LOCATION

Outsourcing
PROFESSIONAL OUTSOURCING

PROFESSIONAL

Issue 13 Summer 2013

I AL
EC
SUMMER 2013

P IN
S EDI DEPE
T N
ADV ORIA DENT
ERT L, N
ORI OT
AL.
www.professionaloutsourcingmagazine.net

Location special
Where to, why to, and when not to offshore,
and why you should understand people’s attitudes
CAPTIVE STRATEGIES OF THE FORTUNE 250 • ATTITUDES TO OFFSHORING • CSR
• ASSESSING LOCATIONS FOR BUSINESS • WHITEHALL STUCK AT THE TRAFFIC LIGHTS
• BEST PRACTICE FOR ITO GOVERNANCE • ASPIRE: THE LSE’S VERDICT
• NHS IT REVELATIONS • FINANCIAL SERVICES II: STANDALONE REPORT
 Serco Global Services
has very quickly emerged
as a leading provider of
Business Process Outsourcing


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For moreinformation,
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contact:

Kerrie Markou Email:

Diana Robertson Tel: +44 (0)7738 896 687 www.serco.com
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I
EDI NDEPE
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ADV ORIA DENT
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ORI NOT
AL.
ur 13th issue is lucky for
O
the UK’s decision-makers
as we present the roster of
writing talent that gives
Professional Outsourcing
its unique proposition in the business
publishing market: nothing but the best
independent thought leaders presenting
in-depth research and opinion – a high-
level conference in magazine form, no less
(together with some great photography).
No outsourcing topics generate more
heat and light than offshoring, and
governments wasting taxpayers’ money on
poorly conceived or mismanaged schemes.
This issue addresses both subjects in more
depth than ever before. Part one presents
a series of hard-hitting, analytical features
on offshore location choice. In it, you will
benefit from the Fortune Global 250’s captive
experiences, get essential knowledge about
the top 10 offshore locations for contact
centres, and find out why the anger that
many people feel about offshoring is so
important to understand. In part two, we
assess Whitehall’s IT outsourcing progress.
Some of what we uncover makes for
incendiary reading.
• Our standalone report returns to that
other hot topic, Financial Services. Our
researchers discover that highly skilled
professional jobs are leaving the City for
Eastern Europe. Find out why, and what
this means for the UK, inside.
Chris Middleton, Managing Editor.
Net circulation Printed in the UK by
9,021 copies The Magazine Printing Company
using only paper from FSC/PEFC suppliers
Feb–April 2012 www.magprint.co.uk
Contents

Contents INDE
EDIT PENDENT
OR
ADVE IAL, NO
RTOR
IAL.
T

Summer 2013
Focus: The Captives 250 6
Get the inside information on the offshore
captives strategies of the Fortune Global 250,
presented by the CGSS’ Ilan Oshri.

Focus: Offshoring attitudes 14

Many employees hate offshoring and see
a threat to UK employment, but others see
opportunity. Who is right, and what are the
internal management challenges?

The Pro: Choose your partner 22

The LSE’s Leslie Willcocks and colleagues
present an in-depth guide to assessing
countries’ true attractiveness for business.
Plus: Workers’ rights and CSR.

Public: Whitehall’s IT journey
The Major Projects Authority has issued its
first report on Government IT programmes.
Is it Stop, Go, or Proceed with Caution?
Plus: G-Cloud funding worries, and some staggering
new insights into the NHS IT programme.
Public: Aspire, the LSE’s verdict
From inception to delivery, the LSE presents
an unparalleled assessment of HMRC’s
Aspire scheme. Find out if the taxpayer wins.
The Highlighter: ITO governance
How to strike the right balance for success.
Legal Briefing
Plus, in this issue’s supplement...
32 The scene of April’s catastrophic factory collapse in Bangladesh, which
claimed over 1,100 lives. In the spotlight: Garment manufacturing for the UK.
Professional Outsourcing Report:
Financial Services II
In the 36-page supplement this quarter:
40
• Introduction: The big picture.
• Customer service: How outsourcing
helps – but can also hinder.
• Go east: Why it is not just low-skilled
50 jobs that are leaving the City.
• The IT factor: Why the spectre of IT
disaster haunts the banking sector.
57 • Aisles of plenty: Supermarket banks.
• Canada says no: How one government
intervened to stop offshoring.

4 Professional Outsourcing
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Sitel provide clients across the globe Our award winning services include:
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Enhancing the customer experience Collections & Receivables

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www.sitel.com
 Focus: LOCATION SPECIAL / CAPTIVES
Captives 250:
the CGSS report
LOCATION SPECIAL, PART 1: CAPTIVE STRATEGIES
In the first of a series of hard-hitting, linked features on location selection this issue,
Ilan Oshri of the Centre for Global Sourcing and Services (CGSS) looks at the lessons
to be learned from the Fortune Global 250’s captive centres strategies since the 1990s.
ocation is one of the most
L challenging decisions when
setting up a captive centre
– a wholly owned operation
from which services are
sourced, usually from offshore. While
India might once have seemed the obvious
choice, more and more countries are now
competing for this type of business, in
some cases very successfully.
As Professional Outsourcing
has previously explored [see standalone
RightShoring report, Autumn 2012; also page 22
this issue], there are a number of detailed
frameworks to help guide decision-makers
in their search for the right captive location.
But while such frameworks are invaluable,
they may not always uncover the volatility
inherent in some overseas markets.
Business risk goes hand in hand with
political instability and economic change,
and so it is essential to stay informed about
the world outside of the technology trade
pages. For example, in 2010 many people
might have been persuaded that Egypt was
a land of unparalleled regional stability and
political probity as it picked up a clutch of
outsourcing awards – mere months before
6 Professional Outsourcing
the Mubarak government fell and the
Arab Spring swept across North Africa
and the Middle East.
So how can buy-side decisions be
made with greater confidence, given the
heightened political sensitivities at home
and the financial tensions that have grown
between nations, including some allies?
To find out, it is useful to look at how the
world’s biggest and most successful firms
have made such decisions in the past,
together with the circumstances in which
they were made.
Accordingly, this article is based
on a unique study of the investments
made by Fortune Global 250 companies
“There are a in new captive centres between 1985
number of detailed and 2010 (prior to the Arab Spring). The
frameworks to data has been gathered by Professional
help guide Outsourcing’s research partner, the
decision-makers, Centre for Global Sourcing and Services
Such frameworks (CGSS) at Loughborough University –
are invaluable, data that were first published in a wider
but they may not academic article in the Journal of Information
always uncover Technology.
the volatility The CGSS’ analysis of 25 years of
inherent in some captive investment data suggests that there
overseas markets.” were four distinct phases: (i) 1985–1997,  
 FOCUS
Photo: Press Association

An easy mistake: Captive strategies should never be set in stone, warns the CGSS.

Professional Outsourcing 7
Focus: Location Special / Captives
the early years; (ii) 1998–2002, the maturity
phase; (iii) 2003–2005, the expansion years;
and (iv) 2006–2010, slowdown and recovery.
Each represented a strategic change in
terms of location choice, the functions
that were offshored, and/or the strategy
that each organisation pursued in setting
up its captive centres. This article focuses
on location. Professional Outsourcing
will explore other areas in future issues.
• The early years 1985-1997
CGSS research reveals that Fortune Global
250 firms set up 21 captive centres between
1985 and 1997. Most of these provided
either business process outsourcing (BPO)
or R&D services to the parent organisation.
Centres were established in eight countries
across three continents – South America,
Asia, and Europe – but the majority were
located in India.
With the influx of some of the largest
multinationals to that country, the Indian
government realised the strategic
importance of faster and more reliable
telecommunications. In 1994, India
deregulated its telecoms sector to attract
the private investment that it believed was
necessary to spur more rapid development.
8 Professional Outsourcing
“While most firms
set up centres that
only serviced the
parent, a growing
number of Fortune
Global 250
companies saw
them as revenue
generators and
outsourced non-
core activities to
local providers.”
(Above): Protesting workers mark
International Labour Day, 1 May
2013, in Manila, Philippines. While
the country is a centre for
Western business, Filipino workers
themselves condemn the policy
of their own local government
in outsourcing labour. (Opposite):
The Chinese premier was
addressing a business summit in
India. The two countries have
become the powerhouse
economies of the 21st century and
are developing closer economic
ties. (Photos: Press Association)
This resulted in increased bandwidth and
greater competition, which suppressed
prices locally while improving the quality
of services. The government also created
Software Technology Parks to host foreign
companies, and invested in developing the
infrastructures to support high-speed
communications between them and the
outside world. Fiscal incentives encouraged
companies to use the parks.
The arrival of several multinationals
seeking to develop new business in India
led to a surge in the pursuit of advanced
technical degrees among students, who were
keen to improve their economic potential
compared to that of their parents. This
resulted in a more skilled workforce, which
in turn reinforced interest in India.
The largely stable political climate, as
well as the improving business environment,
saw GDP double and foreign direct
investment (FDI) increase from 0.1 per cent
of GDP to nearly one per cent in the 1990s.
That said, economic growth and urbani-
sation in India lagged behind that of China,
but India’s English language proficiency,
buy-side pressure to tackle the perceived
threat of the Millennium Bug, and the
success of captive pioneers such as Texas
Instruments, all resulted in increased
attention to the potential of India as an
external resource.
• The maturity phase 1998-2002
Two trends dominated this period. First,
while most firms set up captive centres
that serviced only the parent, a growing
number of Fortune Global 250 companies
saw them as revenue generators and
outsourced non-core activities to local
vendors. These organisations realised that
they could benefit from access to specialist
resources in the local market, enabling a
tighter focus on each captive’s core business.
Second, CGSS data reveals a rise in
captive R&D centres during this time,
particularly in China. While India still
attracted more captives overall, China
began to attract a high proportion of R&D
operations – eight out of a total of 23 such
centres, more than any other country.

Chinese Premier Li Keqiang: Addresses a business summit in Mumbai, May 2013.
While India and China – by now two of
the world’s fastest-growing economies – had
successfully turned themselves into attractive
offshoring destinations, Central Eastern
Europe (CEE) was also beginning to attract
a share of the captive market (12 centres
in total). Poland attracted five in 1999-2000.
For example, HSBC established a captive
in Krakow, while HP and Siemens set up
centres in Warsaw, Wroclaw, and Lodz.
One of the reasons for Poland’s success
was that its government took steps to make
the country more attractive to FDI. For
example, the Krakow Technology Park
(KTP), an economic investment zone
established in 1998, was set up to provide
incentives in the form of significant depreci-
ation write-offs and tax exemptions. In
addition, it hosted 15 higher education
institutes and over 140 research labs to
ensure an ongoing flow of talent to the
captive centres.
Focus: Location Special / Captives
Photo: Press Association
• Expansion 2003-2005
Fortune Global 250 companies expanded
“India and China their search for attractive offshore locations
were attractive to set up captives in 26 countries during
offshoring this period (compared with 19 in Phase 2
destinations, but and 11 in Phase 1).
Central Eastern In 2003, the US government significantly
Europe was also reduced the quota of H1B visas, which
beginning to allow companies to employ specialist foreign
attract a share workers on a temporary basis. This cutback,
of the captives combined with a brain drain to India, the
market.” high cost of domestic talent, an aging
population, and the decline in the number
of domestic science and engineering
graduates, drove many US-based companies
to fill critical positions outside the country.
As India had amply demonstrated in
the 1990s, government incentives to
improve the business climate and attract
foreign investment – combined with a flow
of engineering talent from universities – is
a formula that works. Following this lead,  
Professional Outsourcing 9
Focus: Location Special / Captives
helped other countries to establish
themselves as offshore destinations in the
minds of Western clients.
For example, Taiwan, which had not
previously been a destination for offshoring
captive operations, attracted five R&D
centres, owned by Sony, Ford Motors, Dell,
IBM, and Fujitsu. Similarly, Panama set up
the Panama-Pacific Special Economic Area
in 2001, which offered multinationals tax
benefits and discounted international calls if
they set up call centres within the zone.
Jostling for position
That said, the formula offers no guarantee
of success. For example, in Phase 1 of the
captives era, the Malaysia Research and
Development Grant Scheme, introduced
in 1996, attracted only one multinational,
Panasonic, to open a hybrid R&D centre in
the Multimedia Super Corridor – despite a
media campaign and generous benefits. A
case of being too early to the party, perhaps.
While India maintained its leading
position in Phase 3, rising costs deterred
some multinationals from setting up captive
centres there. Other countries began
competing for offshore money as they
introduced FDI incentives and their univer-
sities produced a healthy supply of talent.
For example, South Africa attracted three
captive centres during this period; Romania
and Sri Lanka attracted two apiece; and
Guatemala, El Salvador, and Thailand
each attracted one (a major achievement for
the two central American countries, being
just a handful of years on from civil war).
However, rising costs in India did not
always force buyers to seek alternative host
nations. For example, German insurance
provider Allianz looked for alternatives
within India to avoid the cost pressures
in Tier-1 cities, such as Mumbai and
Bangalore. The choice was Tier-3 city
Trivandrum, in which Allianz set up a
captive in 2003.
China worked hard to improve its status
too. During Phase 3, increasing numbers
of Chinese firms qualified for CMM
(Capability Maturity Model) and ISO
certification. Ongoing improvements in the
10 Professional Outsourcing
“The formula
offers no
guarantee of
success. In 1996,
Malaysia only
attracted one
multinational
to open a
hybrid R&D
centre, despite a
media campaign
and generous
benefits.”
(Above): Lower labour costs are
one reason for many UK
businesses opening offshore
captives or offshoring routine
work to outsourced services
providers. However, evidence
presented in this issue of
Professional Outsourcing reveals
that other types of UK jobs are
increasingly at risk as global
enterprises seek professional
work from overseas too.
(Photo: Press Association)
Chinese education system, English lessons
in the school curriculum, and an increase
in the number of graduates from Chinese
universities all caught the attention of the
Fortune 250 and allowed China to build on
its position as an offshoring partner.
Multinationals mainly set up R&D
captives in China, seeking to benefit from
the country’s low-cost talent as well as to
position their products for the vast Chinese
market. For example, Japanese electronics
giant Hitachi set up two R&D centres in
China, while General Electric established
its own R&D captive in Shanghai to ensure
a leading position in the region.
Competition for India was hotting up
elsewhere, too. Growth in captive centres
across CEE countries was attributed to the
rapid economic development in the region
and to their accession to the European
Union. Poland, the Czech Republic,
Hungary, and Slovakia all joined the
European Union in 2004, while Romania
and Bulgaria followed in 2007.
• Slowdown/recovery 2006-2010
This period transformed the economic
landscape – not least for buyers
in the US and Western Europe, as the
credit crunch and serial recessions followed
meltdown in the Financial Services sector.
However, CGSS data reveals that a
slowdown in captive operations began in
2006, and so predates the global financial
crisis. Why did this happen? One reason is
a push by Indian outsourcing vendors to
scale up their services by improving
operations and increasing the volume of
transactions that they performed offshore.
This offered clients a viable alternative to
running their own centres.
That said, the challenges that multina-
tionals faced post-2008 (many of which
remain) brought new captive strategies to
the fore, such as the selling off of overseas
units. For example, insurance group Aviva
sold its Indian BPO centres to WNS in
2008, saying at the time that it saw the
buyer as a partner that “truly understands
the insurance industry”. This is interesting,
because captives emerged in the 1990s in

Indian workers: At a BPO centre in Simayal, which employs many women locally.
response to a lack of credible third-party
providers in areas such as BPO and
customer service. In less than two decades,
that situation had changed to such an extent
that some multinationals began divesting
their own centres to secure the services of
offshore providers.
Renewed growth
However, while the captives sector
contracted in 2008-09, CGSS data suggests
that this may have been a blip, as 2010
saw a growth spurt in the form of 33
startups by Global 250 companies.
That said, India certainly experienced a
decline in the number of new captive setups
between 2006 and 2010. The recession
aside, this can be explained by India’s own
rising costs, high attrition rates, and appreci-
ation of the Rupee, as well as by the
Focus: Location Special / Captives
Photo: Press Association
increased attractiveness of locations in parts
of Eastern Europe, Africa, the Middle East,
and the rest of Asia.
Among the newcomers to emerge in
this period was Jordan. Bangladesh and
Indonesia – both countries with recent
histories of political unrest – also attracted
FDI, as did Qatar. [The recent catastrophic
garment factory collapse has seen Bangladesh hit
the headlines for less positive reasons. See pages
22-30 for more.] The Qatar government’s
“While the investment in setting up the Qatar Science
captives sector & Technology Park (QSTP) persuaded Shell
contracted in to open an R&D centre in a country where
2008-09, CGSS foreign workers outnumber native Qataris.
data suggests Again, well-timed and well-researched
that this may government regulation and incentive
have been a blip, programmes proved that they play an
as 2010 saw a important role in improving the attractive-
growth spurt.” ness of a country for offshore investors.  
Professional Outsourcing 11
Focus: Location Special / Captives
• Conclusions
Two key trends in location choice are clear
from this CGSS research: (i) the decline of
India as the most attractive offshoring
location; and (ii) the rise of CEE countries,
together with other challengers. Indeed,
Eastern Europe now attracts more captives
than India. Rising costs in India have
damaged its attractiveness, while
governments in Central Eastern Europe
(and elsewhere) have offered competing tax
benefits to multinationals willing to invest in
their economies – lessons learnt from India’s
success. The proximity of CEE countries to
Western Europe and the generally improved
education system in the region have also
contributed to their success.
But what of the future? It is clear from
CGSS data that choosing a location is not
a one-off decision. Instead, it is one that
the world’s largest companies have revisited
and reconsidered constantly. However, their
decisions have not always been strategic. In
the volatile, risk-laden, post-2008 world,
a more forward-looking policy is essential.
Rethinking the approach
As a new approach to location,
Professional Outsourcing and the
CGSS advise multinationals to consider
both the facilitating and the disrupting
factors that may impact on such decisions
in future. Facilitating factors are those that
may reinforce the initial decision, such as low-
cost labour, the supply of talent, and the
availability of fiscal incentives. Disruptive
factors can include both worsening
economic conditions at the chosen location
and improving conditions elsewhere. To
those they should add political instability,
human rights, and the impact of offshoring
on domestic employment (and reputations).
India benefited for years from a wide
range of factors that helped turn the
country into the most attractive offshore
destination for captive centres from the mid-
1980s onwards. China has since emerged as
a contender, partly because of government
deregulation programmes that have strongly
encouraged FDI.
However, while India has maintained its
12 Professional Outsourcing
The cost factor
Market intelligence company
the Information Services
Group (ISG) has examined the
competition between Western
and Indian outsourced
services providers.
Its most recent Outsourcing
Index found that between
2009 and 2012, Indian
providers increased their
share of global market annual
contract value (ACV) by 13
per cent. In the same period,
Western providers’ share
declined by seven per cent.
This difference has been
mainly attributed to lower
costs, which ISG describes
as the “game changer” in the
global sourcing market,
The gains enjoyed by Indian
suppliers mainly come at the
expense of their Western
counterparts.
The majority of contracts won
by Indian providers have been
in the UK and US, said ISG.
CM
“Decision-makers
should assess
their offshore
captives every
three to five
years. They
should look
for potentially
disruptive
events, as
well as the
attractiveness
of the location.”
leadership in some areas, China has pushed
its R&D facilities centre stage to entice those
multinationals that see a massive growth
market for their products. China’s specialisa-
tion, therefore, has been driven by demand,
while India’s focus on BPO has mainly been
driven by supply (of low-cost labour).
Meanwhile, CEE countries such as Poland
and Hungary have themselves benefited
from a pool of multilingual personnel to
support European clients.
Disruptive factors have been evident
during the ‘captives era’. For example, the
very success of countries other than India
and China in attracting FDI has resulted
in the emergence of locations such as South
Africa, Morocco and Egypt, among others
– although the political situation in many
North African and Middle Eastern countries
remains volatile and uncertain.
Fortune Global 250 companies have
gained years of invaluable experience in
setting up and operating offshore captive
centres, and this must be useful for any
organisation that seeks to follow in their
footsteps. As a result, however, the once-
simple model of a captive centre providing
services to the parent has evolved and
branched into multiple, more complex,
models. Examples include captives that
attract external clients, outsourcing to local
vendors to gain operational efficiencies, and,
on occasion, divestment in return for capital
and a long-term sourcing contract.
Decision-makers should assess their
offshore captive investments every three to
five years. In that assessment, they should
look for potentially disruptive events, such
as the maturity of services offered by third-
party vendors, as well as the attractiveness
of alternative locations and models.
The outcome of these exercises should
tell executives whether migrating a wholly
owned centre to a new location may result
in better returns on their offshoring
investment, or whether switching to a more
sophisticated model would allow the captive
to grow and become a source of expansion
and employment in the region. I
• Additional reporting Chris Middleton.