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The business process and information technology outsourcing (BPO/ITO) markets are evolving in multiple dimensions. They are: 1) Becoming more global; 2) Encompassing a broader array of service areas; 3) Becoming more specialized by industry; and 4) Generating ongoing (and often misinformed and shrill) angst among Western countries not only due to job loss fears, but also because these regions are, in general, loath to change the historical status quo or share their pie with emerging markets.
In terms of "state-of-the-market" specifics, key findings from EquaTerra's 2Q06 Pulse Surveys - conducted among its advisors and a wide variety of leading service providers to reveal in-the-field insights into sector trends and projections - included: BPO and ITO market demand rebounded but is still down year over year and for full-year levels; contract profitability is positive but flattening; deals are becoming smaller and distributed across more service providers; BPO service provider capacity is still constrained; pricing competitiveness is stable and in some cases decreasing in BPO; and the HRO market, particularly for large global deals, remains challenged.
Delving more deeply into the results of the 2Q06 Pulse Survey results: the outsourcing market has undergone a period of rapid growth coupled with globalization over the past two to four years. As a result, service provider capacity, especially for BPO and multi-national or global deals, is constrained. At the same time, many leading service providers feel pressure to improve or at least maintain margins. As a result, buyers with more complex requirements or weak business cases cannot always find providers with the requisite skills and/or desire to compete for their business. Buying patterns are also trending toward more multi-sourcing and greater demands for process improvement over just cost reduction, creating more complex deals that can exacerbate buyer challenges with transition and ongoing governance. So while outsourcing continues to grow in size and acceptance, it is experiencing some growing pains that must be addressed by both buyers and providers.
Against this "market snapshot" back-drop, here are some questions around key issues facing the outsourcing industry today.
Outsourcing management and governance (OM/G) - what happens after the deal is done - is critical to outsourcing success. Yet many outsourcing buyers under-invest in OM/ G, do not adequately prepare for it in advance, and often struggle to find staff with the requisite skills and experience to perform necessary activities. What can buyers do to get better OM/G? What can service providers do to help buyers in these efforts?
TY: This issue exhibits itself differently depending on the size of the outsourcing client. Large, multinational organizations have a structured environment and designated communication paths that enable daily communication and issue escalation, based on documented systems. Small and mid-size companies rely on more personal communication paths and the "hero" concept in managing alternative work environments. Both have challenges in terms of managing an external services relationship.
From the service provider side, the challenge is to continue to have visibility from all levels within the client organization to manage expectations and engage both sides in achieving the strategic objectives in the day-to-day delivery and work process.
For example, the less involved the executive team is in the ongoing relationship, the more risk the provider faces from line managers who are tasked with tactical deliverables and lack the tools/personnel to execute in a different work environment. When in a stressful situation, people will revert to what they know as opposed to assessing the current operating variables to accomplish the same goals. The actual success of an engagement can rely on the lowest level of employees (client and provider side), rapidly assimilating sophisticated communication skills, and global work practices.
From a service provider side, the more structured operating guides that can be instituted early in the process, the better the line managers at the client organization can successfully manage the external services integration.
CS: At the heart of every successful outsourcing agreement is strong communication and a spirit of partnership. All too often, companies fail to realize the full potential of outsourcing because the relationship with the provider tends to be more of a client-vendor relationship rather than a partnership. There are a number of actions that can be taken, both before and during the engagement, that will work to encourage healthy communication and partnership.
Probably the single most important element of successful outsourcing management and governance is ample involvement and ongoing support by the highest ranking members of management - at both the company and the outsourcing provider. It's critical to the long-term health of outsourcing that senior executives take an active role in governance meetings, even if only on a quarterly basis, and champion the solution throughout the organization.
Another best practice in communication and partnership is to contractually align the objectives of the company with those of the provider. At the outset of the engagement, the client should be upfront as to the goals they hope to achieve through outsourcing, and the contract and pricing should be structured so as to encourage behavior that works towards those ends.
Finally, ample attention should be directed toward assessing progress to date and lessons learned. Constant and constructive feedback should be shared between the company and the provider. While service level agreements (SLAs) are a good measurement as to whether the outsourcing solution is meeting the business objectives, there are aspects such as management style, that are better measured through regular satisfaction and feedback surveys. This information should be openly discussed in each governance meeting, and best practices should then be integrated into the project plan. Taken together, these and other such actions will work to establish and reinforce successful outsourcing management and governance practices.
JL: Outsourcers and their customers must jointly create and maintain OM/G to ensure the success of the relationship. At the beginning of the relationship, outsourcers should actively design their governance model as part of the value proposition and include it as part of their proposal. Outsourcers and customers need to arrive at a common agreement that governance is not a by-product of a loose collection of operational service level agreements, but is instead a binding set of actions designed to influence the behavior of the outsourcer in order to achieve a desired result (contract compliance and SLA attainment). It is the enterprise that consumes the services and is impacted the most by the success of the relationship. In order to be successful, buy-in to governance needs to happen at the enterprise level with IT tasked at setting the outsourcing scope. Outsourcers should come to the table with a well-defined relationship model to ensure success. This relationship model should adequately describe the linkages between customer and outsourcer, and detail how the customer will realize transparency and control over their service delivery. The OM/G must anticipate and incorporate some levels of flexibility to accommodate future changes in the business.
SK: Outsourcing management and governance is critical for ensuring success in an outsourcing engagement. Without strong governance and general processes in place for managing an entire engagement, the true benefits of an outsourcing relationship can never be fully realized. From the service provider side of the relationship, integrity, transparency, and a partnership philosophy backed by governance are the key components needed to create trust sufficient to outsource key areas of a firm's business.
As part of every engagement HCL commences with its clients, a steering committee is created which comprises senior management from HCL as well as from the client to ensure the highest level of governance. In addition, a program office is created to oversee the engagement, from start to finish, which ensures a holistic view of all activity. This program office is staffed by both HCL and its client to forecast activity in order to deliver transformational gains for clients. There are four pillars that comprise every HCL engagement to ensure the highest level of work is delivered: communication, trust, openness, and cultural understanding. Governance underscores these four pillars.
Many large BPO and ITO deals already have or will come up for renewal in the next year or two. How well will incumbent service providers fare in these renewals? Will we see a major shift to new service providers? What are the key points buyers need to keep in mind when undertaking outsourcing renewal or negotiation?
TY: New service providers who can match service levels and provide more cost-effective solutions will vie for many of the engagements currently held by traditional suppliers. Some changes will be made on a strategic level, simply to diversify the capability - starting with smaller engagements to verify capability.
CS: Realistically, you can't forecast the likelihood of renewal across the entire market. This truly is a case-by-case decision. The health of the outsourcing engagement likely mirrors the relationship between the company and provider. If during the recent contract timeframe, both parties have shown that they can work together to successfully resolve issues and make a positive impact on the business, and that they both share similar values regarding worth ethic, involvement, and decision-making, then it's likely that the contract will be renewed - and vice versa.
For those relationships that are successful, one important consideration during the renewal process is putting in place mechanisms that encourage ongoing cost-saving process improvements. Initial cost savings are generally easy to recognize for first contracts, largely due to the impact of offshore labor arbitrage. It is ongoing costs savings that are more difficult to realize. However, there are actions that can be taken to encourage continuous improvement, and these should be considered during the renewal process.
For example, at OPI, we consider a successful outsourcing engagement as one in which our annual revenues go down - not up - each year for a select process due to continuous improvement initiatives. While this is part of our methodology, this behavior is also typically reinforced by a pricing structure which encourages such action. Considered a best practice, it is recommended to put in place contractual mechanisms and pricing terms, such as gain-sharing, that encourage cost- saving process improvements.
JL: Incumbents will fare well first and foremost if they've performed successfully in the pre-existing relationship. However, that in and of itself may not be enough if the service provider can't also articulate a strong vision of the future that capitalizes on innovation and transformation in process architecture, technology, and global access to competitive, skilled labor in a flexible contract arrangement.
In order for renewals to move forward, agreements will need to reflect a greater degree of flexibility, identify initiatives that create business value, improve price competitiveness, and optimize operations and governance through a gain/ share approach.
SK: In 2007 and 2008, it's likely that every service provider will need to re-bid its existing business due to changing cost structures, new demands by clients and the overall shifting business landscape. We expect these widespread renewals will significantly "shake up" the distribution of contracts among service vendors, and will ultimately be a reflection of clients' evolving multisourcing strategies. In fact, all signs seem to indicate that the large global outsourcing deals will be divided among multiple vendors. So, multisourcing is on the way, and rather than attempt to push off the inevitable, vendors must embrace this change. As a result, customers will get better pricing from the vendors that are best suited to complete each task, thereby reducing their own risk.
As multi-national service providers continue to expand their global service delivery capabilities and India-based firms expand their geographic footprint in Western markets, China, and other emerging services markets, does one group have an inherent advantage over the other? Will multi-nationals emerge stronger given broader services footprints (e.g., consulting, systems implementation, ITO, and BPO), more specific business process and vertical industry experience, and more executive-level relationship? Or will the Indian firms emerge more strongly given their lower cost base, efficient delivery models, and greater experience in remote delivery of complex services?
TY: It seems natural that over time, the emphasis will shift from purely cost-based drivers to much more of an expertise- or value-based model. The companies that will thrive are those that evolve to providing the outsourced services with higher quality and efficiency than their competitors. As global costs and experience levels equilibrate, pure labor costs will become much less important in the equation. Therefore, the long-term winners will be diverse in makeup. In the short term, labor arbitrage will certainly play a factor likely of causing a shift toward emerging markets like China. The companies that will succeed in China are those that can most effectively accelerate the natural development of experience via technology or leveraging experience gained elsewhere.
CS: Speaking only for finance and accounting outsourcing, multinationals still and will continue to enjoy an advantage over India-based firms, primarily because of cultural differences that India-based firms face when working directly with Western businesses. This advantage manifests itself in process-specific knowledge, vertical industry experience, and more executive-level relationships.
That said, India-based firms do enjoy lower base costs and more efficient delivery models. And for finance and accounting, this advantage will not disappear anytime soon. Indian universities offer advanced accounting training, and the supply of accountants in India is not diminishing.
However, what is happening is that India-based firms are developing and fostering skills desired by Western businesses. Hands-on experience is allowing India-based firms to acquire culture-specific business knowledge and to hone these skills. At the same time, outsourcing and offshoring is becoming more culturally accepted among Western businesses. Taken together, in the long-term, these factors will work to break down the advantage that multinationals currently hold, creating a more level playing field.
JL: A customer should carefully evaluate an outsourcer's global capabilities and experience along with their ability to leverage the most efficient labor and operations model, rather than one that focuses solely on a specific market like India. We believe greater value will be driven from outsourcers that provide services on a global basis, that understand the needs of each market and offer services specific to that market - beyond simply leveraging only cost arbitrage.
Globalization is in fact accelerating the introduction of new markets for economic labor and diverse vertical skills. Today India is a strong player, but many other countries are emerging as challengers. Outsourcers should provide solutions that allow them to lead their clients to the right markets at the right time for the right services versus a onesize- fits-all model. The Philippines are especially good given their strong cultural ties to the U.S.
SK: While multi-nationals like EDS and Accenture have expanded their presence from the U.S. to India - and now to China and other markets with even greater cost advantages - this expanded footprint does not necessarily provide these firms with an advantage over India-based service providers. With millions of well-educated, highly-qualified, English- speaking professionals, India has the benefit of experience and a mature set of skilled labor that Western markets and China do not have. India offers an attractive mix of engineering expertise, high quality work, and proven experience with long distance project execution. Furthermore, India-based vendors are several years ahead of competitors in the areas of business process and strategy.
Further demonstrating this leadership position, India's IT trade body, Nasscom, recently predicted that growth rates for the next 12 months show no sign of India's position of dominance in offshore IT and BPO services waning any time soon. Combined IT services and BPO revenue for the financial year 2006/07 is expected to grow by up to 30 percent, to between $29bn and $31bn. According to Nasscom, this continued level of growth will put India's offshore outsourcing industry on target to hit revenues of $60bn by 2010.
Will increasing geopolitical risks (e.g., nuclear proliferation, terrorism) have a significant negative impact on global outsourcing? Will non-Western service locations (e.g., India, China, and Asia-Pacific) suffer more as a result of these increased risks? Are outsourcing buyers today sophisticated enough to factor in risks when making their outsourcing location decisions? What should buyers do to adequately address these risks and prepare for worst-case scenarios?
TY: The opportunity that China and other emerging sourcing locations offer is global risk diversification. In general, globalization has offered some surprising discoveries. For those companies who have been long-term investors in global capabilities, it is clear that skill sets and competencies can be different, based on cultural, educational, and economic realities in different global locations.
For those companies who are just investigating the global capability model, it will be important not only to evaluate the country, but also the specific companies. In the end, it is the company that you choose, not the country. Business risks should be clearly identified - and it should be in the vernacular of the actual exposure that the company will have. There are a variety of ways to process through risk mitigation.
For the outsourcer services buyer, it is a clear understanding of what exposure the initial program will have, and limiting exposure until the relationship with the services provider is tested and confirmed. This takes a concerted effort from the internal line mangers within the organization to adapt internal process (communication, documentation, networks, etc.) to function in an external mode.
For the services provider, it requires each client functional area that is invested in the process to be managed by a similar functional expert on the services side. Eliminating misunderstanding and inconsistencies early in the process is aided by discussions with professionals in the same function.
For both sides, a backup plan for obvious scenarios should be addressed as the partnership is structured - a roadmap for both issue escalation and resolution, as well as disaster recovery plan are essential to both sides mitigating risk and establishing a basis for operations.
Larger, more sophisticated consumers of outsourcing services certainly consider risks of all types when developing their outsourcing strategy. Geopolitical risk is certainly on the list but falls behind other types of risks such as vendor concentration/power, price inflation, turnover, and epidemic. The vendors themselves must also consider these risks, and it is certainly an important driver behind the pace of movement into China.
CS: Frankly, this hasn't been much of an issue for many of our clients. Most providers today are committed to providing a level of safety and security that ensures ongoing day-today operations. Providers, especially those operating in non-Western service locations, have put in place extensive precautionary efforts including ample data and network security, as well as location and communication redundancies. Additionally, efforts are taken at each location to address country-specific risks.
The truth is that when providers can no longer ensure the industry standard in security and safety, or when the costs of providing such services escalate over and above the savings offered by the location's preferential wage rates, the provider will voluntarily exit the market. Until that happens, I don't foresee a significant negative impact on the majority of non- Western service locations. Competitive markets will always drive demand for labor and services that offer preferential wage rates. So long as providers are able to balance the benefits with the risks, the popularity of outsourcing will continue.
Buyers today are sophisticated enough to factor risks into their outsourcing location decision, and buyers should conduct due diligence on the provider's service locations. We typically recommend that prospects plan a site visit to the service location they are interested in, and thoroughly review all security and safety features offered by the provider. Achieving a level of trust and comfort with your provider will lay a strong foundation going forward.
JL: Both outsourcers and customers are more sensitive to geopolitical risks than ever before and understand that they must be ready to recover rapidly from a disaster. Consequently, outsourcing solutions should include a comprehensive, fault tolerant global support model that provides business continuity and recovery to ensure optimum availability and support of critical business functions needed by the customer.
A customer should require that an outsourcer be able to address their disaster recovery needs by having an appropriate business continuity solution that balances a multi-country strategy and overall economic impact.
SK: It is not likely that increasing geopolitical risks will have a significant detrimental effect on the global outsourcing industry, which would impact non-Western service locations. Not only are firms today able to factor in these risks, but they have already been doing so for quite some time. Geopolitical risks have always existed, but the focus of attention on business taking place in non-Western locations has shifted, and thus the perception of risk has also shifted.
In order to address the risks that do exist, it's wise for companies to engage in multi-geographic delivery models, essentially distributing their risk and tapping into the distinct benefits of various locations. Additionally, appropriate due diligence, education, and proper evaluation of several locations is, of course, extremely important when choosing an outsourcing partner.
China is often at the center of discussions and debates regarding the future of outsourcing. It is a market targeted both as a source as well as a consumer of outsourcing services. What does the future hold for outsourcing and the Chinese market? Will China emerge long-term as the leading provider of outsourcing services? Will it eclipse India and pummel the West? Or will it collapse under its own weight, stressed infrastructure, less-than-open political model, and too rapidly expanding economy? Will its impoverished millions in the countryside become the source of its services growth, or will they help collapse the system?
TY: China's pre-eminent future in the outsourcing or globalization of services is assured. The communications infrastructure, educational policies, government support, private enterprise investment, population, and flood of returnees all point to the rapid establishment of a solid business base. China has the advantage of a long history of adaptability - they are not burdened with the "not invented here" mindset - but are observant and open to learn from the "best in class."
Both the private investors as well as the government are committed to providing world class, competitive services. So the rapid assimilation of quality and technical credentials clearly identifies the interest and capability of the Chinese business community to understand and achieve global business quality standards.
This is not to say that China does not have some mind-bending challenges. Clearly the change from an agrarian society to a technical society creates more than a few dislocations. We see the issues that China faces on a daily basis - the whole debate in terms of money valuation, exports, and health systems is in the worldwide press.
But China has some significant allies in its quest to solve its challenges. There is significant investment of multinationals in China's future, both relying on the availability of low-cost consumer exports to fuel current home markets, as well as the promise of an internal consumer market. The question is, of course, time. If we were to look at one segment - technical services - we have several observations.
The management availability to structure and successfully develop large scale organizations based on a western business model is evolving, but will take another five to ten years to become a basic business posture. Business scale and the availability of strong cadre of global players based in China will grow, but will not be an overnight process.
As for China usurping India or other significant players in the global market, it seems to us that each geographic area has an intrinsic set of capabilities that allow them to become a leader in specific areas - but it is also clear that no one area has a lock on all capabilities. There is also the potential for the internal Chinese market to absorb much of the business energy and capability that is currently being established in China. As we move forward, China will be a target for many of the services that are delivered by other geographic areas.
The near-term future for outsourcing in China is extremely bright. The number of purely China-based providers is growing very rapidly, as is the number of outside companies establishing operations in China. China's infrastructure, including hard infrastructure like roads and power systems as well as its educational infrastructure, can support rapid and extensive growth. In areas like ITO, the limit to growth is experienced especially with project management of larger projects and on issues requiring more experience, such as architecture and design. The ITO industry in China is relatively young and has grown rapidly. The result is that the number of resources with ten years of experience is small compared with India or the West. However, with each passing year this number grows significantly, and companies that leverage experience from other parts of the world can accelerate the learning curve significantly. Although not without issues, the Chinese government's methodical approach to building infrastructure and industries is the major driver of their ascension. Outsourcing, and particularly ITO, has been identified as a strategic industry for China and they are making the necessary investments to be a leader in the market.
CS: For the types of finance, accounting, and tax outsourcing that we at OPI provide, Chinese firms or China-based service locations are not strong contenders in the provider market. One of the reasons that India, for example, is flourishing in F&A outsourcing is because they have a very established accounting profession and offer advanced accounting education at most universities. This truly is a prerequisite when selecting successful F&A service locations, as the skills required to perform such functions as account consolidation and regulatory reporting require quite a sophisticated level of accounting-specific knowledge. Given the language barriers and the lack of a developed accountancy profession in China, in conjunction with the strong supply of F&A professionals in India and Eastern Europe, I don't see the Chinese F&A outsourcing market ramping up in the near future.
JL: China has an immense and fast-growing economy. They will continue to evolve as both a consumer and provider of outsourcing services. The pace of their provisioning capabilities will be impacted in part by cultural, language, and intellectual property concerns. Beyond India, other emerging nations have targeted the outsourcing market as an attractive economic development opportunity. Initally newer entrants will offer commodity type services and, over time, attempt to develop more sophisticated offerings.
SK: There is no doubt that China is a force to be reckoned with. The country has a managed economy and can keep costs low. However, there is a great deal of external pressure mounting on China's leadership, which may eventually push the country to open up its markets - and in turn will likely force costs to go up, removing one of their key assets in the global marketplace. In addition, the jury is still out as to whether China's top-down, authoritarian approach to politics will enable the high-speed economic growth the country is capable of undergoing in the next five or six years. What many people might not realize, however, is that the UN predicts India will overtake China to become the most populated country in the world by 2035, indicating the prospect of continued growth is promising, to say the very least.
As the business and IT services markets continue to globalize, buyers are faced with an increasing array of locations - both country and region - from which to choose. How can buyers assess whether a particular emerging services location is right for them? Should they rely on the service provider to pick the best location? How much does the location matter as it relates to the process being outsourced, or the buyer's vertical industry?
TY: Location for services provisioning is a complex decision, simply because of all the conflicting information sources. As well, location can be a significant factor if certain skill sets, industry, and experience are critical to the program. The basic decision will be based on project/work parameters and skill requirements, resource availability, capability, cost, time constraints, and communication ease.
If the buyer is working with a long-term partner, location can be managed through a discussion matching capabilities with delivery requirements. For a new geographic area, it is important to review specifically with each potential provider, capabilities, and the delivery requirements. Verifying with current service provider clients is important to discover any issues that require adaptation.
CS: Buyers can and should be inquisitive about the locations where the work will be performed, but their real true concern should be quality. As the saying goes, "You should care more about the taste of the sausage rather than where the sausage was made." That said, quality can be affected by location for certain types of outsourcing. Location should be closely considered when cultural or language differences might impact quality.
Culture differences tend to be more pronounced in services that require interaction with customers or employees - for example, when outsourcing call center services or certain types of HRO. Language differences will impact quality on a much broader scale and can impact virtually all types of outsourcing. While the risk of language differences is somewhat mitigated for quantitative-based transactions, language differences will impact quality even for many F&A functions.
In the end, if the outsourcer provides services that meet the required culture and/or language requirements, and provided that the final product adheres to all service level agreements (SLAs) concerning timeliness and quality, then the location itself is often best decided by the service provider.
JL: Customers should always start with their goals and the business rationale for considering outsourcing. Once those are established, an organization considering outsourcing some of its business processes should work with an expert in the service areas being targeted. A customer also needs to assist the outsourcer in developing their operational delivery approach by openly sharing their global business strategy. A customer should emphasize to the outsourcer that global flexibility and delivery architecture is critical because certain areas can provide better access to vertical industry expertise.
An outsourcer should provide thought leadership on emerging markets, entry timing, risk, and exit impact based upon their global capabilities. The outsourcer's operational framework needs to be agile enough to support the business decision to enter a market by being able to balance opportunity and risk.
SK: Location truly depends on the needs of the customer, especially if there are language considerations or specific skill sets that are required. While the service provider can certainly provide input and guidance on location, the final decision on an ideal location must be based on careful analysis of the pros and cons of services available in the locations under consideration.
To address the various geographic needs of customers, HCL covers approximately 80 percent of the total IT space spread across the globe through its presence in the Americas, Europe, and Asia Pacific (including Japan), with locally incorporated offices in each of these countries. We believe that every part of the world has different ways of doing business and, therefore, unless we make the investment of becoming a local player, the move from being a mere vendor to a value-creating partner would be a difficult transition.
Many pundits, particularly equity analysts, question whether HRO service providers will ever consistently be able to turn a decent profit (e.g., 10+ percent deal margins). Are there inherent challenges to HRO that may limit service provider profitability? Are some of the challenges we've seen in early, large HRO deals really systemic problems, or simply representative of a less than mature yet rapidly growing market? Should buyers care about HRO service provider profitability?
CS: I believe the challenges facing the HRO market to be more systemic in nature. With HRO, you have a combination of more standardized functions - like employment contract generation - and very advanced functions such as benefits administration. For those more standardized HR functions that can and are being outsourced, the potential value-add by outsourcing has been severely limited through the use of technology alternatives. Today, so many of the HR functions that can and are being outsourced are already highly automated. There is little room left for labor arbitrage and processes improvements to really make a difference.
On the flip side, the advanced functions, such as benefits administration, require a degree of decision-making, judgment, and cultural awareness that is difficult for offshore providers to deliver. When an employee has a question about medical benefits or 401K, cultural difference can make it very difficult for an offshore professional to fully address employee concerns.
What we are seeing today with HRO, specifically around those standardized functions that can viably be outsourced, is fair markets at work. The market will pay according to the value-add created by the outsourcing arrangement. With so many of these functions having a large technology- driven component, the potential value-add by outsourcing isn't very compelling.
SK: While HRO has a very large market opportunity - The Aberdeen Group recently found that 82 percent of survey respondents said they were either currently outsourcing HR, involved in transitioning HR functions to an HRO provider, or planning to use an HRO provider in the near future (The HRO Benchmark Report, Aberdeen Group, 2006) - many service providers haven not been able to make significant profit in this field because it is a relatively new practice area. As businesses fine tune business models, service providers will better be able to map to HRO processes and provide true value in this key growth area.
While ITO has matured and back-office BPO is maturing, what are the next "hot" BPO areas? Is it "Knowledge Process Outsourcing?" Logistics or document services? Or will the market evolve more along industry, rather than process?
TY: We see some specific areas in the overall category of BPO that China seems particularly well-suited to execute in the early stages of the industry development. Two major plays for BPO, call center and operations utilizing English language skills for processing, are not the best match for Chinese skill sets at the present time. But, if one looks at specific operational process components, China can offer a distinct set of capabilities.
As evidenced from the success in the manufacturing sphere, we believe that China can incorporate task-driven operations in a cost-effective model. Our own experience in document conversion for financial services companies has shown us that our China-based teams can provide high-quality services, if the language equation is adequately addressed.
Expanding this experience, we expect specific industries with large scale consistent information requirements will have a real opportunity to work with China's service providers. Financial service industries, healthcare, and medical verticals all have information processing that can be process driven with excellent results. The key will be matching subsets of information processing to minimize language requirements. This will require a larger scale of operations and process controls that adhere to privacy requirements.
The growth of this market will be based on the migration of the work through the largest service providers and the emergence of China-based niche providers, specializing in industry-based services.
CS: Before we start talking about new BPO areas, we should acknowledge that there really is a lot of room to expand and strengthen the breadth and depth of services provided in the existing BPO arenas. Be it finance and accounting or logistics outsourcing, these areas are growing and have yet to mature. The next hot areas may not be entirely new outsourcing offerings, but instead we'll see the outsourcing of processes that lie further up the intellectual food chain. Specifically, services with greater experiential content will begin to be outsourced.
We are already seeing the finance and accounting outsourcing market moving in this direction. For example, in the last year we have added to our service offerings such functions as FAS123(R) stock option accounting and market intelligence/research services. At the same time, companies have become more comfortable outsourcing many of their complex functions. During 2006, it was not unusual to see a client who had outsourced one or two discrete functions decide to make the move to full-service finance and accounting outsourcing. With full-service F&A outsourcing, many of the services provided require an advanced level of decision-making.
This trend will continue and will largely be driven by both the market's comfort level with outsourcing and by the new availability of an offshore population with ample "on-thejob training." Experience plays an important role, such that today we are able to outsource functions to India that we couldn't outsource several years ago. With each year that passes by, the capability coming out of India is increasing exponentially.
As these trends continue, it will become much more commonplace to see very advanced decision-based processes outsourced and managed offshore.
JL: We think the ITO market will continue to offer attractive growth rates and expansion opportunities for higher value services. This will be especially true for services aligned by industry verticals.
SK: Building on the maturity of the BPO market, companies are now looking to offshore more of their high-end processes to India, fueling the KPO as the next "hot" area. According to a report by GlobalSourcingNow, the global KPO industry is expected to reach $17bn by 2010, of which $12bn would be outsourced to India. In addition, the Indian KPO sector is also expected to employ more than 250,000 KPO professionals by 2010, compared with the current figure of 25,000 employees. Many recent Indian college graduates have specialized in analytics and logistics, making them ideal candidates to lead this next wave of growth.
Additionally, we are seeing significant growth along industry verticals such as medical/healthcare and insurance claims processing. For instance, currently valued at approximately $75bn, the U.S. market for medical devices represents a promising opportunity for manufacturers and service providers. To compete in this attractive market, many medical device companies are partnering with offshore outsourcing companies and collaborating on medical device development and manufacturing. By offshoring anything from application development, systems engineering, and hardware design to software solutions, development processes, and manufacturing, U.S. medical device manufacturers can focus on more strategic, value- added projects, and divert substantial funds to research and development.
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