Q&A: Cliff Justice, EquaTerra
SSON: OK Cliff: how’s the sourcing space developed over the last few years?
Cliff Justice: I think most people – myself included – view a shift around 2005-6 in terms of where the drivers are and some of that may be economy-related or fears over the economy, and some of it may be the maturity at the end of stream – a lot of things have changed. The industry has become more mature. From 2000 to, say, 2005, there was a big focus on outsourcing and offshoring as a way to reduce cost, and access low-cost markets for the purpose of reducing direct labour costs. Since then there has been a renewed focus on not only reducing costs but on improving quality and the effectiveness of the organization – on implementing technology, and leveraging the maturity of the service providers to improve effectiveness. That’s become an equally important driver.
In the past year or so we’ve seen a downturn in the economy which obviously keeps cost at the forefront, but there is an equally strong focus on accessing the capabilities and the maturity, the Six Sigma processes, that a service provider can bring into the organization to drive ongoing productivity and improvement. The issue that companies saw when just going after the labor arbitrage was that it’s a one-time benefit. If you’re not accessing the markets that produce high-quality talent, sustainable talent and sustainable improvements then you’re back where you started a year or two later. So we are putting an increased focus on putting the right resources in the right location with the right service providers that have the capabilities for ongoing sustainable productivity gains, and clients are looking for that.
SSON: Presumably a lot of the shift that took place was as a result of key locations becoming able to provide that sort of element?
CJ: In the past we had predominantly India providing 90-95% of the low-cost labor market. Over the past three years or so we’ve seen, for example, the Philippines emerge as a destination to provide high-quality low-cost voice support as well as F&A BPO support, and for various reasons: synergies with the American educational system and American culture, that provide an advantage that India doesn’t; going a level deeper, the Philippine accounting standards are very similar to American accounting standards; their accent is much more of a western, American accent than you find in India. For call centers, for F&A BPO activity we’re seeing a lot of capability in the Philippines, which is providing some relief - or competition - for India depending on how you look at it.
SSON: What about China?
CJ: Well, China has a role as well. China has a role in technology; a role in very transactional BPO; they’ve been doing well with embedded software; they’ve been providing capabilities in certain types of software development – the coding aspect. But the relationship between Chinese companies and their western counterparts and services really hasn’t matured as well as, I think, some of the predictions would have led you to believe five years ago. It’s still a very small market in terms of directly outsourcing services into China. Service providers providing that as part of their overall solution and having a Chinese component in the back doing data entry or some technology-related work, but providing a western or Indian front end to the client: that’s something we’re seeing a little of. But in terms of the market potential and where it is now, the English language is a big hindrance to China. The ability to communicate right now is an issue.
SSON: Those locations are providing things demanded by external firms. Let’s change the focus a little: how have the requirements of those firms changed over the past few years, in terms of what they’ve been asking of Equaterra?
CJ: Client requirements have become a little more related to the long view. They’re looking a little more at the overall strategy and how sourcing fits into that. Clients maybe five or six years ago were perhaps CIO or even line management. Today the CFO is much more involved in every engagement. So looking at how sourcing ties in with the overall company strategy and will drive and help execute in the long term: client requirements have changed in that sense. We’re looking at how sourcing globally can help a client focus on meeting their long-term needs and their long-term strategic vision and not just the tactical cost-reduction.
SSON: Has the nature of your clients changed in terms of either size or the industry they come from?
CJ: Well it’s still predominantly large companies that are doing this, and it has been for a long time; but we are seeing more mid-market companies having an interest in this. So I think the mix of clients is expanding from large Global 2000 companies to mid-market companies with an interest in global sourcing: how they can access talent that you just can’t access ordinarily. The competition for talent is just too tight in western countries. So for mid-market companies to grow they’re looking at accessing global markets to tap into research and design, into analytics capabilities that exist in other countries. You just can’t find the resources here. It’s not necessarily a cost play for mid-market companies as much as it is a growth issue.
SSON: Presumably that can only be exacerbated over time: the talent gap’s not going to get any smaller.
CJ: No. As other countries come online and become more mature – for example, you see companies getting into Vietnam now; Intel has established a large presence in Vietnam, and other companies are establishing sourcing capabilities there. So other countries like that are tapping into the engineering talent that’s available. It is getting costly in India. Comparatively with the US or the UK or Europe it’s still very competitive, but it’s a matter of finding the right talent, and there’s a lot of capability in Latin America, in Russia, in Central and Eastern Europe: these markets have a long way to go before they’re fully mature and there’s a lot of capacity that’s out there. It’s just a matter of that capacity becoming mature in a way that can be marketed globally and to western companies. English is a factor.
SSON: To what extent over the next few years are the big emerging economies going to become outsourcers themselves?
CJ: That’s another big issue. We’re now competing for the same talent in India as Indian companies are. The Indian market is growing. We’ve known that the Chinese market has had a large domestic demand for quite some time, but now a lot of the major supply markets have big demands on their own internal resources. So it’s not just exporting the skill-set. That’s absolutely a difference today from five years ago. Those companies are going global, and they’re accessing and going after the same skills as we are, but within their own countries.
SSON: So how important do you think that’s going to be in the rise of second-tier locations? You mentioned Vietnam, which is of course perfectly placed near both India and China…
CJ: It’s important. We’re already seeing Chinese companies that have had skill shortages in the big cities in China look at Cambodia, and other countries like that. We’re going to see companies from every developing country – and every developed country – going after resources not just within traditional markets but in emerging countries as well.
SSON: It sounds like outsourcing could save the world…
CJ: It’s definitely a long-term business issue. It’s certainly not a panacea. There’s still a ways to go in terms of maturing the governance of outsourcing, and reaching standards on how complex multi-provider sourcing relationships are managed within organizations. But yes, this is not something that’s going to be going away in the next 20 years. It’s going to be important for any company to be competitive.
SSON: Let’s shift the focus onto shared services. What proportion of shared services leaders have outsourcing strategies?
CJ: OK: let’s start with captive centers, with shared services that have put captive centers in other countries. We’ve seen a major trend towards leveraging the mature outsourcing providers to improve the shared services organizations that have been established around the world. So as shared service centers have globalised – and we tend to call these captive when they’re located in places like India or Latin America – those centers have in general not met the expectations. Operating a shared service center remotely presents its own challenges. The expertise and the infrastructure capabilities needed to manage an offshore SSC are different. So we’re seeing a trend towards SSCs outsourcing components of the internal organization.
There are various names for it - virtual captive, hybrid, internal/external delivery organizations – where outsourcing service providers will provide some infrastructure, and some process capabilities, and they may even share the management and jointly manage components of the operation. Service providers may bring some process maturity that they have, or some training capabilities into the SSC – or HR initiatives, HR capability to go out and hire and recruit and train and retain the personnel. If India has let’s say 300-500 captive centers, a good portion of those will be exploring the third-party-type relationships at one level or another. A large number already are. Large-name companies at some level have partnerships or sourcing agreements with third parties to help manage and improve their SSCs.
SSON: Presumably you’re seeing this as something that’s accelerating?
CJ: It is accelerating. What that means for us is that our market is not just western: it’s also companies in the domestic Indian or Chinese or Latin American markets that have the SSCs in place, so we can advise them through outsourcing parts of them.
SSON: How far do you think the business has changed as a result of the credit crunch?
CJ: You know, outsourcing – especially global outsourcing – is counter-cyclical: when the economy’s good the outsourcing business is good; when the economy is bad, the business gets actually a little bit better! So we’ve seen companies move a bit more aggressively towards outsourcing as a result of the credit crunch; companies that need to stretch their dollar more than they have are looking at how they can maintain the level of service that they have, at lower cost. So they are looking at how outsourcing can help them reduce their cost.
SSON: Do you see this as being adjacent to the process that has already been ongoing in recent years, or are certain types of companies and certain sectors becoming – specifically as a result of the crunch – forced to adopt outsourcing as part of their strategies?
CJ: Yes – or maybe they’re being more aggressive when before they could afford to be a little more conservative when the priority was maybe focused on keeping more resources domestically, to manage relationships. Maybe the credit crunch and economic hardship pushes them to move resources to the most efficient area they can. Many times that means a lower-cost country. So it forces them to expand what they were already doing.
The financial services industry is probably the most mature outsourcing industry – they’ve been outsourcing long before anyone else – and the market was pretty penetrated. This now just forces them to become more aggressive in their global sourcing strategy: their captive centers in India expand; everything we were talking about in terms of the Indian or offshore providers working within their SSOs. The financial services industry has to maintain a lot more control and visibility just because it’s such a regulated industry, so their relationships with third parties have to be well documented, well structured, agreements have to meet their governance and liability requirements. I think they’re getting more aggressive.
It certainly hasn’t slowed. Some predictions were that companies that were heavily leveraged in the financial services sector were at risk: unless you’re with a company that completely went out of business, or the business was reduced dramatically, the outsourcing business has really benefited from the credit crunch. It forces a lot more companies to look at outsourcing or an alternative sourcing strategy.
SSON: Let’s put you on the spot: what’s going to happen in the next five years and which will be the big locations and sectors that will be driving outsourcing?
CJ: That’s not putting me on the spot: I think about this a lot! The next five years, we’ll see more sectors getting involved and becoming more mature in outsourcing: pharmaceutical, healthcare, will be major. Pharma was a little bit late to the outsourcing game, so they’ll be expanding that dramatically, and you’ll see a lot of resources in pharmacovigilance, and some of the analytic areas associated with pharma being outsourced and offshored. It’ll drive tremendous savings in that area. We’re seeing continuing outsourcing in manufacturing. From those verticals, I think we’ll see the most growth.
In terms of the complexion of the market, what we know of as "offshore" and "domestic" today, those lines will be completely blurred. It will just be global sourcing. There’s not going to be a discernable difference. Companies like Accenture and IBM are truly global service providers. When you outsource applications you may have your business requirements done onsite but your coding done in India, your transactions processed in Prague, your calls taken in the Philippines. Traditional Indian service providers are moving more towards the west and developing more of an onsite capability, and the traditional onsite domestic outsourcing service providers are moving towards having the right resources in global locations. And those will adjust and shift as the market changes.
You won’t have a company that’s overcommitted in one market: they’ll have reach in a lot of markets, and as politics change and economies change you may see one market reduce in size and another market expand depending on the skill sets that are available. So more of a supply chain for services, much like manufacturing did, will become more mature. It’s there today, but it’ll become more mature and there’ll be more of a requirement to be competitive in the mainstream climate. You won’t know if your software’s been coded out of India or Russia or China depending on where the requirements are being met, and those requirements will be political stability, transparency, security; all of those requirements will be standard regardless of location.
You’ll see less scrutiny over location as long as that location meets the minimum standard. We’re seeing security standards like BS7799 or ISO27001 setting security standards for international locations, and as long as those standards are audited and maintained then it gives clients, regulators and customers a level of comfort knowing that security measures are met, whether it’s in the US or in India.