SOURCING INTERESTS GROUP RESEARCH REPORT

OFFSHORE OUTSOURCING Part I: State of the Industry This report has been made possible by the sponsorship of the following Sourcing Interests Group member companies:

© 2003 Sourcing Interests Group 30 Hackamore Lane, Suite 12 Bell Canyon, California 91307 Phone: (818) 884-6080 Fax: (818) 884-4875 Web: sourcinginterests.org All rights reserved.

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TABLE OF CONTENTS EXECUTIVE SUMMARY

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INTRODUCTION

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1. THE OFFSHORE OUTSOURCING LANDSCAPE

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The Drivers of “Offshoring” The Benefits of Offshoring The Provider Side of the Marketplace The Client Side of the Marketplace The Near-Term Outlook

2. COUNTRY CONSIDERATIONS

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Overall Considerations India The Philippines China Russia Nearshore to the U.S. Other Countries Local Laws, Taxation, and Governmental Limitations Business Continuity Issues

3. ABOUT THE SPONSORS

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Exlservice Mayer, Brown, Rowe & Maw neoIT Syntel

4. REFERENCES

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EXECUTIVE SUMMARY By Barry Wiegler Founder and Managing Director Sourcing Interests Group “Offshoring” generally means moving resource costs from a developed G-7 nation to low-cost, developing countries. It began in information technology (IT) in earnest in the mid-1990s when companies outsourced the job of making their legacy systems Y2K-compliant (that is, able to accept dates of year 2000 and beyond). At the time, the IT labor market in the developed countries was very tight. Offshoring was often their only option. The deals proved to be very successful, and India became well known for its high-quality application development and maintenance (ADM) work. With the downturn in economies around the world starting in 2000, companies have looked for ways to cut costs. For the past few years, cost cutting has been the main driver. Offshoring has become one option, not just for ADM but for call centers and business process outsourcing (BPO) work as well. In general, net savings are 25% to 50% compared to the U.S. and Europe. But the level of savings depends on how much work is offshored, and how quickly. The optimal offshore-onshore ratio for IT work is typically between 70%-80% offshore and 20%-30% onshore. But some firms only reach 50-50 because the managers feel the need to see people onsite. Besides reducing costs, offshoring taps an educated workforce, which can result not only in higher productivity but better revamped processes. As one example, offshore providers of BPO services generally will not work with paper documents due to the cost and time of shipping them around the world. Thus, they introduce imaging to their clients, vastly improving those paper-bound processes. A main enabler of offshoring has been the plummeting costs of telecommunications. Another is the maturing of offshore providers. A third is the large educated populations in low-wage countries, with a younger © SOURCING INTERESTS GROUP

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generation that is global in its thinking. The September 11th terrorist attacks have not quelled the interest in offshoring, only focused providers’ and clients’ attention on being more thorough when making business continuity plans. In short, the services economy is globalizing, just as the manufacturing industry globalized over the last century. White-collar jobs are moving offshore. The marketplace is growing very fast. The up tick in interest is increasing the participation of onshore outsourcing providers, who are establishing their own offshore operations or forming joint ventures with offshore providers. In fact, offshore is now mainstream for outsourcing providers; they must have an offshore strategy because customers want truly global providers. Governments are also becoming involved, offering incentives to providers that bring business to their country, speeding visa application approvals, granting waivers in labor laws, and such. At the moment, the marketplace is in an expansion mode. It is fragmented, with a wide variety of business models to choose from, a great disparity in provider maturity, and a plethora of new service offerings— such as new application development, implementation of application packages, call centers, remote network management, infrastructure outsourcing, and BPO. BPO is especially of high interest with companies offshoring such processes as customer care, billing, collections, claims processing, and various other back office functions. Maturity of the industry is increasing and consolidation will occur. In fact, it is possible that BPO and IT will merge, as the trend to move more IT work offshore leads to more component-based and packaged systems. Providers will offer more end-to-end business process services with the underlying IT support included. Web Services, which provide services over the Internet, will play into this trend. Customers will see these services available at a click on a screen. On the client side, the Fortune 500 companies have been on the vanguard, often with third-party providers but sometimes in their own facilities. Offshoring appears most risky to companies with only a U.S. presence or a few operations in Europe. They are sticking their toes in the water with pilot projects—to determine what work is most appropriate and how they would manage from a distance. There is clearly a psychological leap that clients must make to outsource offshore. Just moving work outside their company—not to mention half way around the world—can be agonizing. But once the leap is made, no further persuasion is needed. In the main, client satisfaction with offshoring has been high. As a result, offshore deals have been growing in size. In the call center world, for instance, pilot offshore projects previously entailed 25 to 50 seats ($.5 to $1 million dollars). Now companies are signing deals ranging from $5 to $15 million.

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In short, offshoring will become part of every Global 2000 company’s sourcing strategy, and they will expect the same service levels regardless of where the work is performed. They could also use offshoring for new reasons, such as reducing time to market. To take advantage of offshoring, prospective clients need to do their homework on countries and providers. Choosing a country can be an important decision in itself, because different countries have different characteristics. While India now dominates offshore outsourcing, other countries are getting into the game. They should be evaluated on a number of characteristics, listed in this report. There are risks to offshoring, but there are also strategies for mitigating these risks. In some cases, for example, a U.S. client might want some work offshore in Asia with a nearshore hot site as well, perhaps in Canada, the Caribbean, or Mexico. A U.K. firm might do the same, choosing Ireland as its nearshore site for some work but mainly for fast disaster recovery. So country considerations are part of the due diligence effort prospective clients need to undertake. This Part I provides an overview of offshoring. Part II gets into the nuts and bolts of getting ready, understanding the legal issues, and managing offshore outsourcing.

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INTRODUCTION

ABOUT SOURCING INTERESTS GROUP Sourcing Interests Group (SIG), founded in 1991, helps organizations improve their bottom-line performance through progressive sourcing. SIG members are primarily major companies that are either applying progressive sourcing, are leading service providers, or are advisory firms. SIG is their organization for learning about new trends, techniques, services, and products, as well as sharing their experiences. SIG initiates and enhances communications among its 150+ member organizations and provides practical research on current and innovative sourcing issues, products, and services.

REPORT CONTRIBUTORS This two-part SIG Research Report is based on presentations at a recent SIG Conference and on interviews during the first half of 2003. Contributors to this report are:

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Peter Bendor-Samuel, CEO, The Everest Group

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Jonathan Cooper-Bagnall, Partner, PA Consulting Group

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Bharat Desai, CEO, Syntel

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Rebecca Eisner, Partner, Mayer, Brown, Rowe & Maw LLP

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Jake Farkas, Senior Vice President, Trinity Industries

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Chris Ford, Partner, Alston & Bird

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Rohit Kapoor, President and CFO, Exlservice

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Marlin Mackey, Senior Vice President, Health Care, Insurance and Retail

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Dan Masur, Partner, Mayer, Brown, Rowe & Maw LLP iv

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Thom Mead, Chief Sales and Marketing Officer, Exlservice

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Brad Peterson, Partner, Mayer, Brown, Rowe & Maw LLP

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Jeff Rich, CEO, ACS

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Rita Terdiman, Vice President, Industry Services, Gartner Inc.

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Steve Unterberger, Executive Vice President, Business Model Architecture, Exult

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Atul Vashistha, CEO, neoIT

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Avinash Vashistha, Managing Director, neoIT

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Senior executive at a U.S. financial institution

REPORT SPONSORS This report has been made available through funding provided by four sponsors: • • • •

Exlservice Mayer, Brown, Rowe & Maw LLP neoIT Syntel

Each has provided additional insights about offshore outsourcing that were not presented at the conference.

EXLSERVICE Exlservice Inc. (EXL) is a U.S. company that provides integrated BPO solutions, encompassing call center, back-office processes, and webbased customer care to global corporations from its three operations centers in India. We believe in operating as an extension of the clients’ delivery organization, where the most efficient processes and technology solutions are deployed to ensure maximum operations flexibility, highest quality, and cost efficiency. With over 1600 employees, 24/7 operations, ISO certification, Six Sigma rigor, and implementation of proprietary outsourcing methodologies, EXL has the capacity and ability to operate 4500 seats on a 3-shift basis. In their 2002 annual survey, India’s National Association of Software and Service Companies (NASSCOM) named EXL the #1 BPO service provider in India. And in a McKinsey analysis of the BPO market in India, EXL was accorded top rating in both operational capabilities and organizational strength. Contact: Thom Mead, Chief Sales and Marketing Officer, Tel. 770-6307970, [email protected]; www.exlservice.com.

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MAYER, BROWN, ROWE & MAW LLP Mayer, Brown, Rowe & Maw LLP’s 1,300 lawyers worldwide bring value and world-renowned legal expertise to their clients’ outsourcing needs. Mayer Brown advises clients in structuring cutting-edge outsourcing solutions and prides itself on forging successful and lasting relationships. The firm stands at the forefront of the outsourcing revolution, bringing sound advice, practical experience, and legal acumen to its clients. Mayer Brown has one of the largest and most experienced outsourcing teams in the world, with more than 50 outsourcing lawyers in the United States, Germany, France, and the United Kingdom, including more than 20 partners. They represent established and emerging companies in a wide variety of onshore, nearshore and offshore outsourcing transactions, including the outsourcing of business processes and functions, energy management, e-commerce transaction processing and support, mainframe and midrange systems, desktop and laptop computers, help desks, local and wide area networks, telecommunications, Internet/intranet, audio/video conferencing, application development and maintenance, and leasing/procurement. Mayer Brown regularly handles transactions ranging in size and complexity from multibillion dollar global outsourcing transactions to routine out-tasking arrangements. The firm has developed innovative methodologies and tools that facilitate and expedite the successful completion of contract negotiations, while preserving and even strengthening the customervendor relationship. Contact: Rebecca Eisner, Partner, Tel: 312-7018577, [email protected]; Daniel Masur, Partner, Tel: 202263-3226, [email protected]; Brad L. Peterson, Partner, Tel: 312-701- 8568, [email protected], www. mayerbrownrowe.com.

NEOIT neoIT is a leading offshore advisory and management firm. neoIT represents only buyers in a sourcing transaction and focuses exclusively on assisting companies in maximizing their returns from the offshore sourcing of both information technology and business processes, on either a project or enterprise-wide basis. neoIT advisors average more than 15 years of industry experience supporting the sourcing lifecycle, from planning, spend visibility, and supply base rationalization to competitive negotiations, contracting, and service level management. neoIT solutions deliver results in the form of cost savings, improved governance, reductions in sourcing process time, and decreased risks with offshore supplier partnerships. neoIT’s clients for offshore advisory and management include leading firms such as Cardinal Health, Exult, AMP, HCA, AXA, Pyxis Corporation, Carreker, and Shipserv. Contact: Allisson Butler, Tel. 925-355-0557, [email protected]; www. neoIT.com

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SYNTEL Syntel (NASDAQ: SYNT) is a global provider of custom outsourcing solutions in a broad spectrum of information technology and information technology-enabled services. The company’s vertical practices support the entire Design-Build-Operate-Optimize lifecycle of systems and processes for corporations in the financial services, insurance, retail, health care, and automotive industries. The first US-based firm to launch a Global Delivery Service to drive speed-to-market and quality advantages for its customers, Syntel now leverages this efficient model for the majority of its Global 2000 customers. Named one of Forbes Magazine’s “Best 200 Small Companies in America,” Syntel has over 3,000 employees worldwide, is assessed at Level 5 of SEI’s CMM, and is ISO 9001:2000 certified. To learn more, visit us at: www.syntelinc. com or contact Jonathan James, Vice President of Marketing, at [email protected], or Tel. 919-233-6208. Researched and Written by Barbara C. McNurlin

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1. THE OFFSHORE OUTSOURCING LANDSCAPE

Index: The Drivers of “Offshoring” The Benefits of Offshoring The Provider Side of the Marketplace The Client Side of the Marketplace The Near-Term Outlook

Offshore outsourcing began in 1990. The offshore providers were initially called on for supplemental application development help. Since 1995, and to 2005, there have been and will be five main advances in the offshore market, says Rita Terdiman, vice president of Industry Services at Gartner: 1. Starting in 1995, Y2K legitimized the offshore marketplace and gave the Indian providers traction. The deals were very successful, despite the myths. 2. The Indian providers have been adding operations in the U.S., to increase their mindshare in U.S. firms and to become global service providers. 3. At the same time, the largest (Tier 1) U.S.-based outsourcing service providers have been talking about and building their own offshore capabilities. First, they began using offshore labor. Now they are building offshore subsidiaries. 4. We are beginning to see cross collaboration between U.S. and Indian providers, and an expansion of offshore countries – Lithuania, Philippines, Mexico and Canada, and South America. We are also now seeing offshore BPO and contact centers. 5. The largest (Tier 1) Indian outsourcing providers have begun moving up the IT supply chain from their core competence of building and maintaining applications to performing other value-added activities, such as manning help desks and handling business processes. They will look to acquire U.S. service providers and become truly global.

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THE DRIVERS OF “OFFSHORING” Offshoring. Offshore outsourcing, often abbreviated to “offshoring,” generally refers to moving resource costs from a developed G-7 nation to lower cost, developing countries. Many of the large, domestic suppliers are establishing capabilities in the developing destination countries, providing a “transparent” outsourcing model to companies with existing contracts with a system integrator, says Atul Vashistha, CEO of neoIT. The services economy is globalizing. The same thing that has happened to the manufacturing industry over the last century is going to happen in the services economy over the next two decades, says Bharat Desai, CEO of Syntel. The February 3, 2003 issue of Business Week estimates that 2.5 million U.S. white collar jobs will go overseas in the next decade. These white collar jobs will include those in technology development, research, financial analysis, auditing, tax preparation, and on and on. The two key enablers are the ubiquity of the Internet and the millions of miles of fiber cable that have been laid around the world. Together, they permit low-cost telecommunications, which enable businesses to leverage highly qualified workforces anywhere in the world. “We will see more and more such leverage,” says Desai. There are four primary drivers for the rapid growth in offshore outsourcing, says Brad Peterson, a partner with Mayer, Brown, Rowe & Maw LLP, an international law firm.

Certain activities are better suited to offshore than others.

1. Difficult economic conditions in the U.S. – making U.S. businesses hungry for significant savings. Widely cited research from Forrester Research of Cambridge, Massachusetts, indicates cost savings of 25% to 40%. Peterson’s clients project savings within that range. 2. Dramatic reductions in telecommunications costs and increased power of the Internet. 3. Improvements in supplier capabilities. 4. Successful pioneering by well-regarded companies, such as GE. The driver for offshore outsourcing is the potential for cost savings, says Rebecca Eisner, a partner at Mayer, Brown, Rowe & Maw. Certain activities are better suited to offshore than others. For example, call centers, software development, and software maintenance have been outsourced offshore for awhile. Projects like these that have a limited scope lend themselves to offshore outsourcing more so than moving your entire data center to India. Offshoring does present a higher degree of risk, particularly if your business does not have experience or a presence in the offshore location. So less risky projects are more amenable. Some 50 of Mayer Brown’s attorneys focus on outsourcing, 30 in the U.S. and 20 in Europe. Companies have used two primary means to achieve offshore cost reductions, says Vashistha of neoIT: 1. Offshore ownership

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2. Offshore outsourcing The offshore ownership model was used in the first wave of offshoring in the early 1990s. Very large U.S. companies and others established operations or developed partnerships with Indian firms to form companies, which acted as captive providers.

The offshore outsourcing model involves contracting with an external service provider in a lower-wage country who owns the facilities, employs the staff, and assumes the responsibilities for some or all of the deliverables to the client.

Responding to the global need for talent and reduced costs, many of those “spin-offs” or joint venture entities acquired new customers and grew operations as offshore outsourcers. This approach was the first way to reduce service delivery costs. Some of the early leaders in this model were GE and Citibank. The offshore outsourcing model involves contracting with an external service provider in a lower-wage country who owns the facilities, employs the staff, and assumes the responsibilities for some or all of the deliverables to the client. This form of offshoring took off in the mid to late 1990s. It spawned a huge boom to the India IT economy and started many other countries thinking about marketing their low-wage resources to U.S. and EU clients. Scale is a driver. Scale means taking advantage of the large educated populations in such countries as India, China, and Russia. They can bring a lot of resources to solving problems. The demographics are in their favor. They have many young people. “When I go abroad, I see change before my eyes. As a result of the Internet, cable TV, and satellite TV, the world is much, much smaller. Kids in Argentina, India, and America all dress the same way. So there is now a generation that is global in its thinking, dancing, and fashion. These kids are world citizens in terms of their acculturation,” says Desai of Syntel. The economic downturn has spurred offshore outsourcing, giving client companies the incentive to more rapidly develop process-centric or performance-centric operating models, which can also be used to compare offshore companies with developed onshore companies. One model is SEI-CMM, The Software Engineering Institute’s Capability Maturity Model. In essence, it defines five levels of software quality based on the maturity of a firm’s software development processes.

The declining economy has also provided compelling business cases for offshoring based on the lower cost of skilled IT labor.

“Our own tool, neoQA, is similar in that it provides a way to demonstrate value in terms of quality increase and cost savings,” says Vashistha of neoIT. The declining economy has also provided compelling business cases for offshoring based on the lower cost of skilled IT labor (50% to 80% of the U.S. and Europe) in India as well as other nations where outsourcing firms are gaining traction, such as China, Mexico, Hungary, Poland, Russia, and the Philippines. Leading Indian outsourcers like TCS, Infosys, and Wipro have earned a reputation for high-quality service, enabling their U.S., European, and Asian customers to receive equivalent results at a lower cost than in-house or locally outsourced services. Because of the dramatic reduction in labor and operating costs in these

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countries, service providers are able to invest in training and infrastructure, providing a compelling quality case for U.S. buyers. Net savings of 25% to 50% are not uncommon when compared to the U.S. and European labor markets. The global demand for IT skills has driven offshore outsourcing. The economic growth in the mid to late 1990s contributed to global demand for IT skills, particularly in developed countries. U.S. clients used offshore resources to augment IT staff and to respond to the rapid demand for software resources fueled by Y2K and the e-business revolution. The core driver for U.S. and European companies was cost reduction. This demand, in turn, led to liberalized immigration policies and growth of IT and business process outsourcing (BPO) companies in low-wage markets, such as India, Philippines, China, and Russia, says Vashistha of neoIT. To remain profitable and retain competitive advantage, companies are focusing on their core competencies.

September 11th and a global economic slowdown have tightened immigration policies and decreased overall demand for IT services. Even so, to remain profitable and retain competitive advantage, companies are focusing on their core competencies and frequently outsourcing other functions. The mantra is to significantly reduce costs, so offshore markets are becoming increasingly attractive, primarily due to their low labor wages and high service levels. Offshore outsourcing services now range from business processes to software application maintenance and support, new application development, contract R&D, market research, engineering services, and systems integration.

THE BENEFITS OF OFFSHORING The first benefit is always cost, but the long-term benefits are quality, speed, scale, and knowledge. The primary driver will always be cost because the proposition has to be compelling enough to get people to change. But after cost, companies evolve to looking for solutions to their problems. That is what has happened in information technology, says Desai of Syntel. Ten years ago, companies would define their problem, have a manager come up with a detailed solution, then go to an offshore provider and hire them to execute the project. Today, most companies tell an offshore IT provider, “Here’s our problem; you go solve it.” The most successful offshore providers will go a step further by saying to the customer, “We understand this is your problem. Here is a solution that fits.” They will be thinking ahead for their customers. Quality is a differentiator because in outsourcing offshore, customers tap a very large and highly educated workforce. © SOURCING INTERESTS GROUP

The main differentiators between onshore and offshore are cost, quality, and scale. Quality is a differentiator because in outsourcing offshore, customers tap a very large and highly educated workforce, so the best minds in the world can converge to solve those customers’ problems. 1-4

Moving work offshore also focuses attention on clearly defining a process and making that process mature. Both yield much more predictable outcomes for customers.

Once one company in an industry taps offshore, its competitors need to do the same.

Sometimes, companies start with onshore as a first step, then move to offshore. “But the field is rapidly moving away from that two-step process because there are so many great examples of offshoring success. I believe we will see a wave of acceleration in offshoring. One reason is that offshore does offer better, cheaper, faster solutions. Furthermore, once one company in an industry taps offshore, its competitors need to do the same,” says Desai of Syntel. Outsourcing improves operations. “In our call centers, we work like any professional U.S. call center, with call distribution and voice response systems. We use dialers for outbound work. It’s just that our cord is longer. “In our back office operations, we hook in as a remote agent. We depend on imaging technology; we do not ship paper. All paper transactions are scanned in the U.S. and arrive in India digitally via a work queue when the agent logs in. “Imaging has turned out to be a significant improvement over how companies have operated. It’s a good technology, but it never reached the top of many companies’ to-do list. With offshore outsourcing, they are forced to do it. The benefit of their investment comes not just from being able to move work offshore but how it changes how they work in the rest of their company,” says Thom Mead, Chief Sales and Marketing Officer for Exlservice. Going offshore improves service levels in BPO. Call center companies basically have three tiers of work. Tier 1 call-center work is simple work, such as an agent answering a caller’s question, “Do I have insurance with you?” Tier 2 work involves more research, such as determining whether a claimant’s problem is covered by the insurance plan. Tier 3 work requires domain knowledge, such as knowledge a supervisor would have, says Vashistha of neoIT. U.S. call centers typically hire people with a high school degree to handle the calls. In India and the Philippines, the agents have at least a college degree; some have a masters degree. So they can definitely handle Tier 1 questions, and 50-60% of Tier 2 calls. Thus, they can improve service and reduce costs to customers over U.S. call centers.

Providing business continuity also benefits from an onshore, nearshore, offshore combination.

Sometimes onshore complements offshore. In fulfillment and logistics, or pieces of a business that need to be onshore for regulatory purposes, onshore and offshore complement each other. Providing business continuity also benefits from an onshore, nearshore, offshore combination. “We are discussing working with some nearshore companies. We are at the size and scale where we could use a nearshore partner, as a recovery destination. They could provide hot seats or we could perform certain functions there to keep the seat warm, and take on critical work if

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needed,” says Rohit Kapoor, president and CFO of Exlservice. Offshore can offer three levels of value. The first level is cost savings, based on the pure wage cost differential between offshore and domestic people. This difference provides ways to lower clients’ cost structure. The second level comes from enhanced processes, due to domain knowledge. “For example, we concentrate on two markets: financial services and insurance,” says Kapoor of Exlservice. “We know these industries, so our ability to handle their processes cascades benefits to our clients. Normally, clients have dispersed some of their processes geographically or among various business units. We combine them into a shared service environment to optimize the handling of tasks. We can do this because we have that industry domain knowledge.”

Tapping into these three tiers of value is done sequentially. First, you stabilize a process. Next, you optimize it. Then, you make fundamental changes to it.

The third level of value comes from reengineered processes and process improvements, due to use of Six Sigma (implementing processes and practices that improve quality to the point that there is only one error per million items, such as lines of software code). “For example, we have 2% density of Six Sigma black belts (experts in process quality). Their sole job is to improve our processes. We also have an 8% density on quality assurance people, so we measure every task,” says Kapoor. Tapping into these three tiers of value is done sequentially. First, you stabilize a process. Next, you optimize it. Then, you make fundamental changes to it. “We generally start to make changes between 6 and 12 months after we take over a process,” says Kapoor “We have had some quick hits, though. In one case, we made changes in the third month. In that instance, the client had a quality assurance process for accounts payable that involved our auditing 50% of the invoices paid out. We ran that process for 3 months and categorized the invoices into two ‘buckets.’ The invoices that were most important to audit were, of course, the high-value ones. So we proposed an 80/20 rule to our client. We would audit all invoices over $100,000, but only 20% of the invoices under that amount. Using that strategy, we would end up auditing 80% of the value of the invoices. The client agreed to this process change. By implementing it, we reduced the number of people in quality assurance while increasing the value of the audited invoices. That was a quick hit process improvement,” says Kapoor.

THE PROVIDER SIDE OF THE MARKETPLACE The marketplace is growing rapidly. Therefore, it is attracting a number of new players. However, there is a clear distinction between the larger credible group that has relevant experience and some of the new players who are trying to get up to speed. There is also a clear differentiation between players with no experience, management depth, or resources versus those with a track record. One major trend, particularly in India, is software services companies providing BPO servicing. Another major trend is global providers establishing a presence in India using a hybrid model, with onshore, near© SOURCING INTERESTS GROUP

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shore, and offshore capabilities, says Kapoor of Exlservice.

The most mature are application maintenance and management, application migration, and legacy application development.

The least mature service offerings are those just now appearing: call centers, BPO, and infrastructure outsourcing.

The offshore market is fragmented and rapidly evolving. In some places, offshore providers are twenty years behind the U.S. IT outsourcing market. But in other places, they seem to be leaders. There’s high potential, but a limited market right now. The major Indian providers are solid choices for well-defined application development and maintenance (ADM) services, says Peterson of Mayer Brown. However, their capabilities are less developed in areas such as call centers, infrastructure management, application integration, transaction processing, and BPO. Worldwide, there are hundreds of potential providers with a wide variety of business models and levels of experience. Maturity of service offerings vary. Offshore offerings can be ranked as having high, medium, or low maturity, says Terdiman of Gartner. The most mature are application maintenance and management, application migration, and legacy application development, because the offshore firms having been doing these three the longest. Since 2002, the Indian offshore firms have moved into new application development, enterprise application integration, implementation of application packages, and business integration. These could be considered has having medium maturity. The least mature service offerings are those just now appearing: call centers, BPO, and infrastructure outsourcing. The call center and transaction processing markets are more mature than the complex BPO market, says Mead of Exlservice. Call center and transaction processing require different conversations with potential clients than BPO because the call center and transaction processing markets are far more mature and commoditized than the outsourcing of an entire back-office process. More companies have experience centralizing and analyzing their callcenter function than their policy administration, accounts payables, vendor management, or market research functions. There is an easier progression of steps to move from in-house centralization of the call center to domestic outsourcing to offshore outsourcing. Fewer companies have analyzed and optimized their back office functions, let alone outsourced them. The sales cycle is different. Offshore outsourcers must sell two concepts at once – outsourcing and moving the work offshore. However, in transaction processing work, the outsourcer’s employees do not have direct contract with the client’s customers, which can ease some concerns. Even so, outsourcing an end-toend process like policy administration has a longer sales cycle because companies have less experience outsourcing in this area. Traditional systems integrators are offshoring as well. To compete against the economic advantages of offshore outsourcers, traditional systems integrators, such as CSC and Perot Systems, have developed strategic relationships or joint ventures with offshore vendors. In addition, suppliers like EDS and Accenture have developed their own

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Rarely do the large U.S. system integrators sell commodity, cost-cutting offshore capabilities.

offshore capabilities, says Vashistha of neoIT. However, rarely do the large U.S. system integrators sell commodity, cost-cutting offshore capabilities. Instead, they use offshore resources to reduce their average blended rate for application services. MNCs arrived in 2001. The multinational corporations (MNCs) are into the offshore market. All will say they have capability in India. NASSCOM, the central lobby for Indian software firms, has a helpful website that lists the firms by specialty and revenues (www.nasscom. org). Recently, it segmented the listing into firms headquartered in India and MNCs, says Terdiman of Gartner. “In moving work offshore, traditional outsourcing providers look to captive subsidiaries, joint ventures, alliance partners and subcontractors. In recent deals, providers have used a combination of captive offshore subsidiaries – such as call centers in Canada, data centers in the Philippines or Costa Rica, or software firms in India. The outsourcing providers now have subsidiaries, partnerships, and subcontractor relationships with offshore companies with various capabilities,” says Dan Masur, a partner with Mayer, Brown, Rowe & Maw.

Customers now want true global service providers and global delivery.

The onsite-offshore model is the accepted delivery model of most suppliers delivering complex solutions to U. S. clients.

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Today, offshore is mainstream for providers. Every outsourcing service provider needs an offshore strategy because that’s what customers are asking for. Customers now want true global service providers and global delivery. The issue is how providers will achieve a global presence and with whom. There will be a consolidation and eventually a true global sourcing market, says Terdiman of Gartner. *Major providers will use offshore resources. They may acquire existing offshore firms. In the past 12-18 months, though, they have not made sufficient inroads into stemming the flow of work to Indian providers. And they will still have higher margins. Customers will need to pay a 15-20% premium for their brand recognition, says Jonathan Cooper-Bagnall, a partner with PA Consulting Group. The 15/15/70 offshoring model predominates. The onsite-offshore model is the accepted delivery model of most suppliers delivering complex solutions to U.S. clients, says Vashistha of neoIT. The typical ratio is 15/15/70. •

15% of the client staff are retained to provide strategy, architecture, and governance.

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15% of the supplier’s resources are co-located (onshore) with the client to provide liaison, functional, and technical assistance and project management.

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70% of supplier staff are offshore.

The goal of this onsite/offshore model is to give the provider front-end insight and strategic information to develop good requirement documents and communicate to the offshore development team. This ratio depends on the type of work being done and the point in transition. More staff are onshore at the beginning of the transition. The ratio may also be adjusted based on complexity of the work and risk factors. 1-8

Split the work to match this model. In ADM, typically the strategy, requirements capture, solutions architecture, prototyping, and design work are performed at the client site. Development and testing are performed offshore. User acceptance testing and implementation are performed both onsite and offshore. In most cases, the client’s infrastructure provides the environment for ADM programming support as well as system testing. Most large offshore suppliers have sophisticated networks at their development centers. Those that do not must establish reliable communications with clients. In either case, network engineering (protocols, firewalls, access, capacity, etc.) is required to ensure seamless, reliable connectivity. Offshore decisions have onshore impacts, says Cooper-Bagnall of PA Consulting Group. The onshore market could be upset if too much work is outsourced offshore. So it is best to find a workable outsourcing arrangement that considers the impact on onshore providers. In one case, a large utility awarded contracts to six onshore and offshore providers so that the work could move among them. This arrangement has worked because the Indian providers are interested in different kinds of work than the domestic providers. For instance, no domestic company wanted a $50,000 job to fix an application. An Indian company took the job and fixed the problem.

Prospective clients now look for both domain expertise and geographical spread.

New services are being provided. Offshore firms are moving into IT infrastructure outsourcing, ERP services, remote network management, BPO, IT-enabled services, product engineering, embedded software, and technical services. Prospective clients now look for both domain expertise and geographical spread, says Terdiman of Gartner. Global providers are appearing everywhere. In some cases, they address the front-end relationship with customers by providing marketing and sales services. In other cases, they focus on the back end, delivering to customers. In both cases, they are growing to be able to scale around the world. There is a greater focus on security and business continuity. The IndiaPakistan tensions in mid 2002 put the spotlight on business continuity. Buyers saw that their plans were too India-centric. The Indian providers have responded to this concern by increasing their capacity for business continuity both inside and outside of India. Offshore is moving up the maturity scale. The issue is not core versus non-core work. As more companies feel comfortable offshoring, they realize it can complement onshore outsourcing. When people are not required onsite, their work is more likely to move offshore, to significantly reduce costs.

The companies best suited to managing larger offshore work are those that have been providing outsourcing for a while. © SOURCING INTERESTS GROUP

The companies best suited to managing larger offshore work are those that have been providing outsourcing for a while. They are moving up the value chain faster. Large project management is going to be tough for new countries and companies because they do not have the maturity and experience, says Avinash Vashistha, managing director of neoIT. 1-9

Suppliers face more scrutiny. As deals grow larger and longer, suppliers face increased scrutiny and due diligence. Not only are financial statements and operations being scrutinized, but suppliers must also meet their service levels or face financial implications. Formerly, it was unusual to see financial implications of poor performance, says Vashistha of neoIT. Consolidation is coming, as providers match skills and build up the capability to offer their skills in diverse locations. As the industry grows, it will become more credible and foster larger players. That’s where competition is good for everyone, says Kapoor of Exlservice.

THE CLIENT SIDE OF THE MARKETPLACE There is a high degree of awareness that offshore outsourcing can be done successfully in India. The leader is GE, which has had operations in India for seven years. It has internally offshored 12,000 jobs – back-office and call-center work. American Express has 6,000 people doing call-center and accounting work in a captive environment. Dell has 2,000-3,000 people. Dell and Amex do the work themselves in India, and work with outsourcing firms as well. They use others to benchmark cost and delivery standards; they do not presume they do it best themselves, says Mead of Exlservice. Financial institutions and GE have taken the most initiative in moving work offshore. The work is not only IT outsourcing (ITO) but increasingly BPO.

The Fortune 500 companies are the vanguard. Financial institutions and GE have taken the most initiative in moving work offshore. The work is not only IT outsourcing (ITO) but increasingly BPO. There will be a fair amount of interest among mid-tier ITO and BPO providers in establishing offshore connections or sites. But it’s unlikely that small providers will move offshore because they have neither the sophistication nor the appetite, says Terdiman of Gartner. Potential clients are taking more time to assess outsourcing providers and the offshore situation because business continuity has become increasingly important. So there is a lot more due diligence in the market, which is slowing down the decision making. Offshore appears riskier to some. Global deals and outsourcing offshore are tougher for companies that have only a U.S. presence, or have only a few operations in Europe. Offshore appears riskier to them, for good reason: They do not know the local landscape. Those who see higher risk going offshore, but want to explore the possibilities, usually start with pilot programs. Pilots let them understand working in the country, test out the long-distance arrangement, and work out the kinks. “We are seeing this approach being taken in both ITO and BPO,” says Eisner of Mayer Brown. Today, clients are sticking their toes in the water, investigating the possibilities, says Eisner of Mayer Brown. They are asking, “If we outsource offshore, where should we do it? Which functions lend themselves best to offshore? Which areas would we not want to offshore?”

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Offshore is also more complex than outsourcing onshore because you must transfer the knowledge of how to do the work.

In offshore, you have to create a solution from scratch. In onshore outsourcing, employees are often transferred to the provider. In offshore outsourcing, 60-70% of your people no longer have their job because it has moved to a different country. They are either laid off or reassigned. Thus, each offshore deal requires creating the entire solution from scratch. Offshore is also more complex than outsourcing onshore because you must transfer the knowledge of how to do the work – while maintaining service levels from day one, says Vashistha of neoIT. Knowledge transfer is a major part of offshoring. Reap the value by overcoming the perceived risks. U.S. firms have been outsourcing offshore for over five years, so the contracting mechanisms are fairly mature. Offshoring is not new, but people are just now paying more attention to it. We probably should have been paying more attention to some of the risks sooner as well.

Only 16% of U.S. firms use offshore IT development resources.

Only 16% of U.S. firms use offshore IT development resources, according to a 2002 study by the Offshore Development Group, says CooperBagnall of PA Consulting Group. That means many U.S. firms are leaving shareholder value on the table because they are not exploiting these global possibilities. The way to capture this “lost” value is to break through the perceived risk barrier using an effective contracting process and by seeking offshore contracts that bring the highest returns. The route companies are choosing is to carve up their discretionary IT spend and give it to BPO providers and offshore providers rather than to an IT infrastructure provider.

Many of our clients struggle with moving work outside their company.

There is clearly a psychological leap that clients must make to outsource offshore. “Many of our clients struggle with moving work outside their company. They are used to having the employees performing the outsourced functions located just down the hall. They agonize about moving the work to the supplier’s facility, even if it is located nearby. Their concerns often center around wanting to keep people where they can be supervised. The level of concern increases many fold when our clients think about moving the work to the other side of the world,” says Masur of Mayer Brown. “Once that leap is made, though, no persuasion is needed. One recent very large BPO deal involved moving critical functions to offshore facilities all around the world. But, because the client had already moved routine transaction processing and other functions offshore, offshoring was not a sticking point. The client had already become a firm believer in its value.”

Although clients start small, they have had so much customer satisfaction that their deals grow.

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Customer satisfaction is high – far higher than with the domestic Tier 1 outsourcing providers. As a result, although clients start small, they have had so much customer satisfaction that their deals grow. A company may start offshore by outsourcing application maintenance of legacy systems. After being happy with that arrangement, they add development projects and discretionary projects. Over time, the amount of spending offshore grows and grows. 1-11

Whereas domestic IT outsourcing deals are multi-billions of dollars, offshore deals are tens of million of dollars. There has been one $100 million deal, says Terdiman of Gartner. There is increasing interest in using offshore ITO providers to do BPO.

There is increasing interest in using offshore ITO providers to do BPO. Growth in offshore use is also coming from the offshore providers moving into providing additional services. These providers will get a share of the BPO market because BPO providers need an offshore strategy to succeed. Client disappointments come from numerous sources. Many companies have had great experiences outsourcing offshore. Not only are their costs lower, by the quality of the work and the productivity of the people are significantly higher. But disappointments do occur, says Kapoor of Exlservice. Those who do not embrace this concept wholeheartedly, for instance, often introduce considerable delays, apprehension, and even disbelief – all of which lead to wasteful expenses.

Disappointments can also come from inappropriate reliance on RFPs and consultants.

Disappointments also result from miscommunications and different sets of expectations.

Disappointments can also come from inappropriate reliance on RFPs and consultants. Both are appropriate for rationalizing standard products and competing providers. But when a buyer is looking to outsource a core operation, especially a back office operation, it is often impossible to define that process in an RFP. Disappointments also result from miscommunications and different sets of expectations. “To reduce disappointments and properly set expectations, we use our opportunity identification framework. We charge a small fee to go in and map out a company’s processes and advise them which processes should and should not be outsourced. Together, we prioritize the outsourceable ones, giving these potential clients an outsourcing roadmap. Then we define each process for them,” says Kapoor. “When we sign a contract, as part of the migration process, we send our procedures team to the client to map out the process in detail and get a signoff, before transitioning. We use flow charts, screen shots, and escalation procedures to document the process. We want to make sure we both have a clear understanding of how that process will be handled. That documentation helps set expectations properly,” says Kapoor.

Buyers can avoid disappointments by hiring an expert who has dealt with outsourcing, performing due diligence on the providers and their offshore locations, and dealing with credible and experienced providers.

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Buyers can avoid disappointments by hiring an expert who has dealt with outsourcing, performing due diligence on the providers and their offshore locations, and dealing with credible and experienced providers. Offshore outsourcing clients encounter more positive surprises than negative ones. Typically, clients’ expectations are exceeded, says Mead of Exlservice, because situations improve quickly. Clients’ main concerns generally center around downtime of telecom lines. When there is redundancy, though, this is a non-issue. Furthermore, the quality of telecom lines in India has improved over the last 12 to 18 months because the government opened up the local end to local competition. It used to be a monopoly. 1-12

Within the last few months, financial institutions have been questioning what work they can move offshore.

Foreign relationships must not hinder the SEC’s ability to examine a financial institution’s records.

Some industries have legal and regulatory barriers to offshoring. In at least some states, for example, utilities may confront PUC resistance or have regulatory restrictions on moving certain records offshore. Such records must be to available for audit and review on an ongoing basis and this may limit the extent to which utilities can move work offshore, says Masur of Mayer Brown. Financial institutions have special concerns. Within the last few months, financial institutions have been questioning what work they can move offshore, says Chris Ford, a partner with Alston & Bird. Their concerns center around potentially increasing the risks to their reputation, their credit rating, liquidity, and their operations if work is moved offshore. Their boards of directors and managements need to be aware of such risks – economic, social, and political. Some of the tenets they need to follow include: Foreign relationships must not hinder the SEC’s ability to examine a financial institution’s records. Critical information must be held in the bank’s U.S. office. Key documents must be available to the SEC in English. And they must not disclose nonpublic SEC information to the service provider. These concerns can be mitigated by several measures, such as continuously monitoring the service provider’s financial condition, instituting physical and data security controls, having business resumptions plans, buying insurance, and holding independent and internal audit reviews.

Savings are directly proportional to the number of people onshore and offshore – and on the improvement in the process.

Average ratios, onshoreto-offshore are 30-70 or 20-80.

Customers are very ROI and SLA driven. They ask us to lay out detailed technology roadmaps and development lifecycles. © SOURCING INTERESTS GROUP

Offshore is not 80% cheaper; that’s a myth, says Terdiman of Gartner. People are focusing too much on the salary of programmers, reasoning that if programmers cost $20 an hour, there will be an 80% savings. In actuality, savings are directly proportional to the number of people onshore and offshore – and on the improvement in the process. Typically, the savings are 25-50%, but that depends on how much of the work is actually done offshore. Generally, U.S. companies are slow to reach the optimal ratio. For each project, there is an optimal ratio by phase. In requirements, for instance, you need more people onsite. In the coding phase, though, most of them can be offshore. So the ratio changes over time. Average ratios, onshore-to-offshore are 30-70 or 20-80. In reality, most companies only reach 50-50 because U.S. managers like to see people onsite and some Indian firms are not as aggressive as they should be in pulling the work offshore. Other myths include (1) having to have the most highly qualified resources, (2) CMM Level 5 means the best quality, (3) high quality and low cost are the only things that matter, (4) offshore allows round-theclock development, and (5) security and intellectual property issues can be handled by maintaining the code and data in the U.S., says Terdiman of Gartner. Customers want a lot of certainty. “We are seeing more fixed price engagements,” says Desai of Syntel. “Customers are very ROI and SLA driven. They ask us to lay out detailed technology roadmaps and development lifecycles. This certainty, of course, is working in the cus1-13

tomer’s favor.” “In the past, customers paid providers to understand the problem, define the solution, then work out the roadmap. Today, customers ask us providers to understand the problem, determine a solution, and define how we will get them there – all before they will sign a contract. It’s like asking three architects to create three detailed sketches, and specify how the building will be built, before choosing one architect to work with,” says Desai. Given the competitive environment, providers are going along with this large up-front work, just to stay in the game. Some of this penchant for certainty has to do with companies going offshore for the first time.

Formerly, they were only doing pilots with 25-50 seats; the deals were $.5 million to $1 million in size. Now, the deals range from $5 million to $15 million.

“In the future, once customers see that offshoring works, we also expect them to accelerate their whole ramp-up to global delivery. Today, for instance, we might define four ramp-up steps, each taking three months. So total ramp-up takes a year. As they gain organizational learning, that ramp-up time will shorten,” says Desai. There is now a greater propensity among clients to outsource larger pieces of business. Formerly, they were only doing pilots with 25-50 seats; the deals were $.5 million to $1 million in size. Now, the deals range from $5 million to $15 million. “These larger deals now make up a significant part of our work,” says Kapoor of Exlservice. “This growth initially was mainly in call center work,” says Kapoor. “Now some companies also outsource call center work and back office work as an integrated service. Our differentiator is that we can service call centers and back offices together.”

Financial services companies seem to be taking the lead in moving their operations offshore

Little true BPO has been outsourced onshore.

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Global companies are looking at outsourcing their fundamental core processes because there is such a significant cost differential between onshore and offshore, says Kapoor of Exlservice. The large savings attract them to take additional risk with their core functions. Financial services companies seem to be taking the lead in moving their operations offshore. One example is a global investment bank. It is looking at moving support for its equity analysts to India because it sees a 60-70% savings. These support people will provide the equity analysts with the research they want on a company, graphics for a presentation, copyediting, and other support services. This investment bank can use someone in India for $30,000 to $40,000 a year rather than someone in the U.S. costing $150,000 a year. In fact, this bank is questioning and examining all its processes to decide which are candidates for offshoring. Credit card companies and banks are all moving their mainstream operations offshore. Little true BPO has been outsourced onshore. Companies have only experimented with processes at the periphery of their company, says Kapoor. But the opportunity to outsource full business processes offshore is enormous, and companies are looking at their core processes, not their periphery ones. Because these processes are proprietary and intellectual, companies believe they need to establish a strategic relationship with the offshore provider, rather than simply have a loose client-

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While the offshore component may be just one part of their service delivery model, it is one of the principle ways traditional outsourcing providers are able to reduce service delivery costs and offer financial savings to their prospective customers.

provider relationship.

Every deal will have an offshore component, and more and more functions will be performed offshore.

“In the coming years, I believe that the offshore component of major outsourcing transactions will become very commonplace. Every deal will have an offshore component, and more and more functions will be performed offshore. I think the economics will drive this,” says Masur. “The major U.S. outsourcing providers cannot afford to lose transactions to offshore providers, or to lag behind their competitors. If CSC is able to reduce its service delivery costs and obtain a competitive advantage by moving functions offshore, IBM and EDS will have to do so as well.”

They are also looking at strategic options for reducing operational risk, such as gaining equity in our company, forming a joint venture, or entering into an exclusive agreement.

Companies that outsource all or most of their IT generally use between two and five companies.

Global delivery and global sourcing will be integral to every enterprise’s sourcing strategy, says Terdiman of Gartner. The level of interest in offshore outsourcing is astounding. The reality is that offshore outsourcing is here to stay. As a result, the sourcing market is now global. Offshore is now part of most large outsourcing deals. “In large outsourcing deals, we find that traditional outsourcing service providers – such as IBM, CSC, ACS, Accenture, and other first and second tier service providers – increasingly look to offshore service facilities as part of their service delivery solution. While the offshore component may be just one part of their service delivery model, it is one of the principle ways traditional outsourcing providers are able to reduce service delivery costs and offer financial savings to their prospective customers,” says Masur of Mayer Brown.

Offshoring is seen as more strategic. “As offshore deals increase in size, our clients are asking us for ways to reduce their operational risk,” says Kapoor of Exlservice. “For instance, they ask us for pre-determined assistance in disengagement. Today, we negotiate the services we will provide when they plan to disengage, including allowing them to use some of our proprietary software during disengagement for a predetermined price. They are also looking at strategic options for reducing operational risk, such as gaining equity in our company, forming a joint venture, or entering into an exclusive agreement. To address these needs, we offer greater flexibility in our outsourcing contracts. We also look at ways we can offer our resources to help companies work with multiple suppliers.” The multiple partner model is today’s standard, says Marlin Mackey, senior vice president, Health Care, Insurance, and Retail at Syntel. Companies that outsource all or most of their IT generally use between two and five companies. If they do any offshore outsourcing, they have at least two Indian-based companies. They are guarding against single points of service failure, which is a good practice. You want more than one company and more than one location, just as you want more than one way to electronically access your applications. Incentives and bonuses are appearing, says Kapoor of Exlservice.

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“Until recently, clients would only agree on a price and impose penalties. Now, they are willing to pay incentives and performance bonuses when we exceed performance levels in the processes that can improve customer satisfaction, revenue, or sales. That is a major change.” “Clients are also asking us to work more closely with other suppliers. Generally, they have 2 to 3 suppliers, or one offshore and one onshore provider, whom they want to work together to coordinate back-up for each other. We have started doing this coordination on certain processes,” says Kapoor. At contract signing, we take pains to define and limit the space the client is obligated to provide to the provider.

Increasingly, clients do not have extra office space. In the past, clients would provide virtually unlimited office space to a provider. Not any more. Now clients say, “We are consolidating operations, we do not have additional space for your people.” “Thus, at contract signing, we take pains to define and limit the space the client is obligated to provide to the provider,” says Masur of Mayer Brown. “We may even require the provider to relinquish space at specified points during the term of the agreement.” “Our contracts specify in detail the square footage and location of the space to be provided to the provider at client sites – and that’s all that is available. In fact, we require the provider to represent and warrant that it will not need more or different space from the client to perform its contractual obligations,” says Masur. If the provider later needs more space, it will bear the expense of obtaining such space in the market. Global companies also want to set up captive locations for offshore BPO. To afford this, though, they must have significant scale, says Kapoor of Exlservice. Otherwise, the arrangement does not make economic sense. They are working out various business models. One is the build-operate-transfer model. In this model, the buyer outsources work offshore with the intention of growing the work to a certain scale, at which point, the buyer acquires the operation. “We just signed the largest U.K. insurance company on this model,” says Kapoor. “We will build the center, its capabilities, processes, and infrastructure. We will operate and grow it over the next 3 years. At that point, they will have the option to acquire the operation and run it. They believe they can run it themselves when they get to 2000 to 4000 employees. They want management control over that size of operation – and it is a core piece of their business.” Consider the social impact of your decisions. Getting the onshore/ offshore balance is challenging. Customers need to help the offshore providers remain viable because part of the customer role is to build a mutually beneficial business. “We need to help this industry grow up in the right way, with healthy competition. Don’t try to squeeze out every penny. In negotiations, work with the provider. They need a fair profit,” says Cooper-Bagnall of PA Consulting Group. Offshore outsourcing has a social impact. In India, for instance, IT outsourcing has created an elite class. One of the reasons the current economic downturn has not been felt so much domestically is because it is

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There are win-lose deals being signed because there is now so much focus on cost.

affecting Indian jobs first. The influence of buyers has become almost overwhelming. There are win-lose deals being signed because there is now so much focus on cost. The value is slipping away. The industry cannot continue down this path. There must be value on both sides. Long-term viability is a concern. “We need to pay attention to how our outsourcing is affecting others’ culture. Those thinking about outsourcing offshore need to visit the sites because we cannot separate the social side from the economic side,” says Cooper-Bagnall.

THE NEAR-TERM OUTLOOK Clients are handing over entire application development, including design and architecture, not just ADM.

BPO is significantly changing how people look at offshore.

Offshore outsourcing will continue to grow, even with geopolitical concerns.

Increasingly, outsourcing providers are willing to accept service levels for offshore work that are commensurate with those offered in onshore deals.

The terms of offshore deals are changing. Complete IT applications are now being offshored, says Vashistha of neoIT. Clients are handing over entire application development, including design and architecture, not just ADM. And whereas IT spending as a percent-of-revenue has declined, spending on offshore has doubled. Formerly, companies offshored projects. Now, they offshore three-tofive year deals. Hence, contract values are much larger – over $25 million. The deals are getting longer term due to BPO. BPO is significantly changing how people look at offshore. Most BPO work is call center, data entry, and business transaction processing. BPO is where longterm contracts are heading. People now see offshore as long term and no longer as getting a project done cheaper or faster, says Vashistha of neoIT. Offshoring will grow. Not only will more work move to Indian providers but U.S. outsourcing providers are also moving work to India as well, says Mead of Exlservice. ACS and Convergys have set up shop. Accenture and EDS are looking at establishing centers. When you ask them “Why?” their answer is that their customers are asking for it. Customers have heard offshoring is possible, the work is good quality, and it is lower cost. For these reasons, offshore outsourcing will continue to grow, even with geopolitical concerns. Companies just will not put all their eggs in one basket. They will retain some backup in the U.S. or another country. Customers will expect the same service levels, regardless of where the work is performed. Increasingly, outsourcing providers are willing to accept service levels for offshore work that are commensurate with those offered in onshore deals. The service levels, for the most part, will be no different whether the work is performed in New Jersey or New Delhi, says Masur of Mayer Brown. The market drivers have changed. Two years ago, companies looked offshore to get available resources because of labor shortages. Today, they consider offshore to cut costs or improve their return on investment. Next year, they will look offshore to reduce their time to market, speculates Terdiman of Gartner. The number of offshore development centers is increasing. In the

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Since the late 1990s, the trend has been to develop structured quality processes and establish Offshore Development Centers (ODCs), which provide fixed deliverables on either a project basis or a perpetual ADM basis.

Maturing delivery models have made ADM processes, custom application development, application integration, and call centers popular targets for offshoring.

BPO and IT will converge over the next few years as providers create endto-end solutions for business processes and their underlying IT support.

Having multiple choices is critical to healthy markets.

early days of offshoring, capabilities were limited to “body shop” activities. Most contracts involved temporarily augmenting IT staff. Since the late 1990s, the trend has been to develop structured quality processes and establish Offshore Development Centers (ODCs), which provide fixed deliverables on either a project basis or a perpetual ADM basis, says Vashistha of neoIT. A fast-growing trend now is the offshore movement of business processes, such as customer care, billing, collections, claims processing and various other back office functions. Offshore suppliers are moving up the value chain. Also in the late 1990s, offshore suppliers began to move up the value chain by adopting an onsite-offshore development model, with a percentage of supplier resources at the client site. This approach allows offshore suppliers to take on more complex projects because they can provide people who are involved in the strategy and IT architecture phases of ADM work, says Vashistha of neoIT. Maturing delivery models have made ADM processes, custom application development, application integration, and call centers popular targets for offshoring. Low-risk processes include maintaining mature, stable applications (including ERP) and developing large systems with well-defined specifications. Whereas these systems provide an ideal fit for offshore outsourcing, other capabilities, such as around-the-clock development, can be appealing for specific IT projects. For projects relating to specific industries, though, prospective clients need to carefully evaluate suppliers’ domain knowledge and actual experience. BPO and IT will merge. The trend to moving IT work offshore will lead to more component-based solutions and more packaged solutions. In fact, BPO and IT will converge over the next few years as providers create end-to-end solutions for business processes and their underlying IT support, says Desai of Syntel. Web Services, which provide services over the Internet, will play into this trend. Customers will see these services available at a click; but behind them will be enabling technologies and processes that handle customer requests. This scenario fits beautifully with the move to offshore outsourcing because customers will not care where each process is located. All BPO will be supported worldwide with a combination of onshore and offshore sites, says Jeff Rich, CEO of ACS. Demand is growing for the different kinds of BPO, and a variety of providers and approaches to delivery are arising. Having multiple choices is critical to healthy markets. There are now many locations for performing BPO work around the world. ACS, for instance has nine offshore sites, in Mexico, Ghana, India, Guatemala, Jamaica, and China. Processing for larger clients is often handled at multiple sites, to reduce geopolitical risks and enable disaster recovery. ACS categorizes processes into three basic levels of tasks, with over 25 task classifications divided among these three levels:

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1. Level 1 tasks are repetitive tasks. 2. Level 2 tasks involve rule-based decision making and problem resolution 3. Level 3 tasks are fully analytical tasks, research, and non-rulebased decision making. Many companies have domestic staff with Level 3 capabilities performing Level 1 and 2 tasks. When ACS takes on outsourcing work, its goal is to move Level 1 tasks offshore initially, and over time move certain Level 2 and Level 3 tasks offshore as well. It’s a natural migration, says Rich. Ultimately, domestic work should be performed by high-touch Level 3 people.

Once the infrastructure is in place, call centers and BPO can have 100% offshore people.

Growth potential is large, in some areas. One way to view the offshore market is to look at current penetration. Services that could potentially use the most offshore talent, but have the lowest current penetration, are call centers, BPO, and infrastructure outsourcing – the most recent offerings. These are the three areas of greatest opportunity, says Terdiman of Gartner, because there’s a lot more to sell in all three. They present the greatest cost leverage because they require fewer onshore people to manage large numbers of offshore people. For example, once the infrastructure is in place, call centers and BPO can have 100% offshore people. There is less opportunity in three other areas – application maintenance and management, application migration, and legacy application development – because, while they require a medium mix of onshoreoffshore people, the percentage of clients using offshore resources for these three services is already high. Four other services – new application development, enterprise application integration, implementation of application packages, and business integration – also represent smaller areas of opportunity because, while they currently have low penetration, they also require a far higher onshore resources. They present less leverage. Over time, the market will diversify. Most independent service providers in India have been call-center focused. EXL is an exception because it also performs end-to-end back-office-process outsourcing. Over time, though, other service providers will do both, says Mead. IT development is a completely different sector. It is a huge market. The success of that model – application development and maintenance (ADM) – and the good job Indian providers have done in managing IT, have had a positive effect on people’s perception of what can be done in India.

The economic slowdown has made customers move offshore faster, even though they are offering less work.

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What does future growth look like? Despite the geopolitical concerns surrounding the Indian subcontinent, interest in offshore outsourcing has tripled since September 11, 2001, says Terdiman of Gartner. The economic slowdown has made customers move offshore faster, even though they are offering less work. This trend portends a slowdown in the growth rate in the short term, which could lead to a provider shakeout. 1-19

Another factor affecting growth is mid-market adoption.

Competitive pricing has become too much of the focus.

Differentiation is a key in this market. The winners will have domain expertise that match their solution sets.

Another factor affecting growth is mid-market adoption. These firms are more conservative than the large firms, so they are not adapting to offshore as fast. Slow mid-market adoption could slow growth – or accelerate it. There’s too much focus on pricing. Competitive pricing has become too much of the focus. Not only are the least sophisticated users looking at outsourcing as a cost exercise, others are doing the same. They are not remembering that “you get what you pay for.” The result is that low-end IT services are becoming commoditized, says Terdiman of Gartner. To avoid continuing to compete on price, the offshore providers must transform their people’s skills and passions to do higher value work. The winners will differentiate themselves. In fact, rather than go global as many are thinking of doing, those that choose a niche tailored to their core competencies could have an easier time differentiating themselves. Differentiation is a key in this market. The winners will have domain expertise that match their solution sets. In this decade, every Global 2000 company will adopt the offshore trend. “What I am seeing offshore is now becoming mainstream. In fact, I believe that offshore outsourcing will be a significant component of every Global 2000 company’s business and IT outsourcing strategy,” says Desai of Syntel.

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2. COUNTRY CONSIDERATIONS OVERALL CONSIDERATIONS

Index: Overall Considerations India The Philippines China Russia Nearshore to the U.S. Other Countries

Decide on the offshore country first. That’s most important decision because most countries have a predominant composition of skills and capabilities, based on culture, economics, education, and language. Physical infrastructure, government policies, legal and political stability are also critical factors when considering a location, says Vashistha of neoIT. Diversification is increasing. India dominates the offshore marketplace, receiving 85-90% of the offshore revenue. The Tier 1 providers have been the top 20 in terms of revenue. But there is a shakeout, says Terdiman of Gartner. The Tier 1 players will be the top seven or eight providers. Geographic diversification is becoming an increasing issue. Even the U. S. does not feel safe these days. In fact, people wonder where safe sites exist. Even with these fears, companies are not backing off from using offshore providers. Instead, clients and providers are taking a global perspective to sourcing labor and facilities in the three major regions of the world – Asia, Europe, and the Americas. In general, India provides whatever companies need. Other sites will specialize. When looking at a country, evaluate at least nine factors, says Terdiman of Gartner: 1. 2. 3. 4. 5. 6. 7. 8. 9.

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Government support for the industry Labor pool (size and sophistication) Infrastructure Educational system (and growth of labor pool) Cost Process quality Cultural capability Legal system Globalization skills 2-1

Offshore now has Wall Street’s attention. Some 15-25 analysts now track offshore developments, and have created qualitative indicators by country.

Providers often put in redundant circuits, sometimes using alternate technologies (such as satellite), to deal with emergencies.

There are a myriad of country risks, which differ from country to country.

Country risks are more important to providers (or large users) looking to build facilities in a country than to buyers.

A country must have a telecom infrastructure, says Masur of Mayer Brown. Admittedly, some work is either not mission critical or not sensitive to telecom outages. If a call center goes down, for instance, the customer’s business does not go down. Similarly, if a customer’s HR records processing center cannot be accessed, the customer may be inconvenienced; but it not shut down. Even for these kinds of work, and especially for mission-critical work, providers often put in redundant circuits, sometimes using alternate technologies (such as satellite), to deal with emergencies. “I once represented an Indian ADM provider that outsourced its telecommunications needs to a global telecom provider. The parties agreed upon pre-priced packages of telecom services with defined service levels so that the ADM provider knew in advance what service levels, commitments and costs to build into its agreements with new customers,” says Masur. Mitigate country risks. There are a myriad of country risks, which differ from country to country, says Terdiman of Gartner. They include lack of government support for providers, poor English skills, political instability, poor infrastructure and educational system, incompatibility with the buyer country’s culture and legal system, low or poorly skilled labor pool, and quality of business processes. In many ways, country risks are more important to providers (or large users) looking to build facilities in a country than to buyers. For either, there are many sources of information about these marketplaces. Ways to mitigate country risks include creating scenarios around the most likely or most damaging ones, and planning responses. Look to the World Bank, INS, OECD, and the International Monetary Fund for information about countries. Look to the Indian trade association NASSCOM, and others for offshore market information. And, again, disperse offshore sites among countries. Mitigate geopolitical risks. Geopolitical risks relate to doing business in another country. They include currency uncertainty, government policies, religious strife, relationships between countries, terrorism, and such, says Terdiman of Gartner.

Insist on geographical dispersion among your offshore sites – either throughout a country or perhaps throughout a region.

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One example is increased tensions between two countries. Such tensions can result in travel advisories or restrictions on travel, added regulatory hurdles, increased uncertainty, and increased business continuity planning costs. There are several ways to mitigate these geopolitical risks. One is to insist on geographical dispersion among your offshore sites – either throughout a country or perhaps throughout a region. Some Indian providers now have operations in Latin America. That much dispersion helps calm nerves. 2-2

Have a coordinated sourcing strategy that uses onshore, nearshore, and offshore sites.

Create some scenarios. Envision different levels of geopolitical risk, estimate the probabilities and effects of each, and then devise action plans.

Develop business continuity plans with the provider and your business users.

Clients should have their auditors regularly audit their providers’ financials.

There are shifts occurring in the offshore resource base and the kinds of value offshoring offers. Providers are repositioning their resources worldwide.

It’s best to mitigate the risk by using multicountry or multi-location delivery centers. Don’t divide a project between centers, but do consider dividing work by technology or business group. © SOURCING INTERESTS GROUP

A second mitigation step is to have a coordinated sourcing strategy that uses onshore, nearshore, and offshore sites. For the U.S., Canada and Mexico are two nearshore possibilities. Yet a third mitigating strategy is to create some scenarios. Envision different levels of geopolitical risk, estimate the probabilities and effects of each, and then devise action plans for those with the most serious consequences that are the most likely to happen. Revisit the scenarios when new risks become known or change in likelihood. Fourth, develop business continuity plans with the provider and your business users to address the most likely or most costly risks. It is unreasonable to expect providers to be solely responsible for business continuity. Users need to become more responsible, says Terdiman. Manage the risks of changes in global dynamics. These risks center around changes in the offshore outsourcing industry and in the economic and political situations in provider countries. Furthermore, provider consolidation is going on, and it will continue. It’s important for clients to make sure their provider is stable, says Mackey of Syntel. Audit financials regularly. Clients should have their auditors regularly audit their providers’ financials. This need came to the fore recently when a major Indian provider went bankrupt, catching many clients unaware. The provider had to sell off its contracts. The best advice is to perform as much due diligence as you can. “Our financials are published on our Website,” says Mackey. “Some of our clients have had their auditors sit with our CFO and go through our data, rather than take our financials at face value. That’s a good practice.” Keep abreast of the shifting offshore landscape. There are shifts occurring in the offshore resource base and the kinds of value offshoring offers. Providers are repositioning their resources worldwide. Those that have lagged in moving offshore are now trying to get foothold in India and elsewhere, often by forming joint ventures. Be wary of being a first client. Providers are also “jockeying for position” in different areas, sometimes offering loss leaders to gain clients. Be sure the proposed value proposition is sustainable. Limit your exposure to the political climate. On the geopolitical front, the perceived risks of tensions between India and Pakistan are greater than the real risks. The more India becomes an IT provider, the less likely they will disrupt their economy with military tensions. In essence, they cannot afford it because American companies will pull out their offshore work. Even so, it’s best to mitigate the risk by using multi-country or multilocation delivery centers. Don’t divide a project between centers, but do consider dividing work by technology or business group. Also have a hot-site standby, perhaps in the U.S., and have a rapid deployment or relocation capability. “If we lose all three of our Indian sites, we can continue core services within 48 hours in the U.S. That’s 2-3

the worst case. We can also move our people among our three Indian centers rapidly – and even to elsewhere in Asia. Usually, companies would need to continue their critical applications at a back-up site for 30 days,” says Mackey. Keep an inventory of where expertise exists. In IT, developers move around.

Updates are on our Website, but we have, on occasion, e-mailed them to clients.

Have a knowledge base directory. This is an inventory of where expertise exists. In IT, developers move around. Even when they leave a job, they retain some of that knowledge, so it’s important to know where they are so that you can send them to a hot standby, if needed. “We have such a knowledge base of our people, and we provide it to our clients via the Web. So each client knows the name of the experts working for them,” says Mackey. Obtain 24-hour-a-day news updates from delivery centers. When there are political and military tensions anywhere in India, we keep a running update from India. In 2002, for example, we described the escalation, and de-escalation, of tensions between India and Pakistan. The updates are on our Website, but we have, on occasion, e-mailed them to clients. We have identified triggers that tell us when a problem is real,” says Mackey. Dozens of countries are working to copy India’s success, says Peterson of Mayer Brown, with Russia, the Philippines, and China as likely leaders. •

The Philippines has great advantages in call center work for U. S. companies because the decades of U.S. involvement have produced both strong English-language skills and an understanding of U.S. culture and idiom.

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China’s 1.3 billion people and technical skills could, with the right government policies, become a significant force.

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Russia’s strong math and science education make it a likely winner in scientific applications, but it is hampered by the lack of English language skills.

Countries are specializing based on their different capabilities and their ability to scale up, says Terdiman of Gartner:

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India offers just about everything, and will be the only country to do so. It offers application outsourcing, ITO, BPO, product development, and contact centers. Like Russia and China, India also has huge scale possibilities.

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The Philippines specializes in BPO, contact centers, animation, and application development.

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China is specializing in embedded software, hardware services, localization, and application development. Like Russia, it has huge scale possibilities.

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Russia is specializing in high-end software engineering, and has huge scale possibilities.

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Canada is specializing in application development, BPO, and contact centers 2-4

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Northern Ireland specializes in packaged applications, localization, and product development. But with only 2000 graduates a year, it does not have scale possibilities.

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Israel specializes in high-end software and learning systems.

A challenge for offshore providers is translating the value of their quality process designations to buyers. Most Americans do not understand Level 1 of the Software Engineering Institute’s (SEI’s) Capability Maturity Model (CMM) for software development and maintenance, much less Level 5. They do not understand what the certifications truly represent, so they do not know the importance of using a Level-3 firm versus using a Level-5 firm, or whether an ISO certification is a better guide. They also wonder, “How can all these Indian firms be at CMM Level 5 when no one in the U.S. is at Level 5?”

Buyers need benchmarks across many firms; metrics from one provider are not sufficient.

We are increasingly going to see Tier 1 global players trying numerous collaboration techniques – from working directly with offshore providers, to forming joint ventures, to buying entry into a country.

Much of offshore is moving into system integration and consulting. They are not likely to move into strategy. © SOURCING INTERESTS GROUP

The providers’ message should be: The quality level is the way to get invited to the dance. Indians then need to explain how a Level 5 designation in an Indian firm will impact the buyer – and there are impacts. While the designation may mean that the buyer has lower costs and fewer defects, it can also require changes in the buyer’s application development operation, says Terdiman of Gartner. Buyers need benchmarks across many firms; metrics from one provider are not sufficient. RFPs can present a problem as well. Some offshore firms do not answer the questions, which makes comparing their answers difficult. The offshore providers are not household names. One of the challenges confronting potential offshore clients is that the companies in India, Russia, Mexico, and elsewhere are not familiar to Americans. The Indian firms, such as Wipro, Infosys, and TCS, are increasingly moving into the U.S. for marketing and business development. But they are not yet household names, says Terdiman of Gartner. In addition, an increasing number are engaging in cross-border collaboration. U.S. and global external service providers (ESPs) now have partners or have 50-50 joint ventures where they jointly go to market. In the case of Deloitte Consulting and Mastek, Deloitte handles the front end marketing and business development while Mastek handles delivery. CSC and HCL have six partners between them. We are increasingly going to see Tier 1 global players trying numerous collaboration techniques – from working directly with offshore providers, to forming joint ventures, to buying entry into a country. At the moment, everyone is experimenting with different collaboration models as the market evolves, says Terdiman. The global provider landscape looks busy these days because the providers are not only searching for their business model and focus (strategy? consulting?) but some are considering expanding their offerings, and figuring out where offshore fits. Much of offshore is moving into system integration and consulting. They are not likely to move into strategy, even though there is talk about that. 2-5

INDIA India has a labor force of 439 million people. Its outsourcing industry size is $6.9 billion with 900 export-only companies employing 415,000 professionals. Typical IT salaries range from $5000 to $12,000 per year, while a typical BPO salary is $3500 to $7500 per year, states neoIT’s April 2003 Mapping Offshore Markets report.

BPO, ASP, and collaborative opportunities are set to explode. These areas are important because they are higher value services and they are repeatable offerings in various vertical markets.

But there are weaknesses. Infrastructure, cultural differences, and distance from the U.S. are three.

To offset India-centric concerns, Indian providers are establishing backup and contingency centers in such places as Eastern Europe and Uruguay.

Large U.S. domestic companies with limited international business that want to tap India generally go with an outsourcer. © SOURCING INTERESTS GROUP

India is the undisputed leader, says Terdiman of Gartner. It has a solid history in software development, its people are proficient in English, and India has government support and cost advantages. India has the opportunity to create global brands; NASSCOM has played a role in putting India Inc. on the map. It can also expand its existing relationships, serve the Chinese domestic and export markets, and leverage its relationships in the west to access Asia-Pacific or Middle East markets. BPO, ASP, and collaborative opportunities are set to explode. These areas are important because they are higher value services and they are repeatable offerings in various vertical markets. In short, all the buzz about India is valid. Lots of new providers are appearing in the BPO and call center space. Existing providers are expanding into these areas as they try to figure out whether or not American buyers will buy ITO and BPO from the same supplier. But there are weaknesses. Infrastructure, cultural differences, and distance from the U.S. are three. Also India has poor globalization skills, its legal system can be challenging, and it has little business process expertise. Insane price competition ($11.50 an hour for programmers) is leading to commoditization of application maintenance and call center work – much as has happened with data center outsourcing in the U.S. At the moment, the threats or risks include competition for internal resources, regional geopolitical uncertainty, rising labor costs and competition from other countries, strong nationalism, piracy, and government policies. India’s biggest threat in offshore outsourcing actually comes from its neighbor, China. To offset India-centric concerns, Indian providers are establishing backup and contingency centers in such places as Eastern Europe and Uruguay. They want to be truly global. Companies that know India have been the first to move work there, says Mead of Exlservice. Increasingly, non-US banks are doing offshore processing. Hong Kong and Shanghai Bank (HSBC), for instance, uses India because it knows India. HSBC has been in India for 150 years, so it knows how to set up businesses there. GE also knows India, which is how it could keep the work in-house yet perform it offshore. Large U.S. domestic companies with limited international business that want to tap India generally go with an outsourcer. They want to be in India but they do not have the “bandwidth” to establish their own operations there. Those who can do it themselves do. American Express, for instance, has its own facilities, but it also uses outsourcers realizing it cannot do all the work itself. It is often advantageous to offshore with someone who knows the culture, language, local employment markets and such. 2-6

Any country with a reasonably good education system, a low cost of labor, and a reasonably stable government is a promising candidate for offshore sourcing.

India faces stiff competition from other countries. Because of the rising labor costs in India, companies are now looking to China and other countries with even lower costs, such as the Philippines and Costa Rica. Any country with a reasonably good education system, a low cost of labor, and a reasonably stable government is a promising candidate for offshore sourcing, says Masur of Mayer Brown, assuming it is not on a fault line for earthquakes or prone to other natural disasters. Competition in India is intense. Two years ago, there were 1200 offshore providers in India. Now the number smaller, with the small and midsize firms having been hurt the most. The economic slump in the U. S. and elsewhere has accelerated moving work offshore, causing the Indian market to mature faster than expected. Between 1999 and 2001, the market grew 53%, says Terdiman of Gartner.

The multi-national providers are moving into India, which is neutralizing the locals’ price advantage.

Consolidation is already occurring. The result is increased polarization between the Tier 1 providers and everyone else, because the big are getting bigger and stronger. The larger providers are growing 30-40% a year. One reason is because there is a shift to the larger more stable providers for fear that the intense price competition is going to hurt the marginal players – and that could very well happen. In addition, the multi-national providers are moving into India, which is neutralizing the locals’ price advantage. The mid-tier may succeed, but they are being squeezed. Their sweet spot is specialization. And, as niche providers, they can do just fine. There are top five satisfiers in Indian offshore outsourcing, says Terdiman of Gartner. First and second, customers say they receive great quality at a good price. Customer satisfaction is extremely high – presuming, of course, the customer is knowledgeable and chooses a good provider. It is anyone’s guess how long this high satisfaction level can be maintained as deals get larger. Third, customers also are highly satisfied with the technical skills of the offshore providers, and, fourth, with the passion and commitment to the work. Three to four years ago, this passion and commitment were not there; so it has improved considerably. Fifth, customers are pleased that the work is allowing them to improve the quality of their systems. India will remain a leader in IT. But the race for BPO is wide open. Most offshore work is going to India, but other countries – Russia, China and Philippines – are starting to handle data entry, call center work, and application development. India will remain in a major offshore position in IT, although other players will rise. India has the labor pool and it has been handling outsourcing for 15 years, so it has companies with offshore maturity. The Philippines is doing very complex business processes and can be a leading BPO destination, says Vashistha of neoIT.

Generally, Americans do not know what “cultural differences” means, so they are not prepared for them. They need to be. © SOURCING INTERESTS GROUP

The biggest challenge in working with an Indian provider is cultural differences, says Terdiman of Gartner. Generally, Americans do not know what “cultural differences” means, so they are not prepared for them. They need to be. The differences even vary by region. 2-7

One example of a cultural difference is body language. When Indians nod their head up and down, they do not mean “we agree.” They may mean, “we hear what you said” or even “we do not agree but in our culture we do not confront you by saying ‘no.’” Another cultural difference between American and Indian cultures is the means of delivering bad news. Indians will not say “no” nor disagree. They will say “yes” and later state their view in a written document. That view may not be what the Americans understood. Americans can get frustrated, believing they have reached an agreement when, in fact, they have not. A number of Indian firms are now doing their own cultural training to mitigate this disconnect. Indian development teams will not question or be proactive.

The major issues are how these differences manifest themselves in negotiations, communications, and work ethic.

Even though Indian firms want to be global, most are India-centric. Their decisions are made in India, and may not fit the way other countries operate.

Global delivery means having a methodology for shifting work among two to four places around the globe in response to changes in needs or geopolitical developments. © SOURCING INTERESTS GROUP

A third cultural difference is subservience. Indians are great at execution. They are not strong at innovating or creating new insights. Americans need to understand this difference and not have the wrong expectations. Americans often want the outsourcing team to present new ideas and challenge the domestic team, asking “Why are you doing X that way?” Indian development teams will not question or be proactive. They live in a subservient culture. Those Indian firms that are being more proactive in offering new ideas are getting more business. Few providers address these cultural differences well, or close the gap. Indian providers play down the cultural differences when, in fact, these differences should be highlighted, recommends Terdiman. The major issues are how these differences manifest themselves in negotiations, communications, and work ethic. A challenge for Indian providers is going global, says Terdiman of Gartner. Even though Indian firms want to be global, most are Indiacentric. Their decisions are made in India, and may not fit the way other countries operate. Marketing is a good example. Most Indian firms are not good at marketing because they have not hired domain expertise. To market to U.S. firms, for instance, they need people who have worked in U.S. firms and can properly frame the value proposition their domain expertise offers. The marketing people must also understand the business culture of the industry they are marketing in. For example, Syntel has done a good job of hiring industry experts to create offshore practices for the customer relationship and sales and marketing industries. When offshore salespeople do not understand a user’s business, they do not provide Americans with a strong message. And they are not convincing on the benefits of globalization. Branding is going to be key to going global. The offshore providers must become much stronger in branding. Another aspect of going global is global delivery. All the providers need to become stronger here. Global delivery means having a methodology for shifting work among two to four places around the globe in response to changes in needs or geopolitical developments. Most outsourcing buyers do not realize they will need to have “global intimacy” with their provider so that the provider understands the buyer’s business well enough to make such shifts properly. 2-8

Another challenge for offshore firms is expanding the culture of their firms. Some are very “techie” oriented. They need to add a service mindset. This front-end culture is lacking in many Indian firms. Work is performed primarily at night. Almost all EXL call center work is performed at night, which is daytime in the U.S. That’s a fundamental tenet of the work. Employees work through the night. The prime shift starts at 7:00 a.m. U.S. eastern time (5:30 p.m. in India) and ends at 11 p.m. East Coast time (9:30 a.m. India time), says Mead. Many U.S. companies shut down their back-office systems at night. So Indian outsourcers try to find processes that can be done offline for their clients, to use their own systems in India during their day.

THE PHILIPPINES

Leading global companies are using the Philippines as a BPO destination for performing complex business processes.

The Philippines workforce is highly skilled in business and IT, and it has a “service” rather than “techie” mindset.

the Philippines will expand into direct services, rather than subcontracting. Although it could partner with global service providers, it might also create a country brand.

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The Philippines has a labor force of 32 million people. Its outsourcing industry size is $1 billion, with more than 1000 companies employing 290,000 professionals. Many Philippine companies have not focused on SEI-CMM, but some ISO certifications do exist. As a general rule, Philippine companies consistently deliver better quality BPO than ITO engagements. Average IT salaries range from $5000 to $10,000 per year. Average BPO salaries range from $3000 to $8000 per year, states neoIT’s April 2003 Mapping Offshore Markets report. Look out, here comes the Philippines. Leading global companies are using the Philippines as a BPO destination for performing complex business processes. Some of these processes include accounting and financial reporting, technical customer support, employee services, expatriate management, account payables, and travel management. Many companies, such as P&G and ChevronTexaco, have their Asia/Pacific shared services centers in the Philippines, says Vashistha of neoIT. The Philippines is focusing on call centers, says Terdiman of Gartner. It has established a call center academy; it will excel there. The people have good English language skills, an affinity with U.S. culture, and government support. All three are pluses. The Philippines workforce is highly skilled in business and IT, and it has a “service” rather than “techie” mindset. So the labor pool is low cost and high quality, and the infrastructure is being put in place. It is expected that the Philippines will expand into direct services, rather than subcontracting. Although it could partner with global service providers, it might also create a country brand. But, the Philippines is not really aware of its advantages, so its people are migrating to the U.S. instead of staying in the Philippines. The Philippines also lacks an IT development association, and it may not be able to scale as well as its Asian neighbors. Finally, it is not adept at marketing nor does it have experienced management teams to run operations. 2-9

It is likely that the Philippines will continue to be overshadowed by India. It will face increasing competition from China. It may suffer from a perception of political instability, and the government may not be as helpful in incentives and tariffs as it could be.

CHINA

China’s overall outsourcing climate is currently low.

China has a labor force of 734.3 million people. Its 5000 software companies employ some 200,000 professionals. China’s IT services market, measured by revenue, is expected to total $4.9 billion in 2003, an 18.1% hike from 2002. This growth is likely to continue at a compound annual growth rate (CAGR) of 19.6%, doubling the value of the country’s technology services market to $8.9 billion by 2006. China’s growth rate is second only to India’s, states neoIT’s April 2003 Mapping Offshore Markets report. China’s overall outsourcing climate is currently low. For one thing, language and cultural compatibility present barriers to successful outsourcing engagements. With the support of the Chinese government, though, China should be a more attractive offshore location in five to ten years.

China is building information networks at a scale ranked second in the world.

Infrastructure is a problem outside the IT zones, and telecom can be a challenge in many cities. Today, China is building information networks at a scale ranked second in the world (the United States is first). Telecommunications, especially, has skyrocketed in recent years, with China claiming 30 percent of the world’s mobile phone marketplace in addition to the fixed-line infrastructure. Despite the fact that China’s boundaries span five time zones, all of China operates on a single time zone, notes the neoIT report.

Labor rates are very low and present a very attractive value proposition.

Strengths include political stability, strong government support, a huge market, non-Latin language skills, 20-40% cheaper rates than India, strong Linux skills, and attractiveness after joining the World Trade Organization. © SOURCING INTERESTS GROUP

Universities provide a source for excellent technical talent, and produce approximately 50,000 new graduates each year. Unfortunately, many migrate to western pastures. Labor rates are very low and present a very attractive value proposition. Think India 10 years ago – low-cost workers and lots of them. Typical IT salaries range from $3000 to $8000 per year. In China, it’s a buyer’s market. Software companies are in China now, not because of labor quality but because it is a buyer’s market. Simpler work that can be done in India can also be done in China, but scalability and value chain growth will take time, says Vashistha of neoIT. Chinese companies have a higher IT spend than Indian companies. Software companies realize that having a presence in China not only lowers their costs but gives them a marketing office to Chinese companies as well. China is a caution today but it could give India a run for the money. Its strengths include political stability, strong government support, a huge market, non-Latin language skills, 20-40% cheaper rates than India, strong Linux skills, and attractiveness after joining the World Trade Organization, says Terdiman of Gartner. 2-10

The education level and English language skills are low. They lack processes and are not known as innovators.

But China does have weaknesses. Intellectual property protection is nil; piracy is rampant. The education level and English language skills are low. They lack processes and are not known as innovators. Their IT firms are small, they are weak marketers, and they lack global brand names. Furthermore, they do not have a capitalist culture. Threats include distrust of the legal system, the U.S. perception of China, their slow development of business relationships, corruption, shortage of IT resources, and internal opposition to WTO reforms.

RUSSIA Russia has a labor force of 72.6 million. The outsourcing industry in Russia is between $250 million to $350 million in size, with 100 companies employing 8000 professionals, states neoIT’s April 2003 Mapping Offshore Markets report. ISO adoption is widespread but only 3 SEI/ CMM certified companies exist.

ISO adoption is widespread but only 3 SEI/CMM certified companies exist. Top managers typically have a level of proficiency in English. Mid-level and lower-level staff have less proficiency. This can be an issue, but if carefully monitored, can be managed through language training. A typical IT salary ranges from $6000 to $10,000 per year, or $10 to $40 per hour, depending on required skills and project size. For specialists employed in programming, costs range from $380 to $1200 per month; for managers, including project managers, the range is from $700 to $1900 per month.

Russia has an ample workforce with scientific, engineering, and mathematical knowledge, and an elite university system.

Russia could be a terrific provider of IT services, especially complex services. But it faces so many challenges that this might not happen, says Terdiman of Gartner. Russia has an ample workforce with scientific, engineering, and mathematical knowledge, and an elite university system. It is capable of solving large, complex problems, and it has low labor rates. It is close to Western Europe, and eight hours from the U.S. A reverse migration from Europe and the U.S. would increase its capabilities. At the moment, though, the brain drain of high-tech people continues from Russia. The Russian outsourcing industry has no government support and few business skills – in contracting, marketing, business processes, quality, finance, or strategic planning. The country has cultural differences from the West and low English proficiency, and there is low venture investment. Russia’s track record in global markets is poor and it likewise has a poor reputation for management and politics. Finally, it offers little protection for data and intellectual property. Even so, Russia could emerge as an alternative to India and it could provide technical innovation. It could even move into managing projects, not just doing body shop work, especially in engineering and mathematical applications. One new development is the creation of an umbrella organization, the National Software Development Association, to promote Russia’s services abroad.

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NEARSHORE TO THE U.S. Nearshore outsourcing is being considered more seriously. Companies need to pursue a global services strategy and make appropriate use of onshore, offshore, and nearshore resources says Vashistha of neoIT. September 11th changed people’s outlook on how they conduct business. Political and geographic issues became higher considerations. U. S. executives formerly knew it was not safe elsewhere, but they were lulled into not worrying about such issues during the 1990s. September 11th made nearshore important. Nearshore – Canada, Mexico, and the Caribbean – have a lower threat profile, they have good communication infrastructures, and they are relatively lower cost.

Companies that do a lot of offshore work need to take a global view of how they manage their services – looking for the cheapest sources of supply and backup. Nearshore – Canada, Mexico, and the Caribbean – have a lower threat profile, they have good communication infrastructures, and they are relatively lower cost. While offshore increases one’s risk threshold, nearshore can be part of a good backup plan – or be the best option for companies with a lower risk threshold. “We will see the fortunes of Canadian outsourcing firms rise. They will get a percentage of call center work and backup plans,” says Vashistha of neoIT. “Furthermore, companies are likely to use Canada for discrete, critical projects. They will pay more than for India and other lowwage locations, but the work will be close to home. But we rarely see companies using Canada as a stepping stone to going further offshore.” Canada and Mexico are becoming nearshore options. Mexico does a lot of work for GE, IBM, and CSC, so there may not be much left for other companies. Canada is a particularly good nearshore option, says Terdiman of Gartner.

There are some 14,000 call centers in Canada with six or more agents, employing 500,000 people in all.

Outsourcing to this nearshore nation will not save a lot of money, but it will not present many headaches either.

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Canada has become a location to which many are looking, especially for call centers. Canada offers many advantages, including the value of the Canadian dollar against the U.S. dollar, substantially lower labor costs, the availability of English speaking workers, and the presence of such workers in U.S. time zones – all positive nearshore outsourcing factors, says Masur of Mayer Brown. Canada has a labor force of 16 million people. It’s outsourcing industry size is $62.3 billion There are some 14,000 call centers in Canada with six or more agents, employing 500,000 people in all, states neoIT’s April 2003 Mapping Offshore Markets report. Canada is considered a very safe nearshore alternative. Outsourcing to this nearshore nation will not save a lot of money, but it will not present many headaches either. It is a good option for companies that are ready to expand outsourcing initiatives to locations outside of the US, but are not yet ready to fully manage a more traditional offshore location like India or the Philippines, notes the report. The typical salary is $28,000 a year, with labor rates ranging from $22$37 per hour for IT employees. 2-12

OTHER COUNTRIES Mexico’s proximity to the U.S. and participation in NAFTA positions it as a strong nearshore option for U.S. companies. The wage structure is very attractive but there is a lack of government support, low language capabilities, and a lack of investments in quality certifications and infrastructure, notes the neoIT report.

Ireland’s outsourcing industry is $9.8 billion.

Stability, English proficiency, cultural compatibility, and quality processes are Ireland’s selling points.

Ireland has a labor force of 1.8 million people. Ireland’s outsourcing industry is $9.8 billion. More than 850 companies employ 30,000 professionals. Over 140 overseas software companies employ 15,000 people. The country graduates only 5000 or so technical graduates a year. Additionally, U.S. companies such as Dell, IBM, and Microsoft, with development centers in Ireland, are increasing competition and the cost of labor. This combination makes it difficult for companies to scale up fast. Like Canada, Ireland offers a lot of peace of mind, states neoIT’s April 2003 Mapping Offshore Markets report, but Ireland is lacking if the primary objective is cost savings. Stability, English proficiency, cultural compatibility, and quality processes are Ireland’s selling points. Its nearshore location for European shared services centers is ideal, but with a small (and talented) labor pool, the large multinationals are eating up this market quickly, saving little resources for the other, smaller and slow-to-move firms. Labor rates are attractive compared to the USA. Typical IT salaries range from $25,000 to $35,000 per year. Still, other countries are entering the offshore marketplace as viable options, states neoIT’s report Malaysia has a labor force of 22 million people and a low wage structure. It is a good location for smaller operations, but scaling up can be difficult. This market will definitely be a better prospect over the next five years. Singapore is one of the leading locations for Asian headquarters for many global firms. Its high-quality telecom infrastructure and good technical talent have also made it a preferred destination for data centers. But compared to other Asian locations, Singapore is expensive. Latin America. Companies that are risk averse and looking to lower geo-political risk, or are especially interested in satisfying Spanishrelated needs, will find Latin countries good alternatives.

© SOURCING INTERESTS GROUP

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3. ABOUT THE SPONSORS This report has been sponsored by the following four sponsors: •

Exlservice

Exlservice

•

Mayer, Brown, Rowe & Maw

Mayer, Brown, Rowe & Maw

•

neoIT

•

Syntel

Index:

neoIT Syntel

The following descriptive information was provided by the report sponsors.

© SOURCING INTERESTS GROUP

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Exlservice Inc – An overview

Corporate Background Exlservice, Inc. (www.exlservice.com) provides integrated BPO solutions covering back office processes as well as web based and voice customer care, to global corporations (primarily in the US and UK) from its three operations centers in India. The company was incorporated in the US in April 1999 and formally opened its India operations center (call center services and back office) in October 2000. It began with a 500 seat/shift, state of the art facility at Noida, situated on the outskirts of Delhi, the capital of India. Its second center was opened in December 2001 and third center in July 2002, taking its total installed capacity to 4,500 seats on a three-shift basis. The company is positioned as a scalable, people driven organization, supported by state-of-the-art infrastructure, tested Six Sigma based processes and a relentless focus on quality. In November 2002, Oak Hill & FT Ventures along with EXL management team bought out the entire equity of Exlservice Inc. from Conseco Inc., which had acquired the company in August 2001 from the original promoters. With the change in ownership and simultaneous additional funding, EXL’s financial position has been strengthened further. EXL currently maintains over $15 million (USD) in cash on the balance sheet along with three fully funded facilities. EXL is well positioned to fund its entire growth over the next several years and provide innovative operational structures for its clients without having any need for external sources of capital. EXL’s experience base allows it to migrate processes from client site with minimum lead-time and ensure that processes are delivered correctly the first time, every time. With over 2,000 employees and significant operating capacity, EXL has ability and critical mass to scale up to meet client needs in a short period of time. Further expansion in other geographies are pending and will but operation soon.

EXL’s strengths and value proposition As one of the largest providers of outsourced business services from India EXL offers end-to-end integrated solutions from migration, multi-process management to continuous process improvement. Our solutions extend beyond delivering integrated remote services. It extends to a partnership that continuously improves the processes over time; exceeding expectations of customer service and helping the client stay focused on the core business. We realize how important it is to understand our clients’ unique business needs and develop customized solutions that are sensitive to their culture. EXL has an edge over its competitors due to the following differentiating factors: • • • • • • • • •

We are the only large market facing provider of complete integrated back office and customer contact services in India Our proven, wide process experience from having successfully migrating and managing over 80 back office processes. Our demonstrated excellence in customer service, transactions processing, accounting and collections processes Our rigorous implementation of our proprietary outsourcing and service methodologies Our track record of setting and meeting aggressive timelines in implementation of migration projects Our highly effective quality assurance and process improvement programs that are based on Six Sigma methodologies Our commitment to customer service with dedicated relationship managers in US/UK and our focus on building durable partnerships Our highly experienced management team We are owned by Oak Hill Capital Partners and Financial Technology Ventures in partnership with EXL management - this ensures access to capital for future growth and commitment of key management personnel

The copyright in this work is vested in Exlservice Inc. The contents of this document must not be reproduced, in whole or in part, or used or disclosed without the prior written permission of Exlservice Inc.

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Exlservice Inc – An overview

• • • • •

We are a Delaware incorporated company with all contracts signed under US or UK law Our highly scalable operations with organized recruiting, training and incentive programs Our secure and reliable telecommunications infrastructure with co-located earth station Our superior state-of-the-art infrastructure and facilities with planned build out of a fourth center in South India planned for 2003. We provide competitive and flexible pricing structures

Service Offerings EXL’s primary strengths lie in the vertical markets of Insurance, Accounting, Banking, Finance and Technical Support. Having handled over 80 different types of back office processes falling in the above-mentioned verticals over the past two years of operation, EXL has the ability to service similar types of processes. The following are representative of the range of processes that EXL provides to its clients: Back Office Processes •

Insurance and Accounting Services (USA) - Processing transactions related to contracting, license issuance, related correspondence, renewals & terminations, commissions, pay-off & debt management for sales agencies of the insurance company - Setting up and administering new insurance accounts in the systems including Pre-screening / reviewing of applications, application of initial premium to contract accounts, correspondence to transferring companies requesting for funds, writing and assembling of contracts, issuance, processing of refunds etc. - Administering policies including changes of title, address, premium accounting, loan adjustments, day end balancing, withdrawals, transfers, claims processing, related correspondence, and settlement

•

Insurance and Accounting Services (UK) - Handle data migration across dissimilar applications for claims processing - Workflow queue administration by scanning and indexing for claims processing

Accounting Services •

Insurance and Accounting Services (USA) - Preparing reconciliation for specified accounts in standard template (e.g. Unapplied Cash Account, Suspense Account) - Research specified accounts for reconciling Items (General Ledger to General Ledger & General Ledger to Administration Systems) one time clean-up oriented research (e.g. Research Un-reconciled Suspended Policy Accounts followed by Termination or Renewal)

Overdue Payment Collections •

Banking and Financial Services (USA) - Collecting overdue payments from customers for home equity (1-29 days), manufactured housing mortgage (1-89 days), retail credit card (1-119 days) & computer finance (1-60 days)

The copyright in this work is vested in Exlservice Inc. The contents of this document must not be reproduced, in whole or in part, or used or disclosed without the prior written permission of Exlservice Inc.

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Exlservice Inc – An overview

Customer Contact Services Customer Service •

Banking & Financial Services (USA) - Handle customer queries regarding loan balance, payment information, and terms and conditions for mortgage, home equity, and retail card services - Service requests like change of address, dispatch of application forms

•

Insurance and Accounting Services (USA) - Handle customer queries regarding policy details, premium information, face amounts on existing policies and clarifications regarding terms and conditions of in-force policy for life, health and annuity insurance products - Service customer requests like change of address, policy change/amendments/ renewals, dispatch of application forms for termination, loan against policy, claims processing etc. for life, health and annuity insurance products - Handle insurance agent’s queries regarding licenses, contracts, outstanding commissions, etc. - Providing sales support to insurance agent with queries regarding current and impending sales to new clients

•

Insurance and Accounting Services (UK) - Handle New Business quotes for Motor, Household and Travel insurance - Inbound customer service for Inforce administration including premium, changes, benefits and maintenance - Inbound Welcome call for renewals and quote acceptance - Inbound calls for customer and supplier requests for claims on Motor Service - Inbound claims notification, claims fulfilment for Households insurance - Handle inbound calls for claims from third party customers

•

Technical Support & Others (USA) - Provides technical customer support for home & small business for a computer manufacturer

•

Online Gift Catalogue Retailer (USA) - Processing initial order over the phone and handling inbound order fulfilment

Outbound Telemarketing/Sales Initiatives •

Banking & Financial Services and Insurance (USA) - Calling potential customers as a part of telemarketing sales campaign. Concerned with informing customers about the product features and acquiring leads for physical follow up, for mortgage services and insurance clients - Following up with customers to complete inbound transactions

•

Insurance and Accounting Services (UK) - Outbound sales for Motor, Household and Travel insurance - Calling customers to follow on their claims request

The copyright in this work is vested in Exlservice Inc. The contents of this document must not be reproduced, in whole or in part, or used or disclosed without the prior written permission of Exlservice Inc.

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Exlservice Inc – An overview

Company Ownership Oak Hill Capital Partners L.P. (Oak Hill) and Financial Technology Ventures (FT Ventures) hold 66% of the equity of ExlService Holdings, Inc. The management group of EXL holds 34%. 22 senior members of the management team have bought into the equity in the company. The management share includes stock options for employees, above the manager level. Exlservice Inc. provides services to its customers through its subsidiary exl Service.com (I) Pvt. Ltd. in Noida, India. Oak Hill is a $ 1.6 billion private equity partnership that seeks to make significant investments in operating companies through acquisitions, recapitalizations, build-ups, restructurings and minority stakes. Oak Hill’s multiindustry strategy focuses on six broad industry groups: Telecom and Media; Business and Financial Services; Basic Industries; Consumer Products/Retail/Distribution; Healthcare; and Technology. Since 1986, Oak Hill principals have invested over $1.6 billion in 43 control investments, of which over 80% have been realized or are publicly traded. The combined IRR on these investments is over 54%. Oak Hill is part of the Oak Hill Capital group that was founded by Robert M. Bass and currently manages more than $ 8 billion in capital. FT Ventures invests in companies that develop technologies useful for the financial services industry. FT Ventures invests primarily in mid-to-late stage private companies and now has over $ 403 million under management. The limited partners include 39 of the largest financial institutions in the world. These partners are leaders in the innovative deployment of technology for improving operating efficiencies and expanding products and services to better understand and serve their customers.

A schematic of the current ownership structure: EXL Management

Oak Hill (51%) &

FT Ventures(15%)

34 %

66 %

Signatory to Customer Contracts

ExlService Holdings, Inc. 100 % Exlservice Inc.

Sales, Marketing and Technology base Delivery Organization

exl Service.com (India) Pvt. Ltd.

The copyright in this work is vested in Exlservice Inc. The contents of this document must not be reproduced, in whole or in part, or used or disclosed without the prior written permission of Exlservice Inc.

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Outsourcing Practice

Mayer, Brown, Rowe & Maw is a global leader in information technology, telecommunications and business process outsourcing. Our 50 outsourcing lawyers use their experience, methodologies and industry knowledge to produce superior results for our clients.

www.mayerbrownrowe.com

Outsourcing Practice

Clients look to us to evaluate, structure, negotiate and project manage all types of outsourcing transactions—from simple sole-sourced deals to complex, competitively bid, multinational transactions. We advise on the benefits of various structures, apply Legal researcher Chambers named Mayer, Brown, Rowe & Maw its "2003 Firm of the Year" for Communications/Technology in the U.S. based on our achievements in telecommunications and outsourcing. Chambers conducted over 4,500 interviews in the U.S. to construct its 2003 rankings. proven project management and negotiating strategies, and find the best solutions based on individual client needs. Clients rely upon us throughout the entire life cycle of an outsourcing transaction— from the early planning stages, RFP preparation and proposal assessment, to negotiation, closing and post-signing support. We also help companies restructure and renegotiate existing outsourcing relationships and re-source or in-source outsourced services. Each step of the way, our lawyers counsel clients on the available options and their legal and business consequences. We are viewed as thought leaders. Our negotiations with all of the leading service providers, working relationships with the key consultants, and participation in key conferences provide us with the latest insights into the fast-changing outsourcing marketplace.

When asked what sets our outsourcing practice apart from our competitors, we point to the following:

Breadth of Outsourcing Experience We have represented clients in a broad range of on-shore, near-shore and off-shore outsourcing transactions, including the outsourcing of business processes and functions, information technology services and support, application development and maintenance, telecommunications services, transaction processing, leasing/procurement, finance and accounting, customer relationship management, energy management, HR/benefits, facilities management, and logistics. Our outsourcing clients have included established and emerging companies in many different industries including

Legal industry researcher Chambers described our U.S. practice as “[o]ne of the leading firms for IT outsourcing” with “unmatched competence across the full range of communications law” and our London practice as “vibrant… aerospace, defense contracting, electronic commerce, financial services, pharmaceuticals, manufacturing, chemicals, insurance, health care, banking, life sciences, real estate, forestry products, electronics, retail, restaurants, mining, telecommunications, information technology and electrical power.

Outsourcing is the area in which this firm excels...”

Scale We have one of the largest, fastest-growing outsourcing teams in the world, with over 50 lawyers including more than 20 partners. Six of our partners in four offices in the U.S. and Europe were ranked as leading outsourcing lawyers by legal researcher Chambers.

Geographic Reach No other law firm can match our capabilities on both sides of the Atlantic—30 outsourcing lawyers in our Chicago, New York, Palo Alto and Washington, D.C. offices and 20 outsourcing lawyers in our London, Cologne, Frankfurt and Paris offices. Where we do not have offices, we can draw on our extensive network of local-country counsel.

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Outsourcing Practice Size/Complexity of Transactions We handle transactions ranging from routine out-tasking arrangements to global multibillion dollar outsourcing deals. We have handled some of the largest and most complex global outsourcing transactions.

Full Range of Outsourcing Legal Services and Support Our lawyers have access to a wealth of experience in specialty areas related to outsourcing. For example, our market-leading tax advisory practice routinely advises on tax structuring for international outsourcing transactions. Our labor and employment groups are at the forefront in personnel transition issues, including the thorny issues raised by the Acquired Rights Directive. Chambers reports that Mayer, Brown, Rowe & Maw delivers “first rate advice on telecom, IT and e-commerce issues.”

Industry Knowledge and Experience In addition to their legal qualifications, our lawyers draw upon significant practical experience in the outsourcing, information technology and telecommunications industries. Many have worked either as inside legal counsel for outsourcing providers or in business roles for leading technology companies. This gives us a better understanding of critical business and technical issues and insights on creative and practical solutions to complex business problems.

We have represented clients in some of the largest outsourcing transactions ever. Recently, we represented

Proven Methodologies

Bank of America in its

We have used our experience and industry knowledge to develop efficient negotiation methodologies and proprietary outsourcing tools including extensive templates, form agreements and project management tracking forms. These help focus negotiations on client objectives, shorten negotiation time, and reduce cost.

EDS and Proctor & Gamble in

$4.5 billion outsourcing to its $3.0 billion outsourcing to Hewlett-Packard.

Philosophy/Approach We pride ourselves on forging successful and lasting relationships for our clients. We focus on meeting our clients’ business needs, adding value, aligning incentives for success, and offering creative and practical solutions to complex business problems. We employ market-tested risk mitigation strategies to manage the legal and business risks inherent in outsourcing transactions. We take an efficient approach to negotiations, avoiding both academic debate on esoteric legal points and unnecessary acrimony. We strive for clear thinking and clear communications.

Understanding of Customer and Supplier Perspectives We have represented both customers and suppliers in outsourcing transactions. This helps us understand the business objectives, issues and concerns of both customers and suppliers. As a result, we are more able to formulate solutions that meet the needs of both parties.

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“The advice and counsel of neoIT's advisors is invaluable to our offshore strategy.” - Cardinal Health, Inc., a Fortune 100 Healthcare Firm

Given the current economic environment, business and IT executives are looking for opportunities to reduce their company's costs. The boom of the nineties has given way to the realities of stagnant growth, depressed capital markets, heightened competition, and increased geopolitical risks. The focus on revenue growth has been replaced by a focus on cost control and profitability. Consequently, firms are increasingly looking at offshoring their IT infrastructure, application development and maintenance, and the tasks and processes of non-core business operations. What had started with tentative experimental first steps with offshoring by the most sophisticated global firms such as General Electric, Nortel and British Air in the early nineties has evolved into a full sprint by a growing number of small, medium and large size companies, both multinational and domestic. As a result, adoption of offshoring is expected to double over the next two years. To meet this demand, developing countries are emerging as havens for new, sophisticated providers of IT and Business Process Outsourcing (BPO) services. These new companies can offer both high quality and highly competitive prices. While the availability of competitive prices was to be expected, the availability of superior performance has emerged as both the biggest surprise and the greatest source of long-term value creation. But, offshoring is an inherently high-risk endeavor. While the rewards are great, the risks are as well. This is particularly true for those firms who lack the domain expertise about offshore service providers and the mechanics of the offshoring process. Firms dependent upon real time mission critical processes and IT support are rightfully loath to surrender control by outsourcing. For individual executives the personal risks can be threatening and ultimately debilitating. Yet, as a senior executive today, you face the inevitability of outsourcing. The issue is no longer “should we outsource,” but …

www.neoIT.com

Why offshore?

While everyone wants to reduce costs, there are other objectives for offshoring, including the desire to relieve internal resource constraints, improve performance, increase productivity, and re-organize resources to focus on critical, core activities. Understanding these qualitative objectives is important, but establishing realistic, achievable goals requires an intimate knowledge of the mechanics of offshoring and an underestanding of the hidden costs and prerequisites which inievitably dampen returns.

What to offshore?

While many opportunities to reduce costs by moving resources offshore exist, you must first determine the differentiated risk and benefits of offshoring components of your IT and business process portfolio. While offshoring started with IT, BPO will soon surpass IT as an offshoring opportunity.

Where to offshore?

India today is the dominant offshore location but it is definitely not the only location. Whether for IT or BPO, high quality service providers from other developing countries such as Philippines, Russia, Vietnam and China, as well as such “nearshore” locations as Mexico and Canada are also viable options. The key is understanding the distinctive advantages of these locations and how they fit with your objectives

When to offshore?

While the time to offshore for most companies is most likely now, the transition to offshore must be engineered and phased based on the maturity, scope and size of the processes to be offshored and the company’s own offshoring experience. Companies that have more offshore experience will increase their deal sizes and create larger multi-sourced environments whereas less experienced firms may take a more gradual pilot-based approach to build their offshoring competencies.

How to offshore?

Many different participation options are available. Sourcing options range from contracting with domestic firms with offshore capabilities to dedicated centers within offshore firms to firms who opt for the maximum control by building their own offshore delivery capability.

“We were able to leverage neoIT’s offshore sourcing methodology and supplier knowledge to accelerate our implementation timeline and deliver better quality results.” - A Fortune 500 Energy Company

Whom to offshore with?

There is a plethora of potential offshore service providers, present many of whom possess impressive credentials and certifications from independent standard bodies. Unfortunately most of these firms are difficult to differentiate in the absence of objective information and detailed due diligence. The right supplier is not dependent on size or brand, but critical success factors such as domain knowledge, experience, processes, maturity, etc.

How to manage the offshore relationship?

Formulating an offshoring strategy and selecting the right offshore provider is only part of the means to creating value from offshoring. Knowing how to manage and control service providers to produce the desired results in spite of the constraints of distance and communication and cultural obstacles is the single most important driver of offshoring success. Effective management of the relationship directly affects the cost savings and service levels forcasted in contracting.

www.neoIT.com

neoIT is focused exclusively on assisting companies in maximizing their returns from offshoring both information technology and business processes on either a project or enterprise wide basis. We are neither brokers, service providers, or an online marketplace. Our clients include such firms as Siemens, AXA, Cardinal Health Inc., Pyxis, Lucent Technologies, Carreker, AMP and Exult. These firms have been attracted by our proven ability to: Achieve higher than expected cost savings in offshoring services; Evaluate and choose offshore providers who can also achieve higher than expected performance and service levels and; Reduce the risks associated with shifting business operations offshore. We deliver these benefits through the provision of four services: Knowledge: Market Education and Understanding; Plan: Offshore Strategy and Planning; Source: Managed Sourcing and Contracting Events ; Manage: Post Contract Program Management SM

The O4 Process Phase 1: Knowledge

Phase 2: Plan

Phase 3: Source

Phase 4: Manage

TASKS

Understand Offshore Market and Options

Formulate Offshore Strategy

Execute Sourcing and Contracting Events

Deliver Post Contract Program Management

GOALS

Understanding the Offshore Opportunity; Knowledge to help you make the right decision and avoid the wrong decision

A Strategic Offshore Blueprint; Answer the Questions of What, Why, When and Where

Selection of vendor and negotiated contract specifying rules of engagement

Ongoing contract governance and program management to ensure performance and the realization of the projected benefits

neoIT’s successful services delivery model is supplier-neutral and focuses exclusively on the offshore sourcing and delivery management process. neoIT clients benefit from our specialized knowledge of offshore service suppliers’ capabilities and access to the Global Services Network – a proprietary repository of over 5000 global suppliers from the leading offshore markets. Our proprietary technology applications codify our services delivery model and allow us to dramatically reduce the cycle time for sourcing events and provide complete transparency and visibility into the sourcing and delivery management process for our clients. The Next Step Contact neoIT for assistance with your short- and long-term offshore sourcing objectives. In the last 12 months, the firm has managed deals worth over $275 million and expects to surpass over $1 billion in 2003. neoIT employs over 60 advisors and business professionals in the US and throughout Asia and serves as the offshore advisory group for TPI, the global sourcing advisors, (www.TPI.net). The neoIT/TPI partnership enables clients to benefit from the combined expertise and methodologies of both firms. For More Information: 2603 Camino Ramon, Suite 200, San Ramon, CA 94583, Tel: 925.355.0557 | Fax: 925.355.0558

www.neoIT.com

Syntel's Core Services Syntel provides its Global 2000 customers with the ideal combination of real-world solutions: flexible, innovative e-Business, applications management and BPO services, delivered with exceptional quality, unprecedented Syntel builds technology speed, and at a great value. solutions on the foundation of your business strategy,

What is so different about Syntel's delivering real world results that stand the test of time. services? It is HOW we deliver. We approach your enterprise with a basic premise at the forefront of our solutions: your business strategy is at the heart of your business. We know that a successful technology solution will build on that foundation. If it doesn't, it will not stand the test of time. If our technology solution does not enable you to execute your strategy, we have not succeeded. Syntel provides a full spectrum of IT lifecycle solutions, specializing in integrating exclusive innovative technology solutions and proprietary project management processes. Our services fully address transition, upgrade, and mission-critical implementations. This includes: •

Applications Outsourcing, our full lifecycle approach to development, enhancements, maintenance, integration, and technology transformation.

•

e-Business, Syntel’s practice for B2B, CRM, data warehousing, ERP, EAI, web, and wireless.

•

Business Process Outsourcing, our end-to-end seamless solution for IT-enabled services, providing transaction processing, core back office operations, knowledge-based services, and managed services.

Syntel's Vertical Services In addition to our core service offerings, Syntel has developed a suite of services in tune with the business challenges of several industries. In the Financial Services area, we have: •

• • •

Collateral Management solutions, providing a comprehensive solution to manage collateral security related risks in real time. The reduced financial risk associated with collateral shortfall or lost opportunity for inaccurate collateral composition is the advantage to a financial services customer. SMART card migration to help Credit Card companies in their initiatives to move towards EVM-based Smart Card from the magnetic strip card. Mortgage processing and origination integrated BPO+IT service for Mortgage Origination and Servicing. Investment management integrated BPO+IT service for mid and back office.

1 ©2003 Syntel, Inc. v03.2003

For the Insurance Industry, Syntel offers: • •

SEMCI solutions, to assist insurance enterprises in simplifying and streamlining processes, saving time and money, whiIe improving service levels. Enterprise Content Management systems, delivering tangible gains as well as simplified policy and benefit administration, faster delivery of information to agents, customers and partners, and much more.

The Retail Industry is offered: • •

UCC Compliance solution, to ensure retailers and members of the supply chain are ready to accept and store the 14-digit GTIN structure. Supply Chain System optimization, to improve efficiency of systems and processes, saving time and money.

Syntel's Global Delivery Service Global delivery, or offshore outsourcing, has become the way IT projects NEED to be done. The focus of "going offshore" tends to be heavy on the tactical elements and rewards, but Syntel's business model is focused on delivering the strategic benefits of offshore, bringing long-term value as well as time-to-market and economic efficiencies to IT. We deploy a custom delivery model to fit your business goals and a proprietary knowledge transfer methodology to guarantee knowledge continuity. Syntel uses a seamless client-centric offshore delivery model to bring significant benefits to our Global 2000 client base. This mature Global Delivery Service approach enables us to: •

Tap into the best technology teams the world has to offer: Best in class technical talent in e-business, advanced technologies and legacy platform

•

Deliver a high quality product: SEI CMM Level 5 delivery of IT projects

•

Drive speed to market: Using scalability, rapid execution methodologies, Project Management Institute (PMI) accredited project management, and time zone differences to deliver projects faster

•

Deliver a very competitive price point: 15 – 30 percent reduction in development and maintenance costs

Syntel has been helping Global 2000 corporations integrate a global delivery approach into their Information Technology plans for over a decade. We have a focused approach to harness the power of a 24x7 workday. Our results are impressive, and are based several vital tenets: •

Relationships are strategic in nature. We view each customer relationship as a long-term partnership. Built with trust as a key ingredient, we focus on gaining an understanding your business and culture--paramount in developing a longterm strategic partnership. And, Syntel is a flexible company to work with. We enjoy finding creative ways to partner with our customers and help them meet the changing demands of managing their business.

•

Knowledge Capital has immeasurable value. In the world of IT, people-and the knowledge capital they possess-are your greatest assets. Value-added services, which are paramount to a strategic partnership, can be provided only if there is continuity in the team that has the business knowledge capital. We have 2

©2003 Syntel, Inc. v03.2003

the right human resource strategies to retain the knowledge capital on your project. And the right tools to ensure that as our employees' careers grow, the knowledge they have gained on your systems is stored and transitioned to the new team members. •

On-site presence is a significant contributor to success. The mission control for the development and support of systems must remain local and close to the key business users. Our model delivers this, and insulates you from the backoffice of the delivery model, through a strong on-site Project Management team. Increased level of proactivity in responding to needs of the business can only occur when there is a close day-to-day working relationship between the on-site team and the business.

•

Quality makes all the difference. With Global Development Centers assessed at SEI CMM Level 5, we know the value of quality.

•

A proven method for Knowledge Transfer is a must. Syntel's proprietary system, called IntelliTransfer, delivers a meticulous approach to transferring knowledge about your systems to a new team. Complete with defined milestones and deliverables, it ensures both the acquisition and retention of application and business knowledge.

•

Project Management is key to project success. Syntel's initiatives in SEI CMM, ISO, and PMI form the foundation for our overall project management practices. This foundation assimilates project-specific standards, such as industry regulations, DOD or government standards, and IEEE standards to comprise the set of best-practices, standards, and methods used by Syntel Project Managers. This ensures the highest level of project effectiveness, quality, and customer satisfaction. And, 25 percent of our Project Managers are certified by the Project Management Institute as PMPs, with a great deal more in the process.

•

Established infrastructure is vital. Syntel's three Global Development Centers are connected with a robust private data communications network-SyntelNetenabling delivery of services anywhere in the world. SyntelNet is a seamless, compatible, and high-performance network that integrates Syntel's network with customer communications technologies to enable effective project communications. According to an independent report issued by John G. Kinnard & Co., a financial analyst firm, Syntel is recognized as one of the more established offshore programs in India.

3 ©2003 Syntel, Inc. v03.2003

4. REFERENCES Mapping Offshore Markets, neoIT’s Offshore Insights White Paper Series, April 2003, available at www.neoIT.com and www.sourcinginterests.org.

© SOURCING INTERESTS GROUP

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