Is the Arbitrage of Your Offshore Locations Sustainable?
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Transcript of Is the Arbitrage of Your Offshore Locations Sustainable?
Is the Arbitrage of Your Offshore Locations Sustainable?October 18, 2011
Today’s Webinar is brought to you by Everest Group
Today’s Webinar
Is the Arbitrage of Your Offshore Locations Sustainable?
Synopsis:Increasing cost pressures in leading offshore markets are driving companies to question the sustainability of the offshore proposition. Additionally, fluctuating currencies pose challenges to the predictability of arbitrage in many locations. In this webinar, Everest Group experts will answer the following questions:
About Everest Group
How sustainable are offshore locations? Are there real risks of arbitrage eroding? What implications are companies facing in setting their global services strategies?
About Everest Group
Everest Group is an advisor to business leaders on the next generation of global services with a worldwide reputation for helping Global 1000 firms dramatically improve their performance by optimizing their back- and middle-office business services. With a fact-based approach driving outcomes, Everest Group counsels organizations with complex challenges related to the use and delivery of global services in their pursuits to balance short-term needs p g y g pwith long-term goals. Through its practical consulting, original research and industry resource services, Everest Group helps clients maximize value from delivery strategies, talent and sourcing models, technologies and management approaches. Established in 1991, Everest Group serves users of global services, providers of services, country organizations and private equity firms, in six continents across all industry categories. For more information, please visit www.everestgrp.com and research.everestgrp.com.
Proprietary & Confidential. © 2011, Everest Global, Inc. 2
please visit www.everestgrp.com and research.everestgrp.com.For more information, contact Mark Williamson at [email protected]
Q&A
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Click the question mark (Q&A) button located on the floating tool bar in the bottom right of your screen. This will open the Q&A Panel
Be sure to keep the default set to “send to All Panelists”
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Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit
Be sure to keep the default set to send to All Panelists
Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit
Proprietary & Confidential. © 2011, Everest Global, Inc. 3
Introductions
Eric SimonsonManaging Partner, ResearchEverest [email protected]
H. KarthikVice PresidentEverest Grouph k thik@ [email protected]
Proprietary & Confidential. © 2011, Everest Global, Inc. 4
Agenda for today’s webinar
Sustainability of offshore locations– Introduction– Arbitrage sustainability– Talent sustainability
Implications for global services strategies Implications for global services strategies
Proprietary & Confidential. © 2011, Everest Global, Inc. 5
Global companies have built significant offshore workforce and leverage multiple locations
Total offshore scale2011; Thousand FTEs
Number of offshore locations leveraged (#)Regions1 Countries Cities2
33-34
30-31
UK Bank
U S Bank
Substantial (10-25%) proportion of global workforce already
3
3
9
4
21
830-31
15-16
U.S. Bank
Global energy company
offshore
Most companies plan to further increase scale and scope of
3
3
4
3 4
9-10
6-7
U.S. financial services firm
Global technology
scale and scope of offshoring
Increasing complexity of
2
3
4
4
4
46-7
4-5
firm
Global investment bank
managing global sourcing; need to take a “portfolio” view
3
2
4
3
4
3
Proprietary & Confidential. © 2011, Everest Global, Inc. 6
1 Four offshore regions considered: Asia, Latin America, Central & Eastern Europe, Africa & Middle East 2 Only includes cities with captive operations
Companies are concerned about the sustainability of their offshore locations
Key concerns Impact areas
InflationInflation
Currency movementsCurrency movements
Arbitrage sustainabilityArbitrage sustainability
Focus of d ’Currency movementsCurrency movements
Market saturationMarket saturation Talent sustainabilityTalent sustainability
today’s discussion
Market saturationMarket saturation
Geopolitical stability Geopolitical stability
yy
p yand natural hazards
p yand natural hazards Location diversification and
business continuity planningLocation diversification and business continuity planning
Concentration risksConcentration risks
Proprietary & Confidential. © 2011, Everest Global, Inc. 7
How to answer the polling question…
1. Recall your starting salary The first year you started work
( f
1. Recall your starting salary The first year you started work
( f
3. Calculate the ratio of the 5th year to the 1st year of salary
/ (
3. Calculate the ratio of the 5th year to the 1st year of salary
/ (
2. Recall the amount of your salary th
2. Recall the amount of your salary th
The annualized amount (if you were to work a full 12 months)
The annualized amount (if you were to work a full 12 months)
Ratio = Year 5/Year 1 (divide year 5 amount by year 1 amount)
Example– Year 1 (1990) = 20,000
Y 5 (1994) 30 000
Ratio = Year 5/Year 1 (divide year 5 amount by year 1 amount)
Example– Year 1 (1990) = 20,000
Y 5 (1994) 30 000in your 5th year of work Simply add 4 to the year in which
you started work (1990+4 = 1994) This is your fifth salary
in your 5th year of work Simply add 4 to the year in which
you started work (1990+4 = 1994) This is your fifth salary
– Year 5 (1994) = 30,000– Ratio = 30,000/20,000 = 1.5
Select the closest amount to answer the polling question
– Year 5 (1994) = 30,000– Ratio = 30,000/20,000 = 1.5
Select the closest amount to answer the polling question
1990 (year 1) 1991 (year 2) 1992 (year 3) 1993 (year 4) 1994 (year 5)
Example
1990 (year 1) 1991 (year 2) 1992 (year 3) 1993 (year 4) 1994 (year 5)20,000 22,500 25,000 27,500 30,000
Proprietary & Confidential. © 2011, Everest Global, Inc. 8
If your salary changed currencies, please don’t answer the poll!
Poll Question: What is the approximate ratio of your year five salary to your starting salary (beginning of career)?
4%
7%
1.00
1 25 7%
16%
14%
1.25
1.50
1.75 14%
9%
14%
1.75
2.00
2.25
37%2.50
Proprietary & Confidential. © 2011, Everest Global, Inc. 9
Source: Live polling conducted during the “Is the Arbitrage of Your Offshore Locations Sustainable?” webinar on October 18, 2011
What does the ratio imply for your average annual increase in compensation?
RatioAnnual % increase in salary over 5 yearsy y
1.00 0%
1.25 5.7%
1.50 10.7%
1.75 15.0%
Typical band for lower levels of offshore pyramid
Typical band for lower levels of offshore pyramid
2.00 18.9%
2.25 22.5%
2.50 25.7%
What portion of increase is role progression and what is inflation?
Proprietary & Confidential. © 2011, Everest Global, Inc. 10
What portion of increase is role progression and what is inflation?
Agenda
Sustainability of offshore locations– Introduction– Arbitrage sustainability– Talent sustainability
Implications for global services strategies Implications for global services strategies
Proprietary & Confidential. © 2011, Everest Global, Inc. 11
Commonly perceived myths on arbitrage sustainability
Myth
W i fl ti i th d i t d iW i fl ti i th d i t d i C i t i ll th d i t d iC i t i ll th d i t d i
Reality
11Wage inflation is the predominant driver of arbitrage erosionWage inflation is the predominant driver of arbitrage erosion
Currency is typically the predominant driver of arbitrage movements and is often the “wild card”
Currency is typically the predominant driver of arbitrage movements and is often the “wild card”
Wage increases directly correspond to an increase in overall people costsWage increases directly correspond to an increase in overall people costs
Overall people costs typically increase at a lower rate due to multiple efficiency leversOverall people costs typically increase at a lower rate due to multiple efficiency levers
22
India’s arbitrage could erode soon (over the next 5 years)India’s arbitrage could erode soon (over the next 5 years)
India’s arbitrage is likely to last at least 12-13 years, even under highly pessimistic scenarios
India’s arbitrage is likely to last at least 12-13 years, even under highly pessimistic scenarios
33
scenariosscenarios
Locations beyond India have stable costs and are therefore becoming more costLocations beyond India have stable costs and are therefore becoming more cost
Costs increasing in multiple locations; India retaining comparative cost positionCosts increasing in multiple locations; India retaining comparative cost position
44
Proprietary & Confidential. © 2011, Everest Global, Inc. 12
and are therefore becoming more cost competitiveand are therefore becoming more cost competitive
retaining comparative cost positionretaining comparative cost position
1Myth: Inflation is the single biggest driver of arbitrage erosion
Change in annual operating cost per FTE over 2007-11Indexed: Base = 2007 operating cost
Currency depreciation offset the impact of high
ITO: ARGENTINA EXAMPLE
100 28 30 98
offset the impact of high wage inflation
2007 costs Inflation (wages and others) Currency depreciation 2011 costs
Percentage of total operating
Average annual inflation (CAGRElements of
Trends in ARS/USD
WagesWages60-65%
total operating cost
inflation (CAGR over 2007-11)
10-12%1
Overall
Elements of operating cost
0.2
0.3
0.4Ratio
Real estateReal estate
Telecom and othersTelecom and others
10-15%
20-25%
2-3%
Largely stable
operating cost inflation: 6-7%
0.0
0.1
2007 2011
Steadily depreciating as a result of government policy
Proprietary & Confidential. © 2011, Everest Global, Inc. 13
1 Average wage inflation over five years; recent wage inflation is higher (15-18%)
2Myth: Wage increases directly correspond to an increase in overall people costs (page 1 of 2)
ITO: INDIA EXAMPLE
Wage increasesEmployee pyramid
Annual compensation increases for
i di id l (2011) Wage increases significantly correspond to an individual’s career progression (e.g., gain experience within their role)
7-9%
individuals (2011)
Manager and
above
Weighted
role)
For the same role and experience level, salaries have remained largely stable in India (e.g.,
Team leader 8-10%
increase in wages: 9-10%
entry-level salaries for college hires)
Also, wage increases are typically lower at senior levels Therefore the
Senior programmer 12-14%
levels. Therefore, the overall impact on costs is lower than what is typically perceived/highlighted
Junior programmer 14-16%
Proprietary & Confidential. © 2011, Everest Global, Inc. 14
Myth: Wage increases directly correspond to an increase in overall people costs (page 2 of 2)
2
Increase resource utilization
Efficiency levers used by companies
Increase entry level
mix in overall
pyramid
Reduce general and
admin expenses pyramid
Leverage l tlower cost locations
(e.g., Tier-2 cities)
Proprietary & Confidential. © 2011, Everest Global, Inc. 15
Reality: Impact of inflation can be controlled through multiple efficiency levers
Myth: India’s arbitrage could erode soon (page 1 of 2)
3
Historical trends Scenarios used to assess future trendsFactors affecting arbitrage
Wage inflationWage inflation
Optimistic
9-10%
Base case Pessimistic
8-9% 9-10% 11-12%
Fluctuating, with depreciation of 2-3% p.a. over the past five yearsCurrency
movementsCurrency movements
Remains stable
Appreciates at 1% p.a.
Appreciates at 2% p.a.
Trends in INR/USD Scenario based approach used to assess
0.03
Trends in INR/USDRatio
Scenario-based approach used to assess arbitrage sustainability
Although the Indian rupee has depreciated (by 2-3% p.a.) over the past five years, forward-looking scenarios assume appreciating
0 01
0.02
g pp gcurrency, consistent with long-term views on India’s economy and currency
Proprietary & Confidential. © 2011, Everest Global, Inc. 16
0.012007 2008 2009 2010 2011
Myth: India’s arbitrage could erode soon (page 2 of 2)
3
US$
Number of years for arbitrage sustainability ITO SERVICES
Hurdle rate1
US Tier 1 city
US$
Pessimistic scenario
Base case scenario
Optimistic scenario
Hurdle rate1
@ 70%
India Tier 1 city
15-17 years
12-13 years
Time23-24 years
2011
Reality: India’s arbitrage likely to last 12-13 years even under pessimistic scenarios
Proprietary & Confidential. © 2011, Everest Global, Inc. 17
1 Hurdle rate refers to the maximum wage ratio of the destination/source country, which still allows for meaningful offshoring. Hurdle rate is estimated as approximately 70%
Poll Question: Which scenario do you think is most likely?
45%Pessimistic
39%Base case
12%Optimistic
2%Don't know
Proprietary & Confidential. © 2011, Everest Global, Inc. 18
Source: Live polling conducted during the “Is the Arbitrage of Your Offshore Locations Sustainable?” webinar on October 18, 2011
4Myth: Locations other than India have stable costs and have become more competitive (page 1 of 2)
Wage inflation (CAGR over 2007-11)Percentage
8-10% 8-10%
ITO SERVICES
8 10% 8 10%
5-7%4-6%
3-4% Most locations (except
Philippines) have
India Philippines Malaysia Brazil Poland
Currency trends over 2007-11Local currency/USD indexed to 2007
Philippines) have witnessed lower inflation than India
However, currency movements in multiple xx% Net change in currency over 2007-11 pcountries have been less favorable compared to India
Consequently, India’s
+19%+13%
+7%
Appreciating currency: Increases costs in USD
PhilippinesMalaysiaBrazil
relative overall cost position has not changed significantlyIndia
Depreciating currency: Decreases costs in USD
7%
-4%-10%
Poland
Philippines
Proprietary & Confidential. © 2011, Everest Global, Inc. 19
2007 2008 2009 2010 2011
4Myth: Locations other than India have stable costs and have become more competitive (page 2 of 2)
Annual operating costs per FTE per annum2011; Index: India = 100
300 320
ITO SERVICESxx% Arbitrage relative to U.S.
Tier-1 city (Chicago)
300-320
100115-120
170-175 175-180
India (Bangalore) Philippines (Metro Malaysia (Kuala Poland (Krakow) Brazil (Sao Paulo)India (Bangalore) Philippines (Metro Manila)
Malaysia (Kuala Lumpur)
Poland (Krakow) Brazil (Sao Paulo)
80-85% 42-47%67-71%75-80% 69-72%
Proprietary & Confidential. © 2011, Everest Global, Inc. 20
Reality: India has retained its cost position relative to other locations
Agenda
Sustainability of offshore locations– Introduction– Arbitrage sustainability– Talent sustainability
Implications for global services strategies Implications for global services strategies
Proprietary & Confidential. © 2011, Everest Global, Inc. 21
Talent sustainability is influenced by multiple external and internal factors
Growth plans Growth in h
External factors
Quality of talent pool
Growth plans of competitors other
industries
Talent development
initiatives
Talent pool sustainability
Scale of talent pool Migrationyp
Talent and operating
model
Skills and quality
required
Proprietary & Confidential. © 2011, Everest Global, Inc. 22
Internal factors
Alternative talent models can help companies cope with market saturation challenges
Annual demand and supply at entry levelNumber
KRAKOW – VOICE BPO
10,000-12,000
~20 times
3,000-4,0002,500-3,000
4,000-5,0006-7 times
500-600
Industry demand at l l
Supply of employable i d
Supply of employable d d
Employable pool from dj i i
Total employable poolentry-level tertiary graduates undergraduates adjoining areas
Exploring alternative talent pools (e.g., undergraduates, part-time students) can create more room for growth This requires a different operating model (e.g., hiring, training) to implement and scale
Proprietary & Confidential. © 2011, Everest Global, Inc. 23
q p g ( g , g, g) p
Companies need to view talent sustainability in context of their specific functional/skill needs
Total annual graduate pool and annual relevant pools for F&A and IT
KUALA LUMPUR
for F&A and IT2011; thousands
31-32
Ratio of annual supply1 to demand2 – IT
3
9-10 8-9 1
2
Total tertiary graduates
Graduates relevant for F&A
Graduates relevant for IT 0
2011 2012 2013 2014 2015
Sizeable overall graduate pool, but smaller for specialized functions
Potential challenges with sustainability of IT services in Kuala Lumpur, given small pool and players’ growth plans
1 Supply is defined as the number of relevant employable tertiary graduates every year willing to work in the sector
Proprietary & Confidential. © 2011, Everest Global, Inc. 24
1 Supply is defined as the number of relevant, employable tertiary graduates every year, willing to work in the sector2 Demand is defined as the total demand for professionals at the entry-level (<3 years of experience) from offshore industry (expansion of existing players
and setup of new centers)
Agenda
Sustainability of offshore locations
Implications for global services strategy
Proprietary & Confidential. © 2011, Everest Global, Inc. 25
Global services strategies should reflect supply and demand factors that influence sustainability
Supply factorsSupply factors
Leverage locations that are able to attract in-bound talent to offset saturation effects (i.e., talent can and will move to the location from surrounding areas)surrounding areas)
Proactively plan for and manage impact of career progression/tenure in the delivery model – be realistic about what happens in 3-5 years (and when is attrition a good thing)Use sourcing models to intentionally provide options for re balancing work Use sourcing models to intentionally provide options for re-balancing work to new markets
Demand factorsDemand factors
Restructure nature of work to broaden the skill sets which can complete much of the work– Redefine the process– Isolate scarce skill activities from commodity skill activitiesy
Proactively shape demand for locations and sourcing models– Use an integrated view of locations to place work– Use historical trend information and potential future scenarios to
educate business on implications
Proprietary & Confidential. © 2011, Everest Global, Inc. 26
p
Best practices for helping your organization deal with sustainability questions
Fully own the fact that headlines will impact management perceptions– Be prepared and proactive about education
Help organization understand what changes create the greatest impact on total cost (e g– Help organization understand what changes create the greatest impact on total cost (e.g., currency, labor rate, career progression, real estate, attrition)
Track sustainabilityIndividual cost elements– Individual cost elements
– Impact on aggregate cost– Relative to onshore costs– Latent talent supply and demand in key locations
Put changes into context – provide historical view of how exchange rates and wage rates move
When exchange rates move ensure both the positive and negative impacts are appreciated; When exchange rates move, ensure both the positive and negative impacts are appreciated; avoid temptation to take credit for “savings” from exchange rate movements
Proprietary & Confidential. © 2011, Everest Global, Inc. 27
Summary of key messages
Sustainability questions regarding offshore locations are typically around arbitrage and talent pool sustainability
Sustainability questions regarding offshore locations are typically around arbitrage and talent pool sustainabilityp y
Currency movements typically have a more significant impact on arbitrage than wage inflation
p y
Currency movements typically have a more significant impact on arbitrage than wage inflation
Contrary to perceptions regarding arbitrage potential from India– Arbitrage from India is likely to last for a significant period (15+ years)– India is currently retaining its comparative cost position
Contrary to perceptions regarding arbitrage potential from India– Arbitrage from India is likely to last for a significant period (15+ years)– India is currently retaining its comparative cost position
Talent sustainability is influenced by multiple external (i.e., location related) and internal factors (e.g., company-specific talent and operating models)
Talent sustainability is influenced by multiple external (i.e., location related) and internal factors (e.g., company-specific talent and operating models)
Companies need to take an integrated, “portfolio” view towards assessing sustainability. Global services strategies should reflect supply and demand factors that influence sustainability
Companies need to take an integrated, “portfolio” view towards assessing sustainability. Global services strategies should reflect supply and demand factors that influence sustainability
Proprietary & Confidential. © 2011, Everest Global, Inc. 28
Q&A
Attendees will receive an email enabling them to download today’s webinar presentation as well as access a recorded audio version
Attendees will receive an email enabling them to download today’s webinar presentation as well as access a recorded audio version
For advice or research on offshore sustainability, please contact:– Eric Simonson, [email protected]– H. Karthik, [email protected]
For advice or research on offshore sustainability, please contact:– Eric Simonson, [email protected]– H. Karthik, [email protected]
For background information on Everest Group, please visit:– www.everestgrp.com– research.everestgrp.com
Thank you for attending today
For background information on Everest Group, please visit:– www.everestgrp.com– research.everestgrp.com
Thank you for attending today
To ask a question during the Q&A session
Click the question mark (Q&A) button located on the floating tool bar in the bottom right of your screen
To ask a question during the Q&A session
Click the question mark (Q&A) button located on the floating tool bar in the bottom right of your screen
Thank you for attending today Thank you for attending today
Click the question mark (Q&A) button located on the floating tool bar in the bottom right of your screen. This will open the Q&A Panel
Be sure to keep the default set to “send to All Panelists”
Click the question mark (Q&A) button located on the floating tool bar in the bottom right of your screen. This will open the Q&A Panel
Be sure to keep the default set to “send to All Panelists”
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Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit
Then, type your question in the rectangular field at the bottom of the Q&A box and click the send button to submit
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About Everest Group
Everest Group is an advisor to business leaders on the next generation of global services with a worldwide reputation for helping Global 1000 firms dramatically improve their performance by optimizing their back- and middle-office business services. With a fact-based approach driving outcomes, Everest Group counsels organizations with complex challenges related to the use and delivery of global services in their pursuits to balance short-term needs with long-term goals Throughservices in their pursuits to balance short term needs with long term goals. Through its practical consulting, original research and industry resource services, Everest Group helps clients maximize value from delivery strategies, talent and sourcing models, technologies and management approaches. Established in 1991, Everest G f l b l i id f i t i tiGroup serves users of global services, providers of services, country organizations and private equity firms, in six continents across all industry categories. For more information, please visit www.everestgrp.com and research.everestgrp.com.
Proprietary & Confidential. © 2011, Everest Global, Inc. 31
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