The Future of Offshore Outsourcing:
                                 g
Trends and Implications

Findings from
The Internat...
Agenda

 ORN Main Findings

    Introduction ORN

    Offshoring Reaches Executive Suite

    Changing dynamics of outsour...
Offshoring Research Network: History and Scope

  Initiated in 2004 at Duke University CIBER, Fuqua School of
  Business

...
Offshoring Research Network: Sponsors and Affiliates

  The Conference Board is Lead Collaborator for ORN U.S. Buy-side Su...
ORN Buy-side survey demographics

                                                               U.S. survey




         ...
Offshoring Reaches
E
Executive S it
      ti Suite




                     6
Since 2005 dramatic growth in companies adopting strategies
 for guiding offshoring decisions at BU and function level
   ...
Companies experience significantly higher achieved savings
   following implementation of corporate wide offshoring strate...
Changing Dynamics of
Offshore Outsourcing




                       9
Offshoring of knowledge-intensive services is accelerating.
   In 2007 over 50% of new offshoring-outsourcing projects inv...
Knowledge-intensive services include…

           Product Development                          Software Development
Engine...
U.S. companies have dramatically expanded offshore sourcing
        of administrative, and product and software developmen...
But it’s the smaller firms that focus on offshoring
  knowledge intensive
  knowledge-intensive services.
                ...
Number of providers offering IT services continues to grow.


                                                            ...
Providers report that traditional ITO(1) and BPO(2) services are already
                                         commodit...
Longer-term relationships seem to be the norm

                                                    Rate of Renewal of Deal...
Globalization of Service Delivery
& Global Race for Talent




                                    17
Clients are becoming more concerned about availability
  And expertise of talent when choosing offshore locations
        ...
Client are concerned with rising wage inflation & employee
turnover offshore. Providers face same challenges

           C...
Small providers more adept in accessing talent in emerging locations,
     such as China, Russia, Latin America and the Mi...
Spanish companies have better access to high
                skilled talent in Latin America
                      Locatio...
Financial services companies have highest preference for
international service providers
                      p




     ...
Companies with no offshoring experience initially
prefer third-party service delivery models
       third party

         ...
Following adoption of offshoring strategy companies increasingly favor
        captive “own and control” organizational fo...
Near shore locations seem to be gaining in importance
       for software and product development

                       ...
Location matters: companies offshoring in China and
Other Asia prefer “own and control” model
           p




           ...
New offshoring investments in India are shifting from IT to
administrative functions, and from outsource to captive
      ...
Total offshoring of product and software development in
       India are expanding, but share of India is declining
      ...
The Case of Call Centers: Location choice varies greatly
       depending on the country of the buy-side company
         ...
US shortage of S&E talent with advanced degrees not just an
                 H1B visa policy outcome

         250,000    ...
Brazil and Argentina specialize in software, IT, and product
 development, Central America in Call Center & BPO


        ...
FUTURE TRENDS/PLANS




                      32
Companies have aggressive plans to expand offshoring of existing
        projects across all functions (58% to 80%). Plans...
Regardless of industry verticals companies have aggressive plans
       for new software development projects

           ...
Companies with extensive offshoring experience integrate
  offshoring strategy as part of corporate wide global growth
  s...
Companies with offshoring strategy (75% large
     companies) have aggressive plans for new IT, F&A
         p      )     ...
Low-tech companies are targeting new offshoring projects for
IT, contact centers and finance and accounting processes


  ...
Midsize companies are planning new offshoring projects across all
     business processes and functions. Large companies a...
In anticipation of limits to labor arbitrage service providers are
.         planning to build capabilities in end to end ...
THANK YOU!


                          For more information please contact
                                               ...
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Frost And Sullivan Keynote: November 2008

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Includes Implications of Financial Crisis to Globalized Services Industry

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Frost And Sullivan Keynote: November 2008

  1. 1. The Future of Offshore Outsourcing: g Trends and Implications Findings from The International Offshoring Research Network (ORN) Project Presented by Jeff W. Russell Duke Center for International Business Education and Research, The Fuqua School of Business Authored by Arie Y. Lewin Duke University The Fuqua School of Business University, This presentation may not be reproduced, cited, or distributed without the express written consent of the author.
  2. 2. Agenda ORN Main Findings Introduction ORN Offshoring Reaches Executive Suite Changing dynamics of outsource-offshoring Globalization of service delivery & global race for talent Future trends/plans Discussion of Current Issues Implications of financial crisis 2
  3. 3. Offshoring Research Network: History and Scope Initiated in 2004 at Duke University CIBER, Fuqua School of Business Multi year survey • Tracks adoption of offshoring over time by launch year. • Tracks adoption of offshoring strategies, on corporate & function level • Includes over 1600 companies that do, do not, or are considering. • Covers all industries (e.g. financial services) all functions, (e.g. IT) all locations (e g Latin America) and all delivery models (e g captive (e.g. America), (e.g. captive, hybrid) • Complemented by annual ORN Service Provider Survey (since 2007), focused surveys and p ) y participants workshops p p • In-depth analyses, reports, case studies and Academic publications 3
  4. 4. Offshoring Research Network: Sponsors and Affiliates The Conference Board is Lead Collaborator for ORN U.S. Buy-side Survey (since 2007) PricewaterhouseCoopers is Lead Founder of ORN Best Practices Institute and sponsor of ORN EU Survey (2008) Past ORN Sponsors p Booz Allen Hamilton (2006) Archstone Consulting LLP (2004 and 2005) Affiliates: Information Technology Association of America International Association of Outsourcing Professionals g Thirteen CIBERs Council for Entrepreneurial Development Enterprise S ft Et i Software R Roundtable dt bl 4
  5. 5. ORN Buy-side survey demographics U.S. survey EU survey Source: Duke University/Archstone Consulting Offshoring Research Network 2005 Survey and Duke University/Booz Allen y g g y y Hamilton Offshoring Research Network 2006 Survey and Duke University/The Conference Board Offshoring Research Network 2007/8 Survey 5
  6. 6. Offshoring Reaches E Executive S it ti Suite 6
  7. 7. Since 2005 dramatic growth in companies adopting strategies for guiding offshoring decisions at BU and function level Percent implementing offshoring strategies before 2005 vs. by end of 2007 75% are large companies Corporate-wide R&D Product Design IT Engineering Software Development Marketing & Sales Call Center Finance & Accounting Human Resources Before 2005 By 2007 Procurement 0% 10% 20% 30% 40% 50% 60% Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 7
  8. 8. Companies experience significantly higher achieved savings following implementation of corporate wide offshoring strategy Before Implementing Offshoring Strategy After Implementing Offshoring Strategy Administrative services Administrative services Call centers Call centers IT IT Software development Software development Product d l P d t developmentt Product development Marketing & sales Marketing & sales Procurement Procurement 0 10 20 30 40 50 0 10 20 30 40 50 60 70 Savings Expected Savings Achieved Savings Expected Savings Achieved Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 8
  9. 9. Changing Dynamics of Offshore Outsourcing 9
  10. 10. Offshoring of knowledge-intensive services is accelerating. In 2007 over 50% of new offshoring-outsourcing projects involved software development and 30% product development. p p p Cumulative Percent of Companies Offshoring Function 60% 50% Admin 40% CC IT 30% M&S * PD Proc 20% Soft 10% 0% * Product Development (PD) includes engineering, R&D, and product design ** Administrative services include finance & accounting, human resources and legal services Source: Duke University/Archstone Consulting Offshoring Research Network 2005 U.S. Survey and Duke University/Booz Allen Hamilton Offshoring Research Network 2006 U.S. Survey and Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 10
  11. 11. Knowledge-intensive services include… Product Development Software Development Engineering: Product design: Application development Software architecture & design Database design Engineering support Prototype design Embedded systems Product design development Systems design y g Testing Application development Re-engineering Support services Simulating Knowledge Process CAD drawing Outsourcing (KPO) g( ) Drafting & modeling Performance analysis Research & Development: Industry & company analysis Market analysis Credit analysis Code development Data mining Development of new technologies Equity analysis Research on new materials and Forecasting processes Risk management analysis Financial planning 11
  12. 12. U.S. companies have dramatically expanded offshore sourcing of administrative, and product and software development functions ons ber mplementatio Percentage of total numb of offshore im o f P Year in which offshore project was implemented Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 12
  13. 13. But it’s the smaller firms that focus on offshoring knowledge intensive knowledge-intensive services. Distribution of Functional Implementations by Company Size Software f Development Product Development p Procurement Marketing & Sales Small IT Midsize Call Centers Administrative Large L Services 0 20 40 Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 13
  14. 14. Number of providers offering IT services continues to grow. Percentage of Providers Offering Categories of Services(1) 80% viders in the e IT (i l di (including software development) ft d l t) survey offering classes of services Product design, engineering, R&D Call Center 60% Administrative Services (F&A, HR) Percentage of service prov o Procurement KPO Marketing & Sales 40% 20% s 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Year in which services were offered (1) Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis 14
  15. 15. Providers report that traditional ITO(1) and BPO(2) services are already commoditized and will become even more commoditized Extent of Commoditization of Services – Today vs. Expected within 18-36 Months 100% ion in Next 18- Months Call Centers 75% Finance and -36 Accounting Information Technology Human 50% Resources Procurement Engineering g g Marketing Commoditizati & Sales Product 25% Design Legal Services KPO Research & C 0% Development 0% 25% 50% 75% 100% Commoditization today Percentage of providers rating dimensions as high/very high (1) Information Technology Outsourcing (2) Business Process Outsourcing Source: Duke University Offshoring Research Network 2007 Service Provider Survey. 15
  16. 16. Longer-term relationships seem to be the norm Rate of Renewal of Deals by Service Offering Finance & Accounting Marketing & Sales Call Center Knowledge/Analytical Services Human Resources Legal Services Information Knowledge Technology intensive-service Procurement deals tend to be project / task Engineering based vs. outsourcing of t i f Product Design large ITO/BPO deals Research & Development 0% 20% 40% 60% 80% 100% Percentage of deals renewed at expiration of the first contract Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis. 16
  17. 17. Globalization of Service Delivery & Global Race for Talent 17
  18. 18. Clients are becoming more concerned about availability And expertise of talent when choosing offshore locations Location factors for software and product development Talent pool available Low cost of labor High level of expertise Low costs (besides labor costs) Matches language requirements Location of the best service provider Cultural proximity Quality of infrastructure Geographical proximity 0% 10% 20% 30% 40% 50% 60% 70% 80% Early experiments (<2002) Recent projects (2005-2007) Percentage of responses rating location factor as “important” or “very important”
  19. 19. Client are concerned with rising wage inflation & employee turnover offshore. Providers face same challenges Comparison of perceived risks (important and very important) US2007 and US2006 surveys Data D t security it Lack of acceptance from internal clients Lack of acceptance from customers Loss of managerial control     +9% High employee turnover Lack of intellectual property protection Loss of internal capabilities / process knowledge Cultural differences +17% Wage inflation Incompatibility between IT systems 0% 10% 20% 30% 40% 50% 60% US2006 US2007 19
  20. 20. Small providers more adept in accessing talent in emerging locations, such as China, Russia, Latin America and the Middle East India China United States Other Asia W estern Europe Latin America Small Mexico Large Eastern Europe Canada Russia Middle East 0% 20% 40% 60% 80% 100% Percentage of providers offering product development services from these locations Source: Duke University Offshoring Research Network 2007 Service Provider Survey 20
  21. 21. Spanish companies have better access to high skilled talent in Latin America Location choice factors for IT, software and product development implementations in Latin America and Mexico Talent T l t pool available l il bl Geographical proximity Cultural proximity Location of the best service provider Political stability in host country Other Low costs (besides labor costs) Avoiding hot spots Access to local market Matches language requirements Low cost of labor Quality of infrastructure Government incentives US High level of expertise Supporting existing customers locally Spain Collocating with existing manufacturing plant offshore Collocating with existing BP facility offshore 0% 20% 40% 60% 80% 100% Percentage of responses stating factor is “important” or “very important” 21
  22. 22. Financial services companies have highest preference for international service providers p 22
  23. 23. Companies with no offshoring experience initially prefer third-party service delivery models third party Considering US S Offshoring UK Considering Offshoring pain Considering g Sp Offshoring NL Considering N Offshoring 0% 10% 20% 30% 40% 50% 60% 70% 80% 23
  24. 24. Following adoption of offshoring strategy companies increasingly favor captive “own and control” organizational forms. Preference for Service Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 24
  25. 25. Near shore locations seem to be gaining in importance for software and product development Emerging preference for locating software and Latin L ti NPD projects near shore. Canada may be America benefiting from availability of talent. Direct 6% consequence of Canadian immigration policies regardless of high costs? Nine time zone barrier? India China 18% 35% Canada 18% Mexico 23% Number of new implementations Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 25
  26. 26. Location matters: companies offshoring in China and Other Asia prefer “own and control” model p 26
  27. 27. New offshoring investments in India are shifting from IT to administrative functions, and from outsource to captive , p delivery model
  28. 28. Total offshoring of product and software development in India are expanding, but share of India is declining Distribution of locations for product development implementations in different time periods 60% rcentage of to number of implementations India I di 50% China Eastern Europe 40% India's Western Europe share: o 50% Russia 30% Philippines India's Other Asia share: 20% otal Mexico 55% India's Canada share: 68% Australia 10% Middle East Latin America 0% Per Pre-2002 2002-2004 2005-2007 Time period in which implementation was made Source: Duke University/Archstone Consulting Offshoring Research Network 2005 U.S. Survey and Duke University/Booz Allen Hamilton Offshoring Research Network 2006 U S Survey and U.S. Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 28
  29. 29. The Case of Call Centers: Location choice varies greatly depending on the country of the buy-side company p g y y py 100% 90% 80% India 70% Latin America Western Europe 60% Philippines 50% Mexico Other Asia 40% Canada Eastern Europe 30% Other 20% 10% 0% US NL Spain UK Percentage of Call Center implementations in particular locations Source: Duke University/The Conference Board Offshoring Research Network 2005/67/8 Survey 29
  30. 30. US shortage of S&E talent with advanced degrees not just an H1B visa policy outcome 250,000 $12 H1B Cap S&E Graduates GDP (in trillions) $10 200,000 $8 150,000 $6 100,000 $4 50,000 $2 0 $0 1990 1992 1994 1996 1998 2000 2002 2004 2006 Data on Master and PhD degrees in sciences and engineering come from the US National Science Foundation. Data for H1B visa quota come from the US Citizenship and Immigration Services. 30
  31. 31. Brazil and Argentina specialize in software, IT, and product development, Central America in Call Center & BPO Central Distribution of America Functions offshored to L ti A t Latin America by U.S. and i b US d European companies Product & Software Development Mexico Information Technology Brazil Call Centers Other South America Administrative Services Other (e.g. Procurement) Argentina 31
  32. 32. FUTURE TRENDS/PLANS 32
  33. 33. Companies have aggressive plans to expand offshoring of existing projects across all functions (58% to 80%). Plans for relocating back onshore are minimal. Administrative Call Information Marketing Product Software Services Centers Technology & Sales Development Procurement Development 60 56 67 80 53 67 58 Expanding Relocating to another offshore 13 21 5 0 7 7 10 location Relocating back 0 3 0 7 0 7 3 to US Transfer to 3rd party service 3 0 0 7 5 0 5 provider Transfer to a wholly owned 5 0 12 7 14 7 15 subsidiary y No change 28 24 18 7 25 27 21 planned 0 0 3 0 0 0 2 Other Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 33
  34. 34. Regardless of industry verticals companies have aggressive plans for new software development projects Percentage of companies planning new implementations Finance and Professional Technical Insurance Manufacturing Services Software Services 50 27 20 10 29 Finance and Accounting 21 7 40 14 14 Human Resources 14 13 40 19 14 Marketing and Sales 43 27 20 33 57 Information technology 64 27 20 14 14 Call center/help desk p 7 27 0 19 25 Procurement 0 0 0 10 0 Legal Services 0 33 20 14 14 Engineering services 21 27 20 20 14 Research and Development 14 20 20 19 29 Product Design 36 29 40 43 29 Software development Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 34
  35. 35. Companies with extensive offshoring experience integrate offshoring strategy as part of corporate wide global growth strategy Percent rating driver “important” or “very important” Growth strategy Other cost savings Business process redesign Improved service levels 78% Part of a larger global strategy Exploit country-specific advantages Exploit location-specific advantages p p g Domestic shortage of qualified personnel Differentiation strategy Access to new markets Least Experienced Most Experienced Source: D k U i S Duke University/Archstone C it /A h t Consulting Offshoring Research Network 2005 U S S lti Off h i R hN t k U.S. Survey and d Duke University/Booz Allen Hamilton Offshoring Research Network 2006 U.S. Survey and Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 35
  36. 36. Companies with offshoring strategy (75% large companies) have aggressive plans for new IT, F&A p ) gg p , and Call Center operations offshore Percent companies planning new functional implementations (next 18 to 36 months) Software development 42% Information technology Engineering services 33% Finance and Accounting 37% Call center/help desk Procurement With Strategy Research and Development Without Strategy Product Design Marketing and Sales Human Resources Legal Services 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 36
  37. 37. Low-tech companies are targeting new offshoring projects for IT, contact centers and finance and accounting processes Software development p Information technology Research and Development Product Design Call center/help desk Low Tech Procurement Engineering High Tech services Marketing and Sales Human Resources Finance and Accounting Legal Services 0% 10% 20% 30% 40% 50%
  38. 38. Midsize companies are planning new offshoring projects across all business processes and functions. Large companies are particularly planning new call center operations. Software development Information technology Call center/help desk Finance and Accounting Procurement Marketing and Sales Research and D R h d Development l t Small Engineering services Mid Product Design Human R H Resources Large Legal Services 0% 10% 20% 30% 40% 50% 60% Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey 38
  39. 39. In anticipation of limits to labor arbitrage service providers are . planning to build capabilities in end to end business process re-engineering Area of future expertise Business process reengineering Security management Software services SAP Infrastructure management CAD Health Care/Pharmaceuticals Insurance Financial services Engineering services Testing and quality assurance 0 4 8 12 Number of providers Source: Duke University / Booz Allen Offshoring 2007 Service Provider Survey 39
  40. 40. THANK YOU! For more information please contact p The Research Team offshoring@fuqua.duke.edu ff h i @f dk d 919.660.3796 or visit http://offshoring.fuqua.duke.edu This presentation may not be reproduced, cited, or distributed without the express written consent of the author. 40

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