cap source toronto 2

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.

Capability Sourcing OverviewRobert ArmacostSLA, June 7, 2005

2Cap Source toronto 2


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Sourcing is getting increased attention



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Key points

• Capability Sourcing is not a fad – it is a real phenomenon and is here to stay. But, it is not all about India

• It is really hard to do well – it fails as often as it succeeds

• All of our organizations are thinking about what to do with the Library/Research function, and you need to be as well



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Capability Sourcing defined

• Capability sourcing is a process of gaining access to best-in-class capabilities for all activities in a company’s value chain to ensure long-term competitive advantage

Leveraging the right capability at the right costfrom the right source and the right shore

• Capabilities where the company is not best in class can be:

8Built internally via process improvement and investment8Outsourced to a provider who is best in class8Moved offshore when cost and/or quality are superior



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7-Eleven uses Capability Sourcing to focus its management on what matters most

“Everything outside direct store management and customer interaction is fair game for outsourcing. With the right outsourcing partners, a company can achieve virtual integration rather than vertically integrate internally.”

Jim Keyes, CEO, 7-Eleven

“The functions we outsource are very important, and they must be done well, however, they do not represent our core business. By outsourcing…we are able to stay focused on increasing customer service, merchandising and growing the business.”

Keith Morrow, CIO, 7-Eleven

Jan2001

Jan2004

0

5

10

15

$20

Stock price

Example: 7-Eleven



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This is not a .com phenomenon—strong structural factors support Capability Sourcing

Environmentprime forcapabilitysourcing

Long-term decline in logistics

costsHeavy I.T./ERP

investment

Telecom

revolu

tion

Evolution of systems integrators

Geopolit

ical

changes

Social factors



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India is large and growing source for offshore services

Note: IT Services includes hardware maintenance and support, software maintenance and support, consulting, development and integration, training and education, IT management, and business process and transaction management. Results from survey of 42 companies that use offshore resources. Multiple responses given

Source: “Demand Analysis of Offshore IT Services,” Gartner, August 2002, company websites, various news articles

India

E.

Euro

pe

Asi

a-Lo

w W

age

Euro

pe-

Low

Wag

eAust

ralia

/N

ew Z

eala

nd

Can

ada

Asi

a-H

igh

Wag

eEuro

pe-

Hig

h W

age

U.S

.

1.11.5

3.0

7.07.3 7.3

7.88.0

9.1

0

2

4

6

8

10

Supply(High SchoolGrads, M) 82 70 60 60 12 10 58 84 100

Indexed Wage Rates for High School Grads(October 2002)

Key India-Based Captives:

• GE Capital

• Amex

• Dell

• JPM Chase

• AOL

Full-line IT

Data mgmt.

Call ctr.

Trans. Proc.

Call ctr./back office

16,000

4,000

3,800

3,000

3,000

Company Service Lines ~FTE

Key India-Based Outsourcing Providers:

• Wipro

• TCS

• Satyam

• Accenture

• CSC

IT, CC, Trans. Proc.


Full-line IT

IT, Trans. Proc.


Company Service Lines ~FTE

27,200

24,000

12,000

4,300

1,600



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A large percentage of global companies are already outsourcing business functions

IT

Admin

Dist &

Log

Finan

ce HRCa

ll

cent

res

55%

47%

22% 20% 19%15%

0

20

40

60%

Percent of worldwide companiescurrently outsourcing*

* Refers to companies outsourcing more than one major activity.Source: Outsourcing Institute; Smith Barney; Accenture and Economist Intelligence Unit (August 2003)



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However, numerous companies have had difficulty capturing desired results…

Within 5 years

Within 2 years

Within5

years

Within2

years

Giga Gartner Dun & Bradstreet

75%

50% 50%

0

20

40

60

80

100%

% of outsourcingdeals that do notmeet expectations

iQuality concerns- Dell moved some tech support to US from India

following accent & quality complaints (2003)- Lehman Bros moved some call centers from

India (Wipro) to the US due to poor service quality (2003)

- AstraZenenca ended Masram contract mfg deal for quality and supply concerns (2001)

iContract disagreements- Cable & Wireless ended £1.8B deal 5 yrs early

and sued for £128M of overcharge (2003)- IT services deal between CSC and Saks ended

with CSC suing Saks for misuse of trade secrets and violation of contract terms (2001)

iPolitical and geopolitical concerns- Indiana ended $15M outsourcing deal with

Indian provider to protect local business (2003)- Delta cancelled Philippines call centers over

security concerns (2003)

Source: News articles

Unsuccessful DealsUnderperforming Deals



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There are three broad approaches to capability sourcing

Outsource

In-house

On-shore Off-shore

• Compelling cost savings opportunity off-shore

• Direct control required

Captive Center

• Compelling cost savings opportunity off-shore

• Direct control not required

External ServiceProvider (Off-shore)

• Compelling cost savings opportunity on-shore

• Direct control not required

External ServiceProvider (On-shore)

• Managed Base Case offers highest return

• Direct control required

Operate As Is

= Alternative sourcing models

Hybrid solutions



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Attractiveness screen - 6 questions to ask yourself about your function

1. How standardized is the capability/process?

2. How critical is it to your organization’s strategy?

3. How important is real-time and/or local service to your customers?

4. Is demand for service variable?

5. Is highly proprietary data involved?

6. What scale (headcount) are we talking about?

“Cookie cutter” Highly customized

No, it is a basic support function

Yes, key to our success & what

helps us win

Doesn’t matter Critical

Never All the time

Yes, fluctuates alot

No, very steady

Large (over 50) Very small

Less attractive for alternative sourcing

More attractive for alternative sourcing



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How Bain has approached Capability Sourcing

• We had received significant noise about the “opportunities” to move Bain’s research functions to in India

-Weekly calls from 3rd party offshore search providers-Activities of other consulting, banking and professional services firms

• In 2004 we ran Bain’s Library/IS (along with all support functions) through the attractiveness screen. Most of Bain’s functions are not attractive for alternative sourcing. Key drivers

-Need for real-time, customized support-Lack of scale (given multiple language and market needs)-Highly proprietary data

• However, we did identify an opportunity to create a captive offshore facility for client team analytical support

- “Bain Capability Center” opened November 2004-Complements Bain’s library/IS function-So far, so good



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Bain Capability Center India is located in Gurgaon (just outside New Delhi)



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The BCC has been set-up to have ‘Bain’ look and feel

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