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Table of Contents

How Mature Are Offshore ITO and BPO Offerings?

Foreign Outsourcing Invigorates US Economy

The CON-fidence-Games Aspect of Outsourcing Arrangements

A Surprising New Study: SLAs Now Have Teeth

Banks Outsource to Keep Their Global Customers Happy

Handling an Emergency: Outsourcing Provider Delivers Creative Solutions in Times of Crisis

The Trouble with Equity-Stake and Shared-Services-Spinout Models in Outsourcing

How Does the Use of a Third-Party Advisor REALLY Impact Outsourcing Arrangements?

Studies Reveal Eight Buyer-Provider Disconnect Areas Likely to Cause Outsourcing Failures

Missing Link--Study Confirms Failed Outsourcing Arrangements Lack One Crucial Component

What's Wrong with This Picture?-Is Your Outsourcing Logic Flawed?

Driving High-Performance Outsourcing: Best Practices from the Masters

Outsourcing to India: Key Legal and Tax Considerations for U.S. Financial Institutions

When Agility Outweighs Efficiency: BPO Viewpoint

Buyers of offshore services are concerned about an offering's maturity. Is it sufficiently developed to inspire trust and provide a viable alternative to domestic services? Sellers of offshore services ask an additional question: Is the market mature (implying slow growth and defined winners and losers) or emerging (fast growth with a yet-to-be determined set of winners and losers)?

This article explores these questions in general and then uses the insurance industry as a case study.

1. The offshore IT services market is nearing maturity in the application development and maintenance (ADM) space. Industry growth, while still strong at 25 percent per annum, has leveled off and methodologies/ toolsets are now well developed. Other IT services (e.g., remote systems monitoring) are just beginning to emerge. The primary trend in IT services is consolidation, as small and medium-sized service companies (less than $500 million in revenues) are finding it increasingly hard to compete with the larger offshore suppliers (e.g., Tata, Wipro, and a href="http://www.outsourcing-suppliers.com/i/in_te_li.html">Infosys) and traditional suppliers (e.g., IBM and EDS) which are growing at 40 percent plus each year, and doing so at the expense of smaller players.



2. The offshore BPO (business process outsourcing, also known as IT enabled services or ITES) services market is not mature but is worthy of the proverbial toe in the water. While most buyers see substantial commonality in IT services across industries, the opposite is true in the BPO market. Customer service for an insurance company is significantly different than customer service for a bank. Similarly, experience in back-office transactions is not interchangeable across verticals. As a result, any given combination of service and industry is likely to reveal few solid case examples and no clear winners leading the supplier groups.

However, in spite of the suppliers' likely lack of deep expertise in any particular combination of an industry and service line, Everest Group believes that the more adventurous companies are currently testing the BPO market via a pilot, finding the savings to their liking, and partnering with a supplier to increase the scope of the offshore center over time. That there are temporary setbacks is not surprising. That so many companies are standing on the sidelines while their competitors gain a significant time and cost advantage is a surprise. Everest Group is advising clients either to begin pilots now or to adopt a fast-follower strategy by closely monitoring developments in their vertical.

Maturity of Offshore Services in the Insurance Industry

Moving from the abstract to the concrete, Everest recently completed a survey of six top suppliers including both traditional suppliers and offshore "pure plays" (companies based in lower cost locations that specialize in offshore services). Analyzing the survey results, Everest found many more deals and much larger practices were in place in ITO compared to BPO (Exhibit 1):

The suppliers surveyed had nearly 10 times as many IT engagements as BPO engagements. Moreover, within the BPO deals, the scope of services was generally very narrow. One supplier was providing only accounts payable services, another was providing underwriting, while a third was providing simple life insurance transaction processing (e.g., indexing). None were currently providing services within human resources (HR) or general finance and accounting (F&A) functions.

This result is consistent with Everest's market studies in HR and F&A. In the past six years (since the inception of full service HRO and FAO deals), no offshore provider has won a full-services deal (Exhibits 2 and 3):

However, in the financial services sector, banking and credit card operations are generally more advanced in their adoption of offshore outsourcing than insurance companies. In fact, three of the leaders in this field--GE, American Express, and Citigroup--are all financial services companies. The Everest Group study suggests that even BPO offerings in the rest of financial services are still not what one would term mature. We are just seeing the tip of the iceberg. And, other industries are even further behind.

So, if BPO offerings are not mature, what is driving activity? We believe that Exhibit 4 shows the typical market adoption path. Essentially, companies start with IT project work. Once they experience the high quality and low cost of offshore service providers, they often begin expanding to other general and administrative (G&A) functions. Often, the offshore provider begins by developing or maintaining a system, and then over time gains responsibility for the process supported--not just the underlying IT.

Future Outlook

While Everest, and many of our clients, judge offshore IT offerings to be much more mature than offshore BPO offerings, we believe that both are sufficiently developed to merit serious consideration. Companies are currently experiencing great success and drastically reducing costs by moving from having only one to three percent of their IT spend offshore to having more than fifty percent of their development and maintenance resources offshore. BPO will follow suit over the next five years in key G&A functions such as HR and F&A. In fact, many business processes are easier to move offshore than IT for a few key reasons: less knowledge transfer required and greater ability to track productivity and quality.

Click here for the full presentation as made to NASSCOM.

Lessons from the Outsourcing Journal:

• Offshore IT offerings are more mature than BPO offerings by virtue of their longer history, larger scale, and greater ability to leverage their experience across different industry verticals.
• According to the Everest Group study, prospective buyers of offshore BPO services are cautious about suppliers' capabilities unless they (the suppliers) can demonstrate multiple on-going client relationships in that particular vertical/horizontal service offering.
• Given the success that early adopters (such as GE, American Express, and HSBC) have attained in broadly leveraging offshore resources, and the positive experiences of Everest's client base, Everest suggests that companies begin piloting offshore ITO and BPO operations rather than wait longer and risk falling behind their competitors.

Publish Date: September 2004

Copyright © 2004 - Everest Partners, L.P.

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