1、ITES/BPO Opportunity to move up the value chain?This 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
2、during an oral presentation;it is not a complete record of the discussion.20030520DL-ZXE332(ITES,Board Pres.)(JS)-71Source:Gartner;Dataquest;Aberdeen group;McKinsey analysisTelecom costs down by 90%in the last 3 years;world-class reliabilityOver 2.5 million low-cost talented workers in countries suc
3、h as India and PhilippinesEmergence of a credible vendor community0.00.20.40.60.81.01.21.41.61.82.0199219931994199519961997199819992000200120022003EBPO total revenues-India example*$billionCONTEXT:BUSINESS PROCESS OFFSHORING HAS EXPLODED IN THE LAST FEW YEARSEncouraging track record of early movers
4、Demanding U.S market environmentSuccessful track record of I/T offshoring20030520DL-ZXE332(ITES,Board Pres.)(JS)-72“Tech jobs leave U.S.for India,Russia.Whos to blame?”July 2003“Is your job next?”February 2003BUT HAS ALSO CREATED GREAT ANXIETY IN PRIMARY MARKETS“American legislators are accusing Ind
5、ia of stealing jobs”June 2003“Americas pain,Indias 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 Committee20030520DL-ZXE332(ITES,Board Pres.)(JS)-73IN THIS CONTEXT,SEVERAL DOUBTS HAVE
6、 ARISEN ABOUT THE FUNDAMENTAL LONGEVITY AND EVOLUTION OF BPO AS AN INDUSTRY1.Will the BPO phenomenon plateau out in the next few years?2.Even if it survives,moving up the value chain will be difficult and will take several years?3.Value chain moves will be the domain of captives because the trust re
7、quired is too high?20030520DL-ZXE332(ITES,Board Pres.)(JS)-74IN THIS CONTEXT,SEVERAL DOUBTS HAVE ARISEN ABOUT THE FUNDAMENTAL LONGEVITY AND EVOLUTION OF BPO AS AN INDUSTRY1.Will the BPO phenomenon plateau out in the next few years?2.Even if it survives,moving up the value chain will be difficult and
8、 will take several years?3.Value chain moves will be the domain of captives because the trust required is too high?20030520DL-ZXE332(ITES,Board Pres.)(JS)-750.33*Estimate based on historical U.S.reemployment trendsSource:McKinsey Global Institute1.OFFSHORING ACTUALLY GENERATES GREATER VALUE FOR THE
9、GLOBAL ECONOMYTaxes($0.04)Revenues($0.20)Local suppliers($0.09).deliversvalue to India.0.67Cost savings($0.58)Goods sold($0.05)Profits from Indian ventures($0.04).brings returnsto 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 previ
10、ouslyspent in U.S.,now offshored to India.$1.0020030520DL-ZXE332(ITES,Board Pres.)(JS)-760.030.330.100.090.100.01Profits retained in IndiaINDIA CAPTURES 33 CENTS FROM EACH DOLLAR OF SPEND OFFSHORED BY THE U.S.Value accrued from$1 of U.S.spend offshored1Dollars;2002Central govern-ment3State govern-me
11、nt4Total value accrued to IndiaLaborSuppliers2Offshoring sector1 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
12、services sector and the supplier industries and corporate tax on the supplier industries4 Includes sales tax on the supplier industries and revenue from the sale of power to offshored service providers Source:McKinsey Global Institute20030520DL-ZXE332(ITES,Board Pres.)(JS)-77JOBS OFFSHORED WILL BE A
13、 SMALL FRACTION OF THE SHORTAGE IN ELIGIBLE WORKERS Number of workers Millions,2000-2015 Source:U.S.Census;McKinsey Global Institute 3.315.6Jobs projected to go offshoreDecline in working population due to aging20030520DL-ZXE332(ITES,Board Pres.)(JS)-781.170.270.21JOBS OFFSHORED ARE A FRACTION OF AL
14、L MASS LAYOFFS1 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 period2 Average 1996-993 Average 1989-20004 Average 2003-13Source:NBER;BLS;Kletzer;McKinsey Global InstituteAverage annual ma
15、ss layoffs1Millions All mass layoffs2Offshoring projection4Trade-related layoffs320030520DL-ZXE332(ITES,Board Pres.)(JS)-79Economic value of off-shoring realOff-shoring creates 40-50%greater value for the global economyIndia captures 33%of every off-shored dollar while the US retains 67%and the incr
16、emental 40-50%value creationOff-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 realReal people and communities are e
17、ffectedRe-training takes timeManufacturing hang-over still felt20030520DL-ZXE332(ITES,Board Pres.)(JS)-710IN THIS CONTEXT,SEVERAL DOUBTS HAVE ARISEN ABOUT THE FUNDAMENTAL LONGEVITY AND EVOLUTION OF BPO AS AN INDUSTRY1.Will the BPO phenomenon plateau out in the next few years?2.Even if it survives,mo
18、ving up the value chain will be difficult and will take several years?3.Value chain moves will be the domain of captives because the trust required is too high?20030520DL-ZXE332(ITES,Board Pres.)(JS)-711Completed the first round of off-shoring successfullyBuilt substantial scale in operations in Ind
19、iaPenetrated 1-2 businesses in depthStarted capturing labour cost savingsBase A:“Accelerate,extend breadth and depth”Increase breadth and depth of services Strengthen and stabilize architectureInsource-outsource,onshore-offshore architectureGlobal hub architectureStrategic outsourcingB:“Re-engineer”
20、Drive towards operational improvementTask level and process level reengineeringConsolidation 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 va
21、lue out of the shared services utilitySpecialized service bureauGeneric third party BPO providerD:Tackle tough(but large)industriesFOUR POSSIBLE VALUE CHAIN MOVES POSSIBLE20030520DL-ZXE332(ITES,Board Pres.)(JS)-712Simple,standardized activitiesAdvanced technical skill and some judgment requiredExten
22、sive judgment and analytical skill requiredA.MOVES UP THE VALUE CHAIN ALREADY HAPPENING IN TERMS OF BREADTH AND DEPTH OF PROCESSES OFF-SHOREDAXAInsurance claims processingCitibankCheck processing,account application processing,loan processing by a subsidiary(e-Serve)HSBCAccount opening and closing,r
23、etail loan processing,mortgage processingAmerican ExpressLive 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 SolutionsRisk
24、modeling,actuarial services,underwritingCitibankCredit card processing,collection calls,inbound and outbound service centersHSBCInbound customer service center for mortgageCapital OneInbound customer service center,outbound telemarketing(MSourcE)CitibankFinance and accountingGE CapitalInsurance clai
25、ms processing Outbound telemarketing,inbound customer serviceMBNAProcessing of online applications(TransWorks)GE CapitalPayroll accountingInvoice and payment processingMcKinsey&CompanyResearch and knowledge management for world-wide offices in GurgaonGE CapitalRisk analysis,strategic planning and fo
26、recastingFinancial statement analysisExamples of sector-specific(“vertical”)processesExamples of corporate center(“horizontal”)processesGEUK auto applications data entry20030520DL-ZXE332(ITES,Board Pres.)(JS)-713IN FIs,VENDORS AT POINT OF SERVICING THE WHOLE RANGE OF CORE BANKING AND SUPPORT PROCESS
27、ESSource:Vendor interviews,literature searches,vendor websites,McKinsey analysisSample processesTelesalesCustomer serviceTechnical support help deskE-mail supportFax responsesLive interaction(chat room customer service)Customerfacing VoiceNon-voice InboundOutboundTelemarketing Collections(bucket one
28、)Business process off-shoring servicesBenefits administrationPayroll processingRetail banking(account maintenance,opening,check processing)Fund administrationReference data managementClaims processingDatabase integration&analytical servicesSecondary researchA/R and A/P managementReconciliationBack o
29、ffice Core businessSupportHR/AdminConsumer bankingWholesale bankingInsuranceResearchFinance&Acctg.Illustrative vendors20030520DL-ZXE332(ITES,Board Pres.)(JS)-714B.REENGINEERING AND PROCESS IMPROVEMENT CAN PROVIDE ADDITIONAL GAINS OF 30-40%100Original costbaseFactorcostsavingsAdditi-onal telecom&mana
30、g-ement costs Off-shore location costConsoli-dation,standar-dization&superior skills Taskreengi-neeringEcono-mies of scaleProcess reengine-eringNew cost base60-6510-1545-558-135-73-51530-35Does notinclude gains from revenue enhancementTask aggregation and process level improvementTask migrationTask
31、levelimprovementFactor cost benefits(45-55%savings)Additional benefits(30-40%savings)20030520DL-ZXE332(ITES,Board Pres.)(JS)-715Productivity and process re-engineeringEconomies of scaleAggregated cheque order processing tasks and bought-in cross-trained agents,which has significantly increased staff
32、 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 applicatio
33、nEfficiencySource: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 trainingEfficiencyIncrease
34、d 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 annum20030520DL-ZXE332(ITES,Board Pres.)(JS)-716C.F-1000 INSTITUTIONS HAVE INCREASINGLY BEGUN TO REALISE OPPORTUNITIES FOR REVENUE
35、 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
36、%market share improvement in home marketsResearch platform to service customers for a fee offer customized research for strategic customersDevelop modeling platform to provide fee-based analytical capabilities to SME financial services customers offer customized services to large financial instituti
37、onsOffer trade finance services to SME customers that are otherwise uneconomical to serveOffshore R&D(pharma,chemicals)using collaborationsKnowledge on call services for core clients customized research and analyticsRevenue opportunities created through offshoringPotential ideas for F-1000 instituti
38、onsCustomised research for global customers potential to create platform to service other banks20030520DL-ZXE332(ITES,Board Pres.)(JS)-717Columbia 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 gro
39、ws to become the second largest processor in the worldSIGNIFICANT VALUE CAN BE CAPTURED BY TRANSFORMING INTERNAL CAPABILITIES INTO THIRD-PARTY BUSINESSESAmEx transitions internal processing unit into third-party company(FDR)and sells off majority ownership stake(1992)FDR merges with largest competit
40、or and grows to become global leader in transaction processingParentNew businessTransition*March 1,2002Sources:Hoovers;analyst reports;McKinsey analysisManagement buyout of Midland Bank processing unit following merger with First Bank System(1984)IPO in 1986Grown to become leading provider of techno
41、logy and processing services for financial institutionsMidland 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$17 billion in market cap*,growing at 26%CAGR in the last 5 yearsValue creation U.S.$billion20030520DL-ZXE
42、332(ITES,Board Pres.)(JS)-718D.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”tow
43、ards offshoring until late 2001Significantly 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 improvementsSolid vendor base(e.g.,Infosys,Satyam,TCS)with prove
44、n track recordObserved actions of competing players!“Wait and watch”towards outsourcing of business process through 2002 and early 2003Numerous ongoing discussions in 2003 with vendors on finance&accounting and HR offshoringIncreasing focus on rationalizing support function costsEmergence of credibl
45、e success stories and vendors for F&A and HR Observed actions of competing playersMany companies articulating“overall aspiration”cutting across numerous opportunities such as IT,BPO,R&DR&DConcerns around IP and quality of medical infrastructurePositive experience of first movers in addressing concer
46、ns 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 environment20030520DL-ZXE332(ITES,Board Pres.)(JS)-719OPPORTUNITIES FOR OFFSHORING EXIST ACROSS THE PHARMACEUTICA
47、L VALUE CHAIN R&DSupport FunctionsIndustrial OperationsStrategic and commercial busi-ness planning(pre-launch)Product development and life cycle managementPricing and health economicsMarket a product(new and legacy)Customer relationship managementCustomer and consumer servicesSales managementLogisti
48、cs&distributionAfter sales servicesFinance&AccountingInformation TechnologyHuman resourcesLegal Legal counseling advocacy and litigation Intellectual property counselingSales force supportTarget identification&validationLead generation&optimizationPreclinical/ToxicologyClinical Development&TrialsDat
49、a ManagementNew production developmentProcurementPlanning and manufacturing Plant maintenance Quality management Process controlSupply chain managementPerformance monitoring and controlCommercial OperationsSource:Interviews;McKinsey analysisFocus of documentOffshore potential20030520DL-ZXE332(ITES,B
50、oard Pres.)(JS)-720RECENT ACTIVITY POINTS TO GROWING INTEREST OF PHARMACOS IN OFFSHORING DATA MANAGEMENT EXAMPLESource:InterviewsGlobal statistical operations business systemSavings of around 40-60%vis-vis global CROs within first yearTargeting 80-100 global trials in 2003Plans to start related area
