Globalization IT Outsourcing and Business Process Outsourcing February

Globalization, IT Outsourcing, and Business Process Outsourcing February 13, 2006 Hugh Dyar Senior Executive, Accenture

Agenda § The World is Flat § Why now? § IT and Business Process Outsourcing phenomena § How and Why large companies do these things 2

Outsourcing has become a social lightning rod 3

The Flat World The World is Flat Thomas L. Freidman Farrar, Strauss, and Giroux 2005 4

The Three Great Eras of Globalization 1. 0 (1492 – 1800) World shrank from Large to Medium Countries as change agents Battles of muscle, horsepower, steam, ships Inspired by Imperialism, Religion, or both Dominated by Europe Globalization 2. 0 (1800 – 2000) World shrank from Medium to Small Multinational Companies as change agents Battles for markets and labor Railroads, Telegraph, Telephone, PCs, Fiber-Optic cable, Internet Dominated by United States Tom Friedman, “The World is Flat” 2005 5 Globalization 3. 0 (2000 – 2005) World shrank from Small to Tiny, and Flattening Individuals collaborate and compete globally Battles for markets and labor Telegraph, Telephone, PCs, Fiber-Optic cable, Internet Tom Friedman, “The World is Flat” 2005

The Ten Forces that Flattened the World Flattener #1 11/9/89 Berlin Wall falls; Microsoft releases Win 3. 0 Flattener #2 8/9/95 Netscape goes public Flattener #3 Workflow software a. k. a. , Middleware Communism – Equally Poor Capitalism – Unequally Rich Flattener #6 Flattener #5 Open-Source Software IBM’s “Apache” Outsourcing Y 2 K India’s WW footprint Proprietary Vs Open Change your oil, now… Fiber-optic overbuilt Flattener #8 Flattener #9 Flattener #10 Offshoring Flattener #7 Supply Chaining Insourcing Gazelles and Lions Wal-Mart effect UPS effect In-Forming Google, Yahoo!, MSN The Steroids Digital, Mobile, Personal, & Virtual Dec 11, 2001 China joins WTO 6 Flattener #4 The China of Companies Toshiba laptop repair 2% WW GDP on UPS trucks Jet Blue in home agents Tom Friedman, “The World is Flat” 2005 Information Access Moore’s Law Voice Over IP Wireless

The Triple Convergence Around 2000, all Ten Flatteners converged and created a new, flatter, global playing field. Three BILLION people walked out onto the Global playing field from China, India, and the former Soviet Union Convergence #1 New playing field enables sharing of knowledge and work in real time, with no regard to geography, distance, or in future, language Web Enabled Open to more people in more places on more days in more ways than anything like it before in the world. 7 Convergence #2 Convergence #3 New technology combined with new business processes, employees who understand how to leverage technology 3 Billion new players, previously frozen out, now plugged in and anxious to play. Legacy-free Southwest Airlines ticketing Clueless Biz. Hub guy Tom Friedman, “The World is Flat” 2005 Zippies - Liberalization’s Children 54% of India is under 25 yrs old (555 M people)

US companies benefit from Indian hiring boom Exports to India have doubled to $5 B from 1990 to 2003 Each seat needs: Each new earner: Tom Friedman, “The World is Flat” 2005 8 Microsoft windows Intel chips Lucent phones Network switching by Cisco Network connection by AT&T, others Carrier air conditioning Bottled water by Coca-Cola 90% of shares in companies owned by U. S. Has upward career path Is an elite college graduate Wants cell phone Wants American jeans, movies, etc.

The Great “Call Center” phenomenon New Customer Support Agent Burdened Cost FACILITIES BENEFITS A low-wage, low prestige job in America becomes a high-wage, high-prestige job in India. An unmotivated, transitory employee in America is replaced by a highly motivated, productive employee in India. SALARY $1920/mo FACILITIES BENEFITS SALARY $200/mo US Hard to attract applicants 30% annual turnover 9 Includes transportation, lunch, dinner India 6% of applicants hired No turnover

Off-Shoring with Obligation Employment history of New London, CT 19 th century Major whaling center 1960 s, 1970 s Whales long gone Military-oriented employers Electric Boat, US Navy, Coast Guard 2000 Mohegan Sun, Foxwoods Pfizer pharmaceutical research Over time, people and capital are freed up to perform more sophisticated work. 10 Tom Friedman, “The World is Flat” 2005

African Proverb Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must run faster than the slowest gazelle or it will starve to death. It doesn’t matter whether you are the lion or the gazelle. When the sun comes up, you had better start running. 11

Bill Gates’ “Ovarian Lottery” 30 years ago, if you had a choice between being born a genius on the outskirts of Bombay or Shanghai, or being born an average person in Poughkeepsie, you would take Poughkeepsie, because your chances of thriving and living a decent life there, even with an average talent, were much greater. Now, I would rather be a genius born in China than an average guy in Poughkeepsie. 12

Globalization and Outsourcing Factoids § In 2003, 25, 000 US Tax returns done in India. In 2005, expected to be 400, 000 § China has over 160 cities with populations of 1 million or more § In China, when you are one in a million, there are 1, 300 other people just like you § In 2003, China replaced the U. S. as the largest importer of Japanese products § Since the mid-1990 s, cheap imports from China have saved American consumers roughly $600 M and have saved U. S. manufacturers untold billions in cheaper parts for their products. Which as, in turn, enabled the Federal Reserve to hold down interest rates longer. § Yale Fall 1985 71 Chinese, 1 Russian…. Yale Fall 2003 297 Chinese, 23 Russian § In 2004, Infosys received one million applications from young Indians for 9, 000 technology jobs (>100: 1) § Between 1980 and 1999, Arab countries produced 171 International Patents. § There are 18 computers per 1, 000 people in the Arab region today, compared to the global average of 78 per 1, 000 § Only 1. 6% of the Arab population has access to the internet § In 2002, the GDP of Spain is greater than the combined GDP of the 22 Arab countries combined § 16 of the 20 most polluted cities in the world are in China 13 Tom Friedman, “The World is Flat” 2005

Can America survive? -- Yes! § America will do fine in a flat world with free trade, provided it continues to churn out knowledge workers who are able to produce idea-based goods and services that can be sold globally. There may be a limit to the number of good factory jobs in the world, but there is no limit to the number of idea-generated jobs in the world. § Today’s wants become tomorrow’s needs – Internet, Starbucks, Google § Post WWII, America integrated a broken Europe and Japan and yet our standard of living has increased every decade since. Our unemployment remains under 5% § 150 years ago, 90% of Americans worked in Agriculture. Today it’s <4% § We can innovate, and retain high function, high paying jobs here – HP, Dell, Google, Microsoft, Cisco § We remain the world’s largest domestic consumer market, full of early adopters 14 Tom Friedman, “The World is Flat” 2005

Information Technology Outsourcing Business Process Outsourcing Why do companies do these things? How does the process work? How do companies sell and deliver it? 15

The Changing landscape of IT over 50 years IT as a percent of U. S. capital 15 On demand era Business productivity & innovation Client/server era 10 Personal & departmental productivity % Mainframe era 5 Adminstrative productivity 0 1965 1970 1975 1980 1985 1990 Source: U. S. Department of Commerce (Sept. 2002), IBM analysis 16 1995 2000 2005 2010

Gartner Dataquest view of worldwide Business Process Outsourcing opportunity $169. 3 9. 0% CAGR $154. 0 $119. 7 $129. 7 $140. 8 8. 3% CAGR 9. 4% CAGR 17

Increasingly, businesses look to business process outsourcing as a strategic enabler, not only for cost savings Need to focus on core business Solve a business process issue Q: Thinking about outsourcing business processes such as customer care, logistics, HR, etc. , in 2004, is your company going to: 1 Keep at same level 32% Expand 17% Access to technology Optimize existing applications investment Reduce or manage risk Reduce headcount Derive incremental revenue or margin mix Gain variability in cost management Access to global expertise Asset reduction Source: ” Vertical View of BPO Demand: A Study of Five Vertical Industries, *” IDC, 2003 (Financial Services, Health Care, Retail/Wholesale, Utilities/Energy, Manufacturing) 18 Start 6% Have no plans 36% Reduce 7% The number of enterprises planning to start, maintain or expand outsourcing of business processes is growing: § IDC: 55% (August 2004)1 § Gartner Dataquest: 37% (July 2003)2 Sources: “Worldwide BPO Services 2004 Vendor Analysis: Assessing the Strategies of I T Service Providers, ” IDC(Aug. 2004); “BPO User Wants and Needs, ” Gartner Dataquest (July 2003).

Rethinking the Enterprise Percent of sales 100 10% 40% 75 50 40% 25 0 19 10% IT PROFIT RETAINED BUSINESS PROCESSES OUTSOURCED BUSINESS PROCESSES

Large Companies Tend to outsource to the following functions. Large Outsourcing Vendors have built processing centers for these activities in various parts of the world Business Processes Finance & Administration § § § § § Cost accounting JE Processing AP/AR Fixed Assets Project accounting Inter-company billing Credit & collections Cash application Internal/external financial reporting § General accounting § Budget and forecasting Customer Relationship Management Human Resources § Self-service portal § and contact center § § HR process redesign, § subject matter § experts § § Staffing, recruiting, benefits, org. dev. , § training, education § § Expense acctg. , § payroll § Data and analytics § vendor aggregation and management Procurement Service After Sales Industry Specific Strategic sourcing Supplier catalog enablement Supplier relationship management Indirect-direct purchasing Contract management § End-user support § Global Sourcing § Parts logistics § Inventory planning and management § Repair management § Customer support § Service request support § Warranty management § Field services § Technical support Banking/Fin. Markets Customer care § Order management § e. Commerce Warranty service § Field service management § Billing & payments Customer analytics § Call center operations Applications Transformation Technology Transformation Flexible Deal Structures & Financing 20 § Market data mgmt. § Account opening/ maintenance § Collections & recoveries § Banking back office Insurance: § § Claims management Policy administration Customer care HR administration Government: § Traffic congestion toll charging § Case & records mgmnt. § Education and training § Call center

IDC: Business Process Outsourcing leadership High IDC Leadership Grid: BPO Leadership Among IT Service Providers in 2004 Niche IBM Accenture Ability to Grow Share Low Leadership Capgemini CSC ACS Unisys EDS HP Wipro Infosys Crisis Potential Low Legacy Opportunity Alignment Source: “Worldwide BPO Services 2004 Vendor Analysis: Assessing the Strategies of I T Service Providers, ” IDC, Competitive Analysis, Aug. 2004 21 High

The benefits of outsourcing – from tactical to strategic Client Benefits Process Change Ý Focus on core business Extended Enterprise Continuous Strategic Change while Outsourcing Process Enhancement Process Improvement while Outsourcing ÝIncrease flexibility to adapt quickly ÝReduce barriers to change ÝInnovate, improve and transform processes ÝSpeed time to benefits ÝImprove decision support Cost Reduction Cost Take Out ÝReduce costs Return on Investment Business Process Outsourcing targets reducing a client’s costs and investment in business processes 22

Business Process Outsourcing Solutions deliver lower cost and higher quality 100% of staff @ 40 -70% of Original cost Process Efficiency and Transformation 100% of staff @ 100% of Original cost Cost Effectiveness 60% of staff @ 100% of Original cost 23 Global resourcing without transforming is a missed opportunity Many operators have low cost offshore facilities – few have the capability to manage the change and transformation required to deliver the full potential benefits. The IBM approach leverages cost effectiveness and process efficiency and transformation. § Cost effectiveness is achieved through optimized service delivery model (three tier architecture: on site, near shore, offshore) 60% of staff @ 40– 70% of Original cost § Process efficiency is achieved through : § Standardisation § Performance monitoring § Process & technology transformation § Transformation of the entire process and value change

Finance & Admin Typical split of activities within Finance & Accounting Accounts Payable F&A Outsourced Accounts Receivable Fixed Assets Cash & Banking 100% Financial Accounting Management Reporting 100% 80% 70% 50% 20% F&A Retained User Activities 24 Credit Monitoring Physical collections 30% 50% Cash Management Bank Relations Contract Financing Report finalization Books ownership Tax liaison Report Analysis Supplier relationship Price maintenance Communication Capitalization Decision Accruals Budgeting Procurement Sales & Invoicing of expectations Physical Inventory Write-Offs Analysis & Goods Receipt Credit Management re cash movts Physical Tagging Some closing Business Invoice approval Customer Queries Local Reporting activities Commentary

Many groups of functions with major corporations can be charasterized by pyramids. The transformation of HR begins by organizing work to best leverage the talent in the HR function Current State 15% Customer HR Organization 30% Future State HR Strategy and Policy HR Subject Matter Experts 20 -50% Cost Savings 15% 10% 20% 50 - 60% 55% HR Administration BPO Provider 40 - 50% 30% BPO Outsource 25% 25 Customer HR Organization Automation & Self. Service

Is this the whole Outsourcing story? Not just Bangalore 26

Delivery Center – Bangalore Embassy Golf Link Campus (EGL) § Facilitate combining AMS and BPO Operations at one facility § To house over 5, 000 employees securely ● Complex of 3 Buildings § State-of-the-art facility § Intra-City BCP 27

Typical Vendor Delivery Center – Bangalore The Operations Highlights § Large Contiguous Space Availability ● 4 th Flr : 33 K Sq. Ft (In operation) ● 5 th Flr : 33 K Sq. Ft (In operation) § Reliable Connectivity ● 4 Lease Line Provides On Site ● VSNL Earth Station § High quality management and staff with experience in transitioning over 4000 Western roles to India § 1000+ BTO staff, 2000+ by end of 2004 § All staff are English speaking graduates 28 § Reliable Back Up Power ● 9 MW Back Up Generator ● 100% Redundancy In Power Links Capacity International 47 Mb Domestic 43 Mb Tokyo Delhi 4. 5 Mbps USA § Round The Clock Security ● ● Guard Patrols, CCTV, Door Alarms BMS: Fire System/AC/Power/Security § Amenities ● ● Cafeterias / Malls / Banks /Health Club In-house Transport Options Mumbai Pune 9 Mbps Bangalore Singapore

The Philippines • § § § § 29 Labor force of 29 Million 3 rd largest English speaking nation Literacy rate of 94% 380, 000 graduates/year Low attrition rate (less than 15% among Customer Contact Centers) Quality management staff Highly Trainable A fraction of labor cost of US and EU Telecommunications costs have dropped 70% in last 3 years

Many Outsourcing companies have centers all over the globe Calgary Toronto Edmonton Greenock Endicott Lisbon Rotterdam Krakow Newcastle Dalian Shanghai Tulsa Tokyo Bratislava Okinawa Dallas/Atlanta Houston Nashville Lexington Costa Rica Finance & Accounting 30 Manila Budapest Bangalore Delhi/Mumbai Buenos Aires Procurement Human Resources CRM Brisbane In Plan

Three-tier delivery strategy maximizes delivery value Tier 1 Tier 2 Onshore Expertise Support Regional Support Centers Tier 3 Global Support Centers Delivery Capabilities § Three-tier delivery strategy for maximum flexibility § Delivery Centers with 33, 000 process and delivery experts in 15 countries § >50, 000 consultants with expertise in 17 industries and multiple business process areas § >50, 000 Application Management Services Professionals 31 Expertise Support Centers: • Co-located with client • Dedicated • Locationspecific requirements Standard nontransactional activities: • Remote center • Leveraged multi-client facility • Regional expertise Standard transactions: • Lowest cost with high quality • Multi-client facilities • Highly leveraged

Client EXAMPLE -- Scope Description CRM F&A Key business processes, not just backroom operations Contact Center AG and EMEA Inbound and Outbound Financial Services Global AP & T&E EMEA OTC processing US Collections & Cash Apps Data Programming AG and Europe Information entry from public records Product Fulfillment Oracle OTC Migration Implementation Services Transaction Processing Europe only Data Entry and error re-work 32

Client EXAMPLE Solution Map Bethlehem, PA – 104 FTE • US Gold Service – 13 • US Sales and Service 53 • Personalized Investigations – 8. 5 • Advanced Customer Update - 4 • Error Resolution Screening - 10 Mississauga, CA – 35 FTE • US Sales and Service - 13 • Family Tree / Linkage – 1 • ACUG – 4 • DP Canada - 14 Manchester, UK – 27 FTE • EMEA Customer Support - 24 • EMEA Gold Service – 3 Lehigh Valley, PA – 71 FTE DP – US CAN Trade – 5 DP – SMS/RMS – 23 DP – US SMS - 43 High Wycombe, UK – 24 FTE EMEA Customer Support - 4 • DP – EU Delivery – 18 • TP - 2 Waltham, MA 7 FTE • Technical Support - 7 Milan, IT – 66 FTE • Inbound CS • Inbound Tech S • Revenue Generation • Contract Admin Rotterdam - 66 FTE EMEA Customer Support – 5 • Service Failures – 3 • Family Tree – 21 Almelo, NL – 45 FTE • Re-Investigation – 10 • EMEA Customer Support – 1 • DP EU Trade - 3 • Service Failures – 38 • TP - 6 Tucson, AZ – 88 FTE • • US Outbound • • EMEA Gold Service – 4 • EMEA Customer Support – 20 • Service Failures – 1 • TP - 41 Bari, Turin, IT FTE Svc Failures – 24 Austin , Texas – 122 FTE • US Sales and Service – 69 • Technical Support – 13 • Duns. Voice – 6 • Contract Administration – 24 • Usage and Billing - 7 Greensboro, NC – 95 FTE • US Outbound - 95 • Outbound Telecenter • Data collection & DB updates • Self-Analytic product sales Not Included: The outbound European Telecenter operation is outsourced to CSC. Data collected on UK, Germany, Italy, Spain, Portugal. • Data collection & DB updates • Self-Analytic product sales • File maintenance & file builds Current State – 750 FTE 33

Client EXAMPLE Solution Map Bethlehem, PA 66 Rebadged FTE Manchester, UK 27 Rebadged FTE Mississauga, CA 13 Rebadged Greenock ( 170 FTE ) ENG, Italian, FR, Flemish, Dutch • EMEA Gold Service • EMEA Customer Support • ACUG • Family Tree • Re-Investigation • DP – SMS/RMS • TP High Wycombe, UK – 4 Rebadged FTE Rotterdam & Almelo, NL - 6 Rebadged FTE Austin , Texas 69 Rebadged FTE Milan, IT – 24 Rebadged FTE Buenos Aires & Sao Paulo ( 417 FTE ) Bangalore ( 83 FTE) ENG, SPANISH, PORTUGUESE • • US Sales and Service • US Gold Service • US Outbound • Family Tree • Errors / Screeners • Technical Support • Contract Administration • Usage and Billing • DP SMS/RMS • US SMS • DP Canada Future State (1 st step) 34

Client EXAMPLE Solution Map Allentown, PA § AP/T&E Processing (7 FTEs) Bethlehem, PA High Wycombe, UK § AP/T&E Processing (4 FTEs) § Europe OTC Processing (17 FTEs) Milan, Italy § AP/T&E Processing (5 FTEs) § Europe OTC Processing (7 FTEs) § US OTC (38 FTEs) Krakow § AP/T&E Processing (8 FTEs) § Europe OTC (10 FTEs) Tulsa § AP/ T&E Processing (1 FTEs) § Americas Collections (2 FTEs) Brussels/Rotterdam § AP/T&E Processing (1 FTEs) § Europe OTC Processing (2 FTEs) Bangalore § AP/T&E Processing (4 FTEs) § Americas Collections (30 FTEs) § Europe OTC (19 FTEs) Current (81) and Future (74) States 35

It’s a lot more than this!!!! 36

Thank You 37