The entire value chain for consumer products sourced or manufactured in Asia has become increasingly interconnected and mutually reliant—ownership of physical manufacturing assets and intellectual property rights has become more ambiguous and contentious. With ambiguity over ownership and rights to manufacturing assets, customers lose the key leverage of mobility. While brand companies were able to become more price competitive through lower production cost and reduced overheads within their own organizations by outsourcing their design engineering and manufacturing to Asia, their supply chains became longer and, while some new problems are obvious, others remain latent, only to emerge when the relationship breaks down.

Brand Companies

With greater reliance on suppliers in China to design their products and to finance their tooling and inventory, brand companies have found themselves more and more “married” to their suppliers. As a result, Brand companies find themselves directly and indirectly facing the same challenges as their suppliers: currency and commodity volatility, product quality and labor issues.

Brand companies are using the lowest-cost suppliers who themselves often employ unsophisticated purchasing, finance and management practices. As a result, the brand companies are receiving price increase requests from their suppliers on a monthly and sometimes weekly basis as their suppliers struggle to properly manage these issues. Suppliers that are facing these problems have been known to essentially suspend taking orders unless they get the price increases—bringing the supply chain to a grinding halt. Brand companies have an unenviable dilemma: either take the increases and the hit to their margins, or face the daunting prospects of trying to change suppliers during the product life cycle.

Poor product development processes in place between brand companies and their distant suppliers have given rise to three major problems: unclear responsibility for product quality, delayed product realization and ambiguous ownership of protectable intellectual property rights. Supplier financing of tools and lack of clear assignment and licensing of intellectual property can make it cost-prohibitive or impossible to change suppliers when things get tough in the relationship.

Because Chinese suppliers make up such a large portion of most brand companies’ cost of goods, brand companies are pressured to take into account additional concerns such as their suppliers’ environmental and social compliance (ethical) practices.

Finally, corruption continues to be a major issue in China, and brand companies need to be both proactive and vigilant in their management of this issue. Brand companies need to establish clear expectations for their staff and suppliers and adopt policies for doing business with suppliers that engage in corruption, including termination of the business relationship. Brand companies need to structure their affairs with their suppliers so that they can quickly move away from a supplier that engages in untoward business practices.

Manufacturers

As a result of their enhanced roles and capabilities, manufacturers find that they have new leverage in the relationship as well as a heightened awareness of the need to protect their interests and investments. Manufacturers also realize that Chinese non-legal dispute resolution solutions do not adequately meet their needs when dealing with overseas customers. As a result, Chinese suppliers are warming to the idea that manufacturing outsourcing services agreements are not just tools for their customers to control them, but with their new-found leverage, are a means to protect their own interests.

Many Chinese manufacturers today have further taken on advanced marketing services for their customers, including, in some circumstances, to “category management” ranges of products for their customer’s product portfolio. Some suppliers have even greater ambitions—to develop and sell their own brand of products both domestically and abroad.

As a result of increased reliance on manufacturers within the value chain and the investments made by brand companies to improve their manufacturers’ capabilities, brand companies have created a new set of their own competitors that, on their own or in collaboration with retailers, are increasingly well-positioned to chip away at the brand company’s market share and margins.

Retailers

Retailers (those remaining) have strengthened their positions greatly in past 20 years. Retailers now have two sets of suppliers to choose from: brand companies and Chinese manufacturers. A growing share of high-volume, low price-point products are being sourced directly from Chinese manufacturers, further putting pressure on product marketing companies.

Conclusion

Dramatic changes have taken place in the supply chain over the past 20 years, and manufacturing and product development services agreements used in today’s environment all too often do not adequately contemplate or address either the obvious or the latent issues present in this new highly-integrated, mutually-reliant value chain. Manufacturing agreements in use today are often based on the 1990s model of distinct responsibilities of the parties with a relatively simple range deliverables of Chinese manufacturers with a narrow focus on the product, rather than the basket of services now on offer (and often provided).

Supply chain contracts need to address the distinct, discrete services performed by the manufacturer, and adequately protect brand companies’ interests. In the absence of contractual coverage addressing these issues, the current trends tip balance of control in the supplier’s favor and raise an ever-increasing list of issues for brand companies to address without the proper tools.

Low-cost country manufacturing is here to stay. The myriad of issues and challenges that exist will increase, and all players in the supply chain will struggle to adequately control them.

Robust manufacturing and product development outsourcing services agreements should proactively address the new order problems that are emerging in the brand company Chinese manufacturer relationships. A thorough discussion and agreement addressing key issues and providing flexibility for growth and change can keep the relationship balanced and allow the brand company to maintain reasonable options.

Geof Master is a partner in Mayer Brown JSM’s Business & Technology Sourcing practice. He can be reached at geofrey.master@mayerbrownjsm.com

Tom Keenan is a Registered Foreign Lawyer (Victoria, Australia) in Mayer Brown JSM’s Business & Technology Sourcing practice. He can be reached at thomas.keenan@mayerbrownjsm.com

This deconstruction of the manufacturing and product-development process has opened up new possibilities for product companies. However, unless there is evolution in the contracting model that takes these changes into account, product marketing (Brand) companies will increasingly face threats to their core roles and functions. For some companies, the evolution of their value chain has been subtle, while for others, the changes have been dramatic and obvious and these companies have come to well appreciate the value and the leverage that the multi-functional supplier brings to table.

The product value chain is fundamentally comprised of three players (represented in the graphic below):

• Manufacturers—historically focused on the hard aspects of actual manufacture, taking orders from the product marketing companies and manufacturing the products.
• Product Marketing Companies—historically focused on the more intangible upstream and downstream aspects of production such as conceiving, cultivating and launching product and Brand lines.
• Product Distributors—historically focused on the last step in the product value cycle, retail or wholesale (i.e., pushing product in the last mile to end-consumers).

In fact, rather than clearly delineated players, each of these players really represent a collection of functions—of value-add activities that all combine to form the product supply chain. In one of the most significant recent developments, the roles of Chinese product manufacturers have expanded, as these manufacturers have taken on more important roles in the supply chain, even becoming potential competitors to both product marketing companies and retailers.

It is important now to look at Chinese suppliers as providers of bundles of value-adding services that must be managed through a contractual framework that effectively addresses the unique attributes of product sourcing and the Chinese manufacturing landscape—a challenge well-suited to the outsourcing contractual model. This article will look at the evolution of the Chinese supply base in the provision of Original Engineering Manufacturing (OEM) (suppliers that manufacture to designs given to them), and Original Design Manufacturing (ODM) (suppliers that develop products and designs on their own) and the new world of issues that sourcing customers around the world face with their service contracts.

The Evolving Value Chain

It is helpful to explain the evolution in the value chain through a comparison of the roles of each of the key players in the consumer-product value chain over the last 20 years.

In 1990, brand companies were the key drivers of product innovation as they actively cultivated their connections with retailers and consumers to develop each new generation of product. Key functions, such as marketing, product management, product design, design engineering and manufacturing, were deemed “mission critical” strategic functions that were naturally controlled internally. Manufacturers in China did little more than fabricate toolings, inject plastic parts, source components and assemble products for their customers. The relative added-value of the manufacturer was limited and as a result their margins were thin. Retailers were primarily responsible for end-distribution and interfacing with the consumer.
“House Brands” were few and far between and were limited to opportunistic products at lower price points sourced off-the-shelf from suppliers. In summary, there was relatively little overlap in the roles and responsibilities of the different supply chain players.

The Evolving Value Chain 2010

Today, product marketing companies involve their manufacturers significantly earlier in the new product development process in order to save engineering costs and time and to provide for a more seamless transition to manufacturing. Chinese suppliers have risen to the opportunity, investing in product development engineering resources required to help their customers get products off the ground—motivated by the ability to raise their margins, notably through the avoidance of competitive bidding for new products. By getting involved earlier, Chinese suppliers “lock-in” their customers, avoid the risk of having to compete on mere lowest cost manufacturing and improve their margins by using their new-found leverage to quote on a “value-base” rather than “cost plus” basis. The integration of manufacturing suppliers into the process has helped to shorten development lead times, but early integration has left purchasing professionals without the ability to source the product with the best cost supplier.

Over the last 20 years, the confluence of three important factors has shaped the current value chain and shifted leverage away from the brand company to the supplier: (1) consolidation of the retail sector, (2) the need for brand companies to be more cost-competitive through low-cost country manufacturing, and (3) the push by Chinese suppliers to increase their margins and protect their manufacturing through the creation of more ODM products that cannot be ported to other suppliers.

First, consolidation of the retail sector in both North America and Europe has allowed retailers to increase their own margins through the development of “house brands” to supplement their own supplier’s (brand companies’) offerings. While initially undertaken on an opportunistic basis, the trend has become prevalent in hard lines (hardware, electronics), soft lines (clothing) and fast-moving consumer goods (groceries) product offerings, while squeezing the price points where many brand companies operate. As a result of their increased leverage through consolidation, retailers presented an attractive alternative customer base for Chinese manufacturers, allowing both the retailer and manufacturer to greatly increase their margins through the removal of the brand company intermediary.

Second, retailers have pushed their brand company suppliers to offer productivity savings and to lower their prices to consumers with products that are competitively priced against “house brand” products. Competition has further exerted pressure on the same brand companies to increase margins by lowering their manufacturing costs through shifting more and more of their manufacturing to low-cost countries.

Finally, in order to meet the needs of both retailers and brand companies, manufacturers in China have invested in human capital to increase management skills and English language capabilities, as well as investing in new critical areas such as product marketing, project management, product design and engineering, quality systems and injection-mould manufacturing. To further add value for their customers, these mostly privately held (family-run) companies have the cash to offer other services including injection-mould (production equipment) financing and product inventory and warehousing services. Successful Chinese suppliers have made these investments to stand themselves above their peers and in the process, increased their margins and have made themselves indispensable to their customers.

Look for Part 2 of this series where we’ll discuss what this all means today and the role of brand companies, manufacturers and retailers.

Geof Master is a partner in Mayer Brown JSM’s Business & Technology Sourcing practice. He can be reached at geofrey.master@mayerbrownjsm.com

Tom Keenan is a Registered Foreign Lawyer (Victoria, Australia) of Mayer Brown JSM. He can be reached at thomas.keenan@mayerbrownjsm.com

Our IT portfolio consists of E-Commerce, Business Intelligence, Content Management, Third Party Testing and Custom Solutions.  In SCM, we specialize in Source-to-Pay (S2P), Procure-to-Pay (P2P), Spend Management and MRO.  Corbus offers a complete set of PMO solutions including Project Management Capability Assessment, Project Recovery, Project Plan Validation and the Project Audit, and Enterprise Project Management Software.  Corbus has been a leading Business Process Outsourcing (BPO) provider offering Procurement, Supply Chain, E-Commerce and Credit Services.

Corbus creates technology-empowered solutions with industry leading processes and technologies that deliver business value to global clients through year-on-year savings. We are known for our ability to work in true partnership with clients to innovate and bring cost reduction along with enhanced product quality.  Corbus’ alliances allow for effective use of resources and modern knowledge and technology.  With competitive positioning and complete transparency, Corbus and clients together achieve success.

Corbus is a global organization, headquartered in North America with presence in Europe and Asia Pacific markets. Corbus is a wholly owned subsidiary of Soin International LLC, a private multi-national holding company that provides strategic management, administrative systems, and financial support to a diverse array of worldwide subsidiaries and affiliates.

Service Lines

• E-Commerce
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Corbus at a Glance

• Founded: 1994
• Employees: 700+
• Service lines: Aviation, Consumer Package Goods (CPG), Retail, Oil & Gas, Manufacturing, Media, Healthcare, Publishing
• Headquarters location: Dayton, Ohio
• Locations of global delivery centers: United States, United Kingdom, China, India, Switzerland

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Telephone: +1 888-608-9975
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• “Exciting Emerging Companies to Work for”
• “Amity Corporate Excellence Award for Leveraging Technology in Global Business”

Wipro and Outsourcing Center conducted a survey to examine the attitudes and approaches to green supply chain management of organizations across various industry segments. This white paper presents survey findings in such aspects as cost reduction, regulatory compliance, scope of green initiatives, green initiative prioritization, budget constraints, perceived benefits, and other factors associated with green supply chain management.

The paper also includes examples of green supply chain initiatives and benefits achieved by three companies that are leaders in the financial institutions, logistics, and manufacturing industries.

Click here to download the white paper.

Outsourcing Center asked 12 leading ITO and BPO service providers about the forces driving their investments for solutions over the next five years. Market volatility, market differentiation, lack of investment capital, collaboration, globalization, and rethinking how work gets done are among the top business needs for which buyers are asking outsourcing providers for help.

Speed is the theme that emerged in the interviewed providers’ descriptions of their investments in solutions addressing these forces. Here’s a rundown.

Cloud technologies

Wipro Technologies is establishing strong system integration capabilities in private clouds and in integration of public and private clouds. Rajan Kohli, CMO, says, “Our investments are geared at creating platform cloud solutions that successfully deliver business value to clients.”

According to DonSchulman, General Manager for IBM’s global F&A and SCM business, IBM continues investing in its BPO Business Process as a Service (BPaaS) offerings. He says, “Our cloud-based BPO solutions are specifically designed to enable quick deployment of this technology in order to drive rapid benefits. This includes immediate cost-efficiencies, increased scalability, and easier access to technology innovation as well as sustainable performance improvements for client organizations.”

Infosys BPO is investing in services for the cloud as well as services on the cloud “to help clients achieve faster process efficiency and effectiveness,” says Ritesh Idnani, COO.

Joanne Olsen, Senior Vice President, Oracle Cloud Services, points out that “The economy may be officially out of a recession; but organizations have learned that, in the ‘new normal,’ extreme volatility and uncertainty will persist.” Making large capital investments without a fast return on investment is no longer an option; yet, given the uncertainty, organizations need to accelerate the pace of innovation and become more agile and responsive.

“Flexibility and speed are the key attributes for any outsourcing solution for the foreseeable future,” predicts Olsen. Oracle has invested in cloud services to enable clients to achieve financial flexibility and business agility to adjust to changing market conditions and demands quickly and efficiently. With cloud services, they pay for what they use and move their capital expense to an operating expense.

Allied Digital Services is also investing in the cloud delivery model to help companies move from the own-and-operate (cap-ex) model to a services-based (op-ex) model. Kevin Schatzle, President, refers to this as an “IT evolution” enabled by advances in virtualization technologies and the development of remote management tools. As part of the evolution, Allied Digital invested in an integrated delivery framework with customized best-in-breed infrastructure management tools integrated on a common platform that enables visibility to all critical components of an organization’s IT infrastructure.

Partha Sakar, CEO at Hinduja Global Solutions, says “Cloud concepts certainly will disrupt the playing field, but success in many of the disciplines will continue and always require well-trained, compassionate, culturally compatible and, as appropriate, proximate resources.” Therefore, HGS is also investing in building more remote data centers in proximity to current and future growth markets.

Industry-specific solutions / platforms / collaboration

“Companies are looking for new ways to harmonize business processes on an end-to-end basis across their enterprises, so we’re responding to that and investing accordingly,” says IBM’s Schulman. “Our strategy has been to focus on a tighter linkage between F&A and SCM businesses to facilitate more cohesive end-to-end capabilities.

Schulman says companies are increasingly recognizing the need to address both the outsourced and retained portions of their finance and procurement back-office processes in a more integrated, holistic fashion. This requires technology that enables visibility across all processes including non-outsourced scope. He says clients are also looking closely at creating vertical integration of their business to find new ways to interact with their vendors and customers in a consistent manner.

“In fact, we now have the technology available to establish a shared platform that goes beyond individual processes,” says Schulman. “We are able to drive standardization across companies and even industries by connecting data from many disparate sources. Access to this kind of information enables companies to proactively identify and respond to emerging trends, both large and small, for enhanced business agility. At the same time, this technology will help clients innovate their processes in ways that differentiate their enterprise.”

Gordon Coburn, Chief Financial & Operating Officer at Cognizant, says “Tectonic shifts in the economy, society, and technology are driving organizations to create an environment where work becomes a more fluid and intimate collaboration between employees, customers, suppliers, and other stakeholders, delivering continuous business value.” New virtualized platforms are enabling real-time collaboration within organizations and with external partners, leading to new ways of working, managing, and innovating.

To achieve new ways of working, Cognizant is investing in frameworks and methodologies that help companies assess their ability to create more collaborative and virtual ways of working.

Deepak Patel, CEO of Aditya Birla Minacs, also predicts “virtualization” of enterprise business models will accelerate business opportunities for the BPO industry. Aditya Birla Minacs is investing in robust process capabilities aligned to vertical domains. He says market forces are now providing outsourcing service providers with “a unique opportunity to dive deeper into the core processes of their clients and move up and across the value chain.”

TCS is investing in building a strong pool of industry domain experts. It is also investing in acquisitions (such as Citigroup Global Services Ltd and Supervalu’s India captive) to gain vertical expertise.

In addition, TCS continues to invest in building beyond its current seven vertical platform BPO services. These services deliver a process as a service, leveraging the cloud. “Over the next few years, we will invest in strengthening our platforms and increasing service coverage,” states V. K. Raman, Head, Domain Services, TCS BPO Services.

Infosys BPO is investing in vertical domain competencies not only by lateral hiring but also mandating certifications and process trainings that enhance employees’ domain capabilities. “Inherent in the vertical approach is the deeper understanding of the industry nuances. If you are talking to a publishing company, you need to know about royalty accounting. If you are talking to an insurance carrier, then knowing about blue book reporting is where the conversation will veer,” says Idnani.

In its vertical approach, Infosys BPO is also investing in offerings that focus on its clients’ revenue. For example, the provider is focusing on warranty administration in the manufacturing space and sales effectiveness improvement by managing trade promotions for the consumer packaged goods sector.

Wipro is making focused investments in “productized” solutions that combine software, services, infrastructure, consulting, and BPO skills to provide industry-specific reusable solutions. The service provider is identifying platform solutions that address specific vertical industry needs and combine BPO, IT, and infrastructure insights to offer “full-function outsourcing.”

Analytics

IBM remains focused on innovation, including continued investments in integrated analytics that drive additional process optimization. Schulman explains, “Advanced analytics capabilities through mature BPO providers is going to empower companies with game-changing business insight that would be difficult to achieve on their own. When data is standardized across companies and even across industries, analysis of that information will drive insight and visibility into behavior patterns that clients have never had access to before. This information will enable rapid, actionable business decision making from a big-picture perspective that will help drive better overall performance that is sustainable over time.”

Infosys BPO is also investing in high-end analytics services.

Terrence McCrossan, Division Vice President, Marketing & Strategy at ADP, says the forces driving ADP’s investments over the next five years include a growing need to address clients’ focus on financial compliance and controls, globalization, and user expectations. Together, the forces cause an increased emphasis on reporting/analytics and flexibility.

Flexibility

According to Angela Hills, Executive Vice President at Pinstripe, “Market fluctuations are creating demand for companies to scale up and down at a moment’s notice. The need to be scalable and flexible are two of the driving forces in how we are investing in solutions.” She points out that the ability to resource appropriately to meet client needs not only impacts clients but also “has a huge impact on the success of our organization.”

Wipro has invested in multi-tenanted managed services to offer clients a flexible delivery model with just-in-time capacity and predictable high-quality standardized services. The provider is also investing in Centers of Excellence and widely available third-party tools to build accelerators to improve the delivery schedule.

Green technologies

In addition to adding solutions to its IT for Green portfolio, Wipro is now partnering with SAP to collaborate on perpetuating green IT through “green consulting.” Kohli says more such investments will likely follow.

Core processes

Aditya Birla Minacs’ vision is “to be firmly embedded” in its clients core processes, says Patel at Minacs. He predicts that the depth and breadth of outsourced services will grow. Accordingly, one of Minacs’ growth strategies includes “acquiring the right assets that enhance our solutions portfolio and strengthen our capabilities to take on even those processes that are considered core today.”

Time to value

Some of HP’s investments in response to market forces also focus on speed. Buyers’ increased interest in multisourcing means provisioning IT products and services from multiple providers. This leads to smaller, shorter-term relationships. “With higher volumes of smaller deals, HP is investing in a smarter application of technology to ease the cost and complexity of on-boarding new clients and speed time to value in these quick-turn contracts,” explains Russ Daniels, Chief Technology Officer for HP Enterprise Services.

A market shift in expectation of configure-to-order instead of build-to-order for provisioning IT is causing HP to invest in standardization and fully managed, globally delivered IT services that help clients achieve execution speed as well as reduce cost and achieve greater reliability.

Daniels says that faster time to value is also the driving force behind HP’s investment in fully automated self-service delivery of infrastructure, application, and business services that help clients realize the full potential of “IT as a Service.”

What are we to conclude from all the change on the horizon? First, the providers are addressing buyers’ needs. Second, whenever there is a great degree of change, there is also a high degree of risk – especially when speed is a major factor. For advice about risk mitigation, read Eight Biggest Areas of Risk for Buyers of Outsourcing Services, Upcoming Changes Point to Need for Buyers of Outsourcing Services to Alter their Way of Thinking, and Buyers Face Decisions around New Opportunities and Risks in Outsourced IT Solutions.

Nearshore, offshore, onshore, best shore

Although “nearshore” is a favorite model and buzz term bandied about in outsourcing news and advisories today, it will soon fall by the wayside. First of all, it’s a misnomer. “Nearshore” to Japan, for example, is China or Vietnam; but those two service delivery locations to U.S. and European businesses are “offshore.” Brazil is a nearshore provider but also a large onshore provider.

Genpact predicts nearshore service delivery centers will likely continue to grow, but not as significantly in dollars or percentages as the offshore centers. According to Robert Pryor, Executive Vice President of Sales, Business Development and Marketing, we’ll likely see an increase in the use of onshore centers. “Federal, state, and local governments will drive this growth in terms of the attractiveness of incentives they create to stimulate domestic job growth.”

Deepak Patel, CEO, Aditya Birla Minacs, says the decision between nearshore, onshore, or offshore is “not so much about achieving scale but, rather, is about delivering the right value to companies by providing the ideal mix of the right delivery destination and the right knowledge set available. In the coming years, newer geographies will emerge, but smart outsourcers will choose the destination that brings the most value.”

John A. Haslinger, Vice President, Product Marketing at ADP, says, over time, he expects labor arbitrage advantages will remain but increasingly companies will balance them against the need for particular skill sets. In HR, for instance, “companies will balance labor arbitrage with the service provider’s ability to foster long-term relationships.”

Allied Digital Services’ President, Kevin Schatzle, believes nearshoring will increase over the next two years because outsourcing in general will increase. He predicts that in five years, as the industry matures, Canadian pricing will start to approach U.S. costs.

Gordon Coburn, Chief Financial & Operating Officer at Cognizant says globalization initiatives are evolving “from a point-to-point delivery model to a many-to-many model where the provider delivers from many locations in the world to a client’s locations in many other parts of the world.”

Rajan Kohli, CMO, Wipro Technologies, adds that “best shore is the way to go. That may mean a combination of nearshore and offshore, or it may mean just offshore. Buyers will need to make decisions based on cost, business value, and business availability.”

Ritesh Idnani, COO, Infosys BPO, says “the trend of nearshoring will continue to gather steam. But the global economic landscape has definitely mooted the call to a more protectionist outlook by countries, and that trend will continue in the short term. They will, however, have to bear the brunt of continuous monitoring to ensure they continue to be cost effective and build in efficiencies. The ‘offshore train’ left the station several years back; hence, offshore will continue to grow in volume and market share.”

Dina Kholkar, Head, BFSI, TCS BPO Services, predicts that the definitions of onshore, nearshore, and offshore will blur over the next couple of years because providers “will increasingly expand their base to build a global network delivery model to address the diverse demands. There will also be an increasing creation of Centers of Excellence by function,” she states.

The future shift from focusing on nearshore / offshore / onshore debates is nowhere more evident than at HP where there is now a “Best Shore Services” division. Even so, Jeff Womack, Vice President Global Enablement, HP Best Shore Services, says HP believes that nearshoring will “continue to have a seat at the global delivery table because companies – especially in the European Union region – will want the cultural affinities and languages as well as aspects of data privacy.”

Womack also points out that some nearshore locations are already maturing to the point that they no longer meet the requirements to qualify as a true nearshore location because costs begin to reach parity with major markets such as the United States, Western Europe, and Japan.

Yugal Joshi, Senior Analyst, Everest Group, says that, “with offshore suppliers seeing their tax exemptions going away, the cost-effectiveness of their large offshore centers will reduce significantly, which will prompt them to go nearshore.”

Don Schulman, General Manager, Global F&A and SCM, IBM, predicts nearshoring will grow in the short term because organizations will continue to perform high-level activities (such as budgeting and corporate tax) discretely and locally – regardless of whether shared services or outsourcers are doing the work.

“This is less about nearshoring and more about growth due to more complex work moving into a shared-services environment,” Schulman explains. “Success in outsourcing has led to this kind of work moving to a centralized environment. Organizations are beginning to look at their shared-services strategy as a hybrid model. It is not an either/or decision but, instead, a multi-dimensional approach that leverages both internal shared services and outsourcing.”

Industries increasing adoption of outsourcing

Nearly all of the service providers whom we tapped for insights anticipate that the U.S. healthcare industry will experience a dramatic increase in outsourcing over the next two to five years.

Pryor at Genpact says the significant cost pressure and large number of additional people that will need coverage will require that the industry adapt rapidly in leveraging technology, outsourcing, and reengineering to change business models and cost structures.

Most of the executives we interviewed also predict a large uptick in government outsourcing in the next few years. Schatzle at Allied Digital Services says government and education will migrate to outsourcing for IT support and “will receive great benefits of modern approaches.” He advises that buyers in these segments especially need to evaluate IT services from security and redundancy perspectives.

Kohli at Wipro predicts the next few years will see “BPO opportunities arising in retail, manufacturing and media, but in forms as not serviced before.” He says the driver for this growth is the convergence of the Software-as-a-Service (Saas), cloud, and ITO/BPO models “plus the ability of Tier-1 providers to do business function outsourcing.”.

Gopal Devanahalli, Vice President, Infosys BPO, believes the banking industry “will undergo big changes post the financial meltdown.” Increased regulation will lead to a focus on more outsourcing of such processes as treasury, cash management, and custody. He also predicts the intersection of mobile and social technologies will disrupt traditional branch banking, which will lead to more outsourcing.

Patel at Aditya Birla Minacs points out there is a huge pent-up demand in the midmarket, and these companies will turn to outsourcing as a strategy for becoming more competitive in the marketplace. (Also see Risks and Complexities in Outsourcing Decisions in the Midmarket.)

“Practically every industry today is grappling with challenges associated with the global financial crisis, increased regulatory compliance requirements, and content digitization / Web 2.0 environment leading to newer paradigms. There is a need to be able to respond agilely to the market through leaner, meaner organizations,” says V. K. Raman, Head, Domain Services, TCS BPO Services. This is especially true in the Banking, Financial Institutions and Insurance (BFSI), life sciences and healthcare, retail, and government sectors. Raman says these industries will drive outsourcing in the next few years.

Miles Lafferty, Vice President, Hinduja Global Solutions, believes currency fluctuation, particularly the U.S. Dollar and the Euro, and related cross-regional economic policy and ideology will create uncertainty in global sourcing decisions. “That said, this uncertainty will reduce the appetite of many organizations to build captive centers, thereby creating opportunity for outsourcing service providers.”

Regional hot spots

There was a definite consensus among the experts we interviewed regarding opinions on which regions will have more companies turning to outsourcing in the next two years to address their business needs (other than the United States or Europe). The top regions they cited are:

1. Asia Pacific
2. Middle East
3. Latin America
4. Japan
5. Australia
6. India

Most believe that the BFSI industry will lead the way in these countries, just as it did in the U.S. and European early adoption of outsourcing.

Japan is at the forefront because it continues to struggle with a difficult economic climate, says Schulman at IBM. He says that the driver for growth in Latin America and parts of Asia is the large numbers of organizations with a disparate spread of employees and business units across multiple locations and borders

Infosys BPO says the drivers in these regions are cost and process efficiencies at the lower end. But there is also some outsourcing of analytics related to understanding market customer behavior, as well as some outsourcing of vertical-specific functions.

Deepak Rastogi, Senior Vice President, Global Strategy at Hinduja Global Solutions, says ultimately much of the growth in these regions will be consumer driven in the telecom, financial services, and healthcare industries.

Business processes

Which business processes/functions will move to the outsourcing model in the next two to five years? Our experts listed the top three:

1. Analytics – The driver is the need to leverage fact-based insights to improve reporting results, recognize and understand potential opportunities, and deliver better business outcomes.
2. Manufacturing supply chain – Factors driving growth in this area are purchasing cost reductions, cash flow advantages, operations cost savings; and increased business effectiveness (such as shortage management and the capacity to implement advanced logistics models).
3. Work that today appears extraordinarily complex (such as industry accounting, external reporting, planning, budgeting, forecasting) will move to outsourcing as these processes become standardized.

Selecting a service provider

Charlie Bess, HP Fellow, HP Enterprise Services, advises that buyers in these hot spots should look at how service providers invest in making their processes more standardized and their capabilities more flexible, as well as what they are doing to prevent unnecessary business interruptions.

“Investing in automation, for example, is important,” says Bess, “but you need to look under the covers and see what the provider’s approach is when the automation doesn’t work. Rowing harder with new tools may not always be the right answer; you might have struck something unexpected and need to change course.” He advises buyers to ask: “What is the escalation process when the unexpected occurs?”

Abid Ali Neemuchwala, Global Head, TCS BPO Services, warns buyers to seek providers that have the ability to scale and grow across new geographies to support green field ventures.

According to Kohli at Wipro, the most important criteria should be whether the provider can show significant value beyond labor arbitrage and can deliver on the commitment. “All other criteria such as a combination of BPO and IT, cultural fit, quality, and scalability are reflected in the above two major criteria.”

Selecting healthcare service providers will be a big risk, according to Kohli at Wipro. “The key selection criterion should be the provider’s commitment towards timely and quality deliverables, as there is no scope for errors in this zero-error industry.”

Kholkar at TCS advises buyers’ provider-selection criteria should include cultural fit, relationship management ability, and certification from compliance authorities.

IBM’s Schulman says buyers should ensure that their service providers are able to view their processes at a granular level on an end-to-end basis including any portion that the buyer retains. “This is critical to truly understanding a client’s business and being able to effectively collaborate with them to optimize business outcomes.”

Syntel, Inc. was established in 1980 as a local company with a single service offering. Since that time, we have grown into a $410 million global corporation with a market cap of more than $1.5 billion, 16,200+ employees, more than two dozen offices and Global Development Centers around the world, and a full range of ITO and KPO solutions and service offerings.

Syntel has achieved 19% compound annual growth over the past five years (2005-2010). Our growth is attributed to our “customer for life” commitment and ability to continually reinvent ourselves and expand our services to adapt to the shifts of the market and needs of our clients.

Service Lines

A. Industry-specific solutions. At Syntel, our prime objective is to provide targeted solutions to solve your business challenges. Our vertical industry practice groups fuse technical knowledge with business expertise to develop solutions targeted to your business and the competitive challenges you face.

• Financial Services/Banking: End-to-end ITO and KPO solutions for banking, capital markets, and cards and payments industry sectors including risk management, asset management, brokerage, core baking, compliance, fraud solutions, reconciliations, and more.
• Healthcare/Life Sciences: Solutions for compliance, analytics, testing, claims management, records management, and more, spanning payers, providers, medical devices, and life sciences needs for both ITO and KPO services.
• Insurance: KPO and ITO solutions for P&C, life, and retirement including agency management, analytics, policy admin, and more.
• Retail: Targeted solutions for green retail, store systems, POS testing, SCM, and an award-winning Store Service Workbench solution.
• Logistics: Solutions focused on warehouse management systems, package shipment, transportation management systems, supply chain and distribution, freight management, and more.
• Telecom: Solutions tailored for global telecom service providers/carriers and telecom software product vendors including BSS and OSS solutions for billing, revenue assurance, order and service management, and analytics.
• Manufacturing: Framework of solutions fine-tuned to address the unique challenges of the motor vehicles and parts, aerospace, industrial and heavy manufacturing, and medical equipment and supplies industry.

B. Technology solutions and COEs. Syntel’s technology solutions and COEs complement and support our vertical industry solutions. These include:

• Application Development services include new development, enhancements and application consolidation and are focused on helping clients meet emerging business and technology challenges.
• Application Management including our AMO 2.0 offering, a suite of value-added end-to-end services including business and technology alignment, monitoring and alerts, green IT, portfolio rationalization and ITIL-based process consulting to provide your company with a service-oriented, metrics and performance-driven application management function.
• Architecture Services encompass architecture consulting, enterprise content management, enterprise data management and architecture support to enable your organization to achieve an efficient and effective means of driving and validating the value of your technology environment.
• Business Analytics/Business Intelligence provides a full suite of data and analytics services to help extract the real value of your technology, making the data inside your systems work to deliver business intelligence and subsequently improve efficiency, reduce costs, and accelerate ROI.
• Cloud Labs from Syntel provides Portfolio Analysis and Cloud Strategy; Cloud Migration, Re-architecture and Testing; Private and Hybrid Cloud Deployment and Management; PaaS Development, and SaaS Integration.
• IT Infrastructure Management services span the entire spectrum, including consulting and system integration, monitoring & event management, end-user and enterprise computing, network management, security management, and IT helpdesk services.
• Knowledge Process Outsourcing (KPO) industry-specific offerings are tailored to your business needs, and eliminate the costly and time-consuming manual processes that can be a drag on your business operations.
• Migration Center of Excellence (COE) with a dedicated team, focused migration solutions that reduce effort, cost and time to market.
• Oracle and SAP services include implementation, customization, upgrade and migration, systems integration, maintenance/support, performance tuning, optimization, feasibility analysis, and business process reengineering.
• Testing services address the operational, tactical, and strategic requirements of organizations by creating customer-specific solutions using a phased approach and innovative frameworks like our innovative iTAP framework built to lower testing TCO.

Distinctive Capabilities

• Custom, flexible solutions. The biggest difference between Syntel and our competitors is that we will never take a “one size fits all” approach to your business and technology challenges. We collaborate with you to adapt our business model to fit your needs, and align ourselves to your corporate culture to deliver the largest impact on your business.
• Small enough to listen, big enough to deliver™. We leverage our midsize status to focus on client service and create maximum value for our clients by delivering innovation, unique engagement models and closely aligning with our clients’ businesses. Together with our robust Global Delivery Model, world-class infrastructure, and highly skilled IT professionals, this flexibility truly makes us “Small enough to listen, big enough to deliver.”™
• US-based, financially sound, growing organization. Syntel is a U.S.-owned and operated company that has been creating innovative, flexible, adaptable technology solutions for the past 30 years. Publicly traded (NASDAQ: SYNT), our balance sheet is solid, we operate with zero debt, and have more than doubled revenues since 2005, despite economic downturns.
• Extended value – our partnership network. Another way we deliver value is by partnering with the most innovative, value-driven technology and software companies in the world. Whether technology, domain, or solution specific, we integrate our partners’ solutions with our services and frameworks to deliver game-changing technology solutions.

Syntel at a Glance

• Founded: 1980
• 2009 Revenues: $419 million
• 16,200+ employees
• Headquarters: Troy, Michigan
• Global Delivery Centers in Chennai, Mumbai and Pune, India; Memphis, Nashville and Phoenix, USA
• Service Lines/COEs: Application Development & Management, Architecture, Cloud, Business Analytics/DW/BI, IT Infrastructure Management, KPO, Migration, Oracle, SAP, Testing
• Industry Practices: Banking & Financial Services, Healthcare & Life Sciences, Insurance, Logistics, Manufacturing, Retail, Telecom and Tours & Travel

For More Information

Phone: (972) 653-0559
kishore_ramnani@syntelinc.com
www.syntelinc.com

Certifications

• SEI CMMi Level 5
• ISO 9001:2000
• ISO 27001
• ISO 20000
• SAS Type II

Awards and Recognition

• Microsoft India “Partner of the Year” award for Store Services Workbench Retail Solution – 2010
• FinTech 100 – 2010
• Healthcare Informatics 100 – 2010
• International Association of Outsourcing Professionals “The Global Outsourcing 100″ and sub-lists (Banking, Markets, Insurance, Healthcare) – 2010
• Global Services Media and NeoAdvisory “Global Services 100″ and sub-lists (TOP ITO Vendors, Top ADM Vendors, Top Industry-specific BPO Vendors) – 2010
• VAR 500 – 2010
• Software Magazine’s “Software 500″ – 2010
• Dataquest India – Top 50 IT Companies – 2010
• World HRD Congress: “Best Overall Recruiting & Staffing Organization,” “Most Innovative Recruiting & Staffing Program” and “Excellence in HR through Technology” awards – February 2010

What the Analysts are Saying about Syntel

• “Providers like Syntel . . . blend benefits of domain knowledge and experience with strong account management. Apart from deploying senior subject matter experts and IP on the project, these firms also leverage business analysts and senior account management teams to serve the clients effectively.” – Forrester, Right And Wrong Reasons To Work With Tier Two Offshore Providers, August 2010
• “Consultancies such as Syntel are highly verticalized in order to exploit [long-term cost-reduction activities]. Syntel in particular has established labs, automation tools, centers of excellence, and offshore facilities for the redesign of both business and IT processes.” – Forrester, Reducing The Costs Of IT — Views From Consultancies, October 2009
• “Syntel, by emphasizing strong client-centricity, further reinforces its value to its clients beyond the simple relevance of its solutions.” – Forrester, Why Do you Need Tier Two Providers? (And you Do Need Them!), September 2009

Case Studies

Read about the successful relationships Syntel has built with our clients, and how we are creating new opportunities for their businesses: http://www.syntelinc.com/Internal.aspx?id=133

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Early adopters of cloud solutions have focused mostly on email and collaboration solutions; ERP, CRM, and SCM standalone applications; testing environments and systems management tools. The promise of speed, predictable cost and agility is being realized. For these more mature offerings, concerns about security, integration and quality of service have largely been mitigated.

However, cloud deployment models have yet to cross the chasm to production adoption for mission critical, data warehousing, online transaction processing and consolidated workloads where the highest levels of performance, reliability and scalability are required. Until now!

Join us for this insightful, interactive one-hour webinar, in which cloud services delivery experts will:

• Provide you with an update on cloud adoption trends and successes
• Announce the latest Oracle innovations with Exadata in the Cloud services for mission critical workloads
• Share insights on how to propel your organization further by meeting the most demanding requirements of your mission-critical workloads while allowing your highly-skilled resources to turn their full attention towards new innovation

On a flight from Chicago to Dallas/Fort Worth, I picked up a book titled PIG 05049. It is a photo book published in 2009 by a Dutch author, Christien Meindertsma.

Before buying the book, I had a quick glance at one of the comments, which read, “PIG 05049 is one of the sample numbers of Christian’s research. She spent three years researching all the products made from a single pig. Some of the more unexpected results were ammunition, medicine, photo paper, heart valves, brakes, chewing gum, porcelain, cosmetics, cigarettes, conditioner, cheese cake, paint brushes, and even bio diesel.

“Meindertsma makes the subject more approachable by reducing everything to the scale of one animal. After its death, Pig number 05049 was shipped in parts throughout the world. Some products remain close to their original form and function while others diverge. In an almost clinical way, a pig is dissected in the pages of the book – resulting in a startling photo book where all the products are shown at their true scale.”

According to her research, Pig is widely used in at least 187 non-pork products. Neither the farmer nor the consumer is aware of the wide use of pig content in almost all products we use in our daily lives. The raw material travels around the world in these various forms, making the pig one of the important components of the global supply chain for manufacturing and finished goods.

The global supply chain is undergoing tremendous changes. It is restructuring itself, reducing costs, and eliminating low-value-added producers. The result is a huge opportunity for many services companies that are positioned to execute the new complexities of sourcing, coordination, logistics, and transportation of the new supply chain.

The drive to wring more costs out of the customer services supply chain is disaster for inefficient outsourcers or for reasonably efficient outsourcers that can’t find a way to compete with the wages of some developing economies such as Mexico, Chile, Guatemala, and even South Africa.

Unfortunately, only those affected usually understand the supply chain problems. However, supply chain issues affect suppliers, consumers, employers, employees, and merchants — in essence, the entire economy.

Supply chain complexities in daily life

The supply chain problems are evident in every aspect of human life from ordering an online item to getting a laptop from your employer.

At Sears, the HR on-boarding process for a new hire includes shipping the employee a laptop. Sears’s supply chain process resembles the world’s longest train from Zouerate, Mauritania, to the coast at Nouadhibou. The process, like the three-kilometer-long iron ore train, is long, complex, and cumbersome. The average time to receive a laptop for the new hires is roughly 60 days, assuming there are no escalations. That is unlikely since there are at least 15 roadblocks that force manual intervention. The end result: employee dissatisfaction and severe loss of productivity.

Outsourcing as a competitive advantage

Educational Testing Service (ETS), a provider of education assessments and psychometric research, has managed to outsource its entire end-to-end supply chain management. ETS has one of the more complex supply chains since it prints, warehouses, and ships test materials to more than 10 million test-takers in 160 countries every year. Outsourcing allows ETS to continually improve the control, accuracy, and integrity of its operations.

Nokia Siemens Networks (NSN) recently outsourced its global supply chain supporting over 92 countries. NSN, one of the leading telecom network suppliers, is overhauling its supply chain, distribution, logistics, and transportation into five regional hubs across the globe. These hubs, which process over US$8 billion worth of orders, will provide efficiencies and lower costs of goods sold. NSN is undertaking this supply chain transformation to adapt to industry changes and also transform itself from a supplier of equipment to a supplier of services.

Dish Networks, one of the leading broadband and cable providers in the United States, has shifted a significant amount of its customer support from India and the Philippines to Mexico and is further moving its customer support supply chain into inner Mexico cities. The labor arbitrage and the geographic proximity forced Dish to make this move.

Supply chain hubs are shifting regionally to counter wage inflation

Chinese manufacturing — the global manufacturing hub for many organizations from hi-tech to textiles — is moving into Tier-II cities to cut labor costs. The manufacturers are moving from coastal areas to the less underdeveloped areas in central and northern China in part because of the competition from Vietnam and Bangladesh. Material sourcing within China has dropped eight percent year-over-year, and there is a 20 percent YOY increase in sourcing from Bangladesh.

Supply chain consolidation and centralization to cut costs

Wal-Mart, the global retail behemoth, is overhauling its global supply chain by increasing the percentage of direct sourcing from manufacturers and reducing the middlemen. It is creating four global merchandising centers that source goods, fruits, and vegetables from regional hubs. For example, Wal-Mart created a merchandising center in Mexico City to handle merchandising for all emerging markets.

Reemergence of the U.S. railroad

U.S. grain carriers, burdened with big wheat inventories, are facing yet another huge challenge, thanks to burgeoning corn and soybean harvests. Merchants will have to find room to store 17 billion bushels of corn and soybeans — the largest U.S harvest in history.

In a great recession, the U.S. has the best agricultural harvest. At the same time, drought-stricken Russia announced a ban on grain exports, which means the drought will not ease the supply chain challenges facing the United States In India, agricultural has become a non-lucrative business for farmers. The global supply chain, therefore, is posing different demand and supply challenges. It is not a crisis for the agriculture industry if one recognizes and manages it.

The challenges in this supply chain are also putting tremendous pressure on the U.S. transportation industry. The supply chain expects the western railroads to handle the challenge of exporting 130 million tons of U.S. grain to the nearest airports and ports.

The new importance of the U.S. railroads has come full circle from the 1980s. Back then, none other than Warren Buffet wrote off their importance. Recently, he bought BNSF for approximately US$98 billion.
Just as the pig is in every product we use, so supply chain issues affect every aspect of our personal and business lives. We don’t know when, where, how, and why we get affected. But the bottom line is, we do.

Wipro Voice: A Conversation with NS Bala, Senior Vice President and Global Head, Manufacturing Business Unit, Wipro Technologies and Member, Wipro Council for Industry Research

For more than a century, the decisions manufacturers made were related to cost, function, and quality. Now they are adding another dimension: sustainability. “Sustainability has become a profound, board-level issue for manufacturers. Apart from compliance with existing and upcoming environmental legislations, a sustainable manufacturing initiative can help a manufacturer cope with increased global competition and growing supply chain pressure,” says Bala.

Sustainable manufacturing – a challenge and an opportunity

Depending on how you look at it, companies can view sustainability either as a constraint in manufacturing or as a tremendous opportunity to transform the way they do business. “The goal is to achieve more while spending less,” notes the Wipro executive.

Sustainability in manufacturing, while easy to state, is difficult to interpret and adopt. Organizations trying to embracing the concept across the enterprise face a variety of challenges. According to Bala, organizations struggle to:

• Define their collaborative sustainability road map because multiple divisions own the sustainability
• Arrive at a measurable and quantifiable return on investment (ROI) from sustainability projects
• Execute and manage sustainability projects because multiple stakeholders are involved.
• Find appropriate reporting systems because sustainability data lies across the enterprise in multiple systems and formats. The current reporting systems are incapable of providing sufficient intelligence to aid in decision making.

Sustainable manufacturing’s key focus areas

Today, a manufacturing organization’s sustainability champion faces a lot of pressure from internal as well as external stakeholders in four key areas of focus:

1. Operations. Manufacturers must lessen their energy and resource usage, reduce emissions and waste generated across facilities/plants/offices, etc. and still maintain product quality. Bala says the solution lies in implementing concrete action plans based on comprehensive assessment and analysis of the as-is landscape of operations with assistance from IT-enabled decision making.
2. Compliance. An increasingly stringent and government-driven regulations atmosphere, especially in the European Union, is slowly beginning to take shape, which goes beyond the Kyoto protocol in driving and enforcing a sustainable enterprise. Bala says the answer is being ready. That requires putting all the relevant facility, product, and material sustainability data points that may be lying across the organization into a single repository. This move enables reporting and complying in all the required formats.
3. Product sustainability. Customers and industry watchers are increasingly demanding products that have a reduced environmental impact during their life cycle of usage. The challenge lies in ensuring that an organization has visibility into the life cycle environment impact of a product through all the life cycle stages from raw material acquisition, design, and manufacturing to usage and disposal. “Manufacturers have to apply that visibility to design greener products,” Bala suggests.
4. Supply chain sustainability. Today, manufacturers have to enforce their manufacturing procedures across their complete value chain. Manufacturers have to have end-to-end knowledge of the best practices across their multi-tier supplier organization as well as their logistics and fulfillment practice. “This allows them to enable and enforce a sustainable supply chain. It is important both for short-term compliance as well as long-term business viability,” Bala says.

The common theme running across these four focus areas is sustainability, visibility, intelligence, and reporting. Today, however, Bala says manufacturers end up wasting a lot of time and effort in collating data, and analyzing and reporting on sustainability parameters. The Wipro executive says the result is assessment exercises are manual with minimum automation or auditing capability. “This leaves a question mark on the accuracy and reliability of data manufacturers use for decision making,” Bala notes.

The SMART platform

This is where Information technology can help. Wipro has designed and developed a platform — Sustainable Manufacturing Analytics and Reporting Tool (SMART) — that helps address some of the manufacturing pain points in sustainability across all four focus areas. SMART enables multiple stakeholders (such as senior executives, plant managers/controllers, and compliance managers) to make informed decisions on sustainability programs by providing a consolidated, organization-wide view across five key dimensions of sustainability:

1. Energy
2. Resource
3. Emission
4. Waste
5. Recovery

Wipro’s system brings three components to the table:

1. A robust sustainability data gathering and integration framework that is non-intrusive yet can collect and maintain data manually as well as automated from diverse systems (ERP/MES/PLM), whether on the manufacturing plant floor or throughout the extended supply chain.
2. A strong, custom-built, manufacturing industry-based hierarchical data model and analytical engine that provides a range of spatial, temporal, and predictive analytics along with flexible data entry and reporting.
3. Management-level drill-down reporting, compliance disclosures, external communication, and performance management via a host of features such as dashboards, trending, projections, benchmarking, and root-cause analysis. This data moves reporting to intelligence on all sustainability parameters across the manufacturing value chain.

The future of the sustainable automotive business: supporting green driving

The final responsibility for achieving the benefits of green driving rests with the driver on improving his driving behavior. A dashboard display could monitor aggressive acceleration, sharp braking, speeding, tire pressure, engine idling, etc. Wipro Technologies has developed such a solution. The EcoMeter Connect supports various stakeholders involved in emission-reduction efforts across all categories of cars.

This information would guide the driver to improve, with the Eco-Index providing the reference. The EcoMeter could transmit this data through a Telematics gateway to a server, which could provide driving inputs to owners, consumers, and fleet users, even various governmental agencies.

Insurance organizations could offer a green insurance benefit to drivers who drive greener. Fleet owners could improve their profitability by evaluating the fuel consumptions and driving habits of their drivers. Automotive dealers and service centers could use this powerful information to set used-car prices and arrive at extended warranty costs. Governments could use this data to substantiate decision making on policy matters. “All this would result in one final goal: to reduce the emissions and control energy consumption across the global road transport industry,” says Bala.

Wipro set up the Council for Industry Research, comprising of domain and technology experts from the organization, to address the needs of customers. It specifically looks at innovative strategies that will help them gain competitive advantage in the market. The Council in collaboration with leading academic institutions and industry bodies studies market trends to equip organizations with insights that facilitate their IT and business strategies. For more information on the Research Council visit www.wipro.com/industryresearch or email industry.research@wipro.com