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

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