5 common myths of location selection

April 26, 2012

5 Common Myths of Location Selection

Proprietary & Confidential. © 2012, Everest Global, Inc. 2

Introductions

H. Karthik Vice President Everest Group [email protected]

Eric Simonson Managing Partner, Research Everest Group [email protected]

Amneet Singh Vice President Everest Group [email protected]

mailto:[email protected]�




Learning objectives

5 common myths of location selection

Become aware of common pitfalls Separate myths from reality Appreciate best practices

Perspectives on global location portfolio

Understand relevance of portfolio approach Obtain overview of key design considerations


Perspectives are drawn from trends tracked in Market Vista and our location selection work

Subscription services –

reports, inquiry, data

cuts, etc.

Market Vista Global services tracking across functions, sourcing models, locations, and service providers – industry tracking reports also available

Custom research capabilities Benchmarking | Pricing, delivery model, skill portfolio Peer analysis | Scope, sourcing models, locations Locations | Cost, skills, sustainability, portfolio Tracking services | Service providers, locations, risk Other | Market intelligence, service provider capabilities, technologies

Healthcare

Information technology

Finance & accounting

Procurement

Banking, financial services, insurance

Global sourcing

Cloud Vista

Human resources Recruitment process

Transaction Intelligence PricePoint Service provider

Intelligence


Presentation topics


Become aware of common pitfalls

Separate myths from reality

Appreciate best practices


Wrap up and Q&A


Poll Question: What are the most common challenges that you have faced in location selection?

13%

18%

29%

18%

21%

Establishing clear objectives

Aligning stakeholders

Finding convincing data

Overcoming executive biases

All of the above

Source: Live polling conducted during the “5 Common Myths of Location Selection” webinar on April 26, 2012


Commonly perceived myths on location selection

Myth

Rankings are helpful to understand relative attractiveness of locations

Size = Scalability

Wage increases directly correspond to an increase in overall people cost

Rankings often convey a partial view and can mislead location decisions

Scalability does not always correlate with size and is often driven by market, talent pool and operating model considerations

Overall people costs typically increase at a lower rate due to multiple efficiency levers

Reality

Locations experiencing tight labor conditions are always unattractive

Alternative talent models can create adequate room for growth even in tight labor conditions

1

2

3

4

High-cost and low-cost locations are in competition with each other

High-cost locations help optimize the overall portfolio by fulfilling unique needs

5


Myth #1: Rankings are helpful to understand relative attractiveness of locations

1

Reality: Rankings often convey a partial view and can mislead location decisions

Which ranking to believe

Do not necessarily reflect market reality

Can often disguise non-optimum results

Wide variation between agencies and years Country vs. city rankings

Do not often correlate with the end outcome of location decisions

Limitation of location rankings

Score differences between rankings sometimes not meaningful enough to decide relative attractiveness

Location decisions are guided by company specific considerations

Do not adequately reflect trade-offs between risks and costs as per company specific considerations



Location rankings1 2011

1 Annual country location rankings released by a leading professional services firm 2 Analysis based on number of Forbes 2000 captives and 20 leading service providers providing global services support

Market reality2

2011 15-30 <15

Number of players2

51-100 >100

31-50

1

Locations

Dec

reas

ing

attra

ctiv

enes

s

Rankings do not necessarily reflect market activity Change in ranking (2009-2011)1

1 India

2 China

3 Malaysia

5 Indonesia

7 3 Thailand

8 2 Vietnam

9 2 Philippines

12 Brazil

31 6 Hungary



2. Real estate trends

3. Infrastructure (e.g., telecom)

4. Safety and security

5. Operating environment1

6. Salaries and operating costs

Ris

k R

ewar

d

Risk-reward analysis

Cos

t of o

pera

tion

Relative risks Low High

High

Low

Rankings do not adequately reflect trade-offs as per company specific considerations

Preferred options

1. Talent pool and Peer presence

Assessment dimensions

1 Operating environment includes legal and regulatory, labor laws, and government incentives and tax policies

Location decisions are guided by company specific trade-offs between risks and costs

ILLUSTRATIVE

W1%

W4%

W3%

W2%

W5%

Higher risk

Higher cost

Business considerations

1

Attractive choice for risk averse player(s) willing to trade-off cost savings for lower risk profile

Attractive choice for player(s) willing to put in place risk mitigating measures


Myth #2: Size = Scalability

“Size” of overall talent pool is often assumed to indicate scalability Size

Reality: Scalability is driven by multiple factors besides size of talent pool

2

“Scalability” is driven by multiple factors like quality of talent, competition, and companies’ unique requirements

Scale



ILLUSTRATIVE

Annual talent pool

Drop-off due to lack of quality and propensity

Drop-off due to competition

Net available on sustained basis to build scale

Employable pool

Resident Pool

Migration pool

Net drop-off Companies apply further filters on net available pool based on their unique talent models and skill needs (e.g., language skills)

2

Net employable pool available can be much lower than overall talent pool

Estimation for net annual supply of talent in a location



Shanghai

Bangalore

Buenos Aires

Annual IT pool from city1

2012; Indexed to Shanghai

Kuala Lumpur

Krakow

Attractiveness based on size of the employable pool2

3

1

2

4

5

Overall graduate pool statistics can be often misleading

Attractiveness based on employable pool often varies from graduate pool

Employable pool2 as percentage of graduate pool

1.00

0.89

0.35

0.36

0.19

10-12%

28-32%

20-25%

28-32%

30-35%

2

OFFSHORE ITO EXAMPLE

1 Annual graduates from engineering and information technology disciplines from educational institutions within the city only 2 Annual graduates from relevant educational background having requisite technical and appropriate English language skills for IT offshore services industry


Myth #3: Wage increase directly corresponds to an increase in overall people costs

Manager and above

Team leader

Senior programmer

Junior programmer

ITO: INDIA EXAMPLE

“Headline” inflation often reported / discussed

Typical delivery pyramid

Typical individual raises (%)

Typical inflation in salary band (%)

3-5% 10-15%

15-20% 8-12%

25-35% 10-12% 3-8%

50-55% 12-15% 3-8%

4-6%

Actual increase in salary bands over recent times

Reality: Net impact on wage bills much lower than perceived

3

Actual inflation in salary bands is lower than individual changes given promotions / individual growth Attrition in junior roles also provides companies an opportunity to manage costs, especially in a growth

environment


Myth #4: Locations experiencing tight labor conditions are always unattractive

Sources of talent Comments

Employable tertiary graduates and undergraduates from the city

Experienced professionals employed in peer companies

Employable high-school graduates and part-time students

Experienced professionals with similar skills in other industries

Employable graduates and experienced professionals from adjoining areas

“Primary” talent pool from city

“Additional” talent pool

Talent pool from adjoining areas

Main supply of talent across locations

Often relevant in certain locations (e.g., CEE, U.S.) and functions (e.g., contact center)

Reality: Alternative pockets of availability can significantly augment primary talent pool

Often assumed as the only talent pool available in the city

4


Myth #4: Locations experiencing tight labor conditions are always unattractive Annual demand and supply at entry level Number

~20 times

6-7 times

4

KRAKOW – VOICE BPO

Exploring alternative talent pools (e.g., undergraduates, part-time students, influx from other industries) can create more room for growth

This requires appropriate operating models (e.g., hiring, training) to implement and scale

500-600

3,000-4,000 2,500-3,000

4,000-5,000

10,000-12,000

Industry demand at entry-level

Supply of employable tertiary graduates

Supply of employable undergraduates

Employable pool from adjoining areas

Total employable pool


Myth #5: High-cost and low-cost locations are in competition with each other

Companies optimize across multiple dimensions in location decisions

Reward

Other considerations

Description Low-cost locations

High-cost locations Comments

ILLUSTRATIVE

5

Reality: High-cost locations help optimize the overall portfolio by fulfilling unique needs

Delivery risks

Labor arbitrage Operating cost savings

(e.g., facilities etc.) Taxes and incentives

Skills availability Stability & predictability Business continuity

Access to niche skills Customer proximity Time zone overlap

Bangalore offers 60-70% operating cost savings compared to Toronto

A leading bank reports similar C-SAT scores from the Philippines and U.S. centers

Canada offers significant overlap with U.S. business hours and proximity to clients


Myth #5: High-cost and low-cost locations are in competition with each other

Source: Everest Group

India & Asia Pacific

Eastern Europe

Customer acquisition

Customer care R&D HR

Research and development Technical services for

specific businesses

Customer care and HR Knowledge management Engineering and R&D Analytics services Financial forecasting, capital

budgeting and cost analysis

U.S., Canada

High-cost locations and low-cost locations complement each other in achieving global sourcing objectives of companies

Transactional F&A IT support (Infrastructure, ADM) Customer care

OIL & GAS EXAMPLE

Multilingual support in European languages, F&A, HR

UK

Australia

Location footprint of leading oil and gas majors High-cost locations

5


Presentation topics


Wrap up and Q&A Perspectives on global location portfolio

Understand relevance of portfolio approach

Obtain overview of key design considerations


Poll Question: How many total cities are currently in your global delivery portfolio?

2%

15%

28%

15%

40%

2 or less

3-5

6-10

11-20

>20

Source: Live polling conducted during the “5 Common Myths of Location Selection” webinar on April 26, 2012


Global locations portfolio: Relevance

Key advantages of locations portfolio Maintain low cost of delivery to drive

continued savings

Ensure adequate headroom for growth of global services portfolio

Mitigate concentration risk concerns

Support regulatory and business unit preferences

Access niche talent pools

Differences compared to footprint of locations Integrated approach to

– Support current and future business requirements (scale, scope of services, captive vs. service provider mix)

– Balance cost and risk – Plan and manage investment

Continuous rebalancing and

optimization of portfolio


2012: Global locations portfolio 2008: Footprint of locations

Mature buyers are increasingly beginning to view locations as a portfolio to support global delivery

North America

Latin America Africa

India Philippines

EXAMPLE: LEADING GLOBAL OFFSHORING ADOPTER

CEE Europe North America

Latin America Africa

India Philippines

CEE Europe

Multi-directional optimization Uni-directional flows


How many cities?

Which geographies?

What scale in each location?

What roles do different locations play? (hub, spoke, CoE)

How to balance sourcing model mix (i.e., captive vs. service provider)?

How to balance cost and risk?

How to ensure adequate flexibility for future changes?

Location portfolio needs to be heavily influenced with the organization’s sourcing strategy

Key considerations when thinking about a global location portfolio

1. What to source Functions Processes Technologies

4. Managing global sourcing Governance

capabilities Decision-rights/

responsibilities Metrics 2. How to source

Offshore captive Near-shore captive Third-party

Objectives Nature of work Scale

Concentration Flexibility

Demand model

Supply model Supply model

Skill availability Sustainability

3. Where to source Locations Global network


Designing the location portfolio requires three major inputs

Initial view of what roles a location could play for different skills

Hub, spoke, COE, etc.

Languages, proximity, DR/BCP, regulatory, etc.

Identifies major constraints

Volumes, skills, languages, geographies receiving services, etc.

Current and projected views

Inputs to designing location portfolio

Enterprise demand profile

Service capability fit

Roles locations can play

Using these inputs, alternative designs can be evaluated using scenario analysis

1

2

3


Presentation topics



Wrap up and Q&A

Submit any remaining questions


Best practices for helping your organization deal with location questions

Be realistic about scale and ramp-up rates

Although centers can operate at small scale, they tend to be less resilient. Additionally, ramp-up rates differ dramatically by location and need to be understood accordingly

Use the right data Although you will have to make decisions without perfect data, do focus on using data which is applicable to the services industry and relevant skill sets (e.g., languages, technologies, domain knowledge)

Design for the long term

Location selection considerations need to be resilient to macro-environment changes and talent/cost sustainability challenges – new locations are an investment

Precisely define concentration concerns

Location concentration concerns can’t be meaningfully addressed without specifics – The city, the country, the region? Concern for catastrophic or temporarily disruptive events?

Solve for “portfolio” instead of “footprint”

View the location portfolio as a strategic lever to balance savings and mitigate risks in global sourcing programs


To ask a question during the Q&A session Click the question mark (Q&A) button located on right side of your screen – this opens Q&A

Be sure to keep the default set to “send to All Panelists”

Type your question in the box at the bottom of the Q&A box and click the send button

Attendees will receive an email with instructions for downloading today’s presentation

For more information on global sourcing, please contact: – Eric Simonson, [email protected] – Amneet Singh, [email protected] – H. Karthik, [email protected]

Q&A

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