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Trends in Tech Industry and Impact on F&A Outsourcing
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1. Why Technology Industry Trends are Driving Increased Finance & Accounting Outsourcing A Cognizant & Hackett Group Webinar May 17, 20110
Speakers Paul Nowacki, CFA Global Leader, Finance & Accounting Center of Excellence, Cognizant In this role, Paul oversees all of our F&A service delivery for existing clients and solution design for prospective clients for Cognizant worldwide. Paul also serves as a thought leader in F&A and helps identify market trends and shape new Cognizant offerings accordingly. He is based out of Dallas, TX, USA. By combining his industry experience in IT and Finance leadership roles, along with his experience as a transformation consultant, Paul is able to look holistically at Finance & Accounting organizations including process, systems, and organizational design perspectives. Imran Masood Manufacturing, Logistics and Technology BPO Practice Leader, Cognizant Imran works closely with business leaders to help create innovative solutions leveraging Cognizant core strengths of Technology, Industry best practices and process reengineering. Imran is based out of White Plains NY. Imran has over 12 years of professional experience in the areas of business process reengineering, Operations delivery and relationship management. Imran has worked with many Fortune 500 companies, helping them in the areas of shared services setup, offshoring strategy and process innovation with a special focus on multi-location technology leveraged global environments. Prior to Cognizant Imran worked with General Electric, PepsiCo & Siemens among others. He is a management graduate and did his graduation in electrical engineering. He is also a certified black belt and a PMP. Honorio J. Padrón III Principal and Global Practice Leader, IT and Global Business Services, The Hackett Group Mr. Padrón’s career spans 35 years in business and technology management, enterprise business transformation, shared services, outsourcing, and customer experience engineering. He is an expert in all of the facets of enterprise Service Delivery Strategy, design and implementation. He has held senior executive positions in at a number of Fortune 500 corporations, including CEO of Exelon’s Business Services Company Inc.; CIO and SVP Exelon Corporation; CIO and EVP of CompUSA; CIO and SVP of PepsiCo Restaurant Group; and Head of Global Reengineering for Burger King Corporation. His government-related experience includes various program management roles at NASA Kennedy Space Center. CIO Magazine named Mr. Padrón as one of its “Top 100 CIOs,” and RetailTech as one of its “Top 10 CIOs.” He is the recipient of a Computerworld Smithsonian Award for CRM innovation and a Contract Design Award from the Outsourcing Institute. Mr. Padrón is a contributing author of e-Enterprise, The Alignment Effect and Winning The 3-Legged Race: When Business & Technology Run Together.1 | © 2011, Cognizant
Agenda Welcome & Introductions Technology Industry Trends – How is the Current Market Affecting Technology Companies? Implications and Analysis of Industry Trends – How are you funding innovation and efficiency? Finance & Accounting Outsourcing in the Technology Sector – What are the keys to world class performance? Q&A2 | © 2011, Cognizant
Some Cognizant corporate facts Global scale to deliver: Founded in 1994 (CTSH, Nasdaq) Headquarters: Teaneck, NJ Revenues: Part of Fortune 500 » $4.59 Billion (Full 2010) Member, Nasdaq-100 Index Member, S&P 500 Index Employees: App. Market Cap over $23B 104,000* Recent Awards & Recognition Active Customers: 712 Part of World’s Most Admired Companies List (March 2011) Over 50 global delivery and development centers Among Top Performers in Business Week 50 (June 2010) 25 regional sales offices Among Forbes Fastest growing 25 Tech Companies (April 2011) Over 12,000 projects in 40 countries * As of December 31, 20103 | © 2011, Cognizant
Some Hackett Group corporate facts Our Intellectual Property Our Transformation Capabilities BENCHMARKS BEST PRACTICES INTELLIGENCE CENTER™ PERFORMANCE BEST PRACTICES METRICS BEST PRACTICE SOFTWARE PROCESS FLOWS CONFIGURATION PROVEN STRATEGIES REDUCE RISK AND ACCELERATE BENEFIT REALIZATION Over 80% of The Hackett Group revenue is generated from Transformation Analysis, Design and Implementation projects © 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.4
How are technology industry trends driving innovation and efficiency?5 | © 2011, Cognizant
There are a multitude of major trends shaping the Technology Industry; in this webinar we will discuss six that are particularly impactful Consumerism Flash Memory OS Thinking BPM Tablets & Restoration of Apps B2B Smartphones Economic Growth Development Business Fabric Based Virtualization Web 3.0 Analytics Infrastructure Social Networking Enterprise 2.0 Online Privacy & Analytics Cloud Green IT Video Computing Scope of today’s CRM 2.0 Telepresence CIO Role discussion6 | © 2011, Cognizant
These aren’t just every day trends . . . … these are a shift in … and the old road the tectonic plates … will not work any more7 | © 2011, Cognizant
1) Tablets & Smart phones will re-define enterprise computing Mobility key for productivity: In 2011, over 12.5mn (25%) tablets will be bought by enterprises PC and Non –PC Sales Forecast 2011 Tablets – Over 50% of computing Desktops – 50mn, 6% devices sold globally will not 150mn, 18% be PCs Over 1.2 billion people carry Smartphone - Laptops – 375 mn, 46% 200mn, handsets capable of mobile 52% 48% 25% commerce providing an ideal environment for convergence of mobility and the Web Net books – 40mn, 5% …2009 2010 2011 2012 2013 2014 2015… Tablets & Blue ocean Sweet Red Overtake PC Augmented ~70% Enterprise Mobile cloud Smart phones spot ocean & laptop sales reality adoption8 | © 2011, Cognizant
2) Cloud is a game changer, it will change the way IT is done Enterprises will spend 60-70% on SaaS, PaaS and IaaS of the total cloud spending By 2014, cloud computing would be the norm. Over 70% of the enterprises would have adopted cloud services Cloud Services Revenue Forecast Financial services companies are the early movers with over 50% adoption already In 3 years, cloud adoptions will spread across $126bn geographies. Western $78bn Europe with 1/3rd of adoptions will be second biggest market after the 2010 2014 US …2009 2010 2011 2012 2013 2014 2015… Early Across Cloud SaaS, PaaS, Public/Private/ industries Utility solutions Industry norm adopters IaaS Hybrid >50% adoption Computing ~15-20%... Across geographies9 | © 2011, Cognizant
3) Quick answers, collaborative designs and open innovation Social networking analytics will help businesses better understand consumer trends & employee behavior Enterprises will start integrating social networking with business application to develop coordinated strategies Enterprise Social Platforms Market Social platforms will see 33% growth in 2011 In the next 2 years, series of software and services $1860mn will be launched for $630mn businesses to collaborate social business models through cloud 2011 2014 …2009 2010 2011 2012 2013 2014 2015… Social Networking Web 2.0 Mobility Enterprise Adoption by Dominant Key tool to gauge & Analytics blogs enterprises medium of performance For B2B communication10 | © 2011, Cognizant
4) Real time predictive analysis will drive business results Mobile computing will force enterprises to change their BI infrastructure to consume BA on the go The future of business analytics will be the ability to simulate scenarios and forecast results using live data Business Analytics & Optimization Market Businesses will increasingly combine business analytics and social networking to make fail-proof decisions $205bn Technology companies in a $140bn unique position with real- real time data availability 2009 2015 …2009 2010 2011 2012 2013 2014 2015… Business Scoreboards BA SaaS Real time Predictive Mobile Collaborating Forecasting Analytics & dashboards BA analysis BA social networks results11 | © 2011, Cognizant
5) Video will substitute travel Through conferencing or as a communication asset, video will be a dominant content form in the years to come Video will become a key component of corporate communication – internal & external Enterprise Video Asset Management Market The biggest chunk of spending will be on on- premise solutions $325mn Hosted solutions will grow $260mn fastest within the business $200mn $160mn video industry and in the $120mn $90mn next 3 years will reach $500mn 2010 2011 2012 2013 2014 2015 …2009 2010 2011 2012 2013 2014 2015… Key player in Video Voice to video Day-to-day Increasingly Dominant enterprise conference interactions replace travel content form communication strategy12 | © 2011, Cognizant
6) Restoration of economic growth Global technology spend growth has already reached pre-recession levels of 5%. The Q1 2011 results of tech companies have surpassed market expectations comfortably. The combined revenues of the top tech companies show 11% growth in 2010 compared to -0.4% in 2009. In 2011, these companies are expected to grow at 13% Industry Revenue ($bn) Revenue growth 2011E 800 Hardware Ind. 16% Overall Technology Industry 700 Software Ind. 8% 600 Internet Ind. 13% Hardware Industry 500 2010 400 Software Industry Hardware Ind. 12% 300 Software Ind. 6% 200 Internet Ind. 17% Internet Services Industry 100 2009 0 Hardware Ind. 0.3% Software Ind. -5% Internet Ind. 11% …2008 2009 2010 2011 2013 2014 2015… Restoration of Economic Growth $618bn $711bn $554bn $552bn Combined revenues of top companies from each sub industry. Hardware – HP, Dell, Apple, Cisco & Intel. Software – Microsoft, IBM, SAP, Oracle & Symantec. Internet Services – Amazon, Google, eBay & Yahoo. Source for 2011E – UBS Analyst reports.13 | © 2011, Cognizant
Although the tech industry is growing, not everyone is prospering equally Early adopters with clear business strategy are the ones driving growth and not the industry heavyweights 35% Contenders Leaders/ Innovators 30% Microsoft Google $62bn $29bn 25% Intel Oracle $44bn Net Profit Margin 2010 Apple Net Profit Margin 2010 Yahoo $6bn eBay $9bn $27bn Cisco $65bn 20% $40bn Laggards 15% IBM SAP Symantec $6bn $17bn $100bn 10% HP $126bn Amazon Dell $34bn 5% $53bn Slow movers Spoilers 0% -20% 0% 10% 20% 30% 40% -10% Revenue Growth 201014 | © 2011, Cognizant
Coming out of the recession, we are seeing a return of growth and profits, while SG&A remains lean Apple, Google and Intel have performed exceedingly well on net profit margins; due in part by managing SG&A expense Net profit Margin SG&A as % of Revenue 40% 50% 30% 40% 2010 30% 2010 20% 2009 20% 2009 10% 10% 0% 0 eBay Amazon Cisco SAP IBM Symantec Dell SAP HP Amazon Apple Cisco yahoo Intel Apple eBay Symantec Yahoo Google IBM oracle Oracle Google Dell Microsoft Intel Microsoft HP Peer group average (2010) Symantec – Goodwill impairment charges have been discounted from 2009 profit15 | © 2011, Cognizant
The implications are obvious, tech firms need to find ways to continue to manage costs and fund the required acceleration of innovation Imperatives Implications Generate Cash to fund R&D, Universal Pressure » Reduce Cost to … Innovation » Create Flexible Business Model Maximize Value extraction from » Get access to high quality talent and Strategic capabilities new product development, Imperative to… » Cut time to market before competition catches up » Increase Productivity Ensure Product Development » Get access to new markets Speed & Efficiency Tactical » Provide direct support to customers and Opportunity to… end-users » Exploit government incentives16 | © 2011, Cognizant
The tech industry is leveraging Outsourcing at an accelerating rate to respond to these Imperatives The technology industry contributes to 4% of the total outsourcing deals 10 years ago the tech industry entered into 2011E – 59 Deals twenty-some new outsourcing deals per year 5 years ago the tech industry entered into 2010 – 47 Deals Citrix, EMC, Google, thirty-some new outsourcing deals per year Intel, Lenovo, Microsoft 2009 – 57 Deals Today the tech industry enters into fifty-some Dell, HP, Intel, Microsoft, Novell, SAP, Symantec new outsourcing deals per year 2008 – 50 Deals Cisco, Dell, Google, HP, Microsoft, Novell, Symantec, Yahoo 2007 – 42 Deals Dell, EMC, HP, Microsoft, Sun Microsystems, Yahoo 2006 – 44 Deals Apple, HP, Microsoft, NEC, Unisys Corp, IBM, Dell, Novell 2005 – 37 Deals AOL, Apple, EDS, HP, Microsoft, SAP America Inc, Sun Microsystems 2004 – 34 Deals Avaya, EDS, Fujitsu, HP, Microsoft, Sun Microsystems, IBM 2003 – 30 Deals Avaya, EMC, Gateway, HP, Microsoft, Novell, Unisys Corp, Yahoo, IBM 2002 – 28 Deals Apple , Borland, EMC, HP, i2, IBM, Microsoft, Oracle 2001 – 21 Deals AOL, CSC, EDS, Getronics, Apple, HP, Intel, Logitech, Microsoft The list is not intended to be exhaustive but illustrative to show trends17 | © 2011, Cognizant
Increasingly the tech industry is adopting business process outsourcing for processes such as Finance & Accounting, HR, and Customer Support Apart from having built offshore software development capabilities, and outsourcing IT, Tech companies are buying specialized capabilities such as F&A and HR from third parties Microsoft Cisco Intel AOL Finance & Accounting Finance & Accounting Business Finance & Accounting Human Finance & Accounting Human Legal Process Contract Resources Process Customer Support Resources Desktop Management Resources Content Development Business Process Procurement Market Research Market Research United Technologies Symantec Lam Research IBM Finance & Accounting Human Resources Voice Finance & Accounting Human Resources Contract Procurement Market Research Resources Market Research Citrix Sun Microsystems SAP HP Business Process Human Resources Human Resources Payroll Processing Market Research Business Services Avnet eBay Amazon Texas Instruments Finance & Accounting Customer Support Customer Support Voice Human Resources R&D Human Resources Business Processes While accounts payable, receivable and general ledger constitute majority of FAO services, companies have started outsourcing tax, regulatory reporting, internal audit in the recent years The list is not intended to be exhaustive but illustrative to show trends18 | © 2011, Cognizant
Business Process Outsourcing (BPO) and Finance & Accounting Outsourcing(FAO) are growing rapidly across all industries In 2011, cross-industry BPO is expected to grow at over 30% and FAO at over 20% No. of Outsourcing Deals Across Industries Total Contract Value- New FAO Deals $Bn 500 5 400 4 300 3 200 2 100 1 0 0 2007 2008 2009 2010 2011E 2006 2007 2008 2009 2010 2011E BPO Deals FAO Deals FAO Deals Total contract value of FAO deals in 2011 is set to reach $4.4Bn19 | © 2011, Cognizant
What are the keys to world class performance?20 | © 2011, Cognizant
World-Class companies common behaviors Value Contribution Value Generators How Well Designed are Your Services 1. Degree of Services Agility 2. Performance Management Maturity Desired 3. Service Delivery Model Maturity VALUE STRATEGIC ENABLEMENT 4. Service Management Maturity Effectiveness 5. Degree of Process Automation 6. Degree of Sourcing Agility 7. Portfolio Management Maturity How Well Do You Build Services? SERVICE 1. Global Sourcing Capability 2. Project Management Practices OPERATIONAL EXCELLENCE 3. Degree of Resources Agility Expected How Well Do You Operate Services? 1. Services Agility 2. Performance Effectiveness Efficiency 3. Cost Per Equivalent End User Efficiency COST COMPLEXITY REDUCTION How Effective are Your Services? 1. Consumer Experience 2. Business Value Performance 3. Relationship Management© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. | 21
Designing and executing an optimized Service Delivery Model -The key to World-Class performance Enterprise Service Delivery Strategy A strategy for what work is executed where, by whom, and its business benefit Strategic Alignment Service Delivery Model Service Delivery TransformationEnvironmental Drivers Enterprise Strategy Information Organizational Organizational Governance Capabilities & Service Acceptance Placement Organization Performance Service Execution Delivery Goals Skills & Process Capabilities Talent Sourcing Design & Enabling Process Implementation Operating Technology Design Roadmap Principles Performance Outcomes Risk Growth Agility Cost © 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. | 22
Finance outsourcing opportunities continue to expand Function level Process level Accounts Payable Travel and Expense Fixed Assets Cash Application Payroll Inter-company Collections Time and Attendance Cash Accounting General Accounting Dispute Management Credit 30% 37% Customer Billing Tax Filing and Reporting Cash Management Treasury Order Entry External Reporting Inventory Accounting 9% 24% Business Performance Reporting Cost Analysis Business Performance Analysis Budgeting Outlook Interim Reporting 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% GBS - Transactional GBS - Knowledge-centric GBS - Outsourced Outside the GBS organization Source: Global Business Services performance study, 2011© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. | 23
Comparing performance of BPOs and captives in terms of satisfactionwith quality of service delivery shows that both models work On-time Delivery Service Level Accuracy Service Level Satisfaction Level - Change Satisfaction Satisfaction Management Exceeds 23% Exceeds 31% 69% Positive expectations 48% expectations 43% 65% 69% 69% 8% Meets expectations Meets expectations Neutral 38% 29% 17% 8% 0% 23% Below expectations Below expectations Negative 14% 29% 17% Captive BPO Captive BPO Captive BPO Source: Hackett Enterprise Strategy Series – Understanding the trade-offs between captives and BPOs in G&A Business Process Globalization, 2008© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. | 24
BPOs deliver benefits faster Most BPOs and captives deliver savings …the most crucial difference between BPOs relative to baseline operating cost within the and captives with immediate ramifications for same range of 11% to 50%... the business case is ramp-up time Actual Process Operating Cost Savings Average Months Operations at Full Relative to Baseline Cost Volume Over 51% savings 14% 5% 26-50% savings 36% 63% 11-25% savings 36% 27 11% 22 14% 11 13 1-10% savings 5% Spending 0-10% more 0% 16% Captive BPO Captive BPO Planned Actual Ability to leverage the BPO’s existing infrastructure is the crucial differentiator allowing a far more rapid transition of the work. Although realized savings are closely within the same range as a result of accelerated benefits realization, BPOs will have better NPV performance than captives.© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. | 25
In conclusion Situation The technology industry is at an inflection point, with a multitude of major trends shaping the industry The data shows that the trends are measurable, real, and material Analysis of industry financial performance shows recovery from the great recession . . . . . . yet clearly some industry players are benefiting form the seismic shifts, while others are lagging Globalization of the operating model through outsourcing, is an accelerating and measurable response What you need to do now Recognize that globalizing your business process operating model is no longer an option, failure to do so is increasingly leaving you behind your competition Assess your business process operating model with respect to cost, performance, and location Identify your improvement objectives, prioritize and globalize the business processes26 | © 2011, Cognizant
Q&A27 | © 2011, Cognizant
Why Technology Industry Trends are Driving Increased Finance & Accounting Outsourcing A Cognizant & Hackett Group Webinar May 17, 201128