Nilf2012_Hub and Spoke Model_ Pradeep Udhas- KPMG

Hub and Spoke Model A new business paradigm for the IT-BPO Industry

February 2012

Pradeep Udhas

© 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Offshore outsourcing continues to evolve with many more strategic dimensions coming into play over and beyond cost arbitrage

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• Labor and cost arbitrage

• Migration of projects/processes to offshore locations

• Multiple delivery centers across locations to de-risk business

• Maximize benefits from globally dispersed locations

• Obtain low cost, high quality services from external talent at various locations

• Strategically leverage global best practices and talent

• Break the process into components like – voice, data, compliance and execute across multiple locations

• Simultaneously execute tasks across multiple offshore locations

• Clients’ business models necessitate multi-location service delivery capabilities

• Presence of geographically distributed delivery centers becoming crucial for vendors to be considered for large global outsourcing contracts

Moving from cost arbitrage to strategic location sourcing

Current Perspectives Emerging Perspectives

These new perspectives are impacting traditional service delivery models …


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Delivery of IT services has evolved over time; we expect the Hub and Spoke model will be the next logical step for service delivery

Staffing people at the client’s premises

Transferring work or process to a different country / region

Geographical proximity of the delivery center to the client

Distributed delivery centers governed by Hubs

Customer proximity and cost arbitrage

Further reduction to the overall costs of sourcing

Cultural affinity, customer proximity and cost arbitrage

Leverage regional benefits, faster responsiveness and scale business based on

customer demand

Tasks that require a high degree of customer interaction

Well defined tasks with minimal customer interactions

Tasks that require a moderate level of customer interactions

Complex and specialized tasks which require moderate to high

customer interaction

Customer manages resources deployed on the project

Significant management bandwidth is needed from

service provider

Similar levels of management bandwidth as offshore/offsite

model

Highest levels of management complexity among all models

High level of ambiguity in the customers requirements

There is good understanding of customer’s requirements

Cultural affinity / time zone considerations are important to

deliver quality service

There is need to leverage regional benefits offered by

delivery locations

Ready access to customer and information

Lowest operating costs and 24*7 productivity

Cultural affinity, time zone proximity and quick response

to client demands

24*7 productivity, access to high quality talent and cost

benefits

1980’s onwards1990’s onwards

2000’s onwards2010’s onwards

Onsite Offsite / Off-shore Near Shore Hub & Spoke

Meaning

Rationale

Nature of tasks

Management complexity

Best suited when

Advantages

Disadvantages

Source : KPMG in India Analysis

Figure 1 : Evolution of Service Delivery

Lowest cost savings among all models

Reduced access to the customer

Higher operating costs vis-à-vis offshore

Increased management, financial and regulatory

complexity


Emerging locations that encourage technology investments through incentives are expected to drive companies into operationalizing “Hubs” and “Spokes”

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Vendor considerations

Regulatory compliance

Provide services from a large number of globally dispersed locations

Multi-country operations enable mitigation of operating risks

Demand for location related benefits and improved

contracting

Favourable tax and legal structures in some locations

Easy to obtain visas, attractive regulatory norms, and better incentives in some countries

Tax, legal structures, visas, other regulatory compliance

High quality talent at multiple locations

Proximity to customers help understand their needs better

Cultural affinity results in a better customer experience

Easier access to capital at lower interest rates

High quality talent, closer to customers, cultural affinity,

skill-sets, cost arbitrage

Spreading operations over multiple locations helps ensure better business continuity

Favourable policies and low political risk leading to emergence of new destinations

Emergence of Tier II/III/IV cities in domestic market

Political and economic stability for ease of doing

business

Drivers for the Hub and Spoke model in the IT industry

Geo - Political considerations

Customer considerations


Hubs would typically drive strategy and set standards, while spokes would act as extended arms enabling efficient delivery and in some cases fostering innovation

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• Hubs plays the role of “orchestrator” while spokes are aligned to Hubs in all strategic and operational areas

Manpower Augmentation

Meet Performance Expectations

Be a CoE Extension for

the Hub

Support the Hub on Legal

and Tax Compliance

Project Management

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Responsibilities of a SpokeResponsibilities of a Hub

Hub

Customer Management

Quality & Performance Management

Regulatory Compliance

Manpower Considerations Training &

Development

Competence based Spoke


Figure 2 : Responsibilities of a Hub


Figure 3 : Responsibilities of a Spoke


Leading manufacturers in North America focused on “core” areas while outsourcing work across their globally dispersed partner network

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Figure 4 : Functions outsourced by manufacturers


Figure 5 : Evolution of global sourcing locations in the manufacturing industry

Marketing and Sales

Product designProduct

development

Packaging and shipping

Quality and Performance standards

Parent Organization Partner Network

Outsourced

Compliance audits

Contracting and supplier management

Performance management

Quality compliance

Procurement

1960’s North America

1970’s North America, Japan

1980’s East Asia

1990’s East Asia, South-East Asia

2000’s Diversified locations across Asia

2010’s Diversified locations across the World

Lower cost of manufacturing

Ready assimilation of technology know-

how

Industry friendly government policies

Evolution of strong management

practices

are some of the reasons for

expansion in manufacturing

footprint over the last 5 decades


A leading aircraft manufacturer split the development of aircraft components across multiple locations; separate components are then integrated to build the aircraft

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Figure 8 : Hub & Spoke model for a global aircraft manufacturer

Canada Wing/ body fairing Landing gear doors

Australia Movable trailing edge

Italy Centre fuselage Horizontal stabilizer

England Landing gear Engines

France Passenger entry doors

Sweden Cargo access doors

US Forward fuselage Fixed and movable

leading edge Tail fin Aft fuselage Engines Engine nacelles

Japan Forward fuselage Centre wing box Wing Main landing gear

wheel well Fixed trailing edge

Korea Wingtips


Operating in the Hub and Spoke model results in improved time-to-deployment and cost arbitrage, while leveraging regional benefits

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Benefits – Hub and Spoke model


Standardized training modules delivered simultaneously and parallel recruitments across all delivery centers helps reduce time to deployment and also bench strength

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Faster time-to-deployment for projects

Cost arbitrage with improved quality

1. Faster time-to-deployment for

projects

2. Leverage regional benefits

3. Cost arbitrage with improved

quality

4. Tap regionally concentrated niche

skills

5. Improved Business Continuity

6. Absorb regional best practices

Leverage regional benefits

Tap regionally distributed niche skills

Improved Business Continuity

Absorb regional best practices

Leverage regional benefits offered by emerging destinations to the technology service providers

Enables cost arbitrage without compromising on the quality of service delivered by facilitating trade-offs between locations that offer cost benefits and high quality delivery

Niche skills available in non-IT destinations can be best tapped using the Hub & Spoke Delivery model

Distributed and well coordinated service delivery helps spread the risk to business continuity across multiple delivery centers

Integrate regional best practices into global operations resulting in improved and consistent service delivery across delivery locations


Increased complexity of operations, tax, legislative and regulatory compliance are key challenges to be overcome in order to operate in the Hub and Spoke model

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Challenges – Hub and Spoke model


2. Tax and legal considerations

1. Information Security

considerations

3. Increased management

complexity

4. Time zone challenges

5. Complex transition

management

Ensuring compliance with Information Security laws in each region of a globally distributed operation is more challenging in the Hub & Spoke model

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Compliance with multiple Information Security laws

Increased management complexity at the Hub

Complex tax and legal considerations

Time zone challenges impact management bandwidth

Multiple spokes result in more complex transition management

Navigating tax and legislative considerations across spoke locations tend to be more complex

Operating in the Hub & Spoke model results in exponentially higher management complexity at the Hubs

Different time-zones across Hub and Spoke locations makes management supervision more difficult

Moving operations for a client across multiple spokes results in increased complexity of transition management


Investing in building a brand and adequately governing the delivery locations are important to operating effectively in the Hub and Spoke model

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4Key Imperatives for Technology companies

Invest in building a brand that conveys high quality service delivery across all global locations

Pro-actively develop a location strategy to benefit from emerging locations

Corporate governance framework will ensure globally consistent operations

Uniform performance management framework needs to be adopted across all locations

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Global technology backbone leveraged remotely is critical for Hub & Spoke operations

Periodic audits ensure compliance with globally relevant information security considerations

Leveraging delivery focused spokes for business development should be of secondary focus

Hub level manpower planning and training will help manage bench and prevent resource silos

Questions?

Presenter details

Pradeep Udhas

Partner and Head IT-BPO sector for KPMG in India

Nilf2012_Hub and Spoke Model_ Pradeep Udhas- KPMG

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