KPMG Sourcing Advisory 1Q12 Global Pulse Survey

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Trends in shared services, outsourcing, and third-party business and IT service markets, gleaned from KPMG's own field advisors and leading global service providers.

Trends in shared services, outsourcing, and third-party business and IT service markets, gleaned from KPMG's own field advisors and leading global service providers.

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  • 1. KPMG Sourcing Advisory 1Q12 Global Pulse Survey Trends in shared services, outsourcing, andthird-party business and IT service markets, gleaned from KPMG’s own field advisors and leading global service providers.
  • 2. KPMG LLP Shared Services and Outsourcing AdvisoryIntroductionKPMG is pleased to release deployment, and delivery of business The following leading global business and and IT services. They capture changes in IT service providers participated in thethe findings from its KPMG demand, usage levels, future adoption 1Q12 survey:1Q12 global Sourcing Advisory plans, and related key market indicators. • AccenturePulse survey. The Pulse surveys They highlight the changes, and the direction of change, in the GBS market as • ACS, a Xerox companyprovide insights into trends a whole. The surveys focus on where the • ADPand projections in end-user market is going and how that direction is • Atosorganizations’ usage of global changing—or not—as compared to prior • BT Global Services quarters and years.business services (GBS). The • Capgeminilearnings are gleaned from This edition of the global Sourcing • CGIKPMG firms’ advisors, who Advisory Pulse surveys reflects global • CSC business services market activity • Dellwork closely with end-user during 1Q12, as well as projections and • EMCorganizations that are actively predictions for the balance of 2012. • EXL Servicesexploring or undertaking Topics explored include: • Genpactshared services, outsourcing, • GBS demand and adoption trends • HCL Technologiesoffshoring and other service • Drivers for GBS delivery improvement • HPdelivery initiatives, as well as efforts • IBMfrom leading global business and • Current global economic condition’s • Infosys impact on buyer GBS efforts • NorthgateArinsoIT service providers. • Update on cloud adoption as it relates • ProcurianThe Sourcing Advisory Pulse surveys to GBS delivery strategies and models • Syntelare part of a broad family of KPMG Pulse • Outsourcing deal pricing, service • T-Systemssurveys. This collective research program provider profitability, and scope • TCSfocuses on GBS market trending in • Unisysspecific geographies such as China, The Pulse surveys focus on end-userfunctional areas such as real estate organizations’ global use of shared • Wiproand facilities management (REFM), services, outsourcing, and other third- • WNS and specialized constituencies such party services across the following Questions or comments regarding theas third-party legal counsel that advise functional areas: Pulse surveys should be directed tobuyer organizations on outsourcing. It Stan Lepeak, Director, Global Research,examines related key topics such as • Customer care/call center KPMG Management Consulting, atcloud adoption and human resources • Finance and accounting (F&A) slepeak@kpmg.com or +1 203-458-0677 .(HR) transformation, broader business • HRmarket trending via KPMG’s quarterly • Information technology (IT)Business Outlook Pulse survey, and • Knowledge process outsourcing (KPO)vertical industry business trends. • Procurement/source to paySince their inception in 2004, the global • REFMSourcing Advisory Pulse surveys have • Vertical industry business services *KPMG LLP (US), KPMG Holdings Limited (UK) andyielded insightful analyses of current KPMG International have acquired the business andand ongoing market trends in the use, subsidiaries of Advisory firm EquaTerra, Inc.Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 2
  • 3. ContentsIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Management Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 . . KPMG International Firms’ Shared Services and Outsourcing Advisor Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Third-Party Business and IT Service Provider Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Current Market Demand Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6I. KPMG International Firms’ Advisors: Top Approaches to Improve Service Delivery Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 . .II. Business and IT Service Providers Market Demand Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 . .III. Outsourcing Market Macro Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9IV. Market Condition Impact on Global Business Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Market Conditions: Impact on Global Sourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Common Buyer Responses to Current Market Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10V. Update on Cloud Adoption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Cloud Adoption Trending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Buyer Cloud Strategy Skills and Capabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14VI. Current Market Deal Characteristics: Service Providers’ Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 . . Pricing Competitiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Contract Profitability and Ability to Increase Scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16VII. Where to Learn More about Global Sourcing Market Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 KPMG Online Research Portals and Blogs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Service Provider Performance and Satisfaction Market Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Appendix – Key Questions by Advisors’ Primary Geography and Outsourcing Focus Area. . . . . . . . . . . . . . . . . . . . . . . . . . 18Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 3
  • 4. Management SummaryResults from the 1Q12 edition of the quarterly Economic conditions globally are not materially changing the nature and scope of buyers’ GBS efforts. While as noted above,global Sourcing Advisor Pulse surveys find that some work is selectively being brought back in-house frombuyers are continuing to diversify their global previous outsourcing efforts, especially BPO, this is muchbusiness services (GBS) portfolios with an more the exception than the norm and is typically only done for more specialized types of services. When this work is broughtincreased emphasis on the use of domestic and back in-house, it almost always flows into a shared servicesoffshore captive shared services. Outsourcing environment, often near or offshore. Overall buyers’ appetitesremains a core GBS portfolio component, but the for global services remains strong, albeit in a mix that is more favorable to shared services over outsourcing, at least foruse of shared services is growing relatively faster business process work and for new efforts.than traditional outsourcing. In some cases, buyerorganizations are pulling back work previously Cloud continues to grow in popularity and its adoption is increasing, though not as quickly as some on the sell-sideoutsourced and placing it into shared services advertise. Many buyers still struggle to decipher the truecenters; but more often expansion of shared business case for cloud, especially relative to longer-term costservices represents an ongoing consolidation savings opportunities. For many larger buyer organizations cloud deployments are still in the pilot phase–outside of selectof operations previously internally managed and point business process work and for IT support services–asdistributed across the organization. Use of cloud they work to navigate the business and technical challenges ofcontinues to grow (see below) both to enable migrating large, expensive, and complex legacy environments to the cloud. Most buyers need to improve their cloud-relatedshared services and outsourcing efforts or as skills and expertise, such as addressing data security, privacy,an alternative to traditional hosted outsourcing and risk requirements. They must also guard against creatingmodels. complex and difficult-to-govern cloud provider environments and portfolios as they adopt potentially numerous cloud pointsAs buyer GBS portfolios expand, diversify and become more solutions over the next few years.complex, so does buyer interest and focus in defining andpromoting GBS best practices and driving up maturity levels. The Pulse finds that service providers have become moreWhile the quest for greater maturity is nothing new, the rigor optimistic on near- to medium-term outsourcing demand andand focus on doing so continues to intensify and become more on overall services spend growth. This despite increased buyerformalized. KPMG is conducting ongoing market research on interest in shared services, and illustrating that overall thereGBS maturity above and beyond what is addressed in the global is much buyer demand for the full range of global businessSourcing Advisory Pulse surveys. A white paper presenting and services. This is in contrast to more negative sentimentanalyzing phase-one findings from this research was recently registered at the end of 2011. Mixed global economicreleased with additional research being conducted on an conditions and the use of alternative options (e.g., cloud)ongoing basis. are key gating factors for outsourcing demand, and tight rein over discretionary spending is a barrier to consulting growth. Providers continue to cite strong pricing pressure as a challenge to improve profitability, though the severity of this challenge varies across providers. ITO, more specialized BPO (for example specific to vertical industry functions), and multitower deals are the service areas that continue to exhibit the strongest levels of demand.Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 4
  • 5. KPMG International Firms’ Shared Services and Outsourcing Advisor Highlights 1. Improve current SSC/outsourcing governance processes/capabilities Top Means to Improve Service Delivery 2. Internal process improvement/re-engineering efforts Performance 3. Use/expansion of shared services 1. IT Top Focus Areas for Performance 2. F&A Improvement Efforts 3. Procurement/source to pay 1. Perform more thorough benchmarking/ baselining Top Buyer Reactions to Current Market 2. Overhaul outsourcing governance Conditions 3. Reopen contracts to renegotiate pricing 1. IT Top Functional Areas for Cloud Adoption 2. HR 3. F&AThird-Party Business and IT Service Provider Highlights Sixty-eight percent cite pipeline growth quarter-over-quarter (Q/Q) and 61 percent Deal Pipeline expect faster pipeline growth levels over the next 1–2 quarters; both levels up Q/Q 1. IT Top Focus Areas of Demand 2. Bundled BPO & ITO 3. HR 1. Banking, Financial Services, Insurance (BFSI) Top Industries for Demand 2. Consumer packaged goods (CPG) 3. Healthcare Pricing Pressure More aggressive Wage Inflation Mixed impact, depending on provider Contract Profitability Mixed on both new deals and deals in flight Contract Scope Strong emphasis on increasing scope in existing client accounts 1. Perform more thorough benchmarking/ baselining Top Buyer Reactions to Current Market 2. Overhaul outsourcing governance Conditions 3. Reopen contracts to renegotiate pricing 1. IT Top Functional Areas for Cloud Adoption 2. HR 3. F&AShared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 5
  • 6. Current Market Demand ConditionsKPMG International Firms’ Advisors: Top Advisors: Top Approaches to Improve Service DeliveryApproaches to Improve Service Delivery CapabilitiesCapabilitiesKPMG polled its global network of shared services andoutsourcing advisors (KPMG consultants working with clientsin the field) as to the top approaches that buyers are employingtoday to improve service delivery performance, as well as tohelp minimize or reduce service delivery costs (see Figure 1).• Sixty-seven percent of advisors, down 4 percent from last quarter, cited improve current shared services and outsourcing governance processes and capabilities as the most common approach undertaken to improve service delivery capabilities. This has been the top-rated response for several quarters, and reflects market awareness of the importance of sourcing governance to GBS success. It highlights a maturing global business services market in which buyers are focused intently on improving operational Figure 1 capabilities for GBS efforts already deployed in the field.• The second most commonly cited approach was internal Advisors: Top Functional Focus Areas for Service Delivery process improvement or reengineering efforts, identified by Improvement Efforts 47 percent of advisors, down 9 percent quarter over quarter. Ranking a close third and selected by 46 percent of advisors was use/expansion of shared services. Use/expansion of ITO slipped to fourth.• Improving governance processes and capabilities was the top cited approach by all classes of advisors (see Appendix for a breakout of KPMG International firms’ advisor responses by geographic region and by functional area of focus). The expansion of shared services usage was, as to be expected, more frequently cited by advisors who support business process versus IT work, while use and expansion of ITO scored higher among EMEA advisors.KPMG International firms’ sourcing advisors were asked Figure 2in which functional areas buyers are today applying theapproaches outlined in Figure 1 to improve service deliverycapabilities (see Figure 2). IT was the most commonly citedfunctional area, identified by 63 percent of advisors, up 1percent from last quarter, followed by F&A, selected by 51percent of advisors. There was general consensus on theserankings across geographies, though advisors who primarilysupport global deals and clients were more or less bullish onwork in the IT area.Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 6
  • 7. KPMG International firms’ advisors were next polled on Advisors: Demand by Service Delivery Model, Past 1-2the change in demand or usage levels over the past one to Quarterstwo quarters, and expected change in usage levels over thecoming one to two quarters, across four different categories ofbusiness and IT services delivery models employed in servicedelivery improvement efforts. These categories are BPO, ITO,shared services, and internal process improvement efforts (seeFigures 3 and 4).• The greatest growth in demand was once again cited for shared services efforts, identified by 52 percent of advisors, down 4 percent from last quarter (see Figure 3). The percentage of advisors citing growth in demand for internal process improvement rose from 47 to 51 percent. The Figure 3 number of advisors citing demand growth for ITO fell from 39 to 37 percent, while BPO demand growth remained low at 27 percent of advisors. Eleven percent of advisors cited Advisors: Demand by Service Delivery Model, Next 1-2 decreasing levels of demand for BPO. These weaker BPO Quarters growth expectations primarily reflect less demand for more traditional, horizontal BPO (e.g., FAO, HRO and source to pay) versus more specialized, industry-specific BPO where demand is stronger but deals are smaller and more diverse.• Looking forward over the next one to two quarters (see Figure 4), the greatest expected growth is for shared services efforts, identified by 60 percent of advisors, followed by internal process improvement, identified by 54 percent of advisors, up 3 percent from last quarter. Expectations for increased usage of ITO rose from 37 to 40 percent, while BPO demand growth expectations rose from Figure 4 35 to 37 percent of advisors polled.Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 7
  • 8. Business and IT Service Providers Market Demand Service providers polled, similar to KPMG International firms’Assessments sourcing advisors, cited IT as the strongest functional area of market demand. Fifty percent of providers polled, up 5 percentKPMG polled leading global business and IT service providers from last quarter, identified IT as the top area of demand (seeon the current and expected growth levels in their pipelines for Figure 7). This was followed by bundled BPO and ITO efforts,services deals. Providers polled this quarter were more bullish then HRO.regarding new deal pipeline growth projections than they werelast quarter. Service providers were polled on demand levels by vertical industry and industry group. BFSI was clearly the top industry• Sixty-eight percent of service providers cited pipeline growth group, cited by 82 percent of service providers, down 2 percent over the past quarter, an increase of 7 percent from last from last quarter (see Figure 8). CPG was second at 46 percent, quarter’s Pulse (see Figure 5). It is important to note that the and healthcare third at 36 percent. Pulse surveys measure change in pipeline growth levels, not absolute pipeline size or revenue levels. Service Providers: Top Functional Areas of Demand• Sixty-one percent of providers expected the pace of customer demand for business and IT services to increase over the next one to two quarters (see Figure 6), an increase of 16 percent from last quarter.Service Providers: New Deal Pipeline Projections Figure 7 Figure 5 Service Providers: Demand by IndustryService Providers: Demand Next 1-2 Quarters Figure 6 Figure 8Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 8
  • 9. Outsourcing Market Macro Trends KPMG firms’ advisors offered the following comments on GBS trending and service delivery improvement efforts.Results from the Spring 2012 edition of the KPMG GlobalBusiness Outlook Survey illustrates this positive-to-mixed “There seems to an increase in internal processtrending in outsourcing demand. The Global Business improvement particularly as it relates to ERP a drive to ,Outlook Survey is a broad-based study of key global business consolidate data centers and reduce their number, a pushindicators, and another member of the KPMG Pulse family of to selectively outsource IT to accelerate these changes ormarket research studies. Figure 10 shows buyer sentiment on when improvement of shared services internally is takingoutsourcing trending among the 6,000+ survey respondents. too long or appears to be failing. ”Sixty-eight percent of respondents surveyed in the Spring 2012edition of the survey indicated that their organizations will be “Internal and ITO demand focus with a clear view ondoing the same level of outsourcing 12 months forward, while prioritizing portfolio’s and activities and getting high14 percent indicated outsourcing levels will increase. These priority items and key cost saving initiatives underway andtotals are roughly in line with Business Outlook Survey results completed as quickly as possible. ”from the past several quarters; the number of respondentsunsure about future outsourcing declined to 10 percent. “More focus on internal improvement. Minimal investments, quick return. ”Summer 2011 Global Business Outlook: Outsourcing Plans 12 “In the ITO/BPO space we are seeing a focus on vendorMonths Forward management and pushing vendors to come up with increased benefit and efficiency. ” “The centralization of IT services into either a captive or outsourced delivery center seems to be a common theme and focus area for organizations. This is especially prevalent in the application space for ERP systems, where there are significant TCO benefits that can be realized through doing this. Furthermore, the centralization of ERP support and development is an enabler to achieving global business process standardization–which is another common theme Figure 9 that is being observed in the market place (especially for back-office functions–finance, HR, procurement). ” “Again, clients are testing the waters in certain areas for process improvements, as the results of those limited- scope projects are realized, more areas of the business are embracing the approach and doing process improvement projects. As more projects demonstrate levels of organizational maturity in specific business functions, clients are becoming more comfortable with outsourcing those areas (they know they must well understand the processes being executed before being able to successfully outsource those processes/functions.)” “Many of the key players in the ASPAC market are currently looking at their regional operating models. Once this is complete we are likely to see more transformation projects and the physical movement of parts of the operation in an attempt to cut costs and focus on efficiency.” “Shared services and process optimization efforts are likely to increase due to the economic crisis in Europe and the need for cost optimization. It is likely that social laws will not be softened, and as a consequence, BPO is not likely to expand that much. ”Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 9
  • 10. Market Condition Impact on Global Business Current Market Conditions Impact on Buyers’ GBS EffortsServicesThis quarter’s global Sourcing Advisory Pulse surveys examinedthe impact that current global economic and geopoliticalconditions are having on organizations’ global business servicesefforts. While the economy is improving in the United States,there remain longer-term headwinds–for example, relative tofiscal deficits, there is still much uncertainty over economicfutures in the European Union. In other markets such as theBRICs (Brazil, Russia, India, China) economic growth remainsmuch stronger than in Western markets but is slowing. All ofthis impacts buyers’ GBS strategies and tactics both as theyrelate to improving operational efficiency and effectiveness aswell as supporting global market expansion efforts. Figure 10Market Conditions: Impact on Global SourcingMarket conditions always impact buyer demand levels and Common Buyer Responses to Current Market Conditionsusage patterns for global business services provisioning. Some The Pulse surveys next assessed the most common activitiesof the impact is driven by changing market economics, such as that buyers have become more aggressive about undertaking,exchange rate trending, the reemergence of rising wage levels given current market conditions in outsourcing deals already inand higher attrition rates in offshore markets, and the increase flight. Advisors and service providers were asked to identify thein surplus labor in western markets. Increasing service trade frequency with which they are seeing eight different activitiesprotectionist rhetoric and policies in western markets have a in the market and rank them on a one-to-five scale, where onedampening effect, albeit not to a significant degree, at least to represents very uncommon/infrequently undertaken and fivedate. While buying patterns are changing and include the use represents very common/ frequently undertaken (see Figureof more local or nearshore resources for certain services, the 11).overall growth of global sourcing continues relatively unabated. • The most common activity according to KPMG professionals,KPMG polled service providers and its own advisors on what scored at 3.60 on the one-to-five scale, was performing moreimpact various current market conditions are having on buyers’ thorough benchmarking/baselining for new outsourcingGBS preferences and usage patterns (see Figure 10). Advisors efforts. Service providers scored this activity at 3.50 on theand service providers were asked to what degree they agreed scale.or disagreed with five positions related to trending in globalsourcing. They ranked their responses on a one-to-five scale • Both service provider and KPMG advisors scored overhaulingwhere one represents strongly disagree and five strongly outsourcing governance operating models at 3.50. This wasagree. The only trend with consensus agreement, and it followed closely by reopening contracts to renegotiate pricescored just above the midpoint, was that outsourcing buyers and reopening contracts to renegotiate service levels.are growing more interested in offshore services delivered • There are no major differences in responses based onfrom locations other than India. This trend is natural as the geographic or functional area of focus among KPMGnumber of quality and viable global sourcing locations expands advisors, with the largest gap being among advisors in EMEAand Indian service providers themselves diversify delivery regarding enforcing benchmarking clauses in existing deals.capabilities beyond their home market. Neither advisors norservice providers see as a major trend buyers pulling back fromglobal sourcing in general or in their use of India-based serviceproviders overall.Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 10
  • 11. No activity scored above 4.0 or below 2.5 on the five-point scale KPMG International firms’ advisors offered the followinghighlighting that all of these activities are occurring but are far comments on GBS trending is response to current marketfrom universal in uptake. Buyers are advised to regularly review conditions.their options relative to undertaking any of these efforts. “Use of China as an offshore/nearshore center in Asia- Pacific is noticeable, with some very strong capabilityBuyer Reaction to Current Market Conditions emerging for ITO services from heritage providers who see China as an alternative location for investment due to client perceptions and language skills” “Globalization is something irreversible, but the offshore solutions will not be totally concentrated in India. Many global companies are using offshore base in Latin America, and LatAm companies prefer to have their outsourcing base in LatAm for reasons of language issues and time zone.” “The current economic conditions worldwide are actually driving a great sense of urgency in establishing global sourcing as a Plan B or C in case the financial instability causes suppliers to reduce supplies or go out of business. The global hot spots for supply are also increasing their market place/market share drive to obtain more buyers globally. ” Figure 11 “India is no longer the only destination in Asia. Companies have developed a significant reliance on India and are now looking at diversifying this risk. China, Philippines, and Vietnam are all very hot at the moment. ” “Many companies are reopening the discussion about outsourcing contracts, trying to get better conditions on cost as they are more flexible in discussing offshore against onshore; however, the clients want nearshore to seem more comfortable in order to control the outsourcing process.” “Vendor management is a very hot topic at the moment in ASPAC; however, the focus is primarily internal, e.g. how the buyer faces off to the vendor rather than direct vendor engagement and renegotiation. However, this is going to be the next step in the process. ”Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 11
  • 12. Update on Cloud Adoption Buyer Cloud Activity LevelsKPMG is conducting a broad range of market research studieson the adoption, deployment, and usage of cloud services. Asone component of this research, KPMG included a section inthis quarter’s Pulse survey on cloud adoption.KPMG used the following definitions of cloud for the purposesof this Pulse survey.• Infrastructure-as-a-Service (IaaS): Infrastructure that is traditionally provided by servers, desktops, and network equipment, is instead delivered over the Internet. (It can be scaled up or down as needed.)• Platform-as-a-Service (PaaS): Software development, storage, and hosting are accessed as a service over the Internet. Figure 12• Software-as-a-Service (SaaS): On-demand applications are provided through an Internet browser, eliminating the need to install, run, and maintain programs on internal systems. Cloud Adoption by Functional Area• Business-Process-as-a-Service (BPaaS): BPO is provisioned using a cloud model, bundled with SaaS/PaaS/IaaS and delivered over the Internet.Cloud Adoption TrendingThird-party service providers and KPMG International firms’shared services and outsourcing advisors were first polledon the level of uptake for cloud adoption that they are seeingamong typical end-user organizations. Service providers aremore bullish on buyer uptake levels than were advisors. Thisdisparity is related to views into different user organizations,differences of opinion as to what constitutes a “deployment, ” Figure 13and what is truly meant by cloud adoption (as opposed torelabeled legacy computing models).• Fifty percent of service providers polled indicated that their clients have one or more live (as opposed to pilot) cloud services deployments in the field at the business unit level, and that this percentage would increase to 92 percent in 12 months (see Figure 12). Advisors cited much lower adoption rates of 15 percent today and 33 percent in 12 months. Both of these scores are above the levels registered in the 3Q11 global Sourcing Advisory Pulse surveys when these questions were last asked.• According to 78 percent of advisors and 92 percent of service providers, the most common functional area in which cloud services are being deployed is IT, followed by several major business function areas scored at a much lower level (see Figure 13).Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 12
  • 13. Service providers and KPMG International firms’ sourcing IT & Business Professionals’ Cloud “Enthusiasm”advisors were next asked to assess the typical level of“enthusiasm” for cloud adoption among both IT and businessprofessionals in end-user organizations. The point of thisquestion was to gauge the degree to which business and ITprofessionals in end-user organizations are approaching cloudadoption pessimistically, realistically, or overly optimistically.In general, both advisors and providers felt that most IT andbusiness professionals were generally realistic about cloudenablement, and maintain a healthy degree of skepticism(see Figure14).In separate questions, KPMG International firms’ sourcingadvisors and third-party service providers were polled on thematurity of available cloud offerings in the market. Advisorswere asked to assess the maturity of typical cloud offerings inthe market coming from both IT infrastructure and hardwarevendors as well as IT software and service providers. Advisors Figure 14have been of the opinion that what is being taken to marketunder the cloud marketing banner is, for the most part,repackaged legacy offerings; but are more often today giving Advisors: Cloud Offerings’ Maturity Levelsproviders, especially on the software side, more credit forhaving true cloud offerings in the market (see Figure 15).Service providers were asked to comment directly on their ownfirm’s cloud offerings. Not surprisingly, most were positive onboth the quality and quantity of their own offerings(see Figure 16). Figure 15 Service Providers: Cloud Offerings’ Maturity Levels Figure 16Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 13
  • 14. Buyer Cloud Strategy Skills and Capabilities Buyer Cloud SkillsFinally, both service providers and KPMG International firms’sourcing advisors were asked to assess the skills of typicalend-user organizations around various cloud capabilities suchas understanding the technical underpinnings of cloud strategy,or assessing the risks associated with cloud. Providers andadvisors ranked typical buyers’ skills to perform different setsof activities using a one-to-five scale where one representsvery unskilled and five represents very skilled (see Figure 17).Results show there is clearly room for improvement in typicalbuyer skill levels.• The highest score given by advisors at 2.67 on the one-to- five scale was for understanding the technical underpinnings of cloud: how it works. Service providers scored this skill slightly higher at 3.25. Both of these scores are up compared Figure 17 to the 3Q11 Pulse survey.• Service providers scored buyers’ skills at 3.02 for understanding how cloud options can complement or supplant traditional enterprise systems and/or outsourcing investments, while advisors scored this skill at just 2.50. The ability to determine where cloud fits into the service delivery continuum that includes shared services and outsourcing (delivery models themselves that can embody cloud capabilities) is important to deploying GBS efforts.• Coming in at the bottom of the rankings according to both advisors and third-party providers were skills relating to both sourcing and managing cloud initiatives.Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 14
  • 15. KPMG International firms’ sourcing advisors had the following Current Market Deal Characteristics: Servicecomments related to cloud adoption. Providers’ Perspectives “No clear well-defined benefits to the user and limited The final section of the quarterly Sourcing Advisory Global number of providers. They have enough on their plate to do Pulse survey assesses the characteristics of current without cloud adoption. That would change if there is ever outsourcing and third-party services deals in the market from a clear and present danger for which cloud adoption is the the perspective of the business and IT service providers polled. shining knight.” Pricing Competitiveness “Many ASPAC countries are in a unique position. They Increased pricing competitiveness implies the buyer has, or do not necessarily have the same legacy environment as is trying to get, the upper hand in pricing for outsourcing or the Western countries. This makes the adoption of cloud- related third-party services deals. As pricing is one element of based services for local players at times a lot easier. We determining profitability, less competitive pricing is generally are seeing domestic Chinese companies adopting cloud favorable to the service provider. The consensus for most of strategies already. ” the past three years among service providers, especially India- based companies, is that buyers were getting more aggressive “A number of IT execs and CIOs are locked in existing with their pricing demands. Fifty-four percent of service outsource contracts–in these scenarios cloud is a prospect providers polled, up 9 percent from last quarter and the fourth for the future that they are gearing up for but will not be quarterly increase in a row, indicated that pricing pressure implementing/exploiting in the short-term. The level of increased in the quarter, while 46 percent of service providers customization is always a challenge and limitation for indicated they saw little or no change in pricing pressure (see cloud; therefore, the shift to cloud needs to be aligned with Figure 18). a business shift to standard processes, and a willingness to adopt out-of-the-box products. ” Service Providers: Pricing Pressure “In principle, many IT execs and CIOs understand the value of cloud. In the Infrastructure space, they are more advanced in their thinking about how to leverage IaaS; the challenge remains applications. Furthermore, there is concern about data retention and data security that is currently limiting the scope of services that organizations are willing to put into the cloud–less desire to shift business-critical software or business-critical data into a cloud environment. ” “This depends on the service. But a number of providers Figure 18 are able to create a real offering that is not simply a repackage of the legacy offerings. Although the basis is similar, the value is realized in the cost savings. ” “Increasingly, CEOs know there is something in cloud that can save money, ease deployment costs, and simplify management. They are just not sure how to buy it, manage it, or secure it. ”Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 15
  • 16. Contract Profitability and Ability to Increase Scope Service Providers: Contract Profitability, New ContractsSome of the biggest factors impacting contract profitabilitytoday are buyer pricing pressure, wage inflation, and currencyexchange rates, as addressed above, as well as buyer appetitefor more profitable discretionary services such as consultingor transformational outsourcing, which for the most part arestill relatively weak. Providers are somewhat more optimisticthis quarter on their ability to improve contract profitability(see Figures 19 and 20) through a combination of currencyexchange benefits, pushing a mix of higher-profit services, anddriving down their internal costs to deliver services via greaterautomation, standardization, and delivery process streamlining. Figure 19• Thirty percent of service providers polled, down 6 percent from last quarter, indicated that contract profitability is Service Providers: Contract Profitability, Existing Contracts improving in new deals, with just 7 percent indicating a decline in new contract profitability.• Thirty percent of service providers expected to improve contract profitability in existing deals in flight for more than one year, down 15 percent from last quarter, while 15 percent indicated existing deal profitability is declining, up 8 percent quarter over quarter.Deal scope is another element that impacts service providerprofitability. Larger deals tend to offer more room for greaterprofits, though this is not always the case. Doing more Figure 20and broader work with a client should–from the provider’sperspective–ideally lead to doing more strategic, value-added,and more profitable work. Following this logic, if providers are Service Providers: Ability to Increase Deal Scopeable to expand scope in a client account, profitability shouldimprove. Conversely, if a provider cannot improve profitability,it should question whether to push for broader scope in theaccount.Figure 21 illustrates service provider expectations abouttheir ability to increase scope, ideally in a profitable manner,in current accounts. Providers today are focused on growingbusiness in existing accounts, not only because pursuit costsare lower than competing for new business, but also becausedoing so protects their base as buyers rationalize suppliersand cut back on spend levels. Expectations on ability to Figure 21increase scope over the past year have been high, and in 1Q1289 percent of service providers expect to increase scope incurrent accounts, while the balance expected scope levels toremain constant.Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 16
  • 17. Where to Learn More about Global Sourcing Service Provider Performance and Satisfaction MarketMarket Trends StudiesKPMG Online Research Portals and Blogs On an ongoing basis, KPMG conducts a wide range of market studies on Service Provider Performance and Satisfaction in• KPMG Shared Services and Outsourcing Institute both ITO and FAO. The ITO studies cover all major European markets, and the FAO program is global in nature. These studies• KPMG/EquaTerra Research Library survey and interview buyers actively engaged in outsourcing efforts with a named set of leading, market-specific providers.• KPMG/EquaTerra Blog: Advice Worth Keeping The research unveils direct insights into buyer opinions on service provider performance levels, and also assesses and• Directory of all KPMG Institutes interprets general outsourcing demand and activity trends in the markets covered. Market coverage and due dates for the next editions of these studies are as follows: • United Kingdom (next release 2Q12) • Netherlands (next release 2Q12) • BeLux (next release 2Q12) • Nordics (next release 2Q12) • Pan-European ITO (next release 3Q12) Executive summary reports for all of the completed research efforts are available free of charge, and complete results are available for a fee by contacting Stan Lepeak.Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 17
  • 18. Appendix – Key Questions by Advisors’ PrimaryGeography and Outsourcing Focus Area All IT BP All Function Global Americas EMEA Top Approaches to Change Improve current SSC/outsourcing governance 67% 65% 65% 73% 62% 67% 65% Internal process improvement/re-engineering efforts 47% 49% 58% 43% 44% 54% 43% Investments into/improvements to enterprise software systems 18% 21% 18% 17% 15% 18% 17% Investments into cloud computing services 24% 32% 18% 20% 25% 23% 23% Use/expansion of SSCs 46% 30% 48% 53% 56% 48% 40% Use/expansion of offshore captive SSCs 22% 21% 27% 20% 31% 20% 22% Use/expansion of ITO 42% 68% 26% 33% 44% 34% 53% Use/expansion of BPO 28% 24% 40% 37% 33% 27% 25% Nothing/major improvements not required 1% 0% 0% 2% 0% 0% 2% Nothing/lack of ambition/execute support/funding 5% 5% 6% 3% 4% 1% 10% Top Functional Focus Areas All areas, including IT 16% 14% 17% 26% 15% 17% 10% All business functions 10% 3% 8% 18% 15% 9% 2% Vertical industry specific bus. functions 7% 6% 3% 12% 8% 6% 7% Customer care 11% 13% 10% 12% 15% 12% 10% F&A 51% 44% 60% 51% 54% 57% 45% HR 31% 27% 36% 20% 33% 29% 35% IT 63% 81% 57% 59% 50% 64% 68% Manufacturing 1% 1% 0% 2% 0% 1% 2% Procurement/source to pay 34% 31% 35% 34% 31% 33% 43% REFM 6% 6% 9% 0% 6% 6% 5% R&D 3% 7% 4% 3% 6% 3% 3% Sales & marketing 6% 9% 3% 5% 8% 7% 5% Supply chain 22% 27% 23% 20% 12% 24% 28% Transportation/logistics 5% 3% 5% 8% 2% 3% 5%Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 18
  • 19. All IT BP All Function Global Americas EMEA Change in Demand Last 1-2 Quarters Up 51% 61% 50% 52% 46% 56% 41% Internal process improvement Flat 47% 38% 48% 48% 54% 41% 59% Down 2% 1% 2% 0% 0% 3% 0% Up 52% 51% 55% 58% 58% 54% 43% Shared services/SSC Flat 46% 45% 45% 42% 42% 44% 53% Down 2% 4% 0% 0% 0% 1% 4% Up 37% 51% 23% 32% 41% 33% 40% ITO Flat 59% 44% 72% 65% 54% 61% 58% Down 4% 5% 5% 3% 4% 6% 2% Up 27% 30% 27% 29% 24% 23% 28% BPO Flat 62% 58% 63% 60% 60% 66% 62% Down 11% 12% 10% 10% 16% 10% 9% Change in Demand Next 1-2 Quarters Up 54% 65% 53% 49% 43% 60% 56% Internal process improvement Flat 45% 35% 46% 49% 57% 39% 44% Down 1% 0% 1% 2% 0% 1% 0% Up 60% 58% 60% 61% 63% 64% 52% Shared services/SSC Flat 39% 41% 39% 38% 37% 35% 46% Down 1% 1% 1% 2% 0% 1% 2% Up 40% 52% 34% 41% 37% 43% 42% ITO Flat 56% 47% 64% 52% 57% 53% 56% Down 3% 1% 2% 7% 7% 5% 2% Up 37% 41% 35% 41% 33% 33% 44% BPO Flat 55% 53% 59% 45% 53% 58% 54% Down 7% 5% 6% 14% 13% 9% 2% Current Market Conditions Impact on Buyers GBS Efforts Current economic conditions are causing buyers to pull back from 2.43 2.36 2.63 2.33 2.48 2.58 2.34 global sourcing The current political environment is causing pull back from global 2.62 2.59 2.76 2.49 2.60 2.60 2.60 sourcing Current econ./market conditions are causing pull back from 2.45 2.48 2.61 2.38 2.42 2.51 2.45 globalization Current market conditions are causing pull back from using Indian- 2.53 2.42 2.63 2.55 2.69 2.58 2.45 based SPs More interest in offshore services delivered from locations other 3.53 3.46 3.55 3.65 3.74 3.57 3.40 than IndiaShared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 19
  • 20. All IT BP All Function Global Americas EMEA Buyer Reaction to Current Market Conditions More thorough benchmarking/baselining 3.60 3.58 3.60 3.64 3.63 3.51 3.64 Enforcing benchmark clauses 3.01 3.11 3.00 2.84 2.90 2.81 3.32 Reopening contracts to renegotiate pricing 3.42 3.65 3.44 3.44 3.31 3.39 3.51 Reopening contracts to renegotiate SLAs 3.39 3.55 3.36 3.43 3.29 3.42 3.36 Reopening contracts to renegotiate scope 3.34 3.39 3.30 3.42 3.27 3.38 3.34 Pushing for more offshore outsourcing 3.15 3.21 3.21 3.08 3.35 3.12 3.13 Pushing for more nearshore/onshore outsourcing 3.08 2.89 3.17 3.19 3.10 3.14 3.09 Overhauling outsourcing governance operating models 3.56 3.59 3.51 3.63 3.55 3.60 3.45 Cloud Computing Activity No interest/activity Now 9% 4% 15% 8% 9% 9% 7% Interest/no material activity Now 43% 39% 46% 46% 41% 43% 48% Actively exploring options/deploying pilots Now 32% 34% 26% 38% 39% 33% 26% Live deployments at the BU level Now 11% 16% 10% 6% 9% 9% 15% Multiple live deployments at the BU level Now 4% 7% 4% 2% 2% 5% 4% No interest/activity 12 Mths 5% 2% 8% 6% 2% 6% 4% Interest/no material activity 12 Mths 26% 21% 31% 28% 29% 26% 27% Actively exploring options/deploying pilots 12 Mths 35% 37% 35% 31% 29% 36% 41% Live deployments at the BU level 12 Mths 23% 27% 18% 26% 33% 21% 18% Multiple live deployments at the BU level 12 Mths 10% 12% 8% 9% 7% 11% 10% IT Executives Cloud Skepticism/Enthusiasm Extremely skeptical 3% 3% 3% 2% 2% 3% 2% Skeptical but willing to explore/discuss 30% 31% 27% 29% 41% 23% 30% Level-headed, bringing logic, process and experience to bear 48% 45% 49% 51% 37% 55% 49% Enthusiastic but can be reasoned with 17% 18% 18% 18% 17% 17% 17% Evangelist 3% 4% 4% 0% 2% 3% 2% Business Executives Cloud Skepticism/Enthusiasm Extremely skeptical 4% 3% 4% 4% 0% 3% 6% Skeptical but willing to explore/discuss 38% 31% 39% 42% 36% 32% 49% Level-headed, bringing logic, process and experience to bear 34% 45% 37% 38% 43% 45% 18% Enthusiastic but can be reasoned with 21% 18% 17% 17% 18% 18% 24% Evangelist 2% 4% 4% 0% 2% 3% 2% Cloud Offerings Maturity - Typical IT Infrastructure/Hardware Vendor/SP Pure marketing hype 8% 9% 13% 10% 8% 10% 5% Repackaging legacy offerings 53% 47% 48% 57% 55% 47% 53% Real offerings/piloting deployment 36% 42% 33% 33% 32% 40% 42% Multiple live deployments at the BU level across multiple clients 3% 3% 6% 0% 5% 3% 0%Shared Services and Outsourcing Advisory / KPMG Sourcing Advisory 1Q12 Global Pulse Survey / April 2012 20
  • 21. All IT BP All Function Global Americas EMEACloud Offerings Maturity - Typical IT Software Vendor/SPPure marketing hype 7% 5% 14% 8% 13% 7% 5%Repackaging legacy offerings 39% 40% 40% 41% 38% 28% 50%Real offerings/piloting deployment 48% 50% 37% 45% 40% 59% 45%Multiple live deployments at the BU level across multiple clients 6% 5% 9% 6% 10% 7% 0%Top Functional Areas for Cloud AdoptionFinance & accounting 27% 25% 22% 26% 21% 27% 28%Human resources 33% 29% 37% 31% 38% 27% 32%Supply chain 5% 4% 8% 6% 0% 5% 6%Sourcing & procurement 18% 20% 15% 12% 15% 16% 15%Sales & marketing 23% 30% 21% 14% 26% 22% 28%Information technology 78% 84% 69% 84% 77% 73% 74%Manufacturing 5% 1% 1% 2% 3% 1% 2%Buyer Cloud SkillsUnderstanding the tech. underpinnings: how it works 2.67 2.75 2.71 2.58 2.56 2.70 2.73Assessing the near term maturity to support 2.45 2.54 2.48 2.36 2.37 2.50 2.49enterprise computing needsNavigating/assessing vendor & SP markets & landscapes 2.27 2.36 2.27 2.12 2.15 2.32 2.33Sourcing and structuring cloud initiatives & engagements 2.05 2.14 2.12 1.80 1.90 2.01 2.13Managing and governing cloud initiatives & engagements 2.01 2.04 2.01 1.94 1.85 2.01 2.11Assessing risks (e.g., data, IP business, reputational) , 2.33 2.35 2.35 2.24 2.27 2.29 2.49Understanding how cloud impacts 2.50 2.66 2.52 2.32 2.24 2.46 2.69enterprise systems and/or outsourcingContact usStan LepeakGlobal Research,KPMG Management Consulting KPMG LLP the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG ,Director International Cooperative (“KPMG International”). KPMG International’s member firms have 145,000T: +1 203 458 0677. professionals, including more than 8,000 partners, in 152 countries.E: slepeak@kpmg.com © 2012 KPMG LLP a Delaware limited liability partnership and the U.S. member firm of the KPMG , network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. The KPMG name, logo and the phrase “cutting through complexity”www.kpmg.com are registered trademarks or trademarks of KPMG International. April2012