Includes implications of financial crisis on the global services industry

1. 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 This presentation may not be reproduced, cited, or distributed without the express written consent of the author. The Future of Offshore Outsourcing: Trends and Implications

5. ORN Buy-side survey demographics Source: Duke University/Archstone Consulting Offshoring Research Network 2005 Survey and Duke University/Booz Allen Hamilton Offshoring Research Network 2006 Survey and Duke University/The Conference Board Offshoring Research Network 2007/8 Survey U.S. survey EU survey

6. Offshoring Reaches Executive Suite

7. Percent implementing offshoring strategies before 2005 vs. by end of 2007 75% are large companies Since 2005 dramatic growth in companies adopting strategies for guiding offshoring decisions at BU and function level Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey

8. Companies experience significantly higher achieved savings following implementation of corporate wide offshoring strategy Before Implementing Offshoring Strategy After Implementing Offshoring Strategy Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey

9. Changing Dynamics of Offshore Outsourcing

10. * 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 * Offshoring of knowledge-intensive services is accelerating. In 2007 over 50% of new offshoring-outsourcing projects involved software development and 30% product development.

12. Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey Percentage of total number of offshore implementations Year in which offshore project was implemented U.S. companies have dramatically expanded offshore sourcing of administrative, and product and software development functions

13. Distribution of Functional Implementations by Company Size Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey But it’s the smaller firms that focus on offshoring knowledge-intensive services.

14. Year in which services were offered Percentage of service providers in the survey offering classes of services Percentage of Providers Offering Categories of Services (1) (1) Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis (including software development) Number of providers offering IT services continues to grow.

15. Percentage of providers rating dimensions as high/very high Extent of Commoditization of Services – Today vs. Expected within 18-36 Months Commoditization in Next 18-36 Months Commoditization today Call Centers Finance and Accounting Information Technology Human Resources Procurement Engineering Marketing & Sales Product Design Legal Services KPO Research & Development (1) Information Technology Outsourcing (2) Business Process Outsourcing Source: Duke University Offshoring Research Network 2007 Service Provider Survey. Providers report that traditional ITO (1) and BPO (2) services are already commoditized and will become even more commoditized

16. Rate of Renewal of Deals by Service Offering Knowledge/Analytical Services Human Resources Legal Services Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis. Percentage of deals renewed at expiration of the first contract Information Technology Procurement Product Design Engineering Research & Development Finance & Accounting Marketing & Sales Knowledge intensive-service deals tend to be project / task based vs. outsourcing of large ITO/BPO deals Call Center Longer-term relationships seem to be the norm

17. Globalization of Service Delivery & Global Race for Talent

18. Percentage of responses rating location factor as “important” or “very important” Location factors for software and product development Clients are becoming more concerned about availability And expertise of talent when choosing offshore locations

19. Comparison of perceived risks (important and very important) US2007 and US2006 surveys Client are concerned with rising wage inflation & employee turnover offshore. Providers face same challenges

20. Source: Duke University Offshoring Research Network 2007 Service Provider Survey Percentage of providers offering product development services from these locations Small providers more adept in accessing talent in emerging locations, such as China, Russia, Latin America and the Middle East

21. Percentage of responses stating factor is “important” or “very important” Location choice factors for IT, software and product development implementations in Latin America and Mexico Spanish companies have better access to high skilled talent in Latin America

22. Financial services companies have highest preference for international service providers

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

24. Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey Preference for Service Following adoption of offshoring strategy companies increasingly favor captive “own and control” organizational forms.

25. Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey Emerging preference for locating software and NPD projects near shore. Canada may be benefiting from availability of talent. Direct consequence of Canadian immigration policies regardless of high costs? Nine time zone barrier? Number of new implementations Near shore locations seem to be gaining in importance for software and product development

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

27. New offshoring investments in India are shifting from IT to administrative functions, and from outsource to captive delivery model

28. Distribution of locations for product development implementations in different time periods 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 Total offshoring of product and software development in India are expanding, but share of India is declining Percentage of total number of implementations

29. Percentage of Call Center implementations in particular locations Source: Duke University/The Conference Board Offshoring Research Network 2005/67/8 Survey The Case of Call Centers: Location choice varies greatly depending on the country of the buy-side company

30. 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. US shortage of S&E talent with advanced degrees not just an H1B visa policy outcome

31. Argentina Brazil Central America Mexico Other South America Product & Software Development Information Technology Call Centers Administrative Services Other (e.g. Procurement) Distribution of Functions offshored to Latin America by U.S. and European companies Brazil and Argentina specialize in software, IT, and product development, Central America in Call Center & BPO

32. FUTURE TRENDS/PLANS

33. Companies have aggressive plans to expand offshoring of existing projects across all functions (58% to 80%). Plans for relocating back onshore are minimal. Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey Administrative Services Call Centers Information Technology Marketing & Sales Product Development Procurement Software Development Expanding 60 56 67 80 53 67 58 Relocating to another offshore location 13 21 5 0 7 7 10 Relocating back to US 0 3 0 7 0 7 3 Transfer to 3rd party service provider 3 0 0 7 5 0 5 Transfer to a wholly owned subsidiary 5 0 12 7 14 7 15 No change planned 28 24 18 7 25 27 21 Other 0 0 3 0 0 0 2 Administrative Services Call Centers Information Technology Marketing & Sales Product Development Procurement Software Development Expanding 60 56 67 80 53 67 58 Relocating to another offshore location 13 21 5 0 7 7 10 Relocating back to US 0 3 0 7 0 7 3 Transfer to 3rd party service provider 3 0 0 7 5 0 5 Transfer to a wholly owned subsidiary 5 0 12 7 14 7 15 No change planned 28 24 18 7 25 27 21 Other 0 0 3 0 0 0 2

34. Percentage of companies planning new implementations Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey Regardless of industry verticals companies have aggressive plans for new software development projects Finance and Insurance Manufacturing Professional Services Software Technical Services Finance and Accounting 50 27 20 10 29 Human Resources 21 7 40 14 14 Marketing and Sales 14 13 40 19 14 Information technology 43 27 20 33 57 Call center/help desk 64 27 20 14 14 Procurement 7 27 0 19 25 Legal Services 0 0 0 10 0 Engineering services 0 33 20 14 14 Research and Development 21 27 20 20 14 Product Design 14 20 20 19 29 Software development 36 29 40 43 29 Finance and Insurance Manufacturing Professional Services Software Technical Services Finance and Accounting 50 27 20 10 29 Human Resources 21 7 40 14 14 Marketing and Sales 14 13 40 19 14 Information technology 43 27 20 33 57 Call center/help desk 64 27 20 14 14 Procurement 7 27 0 19 25 Legal Services 0 0 0 10 0 Engineering services 0 33 20 14 14 Research and Development 21 27 20 20 14 Product Design 14 20 20 19 29 Software development 36 29 40 43 29

35. Percent rating driver “important” or “very important” 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 Companies with extensive offshoring experience integrate offshoring strategy as part of corporate wide global growth strategy

36. Percent companies planning new functional implementations (next 18 to 36 months) Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey Companies with offshoring strategy (75% large companies) have aggressive plans for new IT, F&A and Call Center operations offsho re

37. Low-tech companies are targeting new offshoring projects for IT, contact centers and finance and accounting processes

38. Midsize companies are planning new offshoring projects across all business processes and functions. Large companies are particularly planning new call center operations. Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey

39. Source: Duke University / Booz Allen Offshoring 2007 Service Provider Survey Area of future expertise Number of providers In anticipation of limits to labor arbitrage service providers are planning to build capabilities in end to end business process re-engineering

40. For more information please contact The Research Team [email_address] 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. THANK YOU!