Stephanie Moore Vice President Forrester Research

TeleconferenceState Of The Market And Latest Developments In Global Outsourcing: What You Need To KnowStephanie Moore

Vice President

Forrester Research

May 9, 2006. Call in at 10:55 a.m. Eastern Time

2Entire contents © 2006 Forrester Research, Inc. All rights reserved.

Agenda

• General offshoring trends 2006: market dynamics

• Trends: India

• Services trends: What are companies offshoring?

• Beyond tier one: cool companies in India

• Other destinations

• New approaches to global sourcing

• Recommendations: doing outsourcing right


Agenda


• Trends: India







Trends 2006: Where are we today?

• North American and Western European companies are more eager than ever to go offshore.

» CEO/board of directors mandate

• Existing offshore efforts are scaling rapidly

» From an FTE perspective

» From a service offering perspective


Labor costs dominate IT budgets; offshoring is a way to reduce these costs

Base: 368 IT executives at North American enterprises(percentages may not total 100 because of rounding)

Source: February 3, 2006, Data Overview “North America's 2006 Enterprise IT Spending Outlook”


Trends 2006: Where are we today?

• Many companies are still only looking for pure labor arbitrage

» How low will the vendors go?

• The smart ones are looking for value

» How can I improve my processes?

» How can I develop new revenue opportunities?

• Many buyers want best-of-breed rather than a single provider

• Most buyers use between two and five offshore providers to manage demand and pricing


Buyers want best-of-breed services

Base: 354 decision-makers who influence outsourcing decisions at US companies

Source: February 3, 2006, Data Overview “North America's 2006 Enterprise IT Spending Outlook”


Some companies are doing offshore outsourcing without sufficient preparation

• Internal preparation is the key to success

• Companies that don’t optimize processes for remote sourcing will not save money and may actually spend more.

• Focus needs to be on governance, SDLC alteration and standardization, customer management processes (requirements and specs), training, and QA

• New roles and responsibilities


What are the offshore challenges?

22%

22%

30%

31%

43%

10%

10%

18%

20%

10%

0% 20% 40% 60%

Cultural differences

Vendors lack business knowledge

Lack of performance metrics

No process for specifying the work

Lack of project management skills

Minor challenge Major challenge

The biggest challenges are internal.

Base: 103 North American IT and business executivesSource: Forrester Research


Agenda


• Trends: India







India trends

• Indian vendors challenged by growth and demand

» Attrition, recruiting, and retention

» The need to scale

» Customer expectations

» Accommodating customer processes

• Global vendors like Accenture and IBM are growing rapidly too.

» For example, in 2001, Accenture had 150 employees in India. Today it has 16,500.

» IBM continues to expand in India.


Example of rapid growth: Infosys

Source: Infosys

17,000

27,500

49,000

0

100

200

300

400

500

600

2003 2004 2005

Clients

0

10,000

20,000

30,000

40,000

50,000

60,000

Employees


Example of rapid growth: Infosys

CAGR: 50 %

Dec ‘00 Dec ‘05

$2B

$250M

Source: Infosys


Trends 2006• M&A in vendor space

» Indians acquire US firms: Cognizant, Kanbay, Satyam, Wipro. A western approach and vertical skills are critical to global success.

» US firms acquire Indians?

• Customer satisfaction reduced by 50% between 2003 and 2005.

» Attrition

» Increase in hard costs

» Decrease in vendor flexibility

» Understanding of total cost of outsourcing


India trends 2006

• Customers look for Indian alternatives but are often disappointed by reality.

• Captive as clients

» Underperforming captive organizations seek support.

• Wage inflation

• Prices are inflating, but not as rapidly as wages.

» Rates increase by about 10%.

» Bands of pricing versus one blended rate

» Lower quality staff in return for stable/lower rates


India trends 2006: What are clients talking about?

• Contract pricing

» Can I get the vendor to make creative rate concessions (different locations, skill sets, volume)?

» Inflation clauses?

• Attrition

» SLAs, HR practice audits

• Vertical skills as a differentiator

• Methodologies: Lighter weight — more agile


Agenda


• Trends: India







Many services are offered: The Indians have moved up the value chain

Applicationservices

Businessprocess

outsourcing

Infrastructureservices

Consulting

Program Management

Contact centers, collection services, KPO (research/analytics), mortgage processing, legal services, tax preparation, claims processing

Architecture, IT strategy, process, quality, strategic sourcing

Testing, app dev, maintenance, prod support

Monitoring, server mgmt., DBA, DT mgmt


What types of work are companies offshoring?

Base: 133 IT decision-makers

Source: Business Technographics® August 2005 United States Enterprise Governance Survey


Where are companies going to increase their offshore spend?

Base: 133 IT decision-makers

Source: Business Technographics® August 2005 United States Enterprise Governance Survey


Testing and infrastructure services are HOT!

• Testing in three flavors

1. Staff augmentation

2. Test process optimization

3. Testing centers of excellence

• Infrastructure services

» Monitoring

» Desktop management

» Server management

» Consulting: server consolidation, etc.


Forrester Wave™: Global Delivery Infrastructure Management, Q4 ’05

Indians perform wellagainst global infrastructure experts.

Example: Wipro and data center outsourcing


Value

Knowledge Services:• Research• Analytics• Legal• Risk management• Underwriting• Medical• Pharmaceutical

research

KPO

Contact Center Services:TelemarketingReservationsCollections

Low-value services:Data entry

Medical transcriptionTransaction processing

Higher-valuecorporate services:

HRFinance and accounting

Procurement

BPO services


Agenda


• Trends: India







Beyond the tier one Indian vendors

• Covansys

• Kanbay

• ThoughtWorks

• Syntel

• Perot Systems

• ITC

• Symphony Services

• Ness Technologies

• Keane

• i-flex solutions

• Patni Computer Systems

• Sapient

• Hexaware Technologies

• NIIT

• L&T Infotech

• Persistent Systems


Agenda


• Trends: India







Favorite offshore country is still India

Base: 100+ global CIOs and business leaders surveyed at PatniConnect 2006

Source: Patni Computer Systems and Forrester Research


China

• China is an attractive outsourcing destination for companies trying to enter the Chinese market or who already have operations there.

• There is a large internal demand for IT service professionals.

» Chinese IT service provider revenue in 2004 was $27 billion, but exports only totaled $633 million.*

• Indian vendors in China are supporting Western clients’ Chinese operations, South Korean clients, or Japanese clients.

• IP laws and language issues are still a problem.

• English-speaking Chinese programmers are at least as expensive as Indian programmers.

*Source: Services Outsourcing World Magazine, February 2006


Other geographies have merit but can’t compete with India for scale or maturity

• Philippines

» Contact centers’ services dwarf software services ($750 million versus $186 million)

• Central and Eastern Europe (Czech Republic, Hungary, Russia, and Poland)

• Mexico

• Brazil

• The Caribbean

• South Africa

• Vietnam

• Malaysia

• Rural sourcing!


Agenda


• Trends: India







Different approaches to offshoring

• More agile processes

» Increase communication

» Expose problems earlier

• Connecting the end user to the vendor

» In the right situation (the right vendor, strong users, and good processes), more effective and flexible approach for user

» Reduces costs

» Increases end user satisfaction

» But IT can lose control if governance structure is not sound.


Agile and traditional project timelines

Source: September 20, 2004, Best Practices “Offshore Outsourcing And Agile Development”


Connecting the internal user to the vendor can eliminate (or exacerbate) communication difficulties


Captive strategies are popular but ultimately not practical . . .

• Much of what you use an outsourcer for is absent from this approach.

» Flexible staffing

» Specialist skills

» Process maturity

• It is expensive and difficult to set up a professional services organization in a foreign land.

» Setup costs

» Recruitment and retention costs

» Ongoing and large training investment

» Substantial investment in process optimization — just because you employ staff in China or India doesn’t mean they use quality processes

» Engagement management skills


Captive strategies are popular but ultimately not practical unless . . .

• Client has a presence in the foreign geography.

• Client wants a presence in foreign geography.

• Legal or regulatory reasons compel the client to employ resources that are processing certain transactions, etc.

• Client is in the IT services or high-tech business.

• Client wants to be in the IT services business


Recommendations

• Invest in internal preparation.

• Understand the market before you enter it.

• Manage your expectations.

• Select vendors that can accommodate your needs and maturity level.


Stephanie Moore

+1 203/221 2859

[email protected]

www.forrester.com

Thank you

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Stephanie Moore Vice President Forrester Research