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The changed agenda in the global sourcing industry

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November 14, 2009 Global ICT services sourcing conference, Sharm-el-Sheikh CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited The changed agenda in the global sourcing industry: perspectives and developments
McKinsey & Company | 1 Executive summary ▪ Long-term trends towards increased outsourcing and offshoring are prevailing. Driven by a changing environment the industry size is expected to triple in the next 10 years – Fundamental advantages of outsourcing (focus on core) and offshoring (need to address onshore skills shortage and cost pressure) continue to hold, thus O+O industry will portray further growth – 20-25% of future growth likely to come from further penetration of already existing segments, while 75-80% likely to stem from new market segments: new verticals (healthcare, etc), SMBs and new domestic outsourcing segments in BRIC countries, overall tripling the addressable market to 1,5 trillion USD by 2020 ▪ While the economic downturn has caused a moderate slow-down in industry growth, there are early signs of recovery – 2009 expecting slowest revenue growth in the history of the O&O industry – Early signs of recovery supported by increased industry activity in 2H 2009 and optimistic outlook of users – However, significant uncertainty remains about ultimate timing and shape of economic recovery (V vs. W) ▪ Moving forward, the imperatives for successful O&O management are coping with increased uncertainty and complexity combined with a strong belief in the fundamental growth perspectives of the industry – Companies need to focus on increasing their ability to manage uncertainty in a flexible and agile mode – The most predominant trends are taking the industry towards an unseen complex multi-dimensionality ▫ Multi-servicing: Everything that can be can be outsourced a/o offshored will be ▫ Multi-sourcing: Buyers of O+O services will play their market choices and exercise price pressure ▫ Multi-shoring: Ever new locations will strive for a share in this growth market – Egypt seems well positioned – Key take-aways: 1) Consider that O&O fundamentals are prevailing and invest in bold moves, 2) Make your organization "fit" for managing uncertainty and consider O&O as key levers 3) Manage the emerging complex multi-dimensionality in O&O
McKinsey & Company | 2 Fundamental advantages of outsourcing and offshoring continue to hold SOURCE: McKinsey O&O Practice ▪ Focus on core business activities/capabilities ▪ Outsource non-core, which are core for partner ▪ Decrease cost through sharing partner’s scale ▪ Variabilize fix cost, and thus ▪ Increase sourcing flexibility to ▪ Meet changing business conditions ▪ Cope with skills shortage in onshore markets by tapping into offshore talent pools; e.g., India produces ~4 million graduates p.a. willing to participate in global workforces ▪ Improve quality of services through employing higher skilled labor; e.g. employment of commerce graduates for accounts payables processing ▪ Lower cost base through labor arbitrage Fundamental advantages Offshore 2 Outsource 1
McKinsey & Company | 3 Focus on the core business: Easier said than done! 1 SOURCE: McKinsey Auto Financial Services Logistics & Transport Auto Supplies Core- vs. Non-Core Business ?! (Example: Automotive industry) Main source of earnings at ▪ GM ▪ VW etc.
McKinsey & Company | 4 SOURCE: McKinsey Core Capabilities mainly shaped by share of internal value generation 1 A Global OEM B Regional Supplier 25 Own value generation 65 Own value generation Is there a necessity for such a large difference in share of internal value generation?
McKinsey & Company | 5 Procure Customer Service Create Make Sell Service Human Resource Management Administer IT Infrastructure incl. AD/AM Accounting, Finance, Legal & Taxes, … Focus on core capabilities may look like A... 1 VALUE ADDED CHAIN OF INDUSTRIAL ENTERPRISE – EXAMPLE A SOURCE: McKinsey Core capabilities
McKinsey & Company | 6 … or: Focus on core capabilities rather looking like B! 1 VALUE ADDED CHAIN OF INDUSTRIAL ENTERPRISE – EXAMPLE B SOURCE: McKinsey Core capabilities Procure Customer Service Create Make Sell Service Administer Human Resource Management Accounting, Finance, Legal & Taxes, … IT Infrastructure incl. AD/AM
McKinsey & Company | 7 Offshore talent pools can yield quality and productivity gains 2 Business Process Offshoring IT Offshoring Number of correct transactions/number of total transactions Percent Project performance Percent on time and budget U.K. Bench- mark Remote facility 95 98 Total satis- faction factor 85 92 95 75 45 30 1 2 3 5 CMM level 41 of 58 CMM level 5 companies in India INDIA EXAMPLE SOURCE: McKinsey P360
McKinsey & Company | 8 While cost savings remain a driving factor for O&O activities … SOURCE: McKinsey Finance 360 Database; McKinsey O&O Practice, MIT Sloan CISR Survey on 80 Outsourcing contracts Why outsource or offshore? Cost savings in support functions 1 Includes management reporting, budgeting and forecasting, decision support 2 Includes tax, treasury, risk management, audit, M&A 3 Includes accounts payable, accounts receivable, T&E, all accounting processes 65 72 Shortening of throughput/ development time 45-50 Quality improvements 55-60 Flexibility increase Cost savings Number of mentions as important Percent Indexed numbers 50 50 66-74 30-35 36-39 IT system design/ process automation 4-5 4-5 Consoli- dation 3-5 4-5 Sourcing (offshoring/ out- sourcing) 8-10 3-4 Original cost base 100 Future cost base Transaction processing3 Business1 support and expert functions2 Process and exe- cution Organiza- tion/gov- ernance Demand manage- ment
McKinsey & Company | 9 Master transaction center for WE EU/global center for core competencies (Co-)Center of EU business management Driver ▪ Low-cost labor ▪ Broad talent pool ▪ Deep talent pool ▪ Engaged workforce ▪ Building career models ▪ Customers/suppliers moving East ▪ Interesting markets ▪ Established EE footprint Examples ▪ Lufthansa (Cracow) ▪ Zurich/Capgemini (Cracow) ▪ P&G/HP (Bucharest) ▪ Delphi (Cracow) ▪ Siemens (Wroclaw) ▪ SAP Labs (Sofia) ▪ Dell (Bratislava) ▪ JCI (Bratislava) Transaction factory Knowledge hub Corporate/regional headquarters Faster move to knowledge-intensive services driven by combination of factors ▪ Talented workforce with good functional knowledge ▪ Cultural proximity/accessibility/time-zone overlap ▪ Language capabilities … many companies have recognized the potential of O&O beyond labor arbitrage CEE EXAMPLE SOURCE: McKinsey EESTCom2, April 2007
McKinsey & Company | 10 Users are convinced of the (growing) importance of O&O Companies offshore more … How do you foresee the impact of the recent financial crisis on offshoring activities and decisions? Percentage of responses (n = 76), EESTCom survey 2009 … and O&O workforce takes up additional/ higher value-add work Shift of work Headcount changes SOURCE: EESTCom survey 2009; press; interviews 4 44 51 3-50 Fewer functions offshored Quicker transition 31-60 Tightening of business cases More functions offshored Others European Investment Bank ▪ Onshore staff more heavily affected by lay-offs ▪ Continued buildup of O&O resources ▪ Relative part of headcount in low-cost locations increased Offshore Onshore
McKinsey & Company | 11 Offshoring revenues USD billions Significant industry growth Growth of O&O continues keeping fundamental momentum SOURCE: NASSCOM report 2009; McKinsey O&O Practice 48 90 6 40 25% 2020E 440 250 110 80 2015E 230 100 2008 90 30 12 2005 37 11 21 5 2001 8 CAGR ESO ITO BPO Global transformative forces are the main driver of future growth
McKinsey & Company | 12 Productivity revolution The great rebalancing ▪ Asian 21st century ▪ Emerging markets scaling up, also in innovation ▪ Further urbanization ▪ Shrinking working age population in key developed countries ▪ Huge pressure on productivity to achieve economic growth Pricing the planet ▪ Rapidly increasing consumption/supply gap in key natural resources creating need for resource efficient climate change solutions ▪ Global economic crisis led to major shifts in industry structures and regulatory control ▪ Countries compete for business activities Opportunities ▪ Rise of untapped market segments – New Geographies – New Service lines; e.g. climate change Verticals like public sector, healthcare – SMB customer segments – Increased adoption of global sourcing Risks ▪ Erosion in existing segments from – Automation – Cannibalization of existing services (e.g., SaaS replacing production support) – Spend consolidation – Slowdown in adoption due to greater regulatory control SOURCE: McKinsey Global Forces Research, Oct. 2009; O&O Practice, Nov 2009 Five global transformative forces impact the outlook of the O&O industry Global Grid • Increased Internet + mobile links transforming the way people interact/live • New trade flows among developing countries Market State 5 global transformative forces
McKinsey & Company | 13 130 Core markets 2008 500 220 150 Total addressable market in 2020 1,500-1,640 405-440 895-980 200-220 Domestic outsourcing market in new geographies 380-420 230-250 85-90 145-160 New verticals in developed countries 190-220 60-70 130-150 Growth in core markets 200-250 30-40 120-140 50-70 280-310 New customer segments 100-110 Total addressable market for global sourcing and domestic outsourcing, 2020 USD billions Innovation can further expand the addressable market ▪ SMBs ▪ Public sector ▪ Healthcare ▪ Media1 ▪ Utilities ▪ 6 verticals (BFSI, telecom, retail, pharma, manufacturing, travel) ▪ North America, Western Europe, Japan ▪ Large enterprises 75-80% of growth from market segments, that are not core today 1 2 3 Engineering services/R&D Business services Technology services 1 Printing and publishing SOURCE: Global Insight; Gartner January 2009 Currently untapped segments will drive 75-80% of incremental growth by 2020 ▪ Brazil ▪ Russia ▪ India ▪ China 20-25% of growth from core markets
McKinsey & Company | 14 Sources of new market growth by 2020 are: Four additional verticals, SMBs across numerous verticals and Domestic BRIC outsourcing SOURCE: Global Insight; Gartner January 2009; McKinsey analysis Global sourcing addressable market for new verticals, 2020 Global sourcing addressable market for SMBs by vertical in core geographies, 2020 ~20 ~35 Banking Retail 80-90 ~10 Insurance Whole- sale banking 30-35 Travel 15-20 Others Manu- facturing ~40 Total 230-250 USD billions 190-220 90-105 Total Media (printing and publishing) 17-20 Utilities 25-30 Healthcare providers 58-65 Public sector and defence 1 3 2 2 1 Total addressable market from new geographies, 2020 India 90-100 China 205-225 Total 380-420 40-45 Brazil 45-50 Russia 3
McKinsey & Company | 15 Executive summary ▪ Long-term trends towards increased outsourcing and offshoring are prevailing. Driven by a changing environment the industry size is expected to triple in the next 10 years – Fundamental advantages of outsourcing (focus on core) and offshoring (need to address onshore skills shortage and cost pressure) continue to hold, thus O+O industry will portray further growth – 20-25% of future growth likely to come from further penetration of already existing segments, while 75-80% likely to stem from new market segments: new verticals (healthcare, etc), SMBs and new domestic outsourcing segments in BRIC countries, overall tripling the addressable market to 1,5 trillion USD by 2020 ▪ While the economic downturn has caused a moderate slow-down in industry growth, there are early signs of recovery – 2009 expecting slowest revenue growth in the history of the O&O industry – Early signs of recovery supported by increased industry activity in 2H 2009 and optimistic outlook of users – However, significant uncertainty remains about ultimate timing and shape of economic recovery (V vs. W) ▪ Moving forward, the imperatives for successful O&O management are coping with increased uncertainty and complexity combined with a strong belief in the fundamental growth perspectives of the industry – Companies need to focus on increasing their ability to manage uncertainty in a flexible and agile mode – The most predominant trends are taking the industry towards an unseen complex multi-dimensionality ▫ Multi-servicing: Everything that can be can be outsourced a/o offshored will be ▫ Multi-sourcing: Buyers of O+O services will play their market choices and exercise price pressure ▫ Multi-shoring: Ever new locations will strive for a share in this growth market – Egypt seems well positioned – Key take-aways: 1) Consider that O&O fundamentals are prevailing and invest in bold moves, 2) Make your organization "fit" for managing uncertainty and consider O&O as key levers 3) Manage the emerging complex multi-dimensionality in O&O
McKinsey & Company | 16 Revenue growth for leading Indian O&O players1 Net Profit growth for leading Indian O&O players Sequential quarter change Year-on-year change SOURCE: Kotak Tech quarterly data book; company websites -3.1 -3.1 3.7 4.0 1.4 9.1 22.0 28.0 -4.2 -4.6 6.2 -7.9 -10.6 -6.3 4.6 2.2 4Q08 3Q08 2Q08 1Q08 1 Results declared in the last 4 sequential quarters of FY 2009 for Top 13 players, Rs to US$ conversion based on income statement publication date rate Overall revenue and profit performance of leading Indian O&O players worsened in 2008 Percent 4Q08 2Q08 1Q08 3Q08
McKinsey & Company | 17 2009 expecting slowest growth in the history of the O&O industry SOURCE: NASSCOM, EESTCom 2009, Customer surveys, McKinsey analysis 1 Including ESO and High Tech R&D services 2 Estimates O&O industry revenue US$ billion 19 25 30 43 55 60 80 BPO ITO1 20092 94-96 32-33 62-63 2008 90 2007 2006 62 13% 4-7%
McKinsey & Company | 18 SOURCE: EESTCom survey 2009; GLG survey 2009; company websites, BITKOM 11/2009 1 Profits declared in the last 4 sequential quarters, Rs to US$ conversion based on income statement publication date rate, Indian Fiscal year Decision makers have an optimistic view of their future O&O activities and expansion, with early signs of recovery evident even within 2009 What are your growth plans for captive offshore locations in the next 12-18 months? Examples of early signs of recovery for 20101 (USD Mio) Percentage of respondents (n = 45), EESTCom survey 2009 In percentage terms, how would your outsourced FTE volume change in the next 1-2 years? Percentage of respondents (n = 30), GLG survey 13 31 40 9 7 20-30% 10-20% Will not change much 10-20% 20-30% Decrease employment in offshore locations Expand employment in offshore locations 30 45 20 5 11-20% 1-10% Will not change 1-10% Volume decrease Volume increase 339 315 261 273 +30% 245 217 202 208 4Q08 1Q09 2Q09 3Q09 +21% 318 314 318 320 0% German market growth (estimates in %) IT market Outsourcing market Total size -2 0 7 5 2009 2010 14,3 15,4 bn EUR
McKinsey & Company | 19 2007 08 09 02 03 04 05 06 0708 09 10 09 0708 05 06 11 04 10 11 12 01 0203 04 05 06 07 0809 12 01 10 11 12 01 0203 04 05 06 2010 70 75 80 85 90 95 100 105 High uncertainty of so far unseen recent crisis situation best addressed via scenarios Dealing with high uncertainty … … via scenarios Ifo-Index in points, year 2000 = 100 ILLUSTRATIVE SOURCE: FTD, Oct.28, 2008, p16; updated with Ifo stats and complemented with scenarios Realists? Moderate crisis Pessimists? Drastic crisis Over optimists? Rapid recovery Medium-term recovery at lower level Optimists ?
McKinsey & Company | 20 Executive summary ▪ Long-term trends towards increased outsourcing and offshoring are prevailing. Driven by a changing environment the industry size is expected to triple in the next 10 years – Fundamental advantages of outsourcing (focus on core) and offshoring (need to address onshore skills shortage and cost pressure) continue to hold, thus O+O industry will portray further growth – 20-25% of future growth likely to come from further penetration of already existing segments, while 75-80% likely to stem from new market segments: new verticals (healthcare, etc), SMBs and new domestic outsourcing segments in BRIC countries, overall tripling the addressable market to 1,5 trillion USD by 2020 ▪ While the economic downturn has caused a moderate slow-down in industry growth, there are early signs of recovery – 2009 expecting slowest revenue growth in the history of the O&O industry – Early signs of recovery supported by increased industry activity in 2H 2009 and optimistic outlook of users – However, significant uncertainty remains about ultimate timing and shape of economic recovery (V vs. W) ▪ Moving forward, the imperatives for successful O&O management are coping with increased uncertainty and complexity combined with a strong belief in the fundamental growth perspectives of the industry – Companies need to focus on increasing their ability to manage uncertainty in a flexible and agile mode – The most predominant trends are taking the industry towards an unseen complex multi-dimensionality ▫ Multi-servicing: Everything that can be can be outsourced a/o offshored will be ▫ Multi-sourcing: Buyers of O+O services will play their market choices and exercise price pressure ▫ Multi-shoring: Ever new locations will strive for a share in this growth market – Egypt seems well positioned – Key take-aways: 1) Consider that O&O fundamentals are prevailing and invest in bold moves, 2) Make your organization "fit" for managing uncertainty and consider O&O as key levers 3) Manage the emerging complex multi-dimensionality in O&O
McKinsey & Company | 21 To navigate the uncertainty, companies need to become more adept at “shaping the future” SOURCE: McKinsey Center for Managing Uncertainty Build awareness ▪ Model company performance and impact under each scenario Enhance resilience ▪ Significantly increase scope and intensity of resiliency actions to safeguard current business Increase flexibility ▪ Build and acquire options for your business and implement "no- regret" moves Determine posture ▪ Take conscious decision wheather company wants to play defense, attack or adapt
McKinsey & Company | 22 Multi-servicing Multi-sourcing (exampl.) Multi-shoring Overarching trends in O&O towards complex multi-dimensionality SOURCE: McKinsey Business model/processes Business capabilities IT infrastructure products IT infrastructure IT applications IT integration platform Business model/processes Business capabilities IT infrastructure products IT infrastructure IT applications IT integration platform ▪ Proliferation of services offshored or outsourced ▪ New customers, verticals and geographies being serviced ▪ Tendency towards indus- trialization of transactional services and adoption of higher value activities ▪ Buyers increasing pres- sure on service providers through increased experi- ence and sophistication in outsourcing ▪ Buyers outsourcing 1 activity to several service providers ▪ Determination of right amount of vendors (typically 2 or 3) ▪ Tendency to diversify risk ▪ Emerging location continue to sustain due to economic attractiveness and risk diversification ▪ Advanced location and governance architectures are developing
McKinsey & Company | 23 Opportunities for global sourcing exist across various functions of the healthcare provider value chain 4 0 5 0 35 35 Sub-function Theoretic maximum share of function that can be outsourced Healthcare provider function Per cent Share of employment Per cent Patient care provision ▪ Physician, practitioner services Nursing services ▪ Nursing care provision Other professional healthcare services ▪ Operating room ▪ Radiography/nuclear medicine ▪ Case management ▪ Pharmacy ▪ Respiratory therapy ▪ Physical therapy ▪ Transport ▪ Other health professional clerical ▪ Diagnostic laboratory etc. Hospitality functions ▪ Housekeeping ▪ Plant operations and maintenance ▪ Security ▪ Laundry/linen ▪ Food services IT services ▪ Hardware operations1 ▪ ADM G&A ▪ General management and legal ▪ Purchasing ▪ Patient billing ▪ Finance and accounting ▪ Personnel/HR ▪ Planning ▪ Medical records ▪ Admissions ▪ 20 ▪ 10 ▪ 10 ▪ 5 ▪ 15 ▪ 15 ▪ 10 ▪ 10 ▪ 30 ▪ 30 ▪ 10 ▪ 15 ▪ 15 ▪ 40 ▪ 20 ▪ 10 ▪ 10 ▪ 15 ▪ 10 ▪ 5 ▪ 10 ▪ 20 ▪ 5 ▪ 60 19 25 28 13 5 10 4 0 ▪ - ▪ 70 ▪ - ▪ 10 ▪ - ▪ - ▪ - ▪ - ▪ - ▪ - ▪ - ▪ - ▪ - ▪ - ▪ 40 ▪ 40 ▪ 50 ▪ 50 ▪ 25 ▪ - ▪ 75 ▪ 10 ▪ 60 Total address- able market for healthcare providers is expected to be USD 58 billion- 65 billion by 2020 High degree of offshor- ability NEW VERTICALS 1 Hardware operations not included SOURCE: Interviews; McKinsey Global Institute analysis HEALTHCARE EXAMPLE
McKinsey & Company | 24 Potential technology and business services offerings for healthcare providers Most important technology services applications1 Per cent Top-3 priorities ▪ Patient-facing services: Medical call centres to reduce cost of hospital admissions, telemedicine for remote monitoring and disease management ▪ Payer/provider-facing services: Billing, administration, scheduling, purchasing etc. Important business services offerings ▪ Dutch company providing outsourcing for billing and collections ▪ German medical call centre company offering on-line and off-line medical consulting for hospitals ▪ British company administering and supporting corporate healthcare programme ▪ German company providing disease management counselling for chronically ill patients Examples 1 2007 HIMSS leadership survey of hospital CIOs SOURCE: Interviews; McKinsey Global Institute analysis NEW VERTICALS 29 29 35 37 43 46 47 47 Computerised practitioner order entry (CPOE) Electronic medical records Clinical information systems Clinical data repository Evidence-based medicine at point of care Point-of-care data collection Bar-coded medication management Enterprise-wide clinical information sharing HEALTHCARE EXAMPLE
McKinsey & Company | 25 Focus of current global sourcing High Low Low High Modularity • Ease in defining work packages with well defined interfaces • Number of feedback loops • More external interfaces and instabilities Module design Systems engineering Certifications Configuration and control management Project management Technical and plant simulations Requirement management Integrated design Advance R&D e.g., materials Layout Dynamic analysis Physical prototype Electrical design CAE CFD FE analysis Technical publication Data conversion (2D to 3D, v4 to v5) Basic design Process Optimisation Low-complexity subassembly design Database management ECN Ability to manage risk ▪ Criticality/risk associated with process ▪ Source of competitive advantage ▪ Requirement to retain in-house skills Asset information management Product design market will expand as companies globally source increasingly complex activities HIGHER VALUE ADD SOURCE: McKinsey analysis
McKinsey & Company | 26 Consumerisation of technology will stimulate adoption of global sourcing by SMBs and even individuals Customer Provider Individual Professional services Legal Accounting Creativity/advertising Financial services Telemedicine Travel services Medical advice Tuition/homework Business Individual Business Present scope of services (large enterprises) SMB B2C NEW CUSTOMER SEGMENTS SOURCE: McKinsey analysis
McKinsey & Company | 27 … but providers willing to help companies increase O&O efficiency Pricing pressures likely to continue, but potentially with increase in volumes O&O prices are likely to decline … SOURCE: Economist; Forbes Asia; interviews 4/2009 UK Pharma company ▪ Intuition to grow large outsourced baseline further led to renegotiation of existing deals ▪ Providers recognize the growth potential and offer – Rate adjustments, especially if overall volume increases – Cooperation on efficiency improvement – More specialized services What is the likely change in technology and business services billing rates in 2009? Percent respondents, n = 29 2009 outlook 36 46 34 40 20 10 10 Existing contracts New contracts Reduce billing rates by more than 10% Reduce billing rates by 5-10% Maintain current billing rates 100 4 Increase billing rates 100 We are experiencing pricing pressures of anywhere from 4% to 15%. – Subramanian Ramadorai, CEO of TCS, March 2009 [There are] predictions that contract prices charged by Indian firms are likely to drop. CLSA1 […] predicts they will fall by 3-5% in the next fiscal year, starting in April 2009 – Economist, Oct 2008
McKinsey & Company | 28 OpCO ADM outsourced to vendor A OpCO ADM outsourced to vendor B OpCO untouched or no OpCo SOURCE: Various press clippings Dual sourcing ADM Outsourcing deal as challenging model of a next generation multi-sourcing arrangement ▪ Retained in-house – ADM strategy & architecture guidance – Select Competence Centers – Vendor Management & Controlling ▪ Bulk of USD 1 billion ADM budget outsourced to A or B for 7 years ▪ Out of 6,000 ADM FTEs in next 3-5 years (of which 3,500 are contractors), 2,500 move to A or B ▪ Contracted blended rate of USD xxx p.d. requiring massive offshoring ▪ Recent B acquisition in India gets substantial load out of this deal EXAMPLE
McKinsey & Company | 29 Companies diversifying location footprints with established locations loosing share SOURCE: EESTCom 2009, McKinsey analysis Share of growth in seats for BPO & ITO Country footprint # of companies in the sample 100% = thousand FTEs 39% 100% = 1-2 countries >=3 countries 2009 44 61% 2008 44 72% 28% 51 58 100% = India Other locations 2009 E ~215-250 42 2008 ~355 49
McKinsey & Company | 30 North America Eastern Europe India China South-East Asia ▪ Philippines are preferred destination for voice ▪ Continued growth in Malaysia ▪ Vietnam still nascent ▪ Emergence of Egypt as potential scale location of choice ▪ Morocco continues to be destination of choice for French companies (~5 deals in 2009) ▪ Limited movement of scale services to near-shore North American destinations though some movement of near-/close-shore services ▪ Eastern Europe continues to maintain share of offshore FTEs ▪ ~86% of growth in existing centers ▪ Argentina and Brazil with different risk and talent profiles; European languages ▪ Emergence of Argentina with notable landmark transactions North Africa South America ▪ China doubling ITO jobs with 100,000+ FTEs likely to be added in domestic and export in 2009 SOURCE: McKinsey Strong momentum seen in the growth of emerging offshoring destinations, based on strong performance in niche areas
McKinsey & Company | 31 British German Spanish 60 100 Novosibirsk, Dalian 10 - 20 Gdansk, Bratislava, Cluj 30 - 40 Rostock Hamburg 50 80 Buenos Aires, Mexico City 30 Constanta, Varna 15 - 25 Valladolid Madrid 15 35 65 130 Hyderabad, Bangalore, … Talinn, Riga Nottingham London ▪ Labor regulation ▪ Proximity ▪ Compliance ▪ Cultural affinity ▪ Cost ▪ Scale Global sourcing is happening at various shores Labor cost index for various shores/semi-experienced software engineer 2006 est. SOURCE: McKinsey O&O Practice June 2007 Onshore Close-shore Near-shore Offshore
McKinsey & Company | 32 Egypt seems well positioned in attracting O&O industry investments Sources: ITIDA; ▪ Government progressing in reforms targeted to attract investors and to simplify doing business ▪ Dedicated agency (ITIDA) supporting growth of BPO/ITO sector and inflow of new investors ▪ Integrated demand strategy with talent pool enhancements established to attract investors with specific service offerings Egyptian government Information Technology Industry Development Agency Information Technology Institute & ITIDA ▪ Tax reforms (e.g., reduction of personal and corporate tax rate) ▪ Customs reforms ▪ Intellectual property protection reforms ▪ Financial sector reforms ▪ Support and foster development of BPO/ITO industry ▪ Guide and promote investments in ICT/BPO sector ▪ Increase exports of ICT products and services ▪ Support R&D in the ICT sector and implement results ▪ Focused outreach to targeted investors based on Egypt's value proposition ▪ University curriculum interventions to scale up suitable graduates pool for BPO activities to 10,000+ on annual basis ▪ Finishing schools and structural university interventions to enhance skill set in European languages by 1000+ annually ▪ IT specific talent programs under design to support growth of ITO industry
McKinsey & Company | 33 Single Multi Servicing Single Multi Sourcing Single Multi Shoring CORE: Complexity Reduction COPE: Complexity Performance Enhancement Focus on CORE appropriate for majority of enterprises; a small league will be capable to capture COPE advantages % of WE enterprises regarding proper complexity management strategy SOURCE: McKinsey O&O Practice 2009 ▪ Capturing value from network management strategies; e.g. hub & spokes ▪ Exploring the long tail ▪ Partner ecosystems ▪ Managing for simplicity across the whole value chain ▪ Capturing value from lean programs and taking out variance wherever feasible ▪ Focus, focus, focus
McKinsey & Company | 34 Key take-aways for successful O&O management in the current and likely future environment Make your organization "fit" for managing the uncertainty and consider O&O as key levers to increase flexibility and agility Manage the emerging complex multi-dimensionality in O&O and apply the best mix for your organization Consider that O&O fundamentals are prevailing and invest in bold moves to increase your long-term benefits SOURCE: McKinsey O&O Practice 2009

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The changed agenda in the global sourcing industry

  • 1. November 14, 2009 Global ICT services sourcing conference, Sharm-el-Sheikh CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited The changed agenda in the global sourcing industry: perspectives and developments
  • 2. McKinsey & Company | 1 Executive summary ▪ Long-term trends towards increased outsourcing and offshoring are prevailing. Driven by a changing environment the industry size is expected to triple in the next 10 years – Fundamental advantages of outsourcing (focus on core) and offshoring (need to address onshore skills shortage and cost pressure) continue to hold, thus O+O industry will portray further growth – 20-25% of future growth likely to come from further penetration of already existing segments, while 75-80% likely to stem from new market segments: new verticals (healthcare, etc), SMBs and new domestic outsourcing segments in BRIC countries, overall tripling the addressable market to 1,5 trillion USD by 2020 ▪ While the economic downturn has caused a moderate slow-down in industry growth, there are early signs of recovery – 2009 expecting slowest revenue growth in the history of the O&O industry – Early signs of recovery supported by increased industry activity in 2H 2009 and optimistic outlook of users – However, significant uncertainty remains about ultimate timing and shape of economic recovery (V vs. W) ▪ Moving forward, the imperatives for successful O&O management are coping with increased uncertainty and complexity combined with a strong belief in the fundamental growth perspectives of the industry – Companies need to focus on increasing their ability to manage uncertainty in a flexible and agile mode – The most predominant trends are taking the industry towards an unseen complex multi-dimensionality ▫ Multi-servicing: Everything that can be can be outsourced a/o offshored will be ▫ Multi-sourcing: Buyers of O+O services will play their market choices and exercise price pressure ▫ Multi-shoring: Ever new locations will strive for a share in this growth market – Egypt seems well positioned – Key take-aways: 1) Consider that O&O fundamentals are prevailing and invest in bold moves, 2) Make your organization "fit" for managing uncertainty and consider O&O as key levers 3) Manage the emerging complex multi-dimensionality in O&O
  • 3. McKinsey & Company | 2 Fundamental advantages of outsourcing and offshoring continue to hold SOURCE: McKinsey O&O Practice ▪ Focus on core business activities/capabilities ▪ Outsource non-core, which are core for partner ▪ Decrease cost through sharing partner’s scale ▪ Variabilize fix cost, and thus ▪ Increase sourcing flexibility to ▪ Meet changing business conditions ▪ Cope with skills shortage in onshore markets by tapping into offshore talent pools; e.g., India produces ~4 million graduates p.a. willing to participate in global workforces ▪ Improve quality of services through employing higher skilled labor; e.g. employment of commerce graduates for accounts payables processing ▪ Lower cost base through labor arbitrage Fundamental advantages Offshore 2 Outsource 1
  • 4. McKinsey & Company | 3 Focus on the core business: Easier said than done! 1 SOURCE: McKinsey Auto Financial Services Logistics & Transport Auto Supplies Core- vs. Non-Core Business ?! (Example: Automotive industry) Main source of earnings at ▪ GM ▪ VW etc.
  • 5. McKinsey & Company | 4 SOURCE: McKinsey Core Capabilities mainly shaped by share of internal value generation 1 A Global OEM B Regional Supplier 25 Own value generation 65 Own value generation Is there a necessity for such a large difference in share of internal value generation?
  • 6. McKinsey & Company | 5 Procure Customer Service Create Make Sell Service Human Resource Management Administer IT Infrastructure incl. AD/AM Accounting, Finance, Legal & Taxes, … Focus on core capabilities may look like A... 1 VALUE ADDED CHAIN OF INDUSTRIAL ENTERPRISE – EXAMPLE A SOURCE: McKinsey Core capabilities
  • 7. McKinsey & Company | 6 … or: Focus on core capabilities rather looking like B! 1 VALUE ADDED CHAIN OF INDUSTRIAL ENTERPRISE – EXAMPLE B SOURCE: McKinsey Core capabilities Procure Customer Service Create Make Sell Service Administer Human Resource Management Accounting, Finance, Legal & Taxes, … IT Infrastructure incl. AD/AM
  • 8. McKinsey & Company | 7 Offshore talent pools can yield quality and productivity gains 2 Business Process Offshoring IT Offshoring Number of correct transactions/number of total transactions Percent Project performance Percent on time and budget U.K. Bench- mark Remote facility 95 98 Total satis- faction factor 85 92 95 75 45 30 1 2 3 5 CMM level 41 of 58 CMM level 5 companies in India INDIA EXAMPLE SOURCE: McKinsey P360
  • 9. McKinsey & Company | 8 While cost savings remain a driving factor for O&O activities … SOURCE: McKinsey Finance 360 Database; McKinsey O&O Practice, MIT Sloan CISR Survey on 80 Outsourcing contracts Why outsource or offshore? Cost savings in support functions 1 Includes management reporting, budgeting and forecasting, decision support 2 Includes tax, treasury, risk management, audit, M&A 3 Includes accounts payable, accounts receivable, T&E, all accounting processes 65 72 Shortening of throughput/ development time 45-50 Quality improvements 55-60 Flexibility increase Cost savings Number of mentions as important Percent Indexed numbers 50 50 66-74 30-35 36-39 IT system design/ process automation 4-5 4-5 Consoli- dation 3-5 4-5 Sourcing (offshoring/ out- sourcing) 8-10 3-4 Original cost base 100 Future cost base Transaction processing3 Business1 support and expert functions2 Process and exe- cution Organiza- tion/gov- ernance Demand manage- ment
  • 10. McKinsey & Company | 9 Master transaction center for WE EU/global center for core competencies (Co-)Center of EU business management Driver ▪ Low-cost labor ▪ Broad talent pool ▪ Deep talent pool ▪ Engaged workforce ▪ Building career models ▪ Customers/suppliers moving East ▪ Interesting markets ▪ Established EE footprint Examples ▪ Lufthansa (Cracow) ▪ Zurich/Capgemini (Cracow) ▪ P&G/HP (Bucharest) ▪ Delphi (Cracow) ▪ Siemens (Wroclaw) ▪ SAP Labs (Sofia) ▪ Dell (Bratislava) ▪ JCI (Bratislava) Transaction factory Knowledge hub Corporate/regional headquarters Faster move to knowledge-intensive services driven by combination of factors ▪ Talented workforce with good functional knowledge ▪ Cultural proximity/accessibility/time-zone overlap ▪ Language capabilities … many companies have recognized the potential of O&O beyond labor arbitrage CEE EXAMPLE SOURCE: McKinsey EESTCom2, April 2007
  • 11. McKinsey & Company | 10 Users are convinced of the (growing) importance of O&O Companies offshore more … How do you foresee the impact of the recent financial crisis on offshoring activities and decisions? Percentage of responses (n = 76), EESTCom survey 2009 … and O&O workforce takes up additional/ higher value-add work Shift of work Headcount changes SOURCE: EESTCom survey 2009; press; interviews 4 44 51 3-50 Fewer functions offshored Quicker transition 31-60 Tightening of business cases More functions offshored Others European Investment Bank ▪ Onshore staff more heavily affected by lay-offs ▪ Continued buildup of O&O resources ▪ Relative part of headcount in low-cost locations increased Offshore Onshore
  • 12. McKinsey & Company | 11 Offshoring revenues USD billions Significant industry growth Growth of O&O continues keeping fundamental momentum SOURCE: NASSCOM report 2009; McKinsey O&O Practice 48 90 6 40 25% 2020E 440 250 110 80 2015E 230 100 2008 90 30 12 2005 37 11 21 5 2001 8 CAGR ESO ITO BPO Global transformative forces are the main driver of future growth
  • 13. McKinsey & Company | 12 Productivity revolution The great rebalancing ▪ Asian 21st century ▪ Emerging markets scaling up, also in innovation ▪ Further urbanization ▪ Shrinking working age population in key developed countries ▪ Huge pressure on productivity to achieve economic growth Pricing the planet ▪ Rapidly increasing consumption/supply gap in key natural resources creating need for resource efficient climate change solutions ▪ Global economic crisis led to major shifts in industry structures and regulatory control ▪ Countries compete for business activities Opportunities ▪ Rise of untapped market segments – New Geographies – New Service lines; e.g. climate change Verticals like public sector, healthcare – SMB customer segments – Increased adoption of global sourcing Risks ▪ Erosion in existing segments from – Automation – Cannibalization of existing services (e.g., SaaS replacing production support) – Spend consolidation – Slowdown in adoption due to greater regulatory control SOURCE: McKinsey Global Forces Research, Oct. 2009; O&O Practice, Nov 2009 Five global transformative forces impact the outlook of the O&O industry Global Grid • Increased Internet + mobile links transforming the way people interact/live • New trade flows among developing countries Market State 5 global transformative forces
  • 14. McKinsey & Company | 13 130 Core markets 2008 500 220 150 Total addressable market in 2020 1,500-1,640 405-440 895-980 200-220 Domestic outsourcing market in new geographies 380-420 230-250 85-90 145-160 New verticals in developed countries 190-220 60-70 130-150 Growth in core markets 200-250 30-40 120-140 50-70 280-310 New customer segments 100-110 Total addressable market for global sourcing and domestic outsourcing, 2020 USD billions Innovation can further expand the addressable market ▪ SMBs ▪ Public sector ▪ Healthcare ▪ Media1 ▪ Utilities ▪ 6 verticals (BFSI, telecom, retail, pharma, manufacturing, travel) ▪ North America, Western Europe, Japan ▪ Large enterprises 75-80% of growth from market segments, that are not core today 1 2 3 Engineering services/R&D Business services Technology services 1 Printing and publishing SOURCE: Global Insight; Gartner January 2009 Currently untapped segments will drive 75-80% of incremental growth by 2020 ▪ Brazil ▪ Russia ▪ India ▪ China 20-25% of growth from core markets
  • 15. McKinsey & Company | 14 Sources of new market growth by 2020 are: Four additional verticals, SMBs across numerous verticals and Domestic BRIC outsourcing SOURCE: Global Insight; Gartner January 2009; McKinsey analysis Global sourcing addressable market for new verticals, 2020 Global sourcing addressable market for SMBs by vertical in core geographies, 2020 ~20 ~35 Banking Retail 80-90 ~10 Insurance Whole- sale banking 30-35 Travel 15-20 Others Manu- facturing ~40 Total 230-250 USD billions 190-220 90-105 Total Media (printing and publishing) 17-20 Utilities 25-30 Healthcare providers 58-65 Public sector and defence 1 3 2 2 1 Total addressable market from new geographies, 2020 India 90-100 China 205-225 Total 380-420 40-45 Brazil 45-50 Russia 3
  • 16. McKinsey & Company | 15 Executive summary ▪ Long-term trends towards increased outsourcing and offshoring are prevailing. Driven by a changing environment the industry size is expected to triple in the next 10 years – Fundamental advantages of outsourcing (focus on core) and offshoring (need to address onshore skills shortage and cost pressure) continue to hold, thus O+O industry will portray further growth – 20-25% of future growth likely to come from further penetration of already existing segments, while 75-80% likely to stem from new market segments: new verticals (healthcare, etc), SMBs and new domestic outsourcing segments in BRIC countries, overall tripling the addressable market to 1,5 trillion USD by 2020 ▪ While the economic downturn has caused a moderate slow-down in industry growth, there are early signs of recovery – 2009 expecting slowest revenue growth in the history of the O&O industry – Early signs of recovery supported by increased industry activity in 2H 2009 and optimistic outlook of users – However, significant uncertainty remains about ultimate timing and shape of economic recovery (V vs. W) ▪ Moving forward, the imperatives for successful O&O management are coping with increased uncertainty and complexity combined with a strong belief in the fundamental growth perspectives of the industry – Companies need to focus on increasing their ability to manage uncertainty in a flexible and agile mode – The most predominant trends are taking the industry towards an unseen complex multi-dimensionality ▫ Multi-servicing: Everything that can be can be outsourced a/o offshored will be ▫ Multi-sourcing: Buyers of O+O services will play their market choices and exercise price pressure ▫ Multi-shoring: Ever new locations will strive for a share in this growth market – Egypt seems well positioned – Key take-aways: 1) Consider that O&O fundamentals are prevailing and invest in bold moves, 2) Make your organization "fit" for managing uncertainty and consider O&O as key levers 3) Manage the emerging complex multi-dimensionality in O&O
  • 17. McKinsey & Company | 16 Revenue growth for leading Indian O&O players1 Net Profit growth for leading Indian O&O players Sequential quarter change Year-on-year change SOURCE: Kotak Tech quarterly data book; company websites -3.1 -3.1 3.7 4.0 1.4 9.1 22.0 28.0 -4.2 -4.6 6.2 -7.9 -10.6 -6.3 4.6 2.2 4Q08 3Q08 2Q08 1Q08 1 Results declared in the last 4 sequential quarters of FY 2009 for Top 13 players, Rs to US$ conversion based on income statement publication date rate Overall revenue and profit performance of leading Indian O&O players worsened in 2008 Percent 4Q08 2Q08 1Q08 3Q08
  • 18. McKinsey & Company | 17 2009 expecting slowest growth in the history of the O&O industry SOURCE: NASSCOM, EESTCom 2009, Customer surveys, McKinsey analysis 1 Including ESO and High Tech R&D services 2 Estimates O&O industry revenue US$ billion 19 25 30 43 55 60 80 BPO ITO1 20092 94-96 32-33 62-63 2008 90 2007 2006 62 13% 4-7%
  • 19. McKinsey & Company | 18 SOURCE: EESTCom survey 2009; GLG survey 2009; company websites, BITKOM 11/2009 1 Profits declared in the last 4 sequential quarters, Rs to US$ conversion based on income statement publication date rate, Indian Fiscal year Decision makers have an optimistic view of their future O&O activities and expansion, with early signs of recovery evident even within 2009 What are your growth plans for captive offshore locations in the next 12-18 months? Examples of early signs of recovery for 20101 (USD Mio) Percentage of respondents (n = 45), EESTCom survey 2009 In percentage terms, how would your outsourced FTE volume change in the next 1-2 years? Percentage of respondents (n = 30), GLG survey 13 31 40 9 7 20-30% 10-20% Will not change much 10-20% 20-30% Decrease employment in offshore locations Expand employment in offshore locations 30 45 20 5 11-20% 1-10% Will not change 1-10% Volume decrease Volume increase 339 315 261 273 +30% 245 217 202 208 4Q08 1Q09 2Q09 3Q09 +21% 318 314 318 320 0% German market growth (estimates in %) IT market Outsourcing market Total size -2 0 7 5 2009 2010 14,3 15,4 bn EUR
  • 20. McKinsey & Company | 19 2007 08 09 02 03 04 05 06 0708 09 10 09 0708 05 06 11 04 10 11 12 01 0203 04 05 06 07 0809 12 01 10 11 12 01 0203 04 05 06 2010 70 75 80 85 90 95 100 105 High uncertainty of so far unseen recent crisis situation best addressed via scenarios Dealing with high uncertainty … … via scenarios Ifo-Index in points, year 2000 = 100 ILLUSTRATIVE SOURCE: FTD, Oct.28, 2008, p16; updated with Ifo stats and complemented with scenarios Realists? Moderate crisis Pessimists? Drastic crisis Over optimists? Rapid recovery Medium-term recovery at lower level Optimists ?
  • 21. McKinsey & Company | 20 Executive summary ▪ Long-term trends towards increased outsourcing and offshoring are prevailing. Driven by a changing environment the industry size is expected to triple in the next 10 years – Fundamental advantages of outsourcing (focus on core) and offshoring (need to address onshore skills shortage and cost pressure) continue to hold, thus O+O industry will portray further growth – 20-25% of future growth likely to come from further penetration of already existing segments, while 75-80% likely to stem from new market segments: new verticals (healthcare, etc), SMBs and new domestic outsourcing segments in BRIC countries, overall tripling the addressable market to 1,5 trillion USD by 2020 ▪ While the economic downturn has caused a moderate slow-down in industry growth, there are early signs of recovery – 2009 expecting slowest revenue growth in the history of the O&O industry – Early signs of recovery supported by increased industry activity in 2H 2009 and optimistic outlook of users – However, significant uncertainty remains about ultimate timing and shape of economic recovery (V vs. W) ▪ Moving forward, the imperatives for successful O&O management are coping with increased uncertainty and complexity combined with a strong belief in the fundamental growth perspectives of the industry – Companies need to focus on increasing their ability to manage uncertainty in a flexible and agile mode – The most predominant trends are taking the industry towards an unseen complex multi-dimensionality ▫ Multi-servicing: Everything that can be can be outsourced a/o offshored will be ▫ Multi-sourcing: Buyers of O+O services will play their market choices and exercise price pressure ▫ Multi-shoring: Ever new locations will strive for a share in this growth market – Egypt seems well positioned – Key take-aways: 1) Consider that O&O fundamentals are prevailing and invest in bold moves, 2) Make your organization "fit" for managing uncertainty and consider O&O as key levers 3) Manage the emerging complex multi-dimensionality in O&O
  • 22. McKinsey & Company | 21 To navigate the uncertainty, companies need to become more adept at “shaping the future” SOURCE: McKinsey Center for Managing Uncertainty Build awareness ▪ Model company performance and impact under each scenario Enhance resilience ▪ Significantly increase scope and intensity of resiliency actions to safeguard current business Increase flexibility ▪ Build and acquire options for your business and implement "no- regret" moves Determine posture ▪ Take conscious decision wheather company wants to play defense, attack or adapt
  • 23. McKinsey & Company | 22 Multi-servicing Multi-sourcing (exampl.) Multi-shoring Overarching trends in O&O towards complex multi-dimensionality SOURCE: McKinsey Business model/processes Business capabilities IT infrastructure products IT infrastructure IT applications IT integration platform Business model/processes Business capabilities IT infrastructure products IT infrastructure IT applications IT integration platform ▪ Proliferation of services offshored or outsourced ▪ New customers, verticals and geographies being serviced ▪ Tendency towards indus- trialization of transactional services and adoption of higher value activities ▪ Buyers increasing pres- sure on service providers through increased experi- ence and sophistication in outsourcing ▪ Buyers outsourcing 1 activity to several service providers ▪ Determination of right amount of vendors (typically 2 or 3) ▪ Tendency to diversify risk ▪ Emerging location continue to sustain due to economic attractiveness and risk diversification ▪ Advanced location and governance architectures are developing
  • 24. McKinsey & Company | 23 Opportunities for global sourcing exist across various functions of the healthcare provider value chain 4 0 5 0 35 35 Sub-function Theoretic maximum share of function that can be outsourced Healthcare provider function Per cent Share of employment Per cent Patient care provision ▪ Physician, practitioner services Nursing services ▪ Nursing care provision Other professional healthcare services ▪ Operating room ▪ Radiography/nuclear medicine ▪ Case management ▪ Pharmacy ▪ Respiratory therapy ▪ Physical therapy ▪ Transport ▪ Other health professional clerical ▪ Diagnostic laboratory etc. Hospitality functions ▪ Housekeeping ▪ Plant operations and maintenance ▪ Security ▪ Laundry/linen ▪ Food services IT services ▪ Hardware operations1 ▪ ADM G&A ▪ General management and legal ▪ Purchasing ▪ Patient billing ▪ Finance and accounting ▪ Personnel/HR ▪ Planning ▪ Medical records ▪ Admissions ▪ 20 ▪ 10 ▪ 10 ▪ 5 ▪ 15 ▪ 15 ▪ 10 ▪ 10 ▪ 30 ▪ 30 ▪ 10 ▪ 15 ▪ 15 ▪ 40 ▪ 20 ▪ 10 ▪ 10 ▪ 15 ▪ 10 ▪ 5 ▪ 10 ▪ 20 ▪ 5 ▪ 60 19 25 28 13 5 10 4 0 ▪ - ▪ 70 ▪ - ▪ 10 ▪ - ▪ - ▪ - ▪ - ▪ - ▪ - ▪ - ▪ - ▪ - ▪ - ▪ 40 ▪ 40 ▪ 50 ▪ 50 ▪ 25 ▪ - ▪ 75 ▪ 10 ▪ 60 Total address- able market for healthcare providers is expected to be USD 58 billion- 65 billion by 2020 High degree of offshor- ability NEW VERTICALS 1 Hardware operations not included SOURCE: Interviews; McKinsey Global Institute analysis HEALTHCARE EXAMPLE
  • 25. McKinsey & Company | 24 Potential technology and business services offerings for healthcare providers Most important technology services applications1 Per cent Top-3 priorities ▪ Patient-facing services: Medical call centres to reduce cost of hospital admissions, telemedicine for remote monitoring and disease management ▪ Payer/provider-facing services: Billing, administration, scheduling, purchasing etc. Important business services offerings ▪ Dutch company providing outsourcing for billing and collections ▪ German medical call centre company offering on-line and off-line medical consulting for hospitals ▪ British company administering and supporting corporate healthcare programme ▪ German company providing disease management counselling for chronically ill patients Examples 1 2007 HIMSS leadership survey of hospital CIOs SOURCE: Interviews; McKinsey Global Institute analysis NEW VERTICALS 29 29 35 37 43 46 47 47 Computerised practitioner order entry (CPOE) Electronic medical records Clinical information systems Clinical data repository Evidence-based medicine at point of care Point-of-care data collection Bar-coded medication management Enterprise-wide clinical information sharing HEALTHCARE EXAMPLE
  • 26. McKinsey & Company | 25 Focus of current global sourcing High Low Low High Modularity • Ease in defining work packages with well defined interfaces • Number of feedback loops • More external interfaces and instabilities Module design Systems engineering Certifications Configuration and control management Project management Technical and plant simulations Requirement management Integrated design Advance R&D e.g., materials Layout Dynamic analysis Physical prototype Electrical design CAE CFD FE analysis Technical publication Data conversion (2D to 3D, v4 to v5) Basic design Process Optimisation Low-complexity subassembly design Database management ECN Ability to manage risk ▪ Criticality/risk associated with process ▪ Source of competitive advantage ▪ Requirement to retain in-house skills Asset information management Product design market will expand as companies globally source increasingly complex activities HIGHER VALUE ADD SOURCE: McKinsey analysis
  • 27. McKinsey & Company | 26 Consumerisation of technology will stimulate adoption of global sourcing by SMBs and even individuals Customer Provider Individual Professional services Legal Accounting Creativity/advertising Financial services Telemedicine Travel services Medical advice Tuition/homework Business Individual Business Present scope of services (large enterprises) SMB B2C NEW CUSTOMER SEGMENTS SOURCE: McKinsey analysis
  • 28. McKinsey & Company | 27 … but providers willing to help companies increase O&O efficiency Pricing pressures likely to continue, but potentially with increase in volumes O&O prices are likely to decline … SOURCE: Economist; Forbes Asia; interviews 4/2009 UK Pharma company ▪ Intuition to grow large outsourced baseline further led to renegotiation of existing deals ▪ Providers recognize the growth potential and offer – Rate adjustments, especially if overall volume increases – Cooperation on efficiency improvement – More specialized services What is the likely change in technology and business services billing rates in 2009? Percent respondents, n = 29 2009 outlook 36 46 34 40 20 10 10 Existing contracts New contracts Reduce billing rates by more than 10% Reduce billing rates by 5-10% Maintain current billing rates 100 4 Increase billing rates 100 We are experiencing pricing pressures of anywhere from 4% to 15%. – Subramanian Ramadorai, CEO of TCS, March 2009 [There are] predictions that contract prices charged by Indian firms are likely to drop. CLSA1 […] predicts they will fall by 3-5% in the next fiscal year, starting in April 2009 – Economist, Oct 2008
  • 29. McKinsey & Company | 28 OpCO ADM outsourced to vendor A OpCO ADM outsourced to vendor B OpCO untouched or no OpCo SOURCE: Various press clippings Dual sourcing ADM Outsourcing deal as challenging model of a next generation multi-sourcing arrangement ▪ Retained in-house – ADM strategy & architecture guidance – Select Competence Centers – Vendor Management & Controlling ▪ Bulk of USD 1 billion ADM budget outsourced to A or B for 7 years ▪ Out of 6,000 ADM FTEs in next 3-5 years (of which 3,500 are contractors), 2,500 move to A or B ▪ Contracted blended rate of USD xxx p.d. requiring massive offshoring ▪ Recent B acquisition in India gets substantial load out of this deal EXAMPLE
  • 30. McKinsey & Company | 29 Companies diversifying location footprints with established locations loosing share SOURCE: EESTCom 2009, McKinsey analysis Share of growth in seats for BPO & ITO Country footprint # of companies in the sample 100% = thousand FTEs 39% 100% = 1-2 countries >=3 countries 2009 44 61% 2008 44 72% 28% 51 58 100% = India Other locations 2009 E ~215-250 42 2008 ~355 49
  • 31. McKinsey & Company | 30 North America Eastern Europe India China South-East Asia ▪ Philippines are preferred destination for voice ▪ Continued growth in Malaysia ▪ Vietnam still nascent ▪ Emergence of Egypt as potential scale location of choice ▪ Morocco continues to be destination of choice for French companies (~5 deals in 2009) ▪ Limited movement of scale services to near-shore North American destinations though some movement of near-/close-shore services ▪ Eastern Europe continues to maintain share of offshore FTEs ▪ ~86% of growth in existing centers ▪ Argentina and Brazil with different risk and talent profiles; European languages ▪ Emergence of Argentina with notable landmark transactions North Africa South America ▪ China doubling ITO jobs with 100,000+ FTEs likely to be added in domestic and export in 2009 SOURCE: McKinsey Strong momentum seen in the growth of emerging offshoring destinations, based on strong performance in niche areas
  • 32. McKinsey & Company | 31 British German Spanish 60 100 Novosibirsk, Dalian 10 - 20 Gdansk, Bratislava, Cluj 30 - 40 Rostock Hamburg 50 80 Buenos Aires, Mexico City 30 Constanta, Varna 15 - 25 Valladolid Madrid 15 35 65 130 Hyderabad, Bangalore, … Talinn, Riga Nottingham London ▪ Labor regulation ▪ Proximity ▪ Compliance ▪ Cultural affinity ▪ Cost ▪ Scale Global sourcing is happening at various shores Labor cost index for various shores/semi-experienced software engineer 2006 est. SOURCE: McKinsey O&O Practice June 2007 Onshore Close-shore Near-shore Offshore
  • 33. McKinsey & Company | 32 Egypt seems well positioned in attracting O&O industry investments Sources: ITIDA; ▪ Government progressing in reforms targeted to attract investors and to simplify doing business ▪ Dedicated agency (ITIDA) supporting growth of BPO/ITO sector and inflow of new investors ▪ Integrated demand strategy with talent pool enhancements established to attract investors with specific service offerings Egyptian government Information Technology Industry Development Agency Information Technology Institute & ITIDA ▪ Tax reforms (e.g., reduction of personal and corporate tax rate) ▪ Customs reforms ▪ Intellectual property protection reforms ▪ Financial sector reforms ▪ Support and foster development of BPO/ITO industry ▪ Guide and promote investments in ICT/BPO sector ▪ Increase exports of ICT products and services ▪ Support R&D in the ICT sector and implement results ▪ Focused outreach to targeted investors based on Egypt's value proposition ▪ University curriculum interventions to scale up suitable graduates pool for BPO activities to 10,000+ on annual basis ▪ Finishing schools and structural university interventions to enhance skill set in European languages by 1000+ annually ▪ IT specific talent programs under design to support growth of ITO industry
  • 34. McKinsey & Company | 33 Single Multi Servicing Single Multi Sourcing Single Multi Shoring CORE: Complexity Reduction COPE: Complexity Performance Enhancement Focus on CORE appropriate for majority of enterprises; a small league will be capable to capture COPE advantages % of WE enterprises regarding proper complexity management strategy SOURCE: McKinsey O&O Practice 2009 ▪ Capturing value from network management strategies; e.g. hub & spokes ▪ Exploring the long tail ▪ Partner ecosystems ▪ Managing for simplicity across the whole value chain ▪ Capturing value from lean programs and taking out variance wherever feasible ▪ Focus, focus, focus
  • 35. McKinsey & Company | 34 Key take-aways for successful O&O management in the current and likely future environment Make your organization "fit" for managing the uncertainty and consider O&O as key levers to increase flexibility and agility Manage the emerging complex multi-dimensionality in O&O and apply the best mix for your organization Consider that O&O fundamentals are prevailing and invest in bold moves to increase your long-term benefits SOURCE: McKinsey O&O Practice 2009