The document discusses the sustainability of offshore locations for global companies. It notes that while wage inflation has traditionally been seen as the main driver of eroding arbitrage, currency movements are often the primary factor impacting costs. Additionally, overall people costs do not always rise directly with wage increases due to efficiency levers. The document also examines scenarios for the sustainability of India's arbitrage, finding it could last 12-13 years even under pessimistic forecasts. Finally, it notes that while other locations have seen lower inflation than India, currency trends have made India's relative cost position stable compared to places like the Philippines, Malaysia, Brazil and Poland.

1. Is the Arbitrage of Your Offshore
Locations Sustainable?
October 18, 2011

2. Today’s Webinar is brought to you by Everest Group
Today’s Webinar
Is the Arbitrage of Your Offshore Locations Sustainable?
Synopsis:
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?
About Everest Group
Everest Group is an advisor to business leaders on the next generation of global services with a worldwide reputation
for helping Global 1000 firms dramatically improve their performance by optimizing their back- and middle-office
business services. With a fact-based approach driving outcomes, Everest Group counsels organizations with
complex challenges related to the use and delivery of g
p g y global services in their p pursuits to balance short-term needs
with long-term goals. Through its practical consulting, original research and industry resource services, Everest
Group helps clients maximize value from delivery strategies, talent and sourcing models, technologies and
management 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. Q&A
To 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. 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. 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. Global companies have built significant offshore
workforce and leverage multiple locations
Total 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
bank
1 Four offshore regions considered: Asia, Latin America, Central & Eastern Europe, Africa & Middle East
2 Only includes cities with captive operations
Proprietary & Confidential. © 2011, Everest Global, Inc. 6

7. Companies are concerned about the sustainability
of their offshore locations
Key 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. 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)
 Example
2. 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 question
Example
1990 (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. Poll Question: What is the approximate ratio of your year
five 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. What does the ratio imply for your average annual
increase 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. Agenda
 Sustainability of offshore locations
– Introduction
– Arbitrage sustainability
– Talent sustainability
 Implications for global services strategies
Proprietary & Confidential. © 2011, Everest Global, Inc. 11

12. Commonly perceived myths on arbitrage
sustainability
Myth Reality
1
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 levers
3
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
scenarios
4
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. Myth: Inflation is the single biggest driver of 1
arbitrage erosion
Change in annual operating cost per FTE over 2007-11 ITO: ARGENTINA EXAMPLE
Indexed: 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 policy
1 Average wage inflation over five years; recent wage inflation is higher (15-18%)
Proprietary & Confidential. © 2011, Everest Global, Inc. 13

14. Myth: Wage increases directly correspond to an 2
increase 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. Myth: Wage increases directly correspond to an 2
increase 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. Myth: India’s arbitrage could erode soon 3
(page 1 of 2)
Factors affecting
arbitrage 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 Appreciates
Currency 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. 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 scenarios
1 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. Poll Question: Which scenario do you think is most
likely?
Pessimistic 45%
Base case 39%
Optimistic 12%
Don't 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. Myth: Locations other than India have stable costs and 4
have become more competitive (page 1 of 2)
Wage inflation (CAGR over 2007-11) ITO SERVICES
Percentage
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 India
Currency trends over 2007-11  However, currency
Local 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 USD
2007 2008 2009 2010 2011
Proprietary & Confidential. © 2011, Everest Global, Inc. 19

20. Myth: Locations other than India have stable costs and 4
have become more competitive (page 2 of 2)
Annual operating costs per FTE per annum Arbitrage relative to U.S. ITO SERVICES
2011; 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. Agenda
 Sustainability of offshore locations
– Introduction
– Arbitrage sustainability
– Talent sustainability
 Implications for global services strategies
Proprietary & Confidential. © 2011, Everest Global, Inc. 21

22. Talent sustainability is influenced by multiple
external 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. Alternative talent models can help companies cope
with market saturation challenges
Annual demand and supply at entry level KRAKOW – VOICE BPO
Number
~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. Companies need to view talent sustainability in
context of their specific functional/skill needs
KUALA LUMPUR
Total annual graduate pool and annual relevant pools
for F&A and IT
2011; 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 2015
Sizeable overall graduate pool, but smaller for Potential challenges with sustainability of IT services
specialized functions in Kuala Lumpur, given small pool and players’ growth
plans
1 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. Agenda
 Sustainability of offshore locations
 Implications for global services strategy
Proprietary & Confidential. © 2011, Everest Global, Inc. 25

26. Global services strategies should reflect supply and
demand factors that influence sustainability
 Leverage locations that are able to attract in-bound talent to offset
Supply
saturation effects (i.e., talent can and will move to the location from
factors
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 complete
Demand
much of the work
factors
– 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. Best practices for helping your organization deal
with 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. 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. 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 today
To 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. 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 Webinars
ITO, Cloud and Next Generation Outsourcing – How Do You Get There?
 Thursday, October 20, 11:00 a.m. CDT
 Register
Save the Date: Market Vista Q3 2011
 November 2011
Proprietary & Confidential. © 2011, Everest Global, Inc. 30

31. About Everest Group
Everest Group is an advisor to business leaders on the next generation of global
services with a worldwide reputation for helping Global 1000 firms dramatically
improve their performance by optimizing their back- and middle-office business
services. With a fact-based approach driving outcomes, Everest Group counsels
organizations with complex challenges related to the use and delivery of global
services in their pursuits to balance short-term needs with long-term goals. Through
short term long term goals
its practical consulting, original research and industry resource services, Everest
Group helps clients maximize value from delivery strategies, talent and sourcing
models, technologies and management approaches. Established in 1991, Everest
Group serves users of global services, providers of services, country organizations
G f l b l i id f i t i ti
and private equity firms, in six continents across all industry categories. For more
information, please visit www.everestgrp.com and research.everestgrp.com.
Proprietary & Confidential. © 2011, Everest Global, Inc. 31

32. Everest Group leads clients from insight to action
Contact 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
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info@everestgrp.com
info@everestgrp com india@everestgrp.com
india@everestgrp com
+1-646-805-4000 +91-124-496-1000
+91-124-496-1100
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+44-207-887-1483 +31-20-301-2138
www.everestgrp.com | research.everestgrp.com | www.sherpasinblueshirts.com
Proprietary & Confidential. © 2011, Everest Global, Inc. 32