Hub and Spoke Model

Hub and Spoke

operating model A new business

paradigm for the Indian IT-BPO Industry

kpmg.com/in

© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The Indian IT-BPO industry has been a sunrise sector for the country for last 3 decades. Since its birth in

‘80s, it has seen two inflection points, Y2K and DotCom, which propelled its growth and then has seen at least

two economic shocks during the DotCom bust and the 2009 meltdown. At an adolescent stage, it is at the cusp

and has an opportunity to become a Global Hub for IT-BPO, rather than merely a most preferred offshore location.

Despite having a commanding 50 percent plus offshore market share, it holds merely 5 percent of global outsourcing market1. If India learns the lessons from the US and Japan on

how they became Global Hubs for manufacturing (Electronics, Auto, Aerospace, Consumer goods) – where they managed

customer requirements, quality, performance, risk management and capital deployment, whereas spokes were created in

China, Taiwan and rest of the world – Indian IT-BPO industry can become the custodian and brand holder, utilizing appropriate world

destinations. India can then command 2 to 3 times of its current share of the global outsourcing market over the next decade. This

paper attempts to draw that parallel and suggest some imperatives for India to become the Global IT-BPO Hub.

Foreword - KPMG in India

Pradeep UdhasPartner and Head

IT - BPO SectorKPMG in India

Kumar Parakala Chief Operating Officer

AdvisoryKPMG in India

1. NASSCOM Strategic Review 2011


The Information Technology-Business Process Outsourcing (IT-BPO) industry has exhibited remarkable growth in the last decade to become one of the most significant growth catalysts for the Indian economy. While its initial value proposition hinged on basic outsourcing advantages of cost and talent, industry focus has shifted to higher value added services, innovation and transformation. Global sourcing is now evolving from being tactical to being of strategic benefit to clients

The Indian IT BPO industry shall realise that to manage changing customer demands, tap emerging opportunities, offer new services, multi-lingual capabilities and business continuity planning, it needs to deliver services from multiple locations across the world. Thus a complete hub and spoke global delivery model encompassing service delivery across multiple continents, which assures clients of flexibility and scalability, is a necessity and a need of the hour.

Indian IT-BPO companies needs to address the key requirements of a global delivery model-a proven multi-location delivery track record, a diverse set of assets/IP/solution accelerators, robust and consistent processes and technologies, depth and breadth of global skills, and an optimised network of centres. Indian companies now have over 560 delivery centres in 70 countries spread across Europe, North and South America, Africa and Australasia. With India acting as a hub while delivery centers across the world acting as business specific scalable “spokes”, the industry shall be able to provide a single face with seamless yet distributed delivery capabilities to the customer, offering both efficiency and flexibility.

This whitepaper provides a complete understanding of the evolution of the hub and spoke model in the global sourcing industry, key characteristics and benefits, and factors critical to the success of this model. We hope you find this interesting, and we welcome your comments and feedback on the same.

Foreword - NASSCOM

Som MittalPresidentNASSCOM


Mr. N. V. ‘Tiger’ TyagarajanPresident and CEO

Genpact

Mr. Anshoo GaurPresident and India HeadAmdocs

Mr. Sanjay JainChief Capability OfficerWNS Global Services

Mr. Naresh WadhwaPresident and Country ManagerCisco India & South Asia

Mr. Prashant RanadeCEO and PresidentSyntel Inc.

Mr. Anil ModiChief Marketing Officer and President (MENA)Aegis Limited

Ms. Aruna JayanthiCEO Capgemini India

Mr. Sandeep SoniPresident Hero BPO

Mr. Dhiraj Dolani & Mr. Venki IyerMentor and Co-FoundersB2R Technologies

Mr. Ajay Chaturvedi Founder-ChairmanHarVa

Mr. Murali VullagantiFounder and CEORuralShores Business Services

Ms. Mythily Ramesh Co-Founder & CEONextWealth Entrepreneurs

Mr. Sudhir Gupta COODrishtee

Our thanks to these leaders for their insights


Table of Contents

Executive summary

Introduction

Early riders of the Hub & Spoke wave: Key takeaways for IT-BPO industry

Hub & Spoke model – Heralding a new era in technology outsourcing

Critical success factors for a successful Hub & Spoke model

India as a global Hub

Way forward

About KPMG in India

About NASSCOM

Glossary

01

03

09

15

23

27

31

35

36

37


1 | Hub and Spoke operating model - A new business paradigm for the Indian IT-BPO Industry

Executive summary

The outsourcing landscape in the IT-BPO industry has undergone several inflection points in the years of its existence. While the initial driving force was the need to cut costs, over the years customers realized that outsourcing could be a tool to achieve much more than just cost advantage; it could also turn out to be a strategic driver to attain business value. This has led to the evolution of a more holistic view on global sourcing with clients and vendors collaboratively striving to achieve the most optimum and beneficial model of outsourcing service delivery.

Source: KPMG in India Analysis - Hub and Spoke operating model, 2012

Evolution of delivery models


Hub and Spoke operating model - A new business paradigm for the Indian IT-BPO Industry | 2

Today, clients and vendors are seeking models to help them coordinate and manage globally dispersed centers, build strong sourcing relationships, instill a collective identity and ultimately deliver high quality services seamlessly. One such operating model that has been successfully implemented across several industries and is expected to drive the next phase of IT-BPO service delivery is the Hub & Spoke model.

The Hub & Spoke model is used in the context of multi location sourcing wherein a central consolidator called the ‘Hub’ provides a single face to the customer while seamless extensions called ‘Spokes’ are leveraged to provide the services, distributed across multiple locations. In a wider role, the Hub is expected to take on management responsibilities including those of capabilities development, customer management, regulatory compliance, uniform standards of delivery, and manpower management. On the other hand, a Spoke is administered as a delivery centre that can be scaled up or down depending upon business requirements. Some companies may also choose to leverage near shore Spokes as base locations for business development.


Hub and Spoke operating model

The ‘Hub & Spoke’ model provides an attractive cost proposition to enterprises while allowing vendors to deliver seamless services. It provides flexibility in service delivery in a way that vendors can scale up or down operations based on client requirements. The model also helps organizations gain business insights by being close to the customer. Service providers are able to tap into smaller cities that provide a compelling value for sourcing. Delivering projects for a client from a large number of globally distributed locations allows vendors to de-risk operations and utilize the benefits of a skilled regional labor pool. Thus, a good mix of locations for service delivery ensures a better quality of service at lower costs.

India has already established itself as the preferred offshoring destination for organizations globally and built a strong expertise in technology operations, business processes and management capabilities over time. This global prowess can now be extended to a new role as Global Hub, managing a geographically dispersed network of Spokes.


The new decade presents India with an opportunity to move beyond the most preferred offshore location to become a Global Hub for IT-BPO managing clients across the different countries around the world. The Indian IT-BPO industry could learn lessons from the success stories of Hub and Spoke model implemented in other industries like manufacturing - automobiles, electronics, consumer goods and aerospace. Just as the US and Japan emerged as the global manufacturing Hubs in the last couple of decades1, managing customer requirements, risks, quality and performance standards with manufacturing locations established around the world acting as Spokes, the Indian IT-BPO industry could also successfully replicate this model leveraging inherent benefits of a widely dispersed geographic location portfolio. This would significantly enhance India’s share in the world’s outsourcing market.

In order to effectively position India as a Global Hub, it is essential to invest in a strong brand, proactively develop a location strategy, adapt and standardize operations across locations, invest in technology and ensure compliance with global security and regulatory standards. The government’s role is to formulate attractive regulations for companies operating out of India, develop infrastructure specially in smaller cities and help project India as a ‘safe investment haven’ to clients and investors. Industry bodies can play a significant role in the process by promoting and marketing the idea of “Brand India” as a Global Hub and further nurturing the managerial talent in the country.

1. KPMG in India Analysis





Introduction

In a rapidly globalizing world, IT-BPO outsourcing has evolved from being optional to a critical lever driving a company’s profitability and growth. What began as a step to achieve cost savings through labor arbitrage has undergone several changes over the past few decades, with vendors moving into new markets and establishing unique offerings and services. Challenging economic conditions from time to time have further necessitated adoption of different delivery models to provide business value. Today, outsourcing has transformed from being merely labor arbitrage with low-cost countries, into an offshoot of true globalization.

Evolution of service deliveryThe outsourcing model has undergone several changes over the past few decades. At the turn of every decade, with increasing complexity and competitiveness in the IT-BPO industry, outsourcing models have witnessed transformation in order to deliver value to clients. It began with onsite staff augmentation where supplemental resources were imported to client locations to work on short-term projects. Since, resources were brought onsite; the cost of labor saving was not substantial. The industry gradually moved to the offshore model in which tasks were outsourced to a different, low cost location achieving a significant cost arbitrage in the process. Soon, a few industry majors realized the advantages of being present near their client markets and established bases close to them, thus leading to the evolution of the near shore outsourcing model. Only recently, has the Hub and Spoke model made way into the management mindshare, as the next viable model of outsourcing.



The initial driving factor behind the development of outsourcing has been the need to cut costs. Over the years, the outsourcing model has undergone several changes, with many stakeholders discovering that outsourcing is not just a tool to achieve cost advantage but instead, a strategic driver to attain business value. Thus, a more enlightened view of global sourcing is starting to emerge as customers get increasingly convinced of its vast and multi-faceted potential.


Evolution of delivery models





Evolving perspectives on global outsourcing

Key drivers for the Hub & Spoke model

Outsourcing is evolving from cost arbitrage to strategic location sourcing

Current Perspective Emerging Perspective

• Laborandcostarbitrage

• Migrationofprojects/processestooffshorelocations

• Multipledeliverycentersacrosslocationstode-riskbusiness.

• Maximizebenefitsfromgloballydispersedlocations

• Qualityservicefromexternallocaltalentatlowercost

• Strategicallyleverageglobalbestpracticesandtalent

• Breaktheprocessintocomponentslike–voice,data,complianceandexecuteacrossmultiplelocations

• Simultaneouslyexecutetasksacrossmultipleoffshorelocations

• Clients’businessmodelsnecessitatemulti-locationservicedeliverycapabilities

• Presenceofgeographicallydistributeddeliverycentersbecomingcrucialforvendorstobeconsideredforlargeglobaloutsourcingcontracts.

In an emerging trend of outsourcing, companies are actively seeking out vendors in diverse locations in order to maximize the benefits of geographic dispersion in order to deliver their services. With a wide geographic dispersion though, comes the added concern of ‘management’. Thus, there is need to establish a highly robust management framework to coordinate globally dispersed centers, build relationships, instill a collective identity and ultimately deliver successfully on the outsourcing mandate. One such model of management that has been successfully leveraged across industries such as manufacturing, logistics and aviation is the Hub & Spoke delivery model.

A combination of customer, vendor and geo political considerations is giving rise to the need for the Hub and Spoke model today. Customers are looking out for vendors who are able to manage a large number of globally dispersed centers. While vendors seek to be closer to their customers they also want tighter and more streamlined management control over operations. Spreading of business operations geographically also ensures adequate diversification of geopolitical risks.





Responsibilities of a Hub

Responsibilities of a Spoke

Areas Responsibilities

Customer management • UnderstandcustomerrequirementsinordertoallocateworktoSpokes

• Provideseamlesscustomerexperienceirrespectiveoftheofficeswheretheservicesarebeingdelivered

Quality, risk and performance management

• Setquality,riskandperformancestandardsfortheHubandSpokes

• Monitorperformance

• Reportorinitiatecorrectiveactionswhereverrequired

Training & development • DefineandimplementtrainingprogramsacrosstheHubandSpokes

• Cross-pollinationofskillsbetweentheHubandSpokestoensureuniformcapabilitydevelopment

Manpower Management • EnsurecontinuousmanpowerplanningacrosstheHubandSpokes

• Ensurevisibilityonemployeerelatedstatisticslikestaffcount,competency,allocation,attritionacrossSpokelocations

Regulatory compliance • EnsurethenecessarycontrolshavebeenputinplaceacrossallSpokelocationstoensureglobalandlocalregulatorycompliance

The Hub & Spoke modelThe Hub & Spoke model is used in the context of multi location sourcing wherein a central consolidator called the ‘Hub’ provides a single face to the customer while seamless extensions called ‘Spokes’ are leveraged to provide the services, distributed across multiple locations. In a wider role, the Hub is expected to take on management responsibilities including those of customer, quality, risk and performance management, training & development, manpower management and regulatory compliance.

Spokes are seamless extensions of the Hub that can be leveraged to provide a service to a customer (internal or external). The typical responsibilities of a Spoke include meeting a Hub’s performance expectations, adding to its manpower needs, local project management, supporting the Hub on legal & tax issues and operating as an extension of delivery or competence center.

In most cases, a Spoke will be leveraged as a delivery centre that can be scaled up or down depending upon business requirements. Most technology companies prefer to keep the management complexity at the Spokes to the minimum. Some companies may choose to leverage near shore Spokes as base locations for business development.

Applicable only to Spokes organized by competence



1. http://www.establishingabroad.com/bazment/4457.aspx

2. Customized World Clock, http://www.timeanddate.com/worldclock/custom.html?sort=1

Going forwardTo summarize, cost arbitrage by itself has ceased to be a key differentiator in the IT-BPO industry. Today, customers expect service providers to have strong delivery capabilities, well evolved across geographic locations in order to drive business value. This changing nature of client requirement is pushing vendors to scale up their location portfolio in order to participate in transformational global deals. One such model that is expected to evolve into the next archetype of multiple location based service delivery is the Hub and Spoke.

The objective of the Hub & Spoke model is to provide greater flexibility to the client in selecting locations out of a portfolio of delivery centers that adequately fulfills all business needs. The Hub & Spoke model is expected to be complementary to the standard practices followed in the industry at present and would not suddenly result in the other models phasing out. The early adopters of this model are likely to gain a significant advantage over other players, and the model itself will evolve into an industry standard over time and be widely implemented in the IT-BPO industry.

Positioning “Brand India” as global HubIndia has successfully emerged as a leader in the IT offshore outsourcing world with its current share at 55 percent in the global offshore market for IT services and software1. Over the years, Indian service providers have significantly expanded their offerings across different verticals to enhance their depth of services. They have also increased their geographic penetration to serve markets other than the US and the UK. India’s advantage lies in its ability to provide a complete spectrum of services, including those related to IT, business and knowledge processes. The experience of handling multiple technology projects, throughout their lifecycles, has helped Indian service providers develop robust management frameworks, which can be further leveraged to run a geographically dispersed delivery model. India’s geographic position enables it to have an 8-12 hour time zone difference with respect to the US and other major markets2. This time zone difference results in a 24x7 service provision with a consequent reduction in turnaround and project execution time. Companies working out of India are able to leverage the significant time overlap with projects being executed from Europe, the US and SE Asia.

Given the outsourcing capabilities developed and strengthened over the past few decades, India can now successfully position itself as the world’s IT Hub, managing a combination of international and domestic ‘Hub and Spoke’ locations, thus leading the emergence of a new paradigm of service delivery in the IT-BPO industry.

Industry ExampleVarious industry players are considering some form of the Hub and Spoke model as a part of their business strategy going forward. For example, a leading BPO player is contemplating creating Hubs which are organized by competencies and/or regions. They are actively expanding their presence in Australia, Europe and North America and confirm that clients are now expecting their service providers to be business and technology experts, and not just provide a cost advantage. The vendor believes that it is important to understand the cultural and process implications of working in the region where their clients operate. As a result, they will continue to invest in building domain expertise and move closer to the customer in the future.

• Costs are no longer the key motivator behind outsourcing decisions

• There is need to partner with the customer in close proximity to add value.

The first generation global delivery model was driven by lower telecom costs. Collaboration technologies will drive the next generation of GDM. Companies need to evolve their business processes around collaboration to succeed in the new paradigm.

- Prashant Ranade CEO and President, Syntel Inc.

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Industry ExampleA leading global product development company with its R&D centre in India has successfully leveraged the Hub & Spoke model to be closer to its market. In the past, this company grew its product portfolio through both in-house development as well as product acquisitions. In case of the latter, while the parent realized the need to provide the acquired company the freedom to grow and expand their product portfolio it was also necessary to bring in benefits of standardization and merge the two entities in a smooth manner. The parent started to support the acquired company in their R&D efforts from an R&D Hub based out of India. Product development efforts were driven by product owners for the region with access to information available at various Spokes. In an effort to further integrate the two entities; some of the staff was transferred from the R&D Hub to the Spokes every year to help them understand their clients (team members at the Spoke) better, leading to significant improvements in the joint product development efforts. The management talent came from the parent Hub. Thus, not only did the engineering Hub ensure standardization of joint product development efforts; it is also allowing the company to outsource some part of the product development efforts to 3rd party service providers.

• R&D Hub co-ordinates all product development efforts across the Spokes

• Standardized R&D processes ensure easy integration of new acquisitions

• Move personnel in R&D centers closer to the customers through cross-pollination

• Outsource product development efforts where possible.

Business models have evolved considerably over time. The command and control structure worked well for traditional industries and economies, in the past. Today’s knowledge economy, coupled with global business environments, requires a structure granting individual units some autonomy in decision making. Further, for businesses to remain competitive, access to the optimal resources – be it talent, materials or best practices from across the globe, is critical. The ‘Hub and Spoke’ model is the manifestation of this business imperative. This will result in strategically located centers of excellence executing portions of the business independently; while relying on the headquarters to facilitate knowledge and process sharing. This is definitely a trend that is here to stay.

- Naresh Wadhwa President and Country Manager, Cisco India and South Asia

Over the next few years, the focus of BPO Service providers will be to help their client achieve specific business outcomes so that they can outperform in their marketplace. There shall be an integration of Global Operating models that goes beyond offshore and near shore centers, significant use of domain consulting skills, operating and process model innovations, technology platforms and embedding analytics to deliver these specific business outcomes…

- Sanjay Jain Chief Capability Officer, WNS Global Services

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Early riders of the Hub & Spoke wave: Key takeaways for IT-BPO industry

The aviation industry1 was the first to successfully implement the Hub and Spoke distribution model, which has since then been adopted by many other industries. The manufacturing industry, for example, put into practice the Hub and Spoke model in order to leverage a global low cost, high quality supplier base which in turn helped facilitate the production process and lower overall costs.

The manufacturing experience with ‘Hub and Spoke’Increased globalization has brought in several opportunities for multinational corporations over the past few decades. Companies have expanded their borders of trade, tapped into new markets and utilized a global talent pool to deliver their services. And in their pursuit of globalization, technology and differential labor costs have been key enablers, with those adopting an innovative, adaptable business model succeeding over the rest.

It was in the mid 1960’s that the manufacturing industry first noticed the initial signs of globalization. Production of consumer appliances and electronics was moving to low-cost, high-quality Japanese producers. This was a move away from the existing production process, which until then was being completely undertaken in the US and Germany.

At this juncture, manufacturers took their first step in breaking from a traditional set up to move into globalization of the labor workforce. Through the 1960’s and 1970’s, realizing that outsourcing to low-cost Japanese producers could help them outrun competition, companies leveraged a number of relationships in Japan, strategically sourcing high-quality products at low cost.

Over the following years, benefits of a global labor market integrated more firmly with the manufacturing process and service delivery model. Gradually, manufacturers moved to countries which not only provided a cost benefit but also readily assimilated technology know-how and offered attractive government policies. Thus, what used to be a single-country venture in the 1960s grew into large, worldwide operations in order to leverage the benefits of multi location sourcing.

To sum up, three factors drove the manufacturing industry to expand its geographic footprint:• Cheap labor at low-cost destinations leading to lowering of overall cost of

manufacturing • Ability of countries to assimilate and replicate the technology know-how• Incentives provided by various local governments to promote the industry

To be successful in a changing market-place, the strategy of the manufacturing industry was two-fold: identify core functions such as branding, design and monitoring operating standards and improve on them, while outsourcing the task of manufacturing finished products to third party suppliers in low cost destinations.

1. Hub and Spoke in Insurance: Aggregate and Conquer, Oliver Wyman



How the manufacturing industry built a globally diversified network can be a useful lesson for IT-BPO companies looking to outsource from all over the world. The industry started off with goods being manufactured at diverse locations that offered attractive cost propositions. Over a period of time, they began adding more locations in the same region. After gaining a good understanding of operating in a region, companies then began exploring the option of setting up their own units to procure goods at even lower costs. This led to the creation of multiple nascent Hubs and Spokes.




Evolution of global sourcing locations in the manufacturing industry

Evolution of outsourcing in manufacturing

Functions outsourced by manufacturers



Over a period of time, the Spokes began to assimilate the best practices from the Hub units of the manufacturer, leading to the evolution of a closely knit Hub and Spoke system of operation. The approach adopted by the industry to transform a series of standalone sourcing units to a tightly enmeshed global sourcing network is illustrated below.


Framework established by the manufacturing industry to manage its sourcing network

Hub and Spoke model in other sectorsThe Hub and Spoke model has been implemented in several other sectors with a great degree of success. Two examples are discussed below.

Case Example: Hi-Tech2 The company under discussion is one of the top hi-tech brands in the world today. While a lot of the concept building and designing of products still happens at its Californian headquarters, the company has successfully leveraged the Hub & Spoke model and outsourced the manufacturing and assembly operations for some of its key flagship products. A few products use the ‘Contract Manufacturing’ form of outsourcing which acts as an extended Spoke.

The company has followed the conventional manufacturing model by using third-party suppliers as its contract manufacturers under a partnership model. The products are not manufactured end-to-end at one single location. The various components of the products are sourced from multiple vendors dispersed geographically. This has successfully helped the company reduce costs and focus on its core competency of design and engineering. In addition, in order to ensure risk management and compliance, the company has created a standard code of conduct and has hired independent auditors to inspect working conditions in vendor factories.

Case Example: Aircraft manufacturing2

In another industry example, a leading global aircraft manufacturer engaged in supplying commercial jetliners and military aircrafts to customers in over 150 countries successfully incorporated the Hub and Spoke model into its operations. Although the manufacturer has been outsourcing parts of its production since the early 80’s, it was only during the fabrication of its latest commercial jetliner, that the company really put the Hub and Spoke model into practice.


2. Company website and Internet Research



Hub and Spoke network of a global aircraft manufacturing firm

To cut production timelines, as well as take advantage of a worldwide supplier base, the company decided to adopt a global sourcing strategy. The aircraft’s design was done at the company’s Seattle headquarters in the US; however the rest of the production process was decentralized. The company outsourced nearly 70 percent of the aircraft’s component production with Japanese aviation industry manufacturers supplying the remaining 30 percent of the aircraft. Thus, this model allowed the company to completely focus on its core competency of designing and assembling aircrafts, while sourcing components from its Spokes.

Key takeaways for technology sectorThe manufacturing industry’s approach to build a globally diversified sourcing network can serve as a blueprint for IT-BPO companies looking to successfully leverage a multi location outsourcing strategy to service their clients.

• Cost control is critical - Cost leadership is a critical factor for continued survival in a highly competitive industry and will be the prime driver for establishing presence in global locations

• Focus on core competency - Companies need to identify core areas of focus which could be IP development, branding etc and invest in them continuously

• Invest in new locations - Companies need to pro-actively invest and develop emerging locations in order to reap the new and attractive benefits offered by them

Key Takeaways:

Costcontroliscritical

Focusoncorecompetency

Investinnewlocations

Culturalalignment

Performancemanagementandtracking

Contributionofprimarymarkets

Australia• Movabletrailingedge

Canada• Wing/bodyfairing• Landinggeardoors

England• Landinggear• Engines

France• Passengerentrydoors

Italy• Centrefuselage• Horizontalstabilizer

Japan• Forwardfuselage• Centrewingbox• Wing• Mainlandinggearwheelwell• Fixedtrailingedge

Korea• Wingtips

Sweden• Cargoaccessdoors

US• Forwardfuselage• Fixedandmovableleadingedge• Tailfin• Aftfuselage• Engines• Enginenacelles



• Deliver the outsourced process simultaneously from multiple locations

• Spilt the process into components - voice, data etc and deliver each of them from the best suited locations

• Use Hub as a consolidator that provides the customer a unified user experience

• View Spokes as extensions to Hubs to help reduce bureaucracy

• Smaller Spokes ensure that they can be managed remotely from the Hubs

• Two Hubs may share a Spoke location.

Global Delivery Model provides brands with possibilities of finding right equilibrium between cost and experience. The GDM needs to leverage technology, process and people skills to provide a seamless and consistent end user experience.

- Anil Modi Chief Marketing Officer and President (MENA), Aegis Limited

“ “Industry ExampleA leading global player in the Consulting, Technology and BPO space has been using the ‘right-shoring’ strategy, the objective being to provide a unified seamless experience to their clients. The firm has centers all over the world to help service clients from the best location. To be more specific, the company splits the process outsourced into multiple components – voice, data etc. and routes these processes to the best location available to serve them. The Hub acts as a consolidator and controller that provide the client a unified experience. The Spokes are viewed as extensions to the Hub which help reduce the time and bureaucracy in servicing clients. Also, the company has developed Spokes in tier 3 and tier 4 cities in India, while creating regional Hubs to control these Spokes. Thus, by limiting the size of the Spokes and with regional Hubs to control them, the complexity involved with deploying the model has significantly reduced. Additionally, for large outsourcing engagements that support global operations, the firm has created client Hubs by geography to service domestic operations. There is also an instance where two offices have shared a Spoke location and another where an office has been phased out as a delivery centre with the rising cost of operations.

• Cultural alignment -There is a need to better understand the cultural nuances of doing business in a region before making substantial investments; thus, it is better ramp up operations gradually

• Performance management and tracking - Companies need to continually monitor the performance of delivery centers through periodic audits and other performance management measures to ensure that brand attributes remain strong

• Contribution of primary markets - Over time, as the business scales it is inevitable that the contribution of primary markets to the product development process will decline and other locations would emerge.





Hub & Spoke model: Heralding a new era in technology outsourcing

A range of Hub and Spoke formats can be formulated keeping in mind factors such as ease of management, skills availability, geographical proximity etc. Three possible models of Hub and Spoke are discussed in this section with their key characteristics, governance mechanism and scenarios under which they could be applied.

1. Hubs with dedicated Spokes Key characteristicsThis model has Hubs with multiple dedicated Spokes servicing them. The Hub’s role is to set the quality and performance standards, manage risks, operating procedures and ensure compliance of the Spoke centers. The Hub also allocates projects and resources for delivery at the Spokes under its supervision. Spokes may not have the required maturity in managing clients and hence, management control largely lies within the Hubs.

Governance mechanism The management control lies at the dedicated Hubs while Spokes have the onus of ensuring regulatory compliance and following the rules of the country in which they are located. In operations, it is the Hub which takes decisions on work allocation and delegates it to the Spokes. The SLAs, response and turnaround time are mandated by the respective Hubs. Also, having a network of Spokes in different time zones allows the Hub to ensure “follow-the-sun” workflow.

Suitable scenarioThis model would be best suited when Spokes are situated in locations having a specific value proposition which could be low-cost, specific skill-sets, cultural affinity with the client etc which is useful for a particular Hub only and not others. This model could also be used when the Spoke is expected to perform easily replicable low to medium skilled tasks. Also, in the domestic scenario, this model could be applied with tier- III, IV cities acting as Spokes for handling medium to low skilled replicable tasks with tier-I, II cities being the Hubs.



2. Single Spoke servicing multiple Hubs Key characteristicsThis model involves presence of a Spoke in a geographic location catering to the multiple Hubs across the globe. The Spokes would handle specific set of requests in their area of specialization from the Hubs catering to their respective customer base. The Spokes would need to have a management layer in order to seamlessly manage and cater to the requests received from the Hubs across the globe.

Governance mechanism The Spokes would have a separate management layer involved in managing the operations. They would also have the discretion to prioritize and work on the tasks received from different Hubs. The SLAs, response and turnaround times are managed and tracked by the Spokes themselves. Also, this model mandates some degree of coordination between the Spoke and Hubs and smooth flow of communication for prioritization of operations.

Suitable scenarioThis scenario typically observed when the Spoke has the necessary resources to support one critical competency. An example of this competency could be language (using São Paulo for Portuguese language skills) or capability (internal functions like risk, legal, etc.). In case of product companies, it could be the global R&D centers working on a set of specific technologies in which they specialize catering to the requests received from other locations.


Hubs with dedicated Spokes


Single Spoke servicing multiple Hubs



3. Hubs with shared SpokesKey characteristicsThis model has Hubs with multiple shared Spokes servicing them. Each Hub would have a network of Spokes while each Spoke can serve multiple Hubs. The Hub would set the quality and performance standards, manage risks, operating procedures, work allocation and ensure compliance of the Spoke specific to its area. Spokes can have internally dedicated teams to cater to its set of Hubs. This responsibility of team allocation may lie with the Spokes though it would be done in consultation with the respective Hubs.

Governance mechanism Since Spokes are reporting to multiple Hubs, there would be a thin management layer handling the overall operations of the Spokes as it requires some degree of coordination and smooth flow of communication for ease of operation. Management control of the projects lies at the Hubs while Spokes ensure job completion and regulatory compliance. In operations, it is the Hub which takes decisions on work allocation and delegates it to the Spokes though the discretion to allocate dedicated resources may lie with the Spokes, in this case.

Suitable scenarioA Spoke is usually shared when it functions as a large delivery center that supports multiple competencies along verticals and/or horizontals. This model is suited when Spokes have skill-sets which maybe a common requirement at more than one Hub, for example bilingual capability, expertise in a specific vertical (E.g. manufacturing, healthcare, BFSI, etc.) or horizontal (E.g. research, supply chain, ERP, CRM etc.).


Hubs with shared Spokes


Capgemini’s Rightshore® strategy ensures work is performed wherever it is best for the quality of service, availability of skills and costs. This means right service, in the right place at the right time. Through a globally distributed delivery network comprising of process, infrastructure and delivery centers, we obtain efficiency gains through economies of scale, increased effectiveness through improved processes and productivity enablers.

- Aruna Jayanthi CEO, Capgemini India

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Hub and Spoke adoption curve in organizations



Adoption curve of Hub and Spoke models in organizationsOrganizations would adopt these three types of Hub and Spoke models based on the expertise gained in managing processes and projects across diverse locations. They would start with phase 1 with least complexity and gradually move into phase 2 with medium complexity and would gradually reach phase 3 leveraging the benefits of Hub and Spoke operating model.

Phase 1Typically, organizations would initially start with a single Hub and multiple Spokes. It could also start with a single Spoke with multiple Hubs initially. This is the simplest of all types and hence, would be the first step for the organizations who would want to venture into multi-level sourcing. The management complexity in handling communication, work distribution, resource allocation, and ensuring compliance is minimal.

Phase 2As the organizations gain experience in operating Hub and Spokes, they could replicate with more Hubs and Spokes with similar configuration at same or other locations within the organization. Phase 2 would involve multiple Hubs with dedicated Spokes or presence of multiple shared Spokes with corresponding Hubs. The management complexity in managing operations would be slightly complex than the phase 1.

Phase 3Phase 3 would involve having a complex network of multiple shared Hubs and Spokes. This is the most complex network of all as each Hub would have shared Spokes and each Spoke would be interacting with multiple Hubs. There would be a management layer both at Hubs and Spokes in order to manage the workload, priority, delegation and tracking of SLAs. This model would be a gradual transformation for organizations which have evolved through phases 1 and 2.

Benefits of Hub & Spoke ModelThe Hub & Spoke model offers a gamut of advantages which include:

• Capabilities development: Increased size of organization results in more specialization and decentralization in decision making, which makes it necessary to add more management layers for better control of resources and inter-organizational interactions. The Hub and Spoke model is a tool that still enables considerable centralized control, especially over aspects such as skill development, resource utilization, operational efficiency and enforcement of uniform standards across delivery centers. The model allows the effective use of regional capabilities such as language skills to develop world class quality of services.

• Cost advantage: A good mix of locations for delivery centers ensures higher quality of service at lower costs. Spokes allow companies to reap benefits of cost arbitrage by leveraging multiple locations (mix of high quality and low cost) to service customers.

• Flexibility and scalability in operations: Multiple delivery centers organized as Spokes allow companies to juggle with resources as per demand across different geographies. Companies can re-staff resources in various geographies to scale-up or scale-down operations.

• Improved time-to-market: Hub & Spoke model allows delivery units to source talent from locations where the required capabilities and skills are available and thereby, save time which would otherwise have gone into training and building centers of excellence in one central location.

• Seamless operations across all Spokes for a Hub: When organized in the Hub & Spoke model companies make a conscious decision to ensure there is a consistent view of customer processes across all locations. This allows technology service providers to leverage Spokes simultaneously to service customers.

Key Benefits:

Capabilitiesdevelopment

Costadvantage

Flexibility&scalabilityinoperations

Improvedtime-to-market

Seamlessoperations

Spreadriskandincreasepresence

Lowerincrementalinvestmentsontechnology

Enforceworldwidebestpractices



Challenges of Hub & Spoke ModelWhile the benefits are substantial, there are a few challenges in this model which have been highlighted below:

• Differencesinlocalregulatoryenvironment,cultureandtimezones: With centers in various parts of the world, the company may face differences in regulatory environment, cultural preferences, time zone etc. which may pose a challenge. Due to differences in time-zones and culture, communication between centers can be impeded. It is important to understand the ‘softer’ aspects of the location and plan accordingly to ensure smooth program management and open bi-lateral communication.

• Multiplelocationstospreadriskandincreasepresence:The Hub & Spoke model helps spread operation risk across various locations. Decentralized operations allow companies to have effective business continuity plan and resiliency in case of any disaster. Also, centers in various parts of the world allow companies to have global presence and wider reach. Companies can target more clients and manage business seasonality and cycles. More importantly, Spokes bring in regional benefits such as near shore and local regulatory incentives to facilitate service delivery .

• Lowerincrementalinvestmentsontechnology:Hub & Spoke model is best leveraged by setting up a “private cloud” that can be accessed globally. This ensures there is no incremental investment in technology for every new centre that is setup.

• Enforcesworldwidebestpractices:Companies can adopt best practices from various parts of the world and extend it to other delivery centers and teams.


Benefits of the Hub & Spoke model

Key Challenges:

Differencesinlocalregulatoryenvironment,cultureandtimezones

Integrationofresourcestoprovidesingle(unified)service

Projectmanagement

Ensuringdataconfidentialityandsecurity

Addressingtaxissues

Capabilities developmentTheHubandSpokemodelenablesconsiderablecentralizedcontroleveninalarge,growingorganization,especiallyoveraspectssuchasskilldevelopment,resourceutilization,operationalefficiencyandenforcementofuniformstandardsacrossdeliverycenters.

Mitigate risks and ensure high availability (24*7*365)Scattereddeliveryhelpsspreadtherisktobusinesscontinuityacrossmultipledeliverycenters.ThisprovidesmoreflexibilitytoplanbettertheBCPandDRconsiderationstoensurehighavailability.

Harmonize global operations Borrowleadingpracticesfromacrosslocationstodevelopaconsistentbestpracticesframeworkthatcanbereplicatedacrosslocations.

Reduced time to deployment for projectsCentralizedtrainingcoordinatedbyhubsensureaconsistentemployeequality.Thesetrainingscanberolledoutinparallelacrossmultiplespokestonewhirestoensuremuchfasterdeploymentofprojects.

Averaged cost arbitrage with improved qualitySomespokelocationsmaybemoreexpensivethanothersbutprovideahigherqualityservice.Abilitytoleveragemultiplelocationstoserviceacustomerallowsthecompanytoimproveservicequalitywhileoptimizingcosts.

Factor in the regional competitive advantagesNicheskillsorlowerpricedskillsthatalignwithacompetencecanbebesttappedusingtheHub&SpokeDeliverymodel.



• Integrationofresourcepoolstoprovideseamlessservices:It is important to synchronize operations between the Hubs and Spokes and tightly integrate their resource pools to provide a seamless service offering to clients. Failure to do this may defeat the entire purpose of running this business model.

• Projectmanagement: Under the Hub & Spoke approach, since the work is distributed across Spokes, following project management practices and existence of a management team which can act as a coordinator between Hub & Spokes is extremely critical. The project status, milestones and deliverables must be tracked and updated on a regular basis. It is also important to run a pilot and transfer less critical, less complex tasks to Spokes before transferring mission-critical processes and applications to reduce the operating risk.

• Ensuringdataconfidentialityandsecurity:In a multi-location firm, protecting intellectual property rights and data is critical. The vendor needs to ensure that there is a proper mechanism for ensuring network security, data security and physical security

• Addressingtaxissues:Different countries have different tax structures; understanding and complying with them can be an arduous task for companies. Thus, firms need to formulate a plan and seek expert advice in order to optimize tax treatment, minimize uncontrolled tax risks, and ensure ongoing compliance with laws.


Key challenges in leveraging the Hub & Spoke model

Integration of resources to provide a consistent customer experience across Spokes ManagementcomplexitytorunasuccessfulHub&Spokemodelisrelativelyhigher.Thereneedstobeamaster-planattheHub,thatisadheredtoandexecutedbyProjectLeadsacrossSpokes.TheProjectLeadsareexpectedtoensuretheSpoke’sresourcesarealignedwiththeHub’sperformanceexpectations.

Managing Information Security considerations across regions is increasingly more challenging InformationSecurity(IS)lawsvaryacrossregions.TheHubwillneedtoidentifypertinentaspectsofISlawsatvariousSpokelocationsanddefinethemasStandardOperatingProcessesandProcedures(SOPP).ThereisalsoaneedtocontinuouslyupdatetheSOPPtoreflectInformationsecurityconsiderationsacrossregions.

Complex transition management processes ProjectsneedtobetransitionedtomultipleSpokes.Decisionsneedtobetakenonphasingthetransitionandthelevelofsupporteachofthespokesneedtoensuresuccessfultransition.

Time-zone considerations need to be navigated to provide adequate Senior Management supportManagementauthorityisscatteredacrosslocationswithanincreasedneedtoorchestrateoperationsfromthehub.Thesemanagementstructuresdemandhigh-availabilityonpartoftheSeniorManagementinspiteofthetime-zoneseparations.ThisproblemisevenmorepronouncedwhentheSpokehaslimitedmanagementcapabilities.

Navigating the regulatory regimes across Spoke locations tend to be complexTaxandlegislativeconsiderationstendtovaryacrossregions.Thereneedstobehighlyskilledpoolofprofessionalexperts(legal&tax)attheHubtohelpidentifyactionstoensurelegalandtaxcomplianceacrosslocations.



Industry ExampleA well-established mid-tier IT services player confirms that Hub & Spoke is a model they are actively exploring as a part of their company strategy. They are already establishing on-site Spokes in response to regulatory decisions and as risk mitigation strategies. In future, they believe the Hub & Spoke delivery model will help enable resource mobility across locations address attrition challenges and provide clients with a one-stop vendor with capabilities to deliver services across multiple locations. The company also believes that the right governance structure is essential to ensure clients are seamlessly serviced from all locations available to the company.

• On-site Spokes are being established as risk mitigation to counter regulatory pressures

• Offshore locations are being developed to address saturation of tier 1 cities

• Right governance structures are paramount to seamlessly leverage these Spoke locations.

India is at the forefront of the rapidly evolving IT and Business Process Offshoring (BPO) market and is well established as a ‘destination of choice’. Having grown manifold in size and matured in terms of service delivery capability and footprint over the past decade, the Indian BPO industry is now at an inflexion point and faces a unique opportunity to enhance its role as a full-service, value-adding partner. Growing at more than 35 percent over the past three years, BPO is the fastest growing segment of the overall offshore market, and is currently estimated at USD 26-29 billion. Factors such as access to talent, service quality, productivity, and time-to-market have played key roles in the growth.

The Hub-and-Spoke model has several features that enable large enterprises to integrate their global and local business processes. Enterprises are expanding their global footprint, stepping over country borders and across continents to embrace new opportunities emerging around the world. As they seal merger and acquisition deals, set up joint ventures, setup sales and operation centers, and create new distribution channels, the enterprise structure becomes ever more complex and business processes lose the vital element of standardization. This is when the Hub-and-Spoke model comes in handy as it serves the various business units with one common set of services, templates, software, and knowledge.

- Anshoo Gaur President and India Head, Amdocs

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Critical success factors for a successful Hub & Spoke model

The ‘Hub & Spoke’ model provides a cost attractive proposition to enterprises while allowing the vendors to deliver high end specialized services. The model also helps organizations gain business insights by being close to the customer. Thus, a good mix of locations for delivery centers ensures higher quality of service at lower costs. But companies need to undertake certain steps to ensure successful implementation of the Hub and Spoke model in order to reap its many benefits. Few of them are discussed below.

Critical success factors to enable the Hub & Spoke modelBuild a strong and consistent globally relevant brandCompanies that have been able to successfully leverage the Hub & Spoke model have been able to do so because they have built a strong brand that is globally recognized. Successful companies that leverage the Hub & Spoke delivery model typically undertake pro-active marketing initiatives to reinforce the brand perception from time-to-time.

Based on discussion with key clients, study of the successful marketing campaigns by technology companies and detailed discussions with the leadership in the technology companies, the brand attributes that would be critical to survive in the next decade are:

• Business expert and innovators

• Technology experts

• Predictable results

• Consistent customer experience across geographies

• Risk averse business practices

• Environmentally conscious

• Consistent and harmonized operating processes.

Pro-actively develop a location portfolioA geographically diverse location portfolio that leverages the location related benefits for both the customers, as well as for the service provider is the key idea behind adopting the Hub & Spoke model. Over time, it will become critical for service providers to actively explore locations where they can setup new centers to keep up with competition and be relevant in the global technology outsourcing market.

As seen in the manufacturing case study, the costs of doing business in a location rise with time making the cost arbitrage available unsustainable. This makes it imperative that a service provider pro-actively monitor the costs of operations to be relevant in the market. For instance, a leading global technology player has converted their first centre in a tier 1 Indian city to a knowledge management unit and has rapidly moved onto developing

Critical Success Factors

Brandbuilding

Diverselocationportfolio

Robusttechnologybackbone

Flexiblegovernancestructures



newer centers in lower cost tier 2 and 3 Indian cities. This company has a pro-active international location strategy that is both quality and cost focused. They provide very limited voice related services from India and prefer to use India more as a data processing Hub.

As more and more IT-BPO companies compete for large global deals, it is essential that they develop a pro-active location strategy to continue being relevant in the market.

Build a globally available robust technology backboneTechnology companies have evolved their approach to service delivery over a period of time. Outsourcing that was earlier characterized by a project moving to a single offshore location has now evolved into a project being executed simultaneously across multiple locations. There are two possible variations of this approach - a project could be supported by two or more locations at any time or a project could be split into components like – voice, data, programming etc. with each component being delivered from a different location. In order to have a consistent view on the status of execution for a project, it is important there is visibility on its execution across all geographies. For this to be possible, the systems executing the project need to be centrally available and accessible over a high-bandwidth network. A “private cloud” maintained either by the service provider or by the client could be a key enabler to distribute projects across locations. Not having a centrally available system would make it difficult to have a uniform view on the status of the projects being delivered across geographies. Also moving project delivery across locations would need fresh investments on technology. This is both cumbersome and unfeasible due to the compliance considerations involved.

Costs associated with outsourcing projects are typically in terms of people and technology. While the manpower investment tend to follow a linear path, it is not necessary technology investments be linear. Investing in a “private cloud” with a scalable architecture will result in a re-usable one-time investment and is even more desirable if the same instance can be replicated across clients. Also negotiations with the technology provider can result attractive pricing models creating a win-win scenario for both the parties, helping the outsourcing services provider avoid significant upfront investments on technology.

Flexible governance structures that enable nimble operationsIt is important that the Spokes work seamlessly as extensions of the Hub and provide means of augmenting resources at specific locations to fulfill client requirements. Companies must ensure that they do not create administrative hurdles in leveraging these locations. Some additional steps that can be taken are:

• ResourcemanagementCompanies operating in the Hub & Spoke model need to have a strong resource management function that covers all locations. The key aspects to be addressed by this function should include – manpower planning, recruitment, staffing, training and bench management. It is important to ensure that the right governance mechanisms and controls exist to guarantee the availability of resources across all locations for projects that the company bids for.

• OperationaldirectionThere needs to be clarity on the location strategy and the reasons for making the investments. This will help put in place the right governance structures. Further, there needs to be clarity on

- Investments being made in setting up of new locations by business unit within the company

- Hierarchy of locations clearly identifying main and the support centers.

• PerformancemanagementAll locations need to have a uniform understanding of performance expectations to ensure a seamless customer experience. The Hubs need to develop rating parameters to monitor the performance of Spokes periodically. These ratings can typically be conducted as a part of the performance review for the location.

These performance reviews will provide an insight into the ability of the Spoke location to handle complex processes, thus helping the Hub take decisions on work allocation across Spokes.

Flexible governance for seamless operations:

Resourcemanagement

Operationaldirection

Performancemanagement

Standardoperatingprocessesandprocedures

Salesandbusinessdevelopment

Managementtalent



• StandardoperatingprocessesandproceduresThe operating processes and procedures need to be consistently followed across all locations. This is necessary to allow the organization to leverage any of the locations available with the assurance that the standards of service delivery are maintained. Also having standard operating procedures across all locations will make it easier to leverage a common technology backbone.

• SalesandbusinessdevelopmentSales and business development efforts could be undertaken at the business level and not at the level of locations. Business development efforts undertaken at Spoke or Hub locations may result in administrative controls that prevent the location from being leveraged by the rest of the company.

• ManagementtalentBy locating high quality management talent at the Hub, companies give themselves the option of being able to setup multiple low cost centers around the Hub, which may otherwise find it difficult to attract managerial skill-sets. As the model evolves, moving some part of the management to the Spokes can also be evaluated.

• Standard operating processes and procedures

• Private cloud will help tap independent centers simultaneously

• Regional Hubs that manage, control and monitor Spoke performances is the way forward for rural BPOs

• Uniform performance management and rating systems need to exist across all centers

• Governance structures must enable the program office to leverage simultaneously these.

Industry ExampleAn emerging rural BPO believes that Hub & Spoke model is the way forward for them to effectively manage their business. They are currently organized by regions – North, South, East and West. Over time they believe these regional headquarters will evolve into Hub setups that control and leverage Spokes around them. The Spokes are typically rural towns that will be tapped further through pro-active investment in high-quality training.

Industry ExampleA leading non-urban BPO firm in North India undertook initiatives to create opportunities within tier 3 and 4 cities so that potential employees did not have to leave their home towns in order to work. The three main parameters, on which their business strategy evolved, were – to leverage partners, to operate through distributed micro centers and to offer strong domain capability. The BPO’s Hub & Spoke model entailed small delivery centers that were geographically dispersed and individually managed. The BPO carried out work management at the Hub while more focused delivery was carried out in Spokes spread across the region. The Hub managed the technology, training, people management and infrastructure for the Spokes. Thus, through innovative people-management in their Hub and by breaking down complex processes into smaller repetitive ones in the Spokes, the non-urban BPO delivered world class quality to its clients.

The next ten years is going to be the decade of non-urban (small towns) BPO and the ‘Distributed Delivery Model’. The demand gap for talent in the metros and the availability of talent in the small towns can be bridged by work moving to small towns. Delivery centers in small towns for executing IT-BPO work provides job opportunities to locals, prevents migration to metros at the same time providing a cost advantage to the outsourcer.

- Mythily Ramesh Co-Founder & CEO, NextWealth Entrepreneurs

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The non-urban BPOs will spark off the digital revolution in the far interiors and connect people with the developed world via the information highway, financially & economically and in more ways than they can imagine. The non-urban BPO lifecycle will be short-lived however the resulting distribution boom will be far more impacting than has been witnessed thus far.

- Ajay Chaturvedi Founder Chairman, HarVa

The market has driven the industry from on-shoring to near-shoring to off-shoring and now rural shoring is touted to be the new dimension to remote business processing which brings in twin advantages in terms of job opportunities to the rural youth and cost efficiencies to the corporate world.

- Murali Vullaganti Founder and CEO, RuralShores Business Services

BPOs that combine rural ethos with a strong business ethic are the next discontinuity and frontier of outsourcing

- Dhiraj Dolani & Venki Iyer Mentor and Co-Founder, B2R Technologies

It is a matter of time before rural BPOs are ready to stake their claim on low end business processes

- Sudhir Gupta COO, Drishtee

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India as a global Hub

Advantage for India India holds a strong position in the global sourcing market owing to its competitive cost advantage and availability of skilled talent pool. Backed by technological boom and regulatory reforms, business enterprises now see great investment potential in the Indian market and India tops the list of most attractive offshore destinations. A number of global MNCs and Fortune 500 companies are now either outsourcing their processes to India or are setting-up their own captives in the country1.

Source: Everest, NASSCOM Strategic Review 2011

Global Sourcing Market

Source: AT Kearney 2011

Attractive locations Index

Source: Everest, NASSCOM Strategic Review 2011

New delivery centers established




Increasing focus on qualityIndian companies are undertaking initiatives to build a high degree of quality orientation by aligning themselves to international quality standards. Companies are devising strategies to shift 40 percent of software services to standardized modules to ensure standardization and increase efficiency. More and more emphasis is being given on data security and privacy. As per NASSCOM analysis, over 50 percent2 of organizations have either deployed or are planning to deploy solutions such as encryption tools, data loss prevention, security incident and event monitoring, mobile data protection, and legal and compliance management. More and more companies are now undertaking quality certifications (such as ISO 9001, SEICMM, CMMi and Six Sigma), security certifications (such as BS 7799, ISO 27001, ISO 20000, HIPAA, etc.) and performance certifications [such as PCMM (People), eSCM (eSourcing Capability Model), COPC (Customer Operations Performance Centre), etc.].1

Over the years of its existence, the Indian software industry has transformed from delivering stand-alone hardware, software and services, to moving up the value chain and providing a complete suite of end-to-end integrated offerings coupled with high-end services like consulting in large transformational deals. IT companies are now also looking at emerging business themes like analytics, mobility, and cloud computing in order to retain their competitive edge.

Source: NASSCOM Strategic Review 2011

Certified Indian IT-BPO organizations


Quality/Certifications

Security Certifications

Performance Certifications

• ISO9001

• SEICMM

• CMMi

• SixSigma

• COBIT

• EFQM(EuropeanFoundationorQualityManagement

• BS7799

• ISO27001

• ISO20000

• HIPAA

• Dataprotectionact

• PCI(PaymentCardIndustryDataSecurity)

• PCMM(People)

• eSCM(eSourcingCapabilityModel)

• COPC(CustomerOperationsPerformanceCenter)


Maturity curve for Indian Technology service providers



Emergence of Tier-II, III, IV cities to reduce the costs further A number of IT-BPO companies in India are opening up centers in Tier-II, III, IV cities to reduce their operational expenditures. These smaller cities offer advantages such as availability of talent at a lower cost, low attrition rate, affordable real-estate, local government support, and a better quality of life. This is further giving rise to a domestic Hub and Spoke model wherein Tier - I, II locations could act as Hubs while Spokes could be a network of Tier - II, III and IV. In a related trend, the concept of rural BPOs is also gaining ground. Though the model is in initial stages, few Indian companies have started to move in this direction.

Government initiativesIndia has been an attractive destination for technology service providers as well as multi-nationals to set up and operate their captive units, R&D and offshore delivery centers. Tax breaks offered to the IT-BPO industry under the STPI, EOU and SEZ schemes have acted as a catalyst in its growth. Although, income-tax benefits under the STPI scheme expired in 20113, the government is taking other initiatives to promote IT-BPO sector especially in Tier-II, III cities through creation of SEZs and financial incentives. The government is also taking measures to overhaul overall fiscal policies through introduction of Goods and Services Tax (GST), Direct Tax Code (DTC), revamp of company laws, and introduction of the IFRS standards.

Source: NASSCOM Strategic Review, 2011

Tier II, III cities in India

Developing infrastructureIndia is strengthening its focus on infrastructure development to support the growing business requirements. While the current state of India’s infrastructure is still sub-optimal, the government is taking measure to improve it. In the Union Budget 2011-12 for example, the development of world class infrastructure was the key focal area, with budgeted spending in infrastructure estimated at INR 2,14,000 Crores, a hike of over 23 percent from 2010-11, providing 48.5 percent of the plan allocation. The budget also proposed to provide the much needed foreign investment in Indian infrastructure by raising their venturing limit to USD 40 billion from USD 20 billion earlier.4

India as ‘Hub’ for global services deliveryToday, Indian IT-BPO majors operate high on the outsourcing maturity curve and are well positioned to execute contracts of global MNCs end-to-end. With companies scoring high on Capability Maturity Model Integration (CMMI), India is now being positioned as a viable IT-BPO Hub extending its capabilities to other service centers and onsite teams globally. Leading MNCs of the world are expected to increasingly consider India as a Hub in their global delivery strategy and develop Spokes in other countries such as the Philippines, China, Uruguay and Mexico. More importantly, clients will take their best practices in India to their shared service centers in other parts of the world.

Given its established dominance in the global outsourcing marketplace, India can emerge as a global Hub for some of its better evolved competencies – both horizontal and vertical. Presently, while software players have invested in technology centers across the globe, most operate as networked delivery models. Pro-actively planning and investing in new locations as part of company’s strategy and taking a Hub & Spoke view to manage disparate global locations would facilitate the emergence of a new model for managing operations effectively, and with India at the center of the development, this could very well drive the next phase of growth for the domestic software industry.

3. Union Budget 2011-12




Industry ExampleA leading global BPO that has evolved into one of the more prominent players from a captive has increasingly begun to expand their global footprint to better meet customer requirements. Their location footprint is a reflection of the skill-sets available in the region to meet customer requirements. Management at the new centers is hired locally. The company has also invested in a global service delivery framework to help create a predictable and sustainable customer experience. However, they have not thought of organizing themselves in a Hub & Spoke formation just yet, which has resulted in a failure to tap the rural BPO market through third party subcontractors. The foundation of the Hub and Spoke delivery model is already in place and by proactively developing it, the company will be able to leverage the benefits of a wider resource pool and market place in the future.

• Location footprint is a function of skill-sets available regionally

• Management at new locations are hired locally

• The Global service delivery framework is enforced at all locations

• Extending existing location portfolio to leverage the benefits of Hub and Spoke model.

Through the decades, we have seen a gradual shift in operating models from onshore to offsite to near shore. Going forward, we expect the client to become location agnostic and emerging destinations will spring up as extensions to the already existing network of delivery centers. Challenging economic conditions are forcing service vendors to push the envelope in terms of adapting to new delivery models that will prove to be low in cost and high on quality. As we see, the Hub & Spoke model should evolve as the service delivery model of choice for leading global vendors. And Indian vendors should take steps to lead that change.

- Sandeep Soni President, Hero BPO

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Way forward

India has established itself as the world’s preferred outsourcing destination and has built strong expertise in technology operations, business processes and management capabilities over time1. Moving forward, companies in India can be positioned as managers of global Hubs, extending their existing dominance and proficiency in technology outsourcing. However, apart from steps taken by IT-BPO companies, a holistic transformation can happen only with support of the other players in the ecosystem – which in this case constitutes the Indian government and industry bodies.

Imperatives for key stakeholdersCompanies• Investinbuildingabrand

A strong brand is critical for clients to accept service delivery that is based on Hub & Spoke model. Without a strong-brand to back them, the Indian technology outsourcing vendors will find it increasingly challenging to prove and convince the client of their capabilities to operate in the Hub & Spoke model. There is a need to move from being a provider of low cost services to being perceived as a business partner that can provide globally consistent services from multiple delivery locations around the world.

• Pro-activelydevelopalocationstrategybasedontheHub&SpokemodelThe Hub & Spoke model of operations requires the service provider to clearly articulate their current operating structure and drivers to invest in multiple locations. If this is not clear, this will result in a number of delivery centers that are under-utilized due to misalignment with the rest of the organization. Service provider should clearly identify the Hubs and Spokes that are likely to emerge over the next two to three year horizon and locations that may need to be phased out.

• Adapt,standardizeandharmonizeoperationsacrossalllocationsGlobally, consistent operations are important to operate effectively in the Hub & Spoke model. The operating procedures and SLAs must reflect the expectations customer has from the brand projected by the company. Standard operating procedures need to be defined and implemented across all locations.

• ActivelymanageperformanceacrossalllocationsDevelop a performance rating system that helps quantify the delivery capabilities available at a location. Also the performance rating system for employees must be the same across all locations. Performance rating will help understand the maturity and hence capability to deliver processes from a delivery centre and will help channel the right process to them while operating in the Hub & Spoke model.

Way forward for organizations:

Investinbuildingabrand

Pro-activelydevelopalocationstrategybasedontheHub&Spokemodel

Adapt,standardizeandharmonizeoperationsacrossalllocations

Activelymanageperformanceacrossalllocations

Investintechnologythatcanbeleveragedacrossalllocations

Ensurecompliancewithglobalinformationsecuritystandards




• InvestintechnologythatcanbeleveragedacrossalllocationsHub & Spoke models are best utilized when a process can be broken down into components and is delivered simultaneously from multiple delivery centers. For this to be possible there needs to be unified view on the execution status of the process. To enable this, service providers need to invest in high-quality technology that can be accessed remotely by multiple locations through a “private cloud”.

• EnsurecompliancewithglobalinformationsecuritystandardsWhen delivering a process across multiple locations, it is important that the service provider is compliant with the prevalent information security laws. For example, a country may have restrictions about processing data generated within its borders at another country location, which may propel the need to establish a delivery centre locally. Also pro-active audits on all delivery locations and publishing the audit reports and actions taken will help build confidence in customers.

Government• Favorabledomesticregulations

The current domestic regulatory environment remains challenging in terms taxation, transfer pricing and IP Protection, putting Indian companies at a disadvantage when pitching for global deals. There is an urgent need to rationalize current taxation structures and transfer pricing laws. Since the original tax exemption (Section 10A/10B) for the industry has now expired,5 given the state of global economy and the Indian IT Industry, the government should frame policies selectively providing tax relief to companies within the sector such as tax rebates on new, innovation led outsourcing models, which could provide the next spurt of growth to the industry.

• DevelopmentofsmallercitiesThe government can give a boost to the industry by encouraging the establishment of IT units in tier-II, III cities and developing satellite townships around these centers, thus, creating a self sustaining ecosystem. Focus should be on creation of an employable workforce, state-of-the-art infrastructure and fully equipped and incentivized technology parks to attract IT firms.

• DevelopmentofinfrastructureA robust infrastructure in terms of transport and communication needs to be in place in order to effectively leverage the multi country Hub and Spoke model. Especially when it comes to broadband, India is notably lagging its peers in Asia and Europe. A well developed physical and social infrastructure will help bridge gaps between geographically dispersed cities.

• ImprovinggeopoliticalenvironmentIf India has to take over the mantle of a global Hub, it is essential that the government ensures and projects India as a safe and attractive destination for investment. Any kind of political and legal uncertainty with doing business in India will discourage clients to move further up the outsourcing value chain and outsource end to end engagements.

Industry Bodies• Promoting“BrandIndia”

Industry bodies and associations can play a significant role in encouraging customers to outsource end to end operations in the Hub and Spoke fashion to India. They would need to make concerted marketing and branding efforts to showcase the expertise of Indian companies. This will significantly enhance the value proposition and brand perception of Indian software providers. In addition, they could highlight prevalent success stories and also help establish connects between customers, governments and Indian companies.

• PromoteTier-II,III,IVCitiesSince smaller cities could emerge as viable Spokes in the India Hub and Spoke story, mobilizing state government support, encouraging academia in them to train employable workforce and marketing their value proposition to clients and software providers will help put them on the global map.

• NurturingmanagerialtalentGiven that strong management is the key to functioning effectively as a Hub, seeking, managing and developing talent through workshops and training sessions would help nurture management talent present in India’s software industry. Key initiatives should be in the areas of coaching and mentoring middle management and enhancing their abilities to handle global operations.

Way forward for government:

Favorabledomesticregulations

Developmentofsmallercities

Developmentofinfrastructure

Improvinggeopoliticalenvironment

Way forward for industry bodies

Promoting“BrandIndia”

PromoteTier-II,III,IVCities

Nurturingmanagerialtalent



• Invested in a “private cloud” for the Technology backbone

• State of the art technology

• Unified Performance Management across Hubs & Spokes

• Cultural affinity through global mobility for citizens.

Industry ExampleA leading Indian BPO has actively embraced the Hub & Spoke model by making the right process and technology investments to enable the same. They have invested in a “private cloud” for their technology backbone that runs on a leading technology platform. Additionally, they have unified the Performance Management process across all their centers. Thus employees at all their Spokes have a unified view of the process and common goals to ensure customer satisfaction. With improved network connectivity in India, this model has enabled them to add new centers within India in a very short time. They have also addressed aspects around cultural affinity by providing citizens in United States of America the right education and training for the job and giving them an opportunity to work in India.

At least over the next few years, India will remain a key destination and center of gravity for ITO/BPO work due to scale, cost and expertise advantage. Having said that, the Hub and Spoke model will become increasingly dynamic and adaptive to client requirements. So depending on what process, cost and business transformation goal a client is looking for across which geographies, different regions and their destinations will take center stage but we will always use our global talent pool and delivery footprint to provide the best possible solution. As we continue to build capability across global locations, our ability to truly leverage the benefits of such a flexible model improves rapidly. And finally it does mean that it is very important for the Government , and industry to continue to invest in talent , capabilities and ease of doing business and reduce cost of delivery , else India being > 50 percent of total share of the market is put at risk!

- N.V. ’Tiger’ Tyagarajan President and CEO, Genpact

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NASSCOM is the premier trade body of the IT-BPO industries in India. It is a global trade body with more than 1200 members, which include both Indian and multinational companies that have a presence in India. NASSCOM’s member companies are in the business of IT services, BPO, Engineering design, products, internet and e-commerce and animation and gaming. NASSCOM’s membership base constitutes over 95% of the industry revenues in India and employs over 2.5 million professionals.

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BCP BusinessContinuityPlan

BPO BusinessProcessOutsourcing

BS BritishStandards

BSDQ BPOServiceDeliveryQualitySystem

BTMQ BPOTalentManagementQualitySystem

CEO ChiefExecutiveOfficer

CMMi CapabilityMaturityModelIntegration

COBIT ControlObjectivesforITandrelatedtechnology

CoE CentreofExcellence

COPC CustomerOperationsPerformanceCentre

CSF CriticalSuccessFactors

DR DisasterRecovery

EFQM EuropeanFoundationforQualityManagement

eSCM eSourcingCapabilityModel

GST GoodsandServicesTax

HIPAA HealthInsurancePortabilityandAccountabilityAct

HR HumanResource

IFRS InternationalFinancialReportingStandards

IP IntellectualProperty

IS InformationSecurity

ISO InternationalOrganizationforStandardization

IT-BPO InformationTechnology-BusinessProcessOutsourcing

MNCs Multi-nationalCompanies

NASSCOM NationalAssociationofSoftwareandServicesCompanies

PCI PaymentCardIndustry

PCMM(People) PeopleCapabilityMaturityModel(People)

R&D ResearchandDevelopment

SEICMM SoftwareEngineeringInstitute'sConfigurationManagementModel

SEZ SpecialEconomicZone

SLA ServiceLevelAgreement

SOP StandardOperatingProcedure

STP SoftwareTechnologyPark

Glossary



BS7799 AcodeofpracticeforinformationassuranceoriginallydevelopedintheUKin1995.ItlaterformedbasisoftheISO17799standards

BusinessContinuityPlan Identifiesorganization’sexposuretointernalandexternalthreatsandsynthesizeshardandsoftassetstoprovideeffectivepreventionandrecoveryfortheorganization,whilstmaintainingcompetitiveadvantageandvaluesystemintegrity

Captive Whollyownedsubsidiary

CentreofExcellence CentreofExcellencereferstoadistinctivecapabilitycentrethathousesagroupofspecialists,toolsandtechnologiesthatcreatecompetenciestomanageanyandallengagementspertainingtoaparticularservicelinetherebyenablingnon-lineargrowth

CloudComputing Thedeliveryofcomputingasaserviceratherthanaproduct,wherebysharedresources,software,andinformationareprovidedtocomputersandotherdevicesasautility(liketheelectricitygrid)overanetwork(typicallytheInternet)

CMMi Aprocessimprovementtoolforevaluatingtheefficiencyofacompanyintechnologyproductsdeliverytoitscustomers.CapabilityMaturityModelIntegrationisusuallyassociatedwithsoftwaredevelopment,andseekstointegratethevariousstepsinthedevelopmentprocess

COBIT ControlObjectivesforInformationandRelatedTechnologyisanITgovernancecontrolframeworkthathelpsorganisationsmeetbusinesschallengesintheareasofregulatorycompliance,riskmanagementandaligningITstrategywithorganisationalgoals

COPC(CustomerOperationsPerformanceCentre)

Acustomercontactcentreandvendormanagementoperationscertificationtodefinetheindustrystandardforcallcentreexcellence.Ithelpscallcentersslashcosts,improveefficiency,boostclientsatisfactionandbuildthebottomline

DeliveryCentre DeliveryCentreisanITvendor’smulti-client,multi-sitecentretoprovidesupportservicessuchasapplicationdevelopmentandmaintenancetoitsglobalclients

DirectTaxCode ThenewtaxcodewhichissaidtoreplacetheexistingIndianIncomeTaxAct,1961

eSCM(eSourcingCapabilityModel)

AframeworkdevelopedtoimprovetherelationshipbetweenITServicesprovidersandtheircustomers.VariousservicesmayincludeIToutsourcing,IThosting,applicationdevelopmentandmaintenanceoutsourcing,networkingservices,businessprocessoutsourcing

GoodsandServicesTax TheGoodsandServicesTax(GST)isavalueaddedtaxtobeimplementedinIndiawhichwillreplaceallindirecttaxesleviedongoodsandservicesbytheIndianCentralandStategovernments

HIPAA TheUSOfficeforCivilRightsenforcestheHealthInsurancePortabilityandAccountabilityAct(HIPPA)PrivacyRule,whichprotectstheprivacyofindividuallyidentifiablehealthinformation;theHIPAASecurityRule,whichsetsnationalstandardsforthesecurityofelectronicprotectedhealthinformation;andtheconfidentialityprovisionsofthePatientSafetyRule,whichprotectidentifiableinformationbeingusedtoanalyzepatientsafetyeventsandimprovepatientsafety.

IFRSstandards InternationalFinancialReportingStandardsareprinciples-basedstandards,interpretationsandtheframework(1989)adoptedbytheInternationalAccountingStandardsBoard(IASB).

ISO20000 ISO20000isaninternationalstandardforITservicemanagementdevelopedin2005.ItwasbasedonandtosupersedetheBS15000standard

ISO27001 ISO27001isanInformationSecurityManagementSystemstandardpublishedbyISOandtheInternationalElectrotechnicalCommission(IEC)toformallyspecifyamanagementsystemthatisintendedtobringinformationsecurityunderexplicitmanagementcontrol

ISO9001 ISO9001specifiesrequirementsforaqualitymanagementsystemwhereanorganizationaimstoenhancecustomersatisfactionthrougheffectiveapplicationofthesystem

Nearshoring Modelthroughwhichserviceproviderdeliversservicesfromacentreinthenearbyvicinityofclient

Offshoring Offshoringisthepracticeofhiringanexternalorganizationtoperformsomebusinessfunctionsinacountryotherthantheonewheretheproductsorservicesareactuallydevelopedormanufactured

Definitions



OutsourcingAbusinessmodelunderwhichclientcontractsoutitsbusinessfunctionoraprocesstoanoutsourcingserviceprovideroritsownunit(captive)insomedistantlocationinsteadofexecutingitin-house

PCMMPCMMisamaturityframeworkthatfocusesoncontinuouslyimprovingthemanagementanddevelopmentofthehumanassetsofanorganization.Itdescribesanevolutionaryimprovementpathfromadhoc,inconsistentlyperformedpractices,toamature,disciplined,andcontinuouslyimprovingdevelopmentoftheknowledge,skills,andmotivationoftheworkforce

PlatformBPOsPlatform-basedBPOisaBPOservicewhereintheserviceproviderembedstheunderlyingtechnologyasanintegralpartoftheservicebeingdelivered

PrivateCloud Proprietarycomputingarchitecturethatprovideshostedservicestoalimitednumberofpeoplebehindafirewall

RuralBPOs BPOsthatareestablishedinTierIII/IVcities.

ServiceLevelAgreement

ServiceLevelAgreement(SLA)isacontractbetweenanetworkserviceproviderandacustomerthatspecifies,usuallyinmeasurableterms,whatservicesthenetworkserviceproviderwillfurnish.ServiceLevelAgreement(SLA)isacontractbetweenanetworkserviceproviderandacustomerthatspecifies,usuallyinmeasurableterms,whatservicesthenetworkserviceproviderwillfurnish.

SixSigmaAbusinessmanagementstrategythatseekstoimprovethequalityofprocessoutputsbyidentifyingandremovingthecausesofdefects(errors)andminimizingvariabilityinmanufacturingandbusinessprocesses

SoftwareandTechnologyParksofIndia

STPIisastatutorybodyforprovidingSingleWindowClearancetosoftwareexporters.Theschemeprovidesvariousbenefitstotheregisteredunitsincluding100percentforeignequity,taxincentives,dutyfreeimport,dutyfreeindigenousprocurement,CSTreimbursement,DTAentitlement,deemedexportetc.

SpecialEconomicZonesSEZsaredesignatedareasincountrieswhichhavemoreliberallawsandeconomicregulationsincomparisontorestofthecountrytopromotetradeandforeigndirectinvestments.Companiesoperatingintheseareasreceivetaxincentivesandpaylowertariffs

Sub-contractingSub-contractingreferstotheconceptwherealargeITServicesvendorcontractsalocalsmalldeliveryprovidertoserviceitsclients.Thisenablesthesub-contractingvendortoimproveitsmarginsorpriceitsofferingsaggressivelytotapthemarket.

TransferPricingReferstothesetting,analysis,documentation,andadjustmentofchargesmadebetweenrelatedpartiesforgoods,servicesandotherintangibleproperty



This document has been released on the occasion of the 20th NASSCOM India Leadership Forum 2012.

The KPMG team which contributed towards the content presented in the document comprises of Arun Chillara, Saurabh Jha, Shailesh Narwaiye, Sidharth Tewari, Nikhil Kumar, Aljo Joseph, Smita Bhattacharya, Aditya Shangloo, Shashank Shetty, Ajay Nainy and Eric Samuel.

A special note of thanks to Jiten Ganatra, Remedios Dsilva and Priyanka Agarwal

Acknowledgement


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Printed in India.

KPMG in India Contacts

Kumar Parakala Chief Operating Officer Advisory T: +91 80 3065 4600 E: [email protected]

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Arun ChillaraAssociate DirectorIT - BPO T: +91 22 3090 2392 E: [email protected]

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Sangeeta GuptaSr-Vice President E: [email protected]

Hub and Spoke

operating model A new business

paradigm for the Indian IT-BPO Industry

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Documents

Hub and Spoke Model