Webinar Deck: GICs vs. Service Providers: Who is Winning?
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Transcript of Webinar Deck: GICs vs. Service Providers: Who is Winning?
GICs vs. Service Providers: Who is Winning? December 12, 2012
Live Tweeting #GIC
Proprietary & Confidential. © 2012, Everest Global, Inc. 2
Introductions
H. Karthik Vice President [email protected]
Shyan Mukerjee Practice Director [email protected]
Proprietary & Confidential. © 2012, Everest Global, Inc. 3
Terminology | Global In-house Center (GIC) replacing “captives”
Context
Historically, the term “captives” has referred to service delivery operations in lower cost geographies, which are owned and operated by the same company receiving the services (i.e., not third-party outsourcing)
Although the term has become widely used, it has a perceived negative tone and is not self-explanatory, causing confusion for those new to the global services space
Furthermore, many organizations, for which “captives” is intended to describe, do not use the term themselves
What has changed Everest Group has adopted “Global In-house
Center” or “GIC” as the preferred term to replace “captives”
This will appear in all of our reports and content beginning in July 2012
Growing industry-wide shift Both NASSCOM (India) and BPAP (Philippines) are championing the change in terminology
Proprietary & Confidential. © 2012, Everest Global, Inc. 4
Discussion points for today
Issues to consider in sourcing model strategy
Market context on sourcing models
Common myths related to sourcing models
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The analysis and insights provided in this webinar are most relevant for large enterprises with multi-geographic businesses
Company size (Revenue)
Geographic coverage
Small (< US$5 billion)
Medium (US$5-10 billion)
Large (> US$10 billion)
Limited to one geography
Some geographies (2-3)
Multiple geographies (>3)
Most applicable Relevant Partially relevant
Relevance of analysis
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Leading global enterprises are leveraging both GICs and service provider models
38%
6%
71%
83%
50%
17%
62%
94%
29%
17%
50%
83%
Sourcing mix for leading enterprises 1
2012, Percentage
Company 1
Company 5
Company 2
Company 4
Company 6
Company 3
18
7
8
5
5
8
#Offshore GIC centers #Leading service providers
4
8
9
6
7
5
Service provider GIC
1 The companies indicated here have offshore scale greater than 5,000 FTEs and revenue greater than US$10 billion
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Enterprises face multiple sourcing model issues as they seek to enhance value from global services
How should I allocate work between sourcing
models?
Are there differences between the sourcing
models in terms of their employee value proposition?
How do I diversify my sourcing model
concentration risk?
What are the key considerations in sourcing
model design?
How should I compare costs between GICs and
service providers?
Can I outsource “complex” processes?
EXAMPLES
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One way to think about sourcing models is as an expanded set of options for organization design
What sourcing model configuration best provides the organization which will most effectively meet the objectives?
Degree of centralization/decentralization
Ability to drive change Performance
Flexibility
Competencies
Incentives
Skills & expertise Culture
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What is the biggest challenge faced by GICs?
19%
12%
44%
11%
11%
Cost competitiveness
Sustaining growth
Developing value beyond arbitrage
Talent development and retention
Increasing influence with parents
Source: Live polling conducted during the “GICs vs. Service Providers: Who is Winning?” webinar on December 12, 2012
Proprietary & Confidential. © 2012, Everest Global, Inc. 10
32%
9%
12%
12%
23%
Enhancing credibility to deliver domain-intensive work
Sustaining growth
Developing higher intimacy with enterprises
Talent development and retention
Margin pressure
What is the biggest challenge faced by service providers?
Source: Live polling conducted during the “GICs vs. Service Providers: Who is Winning?” webinar on December 12, 2012
Proprietary & Confidential. © 2012, Everest Global, Inc. 11
Discussion points for today
Issues to consider in sourcing model strategy
Common myths related to sourcing models
Market context on sourcing models
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Commonly perceived myths on sourcing models
Myth Reality
Service provider model is significantly gaining share compared to GICs
Both models continue to grow, particularly in areas that align with their “sweet spots”
1
GICs are always more expensive than service providers
In some cases, GICs provide lower costs and significant benefits to parents
2
Service providers are best leveraged only for transactional processes
Service providers have also built capabilities in many judgment-oriented processes
3
Clear segmentation between both models is always the most optimal sourcing model design
“One size does not fit all” – other sourcing model designs can also be appropriate
4
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Myth #1: Service provider model is significantly gaining share compared to GICs
1
~90 ~120
~79% ~81%
~21% ~19%
2008 2012E
~3.0 ~3.8
Headcount (Million FTEs)
Revenue (US$ billion)
Reality: Both models continue to grow Marginal decrease in GIC headcount share, however, share in total revenue remains similar given GICs’
upshift towards complex/judgment-intensive work
Global services market size (2008-12) Service provider GIC
~77% ~77%
~23% ~23%
2008 2012E
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GICs continue to have a significant share in certain industry verticals and functions
1
Function Sourcing mix in offshore headcount 2012; Percentage
IT - ADM 30-35% 65-70%
LEADING FINANCIAL SERVICES FIRMS
Note: Analysis based on eight leading financial services firms each with revenue greater than US$10 billion and offshore scale greater than 5,000 FTEs
Mostly leveraged from service providers given their significant capabilities in this space
Mostly delivered through GICs. Work often considered as “core” to business; e.g., IP/data protection
IT - IMS 20-25% 75-80%
BPO - Customer care 35-40% 60-65%
BPO - Non voice 50-55% 45-50%
KPO 80-85% 15-20%
Service provider GIC
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Myth #2: GICs are always more expensive than service providers
Annualized Total Cost of Ownership (TCO) for parent/buyer US$ 000s per FTE per annum
2
Rate per FTE Transition & set-up cost
Governance & day-to-day operations cost
Relationship /account management cost
Productivity savings
Total cost of ownership
Additional costs incurred by buyer in setting-up, managing and governing the relationship
Billing rate charged by service provider and GIC
Savings on account of productivity benefits (e.g., process improvement, efficiency, and automation)
Important to take a TCO view rather than a billing rate view to understand the net financial impact
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Myth #2: GICs are always more expensive than service providers
2
Comparison of GIC and service provider rate and TCO – Transaction process Indexed to service provider
100 100
126
107
Rate per FTE TCO per FTE
Comparison of GIC and service provider rate and TCO – Complex process Indexed to service provider
100 100 112
89
Rate per FTE TCO per FTE
SANITIZED EXAMPLE
In this example, TCO differential lower than rate differential, given higher productivity and lower governance costs for GICs relative to service providers. GIC’s better understanding of parent’s systems/processes, cultural context and domain knowledge are key drivers
For complex work, GIC TCO lower than service providers on account of relative advantages in accessing skills and shorter learning curve
The analysis should not be generalized and is dependent on multiple factors that impact TCO
Service provider GIC
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Relative cost competitiveness is dependent on multiple factors
Factors specific to the work and where/how it is delivered
2
Factors specific to the relative attributes of the sourcing models
Scale
Type & complexity of work
Locations
Model maturity
Talent/resourcing model
Organization context & cultural affinity
Leverage of best practices
Approach to margins/gain-share
Talent/resourcing model
Organization context & cultural affinity
Leverage of best practices
Approach to margins/gain-share
GIC Service provider ?
TCO
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Frequency of inclusion of F&A process over time Percentage
Judg
men
t-int
ensi
ve
Tran
sact
ion-
inte
nsiv
e
15%
28%
26%
61%
23%
25%
46%
73%
76%
80%
6%
19%
24%
50%
20%
24%
44%
71%
77%
82%
No major trend in inclusion of transaction-intensive processes
Significant increase in inclusion of judgment-intensive F&A processes (especially FP&A)
2007-2008 2010-2011
Internal Audit
Treasury and risk management
Regulatory reporting and compliance
Financial planning and analysis (FP&A)
Tax
Fixed assets
General accounting
Accounts receivable (AR)
Accounts payable (AP)
Payroll
Myth #3: Service providers are best leveraged only for transactional processes
Reality: Providers have also built capabilities in multiple judgment-oriented processes, traditionally considered “GIC sweet spots”
3
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While most functions can be delivered from both models, some are best sourced from a specific model
ILLUSTRATIVE
Global In-house Centers (GICs)
Service providers
3
Functions where IP, insight/excellence from domain and intimacy are key considerations Examples: Product control Technology R&D Advanced quantitative
models
Functions where economies of scale and efficiency are key considerations Examples: Data entry Transaction processing Claims processing
Includes most functions spanning rule-based and judgment-based processes. Examples: IT ADM Testing IT helpdesk General accounting Accounts payables/receivables Management reporting Customer service Regulatory reporting Fraud monitoring and compliance
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Segmented model
Clear segmentation of functions/work across models with limited overlap Designed to capture “best of breed” value Example: Source analytics work from GICs and BPO from service providers
Moderate/significant overlap in functional/work across models Designed to establish marketplace, diversify risks and enhance flexibility
Examples:
60% 50% 50% 33%
40% 50% 50% 67%
IT Non-voice BPO Collections Servicing
Service provider
GIC
Design optimized for flexibility Both models can work for most functions, best
fit determined for specific situations (e.g., capacity, business case, LOB preference)
Selectively “compete” work between models using champion-challenger approach
GICs used to “incubate” new areas and build comfort with business, some eventually outsourced
Role in Sourcing Portfolio
Claims processing (low complexity)
Claims – adjudication
Greenfield functions
Under-writing
Champion Tier II offshore BPO provider A
Offshore Tier I service provider
GIC (incubator)
GIC
Tier II offshore BPO provider B
Challenger Rural BPO provider GIC Offshore Tier I provider
Niche providers
Company A Company B Service provider
GIC
Myth #4: Clear segmentation of work between models is always the most optimal design
Mixed models
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How do you expect global enterprises to leverage both sourcing models going forward?
8%
45%
48%
Predominantly compete both models for similar work
Predominantly complement models and deliver distinct work in each
Mix of compete and complement
Source: Live polling conducted during the “GICs vs. Service Providers: Who is Winning?” webinar on December 12, 2012
Proprietary & Confidential. © 2012, Everest Global, Inc. 22
Discussion points for today
Issues to consider in sourcing model strategy
Common myths related to sourcing models
Market context on sourcing models
Proprietary & Confidential. © 2012, Everest Global, Inc. 23
Best practices to consider in sourcing model design and optimization
Be clear on overall sourcing objectives/desired value
Define a “target” sourcing model strategy/design
Drive structured decision making for incremental work packets
1
2
3
Strategic impact
Business impact
Direct-cost impact
C
B
A
Three levels of value Impact on a company’s… Typical result
Cost reduction Process efficiency
Direct-cost base Internal customers
Key processes or applications – Quality– Productivity
External customers
Business process improvement
Quality improvement
Tapping new markets Changing company-level
differentiation
Market differentiators Revenue stream
Criteria GIC Service provider
Scale
Demand variation
Sourcing req estimation
Degree of involvement with end user
Delivery locations
Costs
Domain capability
Process capability
Technology capability
Continuity leverage
Objective evaluation of trade-offs
Overall Score
Objective evaluation suggests third-party model better suited Low fit Moderate fit Excellent fit
Clearly define and articulate value drivers (e.g., efficiencies, scalability)
Align on economic model, investment considerations and risk appetite
Understand desired enhancements to current state
Profile demand (3-5 year view) Define GIC/service provider mix, model
design (e.g., segmented, mixed) and roles (e.g., champion-challenger)
Develop a decisioning framework to evaluate sourcing models for incremental work, aligned to the target end state
Need to apply framework consistently and objectively, to avoid stakeholder bias on decisions
Role in Sourcing Portfolio
Development –new apps
Development –existing apps enhancement Maintenance Testing Infrastructure
Champion Incumbent Tier I offshore service provider
GIC Incumbent Tier I offshore service provider
Incumbent Global Tier I service provider
GIC
Incumbent Global Tier I service providerIncumbent
Global Tier I service provider
GIC
Challenger Tier II / Tier III offshore service provider
Incumbent Tier I service provider
Tier II / Tier III offshore service provider
Tier I offshore service provider
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Decision process guidelines for selecting portfolio model
How large is the potential enterprise “offshoreable” population?
Each function/BU approaches sourcing model in the manner their leadership believes value is best captured
Is there a strong culture/leadership for an international talent model?
Is there a proven history of enterprise-wide back office /technology operating models?
>2,500 FTEs
<2,500 FTEs Leverage only the outsourcing model (exception: if offshore domestic operations can already support other geographies)
Selectively use GIC model for functions/BUs to attain required differentiated talent; use outsourcing in other areas or to complement
No
Yes
Does the organization believe that global operating models are a natural part of the future business strategy?
No
Yes
Invest in GIC model as a strategic initiative to complement outsourcing
Outsourcing likely best fit, assess if internal GIC model provides incremental value in selective areas
Yes
No
1
2
3
4
5
If multiple GIC operations gain scale in offshore locations, some functions or BUs may elect to opt-in and migrate to model 1
Proprietary & Confidential. © 2012, Everest Global, Inc. 25
Global In-house Center (GIC) Value Diagnostic Survey 2012
Are "parent" and "GIC" executives aligned in how they are looking to drive value beyond cost savings? Participate in Everest Group’s GIC Value Diagnostic Survey 2012 and share your perspectives. All participants will receive a complimentary copy of summary findings. Survey Link: surveys.everestgrp.com/s3/gic-survey-9
Are you interested in a custom benchmark of the survey for your organization? If so, please contact us to request an organization-specific link for your company.
Start the Survey
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To ask a question during the Q&A session Click the question mark (Q&A) button located on right side of your screen. This opens Q&A
Be sure to keep the default set to “send to All Panelists”
Type your question in the box at the bottom of the Q&A box and click the send button
Attendees will receive an email with instructions for downloading today’s presentation
For advice or research, please contact: – H. Karthik, [email protected] – Shyan Mukerjee, [email protected]
Q&A
Websites www.everestgrp.com research.everestgrp.com
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Stay connected
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Experts in the global services terrain
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About Everest Group
Everest Group is an advisor to business leaders on the next generation of global services with a worldwide reputation for helping Global 1000 firms dramatically improve their performance by optimizing their back- and middle-office business services. With a fact-based approach driving outcomes, Everest Group counsels organizations with complex challenges related to the use and delivery of global services in their pursuits to balance short-term needs with long-term goals. Through its practical consulting, original research, and industry resource services, Everest Group helps clients maximize value from delivery strategies, talent and sourcing models, technologies, and management approaches. Established in 1991, Everest Group serves users of global services, providers of services, country organizations, and private equity firms in six continents across all industry categories. For more information, please visit www.everestgrp.com and research.everestgrp.com.
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