Patni's success defines a new theory, which proves the proportional relationship between capability and revenue
by Shyamanuja Das Global Services
The rewards for developing capability in engineering services at a time when most offshore service providers were scaling up application development and maintenance services have come to Patni in the form of consistent growth. The last three years have seen the contribution of this business grow consistently — from 4.6% in 2004 to close to 11% in the first three quarters of 2006. This does not include the revenue from software product development and testing services targeted at the independent software vendors.
While Patni targets multiple verticals within product engineering services, medical electronics segment remains its largest segment, with clients such as St. Jude Medical and Toshiba. Patni has stepped up its thrust on consumer electronics and ASICs, having acquired ZaiQ Technologies, a design and verification company, to enhance its capability in this area. Patni has invested in developing domain expertise in most verticals. For example, it employs doctors to train its development and solution teams working on medical electronics. It has also invested in developing tools in areas where open standards are available (such as consumer electronics), thus shortening product development lifecycles and saving cost.
Product engineering is a high margin, fast growing area and the company’s early leadership heralds well for it. The company’s rationale of treating commercial software engineering as a separate service line will be watched carefully by its competitors and customers.
Top 5
1.
Patni Computer Systems
2.
HCL Technologies
3.
Tata Consultancy Services
4.
Infosys Technologies
5.
Headstrong
S T A T S
CEO: N. K. Patni
Skill set: System, board, ASIC, electro-mechanical, applications and embedded software design, quality, compliance and regulatory testing, prototyping
Verticals: Medical and consumer electronics, industrial automation, semiconductors
Customers: St. Jude Medical, Toshiba, Hitachi, Emerson
Delivery centers: India, U.S., U.K.
Employees: 13,500
Revenue: $575,000,000 (est. 2006)
Year founded: 1978
Website: www.patni.com
1/31/2007
Top 10 Specialty Application Development Providers — Winner Polaris
Polaris has been able to grab the top position for the second time as well
by Juhi Bhambal Global Services
This is Polaris’ second consecutive Global Services 100 win in the specialty applications development category. What did the company do right in the last year to retain its top spot?
It sought to specialize itself further by setting up delivery centers focusing on investment banking (Hyderabad, India), retail banking (Mumbai, India) and corporate banking (Chennai, India). The 2,000 staff at Hyderabad is already servicing seven of the top ten global investment banks. Because of its specialization strategy, Polaris commands 10%–15% premium on its services compared to competition.
Moreover, unlike most other Indian service providers in the financial domain that service primarily U.S. customers, Polaris has a global portfolio. While the industry averages 60% U.S.-based clients, Polaris has only 40%. It brings in an additional 30% each from Europe and Asia-pacific.
The company has also worked to expand its client portfolio. Until last year it had a heavy dependence on the Citi Group, with 60% of its revenues coming from it. This year that has come down to approximately 45%.
Going forward, acquisition is ruled out because of the super-specialty nature of the company, and growth will have to come organically. With the IT budget of its client portfolio being $40 billion and the company’s revenue at $200 million, Polaris is confident that it will.
Top 10
1.
Polaris
2.
Softtek
3.
Darwin Suzsoft
4.
i-flex solutions
5.
I.T. UNITED
6.
Scicom (MSC) Berhad
7.
Etech
8.
Globant
9.
ITC Infotech
10.
Zensar Technologies
S T A T S
CEO: Arun Jain
Skill set: Applications development
Verticals: Banking, financial services
Customers: Citi Group, GE, Bear Stearns
Delivery centers: India
Employees: 6,500 (approx.)
Revenue: $179,520,000 (est. 2006)
Year founded: 1993
Website: www.polaris-america.com
by Juhi Bhambal Global Services
This is Polaris’ second consecutive Global Services 100 win in the specialty applications development category. What did the company do right in the last year to retain its top spot?
It sought to specialize itself further by setting up delivery centers focusing on investment banking (Hyderabad, India), retail banking (Mumbai, India) and corporate banking (Chennai, India). The 2,000 staff at Hyderabad is already servicing seven of the top ten global investment banks. Because of its specialization strategy, Polaris commands 10%–15% premium on its services compared to competition.
Moreover, unlike most other Indian service providers in the financial domain that service primarily U.S. customers, Polaris has a global portfolio. While the industry averages 60% U.S.-based clients, Polaris has only 40%. It brings in an additional 30% each from Europe and Asia-pacific.
The company has also worked to expand its client portfolio. Until last year it had a heavy dependence on the Citi Group, with 60% of its revenues coming from it. This year that has come down to approximately 45%.
Going forward, acquisition is ruled out because of the super-specialty nature of the company, and growth will have to come organically. With the IT budget of its client portfolio being $40 billion and the company’s revenue at $200 million, Polaris is confident that it will.
Top 10
1.
Polaris
2.
Softtek
3.
Darwin Suzsoft
4.
i-flex solutions
5.
I.T. UNITED
6.
Scicom (MSC) Berhad
7.
Etech
8.
Globant
9.
ITC Infotech
10.
Zensar Technologies
S T A T S
CEO: Arun Jain
Skill set: Applications development
Verticals: Banking, financial services
Customers: Citi Group, GE, Bear Stearns
Delivery centers: India
Employees: 6,500 (approx.)
Revenue: $179,520,000 (est. 2006)
Year founded: 1993
Website: www.polaris-america.com
Top 10 Best Performing IT Service Providers — Winner Tata Consultancy Services
This year the fourth largest IT-services company in the world jumps astoundingly — from the seventh position to the top position — and comes out as a best performing IT-services provider
by Juhi Bhambal Global Services
TCS, which aspires to top 10 status among the world’s leading service providers, is on the verge of reaching its goal. It is already the fourth largest IT-services company in the world terms of market cap, fifth largest in terms of profits, sixth largest in terms of employees and 12th largest in terms of revenue, according to company sources.
Its focus on large deals and entering the non-U.S. market is likely to take this Indian company further still. While large deals have come to be considered relatively less profitable because of lower margins, TCS derives strategic advantage out of them. It uses its IT-services offerings in large deals to cross sell its other offerings — consulting, BPO, engineering and infrastructure.
On the non-U.S. front, TCS is establishing its presence in Europe, with 2005’s $244 million ABN Amro deal being one of its biggest wins on the Continent. Realizing that Europe is not one, but several, markets, TCS follows a strong localization strategy there. TCS is also one of the few IT services companies that is actively working to address Japan — the second largest IT market by spend after the U.S. It has set up a center dedicated in the Indian city of Calcutta to servicing Japanese customers. The center is already servicing 12 Japanese clients. The company’s latest non-U.S. win has come from Banco Pichincha, Ecuador’s largest private bank. This is a $140 million deal for five years.
Top 10
1.
Tata Consultancy Services
2.
Cognizant Technology Solutions
3.
Infosys Technologies
4.
HCL Technologies
5.
Neoris
6.
Patni Computer Systems
7.
MindTree Consulting
8.
Politec
9.
Satyam Computer Services
10.
Wipro Technologies
S T A T S
CEO: S. Ramadorai
Skill set: Applications development, business-process transformation
Verticals: Banking, financial services, manufacturing, telecom
Customers: ABN Amro, American Express, Verizon Data Services
Delivery centers: India, China, U.S., U.K., South Africa, Latin America, Europe, Japan
Employees: 83,500
Revenue: $3 billion (est. 2006)
Year founded: 1968
Website: www.tcs.com
by Juhi Bhambal Global Services
TCS, which aspires to top 10 status among the world’s leading service providers, is on the verge of reaching its goal. It is already the fourth largest IT-services company in the world terms of market cap, fifth largest in terms of profits, sixth largest in terms of employees and 12th largest in terms of revenue, according to company sources.
Its focus on large deals and entering the non-U.S. market is likely to take this Indian company further still. While large deals have come to be considered relatively less profitable because of lower margins, TCS derives strategic advantage out of them. It uses its IT-services offerings in large deals to cross sell its other offerings — consulting, BPO, engineering and infrastructure.
On the non-U.S. front, TCS is establishing its presence in Europe, with 2005’s $244 million ABN Amro deal being one of its biggest wins on the Continent. Realizing that Europe is not one, but several, markets, TCS follows a strong localization strategy there. TCS is also one of the few IT services companies that is actively working to address Japan — the second largest IT market by spend after the U.S. It has set up a center dedicated in the Indian city of Calcutta to servicing Japanese customers. The center is already servicing 12 Japanese clients. The company’s latest non-U.S. win has come from Banco Pichincha, Ecuador’s largest private bank. This is a $140 million deal for five years.
Top 10
1.
Tata Consultancy Services
2.
Cognizant Technology Solutions
3.
Infosys Technologies
4.
HCL Technologies
5.
Neoris
6.
Patni Computer Systems
7.
MindTree Consulting
8.
Politec
9.
Satyam Computer Services
10.
Wipro Technologies
S T A T S
CEO: S. Ramadorai
Skill set: Applications development, business-process transformation
Verticals: Banking, financial services, manufacturing, telecom
Customers: ABN Amro, American Express, Verizon Data Services
Delivery centers: India, China, U.S., U.K., South Africa, Latin America, Europe, Japan
Employees: 83,500
Revenue: $3 billion (est. 2006)
Year founded: 1968
Website: www.tcs.com
Top 10 Best Performing Managed Services Providers — Winner Affiliated Computer Services
Last year ACS was in the news due to bagging a large number of renewed contracts, and this year, which's just started, the company now makes the news by winning the title of "Best Performing Managed Services Provider"
by Shyamanuja Das Global Services
The fact that ACS has quickly ramped up global delivery capability by building a large India center and acquiring companies in this space has gone in its favor. This, along with customer intimacy and a depth of execution, helped the company win the highest number of new and renewal contracts than any other company in this segment lasr year.
These include contracts from major corporations such as Burger King, Genworth Financial, General Motors, Hallmark, Ingram Micro, McDonald’s and Miller Brewing.
Unlike in application development and consulting engagements, which are project based and are awarded on the basis of many non-delivery factors, managed services are almost always decided on responsiveness and the ability to execute at ground level. So even while private-equity players targeted ACS for a buyout in early 2006 and when a backdating probe forced its then CEO Mark King and a few other senior officers to resign, it never affected the companys’ business performance.
ACS has ITIL-based methodologies that have earned it the ISO 20000 certification, a governance model that fits both single and multi-source agreements. While ACS’ total base of managed services customers stands at more than 300, the company needs to improve in terms of flexibility, market reach (it is still U.S-centered) and a more decentralized global delivery like IBM and Accenture.
Top 10
1.
Affiliated Computer Services
2.
Sutherland Global Services
3.
Tata Consultancy Services
4.
Perot Systems
5.
Infosys Technologies
6.
HCL Technologies
7.
Neoris
8.
Cognizant Technology Solutions
9.
Ness Technologies
10.
Microland
S T A T S
CEO: Lynn Blodgett
Skill set: Business-process transformation, infrastructure, hosting
Verticals: Government, health care, banking, financial Services
Customers: MeadWestvaco, GlaxoSmith-Kline, Hallmark, McDonald's, WellPoint
Delivery centers: U.S., India, Mexico, Ghana
Employees: 55,000
Revenue: $1.4 billion (est. 2006)
Year founded: 1988
Website: www.acs-inc.com
by Shyamanuja Das Global Services
The fact that ACS has quickly ramped up global delivery capability by building a large India center and acquiring companies in this space has gone in its favor. This, along with customer intimacy and a depth of execution, helped the company win the highest number of new and renewal contracts than any other company in this segment lasr year.
These include contracts from major corporations such as Burger King, Genworth Financial, General Motors, Hallmark, Ingram Micro, McDonald’s and Miller Brewing.
Unlike in application development and consulting engagements, which are project based and are awarded on the basis of many non-delivery factors, managed services are almost always decided on responsiveness and the ability to execute at ground level. So even while private-equity players targeted ACS for a buyout in early 2006 and when a backdating probe forced its then CEO Mark King and a few other senior officers to resign, it never affected the companys’ business performance.
ACS has ITIL-based methodologies that have earned it the ISO 20000 certification, a governance model that fits both single and multi-source agreements. While ACS’ total base of managed services customers stands at more than 300, the company needs to improve in terms of flexibility, market reach (it is still U.S-centered) and a more decentralized global delivery like IBM and Accenture.
Top 10
1.
Affiliated Computer Services
2.
Sutherland Global Services
3.
Tata Consultancy Services
4.
Perot Systems
5.
Infosys Technologies
6.
HCL Technologies
7.
Neoris
8.
Cognizant Technology Solutions
9.
Ness Technologies
10.
Microland
S T A T S
CEO: Lynn Blodgett
Skill set: Business-process transformation, infrastructure, hosting
Verticals: Government, health care, banking, financial Services
Customers: MeadWestvaco, GlaxoSmith-Kline, Hallmark, McDonald's, WellPoint
Delivery centers: U.S., India, Mexico, Ghana
Employees: 55,000
Revenue: $1.4 billion (est. 2006)
Year founded: 1988
Website: www.acs-inc.com
Meet the 2007 Global Services 100
ourcing the world's most innovative providers of business and technology services starts with our executive annual listing of the top 100 — prepared in conjunction with neoIT — that identifies leaders in 11 service-delivery areas spanning business process outsourcing, IT outsourcing, engineering and customer care
by Rusty Weston
The burgeoning practice of global services — distributing business and Information Technology (IT) work beyond your country’s borders — is beginning to mature. The signs aren’t quite as obvious — or awkward — as puberty, but the industry is evidently hitting its stride. David Bass, Manager, Application Development and Maintenance, Time Warner Customer Service, notes that “The roles of internal employees have changed,” as a result of his company’s global initiatives.
“We encourage our employees to enhance their knowledge of cutting-edge technology,” says David Bass. “We need employees to be system analysts, business analysts and architects and not to do software coding any more.” Apparently the companies Time Warner hires to handle that load are more than happy to accommodate the work.
Increased market competition is also evident. “The globalization of services is at a torrid pace with focus on greater value generation,” says Atul Vashistha, CEO, neoIT, a services globalization consultancy.
While high margin, transformational consulting work is where most service providers aspire to go, the lure of steady hosting and maintenance initiatives, back-office paperwork and customer contact centers is money that is rarely left on the table. While no consensus exists about industry consolidation in 2007, there’s widespread evidence that executives with global sourcing experience will be much in demand by organizations looking to exploit its enormous potential.
Apparently customers are pleased. A recent report by Capgemini and IDC titled From Transactional to Strategic Business Process Outsourcing (BPO), finds that:
• 85% of companies are saving at least as much as they invest in outsourcing
• 63% of companies are investing the savings back into the organization to improve operational performance, drive innovation or support growth
• 44% of businesses surveyed said the most important criterion in selecting a BPO provider is its ability to deliver transformational services.
Not surprisingly, service providers are sanguine about 2007. N. Chandrasekaran, Tata Consulting Group’s EVP and Head of Global Operations, expresses optimism about the industry’s prospects this year. Chandrasekaran cites a Forrester Research estimate that U.S. purchases of IT goods and services will grow by five percent this year, reaching $1.55 trillion. While such numbers are tricky to substantiate, one look at TCS’ financial statement speaks volumes about the rapid growth of this industry.
“In our most recent quarterly earnings (Q3 FY 2007), we added more than 7,800 employees, bringing our total strength to 83,500 employees, coming from 60 different nationalities,” boasts Tata Consulting Group’s Chandrasekaran.
More impressively, perhaps, TCS was the first Indian service provider to generate one billion dollars in a quarter. And the company has doubled in size every 30 months, he adds.
Yet Chandrasekaran ventures a bit too far with his assertion that their customers are consolidating their IT-services providers. As we have seen and reported in the past year, multisourcing deals are now quite common.
What’s rare is to hear a large corporate customer putting all of its proverbial eggs (IT projects) into one provider’s basket.
But while the industry itself is rapidly maturing there are a fair amount of mergers and acquisitions in the services field. But the long-expected consolidation of service providers has not come to pass.
What Margins Indicate
Outsourcing has moved past early adoption to mainstream acceptance asserts James Friedman, a senior analyst covering business services at Susquehanna Financial Group, an institutional research, brokerage and trading firm. One reason is that there is “significant acceleration in SMBs [Small and Mid sized business] outsourcing, though as a rule SMBs are more inclined to outsource onshore.”
And there are several subtle drivers as well, he notes, ones that don’t get talked about very much in public. “Customers are increasingly aware that their competitors are outsourcing,” says Friedman. And this: “Customers are also aware that the dollar continues to slide against the Indian Rupee, the Philippine Peso and even the Canadian Dollar (long term).
The demand for services is so healthy, he says, that “Offshore vendors have been able to raise prices in the last six months thanks to the high quality and perceived value of their work.” On his list of service providers with escalating prices are perennial Global Services 100 leaders such as Infosys, Patni, Satyam, Cognizant and Ness among others.
But not all market analysts see the world through rose-colored lenses. Rick Saia, Research Analyst/IT Services at Aberdeen Group, expects just the opposite to occur. “With the market for outsourced IT services more global in nature, a buyer’s market looms in 2007 since the broader competitive field will create downward pressure on prices,” predicts Saia. “Providers in other parts of the world, particularly Eastern Europe, are finding better seats in the IT services arena.”
Yet Saia believes that an escalating percentage of IT work will go nearshore rather than offshore. “This will not only improve communication between buyer and provider, but also serve as a help to IT organizations that outsource in order to access superior expertise,” he adds.
While Canada has come to be synonymous with “nearshore” in the United States, increasingly, Mexican companies are competing for work that might have gone north — or all the way to Asia. Alejandro Camino, VP, Marketing and Communications at Softtek, a services provider in Mexico, believes that he understands why Mexico is finally getting more attention. “In a nutshell,” he explains, “nearness plus world-class efficient quality, as simple and as complex as that.”
While there are many ways for service providers to separate themselves from the pack, a good customer reputation is a can’t-miss proposition. Affiliated Computer Systems (ACS), a pace-setter in our annual Global Services 100 study, strives for customer intimacy despite its colossal size and global presence. Al Denis, VP, Solutions Architecture, says, “We adapt to our [customer’s] way of doing business, which translates differently for each client, such as: Offering services in the global regions where they need us; offering pricing terms that are variable, fixed or transactional based on their business; being agnostic in terms of hardware platforms supported; or working in a multi-provider setting.”
Eleven Envelopes, Please
In a typical scenario of companies tapping the global-labor market, the driver has been cost savings or an operational expansion into a new region. In 2007 the more common justification is a lack of available skills. As you might expect, the vast majority of companies prefer to outsource rather than invest in an offshore delivery center with high fixed costs, tax and liability issues. Risk avoidance doesn’t grab the headlines, but it’s also contributing factor in the use of third-party services, even outside of the country.
Yet, even for resource-rich companies, tracking the world market for business and technology service providers is a complicated and expensive undertaking. Only a minority of organizations approach global sourcing in a systematic way with a formal program-management team sending scouts to far-flung destinations.
In this spirit we teamed up with neoIT for the third consecutive year to field an in-depth study of service providers spanning four continents. We vetted the providers much the way a program management office engages in an request for proposals, and selected winners in 11 categories based upon the strengths of the information they provided us, plus what we were able to glean from customers and industry analysts. We organized the winners into three basic categories: Customer and Business Process Awards; Regional and Emerging Provider Awards; and Tech-
Delivery Awards.
What makes these firms more special than the ones that ranked just behind them or those that finished out of the running in our respective categories? These firms demonstrated a pattern of market leadership, innovation and outstanding customer service. If and when your organization conducts a similar program to select service providers in a category such as engineering services, you can almost be certain that your results will vary — no two customer’s weighting systems are the same because everyone has different biases and priorities.
Sourcing the 2007 GS100
During the course of the Global Services 100 study, fielded in conjunction with neoIT, a consulting firm specializing in services globalization, we collected over 250 data points from 147 respondents. The Global Services 100 includes large multinational service providers, emerging BPO providers, vertical specialists and leading customer-service firms.
The data points were clustered into four categories that included operations, services, client data and human-resource policies. Essays also play a significant role in helping us understand providers’ strategies and accomplishments. Respondents to the study included firms from 18 countries, representing the most popular service-delivery destinations such as India, China, the Philippines, Malaysia and Mexico.
Rather than rank each company from one to 100, the approach used in this study is intended to provide users a head start in the quest to maintain updated ‘short lists’ of the leading providers of globally delivered services, ranging from BPO and ITO to regions and emerging leaders. The methodology employed by the study to arrive at each Top List is based on a rigorous frequency analysis followed by a proprietary weighting system allocated amongst the four major categories. The weighting system considers the client’s perspective during the buying process. Sample weights for the IT, BPO and call center lists are presented in the figure below. This year, in addition to the Top Lists categories from previous years, we have added an engineering list to reflect the growing trend and interest in leveraging global talent for these types of services.
Similar to an request for information process, companies that took the time to thoroughly complete entry forms and essays tended to score higher than those that did not. Through the data-collection process, the study aims to assess not just the actual responses but also how companies respond as an indicator of their ability to do so in actual client situations. The judges also paid particular attention to the quality and messaging of respondents’ essays on a range of subjects including competitive differentiation, client satisfaction and human development.
— By Eugene Kublanov, neoIT and
Rusty Weston, Global Services
While high margin, transformational consulting work is where most service providers aspire to go, the lure of steady hosting and maintenance initiatives, back-office paperwork and customer contact centers is money that is rarely left on the table.
Global Services 100 Award 2007: Top 100 Companies
Meet the Global Services 100
Company CEO URL
24/7 Customer P.V. Kannan www.247customer.com
Accenture Bill Green www.accenture.com
Affiliated Computer Services Mark A. King www.acs-inc.com
Augmentum Leonard Liu www.augmentum.com
Auriga Alexis Sukharev www.auriga.com
Bleum Eric Rongley www.bleum.com
Caliber Point Ashok Bildikar www.caliberpoint.com
Cambridge Solutions Chris Sinclair www.cambridgeworldwide.com
Capgemini Paul Hermelin www.capgemini.com
CGI Group Michael E. Roach www.cgi.com
ClientLogic David Garner www.clientlogic.com
Cognizant Technology Solutions Francisco D'Souza www.cognizant.com
Convergys James F. Orr www.convergys.com
Covansys Rajendra B. Vattikuti www.covansys.com
CPM Antonio Carlos Rego Gil www.cpminternational.com
Darwin Suzsoft James Tong www.darwinsuzsoft.com
DataArt Michael Zaitsev www.dataart.com
DBA Danilo Meth www.dba.com.br
Dextra Technologies Daniel Chavez www.dextratech.com
e4e Somshankar Das www.e4e.com
ea Consulting Asia Pacific Chin King Wong www.eacap.com
EDS Michael H. Jordan www.eds.com
EPAM Systems Arkadiy Dobkin www.epam.com
Etech Dilip Barot www.etechinc.com
ExlService Holdings Vikram Talwar www.exlservice.com
FCG Software Services Subramaniam Ramachandran www.fcg.com
Freeborders John Cestar www.freeborders.com
Genpact Pramod Bhasin www.genpact.com
Globant Martin Migoya www.globant.com
HCL Technologies Shiv Nadar www.hcltech.com
Headstrong Arjun Malhotra www.headstrong.com
Hispanic Teleservices Alberto Fernandez www.htc.to
HTC Global Services Madhava Reddy www.htcinc.com
Hinduja TMT Partha D Sarkar www.hindujatmt.com
I.T. United Cyrill Eltschinger www.ituc.com
IBA Group Sergei Levteev www.iba-it-group.com
IBM Samuel J. Palmisano www.ibm.com
ICT Group John J. Brennan www.ictgroup.com
i-flex solutions Deepak Ghaisas www.iflexsolutions.com
Infinite Computer Solutions Upinder Zutshi www.infics.com
Informatica Integral Empresarial Antonio Velasco www.sinersys.com.mx
Infosys Technologies Nandan M Nilekani www.infosys.com
Innominds Software Rao Vemula www.innominds.com
Intelenet Global Services Susir Kumar www.intelenetglobal.com
Intetics Boris Kontsevoi www.intetics.com
ITC Infotech Sanjiv Puri www.itcinfotech.com
Kepler - Rominfo Petrisor Guta www.kepler-rominfo.com
Knoah Solutions Myneni www.knoah.com
Lason Ronald D. Risher www.lason.com
Lohika Systems Daniel Dargham www.lohika.com
Longtop Eric Liang www.longtopinternational.com
Luxoft Dmitry Loschinin www.luxoft.com
marketRx Jaswinder S. Chadha www.marketrx.com
Mastek Sudhakar Ram www.mastek.com
MERA Networks Dmitry M. Ponomarev www.meranetworks.com
Microland Pradeep Kar www.microland.com
MindTree Consulting Ashok Soota www.mindtree.com
Mistral Software Anees Ahmed www.mistralsoftware.com
Motif John Coker www.motifinc.com
MphasiS Jaithirth Rao www.mphasis.com
NCO Group Michael Barrist www.ncogroup.com
Neoris Claudio Muruzabal www.neoris.com
Ness Technologies Raviv Zoller www.ness.com
Neusoft Group Jiren Liu www.neusoft.com
NIIT SmartServe Paul Barrow www.niitsmartserve.com
Objectiva Software Solutions Douglas Winter www.objectivasoftware.com
Ocwen Financial William C. Erbey www.ocwen.com
OfficeTiger Randolph Altschuler and Joseph Sigelman www.officetiger.com
Outsource Partners International Clarence T. Schmitz www.opiglobal.com
Patni Computer Systems N.K. Patni www.patni.com
Perot Systems Peter Atlabef www.perotsystems.com
Polaris Arun Jain www.polaris-america.com
Politec HÉlio Oliveira www.politec.com
Promantra Synergy Solutions Praveen Vadlamudi www.promantra.net
QuEST Ajit A. Prabhu www.quest-global.com
Sapient Jerry Greenberg www.sapient.com
Satyam Computer Services B. Rama Raju www.satyam.com
Scicom (MSC) Berhad Leo Ariyanayakam www.scicom-intl.com
Sierra Atlantic Raju Reddy www.SierraAtlantic.com
Sinapsis Technologies Gerardo Rodriguez www.sinapsis.com
SnT Global David Wong www.sntglobal.com
SoftServe Taras Kytsmey www.softservecom.com
Softtek Blanca TreviÑo www.softtek.com
Sonata Software B. Ramaswamy www.sonata-software.com
SPI Technologies Ernest Cu www.spi-bpo.com
StarSoft Development Labs Nick Puntikov www.starsoftlabs.com
Stream Toni Portmann www.stream.com
Summit HR Worldwide Ranjan Sinha www.summithrww.com
Sutherland Global Services Dilip R. Vellodi www.suth.com
Symphony Services Gordon Brooks www.symphonysv.com
Syntel Bharat Desai www.syntelinc.com
Tata Consultancy Services S. Ramadorai www.tcs.com
TransWorks Information Services Atul Kunwar www.transworks.com
Unisys Joseph W. McGrath www.unisys.com
vCustomer Sanjay Kumar www.vcustomer.com
Vee Technologies Chocko Valliappa www.veetechnologies.com
Vsource Asia Jack Cantillon www.vsourceasia.com
Wipro Technologies Azim H. Premji www.wipro.com
WNS Neeraj Bhargava www.wnsgs.com
Zensar Technologies Ganesh Natarajan www.zensar.com
by Rusty Weston
The burgeoning practice of global services — distributing business and Information Technology (IT) work beyond your country’s borders — is beginning to mature. The signs aren’t quite as obvious — or awkward — as puberty, but the industry is evidently hitting its stride. David Bass, Manager, Application Development and Maintenance, Time Warner Customer Service, notes that “The roles of internal employees have changed,” as a result of his company’s global initiatives.
“We encourage our employees to enhance their knowledge of cutting-edge technology,” says David Bass. “We need employees to be system analysts, business analysts and architects and not to do software coding any more.” Apparently the companies Time Warner hires to handle that load are more than happy to accommodate the work.
Increased market competition is also evident. “The globalization of services is at a torrid pace with focus on greater value generation,” says Atul Vashistha, CEO, neoIT, a services globalization consultancy.
While high margin, transformational consulting work is where most service providers aspire to go, the lure of steady hosting and maintenance initiatives, back-office paperwork and customer contact centers is money that is rarely left on the table. While no consensus exists about industry consolidation in 2007, there’s widespread evidence that executives with global sourcing experience will be much in demand by organizations looking to exploit its enormous potential.
Apparently customers are pleased. A recent report by Capgemini and IDC titled From Transactional to Strategic Business Process Outsourcing (BPO), finds that:
• 85% of companies are saving at least as much as they invest in outsourcing
• 63% of companies are investing the savings back into the organization to improve operational performance, drive innovation or support growth
• 44% of businesses surveyed said the most important criterion in selecting a BPO provider is its ability to deliver transformational services.
Not surprisingly, service providers are sanguine about 2007. N. Chandrasekaran, Tata Consulting Group’s EVP and Head of Global Operations, expresses optimism about the industry’s prospects this year. Chandrasekaran cites a Forrester Research estimate that U.S. purchases of IT goods and services will grow by five percent this year, reaching $1.55 trillion. While such numbers are tricky to substantiate, one look at TCS’ financial statement speaks volumes about the rapid growth of this industry.
“In our most recent quarterly earnings (Q3 FY 2007), we added more than 7,800 employees, bringing our total strength to 83,500 employees, coming from 60 different nationalities,” boasts Tata Consulting Group’s Chandrasekaran.
More impressively, perhaps, TCS was the first Indian service provider to generate one billion dollars in a quarter. And the company has doubled in size every 30 months, he adds.
Yet Chandrasekaran ventures a bit too far with his assertion that their customers are consolidating their IT-services providers. As we have seen and reported in the past year, multisourcing deals are now quite common.
What’s rare is to hear a large corporate customer putting all of its proverbial eggs (IT projects) into one provider’s basket.
But while the industry itself is rapidly maturing there are a fair amount of mergers and acquisitions in the services field. But the long-expected consolidation of service providers has not come to pass.
What Margins Indicate
Outsourcing has moved past early adoption to mainstream acceptance asserts James Friedman, a senior analyst covering business services at Susquehanna Financial Group, an institutional research, brokerage and trading firm. One reason is that there is “significant acceleration in SMBs [Small and Mid sized business] outsourcing, though as a rule SMBs are more inclined to outsource onshore.”
And there are several subtle drivers as well, he notes, ones that don’t get talked about very much in public. “Customers are increasingly aware that their competitors are outsourcing,” says Friedman. And this: “Customers are also aware that the dollar continues to slide against the Indian Rupee, the Philippine Peso and even the Canadian Dollar (long term).
The demand for services is so healthy, he says, that “Offshore vendors have been able to raise prices in the last six months thanks to the high quality and perceived value of their work.” On his list of service providers with escalating prices are perennial Global Services 100 leaders such as Infosys, Patni, Satyam, Cognizant and Ness among others.
But not all market analysts see the world through rose-colored lenses. Rick Saia, Research Analyst/IT Services at Aberdeen Group, expects just the opposite to occur. “With the market for outsourced IT services more global in nature, a buyer’s market looms in 2007 since the broader competitive field will create downward pressure on prices,” predicts Saia. “Providers in other parts of the world, particularly Eastern Europe, are finding better seats in the IT services arena.”
Yet Saia believes that an escalating percentage of IT work will go nearshore rather than offshore. “This will not only improve communication between buyer and provider, but also serve as a help to IT organizations that outsource in order to access superior expertise,” he adds.
While Canada has come to be synonymous with “nearshore” in the United States, increasingly, Mexican companies are competing for work that might have gone north — or all the way to Asia. Alejandro Camino, VP, Marketing and Communications at Softtek, a services provider in Mexico, believes that he understands why Mexico is finally getting more attention. “In a nutshell,” he explains, “nearness plus world-class efficient quality, as simple and as complex as that.”
While there are many ways for service providers to separate themselves from the pack, a good customer reputation is a can’t-miss proposition. Affiliated Computer Systems (ACS), a pace-setter in our annual Global Services 100 study, strives for customer intimacy despite its colossal size and global presence. Al Denis, VP, Solutions Architecture, says, “We adapt to our [customer’s] way of doing business, which translates differently for each client, such as: Offering services in the global regions where they need us; offering pricing terms that are variable, fixed or transactional based on their business; being agnostic in terms of hardware platforms supported; or working in a multi-provider setting.”
Eleven Envelopes, Please
In a typical scenario of companies tapping the global-labor market, the driver has been cost savings or an operational expansion into a new region. In 2007 the more common justification is a lack of available skills. As you might expect, the vast majority of companies prefer to outsource rather than invest in an offshore delivery center with high fixed costs, tax and liability issues. Risk avoidance doesn’t grab the headlines, but it’s also contributing factor in the use of third-party services, even outside of the country.
Yet, even for resource-rich companies, tracking the world market for business and technology service providers is a complicated and expensive undertaking. Only a minority of organizations approach global sourcing in a systematic way with a formal program-management team sending scouts to far-flung destinations.
In this spirit we teamed up with neoIT for the third consecutive year to field an in-depth study of service providers spanning four continents. We vetted the providers much the way a program management office engages in an request for proposals, and selected winners in 11 categories based upon the strengths of the information they provided us, plus what we were able to glean from customers and industry analysts. We organized the winners into three basic categories: Customer and Business Process Awards; Regional and Emerging Provider Awards; and Tech-
Delivery Awards.
What makes these firms more special than the ones that ranked just behind them or those that finished out of the running in our respective categories? These firms demonstrated a pattern of market leadership, innovation and outstanding customer service. If and when your organization conducts a similar program to select service providers in a category such as engineering services, you can almost be certain that your results will vary — no two customer’s weighting systems are the same because everyone has different biases and priorities.
Sourcing the 2007 GS100
During the course of the Global Services 100 study, fielded in conjunction with neoIT, a consulting firm specializing in services globalization, we collected over 250 data points from 147 respondents. The Global Services 100 includes large multinational service providers, emerging BPO providers, vertical specialists and leading customer-service firms.
The data points were clustered into four categories that included operations, services, client data and human-resource policies. Essays also play a significant role in helping us understand providers’ strategies and accomplishments. Respondents to the study included firms from 18 countries, representing the most popular service-delivery destinations such as India, China, the Philippines, Malaysia and Mexico.
Rather than rank each company from one to 100, the approach used in this study is intended to provide users a head start in the quest to maintain updated ‘short lists’ of the leading providers of globally delivered services, ranging from BPO and ITO to regions and emerging leaders. The methodology employed by the study to arrive at each Top List is based on a rigorous frequency analysis followed by a proprietary weighting system allocated amongst the four major categories. The weighting system considers the client’s perspective during the buying process. Sample weights for the IT, BPO and call center lists are presented in the figure below. This year, in addition to the Top Lists categories from previous years, we have added an engineering list to reflect the growing trend and interest in leveraging global talent for these types of services.
Similar to an request for information process, companies that took the time to thoroughly complete entry forms and essays tended to score higher than those that did not. Through the data-collection process, the study aims to assess not just the actual responses but also how companies respond as an indicator of their ability to do so in actual client situations. The judges also paid particular attention to the quality and messaging of respondents’ essays on a range of subjects including competitive differentiation, client satisfaction and human development.
— By Eugene Kublanov, neoIT and
Rusty Weston, Global Services
While high margin, transformational consulting work is where most service providers aspire to go, the lure of steady hosting and maintenance initiatives, back-office paperwork and customer contact centers is money that is rarely left on the table.
Global Services 100 Award 2007: Top 100 Companies
Meet the Global Services 100
Company CEO URL
24/7 Customer P.V. Kannan www.247customer.com
Accenture Bill Green www.accenture.com
Affiliated Computer Services Mark A. King www.acs-inc.com
Augmentum Leonard Liu www.augmentum.com
Auriga Alexis Sukharev www.auriga.com
Bleum Eric Rongley www.bleum.com
Caliber Point Ashok Bildikar www.caliberpoint.com
Cambridge Solutions Chris Sinclair www.cambridgeworldwide.com
Capgemini Paul Hermelin www.capgemini.com
CGI Group Michael E. Roach www.cgi.com
ClientLogic David Garner www.clientlogic.com
Cognizant Technology Solutions Francisco D'Souza www.cognizant.com
Convergys James F. Orr www.convergys.com
Covansys Rajendra B. Vattikuti www.covansys.com
CPM Antonio Carlos Rego Gil www.cpminternational.com
Darwin Suzsoft James Tong www.darwinsuzsoft.com
DataArt Michael Zaitsev www.dataart.com
DBA Danilo Meth www.dba.com.br
Dextra Technologies Daniel Chavez www.dextratech.com
e4e Somshankar Das www.e4e.com
ea Consulting Asia Pacific Chin King Wong www.eacap.com
EDS Michael H. Jordan www.eds.com
EPAM Systems Arkadiy Dobkin www.epam.com
Etech Dilip Barot www.etechinc.com
ExlService Holdings Vikram Talwar www.exlservice.com
FCG Software Services Subramaniam Ramachandran www.fcg.com
Freeborders John Cestar www.freeborders.com
Genpact Pramod Bhasin www.genpact.com
Globant Martin Migoya www.globant.com
HCL Technologies Shiv Nadar www.hcltech.com
Headstrong Arjun Malhotra www.headstrong.com
Hispanic Teleservices Alberto Fernandez www.htc.to
HTC Global Services Madhava Reddy www.htcinc.com
Hinduja TMT Partha D Sarkar www.hindujatmt.com
I.T. United Cyrill Eltschinger www.ituc.com
IBA Group Sergei Levteev www.iba-it-group.com
IBM Samuel J. Palmisano www.ibm.com
ICT Group John J. Brennan www.ictgroup.com
i-flex solutions Deepak Ghaisas www.iflexsolutions.com
Infinite Computer Solutions Upinder Zutshi www.infics.com
Informatica Integral Empresarial Antonio Velasco www.sinersys.com.mx
Infosys Technologies Nandan M Nilekani www.infosys.com
Innominds Software Rao Vemula www.innominds.com
Intelenet Global Services Susir Kumar www.intelenetglobal.com
Intetics Boris Kontsevoi www.intetics.com
ITC Infotech Sanjiv Puri www.itcinfotech.com
Kepler - Rominfo Petrisor Guta www.kepler-rominfo.com
Knoah Solutions Myneni www.knoah.com
Lason Ronald D. Risher www.lason.com
Lohika Systems Daniel Dargham www.lohika.com
Longtop Eric Liang www.longtopinternational.com
Luxoft Dmitry Loschinin www.luxoft.com
marketRx Jaswinder S. Chadha www.marketrx.com
Mastek Sudhakar Ram www.mastek.com
MERA Networks Dmitry M. Ponomarev www.meranetworks.com
Microland Pradeep Kar www.microland.com
MindTree Consulting Ashok Soota www.mindtree.com
Mistral Software Anees Ahmed www.mistralsoftware.com
Motif John Coker www.motifinc.com
MphasiS Jaithirth Rao www.mphasis.com
NCO Group Michael Barrist www.ncogroup.com
Neoris Claudio Muruzabal www.neoris.com
Ness Technologies Raviv Zoller www.ness.com
Neusoft Group Jiren Liu www.neusoft.com
NIIT SmartServe Paul Barrow www.niitsmartserve.com
Objectiva Software Solutions Douglas Winter www.objectivasoftware.com
Ocwen Financial William C. Erbey www.ocwen.com
OfficeTiger Randolph Altschuler and Joseph Sigelman www.officetiger.com
Outsource Partners International Clarence T. Schmitz www.opiglobal.com
Patni Computer Systems N.K. Patni www.patni.com
Perot Systems Peter Atlabef www.perotsystems.com
Polaris Arun Jain www.polaris-america.com
Politec HÉlio Oliveira www.politec.com
Promantra Synergy Solutions Praveen Vadlamudi www.promantra.net
QuEST Ajit A. Prabhu www.quest-global.com
Sapient Jerry Greenberg www.sapient.com
Satyam Computer Services B. Rama Raju www.satyam.com
Scicom (MSC) Berhad Leo Ariyanayakam www.scicom-intl.com
Sierra Atlantic Raju Reddy www.SierraAtlantic.com
Sinapsis Technologies Gerardo Rodriguez www.sinapsis.com
SnT Global David Wong www.sntglobal.com
SoftServe Taras Kytsmey www.softservecom.com
Softtek Blanca TreviÑo www.softtek.com
Sonata Software B. Ramaswamy www.sonata-software.com
SPI Technologies Ernest Cu www.spi-bpo.com
StarSoft Development Labs Nick Puntikov www.starsoftlabs.com
Stream Toni Portmann www.stream.com
Summit HR Worldwide Ranjan Sinha www.summithrww.com
Sutherland Global Services Dilip R. Vellodi www.suth.com
Symphony Services Gordon Brooks www.symphonysv.com
Syntel Bharat Desai www.syntelinc.com
Tata Consultancy Services S. Ramadorai www.tcs.com
TransWorks Information Services Atul Kunwar www.transworks.com
Unisys Joseph W. McGrath www.unisys.com
vCustomer Sanjay Kumar www.vcustomer.com
Vee Technologies Chocko Valliappa www.veetechnologies.com
Vsource Asia Jack Cantillon www.vsourceasia.com
Wipro Technologies Azim H. Premji www.wipro.com
WNS Neeraj Bhargava www.wnsgs.com
Zensar Technologies Ganesh Natarajan www.zensar.com
1/30/2007
China should strive to be “global office” of service outsourcing
With the entry into 2007, a term with a high frequency use, “service outsourcing,” has been added to China’s policy on use of capital from overseas. The Ministry of Commerce discloses that the country is expected to build 10 “service outsourcing”base cities to attract 100 ace transnational firms to transfer their service outsourcing business to China and breed 1,000 big or medium-size service outsourcing enterprises with international accreditations during the period of its 11th Five-Year Program from 206-2010.
“Service outsourcing represents a salient hallmark of the ‘flattening’ world,” notes the global best-selling book “the World Is Flat”. At present, with a diversity of outsourcing international services and an increasing specialization of transnational firms in the developed nations, their rear or logistic service, customer service, commercial business handling, research and development, and consultancy analysis, have been outsourced to the newly emerging nations.
With an annual pace of 30 to 40 percent to speed up, the global outsourcing market is expected to amount to 1.2 trillion US dollars this year. Authoritative agencies have forecasted that off-shore outsourcing for white collars in the United States will reach 30 percent in the next five years and, by 2010, 25 percent of their traditional IT businesses will flow to India, China and Russia. The modernization and globalization of service industry has not only fundamentally altered the development mode of global service business, but changed in an in-depth, penetrating way the growth mode of economy, industries and technologies in all nations, and determined their international competitiveness to a fairly great extent.
Service outsourcing pose an immense opportunity for China, which has attracted a host of foreign manufacturing industries to move into its territory during some 30 years of reform and opening up, spurred the shift of overseas manufacturing industries to China and made “China-made” goods increasingly popular on the world market. In the past decade, it has sustained the relatively high criteria of its information industry and the related infrastructure facilities, provided its outsourcing and off-shore management with more advantages and enabled General Electric (GE), Dell, IBM and Nokia to transfer their rear service in the Asia-Pacific region to China, which has all-round conditions for undertaking service outsourcing, a stable, healthy macro-economic situation and an infinite potential for domestic service industry with available higher-quality but low-cost human resources.
Furthermore, the added value of service outsourcing is anywhere from five to ten-fold higher that of traditional processing and manufacturing industries. With a great headway made in information technology globally, China should conform to the current development trends, spur service outsourcing orderly and turn itself into a “global office.” And India’s experience in this regard is worth learning from.
Thanks to a higher deposit saving rate, China now has a balance of approximately 35 trillion yuan (4.3 trillion US dollars) in deposits, and its foreign exchange reserve exceeds one trillion dollars, so the capital no longer poses a bottleneck for its economic growth. The gut issue at present is how to shift from the effort for attraction of investment to stress on the selection of investment, the investment quality, the optimization of investment mix and the solicitation of investment mode, so as to give scope to the outflow effect of overseas capital.
To date, China has only input one third of the capital it has drawn from overseas into its service sector, whereas other nations usually allocate two thirds of their foreign investment to the same sector. Judging from another perspective, with an average global service trade added value making up two thirds of GDP worldwide, the added value in China’s service industry is only around 40 percent versus over 50 percent for other developing nations. A lower-degree openness constitutes one of the main causes for a sluggish growth in China’s service sector, and the development of service outsourcing is precisely a major breakthrough in expanding the country’s modern service industry and raising its level in the use of overseas capital. “Seizing a golden opportunity, one can attain his status by getting his things done.”
The relevant government departments have made it crystal-clear that China will go on improving incentive measures, set up service outsourcing bases and cultivate relevant enterprises in an effort to boost service outsourcing business. The country will intensify measures to “prop up” spheres concerning banking, qualified personnel training, investment promotion, enterprise accreditation, public information service and intellectual property right protection. When more and more transnational firms turn to China as a leading destination for service outsourcing, the day is not distant for it to become a “global office”.
“Service outsourcing represents a salient hallmark of the ‘flattening’ world,” notes the global best-selling book “the World Is Flat”. At present, with a diversity of outsourcing international services and an increasing specialization of transnational firms in the developed nations, their rear or logistic service, customer service, commercial business handling, research and development, and consultancy analysis, have been outsourced to the newly emerging nations.
With an annual pace of 30 to 40 percent to speed up, the global outsourcing market is expected to amount to 1.2 trillion US dollars this year. Authoritative agencies have forecasted that off-shore outsourcing for white collars in the United States will reach 30 percent in the next five years and, by 2010, 25 percent of their traditional IT businesses will flow to India, China and Russia. The modernization and globalization of service industry has not only fundamentally altered the development mode of global service business, but changed in an in-depth, penetrating way the growth mode of economy, industries and technologies in all nations, and determined their international competitiveness to a fairly great extent.
Service outsourcing pose an immense opportunity for China, which has attracted a host of foreign manufacturing industries to move into its territory during some 30 years of reform and opening up, spurred the shift of overseas manufacturing industries to China and made “China-made” goods increasingly popular on the world market. In the past decade, it has sustained the relatively high criteria of its information industry and the related infrastructure facilities, provided its outsourcing and off-shore management with more advantages and enabled General Electric (GE), Dell, IBM and Nokia to transfer their rear service in the Asia-Pacific region to China, which has all-round conditions for undertaking service outsourcing, a stable, healthy macro-economic situation and an infinite potential for domestic service industry with available higher-quality but low-cost human resources.
Furthermore, the added value of service outsourcing is anywhere from five to ten-fold higher that of traditional processing and manufacturing industries. With a great headway made in information technology globally, China should conform to the current development trends, spur service outsourcing orderly and turn itself into a “global office.” And India’s experience in this regard is worth learning from.
Thanks to a higher deposit saving rate, China now has a balance of approximately 35 trillion yuan (4.3 trillion US dollars) in deposits, and its foreign exchange reserve exceeds one trillion dollars, so the capital no longer poses a bottleneck for its economic growth. The gut issue at present is how to shift from the effort for attraction of investment to stress on the selection of investment, the investment quality, the optimization of investment mix and the solicitation of investment mode, so as to give scope to the outflow effect of overseas capital.
To date, China has only input one third of the capital it has drawn from overseas into its service sector, whereas other nations usually allocate two thirds of their foreign investment to the same sector. Judging from another perspective, with an average global service trade added value making up two thirds of GDP worldwide, the added value in China’s service industry is only around 40 percent versus over 50 percent for other developing nations. A lower-degree openness constitutes one of the main causes for a sluggish growth in China’s service sector, and the development of service outsourcing is precisely a major breakthrough in expanding the country’s modern service industry and raising its level in the use of overseas capital. “Seizing a golden opportunity, one can attain his status by getting his things done.”
The relevant government departments have made it crystal-clear that China will go on improving incentive measures, set up service outsourcing bases and cultivate relevant enterprises in an effort to boost service outsourcing business. The country will intensify measures to “prop up” spheres concerning banking, qualified personnel training, investment promotion, enterprise accreditation, public information service and intellectual property right protection. When more and more transnational firms turn to China as a leading destination for service outsourcing, the day is not distant for it to become a “global office”.
Outsourcers aim for the big league
India's traditional supremacy in the IT offshoring stakes is being challenged by China which plans to quadruple its outsourcing exports by 2010, according to this InformationWeek story.
software outsourcing China skillnet.gifAs EngagingChina has noted before, China is starting from a low base but growing fast. In 2007, China's software outsourcing services are predicted to reach €1.7bn according to German consultancy Skillnet-- see chart.
Nevertheless, China still has a lot to do to convince western customers and software houses that its competencies and skills are comparable with those of India.
In its latest initiative to address these issues, China hopes to convince 100 multinationals to outsource to the country and encourage the development of 1,000 large and mid-size indigenous outsourcers.
Unlike India, China's outsourcing industry remains highly fragmented and none of its indigenous outsourcers are household names in the west.
Most outsourcing experts say China's technical skills are -- or soon will be -- comparable with those of India. But there are a lot more factors that come to play in choosing an outsourcing partner and the lowest-priced bid does not always win.
TifoSoft, a Chengdu-based outsourcer, recently announced it would set up operations in Singapore, presumably in a bid to address the unease that some western customers may have about dealing with a Chinese company. Singapore is home to many multinationals and so western fims will presumably have less qualms using an outsourcing partner based on the island nation, even though the bulk of the work will be done at TifoSoft's facility in Chengdu, where labour costs are only a fifth of those in Singapore.
Also the IT outsourcing theme, ChinaTechNews has an interesting interview with Eric Rongley, CEO of Bleum, one of the first firms to spot the potential of China for offshore software development. To counter the communication problems that can occur with western clients, Bleum has an "English only" policy and provides English classes for its staff . Bleum is one of only a handful of companies in China to boast CMM Level 5 certification -- the highest quality certification.
The company was recently awarded Gold Partner certification by Microsoft in recognition of its expertise in Microsoft technologies.
software outsourcing China skillnet.gifAs EngagingChina has noted before, China is starting from a low base but growing fast. In 2007, China's software outsourcing services are predicted to reach €1.7bn according to German consultancy Skillnet-- see chart.
Nevertheless, China still has a lot to do to convince western customers and software houses that its competencies and skills are comparable with those of India.
In its latest initiative to address these issues, China hopes to convince 100 multinationals to outsource to the country and encourage the development of 1,000 large and mid-size indigenous outsourcers.
Unlike India, China's outsourcing industry remains highly fragmented and none of its indigenous outsourcers are household names in the west.
Most outsourcing experts say China's technical skills are -- or soon will be -- comparable with those of India. But there are a lot more factors that come to play in choosing an outsourcing partner and the lowest-priced bid does not always win.
TifoSoft, a Chengdu-based outsourcer, recently announced it would set up operations in Singapore, presumably in a bid to address the unease that some western customers may have about dealing with a Chinese company. Singapore is home to many multinationals and so western fims will presumably have less qualms using an outsourcing partner based on the island nation, even though the bulk of the work will be done at TifoSoft's facility in Chengdu, where labour costs are only a fifth of those in Singapore.
Also the IT outsourcing theme, ChinaTechNews has an interesting interview with Eric Rongley, CEO of Bleum, one of the first firms to spot the potential of China for offshore software development. To counter the communication problems that can occur with western clients, Bleum has an "English only" policy and provides English classes for its staff . Bleum is one of only a handful of companies in China to boast CMM Level 5 certification -- the highest quality certification.
The company was recently awarded Gold Partner certification by Microsoft in recognition of its expertise in Microsoft technologies.
The China Question: When, Not If, Will It Rival India?
For as long as we can remember, folks have been talking about China as the “next India.”
Every region of the world — from Latin America to Eastern Europe to Africa – wants to be the “next India.” Yet China seems to be the only country with the population, the skills and, perhaps most important, the drive to make it happen.
As fast as India’s outsourcing economy is growing, China’s is growing faster – 36 percent a year, according to Analysys International, which projects it will reach $4 billion by 2009.
Some executives, like the CEO of software development firm Freeborders, insist Chinese developers are more creative thinkers than their Indian counterparts. And the country’s infrastructure tends to be more reliable, at least partially due to government economy-building initiatives.
Indian firms like Tata Consultancy Services are rushing to beef up their Chinese presence. Tata, which is in a joint venture deal with Microsoft, expects to multiply its Chinese workforce by more than 10 times over the next five years, to 5,000 employees. Other major investors in China include IBM, HP and Siemens.
It’s also becoming a destination of choice for management types hoping to hone their skills and get a leg up in the global economy. A Dallas Morning News article quotes a Texas attorney who accepted a position there as saying China is “the industrial revolution in early 19th-century America all over again.”
That bit of hyperbole notwithstanding, there are, of course, challenges: cultural differences, concerns over intellectual property and, oh yeah, a Communist regime.
Some observers, like an executive quoted in this BusinessWeek article, say it will be at least a decade before China’s IT outsourcing industry will rival India’s.
Yet few seem to doubt it will happen. The question is “when” rather than “if” — a question that no other country appears ready to pose just yet.
Every region of the world — from Latin America to Eastern Europe to Africa – wants to be the “next India.” Yet China seems to be the only country with the population, the skills and, perhaps most important, the drive to make it happen.
As fast as India’s outsourcing economy is growing, China’s is growing faster – 36 percent a year, according to Analysys International, which projects it will reach $4 billion by 2009.
Some executives, like the CEO of software development firm Freeborders, insist Chinese developers are more creative thinkers than their Indian counterparts. And the country’s infrastructure tends to be more reliable, at least partially due to government economy-building initiatives.
Indian firms like Tata Consultancy Services are rushing to beef up their Chinese presence. Tata, which is in a joint venture deal with Microsoft, expects to multiply its Chinese workforce by more than 10 times over the next five years, to 5,000 employees. Other major investors in China include IBM, HP and Siemens.
It’s also becoming a destination of choice for management types hoping to hone their skills and get a leg up in the global economy. A Dallas Morning News article quotes a Texas attorney who accepted a position there as saying China is “the industrial revolution in early 19th-century America all over again.”
That bit of hyperbole notwithstanding, there are, of course, challenges: cultural differences, concerns over intellectual property and, oh yeah, a Communist regime.
Some observers, like an executive quoted in this BusinessWeek article, say it will be at least a decade before China’s IT outsourcing industry will rival India’s.
Yet few seem to doubt it will happen. The question is “when” rather than “if” — a question that no other country appears ready to pose just yet.
China, the aspiring scientific superpower
Celebrated as the inventor of development milestones such as the compass and printing, China is aspiring to become a global player in science and technology in the 21st century, casting off decades of neglect of academia and political persecution of intellectuals.
A leading British think-tank predicted this month that China is on the way to becoming a scientific superpower, thanks to the massive increase in its spending on research and a trend for scientists to return home from abroad.
"The center of gravity of innovation has started moving from the West to the East," the newly released report by the London-based Demos, "The Atlas of Ideas: Mapping the New Geography of Science", says. It goes on to warn that the pre-eminence of the United States and Europe in scientific innovation can no longer be taken for granted.
The Demos report is not the first to pinpoint China's efforts at reviving its scientific capabilities. A recent study by the Organization for Economic Cooperation and Development (OECD) claimed that in 2006 China had overtaken Japan as the world's third-largest spender on research and development (R&D) after the United States and the European Union, spending a total of US$136 billion.
The drive to implement the concept of "scientific development" has indeed become one of the tenets of China's top leadership in recent years. President Hu Jintao has called on China to transform itself into an "innovative country" by 2020. The government's target for China is to establish itself as a scientific powerhouse is 2050.
The top leadership's ambitious agenda has resonated with the public. A recent television documentary broadcast by China Central Television, The Rise of the Great Nations, received high rates of approval for showcasing innovation as a key element in creating a superpower.
"We need to undo the influence of our Confucian heritage in thinking that dutifully pursuing knowledge is everything," wrote an anonymous netizen on an Internet forum. "The examples of the US and Japan show that only by fully embracing technology and science can a country achieve great power."
Optimistic projections aside, in terms of concrete scientific achievements China's figures are less impressive. In 2005, China ranked No 10 globally in the number of international patent applications filed, according to the World Intellectual Property Organization. The same year China spent only $30 billion on R&D.
Experts believe the surge in research spending in 2006 reported by the OECD is partly tied to foreign companies moving some of their research operations to China, and to the fact that a lot of research talent and advance equipment is internationally mobile.
Chinese government officials have tried for years to persuade multinationals to invest in local research sites but these efforts have been hampered by the weakness of China's intellectual-property-protection regime. The United States has complained for years and recently threatened a World Trade Organization copyright case against Chinese companies producing illegal optical disks and computer software.
Nevertheless, government pledges to support scientific development and improve standards of intellectual-property protection have succeeded in persuading a range of multinationals, in telecommunications and computer industries in particular, to site their research centers in China. Last year many pharmaceutical multinationals such as Pfizer, Roche, Novartis and Bayer announced they were also forging ahead with research initiatives in China.
The trend of outsourcing R&D to China is expected to continue, with the country poised to become the second-largest if not the largest market for cars, mobile phones and other products.
The rising number of multinational research centers, the steady return of Chinese scientists from abroad, and the growing pool of China's own university graduates are seen as some of the factors that will determine China's emergence as a scientific superpower, according to the Demos report.
"Beijing's university district alone has as many engineers as all of Western Europe, and you can imagine how dynamic the potential is," James Wildson, co-author of the Demos report, was quoted by the official China Daily.
The Chinese leadership has unveiled plans to boost investment in scientific R&D to 900 billion yuan ($116 billion) by 2020. By then, Beijing hopes research spending will account for 2.5% of gross domestic product.
Though China's spending on R&D has increased by 20% a year since 1999, much of the research is tied to developing items for domestic consumers, not scientific breakthroughs. A few high-tech sectors such as space technology and biotechnology have benefited from high-level government support.
The Demos report warns that China's rigid institutional system and unreformed educational system could also hamper China's long-term scientific progress. China's education relies heavily on memorization and fosters little critical thinking.
A leading British think-tank predicted this month that China is on the way to becoming a scientific superpower, thanks to the massive increase in its spending on research and a trend for scientists to return home from abroad.
"The center of gravity of innovation has started moving from the West to the East," the newly released report by the London-based Demos, "The Atlas of Ideas: Mapping the New Geography of Science", says. It goes on to warn that the pre-eminence of the United States and Europe in scientific innovation can no longer be taken for granted.
The Demos report is not the first to pinpoint China's efforts at reviving its scientific capabilities. A recent study by the Organization for Economic Cooperation and Development (OECD) claimed that in 2006 China had overtaken Japan as the world's third-largest spender on research and development (R&D) after the United States and the European Union, spending a total of US$136 billion.
The drive to implement the concept of "scientific development" has indeed become one of the tenets of China's top leadership in recent years. President Hu Jintao has called on China to transform itself into an "innovative country" by 2020. The government's target for China is to establish itself as a scientific powerhouse is 2050.
The top leadership's ambitious agenda has resonated with the public. A recent television documentary broadcast by China Central Television, The Rise of the Great Nations, received high rates of approval for showcasing innovation as a key element in creating a superpower.
"We need to undo the influence of our Confucian heritage in thinking that dutifully pursuing knowledge is everything," wrote an anonymous netizen on an Internet forum. "The examples of the US and Japan show that only by fully embracing technology and science can a country achieve great power."
Optimistic projections aside, in terms of concrete scientific achievements China's figures are less impressive. In 2005, China ranked No 10 globally in the number of international patent applications filed, according to the World Intellectual Property Organization. The same year China spent only $30 billion on R&D.
Experts believe the surge in research spending in 2006 reported by the OECD is partly tied to foreign companies moving some of their research operations to China, and to the fact that a lot of research talent and advance equipment is internationally mobile.
Chinese government officials have tried for years to persuade multinationals to invest in local research sites but these efforts have been hampered by the weakness of China's intellectual-property-protection regime. The United States has complained for years and recently threatened a World Trade Organization copyright case against Chinese companies producing illegal optical disks and computer software.
Nevertheless, government pledges to support scientific development and improve standards of intellectual-property protection have succeeded in persuading a range of multinationals, in telecommunications and computer industries in particular, to site their research centers in China. Last year many pharmaceutical multinationals such as Pfizer, Roche, Novartis and Bayer announced they were also forging ahead with research initiatives in China.
The trend of outsourcing R&D to China is expected to continue, with the country poised to become the second-largest if not the largest market for cars, mobile phones and other products.
The rising number of multinational research centers, the steady return of Chinese scientists from abroad, and the growing pool of China's own university graduates are seen as some of the factors that will determine China's emergence as a scientific superpower, according to the Demos report.
"Beijing's university district alone has as many engineers as all of Western Europe, and you can imagine how dynamic the potential is," James Wildson, co-author of the Demos report, was quoted by the official China Daily.
The Chinese leadership has unveiled plans to boost investment in scientific R&D to 900 billion yuan ($116 billion) by 2020. By then, Beijing hopes research spending will account for 2.5% of gross domestic product.
Though China's spending on R&D has increased by 20% a year since 1999, much of the research is tied to developing items for domestic consumers, not scientific breakthroughs. A few high-tech sectors such as space technology and biotechnology have benefited from high-level government support.
The Demos report warns that China's rigid institutional system and unreformed educational system could also hamper China's long-term scientific progress. China's education relies heavily on memorization and fosters little critical thinking.
1/28/2007
More small businesses seeking experts for non-core tasks
The outsourcing business is likely to record double-digit growth with small and medium-sized enterprises (SMEs) as a new market for the services, says a local specialist."Outsourcing service still has a long way to grow and develop since an increasing number of firms have started to realise its benefits," said Weerachai Ngamdeevilaisak, the director of the local service provider Professional Outsourcing Solutions.
The value of the global outsourcing market has grown sharply, from US$570 billion in 2002 to an estimated U$1.2 trillion last year, according to the Asia-Pacific Human Development Report 2006 issued by the United Nations Development Programme (UNDP).
India alone represents 40% of the global outsourcing market, and in its success in attracting lucrative information technology and call-centre work has been well documented. Other major Asian providers are China, the Philippines, Malaysia, Thailand and Vietnam. The report says Asia's advantage lies in its growing pool of highly skilled and lower-cost workers.
Domestically, SMEs are becoming increasingly aware of the benefits of outsourcing tasks in which they lack expertise or would face high costs if they did the work themselves. Their key areas of interest include financial and accounting services in order to avoid accounting errors and tax exposure.
"That's because SMEs today have begun to realise that abiding by the laws is in fact advantageous to their own businesses since they can lay better and more accurate business plans based on truthful accounting and financial statements," Mr Weerachai explained.
For Professional Outsourcing Solutions, SMEs now represent 20% of its business while multinational companies account for 51% and listed firms 13%.
Founded in 1986, Professional Outsourcing Solutions was once a part of the now-defunct Arthur Andersen group before it became an independent practice in 2002. Its main services are finance, accounting and payroll. It has 100 client accounts, among them large businesses including Krungthai Card, Siam City Cement and Citibank,.
The company's revenue has grown steadily, from 20 million baht in 2002 to 45 million last year. This year, it has a conservative projection of 50 million baht.
Mr Weerachai said the company had not been affected directly by ongoing political and security tensions. A bigger factor is increasing competition in the market from both existing players and newcomers, which has led to a price war.
"Such price wars won't do any good to the industry in the long run since it could reduce the quality standards of the services," he said.
To build a sustainable business for the long term, he said outsourcing providers need to find their niche and strengths.
"And our niche is to focus on quality of service. We've also offered value-added services that others can't, and have not jumped into the pool of the price war."
As a result, he said, the company has maintained a satisfactory service renewal rate of almost 100%. "Besides, we're always obtaining new customers through word-of-mouth."
The value of the global outsourcing market has grown sharply, from US$570 billion in 2002 to an estimated U$1.2 trillion last year, according to the Asia-Pacific Human Development Report 2006 issued by the United Nations Development Programme (UNDP).
India alone represents 40% of the global outsourcing market, and in its success in attracting lucrative information technology and call-centre work has been well documented. Other major Asian providers are China, the Philippines, Malaysia, Thailand and Vietnam. The report says Asia's advantage lies in its growing pool of highly skilled and lower-cost workers.
Domestically, SMEs are becoming increasingly aware of the benefits of outsourcing tasks in which they lack expertise or would face high costs if they did the work themselves. Their key areas of interest include financial and accounting services in order to avoid accounting errors and tax exposure.
"That's because SMEs today have begun to realise that abiding by the laws is in fact advantageous to their own businesses since they can lay better and more accurate business plans based on truthful accounting and financial statements," Mr Weerachai explained.
For Professional Outsourcing Solutions, SMEs now represent 20% of its business while multinational companies account for 51% and listed firms 13%.
Founded in 1986, Professional Outsourcing Solutions was once a part of the now-defunct Arthur Andersen group before it became an independent practice in 2002. Its main services are finance, accounting and payroll. It has 100 client accounts, among them large businesses including Krungthai Card, Siam City Cement and Citibank,.
The company's revenue has grown steadily, from 20 million baht in 2002 to 45 million last year. This year, it has a conservative projection of 50 million baht.
Mr Weerachai said the company had not been affected directly by ongoing political and security tensions. A bigger factor is increasing competition in the market from both existing players and newcomers, which has led to a price war.
"Such price wars won't do any good to the industry in the long run since it could reduce the quality standards of the services," he said.
To build a sustainable business for the long term, he said outsourcing providers need to find their niche and strengths.
"And our niche is to focus on quality of service. We've also offered value-added services that others can't, and have not jumped into the pool of the price war."
As a result, he said, the company has maintained a satisfactory service renewal rate of almost 100%. "Besides, we're always obtaining new customers through word-of-mouth."
Global outsourcing is cause for optimism
Despite the many challenges facing the pharma industry, drug developers should be optimistic, and one of the reasons is the increasing reliance on global outsourcing to speed development and reduce costs, says new report.
According to the Tufts Center for the Study of Drug Development (CSDD), the pharma industry has suffered in the past few years but the higher usage of outsourcing, largely motivated by the need to augment capacity and contain rising R&D costs, has had a very positive impact on drug makers
Since 2001, spending by drug developers on clinical research services has grown 15 per cent annually – outpacing the 11 per cent rate of overall spending on development – as pharma firms have increased their reliance on contract research organisations (CROs).
“It is proven that companies who outsource stages of the drug development tend to have fewer problems, more accurate results, and are also more likely to achieve a higher level of performance,” Tufts CSDD director Kenneth Kaitin told OutSourcing-Pharma.com.
“Higher efficiency and cost effectiveness have resulted in greater utilisation of outsourcing by pharma companies.”
According to Tufts CSDD, CRO usage growth has been driven by rising volume and complexity of global clinical trial activity and the increasing number of smaller firms conducting clinical research studies.
While smaller companies have been outsourcing in the US in the past, according to Kaitin, the main change is that they are now also off shoring the outsourcing process to take advantage of lower costs characteristic of developing countries.
“We are now seeing small and mid-tier pharma companies outsourcing to foreign countries, outside the US and Western Europe, such as China, India, Eastern Europe and Latin America, where development costs are substantially lower,” said Kaitin.
He added that there was an increasing collaboration between big pharma and small pharmaceutical companies, in particular emerging biotech companies.
This collaboration has taken different shapes, including the increase in funding by big pharma into small firms, the growing Mergers and Acquisitions (M&A) activity, and the overall higher interested of big pharma in smaller companies' activities.
“While drug developers have understood that their long-term viability depends on improving R&D productivity – and have taken steps to address the issues – they are about to see their efforts pay off in terms of improved success rates and greater numbers of new medical products reaching the market,” said Kaitin.
Quite a challenge, considering that, according to recent research, approval rates for standard new drug applications have plummeted in the last two years, from 38 per cent in 2003 to only eight percent in 2005, as the US regulator seem to get tougher on new drug approvals
According to the Tufts Center for the Study of Drug Development (CSDD), the pharma industry has suffered in the past few years but the higher usage of outsourcing, largely motivated by the need to augment capacity and contain rising R&D costs, has had a very positive impact on drug makers
Since 2001, spending by drug developers on clinical research services has grown 15 per cent annually – outpacing the 11 per cent rate of overall spending on development – as pharma firms have increased their reliance on contract research organisations (CROs).
“It is proven that companies who outsource stages of the drug development tend to have fewer problems, more accurate results, and are also more likely to achieve a higher level of performance,” Tufts CSDD director Kenneth Kaitin told OutSourcing-Pharma.com.
“Higher efficiency and cost effectiveness have resulted in greater utilisation of outsourcing by pharma companies.”
According to Tufts CSDD, CRO usage growth has been driven by rising volume and complexity of global clinical trial activity and the increasing number of smaller firms conducting clinical research studies.
While smaller companies have been outsourcing in the US in the past, according to Kaitin, the main change is that they are now also off shoring the outsourcing process to take advantage of lower costs characteristic of developing countries.
“We are now seeing small and mid-tier pharma companies outsourcing to foreign countries, outside the US and Western Europe, such as China, India, Eastern Europe and Latin America, where development costs are substantially lower,” said Kaitin.
He added that there was an increasing collaboration between big pharma and small pharmaceutical companies, in particular emerging biotech companies.
This collaboration has taken different shapes, including the increase in funding by big pharma into small firms, the growing Mergers and Acquisitions (M&A) activity, and the overall higher interested of big pharma in smaller companies' activities.
“While drug developers have understood that their long-term viability depends on improving R&D productivity – and have taken steps to address the issues – they are about to see their efforts pay off in terms of improved success rates and greater numbers of new medical products reaching the market,” said Kaitin.
Quite a challenge, considering that, according to recent research, approval rates for standard new drug applications have plummeted in the last two years, from 38 per cent in 2003 to only eight percent in 2005, as the US regulator seem to get tougher on new drug approvals
Outsourcing in China goes high tech
CNN) -- When company executives think of IT outsourcing, places such as India's Bangalore often come to mind. But that may soon change -- more and more companies are turning to China as not just a cheap source of low-end manufacturing labor but to harness high-tech intellectual might.
One of the companies leading the way is Freeborders, a 7-year-old company that creates customized software for Fortune 500 companies around the world. Headquartered in San Francisco, the bulk of Freeborders' staff of 500 programmers is based in Shenzhen, China, across the border from Hong Kong.
"We think the future of (outsourced) programming is in China," says Freeborders CEO John Cestar. Certainly, it's a fast growing field in China -- the country's outsourcing market is growing by 36 percent a year and is expected to be a near $4 billion-a-year business by 2009, according to Analysys International. This year, the company -- which creates custom software to handle billing, finance and other back-office applications -- plans to quadruple its work force in China to 2,000 employees.
In July the company received an Outsourcing Excellence Award from Forbes Magazine for creating a trading platform, fastextile.com, which links textile mills directly to garment manufacturers worldwide. The company was named one of the world's 50 best managed vendors by "The Black Book of Outsourcing."
CNN spoke with Cestar about the rising profile of China's programming might.
CNN: Why did your company choose China over India for its pool of programmers?
Cestar: About eight years ago, everyone caught on about programming in India and there has frankly been very little interest in other country possibilities. What India has pioneered is a software factory model -- sort of a "price per pound" approach; we can do "X" amount of programming for you at $10 an hour. Really, it makes IT workers very much like assembly line workers in the apparel industry. They are not asked to be creative.
In China, when I first went there 15 years ago to set up operations for another company, I was hugely impressed by how creatively the programmers thought ... they were able to bring a lot of problem-solving skills to the table. It just seems an obvious reservoir to tap for the global market, especially for research and development.
Also, China has much better infrastructure than India ... many companies there have to build their own power plants on site because the local power supply is so dicey; that's not an issue here. And the domestic market for programming has much larger potential than India.
CNN: But don't you have a problem with English language ability in China compared to India?
Cestar: That's more a perceived problem than an actual problem. According to NeoIT (an IT analysis firm) there are 5 million who graduate from university in China every year, and a million of them are studying computer science. Of those, at least a third have strong English language skills; of those, about half are conversationally fluent.
It's really more of a (human resources) problem -- you have to give incentives to your staff to constantly improve their English; they know that if they want to succeed in the company to a managerial position, they'll have to have strong English skills. We have four English professors on staff for training.
CNN: When people think "China" and "software," they often think of "piracy." How do you combat that?
Cestar: Clients sometimes ask me, "(Is) the Chinese government going to have a backdoor into your facility?" In Shenzhen, we bring in standards for security which have been approved by international (industrial verification accreditation). When you walk in, the facility is just like anywhere in the Silicon Valley.
To be honest, handling all the compensation information for 8,000 employees of a bank isn't something that you can peddle on the streets of Shenzhen. In fact, clients often say, "Better you than us" to handle this, because the real problems are if the information is leaked within the company -- this information wouldn't mean anything to you unless you were an employee.
The biggest issue is making sure we have internal isolation and controls in place so competitive information can't reach a competitor ... something they can divine by the nature of project the client has hired us to do. We have internal walls in place between clients who are also competitors.
CNN: What's the biggest challenge for working with programmers in China?
Cestar: We need to work with our employees in China to understand billing and HR systems, to learn how a financial services company issues a receipt or a bill. You have to incorporate a constant learning environment, so they understand the needs of a company in Chicago putting out payroll.
One of the companies leading the way is Freeborders, a 7-year-old company that creates customized software for Fortune 500 companies around the world. Headquartered in San Francisco, the bulk of Freeborders' staff of 500 programmers is based in Shenzhen, China, across the border from Hong Kong.
"We think the future of (outsourced) programming is in China," says Freeborders CEO John Cestar. Certainly, it's a fast growing field in China -- the country's outsourcing market is growing by 36 percent a year and is expected to be a near $4 billion-a-year business by 2009, according to Analysys International. This year, the company -- which creates custom software to handle billing, finance and other back-office applications -- plans to quadruple its work force in China to 2,000 employees.
In July the company received an Outsourcing Excellence Award from Forbes Magazine for creating a trading platform, fastextile.com, which links textile mills directly to garment manufacturers worldwide. The company was named one of the world's 50 best managed vendors by "The Black Book of Outsourcing."
CNN spoke with Cestar about the rising profile of China's programming might.
CNN: Why did your company choose China over India for its pool of programmers?
Cestar: About eight years ago, everyone caught on about programming in India and there has frankly been very little interest in other country possibilities. What India has pioneered is a software factory model -- sort of a "price per pound" approach; we can do "X" amount of programming for you at $10 an hour. Really, it makes IT workers very much like assembly line workers in the apparel industry. They are not asked to be creative.
In China, when I first went there 15 years ago to set up operations for another company, I was hugely impressed by how creatively the programmers thought ... they were able to bring a lot of problem-solving skills to the table. It just seems an obvious reservoir to tap for the global market, especially for research and development.
Also, China has much better infrastructure than India ... many companies there have to build their own power plants on site because the local power supply is so dicey; that's not an issue here. And the domestic market for programming has much larger potential than India.
CNN: But don't you have a problem with English language ability in China compared to India?
Cestar: That's more a perceived problem than an actual problem. According to NeoIT (an IT analysis firm) there are 5 million who graduate from university in China every year, and a million of them are studying computer science. Of those, at least a third have strong English language skills; of those, about half are conversationally fluent.
It's really more of a (human resources) problem -- you have to give incentives to your staff to constantly improve their English; they know that if they want to succeed in the company to a managerial position, they'll have to have strong English skills. We have four English professors on staff for training.
CNN: When people think "China" and "software," they often think of "piracy." How do you combat that?
Cestar: Clients sometimes ask me, "(Is) the Chinese government going to have a backdoor into your facility?" In Shenzhen, we bring in standards for security which have been approved by international (industrial verification accreditation). When you walk in, the facility is just like anywhere in the Silicon Valley.
To be honest, handling all the compensation information for 8,000 employees of a bank isn't something that you can peddle on the streets of Shenzhen. In fact, clients often say, "Better you than us" to handle this, because the real problems are if the information is leaked within the company -- this information wouldn't mean anything to you unless you were an employee.
The biggest issue is making sure we have internal isolation and controls in place so competitive information can't reach a competitor ... something they can divine by the nature of project the client has hired us to do. We have internal walls in place between clients who are also competitors.
CNN: What's the biggest challenge for working with programmers in China?
Cestar: We need to work with our employees in China to understand billing and HR systems, to learn how a financial services company issues a receipt or a bill. You have to incorporate a constant learning environment, so they understand the needs of a company in Chicago putting out payroll.
TEDA Introduces New Policy to Support the Development of the Service Outsourcing Industry
Tianjin Economic- Technological Development Area (TEDA), announces ''Interim Provisions of TEDA to Promote the Development of Service Outsourcing.'' The policy will provide various preferential policies covering areas that include improving infrastructure, encouraging talent imports and training, as well as offering competitive tax support.
n compliance with the policy, TEDA will set up a ''TEDA Fund for the Development of Service Outsourcing,'' with RMB100 million dedicated to supporting the development of service outsourcing. For enterprises and institutions meeting the requirements, in addition to the supporting capital for service outsourcing from the state and Tianjin municipality, TEDA will also provide an additional 50% of that supportive fund. Moreover, TEDA also formulated many supporting policies for service outsourcing enterprises in terms of software export, talent training, financial service and IP service etc. TEDA's support will focus on the service outsourcing of key areas such as software development, R&D design, financial backstage services, finance management, administrative management, HR services and client services, etc.
Recently, three famous domestic software outsourcing companies, namely, Dalian Huaxin, Beijing Beyondsoft and Xi'an Yanxing signed investment agreements with TEDA, who will set up companies in TEDA as significant parts of their development strategies.
As Tianjin Binhai New Area is incorporated in the national overall development planning, TEDA will embrace more opportunities and advantages as a core area. TEDA will make another industrial realignment to develop the modern service based on the advanced manufacturing industry, which and promote industrial upgrading.
About Tianjin Economic-Technological Development Area (TEDA)
Tianjin Economic-Technological Development Area (TEDA) was established in 1984 with the approval of the State Council of the People's Republic of China. It is one of the first state-class economic- is TEDA's strategic choice to optimize the industrial structure technological development areas in the country.
TEDA is located in the center of a larger area bordering Bohai Sea and the east of the Asia-Europe Land Bridge, thus serving as the gate to the two super cities of Beijing and Tianjin, and the throat connecting the northeast of China. By the end of 2005, 4,067 foreign companies have landed in TEDA. Of the Fortune 500 companies, 57 multinational companies, from 10 countries and regions, including such well-established multinational giants as Motorola, Samsung and Toyota, invested in 123 enterprises in TEDA. In 2000, "Fortune" listed TEDA as one of the most highly recommended economic areas in China. In 2002 UNIDO listed TEDA as one of the most dynamic areas of China together with Shenzhen, Suzhou, Wenzhou, Shanghai Pudong and Xi'an High-tech Park.
n compliance with the policy, TEDA will set up a ''TEDA Fund for the Development of Service Outsourcing,'' with RMB100 million dedicated to supporting the development of service outsourcing. For enterprises and institutions meeting the requirements, in addition to the supporting capital for service outsourcing from the state and Tianjin municipality, TEDA will also provide an additional 50% of that supportive fund. Moreover, TEDA also formulated many supporting policies for service outsourcing enterprises in terms of software export, talent training, financial service and IP service etc. TEDA's support will focus on the service outsourcing of key areas such as software development, R&D design, financial backstage services, finance management, administrative management, HR services and client services, etc.
Recently, three famous domestic software outsourcing companies, namely, Dalian Huaxin, Beijing Beyondsoft and Xi'an Yanxing signed investment agreements with TEDA, who will set up companies in TEDA as significant parts of their development strategies.
As Tianjin Binhai New Area is incorporated in the national overall development planning, TEDA will embrace more opportunities and advantages as a core area. TEDA will make another industrial realignment to develop the modern service based on the advanced manufacturing industry, which and promote industrial upgrading.
About Tianjin Economic-Technological Development Area (TEDA)
Tianjin Economic-Technological Development Area (TEDA) was established in 1984 with the approval of the State Council of the People's Republic of China. It is one of the first state-class economic- is TEDA's strategic choice to optimize the industrial structure technological development areas in the country.
TEDA is located in the center of a larger area bordering Bohai Sea and the east of the Asia-Europe Land Bridge, thus serving as the gate to the two super cities of Beijing and Tianjin, and the throat connecting the northeast of China. By the end of 2005, 4,067 foreign companies have landed in TEDA. Of the Fortune 500 companies, 57 multinational companies, from 10 countries and regions, including such well-established multinational giants as Motorola, Samsung and Toyota, invested in 123 enterprises in TEDA. In 2000, "Fortune" listed TEDA as one of the most highly recommended economic areas in China. In 2002 UNIDO listed TEDA as one of the most dynamic areas of China together with Shenzhen, Suzhou, Wenzhou, Shanghai Pudong and Xi'an High-tech Park.
1/27/2007
Logistics Outsourcing on the Home Front
It's usually overseas companies benefiting from outsourcing Latest News about Outsourcing work to lower-cost markets, but at least one Syracuse, N.Y., firm is also reaping rewards from the trend.
"As companies become more and more lean and focus on their core competencies, they look to companies like ours to help them manage their supply chain," says Gar Grannell, president of Mohawk Global Logistics, a customs and transportation logistics firm. "The outsourcing of the logistics function grows 10 percent to 20 percent a year worldwide. We're a direct benefactor of that growth."
In the past six years, Mohawk, founded in 1970, grew from about 30 employees to 55. It opened branch offices in Rochester and Albany -- both in New York -- and saw revenues grow an average of 20 percent to 30 percent annually, Grannell says.
He declined to comment on specific revenue numbers.
Offering Expertise
Companies large and small are shedding internal transportation planning. The shipping world is becoming more complex and requires more expertise as rules and regulations mount.
"There's new emphasis on compliance in import and export," Grannell says. "And since 9/11, security Barracuda Spam Filter – Free Evaluation Unit, of course, is the hot button and rightfully so. There [are] all kinds of new programs coming out that are meant to help secure the supply chain coming into the United States.
"We're on top of all those changes. We can help keep our clients in compliance because of that."
Multiple Services
Mohawk Global Logistics handles the planning and arrangements for its clients' domestic and international transportation needs. It also helps its customers' goods clear customs.
The company began more than 36 years ago, focusing mostly on customs work. Its founder, Michael McSherry, is still involved in the firm as chairman.
As Mohawk grew, it began developing more expertise in shipping logistics. In 1985, the revenue was split evenly between customs work and logistics, Grannell says.
Now, about 80 percent comes from the shipping side and 20 percent emanates from customs.
Location, Location, Location
One reason for the company's overall success is the emphasis it places on building relationships with the shipping communities in its markets, Grannell says.
In Syracuse, for example, Mohawk's office is in the same building as the U.S. customs agents and is just a few hundred yards from the airport.
The fact that the firm is based in upstate New York is also an advantage. Most of its competitors are located in larger cities, such as New York, Boston or Miami.
"Because of the many complexities involved in our business, there is a great deal of personal attention you have to apply to the conversation," Grannell says. "It's a model that's based on local expertise.
"It's a lot more difficult for [our competitors] to hop in a car and come talk to a client. We do it on a regular basis."
Grannell joined the company in 1990 as a senior account executive and rose through the ranks until becoming president two years ago.
The Basics
Mohawk employs 10 in Rochester, five in Albany and 40 in Syracuse. It has 15,000 square feet of total space in Syracuse, 10,000 in Rochester and 1,500 in Albany.
The expansion Mohawk began in 2000 came after it tried to serve other markets from its Syracuse headquarters, Grannell says.
"We found that the model that worked here really is a model we needed to use in those markets," he says. "We had to be there. We had to be embedded in those markets and be a part of the community."
Getting Domestic
The firm also entered the domestic arena two years ago, when it began handling logistics for shipments within the United States. Until then, when customers asked about domestic work, Mohawk referred the business to other companies -- often direct competitors.
The firm previously focused on international shipments. The domestic work accounted for less than 10 percent of the company's business last year, but could make up as much as 30 percent this year, Grannell says.
While Mohawk Global Logistics has benefited from a favorable market for its services, Grannell gives much of the credit for growth to his staff.
"As much as we can talk about potential in the marketplace, you still have to have people who can capitalize on it," he says.
"As companies become more and more lean and focus on their core competencies, they look to companies like ours to help them manage their supply chain," says Gar Grannell, president of Mohawk Global Logistics, a customs and transportation logistics firm. "The outsourcing of the logistics function grows 10 percent to 20 percent a year worldwide. We're a direct benefactor of that growth."
In the past six years, Mohawk, founded in 1970, grew from about 30 employees to 55. It opened branch offices in Rochester and Albany -- both in New York -- and saw revenues grow an average of 20 percent to 30 percent annually, Grannell says.
He declined to comment on specific revenue numbers.
Offering Expertise
Companies large and small are shedding internal transportation planning. The shipping world is becoming more complex and requires more expertise as rules and regulations mount.
"There's new emphasis on compliance in import and export," Grannell says. "And since 9/11, security Barracuda Spam Filter – Free Evaluation Unit, of course, is the hot button and rightfully so. There [are] all kinds of new programs coming out that are meant to help secure the supply chain coming into the United States.
"We're on top of all those changes. We can help keep our clients in compliance because of that."
Multiple Services
Mohawk Global Logistics handles the planning and arrangements for its clients' domestic and international transportation needs. It also helps its customers' goods clear customs.
The company began more than 36 years ago, focusing mostly on customs work. Its founder, Michael McSherry, is still involved in the firm as chairman.
As Mohawk grew, it began developing more expertise in shipping logistics. In 1985, the revenue was split evenly between customs work and logistics, Grannell says.
Now, about 80 percent comes from the shipping side and 20 percent emanates from customs.
Location, Location, Location
One reason for the company's overall success is the emphasis it places on building relationships with the shipping communities in its markets, Grannell says.
In Syracuse, for example, Mohawk's office is in the same building as the U.S. customs agents and is just a few hundred yards from the airport.
The fact that the firm is based in upstate New York is also an advantage. Most of its competitors are located in larger cities, such as New York, Boston or Miami.
"Because of the many complexities involved in our business, there is a great deal of personal attention you have to apply to the conversation," Grannell says. "It's a model that's based on local expertise.
"It's a lot more difficult for [our competitors] to hop in a car and come talk to a client. We do it on a regular basis."
Grannell joined the company in 1990 as a senior account executive and rose through the ranks until becoming president two years ago.
The Basics
Mohawk employs 10 in Rochester, five in Albany and 40 in Syracuse. It has 15,000 square feet of total space in Syracuse, 10,000 in Rochester and 1,500 in Albany.
The expansion Mohawk began in 2000 came after it tried to serve other markets from its Syracuse headquarters, Grannell says.
"We found that the model that worked here really is a model we needed to use in those markets," he says. "We had to be there. We had to be embedded in those markets and be a part of the community."
Getting Domestic
The firm also entered the domestic arena two years ago, when it began handling logistics for shipments within the United States. Until then, when customers asked about domestic work, Mohawk referred the business to other companies -- often direct competitors.
The firm previously focused on international shipments. The domestic work accounted for less than 10 percent of the company's business last year, but could make up as much as 30 percent this year, Grannell says.
While Mohawk Global Logistics has benefited from a favorable market for its services, Grannell gives much of the credit for growth to his staff.
"As much as we can talk about potential in the marketplace, you still have to have people who can capitalize on it," he says.
1/25/2007
Neusoft Becomes One of First Chinese Members of the Global Growth Companies Community
Recently, a membership signing ceremony for Global Growth Companies of the World Economic Forum was held in Dalian, China. The VIPs include Xia Deren, Mayor of Dalian City, and Andre Schneider, Managing Director of the World Economic Forum. Neusoft Group Ltd., represented by Yu Keqing, VP & International Cooperation GM, was invited to the event as one of the first Chinese members.
The Community of Global Growth Companies' mission is to enable emerging multinationals to develop into the next generation of global champions and become a major force driving economic development. It is a cross-industry global community of companies that have demonstrated a clear potential to become leaders in the global economy within five years. The companies enjoy a strong industry or regional market presence and have both the aspiration and ability to become global champions. They will be selected based on a combination of factors: Demonstrated growth potential and 15% annual growth over the last two years; minimum revenue thresholds (an indicative range is between US$ 200 million to US$ 2 billion); and demonstrated executive leadership.
As a leading software and solution provider as well as the largest offshore outsourcing provider in China, Neusoft offers a wide portfolio of products, solutions, and services to more than 8,000 large customers in China as well as offshore outsourcing service to over 30 overseas clients. It is qualified to join the Community for its outstanding growth.
Yu Keqing, VP & International Cooperation GM, Neusoft Group Ltd., said, ''As one of the first Chinese members of the Community, Neusoft will fully leverage the platform provided by the Community and actively share experience and thinking of growth together with the Fortune 500 companies and other global growth companies. We hope to make contributions to help Chinese enterprises to fit into global business environment better.''
About Neusoft
Neusoft Group Ltd. is a leading software and solution provider in China. Founded in 1991, Neusoft has three inter-promoting business units that are engaged respectively in software & services, medical systems and IT education & training, supported by a total staff of over 10,000. In addition, the Company has set up software parks in Shenyang, Dalian, Chengdu and Nanhai for further R&D and HR reserves. After successfully constructing a complete sales & service network covering over forty cities around China, it has further extended its branches to the US and Japan. At present, Neusoft offers products and services to over 8,000 large customers, maintaining leading market shares in telecommunications, social insurance, enterprises, electric power, network security and other sectors. It is also China's largest offshore outsourcing service provider.
The Community of Global Growth Companies' mission is to enable emerging multinationals to develop into the next generation of global champions and become a major force driving economic development. It is a cross-industry global community of companies that have demonstrated a clear potential to become leaders in the global economy within five years. The companies enjoy a strong industry or regional market presence and have both the aspiration and ability to become global champions. They will be selected based on a combination of factors: Demonstrated growth potential and 15% annual growth over the last two years; minimum revenue thresholds (an indicative range is between US$ 200 million to US$ 2 billion); and demonstrated executive leadership.
As a leading software and solution provider as well as the largest offshore outsourcing provider in China, Neusoft offers a wide portfolio of products, solutions, and services to more than 8,000 large customers in China as well as offshore outsourcing service to over 30 overseas clients. It is qualified to join the Community for its outstanding growth.
Yu Keqing, VP & International Cooperation GM, Neusoft Group Ltd., said, ''As one of the first Chinese members of the Community, Neusoft will fully leverage the platform provided by the Community and actively share experience and thinking of growth together with the Fortune 500 companies and other global growth companies. We hope to make contributions to help Chinese enterprises to fit into global business environment better.''
About Neusoft
Neusoft Group Ltd. is a leading software and solution provider in China. Founded in 1991, Neusoft has three inter-promoting business units that are engaged respectively in software & services, medical systems and IT education & training, supported by a total staff of over 10,000. In addition, the Company has set up software parks in Shenyang, Dalian, Chengdu and Nanhai for further R&D and HR reserves. After successfully constructing a complete sales & service network covering over forty cities around China, it has further extended its branches to the US and Japan. At present, Neusoft offers products and services to over 8,000 large customers, maintaining leading market shares in telecommunications, social insurance, enterprises, electric power, network security and other sectors. It is also China's largest offshore outsourcing service provider.
China should strive to be "global office" of service outsourcing
With the entry into 2007, a term with a high frequency use, "service outsourcing," has been added to China's policy on use of capital from overseas. The Ministry of Commerce discloses that the country is expected to build 10 "service outsourcing"base cities to attract 100 ace transnational firms to transfer their service outsourcing business to China and breed 1,000 big or medium-size service outsourcing enterprises with international accreditations during the period of its 11th Five-Year Program from 206-2010.
"Service outsourcing represents a salient hallmark of the 'flattening' world," notes the global best-selling book "the World Is Flat". At present, with a diversity of outsourcing international services and an increasing specialization of transnational firms in the developed nations, their rear or logistic service, customer service, commercial business handling, research and development, and consultancy analysis, have been outsourced to the newly emerging nations.
With an annual pace of 30 to 40 percent to speed up, the global outsourcing market is expected to amount to 1.2 trillion US dollars this year. Authoritative agencies have forecasted that off-shore outsourcing for white collars in the United States will reach 30 percent in the next five years and, by 2010, 25 percent of their traditional IT businesses will flow to India, China and Russia. The modernization and globalization of service industry has not only fundamentally altered the development mode of global service business, but changed in an in-depth, penetrating way the growth mode of economy, industries and technologies in all nations, and determined their international competitiveness to a fairly great extent.
Service outsourcing pose an immense opportunity for China, which has attracted a host of foreign manufacturing industries to move into its territory during some 30 years of reform and opening up, spurred the shift of overseas manufacturing industries to China and made "China-made" goods increasingly popular on the world market. In the past decade, it has sustained the relatively high criteria of its information industry and the related infrastructure facilities, provided its outsourcing and off-shore management with more advantages and enabled General Electric (GE), Dell, IBM and Nokia to transfer their rear service in the Asia-Pacific region to China, which has all-round conditions for undertaking service outsourcing, a stable, healthy macro-economic situation and an infinite potential for domestic service industry with available higher-quality but low-cost human resources.
Furthermore, the added value of service outsourcing is anywhere from five to ten-fold higher that of traditional processing and manufacturing industries. With a great headway made in information technology globally, China should conform to the current development trends, spur service outsourcing orderly and turn itself into a "global office." And India's experience in this regard is worth learning from.
Thanks to a higher deposit saving rate, China now has a balance of approximately 35 trillion yuan (4.3 trillion US dollars) in deposits, and its foreign exchange reserve exceeds one trillion dollars, so the capital no longer poses a bottleneck for its economic growth. The gut issue at present is how to shift from the effort for attraction of investment to stress on the selection of investment, the investment quality, the optimization of investment mix and the solicitation of investment mode, so as to give scope to the outflow effect of overseas capital.
To date, China has only input one third of the capital it has drawn from overseas into its service sector, whereas other nations usually allocate two thirds of their foreign investment to the same sector. Judging from another perspective, with an average global service trade added value making up two thirds of GDP worldwide, the added value in China's service industry is only around 40 percent versus over 50 percent for other developing nations. A lower-degree openness constitutes one of the main causes for a sluggish growth in China's service sector, and the development of service outsourcing is precisely a major breakthrough in expanding the country's modern service industry and raising its level in the use of overseas capital. "Seizing a golden opportunity, one can attain his status by getting his things done."
The relevant government departments have made it crystal-clear that China will go on improving incentive measures, set up service outsourcing bases and cultivate relevant enterprises in an effort to boost service outsourcing business. The country will intensify measures to "prop up" spheres concerning banking, qualified personnel training, investment promotion, enterprise accreditation, public information service and intellectual property right protection. When more and more transnational firms turn to China as a leading destination for service outsourcing, the day is not distant for it to become a "global office".
"Service outsourcing represents a salient hallmark of the 'flattening' world," notes the global best-selling book "the World Is Flat". At present, with a diversity of outsourcing international services and an increasing specialization of transnational firms in the developed nations, their rear or logistic service, customer service, commercial business handling, research and development, and consultancy analysis, have been outsourced to the newly emerging nations.
With an annual pace of 30 to 40 percent to speed up, the global outsourcing market is expected to amount to 1.2 trillion US dollars this year. Authoritative agencies have forecasted that off-shore outsourcing for white collars in the United States will reach 30 percent in the next five years and, by 2010, 25 percent of their traditional IT businesses will flow to India, China and Russia. The modernization and globalization of service industry has not only fundamentally altered the development mode of global service business, but changed in an in-depth, penetrating way the growth mode of economy, industries and technologies in all nations, and determined their international competitiveness to a fairly great extent.
Service outsourcing pose an immense opportunity for China, which has attracted a host of foreign manufacturing industries to move into its territory during some 30 years of reform and opening up, spurred the shift of overseas manufacturing industries to China and made "China-made" goods increasingly popular on the world market. In the past decade, it has sustained the relatively high criteria of its information industry and the related infrastructure facilities, provided its outsourcing and off-shore management with more advantages and enabled General Electric (GE), Dell, IBM and Nokia to transfer their rear service in the Asia-Pacific region to China, which has all-round conditions for undertaking service outsourcing, a stable, healthy macro-economic situation and an infinite potential for domestic service industry with available higher-quality but low-cost human resources.
Furthermore, the added value of service outsourcing is anywhere from five to ten-fold higher that of traditional processing and manufacturing industries. With a great headway made in information technology globally, China should conform to the current development trends, spur service outsourcing orderly and turn itself into a "global office." And India's experience in this regard is worth learning from.
Thanks to a higher deposit saving rate, China now has a balance of approximately 35 trillion yuan (4.3 trillion US dollars) in deposits, and its foreign exchange reserve exceeds one trillion dollars, so the capital no longer poses a bottleneck for its economic growth. The gut issue at present is how to shift from the effort for attraction of investment to stress on the selection of investment, the investment quality, the optimization of investment mix and the solicitation of investment mode, so as to give scope to the outflow effect of overseas capital.
To date, China has only input one third of the capital it has drawn from overseas into its service sector, whereas other nations usually allocate two thirds of their foreign investment to the same sector. Judging from another perspective, with an average global service trade added value making up two thirds of GDP worldwide, the added value in China's service industry is only around 40 percent versus over 50 percent for other developing nations. A lower-degree openness constitutes one of the main causes for a sluggish growth in China's service sector, and the development of service outsourcing is precisely a major breakthrough in expanding the country's modern service industry and raising its level in the use of overseas capital. "Seizing a golden opportunity, one can attain his status by getting his things done."
The relevant government departments have made it crystal-clear that China will go on improving incentive measures, set up service outsourcing bases and cultivate relevant enterprises in an effort to boost service outsourcing business. The country will intensify measures to "prop up" spheres concerning banking, qualified personnel training, investment promotion, enterprise accreditation, public information service and intellectual property right protection. When more and more transnational firms turn to China as a leading destination for service outsourcing, the day is not distant for it to become a "global office".
1/24/2007
correction
The article titled "Offshoring is about Tapping Global Talent: Study" which posted on
dated 1/4/2007,I would like to give a correction as the following:
"The Offshoring Research Network is a project of the Center for International Business Education and Research (CIBER) at Duke University's Fuqua School of Business. The ORN project was launched in 2004 and 2005 in partnership with Archstone Consulting LLC and has continued in 2006 with the Booz Allen Hamilton Inc as the lead coproprate sponsor."
I am sorry for my mistake.
dated 1/4/2007,I would like to give a correction as the following:
"The Offshoring Research Network is a project of the Center for International Business Education and Research (CIBER) at Duke University's Fuqua School of Business. The ORN project was launched in 2004 and 2005 in partnership with Archstone Consulting LLC and has continued in 2006 with the Booz Allen Hamilton Inc as the lead coproprate sponsor."
I am sorry for my mistake.
1/23/2007
Offshore attrition on the rise
Offshoring, especially for business process outsourcing (BPO), is about to hit a wall. After all, despite being a relatively new phenomenon made possible by advances in communications, it remains subject to one timeless principle of economics: supply and demand.
The HR pros call it attrition. On any particular project outsourced to a service provider in India, you can expect at least a 15% turnover rate for personnel assigned to the project within a year. For some projects, BPO chief among them, it is not unheard of for a whole staff to turn over by year's end, according to Paul Schmidt, a partner in the global services delivery practice at TPI, one of the larger sourcing advisory organizations.
With technology so closely tied to business strategy, to talk about BPO today is to understand the consequences of not being able to deliver expected services in a timely manner because of high turnover.
Schmidt puts it much better than I can: "There is a tremendous opportunity for value leakage," he says. In other words, if you don't pay enough attention upfront to the realities of attrition at your service provider, you will end up with higher costs, lower-quality deliverables, or, worse, a project that goes bust.
The high attrition rate, particularly in India, finds its roots in the phenomenal growth of outsourcing and offshoring. A recently completed TPI study, "India: An Attractive BPO Destination Marred by Alarming Attrition" by Dinesh Goel and Prabhash Thakur, pegs the growth of BPO attrition during the past three years at approximately 50% per year.
What's fueling this attrition is that despite all you may have heard about how many computer science majors graduate from Indian universities annually, there is a finite talent pool -- and those graduates know it.
The study reports that "the rate of attrition seems to be increasing," and it questions whether the offshore BPO industry can sustain growth and satisfy clients over the long term given this trend. The study cites inconsistent delivery of service levels, loss of client-specific knowledge and additional investment in retraining service provider staff as consequences of these high attrition rates.
Obviously, you can't just ignore the problem and assume that it's up to the service providers to fix it. There are steps you should take, as an offshoring client, to help mitigate the fallout of attrition.
Schmidt recommends a carrot-and-stick approach.
A company must insist on a service-level agreement that quantifies the level of attrition it is willing to tolerate. There must also be clauses within the SLA stating that when turnover reaches a certain threshold, it is the service provider's responsibility to retrain and re-educate workers.
On the carrot side, Schmidt says the client should provide ample training and career movement. It should also consider including engaging and challenging work in the mix. And allowing individuals to rotate through opportunities to work in the U.S. is certainly a big motivator for keeping them on a particular project -- not to mention reward and recognition programs with financial incentives.
That said, Schmidt doesn't see service provider fees going up long term, mainly because of the competitive climate that persists in India.
Soon enough, supply and demand will increase the cost of offshoring. Over time, this will level the playing field and will motivate companies to reconsider whether they should keep projects in-house or send them overseas.
The HR pros call it attrition. On any particular project outsourced to a service provider in India, you can expect at least a 15% turnover rate for personnel assigned to the project within a year. For some projects, BPO chief among them, it is not unheard of for a whole staff to turn over by year's end, according to Paul Schmidt, a partner in the global services delivery practice at TPI, one of the larger sourcing advisory organizations.
With technology so closely tied to business strategy, to talk about BPO today is to understand the consequences of not being able to deliver expected services in a timely manner because of high turnover.
Schmidt puts it much better than I can: "There is a tremendous opportunity for value leakage," he says. In other words, if you don't pay enough attention upfront to the realities of attrition at your service provider, you will end up with higher costs, lower-quality deliverables, or, worse, a project that goes bust.
The high attrition rate, particularly in India, finds its roots in the phenomenal growth of outsourcing and offshoring. A recently completed TPI study, "India: An Attractive BPO Destination Marred by Alarming Attrition" by Dinesh Goel and Prabhash Thakur, pegs the growth of BPO attrition during the past three years at approximately 50% per year.
What's fueling this attrition is that despite all you may have heard about how many computer science majors graduate from Indian universities annually, there is a finite talent pool -- and those graduates know it.
The study reports that "the rate of attrition seems to be increasing," and it questions whether the offshore BPO industry can sustain growth and satisfy clients over the long term given this trend. The study cites inconsistent delivery of service levels, loss of client-specific knowledge and additional investment in retraining service provider staff as consequences of these high attrition rates.
Obviously, you can't just ignore the problem and assume that it's up to the service providers to fix it. There are steps you should take, as an offshoring client, to help mitigate the fallout of attrition.
Schmidt recommends a carrot-and-stick approach.
A company must insist on a service-level agreement that quantifies the level of attrition it is willing to tolerate. There must also be clauses within the SLA stating that when turnover reaches a certain threshold, it is the service provider's responsibility to retrain and re-educate workers.
On the carrot side, Schmidt says the client should provide ample training and career movement. It should also consider including engaging and challenging work in the mix. And allowing individuals to rotate through opportunities to work in the U.S. is certainly a big motivator for keeping them on a particular project -- not to mention reward and recognition programs with financial incentives.
That said, Schmidt doesn't see service provider fees going up long term, mainly because of the competitive climate that persists in India.
Soon enough, supply and demand will increase the cost of offshoring. Over time, this will level the playing field and will motivate companies to reconsider whether they should keep projects in-house or send them overseas.
Outsourcing Product Engineering to Offshore Service Providers
By Steve Banker
ARC is in the process of doing a study on outsourcing of Product Engineering to Offshore Service Providers. In other words, the majority of engineers are based in low cost countries, and there are cost arbitrage advantages that can result from outsourcing of product engineering.
At this point we have had initial discussions with most of the significant suppliers who compete based on the Global Service Delivery model. Perhaps the two most interesting conversations involved Satyam Computer Services, who sent a large team into visit ARC last week, and Quality Engineering & Software Technologies (QuEST).
Satyam, with revenues of over a billion dollars, is a provider of diverse IT and Business Process Outsourcing services, including engineering services. In what they call "extended engineering services", they did over $80 million in business in the last calendar year. In contrast, QuEST is a much smaller company. They had 2006 revenues of about $40 million. They were also much more focused on product engineering services (about 90 percent of their revenues come from engineering services).
Satyam emphasized that they could be a strategic partner that they could speed the customer's time to market. While they are willing to do simpler and more mundane forms of product engineering, they make it clear that they are also capable of providing much more complex services.
In contrast, QuEST was more willing talk about their desire and ability to do non-core engineering. Further, they stress the cost arbitrage advantages of offshoring. Initially, they argue, "Our engineers may only be 60 percent as productive as yours, but in 6 to 12 months, perhaps our engineers will be 80 percent as productive as yours."
Satyam's folks absolutely disagreed with the idea that Indian engineers had to be less productive than their client's. They pointed to one client that measured both Satyam's engineers and their own engineers on productivity. Satyam's engineers, based on these metrics, were indistinguishable from the client's engineers. With time, the right management, processes, and metrics, parity can be achieved.
While I accept the idea that with time, trusted outsource partners will be used more strategically, and their value will go beyond simple labor arbitrage, most companies will begin their engineering outsourcing with less complex tasks, and the initial focus will be cost savings. Based on that premise, what are the economics?
Economics
The surface economics of outsourcing product engineering are very positive. While pay differs by industry and specialization, a fully loaded (salary and benefits) American mechanical engineer with 10 years of experience will cost a company about $10,000 per month. In comparison, offshore providers charge as little as $2,400 per month for relatively simple activities like converting Computer Aided Diagram (CAD) diagrams for use in technical publications to as much as $7,500 for complex Computer Aided Engineering (CAE) modeling and analysis, where engineers are in short supply. $3,000 is a good estimate for the average rate for a seasoned mechanical engineer.
However, in a new engagement with an offshore supplier, there would typically people sent to the company's site, particularly early in the engagement to scope the requirements. The higher the ratio of engineers on site with the customer (the customer pays for travel), or near site (supporting the customer from an office in their home region) as compared to offshore, the more it will cost. However, as a rough industry guide, Western companies should expect to pay a blended rate of about $25 per hour ($4,150) per month.
However, Indian engineers will not be as productive as American engineers. The offshore productivity ratio is the true key to the economics of offshoring Product Engineering Services. Let's assume that offshore suppliers are being overly optimistic on their employee's productivity, and that the true productivity range is from 25 percent to 70 percent. Let's further assume your blended fee for an Indian engineer is $25 per hour versus $60 for an American. If the offshore engineer is 25 productive as the American, the Western firm would have better off keeping all the work internal. They will find themselves 40 percent less cost effective than if they had done the work themselves. If the Indian engineers are 70 percent as productive as the US based engineers, the Western firm is a clear winner. They will find have spent 68 percent less on labor to accomplish a given amount of work. The break even productivity rate is 42 percent. That is the point at which there is no cost advantage, or disadvantage, from offshoring.
This analysis does not consider the extra costs of supervision and travel that would be incurred by a Western firm, which can be substantial.
Factors Affecting Productivity
It is clear that a primary consideration affecting the cost efficiency of an outsourced arrangement is the productivity of the engineers at the out-sourced firm. What are the factors that affect this?
First of all, good metrics are critical. But beyond that, the more seamlessly the two companies’ PLM systems are integrated, the easier it is for offshore engineers to be productive.
The offshore, nearshore, on site ratio also matters. Offshore engineers are the least expensive. On site engineers, foreign engineers from low cost countries that spend several months at a customer's development center working on a project, cost more. Near shore engineers, engineers in a development center in the same region, cost the most, and in fact will cost more than a Western companies own engineers. While some suppliers tout the advantages of 24 hour follow the sun development, these advantages can be more mythical than real, particularly with more complex engineering or projects that are difficult to scope. The vast difference in time zones between North America and India - 6:30 am in Boston is 5:00 pm in Bangalore, India - make having telephone conversations onerous. This makes ongoing supervision and control very difficult. Thus, the higher the ratio of offshore to onshore (or nearshore to offshore), the higher the productivity, but the higher the cost will be.
The ratio of on site, or near site, to offshore should differ depending upon the complexity of work undertaken and a particular supplier's business model. If CAD migration is done, or drawing conversions, all that may be needed is a relatively quick trip to the customer's site to understand the requirements and how they will be measured. With time, as the customer and the outsourcer get to know each other, not even that is required. Specs can just be faxed or emailed over. In contrast, higher value activity, like conceptual design, analysis, and design validation will usually require a higher onsite presence to guaranty productivity.
The tool, industry, and customer experience of the outsourcers' engineers also affects productivity. CAD/CAM/CAE tools are complex. It takes time to learn how to use them well. According to QuEST, many Indian students graduate with no experience having used any of these tools. To deal with this problem, QuEST works with six engineering schools. Experienced QuEST engineers teach courses on how to use CAD tools. The college students can take this course as a paid elective. Of their 900 engineers, about 200 have come out of these CADAM programs. This allows them to get people they know are dedicated to mechanical engineering, and it gives them better insight into which of the graduates have the right skills.
The folks at Satyam vehemently disagree with this premise. They believe that if you recruit more prestigious Indian schools, the typical graduate has better CAD skills than the typical American graduate. One Satyam manager used to work at GM and was responsible for hiring engineers. She argued it has been far easier to find Indians with tool skills than Americans.
From a productivity perspective, even after you have learned to use one tool well, for example Dassault Catia v5, if a customer needs the firm to use different tool, say UniGraphics' NX, the time required to come up to speed on the new tool is significant.
Industry experience affects productivity, including the productivity on a particular tool. If an engineer has aeronautic industry experience, they understand how an airplane is assembled, how they are stamped, and because of this knowledge, they can use the tool in a more productive fashion. Similarly, knowledge of a customer's processes and operations can make the offshore provider more efficient. Unlike in manufacturing, where Lean and Six Sigma are considered operational best practices, there is little agreement on what constitutes operational excellence in product development. The product development processes vary greatly company to company. To the extent that a Western company develops a long term relationship with an offshore company, and the offshore supplier dedicates staff to that customer, productivity can improve.
Satyam has a required course that new engineers assigned to important clients most pass through. The course trains the young engineer on their client's processes and works to pass on some industry domain expertise. Further, they attempt to train their engineers on the industry domain knowledge by actively rotating engineers onsite to see first hand the manufacturing processes.
Productivity can also be adversely affected by the different culture's communication styles. Indians can be very agreeable. In an effort to please they may tell you that work is complete, when it is not done yet. Having Indian managers, who are trained in "soft skills", to manage their own Indian engineers can be one way to avoid this problem.
Finally, it is clear that the cost of Indian engineers is rising and that retention of good engineers is an issue. However, at Satyam the attrition rate is in the single digits, lower than the double digit rates in the IT area. To the extent that Indian companies can keep their engineers engaged on interesting projects, they can help to retain their best engineers. For this reason, a certain amount of rotation of engineers into and out of key accounts may be necessary. Satyam also points out that while wages are rising, young engineers are available. At one of their client's, the average age of the internal engineering force is in the high 50s. In some multinational manufacturers, a whole generation of engineers is on the verge of retirement, and there do not appear to be enough young domestic engineers to fill the vacancies.
One thing is clear; it takes time for offshore engineers to become more productive. This is one reason that companies that are looking to offshore peak engineering demands, rather than engaging in a long term relationship, will never have the productivity and cost efficiencies from their engineering services vendors of companies that view these relationships more strategically. Companies will find it very difficult to engage with large firms, like Satyam, if they are not interested in longer term relationships. But even smaller firms, like QuEST, are unwilling to engage in short term tactical engagements.
ARC is in the process of doing a study on outsourcing of Product Engineering to Offshore Service Providers. In other words, the majority of engineers are based in low cost countries, and there are cost arbitrage advantages that can result from outsourcing of product engineering.
At this point we have had initial discussions with most of the significant suppliers who compete based on the Global Service Delivery model. Perhaps the two most interesting conversations involved Satyam Computer Services, who sent a large team into visit ARC last week, and Quality Engineering & Software Technologies (QuEST).
Satyam, with revenues of over a billion dollars, is a provider of diverse IT and Business Process Outsourcing services, including engineering services. In what they call "extended engineering services", they did over $80 million in business in the last calendar year. In contrast, QuEST is a much smaller company. They had 2006 revenues of about $40 million. They were also much more focused on product engineering services (about 90 percent of their revenues come from engineering services).
Satyam emphasized that they could be a strategic partner that they could speed the customer's time to market. While they are willing to do simpler and more mundane forms of product engineering, they make it clear that they are also capable of providing much more complex services.
In contrast, QuEST was more willing talk about their desire and ability to do non-core engineering. Further, they stress the cost arbitrage advantages of offshoring. Initially, they argue, "Our engineers may only be 60 percent as productive as yours, but in 6 to 12 months, perhaps our engineers will be 80 percent as productive as yours."
Satyam's folks absolutely disagreed with the idea that Indian engineers had to be less productive than their client's. They pointed to one client that measured both Satyam's engineers and their own engineers on productivity. Satyam's engineers, based on these metrics, were indistinguishable from the client's engineers. With time, the right management, processes, and metrics, parity can be achieved.
While I accept the idea that with time, trusted outsource partners will be used more strategically, and their value will go beyond simple labor arbitrage, most companies will begin their engineering outsourcing with less complex tasks, and the initial focus will be cost savings. Based on that premise, what are the economics?
Economics
The surface economics of outsourcing product engineering are very positive. While pay differs by industry and specialization, a fully loaded (salary and benefits) American mechanical engineer with 10 years of experience will cost a company about $10,000 per month. In comparison, offshore providers charge as little as $2,400 per month for relatively simple activities like converting Computer Aided Diagram (CAD) diagrams for use in technical publications to as much as $7,500 for complex Computer Aided Engineering (CAE) modeling and analysis, where engineers are in short supply. $3,000 is a good estimate for the average rate for a seasoned mechanical engineer.
However, in a new engagement with an offshore supplier, there would typically people sent to the company's site, particularly early in the engagement to scope the requirements. The higher the ratio of engineers on site with the customer (the customer pays for travel), or near site (supporting the customer from an office in their home region) as compared to offshore, the more it will cost. However, as a rough industry guide, Western companies should expect to pay a blended rate of about $25 per hour ($4,150) per month.
However, Indian engineers will not be as productive as American engineers. The offshore productivity ratio is the true key to the economics of offshoring Product Engineering Services. Let's assume that offshore suppliers are being overly optimistic on their employee's productivity, and that the true productivity range is from 25 percent to 70 percent. Let's further assume your blended fee for an Indian engineer is $25 per hour versus $60 for an American. If the offshore engineer is 25 productive as the American, the Western firm would have better off keeping all the work internal. They will find themselves 40 percent less cost effective than if they had done the work themselves. If the Indian engineers are 70 percent as productive as the US based engineers, the Western firm is a clear winner. They will find have spent 68 percent less on labor to accomplish a given amount of work. The break even productivity rate is 42 percent. That is the point at which there is no cost advantage, or disadvantage, from offshoring.
This analysis does not consider the extra costs of supervision and travel that would be incurred by a Western firm, which can be substantial.
Factors Affecting Productivity
It is clear that a primary consideration affecting the cost efficiency of an outsourced arrangement is the productivity of the engineers at the out-sourced firm. What are the factors that affect this?
First of all, good metrics are critical. But beyond that, the more seamlessly the two companies’ PLM systems are integrated, the easier it is for offshore engineers to be productive.
The offshore, nearshore, on site ratio also matters. Offshore engineers are the least expensive. On site engineers, foreign engineers from low cost countries that spend several months at a customer's development center working on a project, cost more. Near shore engineers, engineers in a development center in the same region, cost the most, and in fact will cost more than a Western companies own engineers. While some suppliers tout the advantages of 24 hour follow the sun development, these advantages can be more mythical than real, particularly with more complex engineering or projects that are difficult to scope. The vast difference in time zones between North America and India - 6:30 am in Boston is 5:00 pm in Bangalore, India - make having telephone conversations onerous. This makes ongoing supervision and control very difficult. Thus, the higher the ratio of offshore to onshore (or nearshore to offshore), the higher the productivity, but the higher the cost will be.
The ratio of on site, or near site, to offshore should differ depending upon the complexity of work undertaken and a particular supplier's business model. If CAD migration is done, or drawing conversions, all that may be needed is a relatively quick trip to the customer's site to understand the requirements and how they will be measured. With time, as the customer and the outsourcer get to know each other, not even that is required. Specs can just be faxed or emailed over. In contrast, higher value activity, like conceptual design, analysis, and design validation will usually require a higher onsite presence to guaranty productivity.
The tool, industry, and customer experience of the outsourcers' engineers also affects productivity. CAD/CAM/CAE tools are complex. It takes time to learn how to use them well. According to QuEST, many Indian students graduate with no experience having used any of these tools. To deal with this problem, QuEST works with six engineering schools. Experienced QuEST engineers teach courses on how to use CAD tools. The college students can take this course as a paid elective. Of their 900 engineers, about 200 have come out of these CADAM programs. This allows them to get people they know are dedicated to mechanical engineering, and it gives them better insight into which of the graduates have the right skills.
The folks at Satyam vehemently disagree with this premise. They believe that if you recruit more prestigious Indian schools, the typical graduate has better CAD skills than the typical American graduate. One Satyam manager used to work at GM and was responsible for hiring engineers. She argued it has been far easier to find Indians with tool skills than Americans.
From a productivity perspective, even after you have learned to use one tool well, for example Dassault Catia v5, if a customer needs the firm to use different tool, say UniGraphics' NX, the time required to come up to speed on the new tool is significant.
Industry experience affects productivity, including the productivity on a particular tool. If an engineer has aeronautic industry experience, they understand how an airplane is assembled, how they are stamped, and because of this knowledge, they can use the tool in a more productive fashion. Similarly, knowledge of a customer's processes and operations can make the offshore provider more efficient. Unlike in manufacturing, where Lean and Six Sigma are considered operational best practices, there is little agreement on what constitutes operational excellence in product development. The product development processes vary greatly company to company. To the extent that a Western company develops a long term relationship with an offshore company, and the offshore supplier dedicates staff to that customer, productivity can improve.
Satyam has a required course that new engineers assigned to important clients most pass through. The course trains the young engineer on their client's processes and works to pass on some industry domain expertise. Further, they attempt to train their engineers on the industry domain knowledge by actively rotating engineers onsite to see first hand the manufacturing processes.
Productivity can also be adversely affected by the different culture's communication styles. Indians can be very agreeable. In an effort to please they may tell you that work is complete, when it is not done yet. Having Indian managers, who are trained in "soft skills", to manage their own Indian engineers can be one way to avoid this problem.
Finally, it is clear that the cost of Indian engineers is rising and that retention of good engineers is an issue. However, at Satyam the attrition rate is in the single digits, lower than the double digit rates in the IT area. To the extent that Indian companies can keep their engineers engaged on interesting projects, they can help to retain their best engineers. For this reason, a certain amount of rotation of engineers into and out of key accounts may be necessary. Satyam also points out that while wages are rising, young engineers are available. At one of their client's, the average age of the internal engineering force is in the high 50s. In some multinational manufacturers, a whole generation of engineers is on the verge of retirement, and there do not appear to be enough young domestic engineers to fill the vacancies.
One thing is clear; it takes time for offshore engineers to become more productive. This is one reason that companies that are looking to offshore peak engineering demands, rather than engaging in a long term relationship, will never have the productivity and cost efficiencies from their engineering services vendors of companies that view these relationships more strategically. Companies will find it very difficult to engage with large firms, like Satyam, if they are not interested in longer term relationships. But even smaller firms, like QuEST, are unwilling to engage in short term tactical engagements.
1/21/2007
Outsourcing: What International Banks Should Know
As press reports continually remind us, outsourcing is an important focus of every large business. Banks are no different.
A 2005 study by Deloitte Touche Tohmatsu found that the majority of global financial services companies (including banks) surveyed have at least one outsourcing contract.[FOOTNOTE 1] Operations outsourced by such companies include customer call centers, information technology-related services, data processing, investment management and back office clearing operations. Some banks also are establishing subsidiaries to provide these services (called "captive outsourcing") instead of using third-party service providers such as Accenture, OfficeTiger, Infosys or Metavante.
This article looks at international standards and U.S. regulatory requirements for outsourcing of business operations by a bank.
INTERNATIONAL GUIDANCE
There is no dearth of guidance on how banking organizations should handle their outsourcing relationships. At the international level, for example, the Joint Forum, which consists of international banking, securities and insurance regulators, has issued guidance describing the factors that financial services companies and their regulators need to take into consideration in outsourcing arrangements.[FOOTNOTE 2] The Bank for International Settlement's Basle Committee, a group of international bank regulators that sets standards on international banking issues, has included a discussion of outsourcing issues in its publications.[FOOTNOTE 3]
U.S. GUIDANCE
In the United States, there are laws, regulations and regulatory guidance on outsourcing. Under the federal Bank Service Company Act, a bank, including the U.S. office of an international bank, must provide notice to its primary federal regulator when it outsources certain business operations, such as data processing, within 30 days of entering into such an arrangement.[FOOTNOTE 4] A federal banking regulator also must be provided access to the bank's service provider as part of its examination of the bank.
In New York, state-chartered banking organizations and state-licensed offices of international banks must provide prior notice to the New York State Banking Department (NYSBD) of any "data processing" outsourcing arrangement, although the NYSBD generally applies its requirement to any outsourcing of business operations.[FOOTNOTE 5] The NYSBD requires that the contract provide it with access to the service provider's records, books and staff as necessary to examine the bank.
The Federal Financial Institutions Examination Council, a committee of federal and state bank regulators, has issued detailed guidance on outsourcing through its Information Technology booklets, in particular, "Outsourcing Technology Services" (June 2004) and "Supervision of Technology Service Providers" (March 2003). Individual bank regulators also have issued outsourcing guidance.[FOOTNOTE 6]
In addition, some U.S. laws and regulations carry their own service provider provisions, such as the "Interagency Guidelines on Information Security Standards," adopted by the federal banking regulators. The guidelines, with which the banks are expected to comply, require U.S. banks, including U.S. offices of international banks, to implement written information security programs addressing (i) security and confidentiality of customer information, (ii) anticipated threats or hazards to the security or integrity of such information, (iii) unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer, and (iv) proper disposal of customer and consumer information.[FOOTNOTE 7]
Moreover, the guidelines specifically require banks to oversee service provider arrangements and to include a provision in their contracts that the service provider "implement appropriate measures designed to meet the objectives of these Guidelines." Banks also need to monitor the service providers' compliance with this contract provision, such as by reviewing audit reports.
GENERAL PRINCIPLES
What are the more important general principles to be gleaned from all this guidance?
Ultimate responsibility for outsourcing relationships lies with the board of directors and senior management.
The board of directors and senior management of a bank are responsible both for establishing and approving a comprehensive policy to govern the outsourcing process, and for the consequences of any outsourcing arrangement. No outsourcing arrangement should impede a bank's ability to service customers and comply with relevant laws and regulations.
Effective due diligence on potential service providers is critical.
A due diligence checklist for any potential outsourcing arrangement should include the following:
* Obtaining certified copies of the service provider's organizational documents;
* Considering the qualifications and background of the service provider's senior management;
* Researching the reputation of the service provider in the industry;
* Checking the service provider's references and seeking additional references from others;
* Evaluating the financial condition of the service provider by reviewing its audited financial statements and asking for a certificate or other proof of insurance;
* Assessing the service provider's technological and systems capabilities to determine whether it will be able to do the job effectively;
* Reviewing the service provider's internal controls environment and audit function; if there have been lapses in controls, finding out how these lapses were addressed; and
* Examining the service provider's legal and regulatory compliance record, particularly in its home country and in the United States.
A risk management program must take into account all relevant risks.
There are various potential risks involved in any outsourcing arrangement, particularly one involving a provider in another country:
Country/political risk: How politically stable is the government of the country in which the service provider is located? Is there concern that the government could interfere with the service provider's ability to do the job?
Reputational risk: Could problems with the service provider reflect poorly on the bank and its ability to effectively service customers, or, worse, is the service provider violating regulations or agreed-upon procedures such that the bank regulators will seek an enforcement action against the bank?
Operational risk: Is the service provider going to be able to perform the contracted-for services without undue problems or delays? Does the service provider have a business continuity plan in the event of a disaster that disrupts operations?
Compliance risk: Is the service provider able to comply with all relevant laws and regulations and specified company practices?
Strategic risk: Is the outsourced activity in line with the bank's corporate goals? Is there effective oversight of the service provider to ensure compliance with overall corporate goals?
Information security risk: Does the service provider have adequate systems in place to protect data, such as limiting access to records to only those persons needing to review them, providing adequate physical security at the building and having electronic authentication policies such as frequent change of passwords?
The contract with the service provider should be as specific as possible regarding the expectations of the parties.
All the oral "understandings" reached during negotiations are useless unless they are put in writing. A contract must address all of the parties' expectations and describe specific rights and responsibilities, particularly where the contract is calling for a change in the usual procedures followed by the service provider.
For example, a service provider may subcontract out some of its work under a particular service contract, but subcontracting may raise additional risks for the bank. The contract should provide for disclosure to, and approval by, the bank of all subcontracting relationships.
The contract's provisions should include a discussion of the following items:
* Pricing structure, including additional costs for special services;
* Measurable service levels and performance standards;
* Security and confidentiality of information;
* Preservation of intellectual property rights;
* Audit and oversight rights;
* Regular reporting requirements;
* Business continuity plans;
* Acknowledgement of the regulatory right of access to the service provider's systems, records and personnel as part of an examination of the bank;
* Dispute resolution, assignment and indemnification provisions; and
* Termination provisions (the bank should be able to terminate the contract without penalty if the relevant regulator orders the bank to terminate such relationship).
The service provider must understand and acknowledge the importance of regulatory compliance.
In 2002, the U.S. Treasury Department's Office of the Comptroller of the Currency, which charters and regulates national banks, took regulatory action against both a national bank and its service provider for various reasons, including failure to safeguard customer loan files, some of which had been left in a trash dumpster. The contract must be very specific about the service provider's responsibility to comply with changes in all applicable laws or regulations, even if a particular change is applicable only to one jurisdiction.
The bank must have an effective monitoring and oversight mechanism of the outsourcing relationship.
The bank needs to monitor the service provider's performance under contract on a regular basis through review of periodic required reports, audited financials and SAS-70 reviews of the adequacy of the service provider's policies and procedures controls. There also should be periodic on-site meetings at the service provider's office, and regular telephone or e-mail contact.
Offshoring has special risks to keep in mind.
As noted above, a bank's decision to outsource operations to another country requires heightened scrutiny of the risks involved, such as country/political risk and compliance risk. The bank should carefully consider whether the service provider will be able to deliver on a consistent basis the contracted-for services.
For example, there may be restrictions under particular laws or regulations that could impede full performance, such as the strict European Union data transfer laws that permit transfer of personal data to non-EU countries only under certain conditions. A bank's counsel should carefully review any potential data transfer issues, particularly if information might be transferred from an EU location or concern EU residents, whether or not the information was initially stored or intended to be stored in an EU location.
ACROSS MULTIPLE JURISDICTIONS
International banks may find themselves in a bind when they seek to have only one contract with a service provider encompass multiple jurisdictions. It can take months for a bank to agree with a potential service provider with respect to one jurisdiction, let alone more than one.
Additional problems arise after a contract is in effect and the bank seeks to add a new jurisdiction. The service provider may be reluctant to re-open issues that it thought had been decided. The bank must be able to require what is needed from a service provider with respect to a particular jurisdiction despite potential protests. The service provider likely will be familiar with the principal requirements imposed by various countries.
In negotiating any global master outsourcing agreement, an international bank should plan for an expansion of the contract into other jurisdictions and have the service provider agree to a new schedule if it is necessary to accommodate an expansion of services into the new region. Then, when the time comes to discuss the new schedule for a U.S. office of an international bank, the bank should be able to explain the proposed revisions and whether they are derived from law or regulations such as the Interagency Guidelines, from best practices guidance expected to be followed by banks such as review of audit and SAS-70 reports, or from established company policy such as employee background checks.
CONCLUSION
Outsourcing can save a bank millions of dollars, but cost savings alone cannot dictate a service provider contract. The bank must establish an overall policy on outsourcing, conduct effective due diligence of potential service providers, set out expectations in a well-drafted contract and be able to effectively monitor the service provider. In addition, regulatory compliance is a key element of any outsourcing arrangement.
A 2005 study by Deloitte Touche Tohmatsu found that the majority of global financial services companies (including banks) surveyed have at least one outsourcing contract.[FOOTNOTE 1] Operations outsourced by such companies include customer call centers, information technology-related services, data processing, investment management and back office clearing operations. Some banks also are establishing subsidiaries to provide these services (called "captive outsourcing") instead of using third-party service providers such as Accenture, OfficeTiger, Infosys or Metavante.
This article looks at international standards and U.S. regulatory requirements for outsourcing of business operations by a bank.
INTERNATIONAL GUIDANCE
There is no dearth of guidance on how banking organizations should handle their outsourcing relationships. At the international level, for example, the Joint Forum, which consists of international banking, securities and insurance regulators, has issued guidance describing the factors that financial services companies and their regulators need to take into consideration in outsourcing arrangements.[FOOTNOTE 2] The Bank for International Settlement's Basle Committee, a group of international bank regulators that sets standards on international banking issues, has included a discussion of outsourcing issues in its publications.[FOOTNOTE 3]
U.S. GUIDANCE
In the United States, there are laws, regulations and regulatory guidance on outsourcing. Under the federal Bank Service Company Act, a bank, including the U.S. office of an international bank, must provide notice to its primary federal regulator when it outsources certain business operations, such as data processing, within 30 days of entering into such an arrangement.[FOOTNOTE 4] A federal banking regulator also must be provided access to the bank's service provider as part of its examination of the bank.
In New York, state-chartered banking organizations and state-licensed offices of international banks must provide prior notice to the New York State Banking Department (NYSBD) of any "data processing" outsourcing arrangement, although the NYSBD generally applies its requirement to any outsourcing of business operations.[FOOTNOTE 5] The NYSBD requires that the contract provide it with access to the service provider's records, books and staff as necessary to examine the bank.
The Federal Financial Institutions Examination Council, a committee of federal and state bank regulators, has issued detailed guidance on outsourcing through its Information Technology booklets, in particular, "Outsourcing Technology Services" (June 2004) and "Supervision of Technology Service Providers" (March 2003). Individual bank regulators also have issued outsourcing guidance.[FOOTNOTE 6]
In addition, some U.S. laws and regulations carry their own service provider provisions, such as the "Interagency Guidelines on Information Security Standards," adopted by the federal banking regulators. The guidelines, with which the banks are expected to comply, require U.S. banks, including U.S. offices of international banks, to implement written information security programs addressing (i) security and confidentiality of customer information, (ii) anticipated threats or hazards to the security or integrity of such information, (iii) unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer, and (iv) proper disposal of customer and consumer information.[FOOTNOTE 7]
Moreover, the guidelines specifically require banks to oversee service provider arrangements and to include a provision in their contracts that the service provider "implement appropriate measures designed to meet the objectives of these Guidelines." Banks also need to monitor the service providers' compliance with this contract provision, such as by reviewing audit reports.
GENERAL PRINCIPLES
What are the more important general principles to be gleaned from all this guidance?
Ultimate responsibility for outsourcing relationships lies with the board of directors and senior management.
The board of directors and senior management of a bank are responsible both for establishing and approving a comprehensive policy to govern the outsourcing process, and for the consequences of any outsourcing arrangement. No outsourcing arrangement should impede a bank's ability to service customers and comply with relevant laws and regulations.
Effective due diligence on potential service providers is critical.
A due diligence checklist for any potential outsourcing arrangement should include the following:
* Obtaining certified copies of the service provider's organizational documents;
* Considering the qualifications and background of the service provider's senior management;
* Researching the reputation of the service provider in the industry;
* Checking the service provider's references and seeking additional references from others;
* Evaluating the financial condition of the service provider by reviewing its audited financial statements and asking for a certificate or other proof of insurance;
* Assessing the service provider's technological and systems capabilities to determine whether it will be able to do the job effectively;
* Reviewing the service provider's internal controls environment and audit function; if there have been lapses in controls, finding out how these lapses were addressed; and
* Examining the service provider's legal and regulatory compliance record, particularly in its home country and in the United States.
A risk management program must take into account all relevant risks.
There are various potential risks involved in any outsourcing arrangement, particularly one involving a provider in another country:
Country/political risk: How politically stable is the government of the country in which the service provider is located? Is there concern that the government could interfere with the service provider's ability to do the job?
Reputational risk: Could problems with the service provider reflect poorly on the bank and its ability to effectively service customers, or, worse, is the service provider violating regulations or agreed-upon procedures such that the bank regulators will seek an enforcement action against the bank?
Operational risk: Is the service provider going to be able to perform the contracted-for services without undue problems or delays? Does the service provider have a business continuity plan in the event of a disaster that disrupts operations?
Compliance risk: Is the service provider able to comply with all relevant laws and regulations and specified company practices?
Strategic risk: Is the outsourced activity in line with the bank's corporate goals? Is there effective oversight of the service provider to ensure compliance with overall corporate goals?
Information security risk: Does the service provider have adequate systems in place to protect data, such as limiting access to records to only those persons needing to review them, providing adequate physical security at the building and having electronic authentication policies such as frequent change of passwords?
The contract with the service provider should be as specific as possible regarding the expectations of the parties.
All the oral "understandings" reached during negotiations are useless unless they are put in writing. A contract must address all of the parties' expectations and describe specific rights and responsibilities, particularly where the contract is calling for a change in the usual procedures followed by the service provider.
For example, a service provider may subcontract out some of its work under a particular service contract, but subcontracting may raise additional risks for the bank. The contract should provide for disclosure to, and approval by, the bank of all subcontracting relationships.
The contract's provisions should include a discussion of the following items:
* Pricing structure, including additional costs for special services;
* Measurable service levels and performance standards;
* Security and confidentiality of information;
* Preservation of intellectual property rights;
* Audit and oversight rights;
* Regular reporting requirements;
* Business continuity plans;
* Acknowledgement of the regulatory right of access to the service provider's systems, records and personnel as part of an examination of the bank;
* Dispute resolution, assignment and indemnification provisions; and
* Termination provisions (the bank should be able to terminate the contract without penalty if the relevant regulator orders the bank to terminate such relationship).
The service provider must understand and acknowledge the importance of regulatory compliance.
In 2002, the U.S. Treasury Department's Office of the Comptroller of the Currency, which charters and regulates national banks, took regulatory action against both a national bank and its service provider for various reasons, including failure to safeguard customer loan files, some of which had been left in a trash dumpster. The contract must be very specific about the service provider's responsibility to comply with changes in all applicable laws or regulations, even if a particular change is applicable only to one jurisdiction.
The bank must have an effective monitoring and oversight mechanism of the outsourcing relationship.
The bank needs to monitor the service provider's performance under contract on a regular basis through review of periodic required reports, audited financials and SAS-70 reviews of the adequacy of the service provider's policies and procedures controls. There also should be periodic on-site meetings at the service provider's office, and regular telephone or e-mail contact.
Offshoring has special risks to keep in mind.
As noted above, a bank's decision to outsource operations to another country requires heightened scrutiny of the risks involved, such as country/political risk and compliance risk. The bank should carefully consider whether the service provider will be able to deliver on a consistent basis the contracted-for services.
For example, there may be restrictions under particular laws or regulations that could impede full performance, such as the strict European Union data transfer laws that permit transfer of personal data to non-EU countries only under certain conditions. A bank's counsel should carefully review any potential data transfer issues, particularly if information might be transferred from an EU location or concern EU residents, whether or not the information was initially stored or intended to be stored in an EU location.
ACROSS MULTIPLE JURISDICTIONS
International banks may find themselves in a bind when they seek to have only one contract with a service provider encompass multiple jurisdictions. It can take months for a bank to agree with a potential service provider with respect to one jurisdiction, let alone more than one.
Additional problems arise after a contract is in effect and the bank seeks to add a new jurisdiction. The service provider may be reluctant to re-open issues that it thought had been decided. The bank must be able to require what is needed from a service provider with respect to a particular jurisdiction despite potential protests. The service provider likely will be familiar with the principal requirements imposed by various countries.
In negotiating any global master outsourcing agreement, an international bank should plan for an expansion of the contract into other jurisdictions and have the service provider agree to a new schedule if it is necessary to accommodate an expansion of services into the new region. Then, when the time comes to discuss the new schedule for a U.S. office of an international bank, the bank should be able to explain the proposed revisions and whether they are derived from law or regulations such as the Interagency Guidelines, from best practices guidance expected to be followed by banks such as review of audit and SAS-70 reports, or from established company policy such as employee background checks.
CONCLUSION
Outsourcing can save a bank millions of dollars, but cost savings alone cannot dictate a service provider contract. The bank must establish an overall policy on outsourcing, conduct effective due diligence of potential service providers, set out expectations in a well-drafted contract and be able to effectively monitor the service provider. In addition, regulatory compliance is a key element of any outsourcing arrangement.
Asia Pacific Outsourcing Market Bucks Global Trend
Outsourcing deals inked in the Asia Pacific in 2006 topped US$25 million, a 43 percent increase on the previous year, according to advisory firm TPI Inc. Asia Pacific managing director of the outsourcing consultancy, Arno Franz, said 2006 was a stand-out year for the region accounting for 13 percent of the global market.
"It is the first time market share has exceeded 10 per cent since 2002; but the relative immaturity of the Asia Pacific market makes it prone to spikes in activity so it remains to be seen if this is the start of an ongoing growth trend," Franz said.
The compound annual growth rate for service providers in the region is 10.5 per cent, according to TPI, which is more than double the global rate of 4.5 percent.
Despite the 'lumpy' nature of the Asia Pacific market in terms of yearly contract awards, Franz said the sustained growth in annualized revenues since 2002 suggests there is some strength in the region's outsourcing market.
The big six service providers, namely Accenture Ltd., Affiliated Computer Services Inc., CSC Corp., EDS Inc., Hewlett-Packard Co., and IBM Corp., are losing market share.
This group won 40 percent of the region's contracts last year, compared with a 60 percent share in 2002.
Franz said the increased competition shows clients are more receptive to doing business with the non-Big Six providers.
"Alongside the global giants of outsourcing, there is clearly room for smaller, specialized service providers who can address specific client needs," he said.
"At the moment success for service providers in Australia, India and Japan , seems to be the determining factor for success in the Asia Pacific."
Indian outsourcers are increasingly becoming the big winners in the region.
For example, Tata Consultancy Services Ltd. (TCS) announced today it has become the first Indian IT company to net $1 billion in revenues in one financial quarter (Q3 ending December 31, 2006) and post a 40 percent revenue increase year on year.
TCS recently signed a multi-year application development and support contract worth $90 million with Qantas.
Another provider Infosys Technologies Ltd., said earlier this month it expects full year revenue to be US$3.09 billion, up by 43.6 percent from revenue in the previous fiscal year.
In Australia, more than A$7 billion (US$5.46 billion) worth of outsourcing contracts are up for grabs in 2007.
According to research firm IDC, which has released the results of its 2006 Australian outsourcing end-user survey, a number of large contracts are expected to go with selective sourcing as organizations continue to unbundle mammoth IT contracts and look to best-of-breed providers.
IDC research manager for outsourcing and BPO (Business Process Outsourcing), Aprajita Sharma, said tier one providers face tough competition from Indian offshore outsourcers.
"It is the first time market share has exceeded 10 per cent since 2002; but the relative immaturity of the Asia Pacific market makes it prone to spikes in activity so it remains to be seen if this is the start of an ongoing growth trend," Franz said.
The compound annual growth rate for service providers in the region is 10.5 per cent, according to TPI, which is more than double the global rate of 4.5 percent.
Despite the 'lumpy' nature of the Asia Pacific market in terms of yearly contract awards, Franz said the sustained growth in annualized revenues since 2002 suggests there is some strength in the region's outsourcing market.
The big six service providers, namely Accenture Ltd., Affiliated Computer Services Inc., CSC Corp., EDS Inc., Hewlett-Packard Co., and IBM Corp., are losing market share.
This group won 40 percent of the region's contracts last year, compared with a 60 percent share in 2002.
Franz said the increased competition shows clients are more receptive to doing business with the non-Big Six providers.
"Alongside the global giants of outsourcing, there is clearly room for smaller, specialized service providers who can address specific client needs," he said.
"At the moment success for service providers in Australia, India and Japan , seems to be the determining factor for success in the Asia Pacific."
Indian outsourcers are increasingly becoming the big winners in the region.
For example, Tata Consultancy Services Ltd. (TCS) announced today it has become the first Indian IT company to net $1 billion in revenues in one financial quarter (Q3 ending December 31, 2006) and post a 40 percent revenue increase year on year.
TCS recently signed a multi-year application development and support contract worth $90 million with Qantas.
Another provider Infosys Technologies Ltd., said earlier this month it expects full year revenue to be US$3.09 billion, up by 43.6 percent from revenue in the previous fiscal year.
In Australia, more than A$7 billion (US$5.46 billion) worth of outsourcing contracts are up for grabs in 2007.
According to research firm IDC, which has released the results of its 2006 Australian outsourcing end-user survey, a number of large contracts are expected to go with selective sourcing as organizations continue to unbundle mammoth IT contracts and look to best-of-breed providers.
IDC research manager for outsourcing and BPO (Business Process Outsourcing), Aprajita Sharma, said tier one providers face tough competition from Indian offshore outsourcers.
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