Globalization, IT Outsourcing,and Business Process Outsourcing

February 13, 2006Hugh DyarSenior Executive, Accenture

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Agenda

The World is FlatWhy now?IT and Business Process Outsourcing phenomenaHow and Why large companies do these things

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Outsourcing has become a social lightning rod

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The World is FlatThomas L. FreidmanFarrar, Strauss, and

Giroux2005

The Flat World

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The Three Great Eras of Globalization

Globalization 1.0 (1492 – 1800)World shrank from Large to MediumCountries as change agentsBattles of muscle, horsepower, steam, shipsInspired by Imperialism, Religion, or bothDominated by Europe

Globalization 2.0 (1800 – 2000)World shrank from Medium to SmallMultinational Companies as change agentsBattles for markets and laborRailroads, Telegraph, Telephone, PCs, Fiber-Optic cable, InternetDominated by United States

Globalization 3.0 (2000 – 2005)World shrank from Small to Tiny, and FlatteningIndividuals collaborate and compete globallyBattles for markets and laborTelegraph, Telephone, PCs, Fiber-Optic cable, Internet

Tom Friedman, “The World is Flat” 2005

Tom Friedman, “The World is Flat” 2005

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The Ten Forces that Flattened the World

Flattener #1 11/9/89

Berlin Wall falls; Microsoft releases Win 3.0

Flattener #2 8/9/95

Netscapegoes

public

Flattener #3

Workflow software

a.k.a., Middleware

Flattener #4

Open-SourceSoftware -

IBM’s “Apache”

Flattener #5

OutsourcingY2K -

India’s WWfootprint

Flattener #6

Offshoring

Gazellesand Lions

Flattener #7Supply

Chaining

Wal-Marteffect

Flattener #8

Insourcing

UPSeffect

Flattener #9

In-FormingGoogle,

Yahoo!,MSN

Flattener #10

The SteroidsDigital, Mobile,

Personal, & Virtual

Dec11, 2001China joins

WTO

Communism – Equally Poor

Capitalism – Unequally Rich

The China of Companies

Toshiba laptop repair2% WW GDP on

UPS trucksJet Blue in home agents

Moore’s Law

Voice Over IP

Wireless

Information Access

Change your oil, now…

Fiber-optic overbuilt

Proprietary

VsOpen

Tom Friedman, “The World is Flat” 2005

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The Triple Convergence

Around 2000, all Ten Flatteners converged and created a new, flatter, global playing field.

Three BILLION people walked out onto the Global playing field from China, India, and the former Soviet Union

Convergence #1

New playing field enables sharing of

knowledge and work in real time, with no regard

to geography, distance, or in future, language

Web Enabled

Convergence #2

New technology combined with new business processes,

employees whounderstand how to

leverage technology

Convergence #3

3 Billion new players, previously frozen out,

now plugged in andanxious to play.

Legacy-free

Open to more people in more

places on more days in more

ways than anything like itbefore in the world.

Southwest Airlines ticketing

Clueless BizHub guy

Zippies - Liberalization’s Children

54% of India is under 25 yrs old

(555M people)Tom Friedman, “The World is Flat” 2005

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US companies benefit from Indian hiring boomExports to India have doubled to $5B from 1990 to 2003

Microsoft windowsIntel chipsLucent phonesNetwork switching by CiscoNetwork connection by AT&T, othersCarrier air conditioningBottled water by Coca-Cola90% of shares in companies owned by

U.S.

Each seat needs:

Each new earner:

Has upward career pathIs an elite college graduateWants cell phoneWants American jeans, movies,

etc.

Tom Friedman, “The World is Flat” 2005

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The Great “Call Center” phenomenonNew Customer Support Agent Burdened Cost

SALARY

$1920/mo

BENEFITS

FACILITIES

SALARY

$200/mo

BENEFITS

FACILITIES

US

India

Includes transportation,

lunch, dinner

6% of applicants hired

No turnover

Hard to attract applicants

30% annual turnover

A low-wage, low prestige job in America

becomes a high-wage, high-prestigejob in India.

An unmotivated, transitory employeein America is replaced by a highly motivated, productive employee in

India.

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Off-Shoring with Obligation

Employment history of New London, CT

19th centuryMajor whaling center

1960s, 1970sWhales long goneMilitary-oriented employersElectric Boat, US Navy, Coast Guard

2000Mohegan Sun, FoxwoodsPfizer pharmaceutical research

Over time, people and capital are freed up to perform more sophisticated work.

Tom Friedman, “The World is Flat” 2005

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African Proverb

Every morning in Africa, a gazelle wakes up.It knows it must run faster than the fastest lion or it will be killed.Every morning a lion wakes up.It knows it must run faster than the slowest gazelle or it will starve to

death.It doesn’t matter whether you are the lion or the gazelle.When the sun comes up, you had better start running.

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Bill Gates’ “Ovarian Lottery”

30 years ago, if you had a choice between being born a genius on the outskirts of Bombay or Shanghai,or being born an average person in Poughkeepsie, you would takePoughkeepsie, because your chances of thriving and living a

decentlife there, even with an average talent, were much greater.

Now, I would rather be a genius born in China than an average guyin Poughkeepsie.

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Globalization and Outsourcing Factoids

In 2003, 25,000 US Tax returns done in India. In 2005, expected to be 400,000China has over 160 cities with populations of 1 million or moreIn China, when you are one in a million, there are 1,300 other people just like youIn 2003, China replaced the U.S. as the largest importer of Japanese productsSince the mid-1990s, cheap imports from China have saved American consumers

roughly $600M and have saved U.S. manufacturers untold billions in cheaper parts for their products. Which as, in turn, enabled the Federal Reserve to hold down interest rates longer.

Yale Fall 1985 71 Chinese, 1 Russian….Yale Fall 2003 297 Chinese, 23 RussianIn 2004, Infosys received one million applications from young Indians for 9,000

technology jobs (>100:1)Between 1980 and 1999, Arab countries produced 171 International Patents.There are 18 computers per 1,000 people in the Arab region today, compared to

the global average of 78 per 1,000Only 1.6% of the Arab population has access to the internetIn 2002, the GDP of Spain is greater than the combined GDP of the 22 Arab

countries combined16 of the 20 most polluted cities in the world are in China

Tom Friedman, “The World is Flat” 2005

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Can America survive? -- Yes!

America will do fine in a flat world with free trade, provided it continues to churn out knowledge workers who are able to produce idea-based goods and services that can be sold globally. There may be a limit to the number of good factory jobs in the world, but there is no limit to the number of idea-generated jobs in the world.

Today’s wants become tomorrow’s needs – Internet, Starbucks, Google

Post WWII, America integrated a broken Europe and Japan and yet our standard of living has increased every decade since. Our unemployment remains under 5%

150 years ago, 90% of Americans worked in Agriculture. Today it’s <4%

We can innovate, and retain high function, high paying jobs here – HP, Dell, Google, Microsoft, Cisco

We remain the world’s largest domestic consumer market, full of early adopters

Tom Friedman, “The World is Flat” 2005

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Information Technology OutsourcingBusiness Process Outsourcing

Why do companies do these things?How does the process work?How do companies sell and deliver it?

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The Changing landscape of IT over 50 years

Source: U.S. Department of Commerce (Sept. 2002), IBM analysis

IT as a percent of U.S. capital

0

5

10

15

%

1960 1970 1975 1980 1985 1990 2000 20101965 1995 2005

Mainframe eraAdminstrative productivity

Client/server eraPersonal & departmental productivity

On demand eraBusiness productivity& innovation

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Gartner Dataquest view of worldwide Business Process Outsourcing opportunity

Souce: Gartner Dataquest, March 2004

$70.5 $76.8 $83.9 $92.0$100.8

$31.7$34.0

$36.4$39.5

$43.6

$25.1

$22.9

$21.0$19.5

$18.2

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

2003 2004 2005 2006 2007

Bil

lio

ns

AP

EMEA

Americas

8.3%CAGR

8.3%CAGR

9.4% CAGR

$119.7$129.7

$140.8

$154.0

$169.39.0%

CAGR

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Need to focus on core business

Solve a business process issue

Access to technology

Optimize existing applications investment

Reduce or manage risk

Reduce headcount

Derive incremental revenue or margin mix

Gain variability in cost management

Access to global expertise

Asset reduction

Source:” Vertical View of BPO Demand: A Study of Five Vertical Industries,*” IDC, 2003 (Financial Services, Health Care, Retail/Wholesale, Utilities/Energy, Manufacturing)

Q: Thinking about outsourcing business processes such as customer care, logistics, HR, etc., in 2004, is your company going to:1

Sources: “Worldwide BPO Services 2004 Vendor Analysis: Assessing the Strategies of I T Service Providers,” IDC(Aug. 2004); “BPO User Wants and Needs,” Gartner Dataquest (July 2003).

Reduce 7%Have

no plans 36%

Expand17%

Keep at same level

32%

Start6%

Increasingly, businesses look to business process outsourcing as a strategic enabler, not only for cost savings

The number of enterprises planning to start, maintain or expand outsourcing of business processes is growing: IDC: 55% (August 2004)1

Gartner Dataquest: 37% (July 2003)2

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Rethinking the Enterprise

0

25

50

75

100

IT

OUTSOURCED BUSINESS PROCESSES

RETAINED BUSINESS PROCESSES

PROFIT

10%

10%

40%

40%

Percent of sales

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Business ProcessesBusiness Processes

Human Resources

ProcurementIndustry Specific

Flexible Deal Structures & FinancingFlexible Deal Structures & Financing

Applications TransformationApplications TransformationTechnology TransformationTechnology Transformation

Customer Relationship Management

Customer care Order management eCommerce Warranty service Field service

management Billing & payments Customer analytics Call center

operations

Self-service portal and contact center

HR process redesign, subject matter experts

Staffing, recruiting, benefits, org. dev., training, education

Expense acctg., payroll

Data and analytics vendor aggregation

and management

Finance & Administration

Cost accounting JE Processing AP/AR Fixed Assets Project accounting Inter-company billing Credit & collections Cash application Internal/external

financial reporting General accounting Budget and

forecasting

Strategic sourcing Supplier catalog

enablement Supplier relationship

management Indirect-direct

purchasing Contract

management End-user support Global Sourcing

Banking/Fin. Markets Market data mgmt. Account opening/

maintenance Collections &

recoveries Banking back officeInsurance: Claims management Policy administration Customer care HR administrationGovernment: Traffic congestion toll

charging Case & records mgmnt. Education and training Call center

Parts logistics Inventory planning

and management Repair management Customer support Service request

support Warranty

management Field services Technical support

Service After Sales

Large Companies Tend to outsource to the following functions.Large Outsourcing Vendors have built processing centers for these activities in various parts of the world

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IDC: Business Process Outsourcing leadership

Niche Leadership

Crisis Potential Legacy

Opportunity Alignment

Ab

ilit

y t

o G

row

Sh

are

Hig

h

High

Lo

w

Low

IBMAccenture

Capgemini CSCACS

Unisys

EDS

Wipro

InfosysHP

IDC Leadership Grid:BPO Leadership Among IT Service Providers in 2004

Source: “Worldwide BPO Services 2004 Vendor Analysis: Assessing the Strategies of I T Service Providers,” IDC, Competitive Analysis, Aug. 2004

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The benefits of outsourcing – from tactical to strategic

Business Process Outsourcing targets reducing a client’s costs and investment in business processes

Client BenefitsClient Benefits

Continuous StrategicChange while Outsourcing

Process Enhancement Process Improvement while Outsourcing

Cost Reduction

Cost Take Out

Extended Enterprise

Pro

cess

Ch

ang

eP

roce

ss C

han

ge

Return on InvestmentReturn on Investment

Reduce costsReduce costs

Focus on core business Focus on core business

Reduce barriers to changeReduce barriers to change

Innovate, improve and transform processesInnovate, improve and transform processes

Improve decision supportImprove decision support

Speed time to benefitsSpeed time to benefits

Increase flexibility to adapt quicklyIncrease flexibility to adapt quickly

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100% ofstaff @

40-70% ofOriginal cost

60% ofstaff @

100% of Original cost

Cost Effectiveness

Pro

cess

E

ffic

ien

cy a

nd

T

ran

sfo

rmat

ion

100% ofstaff @

100% of Original cost

60% ofstaff @

40–70% ofOriginal cost

Many operators have low cost offshore facilities – few have the capability to manage the change and transformation required to deliver the full potential benefits.

The IBM approach leverages cost effectiveness and process efficiency and transformation.

Cost effectiveness is achieved through optimized service delivery model (three tier architecture: on site, near shore, offshore)

Process efficiency is achieved through : Standardisation Performance monitoring Process & technology transformation

Transformation of the entire process and value change

Global resourcing without transforming is a missed opportunity

Business Process Outsourcing Solutions deliver lower cost and higher quality

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Typical split of activities within Finance & Accounting

100%

AccountsPayable

AccountsReceivable

80%

Cash&

Banking

50%

100%

FixedAssets

70%

FinancialAccounting

ManagementReporting

50%30%

20%

Credit Monitoring Physical

collectionsReport

finalizationBooks

ownershipTax liaison

Report Analysis

F&AOutsourced

F&ARetained

70%

30%

UserActivities

Supplier relationship

Procurement

Goods Receipt

Invoice approval

Price maintenance

Sales & Invoicing

Credit Management

Customer Queries

Capitalization Decision

Physical Inventory

Physical Tagging

Local Reporting

Cash Management

Bank RelationsContract Financing

Communication

of expectations

re cash movts

Accruals

Write-Offs

Some closing

activities

Budgeting

Analysis &

Business

Commentary

Finance & Admin

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Future StateCurrent State

HR Subject Matter

Experts

15%

55%

HR Strategy and Policy

30%

HR Administration

50- 60%

40 - 50%

BPO Outsource

20%

30%

25%

Customer HR Organization

BPO Provider

20-50% Cost Savings

15%

10%

Customer HR

Organization

Automation & Self- Service

Many groups of functions with major corporations can be charasterized by pyramids.The transformation of HR begins by organizing work to best leverage the talent in the HR function

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Is this the whole Outsourcing story?

Not just Bangalore

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Delivery Center – Bangalore

Embassy Golf Link Campus (EGL)

Facilitate combining AMS and BPO Operations at one facility

To house over 5,000 employees securely

● Complex of 3 Buildings

State-of-the-art facility

Intra-City BCP

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Large Contiguous Space Availability● 4th Flr : 33K Sq.Ft (In

operation)● 5th Flr : 33K Sq.Ft (In

operation)

Reliable Connectivity● 4 Lease Line Provides On Site● VSNL Earth Station

Reliable Back Up Power● 9 MW Back Up Generator● 100% Redundancy In Power

Round The Clock Security● Guard Patrols, CCTV, Door Alarms● BMS: Fire System/AC/Power/Security

Amenities● Cafeterias / Malls / Banks /Health Club● In-house Transport Options

The Operations Highlights

High quality management and

staff with experience in

transitioning over 4000 Western

roles to India 1000+ BTO staff, 2000+ by end of

2004 All staff are English speaking

graduates

Singapore

Tokyo

Mumbai

Bangalore

4.5 Mbps

9 Mbps

Pune

Delhi

USA

Singapore

Tokyo

4.5 Mbps

9 Mbps

USA

Capacity

47 Mb

Links

International

Domestic 43 Mb

Typical Vendor Delivery Center – Bangalore

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The Philippines

•Labor force of 29 Million3rd largest English speaking nationLiteracy rate of 94%380,000 graduates/yearLow attrition rate (less than 15% among Customer Contact Centers)Quality management staffHighly TrainableA fraction of labor cost of US and EUTelecommunications costs have dropped 70% in last 3 years

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Many Outsourcing companies have centers all over the globe

Finance & Accounting Procurement Human Resources CRM In Plan

Toronto

Endicott Lisbon

Greenock

Dalian

Okinawa

Lexington

Dallas/Atlanta

Budapest

Krakow

Calgary

Bangalore

Costa Rica

Manila

Newcastle

Bratislava

Edmonton

Buenos Aires

Nashville

Shanghai

Rotterdam

Brisbane

TokyoTulsa

Delhi/Mumbai

Houston

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Delivery Capabilities Three-tier delivery strategy for

maximum flexibility

Delivery Centers with 33,000 process and delivery experts in 15 countries

>50,000 consultants with expertise in 17 industries and multiple business process areas

>50,000 Application Management Services Professionals

Standard transactions:

• Lowest cost with high quality

• Multi-client facilities

• Highly leveraged

Global Support Centers

Standard non- transactional activities:

• Remote center

• Leveraged multi-client facility

• Regional expertise

Regional Support Centers

Expertise Support Centers:

• Co-located with client

• Dedicated

• Location-specific requirements

Onshore Expertise Support

Tier 1 Tier 3Tier 2

Three-tier delivery strategy maximizes delivery value

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Client EXAMPLE -- Scope Description

CRM F&A

Contact CenterAG and EMEAInbound and Outbound

Data ProgrammingAG and EuropeInformation entry from public recordsProduct Fulfillment

Transaction ProcessingEurope onlyData Entry and error re-work

Financial ServicesGlobal AP & T&EEMEA OTC processingUS Collections & Cash Apps

Oracle OTC MigrationImplementation Services

Key business processes, not just backroom operations

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Austin ,Texas – 122 FTE •US Sales and Service – 69•Technical Support – 13•DunsVoice – 6•Contract Administration – 24•Usage and Billing - 7

Current State – 750 FTE

Bethlehem, PA – 104 FTE

Waltham, MA 7FTE• Technical Support - 7

Mississauga, CA – 35 FTE

•US Gold Service – 13• US Sales and Service 53 • Personalized Investigations – 8.5• Advanced Customer Update - 4• Error Resolution Screening - 10

Manchester, UK – 27 FTE

High Wycombe, UK – 24 FTE

Milan, IT – 66 FTE •EMEA Gold Service – 4•EMEA Customer Support – 20•Service Failures – 1•TP - 41

Rotterdam - 66 FTE EMEA Customer Support – 5•Service Failures – 3•Family Tree – 21•Re-Investigation – 10•DP EU Trade - 3

•

•US Sales and Service - 13•Family Tree / Linkage – 1 •ACUG – 4•DP Canada - 14

• Inbound CS • Inbound Tech S • Revenue Generation • Contract Admin

EMEA Customer Support - 4•DP – EU Delivery – 18•TP - 2

•EMEA Customer Support - 24•EMEA Gold Service – 3

Greensboro, NC – 95 FTE•US Outbound - 95

Tucson, AZ – 88 FTE•US Outbound

• Outbound Telecenter• Data collection & DB updates• Self-Analytic product sales

Not Included:The outbound European Telecenter operation is outsourced to CSC. Data collected on UK, Germany, Italy, Spain, Portugal.

• Data collection & DB updates• Self-Analytic product sales• File maintenance & file builds

• Almelo, NL – 45 FTE •EMEA Customer Support – 1•Service Failures – 38•TP - 6

Bari, Turin, IT FTE Svc Failures – 24

Lehigh Valley, PA – 71 FTE DP – US CAN Trade – 5 DP – SMS/RMS – 23 DP – US SMS - 43

Client EXAMPLE Solution Map

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Future State (1st step)

Buenos Aires & Sao Paulo ( 417 FTE )ENG, SPANISH, PORTUGUESE•US Sales and Service•US Gold Service•US Outbound•Family Tree•Errors / Screeners•Technical Support•Contract Administration•Usage and Billing

Greenock ( 170 FTE )ENG,Italian, FR, Flemish, Dutch

•

•EMEA Gold Service•EMEA Customer Support•ACUG•Family Tree•Re-Investigation•DP – SMS/RMS•TP

Bangalore ( 83 FTE) •DP SMS/RMS •DP US SMS •DP Canada

•

Bethlehem, PA66 Rebadged FTE

Mississauga, CA13 Rebadged

Austin ,Texas 69 Rebadged FTE

Manchester, UK 27 Rebadged FTE

High Wycombe, UK – 4 Rebadged FTE

Rotterdam & Almelo, NL - 6 Rebadged FTE

Milan, IT – 24 Rebadged FTE

Client EXAMPLE Solution Map

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Allentown, PA AP/T&E Processing (7 FTEs)

AP/T&E Processing (4 FTEs) Americas Collections (30 FTEs) Europe OTC (19 FTEs)

Bangalore

AP/T&E Processing (8 FTEs) Europe OTC (10 FTEs)

Krakow

Current (81) and Future (74) States

High Wycombe, UK AP/T&E Processing (4 FTEs) Europe OTC Processing (17 FTEs) Milan, Italy

AP/T&E Processing (5 FTEs) Europe OTC Processing (7 FTEs)

Brussels/Rotterdam AP/T&E Processing (1 FTEs) Europe OTC Processing (2 FTEs)

Tulsa AP/ T&E Processing (1 FTEs) Americas Collections (2 FTEs)

Bethlehem, PA US OTC (38 FTEs)

Client EXAMPLE Solution Map

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It’s a lot more than this!!!!

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Thank You