dominance and scale in this market, as the top tier look for larger acquisitions to scale-up even quicker, and valuations drop to more realistic levels.
Despite the uncertainly and current gloom that is consuming us, these really are opportunistic times for the outsourcing industry.
Outsourcing thrives on mergers. disruption, corporate restructuring, cost-containment needs and business change (remember the post 9/11 outsourcing bounce).
The financial services industry is finally ready for that change, and early survey results show this. In addition, the majority of service providers are polarizing their sales efforts on the beleaguered sector to increase their market presence and defend existing business. Moreover, my optimistic side tells me that this bail-out package will be ratified by Congress, and it will drive a new culture of long-term change into the sector that will favor long-term ITO and BPO contracts that reduce costs and add core focus to re-emerged enterprises.
Traditionally, this sector has been very reticent
to adopt much outsourcing outside of IT areas, but this meltdown will surely drive a new era of change, and an embracing of long-term cost-containment strategies. Executives will need to be seen to be implementing radical change, and outsourcing fits the bill. And while many firms will initially move into smaller-scope engagements, the major difference is that we will see firms adopting an outsourcing culture that they would never have previously contemplated.
Here are some key early indicators the industry is telling us:
Over 55% of financial intuitions expect to increasetheir expenditure on ITO and BPO services within the next six months. The key areas where new investment will occur are currently (in order):
(1) Applications outsourcing,
(2) Finance & Accounting BPO,
(3) IT Infrastructure Outsourcing,
(4) Banking BPO services,
(5) IT Staff augmentation projects,
(6) HR Outsourcing projects.
Let's cut to the chase: the financial services sector has held back from many outsourcing opportunities in recent years through a stubborn resistance to change and a fear of losing control over non-core business processes. However, with this nurtured recovery, executives have little choice but to embrace global opportunities that afford long-term cost-savings, access to process acumen and new technologies. I can't wait to reveal the results of this survey next week.
With the whole of Wall St being restructured and substantial investment being primed to re-vitalize the financial services sector, what will be the short-medium term impact on the outsourcing industry?please complete this 2 minute poll here.
I've been trying to get my head around the looming crisis on Wall St. the past few days, and the situation is far more severe than when we discussed the sub-prime crisisa few months ago.
Normally, I'm quick to pounce with my thoughts and opinions (as if you didn't know that already), but I've been truly perplexed by the goings on - and the potential magnitude - of the potential outcome to global markets. I cling to the hope that the bail-out package will quickly steady the economy and spark a mini-revival, despite the long-term ramifications of paying back this debt – and our children footing the bill too. So what does this mean to the outsourcing industry?
Historically, tough economies have proved to be lucrative markets for increased outsourcing: remember the 2001 recession and subsequent deal activity. However, this situation will have a two-pronged impact on the outsourcing industry:
1. Outsourcing drivers: Merger activity is going to provide new outsourcing opportunities, for example the Bank of America, with its acquisition of Merril Lynch, will surely look to move Merrill's support functions onto third-party resources, as BoA has a strong and effective outsourcing culture. And the newly-merged entity may have to look at additional or new providers to support the broader global presence of the new firm – especially when you take into account Merrill's international operations. We can also expect to see a host of other M&A events taking place in the coming weeks (i.e. JP Morgan taking over Washington Mutual's assets, and CitiGroup taking over Wachovia and its global BPO operations). In addition to M&A activity,
there will be some financial institutions looking to reduce SG&A costs quickly, which will opt for outsourced solutions that quickly impact the bottom-line – i.e. F&A BPO and some ITO and possibly some HRO deals, where there is quick remediation of staff.
2. Outsourcing inhibitors: Short-termism is rife. My real concern is that most of the financial services firms are currently looking at mere survival on a month-to-month basis, and will not be looking to move into any complex long-term initiatives. And this includes staff-augmentation projects, a lot of discretionary spend, ERP upgrades, BPO and ITO engagements.
All-in-all, I see this crisis as having a largely positive impact on outsourcing adoption, provided the situation does not spiral even further out of control, the government's bail-out package has the desired effect, and the majority of financial services firms can maintain a long-term strategy.
However, I do not anticipate an immediate spike in demand for outsourcing services – either IT or BPO – as financial services firms iron out their immediate futures, but I do expect to see increased adoption of services from Q2 next year and beyond, when the sector emerges from this restructuring phase.
The recent article on Polandcertainly stoked up some creative discussion about sourcing BPO locations. And none more so than from Ratnesh Mathur, a BPO guru from India, based in Central Europe. Ratnesh has worked in the "outsourcing temples" of Citibank and Infosys, in both India and Europe, for over 17 years. These days, he spends his time traveling to lesser known places in India and Europe, and, when not traveling or working on his upcoming book on Indoeuropean linguistic/cultural links, you can seek his blessings on outsourcing advisory work in India & Europe, through social networks like Linked-in. Anyway, I thought Ratnesh's recent contributions warranted a full-posting:
When selecting a BPO location inside the European Union and in India, its useful to first segregate the City-level metrics from the Country(EU)/State(India)-level metrics and then quantify relative-importance of each metric vis-a-vis others, specific to your unique need:
Country(EU)/State(India) Metrics– BPO/SSC Set-Up time; Visa/ Work Permit Requirements; Subsidies/Government Incentives; Labour Laws; Tax & Accounting Laws; Political stability
City Metrics– People (Labor Pool size / Education – Graduate skills/ Location attractiveness for Senior Foreign Hires/ Understanding of US & Western European cultures/Languages) ; Infrastructure (Real Estate, Telecom, Light/Heat/Water etc) ; BPO/SSC Competition; Travel links with key Client sites
You will discover, from a BPO perspective, that there is little difference between CEE countries. Poland, Czech Rep, Romania, Bulgaria etc. – all present EU stability, consistent ex-communist educational systems, progressive labor/tax/accounting norms more aligned to Brussels roadmaps than Old EU countries, Spirited govt. investment cells etc
Eventually, the one-on-one negotiated government subsidy/incentives (through PaIiz in Poland, CzechInvest in czech rep, SARIO in Solvakia etc) for job creation, is the salient country-level metric for new BPO locations.
Other-wise, its best to focus on City-Metrics to develop a meaningful point of view on a BPO location inside the EU. For example, if you seek to set-up a 500 seats+ BPO venture in the location you select, it's best to validate break-even point for the handful of cities with 300K+ population.
In my experience within the EU (just as in India), its most useful to conduct a location-selection focused on city-metrics and a comparison between 3 Economic (Comparable cost-of-living) Groups of Cities. For example:
a) Prague, Warsaw, Krakow, Budapest, Bucharest, Bratislava
b) Lodz, Wroclaw, Brno, Ostrava, Cluj etc
c) Various Sub-150,000 population towns
Poland and most other CEE countries present several interesting BPO locations. Just as in other industries, the BPO industry too will eventually progress towards a "stateless multinational mindset". See this article from the Economist entitled "In praise of the stateless multinational".
One should mostly trust the NUMBERS of one's business model during BPO location selection within the EU. Inputs to the model are mostly at a city-level.
Comments on a Nation as a BPO location in Europe, still invite a lot of nationalistic demagoguery. As philosopher AC Grayling reminds us – " Nationalism is an evil. It causes unnecessary wars, its roots lie in xenophobia and racism, it is a recent phenomenon – an invention of the last few centuries. The word – "nation" – is meaningless: all nations are mongrel, a mixture of so many immigrations and mixings of people over time that the idea of ethnicity is largely comical. "
Its fairly common these days to find nations presenting themselves aggressively through their investment bodies such as Paiiz, czechinvest, Sario etc. at BPO conferences in the CEE region. A new and meaningless war of words has been underway for the past 5 years. We need to rise to a stateless multinational mindset.
Jason Averbrook on HR and technology: the core theme is about how HR needs to reach outside of the organization to drive performance inside. And technology and social networking tools arethe enabler to make this happen. Here are some of the sound-bites:
"What we thought we were getting from technology is not what we have. We outsourced benefits and payroll, so what are we left with – an address book, and IT tells us it'll cost a million dollars to upgrade!"
So why are people are unhappy with technology?
Because people bought technology without a strategy and LinkedIn knows more about your employees than you do. What people are building outside of work are communities – and who manages all of this stuff? We do – we are all contributing to this everyday. So what's driving technology? We are
People are communicating with other each day using LinkedIn, Facebook, Twitter etc, and employers ask – how do we block this? How can we govern this?
What drives employee engagement? The once-a-year holiday party? Are we providing employees with ways of connecting with each other? So what are these tools and technologies doing? What they are doing..is making us perfectly visible.
Instead, HR should be asking "how can we embrace this to drive collaboration and innovation"
People now average 10 jobs before the age of 38… they are communicating each other in so many ways. The Gen-Ys are growing up with technology – ask a 4 year-old what a mouse is… "it's a thing for the computer". It's a major culture shock to look outside to go inside
It's all about Social Capital – it's the collective value from a group of individuals or employees. HR systems am been built for HR, but what we really need is to have them built for employees.
Been listening to some excellent discussions at Mercer's client event, where the central theme is all about globalization. Mercer's Jeff Miller and Julia Velixon discussed the results of their new study, conducted with the Harvard Business School, based on interviews with senior HR leaders from 60 global corporations. Some key points of note:
Workforces are becoming more globally-dispersed. More than 50% of respondents' workforces reside outside of their corporate home country – the pressure to standardize policies and processes, manage increased workforce mobility and manage compliance needs is greater than ever;
Many senior HR executives are stepping up into global roles, but are finding the transition challenging. 45% of the executives have moved into global roles over the last two-to-three years – many of these transitioned in the last year alone. However, while roles are being structured globally, most of the executives have been struggling to get away from dealing with local and regional issues.
Lack of standardization. The lack of a consistent approach to governance and compliance, especially in Europe and Asia – where employment and tax laws vary widely in different jurisdictions – creates further challenges for HR leaders. There is also a lack of standardization around the approach to global mobility, which hinder's HR's ability to apply consistent procedures to the compensation and benefits of a workforce that has been growing rapidly. It is becoming increasingly important for companies to properly manage the logistics of moving there employees from country to country.
Washington D.C.this week: I have the privilege of delivering a keynote address to Mercer's clients on the subject entitled "Creating a Strategic Enterprise Sourcing Strategy and Governing Change" (whatever will I think up next…). I look forward to posting some banter from their conference, where the central theme is "Successfully Managing the Global Journey". I am particularly interested to hear Jeff Miller and Juila Velixon discuss Mercer's recent study conducted with the Harvard Business School on global service delivery models. I promise to share the findings here. Am also looking forward to hearing Jason Averbrook (great blog by the way) attempting to tie together web 2.0, new HR technologies and outsourcing. Big topics – I love it 🙂
San Francisco and New York next week: I am more excited than usual at the prospect of attending Oracle OpenWorld this year. Both Oracle and SAP's signature events have fast taken-over as industry meets to anyone in the hi-tech and services businesses. If you are there and want to meet up, drop me a mail. What's exciting this year is the stage they are giving to BPO – come visit the panel discussion entitled the "The Good, The Bad and The Ugly", Moscone South, 307 at 5.30pm on Monday. I'll be joined on the panel with my long-time industry cohorts Stan LePeak (Equaterra) and Mark Stelzner (Inflexion Advisors). I'll be spending the latter half of the week in Manhattan where I have brought together some of the leading minds in the BPO industry for a behind-closed-doors round-table (no vendors allowed…sorry).
London and India: Am making plans to visit London and India later in November and December, so look forward to meeting up with many of you during my travels.
I received a very interesting synopsis from a senior executive at one of the major global IT-BPO providers on the subject of Poland as an offshore delivery location. From my own personal experience, Poland has proved to be a first-class location for high-quality, multi-lingual support, particularly for BPO functions such as finance and HR. No wonder providers such as Accenture, ADP, Capgemini, Genpact, HCL, HP and IBM have all made significant investments there, in addition to many captive centers that have been established there in recent years.
Siddhartha makes some excellent points, most notably that Poland is simply not an "alternative offshore location", as its value-proposition is not driven by scale and low-cost, but by highly-motivated and educated staff, and is a proven first-class hub for multi-lingual European language support. He also makes a bold assumption that Poland has the potential to be challenging the unique expertise of a country such as Israel, as Poland possesses far more potential that simply being a BPO / shared services location. In many instances, clients have not found significant cost savings using Polish delivery resources – they have used them because of the value and quality they bring to a global delivery model. Over to you Siddhartha:
“Move Over, India: The Shifting Geography of Offshore Outsourcing Creates New Challengers” stated an article published by the Wharton School, way back in 2005. Every now and then a prominent analyst, consulting or a research firms comes out with a report on alternatives to India as far as offshoring is concerned. Today, Latin America and Eastern Europe are integral to the Global Delivery Models of most organizations – both for their in-house IT/Business Processes as well as outsourced IT/Business Processes. In this context, it is interesting to analyze the case of Poland which is the largest of the new European Union member states.
Poland is not a substitute to India for anyone seeking scale:The fastest ramp-up that a company has achieved in Poland is about 500-600 FTEs during a year – this equates the average weeklyramp-up of some of Indian companies in India (26,000 during the year) and half of peak-day hiring (TCS last year and Cognizant this year made about 1000 offers at Anna University in a day).
Hardly Attractive for Outsourcing from the US:6-7% appreciation of the INR (Indian Rupee) against the USD created a hue and cry in India with NASSCOM almost portraying it as a threat to the industry (INR has already depreciated to be back to cheaper than earlier levels). The Polish Zlotych had appreciated in excess of 30% against the USD in 18-months! Even though there has been USD appreciation over last few weeks, I am not sure of many business models which can take a hit of 25-30% and still remain viable.
More a BPO than a ITO Destination:Poland's is essentially a BPO/Shared Services industry with ITO being restricted to smaller scale Polish players (even with significant presence of IBM and Cap Gemini, their ITO work is not that significant, and focus is more on BPO – primarily Accounting Services). Even among BPO/Shared Service centers, captives form more than half the industry which is very distinct from the India story.
Skill Scarcity: If you sought help from any leading recruitment consultants for hiring people with 4-5 years experience even with common technology skills, they would suggest that it requires a ‘direct search’ as it is a "senior level" hiring placement. Initial offers from consultants mentioned rates of 20-25% of annual salary – you could almost hire a VP on those terms in India. I found this shocking but then it was easy to understand why. A software engineer, business analyst or a transition manager with 5 years experience is a European resource rather than Polish or a Romanian resource and hence cannot be source of any cost arbitrage.
Poland makes up its lack of scale through superior quality: Poland has 45% of its population, in relevant age groups, in its universities; compared to only 10% in India. Moreover, until recently, it did not have graduates, but only post-graduates - hence the quality of human resource in BPO and shared service centers is far superior to most such centers in India and other European nations. Most BPOs hire post-graduates in Economics and Finance from top institutes for their operations – a luxury which may not be available in India other than to some high-end KPO operations (see this earlier discussion).
Ability to attract a truly global workforce: In our organization we not only have a multi-lingual workforce, but a multi-national one which includes Portuguese, Spanish, Russian, Italian, Brazilian, British, Polish and Indian nationals. This gives it an advantage which most Indian operations do not have. While most companies currently leverage this facet largely to source language skills, it has the potential to be extended to other areas in the future.
Poland has far greater potential than simply being a multi-lingual hub: I have talked to outsourcing heads of two leading financial institutions – one European and other American – who acknowledge that their Global Operating/Delivery Model is almost a euphemism for an India-strategy backed by couple of other locations for work that cannot be done out of Indiaeither due to EU or local regulatory restrictions or foreign language requirements.
The language skills advantage is significant but if that remains the key driver of outsourcing to Poland, then some really bright Masters in Economics would be in an accounting operation for a German client – not because she knows econometrics but because she knows German. In fact this ‘alternative offshore location’ positioning is unfair to a country like Poland which offers really unique benefits. With the strength of its education system and ability to attract global talent, Poland should challenge the niche positioning of a country like Israel in high-end technology or other niche skills rather than be a generic offshoring destination.
The amount of consolidation we're seeing in the financial sector, which is likely to have knock-on effects into other industries, will drive new client needs for global sourcing models. Many clients are worried about making large initial capital investments in outsourcing engagements – especially ones which have complex transition and transformational needs, hence those service providers which can help streamline these costs over the course of a contract will be successful. Complexity, disruption and increased globalization drive change, and outsourcing is one vehicle that can help many companies reach a global support infrastructure quickly. Hence, those service providers with the global scale, competency and financial resources to deliver this quickly will be the winners in this market.
