Includes Implications of Financial Crisis to Globalized Services Industry

1. The Future of Offshore Outsourcing:
g
Trends and Implications
Findings from
The International Offshoring Research Network (ORN) Project
Presented by Jeff W. Russell
Duke Center for International Business Education and Research,
The Fuqua School of Business
Authored by Arie Y. Lewin
Duke University The Fuqua School of Business
University,
This presentation may not be reproduced, cited, or distributed without the express written consent of the author.

2. Agenda
ORN Main Findings
Introduction ORN
Offshoring Reaches Executive Suite
Changing dynamics of outsource-offshoring
Globalization of service delivery & global race for talent
Future trends/plans
Discussion of Current Issues
Implications of financial crisis
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3. Offshoring Research Network: History and Scope
Initiated in 2004 at Duke University CIBER, Fuqua School of
Business
Multi year survey
• Tracks adoption of offshoring over time by launch year.
• Tracks adoption of offshoring strategies, on corporate & function
level
• Includes over 1600 companies that do, do not, or are considering.
• Covers all industries (e.g. financial services) all functions, (e.g. IT) all
locations (e g Latin America) and all delivery models (e g captive
(e.g. America), (e.g. captive,
hybrid)
• Complemented by annual ORN Service Provider Survey (since
2007), focused surveys and p
) y participants workshops
p p
• In-depth analyses, reports, case studies and Academic
publications
3

4. Offshoring Research Network: Sponsors and Affiliates
The Conference Board is Lead Collaborator for ORN U.S. Buy-side Survey
(since 2007)
PricewaterhouseCoopers is Lead Founder of ORN Best Practices Institute
and sponsor of ORN EU Survey (2008)
Past ORN Sponsors
p
Booz Allen Hamilton (2006)
Archstone Consulting LLP (2004 and 2005)
Affiliates:
Information Technology Association of America
International Association of Outsourcing Professionals
g
Thirteen CIBERs
Council for Entrepreneurial Development
Enterprise S ft
Et i Software R
Roundtable
dt bl
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5. ORN Buy-side survey demographics
U.S. survey
EU survey
Source: Duke University/Archstone Consulting Offshoring Research Network 2005 Survey and Duke University/Booz Allen
y g g y y
Hamilton Offshoring Research Network 2006 Survey and
Duke University/The Conference Board Offshoring Research Network 2007/8 Survey
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6. Offshoring Reaches
E
Executive S it
ti Suite
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7. Since 2005 dramatic growth in companies adopting strategies
for guiding offshoring decisions at BU and function level
Percent implementing offshoring strategies before 2005 vs. by end of 2007
75% are large companies
Corporate-wide
R&D
Product Design
IT
Engineering
Software Development
Marketing & Sales
Call Center
Finance & Accounting
Human Resources
Before 2005 By 2007
Procurement
0% 10% 20% 30% 40% 50% 60%
Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey
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8. Companies experience significantly higher achieved savings
following implementation of corporate wide offshoring strategy
Before Implementing Offshoring Strategy After Implementing Offshoring Strategy
Administrative services Administrative services
Call centers Call centers
IT IT
Software development Software development
Product d l
P d t developmentt Product development
Marketing & sales Marketing & sales
Procurement Procurement
0 10 20 30 40 50 0 10 20 30 40 50 60 70
Savings Expected Savings Achieved Savings Expected Savings Achieved
Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey
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9. Changing Dynamics of
Offshore Outsourcing
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10. Offshoring of knowledge-intensive services is accelerating.
In 2007 over 50% of new offshoring-outsourcing projects involved software
development and 30% product development.
p p p
Cumulative Percent of Companies Offshoring Function
60%
50%
Admin
40% CC
IT
30% M&S
* PD
Proc
20%
Soft
10%
0%
* Product Development (PD) includes engineering, R&D, and product design
** Administrative services include finance & accounting, human resources and legal services
Source: Duke University/Archstone Consulting Offshoring Research Network 2005 U.S. Survey and
Duke University/Booz Allen Hamilton Offshoring Research Network 2006 U.S. Survey and
Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey
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11. Knowledge-intensive services include…
Product Development Software Development
Engineering: Product design: Application development
Software architecture & design
Database design
Engineering support Prototype design
Embedded systems Product design
development Systems design
y g
Testing Application development
Re-engineering Support services
Simulating
Knowledge Process
CAD drawing
Outsourcing (KPO)
g( )
Drafting & modeling
Performance analysis
Research & Development: Industry & company analysis
Market analysis
Credit analysis
Code development Data mining
Development of new technologies Equity analysis
Research on new materials and Forecasting
processes Risk management analysis
Financial planning
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12. U.S. companies have dramatically expanded offshore sourcing
of administrative, and product and software development functions
ons
ber
mplementatio
Percentage of total numb
of offshore im
o
f
P
Year in which offshore project was implemented
Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey
12

13. But it’s the smaller firms that focus on offshoring
knowledge intensive
knowledge-intensive services.
Distribution of Functional Implementations by Company Size
Software
f
Development
Product
Development
p
Procurement
Marketing &
Sales
Small
IT
Midsize
Call Centers
Administrative
Large
L
Services
0 20 40
Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey
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14. Number of providers offering IT services continues to grow.
Percentage of Providers Offering Categories of Services(1)
80%
viders in the
e
IT (i l di
(including software development)
ft d l t)
survey offering classes of services
Product design, engineering, R&D
Call Center
60% Administrative Services (F&A, HR)
Percentage of service prov
o
Procurement
KPO
Marketing & Sales
40%
20%
s
0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Year in which services were offered
(1) Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis
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15. Providers report that traditional ITO(1) and BPO(2) services are already
commoditized and will become even more commoditized
Extent of Commoditization of Services – Today vs. Expected within 18-36 Months
100%
ion in Next 18- Months
Call Centers
75% Finance and
-36
Accounting
Information
Technology
Human
50%
Resources
Procurement
Engineering
g g
Marketing
Commoditizati
& Sales Product
25% Design
Legal
Services
KPO
Research &
C
0% Development
0% 25% 50% 75% 100%
Commoditization today
Percentage of providers rating dimensions as high/very high
(1) Information Technology Outsourcing
(2) Business Process Outsourcing
Source: Duke University Offshoring Research Network 2007 Service Provider Survey.
15

16. Longer-term relationships seem to be the norm
Rate of Renewal of Deals by Service Offering
Finance & Accounting
Marketing & Sales
Call Center
Knowledge/Analytical
Services
Human
Resources
Legal Services
Information Knowledge
Technology intensive-service
Procurement deals tend to be
project / task
Engineering based vs.
outsourcing of
t i f
Product Design
large ITO/BPO
deals
Research & Development
0% 20% 40% 60% 80% 100%
Percentage of deals renewed at expiration of the first contract
Source: Duke University Offshoring Research Network 2007 Service Provider Survey and Booz Allen Hamilton analysis.
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17. Globalization of Service Delivery
& Global Race for Talent
17

18. Clients are becoming more concerned about availability
And expertise of talent when choosing offshore locations
Location factors for software and product development
Talent pool available
Low cost of labor
High level of expertise
Low costs (besides labor costs)
Matches language requirements
Location of the best service provider
Cultural proximity
Quality of infrastructure
Geographical proximity
0% 10% 20% 30% 40% 50% 60% 70% 80%
Early experiments (<2002) Recent projects (2005-2007)
Percentage of responses rating location factor as “important” or “very important”

19. Client are concerned with rising wage inflation & employee
turnover offshore. Providers face same challenges
Comparison of perceived risks (important and very important) US2007 and US2006 surveys
Data
D t security
it
Lack of acceptance from internal clients
Lack of acceptance from customers
Loss of managerial control
+9%
High employee turnover
Lack of intellectual property protection
Loss of internal capabilities / process knowledge
Cultural differences
+17%
Wage inflation
Incompatibility between IT systems
0% 10% 20% 30% 40% 50% 60%
US2006 US2007
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20. Small providers more adept in accessing talent in emerging locations,
such as China, Russia, Latin America and the Middle East
India
China
United States
Other Asia
W estern Europe
Latin America
Small
Mexico
Large
Eastern Europe
Canada
Russia
Middle East
0% 20% 40% 60% 80% 100%
Percentage of providers offering product development services from these locations
Source: Duke University Offshoring Research Network 2007 Service Provider Survey
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21. Spanish companies have better access to high
skilled talent in Latin America
Location choice factors for IT, software and product development implementations
in Latin America and Mexico
Talent
T l t pool available
l il bl
Geographical proximity
Cultural proximity
Location of the best service provider
Political stability in host country
Other
Low costs (besides labor costs)
Avoiding hot spots
Access to local market
Matches language requirements
Low cost of labor
Quality of infrastructure
Government incentives
US
High level of expertise
Supporting existing customers locally Spain
Collocating with existing manufacturing plant offshore
Collocating with existing BP facility offshore
0% 20% 40% 60% 80% 100%
Percentage of responses stating factor is “important” or “very important”
21

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

23. Companies with no offshoring experience initially
prefer third-party service delivery models
third party
Considering
US
S
Offshoring
UK
Considering
Offshoring
pain
Considering
g
Sp
Offshoring
NL
Considering
N
Offshoring
0% 10% 20% 30% 40% 50% 60% 70% 80%
23

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

25. Near shore locations seem to be gaining in importance
for software and product development
Emerging preference for locating software and
Latin
L ti NPD projects near shore. Canada may be
America
benefiting from availability of talent. Direct
6%
consequence of Canadian immigration
policies regardless of high costs? Nine time
zone barrier?
India
China
18% 35%
Canada
18%
Mexico
23%
Number of new implementations
Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey
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26. Location matters: companies offshoring in China and
Other Asia prefer “own and control” model
p
26

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

28. Total offshoring of product and software development in
India are expanding, but share of India is declining
Distribution of locations for product development implementations in different time periods
60%
rcentage of to number of implementations
India
I di
50%
China
Eastern Europe
40% India's
Western Europe
share:
o
50% Russia
30%
Philippines
India's
Other Asia
share:
20%
otal
Mexico
55%
India's
Canada
share:
68% Australia
10%
Middle East
Latin America
0%
Per
Pre-2002 2002-2004 2005-2007
Time period in which implementation was made
Source: Duke University/Archstone Consulting Offshoring Research Network 2005 U.S. Survey and Duke University/Booz
Allen Hamilton Offshoring Research Network 2006 U S Survey and
U.S.
Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey
28

29. The Case of Call Centers: Location choice varies greatly
depending on the country of the buy-side company
p g y y py
100%
90%
80%
India
70% Latin America
Western Europe
60%
Philippines
50% Mexico
Other Asia
40%
Canada
Eastern Europe
30%
Other
20%
10%
0%
US NL Spain UK
Percentage of Call Center implementations in particular locations
Source: Duke University/The Conference Board Offshoring Research Network 2005/67/8 Survey
29

30. US shortage of S&E talent with advanced degrees not just an
H1B visa policy outcome
250,000 $12
H1B Cap
S&E Graduates
GDP (in trillions) $10
200,000
$8
150,000
$6
100,000
$4
50,000
$2
0 $0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Data on Master and PhD degrees in sciences and engineering come from the US National Science Foundation.
Data for H1B visa quota come from the US Citizenship and Immigration Services.
30

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

32. FUTURE TRENDS/PLANS
32

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

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

35. Companies with extensive offshoring experience integrate
offshoring strategy as part of corporate wide global growth
strategy
Percent rating driver “important” or “very important”
Growth strategy
Other cost savings
Business process redesign
Improved service levels
78%
Part of a larger global strategy
Exploit country-specific advantages
Exploit location-specific advantages
p p g
Domestic shortage of qualified
personnel
Differentiation strategy
Access to new markets
Least Experienced Most Experienced
Source: D k U i
S Duke University/Archstone C
it /A h t Consulting Offshoring Research Network 2005 U S S
lti Off h i R hN t k U.S. Survey and
d
Duke University/Booz Allen Hamilton Offshoring Research Network 2006 U.S. Survey and
Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey
35

36. Companies with offshoring strategy (75% large
companies) have aggressive plans for new IT, F&A
p ) gg p ,
and Call Center operations offshore
Percent companies planning new functional implementations (next 18 to 36 months)
Software development
42%
Information technology
Engineering services
33%
Finance and Accounting
37%
Call center/help desk
Procurement With Strategy
Research and Development Without Strategy
Product Design
Marketing and Sales
Human Resources
Legal Services
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey
36

37. Low-tech companies are targeting new offshoring projects for
IT, contact centers and finance and accounting processes
Software
development
p
Information
technology
Research and
Development
Product Design
Call center/help
desk
Low Tech
Procurement
Engineering High Tech
services
Marketing and
Sales
Human
Resources
Finance and
Accounting
Legal Services
0% 10% 20% 30% 40% 50%

38. Midsize companies are planning new offshoring projects across all
business processes and functions. Large companies are particularly
planning new call center operations.
Software development
Information technology
Call center/help desk
Finance and Accounting
Procurement
Marketing and Sales
Research and D
R h d Development
l t
Small
Engineering services
Mid
Product Design
Human R
H Resources
Large
Legal Services
0% 10% 20% 30% 40% 50% 60%
Source: Duke University/The Conference Board Offshoring Research Network 2007/8 U.S. Survey
38

39. In anticipation of limits to labor arbitrage service providers are
. planning to build capabilities in end to end business process re-engineering
Area of future expertise
Business process reengineering
Security management
Software services
SAP
Infrastructure management
CAD
Health Care/Pharmaceuticals
Insurance
Financial services
Engineering services
Testing and quality assurance
0 4 8 12
Number of providers
Source: Duke University / Booz Allen Offshoring 2007 Service Provider Survey
39

40. THANK YOU!
For more information please contact
p
The Research Team
offshoring@fuqua.duke.edu
ff h i @f dk d
919.660.3796
or visit
http://offshoring.fuqua.duke.edu
This presentation may not be reproduced, cited, or distributed without the express written consent of the author.
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