Capability Sourcing Overview - units.sla.org

Capability Sourcing Overview
Robert Armacost
SLA, June 7, 2005
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.

Sourcing is getting increased attention
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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
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Key points
• Capability Sourcing is not a fad – it is a real
phenomenon and is here to stay. But, it is not
all about India
• It is really hard to do well – it fails as often as it
succeeds
• All of our organizations are thinking about what
to do with the Library/Research function, and
you need to be as well
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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
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Capability Sourcing defined
• Capability sourcing is a process of gaining access to
best-in-class capabilities for all activities in a
company’s value chain to ensure long-term
competitive advantage
• Capabilities where the company is not best in class
can be:
8 Built internally via process improvement and investment
8 Outsourced to a provider who is best in class
8 Moved offshore when cost and/or quality are superior
Leveraging the right capability at the right cost
from the right source and the right shore
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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
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7-Eleven uses Capability Sourcing to focus
its management on what matters most
Example: 7-Eleven
“Everything outside direct store
management and customer
interaction is fair game for
outsourcing. With the right
outsourcing partners, a company can
achieve virtual integration rather than
vertically integrate internally.”
Jim Keyes, CEO, 7-Eleven
“The functions we outsource are
very important, and they must be
done well, however, they do not
represent our core business. By
outsourcing…we are able to stay focused
on increasing customer service,
merchandising and growing the
business.”
Keith Morrow, CIO, 7-Eleven
Stock price
0
Jan
2001
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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
$20
15
10
5
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2004
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This is not a .com phenomenon—strong
structural factors support Capability Sourcing
Heavy
I.T./ERP
investment
Telecom
revolution
Long-term
decline in
logistics
costs
Environment
prime for
capability
sourcing
Evolution
of systems
integrators
Geopolitical
changes
Social
factors
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This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
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India is large and growing source for
offshore services
Indexed Wage Rates for High School Grads
(October 2002)
10
8
6
4
2
0
Supply
(High School
1.1
India
1.5
3.0
7.0
E. Europe
Asia-
Low Wage
Europe-
Low Wage
Australia/
New Zealand
7.3 7.3
Canada
7.8 8.0
9.1
Asia-High
Wage
Europe-
High Wage
U.S.
Grads, M) 82 70 60 60 12 10 58 84 100
Key India-Based Captives:
Company Service Lines ~FTE
• GE Capital
• Amex
• Dell
• JPM Chase
• AOL
Full-line IT
Data mgmt.
Call ctr.
Trans. Proc.
Call ctr./back office
Key India-Based Outsourcing Providers:
16,000
4,000
3,800
3,000
3,000
Company Service Lines ~FTE
• Wipro
• TCS
• Satyam
• Accenture
• CSC
IT, CC, Trans. Proc.
IT, CC, Trans. Proc.
Full-line IT
IT, Trans. Proc.
IT, CC, Trans. Proc.
27,200
24,000
12,000
4,300
1,600
Note: IT Services includes hardware maintenance and support, software maintenance and support, consulting, development and integration, training and
education, IT management, and business process and transaction management. Results from survey of 42 companies that use offshore resources.
Multiple responses given
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This Source: information “Demand is confidential Analysis of and Offshore was prepared IT Services,” by Bain Gartner, & Company August solely 2002, for company the use websites, of our client; various it is news not to articles be relied on by any 3rd party without Bain's prior written consent.

A large percentage of global companies are
already outsourcing business functions
Percent of worldwide companies
currently outsourcing*
60%
40
20
0
55%
IT
47%
Admin
22% 20% 19% 15%
Dist & Log
Finance
* Refers to companies outsourcing more than one major activity.
Source: Outsourcing Institute; Smith Barney; Accenture and Economist Intelligence Unit (August 2003)
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HR
Call
centres
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However, numerous companies have had
difficulty capturing desired results…
100%
Underperforming Deals
% of outsourcing
deals that do not
meet expectations
80
60
40
20
0
75%
Source: News articles
Within
5 years
Within
2 years
50% 50%
Within
5
years
Within
2
years
Giga Gartner Dun &
Bradstreet
iQuality concerns
Unsuccessful Deals
- Dell moved some tech support to US from India
following accent & quality complaints (2003)
- Lehman Bros moved some call centers from
India (Wipro) to the US due to poor service
quality (2003)
- AstraZenenca ended Masram contract mfg deal
for quality and supply concerns (2001)
iContract disagreements
- Cable & Wireless ended £1.8B deal 5 yrs early
and sued for £128M of overcharge (2003)
- IT services deal between CSC and Saks ended
with CSC suing Saks for misuse of trade secrets
and violation of contract terms (2001)
iPolitical and geopolitical concerns
- Indiana ended $15M outsourcing deal with
Indian provider to protect local business (2003)
- Delta cancelled Philippines call centers over
security concerns (2003)
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There are three broad approaches to
capability sourcing
Outsource
In-house
External Service
Provider (On-shore)
• Compelling cost savings
opportunity on-shore
• Direct control not required
Operate As Is
• Managed Base Case offers
highest return
• Direct control required
External Service
Provider (Off-shore)
• Compelling cost savings
opportunity off-shore
• Direct control not required
Captive Center
• Compelling cost savings
opportunity off-shore
• Direct control required
On-shore Off-shore
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= Alternative
sourcing
models
Hybrid
solutions
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Attractiveness screen - 6 questions to ask
yourself about your function
1. How standardized is the
capability/process?
2. How critical is it to your
organization’s strategy?
3. How important is real-time
and/or local service to your
customers?
4. Is demand for service variable?
5. Is highly proprietary data
involved?
6. What scale (headcount) are we
talking about?
More attractive for
alternative sourcing
“Cookie cutter”
No, it is a basic
support
function
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Highly
customized
Yes, key to our
success & what
helps us win
Doesn’t matter Critical
Yes, fluctuates
alot
Less attractive for
alternative sourcing
No, very steady
Never All the time
Large (over 50) Very small
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How Bain has approached Capability
Sourcing
• We had received significant noise about the “opportunities” to
move Bain’s research functions to in India
- Weekly calls from 3 rd party offshore search providers
- Activities of other consulting, banking and professional services firms
• In 2004 we ran Bain’s Library/IS (along with all support
functions) through the attractiveness screen. Most of Bain’s
functions are not attractive for alternative sourcing. Key drivers
- Need for real-time, customized support
- Lack of scale (given multiple language and market needs)
- Highly proprietary data
• However, we did identify an opportunity to create a captive
offshore facility for client team analytical support
- “Bain Capability Center” opened November 2004
- Complements Bain’s library/IS function
- So far, so good
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Bain Capability Center India is located in
Gurgaon (just outside New Delhi)
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The BCC has been set-up to have ‘Bain’ look
and feel
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