Key Market Developments in Q2-2011: Market Vista Report Briefing

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Everest Group research analysts will highlight the findings of the Q2-2011 Market Vista report. Prof. Mary Lacity, professor of information systems at the University of Missouri-St. Louis, will cover a special feature “What Service Providers Say About Clients…”

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Key Market Developments in Q2-2011: Market Vista Report Briefing

  1. 1. Today’s Webinar is brought to you by Everest GroupToday’s WebinarKey Market Developments in Q2-2011: Market Vista Report BriefingSynopsis: Everest Group research analysts will highlight the findings of the Q2-2011Market Vista report. Prof. Mary Lacity, professor of information systems at the Universityof Missouri-St. Louis, will cover a special feature “What Service Providers Say AboutClients…Clients ”About Everest GroupEverest Group is an advisor to business leaders on the next generation of global services with a worldwidereputation for helping Global 1000 firms dramatically improve their performance by optimizing their back- andmiddle-office business services. With a fact-based approach driving outcomes, Everest Group counselsorganizations with complex challenges related to the use and delivery of global services in their pursuits tobalance short-term needs with long-term goals. Through its practical consulting, original research and industry short term long termresource services, Everest Group helps clients maximize value from delivery strategies, talent and sourcingmodels, technologies and management approaches. Established in 1991, Everest Group serves users ofglobal services, providers of services, country organizations and private equity firms, in six continents acrossall 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 1 Proprietary & Confidential. © 2011, Everest Global, Inc.
  2. 2. Q&ATo ask a question during the Q&A session Click the question mark ( q (Q&A) button located on the floating tool bar in the bottom right ) g g of your screen. This will open the Q&A Panel Be sure to keep the default set to “send to a Panelist” Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit 2 Proprietary & Confidential. © 2011, Everest Global, Inc.
  3. 3. Key Market Developments inQ2-2011: Market Vista BriefingWebinarAugust 10, 2011
  4. 4. Introductions Eric Simonson Managing Partner – Research Everest Group eric.simonson@everestgrp.com Salil Dani Research Director – Global Sourcing Everest Group salil.dani@everestgrp.com lil d i@ t Mary Lacity Professor of Information Systems University of Missouri-St. Louis 4 Proprietary & Confidential. © 2011, Everest Global, Inc.
  5. 5. Context settingWhat will you learn from this Webinar? Key findings from the Q2 2011 Market Vista report and what they mean for buyers and y g p y y service providers Highlights of trends across outsourcing and offshoring transactions, captives, location dynamics, service provider developments, and implications for stakeholders in the y , p p , p global services industry A special feature “What Service Providers Say About Clients…” presented by Dr. Mary Lacity y 5 Proprietary & Confidential. © 2011, Everest Global, Inc.
  6. 6. Global services leaders are asked to manage globalsourcing risks and deliver improving results Are there What is the real What are my opportunities inflation and how peers doing? to optimize my does it compare to pricing? price increases in my portfolio? Are there new What new service delivery relevant economic models / service providers are How can I better incentives? my peers leveraging? manage forex changes? h ? What new risks are Are their any new my service political or macro- Who are the How are the providers taking on? economic risks I need emerging service relative costs to be aware of NOW ? providers in my moving across areas? locations? Key decisions that global services managers need to support  Comparison with peers  Location risk management  Service provider selection and optimization p p  Design of new deals  Price benchmarking and contract renewals 6 Proprietary & Confidential. © 2011, Everest Global, Inc.
  7. 7. Market Vista provides continuously updated facts andanalysis every quarter to enable effective managementof global services portfolios Overall sourcing market Supplier landscape Detailed analysis of trends by  Updates on supplier industry vertical and geography market share, Report of transaction volume, capabilities, and size, and momentum performance Perspective on events with  Supplier profiles, significant industry impact (e.g., including data on: M&A)  Transactions Implications of regulatory  Location footprint changes  M&A activity Location data and dynamics Processes and models Data on market activity in  Process-level trends key offshore geographies  Captive set ups,  Political divestures, and overall  Macroeconomic trends  Promotion incentives  Fact based Fact-based insights on Trends in wage inflation, adoption of emerging attrition, and arbitrage pricing models  Data and perspectives on new opportunity areas Location Supplier Quarterly Location Breaking Primer Insights capability Industry trends Report database viewpoint e-newsletter profiles 7 Proprietary & Confidential. © 2011, Everest Global, Inc.
  8. 8. Agenda Key market developments in Q2-2011 Special Feature: “What Service Providers Say About Clients…” 8 Proprietary & Confidential. © 2011, Everest Global, Inc.
  9. 9. Outsourcing activity remained strong while captiveactivity reached a 42-month high in Q2-2011Index of outsourcing transactions1 Index of offshore captive health1Number Number Captive set ups = New + Expansion Captive divestures = 33 516 4 498 508 18 4 13 29 3 14 10 0 0 0 Q2 2010 Q1 2011 Q2 2011 Q2 2010 Q1 2011 Q2 2011 1 Includes only data that has been publicly disclosedSource: Everest Group Transaction Intelligence Database 9 Proprietary & Confidential. © 2011, Everest Global, Inc.
  10. 10. Activity in banking, financial services and insurance(BFSI) was led by the ITO function and pick-up ingeographies beyond North AmericaBFSI transactions by buyer geography1 BFSI transactions by functionNumber Number100% = 103 94 98 100% = 103 94 98 5% 5% 1% Both ROW2 22% 20% 30% BPO 45% 17% 47% 57%Rest of Europe 30% 22% 18% UK 10% 18% ITO 49% 54% North America 45% 38% 37% 30% Q2 2010 Q1 2011 Q2 2011 Q2 2010 Q1 2011 Q2 2011 Industry-level trending analysis included in the Market Vista Industry Trends reports 1 Buyer geography is the buyer location or the signing region associated with the transaction 2 Includes other countries in Asia Pacific, Middle East, Africa, and Latin AmericaSource: Everest Group Transaction Intelligence Database 10 Proprietary & Confidential. © 2011, Everest Global, Inc.
  11. 11. Offshore location activity increased in Q2 2011compared to Q1, with a preference towards Tier-1 cities Q1 2011 Q2 2011 2010 Quarterly averageMarket activity across geographies Market activity across Tier-1 and Tier-2 locationsNumber of service delivery centers set up Number of service delivery centers set up 23 21 21 21 20 19 18 17 17 14 10 9 7 5 2 Asia Europe and Africa1 Latin America Tier-1 Tier-2 1 Six delivery centers were set up in Africa during Q2 2011Source: Everest Group analysis 11 Proprietary & Confidential. © 2011, Everest Global, Inc.
  12. 12. Although Asia continued to dominate captive set ups,notable activity was also reported from Eastern Europeand Middle East Eastern Europe: 11 captive set p p East Asia: 11 captive set ups ups in multiple countries including including Microsoft, Bosch, Dow Chemicals, Deutsche and Marriott Telekom, and Citigroup Middle East: Three captive set ups including Motorola Dell and Motorola, Dell, Essar Steel India: Eight captive set ups, many of them supporting engineering services/ R&DNote 1: Indicate announcements related to new captive set ups and expansionNote 2: All references to captives include only offshore captivesSource: Everest Group analysis 12 Proprietary & Confidential. © 2011, Everest Global, Inc.
  13. 13. Service provider developments | Market Vista Indexservice providersTraditional global service providers Offshore-centric service providers 1 3 21 Perot was acquired by Dell in Sep 2009 and has been rebranded as Dell Services2 EDS was integrated into HP, and the segment is now called HP Enterprise Services (HP ES)3 Hewitt merged with Aon in October 2010 and the combined entity is now known as Aon Hewitt 13 Proprietary & Confidential. © 2011, Everest Global, Inc.
  14. 14. Service provider developments1 | OverviewTop three and bottom three service providers in terms of sequential financial growth1By sequential growth in revenues By sequential growth in operating margins2(Q1 2011 vs. Q4 2010) (Q1 2011 vs. Q4 2010)Percentage Basis points (bps) HCL Technologies 5.8% Aon Hewitt 354 CSC 4.8% Highest growth in Q1 2011 Tech Mahindra 349 Tech Mahindra 4.8% Convergys 297 0.3% Total Market Vista Index service providers -239 -5.0% Convergys -322 IBM GS -6.2% Atos Least growth in Q1 2011 -347 Genpact -12.8% Unisys -829 UnisysTop events in Q2 2011 Top service providers by numberTop outsourcing transactions by deal value of transactions announced Significant M&A deals County of San Diego (U.S.)-HP: US$700  IBM: 27 deals  Capgemini-Prosodie: The acquisition will help million (seven years)  HP: 15 deals Capgemini to enter high-value-added front-office Australian Tax Office-HP: US$500 million (five  Accenture: 11 deals transaction solutions market years)  CSC: eight deals  Genpact-Headstrong: The deal will enable Genpact Department of Veterans Affairs-Dell: US$476  Dell: six deals to add capital markets and healthcare domains to million (four years)  Wipro: six deals its business Healthways-HP: US$380 million (10 years)  CSC-iSoft: The acquisition will accelerate CSC’s global healthcare business growth 1 Analysis includes financials for Mahindra Satyam, which was acquired by Tech Mahindra in April 2009 2 Normalized operating margins excludes ACS, Capgemini, and Dell Services as information is not availableSources: Company disclosures; websites; press releases; Everest Group estimates 14 Proprietary & Confidential. © 2011, Everest Global, Inc.
  15. 15. Agenda Key market developments in Q2-2011 Special Feature: “What Service Providers Say About Clients…” 15 Proprietary & Confidential. © 2011, Everest Global, Inc.
  16. 16. ITO and BPO What Providers Say About Clients and More… Dr. Mary Lacity, Professor of IS y y, UMSL Dr. Leslie Willcocks, Professor of Technology W k and Gl b li ti T h l Work d Globalisation LSEcopyright © Mary C. Lacity and Leslie Willcocks 2011 16
  17. 17. Our Research Over 20 years of Research in ITO and BPO , , y Case studies, interviews, and surveys Client and provider organizations Stakeholders perspective: CXOs to delivery teams Anheuser-Busch General Motors BAE Systems Apache Oil Host Analytics British Aerospace Brown Group Kodak Digital Equipment Corp Browning Ferris Browning-Ferris Lyondell Petroleum Dresdner Bank Industries McDonnell Douglas Deutsche Bank Continental Airlines MEMC Lloyds of London Continental Baking Monsanto Reuters Coopers Industries OAO Technologies Sun Alliance Corio Occidental Petroleum Swiss Bank Cypress Minerals Ralston Purina Inland Revenue Diamond Shamrock Rigg’s Bank Internal Revenue Service DuPont Rochester Telephone Lawrence Livermore EDS Texaco National Labs Enron Vista Chemicals South Australian Exxon E Zland Zl d Government G t First City Bank State of Missouri Westchester Countycopyright © Mary C. Lacity and Leslie Willcocks 2011 17
  18. 18. Review of all Academic Research Client Firm Transaction Characteristics Attributes Motivations to Outsource Influence Outsourcing Outsourcing Sources Decision Outcomes Decision Process P Client Firm Contractual Capabilities Governance Supplier Firm Relational Capabilities Governance N = 1 356 findings 1,356 from academic research on ITO (n=741) and BPO (n= 615) Copyright © 2011 IAOP. All Rights Reserved.copyright © Mary C. Lacity and Leslie Willcocks 2011 18
  19. 19. What Supplier Say… 12 would benefit clients 4 would not benefit clients li tcopyright © Mary C. Lacity and Leslie Willcocks 2011 19
  20. 20. What Providers Say… “We hate novice customers” Unrealistic Expectations Lack f in-house capabilities L k of i h biliti Requires tremendous educationcopyright © Mary C. Lacity and Leslie Willcocks 2011 20
  21. 21. Which types of clients make the best outsourcing partners? Client Firm Transaction Characteristics Attributes Motivations to Outsource Influence Outsourcing Outsourcing Sources Decision Outcomes Decision Process P Client Firm Contractual Capabilities Governance Supplier Firm Relational Capabilities Governance Client has prior experience with outsourcing Copyright © 2011 IAOP. All Rights Reserved.copyright © Mary C. Lacity and Leslie Willcocks 2011 21
  22. 22. Outsourcing Learning Curve “The naïve customer is the customer from hell” Client Learning Phase 4: Institutionalized/ Re-invented Phase 3: Focus on Value-added Value added Relationships mature May renegotiate, switch providers Richer practices emerge Focus on Costs & Quality & Risks Phase 2: Pilots, first relationships Best d B t and worst practices emerge t ti Focus primarily on Costs Phase 1: Hype and fear yp Time/Value Lacity, M. and Rottman, J. (2008), Offshore Outsourcing of IT Work, Palgrave, United Kingdom.copyright © Mary C. Lacity and Leslie Willcocks 2011 22
  23. 23. What Providers Say… Say… “If procurement says ‘it’s all about price’, don’t expect innovation” i ’ d ’t ti ti ”copyright © Mary C. Lacity and Leslie Willcocks 2011 23
  24. 24. What Providers Say… Say… Who has the ideas for innovation? Who pays for innovation? Do innovation funds work? (usually too puny, low priority) D i ti f d k? ( ll t l i it ) Phase IV clients more likely to partner for innovation via risk & reward sharing “We are an IT company, so we ation & Risk Invention can transfuse current IT, state of the art IT, future IT, conceptual IT. But of course that transfusion as far as we are concerned is not free. The big problem is clients Redesigned & Redeployed think that transfusion is free. All Innova we are contracted to do is drive a service of this level.” – Manager, CSC Incremental Improvementscopyright © Mary C. Lacity and Leslie Willcocks 2011 24
  25. 25. What Providers Say… Say… “The length of your RFP is ridiculous.”copyright © Mary C. Lacity and Leslie Willcocks 2011 25
  26. 26. Thorough Client Evaluations Benefit Clients Client Firm Transaction Characteristics Attributes Motivations to Outsource Influence Outsourcing Outsourcing Sources Decision Outcomes Decision Process P Client Firm Contractual Capabilities Governance Supplier Firm Relational Capabilities Governance Contact Completeness is a significant determinant of ITO and BPO outcomes Copyright © 2011 IAOP. All Rights Reserved.copyright © Mary C. Lacity and Leslie Willcocks 2011 26
  27. 27. What Providers Say… Say… “The ideal contract is ten years or more””copyright © Mary C. Lacity and Leslie Willcocks 2011 27
  28. 28. Ideal Contract Duration: Our Research TABLE 2: CONTRACT DURATION (n = 85 outsourcing engagements) Contract Duration YES, most NO, most MIXED results Total expectations expectations met not met 0 to 3 year contracts 28 4 0 32 (8 5%) (87.5%) ( 5%) (12.5%) (0%) 4 to 7 year contracts 19 10 3 32 (59%) (31%) (9%) 8 to 25 year contracts 8 6 7 21 (38%) (29%) (33%) TOTAL NUMBER OF 55 20 10 85 ENGAGEMENTS  copyright © Mary C. Lacity and Leslie Willcocks 2011 28
  29. 29. Ideal Contract Duration Client Firm Transaction Characteristics Attributes Motivations to Outsource Influence Outsourcing Outsourcing Sources Decision Outcomes Decision Process P Client Firm Contractual Capabilities Governance Supplier Firm Relational Capabilities Governance ITO contracts in the three-to-five-year range experience successful ITO outcomes more f frequently than contracts with a greater than five years duration tl th t t ith t th fi d ti BPO contracts – duration was not a significant determinant of BPO outcomes Copyright © 2011 IAOP. All Rights Reserved.copyright © Mary C. Lacity and Leslie Willcocks 2011 29
  30. 30. What Providers Say… Say… “Where are your good people?”copyright © Mary C. Lacity and Leslie Willcocks 2011 30
  31. 31. What Providers Say… Say… “Don’t do man-to-man marking… it wastes our time and your time”copyright © Mary C. Lacity and Leslie Willcocks 2011 31
  32. 32. Retained Client Capabilities Business and Vision 9 capabilities clients need in-house to make Business Systems outsourcing Thinking successful Relationship Contract Builder Facilitation Leadership; L d hi Informed Buying Contract Design of Technical/ Monitoring Delivery of Architecture Process Making Service Architecture processes & technology work Supplier Development Feeny & Willcocks, Sloan Management Review, Vol. 39, 3, 1998, pp. 9-21.copyright © Mary C. Lacity and Leslie Willcocks 2011 32
  33. 33. What Providers Say… “Stay on your own side… we’ll manage our own people”copyright © Mary C. Lacity and Leslie Willcocks 2011 33
  34. 34. Supplier Capabilities Client Firm Transaction Characteristics Attributes Motivations to Outsource Influence Outsourcing Outsourcing Sources Decision Outcomes Decision Process P Client Firm Contractual Capabilities Governance Supplier Firm Relational Capabilities Governance ITO and BPO: The most important supplier capability was “Human Resource Management Capability” Copyright © 2011 IAOP. All Rights Reserved.copyright © Mary C. Lacity and Leslie Willcocks 2011 34
  35. 35. Supplier Capabilities Relationship Capabilities Planning & Contracting Organization Design Customer Governance Development Leadership; Program P Business Management Management Process Behavior Re-engineering Delivery Domain Management Transformation Capabilities Expertise Technology Sourcing Exploitation Capabilities Feeny, D., Lacity, M., and Willcocks, L. (2005), "Taking the Measure of Outsourcing Providers," Sloan Management Review, Vol. 46, 3, pp. 41-48.copyright © Mary C. Lacity and Leslie Willcocks 2011 35
  36. 36. Supplier Management Capability Clients must shift their focus to managing inputs and outputs instead of the providers’ resources p p and processes. Client C Suppliercopyright © Mary C. Lacity and Leslie Willcocks 2011 36
  37. 37. What Providers Say… Say… “The worse our business gets, the worse your business gets ” gets.”copyright © Mary C. Lacity and Leslie Willcocks 2011 37
  38. 38. The Evidence for Win-Win Win- Clients must help ensure that providers earn a profit. Among 85 of our cases, clients were most satisfied when the providers earned th i t id d their target margins! t i ! Winner s Winners 12 Cases 3 Cases Curse Provider Provider Earned 19 C Cases 51 C Cases Margin Negative Positive Outcome Outcome 63.5% positive outcomes Client 36.5% negative outcome g Source: Willcocks, Kern, and Lacity (2006)copyright © Mary C. Lacity and Leslie Willcocks 2011 38
  39. 39. Outsourcing Outcomes Client Firm Transaction Characteristics Attributes Motivations to Outsource N = 1,356 Influence Outsourcing Outsourcing Sources Decision Outcomes Decision Process P Client Firm Contractual Capabilities Governance Supplier Firm Relational Capabilities Governance Clients reported positive outcomes from outsourcing 60% of the time, time negative outcomes 18% of the time, and no changes in time performance as a consequence of outsourcing 22% of the time Copyright © 2011 IAOP. All Rights Reserved.copyright © Mary C. Lacity and Leslie Willcocks 2011 39
  40. 40. What Providers Say… Say… Further Reading: http://www.cutter.com/offers/clients.htmlcopyright © Mary C. Lacity and Leslie Willcocks 2011 40
  41. 41. Q&A 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 Panelist” Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit 41 Proprietary & Confidential. © 2011, Everest Global, Inc.
  42. 42. For more information Attendees will receive an email with a link to download today’s webinar presentation. A recording of the webinar will be available within 24 hours on our website, www.everestgrp.com/category/webinars gp g y For advice or research on outsourcing and offshoring, please contact :  Eric Simonson, eric.simonson@everestgrp.com  Amneet Singh, amneet.singh@everestgrp.com g , g @ gp  Salil Dani, salil.dani@everestgrp.com For background information on Everest Group, please visit:  www.everestgrp.com gp  research.everestgrp.com Thank you for attending today’s presentation 42 Proprietary & Confidential. © 2011, Everest Global, Inc.
  43. 43. Everest Group leads clients from insight to actionContact us for more information about our consulting, research, and industry resources. Dallas (Corporate Headquarters) Canada info@everestgrp.com canada@everestgrp.com +1-214-451-3000 +1-416-865-2033 +1-214-451-3110New York India/Middle Eastinfo@everestgrp.com india@everestgrp.com+1-646-805-4000+1 646 805 4000 +91-124-496-1000 +91 124 496 1000 +91-124-496-1100 UK Netherlands & Continental Europe unitedkingdom@everestgrp.com benelux@everestgrp.com +44-870-770-0270 +31-20-301-2138 www.everestgrp.com | research.everestgrp.com | www.sherpasinblueshirts.com 43 Proprietary & Confidential. © 2011, Everest Global, Inc.

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