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A Low Cost Alternative - Vietnam the new offshore location
- 1. DENVER FALL SUMMIT 2014 Vietnam, the New Offshore Location A Low Cost Alternative: Viet Ho Chief Procurement Officer Russell Investments www.sig.org/eval
- 2. DENVER FALL SUMMIT 2014 Evaluation How-to: Your feedback drives SIG Event content By signing and submitting your evaluation, you are automatically entered into a prize drawing Why? Option 1: App 1. Select Schedule 2. Select Schedule by Day 3. Select Day 4. Select Session 5. Scroll to Description 6. Click on the Evaluation link Option 2: Browser 1. Go to www.sig.org/eval 2. Select Session (#WS06) How?
- 3. Viet Ho, Chief Procurement Officer A low-cost alternative. Vietnam -the new offshore location. OCTOBER 2014
- 4. About Russell Investments* p.4 What we’ve done Who we are Every step matters. Russell is a global asset manager that provides multi-asset solutions, including strategic advice, implementation services, and global performance benchmarks. Outcomes that matter. As of June 30, 2014, Russell has approximately $280 billion in assets under management and works with institutional clients, independent distribution partners and individual investors globally. Assets benchmarked to the Russell Index family surpass $5.2 trillion —more than all other U.S. equity indexes combined. What we do Headquartered in Seattle, Russell has approximately 1800 associates in 21 offices around the world. Russell’s Global Sourcing & Procurement (“GSP”) team is currently comprised of 30 FTEs responsible for approximately $1 billion in spend. *Source: http://www.russell.com/us/about-russell/default.page
- 5. Today’s key objectives & takeaways p.5 Part Two: Review •Overview of the offshore market and its challenges •Offshore opportunities in Vietnam •Case study by Russell •Next steps to take Part One: Discussion
- 6. Offshore Market and Its Challenges -Discussion
- 7. Offshore outsourcing –A brief history* p.7 20 years ago Today 10 years ago 15 years ago 5 years ago The beginning of the Offshore/Outsourcing phenomenon The improvement in telecommunication and the Y2K challenges created opportunities to shift technology work to low-cost countries India, with its large pool of English speaking and technically proficient manpower, was at the centerof the offshore story Other outsourcing countries such as China, Philippines, Mexico, Poland, Ireland, Costa Rica, and Argentina came into the mix The ITO/BPO global outsourcing market is estimated at $180B annually, with India capturing 50% of the market * Source: Nasscom-Association for the Indian software industry
- 8. Emerging challenges in offshoring(focusing on ITO) p.8 Profile* Volume Challenges Large Offshorer > 1000 FTEs •Supplier fragmentation with at least 4-5 suppliers •Offshore rates are comparable across most suppliers •Onshore/niche consulting spend is significant •Business units have their preferred suppliers which lead to a lack of competition Medium Offshorer 300-1000 FTEs •In additionto the above ... •Cost pressure as contractsare renewed •Service quality deteriorating (less focus from major suppliers as they chase new business) •High turnover and visa issues are cropping up and are impacting operations Small Offshorer <300 FTEs •In additionto the above ... •Too small for major suppliers, end up with Tier 2 or 3 providers * Russell segmentation -for discussion purposes only
- 9. Some key considerations* for potential and/or existing offshorers Risk Management •Security and data privacy •Intellectual property •Resource risk Service Levels •Knowledge transfer •Quality control •Account management •Capability Financial Considerations •Total cost •Inflation differential •FOREX Long-term viability •Capacity •Innovation •Regulation •Political stability p.9 Outside of procurement process, four areas are worthy of additional review: * Russell framework -for discussion purpose only
- 10. Russell’s journey to fix the category p.10 1. Strategic Review of the Offshore Outsourcing Category Conducted a total cost analysis (labor, IT, market data, leverage ratio) Evaluated current suppliers for capability Evaluated current service level 2. Develop Options and Obtain Executive Support Alternative India provider or other location Near-shore locations US locations 3. Complete Strategic Assessment
- 11. Russell’s search for another low-cost supplier •Talk with industry analysts (Gartner, Forrester) •Internet and peer research •Conduct RFI Step One Conducted market and supplier search •Eastern Europe •Latin America •Asia (incl. India, China) Step Two Evaluated different geographic locations •Philippines •Malaysia •Vietnam Step Three Detailed look at the following three short-listed locations p.11
- 12. Conclusion from assessment for Russell p.12 ›Bring some of the scope with higher costs and low service levels back in-house ›Compliance ›Reporting ›Identify another low cost location for some of our needs ›Explore Vietnam for ITO services ›Introduce more competition to current supplier base using a new supplier
- 13. Why Russell prefers Vietnam ›Financial attractiveness of Vietnam is significant –30% to 50% lower cost than India (it helps to reset the clock back 10 years) ›Political, social and economic stability are attractive ›For ITO, Vietnam is a comparable alternative to India across multiple areas ›Availability of high-quality skilled resources is attractive ›‘Strategic partnership’ focus from Vietnam companies is better aligned to meet both short and long-term needs of companies like Russell p.13
- 14. Opportunities in Vietnam –Discussion
- 15. Vietnam –A new destination for outsourcing p.15 “Vietnam remains one of the most competitive options in the world for software outsourcing due to its competitive labor costsand other business costs.”(2010) “Vietnam is one of the 10 most attractive global services locationsin the world.”(2011) “Low labor costin Vietnam is attracting many Japanese companies in outsourcing their software development services.” (2014) “Ho Chi Minh City to watch as a location for the next outsourcing boom.” Top 100 Outsourcing Destinations -The de facto ranking of outsourcing cities around the world (2014) -Ho Chi Minh City is ranked at 17thabove Kuala Lumpur -Hanoi is ranked at 22nd
- 16. Why Vietnam?* ›Population of 92M people with 65% younger than 35 ›One of the fastest growing economies in South East Asia ›Politically stable with strong government support for the IT industry ›290 universities/colleges offering IT and communication training ›English is the second language ›Highly skilled and motivated laborforce ›Rates are 30% to 50% lower than India or China ›Quickly becoming the major manufacturing alternative to China (“China +1” strategy) ›Has the potential to be the ITO/BPO alternative to India (“India +1” strategy) p.16 *Sources: General Statistics Office of Vietnam; www.fpt.com; http://www.vietnamoutsource.org/vno-outsource-foundation.html; http://www.tmasolutions.com/whyvn.aspx
- 17. The TRANS-PACIFIC PARTNERSHIP (TPP) will change the game for Vietnam* Objectives Timeline CountriesInvolved •TheTPPintendstoenhancetradeandinvestmentamongtheTPPpartnercountries, promoteinnovation,economicgrowthanddevelopment,andsupportthecreationandretentionofjobs. •AllsignatorycountrieswillberequiredtoconformtheirdomesticlawsandpoliciestotheprovisionsoftheAgreement,whichwillfollowinternationalstandardinareassuchascross-borderservicesupply,financialservice, E-commerce,investment,intellectualproperty,governmentprocurement, employment,environment,state-ownedenterprises. •Started in 2005 and is slated to wrap up negotiations by end 2014. •It is one of the key foreign policy objective of President Obama. •United States •Vietnam •Australia •Brunei •Canada •Chile •Japan •Malaysia •Mexico •New Zealand •Peru •Singapore * For discussion purposes only p.17
- 18. Some areas of outsourcing in Vietnam ITO ›Product engineering ›Application development ›QA & testing ›Maintenance & supporting ›Porting & migration ›IT managed services ›R&D p.18 BPO/KPO –Non-voice BPO ›Data entry & conversion ›Digitization ›Document processing ›Online catalog/image processing ›Loans & mortgage processing ›Title insurance processing ›Procurement, accounting, and finance Sources: http://www.fpt.com.vn/en/products_and_services/software/; http://www.tmasolutions.com/services.aspx; Gartner
- 19. Some key considerations* for potential and/or existing offshorerlooking at Vietnam Risk Management •Review certification level of your supplier (eg. CMMI,ISO) •Ensure you are comfortable with security arrangements such as secured zones, secured network, code stay in the US •Contract with US entity if possible Service Levels •Plan for sufficient knowledge transfer time/resources (there is enough savings to allow you to do this properly) •Plan to have either your people in Vietnam or the VN team members spending significant time at your location •Make sure QC metrics are identified and tracked •Push your supplier to enhance the account management portion of the contract Financial Considerations •Benchmark your cost for both India and Vietnam •Model your cost 3-5 years out (Vietnam is paid in USD) •Look at the total cost of the engagement including leverage factor, IT costs, travel, data Long-term viability •Does your supplier have the capacity or willing to make investment in your scope? •Does your supplier service roadmap fit into your long term plan? •Vietnam relationship with the US is strengthening and is expected to continue p.19 Things to consider when outsourcing to Vietnam: * For discussion purposes only
- 20. Notable outsourcing companies in Vietnam •25 years old •~5,000engineers •Client List: DirecTV, Freescale, Boeing, Deutsch Bank, RamQuest, Old Republic Title, CorsourceTechnology Group, Halliburton, Ambient •17 years old •~2,000engineers •Client list: Alcatel-Lucent, Avaya, Shoretel, Genband, IBM, Brightstar, Amdocs, Prudential, ANZ, NTT, Toshiba, NEC, Hitachi p.20 ›Best in Class Processes: achieved certification as SEI CMMI Level 5; ISO 9001:2008; and ISO/ TS 16949 ›Security Standards: implemented the ISO 27001:2005 (formerly BS 7799 -2:2002) standard for Information Security Management System ›Agile software development methodology adopted widely as industry standard ›Serve niche markets: Custom application development, mobility, telecom, French market focus, Japanese market focus, and non-voice BPO 1. An IT/Telecom Leader ($1.4B) 2. A Private ITO focus leader
- 21. Russell Case Study: A Review (For Discussion Purposes Only)
- 22. Russell case study –MS App. Dev. RFP* p.22 •Application development and support for MS IT projects with $3M in projected spend. Scope •Global Sourcing and Procurement engaged IT to discuss options for application development and IT support. IT was concerned about the low service level provided by the current suppliers and was receptive to consolidating the supply base. •The project executive sponsor is the CIO. Engagement •Russell currently uses six providers (4 US and 2 India) and would like to consolidate the supply baseto leverage the spend and reduce the complexity of supplier management. •Control costs. Applications development and support costs have increased 15% annually from 2011 to 2013. •Identify MS certified providers that have the scale and skills to support Russell’s applications development and support needs for the short and long term. Goals •GSP conducted an RFP with active participation from IT to define the scope, requirements, and evaluation criteria. •The RFP was sent to 14 suppliers and10 responses were received. Based on price and scoring of responses, 6 suppliers were invited to on-site presentations. Sourcing Final Result Russell consolidated the MS Applications Development providers to 2 providers. One located in Vietnam and one located in the US. The recommendation was based on the selected providers having strong service delivery and lower costs. Vietnam providers’ costs are 40% below India and 80% below US providers. * For discussion purposes only
- 23. Next Steps
- 24. Vietnam as a solution to strategic challenges* p.24 Profile Volume Challenges Solutions Large > 1000 FTEs •Supplier fragmentation with at least 4- 5 suppliers •Offshore rates are comparable across most suppliers •Onshore/niche consulting spend is significant •Business units have their preferred suppliers which lead to a lack of competition •Strategic: Develop a Vietnam supplierin this space, start with a pilot in their sweet spot, then help to position your new partner as a competitor to your incumbents as the partner become more knowledgeable (this apply to both India providers as well as US consulting suppliers) Medium 300-1000 FTEs •Cost pressure as contractsare renewed •Service quality deteriorating (less focus from major suppliers) •Turnover/Visa issues are cropping up and are impacting operations •Strategic: Leveragea Vietnam supplier in some sizeable projects, provide competition to your incumbents •Tactical: Use Vietnam resources to augment your weaken areas, shift more as you feel more comfortable Small <300 FTEs •Too small for major suppliers, end-up with Tier 2 or 3 providers •Evaluate Vietnamsuppliers as alternative to your incumbents •Transition over to the new supplier once you are comfortable * For discussion purposes only
- 25. Opportunistic steps to get started in Vietnam to test and confirm the value proposition* For the budget constrained... •Surprise your IT Leaders with a little year-end present –Identify small project(s) that could not be done due to high cost. You may be able to get it done with Vietnamese suppliers Just need some leverage... •Small pilot / Proof of Concept –Start with a small project in a generic skill set area; use the opportunity to “push” your incumbent Need to mitigate country risk... •Qualify Vietnam as a new supplier to use as risk mitigation for your CIO; Create an “India +1” option p.25 * For discussion purposes only
- 26. Rate benchmark* -Complimentary p.26 * For discussion purposes only Assessment of your Offshore rates: ›The blended offshore rates are high (4thquartile), in particular some of the niche skills rates are higher than your peers. A job specific analysis will help ›The blended onshore rates for India suppliers are not competitive ›Your India blended offshore rates are 42% higher than Vietnam suppliers, the range is between 34%- 55%. Your onshore rates are 60% higher than Vietnam suppliers ›Your ITO scope can be covered by two Vietnam suppliers (further detail analysis required) Discuss opportunities: ›Conduct a job specific benchmark analysis to determine rate negotiation strategy –Immediate ›Evaluate Vietnam suppliers for some of the lower risk scope (QA testing, migration support) and project scope (MobileApp, Microsoft App dev, workflow optimization)
- 27. www.russell.com “Russell,” “Russell Investments,” “Russell 1000,” “Russell 2000,” and “Russell 3000” are registered trademarks of the Frank Russell Company. Contact information Viet Ho Russell Investments vho@russell.com PH: 206.321.5540
- 28. DENVER FALL SUMMIT 2014 Session #WS06 A Low Cost Alternative: Vietnam, the New Offshore Location VietHo Russell Investments 206-505-4637 vho@russell.com Speaker:
- 29. www.russell.com “Russell,” “Russell Investments,” “Russell 1000,” “Russell 2000,” and “Russell 3000” are registered trademarks of the Frank Russell Company. Thank you
- 30. www.russell.com “Russell,” “Russell Investments,” “Russell 1000,” “Russell 2000,” and “Russell 3000” are registered trademarks of the Frank Russell Company. The opinions expressed in this material are not necessarily those held by Russell Investment Group, its affiliates or subsidiaries. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.
- 31. DENVER FALL SUMMIT 2014 Session #WS06 A Low Cost Alternative: Vietnam, the New Offshore Location VietHo Russell Investments 206-505-4637 vho@russell.com Speaker: