Frost And Sullivan Keynote: November 2008

The Future of Offshore Outsourcing:gTrends and Implications

Findings from The International Offshoring Research Network (ORN) Project

Presented by Jeff W. RussellDuke Center for International Business Education and Research, The Fuqua School of BusinessThe Fuqua School of Business

Authored by Arie Y. LewinDuke University The Fuqua School of BusinessDuke University, The Fuqua School of Business

This presentation may not be reproduced, cited, or distributed without the express written consent of the author.

Agenda

ORN Main Findings

Introduction ORN

Offshoring Reaches Executive Suite

Changing dynamics of outsource-offshoring

Globalization of service delivery & global race for talent

Future trends/plans

Discussion of Current Issues

Implications of financial crisis

22

Offshoring Research Network: History and Scope

Initiated in 2004 at Duke University CIBER, Fuqua School of Business

Multi year survey• Tracks adoption of offshoring over time by launch year.• Tracks adoption of offshoring strategies, on corporate & function

level• Includes over 1600 companies that do, do not, or are considering. • Covers all industries (e.g. financial services) all functions, (e.g. IT) all

locations (e g Latin America) and all delivery models (e g captivelocations (e.g. Latin America), and all delivery models (e.g. captive, hybrid)

• Complemented by annual ORN Service Provider Survey (since 2007), focused surveys and participants workshops) y p p p

• In-depth analyses, reports, case studies and Academic publications

33

Offshoring Research Network: Sponsors and Affiliates

The Conference Board is Lead Collaborator for ORN U.S. Buy-side Survey (since 2007)

PricewaterhouseCoopers is Lead Founder of ORN Best Practices Institute and sponsor of ORN EU Survey (2008)

Past ORN SponsorspBooz Allen Hamilton (2006)Archstone Consulting LLP (2004 and 2005)

Affiliates:Affiliates:

Information Technology Association of America

International Association of Outsourcing Professionals g

Thirteen CIBERs

Council for Entrepreneurial Development

E t i S ft R dt bl

44

Enterprise Software Roundtable

ORN Buy-side survey demographics

U.S. survey

EU surveyEU survey

Source: Duke University/Archstone Consulting Offshoring Research Network 2005 Survey and Duke University/Booz Allen

55

y g g y yHamilton Offshoring Research Network 2006 Survey and Duke University/The Conference Board Offshoring Research Network 2007/8 Survey

Offshoring Reaches E ti S itExecutive Suite

66

Since 2005 dramatic growth in companies adopting strategies for guiding offshoring decisions at BU and function level

Percent implementing offshoring strategies before 2005 vs. by end of 200775% are large companies

Corporate-wide

IT

Product Design

R&D

Marketing & Sales

Software Development

Engineering

Finance & Accounting

Call Center

Marketing & Sales

0% 10% 20% 30% 40% 50% 60%

Procurement

Human ResourcesBefore 2005 By 2007

77

Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey

Companies experience significantly higher achieved savings following implementation of corporate wide offshoring strategy

Before Implementing Offshoring Strategy After Implementing Offshoring Strategy

Call centers

Administrative services

Call centers

Administrative services

Software development

IT

P d t d l t


IT

Procurement

Marketing & sales

Product development

Procurement

Marketing & sales

Product development

0 10 20 30 40 50 60 70

Savings Expected Savings Achieved

0 10 20 30 40 50

Savings Expected Savings Achieved

88


Changing Dynamics of Offshore OutsourcingOffshore Outsourcing

99

Offshoring of knowledge-intensive services is accelerating. In 2007 over 50% of new offshoring-outsourcing projects involved software development and 30% product development.

60%Cumulative Percent of Companies Offshoring Function

p p p

40%

50%

AdminCCIT

20%

30%ITM&SPDProcSoft

*

0%

10%

* Product Development (PD) includes engineering, R&D, and product design

** Administrative services include finance & accounting, human resources and legal services

1010

Source: Duke University/Archstone Consulting Offshoring Research Network 2005 U.S. Survey and Duke University/Booz Allen Hamilton Offshoring Research Network 2006 U.S. Survey and Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey

Knowledge-intensive services include…

Application developmentEngineering: Product design:

Product Development Software Development

Application developmentSoftware architecture & designDatabase designEngineering support

Embedded systems development

Product design:

Prototype designProduct designSystems design

TestingRe-engineeringSimulatingCAD drawingDrafting & modeling

y gApplication developmentSupport services

Knowledge Process Outsourcing (KPO)Drafting & modeling

Performance analysisIndustry & company analysisMarket analysisCredit analysis

Research & Development:

g ( )

Credit analysisData miningEquity analysisForecastingRisk management analysis

Code developmentDevelopment of new technologiesResearch on new materials and processes

11

Financial planning

U.S. companies have dramatically expanded offshore sourcing of administrative, and product and software development functions

ber

ons

of to

tal n

umb

mpl

emen

tatio

Perc

enta

ge o

f offs

hore

imP of

Year in which offshore project was implemented

12


But it’s the smaller firms that focus on offshoring knowledge-intensive services.

f

Distribution of Functional Implementations by Company Size

knowledge intensive services.

ProductDevelopment

SoftwareDevelopment

Marketing &Sales

Procurementp

Small

AdministrativeCall Centers

ITSmall

Midsize

L

0 20 40

AdministrativeServices

Large

1313


Number of providers offering IT services continues to grow.

80%

ITe

Percentage of Providers Offering Categories of Services(1)

(i l di ft d l t)

60%

IT

Product design, engineering, R&D

Call Center

Administrative Services (F&A, HR)

Procurementvide

rs in

the

of s

ervi

ces (including software development)

40%

Procurement

KPO

Marketing & Sales

serv

ice

prov

ng c

lass

es o

20%

rcen

tage

of

surv

ey o

fferi

0%1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Pes

14

Year in which services were offered

(1) Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis

Providers report that traditional ITO(1) and BPO(2) services are already commoditized and will become even more commoditized

Extent of Commoditization of Services – Today vs. Expected within 18-36 Months

100%

75%

100%

-36

Mon

ths

Call CentersFinance and Accounting

Information

50%

ion

in N

ext 1

8- Information Technology

Human Resources

Procurement

EngineeringMarketing

25%

Com

mod

itiza

ti g gMarketing & Sales Product

DesignLegal Services

KPOResearch &

Percentage of providers rating dimensions as high/very high

0%0% 25% 50% 75% 100%

C

Commoditization today

Development

(1) Information Technology Outsourcing

15

(1) Information Technology Outsourcing(2) Business Process OutsourcingSource: Duke University Offshoring Research Network 2007 Service Provider Survey.

Longer-term relationships seem to be the norm

Rate of Renewal of Deals by Service Offering

Finance & Accounting

Marketing & Sales

Call Center

Knowledge/Analytical Services

Human Resources

Legal Services

Information Technology

Procurement

Engineering

Knowledge intensive-service deals tend to be

project / task based vs. t i f

Knowledge intensive-service deals tend to be

project / task based vs. t i fProduct Design

Research & Development

0% 20% 40% 60% 80% 100%

outsourcing of large ITO/BPO

deals

outsourcing of large ITO/BPO

deals

16

Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis.

Percentage of deals renewed at expiration of the first contract

Globalization of Service DeliveryGlobalization of Service Delivery & Global Race for Talent

1717

Clients are becoming more concerned about availability And expertise of talent when choosing offshore locations

Talent pool available

Location factors for software and product development

Low costs (besides labor costs)

High level of expertise

Low cost of labor

Location of the best service provider

Matches language requirements


Geographical proximity

Quality of infrastructure

Cultural proximity

0% 10% 20% 30% 40% 50% 60% 70% 80%


Early experiments (<2002) Recent projects (2005-2007)

Percentage of responses rating location factor as “important” or “very important”

Client are concerned with rising wage inflation & employee turnover offshore. Providers face same challenges

Comparison of perceived risks (important and very important) US2007 and US2006 surveys

D t it

Lack of acceptance from customers

Lack of acceptance from internal clients

Data security

Lack of intellectual property protection

High employee turnover

Loss of managerial control

+9%

Cultural differences

Loss of internal capabilities / process knowledge

Lack of intellectual property protection

+17%

0% 10% 20% 30% 40% 50% 60%

Incompatibility between IT systems

Wage inflation +17%

19

US2006 US2007

Small providers more adept in accessing talent in emerging locations, such as China, Russia, Latin America and the Middle East

India

Western Europe

Other Asia

United States

China

Eastern Europe

Mexico

Latin America

Western Europe

Small

Large

Middle East

Russia

Canada

0% 20% 40% 60% 80% 100%

Percentage of providers offering product development services from these locations

20

Source: Duke University Offshoring Research Network 2007 Service Provider Survey

Spanish companies have better access to high skilled talent in Latin America

T l t l il bl

Location choice factors for IT, software and product development implementations in Latin America and Mexico

Political stability in host country

Location of the best service provider

Cultural proximity


Talent pool available

Matches language requirements

Access to local market

Avoiding "hot spots"


Other

Supporting existing customers locally

High level of expertise

Government incentives

Quality of infrastructure

Low cost of labor

US

Spain

0% 20% 40% 60% 80% 100%

Collocating with existing BP facility offshore

Collocating with existing manufacturing plant offshore

Supporting existing customers locally Spain

21

Percentage of responses stating factor is “important” or “very important”

Financial services companies have highest preference for international service providersp

22

Companies with no offshoring experience initially prefer third-party service delivery models

Considering

S

prefer third party service delivery models

Considering

Offshoring

UK

US

Considering

Offshoring

pain

Considering

Offshoring

g

NL

Sp

0% 10% 20% 30% 40% 50% 60% 70% 80%

Offshoring

ConsideringN

23

Following adoption of offshoring strategy companies increasingly favor captive “own and control” organizational forms.

Preference for Service

2424


Near shore locations seem to be gaining in importance for software and product development

L tiEmerging preference for locating software and

for software and product development

Latin America

6%

NPD projects near shore. Canada may be benefiting from availability of talent. Direct consequence of Canadian immigration policies regardless of high costs? Nine time zone barrier?

India35%

Canada18%

China18%

zone barrier?

Mexico23%

18%

Number of new implementations

25


Location matters: companies offshoring in China and Other Asia prefer “own and control” modelp

26

New offshoring investments in India are shifting from IT to administrative functions, and from outsource to captive , pdelivery model

Total offshoring of product and software development in India are expanding, but share of India is declining

Distribution of locations for product development implementations in different time periods

50%

60%

I diatio

ns

India'sshare:50%

40%

50% India

China

Eastern Europe

Western Europe

of im

plem

ent

India's

India'sshare:55%

50%

20%

30%Russia

Philippines

Other Asia

Mexico

otal

num

ber o

share:68%

0%

10%

Canada

Australia

Middle East

Latin America

rcen

tage

of t

o

Source: Duke University/Archstone Consulting Offshoring Research Network 2005 U.S. Survey and Duke University/Booz Allen Hamilton Offshoring Research Network 2006 U S Survey and

0%Pre-2002 2002-2004 2005-2007

Time period in which implementation was made

Per

2828

Allen Hamilton Offshoring Research Network 2006 U.S. Survey and Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey

The Case of Call Centers: Location choice varies greatly depending on the country of the buy-side company

100%

p g y y p y

70%

80%

90%

IndiaLatin America

40%

50%

60% Western EuropePhilippinesMexicoOther AsiaCanada

10%

20%

30%

CanadaEastern EuropeOther

0%US NL Spain UK

Percentage of Call Center implementations in particular locations

29

Percentage of Call Center implementations in particular locations

Source: Duke University/The Conference Board Offshoring Research Network 2005/67/8 Survey

US shortage of S&E talent with advanced degrees not just an H1B visa policy outcome

250,000 $12H1B Cap

H1B visa policy outcome

200,000

$8

$10

S&E Graduates

GDP (in trillions)

100,000

150,000

$6

$8

50,000

100,000

$2

$4

01990 1992 1994 1996 1998 2000 2002 2004 2006

$0

30

Data on Master and PhD degrees in sciences and engineering come from the US National Science Foundation. Data for H1B visa quota come from the US Citizenship and Immigration Services.

Brazil and Argentina specialize in software, IT, and product development, Central America in Call Center & BPO

CentralAmerica

Distribution ofFunctions offshored

t L ti A i b U S d

Product & Software

to Latin America by U.S. and European companies

Mexico

Product & SoftwareDevelopment


BrazilOther

South America

Technology

Call Centers

Administrative

Argentina

Services

Other (e.g. Procurement)

31

Argentina

FUTURE TRENDS/PLANSFUTURE TRENDS/PLANS

3232

Companies have aggressive plans to expand offshoring of existing projects across all functions (58% to 80%). Plans for relocating back onshore are minimal.

Administrative Call Information Marketing Product SoftwareAdministrative Call Information Marketing Product SoftwareAdministrative Services

Call Centers


Marketing & Sales

Product Development Procurement


Expanding 60 56 67 80 53 67 58Relocating to another offshore

Administrative Services

Call Centers


Marketing & Sales

Product Development Procurement


Expanding 60 56 67 80 53 67 58Relocating to another offshoreanother offshore location 13 21 5 0 7 7 10Relocating back to US 0 3 0 7 0 7 3Transfer to 3rd

another offshore location 13 21 5 0 7 7 10Relocating back to US 0 3 0 7 0 7 3Transfer to 3rd party service provider 3 0 0 7 5 0 5Transfer to a wholly owned subsidiary 5 0 12 7 14 7 15

party service provider 3 0 0 7 5 0 5Transfer to a wholly owned subsidiary 5 0 12 7 14 7 15y

No change planned 28 24 18 7 25 27 21

Other 0 0 3 0 0 0 2

y

No change planned 28 24 18 7 25 27 21

Other 0 0 3 0 0 0 2

3333


Regardless of industry verticals companies have aggressive plans for new software development projects

Finance and Professional Technical

Percentage of companies planning new implementations

Finance and Professional TechnicalFinance and Insurance Manufacturing

Professional Services Software

Technical Services

Finance and Accounting 50 27 20 10 29

Human Resources 21 7 40 14 14

Finance and Insurance Manufacturing

Professional Services Software

Technical Services

Finance and Accounting 50 27 20 10 29

Human Resources 21 7 40 14 14

Marketing and Sales 14 13 40 19 14

Information technology 43 27 20 33 57

Call center/help desk 64 27 20 14 14

Marketing and Sales 14 13 40 19 14

Information technology 43 27 20 33 57

Call center/help desk 64 27 20 14 14p

Procurement 7 27 0 19 25

Legal Services 0 0 0 10 0

Engineering services 0 33 20 14 14

p

Procurement 7 27 0 19 25

Legal Services 0 0 0 10 0

Engineering services 0 33 20 14 14Engineering services 0 33 20 14 14

Research and Development 21 27 20 20 14

Product Design 14 20 20 19 29

Engineering services 0 33 20 14 14

Research and Development 21 27 20 20 14

Product Design 14 20 20 19 29

3434

Software development 36 29 40 43 29Software development 36 29 40 43 29


Companies with extensive offshoring experience integrate offshoring strategy as part of corporate wide global growth

Growth strategy

Percent rating driver “important” or “very important”strategy

Improved service levels

Business process redesign

Other cost savings

Growth strategy

78%

Exploit location-specific advantages

Exploit country-specific advantages

Part of a larger global strategy

Improved service levels

Access to new markets

Differentiation strategy

Domestic shortage of qualifiedpersonnel

p p g

Least Experienced Most Experienced

S D k U i it /A h t C lti Off h i R h N t k 2005 U S S d

3535

Source: Duke University/Archstone Consulting Offshoring Research Network 2005 U.S. Survey and Duke University/Booz Allen Hamilton Offshoring Research Network 2006 U.S. Survey and Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey

Companies with offshoring strategy (75% large companies) have aggressive plans for new IT, F&A

Percent companies planning new functional implementations (next 18 to 36 months)

p ) gg p ,and Call Center operations offshore

42%Engineering services

Information technologySoftware development

37%33%

Research and DevelopmentProcurement

Call center/help deskFinance and Accounting

Engineering services

With StrategyWithout Strategy

Legal ServicesHuman Resources

Marketing and SalesProduct Design

Without Strategy

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

3636


Low-tech companies are targeting new offshoring projects for IT, contact centers and finance and accounting processes


Product Design

Research and Development

Information technology

p

Procurement

Call center/help desk

Product Design

Low Tech

Human Resources

Marketing and Sales


High Tech

0% 10% 20% 30% 40% 50%

Legal Services

Finance and Accounting

Resources

0% 10% 20% 30% 40% 50%

Midsize companies are planning new offshoring projects across all business processes and functions. Large companies are particularly planning new call center operations.



Call center/help desk

Information technology


R h d D l t

Marketing and Sales

Procurement


H R

Product Design


Research and DevelopmentSmall

Mid

0% 10% 20% 30% 40% 50% 60%

Legal Services

Human ResourcesLarge

3838


.In anticipation of limits to labor arbitrage service providers are planning to build capabilities in end to end business process re-engineering

Business process reengineering

Area of future expertise

SAP

Software services

Security management

Business process reengineering

Health Care/Pharmaceuticals

CAD

Infrastructure management

SAP


Financial services

Insurance

0 4 8 12

Testing and quality assurance

Number of providers

3939

Source: Duke University / Booz Allen Offshoring 2007 Service Provider Survey

THANK YOU!

For more information please contactp

The Research Teamff h i @f d k [email protected]

919.660.3796

or visithttp://offshoring.fuqua.duke.edu

4040

This presentation may not be reproduced, cited, or distributed without the express written consent of the author.

Frost And Sullivan Keynote: November 2008

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