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Global Trends in SSC and BPO

- And the Impacts for China

International BPO Agenda Seminar

Soeren Dressler, PhD

- Director -

Offshoring Institute

Shanghai, Oct 23, 2009

5/21/2010© Offshoring Institute2

Table of Contents

The great potential of SSC and BPO in unstable economic environments

Facts about the crisis

The complete outsourcing model

Flexibility of indirect costs through Shared Services and BPO

Smart models to manage SSC/BPO utilization

Charging of Shared Services and BPO services

Cases

1. China as potential service hub for Japanese global players

2. Multi-City comparison across Asia

Special Topics

1. SSC/BPO Business Cas

2. Peopel Motivation



U.S. job losses accelerated in September

and the unemployment rate climbed to 9.8

percent, the highest level since 1983.

Payrolls dropped by 263,000, bringing total

jobs lost since the recession began to 7.2

million, the biggest decline since the Great

Depression.

Financial firms cut more than 180,000

jobs in the Americas in the credit crisis

that brought down or forced the sales of

Bear Stearns Cos., Washington Mutual

Inc., Merrill Lynch & Co. and Lehman

Brothers.

7 October 2009 - There are

now six unemployed workers

for every job opening in

America. .

More than one million Americans

have filed for bankruptcy in the

first nine months of 2009,

according to the American

Bankruptcy Institute.

The “disappointing” September

(2009) employment figures

indicate it will take the U.S. four

years to recover all the jobs lost

during the recession, according to

economists at JPMorgan Chase &

Co. in New York.

The United States – Homeland of the crisis

Examples of the crisis in the U.S.



Salary levels for entry-level positions will be

lower than last year, and salary increases

will be much more reasonable than in years

past when many workers expected 10-25%

salary increases.

The economic slowdown has negatively

affected external demand for China’s

products, resulting in a fall in exports.

Trade volume for the first five months of

2009 dropped by 24.7% compared with

the same period in 2008. .

The financial crisis has posed

a threat to the security of

China’s foreign exchange

reserves which are

predominantly in U.S.

Treasury bills

After a steady decline of

unemployment China has

experienced a growth of the

unemployment rate of 0.3% since

beginning of 2009

As a result of the global financial

crisis a large number of export-led

private enterprises in China’s

coastal provinces have gone

bankrupt, with around 20 million

unskilled workers losing their jobs.

…And the effects on China:

Examples of the crisis in China



Growth rates in the U.S.

• Has the crisis reached its peak

and is the worth over?

• Unemployment in the U.S. is

dangerously high

• The sheer data do not show

signs of a turnaround

• However, the confidence of

businesses and consumers has

risen lately

Comments



Growth rates in the Euro zone

• The Euro zone has been

impacted as well

• Production output appears to

recover

• But, wrong government subsidy

practices will hit the automotive

industry in Germany in 2010

• There are lots of job losses

expected in 2010

Comments



• The GDP growth has almost cut

in half compared to Feb 07

• Even unemployment is on the

rise

• China is very dependent on the

U.S.

• Is there a recovery in sight?

Comments

Growth rates in China



• Social partnership concepts in continental Europe: in times of crisis no additional

headcount will be reduced above the absolute required levels

• Resources in the back office are underutilized due to slower demand no need

for additional outsourcing activities

• Companies are struggling for survival in times of crisis outsourcing projects

range quite low in the prioritization

• Outsourcing is more risky than never If BPO providers are been asked to take

on fluctuating (and uncertain) volumes of companies they require risk

compensation OR will deny potential deals entirely due to the current business

risks BPO markets are not functioning very well

Fear of additional lay

offs

What does it mean for the SSC and the Business Process Outsourcing industry

Underutilization

Low priority for SSC

and BPO

Risks of BPO

BUT…

In the mid-term companies will re-visit the back office cost structures

Companies have understood the urgent need for flexibility in the administrative processes

Shared Services have limits in cases of shrinking volumes (fix cost block!)

With a recovering economy BPO will experience stronger demands

• Minimal and infrequent

• Restricted to financial reviews and capital allocations

• Limited, often quarterly

• Focused on strategic and financial review and guidelines

• Frequent• Focused on

operating performance

• Intensive and frequent

• Focused on functional and SBU interaction

Degree Of Corporate

Intervention In

Businesses

• Tax, Treasury, Legal and Investor Relations at corporate level

• All other at operating entity level

• Support functions in offshored Shared Services, Outsourcing

• Strategic, Legal and Corporate Finance functions, HR Policy & Strategy at corporate level

• All other at BU level • Shared services

may be appropriate

• All operations at corporate level and operating entity level

• Key operating

functions at

corporate level

Placement Of Staff

• Minimal • Medium/small • Large • LargeSize Of Corporate

Staff

• Large • Medium/small • Small/Medium • MinimalSize Of Business

Unit Mgmt. Staff

Intervention from Corporate and Placement of Staff

Functional

Organization

Holding

CompanyOperational

Headquarter

Strategic

Headquarter

9

Potential of SSC and BPO

© Offshoring Institute

Core Processes

Support Processes

IT

Finance & Accounting

HR

Research & Development

Procure-

ment

Inbound

Logistics

Opera-

tions

Outbound

Logistics

Sales &

Marketing

Strategic Management

Other Administrative Processes

BPO now means Outsourcing of Support Processes, SSC can be considered as

“internal Outsourcing”


Supplier Customer

10 © Offshoring Institute

Other Admin

F&A

HR

R&D

Proc. Inbound-

Logistics

Opera-

tions

Outbound-

Logistics

Strategic Management

IT

Proc.

Trans.Cust.

Supp.

Sales

&

Mark.

Internal Processes

Outsourcing-Processes

11

Supplier Customer

The complete Outsourcing Model (Theory)

A Vision to become Reality soon


BPO

ITO



Table of Contents







Cases



Flexibility through SSC and BPO

Fluctuating capacities are a specific challenge for smaller scaled SSC – peak utilization can not be managed effectively

13 © Dressler & Partner 10-05-21

Peak capacity due to

integration of newly

acquired subsidiary

Overutilization leads to

backlog of regular tasks,

e.g. tax related reporting,

payroll, reporting to

authorities with severe

consequences

(penalties!)

Planned peak utilization

at year end typical

hockey stick effect can

be mitigated by rented

personnel

Case example


BPO providers usually apply pool-solutions in order to manage fluctuating capacity requirements as flexible and efficient as possible

14 © Dressler & Partner 10-05-21

Above 100% capacity

needed due to

restructuring

Below 100% capacity

needed due to decrease

in demand and

subsequent decrease in

transaction volume

Regular, planned and

contractual agreed

capacity is by far less

expensive than pool

capacity

However, provider

guarantees capacity

peaks

Illustrative

= Regular client-specific capacity (contractually agreed)

= Add-on capacity from pool

Case examples

16. März 2009© Offshoring Institute15

Administrative

workforce

(non-SSC)

Business-related

educational

backgrounds

Technical

educational

backgrounds

Suited for SSX

tasks

Suitability

can be reached

by training

10%

20%

30%

40%

Effective capacityAvailability

50% +

Filter:

QualificationFilter:

Capacity available

Real Case

Capacity pool

VorgehensweisePotentialerhebung

Large corporations can manage peak capacity through higher flexibility of its

administrative workforce

~ 85,000

employees

~ 60,000 employees

~32,000

This means business

professionals could

theoretically provide

50% of their regular

working time to SSC

support

Often the case if

supervision or

monitoring tasks

characterize the

regular job

This leads to lots of

lead times that can

be used up by SSC

transactional tasks

Example: IT

professionals

monitoring up-time of

systems – if no

system break downs

occur IT help desk

tasks can be worked

on

16. März 2009© Offshoring Institute16

VorgehensweisePotentialerhebung

Would it be possible to be as flexible as a BPO provider by just using spare

capacity of the entire organization – yes, it would (theoretically…)

Methodology research on flexible

utilization model

The Corporate Flexible Utilization Model is

currently investigated by a PhD study in

conjunctions with one of the top 5

companies in Germany

First results indicate that large-scale

corporation do have lots of spare capacity

that could be used by service functions

However, practical application is still limited:

mainly workers council issues

(Monitoring of personnel work data)

If model would work in reality – what does it

mean to the BPO industry?

The reality as-of-today

Quite unrealistic assumption that

employees would indicate “spare” capacity

would fear bad impacts on corporate

career, compensation and even job loss

However, if SSC support is rewarded

appropriately identification of capacity

pockets might be possible

Requires entire different mind-set, SSC-

specific training and IT support so people

can log-in from remote and work on a

hourly basis for the SSC

Again: different thinking required!

(“I do have time and capacity, I help out for

an hour, half a day or multiple days”

requires openness, trust and transparency


Shared Services have become established organizational models – nowadays the internal customers are asking for fair and transparent pricing even more

17 © Dressler & Partner

Objectives of pricing in Shared ServicesImpacts on the organization

Comprehensive and workload-based pricing models lead

to better transparency and fairness

10-05-21

Flexibility through SSC and BPOResults of the charging study 2008

Fixed Price and Time and Material are the most applied charging mechanisms

among the services deliverered in general

Charging Mechanisms usage frequency chart

10-05-21© Offshoring Institute18

• The graphic shows the

preference for each charging

mechanism among the

companies interviewed

• The percentages were obtained

taking into account the total

clients portfolio and how often

the specific charging

mechanism is applied among

them

Comments

Nevertheless, individually BPO providers prefer the Per Transaction charging

mechanism meanwhile captive centers prefer Time and Material pricing method

Note: Please refer to slide 5f for Charging mechanisms definitions

Charging mechanisms among BPO

providers


25%

40%

10%

25%

0% 0%Fixed price

Time and material

Per transaction

FTE based, prod. Cap.

Business benefit based

Incentive-based (KPI based)

Charging mechanisms among SSC


Combination of fixed price and per transaction method is by far the most common

charging mechanism overall


Types of combinations in use

The graphic displays the

percentage of companies, that

mentioned a specific type of

combination of different

charging mechanisms

The most mentioned

combination refers to a fixed

base fee and additional fees

per transaction to cover

changes of the transaction

volume

Comments

50%

20%

10%

10%

0% 10% 20% 30% 40% 50%

Fixed price/ per

transaction

Fixed price/ benefit-

based

Fixed price/ time &

material

Per transaction/ time

& material


Most companies track their cost for products and services to accomplish cost

transparency among their projects

In order to assign the

costs Cost Center

accounting is the most

common calculation

method among the

interviewees

The pie chart shows the

way the services

providers assign their

cost to products and

services delivered

(which has no influence

on the charging

methods!)

Comments


Cost calculation methods among services

providers

53%

37%

10% 0%

Cost Center

Accounting

Process/ ABC costing

Unspecified allocation

keys

No calculation


Flexibility through SSC and BPOPricing

Simplified example of a transactional-based charging model

Transaction type total volume LE 1 LE 2 LE 3 WF

automatic invoices 10 2 2 6 0,1

manual transactional invoices 10 2 4 4 1,0

manual non-standardized invoices 10 2 6 2 3,0

Sum 30 6 12 12

Workload 0,1 of transactional invoice

Workload 3x higher than transact. invoice

Legal Entities (LE) Baseline:

Same structure of invoices per LE

Transaction type

adjusted

volume Price per invoice Budget LE 1 Budget LE 2

Budget LE

3

automatic invoices1

(10*0,1)0,24 €

(100/41*0,1)

0,49 €

(0,24€*2)

0,49 €

(0,24€*2)

1,46 €

(0,24€*6)

manual transactional invoices10

(10*1,0)2,44 €

(100/41*1,0)

4,88 €

(2,44€*2)

9,76 €

(2,44€*4)

9,76 €

(2,44€*4)

manual non-standardized invoices30

(10*3,0)7,32 €

(100/41*3,0)

14,63 €

(7,32€*2)

43,90 €

(7,32€*46

14,63 €

(7,32€*2)

Sum 41 20,00 € 54,15 € 25,85 €

Weighting Factor of each invoice type

Total cost for all LE 100,00 €



Volume baseline

Upper dead band

Lower dead band

Ceiling

Floor

Transactional adjustments,

e.g. by number of invoices

above dead band

No pricing adjustments




below dead band

+ 10% - 25%

+ 10%

- 10%

- 10% - 25%

Change of contract (re-

negotiation)


negotiation)

Transactional flexible pricing models contain usually pre-determined

dead bands and variable charges above/below certain thresholds

Values illustrative



Volume baseline = 100,000 invoices

Upper dead band = 110,000 invoices

Lower dead band = 90,000 invoices

Ceiling

Floor



above dead band





below dead band

+ 10% - 25%

+ 10%

- 10%

- 10% - 25%


negotiation)


negotiation)

Transactional flexible pricing models contain usually pre-determined

dead bands and variable charges above/below certain thresholds

Values illustrative

+ 1.95 EUR per additional

invoice above 110,000

- 1.95 EUR per invoice

below 90,000

Case example



Volume baseline = 100,000 invoices

Upper dead band = 110,000 invoices

Lower dead band = 90,000 invoices

Ceiling

Floor

+ 1.95 EUR per additional

invoice above 110,000

- 1.95 EUR per invoice

below 90,000

Case example Base contract data:

• 100,000 invoices in period

(volume baseline)

• Base charge 180,000 EUR

(1.80 per invoice)

Situation A

• 125,000 invoices

• Calculation:

• Base charge: 180,000 EUR

• 15,000 invoices above

baseline

• 15,000 * 1.95 = 29,250

• Charge for period overall

180,000 + 29,250

= 209,250

Situation B

• 75,000 invoices

• Calculation:

• Base charge: 180,000 EUR

• 15,000 invoices below

baseline

• 15,000 * 1.95 = 29,250

• Charge for period overall

180,000 - 29,250

= 150,750

In order to simplify charging, adjustments are required only in cases

the intervals (dead bands) are left



Invoice volume

(quarterly payment)

Adjustment required

Calculation of yearly charges

• Quarter 1 : 180,000 (Base)

• Quarter 2: 180,000 (Base)


- 1,000 * 1.95

= 178,050


• Overall: 718,050

Low effort charging model

through dead bands

Continuous higher/lower

volumes require adjustments on

a yearly basis

The intervals need to be defined according to the

realistically planned volumes


Flexibility through SSC and BPOTypes of charging mechanisms

Seven general types of charging mechanisms are most common among the

services providers (both captive centers and BPO industry)


Charging mechanism Short description

Fixed price Pricing is agreed before start of operations, based on processes, activities, SLAs, or specific

requirements contained in the agreement

Time and material Price is accorded to the duration of the service provided and the amount of material to be spend

during the serving of the activities/services supplied to the customer

Per transaction The price is always given in proportion to the number of transaction taking place during the service

provision. For this, each transaction should have a unique and particular price

Business benefit-based The price change in proportion to the benefit reached by the customer due to the leverage of its

services to the provider

Incentive-based (KPI based) Prices is conditioned to the reaching of goals established before the start of the deal. Penalties

generally appear when goals are not obtained

Business benefit-based The price change in proportion to the benefit reached by the customer due to the leverage of its

services to the provider

FTE based The price is established in direct function of the number of employees dedicated exclusively to the

engagement

Revenue based A percentage of the customer’s revenues is fixed at the beginning of the engagement as a price

for the services provided

Production capacity based The price is based on the installed production capacity of the operating units/ companies served

and only changes if the capacity varies (extending or downsizing the factory capacity)

Flexibility through SSC and BPOCharging methods (advantages and disadvantages)

The pro’s and con’s of the charging mechanisms are based on the particular clients

point of view


Model Pro’s Con’s

Fixed price

Low risk of cost overrun

Forces BPO provider to have well- defined

scope and requirements

Easy to budget

Change orders required for any modification

to scope or requirements

Challenge to introduce innovation

Potential to pay more than market price,

especially on long-term engagements

Time and material

Client pays only for the resources used

Enables the client to choose and adjust

resources

No long-term commitments to the BPO

provider

No incentive for the BPO provider to

improve efficiency or effectiveness

High administrative costs to track resources

with billings

Business benefit-based /

Incentive-based (KPI-based)

Aligns business value with costs

Ability to bolt on incentives to another

pricing model, such as T&M, fixed price or

cost plus

Forces client to document the business

case and quantify value of provider

performance

Payment of incentives can be contentious,

especially if there has been a change in

leadership from contract initiation to service

completion

If incentive cannot be earned, then there is

risk of performance degradation

Per transaction

Client pays only for services it uses

Low capital investment for new

technologies or processes or to

accommodate growth in business

For more accurate chargeback

Unit or use costs can be problematic for

very high unplanned volumes

Demand forecasting, if immature, makes

this model too reactive and perceived as

expensive

Challenge to benchmark for industry-

specific and point solutions

Flexibility through SSC and BPOCharging methods (advantages and disadvantages)

The providers evaluate the charging mechanisms from a different perspective


Model Pro’s Con’s

Fixed price

Committed revenue stream for the

engagement

The ability to manage margins and

profitability through accurate use of

resources

Lock-in for contract term creates up-selling

opportunity

Risk of margin erosion if pricing

assumptions are incorrect or engagement is

poorly managed

Relationship strain if many change orders

are required

Customer satisfaction problems when

moving from custom to standard

environment

Time and material

Low risk on potential disconnect between

revenue and cost

Good margin on no commoditized skill sets

Enables the use of resources on th BPO

provider's bench

No long-term revenue commitments

Administrative overhead to track resources

with billings

Unable to charge for value; challenge to

grow the relationship

Business benefit-based /

Incentive-based (KPI-based)

Incentive payments go straight to the

bottom line

Enables the provider to show true value

Increases visibility of the provider and casts

it as partner with the business

Increased risk for margin erosion if

business value is not delivered

Requires the BPO provider to drive the

engagement if client momentum or

attention slips

Per transaction

BPO Provider can leverage ist solutions

and is in control of delivery

Ability to create value and charge for it

Higher margin potential on one to-many,

standard solutions

Only committed revenue stream is the

minimum base amount

Lower switching costs and less lock-in

Immature contracting and pricing practices

for alternative delivery and acquisition

models


Table of Contents

Additional discussion topics

Business case for SSC

People side of SSC

People motivation

31

Net Cost-Benefit Savings Realized

Factor CostImprovement

Consoli-dationImpact

ProductivityImpact

OthersTelecom,Other Infra-

structure

TravelResourceMix

NetImprove-

ment

45 – 50%

8 – 10%

8 – 10%

5%

(~5%)

(8 – 10%)

(12 –

15%)

41 – 45%

Offshoring – Benefits Case

Optimizing through BPO

Opportunity for Cost Reduction

Baseline Costs Consolidation/Standardization /Reengineering

Outsourcing/ Offshoring of Selected Processes

20% – 40%

Savings 40% – 60%

Savings

Example

While a comprehensive Finance Transformation can reduce costs by up to 60%

often half of the savings is contributed through Offshoring and Outsourcing of

selected F&A processes

32


BPO

Potential Savings Components through Shared Services and Outsourcing Activities

Offshoring

Dependent on the selected processes and their magnitude savings from

Offshoring and BPO range between 20 – 40% with headcount reduction

and labor rates often being the biggest contributors

InternalBaseline

HeadcountReduction

Labor Rates ProcessEfficiency

TechnologyAdvantage

ScaleEfficiency

BPO Margin NewBaseline

33


A reliable business case should consider best case and worst case options.

Extra costs by moving to a SSC/BPO environment need to be accounted for

34

Net savingsminimum:15% Net savings

maximum:30%

Consolidation Reengineering Labour Arbitrage

Coordination/

Travel/ Expats/

Quality Mngt.

As Is To Be

7

5

%

10

0

%

Cost

Minimum savings

Added amount to maximum savings

(best case)

5

0

%

34 April 17, 2008© Offshoring Institute


Business Case - Overview

Determining the investments required is key to develop a proper business case

and to determine the pay back period

Shadow Operations

Severance ConsultingInfrastructure

• Part of the Shared

Services/ BPO

Assessment Framework

• Purpose: assessing the

required investments

• Each category is based

on a specific rationale and

project experiences

• Figures should be

specified jointly with client

as many data depend on the company s situation

(e.g. severance

packages)

SSC/BPO Investment

Model - Key facts

Hiring &

Training

Total

Investment

Cost

20%

16%

9%

5%

5% 55%Percentage of the running yearly cost;

based on real case studies

• One time investment are not

necessarily required at the beginning

of the investment phase

• Certain one time investments take

place in a phased approach as well,

i.e. severance or hiring costs of

locations that are transferred at a

later stage in the SSC/hub


Investments

5/21/2010

Challenges of Shared Services

Cost structure

Ideally, SSC/BPO initiatives reach a pay back time of less than 26 month –

however, this depends on the migration strategy, scope, and locations

Consulting

Shadow

Operations

Severance

Hiring &

Training

Infrastruct.

3.0

-3.0

2.0

1.0

-1.0

-2.0

Savings

-3.2 mill. $

0.75 mill.

1.5 mill.

1.5 mill.

1.5 mill.

1.5 mill.

Assumptions:

Half of the savings in year 1

Business Case period: 5 years

Estimatednet savings

after 5 years:3.55 mill. $

© Offshoring Institute36

Pay Back Analysis – Ideal Case

5/21/2010


Business Case

Severance regulations in specific countries and based on certain unions/ workers council

agreements can postpone pay back periods significantly – and put entire projects at risk

Consulting

Shadow

Operations

Severance

Hiring &

Training

Infrastruct.

-3.0

2.0

1.0

-1.0

-2.0

Savings

-4.2 mill. $

0.75 mill.

1.5 mill.

1.5 mill.

1.5 mill.

1.5 mill.


Pay Back Analysis – Ideal Case

• Real case

• 70 FTE in scope

• Locations: Germany, France,

Spain

• 50 FTE to be laid off

• Average tenure with firm: 11.5

years

• Average gross salary (monthly):

3,300 EUR

• Severance payments overall:

1.9 mill.

• Extension of pay back period of

almost one year

-4.0

Real Case

5/21/2010


Business Case

People Transition


8

Leave Company

• New engagement

with new company

• Early retirement

• Unemployed

Severance Package

Remain with

Company

• Retained organization

• New job and tasks

• Prior tasks for

different department

Transfer to

Service

Provider

• New job with service

provider

• Similar tasks than

before

HR Scenarios in

F&A BPO

Finance Transformation leads to various options for the employees–

however, most of them are concerned about loosing the current job only

People Transition


Staff are retrained and

dispersed into different

roles in the corporation

Staff are assigned to the

retained Organization

performing enhanced

tasks compared to prior

role

Staff are re-assigned into

similar roles using similar

skills at other places

within the corporation

Staff are transferred to

one of the service

centers, re-trained and

dispersed into the wider

labor pool


the service provider

performing enhanced


job (interface to former

company)


one of the service centers

performing similar tasks

than before

Current Company Service Provider

Levels of Job

Enhancement

For employees staying with the firm and/or service providers

various options for job enhancement are possible

Career

development path

within the Service

Provider

organization

People Transition


0

++

+/-

--

Beginning

outsourcing/

offshoring threat

Job loss

(voluntary or

forced through

outsourcing)

Orientation and

re-training phase

New job

New job, challenging,

exciting work

Constant offshoring

threat, less

challenging work

Increased quality of

job life through new

job orientation

• New organizational and

psychlogical research suggests a

higher quality of work life if the

work is challenging and in line

with the individual personal

characteristics (see Bolles,

Richard N., 2007)

• Many Finance Transformations

leave employees in constant fear

about their jobs, in particular

since SSC or BPO are often

major parts of the solution

• A proper and open

communication strategy enables

employees to start a new career

orientation early in the process

• In the mid-term a clear cut

creates higher satisfaction than

living with constant job loss fear

• Therefore, early communication

and a swift execution of the

Finance Transformation are key

to a successful implementation

Constant job threats are a major obstacle to Finance

Transformations and hinder work satisfaction

Job

Satis-

faction

Attracting People


1 SSC Manager/Head of major function

Span of Control 6-8

= 7 Department Managers/ Team Leaders,

Span of Control 8 – 12 (dependent on level of

transactional tasks)

= 70 Staff members

Span of Control Benchmarks

Ideal minimum size ~ 78 employees

In order to run an efficient Shared Service operation

a size of at least 78 FTEs is advised


Table of Contents







Cases



Case

China as potential service hub for

Japanese global players

Dalian

Shanghai

Countries/cities with ITO/BPO and/or

SSC activities involving Japanese

companies:

China

Dalian

Shanghai

Shenzhen

Nangjing

South Korea

India

Mumbai

Bangalore

Philippines

Manila

Indonesia

Malaysia

Rationale: low labor costs, access to

larger talent pools, language capabilities

Australia

Singapore

Rationale: quality-driven

Comments

Japan – F&A SSC and BPO Situation

Geographic perspective

Japanese corporations are using typical nearshoring destinations in the Asia-Pacific

regions. The rationale is the same as for European and North American companies

Nanjing

Shenzhen


PhilippinesBangalore

Mumbai

Singapore


SSC/BPO/ITO Situation

• The IT outsourcing market

is more developed than

the BPO

• Large-scale deals with

global providers (e.g. IBM,

infosys, etc.) are taking

place on a regular basis

• Most of the ITO is taking

place in low-cost

offshoring spots (see

previous slide)

ITO

• Most of the Shared

Services Centers for

Financial activities are

located within the

geographical limits of

Japan; big number of

them in Tokyo

• On the other hand, most

of the IT SSC are located

in the countries mentioned

in the previous slide and

just few of them in Japan

itself

Captive/SSC

• Except for few large-scale

engagements, the

outsourcing industry for

back-office is not as

demanded as in other

countries and is more

limited to minor deals plus

taking place within the

geographical limits of

Japan

• The Japanese BPO

providers have a great

part of market share for

the outsourcing contracts

BPO

Current situation in Japan shows most of the captive and outsourcing activities

for back-office taking place in mainland Japan. BPO activity seldom take place

abroad



ITO/BPO/SSC Market Assessment

• Japan is a typical receiving country of BPO/ITO

and captive SSC services

• Trade balances Japan

• Import of ITO services

$150 – 200 mill

• Import of BPO services

$20 – 40 mill

• Import of captive F&A services (estimate)

Less than $10 mill

Comparisons

• Germany


$400 – 600 mill


$100 – 150 mill

• USA


$ 11.2 – 12.5 bill


$4.0 – 4.4 bill

Import/Export of IT and Business

Process Services to Japan

Sources: Offshoring Institute Database, Offshoring Institute expert interviews, Business Insight,

Nearshoring activities in IT and BPO are relatively small compared to other

countries with ITO displaying high growth rates



Challenges


Changing Population for Talent

• Educational trends in Japan show a

relative shortage of talent pool and a

surplus of middle-level and senior

employees. Consequently, firms in Japan

will have to offer more incentives to

attract and retain qualified talent pool.

Attitude towards Outsourcing.

• Japanese companies are skeptical toward

the idea of handling end-to-end processes

to an external entity and F&A is

considered as delicate information. As

well they are quite reluctant about the idea

of employees changing companies due to

an outsourcing deal.

Cultural factors

• Usually Japanese companies operate

with the idea of “grouping”: meaning

affiliated companies work together. Only

till recently the adoption of outsourcing

for back-office has slowly evolved but

reluctance is still an issue stopping large-

scale BPO deals to occur.

Human Resources challenges

• “Lifetime employment.“ heritage. This

long-standing tradition breaks down many

possibilities or job reallocation to low-cost

countries. Social stigma carries a negative

image to the company carrying on to

mass-lay off.

Challenges

Japan has not been very open to outsourcing and nearshoring until recently. With

economical and social changes taking place this will slowly change in the future


Japan/China Issues

• Talent is available and growing in numbers,

yet their proficiency in foreign languages

and cultures and process expertise is

lacking. For voice-based BPO services,

only Japanese businesses are being

serviced currently from cities like Dalian

which has a high Japanese-literacy rate

• Nevertheless, Japanese customers are

quite reluctant to Japanese being spoken

with a Chinese accent, so few of them

actually use China-based services.

• Privacy laws are still confuse and untidy ,

causing great security concerns,

specifically around F&A issues.

China

Although China being the natural nearshoring low-cost option there are several

issues slowing down the shoring industry among both countries

• Low adoption of European-style business

process outsourcing

• Services performed are low-

value operations such as scanning,

printing/binding or data entry (no

progression “up” the value chain yet)

• Japanese companies will not send their

financial documents (e.g. Supplier

Invoices) outside Japan for scanning or

processing not because of legal

constraints, but due to the deeply-ingrained

Japanese culture on keeping certain

information and data confidential

Japan



Regional Wages Comparison

Wages Comparison Chart

0

5000

10000

15000

20000

25000

30000

35000

40000

Japan

Singapore India

China

Malaysia

Philippines

F&A (semi-

senior)

Admin

Professions

€ p.a.

• Singapore’s rationale is

the high quality of its

talent pool, nevertheless

cost is not as attractive

as other Asian countries

• Philippines is the most

cost-driven attractive

location and with good

English capabilities, but

poor on Japanese

cultural and linguistic

compatibility

Comments

Salaries in Japan are on average four times higher than those in the low-cost

Asian countries


Source: Offshoring Institute Database


Infrastructure Costs Regional Comparison

Real Estate Price Comparison

0

100

200

300

400

500

600

700

Japan

Singapore

ChinaIndia

Philippines

Malaysia

€/sqm/p.a.

• The graphic shows the

average country yearly

rent value for an office

rent Class A (one before

AAA)

• Infrastructure quality in

the low-cost Asian

countries is still lacking

reliability and quick

upgrade capabilities

Comments

Real estate prices in Japan are on average six times higher than those from the

low-cost Asian countries


Source: Offshoring Institute Database


Selected Shared Services Activities

Fuji-Xerox Canon Pioneer

Branch name Fuji Service Center Canon Business

Support

Pioneer Shared Services Japan

Corporation

Location Shanghai, China Tokyo, Japan Tokyo, Japan

Employees Less than 20 670 315

Activities Account Management of global

accounts for the whole Asia-

Pacific region

Mainly IT shared

services for the Canon

Group worldwide

(1) Business Support services for

Pioneer Headquarters and Sales

Branches mainly in Asian region

(accounting, salary and fringe

benefit, general affairs, sales

administration support)

(2) Planning and development of

a strategic logistic system

and to provide logistic support

services

(3) Planning and development of

Information Systems

Most of the captive activities take place within the geographical limits of Japan.

Offshore Shared Services of the Japanese companies are usually relatively

small in size



Selected Shared Services Activities

Hitachi Sony Sony

Branch name Hitachi Finance Services Global Infrastructure

Shared Service

Sony Global Treasury Services

Location Tokyo, Japan Singapore UK, Tokyo, Singapore

Employees 430 150 - 250 100 - 150

Activities Financial and accounting

affairs services such as

book-keeping, journal

entries, receipts and

disbursement, fixed

assets administration for

Asian region

IT infrastructure and

network services for Sony

companies in the region

Inter-company loans and deposits:

maximising internal funding opportunities;

Running account service: automating

posting and reconciliation of receipts and

payments on behalf of the various Sony

Opcos; Automatic sweeping service:

providing internal liquidity management;

Proxy payment service: making payments

on behalf of the Opcos; and Global

settlement platform: expediting

settlements related to Sony's business-to-

business (B2B) ecommerce sites.

Most of the SSC located in the limits of mainland Japan, are established in

Tokyo and the size can vary from some tens to hundreds of FTEs



BPO/ITO Providers to Japanese Companies

Company name Global/Local BPO/ITOShore Delivery

LocationEmployees

Infosys Global with local

delivery capabilities

BPO/ITO Japan, China

(multiple locations),

Philippines

CapGemini (In Japan:

Zacatii Consulting)

Global and local BPO Tokyo, Japan. China 130

Genpact Global, and local

offices (no local

delivery capabilties)

BPO/ITO China (multiple

locations), Philippines

IBM Global and Local (for

ITO)

BPO/ITO China, Japan 16.000 in Japan (IT

services, sales,

software)

Most of the global BPO/ITO providers count with either onshore or nearshore

delivery capabilities aiming at satisfying the Japanese market



LocationEmployees

EDS Global ITO Wuhan, China ~1000

ACS Global BPO Tianjin, China 200

Accenture Global BPO/ITO Shanghai, Beijing,

Dalian, Hong Kong

Most of the IT outsourcers provide services from nearshore locations,

meanwhile Back-office providers generally have a local delivery center

Japan – F&A SSC and BPO SituationBPO/ITO Providers to Japanese Companies



LocationEmployees

Okamoto and Co Local BPO Tokyo, Japan 50

HTM (Japan and USA

owned)

Local BPO Tokyo, Japan 30 – 40

KPMG Azsa & Co.

(Japanese member

firm of KPMG Int.)

Local and Global BPO, Tax and Legal Tokyo, Japan 120 – 160

AP Outsourcing Ltd. Local BPO Tokyo, Japan 77

There is a number of well established local BPO providers in Japan which

apparently have a cultural advantage over the global competitors

Japan – F&A SSC and BPO SituationBPO/ITO Providers to Japanese Companies


Most of the captive solutions for F&A are located in mainland Japan

Most of the BPO deals are also taking place within the geographic limits of the country

Financial information is perceive as of high-importance and therefore companies need to develop a

sense of trust on the partner before releasing any confidential information

Appears that for the global BPO providers attract credibility among Japanese customers, they

usually need to have local delivery capabilities

IT is the most recurrent outsourced-offshored or captive-offshored activity

Mass lay-offs due to offshoring/outsourcing deals may create an stigma of negative corporative

image among the local society

Nearshore locations (e.g. China) are usually perceived as untidy in regards of legal affairs and

therefore not entirely reliable for delicate information

Nevertheless, as shown on this research, some BPO large-scale deals took place in recent years

Japanese companies are aware of the global competition and BPO/ITO and captive solutions are

not anymore entirely excluded from the development strategies

Japan – F&A SSC and BPO SituationGeneral Conclusions


Case

Location Ranking APAC (Asia, Pacific)


Scope - Locations in Asia Pacific

Shanghai

Hong Kong

Singapore

Darwin

Following selected locations were included in the ranking model for Asia



Visual Data

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

Singapore Shanghai Hongkong Darwin

Environment

Infrastructure

People

Labor cost

Ran

kin

g R

esu

lt (

va

lue

be

twe

en

1 a

nd

5)



Results

Singapore leads the ranking and outperforms other locations in particular in the

categories “Infrastrucure” and ”Environment”. Property prices are on average, media

infrastructure and environmental factors are highly developed .

Shanghai is leading in the categories „Labor Cost“ and „People“ due to

low salaries and the size of the qualified labor pool.

Hongkong scores average results over all four categories

Darwin scores the lowest results in the overall ranking and demonstrates very poor

results in the categories “Labor Cost” and “People”. The labor costs are relatively high

in Darwin compared with the other Asian locations and its labor pool is fairly small.


Location Labor

Cost

People Infra-

structure

Environ-

ment

Total*

Singapore 0,81 0,89 1,09 0,88 3,67

Shanghai 0,99 1,09 0,78 0,70 3,57

Hong Kong 0,84 0,71 0,84 0,81 3,21

Darwin 0,42 0,62 0,81 0,75 2,59

Example (maximum) 1,11 1,51 1,41 0,96 5,00

Example (minimum) 0,22 0,30 0,28 0,19 1,00


Results

* Rounding difference 0,1 may occur due to more detailed calculation.

Singapore scores the best, followed by Shanghai which shows significant need for

improvement in its infrastructure and environment.

Selected Criteria


Language capabilities are the single most important criterion with nearly 10% weight

of the total ranking.

Details

Language Weight

English 40%

Chinese (Mandarin) 25%

Japanese 20%

Chinese (Cantonese) 5%

Korean 5%

Thai/ Malay/ Indonesian 5%

Scoring structure Asia, Pacific

Selected Results:

Shanghai, Darwin and Singapore are the most suitable locations in APAC leaving behind Hong Kong

with its limited language capabilities in Chinese (Mandarin) and Japanese.

Methodology, Scoring Model

1. Data capturing through the Offshoring Institute - overall 35 criteria for each of the 13 by the client

predetermined locations to identify the most suitable location.

2. Location Scoring – The location scoring was performed using a scoring models for APAC. All criteria

were evaluated for each location on a scale from “5” (best) to “1” (worst); N/A values were scored as

“3”

3. Criteria Weighting – Client Executives provided their opinion with respect to the importance of the

single weighting factors. The Offshoring Institute averaged the weights for the location ranking.

4. Location Ranking - The location scoring results derived from the criteria research were multiplied

with the weighting factors to determine the final location ranking.


The Offshoring Institute uses a proven methodology to achieve reliable results.

Datapool

Labor Cost

Methodology


Source 2

Location Salary

Accounts Clerk

Scoring result

1

City 1 20,000 $ 5

City 2 30,000 $ 3

City 3 40,000 $ 1

Location Salary

Executive

Scoring result

2

City 1 200,000 $ 1

City 2 150,000 $ 3

City 3 100,000 $ 5

Location Scoring result 1 Ranking result 1 Scoring result 2 Ranking result 2 Ranking result

total

City 1 5 3.5 (5 * 70%) 1 0.3 (1 * 30%) 3.8

City 2 3 2.1 (3 * 70%) 3 0.9 (3 * 30%) 3.0

City 3 1 0.7 (1 * 70%) 5 1.5 (5 * 30%) 2.2

Example

Weighting structure

Accounts Clerk: 70% Executive: 30%

Source 1 Source 3

Source 4



Asia, Pacific

China Singapore Australia

Hong Kong Singapore Darwin

Shanghai

The client identified 4 locations in scope for the location ranking.Decision



Labor Cost People Infrastructure Environment

Average proportion of

total ranking22,25 % 30,25% 28,25% 19,25%

Number of criteria 8 7 15 8

Most important

criterion

Labor cost of

accounts clerk

Language

capabilities

Time

zone

Reluctance

about spec.

countries

Percentage of

total ranking4,2% 9,8% 4,4% 4,0%

Second most

important criterion

Accounts/

Finance

Manager

Average day of

absence per yearInternet speed

Government

effectiveness

Percentage of

total ranking3,1% 3,8% 3,6% 2,9%

The client determined the following weighting factors for the location analysis.Structure

Executive Summary


Criterion Person 1 Person 2 Person 3 Person 4 Average

Cost of Executive/ Directors 10% 10% 15% 10% 11%

Call Center Manager 5% 20% 10% 15% 13%

Call Center Supervisor 15% 0% 10% 20% 11%

Call Center Agent 5% 15% 20% 15% 14%

Accounts/ Finance Manager 20% 10% 15% 10% 14%

Financial Analyst 5% 5% 10% 5% 6%

Accounts Clerk 30% 20% 10% 15% 19%

Average Nominal Wage Growth 10% 20% 10% 10% 13%

Total weight of category

labor cost20% 30% 15% 24% 22,25%

The Team members weighted each category with its regard to importance.

For example for labor cost following average results were provided

Decision

Weighting factors



Cost of Executive/ Directors 10% 10% 15% 10% 11%

Call Center Manager 5% 20% 10% 15% 13%

Call Center Supervisor 15% 0% 10% 20% 11%

Call Center Agent 5% 15% 20% 15% 14%

Accounts/ Finance Manager 20% 10% 15% 10% 14%

Financial Analyst 5% 5% 10% 5% 6%

Accounts Clerk 30% 20% 10% 15% 19%

Average Nominal Wage Growth 10% 20% 10% 10% 13%


labor cost20% 30% 15% 24% 22,25%

The chart summarizes the supporting information for the calculation of the

weighting factor for labor cost.

Decision

Weighting factors



Size of labor pool overall 5% 15% 10% 15% 11%

Unemployment rate 5% 10% 15% 10% 10%

Attrition rate in administrative

professions5% 10% 15% 15% 11%

Average days of absence per year 20% 15% 5% 10% 13%

Number of graduates in business 10% 10% 15% 10% 11%

Number of labor pool business 0% 20% 10% 15% 11%

Language capabilities 55% 20% 30% 25% 33%


people35% 25% 35% 26% 30,25%


weighting factor for people.

Decision

Weighting factors



Downtown office rent p. sqm (p.a.) 5% 5% 1% 1% 3%

Downtown office Sales Price p. sqm (p.a.) 0% 0% 1% 0% 0%

City office rent p. sqm (p.a.) 5% 10% 2% 12% 7%

City office sales price p. sqm (p.a.) 0% 0% 2% 0% 1%

Metropolitan area office rent p. sqm (p.a.) 10% 10% 3% 17% 10%

Metro area office sales price p. sqm (p.a.) 0% 0% 3% 0% 1%

Average vacancy rate 5% 5% 5% 6% 5%

Internet cost per month 10% 5% 3% 10% 7%

Internet speed 20% 10% 15% 6% 13%

Internet quality (penetration rate) 15% 5% 11% 6% 9%

Phone call to central Europe per minute 5% 10% 2% 5% 6%

Phone call to USA per minute 10% 5% 2% 2% 5%

Time zone 5% 15% 25% 17% 16%

Average travel time (air) from Frankfurt 10% 5% 10% 10% 9%

International airport, int. destinations 0% 15% 15% 8% 10%


infrastructure30% 25% 30% 28% 28,25%


weighting factor for infrastructure.

Decision

Weighting factors



Corruption perception 5% 15% 20% 10% 13%

Government effectiveness 10% 15% 20% 15% 15%

Population of the city 10% 15% 10% 13% 12%

Pollution 10% 15% 3% 12% 10%

Recreational facilities 5% 10% 10% 10% 9%

Cultural facilities 5% 5% 10% 8% 7%

Crime rates 20% 10% 7% 19% 14%

Reluctance about specific countries 35% 15% 20% 13% 21%


environment15% 20% 20% 22% 19,25%


weighting factor for environment.

Decision


Table of Contents







Cases



Special Topics

1. SSC/BPO Business Cas

2. Peopel Motivation

73

Net Cost-Benefit Savings Realized

Factor CostImprovement

Consoli-dationImpact

ProductivityImpact

OthersTelecom,Other Infra-

structure

TravelResourceMix

NetImprove-

ment

45 – 50%

8 – 10%

8 – 10%

5%

(~5%)

(8 – 10%)

(12 –

15%)

41 – 45%

Offshoring – Benefits Case

Why Offshoring


Opportunity for Cost Reduction

Baseline Costs Consolidation/Standardization /Reengineering

Outsourcing/ Offshoring of Selected Processes

20% – 40%

Savings 40% – 60%

Savings

Example

While a comprehensive HR Transformation can reduce costs by up to 60% often half of the

savings is contributed through Offshoring and Outsourcing of selected HR processes

74

Why Offshoring


BPO

Potential Savings Components through Shared Services and Outsourcing Activities

Offshoring

Dependent on the selected processes and their magnitude savings from Offshoring and BPO range

between 20 – 40% with headcount reduction and labor rates often being the biggest contributors

InternalBaseline

HeadcountReduction

Labor Rates ProcessEfficiency

TechnologyAdvantage

ScaleEfficiency

BPO Margin NewBaseline

75

Why Offshoring


A reliable business case should consider best case and worst case options.

Extra costs by moving to a SSC/BPO environment need to be accounted for

Net savingsminimum:15% Net savings

maximum:30%

Consolidation Reengineering Labour Arbitrage

Coordination/

Travel/ Expats/

Quality Mngt.

As Is To Be

75

%

100

%

Cost

Minimum savings

Added amount to maximum savings

(best case)

50

%


Why Offshoring

Business Case - Overview

Why Offshoring

Determining the investments required is key to develop a proper business case

and to determine the pay back period

Shadow Operations

Severance ConsultingInfrastructure

• Part of the Shared

Services/ BPO

Assessment Framework

• Purpose: assessing the

required investments

• Each category is based

on a specific rationale and

project experiences

• Figures should be

specified jointly with client

as many data depend on the company s situation

(e.g. severance

packages)

SSC/BPO Investment

Model - Key facts

Hiring &

Training

Total

Investment

Cost

20%

16%

9%

5%

5% 55%Percentage of the running yearly cost;

based on real case studies

• One time investment are not

necessarily required at the beginning

of the investment phase

• Certain one time investments take

place in a phased approach as well,

i.e. severance or hiring costs of

locations that are transferred at a

later stage in the SSC/hub


Investments

Why Offshoring

Ideally, SSC/BPO initiatives reach a pay back time of less than 26 month –

however, this depends on the migration strategy, scope, and locations

Consulting

Shadow

Operations

Severance

Hiring &

Infrastruct.

30

-30

20

10

-10

-20

Savings

-32 mill. $

7,5 mill.

15 mill.

15 mill.

15 mill.

15 mill.

Assumptions:

Half of the savings in year 1

Business Case period: 5 years

Estimatednet savings

after 5 years:40,5 mill. $


Pay Back Analysis

Managing HR Operations Offshore

21/05/1079

Leave Company

• New engagement

with new company

• Early retirement

• Unemployed

Severance Package

Remain with

Company

• Retained organization

• New job and tasks

• Prior tasks for

different department

Transfer to

Service

Provider

• New job with service

provider

• Similar tasks than

before

HR Scenarios in

HR BPO

HR Transformation leads to various options for the employees–

however, most of them are concerned about loosing the current job only




Staff are retrained and

dispersed into different

roles in the corporation

Staff are assigned to the

retained Organization

performing enhanced


role

Staff are re-assigned into

similar roles using similar

skills at other places

within the corporation


one of the service

centers, re-trained and

dispersed into the wider

labor pool


the service provider

performing enhanced


job (interface to former

company)


one of the service centers

performing similar tasks

than before

Current Company Service Provider

Levels of Job

Enhancement

For employees staying with the firm and/or service providers

various options for job enhancement are possible

Career

development path

within the Service

Provider

organization


21/05/1081

++

+/-

--

Beginning

outsourcing/

offshoring threat

Job loss

(voluntary or

forced through

outsourcing)

Orientation and

re-training phase

New job

New job, challenging,

exciting work

Constant offshoring

threat, less

challenging work

Increased quality of

job life through new

job orientation

• New organizational and

psychlogical research suggests a

higher quality of work life if the

work is challenging and in line

with the individual personal

characteristics (see Bolles,

Richard N., 2007)

• Many back office transformations

leave employees in constant fear

about their jobs, in particular

since SSC or BPO are often

major parts of the solution

• A proper and open

communication strategy enables

employees to start a new career

orientation early in the process

• In the mid-term a clear cut

creates higher satisfaction than

living with constant job loss fear

• Therefore, early communication

and a swift execution of the

transformation are key to a

successful implementation

Constant job threats are a major obstacle to Finance

Transformations and hinder work satisfaction

Job

Satis-

faction


Offshoring Institute

82

Berlin, Germany

Treskowallee 26

+49 30 500 1226-10

www.offshoring-institute.com


http://www.offshoring-institute.com/



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