Outsourcing and Localization. Marcos Mayo Director in Supply Management, A.T. Kearney

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3 Outsourcing and Localization Marcos Mayo Director in Supply, A.T. Kearney

4 10 years of consulting experience in Supply (North America, Europe and the Middle East) Focus areas: - Large procurement transformation programs - Procurement enabled localization - Strategic sourcing - Training Education: - MBA (Supply Chain ) - Masters in Industrial - Chemical Engineering

5 Companies looking at BPO should start by answering three basic questions Why? To - reduce cost - improve service - reduce complexity (focus on core) What - functions? - activities? Who? - Selection criteria? - Profile? - Location?

6 An ocean of activities are potential BPO targets prioritize Research & Information services in HR Program Oversight & Delivery Training Strategy Development Training Health Benefits Workforce Planning Pension Benefits Planning Welfare Benefits Planning Payroll Processing Employee communication General/ Open book Accounting Core Banking Equity Financial & Insurance Research Revenue Cycle Underwriting & Asset Mgmt Financial Administr ation Compliance and recovery Transaction Tax Pension/ Welfare Benefits administration Treasury & Risk Mgt. Recruitment & Selection Customer Help Desk Analytics CRM Solutions Contact centers Data Analytics Bills/Payment Processing Claims/ Cheque processing Consumer Credit Automated Order Placements and Delivery Programming & Loan processing/ Maintenance servicing services Security Services Customer interaction IT Infrastructure Order IT Application Technical support Category Facilities Optimization Offshore Servicing Document Processing Credit Risk. Analysis and Reporting IT Consulting Managing Network Firewalls Programming & Maintenance Optimization of services network Traffic IT Spend Multi Vendor Business & Market Research Contracts allocation Security Technology System consulting & Design Services Application Development, Testing and Systems Maintenance Integration Vendor Negotiations Vendor Sourcing Commodities Transportation Warehouse/ Determination Logistics Trade Order Mgmt BPO maturity Inventory Captive Offshore Content Design & development services Freight Payment Processing Remote Data Center Operation services Facility Operation and Vendor Enrolment One-stop solutions Product Engg, Design, Dev & Testing Research & Development Vertical Integration across functions Paralegal Consulting Medical Content Research & Consulting & Analytics Services Knowledge 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? Source: IDC; Gartner; Forrester; AMR Research; A.T. Kearney

7 and treat BPO implementation as a transformation program where change plays a key role BPO partner selection process Go/No-Go gates Strategic assessment validation Long vendor list RFP launch RFP responses evaluation Site visits & detailed solutioning Negotiations & solution finalization Implementation Ongoing evaluation of BPO business case Confirm scope of the initiative Validate baseline and initial savings estimates Develop evaluation criteria based on business goals Develop and launch a comprehensive RFP Evaluate RFP responses Down-select vendors based on evaluation criteria (technical and commercial) Evaluate vendor operations Refine vendor evaluation Down-select top vendors for negotiations and due diligence Detail transition plan Finalize negotiations Confirm business case Select vendor Define and sign operating agreement Align migration teams Plan migration activities Establish connectivity to remote locations Establish vendor organization

8 While BPO can help you achieve your business goals, it can also have some undesirable side effects BPO impact on local labor BPO most common target GCC national to expat ratio Private sector 1 1, % 66% Nationals 60% 34% Expats Core Functions Support Functions 1, % 80% Nationals 5% 20% Expats Core Functions Support Functions GCC national to expat ratio Government 1 Replaced by labor from: 2016 A.T. Kearney GSLI TM (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 Significant differences exist by country and industry Financial Attrac. People Skills and Avai. Business Env.

9 At first sight, within the context of BPO, financial performance and promotion of local labor seem hard to reconcile Catch-22 Focus on financial performance Outsourcing of activities performed by local labor Challenged long term sustainability Financial performance Promotion of local labor Focus on promotion of local labor Impacted financial performance Challenged mid term sustainability

10 What if we were to reinvest part of the cost savings derived from BPO into creating local value Reinvesting in local value creation BPO Source: Auguste Rodin; A.T. Kearney

11 Interestingly, the solution lies within a BPO target Research & Information services in HR Program Oversight & Delivery Training Strategy Development Training Health Benefits Workforce Planning Pension Benefits Planning Welfare Benefits Planning Payroll Processing Employee communication General/ Open book Accounting Core Banking Equity Financial & Insurance Research Revenue Cycle Underwriting & Asset Mgmt Financial Administr ation Compliance and recovery Transaction Tax Pension/ Welfare Benefits administration Treasury & Risk Mgt. Recruitment & Selection Customer Help Desk Analytics CRM Solutions Contact centers Data Analytics Bills/Payment Processing Claims/ Cheque processing Consumer Credit Automated Order Placements and Delivery Programming & Loan processing/ Maintenance servicing services Security Services Customer interaction IT Infrastructure Order IT Application Technical support Category Facilities Optimization Offshore Servicing Document Processing Credit Risk. Analysis and Reporting IT Consulting Managing Network Firewalls Programming & Maintenance Optimization of services network Traffic IT Spend Multi Vendor Business & Market Research Contracts allocation Security Technology System consulting & Design Services Application Development, Testing and Systems Maintenance Integration Vendor Negotiations Vendor Sourcing Commodities Transportation Warehouse/ Determination Logistics Trade Order Mgmt BPO maturity Inventory Captive Offshore Content Design & development services Freight Payment Processing Remote Data Center Operation services Facility Operation and Vendor Enrolment One-stop solutions Product Engg, Design, Dev & Testing Research & Development Vertical Integration across functions Paralegal Consulting Medical Content Research & Consulting & Analytics Services Knowledge Vendor negotiation Vendor selection Contract allocation Ability to influence vendor s behavior

12 Vendors create local value in multiple ways beyond the generation of local jobs How do vendors create local value? Local jobs (& salaries) Expenditures (opex) Development Platforms Skills Investments in R&D Investments (capex) Historical Capital Investments Foreign jobs (& salaries) Procurement of products Local labor plans Investments in high value added steps of the value chain Investments in certain provinces Current Capital Investments Procurement of services Future Capital Investments

13 A comprehensive way to measure local value creation is the cornerstone of this approach Driver Sub-driver Contribution Local jobs Expenditures (opex) Foreign jobs Local COGS Medium Foreign COGS Low Investments (capex) Historical Capital Investments Current Capital Investments VLV creation (USD/year) Future Capital Investments Low Skills development Development Platforms Strategic Investments Clustering potential

14 USD MM / Year shifting the question to if I am going to invest, whom do I get the best return from? Total cost vs. Local value (for a given performance) TCO 1 (USD MM / Year) VLV 2 (USD MM / Year) baseline 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 = Vendor A Vendor B Vendor C Vendor D Vendor D TCO = USD 50 MM / Year VLV = USD 20 MM / Year Return = TCO: Total Cost of Ownership; 2. VLV: Vendor Local Value; 3. Excludes company profits

15 Vendor local value creation becomes part of the supplier evaluation and selection criteria 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 BPO Procurement Driver Sub-driver Contribution Local COGS Expenditures (opex) Foreign COGS Local jobs Low Foreign jobs Medium Investments (capex) Historical Capital Investments Current Capital Investments Future Capital Investments Low Development Platforms Skills development Strategic Investments Clustering potential

16 Key takeaways 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

17 Thank You