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              • 1. ITES/BPO – Opportunity to move up the value chain?January 13, 2004This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.Presentation at iTECH 2004
              • 2. Source: Gartner; Dataquest; Aberdeen group; McKinsey analysisSupply-side enablersTelecom costs down by 90% in the last 3 years; world-class reliability Over 2.5 million low-cost talented workers in countries such as India and Philippines Emergence of a credible vendor community total revenues- India example* $ billionCONTEXT: BUSINESS PROCESS OFFSHORING HAS EXPLODED IN THE LAST FEW YEARS…Encouraging track record of early movers Demanding U.S market environment Successful track record of I/T offshoringDemand side forces1030918 Offshoring workshop v2
              • 3. “Tech jobs leave U.S. for India, Russia. Who’s to blame?” – July 2003“Is your job next?” – February 2003…BUT HAS ALSO CREATED GREAT ANXIETY IN PRIMARY MARKETS “American legislators are accusing India of stealing jobs” – June 2003“America’s pain, India’s gain” – January 2003“3.3 million U.S. service jobs to go offshore by 2015” – November 2002“Can America Lose These Jobs and Still Prosper?” – July 2003U.S. House Sub-business Committee2
              • 4. IN THIS CONTEXT, SEVERAL DOUBTS HAVE ARISEN ABOUT THE FUNDAMENTAL LONGEVITY AND EVOLUTION OF BPO AS AN INDUSTRYWill the BPO phenomenon plateau out in the next few years?Even if it survives, moving up the value chain will be difficult and will take several years?Value chain moves will be the domain of captives because the trust required is too high?3DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 5. IN THIS CONTEXT, SEVERAL DOUBTS HAVE ARISEN ABOUT THE FUNDAMENTAL LONGEVITY AND EVOLUTION OF BPO AS AN INDUSTRYWill the BPO phenomenon plateau out in the next few years?Even if it survives, moving up the value chain will be difficult and will take several years?Value chain moves will be the domain of captives because the trust required is too high?4DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 6. 0.33 * Estimate based on historical U.S. reemployment trends Source: McKinsey Global Institute1. OFFSHORING ACTUALLY GENERATES GREATER VALUE FOR THE GLOBAL ECONOMYTaxes ($0.04) Revenues ($0.20) Local suppliers ($0.09). . . delivers value to India . . .0.67Cost savings ($0.58) Goods sold ($0.05) Profits from Indian ventures ($0.04). . . brings returns to U.S. . . .1.45-1.47. . . and makes the global pie that much bigger0.45-0.47. . . creates new value from re-employing U.S. labor* . . .$1 previously spent in U.S., now offshored to India . . .$1.005
              • 7. 0.030.330. retained in IndiaINDIA CAPTURES 33 CENTS FROM EACH DOLLAR OF SPEND OFFSHORED BY THE U.S.Value accrued from $1 of U.S. spend offshored1 Dollars; 2002Central govern-ment3State govern-ment4Total value accrued to IndiaLaborSuppliers2Offshoring sector 1 Estimated using the India offshored services industry case 2 Includes revenue accrued to the supplier industries less sales taxes, income taxes to employees and corporate taxes 3 Includes income tax from labor employed in the offshored services sector and the supplier industries and corporate tax?on the supplier industries 4 Includes sales tax on the supplier industries and revenue from the sale of power to offshored service providers Source: McKinsey Global Institute6
              • 8. JOBS OFFSHORED WILL BE A SMALL FRACTION OF THE SHORTAGE IN ELIGIBLE WORKERS Number of workers Millions, 2000-2015 Source: U.S. Census; McKinsey Global Institute Jobs projected to go offshoreDecline in working population due to aging7
              • 9. JOBS OFFSHORED ARE A FRACTION OF ALL MASS LAYOFFS 1 Bureau of labor statistics defines mass layoffs as job loss actions leading to the displacement of 50 or more workers by a given establishment during a 5-week period 2 Average 1996-99 3 Average 1989-2000 4 Average 2003-13 Source: NBER; BLS; Kletzer; McKinsey Global InstituteAverage annual mass layoffs1 Millions All mass layoffs2Offshoring projection4Trade-related layoffs38
              • 10. Economic value of off-shoring real Off-shoring creates 40-50% greater value for the global economy India captures 33% of every off-shored dollar while the US retains 67% and the incremental 40-50% value creation Off-shored jobs small fraction of expected retirements/lay-offs THEREFORE, BUSINESS LOGIC WOULD INDICATE THAT BPO HERE TO STAY … BUT WILL REQUIRE HANDLING CUSTOMER CONCERNS WITH COMPASSIONNegative emotional impact at the customer equally real Real people and communities are effected Re-training takes time Manufacturing hang-over still felt9DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 11. IN THIS CONTEXT, SEVERAL DOUBTS HAVE ARISEN ABOUT THE FUNDAMENTAL LONGEVITY AND EVOLUTION OF BPO AS AN INDUSTRYWill the BPO phenomenon plateau out in the next few years?Even if it survives, moving up the value chain will be difficult and will take several years?Value chain moves will be the domain of captives because the trust required is too high?10DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 12. Completed the first round of off-shoring successfully Built substantial scale in operations in India Penetrated 1-2 businesses in depth Started capturing labour cost savingsBaseA: “Accelerate, extend breadth and depth”Increase breadth and depth of services Strengthen and stabilize architecture Insource-outsource, onshore-offshore architecture Global hub architecture Strategic outsourcingB: “Re-engineer”Drive towards operational improvement Task level and process level reengineering Consolidation and aggregation of functions Leverage low cost position to start offering new services to customers and improve competitive position in home marketsC: “Externalize”Take robust platforms external and create value out of the shared services utility Specialized service bureau Generic third party BPO providerD: Tackle tough (but large) industriesFOUR POSSIBLE VALUE CHAIN MOVES POSSIBLE11DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 13. Simple, standardized activitiesAdvanced technical skill and some judgment requiredExtensive judgment and analytical skill requiredA. MOVES UP THE VALUE CHAIN ALREADY HAPPENING IN TERMS OF BREADTH AND DEPTH OF PROCESSES OFF-SHOREDAXA Insurance claims processingCitibank Check processing, account application processing, loan processing by a subsidiary (e-Serve)HSBC Account opening and closing, retail loan processing, mortgage processingAmerican Express Live brokerage advice from qualified agents through a vendor in the Philippines (eTelecare) Extensive offshoring of credit card services (including risk modeling and credit evaluation) Extensive financial analysesGE Capital Business Solutions Risk modeling, actuarial services, underwritingCitibank Credit card processing, collection calls, inbound and outbound service centersHSBC Inbound customer service center for mortgageCapital One Inbound customer service center, outbound telemarketing (MSourcE)Citibank Finance and accountingGE Capital Insurance claims processing Outbound telemarketing, inbound customer serviceMBNA Processing of online applications (TransWorks)GE Capital Payroll accounting Invoice and payment processingMcKinsey & Company Research and knowledge management for world-wide offices in GurgaonGE Capital Risk analysis, strategic planning and forecasting Financial statement analysisExamples of sector-specific (“vertical”) processesExamples of corporate center (“horizontal”) processesGE UK auto applications data entry12DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 14. IN FIs, VENDORS AT POINT OF SERVICING THE WHOLE RANGE OF CORE BANKING AND SUPPORT PROCESSES Source: Vendor interviews, literature searches, vendor websites, McKinsey analysis Sample processesTelesales Customer service Technical support help deskE-mail support Fax responses Live interaction (chat room customer service)Customer facing VoiceNon-voice InboundOutboundTelemarketing Collections (bucket one)Business process off-shoring servicesBenefits administration Payroll processingRetail banking (account maintenance, opening, check processing)Fund administration Reference data managementClaims processingDatabase integration & analytical services Secondary researchA/R and A/P management ReconciliationBack office Core businessSupportHR/ AdminConsumer bankingWholesale bankingInsuranceResearchFinance & Acctg. Illustrative vendors13DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 15. B. REENGINEERING AND PROCESS IMPROVEMENT CAN PROVIDE ADDITIONAL GAINS OF 30-40%100Original cost baseFactor cost savingsAdditi- onal telecom & manag-ement costs Off-shore location costConsoli-dation, standar-dization & superior skills Task reengi-neeringEcono-mies of scaleProcess reengine-eringNew cost base60-6510-1545-558-135-73-51530-35Does not include gains from revenue enhancementTask aggregation and process level improvementTask migrationTask level improvementFactor cost benefits (45-55% savings)Additional benefits (30-40% savings)14DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 16. Productivity and process re-engineeringEconomies of scaleAggregated cheque order processing tasks and bought-in cross-trained agents, which has significantly increased staff utilisationDecreased time taken for month-end closing from 5 to 2 days by modifying and eliminating tasksRe-engineering (end-to-end)IN FACT, OVER TIME COMPANIES HAVE CAPTURED ADDITIONAL PRODUCTIVITY GAINSReduced 40 FTEs by digitising the ‘back lining’ process in the contact centre Technology applicationEfficiency Source: Expert interviews; literature searchesReduced average call centre talk time from 180 to 100 seconds through use of more qualified agentsImproved total customer satisfaction score from 85% to 92% after offshoring call centre services to IndiaBetter talent and trainingEfficiencyIncreased first time resolution rates from US benchmark of 59% to 74% resulting in reduction in repeat support calls and on-site dispatch calls leading to savings of ~$2?million per annum15DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 17. C. F-1000 INSTITUTIONS HAVE INCREASINGLY BEGUN TO REALISE OPPORTUNITIES FOR REVENUE ENHANCEMENTLive brokerage advice for mass affluent customers from Series 7 qualified agents through vendor in the Philippines (eTelecare)£50 million/year gained through revenue audits – interline, agent, and used ticketsAbility to price insurance policies at significantly below competition leading to 5-7% market share improvement in home marketsResearch platform to service customers for a fee – offer customized research for strategic customers Develop modeling platform to provide fee-based analytical capabilities to SME financial services customers– offer customized services to large financial institutions Offer trade finance services to SME customers that are otherwise uneconomical to serve Offshore R&D (pharma, chemicals) using collaborationsKnowledge on call services for core clients – customized research and analyticsRevenue opportunities created through offshoringPotential ideas for F-1000 institutionsCustomised research for global customers – potential to create platform to service other banks16DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 18. Columbia Bank & Trust (later Synovus) transitions internal credit-card processing business into third-party company (1982) CB&T sells 19% of company in IPO (1983) TSYS grows to become the second largest processor in the worldSIGNIFICANT VALUE CAN BE CAPTURED BY TRANSFORMING INTERNAL CAPABILITIES INTO THIRD-PARTY BUSINESSES AmEx transitions internal processing unit into third-party company (FDR) and sells off majority ownership stake (1992) FDR merges with largest competitor and grows to become global leader in transaction processingParentNew businessTransition * March 1, 2002 Sources: Hoovers; analyst reports; McKinsey analysis Management buyout of Midland Bank processing unit following merger with First Bank System (1984) IPO in 1986 Grown to become leading provider of technology and processing services for financial institutions Midland Bank$5 billion in market cap*, growing at 5% CAGR in the last 5 years$8 billion in market cap*, growing at 31% CAGR in the last 5 years$17 billion in market cap*, growing at 26% CAGR in the last 5 yearsValue creation U.S. $ billion17DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 19. D. NEW INDUSTRIES THAT HAVE PLAYED “WAIT AND WATCH” GAME TRADITIONALLY NOW ACTIVELY EXPLORING AND COMMENCING OFFSHORING – PHARMACEUTICAL EXAMPLEArea IT offshoringSupport functionsAttitude towards outsourcing/offshoringKey factors driving increasing momentum“Wait and watch” towards offshoring until late 2001 Significantly higher acceptance in 2002 “Triggers pulled” in 2003 by several players including BMS, Novartis, AbbottMainstreaming of IT offshoring and emergence of credible success stories on cost and quality improvements Solid vendor base (e.g., Infosys, Satyam, TCS) with proven track record Observed actions of competing players!“Wait and watch” towards outsourcing of business process through 2002 and early 2003 Numerous ongoing discussions in 2003 with vendors on finance & accounting and HR offshoringIncreasing focus on rationalizing support function costs Emergence of credible success stories and vendors for F&A and HR Observed actions of competing players Many companies articulating “overall aspiration” cutting across numerous opportunities such as IT, BPO, R&D R&DConcerns around IP and quality of medical infrastructurePositive experience of first movers in addressing concerns and benefiting significantly e.g., AZ and BMS in R&D; Pfizer & Eli Lily in clinical development; Novartis & Pfizer in data management Improved medical infrastructure and favorable regulatory environment18DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 20. OPPORTUNITIES FOR OFFSHORING EXIST ACROSS THE PHARMACEUTICAL VALUE CHAIN R&DSupport FunctionsIndustrial OperationsStrategic and commercial busi-ness planning (pre-launch) Product development and life cycle management Pricing and health economics Market a product (new and legacy) Customer relationship management Customer and consumer services Sales management Logistics & distribution After sales servicesFinance & Accounting Information Technology Human resources Legal Legal counseling advocacy and litigation Intellectual property counseling Sales force supportTarget identification & validation Lead generation & optimization Preclinical/ Toxicology Clinical Development & Trials Data ManagementNew production development Procurement Planning and manufacturing Plant maintenance Quality management Process control Supply chain management Performance monitoring and controlCommercial OperationsSource: Interviews; McKinsey analysisFocus of documentOffshore potential19Business process model
              • 21. RECENT ACTIVITY POINTS TO GROWING INTEREST OF PHARMACOS IN OFFSHORING – DATA MANAGEMENT EXAMPLE Source: InterviewsGlobal statistical operations business systemSavings of around 40-60% vis-à-vis global CROs within first year Targeting 80-100 global trials in 2003 Plans to start related areas of filing and report writing, efficacy reporting and statistical design for Phase IV studies Entering into Phase I reporting for complex oncology trials and traditionally outsourced, Phase IV trialsStatistical study designStatistical programmingDocument managementDatabase lockingReport writing and filing to medical authorities Operations in IndiaStarted operations in 2001 Approximately 30 statisticians out of global team of 250 located in India Focus on standard safety reporting for Phase II and III trials Reports focused on US FDA and EMEA Over 40 global trials supported in first year of operation Supporting 2 mega trials of over 10,000 patient records each Conduct several short turn-around analyses for clinical pharmacology studiesNOVARTIS EXAMPLE20DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 22. OFFSHORING CAN RAPIDLY MOVE UP THE PHARMA VALUE CHAINSupport functions Finance and accounting Information technology Human resources R&D Clinical development Data management, including bio-statsContract manufacturing Drug manufacturing (TBD) Formulations development Custom chemical synthesis R&D Bio-informatics Analog generation Support functions Sales force supportContract manufacturing New product development R&D Lead generation and optimisationPhase 1: “Early wins”Phase 2: Minimal risk movePhase 3: High-end activitiesRationaleSignificant experience across other industries Strong vendor base Pharmas already doing itSignificant bottom line impact potential visible Emerging vendor baseIPR issues need to be clarified Comfort around Asia needs to be establishedOpportunity1234521DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 23. IN THIS CONTEXT, SEVERAL DOUBTS HAVE ARISEN ABOUT THE FUNDAMENTAL LONGEVITY AND EVOLUTION OF BPO AS AN INDUSTRYWill the BPO phenomenon plateau out in the next few years?Even if it survives, moving up the value chain will be difficult and will take several years?Value chain moves will be the domain of captives because the trust required is too high?22DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 24. IN THE END STATE, LARGE INSTITUTIONS WILL USE A COMBINATION OF CAPTIVE AND VENDOR FACILITIESExamplesStarted off handling all processes in-house Now outsources call centre services to multiple third party vendorsStarted offshoring operations by outsourcing In addition to outsourcing, now also runs a captive centreJV/ Alliance Indian best-of-breed vendorDelayOutsource to Global brandCaptiveJV/ Alliance Indian best-of-breed vendorDelayCaptiveFrom primarily captive……to hybrid modelFeasibility of outsourc-ing the processCross-border operation sophisticationOutsource to Global brand23DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 25. IN FACT, MATURE OFFSHORERS HAVE DEVELOPED AN INTEGRATED ARCHITECTURE OVER TIMEStarted with 150 person completely captive unit in 1994 primarily for back end processing Entry into knowledge intensive activities in 2000-01 Significant expansion of head count and service line in 2001 Geographical diversification into Philippines in 2001ModelThird party – Philippines Reduces country risk Provides BCPThird party – India Exclusive support to AMEX Creates scale with minimal investment Diversifies risk Competes with captive and provides BCPCaptive operations Leverages brand, Important for regulatory issues Preserves proprietary process knowledge% of total off shored services700 FTEs Voice based customer support for credit card operationsOver 2000 FTEs across vendors such as Spectramind, Daksh, EFunds Voice based customer support for credit card operationsOver 1600 FTEs Involved in high-end and low-medium-end, proprietary/non proprietary services (e.g., A/C reconciliation,A/C opening and closing, Ledger activities for credit cards, A/C planning and forecasting, Fraud and risk modeling)Scale, scope and management model30%50%20%24DL-ZXE332(ITES, Board Pres.)(JS)-7
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              • 27. Rigorous analytic approachSponsor-led approachOutside-in approachF-1000 PLAYERS HAVE ADOPTED THREE APPROACHES TO SELECT PROCESSES FOR OFFSHORINGDetailed analysis to identify high potential processes, percentIdentify processes for offshoring based on simple criteria Sponsorship from process owner (e.g., inside Group Ops. in LTSB) Least organizational resistance (e.g., overflow work) Low reputation/service quality riskUse external benchmarks (activities and phasing) to identify and prio-ritize the corresponding candidate process in your organization Use benchmark information on off-shore-onshore split and internal FTE mapping (for identified candidate processes) to size the opportunityFilter activities by offshorabilityIdentify processes/ activities offshored by existing players'Build and they will come' – allow other parts of the organization to decide on offshoring at their own pace26030918 Offshoring workshop v2
              • 28. Retail bankingMerchant acquiringFinancial services sectors with high potential for offshoring*Retail bankingMortgagesServicingOriginationLife and healthPersonalGroup and healthProperty and casualtyDeposit productsConsumer loans Credit cardsCard issuance & servicingInvestment bankingResearch7-1110-158-157-125-1010-205-105-125-128-15Per cent of cost base offshorable15-2020-2525-3020-2510-1530-4010-1520-3020-2525-30THIS HAS PRIMARILY BEEN DRIVEN BY THE SIGNIFICANT 35-50% COST SAVINGS OPPORTUNITY * Asset management module including retail brokerage to be completed ** Does not include potential cost savings from offshoring IT and corporate center processes *** Non-interest expense - operating cost only, excluding interest expense, advertising, and corporate G&A where separable; assumes institution is a “pure-player”Potential institution- wide savings**35-50% savings in off-shored activitiesWholesale banking InsurancePer cent of total NIE***27
              • 29. VENDOR LANDSCAPE IS CONSOLIDATING AND MATURING BPO start-upsBPO arms of Indian IT services playersBPO arms of large financial institutions Global BPO companiesCall center, technical help desks and email based help desksCall center, Techmail help desk Call center, Insurance claims processing, airline revenue accountingInbound call center and financial servicesCall centers, technical help desks and email based help desks – dedicated centers for BankofAmerica, AmexMortgage processing (Greenpoint) and financial services Service line focusEmployeesLeading playersCall center and financial services (payments, card processing)Customer care, financial and accounting, paymentsCustomer care (largely inbound)Call center, technical help desk, loan processing28DL-ZXE332(ITES, Board Pres.)(JS)-7
              • 30. SELL OUTS HAVE BEEN WITNESSED IN THE RECENT PASTSource: McKinsey, Nasscom, press articles20021996In April 2002, Warburg Pincus, leading private equity investor acquired 70% majority stake Strategy requires investment to fully exploit growing third party client base Allotted $3 million to set up third business process outsourcing (BPO) centre by 2003Key eventsSet up captive center in 1996 as wholly owned subsidiary to reduce the airline's operating cost Processed about 80% of BA’s backend operations Largely focused on airline clients 16.0 (FY2001)Revenue (USD mil.)8.9 (FY1999)1,700 (FY2001)EmployeesUnavailableOffshored activitiesCustomer complaints Passenger/agent claims Tracking cargoCustomer Care / CRM Loyalty program support Revenue Accounting Marketing program development and management2002Conseco fully exited by selling out stake to Oakhill Partners by Nov 2002; however it has continued outsourcing its transaction processing EXL Services named largest 3rd party IT-enabled service company in India in revenue terms2001Conseco acquired EXL in 2001 for about $ 52.6 million~6025 (FY2001)3,500 (FY2002)300 (FY2000)Internet and voice customer servicesCritical Back Office Operations Transaction processing CollectionsRationale for sell-outConseco was in financial distress due to diminishing core business and sold out captive center to raise fundsBA sold out captive center to improve diversity of talent3rd party provider3rd party providerBA set up captive BA sold captive to Warbug Pincus Conseco acquired EXL Services as captive centerConseco sold EXLServices to Oakhill PartnersEXAMPLES29DL-ZXE332(ITES, Board Pres.)(JS)-7



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