Operational Excellence The Next Frontier in Offshoring

1
Operational Excellence The Next Frontier in
Offshoring
CONFIDENTIAL
February 2007
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 during an oral
presentation it is not a complete record of the
discussion.
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OPERATIONAL EXCELLENCE IS KEY TO CONSOLIDATE
INDIAS DOMINANT POSITION IN THIS INDUSTRY
60.0
Industry on track to achieve US60 billion, but
potential is 5x
300.0
US billion
24 CAGR
33
2005-06
2006-07
2010
Worldwide offshore market potential
Indian IT BPO industry
1. Operations Excellence 2. Education 3.
Infrastructure

• Todays discussion is focused on 1 of the 3 areas
  highlighted by the NASSCOM-McKinsey 2005
  required to realize Indias potential

3
INDIAN IT AND BPO INDUSTRY IS UNDERGOING
FUNDAMENTAL STRUCTURAL SHIFTS
Emerging trends

• New clients less sophisticated and often unclear
  about offshoring objectives
• Mature clients focusing on value extraction
  opportunities beyond labour cost savings

• Breadth of services being offshored expanding
• Scope of work increasingly includes more complex
  upstream components
• Clients beginning to prefer commercial models
  that transfer operating risk to providers

• Depleting talent pool forcing providers to incur
  higher costs to source right talent
• Inability to extract additional value on pricing
  putting pressure on margins

4
McKINSEY HAS CREATED A 360? BENCHMARKING-CUM-DIAGN
OSTIC FRAMEWORK FOR INDUSTRY TO ACHIEVE
OPERATIONAL EXCELLENCE
What it does . . .
Where we are . . .

• Benchmarking-cum-diagnostic completed for
• 23 leading BPO companies covering 162 processes
  and over 4,800 responses
• 10 leading IT services companies covering 58
  projects with over 390 responses
• Extending 360? to
• Eastern Europe, Philippines, China and onshore
  remote centers in US and UK
• Software product companies

• Seeks responses from all stakeholders to assess
  operational excellence at BPO (Process 360?) and
  IT services (Project 360?) companies
• Provides 360? view and insight on alignment
  between clients and operating team
• Identifies best practices and helps improve
  underlying functional practices which drive
  performance
• Provides perspectives on offshore metrics across
  both captives and third parties

McKinsey360? benchmarking
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SUMMARY OF KEY FINDINGS FROM IT SERVICES AND BPO
BENCHMARKING
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SUMMARY OF KEY FINDINGS FROM IT SERVICES AND BPO
BENCHMARKING

• Clients highly satisfied with remote center
  performance
• BPO Average client satisfaction score 3.2 on a
  scale of 1-4
• IT Services Average client satisfaction score
  of 85
• Encouraging evidence of productivity improvements
• Continuing strong financial case for offshoring
  despite wage inflation

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CLIENTS ARE HIGHLY SATISFIED WITH OFFSHORING
Highly dissatisfied
Highlysatisfied
Client evaluation of performance by process group
Specialised voice
2
Knowledge services
5
3
Basic data
6
Research andanalytics
Source McKinsey 360º benchmarking
8
PRODUCTIVITY IMPROVEMENTS ARE EVIDENT, ESPECIALLY
IN APPLICATION MAINTENANCE PROJECTS
35
ILLUSTRATIVE
Tickets open at the beginning of the month
Example from a leading IT services company
Indexed
Post the initial phase, we expect our vendor to
bring productivity improvements and factor them
into their operating plans
Customer
Month 5
Month 4
Month 3
Month 2
Month 1
Source Customer interviews McKinsey High-Tech
practice
9
LABOUR COST ARBITRAGE VIS-À-VIS DEVELOPED MARKETS
WILL BE SUBSTANTIAL DESPITE WAGE INFLATION
Indexed cost to company for IT workforce
Indexed wage differential
US
India
14
100
2005
86
18 CAGR
2 CAGR
32
110
2010
77
Source McKinsey analysis
10
SUMMARY OF KEY FINDINGS FROM IT SERVICES AND BPO
BENCHMARKING
Client focus rapidly evolving likely to place
increasing pressure on offshore units

• BPO Clients increasingly looking for higher
  order benefits such as productivity enhancements
  and innovation
• IT Services Mature customers pushing providers
  upstream where practices are relatively immature

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WHILE BPO CLIENTS INITIALLY FOCUS ON COST AND
QUALITY, THEIR PRIORITIES SHIFT QUICKLY
24
BPO INDUSTRY AVERAGE
Predominant focus area
Client weightage on key metrics by offshore
process tenure
Per cent
Basic data
Specialised voice
Risk
Innovation and productivity
Speed and flexibility
Quality
Cost
lt12 months offshore
gt12 months offshore
gt12 months offshore
lt12 months offshore
Source McKinsey 360º benchmarking
12
IT SERVICES CLIENTS ARE PUSHING THE INDUSTRY
UPSTREAM WHERE PRACTICES ARE BEING TESTED
12
Practices
. . . where practices are relatively immature
Rising customer expectations pushing industry to
move towards end-to-end development models . . .
Per cent (disagree)
Requirement gathering
Requirement gathering
Solution design
AD
AM
Detail design
PIS
Traditional model
Emerging model
Coding
Solution design proposal writing
Unit testing
AD
Systems testing
AM
User testing
PIS
13
SUMMARY OF KEY FINDINGS FROM IT SERVICES AND BPO
BENCHMARKING
Clients highly satisfied with remote center
performance
1
Client focus rapidly evolving likely to place
increasing pressure on offshore units
2
Significant variability in performance at
operating level capable people not
institutionalised processes driving performance

• BPO Data processes performing better than voice
• BPO On average, third party providers
  outperforming captives on most metrics and
  practices however, gaps can be bridged
• BPO Remote center location does not guarantee
  performance
• BPO Consistency in performance lacking across
  and within centers
• IT Services Variability does not decrease even
  in more mature IT services

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DATA OPERATIONS ARE PERFORMING BETTER THAN VOICE
OPERATIONS
93.0
SLA compliance (quarter before last)
SLA compliance (last quarter)
Per cent
Per cent
97.3
96.4
Basic data
Rules-based decisioning
97.4
97.2
Basic voice
93.2
93.6
Specialised voice
93.6
93.5
Source McKinsey 360º benchmarking
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THIRD-PARTY PROVIDERS OUTPERFORM CAPTIVES
BEST-IN-CLASS CAPTIVES SHOW THIS GAP CAN BE
BRIDGED
6
RULES-BASED DECISIONING PROCESS EXAMPLE
Cost
Industry average
Best-in-class
US/FTE/hour
US/FTE/hour
-14
29
9.9
6.5
5.6
7.7
Third party
Captive
Third party
Captive
Source McKinsey 360º benchmarking
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PLAYERS IN HIGH COST CITIES HAVE BEEN ABLE TO
DELIVER SUPERIOR COST AND QUALITY PERFORMANCE
174.0
BASIC DATA PROCESS EXAMPLE
Time to stabilise operations
Cost
Provider
SLA compliance
Days
Per cent
Index Mumbai 100
161
Gurgaon
90.0
105
147
Bangalore
96.7
96
147
Chennai
95.3
75
100
Mumbai
99.0
75
Figures are for providers with best-in-class
cost for each of the locations Source McKinsey
360º benchmarking
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IN GENERAL, CONSISTENTLY HIGH PERFORMANCE ACROSS
PROCESS GROUPS REMAINS ELUSIVE
50
CASE STUDY OF BANGALORE BASED CENTRE
Below average
Average
Above average
Performance vis-à-vis industry
Metric
Rules-based decisioning
Basic data
1. Cost (/FTE/hour)
2. SLA compliance (Per cent)
3. Ability to handle fluctuations over
forecasted volumes (Per cent)
4. Annual productivity improvement (Per cent)
Source McKinsey 360º benchmarking
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THERE IS SIGNIFICANT VARIANCE IN PROJECT-RELATED
METRICS IN IT SERVICES TOO
Lagging
Industry min/max
gt35
25-35
10-25
5-10

• Cost of Quality

lt50
50-75
75-90
gt90

• People fulfillment rate (per cent)

• Proportion of projects with cost overrun

gt25
10-25
5-10
lt5
gt5
2.5 5
1-2.5
lt1

• TM revenue leakage

Source McKinsey 360o benchmarking
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SUMMARY OF KEY FINDINGS FROM IT SERVICES AND BPO
BENCHMARKING
Clear evidence that operational excellence is a
lasting source of competitive advantage

• BPO Institutionalising practices in talent
  management and execution methodologies likely to
  yield between 20-30 advantage on cost and 3-5
  on SLA compliance
• IT Services Providers with institutionalised
  best-in-class practices in solution design,
  people planning and utilisation, and training
  enjoy a 3-6 EBIT advantage

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OPERATING TEAMS DISSATISFIED WITH SEVERAL
OPERATING AREAS
27
Operating team disagreement
Operating team disagreement
IT services practices
BPO practices
Per cent
Per cent

• Employee engagement

• Pricing and negotiations

• Requirement gathering

• Continuous process improvement

• Solution design and proposal writing

• Recruitment

• Migration planning

• Training

• Workforce management

• Performance management

• IT/Telecom management

• People planning utilization

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POOR OUTCOMES ARE A RESULT OF WEAK UNDERLYING
PRACTICES
30
Disagree-ment
RECRUITMENT EXAMPLE
Practice statements
Respondent scores
Per cent
Clients Operating team
Disagree-ment

• Clear job description at a task level
  incorporating process-specific skills

13
Outcome statements
Per cent
25

• Sourced right profile

14

• Established hiring process with clear internal
  SLAs

16
24
22

• Dynamic sourcing model enabling sourcing pools
  changes per requirements

31

• Sourced on time

31
20
27

• Regular meetings between recruitment and
  operations to plan hiring requirements

36
35
Source McKinsey 360º benchmarking
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IT SERVICES COMPANIES ON AVERAGE CAN IMPROVE
THEIR OPERATING PROFITS BY 3-6 PERCENT POINTS
Rationale
Potential initiatives
Levers

• Span-of-control varies widely across companies
  indicating opportunity for improvement
• Several sub-critical mass projects lead to
  fragmentation and higher usage of senior talent

• Robust recruitment and training processes
• Stronger account management allowing larger
  projects
• Business development discipline to accept only
  larger projects

• Offshore utilisation varies widely (from 60 to
  more than 75)

• Empowered central resource management function
• Performance reviews for PD/PMs emphasise improved
  project level utilisation

• Significant dispersion in pricing even for
  standard service offerings

• Clear pricing guidelines (e.g., minimum gross
  margin requirements, well-defined discount/free
  offers) to sales force
• Effective sign-off and pricing review mechanisms

Source McKinsey 360o benchmarking
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APPENDIX
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SIGNIFICANT FLUCTUATIONS ON PERFORMANCE IN KEY
PRACTICES ACROSS PROJECTS OF THE SAME OFFSHORE
UNIT
Range in practice scores across different
projects in the same company (score
of 1 to 4)
EXAMPLE
Project management
Requirement gathering
Utilisation management
Training
Source McKinsey 360o benchmarking