Frost Report

F

Shared Services and Outsourcing (SSO)

Hub Potential Analysis

JULY 2007

GROWTH CONSULTING

2007 ®FROST & SULLIVAN 2

Table of Contents

1.0 Executive Summary ......................................................................... 3

2.0 Introduction...................................................................................... 5 2.1 Objectives................................................................................................... 5 2.2 Scope .......................................................................................................... 5 2.3 Methodology .............................................................................................. 7

3.0 Overview......................................................................................... 10 3.0.1 SSO Determinants ............................................................................. 11 3.0.2 SSO Trends........................................................................................ 18 3.0.3 SSO Locations ................................................................................... 25

3.1 Finance & Insurance................................................................................ 53 3.1.1 SSO Determinants ............................................................................. 53 3.1.2 SSO Trends........................................................................................ 62 3.1.3 SSO Locations ................................................................................... 67

3.2 FMCG & Retail.......................................................................................... 73 3.2.1 SSO Determinants ............................................................................. 74 3.2.2 SSO Trends........................................................................................ 81 3.2.3 SSO Locations ................................................................................... 89

3.3 Technology............................................................................................. 103 3.3.1 SSO Determinants ........................................................................... 104 3.3.2 SSO Trends...................................................................................... 112 3.3.3 SSO Locations ................................................................................. 118 3.4 Energy ................................................................................................. 127 3.4.1 SSO Determinants ........................................................................... 127 3.4.2 SSO Trends...................................................................................... 134 3.4.3 SSO Locations ................................................................................. 139

3.5 Healthcare .............................................................................................. 145 3.5.1 SSO Determinants ........................................................................... 146 3.5.2 SSO Trends...................................................................................... 153 3.5.3 SSO Locations ................................................................................. 159

3.6 Transportation & Logistics................................................................... 166 3.6.1 SSO Determinants ........................................................................... 167 3.6.2 SSO Trends...................................................................................... 171 3.6.3 SSO Locations ................................................................................. 176

3.7 Entertainment and Media...................................................................... 180 3.7.1 SSO Determinants ........................................................................... 180 3.7.2 SSO Trends...................................................................................... 186 3.7.3 SSO Locations ................................................................................. 191

4.0 Conclusion ................................................................................... 196

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1.0 Executive Summary

After the technology bust of early 2000, corporations worldwide faced the challenge of

arresting the decline in margins. To protect margins and enhance cash flows to fund

future growth, large multinational corporations turned to Shared Services and Outsourcing

(SSO), with many companies aggressively emulating success stories like General

Electric’s captive shared services operations in India. Falling infrastructure costs, proven

business models, the hunt for economies of skill, and fast evolving maturity of service

providers from low cost locations, only helped to accelerate the growth in SSO, especially

for offshoring. With the global economy recovering, these SSO operations have played a

significant role in boosting the profits for companies across several verticals to record

levels.

Frost & Sullivan has estimated the SSO market for 2006 to be around US$ 930 billion,

projected to grow to US$ 1,430 billion by 2009, growing at a CAGR of 15%. Offshoring,

which constituted a miniscule part of the total pie, is expected to grow at double the rate

for overall SSO. The key drivers for SSO have continued to be cost benefits through

standardization, leveraging of scale benefits, and cost arbitrage in countries like India and

China. Other benefits include ability to free up of precious management time to allow

them to focus on core competencies; drive business innovation even in non-core areas;

and reap benefits from standardization and resulting efficiencies; which have forced large

corporations to explore further expansion of their current SSO operations or setting up

new centers. On the other hand, concerns with SSO such as threat of loss of control and

compromising confidentiality; potential reduction in service quality levels; risk of breach of

intellectual property and shortage of skilled people through high attrition resulting in

escalating costs, etc.; have forced some companies to reconsider against ramping up

their SSO operations. Restrictive government regulations and political backlash in “send”

countries have also forced some companies to adopt a more cautionary approach

towards SSO.

While the Finance and Insurance vertical together with Technology continues to remain

the largest verticals for SSO, constituting over 50% of the total spend on SSO, other

verticals have developed effective operating models for SSO for functions such as IT

services, finance and accounting, HR services, customer support and call center. Sectors

like healthcare have gone to the extent of outsourcing core R&D functions while telecom

companies in countries like India have outsourced network management, a function

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considered core for telecom operators. While the captive model and the third party model

have become dominant, increasing instances of hybrid models involving equity

participation, joint ventures and project funding, are being witnessed.

Most governments in top SSO locations offer various incentives to attract capital;

however, structural factors like low labor costs and abundant supply of relevant skill have

ensured that India remains as the prominent top of the mind location for SSO. But with

high attrition rates and rising wage levels, India is facing threat from China which is

emerging fast as an attractive location for IT, R&D and procurement services. Eastern

European countries have been able to capitalize on their proximity to western European

countries, while Malaysia and Singapore have continued to grow. Our study reveals that

across the seven verticals India remains the top location for SSO, followed by China,

Ireland, Singapore, Malaysia, Mexico, Czech Republic, Poland, Philippines and Canada.

New locations are emerging for specialized functions (Russia for high end software

development) or for particular verticals (Dubai for BFSI).

This report by Frost & Sullivan elaborates on the current state of the SSO landscape

including current trends for SSO, key drivers and constraints, SSO spend trends, location

selection criteria for SSO and top of the mind locations; for seven verticals. The report

leverages upon a survey of Fortune 500 and Forbes 2000 companies conducted as part

of this study to benchmark the top locations for SSO for seven different industry verticals

globally.

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2.0 Introduction

2.1 Objectives

The objectives of the study are to profile leading global companies from the Fortune 500

and Forbes 2000 list and to understand their Shared Services or Outsourcing (SSO)

patterns currently and in the future. This includes but is not limited to:

� Key Determinants

� Key Trends

� Key Location Selection and Criteria

A vertical specific analysis was performed to establish insights in SSO patterns and

location selection. An in-depth analysis of the top SSO locations was conducted to

understand their positioning, strengths and weaknesses.

2.2 Scope

To define the scope of this study, we have defined SSO as shown in Figure 2.1

Figure 2.1 Definition of Shared Services and Outsourcing (SSO)

Definition of SSO

Integrate Foreign Capability

Integrate Domestic Capability

Ownership

Offshore

Onshore

Insource Outsource

Source Foreign Capability

Source Domestic Capability

Location

Definition of SSO

Integrate Foreign Capability

Integrate Domestic Capability

Ownership

Offshore

Onshore

Insource Outsource

Source Foreign Capability

Source Domestic Capability

Location

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The selection criteria for the companies include the following parameters:

� Companies from the Fortune Global 500 and Forbes 2000

� Employ more than 1,000 employees with revenues exceeding US$1 billion

� Vertical coverage

Figure 2.2 illustrates the seven verticals covered as part of this study.

Figure 2.2 Verticals to be covered for the study

Figure 2.3 illustrates the functions typically covered as part of SSO operations:

Figure 2.3 Functions for SSO

Verticals for Analysis

EnergyEnergy solutions providers, power generation solution providers and petroleum refineries. E.g., BP, Shell.

Entertainment & Media Entertainment content providers, broadcasters and publishers. E.g., Time Warner

Finance & InsuranceFinancial services institutes such as banks, insurance and wealth management companies. E.g., Citigroup

FMCG & RetailFast moving consumer goods producers and retailers. E.g., Nestle, McDonald's and Wal-Mart

Transportation & LogisticsAutomotive, ship, plane and parts manufacturers and logistic solutions providers (ground, sea, air). E.g., Toyota, Boeing and Fedex

TechnologySolutions, services and equipment providers for information technologies and communications. Examples are IBM, Vodafone and Nokia

Healthcare Includes pharmaceutical solutions and equipment providers and healthcare insurance providers. Examples are Pfizer, Aviva and United Health Group

Verticals for Analysis

EnergyEnergy solutions providers, power generation solution providers and petroleum refineries. E.g., BP, Shell.EnergyEnergy solutions providers, power generation solution providers and petroleum refineries. E.g., BP, Shell.

Entertainment & Media Entertainment content providers, broadcasters and publishers. E.g., Time WarnerEntertainment & Media Entertainment content providers, broadcasters and publishers. E.g., Time Warner

Finance & InsuranceFinancial services institutes such as banks, insurance and wealth management companies. E.g., CitigroupFinance & InsuranceFinancial services institutes such as banks, insurance and wealth management companies. E.g., Citigroup

FMCG & RetailFast moving consumer goods producers and retailers. E.g., Nestle, McDonald's and Wal-MartFMCG & RetailFast moving consumer goods producers and retailers. E.g., Nestle, McDonald's and Wal-Mart

Transportation & LogisticsAutomotive, ship, plane and parts manufacturers and logistic solutions providers (ground, sea, air). E.g., Toyota, Boeing and FedexTransportation & LogisticsAutomotive, ship, plane and parts manufacturers and logistic solutions providers (ground, sea, air). E.g., Toyota, Boeing and Fedex

TechnologySolutions, services and equipment providers for information technologies and communications. Examples are IBM, Vodafone and NokiaTechnologySolutions, services and equipment providers for information technologies and communications. Examples are IBM, Vodafone and Nokia

Healthcare Includes pharmaceutical solutions and equipment providers and healthcare insurance providers. Examples are Pfizer, Aviva and United Health GroupHealthcare Includes pharmaceutical solutions and equipment providers and healthcare insurance providers. Examples are Pfizer, Aviva and United Health Group

Functions for SSO

Customer Service & Call Centers

� Customer Support

� Customer Retention

� Inquiry & Complaints

Sales & Sales Generation

� Lead generation

� Lead Qualifying

� Telemarketing

� Booking & Reservation

Human Resources

� Health & Welfare Admin

� Talent Management

� Performance Management

� Compensation Administration

Corporate Learning Programs

� Curriculum development

� Learning program

IT Services & Support

� Application Support

� System Design & Upgrades

� Hardware Maintenance

Procurement

� Sourcing Management

� Continuous Savings

� Transaction Management

Back-Office Processing

� Data Processing

� Data Imaging & Digitization

� Data Maintenance & Support

� Data Archiving

Finance & Accounting


� General Accounting

� Treasury & Risk Mgmt.

� Tax Management

Strategic / Capability Development

� New/ Emerging Technologies

� Design/ Testing of new products

� Prototyping/Development

Functions for SSO


� Customer Support

� Customer Retention

� Inquiry & Complaints


� Lead generation

� Lead Qualifying

� Telemarketing

� Booking & Reservation

Human Resources

� Health & Welfare Admin

� Talent Management

� Performance Management

� Compensation Administration


� Curriculum development

� Learning program


� Application Support

� System Design & Upgrades

� Hardware Maintenance

Procurement

� Sourcing Management

� Continuous Savings



� Data Processing

� Data Imaging & Digitization

� Data Maintenance & Support

� Data Archiving



� General Accounting

� Treasury & Risk Mgmt.

� Tax Management

Strategic / Capability Development

� New/ Emerging Technologies

� Design/ Testing of new products

� Prototyping/Development

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This report highlights the findings based primarily primary and secondary research, and

focused group discussions held in India, Singapore and the US.

2.3 Methodology

Frost & Sullivan has used primary research, secondary research and Focus group

discussions (FGD) to develop both the interim and the final report. The overall

methodology for our study has been illustrated in Figure 2.4.

Figure 2.4 Overall Methodology

Primary Research

As part of our primary research, we had established contact with 338 companies who

have been selected based on the predetermined selection criteria to form the basis of

analysis across the seven verticals. The primary research has served as the basis for the

quantitative analysis to rank the countries for each vertical and across verticals. The

methodology used for our analysis has been explained in Figure 2.5 and 2.6.

Overall Methodology

Primary

� Interviews across 7 industry

verticals

� Based on companies

identified through secondary

research

� Questionnaire based on

Frost research & analysis

Secondary

� Identification of companies

for 7 verticals based on

Fortune Global 500 and

Forbes 2000 list

� Additional research on

selected countries,

companies and SSO

� Cross-validation of primary

and secondary results

� Forecast of vertical wise

SSO spend

� Analysis of primary

research (how were

drivers, constraints,

locations, trends ranked)

� Development of weights for

scoring/ranking of locations

� Evaluation of SSO hub

attractiveness for each

vertical

Output & Recommendations

Overall

� Impact of SSO on companies: Revenues, Profits and Market Capitalization

� Top 10 SSO hubs across 7 verticals� SWOT analysis of key SSO hubs

Industry Vertical Specific

� Drivers for SSO: Current and Future� Concerns for SSO: Current and Future� Spending Trends on SSO� Spending Levels of SSO by Business Processes� Evaluation of business processes for SSO as per perceived strategic value

� SSO Party of Choice: Subsidiary, JV, 3rd Party� SSO Location Selection Criteria in terms of Importance� Recommenders and Decision Makers on SSO� Benchmarking of SSO Locations: Overall & Function-wise� Benchmarking of Top Locations as per key SSO location consideration parameters

Analysis & Scoring

Overall Methodology

Primary

� Interviews across 7 industry

verticals

� Based on companies

identified through secondary

research

� Questionnaire based on

Frost research & analysis

Secondary

� Identification of companies

for 7 verticals based on

Fortune Global 500 and

Forbes 2000 list

� Additional research on

selected countries,

companies and SSO

� Cross-validation of primary

and secondary results

� Forecast of vertical wise

SSO spend

� Analysis of primary

research (how were

drivers, constraints,

locations, trends ranked)

� Development of weights for

scoring/ranking of locations

� Evaluation of SSO hub

attractiveness for each

vertical

Output & Recommendations

Overall

� Impact of SSO on companies: Revenues, Profits and Market Capitalization

� Top 10 SSO hubs across 7 verticals� SWOT analysis of key SSO hubs

Industry Vertical Specific

� Drivers for SSO: Current and Future� Concerns for SSO: Current and Future� Spending Trends on SSO� Spending Levels of SSO by Business Processes� Evaluation of business processes for SSO as per perceived strategic value

� SSO Party of Choice: Subsidiary, JV, 3rd Party� SSO Location Selection Criteria in terms of Importance� Recommenders and Decision Makers on SSO� Benchmarking of SSO Locations: Overall & Function-wise� Benchmarking of Top Locations as per key SSO location consideration parameters

Analysis & Scoring

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Figure 2.5 Methodology for Analysis: 1

Figure 2.6 Methodology for Analysis: 2

Secondary Research

Extensive secondary research has been conducted to serve the following purposes:

� Comprehensively profile the selected companies for primary research

� Understand recent trends in SSO

� Develop an understanding of the strengths and weaknesses of top SSO locations

Methodology for Analysis

Total companies : 338

BFSI

T&L

E&MFMCG/Retail

Technology

Healthcare

Energy

80

59

850

25

59

57

Weights used for overall analysis:

• In a vertical, countries scored on basis

of whether they have been ranked

among top 3 by surveyed companies

• 50% weight if ranked as1st preference;

30% if 2nd preference, 20% if 3rd

preference

• Ranking of locations in each vertical

allocated weights proportionate to the

vertical's projected SSO spend in 2006

to arrive at overall score


Total companies : 338

BFSI

T&L

E&MFMCG/Retail

Technology

Healthcare

Energy

BFSI

T&L

E&MFMCG/Retail

Technology

Healthcare

Energy

80

59

850

25

59

57

Weights used for overall analysis:

• In a vertical, countries scored on basis

of whether they have been ranked

among top 3 by surveyed companies

• 50% weight if ranked as1st preference;

30% if 2nd preference, 20% if 3rd

preference

• Ranking of locations in each vertical

allocated weights proportionate to the

vertical's projected SSO spend in 2006

to arrive at overall score


• Companies asked to indicate their top three SSO locations

• Companies asked to rate the importance of each location selection criteria to get relative importance of each

• Companies asked to rate their top three locations against each criteria

5 5

Business Environment Conduciveness

-Political stability

-Infrastructure quality

-Cultural adaptability

-Intellectual Property Regulation

Cost Efficiency

-Labor

-Infrastructure

-Tax & Regulatory costs

Quality of Human Capital

-Labor force skills and availability

-Education and language level

-Attrition rates




-Attrition rates

5


• Companies asked to indicate their top three SSO locations

• Companies asked to rate the importance of each location selection criteria to get relative importance of each

• Companies asked to rate their top three locations against each criteria

5 5











Cost Efficiency

-Labor

-Infrastructure


Cost Efficiency

-Labor

-Infrastructure





-Attrition rates




-Attrition rates




-Attrition rates




-Attrition rates

5

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Focus Group Discussions

As part of the project, three focus group discussions are to be conducted in India,

Singapore and the USA. While the FGD in India was focused on the Technology sector,

the FGD in Singapore was focused on the Finance and Insurance vertical. The FGD in

the USA targeted participants from companies involved in SSO across verticals.

Participants for all the FGDs are from senior management levels from Fortune 1000

companies.

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3.0 Overview

The overview section (Section 3.0 and its subsections) summarizes the key findings

across all verticals. We have highlighted the key issues and considerations for an SSO

operation, the key drivers and concerns for SSO, functions typically conducted under

SSO, nature of ownership of SSO operations, key criteria for location selection for SSO

and top of the mind locations.

For each of the verticals (Sections 3.1 – 3.7 and their subsections), we have detailed

these findings with the sections for each vertical comprising of the following subsections:

� Overview: General overview of the vertical

� SSO Determinants:

o General Perception: Summary of SSO trends for the vertical

o Issues/ Considerations: Issues and considerations faced by a company in

the vertical before starting or running existing SSO operations

o SSO Drivers: Key drivers for setting up or expanding SSO for the vertical

o SSO Constraints: Key constraints impeding setting up or expanding SSO

for the vertical

� SSO Trends:

o Spend on SSO: Overview of spend by the companies in the vertical on

SSO

o Degree of SSO by type: Functions for the vertical witnessing maximum

SSO activity

o SSO Party of Choice: Nature of ownership of SSO operations prevalent for

the vertical

� SSO Locations:

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o Selection Criteria: Key parameters considered by the companies in the

vertical for evaluating a location

o Top of the mind Locations: Overview of top SSO locations for the vertical

3.0.1 SSO Determinants

3.0.1.1 Issues/Considerations

Companies across all the verticals studied have some form of SSO operations and many

of them are in the process of expanding existing or setting up new locations.

The following issues and considerations, as highlighted in Figure 3.1 are important factors

that need to be integrated while setting up an SSO operation:

Figure 3.1 Issues and Considerations for SSO set-up

Adherence to regulations as well as other compliance factors

Regulations and initiatives such as Sarbanes-Oxley (SOX), Basel-II and Data Protection

laws significantly impact SSO operations. While the impact of regulations can be most

acute for the BFSI and healthcare verticals; they often impact the feasibility and

attractiveness of any SSO decision. The US government including the FDA has been

increasing the regulatory burden on life sciences corporations. This will impact not only

the companies in the vertical themselves, but also their shared services or outsourcing

Issues and Considerations

Regulations & Compliance

SSO Operations

Risk Diversification

Identification of Processes Suitable for

SSO

Impact on “Send”(Company) Economy

Complexity & Risks

Vendor Selection & Management

Cultural Differences

Issues and Considerations

Regulations & Compliance

SSO Operations

Risk Diversification

Identification of Processes Suitable for

SSO

Impact on “Send”(Company) Economy

Complexity & Risks

Vendor Selection & Management

Cultural Differences

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service providers. Stringent regulations are also present in many host countries that

impact the attractiveness of the location as an SSO destination. For example, India has

strict laws regulating conduct of clinical trials. Malaysia similarly has provisions with

respect to storage of data involving Malaysians. A detailed study of relevant regulations in

both “host” and “send” countries is essential to build in both the essential safeguards and

correct evaluation of SSO locations.

Diversification of risks for SSO initiatives on a global scale

While Asia has been a favorite offshoring location for many years, many large companies

have set up facilities with excess of 10,000 employees in a few countries like India and

China. This concentration often exposes the company to several risks and serves as a

critical parameter when they consider expansion of SSO operations. The Tsunami in

2004, flooding in Mumbai in 2005 and the political turmoil in Thailand in 2006 are

examples that show the need for SSO location diversification.

Management of Impact on “Send” (Company) Economy

Often benefits from offshoring and outsourcing are perceived to be enjoyed at the cost of

job losses in the ‘send’ countries. In most cases, the internal staff is handed over to the

outsourcing provider; however, some job losses are inevitable, especially when offshoring

is involved. An example is the deal between Wyeth and Accenture as part of which 150 of

Wyeth's clinical data management (CDM) staff work for Accenture at Wyeth's facilities.

In the European Union, regulations that protect employees against retrenchment pose a

great restraint to companies planning to outsource non-core functions. In the USA as

well, with the presidential elections coming in 2008, retrenchment due to outsourcing or

offshoring may re-emerge as a key issue. Any offshoring decision is often accompanied

by widespread publicity campaigns against the companies involved which may seriously

impact the brand image. Therefore most Fortune 500 companies typically maintain a low

profile whenever they take such decisions. Companies are also working with local and

federal governments to ease the pain of employees affected through outsourcing or

offshoring.

Identification of Processes Suitable for SSO: outsource/ offshore or onshore

Different verticals have different pecking order for services or functions when it comes to

outsourcing or offshoring. For instance, FMCG & Retail companies would not outsource

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Strategic/ R&D for the reason that it is too core and critical to their overall marketing and

product competitiveness in the market. BFSI companies are often forbidden by

regulations to outsource certain processes and even when there are no such constraints;

they prefer to retain, in-house, activities such as interaction with premium customers.

Functions such as IT Services and Support of Back Office Processing, which are not

seen to be the core competencies for most companies, are often the most outsourced

activities. Companies in Japan and Korea are the exception as most of them are still

exploring the idea of SSO and are not ready to dabble in either outsourcing or offshoring.

However, as a first step, companies need to ask themselves, “Why choose SSO” in the

first place? Long-term planning often times falls prey to the operational needs and tactical

decisions of the daily business. A closer look at the overall implications and fit into the

firm’s strategy as well as cost/benefits is required before arriving at the conclusion of SSO

being the optimal solution.

Management of Complexity and Risks

Companies are extremely concerned about losing control over their businesses in pursuit

of SSO, given that this could have a serious impact on their reputation and competitive

position. Especially for the financial services industry, which handles extremely sensitive

customer data, a loss of such data could seriously damage a firm’s reputation and overall

business. In 2006, an employee in India was arrested at a data processing center for

allegedly siphoning US$420,000 from the accounts of 20 HSBC customers. Although

offshoring and outsourcing services can have a significant impact on a company’s cost

efficiency, incidents like the one at HSBC holds companies back from fully exploring

those benefits. Because of this policy, proper risk management is a top priority for

companies planning to take SSO further.

A key issue for companies considering SSO is the monitoring of processes given that

offshoring and outsourcing exposes the company to several constraints: from time zone,

language and cultural issues to poorly defined contracts and Service Level Agreements

(SLAs). Lack of monitoring can easily result not only in higher costs than planned but also

damages to a firm’s reputation and fines from industry regulators. Proper monitoring

through established policy operational guidelines and supporting reviewing mechanisms

can also help companies avoid substantial risks. For example, for Northwestern Mutual

(NM), IT workers at the insurance company’s provider, India-based Infosys are only

provided terminals that do not allow users to alter, record or print data. Terminals are

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linked to NM’s servers in the US via secure, high-speed phone lines.

Vendor selection & management

For any company wanting to outsource their business processes, the key question to be

answered is which vendor should they select? Should they entrust a single vendor to

provide for all their outsourcing needs or should they be faced with management

complexity issues and challenges by outsourcing to multiple providers for different

functions? An example of a cancelled deal is the one between J. Sainsbury with

Accenture. The service level agreement (SLA) commitment needs to be clearly spelled

out and understood by both parties to avoid future misunderstandings or disappointment.

Continuous and open feedback and communications are pivotal to keeping good working

relationships between the buyers and the providers (3rd party providers).

Strong cultural fit and compatibility with the outsourcing service provider is a must for the

success of outsourcing relationships. A global logistics company highlighted that

oftentimes, senior management are highly focused on the cost-benefit aspect of shared

services and outsourcing at the expense of such real-world elements as language and

cultural barriers that could potentially arise in call centers, as well as a general tendency

among call center staff to be overly mechanical in carrying out seemingly routine tasks.

Therefore, companies often prefer to offshore business to countries with strong cultural

affinity to its home market. Eastern Europe has benefited a lot from offshoring based on

this criterion from other EU countries. Voice based centers located in Philippines have

also been able to capitalize on their historic relationships with the USA to gain business.

Proximity to customers appear to be the key criteria that media and entertainment outfits

select shared service and outsourcing locations.

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3.0.1.2 SSO Drivers

The key drivers for SSO across the studied verticals have been highlighted in Figure 3.2

Figure 3.2 Drivers for SSO across verticals

Small and large organizations across most if not all sectors analyzed in this study cite

cost savings as the decisive driver of their shared service and outsourcing initiatives,

generating savings ranging from 10 to 30% annually. In a similar vein, such initiatives

allow many organizations to reduce operating costs by up to 40%, largely brought about

by relatively lower wages in offshore locations. 90% of survey respondents highlighted

potential reduction of costs as either High or Very High in terms of its importance as a

driver.

The fact that shared services and outsourcing enable organizations to hone a sharper

competitive advantage is widely recognized as a key motivator by companies in the BFSI,

technology, energy, and transportation and logistics sectors. For technology companies,

the deployment of shared services and outsourcing facilitates their efforts in improving

products and service quality. 80% of survey respondents cited ability to enhance

competitiveness as either High or Very High in terms of its importance as a driver.

The ability to focus on core strengths and free up resources to better serve customers

and stave off competition is another critical driver, especially for the BFSI and technology

sectors. Over 90% of survey respondents highlighted the ability of SSO operations to

1%

1%

1%

1%

1%

34%

43%

10%

37%

6%

20%

43%

54%

55%

37%

44%

45%

73%

53%

43%

45%

10%

20%

46%

17%

20%

27%

12%

1%Improve employee productivity

Improve asset utilization

Enhance competitiveness

Focus on core competencies

Improve customer service

Reduce operating costs

Access scarce talent

Overcome HR shortages

Drivers

* Percentages shown are % of total response

Very Low Low Medium High Very High

1%

1%

1%

1%

1%

34%

43%

10%

37%

6%

20%

43%

54%

55%

37%

44%

45%

73%

53%

43%

45%

10%

20%

46%

17%

20%

27%

12%

1%Improve employee productivity








Drivers



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allow corporations to focus on core competencies costs as either High or Very High in

terms of its importance as a driver.

The need for greater access to talent to help overcome skill shortages, especially in areas

that require specific skill-sets, is what drives transportation and logistics as well as FMCG

companies to pursue shared services and outsourcing. Multinational organizations have

an inherent need for a centralized unit to perform key corporate tasks to support the

operations of multiple offices worldwide. To that effect, shared services allow for

centralization, enabling multinationals to achieve greater business efficiencies.

Continued business innovation, commonly regarded as a critical factor that shapes a

company’s success, drives companies in the technology and media and entertainment

sectors to embrace shared services and outsourcing. The creation of innovation hubs in

offshore facilitates technology companies’ efforts in driving innovation. Similarly for the

technology sector, the abundance of talent in a given offshore location addresses the

perceived shortage of qualified R&D personnel in the parent company, thus driving

technology companies to look overseas to serve their R&D needs.

Other key drivers include the ability to decrease time to market, particularly in the drug

discovery arena. The prevalence of international mergers and acquisitions in the energy

sector is spurring the need for greater streamlining of activities, uniformity and

standardization. The fact that these may be achieved through shared services drives

energy conglomerates to adopt this practice. This view is also shared by large automobile

makers that regard shared services as playing a pivotal role in helping them manage

complex internal business processes.

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3.0.1.3 SSO Concerns

The key drivers for SSO across the studied verticals have been highlighted in Figure 3.3

Figure 3.3 Concerns for SSO across verticals

The top three concerns cited by the surveyed companies across the verticals are potential

compromise with confidential information, loss of control and organizational de-skilling.

The risk of compromising confidentiality brought about by the widespread customer data

theft and poorly enforced data protection laws in some outsourcing countries is holding

back many companies particularly in the BFSI, FMCG and transportation and logistics

sectors from offshoring non-core tasks. Companies are becoming increasingly wary of the

high risk of breach of intellectual property, or IP, especially in countries that ostensibly

lack a strong mechanism to safeguard IP rights. The risk of de-skilling along with concern

for loss of control that may potentially arise from outsourcing functions that support core

components is diminishing the appeal of outsourcing in favor of fully owned shared

services centers.

A common concern shared by companies across all verticals is an acute shortage of

suitably qualified personnel to manage a particular outsourced function and a lack of

domain expertise among existing staff.

Concerns

2%

1%

1%

5%

27%

1%

6%

9%

4%

34%

58%

3%

10%

6%

3%

23%

23%

36%

38%

11%

29%

29%

18%

19%

46%

55%

47%

16%

4%

49%

52%

60%

46%

23%

13%

12%

6%

18%

9%

16%

32%Compromise confidentiality

Loss of control

Increased costs

Reduced service level of 3rd party

Lack of knowledge about outsourcing

Lack of competent mgmt. staff

Over-reliance on external party

Stability of 3rd party

Org. de-skilling


Concerns

2%

1%

1%

5%

27%

1%

6%

9%

4%

34%

58%

3%

10%

6%

3%

23%

23%

36%

38%

11%

29%

29%

18%

19%

46%

55%

47%

16%

4%

49%

52%

60%

46%

23%

13%

12%

6%

18%

9%

16%


Loss of control

Increased costs






Org. de-skilling


GROWTH CONSULTING


A poor understanding of customers and cultural nuances are widely viewed as a deterrent

for offshoring call centers overseas.

The risks associated with government regulations governing outsourcing pose another

obstacle to outsourcing and offshoring, particular for BFSI, technology and healthcare

companies around the world.

Other deterrents include over-dependence on external organizations, inadequate world-

class infrastructure and manpower and not least reduced service levels. High attrition

rates associated with increasing wage levels in some offshore countries have also been

cited as a concern by many organizations.

3.0.2 SSO Trends

Total spend on SSO operations by the seven studied verticals are expected to grow from

a base of US$ 930 billion in 2006 to over US$1,430 billion by 2009. Technology and BFSI

are expected to constitute over 50% of spend on SSO by 2009. Healthcare and

Technology are expected to be the key growth verticals; SSO spend by these two

verticals are expected to grow at a CAGR of 26% and 22% respectively between 2006

and 2009. Figure 3.4 highlights the spend on SSO by each vertical and the corresponding

growth rates.

Figure 3.4 Spend on SSO by verticals and projected growth

Spend on SSO Operations

Spend on SSO by Vertical ($ bn) CAGR in SSO Spend by Vertical (2006-2009)

273361

84

10039

52113

147233

420

59

94

130

258

0

300

600

900

1200

1500

2006 2009

Healthcare

FMCG Retail

Technology

T&L

E&M

Energy

BFSI 10%

6%

10%

9%

22%

17%

26%

BFSI

Energy

E&M

T&LTe

chnologyFM

CG; RetailHe

althcare

Healthcare

FMCG Retail

Technology

T&L

E&M

Energy

BFSI

SSO Revenue

Average: 15%


Spend on SSO by Vertical ($ bn) CAGR in SSO Spend by Vertical (2006-2009)

273361

84

10039

52113

147233

420

59

94

130

258

0

300

600

900

1200

1500

2006 2009

Healthcare

FMCG Retail

Technology

T&L

E&M

Energy

BFSI 10%

6%

10%

9%

22%

17%

26%

BFSI

Energy

E&M

T&LTe

chnologyFM

CG; RetailHe

althcare

Healthcare

FMCG Retail

Technology

T&L

E&M

Energy

BFSI

SSO Revenue

Average: 15%

GROWTH CONSULTING


While the overall spend on SSO is expected to grow at a CAGR of 15% between 2006

and 2009, this spend as a percentage of overall revenues across these seven verticals is

expected to remain stagnant. While sectors like healthcare and entertainment and media

will see a significant increase in adoption of SSO; BFSI, technology, travel and logistics

and FMCG/ Retail will witness limited increase for the same parameter. The energy

vertical is expected to witness a decline for SSO spend expressed as a proportion of

revenues for the vertical. This is because the revenues for the vertical is expected to grow

significantly given the projections for oil prices while SSO activity is expected to grow at a

relatively lower rate. Figure 3.5 tabulates the projections for the spend on SSO and the

same expressed as a percentage of overall revenues, as well as the outlook for spending

for the key functions.

Figure 3.5 Spend on SSO across verticals and key functions

3.0.2.1 Degree of SSO by type

Results from our research shows that while many companies have some or the other

experience with SSO activity, the degree to which the companies are willing to embrace

SSO and outsourcing operations vary significantly from company to company. Our study

has observed the usage of SSO across all functions, however, with different emphasis, as

highlighted in Figure 3.6


Spending Trends on SSO Functions for SSO (Spending Levels)

4.1% 4.1% 4.1% 4.1%

930

1080

1240

1432

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2006 2007 2008 2009

0

300

600

900

1200

1500

SSO spend as % of Revenue

SSO Spending(US$ ‘000 Million)

1%

3%

15%

2%

4%

36%

2%

1%

12%

29%

4%

53%

2%

12%

50%

6%

0%

30%

30%

29%

21%

31%

43%

13%

18%

9%

31%

30%

43%

9%

44%

33%

1%

38%

43%

20%

10%

21%

2%

22%

8%

36%

47%

8%


Human Resources

Procurement

Customer Service & Call Center

Corporate Learning




Strategic/R&D

* Percentages shown are % of total responseVery Low Low Medium High Very High


Spending Trends on SSO Functions for SSO (Spending Levels)

4.1% 4.1% 4.1% 4.1%

930

1080

1240

1432

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2006 2007 2008 2009

0

300

600

900

1200

1500



1%

3%

15%

2%

4%

36%

2%

1%

12%

29%

4%

53%

2%

12%

50%

6%

0%

30%

30%

29%

21%

31%

43%

13%

18%

9%

31%

30%

43%

9%

44%

33%

1%

38%

43%

20%

10%

21%

2%

22%

8%

36%

47%

8%


Human Resources

Procurement


Corporate Learning




Strategic/R&D

* Percentages shown are % of total responseVery Low Low Medium High Very High

GROWTH CONSULTING


Figure 3.6 Mapping of functions for SSO and their adoption by verticals

This section gives an overview of the degree of SSO by various types of operations e.g.

IT Services & Support, Human Resources, etc.


As IT becomes more and more closely integrated and an inseparable part of the business

environment, organizations feel that the operations and support functions can be handled

best if they are either outsourced or centrally managed through a few captive centers

around the globe.

All verticals have seen instances of companies outsourcing IT services and support to

specialized players like IBM, EDS, and Accenture etc. as a part of multiyear and

multimillion dollar deals. The deals when looked at in isolation appear to be very costly,

however, when looked at from the strategic vision the company, a few hundred million

dollars spent now will potentially save the company billions in cost savings on non-core

functions in the coming few years while ensuring excellence and business innovation

A good example to illustrate this type of outsourcing is Vodafone. In Oct. 2006, Vodafone

decided to outsource its IT operations to IBM and EDS in a multiyear contract that spans

for seven years. The company has not released any financial details of the deal, however

said that it will help it save US$ 600 million in maintenance costs.

Functions for SSO and their adoption by verticals

Research & Development

Procurement

Corporate Learning

Human Resources

Customer Service


Back-office Processing


Healthcare, Technology

FMCG

Energy

Common across all industries

Energy, FMCG & Retail, Media & Entertainment, Technology, Transport & Logistics

BFSI, FMCG & Retail, Media & Entertainment, Technology, Transportation & Logistics

BFSI, Energy


Function Verticals with significant adoption of SSO

Functions for SSO and their adoption by verticals


Procurement

Corporate Learning

Human Resources

Customer Service


Back-office Processing


Healthcare, Technology

FMCG

Energy


Energy, FMCG & Retail, Media & Entertainment, Technology, Transport & Logistics

BFSI, FMCG & Retail, Media & Entertainment, Technology, Transportation & Logistics

BFSI, Energy


Function Verticals with significant adoption of SSO

GROWTH CONSULTING


Human Resources

With business going global and having multiple locations, managing human resources

across the organization is becoming more and more challenging. Human Resources

departments not only have to deal with host of specialized functions like payroll

operations, benefits administration, employee records and data management and asset

management services.

The answer to this problem has emerged through HR outsourcing. There are a host of

companies specializing in this field, e.g. Hewitt Associates. Sony Electronics has

outsourced its HR functions to Hewitt Associates. Sony claimed that Hewitt's HR

outsourcing services will enable Sony Electronics human resources to focus on its

strategic human resources functions, freeing the HR staff from day-to-day management

of essential but non-strategic duties. Standard Chartered for example set up an HR

Shared Services Center in Chennai, India with the aim to deliver a consistently high

service for its global operations. Services like payroll operations and benefits

administration fall under these initiatives.

Finance and Accounting

Among the SSO services within this category include: General Accounting (Bookkeeping,

A/P, A/R), Bank Statement Consolidation, Payroll and Tax returns, Financial Analysis and

Reporting (Balance Sheet Analysis), Non-Profit Accounting, and Check Processing. SSO

for finance and accounting services is especially common for FMCG/ Retail and Energy

verticals.

BP outsourced its finance and accounting to two centers, one in Budapest to serve the

European customers, while the other in Calgary to serve the American customers. The

Budapest center is run by EDS, with an investment of US$ 8.5 million. The Calgary center

is run by IBM, a three-floor data centre. Exxon Mobil also runs a shared service in Czech

Republic for the finance and accounting.

Customer Service

Call center off-shoring has been motivated by two key factors – cost and operation

efficiencies. The technology, BFSI, FMCG/Retail and Transportation and Logistics sector

has many examples of companies which have either outsourced customer service and

call centre functions to third party providers in low cost countries or have set up their own

GROWTH CONSULTING


captive centers in low cost destinations to serve its customers globally. HP is one good

example; HP runs its entire call centre operation through its centers in India.


Outsourcing of R&D functions has been a topic of hot debate for the last couple of years.

For example in the technology sector, companies are trying to answer one important

question – What started as Original Equipment Manufacturing (OEM) outsourcing and

transformed into Original Design Manufacturing (ODM) is now going to transform into full

fledged outsourcing of R&D functions?

Similarly, in the pharmaceutical sector, generic drug companies from Asia which were

considered a threat to big pharma from the USA and Europe have now become strategic

partners in the quest to discover new chemical entities and drug discovery. These generic

drug companies also offer a host of specialized services in the clinical trails phase. FMCG

companies on the other hand typically tend to keep R&D in-house.


In lines with HR processes, several companies have also outsourced Corporate Learning

programs to specialists. BP outsourced corporate learning programs to Exult that

provides global access for all BP employees to a tailored digital skills curriculum to

support the development of IT skills and a global hosting environment for custom BP e-

Learning.


Back-office processing make up the largest portion of the BFSI SSO market, credit card

and other transaction processing, for example. Bank of America has a shared services

center in India for back-office processing. HSBC set up its Electronic Data Processing

unit in Hyderabad, India which controls back-office processing in Bangalore,

Visakhapatnam. The three processing centers have a staff of more than 4,500

employees. Citigroup chose China as a location for its back-office operations.

Procurement

Procurement has emerged as a key business processes for SSO for FMCG/ Retail

vertical. It is also extensively practice by IT verticals especially for IT related procurement.

GROWTH CONSULTING


Tasks within this function include supplier sourcing and management (supplier’s pricing &

performance), continuous savings implementation and transaction management.

Walmart, in China, procured more than US$ 7.5 billion worth of Chinese goods through its

procurement center in Shenzhen, Guangzhou province (south of China), which is more

than half of its global volume of direct imports. While some firms prefer to have a wholly

owned procurement unit, some companies outsource this function to specialized

procurement service providers. For instance, Kimberly Clark hired procurement specialist

ICG Commerce in 2005 for its procurement needs, as part of a five years contract.

3.0.2.2 SSO Party of Choice

There are currently three models of SSO being adopted by the Global Fortune 500 and

Forbes 2000 companies. They either own the operations fully, set up joint-venture with

reputable third/external party or completely outsource the operation to SSO providers.

Their preference for either mode of operations is shown in Figure 3.7

Figure 3.7 SSO Party of Choice across verticals

64% of the SSO operations of the surveyed companies are wholly owned; the

corresponding numbers for Joint Venture and 3rd party outsourcing are 17% each.

SSO Party of Choice

76%

49%

77%

46%

64%

91%

53%

33%

87%

16%

23%

16%

14%

22%

8%

33%

29%

10%

8%

29%

7%

40%

13%

1%

14%

38%

4%


Human Resources

Procurement

Customer Service and Call Centers





Strategic / R&D

Wholly Owned Joint-Venture Third Party

Wholly Owned

Third Party

Joint Venture

64 %17 %

17 %

SSO Party of Choice per FunctionSSO Party of Choice


SSO Party of Choice

76%

49%

77%

46%

64%

91%

53%

33%

87%

16%

23%

16%

14%

22%

8%

33%

29%

10%

8%

29%

7%

40%

13%

1%

14%

38%

4%


Human Resources

Procurement






Strategic / R&D


Wholly Owned

Third Party

Joint Venture

64 %17 %

17 %

SSO Party of Choice per FunctionSSO Party of Choice


GROWTH CONSULTING


Own Facility

In this model, the organization owns all the physical infrastructures. In addition, the

company is directly responsible for its employees’ recruitment and welfare needs.

Companies which are concerned about loss of control, protection of intellectual property

and might face regulatory hurdles choose this model. This model is most extensively used

by BFSI companies for their business processes which cannot be outsource due to

regulatory constraints and also by companies in other verticals willing to maintain greater

control.

For example, Shell runs five shared service centers that are fully owned subsidiaries of

Shell. They are located in Cyberjaya (Malaysia), Glasgow (UK), Krakow (Poland), Manila

(Philippines) and Guatemala. The reasons for Shell to choose fully owned centers are

concerns about losing command and influence with outsourcing. Boeing and Maersk’s

corporate learning programs are conducted internally while Qantas and Northrop

Grumman’s procurement activities are centrally managed from their respective shared

service centers.

Hybrid Relationships

The two most common forms under this model are joint ventures and collaborative

partnerships. This model is sometimes preferred because of the element of control it

provides without the risks of running subsidiaries. In 2004, Quintiles and Solvay entered a

unique risk-sharing agreement under which Quintiles will invest US$25 million worth of

development services for ten of Solvay’s phase II projects from 2004-06, thereby bearing

around 50% of the risk. Solvay would provide Quintiles with milestone payment for each

of these projects reaching phase III. Unlike similar previous deals, however, Quintiles will

not receive royalties from drug sales

Third Party Provider

This model is where third parties carry out majority if not all of the organization’s specified

business processes. This model has been most prevalent for IT services across all

verticals. As part of a US$1.8bn outsourcing initiative, Dutch bank ABN Amro, in 2005,

signed a deal with Indian IT services companies Infosys and TCS for application support

and enhancement. The bank already had a US$1.5bn desktop outsourcing deal with EDS

for its wholesale operations.

GROWTH CONSULTING


As HR outsourcing matures, we are likely to see this model adopted in for HR services as

well. In February 2007, TalentTrack, announced outsourcing agreement with Tenet

Healthcare Corporation to assist its hospitals in developing an efficient, consistent and

centralized physician recruitment process that will support the system’s targeted and

aggressive growth initiatives.

Similarly, companies are increasingly outsourcing their call centers to external parties.

BSkyB is just an example of an increasing number of companies that have outsourced

their call center operations, in this case, to U.K. based Response Handling.

3.0.3 SSO Locations

3.0.3.1 Selection Criteria

Key factors considered while deciding upon location for SSO are compensation,

infrastructure, and tax and regulatory costs; labor force experience and availability and

regulatory environment for IP as highlighted in Figure 3.8

Figure 3.8 Location Selection Criteria for SSO across verticals

SSO Location Selection Criteria


1%

1%

1%

12%

11%

30%

11%

19%

26%

41%

29%

7%

23%

37%

23%

15%

10%

28%

6%

16%

37%

11%

20%

51%

15%

40%

51%

53%

41%

63%

48%

49%

59%

69%

36%

55%

34%

33%

32%

23%

29%

25%

9%

27%

10%

6%

28%

Compensation Costs

Infrastructure costs

Tax & regulatory costs

Labor force availability

Labor force experience

Education & language

Attrition rates

Political stability

Infrastructure quality

Cultural adaptability

IP regulation

SSO Location Selection Criteria


1%

1%

1%

12%

11%

30%

11%

19%

26%

41%

29%

7%

23%

37%

23%

15%

10%

28%

6%

16%

37%

11%

20%

51%

15%

40%

51%

53%

41%

63%

48%

49%

59%

69%

36%

55%

34%

33%

32%

23%

29%

25%

9%

27%

10%

6%

28%

Compensation Costs






Attrition rates

Political stability



IP regulation

GROWTH CONSULTING


Labor Costs and Availability

Historically, companies have regarded labor costs and availability as paramount to their

decision in its selection of SSO locations. Across verticals, search for low cost options for

operations have driven SSO activities. As an example of labor cost arbitrage: In Ireland, a

call center agent’s average salary is around US$ 23,000 – US$34,000 annually as

compared to a US$2,800 annual salary for a similar position in developing countries such

as Malaysia and the Philippines. A growing number of Hollywood studios are already

harnessing the scalable pool of animation talent that India has to offer at half the cost of

performing the same services in the United States. In the healthcare vertical, CROs are

expanding into low cost geographies especially to India and China. Costs are low in these

countries not only because of shorter time taken to recruit patients for clinical trials but

also due to lower salaries for the employees involved. The presence of excellent institutes

for higher education in India, China, East Europe and Russia has made these locations

attractive for high end R&D activities, especially for the healthcare and technology sector.

However, high demand has caused attrition rates and remuneration to increase sharply in

India, especially for jobs that require better skilled programmers and for middle

management. Firms like ABN Amro face situations where they invest several months into

training individuals only to see them shift to competitors after one year for higher salary. It

is this wage inflation that made companies to consider countries like China which are at

the earlier stages of SSO demand. The problem with alternatives in the region is that in

the case of China for example, graduates and professionals are not necessarily equipped

with sufficient language and domain skills.

Intellectual Property & Confidentiality Protection

A location’s ecosystem for protecting intellectual property plays a key role while deciding

SSO locations, especially for functions involving data or concepts essential to core

competitiveness of the company. Companies typically ask the following questions to

evaluate a location in this respect:

� Does the country under consideration have a history of enforcing international IP

laws?

GROWTH CONSULTING


� Does the country in question have a transparent and honest court system that is

efficient and sophisticated enough to effectively deal with an IP problem before

market share is diluted and customers stolen?

� What measures are in place in the country to prevent IP thefts (are there effective

criminal and financial penalties as deterrents)?

The US and especially the EU have laid down strict and clear provisions over the transfer

of data to third countries. As a consequence, some FMCG & Retail companies rather set

up their SSO operations in the USA, UK or other European locations where the regulatory

systems are well enforced and clearly written.

Several SSO locations are now taking active measures to address these concerns. For

example, India is initiating to draft bills which are similar to UK’s Data Protection Act and

would negotiate for an agreement that resembles the US-EU efforts in providing for ease

of transferring data between EU nations and the USA documented in the US Safe Harbor

framework.

Infrastructure Costs and Quality

Across verticals, infrastructure quality and cost is a key determinant to its overall

attractiveness for SSO. For example, BMW regards telecommunications costs as an

important consideration in its selection of offshore locations. Top energy vertical

companies such as Exxon Mobil, Shell and BP have their shared service centers located

in South East Asia and Eastern Europe where the infrastructure cost is much lower

compared to North America and Western Europe. Many respondents feel that even

though India’s overall labor costs is low, the cost benefit is to an extent overrun by its poor

infrastructure. Apart from power supply, logistics and transportation infrastructure are

critical for FMCG & Retail companies, especially for its procurement centers where China

scores substantially better than India

GROWTH CONSULTING


Government incentives (Tax and Regulatory costs)

Many companies have highlighted favorable government policies to be a compelling

reason as to why they want to start their SSO operations in a particular country. Czech

Republic provides up to 50% of eligible business expenses as subsidy, 35% of special

training costs and 60% of general training costs for companies interested in setting up

their SSO centers there. China has Special Economic Zones (SEZ) that promote high

international quality standards in the Hainan Province, Shenzhen or Shantou with

financial incentives. India is also deploying a comprehensive SEZ scheme.

Flexible labor laws that make it easy to attract foreign talent are key drivers as well.

Locations like Singapore and Dubai deserve special mention in this context.

Among other factors, proximity to key markets have also been highlighted as a key

decision criteria.

Proximity to Key Markets

Another criterion that is growing in importance is proximity to key markets to help

monitoring and eliminate language and cultural issues when it comes to SSO. Many

utilities and media companies chose to set up their shared service center in their home

country. These companies are generally not multinational companies and hence, prefer to

stay in home country. Often these companies are also the chief source of employment in

the region and fear political backlash if they were to offshore functions.

Another trend for large companies is to have one hub in Asia to serve the APAC region,

one hub in Europe to serve the European region, one Latin American country to serve the

South American markets, and so on instead of one or two hubs to serve many regions.

Denmark, that provides good geographical position to enter the Nordic region, has been

thereby able to attract companies like Christian Dior and the Gillette group (under Procter

& Gamble). As many companies have highlighted that even though there are many

cheaper locations for them to choose from such as Russia, India or China, they feel more

comfortable if they are able to fly their team in within a short span of time (less than 6

hours) if there are any issues in their SSO centers to resolve those problems. Coca-Cola

GROWTH CONSULTING


for instance, kept their shared services center onshore in Tampa, Florida, USA which is

only a mere 1.5 hour’s flight to its headquarters in Atlanta, Georgia, USA.

When it comes to decision making, key decision makers are the CEO, COO and

Functional heads. Regional/ Geographic managers and interdepartmental teams are the

key people involved when it comes to recommending locations for SSO. Figure 3.9

highlights the findings from the survey with respect to key decision makers and

recommenders for SSO.

Figure 3.9 Key People involved in SSO decision making for SSO across verticals

3.0.3.2 Top of the Mind Locations

Based on the research and interviews with companies across all seven industry verticals,

we have identified India and China as the top locations for SSO. Ireland, Singapore and

Malaysia are ranked third, fourth and fifth respectively with limited difference between

their overall scores. Compared to our previous study, the preference for Malaysia and

Key People involved in SSO decision making

Functional Heads (IT/HR/CFO)

Interdepartmental Team

External Consultants

COO

CEO

SSO Location Managers

Regional/ Geographical Mgrs

Others

16%

43%

15%

52%

25%

24%

1%

Recommenders Decision Makers


47%

37%

65%

Others

Interdep

artm

ental

Tea

m

Key People involved in SSO decision making




COO

CEO



Others

16%

43%

15%

52%

25%

24%

1%



47%

37%

65%

Others

Interdep

artm

ental

Tea

m

GROWTH CONSULTING


Mexico as an SSO location has improved whereas that for Philippines and Canada has

dropped. Figure 3.10 highlights the top 10 locations and their overall scores while Figure

3.11 shows the relative position of each country for the seven verticals studied.

Figure 3.10 Top SSO locations across verticals

Figure 3.11 Positioning of countries as SSO location for the seven verticals

Top SSO Locations

India

China

Ireland

0.16

0.17

0.24

0.26

0.30

0.70

0.72

0.77

1.76

2.25

Rank

* Score based on percentage of respondents having chosen as one of their top 3 locations for SSO (50% weight for 1st preference, 30% for second preference; weights of each vertical applied subsequently)

Singapore

Malaysia

Mexico

Czech

Poland

Philippines

Canada

Overall Score*

1

2

3

4

5

6

7

8

9

10

Top SSO Locations

India

China

Ireland

0.16

0.17

0.24

0.26

0.30

0.70

0.72

0.77

1.76

2.25

Rank

* Score based on percentage of respondents having chosen as one of their top 3 locations for SSO (50% weight for 1st preference, 30% for second preference; weights of each vertical applied subsequently)

Singapore

Malaysia

Mexico

Czech

Poland

Philippines

Canada

Overall Score*

1

2

3

4

5

6

7

8

9

10

1

2

3

4

5

6

7

8

9

10

Top Locations across Verticals

BFSI Energy Healthcare Media

& Entertainm. TechnologyTransportation& Logistics

FMCG & Retail

Canada

China

India

Malaysia

Mexico

Poland

Czech Republic

Ireland

Philippines

Dubai

Singapore

Verticals

Locations

Significant &Growing

Emerging location

UK

US

Russia

Eastern Europe*

Australia

France

Stable Declining*Excludes Czech, Poland

Top Locations across Verticals

BFSI Energy Healthcare Media

& Entertainm. TechnologyTransportation& Logistics

FMCG & Retail

Canada

China

India

Malaysia

Mexico

Poland

Czech Republic

Ireland

Philippines

Dubai

Singapore

Verticals

Locations

Significant &Growing

Emerging location

UK

US

Russia

Eastern Europe*

Australia

France

Stable Declining*Excludes Czech, Poland

GROWTH CONSULTING


The section below provides a detailed overview of the top ten countries.

India (Rank 1)

Figure 3.12 Country snapshot: India

Current SSO Situation

India is the leading SSO destination in the world. Providers are maturing and moving up

the value chain. The market is experiencing consolidation and high levels of absorption.

Providers are expanding their onshore presence to strengthen their global delivery

capabilities. Demand for experienced professionals is outpacing their supply and attrition

levels in the industry remain between 25-40 percent. India hosts both captive and

outsourced operations of major corporations like JP Morgan, British Airways, GE,

Accenture, IBM, etc. with several of these centers employing in excess of 10,000

employees.

Business Environment

Conduciveness

� Lower labor cost as compared to western countries� Large pool of professional & English speaking graduates� Absence of unions in IT/ITES sector� Democratic and stable government� Presence of Software Technology Parks (STPs) and Export Processing Zone (EPZs) in most states.

Cost Efficiency


� Booming economy with more than 8% growth annually for the last few years.

� Rapidly rising wages, almost 30% annually� Rising prices of prime real estate near metros� Loss of efficiency due to poor road and domestic air transport infrastructure.

� Appreciating Indian Rupee against the US dollar is a concern

Favorable Conditions Average Conditions Not Favorable Conditions

� Huge labor force� Highest number of English speaking graduates annually worldwide

Country Snapshot SSO Environment Snapshot

GDP per Capita

GDP Growth

Population

Total Workforce

US$3,700

8.4%

1.13bn

509.3m


Conduciveness

� Lower labor cost as compared to western countries� Large pool of professional & English speaking graduates� Absence of unions in IT/ITES sector� Democratic and stable government� Presence of Software Technology Parks (STPs) and Export Processing Zone (EPZs) in most states.

Cost Efficiency


� Booming economy with more than 8% growth annually for the last few years.

� Rapidly rising wages, almost 30% annually� Rising prices of prime real estate near metros� Loss of efficiency due to poor road and domestic air transport infrastructure.

� Appreciating Indian Rupee against the US dollar is a concern


� Huge labor force� Highest number of English speaking graduates annually worldwide


GDP per Capita

GDP Growth

Population

Total Workforce

US$3,700

8.4%

1.13bn

509.3m

GROWTH CONSULTING


Strengths & Weaknesses

� Strengths: Large talent pool, English speaking labor force, cost efficiency are some of

the strengths that India possess as an offshoring destination

� Weaknesses: Poor infrastructure, rising wages, and the appreciation of the Indian

Rupee against the US dollar

Government Initiatives to promote SSO

The central and state governments have whole heartedly supported the industry. Some of

incentives provided are – Special tax arrangements, rebate on cost of land, concession in

power tariff, special incentive packages for project valued at more than US$ 10 million.

Indian state Governments have taken the following steps to boost the growth of the SSO

industry within their domains:

� A majority of the states have enacted laws to allow employees to work on National

Holidays; allow women to work in night shifts; and offices to function 24 hours a day,

all through the year (i.e. 24x7x365).

� State Governments have announced IT policies that seek to create (through focused

Human Resources Development (HRD) programs), a trained pool of manpower with

the skills and aptitudes appropriate for the SSO industry requirements. Bridge

programs for engineering graduates, communicative English, soft skills, accent

neutralization, ITES sub-domain level training, etc. have been given focused attention

by the state governments.

Most of the states in India have Software Technology Parks (STPs) and Export

Processing Zones (EPZs) offering world-class infrastructure with reliable data

communication facilities. Further, to leverage private sector investments, the state

governments have proactively come out with several special incentives such as Special

Tax Incentives, Rebate on Cost of land, Rebate on stamp duty on sale/lease of land,

Rebate on stamp duty on sale/lease of land, Concession in power tariff for new units,

Self–certification under various Acts, Special incentive packages for mega projects (>

US$ 10 million)

GROWTH CONSULTING


SSO Outlook

India will continue to be a leading destination for offshoring in the near future. The

advantages which India offers far outweigh the concerns. Indian outsourcing outfits are

growing rapidly and becoming global players, in addition to this, already established

global players continue to add to their headcount in India. India is also emerging as a

location of choice for high end research and design work especially in the technology,

automotive and the pharmaceutical sector.

GROWTH CONSULTING


China (Rank 2)

Figure 3.13 Country snapshot: China


China remains a favorable hub for SSO activities given its talent, ability to scale, huge

local market, world class infrastructure in major cities and other attractive factors that will

spur China ahead such as the hosting of the Olympic Games in 2008 in Beijing as well as

the Expo 2010 - World Fair in Shanghai in the year 2010.

China has managed to attract names like IBM, Accenture, SONY, NEC, Rockwell,

BearingPoint, Matsushita, Ericsson, Nokia, GE, Dell, SAP, Satyam and other MNCs to

establish their application development centers as well as BPO and IT Services centers in

software parks across China. From the banking industry, powerhouse Citigroup chose

China for its back office operations in addition to its existing center in Singapore.

Japanese outsourcing to Dalian, China, reached US$ 375 million in 2004. Major

pharmaceutical companies such as Roche, GlaxoSmithKline and Eli Lily have established

their R&D centers in Shanghai, China thus implying the high quality of Chinese talent in

the R&D segment of biotechnology and healthcare. For the FMCG & Retail sector, China

is at the forefront for procurement tasks.



Conduciveness

� Politically stable given a single party ruling, the Communist Party of China.

� Rated poorly in terms of corruption 45,400 km of expressway, 78,000 km of railway network in 2007 as well as over 500 airports.

� Spent just over US$ 136 billion on R&D in 2006 and it now ranks second worldwide with 926,000 researchers

Cost Efficiency


� GDP growth at 10.5 %� Annual salaries for entry level staff starts at US$5460, Team Lead with 2-3 years experience can earn US$8,800 annually and managers with 5 - 8 years of experience can obtain a salary package of US$ 13,732.


� 629 higher learning institutions across China with the most famous being Tsinghua and Beijing University, the equivalent of MIT and Harvard in China

� Out of the 202,600 graduates in China, 38,400 are PH.D and 164,200 are master's degree holders.

GDP per Capita

GDP Growth

Population

Total Workforce

US$7,600

10.5%

1,3bn

918m



Conduciveness

� Politically stable given a single party ruling, the Communist Party of China.

� Rated poorly in terms of corruption 45,400 km of expressway, 78,000 km of railway network in 2007 as well as over 500 airports.

� Spent just over US$ 136 billion on R&D in 2006 and it now ranks second worldwide with 926,000 researchers

Cost Efficiency


� GDP growth at 10.5 %� Annual salaries for entry level staff starts at US$5460, Team Lead with 2-3 years experience can earn US$8,800 annually and managers with 5 - 8 years of experience can obtain a salary package of US$ 13,732.


� 629 higher learning institutions across China with the most famous being Tsinghua and Beijing University, the equivalent of MIT and Harvard in China

� Out of the 202,600 graduates in China, 38,400 are PH.D and 164,200 are master's degree holders.

GDP per Capita

GDP Growth

Population

Total Workforce

US$7,600

10.5%

1,3bn

918m


GROWTH CONSULTING


� Strengths: Abundance of human capital especially for R&D functions, relatively

cheaper human resource than most competing nations

� Weaknesses: No single government body to handle and coordinate SSO enquiries/

investments, lack of English speakers


There is no single government body such as MDeC in Malaysia or iDA in Singapore to

handle all SSO matters. Corporate tax rates are non-uniform across China. For example,

Shanghai and Guangzhou taxes are at the high end of 33% and 30% respectively

whereas Zhuhai stands at an attractive rate of 15% and Dalian at 24%. The Chinese

government has designated several cities in China to be the hub of excellence for SSO

activities, namely, Beijing, Shanghai, Hangzhou, Tianjin, Nanjing, Chengdu, Xi’An,

Shenzhen and Dalian.

SSO Outlook

China is unique compared to other SSO contenders due to its ability to cover lower end

functions such as back office processing to high value functions such as R&D. Even

though the Chinese government has earmarked many major cities in China as hub of

excellence for SSO, there is a lack of collective measures from the various government

agencies involved to ensure the success of these cities. However, China will remain as

one of the strongmen in the arena of SSO given its labor force skills and availability.

GROWTH CONSULTING


Ireland (Rank 3)

Figure 3.14 Country snapshot: Ireland


The base layer of the offshoring value pyramid – running infrastructure and applications –

is currently where most of the action is in the Irish offshoring market; however this tends

to be a commodity business and therefore Ireland is losing its share. However, many

healthcare and technology companies have established their R&D centers in Ireland with

the entertainment and media vertical exploring the location for their offshoring initiatives.

Global leaders such as Accenture, Allergan, Black & Decker, Citigroup, Colgate, Oracle,

Pfizer, Microsoft, Whirpool, Xerox, Hertz, IBM, Dell, RCI, AOL, eBay, SAP, Siemens,

Bertelsmann have located pan-European/EMEA/Global centres in Ireland.


Conduciveness

� Total investment of approximately US$ 250 billion for national development in the next 7 years.

� Ranked 2nd out of 60 countries in World Competitiveness Report for education system and 3rd for per capita productivity

� One of the most beneficial corporate tax regimes in the world with 12.5% corporate tax.

Cost Efficiency


� Labor costs are fast increasing; higher than many EU countries


� 3rd out of 60 countries for per capita productivity in the World Competitiveness Report 2005

� Over 39% of Irish people aged 25-34 have a third level education

� Highest output of Science and Engineering graduates within Europe.


GDP per Capita

GDP Growth

Population

Total Workforce

US$43,600

5.2%

4.1m

2.1m


Conduciveness

� Total investment of approximately US$ 250 billion for national development in the next 7 years.

� Ranked 2nd out of 60 countries in World Competitiveness Report for education system and 3rd for per capita productivity

� One of the most beneficial corporate tax regimes in the world with 12.5% corporate tax.

Cost Efficiency


� Labor costs are fast increasing; higher than many EU countries


� 3rd out of 60 countries for per capita productivity in the World Competitiveness Report 2005

� Over 39% of Irish people aged 25-34 have a third level education

� Highest output of Science and Engineering graduates within Europe.


GDP per Capita

GDP Growth

Population

Total Workforce

US$43,600

5.2%

4.1m

2.1m

GROWTH CONSULTING



� Strengths: World class infrastructure, talented workforce and government support

� Weaknesses: Small size of labor force and high cost of living


Ireland has one of the most benevolent corporate tax environments in the world. A

corporation tax rate of 12.5% applies to all corporate trading profits. Tax credits are

provided for incremental expenditure on Research and Development. Ireland also has a

favorable holding company regime and double taxation agreements with 44 countries.

SSO Outlook

Ireland is likely to loose share in low value operations. Though it has held on to its

position as a top location for SSO, its value proposition is eroding fast. However, it is

generating significant interest for higher value activities like R&D.

GROWTH CONSULTING


Singapore (Rank 4)

Figure 3.15 Country snapshot: Singapore


Singapore is considered a leader in high-tech outsourcing for many large corporations in

the world. In 2006, Singapore hosted 95 off-shoring projects in total. Some notable

examples are SAP SSC, Citibank, DBS, etc. Singapore hosts more than 7,000 MNCs with

over 60% based in Singapore as regional headquarters.


� Strengths: Highly skilled and educated workforce, extensive communications

infrastructure, free trade agreement with USA, secure location for sensitive high-end

activities

� Weaknesses: Relatively high wage levels, small labor pool


Conduciveness

� Stable political system� Minimal corruption� Low income and corporate tax system� Ease of starting a business� Safe location for sensitive high-end activities

Cost Efficiency


� GDP growth at 7.3%� Low inflation at 0.8%� No threat of expropriation, and contracts are very secure

GDP per Capita

GDP Growth

Population

Total Workforce


US$30,161

7.3%

4.5m

2.3m

� Highly flexible employment regulation� High wages, low workforce numbers� 71% of the population is literate in English� Multi-lingual capability



Conduciveness

� Stable political system� Minimal corruption� Low income and corporate tax system� Ease of starting a business� Safe location for sensitive high-end activities

Cost Efficiency


� GDP growth at 7.3%� Low inflation at 0.8%� No threat of expropriation, and contracts are very secure

GDP per Capita

GDP Growth

Population

Total Workforce


US$30,161

7.3%

4.5m

2.3m

� Highly flexible employment regulation� High wages, low workforce numbers� 71% of the population is literate in English� Multi-lingual capability


GROWTH CONSULTING



The Government has increased the capacity of technical schools and universities as well

as made it easier to recruit foreign professionals to work in service centers. The US-

Singapore free trade agreement that emphasizes on the Intellectual Property protection

will help promote Singapore as the main hub for knowledge-based outsourcing

SSO Outlook

Singapore’s outlook as an SSO location is promising, with its highly skilled labor pool and

commitment to business continuity and disaster recovery. Flexible labor policy to attract

foreign talent will ensure that any corporations who would like to set up SSO centers in

the island would be able to find the required-skills for their operations.

GROWTH CONSULTING


Malaysia (Rank 5)

Figure 3.16 Country snapshot: Malaysia


Malaysia has established itself as a strong player in BFSI, T&L and Energy verticals and

as an emerging location for Technology. Recent SSO investments include Dell Malaysia

Enterprise Command Center, Satyam’s Global Solutions Centre and Al-Jazeera’s regional

broadcast center. Successful SSO operations include DHL, Shell, HSBC, Standard

Chartered’s Scope International shared services center, Monster Technologies, TRW and

British American Tobacco’s Group Service Delivery (GSD). Malaysia is also witnessing

continued expansion from existing players such as IBM with its recent Asia Pacific

Finance Regional Support Center.


� Strengths: Multilingual and multicultural workforce to serve different regions, low wage

inflation and the lowest turnover of staff in Asia Pacific indicating the overall loyalty

that the workforce has

� Weaknesses: Lack of qualified human resource especially in the field of R&D



Conduciveness

� In terms of political ratings, Global Insights gave Malaysia a score of 1.75 (1 means low risk and 5 means high risk).

� Malaysia is ranked 39 out of 159 countries in the world according to the Corruption Perception Index study by Transparency International.

� There are 49,935 km of paved roads in Malaysia and an estimated RM 159.4 billion (~ US$ 47 billion) in funds will be invested in infrastructure building and upgrade in 2007.

Cost Efficiency


� GDP growth at 5.9 %� Malaysia has a low wage inflation (5.5%) compared to many other top Asian countries.

� In 2005, Malaysia's salary increase budget ranged from 5.4% to 6.1%


� Attrition rate in Malaysia remained almost static at 12.5% up from 12.4% of 2004.

� Ministry of Education statistics show that 11,619 turned out to be ICT graduates in 2003. By 2006, the country projected a total of 43,757 ICT Diploma and Degree graduates.

� Multilingual and multicultural workforce

GDP per Capita

GDP Growth

Population

Total Workforce

US$12,700

5.9%

24.8m

10.6m



Conduciveness

� In terms of political ratings, Global Insights gave Malaysia a score of 1.75 (1 means low risk and 5 means high risk).

� Malaysia is ranked 39 out of 159 countries in the world according to the Corruption Perception Index study by Transparency International.

� There are 49,935 km of paved roads in Malaysia and an estimated RM 159.4 billion (~ US$ 47 billion) in funds will be invested in infrastructure building and upgrade in 2007.

Cost Efficiency


� GDP growth at 5.9 %� Malaysia has a low wage inflation (5.5%) compared to many other top Asian countries.

� In 2005, Malaysia's salary increase budget ranged from 5.4% to 6.1%


� Attrition rate in Malaysia remained almost static at 12.5% up from 12.4% of 2004.

� Ministry of Education statistics show that 11,619 turned out to be ICT graduates in 2003. By 2006, the country projected a total of 43,757 ICT Diploma and Degree graduates.

� Multilingual and multicultural workforce

GDP per Capita

GDP Growth

Population

Total Workforce

US$12,700

5.9%

24.8m

10.6m


GROWTH CONSULTING


MSC (Multimedia Super Corridor) status companies operating in Cyberjaya, Technology

Park Malaysia, Kuala Lumpur City Centre, Kuala Lumpur Tower, Bayan Lepas, (Penang)

and Kulim High Tech Park in Kedah enjoys the following incentives:

� Pioneer status with a tax exemption of 100% of the statutory income for a period of 10

years or Investment Tax Allowance of 100% on the qualifying capital expenditure

incurred within a period of 5 years to be offset against 100% of statutory income for

each year of assessment

� R & D grants (for majority Malaysian owned MSC status companies)

Other advantages of MSC include duty-free import of multimedia equipment, Intellectual

property protection , a comprehensive framework of cyber laws, no censorship of the

Internet, world-class physical and IT infrastructure, globally competitive

telecommunication tariffs and services, high-powered implementation agency, the

Multimedia Development Corporation to provide consultancy and assistance within the

MSC, high quality, planned urban development, excellent R&D facilities and lastly, a

green and protected environment.

On human capital development, initiative such as MSC KDI (K-workers development

institute) in Malaysia to help graduates develop and acquire the necessary skills in ICT is

lauded by many respondents as a great measure to improve the technical skills of SSO

workers in Malaysia.

SSO Outlook

It is estimated that there are currently about 30,000 to 40,000 people who are working in

Malaysia’s SSO companies and in the long run, Malaysia may not be able to meet the

growing requirements of SSO operations as compared to countries with an abundance of

workforce such as China and India.

GROWTH CONSULTING


Mexico (Rank 6)

Figure 3.18 Country snapshot: Mexico


The SSO landscape in Mexico is characterized by an ever increasing presence of

established IT service providers – EDS, IBM, ACS, Gedas, and HP to name but a few.

Growing at an annual rate of five percent, Mexico’s outsourcing industry is driven primarily

by offshore outsourcing initiatives adopted by global automobile conglomerates and major

international airlines.

ACS’ center situated in Ciudad Juarez manages a significant portion of Air France’s

outsourced passenger revenue accounting business. IBM, on the other hand, has data

centers in Guadalajara and Monterrey with 1,200 staff serving numerous clients in the

large corporate and medium enterprise segments worldwide.

Announcing plans to hire some 5,000 workers in its recently launched software

development center in Guadalajara, TCS is the latest in a growing list of major global IT

service providers to set up shop in Mexico. The center is designed to perform certain

tasks currently completed in India.

This move is principally driven by mounting labor costs witnessed in India. Not least,

given that business emanating from the US accounts for the consultancy’s largest source


Conduciveness

� Strong cultural affinity with the U.S. � Liberalization of national infrastructure underway to catalyze upgrading initiatives

� Government incentives and subsidies to promote growth of IT industry

� Labor and tax reforms needed� Although politically stable, some instances of corruption persists

Cost Efficiency


� Access to inexpensive labor pool� Low inflation at 3.4%� Relatively low foreign exchange - 10.899 Mexican pesos/US$

� 90% of trade under free trade agreements with over 40 countries; key member of NAFTA


� Supply of highly skilled labor outweighed by blue collar labor pool

� IT-related courses gaining popularity in universities and technical schools

� Relatively low attrition rate at less than 5%� Ample supply of native Spanish speakers to serve growing Hispanic market in North America

GDP per Capita

GDP Growth

Population

Total Workforce

US$10,600

4.8%

108m

38m



Conduciveness

� Strong cultural affinity with the U.S. � Liberalization of national infrastructure underway to catalyze upgrading initiatives

� Government incentives and subsidies to promote growth of IT industry

� Labor and tax reforms needed� Although politically stable, some instances of corruption persists

Cost Efficiency


� Access to inexpensive labor pool� Low inflation at 3.4%� Relatively low foreign exchange - 10.899 Mexican pesos/US$

� 90% of trade under free trade agreements with over 40 countries; key member of NAFTA


� Supply of highly skilled labor outweighed by blue collar labor pool

� IT-related courses gaining popularity in universities and technical schools

� Relatively low attrition rate at less than 5%� Ample supply of native Spanish speakers to serve growing Hispanic market in North America

GDP per Capita

GDP Growth

Population

Total Workforce

US$10,600

4.8%

108m

38m


GROWTH CONSULTING


of revenue, TCS believes Mexico’s low labor and infrastructure costs combined with the

low Peso, relative to a rising Rupee, may help boost the company’s earnings from the US

market.

The continued presence of established IT service providers with strong links with the

automotive sector has been crucial in attracting the likes of Volkswagen, General Motors,

Nissan and Mercedes Benz to deploy their outsourcing initiatives in Mexico.

Similarly, the growth of call centers in the country is propelled by demand from U.S. firms

seeking to reinforce their services for the growing Hispanic customer base across North

America.


� Strengths: Relatively low labor and infrastructure costs coupled with being a

nearshore alternative for U.S. businesses

� Weaknesses: The growth of Mexico’s SSO industry is impeded by systemic flaws,

primarily rigid labor laws and the continued displacement of skilled labor resulting in

an unbalanced labor market


In partnership with Canieti, a Mexican IT trade group, the Mexican Ministry of the

Economy launched MexicoIT to raise the country’s visibility as an IT and business

process outsourcing destination. One of the program’s objectives is to promote several

technology clusters situated in Mexico City, Monterrey, Jalisco, Tijuana as software

development and business process outsourcing centers.

To that effect, the Mexican government has implemented affirmative measures toward

creating a conducive business climate. Such measures include financial incentives for

conducting technology research and development in the country, as well as grants and

scholarships for enrollment in IT training programs. Additionally, the government, via

Prosoft, also offers support for startups in obtaining software quality certification.

GROWTH CONSULTING


SSO Outlook

Global IT service providers with strong links with the automotive sector play a pivotal role

in attracting major automobile players to deploy their outsourcing initiatives in the country.

Similarly, the growth of call centers in Mexico is propelled by demand from U.S. firms

seeking to serve the ever growing Hispanic customer base witnessed in the North

American market.

GROWTH CONSULTING


Czech Republic (Rank 7)

Figure 3.18 Country snapshot: Czech Republic


Czech Republic is considered by many large MNCs for functions such as Finance &

Accounting and also IT Services & Support though in recent years, Czech Republic is

determined to position itself as a hub for R&D excellence. Examples: InBev Business

Services Czech which was set up with a cost of US$ 2.57 million, Accenture (US$ 2.75

million), CSC (US$ 1.88 million), Global Tele Sales Brno– Lufthansa’s call center (US$

1.55 million), IBM Global Services Delivery Center (US$ 4.18 million). To date,

Panasonic, Honeywell, Mercedes Benz, Motorola, Rockwell Automation, Thermoking and

Visteon are among the many global enterprises who have established their R&D or

design centers in Czech Republic. Major finance & accounting SSO deals include

investments from pharmaceutical and consumer powerhouse Johnson & Johnson, UK’s

Tesco, Energy giant Exxon Mobile, Siemens, SAP and Philips whereas top logistics

players such as DHL, global IT player IBM, Tesco and one of the largest job search

engine in the USA, Monster Technologies, makes the most substantial investments in the

IT Services & Support SSO scene. DHL Information Services (Europe) s.r.o. was set up

with a cost of close to US$ 200 million and Sun Microsystem’s software development

center was started at a cost of US$ 22.81 million.



Conduciveness

� Czech Republic scored 4.3 in the Transparency International Corruption Perception Index .

� Measured on a per capital basis, Czech Republic is by far the most successful country in attracting FDI in Central Europe.

� Czech Republic is strategically located and its capital, Prague,is only 354 km from Berlin, Germany, 1,229 km from London, UK, and less than 2,000 km to most major European cities.

Cost Efficiency


� GDP growth at 5.43 %� Real wages, with inflation taken into account, increased by 3.9%. The wage-growth rate is healthy and is not endangering the economy's competitiveness thanks to increasing labor productivity.

� Inflation rate of 2.9% according to IMF, World Economic Outlook Database


� The Czech Republic has a total of 67,535 students in higher learning institutions with 7,168 of them being graduate students.

� Close to 70 per cent of the Czech population is able to speak a foreign language where English and German are most widespread.

GDP per Capita

GDP Growth

Population

Total Workforce

US$13,654

5.43%

10.2m

5.27m



Conduciveness

� Czech Republic scored 4.3 in the Transparency International Corruption Perception Index .

� Measured on a per capital basis, Czech Republic is by far the most successful country in attracting FDI in Central Europe.

� Czech Republic is strategically located and its capital, Prague,is only 354 km from Berlin, Germany, 1,229 km from London, UK, and less than 2,000 km to most major European cities.

Cost Efficiency


� GDP growth at 5.43 %� Real wages, with inflation taken into account, increased by 3.9%. The wage-growth rate is healthy and is not endangering the economy's competitiveness thanks to increasing labor productivity.

� Inflation rate of 2.9% according to IMF, World Economic Outlook Database


� The Czech Republic has a total of 67,535 students in higher learning institutions with 7,168 of them being graduate students.

� Close to 70 per cent of the Czech population is able to speak a foreign language where English and German are most widespread.

GDP per Capita

GDP Growth

Population

Total Workforce

US$13,654

5.43%

10.2m

5.27m


GROWTH CONSULTING


� Strengths: Quality workforce with good qualification, a huge percentage of German

speaking population to serve German-speaking nations, spending on R&D is higher

than most Eastern European nations highlighting Czech’s determination to be a hub

of excellence in Eastern Europe for R&D functions

� Weaknesses: Lack of scalability given its small population size


The Framework Program for Support of Technology Centers and Centers of Business

Support Services offers subsidies for business activities in the areas of technology

centers and business support services as well as training and re-training.

Subsidy up to 50% of eligible business expenses (wage/ capital expenditure on tangle/

intangible assets), paid during the period of a maximum of 10 years will be provided along

with a subsidy of up to 35% of special training cost and 60% of general training costs.

Czech Republic has a fairly open immigration policy which offers selected qualified

foreign workers the option of obtaining permanent residence permits after only two and a

half years of living and working in the country. With an open immigration policy, it is hope

that more talent will be attracted to Czech Republic to plug the gaps.

SSO Outlook

Given Czech Republic’s small population size, many players foresee a difficult market in

terms of getting qualified labor and even Czech Republic’s openness to highly skilled

labor immigration may not be quick enough to respond to growing needs from the SSO

market. Due to lack of scalability, Czech Republic may lose out in the long run to labor

rich SSO hubs such as India and China. However, its strong value proposition of proximity

to Western Europe will drive its growth in the near term.

GROWTH CONSULTING


Poland (Rank 8)

Figure 3.19 Country snapshot: Poland


Poland is considered a leader in call center outsourcing for European corporations or

corporations with substantial business activities in the Europe. Currently, Poland has

1210 shared service centers with an average of 10 to 30 consultants in each center.

Some notable examples are Royal Philips Electronics, Thomson, Lufthansa, Citigroup

and Accenture. Apart from the productivity and low staffing cost, Poland has multiple

cities such as Gdansk, Warsaw, Krakow and Lodz with large populations of 1 million, 2

million, 750,000 and 1 million respectively. To put the factor in perspective, Poland has 42

cities with more than 100,000 inhabitants, while Hungary has 9 and Czech Republic has

5. Thus, corporations have higher flexibility in locating their SSO centers in Poland.


� Strengths: Labor availability, skills and productivity, relative low wage compared to

Ireland, more choice of SSO locations

� Weaknesses: Competition with neighboring locations due to wage inflation, poor

transport infrastructure


Conduciveness

� Political unstable with new government's anti-foreigner stance

� Relatively fast to start a business� EU member� Low corporate tax rate� Significant corruption

Cost Efficiency


� GDP growth at 4.6%� Low inflation at 2.4%� Allows for 100 percent foreign ownership of domestic businesses but sets ceilings on the share of foreign ownership in various industries

GDP per Capita

GDP Growth

Population

Total Workforce


US$8,655

4.6%

38.5m

17.1m

� Inflexible employment regulations� Matched language to Europe countries (English and German)

� High labor productivity growth rate



Conduciveness

� Political unstable with new government's anti-foreigner stance

� Relatively fast to start a business� EU member� Low corporate tax rate� Significant corruption

Cost Efficiency


� GDP growth at 4.6%� Low inflation at 2.4%� Allows for 100 percent foreign ownership of domestic businesses but sets ceilings on the share of foreign ownership in various industries

GDP per Capita

GDP Growth

Population

Total Workforce


US$8,655

4.6%

38.5m

17.1m

� Inflexible employment regulations� Matched language to Europe countries (English and German)

� High labor productivity growth rate


GROWTH CONSULTING



Polish Information and Foreign Investment Agency (PAIIZ) is established in June 2003 to

stimulate FDI and offer information and support to investors. Poland has low corporate

income tax rate of around 19%.

SSO Outlook

Cost advantage is eroding due to increasing wages in Poland. Poland has poor transport

infrastructure; however, the Ministry of Infrastructure is undertaking a program for

fundamental adaptations of the road network to EU standards by 2015. However, given

the country’s ample supply of labor force, with their highly skilled language capabilities as

well as cultural similarities to the western Europe, Poland is likely to remain a competitive

player in SSO.

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Philippines (Rank 9)

Figure 3.20 Country snapshot: Philippines


Philippines hosts over 60 service providers with 22,500 full time employees involved in

back office segment and the estimated revenue in 2005 is US$180 million from the

segment. Several notable SSO centers in Philippine include HSBC’s BPO delivery center,

Citigroup’s SSC, Dell’s SSC, Safeway’s SSC and Global eXchange SSC. Several

companies have also relocated their SSO operations to Philippines. IBM, for example,

shut down a large site in Bangalore and moved the site’s operation to Philippines.

Similarly, Skyes closed the Indian operations and moved to Philippines.


� Strengths: Manpower competency in English and ICT, low cost of labor and operation,

traditional tie with USA

� Weaknesses: Limited city for SSO (Manila and Cebu city only), wage inflation and

attrition



Conduciveness

� Political instability� Moderate effort to start a business� Relatively high income and corporate tax rates� Wide spread corruption

Cost Efficiency


� GDP growth at 5.4%� High inflation rates at 6.9%� Maintain two negative lists as entry barrier for foreign investment

GDP per Capita

GDP Growth

Population

Total Workforce


US$5,000

5.4%

89.5m

36.7m

� Rising cost of staff recruitment and retention� English and Filipino are the first language� Significant experience in serving offshoring business targeted at US markets



Conduciveness

� Political instability� Moderate effort to start a business� Relatively high income and corporate tax rates� Wide spread corruption

Cost Efficiency


� GDP growth at 5.4%� High inflation rates at 6.9%� Maintain two negative lists as entry barrier for foreign investment

GDP per Capita

GDP Growth

Population

Total Workforce


US$5,000

5.4%

89.5m

36.7m

� Rising cost of staff recruitment and retention� English and Filipino are the first language� Significant experience in serving offshoring business targeted at US markets


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The Government has been actively promoting the American financial certifications such

as Series 6 and 7 that are compliance with the needs from the American and many other

countries’ enterprises.

SSO Outlook

The Philippines is expected to remain popular for back office operations, especially for

call center and tech helpdesk functions. However, Philippines will need to diversify its

SSO locations and choices from its only current main hub in Manila and Cebu city. This is

due to the high wage inflation and attrition in Manila where call centers are facing a

situation where the employees are expected to demand an average of 70% salary

increment in the near future.

Furthermore, due to its heavy exposure to American corporations, the Philippine may lose

its SSO attractiveness with the near-shoring option for American corporations to

outsource to Latin America. Also, the Philippines has limited capability to serve high value

functions like R&D.

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Canada (Rank 10)

Figure 3.21 Country snapshot: Canada


Canada is a world leader in IT-outsourcing with a specialization in call centers, BPO and

IT services. With high levels of education and trained workforces and excellent

infrastructure, Canada can attract especially high-end projects. Particularly for the U.S.A,

Canada is a favorite outsourcing destination due to geographic, cultural/language

advantages and regulatory similarities i.e. Sarbanes-Oxley. US-related outsourcing

projects occupy around 180,000 workers in Canada with 50% being call center-related.

Companies that use Canada as outsourcing destination are Dell with centers in Ottawa,

Toronto and Edmonton, US Robotics, 3Com, Fujitsu, Unisys, etc. Procter & Gamble

(P&G) and Lufthansa both set up shared services centers in Canada. While P&G is using

its center to serve US customers, the German airline offshored HR functions.



Conduciveness

� Stable political system� Minimal corruption� Moderate income and corporate tax system� Almost US$13.7bn in outsourcing revenues� About 32,000 ICT companies operating in the country� Government spending in ICT sector about US$4.9bn (2005)� High government expenditures due to elaborate social programs

Cost Efficiency


� GDP growth at 2.8%� Low inflation at 2%� Great natural resources and substantial economic surplus� Government restrictions for certain industries (telecoms, BFSI, broadcasting, newspapers, energy monopolies, book publishing, filmmaking and distribution and air transport)

� Labor costs up to 20% lower than in US

GDP per Capita

GDP Growth

Population

Total Workforce


US$35,200

2.8%

32.5m

17.6m

� Labor pool size of 17.6m� Highly skilled labor pool� 69% of workforce employed in services sector� Long experience in BPO, especially serving US market� Government continuously invests in enhancing education and skill sets



Conduciveness

� Stable political system� Minimal corruption� Moderate income and corporate tax system� Almost US$13.7bn in outsourcing revenues� About 32,000 ICT companies operating in the country� Government spending in ICT sector about US$4.9bn (2005)� High government expenditures due to elaborate social programs

Cost Efficiency


� GDP growth at 2.8%� Low inflation at 2%� Great natural resources and substantial economic surplus� Government restrictions for certain industries (telecoms, BFSI, broadcasting, newspapers, energy monopolies, book publishing, filmmaking and distribution and air transport)

� Labor costs up to 20% lower than in US

GDP per Capita

GDP Growth

Population

Total Workforce


US$35,200

2.8%

32.5m

17.6m

� Labor pool size of 17.6m� Highly skilled labor pool� 69% of workforce employed in services sector� Long experience in BPO, especially serving US market� Government continuously invests in enhancing education and skill sets

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� Strengths: Excellent ICT infrastructure, mature market for provision of outsourcing

services, highly educated workforce (~20% lower labor costs compared to US), native

English speakers, ideal nearshoring location for US

� Weaknesses: Overall costs higher than Asian competitors, small labor pool compared

to India, China


Canada is working on positioning itself as a preferred location for complex processes

such as HR outsourcing, niche IT development or R&D services together with continuous

investments in education and infrastructure areas will complement the plans.

SSO Outlook

Canada will continue to be key SSO location for firms based in the U.S.A. or companies

needing to serve US customers. Canada will also profit from firms with negative

offshoring or outsourcing experiences in low-cost (Asian) countries. In the years to come,

more and more elements of Canada’s USP will be successfully replicated and offered by

Asian peers, thus threatening to slow down long term growth given its limitation of having

a comparatively small workforce.

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3.0 Vertical Analysis

3.1 Finance & Insurance

The Banking, Financial Services and Insurance industry (BFSI, or FSI for short) consists

of major players such as Citigroup, Goldman Sachs, American Express or American

International Group. Increasing pressure to outperform competitors and the search for

new revenue streams is driving the overall business landscape and strategies of the

industry. Just recently the biggest merger talks in Europe were announced: Barclays Plc

is offering about US$80bn for Dutch-based ABN Amro to help the bank pursue its

aggressive growth targets, according to Barclays CEO John Varley. FSIs will further try to

profit from the favorable economic conditions to widen their reach and improve product

and service portfolios. Size matters – and is leading FSIs into developing markets that

provide access to a vast customer base – e.g. China. Apart from a strong and ideally

global presence, FSI’s find that their customers want to be treated with excellent services

and products that are tailored to their needs. All these factors need to be juggled with

while adhering to increasingly strict regulatory requirements such as Basel-II and

Sarbanes-Oxley. The following sections provide an overview on how Shared Services and

Outsourcing affect the BFSI industry as it strives for increasing competitiveness while

reducing costs.


3.1.1.1 General Perception

The financial services sector considers SSO as a key element to remain competitive while

streamlining processes and cutting down on costs. Companies tend to set up either their

own operations, team up with service providers or a combination of both. Offshoring to

destinations such as India, China or the Philippines are mostly preferred by the industry.

However, strict regulations and data protection laws such as in the European Union

prevent BFSIs to fully tap on the possibilities of SSO. As a result, destinations in the

Central and Eastern European countries are very popular for European-based FSIs since

they are not just part of the EU but also provide a highly skilled workforce at better prices

and in close proximity. Overall it can safely be assumed that offshoring and outsourcing

will continue to grow at levels over 20% in the coming years but witness a shift to other

locations for cost and risk-diversification reasons. More and more companies will try to

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achieve “Best shoring” which essentially means tapping on different locations globally that

best address a financial services company’s SSO needs.

In the following sections an overview of the key elements that determine and influence

SSO decisions is presented and explained.


When considering SSO initiatives, companies face a variety of challenges they need to

consider. The following issues and considerations are important factors that need to be

clarified in the beginning:

Strategic justification and planning of increasingly complex SSO initiatives

While many companies in the finance sector use SSO to drive down costs and focus on

core competencies the first question often asked is “Where to set-up a shared services

center” or “Which country to choose to outsource and/or offshore processes” instead of

“Why choose SSO” in the first place? Long-term planning often times falls prey to the

operational needs and tactical decisions of the daily business. In the heat of the day and

under constant pressure to cater to stakeholders of the firm, SSO might at first seem the

right path to choose to show the determination to cut costs, streamline processes and

improve competitiveness. A closer look at the overall implications and fit into the firm’s

strategy as well as cost/benefits could reveal that SSO in fact may not the optimal

solution at times.

Adhering to requirements from government regulatory bodies as well as other compliance

factors

Regulations and initiatives such as Sarbanes-Oxley (SOX), Basel-II and Data Protection

laws significantly impact FSIs when it comes to SSO. In 2004, Lloyds TSB in the UK was

facing a complaint that it had acted against the UK Data Protection Act 1988 and the

applicable European Directives with its offshoring plans to India. The company was

accused of failing to seek written content of its customers to the transfer of sensitive data

outside the EU. While the European Union recognizes few selected countries outside of

its boundaries as meeting the required data protection standards (e.g. Switzerland,

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Canada, Argentina)1 it does not include popular offshoring locations such as China or

India. As a result, financial institutions’ plans to offshore processes that involve dealing

with sensitive customer data (even be it for disaster recovery) often face regulatory and

compliance issues which impact the potential benefits offered by SSO.

Need for diversification of SSO initiatives on a global scale

Asia has been a favorite offshoring location for many years. The most popular locations

like India and China attract MNCs with their abundance of (skilled) labor at low costs.

FSIs have now started to apply a rule which they often tell their customers “diversify to

spread the risk”, i.e. spreading SSO initiatives in different countries and regions. The

Tsunami in 2004, flooding in Mumbai in 2005 and the political turmoil in Thailand in 2006

are examples that show the need for SSO location diversification.

Monitoring of outsourced and offshored processes

Another key issue for FSIs is the monitoring of processes, once they are outsourced to a

third party or offshored to a location thousands of miles away. Lack of monitoring can

easily result not only in higher costs than planned but damages to a firm’s reputation and

fines from industry regulators. Reasons that influence monitoring issues start from time

zone, language and cultural issues to poorly defined contracts and Service Level

Agreements (SLAs). The major rule to ensure proper monitoring and a successful SSO is

“responsibility and accountability”. Although a process is situated in another country or

outsourced to a third party provider, the financial institution has to remain in control by

treating the respective process as if it was still a part of the firm. Negligence created by

relying on the reputation of a provider or the belief that the process is non-critical and

thus less relevant might soon catch up negatively impact the company’s competitive

stand. One example that show the need for monitoring was Lehman Brother’s decision to

shift parts of its computer help desk from India back to the US citing of lack of specialized

training and the difficulty the sustain knowledge transfer. Outsourcing providers such as

1 For further details see: http://ec.europa.eu/justice_home/fsj/privacy/thridcountries/index_en.htm

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Infosys or TCS have opened subsidiaries in Canada that can be more easily monitored by

US-based companies. Choosing a competent partner, that offers strategic and

operational fit while using SLAs and continuous monitoring is key to realizing the targeted

beneficial effects of SSO plans.

To reduce security risks and privacy leaks Northwestern Mutual (NM) applies several

approaches. IT workers at the insurance company’s provider, India-based Infosys are

only provided terminals that do not allow users to alter, record or print data. Terminals are

linked to NM’s servers in the US via secure, high-speed phone lines. Northwestern Mutual

feels that this way, access to customer data can be granted to a provider in an offshore

location. The move was essential since originally NM only sent IT applications to India

which did not involve sensitive information. If all states in the US follow lawmakers in

California which decided to impose restrictions on offshoring personal data, such

initiatives might soon not be possible any longer.2

Rising complexity of SSO and increasing need for risk management

In 2006, police in India arrested an employee at a data processing center for allegedly

siphoning US$420,000 from the accounts of 20 HSBC customers. Although offshoring

and outsourcing services can have a significant impact on a company’s cost efficiency,

incidents like the one at HSBC holds banks and regulators back from fully exploring those

benefits. Especially the financial services industry handles extremely sensitive customer

data, a loss of which could seriously damage a firm’s reputation and overall business if it

is abused. Ever tighter compliance and data protection laws force FSIs to be extremely

careful and transparent when it comes to things like offshoring credit card processing. As

a result, the responsibility of offshored processes remains with the financial services

institution – and not with the provider. If problems or cases of e.g. data theft occur, the

FSI is accountable. Whenever offshoring comes into the picture, risk management and

compliance with regulations are the top priority in this industry.

2 Under the Gramm-Leach-Bliley Act of 1999, financial services companies are not prevented from transferring customer data to offshore third parties for processing. Customers need to be informed by FSIs about these practices but cannot opt out of such activities.

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3.1.1.3 SSO Drivers

Cost benefits are they most common key drivers mentioned by respondents when asked

what made them turn toward SSO. Digging deeper into the rationale behind this revealed

further factors that influenced companies’ decisions:

Figure 3.1.1 Finance & Insurance: SSO Drivers

Cost Benefits

All interviewed companies found that the realization of cost benefits is the key driver for

engaging in SSO. While 23% considered the reduction of cost benefits important, 77% of

companies selected it to be of “very high” importance and by far the most important

factor. Benefits are derived from countries that offer skilled labor but at lower wages. For

many processes, India is a preferred location since it offers an abundance of skilled

workers with English language skills that are available at much lower salaries compared

to Western countries. In 2004, ABN Amro started a restructuring effort that included the

consolidation of its back-office to achieve an estimated cost saving of US$300 million. In

general, industry analysts estimate that by moving IT work offshore FSIs can cut costs by

up to 40%.

42%

37%

14%

56%

21%

8%

12%

11%

44%

68%

57%

23%

33%

39%

74%

67%

24%

31%

77%

14%

24%

12%

12% Improve employee productivity










42%

37%

14%

56%

21%

8%

12%

11%

44%

68%

57%

23%

33%

39%

74%

67%

24%

31%

77%

14%

24%

12%











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Focus on Core Competencies

Focusing on core competencies frees resources to better serve customers and increase

innovation to keep competition away which was confirmed during interviews as no

company found this to be a low-priority factor. Over 60% categorized the focus on core

competencies as either high or very high for the business. Wachovia sealed a US$1.1bn

deal with Genpact in India to outsource parts of its finance and accounting processes.

According to company sources the move was driven primarily to reduce cost and boost

the core business. In recent years, FSIs have realized that the increase in global

competition and the pressure to become more profitable and still deliver best of breed

service to customers can only be achieved by doing what the firm does best. While the

first challenge lies in the identification of a company’s core strengths, the second is to find

somebody whose key strength lies in the processes that should be outsourced. Firms like

JP Morgan develop shared service center that streamline processes, making it possible to

focus more on core competencies without the involvement of an external party and

maintain control and data internally. In 2004, Merrill Lynch signed a deal with IBM for

Systems Integration Services for its Corporate Technology Group that manages the firm’s

technology for Corporate Services, Finance, HR, Marketing & Communications, Research

and Treasury areas.

Access to Qualified Personnel

Often it is not just pure cost-savings that make SSO an essential component of an FSI’s

strategy. The continuous increase in demand for IT professionals can only be satisfied by

tapping into the pool of graduates churning out of universities in Asia and Eastern

Europe. China is on its way to overtake India not just in numbers of IT graduates, but also

works closely with the financial services industry to educate students in areas specifically

catering to the needs of financial services companies. Although quantity of a country’s

labor pool is a very critical rationale to overcome HR shortages as stated by over 90% of

interviewees which found it to be a high or very high driver, companies also consider the

level of education and skill sets as this determines the types of processes they can

offshore and the overall value-for-money of such employees. As a consequence,

companies in the BFSI sector have started to work with universities in countries like China

to ensure that skill sets are taught which cater to the firm’s specific needs.

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Enhance Competitiveness

What could be considered as an “umbrella term” for other drivers such as cost reduction

and process improvement is the constant aim to enhance competitiveness. Bank of

America set up its back-office processing center in India to help the firm stay on top of the

competition. By turning towards SSO for outsourcing processes or to set up a captive

operation in a country like China or India FSIs improve the company’s performance that

help it to focus on processes and services which promise an increase in profitability,

streamlined processes and better customer care. As a result of globalization it is easier

than ever for companies to set-up operations in foreign markets and take away domestic

business from already established players. The ability to offshore functions like call

centers to a low-wage country frees cash-flows to be used in product development or

setting up operations in a promising new market. Shareholders put ever increasing

pressure on financial service companies to show better results each year while keeping

the competition at a safe distance. Outsourcing or offshoring to low-cost destinations are

key elements to help fulfill these goals. As one of the major outsourcing providers

estimates, the demand for SSO in the financial service industry will continue to grow

around 25% per year in the coming years.


While SSO may at first seem to be the solution to many of a company’s goal (i.e. reduce

costs and improve the market position) there are several key concerns that should be

considered to prevent issues and complications that could otherwise have been avoided.

During our research, we have identified several factors that companies from the BFSI

sector need to consider before embarking on the SSO journey since they could

significantly influence the success of the operation.

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19%

22%

4%

5%

38%

78%

18%

7%

15%

21%

43%

6%

46%

21%

44%

68%

56%

51%

36%

56%

31%

44%

12%

23%

43%

23%


Loss of control

Increased costs






Org. de-skilling

19%

22%

4%

5%

38%

78%

18%

7%

15%

21%

43%

6%

46%

21%

44%

68%

56%

51%

36%

56%

31%

44%

12%

23%

43%

23%


Loss of control

Increased costs






Org. de-skilling



Figure 3.1.2 Finance & Insurance: SSO Concerns

Loss of Confidentiality/Control

The major concern companies in the BFSI sector see when turning towards SSO and

outsourcing in specific, is the risk of losing control and sensitive information. About 70%

identified this to be the factor with a very high concern to their SSO plans. Several factors

can cause a bank or an insurer to lose control over an outsourced or offshored process.

Interviewees cited that especially when they first turned towards SSO, inexperience in

planning and negotiations with service providers were main problems. Nowadays, firms

seek to have close ties with service providers and use cross-functional teams to best

manage and implement SSO plans and the realization of goals. As an interviewee from a

major US bank put it, “senior management commitment is essential”. About ¾ of

interviewed executives put a high or very high importance to both monitoring third parties

and ensuring their compliance with contracts and Service Level Agreements (SLAs). It is

for these reasons that SSO initiatives needs to be driven top-down together with all the

necessary support. Furthermore, properly defined SLAs and constant monitoring of the

process needs to be in place to ensure that loss of control never becomes an issue.

Losing confidential data like customer account numbers or credit card details is a prime

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concern when engaging in SSO. In August 2005, former employees of Mphasis in India

(now owned by EDS), misused access to customer data from Citibank that resulted in

damages of US$350,000. Although such incidents are rare there are indications that

confidential information is easier available than thought. In 2006, a report by Channel 4 in

the UK revealed that credit card and bank details from British customers are available in

India for around US$10 each. Allegedly technical support staff that visit call centers

downloaded not just bank and credit card details but also security codes and passport

details. These examples show that it is even more critical to ensure that offshoring and

outsourcing to third parties, which still poses a risk to the handling of confidential

information, needs to be addressed by all parties involved. Otherwise serious compliance

issues and damages to a firm’s reputation could easily outweigh the advantages of SSO.

The risk of De-skilling

A director in charge of services at a major European bank warned that not all that can be

outsourced should be outsourced. Before processes are outsourced, a company needs to

understand how all processes are interlinked and “identify critical core and sub-core

components”. In some cases it seems easy at first to pinpoint whatever can be handled

by a third party but upon a closer look, “you realize that certain components are essential

to support core processes and outsourcing them would result in weakening the overall

business in the long term”. Almost 90% of interviewees shared this opinion and rated de-

skilling as either a high or very high concern in the study. When a financial institution

announces an SSO initiative there is also the risk that through lack of communication

and involvement of all stakeholders involved (i.e. employees) a company risks losing

valuable employees because they “do not see a fit in the new structure” as a UK-based

head of outsourcing put it.

Another key concern highlighted by several companies was regulations and government

restrictions.

Regulations and Government Restrictions

Offshoring initiatives are under close scrutiny by governments and regulators in the EU

and the US. Fraud cases like the one in India which affected HSBC customers, triggered

politicians and regulators to put tight restrictions in place. Certain states in America

prohibit offshoring jobs if it can be done domestically. In the EU companies that outsource

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4.75% 4.87% 4.95% 5.13%

273

300

326

361

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

2006 2007 2008 2009

0

50

100

150

200

250

300

350

400



22%

3%

57%

27%

78%

13%

43%

43%

60%

29%

29%

47%

6%

43%

13%

48%

48%

38%

31%

16%

14%

24%

24%

69%

78%


Human Resources

Procurement


Corporate Learning




Strategic/R&D



4.75% 4.87% 4.95% 5.13%

273

300

326

361

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

2006 2007 2008 2009

0

50

100

150

200

250

300

350

400



22%

3%

57%

27%

78%

13%

43%

43%

60%

29%

29%

47%

6%

43%

13%

48%

48%

38%

31%

16%

14%

24%

24%

69%

78%


Human Resources

Procurement


Corporate Learning




Strategic/R&D

or offshoring to other European states get tax incentives and the processing of sensitive

customer information outside the union is prohibited.

3.1.2 SSO Trends

3.1.2.1 Spend on SSO

Based on global demand, it is estimated that the BFSI sector constitutes for around 25%

of demand which makes it one of the two biggest industries together with the technology

sector which accounts for around 29% respectively. We believe that in the coming years,

demand from the BFSI vertical will continue to grow at a CAGR of approximately 10%

between 2006 and 2009, thus increasing SSO spending from US$ 273m to US$ 361m.

This represents a healthy growth rate but is lower than the 15% overall growth which the

industries combined will experience.

Figure 3.1.3 Finance & Insurance: Spend on SSO

The SSO spend of the BFSI industry will increase slightly during the same period from

4.75% in 2006 to about 5.13% in 2009. A key factor that can influence the spending is

changes in the regulatory environment which could further restrict processes that can be

offshored. Since the United States will be electing a new president in 2008, outsourcing of

US jobs to other countries could become a political interest, especially if the economy

should experience a major slow-down.

As for the SSO process focus, non-critical processes, especially IT services & support

and back-office processing will continue to be the primary focus for SSO projects aiming

to streamline processes and reduce costs. Since these processes have been a focus

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area for quite some time and considering that the BFSI sector has been getting more and

more comfortable with SSO, we see that new areas will attract more attention in the

future, keeping compliance and regulations in mind. Finance & accounting, corporate

learning and procurement are three such processes, where BFSIs will increasingly

explore opportunities to achieve cost efficiency and streamlining overall business.


For the financial services sector, IT-related services still remain the first candidates that

come into people’s mind when it comes to outsourcing. Finance & Accounting, HR and

Procurement are also on the list for SSO. While in general processes that are non-core,

do not fall under strict compliance or regulatory laws and can be better handled by a third

party are selected, it is often not an easy process to determine which processes fall into

that category. As mentioned previously, a thorough analysis of the overall processes

needs to be done to identify areas that are non-core and should not remain in-house to

prevent de-skilling or may affect the competitive position. On top of that, FSIs should not

try to outsource or offshore processes that have flaws and show signs of inefficiencies or

other issues. Outsourcing a process only to hope that a third party can fix it and do it

better will only turn out to be wishful thinking.

Generally the SSO initiative should have the support and commitment of the top level

management and fit into the overall strategy of the firm. Furthermore, rather than

following a trend the FSI needs to clearly determine which processes can be considered

for SSO and if they should be outsourced or if a captive, offshored solution is ideal. The

following description and examples of selected types of SSO should be used as an

indicator.


Back-office processing make up the largest portion of the BFSI SSO market e.g. Credit

card and other transaction processing. Bank of America has a shared services center in

India for back-office processing. The key reason for choosing India stated by Bank of

America was that the country “is a leader in information technology and processing and

has a large English-speaking workforce and good infrastructure. HSBC set up its

Electronic Data Processing unit in Hyderabad, India which controls back-office processing

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in Bangalore, Visakhapatnam. The three processing centers have a staff of more than

4,500 employees. Citigroup chose China as a location for its back-office operations.


Services that are suitable in this category are:

• General Accounting (Bookkeeping, A/P, A/R)

• Bank Statement Consolidation

• Payroll and Tax returns

• Financial Analysis and Reporting (Balance Sheet Analysis)

• Non-Profit Accounting

• Check Processing

In India, Mumbai and Delhi are considered prime F&A offshore centers. Morgan Stanley,

Lehman Brothers, Citibank and JP Morgan set up there centers in Mumbai, while Fidelity

selected Delhi for its operations. Colombo in Sri Lanka is emerging as a hotspot for F&A

since it offers the highest number of UK certified accounts and setting up a center here is

relatively cheaper than in India. HSBC is one example that chose this location. For

institutions in Europe, Krakow in Poland is a prime destination for F&A offshoring. The city

has some 30,000 graduates each year – 21,000 of them in economics. Other locations in

Central and Eastern Europe (CEE) are Bratislava in Prague and Budapest in Bucharest.

Even the United Kingdom manages to attract firms like The Bank of New York and The

Royal Bank of Scotland which set up F&A centers in Manchester, due to its good

transport and business infrastructure, a wide pool of talent and compliance with regulatory

and customer expectation – despite higher costs than the aforementioned locations in

CEE.


IT Services & Support such as help desk assistance, remote personal computer repair

GROWTH CONSULTING


assistance or disaster recovery operations are potential functions that a financial services

company considers for SSO. As part of a US$1.8bn outsourcing initiative, Dutch bank

ABN Amro, in 2005, signed a deal with Indian IT services companies Infosys and TCS for

application support and enhancement. The bank already had a US$1.5bn desktop

outsourcing deal with EDS for its wholesale operations.

Human Resources

Increasingly, FSIs are adding HR operations to their outsourcing/offshoring list. Standard

Chartered for example set up an HR Shared Services Center in Chennai, India with the

aim to deliver a consistently high service for its global operations. Services like payroll

operations and benefits administration fall under these initiatives.


By setting up call centers in offshore locations financial institutions not only aim at

reducing costs but also to leverage on language and cultural similarities. US companies

like American Express prefer the Philippines for the language skills (US English) on top of

the cost benefits it is able to generate by setting up a call center here. These moves

however do not always work as planned. In 2006 Lloyds TSB Group dropped its Indian

call center since its new automated answering service had cut the number of customers

wanting to talk to live people by almost 30% which was much higher than the estimated

8%. As a consequence the company’s spillover call center in Mumbai was not needed

any longer. Lloyds TSB Union on the other hand claimed that it was in fact a petition

signed by 400,000 of the British banking and insurance giant which opposed the handling

of their financial services abroad that led to this decision. Whatever the reason was, this

example shows the importance of proper planning and handling of offshoring processes

in general and those that handle sensitive customer information in specific.


In financial services, companies tend to either rely on their own facilities for offshoring

services, select a third party or a combination of both, i.e. the formation of a joint venture.

GROWTH CONSULTING



47%

17%

35%

30%

25%

77%

8%

8%

87%

44%

46%

54%

8%

55%

16%

57%

23%

7%

10%

37%

11%

62%

21%

7%

35%

69%

6%


Human Resources

Procurement






Strategic / R&D

Wholly Owned

Third Party

Joint Venture

37%

34 %

29 %



47%

17%

35%

30%

25%

77%

8%

8%

87%

44%

46%

54%

8%

55%

16%

57%

23%

7%

10%

37%

11%

62%

21%

7%

35%

69%

6%


Human Resources

Procurement






Strategic / R&D

Wholly Owned

Third Party

Joint Venture

37%

34 %

29 %


Figure 3.1.4 Finance & Insurance: SSO Party of Choice

While all three types of setting up SSO operations are used, those that are pursued by a

BFSI firm on its own or together with a third party are preferred by almost ¾ of

interviewees over outsourcing the process completely to an external provider. The main

rationale for remaining in full control or maintaining a significant involvement through a

partnership solution is to be able to ensure full compliance as well as minimizing the risk

of potentially compromising or even losing sensitive customer data. This is reflected in the

study with 93% of companies stating that they prefer to conduct R&D-related processes

under full or significant control rather than leaving it completely to a service provider.

Similar results were shown for Sales & Sales Generation, although with 16% almost twice

as many firms referred to JVs in this case.

Own Facility

By choosing this option, financial services companies remain in full control over the

operation and can monitor and modify its performance and set-up directly. This choice

gives a company excellent insight and experience into SSO which can later be used when

the firm wants to shift to an outsourcing or third party operation. In some instances like JP

Morgan and IBM in 2004, the FSI can even realize that service like IT are an essential

part of the core business and as a consequence should be handled in-house. In JP

Morgan’s case this resulted in the cancellation of the US$5bn IT outsourcing contract with

IBM.

GROWTH CONSULTING


Hybrid Relationships

Joint ventures and other types of partnerships have the advantage that an FSI can split

responsibilities. Deutsche Bank and Accenture formed a joint-venture where Accenture to

manages their Accounting, IT and HR functions. Important in this type of arrangement is

the proper management of the relationship to avoid tensions and confusion with

responsibilities.


Leaving a process in the hands of a third party which is thousands of miles away is a

challenge for FSIs. Key issues with this form of SSO is managing and monitoring the

performance of the third party which is also operating in another country or even continent

– which can include cultural and time-zone challenges. As a consequence, only non-

critical processes such as IT support mainly fall into this category. Exceptions involving

sensitive customer data are credit card processing which is outsourced by some banks to

providers such as First Data or even other large financial institutions which provide

processing for smaller to mid-sized institutions.

3.1.3 SSO Locations


In the BFSI sector, three parties are involved in the decision making process, i.e. the

CEO, COO and the functional heads. Interestingly only the COO position is participating

in both recommendation and decision making process. Although it was not analyzed how

significant each of the recommenders party is with respect to suggesting suitable

locations, it can be assumed that external consultants, especially those that are involved

in consulting and implementing SSO projects, tend to play a major role in identifying

suitable locations.

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1%

1%

10%

1%

9%

3%

1%

14%

51%

28%

35%

54%

54%

71%

86%

61%

72%

85%

86%

49%

58%

64%

36%

45%

20%

14%

39%

25%

15%

14%

Compensation Costs






Attrition rates

Political stability



IP regulation

1%

1%

10%

1%

9%

3%

1%

14%

51%

28%

35%

54%

54%

71%

86%

61%

72%

85%

86%

49%

58%

64%

36%

45%

20%

14%

39%

25%

15%

14%

Compensation Costs






Attrition rates

Political stability



IP regulation


Figure 3.1.5 Finance & Insurance: SSO Recommenders & Decision Makers

Figure 3.1.6 Finance & Insurance: SSO Location Selection Criteria




COO

CEO



Others

100%

63%

100%

Others

Interdep

artm

ental

Tea

m

100%

100%

100%

100%

38%





COO

CEO



Others

100%

63%

100%

Others

Interdep

artm

ental

Tea

m

100%

100%

100%

100%

38%



GROWTH CONSULTING


For the location selection process all factors listed in Figure 3.1.6 play an important role in

finding a suitable country. Cultural adaptability however is seen as somewhat important

but not as critical as education and language for example. In the medium to long-term the

scale might tip toward more firms ranking this factor as increasingly highly important since

being able to cater to different cultures in an appropriate way might be the next wave of

achieving competitive advantage through cultural differentiation as seen with Islamic

banking.

While all criteria have been acknowledged to play a crucial role, the following ones were

mentioned specifically during the research process.

Low wage structures & Education

Attractive, i.e. low wages for skilled employees, are still the key reason to go offshore.

Compared to a UK graduate a financial service company can get five or more employees

in countries like India and China. High demand has caused attrition rates and

remuneration to increase sharply in India, especially for jobs that require better skilled

programmers and middle management. Firms like ABN Amro face situations where they

invest several months into training individuals only to see them shift to competitors after

one year for higher salary. It is this wage inflation that made companies starting to

wonder if they should consider countries like China which are at the earlier stages of the

SSO demand. The problem with alternatives in the region is that in the case of China for

example, graduates and professionals are not necessarily equipped with the

understanding necessary for the industry and thus would need intensive training – apart

from potentially higher problems in communicating in English.

Infrastructure

The availability of suitable infrastructure is a key component for any SSO efforts. While

one component is a government initiative to set up e.g. Special Economic Zones or

corridors that boast excellent communications infrastructure, things such as uninterrupted

power supply and connections to transportation infrastructure play an important role as

well. In the case of China, the Olympic Games 2008 are a key driver that results in overall

improvements of ICT and other infrastructure.

GROWTH CONSULTING


Attractive government policies

In order to attract foreign companies to set up SSO operations, countries need to create

an atmosphere that provides the right elements to MNCs. Locations like Singapore and

Dubai promote themselves as (upcoming) financial hubs and make it easy for firms to

settle down due to tax incentives and employment laws that make it easy to attract foreign

talent. Countries like Malaysia set up Multimedia Super Corridors that offers tax breaks,

facilities and excellent infrastructure to foreign companies. China as well has Special

Economic Zones that promote high international quality standards such the Hainan

Province, Shenzhen or Shantou. Events such the political coup in Thailand in 2006 or the

bird flu outbreaks in the region have the potential to cast a minor shadow on such efforts.


As in the previous study the top two locations remain China and India with Singapore

coming in at number three. While the first two locations are primarily selected due to the

size and low cost labor pool, Singapore manages to position itself as the primary location

in Asia for firms that look for first class business environment and highly skilled labor to

cater to any level of SSO operations.

GROWTH CONSULTING


Figure 3.1.7 Finance & Insurance: Top SSO Locations

Despite the high attrition rates and wage inflation, respondents believe that India will

remain top choice for FSIs in the medium term. For China companies predict that the

country has the potential to eventually overtake India and claim the number one position.

Apart from also having a huge and highly educated workforce, China attracts companies

with lower wages, and improving English language capabilities. BFSI companies work

together with local universities to develop curriculums that especially cater to their needs

and churn out graduates that are perfectly trained for the companies’ needs. With the

2008 Olympics coming up, the event may give the country a big boost that will further

stimulate its attractiveness as offshoring location.

Ranked #1 Ranked #2 Ranked #3


Top SSO Locations

1

2

3

India

China

Singapore 3%

12%

15%

2%

6%

10%

7%

3%

Rank% of Respondents who ranked among top 3

Emerging Locations

Stable/Declining Locations

Eastern Europe, Dubai, Malaysia, Philippines

USA, UK



Top SSO Locations

1

2

3

India

China

Singapore 3%

12%

15%

2%

6%

10%

7%

3%


Emerging Locations



USA, UK


Top SSO Locations

1

2

3

India

China

Singapore 3%

12%

15%

2%

6%

10%

7%

3%


Emerging Locations



USA, UK

Top SSO Locations

1

2

3

India

China

Singapore 3%

12%

15%

2%

6%

10%

7%

3%


Emerging Locations



USA, UK

GROWTH CONSULTING


Figure 3.1.8 Finance & Insurance: Ranking of Top SSO Locations

In regions outside of Asia, looking at the restrictive environment in the EU, BFSIs in this

region look towards Eastern Europe for their language abilities and similar cultural basis.

Although those locations do not have wages as low as Asian countries, but they offer a

highly skilled workforce that is available next door for a good price. For North America,

destinations like Canada or South America are attractive for the same reasons. Although

countries in Asia may offer lower wages, firms find it easier to handle SSO operations if

the offshoring location is nearby, i.e. can be reached within one or two hours by plane and

offers language as well as cultural similarities. Other emerging locations include Dubai,

Malaysia and Philippines. Malaysia has been attracting companies from the BFSI sector

with its favorable environment consisting of good infrastructure and low cost, the

Philippines is especially preferred for customer service and call center functions.

Overall Score

Ranking of Top Locations

3.6

4.1

4.3

3.9

4

4.2

3.4

3.5

3.5

Singapore

China

India

3.9

3.9

4.0

Score across Key Parameters

Cost Efficiency Bus. Envt. Conduciveness


Overall Score


3.6

4.1

4.3

3.9

4

4.2

3.4

3.5

3.5

Singapore

China

India

3.9

3.9

4.0



Quality of Human CapitalCost Efficiency Bus. Envt.

ConducivenessQuality of

Human Capital

GROWTH CONSULTING


3.2 FMCG & Retail

With a predicted rise of global middle class by the World Bank, and most Fortune 500

and Forbes 2000 retail & FMCG companies recording double digit growth in terms of net

income and sales in 2006, the sector looks set for a rosy and healthy future.

The FMCG (Fast Moving Consumer Goods) industry, also known by its other name,

Consumer Packaged Goods (CPG), generates products that have a quick turnover, and

relatively low cost targeting mostly the consumer market. Some household names in this

sector include Kellogg’s, Nestle, Unilever, Procter & Gamble, Kimberly Clark, Coca-cola,

etc. The retail vertical caters to the sale of goods or merchandise, from a fixed location

such as a department store or kiosk, in small or individual lots for direct consumption by

the purchaser. Examples of major retailers include Seven & I Holdings and AEON group

in Japan, USA based retail giants like Walmart, Target, Krogers, Walgreen, Swiss

grocery chain retailer Migros, US based Tesco, and Marks & Spencer.

USA based retail & FMCG companies account for a large majority of both the Fortune

500 and Forbes 2000 lists covering a total of 54.1% and 47.95% respectively in terms of

number of companies in the lists. European based companies come in second place at

34.43% in the Fortune 500 and 28.77% for the Forbes 2000 list. In other words, any

hiccups or movements in the USA and European based FMCG & Retail companies would

have a major impact on the overall market worldwide. Combining both lists, the total

revenue generated in 2006 for all these companies tallies up to more than US$ 2.7 trillion.

In mature markets, retail sector companies are constrained in their ability to grow and

maintain profit margins as a result of a pressure on prices, market saturation, and slowing

population growth. Threat to house prices in the US also poses risk for consumption

growth.

As a consequence, the strategic focus of the sector is moving towards the emerging

economies and expanding consumer markets of Asia and Central & Eastern Europe -

China and India in particular - which offer new opportunities for growth through global

sourcing, off-shoring and the development of modern retailing.

GROWTH CONSULTING




Going forward, the FMCG & Retail vertical will see SSO as a path to get access to better

talents and conduct efficient operations while reducing operating expenditure, though

data security, organizational de-skilling and a lack of qualified management staff will

continue to plague this industry.

Finance & Accounting, IT Services & Support, HR, Procurement and Customer Service &

Call Centers remain the most popular functions for SSO and wholly owned shared

services units are the most favored form of SSO type.

In terms of location selection criteria, labor force experience and availability are two

pivotal factors in attracting SSO investments though business environment, HR and cost

efficiency issues play a role for FMCG & Retail firms when deciding on where to hub their

SSO activities. The vertical also looks into other unique factors such as scale and

geographical proximity to key markets or headquarters when deciding on SSO locations.

Finally, top of mind locations for the SSO for the FMCG & Retail vertical are the UK, India,

Poland, Czech Republic and the USA.


FMCG & Retail companies are typically faced with the following issues and considerations

before starting or running existing SSO operations.

Vendor selection & management

For FMCG & Retail companies wanting to outsource their business processes, the key

question to be answered is which vendor should they select? Should they entrust a single

vendor to provide for all their outsourcing needs or should they be faced with

management complexity issues and challenges by outsourcing to multiple providers for

different functions? These are extremely critical questions to ask as selecting the wrong

vendor would lead to disappointment and possibly even cancellation of a contract that will

ultimately translate to loss of money, time and resources. An example of a cancelled deal

GROWTH CONSULTING


is the one between J. Sainsbury and Accenture. Management of these SSO hubs will also

be a sticky issue for FMCG & Retail companies as they will need to hire highly qualified

SSO managers with substantial skills in liaising with the external providers or people with

the management skills in dealing with internal shared services centers’ matters.

The service level agreement (SLA) commitment needs to be clearly spelt out and

understood by both parties to avoid future misunderstandings or disappointments.

Continuous and open feedback and communications are pivotal to keeping good working

relationships between the buyers (FMCG & Retail companies) and providers (3rd party

providers).

Identifying functions to outsource/ offshore or onshore

It is no longer a question of whether FMCG & Retail companies should outsource or not.

Neither is it a question of whether they go onshore or offshore. Most, if not all the major

North American and European Fortune 500 and Forbes 2000 FMCG & Retail companies

have SSO operations in one way or the other. Hence, the more critical question to be

answered would be: Which functions need to be outsourced, offshore or onshore? Many

FMCG & Retail companies have cited tactical reasons when determining the right function

to outsource or for shared services. For instance, FMCG & Retail companies would not

outsource Strategic/ R&D for the reason that it is too core and critical to their overall

marketing and product competitiveness in the market. Functions such as IT Services and

Support of Back Office Processing, which are seen to be not the core competencies of

these companies, are often the most outsourced activities.

Asia-based Fortune 500 and Forbes 2000 companies are the exception as most of them

are still exploring the idea of SSO and are not ready to dabble in either outsourcing or

offshoring. Japanese companies are especially cautious about working with non-

Japanese companies due to a cultural factor known as keiretsu (set of companies with

interlocking business relationships and shareholdings) thus impeding the possibilities of

offshoring or outsourcing for Japan based companies for their business processes.

Interestingly enough, Japanese companies seem rather open about outsourcing jobs to

one nation - China, where an abundance of Japanese speaking graduates is available,

especially in the city of Dalian. This may be a strategic decision of convenience since

China is the manufacturing ground for many Japanese products. It should be noted that

this trend is still not as prevalent in the FMCG & Retail sector yet as compared to the

GROWTH CONSULTING


12%

4%

4%

4%

4%

4%

16%

4%

48%

28%

4%

20%

48%

20%

32%

64%

44%

72%

28%

52%

48%

56%

16%

4%

52%

24%

24%

44%











Technology sector.

3.2.1.3 SSO Drivers

The FMCG & Retail sectors have expressed improving competitiveness along with cost

reduction and better access to talent as the major drivers for their enterprises’ SSO

decisions.

Figure 3.2.1 FMCG & Retail: SSO Drivers

According to most FMCG & Retail respondents of the survey, the top 3 most important

drivers for their sector would be to improve employee productivity, enhance

competitiveness as well as to reduce operating costs. Better access to talents with

specialized skill sets is also another factor behind SSO adoption.

Improve employee productivity

The FMCG & Retail sector, like many other industries have a multitude of functions to

handle on a day to day basis. The core ones being procurement, research & development

of new products, marketing, sales, etc and functions which are not the core competencies

of these organizations such as finance & accounting, IT services & support, corporate

learning programs, etc. To ensure that their staff are not drown in handling a diverse

GROWTH CONSULTING


array of tasks that may ultimately lower productivity as it takes time away from their main

tasks, FMCG & Retail companies decided that it is best to consolidate the tasks for

shared services centers to handle or just outsource them to a third party expert. Before

shared services came along, McDonald’s used to have their restaurant workers take time

away from serving customers at the store front to attend to drive through customer

orders. This lowers the overall productivity of some staff because the traffic at drive

through lanes is not always high and it would not be feasible for a staff to run in and out of

the drive through lanes to check. In July 2006, all major drive through counters of

McDonald’s in the USA have call center staff who sits in Gillette, Wyoming to answer

customer orders and sends the order to the right McDonald’s kitchen. According to

McDonald’s spokesperson, average time to respond to a customer waiting to order is less

than 5 seconds as compared to 30 seconds previously.

Enhance competitiveness: Improving efficiency through centralizing

Four thousand different financial controls across worldwide operations that do not appear

to communicate with one another is one gigantic financial accounting mess. This problem

may seem pretty unlikely but was once a major financial issue that plagued FMCG giant,

Kimberly Clark, before it established its Finance & Accounting shared services center in

Brighton, England. In 2005, Kimberly Clark finally decided to perform a clean up of their

financial system to improve their overall efficiency which they hope would help life their

overall efficiency.

Before 2000, Tate & Lyle deployed various accounting systems throughout its offices in

Europe. Today, it has a shared services center for finance & accounting in Finland which

handles up to 100,000 invoice credit notes annually for cost centers across France, UK,

Belgium, Netherlands, Luxemburg, Germany, Spain and Italy. Tate & Lyle group is much

more competitive and efficient today with a recorded jump in operating profit by 26.1% in

its half yearly results in 2006.

As Cadbury Schweppes’ Business Services and Strategy director puts it, shared services

helps in “…improving efficiency in support of increased profitability”.


One of the most compelling reasons for FMCG & Retail companies to own SSO is the

cost benefit associated with it. UK based Tesco, for instance, owns a procurement shared

GROWTH CONSULTING


services center in India that has helped the British consumer goods retailer realize cost

savings of 30% of its procurement costs. In fact, it is looking forward to double its head

count in this center. Another example, British American Tobacco’s Group Service Delivery

(GSD) center in Malaysia, the global shared services organization for British American

Tobacco (BAT), has so far saved the BAT group more than 30 million British Pounds

(around US$ 59.7 million), an equivalent of 10 to 3% savings annually.

Other key driver mentioned by the respondents is better access to talent.

Better access to talent

Most respondents have highlighted that improved access to scarce talent and overcoming

human resource shortages are the key rationales for their SSO decision. It should be

noted that one of the most popular functions for SSO in this industry is Finance &

Accounting that is known to require very specific skill-sets such as transaction

management, accounting, treasury & risk management and tax management, all of which

are scarce amongst existing workforce worldwide. In addition, many enterprises owned

or still own a multitude of financial controls across borders; consolidating them into a

single system is often a key part of their SSO operations. The task of congregating a

diverse array of systems into a single unified financial system, in addition to the need to

retrain staff on the new system would only be possible with the best talents around.

GROWTH CONSULTING


16%

12%

48%

52%

28%

4%

12%

16%

32%

36%

24%

36%

20%

8%

4%

60%

56%

64%

12%

4%

56%

52%

72%

36%

28%

16%

4%

4%

4%

8%

20%


Loss of control

Increased costs






Org. de-skilling



3.2.1.4 SSO Concern

FMCG & Retail companies are faced with the following challenges and concerns when

considering new SSO operations or running existing SSO centers.

Figure 3.2.2 FMCG & Retail: SSO Concerns

Some of the major concerns highlighted by this industry are the compromise of

confidentiality, loss of control as well as organizational de-skilling. Another slightly less

important concern would be the lack of competent management staff for SSO.

Compromise confidentiality

Industry players have expressed their concerns over any forms of compromise in data

confidentiality and one particular incident was that of theft of customer information by a

call center staff named Arif Azim in Delhi. Even though India convicted its first cyber

criminal, Arif, in February of 2003, this does not help in mitigating the loss of confidence

in the ability of outsourcers to secure data. Moreover, a generally higher attrition rate in

the outsourcing industry further undermines the industry’s ability to sufficiently screen

through the backgrounds of their staff thus implying a higher possibility of hiring wrong

staff who may not abide to processes and regulations when handling client information.

GROWTH CONSULTING


Moreover, there is often a lack of enforcement of data protection laws in major

outsourcing countries such as India and China, posing a major hindrance according to a

major retail player in the USA.

Loss of control

New product development and innovation are the most crucial competitive advantages for

an FMCG & Retail company and they would guard these with all their might to ensure that

sensitive information does not fall into the hands of their competitors. Hence, for sensitive

task like research and development, an FMCG & Retail will never want to lose control

over it to an outsourcer. Even when it comes to shared services, they will only select

specific locations which are closed to their HQ or even within their HQ for their R&D

function given the impact the organizations will experience if any product/ marketing

sensitive data leaks out. Procter and Gamble for instance does not outsource their R&D

function and would only allow for programs like “Connect + Develop” to gain access to

products/ patents developed outside of Procter and Gamble.

Organization de-skilling

Within the FMCG & Retail industries, a majority of SSO activities involve wholly owned

shared services centers. Some of the major shared services deals include Johnson &

Johnson’s Finance & Accounting shared services center in Czech Republic, Tesco’s

Finance & Accounting and IT support centers in Czech Republic and India, Coca-cola’s

HR shared services center in Tampa Bay, Florida, USA, Marks & Spencers’ HR and

Finance & Accounting functions in Manchester, UK, Kimberly Clark’s Finance &

accounting shared services center in Brighton, UK and the list goes on. This indicates that

most organizations are concerned over the loss of particular skill sets as a result of

outsourcing, preferring to operate fully owned shared services centers. As they are still

exploring external parties’ fit, they would not want to be faced with the situation where

they need to build up an entire team from scratch should any major problems force them

to cancel their outsourcing or joint venture contract and bring the business process back

in-house.

Other key concern mentioned by survey respondents is the lack of competent staff to

manage the area.

GROWTH CONSULTING


Lack of competent staff to manage the area

SSO is a fairly new playground for most retailers and FMCG companies with most of the

SSO contracts or centers being signed or established over the last five years. Hence,

there may not be sufficient talent with the right skill sets for managing the SSO centers

and teams and at the same time have an in-depth functional knowledge and background

in the FMCG & Retail industries.

3.2.2 SSO Trends


Most firms interviewed cited that they have spent in the range of less than 3% of their

annual revenue on SSO and will continue in similar fashion for future SSO investments.

Certainly, the cost of establishing an SSO operation differs by the location selected. For

instance, Marks & Spencer spent close to US$ 450 million on its Brighton (UK) facility

whereas BAT only had to foot an initial investment of around US$ 5 million in its Group

Service Delivery (GSD) center in Malaysia. Supervalu has spent around US$ 50 million

for a period of 5 years for its SSO operations in India.

In the outsourcing space, the scenario is similar with Altria investing US$ 1.7 billion (less

than 2 % of its US $ 101 billion annual revenue in 2006) with EDS for IT services, and

Cadbury Schweppes investing US$ 25 million over a 5 years contract with CSC.

GROWTH CONSULTING



4%

12%

8%

8%

48%

12%

4%

4%

4%

12%

48%

60%

4%

28%

24%

24%

32%

52%

20%

4%

36%

52%

68%

52%

44%

24%

72%

44%

16%

12%

16%

4%

16%

8%


Human Resources

Procurement


Corporate Learning




Strategic/R&D


2.15% 2.15% 2.16% 2.17%

59

68

79

94

0%

1%

2%

3%

4%

5%

2006 2007 2008 2009

0

50

100




4%

12%

8%

8%

48%

12%

4%

4%

4%

12%

48%

60%

4%

28%

24%

24%

32%

52%

20%

4%

36%

52%

68%

52%

44%

24%

72%

44%

16%

12%

16%

4%

16%

8%


Human Resources

Procurement


Corporate Learning




Strategic/R&D


2.15% 2.15% 2.16% 2.17%

59

68

79

94

0%

1%

2%

3%

4%

5%

2006 2007 2008 2009

0

50

100



Figure 3.2.3 FMCG & Retail: Spend on SSO

The spending on SSO in 2006 was US$ 55 billion, which is 2.15% of the total industry

revenue and is expected to grow to US$ 68 billion in 2007. The SSO spending is likely to

grow to US$ 79 billion and US$ 94 billion in 2008 and 2009 respectively. The percentage

of SSO spending as part of revenue is not expected to rise significantly according to most

respondents as the spending for SSO for the next five years has been well provisioned for

and is only expected to fall in the range of less than 3% of an organization’s total revenue.

Spending on SSO is on the rise especially for functions such as Finance & Accounting

and Procurement which we shall see as the two most common SSO functions for this

industry. Spending for customer service & call center is expected to fall because this is

one of the earliest industry to experiment with this function and most of the initial setup

costs has been spent. Recurring costs for customer service & call centers are usually not

on the high end.


The trend amongst FMCG & Retail companies is to primarily establish shared services

and outsourcing for Finance & Accounting functions, followed by IT Services & Support,

HR, Procurement and Customer Services & Call Centers.

Many interviewed respondents emphasized and insisted that they will not outsource R&D

GROWTH CONSULTING


functions as it was too critical for their organization’s strategic competitiveness and they

would not risk any chance of leaking out any information that may be an issue.

Brief description and examples for selected types of SSO are discussed next.


Many enterprises within this industry had in the past acquired different Finance &

Accounting systems for individual offices around the globe and this often led to chaos

when these systems did not talk or operate with one another. With finance & accounting

tasks comprising of transaction management, finance, general accounting, risk, tax and

treasury management, it became impossible for FMCG & Retail companies to hang on to

an array of different financial reporting systems. Moreover, Sarbanes-Oxley act has

established stricter provisions which US based companies have to adhere to in its

accounting architecture. Thus, it is no surprise that a majority of this industry’s firms push

for greater standardization of its finance & accounting functions. Example of firms having

finance & accounting SSO centers are Procter & Gamble’s Global Business Services

Office for accounts payable transactions, Johnson & Johnson’s in Czech Republic,

Nestle’s regional treasury center in Singapore, Unilever’s financial shared services center

in Chile serving the South American market, Christian Dior’s finance center in

Copenhagen, Denmark to serve the Baltic region, Kellogg’s European Financial Services

center in Stretford, Manchester servicing 11 European markets dealing with financial

reporting, cost accounting, fixed assets management and credit control, etc.

Hubs interested in gaining more investments from this sector would need to make

significant investments in its workforce by encouraging the labor force to take up financial

or accounting based certifications such as CFA (Chartered Financial Analyst) and CPA

(Certified Public Accountant). A pool of ready financial and accounting talent would be

critical in attracting the set up of financial & accounting shared services centers by

companies from this industry.

GROWTH CONSULTING



Given that IT Services & Support is not the core competency for FMCG & Retail

companies, there is a trend for a majority of these companies to outsource this function

as oppose to setting up a shared services center of their own.

Some of the major IT Services & Support outsourcing deals signed off are Cadbury

Schweppes’ US$ 25 million with CSC for a period of 5 years, Office Depot with ACS,

Kimberly Clark with Cognizant, Sara Lee with HP, Target with India’s Tata Consultancy

Services, Procter & Gamble’s 10 years contract costing US$ 3 billion with HP and Krafts’

US$ 1.7 billion deal with EDS spanning a total of 7 years. Certainly, there are shared

services set up for IT Services & Support as well and examples of such set-ups are

Supervalu’s center where they have incurred an investment of US$ 50 million over a

period of 5 years, Tesco’s Hindustan Service Center in India and Royal Ahold’s shared

services center in the USA.

Human Resources

In the last five years, many FMCG & Retail companies have resorted to outsourcing, off-

shoring or on-shoring of their HR Services.

Unilever outsourced its HR function to Accenture under a seven year contract as part of

the “One Unilever” program covering Europe, Americas, Asia and AMET (Africa, Middle

East and Turkey) providing services to nearly 200,000 employees from centers in

Bangalore (India), Manila (Philippines), Dalian (China), Bucharest (Romania), Prague

(Czech Republic) and Curitiba (Brazil). Examples of services provided by Accenture

include payroll administration, recruitment, reward administration, performance

management, workforce reporting, core HR administration and third party provider

management services.

Gillette (under Procter & Gamble) and Johnson & Johnson have also set up shared

services centers for their human resources needs. Altria has two HR shared services

setups in Krakow, Poland and Buenos Aires, Argentina to serve Europe and Latin

American markets whereas Coca-cola prefers to have an on-shore center in Tampa Bay,

Florida, USA which was set up with an initial investment of US$ 2.4 million. Nike found the

need to service their employees in Europe via the HR center in Hilversum, Netherlands

whereas Kimberly Clark and Coles Myer found that they could outsource this function to

GROWTH CONSULTING


external parties like Accenture and EDS.

The sophistication of this function for this vertical is still very limited as it involves mainly

processing of information such as payroll administration instead of higher end functions

such as performance and talent management and recruitment. In view of this, we may

see a trend of movements of HR SSO centers to developing nations such as India, China,

Malaysia, Philippines, etc from existing hubs. In the long run, cost will be the differentiator

for a hub. As the Business Services and Strategy director of Cadbury Schweppes said,

“… cost and capability will be the main reasons for us to outsource this function”.

Other key areas for SSO mentioned by respondents include procurement, customer

service and call centers, and strategic sourcing (R&D).

Procurement

Procurement is one of the most important business processes for an FMCG & Retail

company whereby more cost effective purchasing would mean better margins for these

firms. Tasks within this function include supplier sourcing and management (supplier’s

pricing & performance), continuous savings implementation and transaction management.

Given the importance attached to this function, it would not be surprising that

procurement is a function for which FMCG & Retail firms would prefer to have a more

centralized set-up.

Walmart, through its Indian procurement arm, Walmart Global Sourcing India Private

Limited, directly purchased more than US$ 400 million worth of goods from Indian

suppliers. This phenomenon is even more astounding in China where Walmart procured

more than US$ 7.5 billion worth of Chinese goods through its procurement center in

Shenzhen, Guangzhou province (south of China), which is more than half of its global

volume of direct imports.

While some firms prefer to have a wholly owned procurement unit, some companies

outsource this function to specialized procurement service providers. For instance,

Kimberly Clark hired procurement specialist ICG Commerce in 2005 for its procurement

needs, as part of a 5-years contract.

As volume and costs are the two major factors for procurement, it should be no surprise

that India and China are the two most preferred locations for this function. Unless a hub is

able to provide the scale and diversity of products that China and India are able to offer at

GROWTH CONSULTING


similar or lower prices, this will remain the stronghold for the two giant nations.


The FMCG & Retail sector is probably one of the earliest sectors to experiment with

customer service and call centers given the closeness of this industry to serving its

clients.

Unlike other industries where call centers and customer service centers are driven mainly

by cost and cultural adaptive-ness, the FMCG & Retail industry places its focus on

language capability and locality. As Marks & Spencer’s director of shared services, Dan

Foley, puts it, it is a tactical decision for FMCG & Retail companies to want to keep their

Customer Service & Call Centers onshore.

A few examples of customer service & call centers are Supervalu and Avon, which are

both located in the USA, Nike’s customer service center for Europe in Hilversum,

Netherlands and Marks & Spencer’s Manchester (UK) customer service center in

Manchester city, UK.

Hubs wishing to build a reputation as the preferred customer service & call centers hub

for this vertical would need to position itself as a hub serving the regional market that it is

located in since it is the industry’s preference for geographical proximity for this function.

For instance, Malaysia or the Philippines can be positioned as an FMCG & Retail

company’s call center & customer service hub in South East Asia.

Strategic Sourcing (R&D)

The key competitive difference between FMCG & Retail companies is no less than the

products that they market and this requires substantial strategic planning and lots of

research & development efforts. Given the high strategic value of this function, this is one

function that most FMCG & Retail companies prefer to not outsource or even offshore.

However, FMCG & Retail companies are often comfortable with working with an external

party in obtaining new products or patents in specific situations. Procter & Gamble for

instance, has a Connect + Develop program aimed at discovering new product

innovations which external parties have developed. They have been rather successful in

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75%

59%

80%

56%

33%

87%

70%

13%

57%

6%

8%

12%

10%

13%

15%

13%

14%

25%

35%

12%

32%

57%

0%

15%

73%

29%


Human Resources

Procurement






Strategic / R&D


Wholly Owned

Third Party

Joint Venture

59 %

10 %

31 %


75%

59%

80%

56%

33%

87%

70%

13%

57%

6%

8%

12%

10%

13%

15%

13%

14%

25%

35%

12%

32%

57%

0%

15%

73%

29%


Human Resources

Procurement






Strategic / R&D


Wholly Owned

Third Party

Joint Venture

59 %

10 %

31 %


this program and some of the well known products acquired through this program are

Bounce (dryer added softener invented by an independent inventor), SpinBrush, Olay

Skin Care pump developed by a European packaging product company and Swiffer

dusters developed by a Japanese company.


Three major categories have emerged for SSO within the FMCG & Retail industry. Either

the enterprises are using their own facility and resources, or entering into a joint venture

with 3rd party providers or totally outsourcing to an external service provider.

Figure 3.2.4 FMCG & Retail: SSO Party of Choice

The most common SSO choice is wholly owned (i.e. the purest form of shared services)

according to closed to sixty percent of the respondents. Third party outsourcing is the

second most popular choice at closed to one third of the respondents and joint venture is

the least mature at a mere 10%. As IT Services & Support is not the core competency for

this industry’s organizations, most companies prefer to outsource it to third party vendors,

thus explaining the high percentage of third party preference at 73%. For functions which

have direct strategic importance to the FMCG & Retail organizations (e.g. strategic/ R&D,

sales & sales generation and procurement), wholly owned is still the preferred choice.

Own Facility

GROWTH CONSULTING


Most FMCG & Retail companies prefer this operation as it facilitates better control over

issues such as retaining of knowledge, better data security protection, better recruitment

of talent and better commitment & management.

J. Sainsbury, a UK’s leading food retailer, made a decision in 2005 to cancel its IT

outsourcing deal of US$ 4.18 billion with Accenture and this major blow to Accenture

signals that FMCG & Retail companies have a want to bring back their functions in-house.

Additionally, most FMCG & Retail companies prefer to offshore or onshore their

operations as opposed to outsourcing to an external party. Examples are Procter &

Gamble, Johnson & Johnson, Tesco, Coca-Cola, Inbev, British American Tobacco,

Carlsberg, Kellogg, Levi Strauss etc.

Joint venture

This is the least common form of collaboration given that FMCG & Retail companies are

still relatively new to SSO as can be seen by the fact that most SSO contracts or centers

were only set up only in the last five years. They still prefer to have control over their

operations or fully outsource as a way to test if they can go into future collaborations with

their outsourcer.


FMCG & Retail firms have less preference for using Third Party provider and would only

outsource less strategic functions such as IT Services & Support, HR and Finance &

Accounting. Examples of third party arrangements include Target and Best Buy with Tata

Consultancy, Procter & Gamble with HP, Altria with EDS, Unilever with IBM & Accenture,

Sara Lee with HP, Office Depot with ACS, Cadbury Schweppes with CSC, Colgate

Palmolive with IBM, etc.

Outsourcing is a good test bed for FMCG & Retail companies to try out if their outsourcer

is a fitting partner should they decide to convert their outsourcing contract to a joint

venture operation, according to most respondents interviewed.

Even though FMCG & Retail companies are in the midst of testing out their partners

through outsourcing, they are mostly only willing to work with the better known

outsourcers or service providers such as IBM, HP, Accenture, TCS, Infosys, CSC, ACS,

EDS, etc. This would pose a challenge for local outsourcing companies who are

interested in penetrating the FMCG & Retail sector.

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COO

CEO



Others

21%

43%

36%

Others

Interdep

artm

ental

Tea

m

13%

14%

13%

24%

23%

7%

1%



3.2.3 SSO Locations


For FMCG & Retail companies, the most critical selection criteria is labor force experience

& availability though many other factors play critical roles in attracting these companies to

set up their SSO operations in a particular country.

Figure 3.2.5 FMCG & Retail: SSO Recommenders & Decision Makers

As can be seen from the chart above, CEOs, COOs as well as functional heads are the

ultimate decision makers for SSO whereas interdepartmental teams and functional heads

serve as key recommenders to an organization on where to set up their SSO operations,

who to outsource it to, what functions should be a shared service, etc. Interestingly,

external consultants play a part in influencing the SSO decision making thus implying the

need to have joint thought leadership campaigns with consulting houses on SSO as

means of influencing the SSO location suggestion.

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4%

4%

8%

4%

12%

20%

40%

20%

4%

76%

16%

52%

68%

76%

72%

80%

68%

60%

60%

72%

24%

28%

48%

28%

16%

24%

8%

8%

20%

24%

56%

Compensation Costs






Attrition rates

Political stability



IP regulation


Figure 3.2.6 FMCG & Retail: SSO Location Selection Criteria

IP Regulation, Infrastructure Costs and Compensation Costs form the three most

important location selection criteria in the minds of the respondents when selecting a

country for their SSO location. Other factors play important roles as well and the

elaboration of most of the key selection criteria is summarized as of below:


• Similar legal systems on data protection (under IP Regulation)

Across functions, be it Finance & Accounting, Back Office Processing, Human

Resources or IT Services, the volume of sensitive data involved are mountainous and

different countries have different regulations pertaining to the transfer of data across

national borders. The EU (European Union) for instance have laid down very strict

and clear provisions over the transfer of data to third countries in “Transfer of

Personal Data to Third Countries – Article 25” and the European Union Directive on

Privacy Protection while the USA is less regulated about transferring data across

country borders though for the financial institutions, they are regulated by the Gramm-

Leach-Bliley Privacy & Safeguards Rules and the HIPAA regulation is enacted for the

healthcare sector.

Many FMCG & Retail companies are taking extra precaution when dealing with the

GROWTH CONSULTING


sending and receiving of data to ensure that they do not violate any data protection

act in the countries which they operate from. Hence, some FMCG & Retail companies

rather set up their SSO operations in the USA, UK or other European locations where

the regulatory systems are well enforced and clearly written.

A country worth mentioning is India which is initiating to draft bills which are similar to

UK’s Data Protection Act and would negotiate for an agreement that resembles the

US-EU efforts in providing for ease of transferring data between EU nations and the

USA documented in the US Safe Harbor framework. Given India’s commitment to

heighten privacy protections, FMCG & Retail companies may be more enticed to enter

India or engage India-based companies for the future SSO needs.

• Favorable government policies

Many FMCG & Retail companies have highlighted favorable government policies to be

one of the most compelling reasons as to why they want to start their SSO operations

in a particular country.

Two popular Eastern Europe SSO hubs amongst FMCG & Retail companies, Poland

and Czech Republic, have relatively enticing perks for companies to set up their SSO

operations there. Czech Republic provides up to 50% of eligible business expenses

as subsidy, 35% of special training costs and 60% of general training costs for

companies interested in setting up their SSO centers. Poland on the other hand has

allocated over 90 billion Euros for development, infrastructure and human capital

building for investors to leverage upon and up to 14 Special Economic Zones and

Technology Parks with special incentives for investors who plan to et up SSO

operations in those parks.

• Infrastructure quality

For SSO centers to run smoothly and continuously non-interrupted power supply is

critical and many respondents interviewed have highlighted the power problem that

plagues some developing nations, especially India. Even though India’s overall labor

costs is low, poor infrastructure partially wipes out those benefits. Some companies

resorted to purchasing extra generators as power supply backup thus increasing the

GROWTH CONSULTING


operational costs of their SSO centers.

Apart from power supply, logistics and transportation infrastructure are critical for

FMCG & Retail companies, especially for procurement centers. Logistics is one of

India’s weakest links as compared to the excellent logistics and transportation that

China has built. China was reported to have 45,400 km of expressway out of the total

1.92 million km of roads at the end of 2006, second only to the USA and around

78,000 km of railway network in 2007. Airport wise, China has over 500 airports with

world class facilities such as the Shanghai Pudong International airport, Hong Kong

Chek Lap Kok International Airport and the Beijing Capital International airport. India

has around 63,000 km of railway track and only 4,885 km of expressway. It has

around 340 civilian airports, out of which 20 are international airports. Hence, many

FMCG & Retail companies have cited China to be a better site for procurement SSO

purposes given China’s edge in providing better logistics and transportation

infrastructure.

Cost Efficiency

• Infrastructure cost

As mentioned in the section for infrastructure quality, some respondents highlighted

the problems of power failure in developing nations such as India that led to the need

for extra investments in power generators as well as redundant centers. Also, due to

lack of deregulation of the Telco markets in many countries, monopoly of a single

Telco provider is very much prevalent and that kept telecommunication price at an

artificially high level. Most respondents have highlighted the high infrastructure cost

tied in even when they invest in the so-called ‘cheap’ locations like India because of

poor infrastructure and/or high telecommunication costs. Hence, many FMCG & Retail

companies actually prefer to locate their SSO operations in more developed nations

such as UK and the USA for the very reason that the efficiency and quality of

infrastructure found in those countries can very well cover for the ‘perceived’ high

costs of locating in those countries.

• Labor cost - It is not just about being cheap

GROWTH CONSULTING


Similar to most industries, FMCG & Retail companies are concerned about keeping

costs low; however, when it comes to SSO operations, it is not always the cheapest

location that wins out. It is usually the most cost effective hub that is able to best

serve the function that will emerge as winner of choice.

In a rather surprising turnout, many ‘expensive’ locations such as UK, USA,

Netherlands, Denmark, Finland, etc are preferred destinations for SSO within the

FMCG & Retail industry. Denmark’s city, Copenhagen, is the world’s 8th most

expensive city; Helsinki in Finland is the 25th most expensive city whereas Amsterdam

in Netherlands is the 41st most expensive city according to a cost of living comparison

study. The high living cost indirectly correlates to higher wages and yet many FMCG

& Retail companies rather onshore in UK and USA or offshore to dearer locations in

Western Europe. However, these locations are more cost effective for several

reasons and one major reason is driven by logistics.

Many FMCG & Retail companies highlighted that even though there are many

cheaper locations for them to choose from such as Russia, India or China, they feel

more comfortable if they are able to fly their team in within a short span of time (less

than 6 hours) if there are any issues in their SSO centers to resolve those problems.

The earlier an SSO center issue gets resolved, the lower their loss incurred. Coca-

Cola for instance, kept their shared services center onshore in Tampa, Florida, USA

which is only a mere 1.5 hour’s flight to its headquarters in Atlanta, Georgia, USA.

Moreover, many FMCG & Retail enterprises state that the overall infrastructure of the

more developed nations are much better and saves them from other operational costs

such as purchasing of additional generators as power supply in the event of a power

failure in India or Philippines or even having to set up ‘redundant’ back up centers in

more than one location in the event of any major cable breakdown such as the recent

connectivity failure which struck many parts of Asia due to damaged underwater

cables as a result of the Taiwan earthquake.


• Labor force experience & availability

This is one of the most important selection criteria for FMCG & Retail companies. One

GROWTH CONSULTING


of the favorite regions for FMCG & Retail companies to establish SSO operation,

Europe, is seen to have a pool of talent with good skill sets particularly in Finance &

Accounting and IT Services even though their average salary may be many times

more than their developing countries’ counterparts. In Ireland, for instance, a call

center agent’s average salary is Euro 17,000 – 25,000 (around US$ 23,000 –

US$34,000) annually as compared to a US$ 2,800 annual salary for a similar position

in developing countries such as Malaysia and Philippines.

FMCG & Retail companies with SSO operations in UK highlighted Britain’s high

quality educational system which churns out qualified graduates to work in the shared

services industry. A fairly expensive city in the UK, Manchester, has managed to

attract many FMCG & Retail MNCs to set up their shared services centers there.

Some examples include Australia’s Woolworths group, US based Kellogg’s, home

grown retailer Marks & Spencer and packaging giant Tetra Pak. These shared

services center can tap into the graduate talents from nearby universities such as the

University of Manchester, Manchester Metropolitan University and so on. Manchester

city also offers a unique BTEC certification in “Providing Shared Services” and the

North West Shared Services Forum which is supported by a government agency,

MIDAS (Manchester Investment Agency).

India is one location outside of Europe which has the talent with the right experience.

India as a nation has over 20 years of experience in SSO and its workforce clearly

has the right transferable skills in SSO operations that are valuable across different

industries. NASSCOM (National Association of Software & Service Companies) of

India has taken further measures in ensuring that its graduates are marketable for the

SSO industry by launching ‘finishing school’ courses in seven National Institutes of

Technology (NITs) and at IIT-Roorkee. This is a six to eight weeks program which will

concentrate in building up both the soft skills and technical skills of their graduates.

Given India’s initiatives in developing its labor force for SSO, many FMCG & Retail

companies have found India graduates to be suitable for their SSO operations.

Locations interested in becoming the next SSO destination for FMCG & Retail

companies will have to showcase its efforts in developing its human capital. Initiatives

such as MSC KDI (K-workers development institute) in Malaysia and the funding

provided to software vendors for international-standards certification such as Microsoft

Certified Professionals (MCP), Oracle and SAP by China are good efforts that need to

GROWTH CONSULTING


be broadcasted.

Distinctive competencies

• Scale

For the FMCG & Retail industry, scale in terms of choice of goods for procurement

purposes is critical. Both China and India are excellent destinations, especially, for

retailers in setting up procurement centers as both countries are able to offer a broad

range of goods at a very low price. Again, Walmart is a testament as to how great a

scale of procurement can be made in these two countries. If Walmart is taken as a

country, it would be one of China’s largest trading partners, ahead of Russia, Australia

or Canada. In the long run, China will still lead the pack for procurement SSO

operations if India does not improve its infrastructure for transportation & logistics at

the rate that China is improving the same.

No other nation at the moment has the scale and range of products that India and

China can offer for FMCG & Retail companies to procure upon. Thus, these two

nations are predicted to still be the two preferred hubs when it comes to procurement.

• Geographical closeness

A fairly interesting element of SSO within the FMCG & Retail sector is the preference

for geographical closeness. This means that FMCG & Retail companies would prefer

to have one hub in Asia to serve the APAC region, one hub in Europe to serve the

European region, one Latin American country to serve the South American markets,

and so on instead of one or two hubs to serve many regions.

Bart de Boever, former Managing Director of Christian Dior’s Nordic region shared

services center in Copenhagen, Denmark cited that Denmark provides good

geographical position to enter the Nordic region in addition to ease of establishing a

company and hiring of new recruits. Christian Dior could have earmarked India to

serve the Baltic region and yet it did not and instead, it chose a fairly expensive

GROWTH CONSULTING


location like Copenhagen to do so.

Apart from Christian Dior, the Gillette group (under Procter & Gamble) is also active in

Copenhagen, Denmark with its financial shared services center. There are fewer

tendencies for FMCG & Retail companies to choose a single location to serve multiple

locations across the globe. For instance, Procter & Gamble has shared services

centers in Newcastle (UK) to serve UK and Ireland, Manila (Philippines) to serve

primarily English speaking nations, San Jose (Costa Rica), Warsaw (Poland) to serve

Eastern Europe, Brussels (Belgium) to serve the Benelux region, Singapore to serve

South East Asia, Cincinnati (USA) for their USA offices and Toronto (Canada).

Another example would be Cadbury Schweppes which has a Shared Business

Services (SBS) center for its Cadbury Schweppes American Beverages unit in the

USA and a Global Strategy & BPO Delivery Unit for Finance & Accounting unit in

another location to serve the European region.


Some unlikely names are not only the top of mind locations for SSO operations but also

actual sites which host a multitude of SSO functions for many Fortune 500/ Forbes 2000

FMCG & Retail companies. The most commonly heard names are UK, India, Poland,

Czech Republic and the USA (not mentioned in any particular order). China is not on the

list as many FMCG & Retail companies view it as only a great hub for procurement but

not other functions.

GROWTH CONSULTING


Figure 3.2.7 FMCG & Retail: Top SSO Locations

After tallying in the top of mind rankings from the FMCG & Retail industry respondents, it

is learned that India, USA and UK are the top 3 SSO locations for this vertical with India

and USA tying in terms of the number of number 1 rankings (20% each).

Top SSO Locations

1

2

3

India

USA

UK 12%

20%

20%

16%

4%

32%

12%

20%

Rank

Emerging Locations


East-EU: Czech Republic, Poland; HungaryMexico, Malaysia

UK, USA, Canada, Ireland


% of Respondents who ranked among top 3


Top SSO Locations

1

2

3

India

USA

UK 12%

20%

20%

16%

4%

32%

12%

20%

Rank

Emerging Locations


East-EU: Czech Republic, Poland; HungaryMexico, Malaysia





GROWTH CONSULTING


Figure 3.2.8 FMCG & Retail: Ranking of Top SSO Locations

In terms of overall score, India leads in terms of overall cost efficiency due to its relatively

cheaper wages. USA leads the pack in terms of overall business environment

conduciveness and that is not difficult to see why because many FMCG & Retail

companies are headquartered in the USA and the familiarity to the USA helps to boaster

its image as a hub of excellence for SSO operations. In terms of human capital quality,

USA workers emerge at the top. As a whole, both India and USA tie at a score of 3.7

ahead of UK’s 3.6 and Malaysia’s overall score of 3.5. Malaysia is seen as an emerging

location for FMCG & Retail companies to locate their SSO operations to and the small

fraction of difference in score from the top 2 locations is a sign that Malaysia is beginning

to emerge in the minds of these Fortune 500/ Forbes 2000 companies as a possible

future SSO location.

India – labor force availability and scalability

The next location, India’s ability to attract major retailers such as Supervalu (US), Tesco

(UK) and Target (US) along with FMCG giants such as Unilever (Netherlands), Procter &

Overall Score


3.4

3.4

4.1

4

4.2

4

3.4

3.6

3.2

UK

USA

India

3.6

3.7

3.7




Overall Score


3.4

3.4

4.1

4

4.2

4

3.4

3.6

3.2

UK

USA

India

3.6

3.7

3.7





Human Capital

GROWTH CONSULTING


Gamble (US), etc are testaments to India’s attractiveness as a shared services and

outsourcing center. India is able to provide the labor force scalability and low labor force

cost in spite of raising concerns about wage hikes and high attrition rates especially

among call center workers which one retailer highlighted could be as high as a 100% (an

entire team gone). India is especially favored for IT Services & Support function, which

many FMCG & Retail companies feel that India has a sufficient pool of such talents from

shared services & outsourcing centers from other verticals with the necessary

transferable skills. Scalability is also not an issue for SSO centers operating from India as

can be seen by Tesco’s interest to double its Hindustan Center headcount and many

other FMCG & Retail companies’ future plans to increase headcount for their SSO

operations in India.

United States of America – the familiar turf for FMCG & Retail companies

The homeland to most FMCG & Retail companies, USA is also within the radar of being

one of the hot favorites for FMCG & Retail companies to base their SSO operations in. It

should be noted that most FMCG & Retail companies in the Fortune 500 and Forbes

2000 lists are headquartered in the USA, which explains why they prefer to work within a

familiar territory. Some respondents cited familiarity with the legal systems especially for

finance & accounting functions to be the most important factor that draws them to set up

their SSO operations in the USA. Coca-Cola’s Finance & Accounting shared services

center in Florida, Royal Ahold group’s IT services operations in Pennsylvania and the

State of New York and Levi Strauss in Oregon are some of the many examples of FMCG

& Retail SSO sites in the USA.

For European FMCG & Retail companies which set up SSO operations in the USA, the

U.S. Safe Harbor framework played a leading role in their decision. On October of 1998,

the European Commission’s Directive on Data Protection went into effect that would

prohibit any transfer of personal data to non-European Union nations that do not meet the

standards set for privacy protection. The United States takes a different approach when

handling data transactions across borders so in order to bridge the gap, the U.S.

Department of Commerce in consultation with the European Commission developed a

"safe harbor" framework. This framework prevents companies from experiencing any

interruptions in their business dealings with the European Union or having to face any

prosecution by European authorities under European privacy laws. The registration to this

safety harbor is totally voluntary and many leading FMCG & Retail companies such as

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Johnson & Johnson, Procter & Gamble, Best Buy, ConAgra Foods, Pepsi, etc are

registered in this list.

United Kingdom – a showcase that cost is not the most determining factor

UK has not only been very successful in convincing many of its ‘local’ Fortune 500/

Forbes 2000 companies to host their SSO functions there but also attracted many

‘foreign’ FMCG & Retail companies to establish their SSO presence there. For instance,

US based Procter & Gamble has a Global Business Services Center in Cobalt Park which

serves the European, Middle East and Africa markets, home grown retailer Marks &

Spencer operates its HR, Finance & Accounting and Customer Service & Call Centers in

Manchester, US based FMCG giant Kimberly Clark currently hosts a Finance &

Accounting shared services center in Brighton, England’s own J. Sainsbury established a

Finance & Accounting in Streatham, and US food company Kellogg’s has a Finance &

Accounting shared services center in Manchester city. The presence of all these brand

names in UK indicates the country’s good standing as a shared services hub and many

respondents highlighted that UK was chosen due to its close proximity to many European

countries, the English language capability, the experienced workforce for high end

functions such as risk & tax management and the excellent educational system which

churns out valid and marketable graduates for the shared services and outsourcing

industry.

Marks & Spencer said that they initially chose Manchester because Manchester is easily

accessible for the workforce living outside Manchester city and thereby ensures the

availability of labor force for future growth. It also finds the certification in shared services

program by MIDAS (Manchester Investment Agency) in joint efforts with AstraZeneca, the

Royal Bank of Scotland, Tetrapak as well as Marks & Spencer is essential and helpful in

developing the much needed talent pool that is tailored for the shared services industry in

UK.

Poland – the unlikely Eastern European hub

A surprising face to SSO is probably Poland given the fact that Warsaw, Poland is one of

the most expensive cities in the world according to a survey conducted by the Economist

Group. Hence, the country’s USP has very little to do with costs. Poland has been

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pushing to develop itself into the financial center and Silicon Valley of Central & Eastern

Europe and this effort is strongly backed by its government. With around 126 state higher

education academies including 17 universities, 18 universities of technology and 301

private higher institutions with over 2 million of its young population currently in

universities, Poland offers a highly educated workforce. It also encourages companies to

locate their SSO operations in Special Economic Zones, which provide lucrative tax

exemptions and thus far, successfully attracted more than 45 foreign MNCs across

different verticals to establish their shared services & outsourcing centers in multiple

locations across Poland with Warsaw and Krakow being the two most popular locations.

Some examples of FMCG & Retail companies include Avon in Warsaw, Electrolux and

Philip Morris in Krakow and Carlsberg in Poznan.

FMCG & Retail companies are attracted to Poland due to Poland’s high quality workforce

and this again shows that low wage is not necessary the winning recipe.

Czech Republic

Another Eastern Europe hub mentioned in interviews is Czech Republic which has been

aggressively promoting itself as an SSO Hub through its investment agency, CzechInvest.

Subsidies of up to 50% of eligible business expenses (wage or capital expenditure on

tangible & intangible assets) paid during the period of maximum 10 years and up to the

state aid ceiling and up to 35% of special training costs subsidy make for extremely

attractive perks to draw FMCG & Retail companies to set up SSO operations in Czech

Republic. Companies like Tesco, Johnson & Johnson and Inbev set up there SSO

operations here.

Though Prague is still the Czech Republic’s heart for SSO activities, recent development

in the South Moravian Region has made the city of Brno another center for IT, software

development and research. 42.4% of South Moravian Region’s population holds a

university degree or has completed upper-secondary education. There are 12 universities

and higher education institutions in this region, producing more than 65,000 graduates in

2005, according to the Institute of Information on Education. To add to the benefits,

Brno’s office rent is significantly lower than that of Prague at 10 Euros/m2/month as

compared to 18 Euros/m2/month in the capital city.

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Combining the forces of these two cities, Czech Republic looks set to attract more SSO

activities.

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3.3 Technology

Technology industries — semiconductors, software, computers, telecommunications and

networking — are increasingly affecting our lives in ways which would have been a thing

of science fiction a few years ago. Though the sector has matured over the past 25 years,

technology companies have to wrestle with constant challenges. Access to capital, faster

time-to-market, and finding and keeping the right talent are more critical than ever. So is

managing stakeholder and financial market expectations. Some of the top of mind issues

which the technology industry is facing are as follows:

� Convergence – With the birth of devices to harness broadband, consumers and

businesses are pushing hard and fast to accelerate and incorporate technological

changes. Companies can harness the opportunities around convergence and

translate them into value creation. The corporate winners will be companies that

manage change nimbly, fusing state-of-the-art technology with a clear vision of the

future.

� Mergers and Acquisitions – A merger or acquisition can add considerable value to

a business, but making sure that each stage of the transaction process — from

valuation to negotiation and completion — is successful demands considerable

experience and knowledge. As a result of the global economy such opportunities

can arise anywhere in the world and M&A plans can face considerable challenges

from regulatory restrictions to tax issues.

� Maximizing the value of Intellectual Property - Leapfrogging technologies pressure

companies to take a closer look at exploiting and protecting their intellectual

capital. The selling and buying of intellectual property assets can reduce risk,

accelerate time-to-market, and offer companies a real competitive advantage. At

the same time, protecting intellectual property from patent and copyright

infringement is equally critical. Intellectual property is a business, financial, and

competitive asset to be managed, protected, and maximized.

� Global expansion - Technology companies tend to venture abroad quickly to grow

revenues, secure market share, and gain access to low-wage knowledge workers.

As a result, this borderless industry challenges companies to manage a global

work force, currency risks, technology transfers, and global supply chains, all

while being able to respond to different relationships with governments and

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regulators. Offshore outsourcing to lower costs makes technology companies

vulnerable to supplier’s financial instability, intellectual property breaches, legal

and regulatory risk, labor and social issues, insufficient and ineffective supply

chain control procedures, and environmental issues.

� Talent management – Knowledgeable people are a technology company’s

competitive edge. But it is not easy to attract and keep the best employees.

Shifting global pools of talent, disruptive and expensive turnover, ever evolving

technical skill needs, and a looming talent shortage as baby boomers prepare to

retire create constant challenges. To attract and retain key people, technology

companies must strategically align recruiting, HR programs and systems,

management style, incentives, and corporate culture. To beat the competition for

the top brains the strategy must be competitive yet cost efficient.

� Outsourcing and offshoring - Outsourcing is not new, but it can be more

complicated to evaluate and implement offshore. The functions and processes

that lend themselves to outsourcing for technology companies include software

development, application hosting, data centers, network management, and back

office functions. The promise of immediate cost-savings can be a major incentive

to explore overseas outsourcing options. But some companies fail to understand

the practical considerations and risks. The issues that eat offshoring cost savings

include extra overhead, the threat of IP slippage, and poor communications. The

most successful companies start off shoring low-value, non-core functions. Once

they understand the process and cost model required to be effective and efficient,

they can make educated outsourcing/offshoring decisions for other areas.



The technology sector has been one of the earliest pioneers for Shared Services or

Outsourcing (SSO) to capture cost benefits and competitiveness from scale of operations

and synergy in integration of geographies and functions. Starting with low end back office

jobs, the technology sector has slowly moved the nature of work outsourced toward more

specialized jobs. Outsourcing providers have also steadily increased their competencies

and taken the opportunity to move up the value chain.

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However, issues like IP rights protection and shortage of talent still hamper the

technology sector from taking full advantage of outsourcing and SSO activities.


Companies have to handle a variety of issues and considerations before starting SSO

operations. If the SSO operations are already in place, they have to adapt themselves to

changing business and regulatory environments from time to time. The following are

some of the key issues that organizations have to tackle when planning their SSO

strategy.

Manage remote operations and responsiveness

It is important that the limitations and challenges of remote operations be recognized and

dealt with. In addition to the usual challenges associated with managing and monitoring

relationships at arms length, remote locations can introduce particular difficulties with

respect to the provision of customer service. Increasingly customers express anxiety and

discomfort at the prospect of using overseas call centers. The challenges of SSO are not

only restricted to possible adverse consumer reactions. As the practice moves up the

value chain and starts to encompass more complex business processes, firms should be

concerned about the migration of knowledge to providers and other third parties, and the

impact that this may have on their own competitive levers. A case in point is the scrapping

of Apple’s technical support center in India. While commenting on the closure, sources

familiar with this situation have been quoted as saying, “India isn't as inexpensive as it

used to be. The turnover is high, and the competition for good people is strong.”

Managing Job Losses

In their bid to increase shareholder value and boost profit margins, companies worldwide

are offloading non core functions like customer service, IT help desk operations,

accounting, human resources to specialized outsourcing providers. However these

benefits are enjoyed at the cost of jobs in the USA. and Europe. In most cases, the

internal staff is handed over to the outsourcing provider; however, some job losses are

inevitable.

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In the European Union where employees are well protected against retrenchment, this

poses a great concern to companies planning to outsource non core functions. A recent

example is Deutsche Telekom’s plans to outsource over 45,000 call center jobs and

extend working hours at call centers.

In the USA, job losses due to outsourcing have become a socio-political issue. With the

imminent presidential elections in 2008, retrenchment due to outsourcing will be in the

news time and again for at least the next year.

Resolve the increasing regulatory requirements governing SSO and responsibility for

compliance

The regulatory environment is becoming stricter to prevent the recurrence of events akin

to the accounting scandals publicized in recent years. Compliance with numerous

regulatory initiatives from Sarbanes-Oxley to International Accounting Standards is

perceived by many as a burden. In addition, some European firms are subject to

increasingly intense regulatory scrutiny on matters related to business continuity and

provisions of the Data Protection Act. Compliance with these requirements may be more

complex once third parties, distinct cultures and legal systems come into the fold.

Country Specific Economic and Regulatory Factors

Economic factors such as outsourcing incentives offered by developing countries have

led to the recent R&D outsourcing trend.

Distinct social and economic factors prevalent in a particular country may make it better

suited for certain outsourcing operations. For example, India is found to be more suitable

for call center customer support due to an ample supply of English speakers, whereas

China is perceived to have a more conducive environment for R&D.

A robust legal framework with legislation governing the management of patents,

trademarks, designs, and copyrights forms a strong foundation for the protection of

intellectual property while outsourcing. Similarly, it is desirable for the outsourcing

destination country to comply with the provisions of the World Trade Organization’s

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(WTO) Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement. This

pact deals with issues related to copyright, patents, trademarks, geographical indicators,

and industrial designs.

3.3.1.3 SSO Drivers

The drivers for setting up SSO operations for the technology sector can be cost savings,

increasing output, shortening time to market and so forth. The following are some of the

drivers believed to be the most important as highlighted in Figure 3.3.1

Figure 3.3.1 Technology: SSO Drivers


Over 90% of respondents cited cost savings as a key rationale for SSO, particularly those

destined for low wage countries. As well as short-term gains in cost reductions, SSO

helps firms reduce their need for long-term investment in human capital and fixed assets.

Vodafone outsourced its IT operations to IBM and EDS under a seven year contract

signed in 2006. The projected cost saving through this deal is US$ 600 million. Nokia

extended its outsourcing contract with Hewlett-Packard for five years to 2010 to manage

Nokia's IT infrastructure and operations as well as messaging and groupware systems.

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Under this renewal valued at about US$ 100 million annually, Nokia will move to a

service-based model aimed to help it cut costs.


Over 85% of respondents cited this factor as prominent in deciding which functions to

outsource.

Unlike many other sectors, R&D and innovation are crucial for technology organizations

to achieve competitive advantage and sustain long run growth. However, with growing

global operations, firms require sound business, marketing and operational strategies in

addition to technical expertise, which usually translates into higher operating costs. SSO

appears as another cost effective alternative, allowing these firms to refocus and allocate

more resources to develop core activities. Many technology organizations are increasingly

looking into the outsourcing options available for human resources, accounting, supply

chain solutions and customer service. By outsourcing its human resource functions to

Hewitt, Sony Electronics is able to focus on its strategic human resource functions,

freeing the human resource staff from day-to-day management of essential but non-

strategic duties.

In a unique deal of sorts Philips Electronics appointed Merrill Lynch for seven years to

manage its in-house portfolio management operations in 2005.


Time to market and time to volume of electronic products are major factors that drive

outsourced R&D. Electronics products are following a rapid trend of obsolescence. For

example, the advancement of processing speed follows Moore's law. Miniaturization of

semiconductors plays a major role in rendering electronic goods and appliances obsolete

rapidly. The onset of R&D has reduced the time to market for an electronic product

drastically. Similarly, the need to develop multiple products for multiple markets has

posed a significant challenge for the R&D operations of original equipment manufacturers

(OEMs). In the case of mobile phones the time to market has reduced to 4 to 6 months. A

delay in the time to market and time to volume would in turn reduce the competitiveness

of the product in the market. Timely product launches in geographically dispersed

markets across the world are the foremost concern of OEMs. As such, OEMs in the

United States and Europe find outsourcing R&D an inevitable exercise. The widespread

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presence of R&D centers worldwide enables transnational corporations to pursue round-

the-clock R&D.

Other drivers cited by respondents as drivers for SSO include ability to access scarce

talent, and improved products and services quality.


The Asian region is well known for its pool of human resources and talent, especially in

China and India. With R&D being offshored progressively to China and India,

corporations in these locations face stiff competition in retaining the services of

engineers, doctorate holders, and programmers. This phenomenon is due to the gradual

escalation of salaries and high demand for talent.

Improved products & service quality

Collaborating with outsourcing service providers can improve overall process quality. This

is because providers tend to have the highest possible quality certifications, for example,

the Capability Maturity Model (CMM) - the highest level of software development process

quality - and Six Sigma. Additionally, providers are usually selected from bidders with

established competencies, often the best in their particular areas. However, from the

growing debate on poor service deliveries by offshore call centers, it may appear that

outsourcing may not always improve service quality.

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Even as the promise of immediate cost-savings can be a major incentive for considering

overseas outsourcing options, some companies fail to recognize the practical

considerations and risks.

Key concern areas affecting SSO operations are highlighted in Figure 3.3.2:

Figure 3.3.2 Technology: SSO Concerns

Loss of Control and Over-Dependence

In a competitive environment where innovation is key, conducting new R&D activities

offshore is a major concern. Companies may not have the best control over intellectual

property as compared to onshore operations. Loss of control may arise as companies

lack the capability or experience to manage outsourced activities and providers or simply

do not actively manage the provider-outsourcer relationship. Some companies use

dedicated liaison teams to actively manage the relationships. These usually comprise of

managers and other employees with prior experience in outsourcing, joint ventures or

cross-functional teams. Importantly, for some respondents, not only are these teams able

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to help develop a provider’s strategy, but also ensure it is aligned with their firm’s overall

corporate strategy.

Issues associated with control over intellectual property have a major impact on long run

sustainability. Offshore outsourcing allows outsource service providers access to intimate

knowledge on a company’s activities that is, in turn, subject to potential misuse.

Increasing the transparency of the entire process comes at higher costs, diminishing

outsourcing advantages.

Over 80% of respondents rated this as a major concern. Close to 70% of respondents

also feel that outsourcing will put their organization at a risk of de-skilling internal

employees.

Rising Costs and Hunt for greener pastures

Although India remains a leading offshore outsourcing destination due to its early mover

advantage, companies are looking toward other countries due to rising costs. In 2005,

more than half of India's IT employees received at least a 15% salary hike with the top

10% of the workforce receiving an average raise of more than 40%. The growing demand

for outsourcing jobs in India is attracting several new entrants into the business,

increasing competition and lowering prices. Some Indian companies, for instance, are

currently billing US$ 20 per programming hour for US software outsourcing contracts,

down from over US$ 60 in 2000. Several American companies, including Coach,

Motorola, and Target, also have begun deploying IT or IT-driven business-process work

to China, accounting for about 15% of the country's outsourcing contracts. The monthly

salary for programmers in high-tech hot spots such as Beijing, Shanghai, and Shenzhen

is between US$ 600 and US$ 960, according to a survey conducted by InformationWeek

China. This represents about half the salary paid for a similar position in India and less

than a quarter of that in the United States. Rates are even lower in secondary locations.

For instance, the average salary for a programmer in Dalian is US$ 450 per month.

Other concerns highlighted by respondents include Implementation & project

management factors, and political and regulatory risks.

Implementation & project management factors

Many companies that outsource business processes and R&D for the first time have an

uphill task managing outsourced operations. One of the major factors that contribute to

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making outsourcing cost-effective is the optimization of offshore establishment costs.

Failed strategies of outsourcing processes lead to excessive expenditure, or in worst case

scenarios, failure of the entire outsourcing project. Issues associated with vendor

selection pose the foremost challenge. The protocol to be followed to transfer work

offshore involves substantial expenditure. The onshore problems arising from outsourcing

are the costs involved in job layoffs and the legal implications. In many cases, intensive

training of overseas employees is required to inculcate cultural aspects and language

skills to establish smooth channels of communication. The cost of ramping up productivity

and managing offshore operations are prime factors that need to be optimized.

Political and regulatory risks

As the numbers of offshoring and outsourcing activities constantly increase in the

technology sector, governments are looking into the possibilities of regulating or

discouraging outsourcing. As mentioned earlier, new opportunities in offshore locations

are created at the cost of employment opportunities in the parent country. Thus

increasing pressure from the public forces the government to pursue necessary action.

3.3.2 SSO Trends


The spending pattern on SSO activities depends mainly on factors such as what

according to the company are their core activities, strategic goals, scale of the business,

geographical spread of the business etc.

Figure 3.3.3 Technology: Spend on SSO

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Technology companies started their SSO activities by spending on low end functions such

as claims processing, customer call handling, billing etc. As the outsourcing and SSO

industry matured the spending patterns have shifted towards more specialized and skilled

functions such as design, testing and measurement etc.

Primary research indicates that spending on SSO activity in the technology sector is on a

steady rise, albeit only marginally. While findings from this study show that spending on

SSO activities was 5.8% of the total revenues for the technology vertical, this ratio is

expected to increase to 6% by 2009. Actual spending on SSO activities will rise from US$

233 billion to US$ 420 billion by the end of the forecast period. Spending on almost all

SSO activities is slated to increase over the forecast period. IT services and support,

human resources and increasingly, finance and accounting are the most heavily

outsourced functions.


Increasingly companies in technology sector are transforming themselves in companies

with three major characteristics – brand recognition, massive intellectual property and

constant innovation. Any function on the periphery of these three activities is a potential

target for SSO.

IT services & support

More and more technology firms view the maintenance of IT services and support for

internal operations as a challenge amid the rising cost of keeping systems up to date and

IT services at a level suitable for a regional/global operation. Increasingly, more firms are

willing to evaluate and let third parties take over the management of IT services and

support so they can focus their resources on keeping abreast with industry trends and

ultimately, stay ahead of their competition. The following are some examples of recent

deals.

In October 2006, Vodafone decided to outsource its IT operations to IBM and EDS in a

multiyear contract spanning seven years. Although financial details of the deal were

undisclosed, the deal is believed to help Vodafone save US$ 600 million in maintenance

costs.

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In a deal signed in 2003, Telecom Italia engaged HP for IT management services for its

90,000 users.

HR Services

Outsourced HR services typically include payroll operations, benefits administration,

employee records, data management and asset management services.

Sony Electronics believes that outsourcing its HR functions to Hewitt Associates would

enable it to focus on strategic human resource functions, freeing the HR staff from day-to-

day management of essential but non-strategic duties.

Hughes Electronics, well known for its subsidiary DirecTV, began to outsource various HR

functions to pursue a cost avoidance strategy. The main cost the global communications

company wanted to avoid was that of upgrading its legacy mainframe system to meet the

growing HR service levels demanded by its 13,000 employees. Developing additional in-

house administrative capabilities was certainly not the answer. And creating a new

internal system was not considered realistic. So a task force at the company conducted

an eight-month study of options for both its DirecTV subsidiary and corporate

headquarters--seeking a better HR solution. The choice soon came down to buying a

product off the shelf or outsourcing, and ultimately the task force determined outsourcing

to be significantly cheaper. Hughes began off loading its payroll, hiring procedures,

compensation management, and other HR functions to Fidelity Employer Services Co.

(FESCo), the unit of Boston-based Fidelity Investments that was handling Hughes's

401(k), defined-benefit plan, and health and welfare administration.

Organizations are primed for human resources (HR) outsourcing as they look to

standardize HR processes and focus on business issues, according to a new survey by

Hewitt Associates, a global human resources services company.

Customer Service and Call Center

Call center offshoring has been motivated by two key factors – cost and operation

efficiencies. The technology sector is awash with examples of companies which have

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either outsourced customer service and call centre functions to third party providers in low

cost countries or have set up their own captive centers in low cost destinations to serve its

customers globally. HP is one good example; HP runs its entire call centre operation

through its centers in India.

Other functions considered suitable for SSO operations include R&D and Finance &

Accounting services.


BT outsourced its Finance and Accounting operations to Xansa, the financial terms of the

deal were not disclosed but the two parties have said that the projected cost saving for BT

is a approximately US$ 185 million spread over seven years. Xansa's combined BPO and

IT capability offered BT the ideal solution, not only transferring staff, services and

supporting technology but also, guaranteeing savings through improved service delivery.

This innovative agreement was based on a strategic partnership with shared governance.

The integrated service provided by Xansa includes the largest Oracle payroll in Europe

(as of July 2002). Together with the processing of over 100,000 pay slips they also

process 40,000 expense claims every month. Xansa manages three million BACS

payments, accounts payable (£13bn), financial accounting and reporting.

Commenting on the deal, Ian Livingston, BT Group Finance Director said "Our

partnership with Xansa increases our ability to support our core business pro-actively and

economically."


Outsourcing of R&D functions has been a topic of hot debate for the last couple of years

in the technology sector. Companies are trying to answer one important question – What

started as Original Equipment Manufacturing (OEM) outsourcing and transformed into

Original Design Manufacturing (ODM) is now going to transform into full fledged

outsourcing of R&D functions?

When Western corporations began selling their factories and farming out manufacturing

GROWTH CONSULTING


in the '80s and '90s to boost efficiency and focus their energies, most insisted all the

important research and development would remain in-house. But that pledge is now

passé. Today, the likes of Dell, Motorola and Philips are buying complete designs of

some digital devices from Asian developers, tweaking them to their own specifications,

and slapping on their own brand names. It's not just cell phones. Asian contract

manufacturers and independent design houses have become forces in nearly every tech

device, from laptops and high-definition TVs to MP3 music players and digital cameras.


Three major categories have emerged for SSO within the technology sector. Either the

enterprises are using their own facility and resources, or entering into a joint venture with

3rd party providers or completely outsourcing to an external service provider.

Figure 3.3.4 Technology: SSO Party of Choice

Own Facility

Some technology firms prefer this arrangement because it allows greater control over

issues such as staff selection and training as well as product and service quality. It also

allows the company to guard its intellectual property in a more secure way. This is

51%

13%

71%

17%

51%

77%

21%

20%

82%

16%

16%

22%

0%

16%

15%

36%

10%

9%

33%

71%

7%

83%

33%

8%

43%

70%

9%


Human Resources

Procurement






Strategic / R&D


Wholly Owned

Third Party

Joint Venture

45 %

16 %

40 %


51%

13%

71%

17%

51%

77%

21%

20%

82%

16%

16%

22%

0%

16%

15%

36%

10%

9%

33%

71%

7%

83%

33%

8%

43%

70%

9%


Human Resources

Procurement






Strategic / R&D


Wholly Owned

Third Party

Joint Venture

45 %

16 %

40 %


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important specifically now that high end design and development work is being done in

Asia. China and India though have repeatedly shown commitment towards IP protection

but the legal frameworks in both countries is still weak.

Out of the companies which Frost & Sullivan interacted with 45% said they prefer to set

up their own facilities to carry out SSO functions. These functions are generally high end

jobs like R&D, procurement and sales. More than 82% companies indicated that they

either carry out or would like to carry out R&D activities in their own facilities.

There are numerous examples in the technology sector where companies have set up

captive centers in low cost destinations and relocated non core activities to these centers.

Dell, HP, Ericsson, Texas Instruments, Motorola are some of the companies which have

captive centers in India.

Samsung set up a China International Outsourcing Center which has 10 offices based in

Hong Kong, Shenzhen and Tianjin under it. The main objective to set up these facilities is

to lower Samsung’s production costs. The total investment for this project is

approximately US$ 18.5 billion.

Joint venture

In 2005, NEC Corporation set up a joint venture with HCL Technologies in India to provide

offshore software engineering solutions for NEC. The JV, in which the Japanese firm

would hold the majority stake of 51 per cent, provides offshore solutions in embedded

software, hardware design, network and security, mobile technology to NEC. Besides, it

would also conduct Research and Development (R&D) in high performance computing for

NEC, its subsidiaries and their clients in Japan and worldwide. The venture, based in

Noida, was projected to generate $25-million in three years and up to $100-million

revenue a year in a five-year period. Similar relationships are expected to increase in

number and scope going forward.

Joint ventures are still not a well established model for carrying out SSO functions, only

16% companies surveyed indicated that it is their preferred model for SSO. Back office

processing was one of the main functions that companies would consider delegating to a

joint venture facility.

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IBM Global Services, Computer Sciences Corporation, EDS, Accenture are some of the

leading companies offering services in this space. In addition to these multinationals,

Indian companies are also making their presence felt in the global services arena. Infosys

Technologies, Wipro Technologies, HCL Technologies and Satyam are the big four which

have the capability to dethrone the western big wigs in the services arena.

Over the years, third party providers have become highly skilled in carrying out low cost

functions, 40% of the companies surveyed felt that it was best to delegate functions like

IT services and support, HR, etc.

Telstra, the Australian telecom major, has contracted its IT operations to Infosys and

Satyam. The initial phase of a massive overhaul of its US$ 1.3 billion-a-year information

operations to India has already been completed.

Nokia entered into a contract with HP in 2004, to manage the IT infrastructure and

operations for Nokia's network and for its messaging and groupware systems. The

contract is for five years and billed at US$ 100 million annually.

Vodafone awarded a seven year contract to IBM and EDS to manage its IT operations as

a part of its cost cutting plans and pressure from shareholders.

3.3.3 SSO Locations


The very philosophy of outsourcing and SSO hinges on the principles of cost cutting, so it

is but natural that the first and foremost selection criteria for a company. However this is

not the only factor under consideration when companies choose an SSO location. This

section will take a closer look at some of the factors which influence the choice of location

for SSO operations.

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COO

CEO



Others

34%

18%

48%

Others

Interdep

artm

ental

Tea

m

25%

9%

4%

19%

24%

15%

1%






COO

CEO



Others

34%

18%

48%

Others

Interdep

artm

ental

Tea

m

25%

9%

4%

19%

24%

15%

1%



Figure 3.3.5 Technology: SSO Recommenders & Decision Makers

SSO has now become an integral part of operational strategy for a large number of

companies. Executive level staff is routinely involved in site selection for setting up SSO

facilities. Functional heads and external consultants are mostly used to recommend SSO

locations and the final decision lies with CXO level staff.

Figure 3.3.6 Technology: SSO Location Selection Criteria


43%

13%

12%

42%

6%

32%

50%

12%

12%

70%

15%

39%

47%

72%

40%

62%

49%

36%

73%

72%

15%

56%

18%

40%

16%

12%

32%

13%

10%

15%

16%

1%

29%

Compensation Costs






Attrition rates

Political stability



IP regulation


43%

13%

12%

42%

6%

32%

50%

12%

12%

70%

15%

39%

47%

72%

40%

62%

49%

36%

73%

72%

15%

56%

18%

40%

16%

12%

32%

13%

10%

15%

16%

1%

29%

Compensation Costs






Attrition rates

Political stability



IP regulation

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Costs

The cost of labor and cost of infrastructure will be the foremost parameters under

consideration. In this regard, developing countries in Asia, Latin America and East Europe

are very attractive destinations.

For lower order Business Process Outsourcing (BPO) activities where cost is the major

factor in selecting an offshore location, Indian cities are attractive. Delhi, Chennai and

Bangalore all feature in the top five cities, along with Manila and Buenos Aires due to their

low labor costs, and are likely to attract relatively routine BPO and call centre activities

(e.g. ticketing, account administration and claims processing).

Real estate, while not a major factor in selecting a city for off shoring, influences this

decision by contributing to the overall business cost. The lack of suitable real estate

delivery options may also reduce the attractiveness of some cities. Indian and Chinese

cities are less attractive in terms of the real estate market structure and availability of

space, with cities like Kuala Lumpur, Manila and Johannesburg being more attractive on

this indicator.

Various cost issues – Tax and regulatory costs, infrastructure costs and compensation

costs were rated highly by companies while selecting sites to set up SSO facilities. Tax

and regulatory costs were rated high and above by 88% companies, infrastructure costs

were rated high and above by 88% of the companies surveyed and compensation costs

was rated high and above by 57% of the companies.

Intellectual Property & Regulatory Issues

Intellectual property (IP) is a hot topic in all developed countries and is of particular

significance in the information technology sector. Offshore outsourcing companies have

to be given source code to work from, have to be educated on business processes, and

taught how their IT services or products will be used in higher cost countries. This in turn

creates a situation where a company from a higher cost country could be creating a

potential competitor 1-2 years down the road that not only knows how to create a highly

effective competing product or service, but also knows who your customers are. Most

offshore outsourcers would never consider stealing intellectual property, but that doesn’t

preclude some of their employees from doing so.

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Questions regarding the safety of technology IP in some lower cost countries have been a

significant restraining factor to offshore outsourcing as well as off shoring. IP risks rank

quite high when companies are selecting a SSO site, 85% of the companies which

participated in the survey gave IP risks a high rating.

Labor force experience and availability

Two major issues are under consideration when one talks about human resources – size

of the overall labor pool and the quality of labor. The world’s mega cities score most

highly in labor supply. These mega cities are spread between Latin America (Buenos

Aires, Sao Paulo, Mexico City) and Asia (Shanghai, Manila), and offer large pools of

potential labor for companies considering off shoring. With the exception of Manila, these

cities do not have significant levels of BPO off shoring at present. The advantage of less

competition for staff in these cities will however be offset by the smaller pool of

employees with relevant experience.

Where labor quality is concerned, Manila, Moscow and Budapest rank highly on the

aggregate index. However, at the level of the individual indicators which comprise the

composite index, there is significant variation. Bangalore, Delhi, Chennai and Manila all

score particularly high on the availability of IT skills. In India, there is a vast pool of IT

graduates in the tier one and two cities. Some 300,000 graduates become available for

work every year in Bangalore alone. The pool of tertiary qualified staff is somewhat lower

in Latin American and European cities.

Attrition rates and labor force experience and availability are some of factors on which we

sought opinions during the survey. 94% of the companies gave labor experience a high

and above rating.

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The most preferred locations for SSO operations for the technology vertical are India,

Ireland and China as highlighted in Figure 3.3.7 Emerging locations include east

European countries, Malaysia and a few Latin American countries.

Figure 3.3.7 Technology: Top SSO Locations

Top SSO Locations

1

2

3

India

Ireland

China 6%

11%

12%

6%

4%

4%

1%

2%

4%

Rank

Emerging Locations


East-EU: Czech Republic, Poland; Lat Am: Peru, Mexico; Malaysia

UK, USA, Canada




Top SSO Locations

1

2

3

India

Ireland

China 6%

11%

12%

6%

4%

4%

1%

2%

4%

Rank

Emerging Locations


East-EU: Czech Republic, Poland; Lat Am: Peru, Mexico; Malaysia

UK, USA, Canada




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India ranks very high on all parameters as highlighted in Figure 3.3.8

Figure 3.3.8 Technology: Ranking of Top SSO Locations

India – Constantly moving up the value chain

In recent years it has been observed that more and more foreign companies are

delegating work of strategic importance to their development centers in India. This is

further established by the fact that many of them have set up their largest R&D centers

outside their country of origin in India. India has one of the highest numbers of

engineering graduates in the world and the largest base of Java certified developers in

the world. India is close to the fast-growing Asian markets, and many development

centers here work to cater to these markets. Also, a prime motive behind the allocation of

research work on emerging markets to R&D centers in India is that India itself is an

emerging market, and a company's proximity to such markets would help researchers do

efficient first-hand work. The Indian government has also been instrumental in helping

MNCs set up R&D centers in India, and is helping them with tax exemptions and other

incentives. Information technology and English skills are the main factors that drive

Overall Score


3.5

2

4

3.4

4.4

4

3.7

4.5

3.4

China

Ireland

India

3.3

3.3

3.8




Overall Score


3.5

2

4

3.4

4.4

4

3.7

4.5

3.4

China

Ireland

India

3.3

3.3

3.8





Human Capital

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western countries to outsource from India. India is surging as a top destination for venture

capital financing. The trend is due to India's capabilities in information technology services

and business process outsourcing.

India ranked number one with 12% of the companies recommending it as its first choice

for SSO operations. India achieved an overall score of 3.8 over 5 in terms of cost

efficiency, conduciveness of business environment and quality of human capital.

Ireland – Still a preferred location

One of the reasons why so many companies choose Ireland is because of the unique

workforce - Ireland has one of the youngest populations in Europe with over 36% under

the age of 25 years. Ireland's unique population and age structure that has fuelled much

of Ireland's recent prosperity will continue for the next 15 years with a key focus on

education and research in Ireland.

In a study of demographic trends, economists at NCB Stockbrokers forecast that

projected population declines across much of Europe meant Ireland's already strong

economy would look even more attractive in a European context over the next decade.

The population of the Republic will grow by 30% to over 5.3 million by 2020 and to six

million by 2050.

The population between the ages of 15 and 64 will rise by 700,000 in the next 15 years.

Sustained strong growth in the labor supply will maintain a capacity for growth in Ireland

that will far outstrip that in other EU countries where the demographic outlook is much

less favorable the report states.

Irelands total investment in knowledge (including investment in public and private

spending on higher education) increased by an average annual rate of over 10% over the

past decade compared with averages of around 3% by the EU and the OECD.

The overall tax burden in Ireland is the lowest among all other EU member states. A focus

of Ireland's strategy to attract investment is to create a favorable economic and fiscal

environment which is supportive of industry. This is evidenced by various investment

incentives which are in place, creating a unique business opportunity in Ireland. Following

are some of the most attractive features for investors in Ireland -

• Ireland has one of the most beneficial corporate tax environments in the world. A

GROWTH CONSULTING


corporation tax rate of 12.5% applies to all corporate trading profits.

• Tax credits for incremental expenditure on Research and Development.

• A favorable holding company regime

• Double taxation agreements with 44 countries

Ideas and knowledge have transformed business and industry and have been crucial in

the development of the Irish economy. The Irish Government's economic policies are

directed towards the creation of a stable economic environment that is supportive of the

needs of business. Ireland's economic growth rates in recent years have consistently

been among the highest of the OECD countries.

Ireland achieved an overall score of 3.3 out of 5 and 11% of the companies surveyed said

that it would be their first choice of location. Technology companies present in Ireland

include AOL, Analog devices, Microsoft, and Lucent.

China

The rationale for US companies to outsource IT jobs to China is obvious: cheap labor

costs. This can translate into up to 40% less in application development costs than even

India, the erstwhile low-wage haven for companies looking abroad. In terms of R&D

export, China's main advantage for the future is the presence of a clear government

strategy for software and R&D. Enshrined within the tenth Five-Year Plan (2001-2005) is

a policy of prioritizing R&D, especially software and software exports, in the hope of

emulating India's success – a hope that World Trade Organization entry may greatly

advance. This has recently brought tax breaks for software development, access to cheap

capital, and relaxation of rules on sending employees abroad. China also has a strong

telecommunications infrastructure and an appropriate educational system that delivers

software labor with lower costs.

Japan has proven to be a force to reckon with in terms of product innovation, whether in

electronics, software or the automobile industries. Now, China is following a similar path.

It boasts engineers who produce today's most advanced computer chips. They also

design some of the most sophisticated software available; handwriting recognition

GROWTH CONSULTING


software on tablet PCs, for example. China now graduates more engineers than any other

country, and three times the number of engineers as does the U.S.

Eastern Europe

Eastern Europe is emerging as a top outsourcing destination next to countries such as

India and China. The enlargement of the European Union (EU) is a factor, which is driving

this trend. Companies such as Bulgaria, Romania, and Estonia are gaining prominence

as low-cost IT outsourcing destinations. Bulgaria and Romania are expected to become

members of EU in the year 2007. Skype, the program for making free calls over the

Internet is a product of Estonian developers. The economic growth of Estonia is the

second fastest in Europe. Countries such as Poland, Czech Republic, and Hungary are

also emerging as low-cost R&D destinations. The three countries better known for

electronics manufacturing are now restructuring themselves as R&D destinations.

Hungary has a high percentage of technical workers among its total graduate work force.

GE and IBM have made investments of US$1.3 billion combined. The Czech Republic is

home to six technical institutes with electronics specializations. These institutes are rich

sources of graduates having IT and electronics-related competencies. Salaries for

engineers in these countries could be up to five times lower than western European

countries.

GROWTH CONSULTING


3.4 Energy

The Energy sector can be broadly represented by 2 categories. They are Oil & Gas

Operations (Petroleum Refining) and Utilities. Oil & Gas Operations companies occupy

74.2% of the total energy companies in the Fortune 500 segment, based on revenue

calculation in 2006. Top 5 Oil & Gas Operations include Exxon Mobil, Shell, BP, Chevron

and ConocoPhillips while top 5 Utilities include State Grid, EON, Électricité De France,

Suez and Gazprom. Oil & Gas Operations generally have operations worldwide while

Utilities only have offices and are usually the main energy providers in their home

countries. According to OECD, global demand is expected to grow by more than half over

the next quarter of a century. Investment needs exceed US$20 trillion, mainly because of

higher unit costs.

With oil and gas prices are at record highs, and are not expected to decline given the

growing demand for these resources. Energy companies are diversifying their product

mix, as non-traditional fuel sources become more price competitive, and alternative fuels

are gaining interest. New investment in LNG, oil sands, oil shale, ethanol and other

sources and products are showing rapid growth.

Things are equally turbulent for the utilities sector where previously sacrosanct national

boundaries are falling as cross border investment progresses, particularly in the EU.



Companies in the Energy vertical have been experiencing fast paced and unusually

diversified organic growth, together with heightened activity involving overseas

acquisitions. The growth poses multiple challenges because the energy companies have

to adapt to different languages and cultural varieties, multiple taxes and regulatory

requirements, internal control, availability of multi-skilled labors as well as scalability of

infrastructure facilities. Hence, in deciding on locations for SSO, companies in the energy

vertical would look at the above constraining factors before deciding on the best location

for their SSO operation.

GROWTH CONSULTING



In choosing between shared services and outsourcing, the energy vertical companies

have indicated that outsourcing providers can ensure faster operation and thus providing

them an opportunity to learn from these providers’ experience. However, setting up

captive shared service centers will cost less from their perspective. For example, Centrica

set up an HR Shared Service Center in 2002. However, the entire shared service center

was outsourced to Hewitt in 2006 since Centrica realized a specialized provider would

have the right skills to handle the operation. Although outsourcing may limit their flexibility

due to contract lock-in, and significant people change, Centrica identified that the option

could allow greater momentum and focus, as well as learning from the outsourcer’s

experience. As a result Centrica would be able to benefit from a 30% cost reduction after

three years of outsourcing.

However, outsourcing poses more issues when the company is acquired by another

entity. The new entity will need to inherit the contract tied up to the former company. This

can cause complications if the new entity objectives’ are not aligned with the “inherited”

contract. For example, when Powergen acquired TXU, Powergen "inherited" a major

outsourcing contract between TXU and Vertex. That was a contract for various customer

management services which was worth in excess of US$200 million per year. Significant

re-negotiations took place in 2003 and 2005 (in 2005 against a background of alleged

breach by Vertex), during which the value of the contract was sharply reduced.

3.4.1.3 SSO Drivers

The key drivers for SSO activities in the Energy vertical are cost reduction and mitigation

as well as enhancing competitiveness. Apart from these, overseas merger & acquisition

(M&A), activities streamlining, and need for process excellence, uniformity and

standardization are also some other drivers that most Energy companies highlighted.

GROWTH CONSULTING


18%

25%

11%

46%

38%

42%

13%

6%

21%

57%

36%

38%

40%

33%

53%

51%

67%

43%

60%

14%

33%

43%

12%











Note; Streamlining of operations acquired from M&A is a key driver

Figure 3.4.1 Energy: SSO Drivers


All Energy companies indicated that reducing operating cost is their main driver to adopt

SSO. Energy companies are traditionally very large organizations. These companies do

not invest extensively on talent management on non-core activities (nor should they do

so). Often, third party outsourcers can provide these companies with proper talents

together with cheaper cost. On the other hand, using third party outsourcers can also

provide a substantial reduction in CAPEX, and this is critical to companies who are

concern about their financial volatility. A smoother spending, via the outsourcing method,

can reduce the fluctuations in balance sheet statements, by transferring the initial

investment outlay to future OPEX spending. This allows the companies to achieve top

quartile operating and cost performance. TXU, for example, managed to gain a 30%

saving via its 10 years outsourcing deal with Capgemini Energy LP and Hewitt

Associates. Similarly, when BP outsourced their HR processes to Exult, it managed to

recover the costs of the initial seven years contract in only three years.

GROWTH CONSULTING


Accenture and Sadiel manage and support the development of Endesa’s commercial IT

systems while Capgemini, Indra and IBM are involved in the development of Endesa’s

distribution, generation and internal management systems. The five year contracts allow

these vendors to integrate and manage Endesa’s range of disparate systems in 1998 in

preparation for competition (it was running up to 10 legacy end user management

platforms as a result of M&A activity). Endesa managed to gain cost savings of US$71

million. Its tactic of outsourcing different parts of the core systems infrastructure is an

important part of this cost cutting strategy.

Enhance Competitiveness and focus on core competencies

94% of the Energy companies indicated that enhancing their competitiveness is the main

driver for SSO adoption. Intense competition — in conjunction with outdated information

systems and manual processes in key business areas — made it difficult for many energy

vertical companies to sustain a high level of efficiency. Halliburton, for example, found

that production planning had become cumbersome, time-consuming and costly, resulting

in excess inventory and limited capacity knowledge. The company also felt customer

pressure to reduce cycle time, increase flexibility and responsiveness and speed delivery

time. By outsourcing to IBM, the inventory levels were reduced by 30%, the on-time

delivery was improved to 90% and the cycle times were shortened by 15%. This has

significantly improved the efficiency and competitiveness of Halliburton in the oil and gas

industries.

Other drivers mentioned by survey respondents include streamlining of operations

acquired through M&A, and achieving Process Excellence, Uniformity and

Standardization.

Streamlining Merger & Acquisition (M&A) Activities

In 2001, many utility companies were becoming financially strained due to poor

investments in energy trading or merchant operations and unsuccessful forays into

GROWTH CONSULTING


international markets. Hence, many energy vertical companies were involved in M&A

exercises to reinforce their financial profile. Such exercises required uninterrupted

integration with the existing business operations. SSO activities become prominent since

involved parties found setting up SSO centers as an effective solution for integrating

operations. In fact, when BP acquired Amoco in USA, it managed to accelerate the

acquisition integration by reducing the cycle time by approximately 40% with SSO. The

SSO center also helps BP to improve the quality of data and operations by reducing

closing cycle time from 18 to eight days.

Thames Water, the world’s third largest water company, on the other hand, sought

Xansa’s expertise to deliver the initial phase of a BPO operation. Thames Water and

Xansa have worked together for over 15 years. As a preferred supplier of IT services,

Xansa has supported Thames Water's transition through de-regulation, its merger with

RWE and its e-business developments.

Process Excellence, Uniformity and Standardization

Renewed focus on optimizing core power generation and delivery assets requires

emphasis on process excellence, uniformity and standardization. Customer care

improvement, investments in technology, infrastructure, and people resources compete

for capital spend for core business functions while operating processes and procedures

are significantly lagging best in class in call center industry practices. Energy vertical

companies have benefited from the streamlining of activities when setting up the shared

services center or outsourcing the mundane process externally.


Energy companies are faced with the challenges and concerns as highlighted in Figure

3.4.2 when considering new SSO operations or running existing SSO centers. These

concerns include reduced service level of 3rd party, organization de-skilling and lack of

competent management staff.

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41%

6%

5%

22%

29%

21%

31%

71%

23%

30%

78%

78%

59%

56%

28%

68%

24%

72%

70%

22%

12%

23%

32%


Loss of control

Increased costs






Org. de-skilling



Figure 3.4.2 Energy: SSO Concerns

Reduced Service Level of 3rd Party

All Energy companies indicated that reduced service level of 3rd party is the main

concerns for SSO adoption. Service level, by definition, is the benchmark used to

measure performance of any process in order to ensure consistent revenue growth in any

enterprise. Since 3rd party service providers are not tied up to the business revenue

growth by default, the service level may be reduced because the outsourcing task is

contracted in the initial phase before the end performance is identified. Shell, for example,

has opt to set up shared service centers instead of outsourcing for certain business

processes in order to ensure high service level required in the company.

Organization de-skilling

All Energy companies indicated that organization de-skilling is the main concern for SSO

adoption. Most enterprises find that de-skilled workers become alienated from their work

due to the perceived lower class of jobs. These workers are unable to find an association

with their company’s business growth direction, since they are working on such jobs

requiring little training. Continuous staff motivation is perceived to be required by Energy

GROWTH CONSULTING


companies who would like to adopt SSO.

Lack of Competent Staff to Manage the Shared Service Centers

79% of the Energy companies indicated that lack of competent management staff is the

main concerns for shared service adoption. Companies from the Energy vertical are

facing issues with the lack of competent staff to handle their shared service centers.

Progress Energy, for example, voiced out their intention to set up a shared service center

but to no avail due to the lack of experience in handling such activity. This is particularly

acute for energy companies which have grown large through a series of M&A activities

and therefore are required to set up large SSO centers for their business processes.

A few players, particularly originating from develoing markets, indicated that they were

unable to utilize win-win benefits from SSO as a result of lack of experience in executing

any well-established model.

Win-win Benefits not Visible in Terms of Cost and Service Quality

A majority of the energy companies mentioned that there is a lack of understanding in

doing detailed quantitative analysis to understand total financial impact of setting up SSO

centers. Often, there are no visible benefits in terms of cost and service quality that could

be enjoyed by the companies that set up the shared service centers. For example,

Reliance Industries could not identify the win-win benefits of setting up the shared service

center for its Group Company. This delayed the intention of setting up a center in

Mumbai, India.

No Clear Effective Model for Shared Services

While companies with several years of experience in outsourcing, offshoring or running

shared services centers have developed a proper operational model for most of the

business processes represented, Energy companies in many emerging markets have

several issues while setting up new SSO centers. Reliance Industries of India has further

emphasized that process excellence; service quality and delivery were surprisingly not the

focus areas in their present shared services model, thereby reducing the organization’s

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enthusiasm for SSO.

3.4.2 SSO Trends


Most companies in the energy industry indicate that SSO spending is amounted to at

most 3% of the revenue earned over any year. Apart from the top five energy vertical

companies, namely Exxon Mobil, Shell, BP, Chevron and Total who have more visible

SSO activities in place, most other companies’ (such as ConEdison and Reliance

Industries) SSO activities are at its nascent stage.

Spend on SSO is expected to grow at a CAGR of 6%, from US$84 million in 2006 to

US$100 million in 2009 due to expanded volume of business, mainly in the Oil & Gas

sector. However, spending as a percentage of revenue is expected to drop from 1.9% in

2006 to 1.2% in 2009. This is because the increased revenue foreseen in the next 3 years

are mainly from expected increase in oil prices, which is not likely to influence the

increased spending in SSO.

Figure 3.4.3 Energy: Spend on SSO

1.9%1.6%

1.4% 1.2%

8489

93100

0.0%

2.0%

4.0%

2006 2007 2008 2009

0

50

100

150


10%

4%

57%

15%

90%

11%

44%

43%

70%

13%

47%

43%

22%

14%

21%

15%

53%

53%

46%

30%

74%

45%

33%

12%

34%


Human Resources

Procurement


Corporate Learning




Strategic/R&D




1.9%1.6%

1.4% 1.2%

8489

93100

0.0%

2.0%

4.0%

2006 2007 2008 2009

0

50

100

150


10%

4%

57%

15%

90%

11%

44%

43%

70%

13%

47%

43%

22%

14%

21%

15%

53%

53%

46%

30%

74%

45%

33%

12%

34%


Human Resources

Procurement


Corporate Learning




Strategic/R&D




GROWTH CONSULTING



The trend amongst Energy companies is to primarily establish shared services and

outsourcing for IT Services and Support, Back-Office Processing, Finance and

Accounting, and Human Resources.

Brief description and examples for selected types of SSO are discussed next.

IT Services and Support

Almost 80% of the Energy companies would like to or have already set up SSO for IT

services and support. Most energy companies usually take IT services and support as

their first business process for migration to shared service or outsourcing. For example,

EDP transferred Edinfor, its IT services subsidiary to LogicaCMG in 2006. BG Group’s IT

systems are run by Accenture. AEP set up a shared service centre with some 2500

employees and contractors to run the IT system.

As an example of offshoring, Shell runs an offshore regional centre in Malaysia providing

centralized IT services and solutions. It has another offshore regional center in Philippines

providing back office operations. Exxon Mobil, on the other hand, has a project and

support shared service centre in Singapore. The centre has 60 employees, comprising

experienced systems engineers and business specialists. The centre is equipped with

Global Enterprise Management System (Gems), an advanced information system that

supports common worldwide business processes, including procurement, production

planning and quality management and customer orders.


Outsourcing of back office process to low cost countries like India has become popular

with energy companies. 86% of the Energy companies would like to or have already set

up SSO for back-office processing.

British Gas, the largest supplier of residential gas and electricity in Britain, outsourced its

back office operations to ExlService Holdings in 2005. British Gas is the brand name for

energy and energy-related services offered by Centrica plc in the UK. Centrica used

GROWTH CONSULTING


rigorous selection criteria to evaluate suppliers in India and eventually selected EXL

reportedly for its excellence in professional management, rigor in migration and expertise

in back office operations. The operations in their steady state will be serviced from EXL’s

facilities in Noida (part of the National Capital Region) and Pune. The main drivers for the

outsourcing by Centrica are to improve productivity and reduce costs. Another example is

Exxon Mobil which runs an offshore shared service in Malaysia for its back-office

processing.


86% of the Energy companies would like to or have already set up SSO for finance and

accounting. BP outsourced its finance and accounting to two centers, one in Budapest to

serve the European customers, while the other in Calgary to serve the American

customers. The Budapest center is run by EDS, with an investment of US$ 8.5 million.

The Calgary center is run by IBM, a three-floor data centre. Exxon Mobil also runs a

shared service in Czech Republic for the finance and accounting.

Other functions cited as being prominent in witnessing SSO activities are human resource

related functions and corporate learning programs.

Human Resources

53% of the Energy companies has already set up or intend to set up SSO for Human

Resources. Several energy companies have either set up captive HR shared service

operations or have outsourced HR functions to specialists. Energy companies are

concerned about the retention rate, and hence consider it important to educate their SSO

staff of the value of their works. Furthermore, energy companies would like the SSO

centers conform to certain quality control in order to deliver the optimum performance.

Cultural adaptability is also critical in the HR SSO in order to ensure a smooth transition.

Chevron started the Manila Shared Services Center in 1998. The HR Shared Services are

expatriate-managed. Another similar center is located in South Africa. The Manila site

supports Asia Pacific and USA while the South Africa site supports seven African

countries. The HR Shared Services provided include HR data maintenance, recruiting,

GROWTH CONSULTING


expatriate administration and compensation & benefits. In dealing with the HR Shared

Services, Chevron has identified a number of challenges that need to be solved in order

to ensure the success of the center. One of the main challenges is the need to show its

staff that they are part of the company and not a cost saving tool. Chevron helps each of

the employees to develop a career path in order to avoid high attrition.

Centrica has entered into a seven year contract with Hewitt Associates to outsource their

HR services that include payroll, reward operations, and performance management. The

outsourcing arrangement affects 135 roles within the company. 66% of HR processing

work would be performed offshore in Glasgow and India, both of which have Six Sigma

capabilities. The company will also outsource the voice related services to Krakow in

2009.

Duke Energy signed an outsourcing contract with Hewitt Associates in 2005. Under the

agreement, 100 Duke Employees were shifted to Hewitt. The majority of them had stayed

on with the outsourcing company for six months to oversee the transition after which

Hewitt reviewed its workforce needs. Among those 100 employees were a few managers

who have stayed at Hewitt for the long term to help the outsourcing company get a sense

of and preserve Duke's culture and needs.


In line with HR processes, several energy companies have also outsourced Corporate

Learning programs to specialists.

BP outsourced corporate learning programs to Exult that provides global access for all BP

employees to a tailored digital skills curriculum to support the development of IT skills and

a global hosting environment for custom BP e-Learning. BP employees use Exult’s

SkillSoft catalogue to support the continued development of e-Learning within BP. BP has

an 8% stake in Exult, an example of evolving relationship between client and SSO service

provider.

GROWTH CONSULTING



Three major categories have emerged for SSO within the energy sector. Either the

enterprises are using their own facility and resources, or entering into a joint venture with

3rd party providers or totally outsourcing to an external service provider.

Figure 3.4.4 Energy: SSO Party of Choice

Own Facility

For many energy companies, a major concern with outsourcing is that they will lose value

add, knowledge and intimacy. With this in mind, 36% of the Energy companies preferred

to set up their own facility (shared service centers) to centralize the business processes

across different countries. The favorable business processes for this method are R&D

and sales related activities.

For example, Shell runs five shared service centers that are fully owned subsidiaries of

Shell. They are located in Cyberjaya (Malaysia), Glasgow (UK), Krakow (Poland), Manila

(Philippines) and Guatemala. The reasons for Shell to choose fully owned centers are

because during the time of set-up, Shell did not exactly understand the essential

parameters. They are also concerned about losing power and influence with outsourcing.

55%

27%

55%

27%

45%

82%

27%

18%

82%

36%

36%

36%

18%

45%

18%

55%

55%

18%

9%

36%

9%

55%

9%

0%

18%

27%

0%


Human Resources

Procurement






Strategic / R&D

Wholly Owned Third Party Joint Venture

Wholly Owned

Joint Venture

Third Party

36 %

35 %

28 %


55%

27%

55%

27%

45%

82%

27%

18%

82%

36%

36%

36%

18%

45%

18%

55%

55%

18%

9%

36%

9%

55%

9%

0%

18%

27%

0%


Human Resources

Procurement






Strategic / R&D

Wholly Owned Third Party Joint Venture

Wholly Owned

Joint Venture

Third Party

36 %

35 %

28 %


GROWTH CONSULTING



Energy companies typically use outsourcing arrangements for non-core activities like HR,

business processes and IT services. This is the next preferred method by 35% of the

Energy companies. A unique case was when TXU decided to spin off the HR outsourcing

from Capgemini Energy (JV between TXU and Cap Gemini) to Hewitt. The agreement

frees Capgemini Energy to focus on its core offerings in finance and accounting, as well

as on growing opportunities in procurement. The other business processes that favor this

method are IT services & support and back-office processing.

Joint venture

This is one of the emerging forms of collaboration between energy companies and

service providers, with 28% of the Energy companies favor this approach. Capgemini

Energy, a joint venture between Capgemini and TXU is a good example of a joint venture.

This new company provides information technology and business process outsourcing

services to the electric, gas and water utility industries in the USA. Capgemini owns 97%

of the new firm, and the remaining is held by TXU. Capgemini Energy also has a US$3.5

billion transformational outsourcing agreement with TXU. It has the mission of improving

service levels and reducing US$150 million per year in operating costs for TXU across

human resources, finance & accounting, IT, customer care, revenue management and

supply chain. This approach is most visible in the customer service and call centers set

up.

3.4.3 SSO Locations


For energy companies, the most critical selection criteria are labor force experience,

infrastructure quality, and political stability though many other factors play critical roles in

attracting these companies to set up their SSO operations in a particular country. Usually,

the interdepartmental team, SSO location managers, regional managers and/or external

consultants will recommend the ideal locations for SSO activities while the final decision is

made by CEO and/or COO as shown in Figure 3.4.5

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100%

100%

100%

100%

64%

25%




COO

CEO



Others

36%

75%

100%

Others

Interdep

artm

ental

Tea

m






COO

CEO



Others

36%

75%

100%

Others

Interdep

artm

ental

Tea

m




21%

14%

13%

14%

14%

14%

7%

67%

14%

67%

64%

44%

74%

40%

74%

64%

49%

71%

33%

64%

12%

23%

44%

12%

60%

12%

23%

51%

22%

23%

Compensation Costs






Attrition rates

Political stability



IP regulation


Figure 3.4.5 Energy: SSO Recommenders and Decision Makers

Figure 3.4.6 Energy: SSO Location Selection Criteria

GROWTH CONSULTING


The elaboration of the key selection criteria are summarized as of below:

Labor Force Experience and Availability

Labor force experience plays a significant factor in SSO hub selection process, with all

Energy companies indicating it as highly important. Shell Shared Service Centre in

Glasgow, UK is an example where labor force experience and availability factor became

an important consideration. Shell picked Glasgow for its availability of experienced

manpower with accounting and finance skills as well as foreign language skills to cater

mainly to the European customers mainly. The centre’s employees cover 34 languages.

Political Stability

The first criterion that all Energy companies would perform in selecting SSO location is to

pick a country with stable politics. As indicated by most Energy companies, political

stability is a pre-requisite before they even start to do a thorough understanding and

analysis of other factors such as labor force’s and infrastructure’s availability and cost.

Factors to be considered in the political stability criterion include frequency of change in

the top governmental officers, terrorism level, currency fluctuation, inflation and economic

growth.

Infrastructure Quality and Cost

93% of the Energy companies consider infrastructure quality (as well as cost) an

important criterion when selecting locations for SSO activities. Top energy vertical

companies such as Exxon Mobil, Shell and BP have their shared service centers located

in South East Asia and Eastern Europe where the relative infrastructure cost is much

lower compared to North America and Western Europe. Since infrastructure cost

occupies the major portion of cost of running an energy company, the reduction in

infrastructure cost will also reduce the operating expenses. In fact, for Centrica, the

outsourcing effort will drive down the operating cost by 40% by the third year of the

contract.

GROWTH CONSULTING


Cultural Adaptability (unique to Utilities)

Many utilities companies chose to set up their shared service or outsourcing in their home

country. These utilities firms are generally non-multinational company and hence, they

don’t see the need to venture offshore. For example, ConEdison has its shared service

center in New York, where their energy operation is located while Progress Energy

outsourced its business processes in North Carolina, where one of their energy

operations is located, the other one being in Florida. Employees in these SSO centers

understand the local culture and are able to handle the situation better with the local

communities.


The most preferred locations for SSO operations for the energy vertical are the

Singapore, Malaysia and Philippines as highlighted in Figure 3.4.7; emerging locations

include Poland while Ireland is witnessing decline. The comparison of top locations is

shown in Figure 3.4.8.

Figure 3.4.7 Energy: Top SSO Locations

Top SSO Locations

1

2

3

Malaysia

Singapore

Philippines 3%

3%

5%

4%

5%

3%

7%

5%

4%

Rank



Emerging Locations


Poland

Ireland


Top SSO Locations

1

2

3

Malaysia

Singapore

Philippines 3%

3%

5%

4%

5%

3%

7%

5%

4%

Rank



Emerging Locations


Poland

Ireland


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Overall Score

3.9

3.7

3.7

3.9

3.9

4.2

3.8

4.1

4.4

Philippines

Singapore

Malaysia

3.9

3.9

4.1




Overall Score

3.9

3.7

3.7

3.9

3.9

4.2

3.8

4.1

4.4

Philippines

Singapore

Malaysia

3.9

3.9

4.1





Human Capital

Figure 3.4.8 Energy: Ranking of Top SSO Locations

Singapore

Singapore, with its strong business environment conduciveness and high quality of

human capital, becomes the top of the mind SSO location. There are more than 7,000

MNCs in Singapore, with many of which have established regional or international

headquarters. As their operations expand, these companies have found that it makes

increasing sense to consolidate certain business processes in one location. The ease of

recruiting talents, robust infrastructure and logistics together with stable politics form

some of the factors that have attracted these companies to locate their SSO centers in

the island. For example, ExxonMobil has a 60-high quality team in Singapore, comprising

experienced systems engineers and business specialists, and the country is the Asia-

Pacific project and support centre for its Global Enterprise Management System (GEMS).

The GEMS platform supports common worldwide business processes, including

procurement, production planning and quality management and customer orders.

Malaysia

Malaysia ranks in the second place in the top of the mind SSO locations ranking. The

country provides a relatively high standard of labor force in the region, with multi-lingual

capability at relatively low cost. The macro condition is highly favorable, with stable

politics and strong economic growth. Shell Information Technology is a notable example

as it serves as a regional centre to provide centralized IT services and solutions.

ExxonMobil Business Support Centre, on the other hand, provides regional shared

services and data support activities to its internal customers.

GROWTH CONSULTING


Philippines

Philippines, with its strong cost efficiency, clinched the second place, together with

Malaysia, in the top of the mind SSO locations ranking. Philippines provide high standard

of infrastructure quality at a lower cost due to its liberalized telecommunications industry.

Furthermore, its strong tie with USA in the past provides an attractive force to American

companies and a strong momentum for European companies to set up SSO in the

Philippines. For example, Chevron set up its Manila Shared Service Center in 1998 to

support the Asia Pacific and US operations. The center offers 3 services, namely Finance

and Accounting, SAP support and HR support. The other notable shared service center

that follows the trend is Shell Shared Services.

Poland (emerging country for SSO in Europe)

Poland is one of the main SSO hubs for major European companies, due to its

geographical proximity and cultural similarity advantages. For example, Shell has a

shared service centre in Krakow while Centrica plans to open a call centre in the same

place in 2009. Poland employee commands an average salary of US$7,432 while the

similar person would command US$37,160 in Ireland. The attraction of the market is the

38 million people, a skilled and relatively low-cost workforce and good languages. It has a

low corporate income tax rate of around 22%.

USA (especially for the Utilities Companies)

Many utilities companies located in USA prefer to set up domestic SSO centers. This is

because they are often not a multinational entity with most employees residing in the

home country like in TXU’s case. While the infrastructure cost is high, most of these costs

are sunk costs by nature. The utilities are not able to take advantage of the lower tax

incentives in the foreign countries because much revenue is still derived within the

country. And even with tax saving in certain states, the saving will usually pass to the

consumers due to intense competition. Furthermore, most utilities are one of the major

recruiters in any city and fear potential political backlash in case they relocate operations.

GROWTH CONSULTING


3.5 Healthcare

Patient and managed care, pharmaceuticals and life sciences & biotechnology constitute

the healthcare sector. Rising costs, expanding market demand, and increasing customer

dissatisfaction with failing healthcare systems or a lack of the same will characterize

healthcare in this decade and help redefine the roles of patients, providers and payers.

Simply put, healthcare organizations face a growing imbalance of supply and demand. On

the demand side is a large population of aging patients, specifically in the USA and

Western Europe, in deteriorating health who demand more services, pharmaceuticals,

and medical breakthroughs. The supply side, however, is hampered by a shrinking pool of

investment capital, a shortage of willing caregivers, and aging physical plants straining

under the current volume of patients.

Clearly, demand is driving the system and flipping the traditional paradigm in which many

health systems attempted to control costs by controlling supply. Under these conditions,

healthcare providers must meet the challenge of effectively managing patient demand

while payers must drive patients to the most cost-effective providers. The healthcare

organizations that prosper in this environment will be those that recognize the

supply/demand imbalance and respond with flexible and effective processes for delivering

superior customer service.

Investor interest in biotechnology and medical devices has never been higher. Consumer

demand for improved healthcare relentlessly drives the life science industry to find new

and ever more innovative therapies and delivery technologies, promising a combination of

medical breakthroughs and significant financial rewards for investors.

This dynamism also translates into an ever-increasing number of joint ventures and

strategic alliances as companies scramble to be first to market while expanding their

inventory of intellectual property.

Pharmaceutical and life sciences companies are among the most analyzed and evaluated

organizations in business today. Each company's financials, strategy and plans are

scrutinized and compared to both current and historical benchmarks. In recent years,

profitability has been lagging as many companies have been unable to sustain the robust

growth that was once a hallmark of the industry. Considering the broader picture, analysts

expect that the existing "blockbuster model" will be viable for the foreseeable future, but

over time they suggest that a new approach will be needed to successfully address the

GROWTH CONSULTING


difficult challenges ahead. The challenges are well known and include declining

profitability, thinning pipelines, growing generic competition, and skyrocketing operating

and marketing costs.

In the future, the approach that companies pursue will depend in large measure upon

their individual goals. Whether they choose an innovation-based model built on the

promise of personalized medicine or instead focus on an alternative operating structure

such as the virtual organization, inevitably companies will need to decide how to satisfy

contending stakeholder demands while pursuing sustainable growth in a highly

competitive market.



As costs continue to rise against depleted budgets, healthcare organizations are in

search of effective cost-reducing solutions. Many have turned to outsourcing as a way to

combat their organizational inefficiencies. Today, the outsourcing of technology as a cost-

reducing method has taken full force across a broad spectrum of industries, including the

healthcare segment. With an increasing awareness for greater efficiency and output

standards, the healthcare marketplace holds tremendous outsourcing opportunity and a

substantially expanding pipeline. Life sciences companies have set-up extensive

operations in low cost countries for activities ranging from basic drug discovery R&D,

clinical trials, manufacturing to customer support.


Regulatory Compliance

The Health Insurance Portability and Accountability Act (HIPAA) establish strong

guidelines for data transfer, storage, and reporting. The US government including the

FDA has been increasing the regulatory burden on life sciences corporations. This will

impact not only the companies in the vertical themselves, but also their shared services or

outsourcing service providers.

GROWTH CONSULTING


Manage the risks associated with increasingly complex SSO arrangements

Healthcare providers and pharmaceuticals alike are extremely concerned about losing

control over their businesses in pursuit of SSO, given that this could have a serious

impact on their reputation and competitive position. SSO risks are increasing in the

healthcare industry, with greater degree of offshoring. Data security risks and privacy

concerns are high on companies’ agenda, and these risks increase when data is being

stored or transferred across borders. Managing compliance risk is particularly difficult

when off shoring is used.

As a result, transparency and effective risk management have never been more important

to the industry. Healthcare companies are under pressure to provide ever more complex

and frequent reporting to the regulators and investment community. Companies which

offshore processes are still accountable for them, if a service provider fails to comply, the

source company is still to blame. Because of this policy, proper risk management is a top

priority for companies planning to take SSO further.

Developing Strategic Fit between Outsourcers and CRO

In the past, outsourcing was conducted in a non-strategic, piecemeal fashion. Executives

simply outsourced to resolve a shortage in R&D resources without taking a long-term

perspective of focusing on particular aspects of R&D and externalizing others. Most

pharmaceutical and biotech companies were and continue to be uncomfortable with

outsourcing the entire portfolio of drug discovery to single contract research companies.

The increasing pressure on pharmaceutical and biotech companies to improve research

productivity has led to more strategic relationships being formed between the sponsors

and contract research companies. The value of such a strategic fit is being appreciated

much more today with an increasing number of companies looking to add research

capabilities through their contract research partnerships. The need for developing a

strategic fit has been further fuelled with a spate of biotech companies working on

technologies complementing research done by pharmaceutical companies. These

strategic fits are difficult to achieve and pose a big challenge. With a number of

macroeconomic factors coming into play, it is becoming increasingly difficult for global

outsourcing companies to locate and develop strategic partnerships with their contract

research companies. Global drug discovery contract research companies in search of

GROWTH CONSULTING


success in the near future need to necessarily ensure that they strategically fit the

outsourcing of global biotech and pharmaceutical majors. While understanding the

strategic needs of the global outsourcers could be an important hurdle to overcome,

developing the strategic fit might involve prohibitive investments. Investments in

infrastructure, manpower, and technologies, which could undo plans of a number of

companies aspiring to dominate the drug discovery contract research space.

Establishing Credibility

Given the proprietary knowledge and the high quality work involved, global sponsors of

drug discovery contract research would prefer associating themselves with the best of

breed companies in the market as long as the price is right. Companies vying for

revenues from drug discovery contract research would be at an advantage if they get their

credibility in place before scouting for work. Credibility of an existing contract research

player is revealed through its past track-record including contract research work carried

out in terms of type of work, sponsors involved, quality of work done, etc. Add to these

elements such as domain expertise and the high quality manpower, infrastructure, etc.,

the combination would build credibility. No doubt macroeconomic variables like the

country’s regulatory norms such as protecting IPRs decide the quantum of contract

research work as well as its position in the R&D value chain. Credibility of new entrants is

built on the technical skill-sets of people, the domain expertise, and the track-record of

the scientists who would be undertaking the project. Building credibility in the market

would be the first and most important challenge that needs to be overcome by industry

participants in order to succeed in today’s competitive market scenario.

3.5.1.3 SSO Drivers

The healthcare sector is struggling with high operating costs (especially sales and

marketing costs), falling margins and drastically reducing pipelines. Faced with

challenges like these, cost cutting is the foremost priority. In addition to this, companies

are also trying to reinvent themselves by outsourcing non core functions and keeping the

core functions in house. Following are some of the key drivers that motivate healthcare

companies to look at SSO and outsourcing.

GROWTH CONSULTING


Figure 3.5.1 Healthcare: SSO Drivers

Reducing Operating Costs

Most respondents cited cost savings as a key rationale for SSO and, particularly so for

those destined for low wage countries. As well as short-term gains in cost reductions,

SSO benefits firms by reducing their need for long-term investment in human capital and

fixed assets. Pfizer outsourced its IT operations to Infosys and Satyam of India as a part

of its US$ 4 billion cost saving plan in 2005. In early 2007, Pfizer also announced that it

will relocate its IT helpdesk operations to the HP Global Solution Center in Dalian, China.

The company is already in the process of moving all of Pfizer's helpdesk operations in

Japan to the site, which will be up and running by mid 2007. Following this, HP will also

relocate the helpdesk outfits of 13 other countries in the Asia-Pacific to the Chinese site,

over three stages. The countries involved in the reshuffle are Thailand, Indonesia,

Pakistan, Australia, New Zealand, China, Korea, Taiwan, Hong Kong, Malaysia,

Singapore, Philippines and India.

Overcoming costs is one of the important hurdles in pharmaceutical and biotech research

and development. In the late 1970s, according to a study by the Tufts Center for the

Study of Drug Development, the average cost of developing a drug from target compound

through animal models and clinical trials to market was about US$54 million. From early

9% 77%

34%

43%

10%

38%

6%

21%

44%

56%

14%

56%

37%

44%

44%

74%

52%

43%

44%

10%

20%

46%

17%

20%

27%

13%









Others



9% 77%

34%

43%

10%

38%

6%

21%

44%

56%

14%

56%

37%

44%

44%

74%

52%

43%

44%

10%

20%

46%

17%

20%

27%

13%









Others



GROWTH CONSULTING


1990s to the end of that decade, estimated cost more than doubled from about US$230

to around US$500 million. As per a recent study released by Tufts Center for the Study of

Drug Development, it takes US$810 million and 10 to 15 years to get a drug to market

today. With pharmaceutical and most importantly, biotech companies being hard-pressed

to show a strong bottom-line, convincing shareholders to spend millions on drug discovery

is becoming harder by the day. Increasingly, the global trend of pharmaceutical and

biotech companies is to outsource research to cut costs and make new drug discovery a

viable option. For one, the drug discovery contract research organization complements

the pharmaceutical and biotech company with proprietary technology/product and most

importantly, it contributes to reducing the cost of discovery through economies of scale.

With more and more drug discovery contract research companies offering a strategic fit to

their sponsors, cost advantages offered by them are sure to drive this market in the years

to come.

Over 90% of the companies surveyed gave this metric a very high or high ranking, this

reaffirms that rising operating costs are a significant restraint on the healthcare costs.

Enhance competitiveness by Reducing Time for Labor Intensive R&D Processes

Biotechnologies such as genomics, gene sequencing projects, high-throughput

screening, combinatorial chemical synthesis, pharmacogenomics, and proteomics studies

are creating massive volumes and multiple sources of biological and chemical data. This

data is threatening to create a bottleneck that might hamper the growth of biotechnology

itself. Optimization of the drug discovery process has been the prime concern of both

biotech and pharmaceutical companies. Currently, there is increased pressure to develop

breakthrough drugs and shorten the drug discovery time and costs involved.

Pharmaceutical and biotech companies are increasingly looking at genomics to find

solutions. It has been estimated that about 20% of the current novel discovery programs

are based on genomics. It is predicted that virtually all new discovery programs over the

next five years will be genomics-based. Increasingly, pharmaceutical and biotech

companies are appreciating the need to delineate the focus on time and laborious drug

discovery processes and outsource. This would not only result in cost savings for the

pharmaceutical and biotech companies but also help them in optimizing drug discovery

resources. The consequent increase in time and a more labor intensive drug discovery

GROWTH CONSULTING


process is sure to drive drug discovery contract research in the near future and its impact

will be felt across all steps in the drug discovery process. Cognizant Technologies is fast

becoming a global leader in sectors like clinical data management. Cognizant does

outsourced clinical data management for Pfizer. TCS recently struck a deal with the

British pharmaceutical giant GSK to provide outsourced drug discovery support. The

contract has cost GSK approximately US$ 20 million. GSK is also involved in research

collaboration with Ranbaxy Laboratories, India’s largest drug maker, to jointly develop

drugs in areas such as urology, diabetes and asthma.


Healthcare companies are faced with the following challenges and concerns when

considering new SSO operations or running existing SSO centers.

Figure 3.5.2 Healthcare: SSO Concerns

9%

3%

33%

53%

84%

53%

33%

45%

40%

22%

23%

37%

19%

14%

7%

37%

59%

45%

21%

7%

69%

46%

67%

52%

10%

5%

10%

6%

8%

17%

14%


Loss of control

Increased costs






Org. de-skilling

Others



9%

3%

33%

53%

84%

53%

33%

45%

40%

22%

23%

37%

19%

14%

7%

37%

59%

45%

21%

7%

69%

46%

67%

52%

10%

5%

10%

6%

8%

17%

14%


Loss of control

Increased costs






Org. de-skilling

Others



GROWTH CONSULTING


Compromise confidentiality (Lack of Strong IPR Protection)

Strong intellectual property rights (IPR) protection is vital for a knowledge intensive

industry like the healthcare and biotech sector. With the cost of research being

astronomical today, loss of intellectual property could cost pharmaceutical and biotech

companies billions of dollars. Hence when pharmaceutical and biotech companies

evaluate strategic SSO and contract research partners, they necessarily check if the

concerned firm has adequate IPR or not. With a number of pharmaceutical and biotech

companies in regions such as the Asia Pacific vying for drug discovery contract research

opportunities, strong local patent protection laws within the country are an important

consideration. With the enforcement of WTO regulations and TRIPS agreement, the

outlook towards IP protection in developing countries looks increasingly encouraging.

Over 86% companies rated confidentiality concerns highly and over 81% companies felt

that losing control over operational detail could be a restraint while outsourcing.

Lack of Domain Expertise and Reduced service levels

Drug discovery contract research opportunities are growing by leaps and bound with more

and more pharmaceutical and biotech companies identifying the competitive advantage of

strategic outsourcing of drug discovery. While opportunities arise, the domain expertise

and abilities of a drug discovery research organization in meeting the requirements of the

sponsor companies is a strong limiting factor. With pharmaceutical and biotech

companies increasingly looking at niche discovery contract research companies with

proprietary technologies that complement its focus, it is becoming increasingly difficult for

discovery contract research organizations to offer competitive advantages or

complementary technology. Pharmaceutical and biotech companies outsourcing

discovery research are increasingly favoring companies with platform technologies to

partner. For companies to develop such platform technologies, huge investments are

needed, making it beyond the means of most companies seeking contract research

opportunities. As these high value opportunities mean moving up the value chain and

enriching the core expertise of the company, lack of domain expertise is an important

limiting factor to contract research opportunities. Lack of domain expertise also restricts

the number of segments of drug discovery contract research that an organization could

get into and becomes a hurdle in moving up the value chain of drug discovery.

GROWTH CONSULTING


Unavailability of World-Class Infrastructure and Manpower

One of the defining factors for success in the global drug discovery contract research

markets is the availability of world-class infrastructure and manpower. The manpower

managing the drug discovery process needs high technical and management skills.

Obviously, pharmaceutical and biotech companies prefer to liaison with drug discovery

contract research organizations that boast of the best breed of infrastructure and

manpower. With the cost of setting up world-class infrastructure increasing by the year,

companies in drug discovery contract research struggle to meet the demands of

sponsors. With brain drain impacting most of the regions such as Asia Pacific, getting the

best of breed manpower is proving a nightmare for most contract research organizations.

With prohibitive costs involved, this restraint is likely to impact the market strongly during

the forecast period.

Another key concern mentioned by healthcare companies as a key concern area is

regulatory hurdles.

Regulatory Hurdles

Several developed economies have established regulations on the conduct of clinical

trials in developing countries as a safeguard against dubious practices. Even host

countries often have guidelines that hinder growth of outsourcing. For example,

conducting phase 1 trials in India is not allowed unless its part of global simultaneous

trials. India also allows only limited testing on primates.

3.5.2 SSO Trends


Primary research indicates that the spending on SSO activity in the healthcare sector is

on a rise steadily.

Our findings show that spending on SSO activities was 5.5% of the total revenues for the

healthcare vertical. This ratio is estimated to reach 7% by year 2009. Actual spending on

SSO activities will go up from US$130 billion to US$258 billion by end of the forecast

period. Spending on almost all SSO activities is slated to increase over the forecast

period. R&D activities are likely to be heavily outsourced during the next few years as

healthcare companies try to find new drugs and reduce operating costs. In addition to this

GROWTH CONSULTING


spending on other SSO activities is expected to increase.

Figure 3.5.3 Healthcare: Spend on SSO



Increasingly, more healthcare firms are willing to evaluate and let third parties take over

the management of IT services and support so that they can concentrate their resources

on keeping abreast with industry trends to stay ahead of the competition. Global pharma

major Pfizer, engaged Infosys and Satyam in 2005 on a multiyear contract to manage its

IT operations as a part of its US$ 4 billion cost cutting plans. GlaxoSmithKline engaged

ACS for five years at a cost of US$ 100 million. Under terms of the agreement, ACS will

provide remote server management and monitoring services for more than 5,000 UNIX,

Wintel, OS390 Mainframe, and Open VMS servers located at GSK data centers in the

U.S. and United Kingdom (UK). ACS became an IT outsourcing partner to GSK in June

2003 when ACS began supporting GSK's legacy business systems. In 2004, ACS signed

a subsequent agreement to custom build a new Registration and Medication Ordering

System (RAMOS), supporting GSK's RAMOS clinical trials.

5.5% 6.0%6.5%

7.0%130

167

208

258

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2006 2007 2008 2009

0

50

100

150

200

250

300


36%

44%

7%

63%

8%

22%

29%

46%

30%

60%

15%

25%

12%

21%

32%

37%

10%

54%

31%

50%

54%

37%

10%

34%

16%

2%

25%

34%

34%


Human Resources

Procurement


Corporate Learning




Strategic/R&D




5.5% 6.0%6.5%

7.0%130

167

208

258

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2006 2007 2008 2009

0

50

100

150

200

250

300


36%

44%

7%

63%

8%

22%

29%

46%

30%

60%

15%

25%

12%

21%

32%

37%

10%

54%

31%

50%

54%

37%

10%

34%

16%

2%

25%

34%

34%


Human Resources

Procurement


Corporate Learning




Strategic/R&D




GROWTH CONSULTING



R&D outsourcing is fast becoming the cash cow of the healthcare outsourcing market, so

much so that it merits a stand alone analysis as a market in itself. As costs of

management rise, profits decline, pipelines shrink and generic drug makers enter the

market, R&D outsourcing in healthcare cannot be taken lightly.

Pharmaceutical R&D in developed countries is very costly. The estimations from industry

sources reflect that the cost of bringing one new molecule into the market amounts to

US$800 million. Also, the process of drug development and commercialization is a

lengthy and risky process. It is estimated by The European Federation of Pharmaceutical

Industries and Associations (EFPIA) that on an average, out of 10,000 molecules

developed in laboratories, only one or two will successfully pass all the stages of drug

development and finally be commercialized. It is also stated by the EFPIA that the total

European pharmaceutical R&D investment in 2004 was approximately US$ 26.1 billion.

Termed as Research Process Outsourcing/Off shoring (RPO), this is potentially the

fastest SSO growth area for the healthcare industry. All major pharmaceutical companies

have become active proponents of RPO and specialized service providers like Albany

Molecular, Siro Clinpharm, etc. have seen strong ramp-up of their business over the last

five years

Additionally several deals have been observed in the area of HR services.

Human Resources

HR outsourcing is becoming an important SSO area for the healthcare industry. Pfizer,

the world’s largest pharmaceutical company, for instance, outsourced managed care plan

administration service to Hewitt Associates. In February 2007, TalentTrack, announced

outsourcing agreement with Tenet Healthcare Corporation to assist its hospitals in

developing an efficient, consistent and centralized physician recruitment process that will

support the system’s targeted and aggressive growth initiatives. The contract gives

TalentTrack complete end-to-end responsibility for all Physician recruitment functions,

including third party vendor management, for each of Tenet’s 52 hospitals. The

centralized approach will be one that is measurable and has common standards across

the system. TalentTrack’s focus will be to ensure that there are immediate, dedicated

resources and a seamless process to recruit upwards of 300 physicians a year. Because

GROWTH CONSULTING


65%

29%

75%

27%

52%

91%

35%

5%

30%

9%

7%

17%

0%

30%

0%

14%

16%

22%

26%

64%

8%

73%

18%

9%

51%

79%

48%


Human Resources

Procurement






Strategic / R&D


Wholly Owned

Third Party

Joint Venture

45 %

13 %

42 %


65%

29%

75%

27%

52%

91%

35%

5%

30%

9%

7%

17%

0%

30%

0%

14%

16%

22%

26%

64%

8%

73%

18%

9%

51%

79%

48%


Human Resources

Procurement






Strategic / R&D


Wholly Owned

Third Party

Joint Venture

45 %

13 %

42 %


the market for physician manpower is highly competitive, TalentTrack will be responsible

for building an internal candidate database as well as providing documentation and

tracking of all recruitment activity to improve existing processes.


Within the healthcare sector, three main models have emerged from the practice of off

shoring. Firms are either using their own facility, forming relationships with third parties, or

relying solely on the third party outsource provider.

Figure 3.5.4 Healthcare: SSO Party of Choice

Wholly owned

A wholly owned arrangement allows the company to guard its intellectual property in the

most secure way compared to partnerships or outsourcing arrangements. This is

important specifically now that high-end design and development work is being done in

Asia. China and India though have repeatedly shown commitment towards IP protection,

but legal frameworks in these countries are still weak. GSK has sizeable research

operations in Bombay and Bangalore and employs 2,400 people in India, where it controls

5.9% of the pharmaceuticals market. Pfizer’s clinical research operations in India, set-up

in 1996, has invested US$13 million in clinical trials in India over the past seven years;

current activities include data management-biometrics, medical writing, clinical trials

management etc. Novartis has staffed its clinical trials set-up in China by bringing in

European experts.

GROWTH CONSULTING


Majority of the companies in healthcare sector prefer to have a wholly owned facility.

Finance and accounting, sales and corporate learning are some of the functions which

are run out of wholly owned facilities.

Hybrid Relationships (Alliances)

The two most common forms are joint ventures and collaborative partnerships. Pfizer has

investments valued at more than US$1.70 billion, supporting strategies that are designed

to maximize research and development productivity. Of this nearly US$700 million has

been spent on alliances/outsourcing in the past decade (US$780.3 million from 1986 to

2002) and half in assembling more than 500 quality alliances, which span from gene and

lead identification to developing smarter clinical trials and extending the utility of

medicines. The alliances for cancer research and development have been mainly for

screening of potential candidates or developing leads based on targets identified by Pfizer

in-house. The company also aims at understanding the tumor growth regulation through

its alliance with OSI, which is a major partner in this sector. Other partners are Abgenix,

Onyx, and Repligen.

GSK’s cumulative contract/collaborative research payout was US$597.9 million for period

1987 to 2002. The alliances included in its portfolio are those made independently by

Glaxo and SmithKline Beecham prior to the merger as well as early collaborations formed

by Burroughs Wellcome prior to its merger with Glaxo. Oncology research dominates the

sector wise external alliances formed by the pharmaceutical giant. The company’s focus

for contract research in this area has been on vaccine development, oligonucleotides, and

novel concepts like mitotic kinesin inhibitors. A significant alliance made in this sector

both in terms of scope and value is with Corixa for vaccine development against several

types of cancer. Other alliances are with Cytokinetics, Coley Pharmaceuticals, and

Biovex. The company has also harnessed expertise in immunohistochemistry-based

diagnostic analysis to identify target markets for novel cancer therapy.

In 2004, Quintiles and Solvay entered a unique risk-sharing agreement under which:

� Quintile will invest US$25 million worth of development services for ten of Solvay’s

phase II projects from 2004-06, thereby bearing around 50% of the risk

� Solvay would provide Quintiles with milestone payment for each of these reaching

phase III

GROWTH CONSULTING


� Unlike similar previous deals, however, Quintiles will not receive royalties from

drug sales

� Project and annual spending limits are specified; spending beneath these limits

may be carried over to other projects or another year, but may not exceed the

overall US$25 million limit

With this deal, Solvay expects to double early clinical capacity. Quintiles will receive early

revenues as more projects move faster into phase III and are funded by Solvay under

pre-existing preferred partnership agreements with Quintiles.

Instances of hybrid relationships are still rare. Only 13% of the companies surveyed

indicated that they prefer this mode of SSO operations. Strategic R&D is likely to adopt

this model in the coming few years as healthcare companies and contractors try to hedge

their risks using a risk-reward model.


The development outsourcing market (US$ 11 billion in 2004) is expected to grow at a

CAGR of ~15% for the period of 2004-2009. Innovators are increasingly partnering with

CROs and CMOs for early-stage synthesis, process development and scale-up to

increase speed of development. The Wyeth-Accenture deal of 2004 was a landmark

agreement for data management. Wyeth outsourced entire clinical data management

(CDM) to Accenture for 10 years with defined targets with Accenture to pay Wyeth if

targets are not met as part of the deal 150 of Wyeth's CDM staff work for Accenture at

Wyeth's facilities, remaining 150 posts at Wyeth were eliminated. Target results (over 10

years) included the following:

� 80% reduction in “last patient visit to database lock time” by 2007

� 35% reduction in CRF processing cost

� Keep Wyeth in the top 5% of industry efficiency benchmarks

� Execute anticipated threefold increase in clinical trials without increasing staffing

Specialized third party providers are preferred mode of outsourcing for non core functions

GROWTH CONSULTING


46%

22%

42%

Others

Interdep

artm

ental

Tea

mFunctional Heads

(IT/HR/CFO)



COO

CEO



Others

20%

5%

6%

26%

19%

16%

1%






COO

CEO



Others

20%

5%

6%

26%

19%

16%

1%



like IT operations, back office processing and customer call services. Over 40%

companies prefer this model for their SSO operations.

3.5.3 SSO Locations


Cost is often not the only factor under consideration when companies choose an SSO

location. This section will take a closer look at some of the factors which influence the

choice of location for SSO operations. Figure 3.5.5 illustrates the key recommenders and

decision makers while Figure 3.5.6 highlights the key location selection criteria.

Figure 3.5.5 Healthcare: SSO Recommenders & Decision Makers

GROWTH CONSULTING


Figure 3.5.6 Healthcare: SSO Location Selection Criteria

Cost efficiency

Countries like India and China have emerged as low cost locations for carrying out clinical

trials. Costs are low in these countries not only because of shorter time taken to recruit

patients but also due to lower salaries for the employees involved. Similar rationale also

applies to setting up R&D labs where salaries of PhDs are much lower in India and China.

CROs are expanding into these low cost geographies especially to India and China; large

CROs have presence in 20 or more countries. M&A and alliances among CROs have

been intense to gain complementary capabilities and enhance geographic presence.

Quintiles, a leading CRO, currently employs over 850 people in India and has three

offices in China. Covance, another top five CRO has a partnership with SIRO in India and

a partnership with Excel in China.

Infrastructure costs, tax and regulatory costs and compensation costs some of the cost

factors which over 90% of companies rated highly while selecting SSO locations.


6%

25%

21%

30%

21%

29%

48%

16%

33%

5%

61%

60%

66%

45%

66%

66%

64%

45%

74%

61%

61%

33%

15%

13%

25%

34%

13%

7%

7%

10%

6%

34%

Compensation Costs






Attrition rates

Political stability



IP regulation


6%

25%

21%

30%

21%

29%

48%

16%

33%

5%

61%

60%

66%

45%

66%

66%

64%

45%

74%

61%

61%

33%

15%

13%

25%

34%

13%

7%

7%

10%

6%

34%

Compensation Costs






Attrition rates

Political stability



IP regulation


GROWTH CONSULTING


Intellectual Property & Regulatory Issues

Intellectual property (IP) is a hot topic in all developed countries and is of particular

significance in the healthcare sector. Offshore outsourcing companies have to be given

access to proprietary knowledge about chemical entities and molecules developed in

house by companies when doing R&D to expand on the research further or do validation

or clinical trials. This in turn creates a situation where a company from a higher cost

country could be creating a potential competitor 1-2 years down the road that not only

knows how to create a highly effective competing product or service, but also knows who

your customers are.

Over 95% of companies felt they need to give high importance to the IP regime governing

the location where SSO operations are going to be established.

Quality of Human Resources

The presence of excellent institutes for higher education in India, China, East Europe and

Russia has made these locations attractive for high end R&D activities for the healthcare

sector.

Labor force availability also rated highly, over 75% indicated that they give this factor high

importance when deciding on the location for their SSO facility. All the surveyed

companies also look at the quality of man power available at the location of SSO

operation.

GROWTH CONSULTING



The most preferred locations for SSO operations for the healthcare vertical are India,

China and Ireland as shown in Figure 3.5.7 while Figure 3.5.8 provides their comparison.

Figure 3.5.7 Healthcare: Top SSO Locations

India was ranked as the number one choice for SSO operation by 10% of the companies.

Even though China was indicated as the first choice by 12% of the companies, factors like

quality of manpower, cost effectiveness etc. tilt the balance in favor of India as the most

preferred destination. Ireland came in third as most preferred destination for healthcare

SSO operations.

Top SSO Locations

1

2

3

India

China

Ireland 11%

12%

10%

2%

4%

7%

5%

1%

3%

Rank

Emerging Locations


East-EU: Czech Republic, Poland; Singapore

UK, USA, Canada




Top SSO Locations

1

2

3

India

China

Ireland 11%

12%

10%

2%

4%

7%

5%

1%

3%

Rank

Emerging Locations


East-EU: Czech Republic, Poland; Singapore

UK, USA, Canada




GROWTH CONSULTING


Overall Score

2.7

3.4

3.8

4

4.1

4

4

3.4

3.8

Ireland

China

India

3.3

3.6

3.8




Overall Score

2.7

3.4

3.8

4

4.1

4

4

3.4

3.8

Ireland

China

India

3.3

3.6

3.8





Human Capital

Figure 3.5.8 Healthcare: Ranking of Top SSO Locations

India – The Mecca of Outsourcing

India has already established itself as the leading destination for IT and IT enabled

services. Leading global players from the healthcare industry have relocated their IT and

IT services centers to India, however, in this section we would like to highlight the

specialized capabilities that India has been building in the healthcare and pharmaceutical

outsourcing.

Pharmaceutical industry in India is one of the fastest growing sectors. The industry has

achieved global recognition as a producer of generic products and low-cost high-quality

bulk drugs and formulations. Majority of the leading companies have established market

presence in more than 60 countries, which also includes the United States and major

European countries. Currently, Indian companies are spending less than 5% of their

revenues in R&D, while this percent is as high as 18% for multinational pharmaceutical

majors. However, the increasing realization of potentials in Pharma R&D is moving Indian

pharmaceutical industry to a more research-driven business strategy. Companies such as

Ranbaxy, Dr. Reddy's Laboratories are successfully setting the standards for other Indian

companies such as Cipla, Wockhardt, Nicholas Piramal and Torrent, which are now

engaged in R&D activities post-patent reform in 2005. There is also an increase in

collaborative outsourcing to India. For example, Ranbaxy has made an agreement with

GlaxoSmithKline in discovering and developing new NCEs for some of the selected

GROWTH CONSULTING


therapeutic areas. According to Confederation of Indian Industry (CII), R&D in India has

rapidly grown from US$52 million in 2000 to US$74 million in 2002. CII expects R&D

investments to be US$320 million in 2005, which will account for 5% of total turnover. It is

estimated that in the coming eight to 10 years, the total pharmaceutical R&D outsourcing

from the United States to India will value at US$1.5 billion. CII also suggests that the cost

of clinical trials in India is less than one-tenth of the costs in Western countries. It is also

shown that the total R&D investment from India's top 10 pharmaceutical companies

crossed US$170.0 million in 2004. The number of international pharmaceutical firms with

a research presence in India has increased significantly during the past five years.

AstraZeneca had established a major R&D facility in 2003, and also expanded its

pharmaceutical division during 2004. At present, Sanofi-Aventis, Eli Lilly, Novartis, Pfizer,

GlaxoSmithKline, have established clinical research studies in India.

While the CRO market is fragmented with a number of small companies, reputed players

have gained significant traction with over 50% CAGR over last three years. Global majors

like Quintiles, PPD, Parexel, MDS and ICON have either set up their own operations in

India or have partnered with local players. Larger Indian CROs are tying up with global

majors to obtain relationships and expertise in project management e.g. Siro-Covance.

Many of the CROs who initially offered only BE studies have invested in clinical trials, e.g.

Lotus labs. While there are few dedicated companies which provide only support services

for clinical trials, some Indian CROs are providing complete services by including back

office support, medical writing, statistical analysis, SAS programming, data management,

site management etc.

India achieved an overall score of 3.8 based on its cost effectiveness, business

environment and quality of human capital.

China – Gateway to a the biggest market through Outsourcing

Today, the Chinese pharmaceutical market is growing at an impressive double digit pace

with a projected value of US$ 25 billion by 2008. A rising activity in the Chinese life

sciences arena has been reported with the increasing high-level support from the

government. The thriving generic and bulk active drugs market continue to be the

mainstay for the Chinese domestic drug industry with an estimated 90% of the drugs in

the market being generics. The Chinese pharmaceutical market is highly fragmented with

thousands of small pharmaceutical companies involved in manufacturing one or two

GROWTH CONSULTING


generic drugs. Quality control and cost concerns are also present among the

manufacturers in China. These led to increased supervision from the government to

maintain the quality of the pharmaceutical products. Also, with the increased interference

from the government, a gradual shift from generic to innovation led to the development of

contract research markets, which resulted in increased partnership with multinational

pharmaceutical companies and other bodies. The inherent limiting conditions prevalent in

this country have curbed the Western firms from full capitalization on R&D potential.

However, big pharma companies are increasingly interested in China. Roche has a

US$11 million R&D center in Shanghai, one of five global R&D centers; also conducting

genetic epidemiology studies on diabetes, Alzheimer’s etc. in collaboration with Chinese

National Human Genome Centers. Eli Lily has a 100 people R&D center for chemistry

services in Shanghai together with Shanghai ChemExplorer. Novo Nordisk has a R&D

center in China, first outside Denmark for molecular biology, protein chemistry and cell

biology, plan to grow from 20 to 60 scientists. GSK has established a Global OTC R&D

center; GSK has invested US$2 million towards combinatorial chemistry R&D with the

Shanghai Institute of Medical Materials (SIMM).

According to China's Department of Drug Registration, demand for clinical trials in China

has increased significantly. Applications for clinical trials increased by over 400% to 2,500

in the first half of 2003. Several new hospitals were added to the existing list of 165

hospitals permitted to conduct human clinical trials in China. However, a considerable

proportion (47% in 2001) of the trials is for traditional Chinese medicines. The SFDA is

taking steps to further increase the attractiveness of the Chinese trials market. Standard

rules for conduct of trials were released in 2003 and 2004 and GCP training was made

compulsory in April 2004.

China achieved an overall score of 3.6 based on cost effectiveness, business

environment and quality of human capital.

Ireland

Ireland achieved an overall score of 3.3 out of 5 and was the third most preferred location

for SSO operations amongst the healthcare vertical. Pfizer, Takeda, Wyeth and GSK are

some the major corporations to have set up SSO locations in Ireland.

GROWTH CONSULTING


3.6 Transportation & Logistics

One of the world’s largest industries, transportation & logistics covers a broad range of

sectors ranging from automobiles, aircrafts, trains, logistics services as well as express

delivery services.

The global automobile landscape is rapidly changing as demand grows for lower priced

automotive components, spurring component suppliers to look to China for low-cost

production. Along with that, soaring global demand for Asian cars that are enjoying a

rapidly expanding customer base worldwide has resulted in mounting pressure on major

American automakers to adopt cost saving measures and regain market share in the face

of escalating domestic labor costs and intense competition from foreign-based firms.

Faced with mounting costs, stringent labor laws, and unfavorable government regulations,

some European car manufacturers also continue to generate dismal earnings.

The airline industry continues to be affected by staggering fuel prices, triggering

increases in airfares by some airlines which, in turn, are intensifying already fierce

competition between established airlines and discount carriers. With competition stiffer

than ever, innovation is a vital ingredient for developing a sustainable competitive

advantage.

Leading the innovation race are airlines in the Asia Pacific region, most of which have

already deployed in-flight communication technology in an effort to grow their market

share of premium customers, particularly itinerant business travelers. Conversely, despite

paving the way for many of the technologies that are now being harnessed by airlines

globally, highly leveraged North America carriers are putting the brakes on technology

innovation to focus on streamlining operations.

Across all geographical regions, both established and budget airlines alike have mounted

aggressive campaigns to reduce costs and ultimately, narrow the gap between the two

airline segments as is evident from widespread investment in automated passenger

facilities such as e-ticketing and self-service kiosks.

In the logistics service industry, consolidation is becoming a widespread practice as more

and more logistics service providers begin to recognize the benefits that may be realized

through mergers and acquisitions, principally economies of scale and skills.

GROWTH CONSULTING




Across all sectors that make up the transportation and logistics ecosystem, cost savings

appear to be the key motivator for much of their shared services and outsourcing

initiatives. In addition, innovation appears to be a common goal for a large number of

organizations in this industry to develop and maintain a competitive advantage. To that

effect, information technology plays a significant role in supporting efforts to achieve rapid

innovation. As such, the need to reduce costs and the industry’s high dependency on IT

services have resulted in the widespread outsourcing and offshoring of IT support

functions.


A key consideration that needs to be evaluated prior to venturing into outsourcing

initiatives is to ascertain whether there is a strong cultural fit and compatibility with the

outsourcing service provider. This is to ensure that the two organizations are able to

maintain synergies throughout the entire duration of the contract. Equally as important is

the need to ensure that the service provider has a clear understanding of the outsourcer’s

business model.

A global logistics company highlighted that oftentimes, senior management are highly

focused on the cost-benefit aspect of shared services and outsourcing at the expense of

such real-world elements as language and cultural barriers that could potentially arise in

call centers, as well as a general tendency among call center staff to be overly

mechanical in carrying out seemingly routine tasks. This may hamper their ability to

provide outside the box solutions to resolve customer issues.

3.6.1.3 SSO Drivers

For the transportation and logistics sector, the decision to venture into shared service and

outsourcing initiatives is principally driven by the need to enhance competitiveness,

improve customer service and not least, realize cost savings as shown in Figure 3.6.1.

GROWTH CONSULTING


Figure 3.6.1 Transportation & Logistics: SSO Drivers

Reduce costs and increase competitiveness

Heightened security measures post 9/11 in 2001 cost the airline industry US$ 5.1 billion

annually. Similarly, the availability of lower airfares offered by budget airlines has sparked

fierce price competition, causing more established airlines to review their price structures

with a view to stay competitive and maintain their market share. Invariably, these factors

combined are spurring airlines to deploy various measures to reduce operational costs in

order to maintain profitability.

Along with this, the perceived commoditization of services offered by airlines has caused

carriers to adopt both shared service and outsourcing strategies that would allow them to

focus on introducing innovative services in order to enhance their competitive advantage.

For such carriers as Air France, Jetstar – budget airline and subsidiary of Qantas – and

Lufthansa, the need to improve competitiveness and enhance business innovation are

perceived as equally significant drivers for their SSO initiatives as the need to reduce

operating costs.

For the automotive industry, the ability to offer a broad range of vehicles is a critical

success factor. This, in turn, has resulted in the need for automobile manufacturers to

2%

2%

2%

4%

28%

44%

56%

12%

26%

8%

20%

50%

46%

36%

26%

58%

44%

66%

52%

30%

20%

2%

12%

14%

30%

28%

24%

26%

12%









Others



2%

2%

2%

4%

28%

44%

56%

12%

26%

8%

20%

50%

46%

36%

26%

58%

44%

66%

52%

30%

20%

2%

12%

14%

30%

28%

24%

26%

12%









Others



GROWTH CONSULTING


integrate the operations of their numerous vehicle brands in order to accelerate sales and

distribution of their brands as well as maintain a high level of service to retailers and

customers. To that effect, many automotive companies have created shared service

centers to carry out such tasks.

This strategy is apparent within the Premier Automotive Group, the Consumer Business

Group of Ford Motor responsible for premium vehicles, to enable each of its brands

namely Aston Martin, Jaguar, and Land Rover, to better leverage their individual positions

within the luxury vehicle market and provide the resources necessary to support a

stronger franchise network.

Central to Audi’s decision to outsource some of its IT, finance and accounting, and

human resource functions is to realize cost saving benefits.


On the other hand, the need to improve access to scarce talent and surmounting labor

shortage are cited as key outsourcing drivers for BMW, outweighing other drivers such as

reducing operating costs, improving competitiveness as well as customer service. In

addition to cost reduction, another key driver for logistics companies, specifically Maersk,

is to have greater access to scarce talent, specifically employees that have a keen

familiarity with the complexities associated with the global logistics business.

Manage Complexity

Given that technology is seen as a key competitive differentiator by many express

transportation companies, for instance to perform various IT-enabled services including

real-time tracking of deliveries, such companies as FedEx recognize the need for

outsourcing their IT operations to support their massive IT infrastructure. Equally as

important for FedEx is the introduction and development of new systems to improve

internal processes.


It is observed that the key constraints arising from shared service and outsourcing

GROWTH CONSULTING


initiatives vary across the transport and logistics industry. Automobile manufacturers may

encounter a host of concerns distinct from those of airlines. That said, Figure 3.6.2

illustrates that compromised quality of service by third party providers, lack of domain

expertise and potential breach of confidential data emerge as universal concerns.

Figure 3.6.2 Transportation & Logistics: SSO Concerns

Reduced Service Levels

Reduced service level of external organizations is perceived by Lufthansa, Air New

Zealand, Audi, BMW and Maersk as a key concern for some of their outsourcing

initiatives. Similarly, the level of stability of and lack of confidence in external service

providers are also cited as another albeit lesser constraint.

Concerns regarding loss of confidential information

The likelihood of compromising confidentiality presents a concern for some airlines,

especially in areas that may potentially undermine their intellectual property. To put this

into perspective, Jetstar is of the view that if a particular business function involves

management of its intellectual property; the budget carrier would then opt to maintain,

develop and nurture such functions internally.

2%

4%

4%

2%

10%

2%

2%

10%

20%

2%

12%

54%

2%

8%

2%

2%

36%

36%

46%

32%

28%

56%

46%

38%

46%

40%

22%

38%

38%

2%

26%

46%

44%

40%

8%

14%

8%

12%

12%

6%


Loss of control

Increased costs






Org. de-skilling

Others


There is a growing trend toward nearshore locations.


2%

4%

4%

2%

10%

2%

2%

10%

20%

2%

12%

54%

2%

8%

2%

2%

36%

36%

46%

32%

28%

56%

46%

38%

46%

40%

22%

38%

38%

2%

26%

46%

44%

40%

8%

14%

8%

12%

12%

6%


Loss of control

Increased costs






Org. de-skilling

Others


There is a growing trend toward nearshore locations.


GROWTH CONSULTING


Lack of Domain Expertise

The degree of an external organization’s domain expertise is also perceived as a rising

concern by automobile manufacturers. This was one of the key considerations in Volvo

Car Corporation’s decision to extend its IT outsourcing contract to a service provider

known for its high level of domain expertise in the automotive industry. Similarly, BMW

also cited the lack of competent staff to manage IT-related services as a primary concern

in its IT outsourcing initiatives.

3.6.2 SSO Trends


As a whole, the transportation and logistics sector’s investment in shared services and

outsourcing initiatives in 2006 ranges from three to five percent of annual revenues.

Spend on SSO is expected to grow at a CAGR of 9% between 2006 and 2009 with IT

services & support, finance & accounting, customer service & call centers & human

resources services driving this growth. The total SSO spend by the sector is expected to

grow from US$ 113 million in 2006 to US$ 147 million in 2009.

The nature of the airline business is such that the costs associated with flight operations

including cabin crew salaries, fuel, aircraft maintenance, air navigation, airport charges,

make up the bulk of total operating costs, thus leaving a relatively small percentage to

deploy for shared service and outsourcing initiatives. For Jetstar, this figure is quantified

at approximately four percent of total revenue.

BMW, however, spent between 35 and 50 percent of its revenues in 2006 on shared

services and outsourcing.

GROWTH CONSULTING


Figure 3.6.3 Transportation & Logistics: Spend on SSO


Within the transportation and logistics sector, a considerable number of companies are

exhibiting a growing tendency to outsource IT services and support, whereas such

functions as finance and accounting and human resources are retained within the

organization and carried out internally at shared service centers.

IT services and Support

IT services and support are increasingly being outsourced in the transportation and

logistics sector as is apparent in companies in the airline industry – British Airways; the

automotive industry – Volvo; and logistics industry – Maersk, to cite a few examples.

British Airways awarded framework contracts for software development work to NIIT and

TCS in India which manage lower-level application development and programming for the

U.K. carrier. Similarly, Volvo renewed its longstanding outsourcing contract with WM-data,

a LogicaCMG company, which is responsible for developing, implementing, and

supporting the Swedish automobile manufacturer’s global client and server platform for

clients in Sweden and national sales companies across Europe.

4% 4% 4% 4%

113

123

135

147

0%

2%

4%

6%

2006 2007 2008 2009

0

50

100

150




6%

2%

2%

4%

4%

20%

2%

2%

6%

12%

14%

36%

10%

38%

14%

2%

24%

16%

22%

34%

30%

40%

16%

18%

18%

28%

36%

26%

4%

40%

24%

32%

46%

8%

14%

16%

8%

10%

18%

8%


Human Resources

Procurement


Corporate Learning




Strategic/R&D


4% 4% 4% 4%

113

123

135

147

0%

2%

4%

6%

2006 2007 2008 2009

0

50

100

150




6%

2%

2%

4%

4%

20%

2%

2%

6%

12%

14%

36%

10%

38%

14%

2%

24%

16%

22%

34%

30%

40%

16%

18%

18%

28%

36%

26%

4%

40%

24%

32%

46%

8%

14%

16%

8%

10%

18%

8%


Human Resources

Procurement


Corporate Learning




Strategic/R&D


6%

2%

2%

4%

4%

20%

2%

2%

6%

12%

14%

36%

10%

38%

14%

2%

24%

16%

22%

34%

30%

40%

16%

18%

18%

28%

36%

26%

4%

40%

24%

32%

46%

8%

14%

16%

8%

10%

18%

8%


Human Resources

Procurement


Corporate Learning




Strategic/R&D


GROWTH CONSULTING



It is also evident that finance and accounting functions are increasingly carried out on a

shared service basis. FedEx set up a financial services center in Singapore in 2002, its

first outside the United States, to serve the fledgling logistics business in Asia Pacific.

With almost 300 staff, the center serves 14 markets including Japan, Taiwan, and Hong

Kong and handles such transactions as invoices and collection for the package carrier’s

operations across the entire region.

Similarly, a shared services approach is also adopted by Air New Zealand and Lufthansa

not only for their finance and accounting functions, but also for their human resource

administration functions. Lufthansa’s shared service centers are currently located in

Ireland, Canada, South Africa, Czech Republic, and Poland while Air New Zealand’s are

located in Auckland, New Zealand and to some extent, Fiji.

Customer Service and Call Center

Some airlines demonstrate a tendency to outsource their customer service and call

centers as is practiced by Jetstar which currently has Kuala Lumpur, Malaysia to serve

the Asian market; Melbourne, Australia for the Australian and New Zealand markets; and

Japan for the Japanese market.

At the same time, a number of airlines are more inclined to retain their customer services

and call centers within the organization, typically via shared services. This is largely to

promote and maintain a consistent level of service provided by customer-facing staff.

Given the knowledge intensive nature of customer services and call centers within the

airline sector, an established North American airline stressed the importance of building

specific know-how among its call center staff. Such knowledge ranges from airline

bookings to frequent flyer programs, and the variable prices associated with multiple

routes to the evolutionary nature of airline regulations. The same airline cited that

although it takes six months to complete formal on-the-job training for call center staff, it

may take up to one year for them to develop a strong familiarity with the intricacies of the

airline’s call center business.

For the airline sector, outsourced customer service functions even cover lost baggage

services. Responding to more stringent EU regulations governing lost baggage claims,

GROWTH CONSULTING


Air France started outsourcing management of its lost baggage claims to Team Trackers,

a move aimed at reducing the airline’s exposure during peak periods.

Additionally, airline reservations are also performed through both shared services and

outsourcing. Jetstar’s reservations are outsourced to Naditaire while a number of United

States-based airlines choose to carry out their reservations internally via shared services.


Two major categories have emerged for SSO within the Transportation and Logistics

sector. Either the enterprises are using their own facility and resources, or outsourcing

completely to an external service provider. In a unique case, British Airway’s subsidiary,

WNS eventually listed itself in the NYSE and from thereon maintained arms length

relationship with BA while offering its services to external clients.

Figure 3.6.4 Transportation & Logistics: SSO Party of Choice

Wholly Owned

Third Party

Joint Venture

65 %12 %

22 %

79%

76%

69%

42%

48%

100%

75%

19%

88%

8%

15%

15%

12%

8%

25%

9%

13%

24%

15%

43%

39%

17%

56%

3%


Human Resources

Procurement






Strategic / R&D


Note: Some airlines tend towards captive customer service & call centers, citing the relative ease of developing airline specific knowledge among customer-facing staff & achieving consistency in quality of service as key factors.


GROWTH CONSULTING


Outsourcing to Third Party

The transportation and logistics sector demonstrates a proclivity to favor outsourcing of IT

services to third party service providers. Conversely, there is also a growing trend toward

adopting a shared services approach for such functions as finance and accounting,

human resources, corporate learning programs, and procurement. This section serves to

distinguish between the two approaches while providing examples of current practices

adopted by major companies within the sector.

British Airways formed WNS Global Services in 1996 as a wholly owned captive business

process outsourcing division in Mumbai. The UK carrier’s initial objective of setting up an

outsourcing arm in India was primarily to support the airline’s back-office operations and

manage ticketing.

However, the completion of WNS’ IPO on the New York Stock Exchange a decade after

its inception ended the airline’s equity relationship with its Indian offshore outsourcing

unit. Today, British Airways continues to be WNS’s third largest client accounting for 12%

of its revenues amounting to US$ 202.6 million in FY 2006.

Additionally and as indicated earlier, British Airways also has agreements with

independent outsourcing service providers in India for software development work, as

does Volvo with WM-data which is responsible for a considerable portion of the Swedish

automobile maker’s IT support functions. Similarly, the bulk of Jetstar’s IT services and

support functions are outsourced to a number of Australian service providers including

Telstra, Optus, and Sonnet.

Own Facility

FedEx’s financial services are performed in its shared service center in Singapore

whereas Air New Zealand and Lufthansa have both set up their own centers in various

countries, including Ireland and New Zealand, to manage finance and accounting as well

as human resource functions.

Boeing and Maersk’s corporate learning programs are conducted internally while Qantas

and Northrop Grumman’s procurement activities are centrally managed from their

respective shared service centers.

GROWTH CONSULTING


26%

8%

46%

Others

Interdep

artm

ental

Tea

mFunctional Heads

(IT/HR/CFO)



COO

CEO



Others

26%

32%

26%

36%

54%

34%

1%






COO

CEO



Others

26%

32%

26%

36%

54%

34%

1%



3.6.3 SSO Locations


Among the more prominent criteria in the selection of locations are IP regulation,

infrastructure quality and costs and not least, compensation costs. Agility and efficiency of

service providers often override location specific factors.

Figure 3.6.5 highlights the findings from the survey with respect to key decision makers

and recommenders for SSO. Typically the CEO, functional heads and COO play a pivotal

role in making SSO related decisions as illustrated in the following graph.

Figure 3.6.5 Transportation & Logistics: SSO Recommenders & Decision Makers

GROWTH CONSULTING


Figure 3.6.6 Transportation & Logistics: SSO Location Selection Criteria

BMW regards telecommunications costs as an important consideration in its selection of

offshore locations. That aside, the performance car maker also places high emphasis on

the presence of a robust mechanism to safeguard intellectual property rights.

For Audi, more important than location factors like infrastructure costs, is the ability of

external service providers to demonstrate prompt response to critical issues. For a

number of airlines including Jetstar, location again may not be as significant a criterion as

other factors such as the degree of adaptability and flexibility demonstrated by service

providers, coupled with the total cost of ownership associated with outsourcing contracts.

Along with factors that help airlines realize cost saving benefits, the availability of

government subsidies and tax incentives are also viewed favorably especially by airlines

which have been facing significant operating losses in recent years.


India, Singapore and Malaysia are the top three locations with parts of Eastern Europe

and Latin America, China and South Africa the top emerging locations for SSO in the

transportation and logistics sector as shown in Figure 3.6.7 The comparison of the top

locations is presented in Figure 3.6.8


2%

4%

2%

4%

2%

2%

8%

2%

17%

4%

15%

19%

21%

19%

28%

34%

29%

13%

17%

32%

9%

48%

54%

57%

54%

57%

49%

52%

72%

53%

45%

62%

38%

27%

19%

23%

13%

15%

6%

13%

30%

6%

23%

Compensation Costs






Attrition rates

Political stability



IP regulation


2%

4%

2%

4%

2%

2%

8%

2%

17%

4%

15%

19%

21%

19%

28%

34%

29%

13%

17%

32%

9%

48%

54%

57%

54%

57%

49%

52%

72%

53%

45%

62%

38%

27%

19%

23%

13%

15%

6%

13%

30%

6%

23%

Compensation Costs






Attrition rates

Political stability



IP regulation

GROWTH CONSULTING


Overall Score

3.7

3.6

4.3

3.7

3.6

4.4

3.3

3.8

3.5

Malaysia

Singapore

India

3.6

4.0




3.5

Overall Score

3.7

3.6

4.3

3.7

3.6

4.4

3.3

3.8

3.5

Malaysia

Singapore

India

3.6

4.0





Human Capital

3.5

Figure 3.6.7 Transportation & Logistics: Top SSO Locations

Figure 3.6.8 Transportation & Logistics: Ranking of Top SSO Locations

While India attained the highest overall score, it also achieved the highest rating for cost

efficiency and business environment conduciveness. On the other hand, Singapore

Top SSO Locations

1

2

3

India

Singapore

Malaysia 6%

3%

8%

2%

4%

5%

5%

10%

Emerging Locations


East-EU: Czech Republic, Poland; Lat Am: Peru, Mexico, China, South Africa





Top SSO Locations

1

2

3

India

Singapore

Malaysia 6%

3%

8%

2%

4%

5%

5%

10%

Emerging Locations


East-EU: Czech Republic, Poland; Lat Am: Peru, Mexico, China, South Africa





GROWTH CONSULTING


earned the highest rating for quality of human capital.

The top three locations have also emerged as attractive hubs for IT support and customer

services.

Companies with finance and accounting, human resource, and call center functions

carried out internally or outsourced to external organizations demonstrate a preference for

locations that are situated near their source of business and/or markets. Air France’s

finance and accounting functions are outsourced to external parties in France as well as

Mexico and Peru, while Air New Zealand and Lockheed Martin’s human resource

administration functions are performed at their corporate shared service centers in

Auckland and various locations throughout the United States respectively.

Although Jetstar’s call centers are currently based in Kuala Lumpur to serve the Asia

Pacific market, the budget airline is also considering the Philippines for the provision of

call center services.

GROWTH CONSULTING


3.7 Entertainment and Media

In considering the media and entertainment landscape, it is vital to take into account the

prevailing trends that are evolving rapidly in diverse sectors spanning television and radio

broadcasting, satellite and cable television, movie production, news and media agencies

as well as information providers.

The onslaught of alternative delivery methods such as IPTV combined with the availability

of video and music entertainment on multiple platforms, including mobile phones and

iPods, are allowing for broader choice and greater control among consumers while

perpetuating more intense competition between traditional and new media players.

For example, traditional cable and satellite television firms are contending with

telecommunications companies offering triple play services – voice, television, and

Internet services – to maintain their market share. Equally, traditional radio broadcasters

are also struggling to maintain their listenership that is rapidly being undermined by

satellite radio broadcasters; likewise, newspapers are also facing heated competition in

maintaining readership as Internet-based news content proliferates.

As such, all sectors of media and entertainment are facing the burgeoning issue of

maintaining control of content and audiences while harnessing the potential benefits of a

growing number of innovative digital delivery venues that continue to fuel the market with

more and more options.



The outsourcing landscape in the media and entertainment sector is characterized by

long-term mega deals with third party service providers performing a variety of tasks

primarily IT services & support and finance and accounting, with contracts ranging from

US$ 25 m to US$ 500 m for durations spanning from five to 12 years.

Leading the list of big spenders are broadcasters as well as satellite and cable television

providers. Joining them are movie production houses that are increasingly outsourcing

animation-related graphics work to offshore locations and news agencies that have taken

bold steps in outsourcing what was once considered core competencies such as editorial

GROWTH CONSULTING


and advertising design.


While movie production studios are on an aggressive pursuit for new destinations to

outsource their animation work at fractionally lower costs, there is nonetheless a need

prior to entering into a contract to ensure that offshore animators and co-production

houses are sufficiently equipped with animation rendering facilities along with the

requisite skill sets to deliver consistent quality while still meeting seemingly tight delivery

schedules prevalent in the film industry.

3.7.1.3 SSO Drivers

In figure 3.7.1, it is apparent that the need for cost savings outweighs other factors in

driving companies in this vertical towards SSO. This is followed by the need to enhance

competitiveness and improve customer service.

Figure 3.7.1 Entertainment & Media: SSO Drivers

75%

63%

13%

13%

25%

38%

25%

38%

25%

25%

25%

25%

38%

13%

25%

25%

38%

25%

25%

50%

63%

38%

38%

13%











75%

63%

13%

13%

25%

38%

25%

38%

25%

25%

25%

25%

38%

13%

25%

25%

38%

25%

25%

50%

63%

38%

38%

13%











GROWTH CONSULTING


Cost savings

The primary driver of animation offshoring is cost savings, largely arising from the

availability of low-cost animation platforms and state-of-the art animation labs in emerging

animation hubs such as India, the Philippines, Korea as well as Taiwan. This is apparent

within such global movie and entertainment giants as Disney, Sony Pictures and Fox

Entertainment. The outsourcing of broadcasting technology is regarded by MTV Asia as

more cost efficient than performing such services internally. The BBC’s practice of

outsourcing and offshoring much of its finance and accounting and human resource

activities as well as IT services and support is motivated principally by the need to

enhance business innovation and reduce operating costs. The current contract that it

recently sealed with Xansa for the provisioning of finance and accounting services is

expected to generate savings of US$ 38 million annually.

Cost savings appear to be the primary motivator for offshoring some aspects of

journalism as is apparent with Reuters that is already taking advantage of the significantly

lower costs of hiring financial journalists in Bangalore. Another driver for this emerging

trend is to enable core journalists located in head offices to focus their time and effort on

developing strategic stories.

The next two subheadings underscore the growing importance of other key drivers,

namely the need to achieve greater efficiencies and drive business innovation.

Enhance competitiveness through greater efficiencies

Among the key factors motivating the media and entertainment sector to adopt shared

service and outsourcing initiatives are the need to drive greater efficiency across the

entire organization as well as to realize the potential cost savings that may be accrued by

outsourcing and offshoring selected business processes.

The BBC’s practice of offshoring much of its finance and accounting and human

resources activities as well as IT services and support is motivated principally by the need

to enhance business innovation and reduce operating costs. Central to its stated

objectives are to facilitate service transformation coupled with the need for greater

business efficiency. British Sky Broadcasting regards the presence of a shared service

center for the provisioning of human resource services would help improve asset

GROWTH CONSULTING


utilization, drawing other work streams away from human resource associated functions.

As well as this, another driver for its formation of a human resource shared service center

is to maintain control of such services, which it believes would be undermined if

outsourced to external organizations.

Drive Business Innovation

McGraw-Hill believes the outsourcing of IT support services would better enable the

publishing conglomerate to utilize innovative technologies, which in turn would provide the

reinforcement necessary for business innovation. Similarly for satellite and cable

television providers, DirecTV and Cablevision, harnessing potential cost savings as well

as augmenting internal IT development capabilities are core drivers for outsourcing a

significant portion of their IT services.


Figure 3.7.2 illustrates the most commonly cited issues encountered by media and

entertainment organizations. Dominating the list of inhibitors of outsourcing are loss of

control, lack of competent management staff and inconsistent service levels among

vendors.

For some companies in this sector, these concerns may not necessarily be as worrisome

as such issues as the limited understanding among offshore call center workers of local

customers and cultural nuances, and inadequate staff training in external organizations

that may potentially undermine the desired quality of service. Along with these, increasing

costs coupled with staggering attrition rates witnessed in some offshore locations are also

cause for concern.

GROWTH CONSULTING


Figure 3.7.2 Entertainment & Media: SSO Concerns

Loss of control (loss of understanding of Customers)

There is a prevailing tendency among satellite and cable television providers to situate

their customer service and call centers close to their markets. Although it may be more

cost effective to offshore such services to locations where labor costs may be lower, there

is a growing concern stemming from the fact that foreign call center workers may not

necessarily understand their local customers. It is largely for this reason that Comcast

opened a captive call center in Texas to serve the domestic market while stepping up

efforts to provide more intensive training to justify higher costs associated with locally

based call centers. Another mounting concern stems from the fact that local customers

may not necessarily appreciate dealing with foreign call center workers adopting false

personas as may be revealed by cultural and linguistic clues.

Given that the BBC outsources much of its finance and accounting transactions to

offshore locations, it nonetheless recognizes the possibility that the retained external

organization may not necessarily make the provisions necessary for continuous talent

development of staff that perform the stated function, a scenario that exposes the

national broadcasting corporation to the risk of compromised quality of service.

Other factors highlighted by survey respondents as concerns include cultural nuances,

inadequate cost savings and high attrition rates.

38%

13%

25%

13%

25%

13%

13%

13%

63%

50%

63%

38%

63%

38%

63%

88%

63%

38%

13%

25%

13%

25%

25%

25%

13%

25%

13%

13%


Loss of control

Increased costs






Org. de-skilling



38%

13%

25%

13%

25%

13%

13%

13%

63%

50%

63%

38%

63%

38%

63%

88%

63%

38%

13%

25%

13%

25%

25%

25%

13%

25%

13%

13%


Loss of control

Increased costs






Org. de-skilling



GROWTH CONSULTING


Cultural Nuances

The primary concerns associated with offshoring journalism arise from distinct work

cultures in the United States and India coupled with differences in the style of

communication. Reuters has cited that the laidback nature of the Indian work culture

coupled with a broad tendency among Indian journalists to write overly wordy copy need

to be surmounted by installing a sense of urgency and providing adequate training to

ensure crisp and accurate copy.

Inadequate Cost Savings

Like the BBC, much of MTV Asia’s finance and accounting transactions are also

outsourced to an external party; however, it has cited inadequate cost savings as a

concern compounded by mounting costs related to outsourcing such services to its

current provider. Not dissimilarly, the entertainment channel is also casting its net beyond

Singapore for external providers of broadcasting technology that are able to help the

Viacom subsidiary realize greater cost savings. The fact that there are a limited number

of suitably qualified broadcasting technology service providers in the Southeast Asian

region is cited as another inhibiting factor.

While movie production studios are already realizing the much heralded cost saving

benefits of offshoring animation work, they are also exposing themselves to the risk of

inconsistent quality that may potentially arise in the delivery of post production work.

High Attrition Rates

Another constraint stems from high attrition rates among Indian journalists which Reuters

describes as staggering as compared to those of their counterparts in other Reuters

offices. Such high turnover is perpetuated by the rapid growth of financial journalism

propelled by India’s economic boom and to a certain extent, the deregulation of television,

resulting in the creation of half a dozen financial news channels on cable television.

Invariably, this has led to a growing demand for financial journalists as well as escalating

salaries, making it more challenging for news agencies such as Reuters to retain staff.

GROWTH CONSULTING


3.7.2 SSO Trends


The percentage of revenue invested by the media and entertainment sector in shared

services and outsourcing varies widely. While most players in the sector spend between 3

and 10% of total revenue on SSO operations, a few broadcasters spend up to 45% of

their revenues on SSO.

Figure 3.7.3 illustrates that spend on SSO as a percentage of overall revenues is

expected to grow at a CAGR of 10% between 2006 and 2009. The functional areas of IT

services, finance and accounting, human resource services and customer service and call

centers are driving this growth in the current media and entertainment environment. This

trend is expected to change, however, with SSO spend in the upcoming areas of

animation, broadcasting technology and journalism expected to spiral as more and more

media and entertainment companies recognize the potential cost benefits that may

accrue from outsourcing such tasks to less expensive locations.

Leading the list of big spenders are organizations from the broadcasting segment as well

as satellite and cable television providers. Along with them, movie studios are also

demonstrating an ever increasing trend to invest generously in animation work in offshore

locations.

Figure 3.7.3 Entertainment & Media: Spend on SSO

8.50% 9.00% 9.50% 10.00%

47

52

4339

0.00%

3.00%

6.00%

9.00%

12.00%

15.00%

2006 2007 2008 2009

0

20

40

60

80


13%

38%

38%

25%

50%

38%

38%

13%

38%

13%

25%

13%

13%

13%

13%

25%

13%

13%

25%

25%

13%

13%

38%

25%

38%

13%

13%

13%

25%

13%


Human Resources

Procurement


Corporate Learning




Strategic/R&D




8.50% 9.00% 9.50% 10.00%

47

52

4339

0.00%

3.00%

6.00%

9.00%

12.00%

15.00%

2006 2007 2008 2009

0

20

40

60

80


13%

38%

38%

25%

50%

38%

38%

13%

38%

13%

25%

13%

13%

13%

13%

25%

13%

13%

25%

25%

13%

13%

38%

25%

38%

13%

13%

13%

25%

13%


Human Resources

Procurement


Corporate Learning




Strategic/R&D




GROWTH CONSULTING



The functional areas commonly outsourced or carried out through shared services are

principally finance and accounting, human resources, IT support services and customer

service and call centers. Key activities in the aforementioned areas include accounts

payable, payroll and managed services. Emerging areas that have entered the

outsourcing fold are 3D feature animation films, broadcasting technology, and journalism.

Other functions managed at shared service centers or outsourced on a relatively smaller

scale include real estate and facilities management and fulfillment activities such as

printing and binding services.


Media and entertainment companies recognize the potential benefits that may accrue

from outsourcing finance and accounting services. In a recently inked US$ 160 million

finance and accounting services deal, the BBC engaged Xansa for the provisioning of a

host of transactions including purchasing and sales transaction processing, artist and

contributor payments, financial management and project accounting, payroll and

expenses services. MTV Asia, a subsidiary of Viacom, also outsources its payroll services

to a Singapore based service provider.

HR Services

Similarly, Vivendi Universal Entertainment currently engages Exult, Inc. for the

provisioning of some accounting and human resource related processes including payroll

and accounts payable. This is part of a 10-year agreement worth approximately US$ 60

million for Exult.

Outsourcing aside, more and more media and entertainment outfits have also formed

shared service facilities to manage their finance and accounting as well as human

resource services. This practice is adopted throughout The Walt Disney Company where

such services are managed by Disney Worldwide Shared Services in Florida. Similarly,

throughout British Sky Broadcasting, or BSkyB, human resource related functions are

centrally managed by an internal shared service team within the human resource

GROWTH CONSULTING


department.

IT Services

Specific examples of IT services typically outsourced to external service providers are

managed services, data services and code development to name a few. The outsourcing

of such services is apparent in the Walt Disney Company in which desktop computer

support and network management are outsourced to IBM and ACS in the United States.

By the same token, McGraw-Hill engages AT&T and Verizon Business for the

provisioning of managed services while The Nielsen Company, formerly VNU, outsources

a sizeable chunk of its data services to outsourcing providers in India.


Bucking the trend of outsourcing call center services, a growing number of cable and

satellite television providers in North America and the United Kingdom have set up

captive call centers as evidenced by Comcast’s call centers in Irving, Texas as well as

those of Virgin Media dispersed throughout the U.K.

Emerging Areas

The fact that global movie production and entertainment houses from the United States,

Canada, United Kingdom, France and Japan are increasingly offshoring 3D animation film

work is testament to the rising prominence of this area in the outsourcing landscape.

Entertainment conglomerates that have begun to outsource an abundance of

development, production and post-production work, especially to India and to some extent

the Philippines, include Disney, Sony Pictures, Viacom, Cartoon Networks and Fox

Entertainment.

More and more media organizations are increasingly offshoring journalism to cheaper

locations overseas. Along with that, IT support services and content related tasks such

as graphic design and copy editing are also being sent abroad. Led by Reuters, this

practice has recently gained wide acceptance among similar news providers including

GROWTH CONSULTING


Columbus Dispatch and Dallas Morning News that engaging the services of advertising

design to Affinity Express in Pune, India, and of which IT computer support is outsourced

to India.

In MTV Asia, broadcasting technology is currently outsourced to Ascent Media in

Singapore, while a considerable portion of McGraw-Hill’s fulfillment activities for its

portfolio of magazines are also outsourced to offshore locations. The Nielsen Company

recently established its Corporate Real Estate Services to manage property and facilities

related matters for its businesses worldwide.


Entertainment and media companies typically use either third party outsourcing or wholly

owned facilities for their SSO operations. This is illustrated in figure 3.7.4. There is a

growing trend toward forming corporate centers of excellence for finance and accounting

as well as human resource services. While third party outsourcing is prevalent in the

provisioning of IT services, it is also gaining rapid momentum in animation and journalism.

Figure 3.7.4 Entertainment & Media: SSO Party of Choice

Outsourcing

There is a growing trend among an increasing number of media and entertainment

companies to outsource IT related services, principally telecommunications network

management, code development work and data services, to independent service

60%

60%

60%

50%

50%

60%

33%

50%

33%

67%

40%

40%

40%

50%

50%

40%

67%

50%

67%

33%


Human Resources

Procurement






Strategic / R&D


Wholly Owned

Third Party

56 %

44 %


60%

60%

60%

50%

50%

60%

33%

50%

33%

67%

40%

40%

40%

50%

50%

40%

67%

50%

67%

33%


Human Resources

Procurement






Strategic / R&D


Wholly Owned

Third Party

56 %

44 %


GROWTH CONSULTING


providers. The outsourcing of such functions is widely practiced by Cablevision, McGraw-

Hill and The Nielsen Company. Similarly, companies that continue to outsource their call

centers to external parties demonstrate a tendency to engage local call center providers.

BSkyB is just an example of an increasing number of companies that have outsourced

their call center operations to U.K. based Response Handling.

Own Facility

Although the outsourcing of finance and accounting transactions and human resource

services are becomingly increasingly prevalent in this sector, some media and

entertainment companies are inclined to retain such functions within their shared service

operations. Through Disney Worldwide Shared Services and The Nielsen Company’s

corporate centers of excellence, respectively, these two media and entertainment

conglomerates are able to streamline and standardize the processes necessary to

manage their key corporate functions.

Captive call centers are becoming increasingly prevalent within the cable and satellite

television sector across the United Kingdom and North America as reflected in the call

center operations of Comcast and Virgin Media.

GROWTH CONSULTING


25%

38%

63%

Others

Interdep

artm

ental

Tea

m




COO

CEO



Others

25%

25%

24%

38%

13%

25%

38%

1%






COO

CEO



Others

25%

25%

24%

38%

13%

25%

38%

1%



3.7.3 SSO Locations


As seen in figure 3.7.5, the CEO, COO and functional heads play a key role in making

SSO related decisions.

Figure 3.7.5 Entertainment & Media: SSO Recommenders & Decision Makers

While infrastructure quality and costs, labor force availability and compensation costs

appear to be the key criteria that media and entertainment outfits consider in selecting

shared service and outsourcing locations, geographical proximity to customers is also

growing in importance.

Figure 3.7.6 Entertainment & Media: SSO Location Selection Criteria

GROWTH CONSULTING



43%

43%

57%

29%

43%

43%

71%

57%

29%

43%

50%

29%

14%

29%

14%

29%

29%

14%

29%

29%

43%

50%

14%

43%

14%

43%

29%

29%

14%

14%

43%

14%

14%

14%

Compensation Costs






Attrition rates

Political stability



IP regulation


43%

43%

57%

29%

43%

43%

71%

57%

29%

43%

50%

29%

14%

29%

14%

29%

29%

14%

29%

29%

43%

50%

14%

43%

14%

43%

29%

29%

14%

14%

43%

14%

14%

14%

Compensation Costs






Attrition rates

Political stability



IP regulation

Costs and Availability (Labor and Infrastructure)

The BBC regards labor costs and availability as paramount to its decision in its selection

of offshore locations, primarily India and Northern Ireland, to host a variety of corporate

functions.

Global movie studios demonstrate a strong inclination to offshore animation and special

effects work to locations that are able to offer a quality animation talent pool at

substantially lower costs. To that effect, a growing number of Hollywood studios are

already harnessing the scalable pool of creative animation talent that India has to offer at

half the cost of performing the same services in the United States.

Proximity to Customers

Another important criterion growing in importance is geographical proximity to customers.

Such is the case with satellite and cable television providers in the United States and

United Kingdom that are entrenched in the practice of setting up captive call centers

domestically to serve their respective markets. Equally, cultural affinity is also

acknowledged as a key factor for situating call centers near the source of business.

GROWTH CONSULTING



The US, India and UK are the top three locations with Ireland the top emerging location

for SSO in the media and entertainment sector.

Figure 3.7.7 Entertainment & Media: Top SSO Locations

While the US attained the highest overall score, it also achieved the highest rating for

quality of human capital. A close second, India surpassed other countries with respect to

cost efficiency.

Rank


Top SSO Locations

1

2

3

USA

India

UK 13%

25%

50%

13%

13%

13%

Emerging Locations


Philippines, Ireland

UK, USA


% of Respondents who ranked among top 3Rank


Top SSO Locations

1

2

3

USA

India

UK 13%

25%

50%

13%

13%

13%

Emerging Locations



UK, USA



Top SSO Locations

1

2

3

USA

India

UK 13%

25%

50%

13%

13%

13%

Emerging Locations



UK, USA



GROWTH CONSULTING


Figure 3.7.8 Entertainment & Media: Ranking of Top SSO Locations

United States and United Kingdom

The formation of corporate shared services is proliferating across the media and

entertainment sector in both the United Kingdom and United States, primarily to serve a

number of key functional areas including finance, human resources and procurement. For

instance, British Sky Broadcasting’s (BSkyB) human resources are carried out at their

shared service center in England. Additionally, in what is referred to as “Project Forward”,

The Nielsen Company has established corporate centers of excellence in numerous

locations in the United States to manage selected processes for its global businesses.

Along with the aforementioned processes, such centers also have overall responsibility

over real estate and facilities management and outsourcing.

Broadcasting companies in the United Kingdom demonstrate a proclivity to maintain their

Overall Score


2

4.2

3

3.8

3.8

3.8

4

3.1

4.2

UK

India

USA

3.5

3.6

3.8




Overall Score


2

4.2

3

3.8

3.8

3.8

4

3.1

4.2

UK

India

USA

3.5

3.6

3.8





Human Capital

GROWTH CONSULTING


customer support services and call centers within the country as is practiced by the BBC

and Virgin Media, which has call centers operating in various locations including Glasgow,

Manchester, and Teesside.

In the same way, cable and satellite television service providers in North America exhibit a

similar inclination to keep their customer care services and call centers within the United

States as is the case with Comcast and DirecTV.

India

Viewed as a prime location for IT services by numerous sectors, India is also regarded

favorably by the media and entertainment sector as a preferred offshore destination for

the outsourcing of IT support and services. The Nielsen Company started to outsource

jobs at its marketing information division to India, primarily for data services.

Cablevision has strategic partnerships with Indian IT vendors, both to augment internal IT

development capabilities and to help plan, design and implement new projects. Similarly,

McGraw-Hill has developed a strong partnership with IT service providers in India,

outsourcing a fair amount of code development work to various locations across the

country.

IT aside, India has also grown in prominence as an offshore center for finance and

accounting services. The BBC's financial and accounting services are housed from a mix

of locations not only in the United Kingdom, but also in India.

Not least, India is also gaining more and more impetus as a highly favored location for

animation and content development outsourcing. Disney, Fox Entertainment, Lionsgate,

NBC Universal and Sony Entertainment are just a handful of global entertainment outfits

harnessing India’s 3D animation capabilities at fractionally lower costs.

Ireland

A considerable amount of IT and non-IT related activities are also outsourced to or

carried out at shared service centers across Ireland and Northern Ireland. The BBC’s

human resources are currently outsourced to a third party in Northern Ireland, while some

non-technology related activities of McGraw-Hill’s global businesses are managed

centrally at the publisher’s shared service operations in Galway, Ireland.

GROWTH CONSULTING


4.0 Conclusion

Companies worldwide have been using Shared Services and Outsourcing to cut down on

costs and streamline their processes in an effort to improve overall business and

strengthen their market position. As the 2007 Frost & Sullivan shows, MNCs across

industry verticals are not just continuing but increasing their SSO efforts. The learning

curve that built up in recent years by outsourcing and offshoring, mainly non-core, non-

critical processes to low-cost countries such as China, India, Malaysia or Eastern Europe

has increased companies’ comfort-level and SSO might slowly gain a foothold in more

core areas. While some industries like BFSI might never be able to use the full potential

of SSO due to the stringent regulations they are facing and the risk to their reputation

among customers; others, like Technology or Healthcare are exploring or already

pursuing such opportunities. On the other side of the scale, more countries are exploring

ways to tap into the lucrative SSO market to boost their economies by attracting world

class companies. As a consequence, such countries will have to ensure that they do not

just offer cheap labor but more value for money in terms of tying close knots with the

industry to understand their needs and provide excellent SSO solutions to cater to them.

This includes a strong effort to ensure that whatever processes or data is outsourced or

offshored, is both safe and protected by IP regulations which are strictly enforced to

provide a high level of comfort and security to companies.

There is no doubt that SSO will continue to be a key component of companies’ efforts to

grow and improve their business. With MNCs at the forefront of the SSO movement and

more medium and small service providers offering outsourcing and offshoring services,

SMEs are in the starting position to take SSO to the next level by jumping on the wagon

that promises lucrative benefits.

Documents

Frost Report