Is the Arbitrage of Your OffshoreLocations Sustainable?October 18, 2011
Today’s Webinar is brought to you by Everest GroupToday’s WebinarIs the Arbitrage of Your Offshore Locations Sustainable?S...
Q&ATo ask a question during the Q&A session   Click the question mark (Q&A) button located on the floating tool bar in th...
Introductions                                       Eric Simonson                                       Managing Partner, ...
Agenda for today’s webinar   Sustainability of offshore locations    – Introduction    – Arbitrage sustainability    – Ta...
Global companies have built significant offshoreworkforce and leverage multiple locationsTotal offshore scale             ...
Companies are concerned about the sustainabilityof their offshore locationsKey concerns              Impact areas Inflatio...
How to answer the polling question…1. Recall your starting salary                                        3. Calculate the ...
Poll Question: What is the approximate ratio of your yearfive salary to your starting salary (beginning of career)?       ...
What does the ratio imply for your average annualincrease in compensation?                    Annual % increase in        ...
Agenda   Sustainability of offshore locations    – Introduction    – Arbitrage sustainability    – Talent sustainability...
Commonly perceived myths on arbitragesustainability    Myth                                                               ...
Myth: Inflation is the single biggest driver of                                                                           ...
Myth: Wage increases directly correspond to an                                                                            ...
Myth: Wage increases directly correspond to an                                                   2increase in overall peop...
Myth: India’s arbitrage could erode soon                                                                                  ...
Myth: India’s arbitrage could erode soon                                                                                  ...
Poll Question: Which scenario do you think is mostlikely?                       Pessimistic                               ...
Myth: Locations other than India have stable costs and                                                                    ...
Myth: Locations other than India have stable costs and                                                                    ...
Agenda   Sustainability of offshore locations    – Introduction    – Arbitrage sustainability    – Talent sustainability...
Talent sustainability is influenced by multipleexternal and internal factors                                        Extern...
Alternative talent models can help companies copewith market saturation challengesAnnual demand and supply at entry level ...
Companies need to view talent sustainability incontext of their specific functional/skill needs                           ...
Agenda   Sustainability of offshore locations   Implications for global services strategy                               ...
Global services strategies should reflect supply anddemand factors that influence sustainability             Leverage loc...
Best practices for helping your organization dealwith sustainability questions   Fully own the fact that headlines will i...
Summary of key messages   Sustainability questions regarding offshore locations are typically around arbitrage    and tal...
Q&A   Attendees will receive an email enabling them to download today’s webinar presentation as well as access    a recor...
Related Content                                               Related Research   Market Vista: Q2 2011   Global Location...
About Everest GroupEverest Group is an advisor to business leaders on the next generation of globalservices with a worldwi...
Everest Group leads clients from insight to actionContact us for more information about our consulting, research, and indu...
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Is the Arbitrage of Your Offshore Locations Sustainable?

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Increasing cost pressures in leading offshore markets are driving companies to question the sustainability of the offshore proposition. Additionally, fluctuating currencies pose challenges to the predictability of arbitrage in many locations. In this webinar, Everest Group experts will answer the following questions:
How sustainable are offshore locations? Are there real risks of arbitrage eroding?
What implications are companies facing in setting their global services strategies?

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Is the Arbitrage of Your Offshore Locations Sustainable?

  1. 1. Is the Arbitrage of Your OffshoreLocations Sustainable?October 18, 2011
  2. 2. Today’s Webinar is brought to you by Everest GroupToday’s WebinarIs the Arbitrage of Your Offshore Locations Sustainable?Synopsis:Increasing cost pressures in leading offshore markets are driving companies to question the sustainability of theoffshore proposition. Additionally, fluctuating currencies pose challenges to the predictability of arbitrage in manylocations. In this webinar, Everest Group experts will answer the following questions: How sustainable are offshore locations? Are there real risks of arbitrage eroding? What implications are companies facing in setting their global services strategies?About Everest GroupEverest Group is an advisor to business leaders on the next generation of global services with a worldwide reputationfor helping Global 1000 firms dramatically improve their performance by optimizing their back- and middle-officebusiness services. With a fact-based approach driving outcomes, Everest Group counsels organizations withcomplex challenges related to the use and delivery of g p g y global services in their p pursuits to balance short-term needswith long-term goals. Through its practical consulting, original research and industry resource services, EverestGroup helps clients maximize value from delivery strategies, talent and sourcing models, technologies andmanagement approaches. Established in 1991, Everest Group serves users of global services, providers of services,country organizations and private equity firms, in six continents across all industry categories. For more information,please visit www.everestgrp.com and research.everestgrp.com.For more information, contact Mark Williamson at mark.williamson@everestgrp.com Proprietary & Confidential. © 2011, Everest Global, Inc. 2
  3. 3. Q&ATo ask a question during the Q&A session Click the question mark (Q&A) button located on the floating tool bar in the bottom right of your screen. This will open the Q&A Panel Be sure to keep the default set to “send to All Panelists” send Panelists Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit Proprietary & Confidential. © 2011, Everest Global, Inc. 3
  4. 4. Introductions Eric Simonson Managing Partner, Research Everest Group eric.simonson@everestgrp.com H. Karthik Vice President Everest Group h.karthik@everestgrp.com h k thik@ t Proprietary & Confidential. © 2011, Everest Global, Inc. 4
  5. 5. Agenda for today’s webinar Sustainability of offshore locations – Introduction – Arbitrage sustainability – Talent sustainability Implications for global services strategies Proprietary & Confidential. © 2011, Everest Global, Inc. 5
  6. 6. Global companies have built significant offshoreworkforce and leverage multiple locationsTotal offshore scale Number of offshore locations leveraged (#)2011; Thousand FTEs Regions1 Countries Cities2 UK Bank 33-34 3 9 21  Substantial (10-25%) proportion of global 3 4 8 workforce already U.S. U S Bank 30-31 offshore Global energy 3 3 4  Most companies plan 15-16 company to further increase scale and scope of U.S. financial 2 4 offshoring 9-10 4 services firm  Increasing Global technology 4 complexity of 6-7 3 4 firm managing global sourcing; need to Global investment take a “portfolio” view 4-5 2 3 3 bank1 Four offshore regions considered: Asia, Latin America, Central & Eastern Europe, Africa & Middle East2 Only includes cities with captive operations Proprietary & Confidential. © 2011, Everest Global, Inc. 6
  7. 7. Companies are concerned about the sustainabilityof their offshore locationsKey concerns Impact areas Inflation Arbitrage sustainability Focus of Currency movements today’s d ’ discussion Talent sustainability y Market saturation Geopolitical stability p y and natural hazards Location diversification and business continuity planning Concentration risks Proprietary & Confidential. © 2011, Everest Global, Inc. 7
  8. 8. How to answer the polling question…1. Recall your starting salary 3. Calculate the ratio of the 5th year The first year you started work to the 1st year of salary The annualized amount ( f you were (if  Ratio = Year 5/Year 1 (divide year 5 / ( to work a full 12 months) amount by year 1 amount)  Example2. Recall the amount of your salary – Year 1 (1990) = 20,000 in your 5th year of work – YYear 5 (1994) = 30 000 30,000 Simply add 4 to the year in which – Ratio = 30,000/20,000 = 1.5 you started work (1990+4 = 1994)  Select the closest amount to answer This is your fifth salary the polling questionExample1990 (year 1) 1991 (year 2) 1992 (year 3) 1993 (year 4) 1994 (year 5)20,000 22,500 25,000 27,500 30,000 If your salary changed currencies, please don’t answer the poll! Proprietary & Confidential. © 2011, Everest Global, Inc. 8
  9. 9. Poll Question: What is the approximate ratio of your yearfive salary to your starting salary (beginning of career)? 1.00 4% 1.25 1 25 7% 1.50 16% 1.75 14% 2.00 9% 2.25 14% 2.50 37%Source: Live polling conducted during the “Is the Arbitrage of Your Offshore Locations Sustainable?” webinar on October 18, 2011 Proprietary & Confidential. © 2011, Everest Global, Inc. 9
  10. 10. What does the ratio imply for your average annualincrease in compensation? Annual % increase in Ratio salary over 5 y y years 1.00 0% 1.25 5.7% 1.50 10.7% Typical band for lower levels of 1.75 15.0% offshore pyramid 2.00 18.9% 2.25 22.5% 2.50 25.7% What portion of increase is role progression and what is inflation? Proprietary & Confidential. © 2011, Everest Global, Inc. 10
  11. 11. Agenda Sustainability of offshore locations – Introduction – Arbitrage sustainability – Talent sustainability Implications for global services strategies Proprietary & Confidential. © 2011, Everest Global, Inc. 11
  12. 12. Commonly perceived myths on arbitragesustainability Myth Reality1 Wage inflation i th predominant d i W i fl ti is the d i t driver Currency i t i ll th predominant d i C is typically the d i t driver of arbitrage erosion of arbitrage movements and is often the “wild card”2 Wage increases directly correspond to an Overall people costs typically increase at a increase in overall people costs lower rate due to multiple efficiency levers3 India’s arbitrage could erode soon (over India’s arbitrage is likely to last at least 12- the next 5 years) 13 years, even under highly pessimistic scenarios4 Locations beyond India have stable costs Costs increasing in multiple locations; India and are therefore becoming more cost retaining comparative cost position competitive Proprietary & Confidential. © 2011, Everest Global, Inc. 12
  13. 13. Myth: Inflation is the single biggest driver of 1arbitrage erosionChange in annual operating cost per FTE over 2007-11 ITO: ARGENTINA EXAMPLEIndexed: Base = 2007 operating cost Currency depreciation offset the impact of high wage inflation 100 98 28 30 2007 costs Inflation (wages and others) Currency depreciation 2011 costs Percentage of Average annual Trends in ARS/USD Elements of total operating inflation (CAGR Ratio operating cost cost over 2007-11) 0.4 60-65% 10-12%1 0.3 Wages Overall 0.2 10-15% 2-3% operating cost 0.1 Real estate inflation: 6-7% 0.0 2007 2011 Telecom and 20-25% Largely others stable Steadily depreciating as a result of government policy1 Average wage inflation over five years; recent wage inflation is higher (15-18%) Proprietary & Confidential. © 2011, Everest Global, Inc. 13
  14. 14. Myth: Wage increases directly correspond to an 2increase in overall people costs (page 1 of 2) Annual ITO: INDIA EXAMPLE compensation Employee pyramid increases for i di id l (2011) individuals  Wage increases significantly correspond to an individual’s career Manager 7-9% progression (e.g., gain and experience within their above role)  For the same role and Team leader 8-10% experience level, salaries have remained largely Weighted stable in India (e.g., increase entry-level salaries for in wages: college hires) 12-14% 9-10% Senior programmer  Also, wage increases are typically lower at senior levels. Therefore levels Therefore, the overall impact on costs is lower than what is 14-16% typically Junior programmer perceived/highlighted Proprietary & Confidential. © 2011, Everest Global, Inc. 14
  15. 15. Myth: Wage increases directly correspond to an 2increase in overall people costs (page 2 of 2) Increase resource utilization Increase Reduce entry level general and Efficiency levers mix in admin used by companies overall expenses pyramid Leverage lower cost l t locations (e.g., Tier-2 cities) Reality: Impact of inflation can be controlled through multiple efficiency levers Proprietary & Confidential. © 2011, Everest Global, Inc. 15
  16. 16. Myth: India’s arbitrage could erode soon 3(page 1 of 2)Factors affectingarbitrage Historical trends Scenarios used to assess future trends Optimistic Base case Pessimistic 9-10% 8-9% 9-10% 11-12%Wage inflation Fluctuating, with depreciation of 2-3% p.a. Remains Appreciates AppreciatesCurrency over the past five years stable at 1% p.a. at 2% p.a.movements Trends in INR/USD  Scenario-based Scenario based approach used to assess Ratio arbitrage sustainability 0.03  Although the Indian rupee has depreciated (by 2-3% p.a.) over the past five years, forward- looking scenarios assume appreciating g pp g 0.02 currency, consistent with long-term views on India’s economy and currency 0.01 0 01 2007 2008 2009 2010 2011 Proprietary & Confidential. © 2011, Everest Global, Inc. 16
  17. 17. Myth: India’s arbitrage could erode soon 3(page 2 of 2) Number of years for arbitrage sustainability ITO SERVICES US$ Base case Optimistic Pessimistic scenario scenario US Tier 1 city scenario Hurdle rate1 @ 70% India Tier 1 city 12-13 years 15-17 years 23-24 years Time 2011 Reality: India’s arbitrage likely to last 12-13 years even under pessimistic scenarios1 Hurdle rate refers to the maximum wage ratio of the destination/source country, which still allows for meaningful offshoring. Hurdle rate is estimated as approximately 70% Proprietary & Confidential. © 2011, Everest Global, Inc. 17
  18. 18. Poll Question: Which scenario do you think is mostlikely? Pessimistic 45% Base case 39% Optimistic 12% Dont know 2%Source: Live polling conducted during the “Is the Arbitrage of Your Offshore Locations Sustainable?” webinar on October 18, 2011 Proprietary & Confidential. © 2011, Everest Global, Inc. 18
  19. 19. Myth: Locations other than India have stable costs and 4have become more competitive (page 1 of 2)Wage inflation (CAGR over 2007-11) ITO SERVICESPercentage 8 10% 8-10% 8 10% 8-10% 5-7% 4-6% 3-4%  Most locations (except Philippines) have witnessed lower India Philippines Malaysia Brazil Poland inflation than IndiaCurrency trends over 2007-11  However, currencyLocal currency/USD indexed to 2007 xx% Net change in currency over 2007-11 movements in multiple p countries have been less favorable Appreciating currency: Increases costs in USD compared to India +19% Brazil +13% Malaysia 7% +7%  Consequently, India’s Philippines relative overall cost -4% Poland position has not -10% India changed significantly Depreciating currency: Decreases costs in USD2007 2008 2009 2010 2011 Proprietary & Confidential. © 2011, Everest Global, Inc. 19
  20. 20. Myth: Locations other than India have stable costs and 4have become more competitive (page 2 of 2)Annual operating costs per FTE per annum Arbitrage relative to U.S. ITO SERVICES2011; Index: India = 100 xx% Tier-1 city (Chicago) 300-320 300 320 170-175 175-180 115-120 100 India (Bangalore) Philippines (Metro Malaysia (Kuala Poland (Krakow) Brazil (Sao Paulo) Manila) Lumpur) 80-85% 75-80% 69-72% 67-71% 42-47% Reality: India has retained its cost position relative to other locations Proprietary & Confidential. © 2011, Everest Global, Inc. 20
  21. 21. Agenda Sustainability of offshore locations – Introduction – Arbitrage sustainability – Talent sustainability Implications for global services strategies Proprietary & Confidential. © 2011, Everest Global, Inc. 21
  22. 22. Talent sustainability is influenced by multipleexternal and internal factors External factors Growth in Growth plans other h of competitors industries Talent Quality of development talent pool initiatives Scale of talent Talent pool Migration p pool y sustainability Talent and Skills and operating quality model required Internal factors Proprietary & Confidential. © 2011, Everest Global, Inc. 22
  23. 23. Alternative talent models can help companies copewith market saturation challengesAnnual demand and supply at entry level KRAKOW – VOICE BPONumber ~20 times 10,000-12,000 4,000-5,000 6-7 times 2,500-3,000 3,000-4,000 500-600 Industry demand at Supply of employable Supply of employable Employable pool from Total employable pool entry-level l l tertiary graduates i d undergraduates d d adjoining areas dj i i Exploring alternative talent pools (e.g., undergraduates, part-time students) can create more room for growth This requires a different operating model (e.g., hiring, training) to implement and scale q p g ( g, g, g) p Proprietary & Confidential. © 2011, Everest Global, Inc. 23
  24. 24. Companies need to view talent sustainability incontext of their specific functional/skill needs KUALA LUMPURTotal annual graduate pool and annual relevant poolsfor F&A and IT2011; thousands Ratio of annual supply1 to demand2 – IT 3 31-32 2 9-10 8-9 1 Total tertiary Graduates Graduates graduates relevant for F&A relevant for IT 0 2011 2012 2013 2014 2015Sizeable overall graduate pool, but smaller for Potential challenges with sustainability of IT servicesspecialized functions in Kuala Lumpur, given small pool and players’ growth plans1 Supply is defined as the number of relevant, employable tertiary graduates every year willing to work in the sector relevant year,2 Demand is defined as the total demand for professionals at the entry-level (<3 years of experience) from offshore industry (expansion of existing players and setup of new centers) Proprietary & Confidential. © 2011, Everest Global, Inc. 24
  25. 25. Agenda Sustainability of offshore locations Implications for global services strategy Proprietary & Confidential. © 2011, Everest Global, Inc. 25
  26. 26. Global services strategies should reflect supply anddemand factors that influence sustainability  Leverage locations that are able to attract in-bound talent to offsetSupply saturation effects (i.e., talent can and will move to the location fromfactors surrounding areas)  Proactively plan for and manage impact of career progression/tenure in the delivery model – be realistic about what happens in 3-5 years (and when is attrition a good thing)  Use sourcing models to intentionally provide options for re balancing work re-balancing to new markets  Restructure nature of work to broaden the skill sets which can completeDemand much of the workfactors – Redefine the process – Isolate scarce skill activities from commodity skill activities y  Proactively shape demand for locations and sourcing models – Use an integrated view of locations to place work – Use historical trend information and potential future scenarios to p educate business on implications Proprietary & Confidential. © 2011, Everest Global, Inc. 26
  27. 27. Best practices for helping your organization dealwith sustainability questions Fully own the fact that headlines will impact management perceptions – Be prepared and proactive about education – Help organization understand what changes create the greatest impact on total cost (e g (e.g., currency, labor rate, career progression, real estate, attrition) Track sustainability – Individual cost elements – Impact on aggregate cost – Relative to onshore costs – Latent talent supply and demand in key locations Put changes into context – provide historical view of how exchange rates and wage rates move When exchange rates move ensure both the positive and negative impacts are appreciated; move, avoid temptation to take credit for “savings” from exchange rate movements Proprietary & Confidential. © 2011, Everest Global, Inc. 27
  28. 28. Summary of key messages Sustainability questions regarding offshore locations are typically around arbitrage and talent pool sustainability p y Currency movements typically have a more significant impact on arbitrage than wage inflation Contrary to perceptions regarding arbitrage potential from India – Arbitrage from India is likely to last for a significant period (15+ years) – India is currently retaining its comparative cost position Talent sustainability is influenced by multiple external (i.e., location related) and internal factors (e.g., company-specific talent and operating models) Companies need to take an integrated, “portfolio” view towards assessing sustainability. Global services strategies should reflect supply and demand factors that influence sustainability Proprietary & Confidential. © 2011, Everest Global, Inc. 28
  29. 29. Q&A Attendees will receive an email enabling them to download today’s webinar presentation as well as access a recorded audio version For advice or research on offshore sustainability, please contact: – Eric Simonson, eric.simonson@everestgrp.com – H. Karthik, h.karthik@everestgrp.com For background information on Everest Group, please visit: – www.everestgrp.com – research.everestgrp.com Thank you for attending todayTo ask a question during the Q&A session Click the question mark (Q&A) button located on the floating tool bar in the bottom right of your screen screen. This will open the Q&A Panel Be sure to keep the default set to “send to All Panelists” Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit Proprietary & Confidential. © 2011, Everest Global, Inc. 29
  30. 30. Related Content Related Research Market Vista: Q2 2011 Global Location Insights: July 2011 – Offshore Locations: Service Providers’ Perceptions and Plans Global Location Insights: June 2011 – Offshore Locations: Buyers’ Perceptions and Plans Global Location Insights: December 2010 – India in 2011 – Labor and Cost Sustainability in the Indian Offshore Services Market Off h S i M k t Upcoming WebinarsITO, Cloud and Next Generation Outsourcing – How Do You Get There? Thursday, October 20, 11:00 a.m. CDT RegisterSave the Date: Market Vista Q3 2011 November 2011 Proprietary & Confidential. © 2011, Everest Global, Inc. 30
  31. 31. About Everest GroupEverest Group is an advisor to business leaders on the next generation of globalservices with a worldwide reputation for helping Global 1000 firms dramaticallyimprove their performance by optimizing their back- and middle-office businessservices. With a fact-based approach driving outcomes, Everest Group counselsorganizations with complex challenges related to the use and delivery of globalservices in their pursuits to balance short-term needs with long-term goals. Through short term long term goalsits practical consulting, original research and industry resource services, EverestGroup helps clients maximize value from delivery strategies, talent and sourcingmodels, technologies and management approaches. Established in 1991, EverestGroup serves users of global services, providers of services, country organizationsG f l b l i id f i t i tiand private equity firms, in six continents across all industry categories. For moreinformation, please visit www.everestgrp.com and research.everestgrp.com. Proprietary & Confidential. © 2011, Everest Global, Inc. 31
  32. 32. Everest Group leads clients from insight to actionContact us for more information about our consulting, research, and industry resources. Dallas (Corporate Headquarters) Canada info@everestgrp.com canada@everestgrp.com +1-214-451-3000 +1-416-865-2033 +1-214-451-3110 New York India/Middle East info@everestgrp.com info@everestgrp com india@everestgrp.com india@everestgrp com +1-646-805-4000 +91-124-496-1000 +91-124-496-1100 United Kingdom Netherlands & Continental Europe unitedkingdom@everestgrp.com benelux@everestgrp.com +44-207-887-1483 +31-20-301-2138 www.everestgrp.com | research.everestgrp.com | www.sherpasinblueshirts.com Proprietary & Confidential. © 2011, Everest Global, Inc. 32

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