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Global Services Digital Magazine November Issue


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Obama’s selective globalization logic and cozying up to business
is not going to impact trends in services globalization.

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Global Services Digital Magazine November Issue

  1. 1. GLOBAL SERVICES A CYBERMEDIA PUBLICATIONAn integrated media platform which connects thevarious constituents of the global technology and Pradeep Gupta business processing services industry ecosystem. Chairman & Managing Director Cyber Media (India) Ltd.DIRECTORY OF SERVICES E. Abraham Mathew PresidentNEWSLETTER Ed Nair EditorA regular digest of key industry happenings. MAGAZINE Satish Gupta Associate Vice PresidentThe fortnightly digital magazine features research, articles and experts’ views. Available on Pratibha Sruthi RamakrishnanGlobal Services’ web-based seminars aim to useful information related to outsourcing Niketa Chauhanindustry in the form of presentations and dis- by industry specialists. Virendra Kumar deliver indepth analysis and research reports OFFICESon sourcing subjects. Global Services Media LLC. 806 Green Hollow Drive, Iselin, NJ 08830MICROSITES T: 678-665-6005Online resource center designed to provide Global Servicesfocused content on special subjects to the out- Cyber Media (India) Ltd.sourcing community. CyberHouse, B- 35, Sector 32 Gurgaon-122001, IndiaEVENTS Tel: +911 24 4822222 Fax: +911 24 2380694From multi-day, high-level, resort conferences to Contact: breakfast discussions we offer a numberof opportunities that connects the outsourcing Disclaimercommunity. All rights reserved. No part of this publication may be reproduced by any means without prior written permission from the publisher.CUSTOM PROGRAM LETTERS TO THE EDITORCustomized services rendered through different Send letters to, or tomedia platforms. any of our writers. We reserve the right toOSOURCE BOOK edit all letters. Postings submitted to our blogs and letters to the editor may be pub-A directory of global outsourcing service lished in our digital magazine or 3 GlobalServices November 2010
  2. 2. N o v e m b e r 2 0 1 0 Vo l u m e 2 , I s s u e 2 FEATURES 10 ARE YOU BEING SERVED? by Ed Nair New rules for the services organization 8 21 GLOBAL BANKS TO INVEST IN THE IT OPPORTUNITY IN HEALTHCARE CREATING FLEXIBLE PLATFORMS LEGISLATION by Ed Nair by Sruthi Ramakrishnan Even as the short-term business prospects are bleak, global banks IT reforms are an important and integral part of the reforms will focus their technology services investments towards managing planned under the Patient Protection and Affordable Care Act risk and compliance, creating platforms for growth, and improving customer analytics. 17 23 THE SKYS NOT PROCUREMENT FALLING ON THE OUTSOURCING – INDIAN IT INDUSTRY CHINAS MISSED by Sruthi Ramakrishnan OPPORTUNITY There is more to the increase in MAT and expiry of STPI benefits by Pratibha Verma than meets the eye and a deeper study shows that the situation is PO, which is still not mature in China, is growing at a slow pace. not as dire as is being made out to be Due to this its capabilities are untapped by many companies 19 25ARE ‘ON-DEMAND’ CALL CENTERS IN STRONG CONTRACTDEMAND? RESTRUCTURING LEADS WEAK Q3by Vijay Venugopalan by Sruthi RamakrishnanMore and more organizations are buying/exploring On-demand solu- Restructuring of contracts heavily influenced the last three quar-tions, the economic situation has fuelled the desire to go on-demand ters, and will continue to influence Q44 GlobalServices November 2010
  3. 3. Releasing November 29th To advertise or to participatecontact: Satish Gupta at
  4. 4. EDITOR’S NOTE The Theory of Convenience C all it the ‘theory of convenience’, to be accorded to Barack Obama, Pres- ident of the United States of America. Outsourcing is a word to be used by Democrats ‘before’ elections to highlight that American national interests should be protected in the so- called game of globalization; jobs should not move out of the US; compa- ED NAIR nies that offshore work to other countries should be taxed; countries like India and companies from India exist to primarily render millions of Americans Editor jobless and hence should be penalized through criticism, oppressive immi- gration rules, and threats of further regulation. If you win the elections, you keep the issue on the backburner and use it selectively to rouse nationalistic fervor. Obama’s selective If you lose the elections, you drop the word from your lexicon and instead preach the benefits of globalization, where the term has a specific meaningglobalization logic and suitable to the context. Globalization now means more jobs in the US throughcozying up to business increase of US exports to countries like India. Like Obama’s recent trip to Indiais not going to impact where he announced deals worth $10 B and creation of 54,000 jobs— calculated to win brownie points back home. trends in services None of these arguments matter. Globalization in general and globaliza- globalization. tion of services in particular are trends that are not reversed by political logic or even economic logic covered with political dough. American multinational corporations thoroughly understand globaliza- tion and are doing the right things. Emerging countries like Brazil, China, and India too understand globalization in their national contexts and out- side. Obama’s selective globalization logic and cozying up to business is not going to impact trends in services globalization. The trends and practices in services arise out of the need to deliver value back to the business. Mature companies who have been through several gen- erations of sourcing do this by looking at new rules of services delivery. Read a few dominant ideas in this issue’s cover story titled, ‘Are You Being Served?’ (page 10) GS6 GlobalServices November 2010
  5. 5. Releasing DecemberCase Studies are invited from service providers. For more details contact: Satish Gupta at or visit:
  6. 6. Global Banks Industry Outlook to Invest inCreating Flexible PlatformsEven as the short-term business prospects are bleak, global banks will focustheir technology services investments towards managing risk and compliance,creating platforms for growth, and improving customer analytics.By Ed NairI BM announced a deal with ABN AMRO (see Box) in October. The deal has been hailed as a mega-deal in terms of its value at nearly $1.8 B. At a time whensuch megadeals are on the decline, this deal embodiesmany of the trends in the large financial services industrysegment globally. In terms of market environment, the short to mediumterm outlook for the industry is difficult for banks in the USand Western Europe. There is also quite a bit of social back-lash because of the financial crisis; customers believe that thebanking industry created the financial crisis that led to therecession. In terms of market regulation, the combination of in-country regulations like Dodds-Frank bill in US, similar oth-ers in UK and Germany, as well as international regulationslike Basel III, and also the expectation that the IMF is goingto put together a fund to prevent systemic failures, are puttingnew pressures on financial services companies. Both of thesepresent a real challenge to profitability. Likhit Wagle Though the regulations have been watered down (Basel III Global Industry Leader: Banking &is much less draconian than what it was expected to be) and Financial Markets, IBM Globalthe industry has been given a long time to create the capitalrequired for Basel III, the return on equity which used to be Business Services14 percent to 18 percent will fall below 10 percent in the nextcouple of years. When you compare this to the cost of capital,it looks very unattractive. ty is enormous. Even conservatively looking at the next five to Profit squeeze is being exacerbated in banks where invest- ten years, the global economy would grow at 5.8 percent to 6ment banking was really driving the profitability in the past. percent annual compounded. Says Likhit Wagle, GlobalBanks are being forced to shed hedge funds, proprietary trad- Industry Leader: Banking & Financial Markets, IBM Globaling activity and such other engines of growth. Profitability is Business Services, “That is significant amount of wealth beinggoing to be considerably low in the coming few quarters. So created and this has to be disintermediated by the bankingthe short-term picture is challenging. industry.” So, is it all gloom and doom? Hardly. In emerging markets The emerging market opportunity is based on economiclike China, India, Brazil, Middle East, the scale of opportuni- growth in these geos as well as the proportion of population8 GlobalServices November 2010
  7. 7. Industry Outlook ABN AMRO extends Infrastructure Services Agreement with IBM ABN AMRO signed a contract to extend its services agreement with IBM. IBM will build and provide a new computing environment while integrating the existing infrastructure of ABN AMRO and the former Fortis Bank is an extension to the original contract. Next to that the infrastructure services for the former Fortis Bank Nederland will come in. Both banks legally merged on July 1, 2010. Systems development will con- tinue to be undertaken by a number of suppliers including Accenture, Infosys, and TCS. On 1 September 2005 IBM announced that it signed a global contract with Dutch global bank ABN AMRO to implement an on-demand IT infrastructure that will enable the bank to more rapidly roll out additional services while significantly reducing IT costs. The contract, worth about EURO 1.5 billion over 5 years, supports ABN AMRO operations worldwide and represents the most extensive rollout of IBMs data center automation technology, called Universal Management Infrastructure. Further information from Nelson-Hall reveals: I Data center management, with IBM managing the IT infrastructure on ABN AMRO premises in Amsterdam. The existing data center infrastructure will be moved to a private cloud environment I Desktop services. These services will retain a conventional desktop approach rather than moving to a virtualized environment, with a major emphasis on improving collaboration through use of common email infrastructure and community based collaboration utilizing web chat technology I Service integration, with IBM taking overall responsibility for the roll-out of new systems on-time and on-budget. A single set of KPIs are being shared by IBM and the applications development suppliers. Andy Efstathiou and John Wilmott, analysts from Nelson Hall opine, “ABN AMRO is seeking to simplify its operating model to achieve a reduced cost:income ratio while also improving its ability to comply with the regulatory environment and improve its time-to-market. The service integration role being undertaken by IBM is key to achieving these goals. The contract is also an early example of a major bank moving to a private cloud-based server infrastructure.” IBM’s clients include Russias largest bank, VTB, as well as Danske Bank in Denmark and Nordea in Sweden – meanwhile a number of financial services companies in Europe are currently in negotiations with IBM for Services contracts. Worldwide, IBM’s clients inlcude Citi, VietinBank, one of the largest banking institutions in Vietnam, the Agricultural Bank of China, Discover Financial Services, and the National Bank of Canada.that is underserved— conservative estimates put it at 750 mil- Organizations are sitting with expensive legacy systemslion upwards and a third of which includes people with rising and want to take costs out, not incremental costs, but wholeincomes. This translates to growth rates of 25 percent or more areas of costs. This involves rationalizing systems, reengineer-per year. So, the medium term view is very bullish. ing applications, and making the system more flexible. It The IT services spend in the global financial services sec- requires creating a platform that is standard and flexible. Fortor is largely marked towards three areas: a)getting the orga- instance, in the ABN-AMRO deal, both ABN and Fortis willnization ready in the area of risk and compliance b)creating migrate onto this platform that would in turn help them toplatforms that are standardized and flexible and c) getting become more customer-centric.customer analytics in place. Many of these new services are From a strategic point of view, the traditional approachbeing provided using new technologies like cloud. Says at banks has been to free up more budget to run the bankWagle, “The approach is to avoid either doing a wholesale as opposed to changing the bank. However, the balance isrip-and-replace or a band-aid kind of quick fix. The objective now changing when banks are investing in applicationis to simplify the operating model and the ABN-AMRO deal development, infrastructure refreshes, and process out-is a good example.” sourcing. GS9 GlobalServices November 2010
  8. 8. Are You Being Served? Special Report10 GlobalServices November 2010
  9. 9. Are You Being Served? Special Report11 GlobalServices November 2010
  10. 10. Are you being served? Special Report Are You Being Served?The new rules for the services organization: consolidate and standard-ize delivery; balance internal, external, and virtual capabilities; andmanage services like a portfolio.By Ed NairI f you are in global sourcing of ser- CJ: In the last two years, clients have vices, talking with Cliff Justice is been demanding more from their great investment in time, espe- sourcing advisors in the area of valuecially if the consultant’s clock is not creation through optimization of sev-ticking. Cliff Justice is the National eral functions or their own internalLeader, Shared Services and services organization and seekingOutsourcing Advisory, KPMG. He more value out of managing SG&Ahas been advising companies on glob- areas.alization, services delivery models, Whereas, ten years ago we wereoutsourcing, global sourcing and brought in as advisors to help themsuch for over 20 years. Cliff ’s work centralize shared services models orwith NeoIT, TPI, Equaterra- all advise them on the structuring ofreputed sourcing advisory compa- outsourcing contracts and helpingnies— where he either worked or make deals.managed partnerships, puts him as a Today it is much more aroundleader in the sourcing advisory space. enterprise services, enterprise trans-His insights are thorough and amaz- formation, and aligning that transfor-ing; his ideas are path-breaking and mation to drive competitive advan-impactful. Excerpts from a conversa- tage to clients. More clients are ask-tion with Cliff Justice on the new ing— how do I get competitive Cliff Justice,rules and models of services delivery: advantage through handling SG&A, National Leader, Shared through partners, through the way I Services and OutsourcingGS: We are just out of the recession. move services up the value chain, Advisory, KPMGWhat are your clients asking you to how do I access data and knowledgedo today? How’s it different from in a better way, how do I leverage theyesterday? maturity of the services organization12 GlobalServices November 2010
  11. 11. Are you being served? Special Reportthat has been in place to really drive chain helping quantify value cre- Sourcing advisory has to include peo-better business value. In the last two ation. ple and change; process transforma-years, these were the dominant con- This requires going back to the tion in all functional areas likeversations. business and is a lot more challeng- finance, HR, IT, supply chain; and The other important conversation ing; it requires lot more insight into enterprise risk management.centered on managing risk. Back in the business— more than just doing Transactions services are fine; youthe day of pure outsourcing con- a base case analysis and measuring have to have those best-in-class. Buttracts, the risk question was a side savings of a transactional service. if clients really want the leverage, theyquestion. Now it is incorporated as They are table stakes that have to be have to think about service deliverypart of the value preservation discus- done. more organizationally, integrate withsion. business partners, and drive value GS: This is like more business con- back to businesses.GS: Sourcing advisory as a business sulting work.has been in turmoil. What is threat- CJ: We have always been doing that. GS: You mentioned about SG&A. Isening a change there? How has it There’s always a component of busi- it time to rewrite Porter’s valueevolved? chain? Are support functionsCJ: In the very early days, say getting to the core?from 1997 to 2003, it was “The economy has caused CJ: What we are seeing is thatreally about identifying the slowdown in major transfor- traditional support-orientedright outsourcing vendors, functions contain lot of datascoping out the outsourcing mation investment, but that’s and knowledge. There’s lot ofcontract, structuring the deal, changing. Companies are look- cost and expense to thoseputting in the governance functions and there’s lot ofmechanisms, and managing ing at creating sustainable value that comes out of thosethe deal. From 2003 to 2007,it was all about optimizing services organization as functions. Organizations that can think in terms of virtual-those relationships. From opposed to chasing labor ization, in terms of harnessing2008 onwards, we started hit-ting the rocky shores, it was arbitrage,” the capabilities that reside within the company and har-about how do we really opti- ness those well, as well as har-mize and create value and nessing outsourcers and virtu-competitive advantage out of Cliff Justice al platforms, SaaS, and cloudthe investments that we made National Leader, Shared platforms, can create a muchinto shared services and out- more dynamic model that cansourcing partnerships. Services and Outsourcing address new questions to the Some industries are Advisory, KPMG business, changes to the busi-approaching this for the first ness faster than before. It is alltime and wondering how to support, but it is the newleapfrog. For example, the value that support can con-pharma industry was late into the ness strategy that has to be aligned to, but they are now incorporating sourcing strategy. It was being done The core is still the core, it is real-things like pharmacovigilance into a even ten years ago, but it is more vis- ly about how your SG&A functionscentralized shared services model, ible now. There were larger dollars are treated and addressed that theysome enabled by external parties, attached to sourcing deals and a lot of can become a competitive advan-some not. The line between them is perceived external and internal value tage.getting blurrier. We are structuring in traditional sourcing advisory. These are not necessarily revenuethem in a very similar way whether it We have a developed a platform generators; some industries may hiveis provisioned internally or externally, that is comprehensive and holistic. It them out and create a profit center. Itwe are seeing lot more hybrids than helps a client look at a long-term is probably still not their core busi-what we ever had, and more mature roadmap, not just a tower or two, on ness, but it enables their core businesscompanies are moving up the value how you provision the function. to become more competitive.13 GlobalServices November 2010
  12. 12. * Offer extended till November 10, 2010
  13. 13. Are you being served? Special Report The Service Delivery Maturity Curve Level 5 - Integrated Ex: Globally Integrated Services Portfolio with Rational Balance of Outsourcing Relationships and Standardized and Integrated Delivery Centers and CoE’s Extended Global Value Capture and Performance Sustainability Enterprise Services Portfolio Management and Enterprise (EGE) Governance Service Delivery Management Maturity us Foc Characteristics of a mature EGE Level 4 - Optimized er Ex: Optimized Balance of Internal and External • Integrated services portfolio consisting of om Delivery Capabilities – Best of Breed Global Sourcing internal and external service providers st Customer focused Governance Organization that operating on a standard platform Cu Manages Customer Value • Central service portfolio management capability Level 3 - Strategic • Common services architecture across Ex:Traditional Outsourcing Relationship with Global functions Delivery, Non Integrated Internal (SSC) Capabilities Functional Governance Organization that Manages • Balance of virtual and physical capabilities Vendors and Contracts • Rational mix of global service delivery models Level 2 - Rationalized • Services organization is focused on Ex: Single Function SSC with Tactical Onshore or Offshore beyond cost arbitrage and on sustainable Vendor Relationships competitive advantage Limited or Cost oriented Vendor Management Level 1 - Sub Optimized Ex: Decentralized and Duplicative Functions Traditional Outsourcing Little Central Control over Business Support Services and Shared Services Source: KPMG TimeGS: So what rules are you rewriting? services organization that serves more balance and external balance byCJ: The rewriting of the rule is— business units. These are centers of managing services as a portfolio.whether you can take these and man- excellence for that service. For exam- Looking at internal provisioning andage them to the lowest cost and oper- ple, research centers combine massive comparing and benchmarkingate them purely on efficiency; or do knowledge and data or take shipping against the external market is impor-you put enterprise-wise strategic ini- companies that carry lot of data on tant. That’s what leading companiestiatives in place to drive innovations trends. do. More importantly, what we see isinto those services. That’s what we are that services portfolio organizationtalking about. GS: Going back, you mentioned across the enterprise should have a Drive the innovation, add a rea- proper balance between internal and broad view across the organization,sonable cost, create a flexible model. external capabilities. How does that cross the enterprise, helps the com-The cloud discussion is bigger than work? pany realize the services; it is really a way of thinking CJ: The desire for control over the Drive and quantify the synergiesabout flexibility in business. services, the ability to control risk, that are sometimes not obvious Create an extended global enter- the specificity of the function, when you go to an end-to-endprise with internal, external and vir- understanding whether the service is process. That’s for a lot of companiestual capabilities, many of which can something that third party providers seeing true value. It is true for anbe provisioned quickly, as and when have the maturity in providing— end-to-end process like say procure-new businesses are introduced into these are the questions to be asked. to-pay.the environment. It is not about the price you are This is hard to do because you are One of the key things that we going to pay; lot of things can be breaking the traditional functionaltalked about in the framework is how moved out for a lower price, but structure; it requires a lot of changecompanies can take high value add productivity could get impacted. in management. But there are someservices that may be best in class Hence, we are saying that companies good examples of companies outwithin a business unit and create a should look at optimizing internal there doing this.15 GlobalServices November 2010
  14. 14. Are you being served? Special Report 4 Principles of Extended Global Enterprise Model I It’s blind to the organizational structure and therefore immune to any limitation that such a struc- ture might impose. Driven by customer need and not organizational structure: I One-size-fits-all service offerings have been replaced with a balanced portfolio of retained, out- sourced and centralized service offerings with tiered, tailored and bundled services across func- tions. I The “set and forget” approach or simple vendor management has been replaced by a more sophis- ticated Services Portfolio Management organization. I Business transformation is all about business simplification. It’s really a reduction in complexity –consolidating and standardizing services delivery and then simplifying those service delivery stan- dards. Instead of a siloed and redundant approach with fragmented planning – one services deliv- ery strategy for IT, another for HR, and so on – you’ll have a single, common strategy within a com- mon services delivery framework to achieve a common goal.GS: For many, shared services have Enterprise model all about? Sounds how to build a shared services orga-become unwieldy. Why make when like yet another consulting method- nization, how to build an outsourc-you can buy? Are shared services on ology. ing deal, how to manage shared ser-the decline? CJ: Extended Global Enterprise is vices, how to manage outsourcingCJ: No. Not at all. It’s just the oppo- KPMG’s philosophy, framework, contracts, and many others. EGEsite. More companies are looking at methodology, point of view or what- helps companies approach their ser-shared services, but the blend in pro- ever you call it; it’s a holistic view on vices in the way they want. It givesvisioning is changing. service delivery of enterprise ser- them the enterprise capability that In the past, shared services and out- vices. It addresses companies that are goes across functions and creates asourcing were two distinct service both very new to services as well as common way to access models. That distinction is those that are extremely mature in There are different degrees to thisgoing away; they are becoming highly services. It is a comprehensive set of like different levels in a maturityblended. A company provisions its ser- principles that we as a firm use to model. At the top is a completelyvices in a very centralized way and enable our partners, advisors, integrated end-to-end services orga-enables more or less through third employees, to work with clients that nization with complete service port-party. Some companies don’t even call leverage the practices that we believe folio management (SPM). Theit outsourcing. That is, provisioning of will drive value into their services SPM is a very simple interface toservices through partners within shared organization. It is a roadmap to cre- request and manage services. Theservices unit is certainly on the rise. ating a long-term services strategy goal is to create an organizational You can see this growth at the ser- and the framework helps clients capability that can interfacevice provider’s end. Even in a down design and implement a comprehen- between a complex multi-tower ser-market, they are growing, their sive services model that continues to vice delivery organization and thepipelines are full. evolve over time. It is agnostic to business and its customers. SPM The economy has caused slow- both outsourcing and shared services helps the adoption of services with-down in major transformation invest- in that it doesn’t recommend one out worrying about different con-ment, but that’s changing. over the other. tracts, different pricing, differentCompanies are looking at creating SLAs— the SPM handles all thatsustainable services organization as GS: How do you compare this with and it constantly evolves and alignsopposed to chasing labor arbitrage. the other frameworks? all of the services to the services CJ: I am not aware of any that is strategy. GSGS:What’s this Extended Global similar. There are frameworks on16 GlobalServices November 2010
  15. 15. IT Market Dynamics The Sky’s Not Falling on the Indian IT IndustryThere is more to the increase in MAT and expiry of STPI benefitsthan meets the eye and a deeper study shows that the situation isnot as dire as is being made out to beBy Sruthi RamakrishnanT wo things which have been making news companies, including those operating in Software recently and are projected to have grave Technology Parks, already pay this tax. The real cause of implications for the Indian IT industry are worry is that firstly, it it is planned to be extended to the the proposed extension of MAT to the hith- SEZs, and secondly, tax benefits will change from being erto tax- free Special Economic Zones profit-linked to investment-linked.(SEZs), and the expiry of the Software Technology Parks of "For SEZ, the tax benefit is for a period of 15 years,"India (STPI) scheme in March 2011. says Raju Bhatnagar, VP, Government Relations and BPO, The concern about both is that they will increase the NASSCOM. "this is structured as a 100% tax benefittax burden on the IT companies across the board, irre- available only for the first five years, 50% tax benefit forspective of size, location or turnover. The truth is that the next five years, and the last five years has a tax benefitthere is more to these measures than meets the eye and a of 50%, provided the profits are invested in certain pre-deeper study shows that the situation is not as dire as is determined avenues. So after the tax holiday is there frombeing made out to be. lets say 2006-10, you get 50% tax holiday, on the remain- ing 50% you have to pay full tax.The MAT Math For an organisation that is halfway in the SEZ benefits,It is not the increase in the tax itself, which actually comes they are paying normal tax. So the normal tax paid versusto less than a percentage point, which is worrying. Most IT the computed MAT, whichever is higher is what would be17 GlobalServices November 2010
  16. 16. IT Market Dynamicsapplied." Thus the MAT increase may not impact too Calling for extension of benefits is not wrong. Butmuch after the first 5 years of tax benefit is availed. believing that the Indian IT industrys USP is solely the So the real challenge seems to be the change from prof- tax sops and incentives offered by the government is.“Ourit-linked to investment-linked approach to tax benefits, as tax liability will go up to 25% next fiscal from aroundthe latter approach would benefit sectors with large capi- 21% in the present fiscal on account of this,” Vtal investments. "If there is a tax benefit that is being Balakrishnan, CFO, Infosys told Financial Express regard-allowed, let us say for the SEZ, and MAT is levied, upto ing the end of the STPI tax benefit. But a company oftwo-thirds of the tax benefit gets nullified," says Infosys size and spread- across services, industry verticalsBhatnagar. and geographies- can surely absorb the increase in tax out- But this may not impact the big players like Infosys and flow. After all, it was none other than Infosys Founder-TCS significantly, who have multiple units in various stages Chairman Narayan Murthy who said that “Asking for taxof operation in SEZs, besides subsidiaries operating outside exemption for 10s of years in my opinion is not theIndia. "There are several non-financial charges that they are smartest thing” and believes that IT and software sectorable to take credit of which are allowed as per the Income should and are capable of paying taxes just like otherTax law," he says. "Besides, they have subsidiaries operating industry foreign countries. So they pay tax in those countries for Alternatively, they can shift operations to their deliverywhich they are eligible to claim credit in India. So when centers outside India. That is one advantage the servicesyou talk of the effective rate of tax for a company which is sector enjoys. "In services you can, pretty much at the dropa conglomerate, it is not sim- of a hat, pick up your serviceple, there are multiple aspects delivery center and shift it,"that come into play." Believing that the Indian IT says Bhatnagar. Where does that leave Admittedly, this can worksmaller companies? "So far as industrys USP is solely the tax both ways, and drive away for-those companies which are sops and incentives offered by eign companies with Indiannot in SEZs are concerned, subsidiaries to countries offer-they will have to in any case the government is wrong ing more tax benefits. Butpay under normal income tax, what needs to be kept in mindand not get incentive deduc- is that the Indian IT industrytion. So they will not be affected by MAT," says Sunil Shah, took the world by storm on the basis of its strong skill sets,a partner at Deloitte Haskins & Sells. talent pool and innovativeness and not solely low costs. Thus the proposed extension of MAT to SEZs doesnt The former, combined with Indias rising status as an ITimply an uniform increase in taxes at one go, but a phased market, continue to propel Indias IT story.increase according to the age of each unit of a company. Survival of the FittestConcern about STPI With the partial loss of their protective cocoon, companiesRegarding the other major concern about the expiry of the will have to increase efficiency and become more compet-STPI exemptions in March 2011, firstly, it is the benefit itive to retain customers. Smaller companies today alreadyprovided by Section 10A of the income-tax law (100 per understand that going niche is the way forward.cent deduction for 10 years of export profits derived by Companies which are good at what they are doing, espe-units set up in any STPI, which is in accordance with the cially if its specialized services, will always be in demandscheme notified by the Central Government) alone that is even if they chose to marginally increase their prices.coming to an end. "Under the STPI scheme there are mul- In short, the industry need not hassle itself over mea-tiple benefits that are available, like the income tax benefit, sures which will, at best, cause a marginal increase in theirbonded delivery center, duty free imports from within tax outflow. While they will, in the short term, hit theIndia, etc. Of these benefits, one which is the income tax "Infosys and TCSs of the future which are still in thebenefit will expire. The rest remain open-ended, they dont process of growing", as Bhatnagar puts it, expecting exten-have a sunset date," says Bhatnagar. sion of exemptions endlessly is unrealistic. In an industry Besides, its end does not come as a surprise for the where low cost is fast ceasing to be the deal clincher, allindustry. It was known from the inception of this scheme providers will eventually have to depend on the efficiencythat this particular benefit has a ten-year horizon, which and quality of their work to survive. The sooner the Indianwas later extended to 12. industry admits and adapts to this, the better. GS18 GlobalServices November 2010
  17. 17. BPO Market DynamicsAre ‘On-Demand’ ContactCenters in Demand?More and more organizations are buying/exploring On-demand solutions,the economic situation has fuelled the desire to go on-demandBy Vijay Venugopalan, CRM Capability Lead, APAC, BT Global ServicesO n 4th Sep 1882, the world’s first power sta- tion started its operation in New York City. 85 customers in lower Manhattan received enough power to light up 5000 lamps and they paid US 5$ per Kilowatt-hour in today’s dollar terms. Until then, people relied onexpensive battery powered ‘lighting bulb’. Power on-demand took over battery based power rapidly in its devel-opment cycle. That’s the history of electricity. Let’s look at computing;Growth of computers was slow until IBM releasedMainframe systems in the mid-80s. Due to the size, com-plexity & cost of Mainframes, the ‘Digital Computing’ eraactually started as a hosted model - one centralized main-frame with ‘dumb’ terminals deployed across the enter-prise. Had we continued in this path, perhaps all of uswould be paying monthly PC usage bills like our powerbills – well, I wouldn’t have had the opportunity to writethis article! The point is many of what we use today such as tele-phone, power (even cars and real estate!) have changed Vijay Venugopalan,from ‘buy’ to ‘share’. CRM Capability Lead, APAC, The ‘Microprocessor’ generation which made BT Global ServicesPCs/servers possible, fundamentally changed the trajecto-ry of ‘Digital Computing’. Long story short - mainstream of the single largest expenses and it makes their businessesIT solutions moved to outright purchase as it made perfect less agile to change. What causes the shift in mindset?business sense from a Cost/Benefit perspective. Unpredictable and escalating costs of IT operations, tech-Organizations invested on technology infrastructure to nology obsolescence and changing customer demands!empower their businesses. IT assets were depreciated over In the ‘credit crunched’ economy, a corporate executive3 – 5 years. Happy days! wants to improve efficiency, productivity and to make In my opinion this history sets the context for the their business agile to ‘change’. Hence executives tend tofuture of IT services. invest the scarce resource ‘dollars’ on core business func- In the last 10 years, many global organizations have tions such as R & D, product enhancements, emergingrealized that their IT assets are cumbersome and expensive manage. Some CFOs even claim that technology is one On the other hand, consumers want to have personal-19 GlobalServices November 2010
  18. 18. BPO Market Dynamicsized, timely service anytime anywhere via multi-channel. been providing network based on-demand services for overThis trend has led to interesting survey results: a decade and have addressed these concerns already. “80 per cent of businesses think they deliver a superior Optimized on-demand contact center services are availableexperience, yet only eight percent of customers agree” at a global scale – these services have the unique ability to[Source: Frost and Sullivan] collect the contact (not just calls!) from anywhere in the This ‘paradigm shift’ in expectations has paved the way world and deliver it to an agent with the right skills work-for ‘On-demand’ services. ing anywhere in the world – with secure platforms and An on-demand contact centre meets these criteria, data privacy [It is mandatory for SPs who are registeredcombining hosted IP telephony and automated, voice-acti- data controllers under the data protection act]vated software-as-a-service to deliver a package that is Wondering how? The contact center services are hosteddeeply scalable and can be purchased in new and flexible on a very large voice and data network that spans acrossways, such as per concurrent agent and by the hour. This 170+ level of cost granularity will allow chief operating offi- Just deciding a best on-demand platform alone is notcers and heads of customer service to measure the efficien- adequate. Organizations adapting to on-demand modelscy and cost of operation, unlock service improvements and should be prepared for an internal transformation – toadditional cost savings in the make changes to their operat-future and its needless to say ing model, process, gover-these fully managed services Organizations adapting to on- nance and people. Suchwill remove worries about risk changes will determine theof technology obsolescence. demand models should be pre- success factor of the on- Some of the early net- pared for an internal transfor- demand deployment. If anworked IT services providers organization gets its internal[SPs] like BT Global Services mation – to make changes to transformation right, on-have invested quality time and their operating model, process, demand platform will fit ineffort (and dollars!) on market like a charm.research, designed mar- governance and people In 2010, finding the rightket/industry relevant packaged technology partner to moveon-demand applications and created business models & contact centres into the cloud, and the right commercialreturn-on-investment tools around it and have acquired model to buy those services, will be vital.customers. The first agent logged into BT’s contact center On- Long termdemand platform back in 1999. If we take the long term view of the On-demand contact Many global MNCs have changed their operating mod- centers, say 5- 10 years from now, many organizationsels to adapt to on-demand contact centers and have seen would have procured contact center applications as abenefits. More and more organizations are buy- shared service. We are talking about hundreds of thou-ing/exploring On-demand solutions, the economic situa- sands of agents using on-demand service which will invari-tion has fuelled the desire to go on-demand. ably bring down the cost per agent. Comments I hear in Asia are ‘Are these on-demand con- Business models will evolve to provide the service fortact centers fit for purpose?’ or ‘On-demand contact cen- free as auxiliary revenue streams like network will make upters are only fit for short term deployments’. To get some for it. After all, free is better than cheap if it results in aclarity around this, let’s analyze the future of On-demand win-win deal for customers and 2 parts –Short & Long term. Whats more, on-demand call centers will also be a means to gain points on ‘Corporate Social Responsibility’Short term as arguably, On-demand services will reduce carbon emis-In Asia, we are in the transition stage from outright pur- sion compared to on-premise rivals. Hence, organizationschase to On-demand services. While many organizations will evaluate which SP to choose rather than which tech-see the benefits of On-demand contact centers, they have nology to choose and buy.concerns around security, data privacy and some say – ‘In On a long term perspective, it’s obvious that on-the long run hosted or cloud based contact center services demand contact center solutions are the way to go and itare expensive’ will be very difficult to justify an outright purchase busi- Global networked IT service providers like BT have ness case! GS20 GlobalServices November 2010
  19. 19. IT Market DynamicsThe IT Opportunity inHealthcare LegislationIT reforms are an important and integral part of the reforms plannedunder the Patient Protection and Affordable Care ActBy Sruthi RamakrishnanT he US healthcare reform bill, even before solutions on insurance exchange because we believe there being passed into law (the Patient Protection is a huge opportunity in trying to create an insurance and Affordable Care Act) in March 2010, was exchange. It constitutes essentially six buckets- product touted to bring a huge boom for 3rd party configuration; quoting engine; payment gateway; applica- service providers. But while the BPO oppor- tion processing; reporting certain tools which will inter-tunity is quite visible- in the form of increased customer face with individuals and their families, employers, agents,service, claims processing, etc- the IT aspect of it is less payers, which will extend towards data migration; andobvious. Nevertheless, it is an even more important and automated enrollment processes. That can be extended to,integral part of the planned reforms. from an infrastructure perspective, to solutions in cloud "There is going to be a need to invest more in IT sys- computing."tems to not only support a The federal plan to launchlarger user base for goods and a healthcare informationservices, but also to support the superhighway, the Nationwideadministrative side of deliver- The federal plan to launch the Health Information Networking these services adhering to Nationwide Health Information (NHIN) also requires expand-the additional regulations ing and uphauling the existingcoming on board. It is going to Network (NHIN) requires expand- IT infrastructure. Mark Boxer,require more systems, greater ing and overhauling the existing Senior Vice President andautomation and integration of Group President of ACSthe existing systems in order to IT infrastructure Government Healthcarebe able to support these ser- Solutions, now part of ACSvices on a practical basis, and Xerox, says," For the EMRalso to achieve greater efficiency and effectiveness," Stan (Electronic Medical Record) to be meaningful, it has to beLepeak, Managing Director of Research, EquaTerra had aggregated and it has to be shared. We have got the datasaid in a March 2010 podcast (What Effect Will Healthcare assets, the aggregation engine to aggregate EMRs into EHRsLegislation Have on IT Services and Outsourcing?) organised (Electronic Health records). EHR cuts across hospital sys-by EquaTerra. tems, And then EHRs can be shared on a Health Service providers in the IT space are well aware of the Information Exchange, which would be filled by states.opportunities that the legislation has brought. “From an In addition to all the stuff that build the infrastructure,application development perspective, we believe that the we also have critical rules engines that sit on top of theopportunity that lies for us is the requirement for new health exchanges that prospectively identify patients thatclaims administration application,” says Pradep Nair, Vice are at risk of getting diabetes, heart disease, etc. So this canPresident & Head – Global Life Sciences Practice, HCL. help physicians take action before it becomes a critical issue."From infrastructure, there is an increased storage require- That is the promise of the healthcare reform."ment." So there is a lot of potential for growth for the service He sees insurance as another segment with huge providers. For healthcare providers and payers, there is apotential for IT expansion. "There is the framework of major incentive to increase outsourcing to them- cost ben-21 GlobalServices November 2010
  20. 20. IT Market Dynamics Key Vendors in US IT Hospital Market Top Enterprise Healthcare IT Vendors Top Consulting Firms for Hospitals Cerner Corporation Healthland Accenture CPSI Keane Healthcare Services ACS (acquired by Xerox) Eclipsys Corporation McKesson Provider Technologies Beacon Partners Epic Systems Corporation Medical Information Technology BearingPoint GE Healthcare QuadraMed Corporation Cerner Corporation Healthcare Management Siemens Healthcare Courtyard Group Systems CSC Niche Vendors Deloitte Encore Health Resources Vendor Specialty Environment Hayes Management ADP payroll services IBM Kronos time and attendance systems McKesson Provider Technologies Lawson Software enterprise resource planning Perot Systems Corporation (acquired by Dell) Mediware pharmacy, blood bank Siemens Healthcare Oracle Corp./PeopleSoft enterprise resource planning Philips Healthcare intensive care systems, cardiology information Top Firms Providing Outsourcing systems, PACS systems for both radiology and Services to Hospitals cardiology, and obstetrical systems ACS Picis/MSM operating room management, emergency CareTech Solutions, Inc. department, and intensive care unit (ICU) Cerner Corporation applications CSC SCC Soft Computer laboratory, radiology, pharmacy Eclipsys Corporation Sunquest Information Systems laboratory and radiology IBM Surgical Information Systems operating room management McKesson Provider Technologies 3M Health Information encoding, dictation, transcription, and HIM Systems management applications Perot Systems Corporation (acquired by Dell) Unibased Systems Architecture enterprise scheduling Siemens Medical Solutions Source: Executive summary of HIMSS Anaytics Report ‘Essentials of the U.S. Hospital IT Market’ 5th edition.efit. "For firms, particularly the smaller to mid-size organi- cies, and 43 percent vacancies for business software imple-zations, the equation has changed as to what is the fully mentation and support personnel. These figures are onlyloaded cost of an employee, and thats going to change the set to grow as the country begins implementing theequation of whether it makes sense to add that next person Health IT Workforce Development Program, leadingor to invest in technology to automate that activity or rely more agencies to look at outsourcing as a way out. "Whileon third parties," says Stan Lepeak. in some cases firms may make the investments themselves Besides IT systems, another resource which will be and deploy management systems, in many cases they areequally in demand are the IT personnel skilled to man going to look outside to the IT experts, so that they canand maintain the systems, for whom there is already a concentrate on their piece of healthcare and let third par-glaring shortage. According to a College of Healthcare ties manage the back office IT systems," says Lepeak.Information Management Executives survey of 182 Thus for the countrys healthcare system to meet thehealthcare CIOs, there is already a 71 percent shortage of huge targets set by the Federal govt in the next few years, ITclinical support implementation and support personnel. will have a big role to play, and in that third party providersThere are 44 percent vacancies for infrastructure vacan- will have a dominant say. GS22 GlobalServices November 2010
  21. 21. Procurement OutsourcingProcurementOutsourcing:China’s MissedOpportunityThe potential for China to make it big in procurement outsourcing is huge.Though lot of ground needs to be covered, there’s ample reason for hope.By Pratibha VermaC hina’s role as the global hub for manufacturing and companies in favor of domestic suppliers with "indigenous procurement has not translated into leadership posi- innovation," according to The Wall Street Journal. tion in procurement outsourcing. It’s like the top De Gucht also expressed concern on behalf of EU compa-medical school not having any hospitals around. nies that are becoming increasingly agitated about the lack of Is this a missed opportunity for China? Is the tide slowly protection for intellectual property in China.shifting in China’s favor? Will China make it big in procure- "Theres so much discussion about Chinas indigenousment outsourcing? innovation policy, because it forces European companies to register as a Chinese company to get access to private pro-Difficulties of the China Way curement markets, he says."China is a complex place for foreign businesses. Regulations Saurabh Gupta, Analyst, Everest, says, “The biggest issueare sometimes unclear, and often not with China is that there is a lack of servicehelpful. Contract enforcement can be culture. Chinese Government philosophytricky. Its business culture differs from is based on producing cheapest andthat of India or Philippines. And most world- class goods unlike India whoseimportantly, language is a critical barrier. philosophy is to provide best services at The European Union has recently low cost. The mindset is different. You getturned up the growing international pres- a lot of benefit if you open a shop in Indiasure on China to give foreign companies but you dont get them in China. Lack ofaccess to its national procurement deals. government support and language also EU Trade Commissioner Karel De deter companies from investing in PO.”Gucht said, “China needs to improve When it comes to Procure-to-Payinvestment opportunities for foreign com- process, which is transactional in nature,panies, as European businesses are raising China is not the attractive destination to"serious questions" about Chinas pro- do that. The value proposition comes incurement policies. Many companies have only when you deal with the country forexpressed concern that recently drafted low cost country sourcing. It is difficult topolicies will discriminate against foreign set up a center in China. People want to23 GlobalServices November 2010
  22. 22. Procurement Outsourcingset up shop in China and buy from local Chinese manufac- dealing with a number of clients but none of them have hugeturers, but only a few large service providers have delivery cen- clients. They are all getting themselves positioned for anters in China. upcoming wave of procurement outsourcing. Accenture started its procurement delivery hub to serveChange in Procurement Practices multi-national clients in 2002 in Dalian and established itselfMichael Rehkopf, Analyst, TPI says, “In procurement out- as a strong procurement service provider over a period of 8sourcing, direct activities like buying raw material are huge, years.and often its done in-house. When we look around, we see a David Conte, Senior Executive, Accentures procurementfew firms doing one or two key grand deals but nobody would BPO services group says, “China not only provides access todo 20 or 50 in numbers. Procurement outsourcing revenue in a large, highly skilled talent base of procurement professionalsChina is sort of going slowly but spend control is slowly being but, just as importantly, it provides access to local suppliersshifted to China.” and low cost services.” As organizations become more comfortable to see where He opines that Chinas cost competitiveness will remain athey want to locate their control for their spend, they move to key differentiator for multi-national clients.the region where they have got the manufacturing facilities. Conte also says that with other markets, there will be new In the past, MNCs in China were focusing on their top- opportunities for growth in China as the supply base contin-line growth and the spends were ues to mature and expand intorelatively small. There has been new segments. Additionally,a rapid change in that area. For “Local companies in China China will continue to be ansuppliers, PO base is slowly important location for helpingbecoming strong. Organizations believe that they can do every- clients manage and balance sup-are starting to shift their focus thing themselves and at a cheap- plier risk. More generally, wenot only to increasing their also expect to see continuedspend but also to do PO work er rate. But what we see in the demand from clients to helpmore efficiently and effectively. coming years is that they would them add value and analytical Rehkopf says, “We have wit- insight from their BPO engage-nessed two trends. The first one no longer have sufficient data ments back into their the movement of that activityfrom Europe and North and robust quality processes.” Gupta says, “PO is growing in China but I havent seen tooAmerica to the region where many suppliers from Chinesethings are being procured and Michael Rehkopf, Analyst TPI origin coming into play. Theythe second one is the decision are all global suppliers. There ison whether they should be done this value proposition thatin-house or outsourced. We are seeing both the things hap- country operates on low cost country model. That is distinc-pening simultaneously.” tive and unique about China and no other geography can One of the biggest differentiators for China is language. support this.”China is perceived as a very good destination for people who Nearly 10 to 15% of all PO deals signed in the last 3 yearsdeal in Chinese, Japanese or Korean. have China as a delivery location. The key locations in China Rehkopf says, “Local companies in China believe that they from a PO perspective are Dalian, Guangzhou, Shenzhen,can do everything themselves and at a cheaper rate. But what and Shanghai.we see in the coming years is that they would no longer have Everest classifies 20+ PO suppliers into emerging sup-sufficient data and robust quality processes. Then they might pliers, leaders and major contenders based on a compre-start depending on outsourcing not only for cost benefits but hensive assessment of capabilities and market success.also for overall benefits.” Nearly a third of all these PO suppliers have presence in “A lot of MNCs have been controlling their spends from China. However, it is interesting to note that while all POother parts of the world. I anticipate that there is significant leaders have a China-based presence, only 25% major con-uptick in this kind of outsourcing in the next four-five years. tenders have delivery capabilities in China and none of thePeople have now stated thinking that outsourcing makes sense.” emerging players is present in China. So it is evident that China is an important cog in the overall delivery strategyService Providers Troop In for established PO suppliers and is emerging as a differen-Some suppliers have set up their centers in China and are tiator. GS24 GlobalServices November 2010
  23. 23. Market analysisStrong Contract RestructuringLeads Weak Q3Restructuring of contracts heavily influenced the last three quarters,and will continue to influence Q4By Sruthi RamakrishnanT he TPI Q3 analysis shows that a pause in the market they initially took at the start of the recession. Projects involv- recovery has dampened year-to-date momentum (see ing new scope and budget approval are once again being Fig.1), but data and service provider feedback suggest delayed. Restructuring which bring quicker and potentiallythat a more active 4Q10 is underway. easier returns to bottom lines tend to move forward unim- Restructuring of contracts has heavily influenced how the peded,” said Keppel.last quarter, and in fact the annual TCV (Total Contract In numbers, restructuring constituted 20% of the marketValue), have shaped up. “In the 1st quarter of this year there for both ITO and BPO and about 1/3rd of TCV. The relativewas an unprecedented 42% of global TCV which were strengthening of BPO contract restructuring shows therestructuring related. At that maturing of the BPO markettime we anticipated more as some of the larger oppor-renewals were on the way. In tunities awarded in the mid-Q3 they make 48% of global “Some of the 7- 10 year dle of the decade come up forTCV,” said John Keppel, contracts rewarded in the early renewal.Partner & Managing On the other hand, newDirector, TPI Research, part of the decade are up for scope activities were down,Analytics and Intelligence at renewal. At the same time, some not just in terms of globalThe TPI Index webinar. market share but also by“Restructuring TCV repre- of the recent 3-5 year contracts. absolute TCV numbers. Newsents about 34% of the globalmarket, compared to the 20% As a result, there were more scope TCV was down signifi- cantly, by about 50% QoQwe’ve typically seen over the contracts being restructured and YoY. Clearly, new trans-past 3 years.” actions are not entering the The past quarter saw some simultaneously,” market as quickly as theylarge restructurings- General John Keppel, Partner & Managing used to in previous years.Motors, Bank of Ireland, This is being attributed atABN Amro, etc. In fact, six of Director, TPI Research least partly to the recessionthis year’s nine mega-deals and delay in new projects.were restructurings. One of the reasons for this extent of restructuring activity Industry- wiseis the change in the timing of renewals. “Some of the 7- 10 For ITO, which has seen consistent performance since 2006,year contracts rewarded in the early part of the decade are up a huge Q1 followed by two weaker quarters has resulted in afor renewal. At the same time, some of the recent 3-5 year flat year. Most of the ITO mega-deals awarded have bundledcontracts. As a result, there were more contracts being restruc- Infrastructure and ADM together. Much of the activity in thistured simultaneously,” said Keppel. space was restructuring related. Another reason is that larger economic difficulties still While BPO TCV is typically comprised mostly of newcover outsourcing adoption. “In North America especially, scope, an increasing amount is restructurings. The traditionalCIOs and CFOs are returning to a restraining posture that BPO strengths- contact centers, FSO, HRO, F&A generally25 GlobalServices November 2010
  24. 24. Market analysis 3Q10 and YTD Headlines Restructurings include renegotiations, renewals, extensionsSource: The TPI Index: An Informed View of the State of the Global Commercial Outsourcing MarketThird Quarter 2010trended downwards and have been lower that their 2006 lev- ond largest outsourcing market in the world in 2010, andels, while there was some pickup in HRO and FSO. More the Dutch market provided strength in Europe. The resultsthan half the activity in multi-process BPO was restructuring in both geographies have been heavily influenced by largerelated. The emerging R&D KPO activity is picking up in restructurings signed during the first nine months of thisvolume and contracts. year. Geographically, APAC has shown the most fluctuation, atRegion-wise 49%, due to a few large deals.The Americas experienced a decline in both the number andTCV of contracts in the past quarter. This is important espe- Vertical-wisecially since the Americas, and the US IT market in particular The Financial Services sector has grown the most this year,have been leading the market recovery which began in 3Q last supported by large mega-deal restructurings. Driven mainlyyear. Despite this, TCV for this year is high because of by EMEA region, the growth in this sector has been support-extremely strong first half performance and this makes the ed by megadeal restructurings in the region, like that of ABNAmericas the largest buyer of outsourcing services so far this Amro. Manufacturing has not improved on the same lines,year. “The US, which is traditionally the dominant force in though the Americas saw activity in this space.the Americas region, has improved its share of the global mar- Retail, travel and transport, and hospitality sectors haveket from 36% to 44& YoY to date. The Americas is expected adopted outsourcing at an increasing pace over the last end this year on the upside,” said Duncan Aitchison, Retailers, still experiencing top line pressure, are looking atPartner & President, TPI EMEA. outsourcing to help reduce costs. Hospitality, travel and trans- More contracts were granted in EMEA than Americas port have nearly doubled their contract values.this quarter, but this region is still lagging behind Americas Looking at the number of deals coming up for renewal,in both metrics. Within EMEA, there seems to be a lot of 2011 again looks like it will be very active on the restructur-activity in less mature markets. The Nordic region, the sec- ing front, though not as much as 2010. GS26 GlobalServices November 2010