Outsourcing and Localization

Marcos Mayo Director in Supply Management,

A.T. Kearney

• 10 years of consulting experience in Supply Management (North

America, Europe and the Middle East)

• Focus areas:

- Large procurement transformation programs

- Procurement enabled localization

- Strategic sourcing

- Training

• Education:

- MBA (Supply Chain Management)

- Masters in Industrial Management

- Chemical Engineering

Companies looking at BPO should start by answering three

basic questions

Source: A.T. Kearney

Why? To…

- …reduce cost

- …improve service

- …reduce complexity (focus on core)

What…

- …functions?

- …activities?

Who?

- Selection criteria?

- Profile?

- Location?

Source: IDC; Gartner; Forrester; AMR Research; A.T. Kearney

An ocean of activities are potential BPO targets – prioritize…

Some key considerations

• Where is the cost concentrated?

• How complex are these

activities?

• What is the value of

conducting them in-house?

• How mature is the BPO

supply market?

• What are the potential risks

and tradeoffs?

• Research & Information

services in HR

• Program Oversight &

Delivery Training

• Strategy Development

Training

• General/

Open book

Accounting • Equity Financial

& Insurance

Research • Core Banking

• Revenue Cycle

Management • Underwriting &

Asset Mgmt • Health

Benefits

• Workforce

Planning

• Pension

Benefits

Planning

• Welfare

Benefits

Planning

• Financial

Administr

ation

• Data

Analytics

• Compliance

and recovery

management

• Offshore

Servicing

• Document

Processing

• Facilities

Optimization

• Credit Risk

Management. Analysis

and Reporting

• Consumer

Credit

• Automated Order

Placements and

Delivery

• Security

Management

• Technology

Management • Content

Design &

development

services

• Remote Data

Center Operation

services

• System Management

consulting & Design

Services • Application

Development,

Testing and

Maintenance

• IT Consulting

• Systems

Integration

• Optimization of

network Traffic

• Managing

Network Firewalls

• Programming &

Maintenance

services

• IT Spend

management

• Facility Operation

and Management

• Vendor

Management

• Enrolment

Management

• Vendor

Sourcing

• Vendor

Negotiations • Contracts

allocation

• Commodities

Determination • Transportation

Management • Warehouse/

Inventory

management

• Freight

Payment

Processing

• Logistics Trade

Management

• Order Mgmt

• One-stop

solutions

• Research &

Development

• Vertical Integration

across functions

• Product Engg,

Design, Dev &

Testing

• Paralegal

Consulting

• Research

& Analytics

• Medical Content

& Consulting

Services • Knowledge

Management

• Captive Offshore

• Payroll

Processing

• Employee

communication

• Transaction

Management

• Bills/Payment

Processing

• Claims/ Cheque

processing

• Programming &

Maintenance

services

• Security Services

• Multi Vendor

Management

• Business & Market

Research

• Category

Management

• IT Infrastructure

Management

• Loan processing/

servicing

• Customer

interaction

• Tax

Management • Pension/ Welfare

Benefits

administration

• Treasury & Risk

Mgt.

• Recruitment &

Selection • Customer

Analytics

• Order

Management

• IT Application

Management

• Technical support

• CRM Solutions

• Contact centers

management

• Help Desk

BPO maturity

…and treat BPO implementation as a transformation program where change management plays a key role

BPO partner selection process

Source: A.T. Kearney

• Detail transition

plan

• Finalize

negotiations

• Confirm business

case

• Select vendor

• Define and sign

operating

agreement

• Evaluate vendor

operations

• Refine vendor

evaluation

• Down-select top

vendors for

negotiations and

due diligence

• Evaluate RFP

responses

• Down-select

vendors based on

evaluation criteria

(technical and

commercial)

• Develop evaluation

criteria based on

business goals

• Develop and launch

a comprehensive

RFP

• Align migration teams

• Plan migration

activities

• Establish connectivity

to remote locations

• Establish vendor

management

organization

• Confirm scope of

the initiative

• Validate baseline

and initial savings

estimates

RFP responses evaluation

Site visits & detailed

solutioning

Negotiations & solution

finalization Implementation Long

vendor list

RFP launch

Strategic assessment validation

Ongoing evaluation of BPO business case

Go/No-Go gates

While BPO can help you achieve your business goals, it can also have some undesirable side effects

1. Significant differences exist by country and industry Source: A.T. Kearney

BPO impact on local labor

GCC national to expat ratio – Private sector1

GCC national to expat ratio – Government1

BPO most common target

2016 A.T. Kearney GSLITM (Global Services Location Index)

1 India

2 China

3 Malaysia

4 Brazil

5 Indonesia

6 Thailand

7 Philippines

8 Mexico

9 Chile

10 Poland

11 Vietnam

12 Bulgaria

13 Romania

14 Sri Lanka

15 US

16 Egypt

17 Russia

18 Latvia

19 Costa Rica

20 Columbia

21 Turkey

22 Bangladesh

23 Germany

24 Ukraine

25 UK

Replaced by labor

from:

1.54

2.48 5.32

5.31

0.87

2.37

1.10

1.72

2.14 2.32

3.34 5.31

1.121.14

5.310.84

5.332.70 0.99 1.64

5.382.23

5.512.88 2.11

5.543.37 1.03

2.99 0.94 1.66

5.663.19 1.25

1.14

5.592.79 1.16 1.64

5.60

1.42 1.89

6.492.28 2.71 1.51

6.963.22 2.55 1.19

1.40

3.04 1.44 1.44

5.993.23 1.54 1.22

6.002.34 2.07 1.59

6.052.75

1.38 1.46

5.32

1.22

5.682.41 1.37 1.90

5.72

3.03 5.29

2.332.280.67 5.28

1.61

5.883.17 1.43 1.29

5.92

1.80 1.34

5.453.20 1.29 0.96

2.70 0.90

2.58 1.26 1.88

5.872.71 1.56

Business Env.Financial Attrac. People Skills and Avai.

95%80%

20% Expats

Nationals

Support Functions

430

Core Functions

1,000

5%

60%34%

40%66%

Expats

Nationals

Support Functions

470

Core Functions

1,000

Focus on financial

performance

Outsourcing of activities

performed by local labor

Challenged long term

sustainability

Focus on promotion of

local labor

Impacted financial

performance

Challenged mid term

sustainability

At first sight, within the context of BPO, financial performance and promotion of local labor seem hard to reconcile

Catch-22

Financial

performance

Promotion of

local labor

Source: A.T. Kearney

What if we were to reinvest part of the cost savings derived from BPO into creating local value

Reinvesting in local value creation

Source: Auguste Rodin; A.T. Kearney

BPO

Interestingly, the solution lies within a BPO target

• Research & Information

services in HR

• Program Oversight &

Delivery Training

• Strategy Development

Training

• General/

Open book

Accounting • Equity Financial

& Insurance

Research • Core Banking

• Revenue Cycle

Management • Underwriting &

Asset Mgmt • Health

Benefits

• Workforce

Planning

• Pension

Benefits

Planning

• Welfare

Benefits

Planning

• Financial

Administr

ation

• Data

Analytics

• Compliance

and recovery

management

• Offshore

Servicing

• Document

Processing

• Facilities

Optimization

• Credit Risk

Management. Analysis

and Reporting

• Consumer

Credit

• Automated Order

Placements and

Delivery

• Security

Management

• Technology

Management • Content

Design &

development

services

• Remote Data

Center Operation

services

• System Management

consulting & Design

Services • Application

Development,

Testing and

Maintenance

• IT Consulting

• Systems

Integration

• Optimization of

network Traffic

• Managing

Network Firewalls

• Programming &

Maintenance

services

• IT Spend

management

• Facility Operation

and Management

• Vendor

Management

• Enrolment

Management

• Vendor

Sourcing

• Vendor

Negotiations • Contracts

allocation

• Commodities

Determination • Transportation

Management • Warehouse/

Inventory

management

• Freight

Payment

Processing

• Logistics Trade

Management

• Order Mgmt

• One-stop

solutions

• Research &

Development

• Vertical Integration

across functions

• Product Engg,

Design, Dev &

Testing

• Paralegal

Consulting

• Research

& Analytics

• Medical Content

& Consulting

Services • Knowledge

Management

• Captive Offshore

• Payroll

Processing

• Employee

communication

• Transaction

Management

• Bills/Payment

Processing

• Claims/ Cheque

processing

• Programming &

Maintenance

services

• Security Services

• Multi Vendor

Management

• Business & Market

Research

• Category

Management

• IT Infrastructure

Management

• Loan processing/

servicing

• Customer

interaction

• Tax

Management • Pension/ Welfare

Benefits

administration

• Treasury & Risk

Mgt.

• Recruitment &

Selection • Customer

Analytics

• Order

Management

• IT Application

Management

• Technical support

• CRM Solutions

• Contact centers

management

• Help Desk

BPO maturity

Vendor negotiation

Vendor selection

Contract allocation

Ability to influence

vendor’s behavior

Vendors create local value in multiple ways beyond the generation of local jobs

How do vendors create local value?

Source: A.T. Kearney

Skills

Procurement of

products

Local jobs

(& salaries)

Investments in

certain provinces

Historical Capital

Investments

Current Capital

Investments

Future Capital

Investments

Expenditures

(opex)

Investments

(capex)

Development

Platforms

Foreign jobs

(& salaries)

Procurement of

services

Local labor plans Investments in high

value added steps of

the value chain

Investments in R&D

Foreign jobs Medium

Local jobs High

Source: A.T. Kearney

A comprehensive way to measure local value creation is the cornerstone of this approach…

Expenditures (opex)

Investments (capex)

Development Platforms

Driver

Skills development

Foreign COGS Low

Local COGS High

Sub-driver Contribution

VLV creation

(USD/year)

Strategic Investments

Clustering potential

Historical Capital Investments

Current Capital Investments

Future Capital Investments

High

High

High

High

High

Low

Total cost vs. Local value (for a given performance)

0

10

20

30

40

50

60

70

80

90

100

Vendor D Vendor C Vendor B Vendor A

…shifting the question to “if I am going to invest, whom do I get the best return from?”

1. TCO: Total Cost of Ownership; 2. VLV: Vendor Local Value; 3. Excludes company profits Source: A.T. Kearney

VLV2 (USD MM / Year)

TCO1 (USD MM / Year)

baseline

US

D M

M /

Year

• Vendor A

‒ TCO = USD 90 MM / Year

‒ VLV = USD 10 MM / Year

‒ Return = 0.11 (for every dollar company spends with this vendor, this vendor generates 0.11 cents of local value)

• Vendor B

‒ TCO = USD 80 MM / Year

‒ VLV = USD 35 MM / Year

‒ Return = 0.44

• Vendor C

‒ TCO = USD 55 MM / Year

‒ VLV = USD 30 MM / Year

‒ Return = 0.55

• Vendor D

‒ TCO = USD 50 MM / Year

‒ VLV = USD 20 MM / Year

‒ Return = 0.40

Vendor local value creation becomes part of the supplier evaluation and selection criteria

Source: A.T. Kearney

Vendor selection criteria (into RFP)

• Vendor Capabilities

‒ Production capabilities

‒ Technical capabilities (e.g., design)

‒ Product quality (references, inspection reports)

‒ Supply risk (e.g., financial)

‒ Logistics (e.g., lead time)

• Total Cost of Ownership

‒ Acquisition price

‒ Installation cost

‒ Operational cost

‒ Maintenance & repair cost

‒ Disposal cost

• Vendor Local Value Creation

Expenditures (opex)

Investments(capex)

Development Platforms

Driver

Skills development

Foreign COGS Low

Local COGS High

Foreign jobs Medium

Local jobs High

Sub-driver Contribution

Strategic Investments

Clustering potential

Historical Capital Investments

Current Capital Investments

Future Capital Investments

High

High

High

High

High

Low

BPO

Procurement

Source: A.T. Kearney

Within the context of

BPO, financial

performance and

promotion of local

labor seem hard

to reconcile

Reinvest part of the

cost savings derived

from BPO into

creating local

value

The solution lies

within one of the

prime BPO targets:

Procurement

Key takeaways

Thank You