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A piece of work for a friend picthing an idea to help extract greater customer value via offshoring.

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Digital Orchestra

  1. 1. Where Technology, Innovation and Entrepreneurism Meet November 2007 OFFSHORING: Creating flexibility and extracting value by leveraging global labour arbitrage opportunities CONFIDENTIAL | Document numb: DO170175
  2. 2. Confidentiality Our clients’ industries are extremely competitive. The confidentiality of companies’ plans and data is obviously critical. Digital Orchestra will protect the confidentiality of all such client information. Similarly, management consulting is a competitive business. We view our approaches and insights as proprietary and therefore look to our clients to protect Digital Orchestra’s interests in our presentations, methodologies and analytical techniques. Under no circumstances should this material be shared with any third party without the written consent of Digital Orchestra . Copyright © 2007 Digital Orchestra Document numb: DO170175
  3. 3. Presentation Contents Digital Orchestra – About Us…………………………………………………………………………… 3 Offshoring, History & Trends ………………………………………………………………………….. 6 Key Offshore Markets………………...………………………………………………………………... 11 Commercial Drivers & Motivations …………………………………………………………………..15 Insights on Execution …………………………………………………………………………………. 19 Conclusions &Next Steps …………………………………………………………………………….. 21 2 Document number: DO170175 © 2007 Digital Orchestra
  4. 4. Section 1 Digital Orchestra About Us Document numb: DO170175
  5. 5. Digital Orchestra Get to know us and how we can help What do we do, and where do we add value? Who we are? Simon Ashwin: – 15 years experience in marketing & advertising – 5 years experience managing State Govt projects – Extensive networks and contacts within China We performance tune – Broad commercial experience across Asia project based – More points operations to extract – More Points greater value, flexibility – More Points and efficiency VALUE Where we’ve worked and provided support ? We help clients We develop implement strategies that technology based help SME solutions businesses grow responsibly 4 Document number: DO170175 © 2007 Digital Orchestra
  6. 6. Digital Orchestra What is important to us Our Values Solution focused Our solution focused approach is driven by the desire for “Excellence”. Implementations that withstand the test of time involves really understanding your needs, evaluating the available options and selecting a strategic course that best leverages your capabilities. Sometimes opportunities don’t exist and they need to be created. “Enterprising” organisations can make the best out of any given situation by changing the rules the game to unlock greater value. Quality ideas well implemented are the cornerstone of best practice and a necessary ingredient for innovation success. This is what we do best. How we get there For us the journey is just as important as the outcome. We choose to reach success together through teamwork by creating a working relationship that is both productive and exciting. Who you are While we may have come from large scale organisations and projects, we choose to work with nimble SME sized clients, where strategies are actually executed rather than filed away on a dusty shelf. 5 Document number: DO170175 © 2007 Digital Orchestra
  7. 7. Section 2 Offshoring, History & Trends Document numb: DO170175
  8. 8. Terminology Common language used when discussing Offshoring and related concepts Offshoring Outsourcing Offshoring describes the relocation of business processes Outsourcing involves the transfer of the management or from one country to another. This includes any business day-to-day execution of an entire business function to an process such as production, manufacturing, or services. external service provider. Comparative advantage is achieved when countries freely Business segments typically outsourced include information trade the items that cost the least for them to produce, in order technology, human resources, facilities and real estate to extract the greatest value. management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, customer services, market research, manufacturing and engineering. Innovation Offshoring Nearshoring Once companies are realizing the cost savings, many high- The complexity of offshoring stems from different languages tech product companies leverage countries like South Africa, and cultures, long distances and different time zones, India, China, Mexico, Russia, etc. to pilot product innovation spending more time and effort on establishing trust and long- in small markets. term relationships, overriding communication barriers and activities of that kind. Should the pilots prove successful they are ramped up into larger markets. Should the pilots fail, they are lower profile and Nearshoring is a derivative of the business term offshoring. have cost the organisation less than broad big-bang product Offshoring is a business activity that can be complex and risky launches. because it involves working with a foreign, distant organization. In contrast, nearshoring reduces the complexity and risk of Examples include: offshoring by limiting the tyranny of distance. – Visa and Mastercard piloting contactless credit cards in Examples of nearshoring: American clients nearshoring to Malaysia and the Philippines. Mexico, Austrian clients nearshoring to Slovakia, Japanese – Vodafone is developing peer to peer mobile payments clients nearshoring to China. technologies in Africa as an alternative to lacking banking infrastructure 7 Document number: DO170175 © 2007 Digital Orchestra
  9. 9. History of Offshoring Agricultural Offshoring Offshoring is certainly not a new phenomenon. The notion of colonial development between the 1600’s to 1800s is predicated on the offshoring of agricultural production of goods like cotton, grain and tobacco. Land poor empires like England and sought strategies to expand their resource base outside what their little island could produce. Industrial & Manufacturing Offshoring Early industrialised examples of offshoring include Henry Ford’s first overseas plant established in Trafford Park, Manchester, England. Today manufacturing offshoring is a common phenomenon across all industries from automotive, electronics, and fashion etc. Henry Ford IT Offshore Outsourcing In the 1960s low level assembly of semiconductors was performed in Penang and Singapore. In the 1970s and 80s manufacturing of chips and consumer electronics ramped up in Taiwan. Today Taiwan is offshoring manufacturing and services to mainland China for the very same cost considerations. In 1977 India’s reform to its company ownership laws forced IBM to exit the Indian market, leaving behind a nascent IT infrastructure without any support. India was forced to become technologically self sufficient and its education system began churning out engineers to meet the government demand. In the 1990’s demand for low level IT skill labour was fuelled by Y2K modifications and to a lesser degree the internet boom. Since China joined the World Trade Organisation in 2001, its new ecosystem is starting to rival India as an attractive offshoring destination. 8 Document number: DO170175 © 2007 Digital Orchestra
  10. 10. Service Based Case Study – Finance Industry Source: Oliver Wyman The trend towards offshoring • Offshoring is not limited to just manufacturing and component sub assembly • More and more service based organisations are offshoring its non-core support functions • 73% of all Fortune 200 companies say “offshoring is an important part of their growth strategy” • The diagram shows the key strategies adopted by the financial service sector, indicating that offshoring plays an integral role in the next phase of the industry’s growth in the same way that outsorcing once did in the 1990’s. 9 Document number: DO170175 © 2007 Digital Orchestra
  11. 11. IT Offshoring Timeline The evolution of modern Offshore Outsourcing Phase 3 Phase 1 Phase 2 Growing Acceptance Critical Mass & Momentum Emerging Concept 2006 1978 1994 1995-2000 IBM exits India, Global offshore NAFTA Internet & leaving behind a spending will reach agreement Y2K work nascent and $USD50 billion by 2007 stimulates drives low (Source: Gartner group) unsupported IT international level IT work infrastructure free trade to India 1960s 1970s 1980s 1990s 2000s 2010s 1980s 2001 Specific Case Example 2007 India’s Education China General Comments Infosys announces System becomes more joins $100m acquisition in Country Specific 70s tech savvy to support WTO EU. the legacy of IBMs exit India changed its company laws to 2005 1999 2003 limit foreign 73% of all Fortune 200 Infosys, an Indian Infosys ownership to 40% companies say “offshoring based outsource acquires is an important part of their firm attains SEI- Australian growth strategy”(Source: Duke CMM level 5 company, University, Ciber/Archstone study) standard Expert IS for $22.9m 10 Document number: DO170175 © 2007 Digital Orchestra
  12. 12. Section 3 Key Offshore Markets Document numb: DO170175
  13. 13. “A range of countries are involved in offshore outsourcing. The big ones on our radar are India, China, Israel, South Africa, Northern Ireland, Asia, Southern Ireland, Czech Republic, Poland, Hungary and Russia. Africa, Eastern Europe We evaluate each of these countries based on and language compatibility, government support, South America infrastructure, educational system, cost, labour, political stability, cultural compatibility and security.” (Roger Cox, Analyst, Gartner Group). Document numb: DO170175
  14. 14. Global Offshore Market Salaries Average Entry Level Programmer Salaries (USD) $15K – 20K p.a $10K – 15K p.a $5K – 10K p.a Less than $5K p.a Source: Modified from CIO 2006 Outsourcing Guide 13 Document number: DO170175 © 2007 Digital Orchestra
  15. 15. The 2 Key Offshore Markets for Australian SMEs Of the 5 attractive markets (Mexico, South Africa, Russia, China & India), India and China offer the lowest cost and lower risks based on the concept of nearshoring. India China India will remain preeminent offshore Whilst India continues to be a prime provider of IT services for the foreseeable location for offshoring, it faces the danger future, currently representing a 75% of losing its crown to an increasingly- market share (Source: Sandhill Group) competitive China (Source: Deloitte) Gartner estimates India’s share to be China’s offshore business is growing higher between 80-90%, although see this aggressively at a rate of nearly 47.9% market share to be highly contested by annually (Source: XMG Global) emerging markets over the next decade. China, since its business/economic The Indian Offshore market continues to reforms began in 1978, has been a bigger grow at a compound annual growth rate of beneficiary of foreign investment than has 29.5 percent to reach US$34.1 billion in India. As a result, growth has been revenues by the end of 2007 (Source: Business generally faster. China’s exports grew Week) ten-fold to nearly $1 trillion annually in the years from 1978 through 2006. (Source: By 2010, the offshore industry will have Plunkett Research) changed India's labour market, with an estimate 25 percent of India's vast and An average developer will cost between talented middle-class working in the $USD 10-20 per hour for an 8.5hr day. offshore outsourcing industry (Source: Everest Wages are below that of India as Indian Group) salaries are increasing 20-30% p.a. (Source: Rod Solomons, EBO Exec, IBM India) India & China are pragmatic entry points for Australian SMEs looking to pilot an offshore initiative 14 Document number: DO170175 © 2007 Digital Orchestra
  16. 16. Section 4 Commercial Drivers & Motivations Document numb: DO170175
  17. 17. Top Reasons for Outsourcing vs. Offshoring Motivations behind offshoring much more cost focused than Outsourcing Top Reasons for Outsourcing Top Reasons for Offshoring (Source: Michael Corbett & Assoc) (Source: AT Kearney) Speed to market 10% Other Improve Quality <10% 13% Reduce Costs 36% Conserve Capital 1% Reduce Costs >90% Foster Innovation 4% Focus on Core A T Kearney conducted a study based on field work carried 36% out at more than 60 offices in 37 countries, augmented by interviews with global executives. The study found that more than 90 per cent of companies surveyed named costs as the main reason for their initial decision to offshore jobs. 16 Document number: DO170175 © 2007 Digital Orchestra
  18. 18. The economics behind offshoring and expected cost savings Unrealistic Expectation Probable Range Realistic Estimate >80% Saving 18 – 64% Saving 30 – 40% Saving It was not unheard of, for In A.T. Kearney's study Accenture is working customers to go into an of multinational with a quot;major offshore outsource companies it identified transportation equipment engagement expecting that those with a focus companyquot; that's planning to received 80% cost on overall performance to offshore more than savings. rather than cost, were half of its parts the biggest winners, procurement over the This gold rush mentality saving 3.5 times more next few years. Most of it sets unrealistic money than companies will go to China. quot;We're expectations and undue that offshore simply to talking about 30% to pressure, which cut costs. 40% cost reductions” positions the execution (Pat Byrne,Managing Global team for failure rather Top performers who Partner, Accenture) than success. focused on a holistic program achieved up to (Phillip Hatch, President, Ventoro 64% cost savings in their Institute) offshore activities. 17 Document number: DO170175 © 2007 Digital Orchestra
  19. 19. Breakdown of Expected Savings Quality & Integration are the biggest cost leakage areas Requires diligent risk management to ensure value extraction 30 to 40% Net Cost Savings 20 Increased Integration Costs Increased 5 Communications Cost 25 Increased Quality Control Increased Project 10 Management Gross Expected Cost 100 Saving 0 20 40 60 80 100 120 (%) 18 Document number: DO170175 © 2007 Digital Orchestra
  20. 20. Section 5 Insights on Execution Document numb: DO170175
  21. 21. What to focus on Results from the A T Kearney Offshore Study Take a holistic approach Critical Success Factors The A T Kearney study showed that organisations who 1. Focus on performance and NOT savings; focused exclusively on cost savings extracted considerably 2. Have the right people lead, invest in the management team; less value from their offshoring programs. 3. Manage problems with an open communication policy; 4. Supplier Selection: focus on compatibility NOT price; 5. Escalate offshore commitment inline with experience curve; and 6. Ensure team/supplier integration by sending staff and key touch point roles overseas. Key risks highlighted for Tasmania Top performers who focused on a range of 6 mutually reinforcing areas achieved operational performance improvement AND as a natural by-product of this extracted the greatest levels of cost savings. The key areas are: – Capacity – Capability – Flexibility – Process Maturity – Service Levels – Revenue Performance 20 Document number: DO170175 © 2007 Digital Orchestra
  22. 22. Section 6 Conclusions & Next Steps Document numb: DO170175
  23. 23. Conclusions The opportunity is there for SMEs to grow What is the opportunity? Offshoring Lifecycle 1. Offshoring as a business tool was formerly 1. Large Companies exclusive to very large firms such as IBM, Microsoft, 2007 offshore their back offices Dell, Oracle and HP, each of whom have invested to reduce costs (IBM, over $USD1 billion in their Indian operations alone DELL, Microsoft, Oracle) in an effort to remain price competitive. 3. Service maturity lowers risk sufficiently for SMEs to 2. Over time local offshore service providers have offshore non-core functions emerged in the own right. The ascendency of this segment has been heralded by Infosys signalling 2. Service providers offering their intent to grow via acquisition. “Infosys have offshore support to provide greater flexibility and rapid been doubling in size approx. every 2 years mainly growth options (e.g. Infosys, through organic growth but are now focussing on Tata, Wipro) acquisitions to continue their growth rates. ” - Rod VALUE Solomons (EBO Exec, IBM India) What to offshore Infosys commented that their “acquisitions need to Complexity provide new platforms for Infosys to base its To ensure the success Degree of Integration Low High business on or open new markets” – Gopalakrishnan of the pilot the project (CEO, Infosys) should have the High highlighted 3. Due to rapidly expanding infrastructure in both India characteristics. and China and a growing resource base of educated labour, the risk of entry for SME offshoring Complexity and degree Low programs has been dramatically reduced. of integration can be increased as experience develops over time 22 Document number: DO170175 © 2007 Digital Orchestra
  24. 24. Next Steps Sign-Off Concept Plan a Pilot Development Pilot • Find a Partner We are Nov Dec • Select a Project Concept phase here 2007 2007 • Set Pilot Objectives Jan/Mar April May June Realization phase 2008 2008 2008 2008 Sign-Off Conduct Review Refine Production Model Pilot Lessons Model July Execution 2008 Implementation 23 Document number: DO170175 © 2007 Digital Orchestra
  25. 25. Plan a Pilot The primary purpose of the pilot is to test the underlying economics and assumptions Select a Pilot Partner Select a Pilot Project Establish Pilot Objectives Liaise with the Tasmanian Its is envisaged that a pilot The pilot will be conducted Government to select an project will be a piece of work as a formal project with an appropriate pilot partner. that would ordinarily cost appropriate governance $AUD 80 – 100k to deliver. structure consisting of The pilot partner should be representatives from Digital a technology based service The project needs to be small Orchestra, the selected pilot provider seeking innovative enough to manage the degree partner and members from ways to increase scale. of risk so that the pilot partner Tasmanian Govt. is not overly exposed, yet Necessary attributes of a materially large enough to test Objective measures will be good partner includes: the fundamental economics of established based on the offshoring. relevant A T Kearney 1. Open minded categories. management. The project needs to be based on readily available or open The target outcome will be to 2. Sympathetic working staff technologies that would be deliver the pilot project to an (esp. team lead. easy to procure offshore, acceptable degree of quality 3. Organisation serious about: rather than niche specific and cost saving of no less Performance proprietary or legacy than 30-40% of the $80-100K improvement technologies. project value. Cost saving The project needs to be of low Innovation to moderate degree of complexity with minimal integration requirements. 24 Document number: DO170175 © 2007 Digital Orchestra
  26. 26. Profile of the ideal pilot Ideal case Worse case (What to look for) (What to avoid) 80% Performance Improvement 80% Cost Saving Focus 20% Cost Saving 10% Performance 10% Other Staff Engagement Staff informed, engaged, and onboard Staff kept in the dark Project Size Focused small to medium sized Large scale project with ambiguous deliverable with clearly defined scope and scope and potential for unforeseen easily measurable success/failure criteria deviations with difficult to measure success/failure criteria Project Complexity Low complexity, easily documented Highly complex project with multiple requirements requiring commonly integration points, difficult documentation available tools using nascent technologies or legacy tools Low High Low High 25 Document number: DO170175 © 2007 Digital Orchestra
  27. 27. Where Technology, Innovation and Entrepreneurism Meet Thank You 26 Document number: DO170175 © 2007 Digital Orchestra