a low cost alternative - sig
TRANSCRIPT
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NV
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2014
Vietnam, the New Offshore
Location
A Low Cost Alternative:
Viet HoChief Procurement Officer
Russell Investments
www.sig.org/eval
DE
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ER FALL
SU MMIT
2014
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Viet Ho, Chief Procurement Officer
A low-cost alternative.
Vietnam - the new offshore location.
OCTOBER 2014
About Russell Investments*
p.4
What we’ve done
Who we are
Every step matters. Russell is a global asset manager that provides multi-asset
solutions, including strategic advice, implementation services, and global
performance benchmarks.
Outcomes that matter. As of June 30, 2014, Russell has approximately
$280 billion in assets under management and works with institutional clients,
independent distribution partners and individual investors globally. Assets
benchmarked to the Russell Index family surpass $5.2 trillion — more than all
other U.S. equity indexes combined.
What we do
Headquartered in Seattle, Russell has approximately 1800 associates in 21
offices around the world. Russell’s Global Sourcing & Procurement (“GSP”)
team is currently comprised of 30 FTEs responsible for approximately $1
billion in spend.
*Source: http://www.russell.com/us/about-russell/default.page
Today’s key objectives & takeaways
p.5
Part Two: Review
• Overview of the offshore market
and its challenges
• Offshore opportunities in Vietnam
• Case study by Russell
• Next steps to take
Part One: Discussion
Offshore Market and Its Challenges - Discussion
Offshore outsourcing – A brief history*
p.7
20
years
ago
Today
10
years
ago
15
years
ago
5
years
ago
The beginning of the
Offshore/Outsourcing
phenomenon
The improvement in
telecommunication and
the Y2K challenges
created opportunities to
shift technology work to
low-cost countries
India, with its large pool
of English speaking and
technically proficient
manpower, was at the
center of the offshore
story
Other outsourcing
countries such as China,
Philippines, Mexico,
Poland, Ireland, Costa
Rica, and Argentina came
into the mix
The ITO/BPO global outsourcing market is estimated at
$180B annually, with India capturing 50% of the market
* Source: Nasscom - Association for the Indian software industry
Emerging challenges in offshoring (focusing on ITO)
p.8
Profile* Volume Challenges
Large Offshorer > 1000 FTEs
• Supplier fragmentation with at least 4-5 suppliers
• Offshore rates are comparable across most suppliers
• Onshore/niche consulting spend is significant
• Business units have their preferred suppliers which
lead to a lack of competition
Medium Offshorer 300-1000 FTEs
• In addition to the above ...
• Cost pressure as contracts are renewed
• Service quality deteriorating (less focus from major
suppliers as they chase new business)
• High turnover and visa issues are cropping up and
are impacting operations
Small Offshorer < 300 FTEs
• In addition to the above ...
• Too small for major suppliers, end up with Tier 2 or 3
providers
* Russell segmentation - for discussion purposes only
Some key considerations* for potential and/or existing offshorers
Risk Management
• Security and data privacy
• Intellectual property
• Resource risk
Service Levels
• Knowledge transfer
• Quality control
• Account management
• Capability
Financial Considerations
• Total cost
• Inflation differential
• FOREX
Long-term viability
• Capacity
• Innovation
• Regulation
• Political stability
p.9
Outside of procurement process, four areas are worthy of additional review:
* Russell framework - for discussion purpose only
Russell’s journey to fix the category
p.10
1. Strategic Review of the Offshore Outsourcing Category
Conducted a total cost analysis (labor, IT, market data, leverage ratio)
Evaluated current suppliers for capability
Evaluated current service level
2. Develop Options and Obtain Executive Support
Alternative India provider or other location
Near-shore locations
US locations
3. Complete Strategic Assessment
Russell’s search for another low-cost supplier
• Talk with industry analysts (Gartner, Forrester)
• Internet and peer research
• Conduct RFI
Step One
Conducted market and supplier search
• Eastern Europe
• Latin America
• Asia (incl. India, China)
Step Two
Evaluated different geographic locations
• Philippines
• Malaysia
• Vietnam
Step Three
Detailed look at the following three
short-listed locations
p.11
Conclusion from assessment for Russell
p.12
› Bring some of the scope with higher costs and low service levels
back in-house
› Compliance
› Reporting
› Identify another low cost location for some of our needs
› Explore Vietnam for ITO services
› Introduce more competition to current supplier base using a new
supplier
Why Russell prefers Vietnam
› Financial attractiveness of Vietnam is significant – 30% to 50%
lower cost than India (it helps to reset the clock back 10 years)
› Political, social and economic stability are attractive
› For ITO, Vietnam is a comparable alternative to India across
multiple areas
› Availability of high-quality skilled resources is attractive
› ‘Strategic partnership’ focus from Vietnam companies is better
aligned to meet both short and long-term needs of companies
like Russell
p.13
Opportunities in Vietnam – Discussion
Vietnam – A new destination for outsourcing
p.15
“Vietnam remains one of the most competitive options in the
world for software outsourcing due to its competitive labor
costs and other business costs.” (2010)
“Vietnam is one of the 10 most attractive global
services locations in the world.” (2011)
“Low labor cost in Vietnam is attracting many Japanese
companies in outsourcing their software development
services.” (2014)
“Ho Chi Minh City to watch as a location for the next
outsourcing boom.”
Top 100 Outsourcing Destinations - The de facto ranking of
outsourcing cities around the world (2014)
-Ho Chi Minh City is ranked at 17th above Kuala Lumpur
-Hanoi is ranked at 22nd
Why Vietnam?*
› Population of 92M people with 65% younger than 35
› One of the fastest growing economies in South East Asia
› Politically stable with strong government support for the IT industry
› 290 universities/colleges offering IT and communication training
› English is the second language
› Highly skilled and motivated labor force
› Rates are 30% to 50% lower than India or China
› Quickly becoming the major manufacturing alternative to China
(“China +1” strategy)
› Has the potential to be the ITO/BPO alternative to India (“India +1”
strategy)
p.16
*Sources: General Statistics Office of Vietnam; www.fpt.com; http://www.vietnamoutsource.org/vno-outsource-foundation.html;
http://www.tmasolutions.com/whyvn.aspx
The TRANS-PACIFIC PARTNERSHIP (TPP) will
change the game for Vietnam*
Objectives Timeline Countries Involved
• The TPP intends to enhance trade and
investment among the TPP partner countries,
promote innovation, economic growth and
development, and support the creation and
retention of jobs.
• All signatory countries will be required to
conform their domestic laws and policies to
the provisions of the Agreement, which will
follow international standard in areas such as
cross-border service supply, financial service,
E-commerce, investment, intellectual
property, government procurement,
employment, environment, state-owned
enterprises.
• Started in 2005 and is
slated to wrap up
negotiations by end
2014.
• It is one of the key
foreign policy objective
of President Obama.
• United States
• Vietnam
• Australia
• Brunei
• Canada
• Chile
• Japan
• Malaysia
• Mexico
• New Zealand
• Peru
• Singapore
* For discussion purposes only
p.17
Some areas of outsourcing in Vietnam
ITO
› Product engineering
› Application development
› QA & testing
› Maintenance & supporting
› Porting & migration
› IT managed services
› R&D
p.18
BPO/KPO – Non-voice BPO
› Data entry & conversion
› Digitization
› Document processing
› Online catalog/image processing
› Loans & mortgage processing
› Title insurance processing
› Procurement, accounting, and finance
Sources: http://www.fpt.com.vn/en/products_and_services/software/; http://www.tmasolutions.com/services.aspx; Gartner
Some key considerations* for potential and/or existing offshorer looking at Vietnam
Risk Management
• Review certification level of your supplier (eg. CMMI, ISO)
• Ensure you are comfortable with security arrangements such as secured zones, secured network, code stay in the US
• Contract with US entity if possible
Service Levels
• Plan for sufficient knowledge transfer time/resources (there is enough savings to allow you to do this properly)
• Plan to have either your people in Vietnam or the VN team members spending significant time at your location
• Make sure QC metrics are identified and tracked
• Push your supplier to enhance the account management portion of the contract
Financial Considerations
• Benchmark your cost for both India and Vietnam
• Model your cost 3-5 years out (Vietnam is paid in USD)
• Look at the total cost of the engagement including leverage factor, IT costs, travel, data
Long-term viability
• Does your supplier have the capacity or willing to make investment in your scope?
• Does your supplier service roadmap fit into your long term plan?
• Vietnam relationship with the US is strengthening and is expected to continue
p.19
Things to consider when outsourcing to Vietnam:
* For discussion purposes only
Notable outsourcing companies in Vietnam
• 25 years old
• ~5,000 engineers
• Client List: DirecTV, Freescale, Boeing,
Deutsch Bank, RamQuest, Old Republic
Title, Corsource Technology Group,
Halliburton, Ambient
• 17 years old
• ~2,000 engineers
• Client list: Alcatel-Lucent, Avaya, Shoretel,
Genband, IBM, Brightstar, Amdocs,
Prudential, ANZ, NTT, Toshiba, NEC, Hitachi
p.20
› Best in Class Processes: achieved certification as SEI CMMI Level 5; ISO
9001:2008; and ISO/ TS 16949
› Security Standards: implemented the ISO 27001:2005 (formerly BS 7799 -2:2002)
standard for Information Security Management System
› Agile software development methodology adopted widely as industry standard
› Serve niche markets: Custom application development, mobility, telecom, French
market focus, Japanese market focus, and non-voice BPO
1. An IT/Telecom Leader ($1.4B) 2. A Private ITO focus leader
Russell Case Study:
A Review (For Discussion Purposes Only)
Russell case study – MS App. Dev. RFP*
p.22
• Application development and support for MS IT projects with $3M in projected spend.
Scope
• Global Sourcing and Procurement engaged IT to discuss options for application development and IT support. IT was concerned about the low service level provided by the current suppliers and was receptive to consolidating the supply base.
• The project executive sponsor is the CIO.
Engagement
• Russell currently uses six providers (4 US and 2 India) and would like to consolidate the supply base to leverage the spend and reduce the complexity of supplier management.
• Control costs. Applications development and support costs have increased 15% annually from 2011 to 2013.
• Identify MS certified providers that have the scale and skills to support Russell’s applications development and support needs for the short and long term.
Goals
• GSP conducted an RFP with active participation from IT to define the scope, requirements, and evaluation criteria.
• The RFP was sent to 14 suppliers and10 responses were received. Based on price and scoring of responses, 6 suppliers were invited to on-site presentations.
Sourcing
Final ResultRussell consolidated the MS
Applications Development
providers to 2 providers. One
located in Vietnam and one
located in the US. The
recommendation was based on
the selected providers having
strong service delivery and lower
costs. Vietnam providers’ costs
are 40% below India and 80%
below US providers.
* For discussion purposes only
Next Steps
Vietnam as a solution to strategic challenges*
p.24
Profile Volume Challenges Solutions
Large> 1000
FTEs
• Supplier fragmentation with at least 4-
5 suppliers
• Offshore rates are comparable across
most suppliers
• Onshore/niche consulting spend is
significant
• Business units have their preferred
suppliers which lead to a lack of
competition
• Strategic: Develop a Vietnam supplier in this
space, start with a pilot in their sweet spot,
then help to position your new partner as a
competitor to your incumbents as the partner
become more knowledgeable (this apply to
both India providers as well as US consulting
suppliers)
Medium300-1000
FTEs
• Cost pressure as contracts are
renewed
• Service quality deteriorating (less
focus from major suppliers)
• Turnover/Visa issues are cropping up
and are impacting operations
• Strategic: Leverage a Vietnam supplier in
some sizeable projects, provide competition
to your incumbents
• Tactical: Use Vietnam resources to augment
your weaken areas, shift more as you feel
more comfortable
Small< 300
FTEs
• Too small for major suppliers, end-up
with Tier 2 or 3 providers
• Evaluate Vietnam suppliers as alternative to
your incumbents
• Transition over to the new supplier once you
are comfortable
* For discussion purposes only
Opportunistic steps to get started in Vietnam to test and confirm the value proposition*
For the budget constrained...
• Surprise your IT Leaders with a little year-end present – Identify small project(s) that could not be done due to high cost. You may be able to get it done with Vietnamese suppliers
Just need some leverage...
• Small pilot / Proof of Concept – Start with a small project in a generic skill set area; use the opportunity to “push” your incumbent
Need to mitigate country risk...
• Qualify Vietnam as a new supplier to use as risk mitigation for your CIO; Create an “India +1” option
p.25
* For discussion purposes only
Rate benchmark* - Complimentary
p.26* For discussion purposes only
Assessment of your Offshore rates:
› The blended offshore rates are high (4th quartile), in particular some of the niche skills rates are
higher than your peers. A job specific analysis will help
› The blended onshore rates for India suppliers are not competitive
› Your India blended offshore rates are 42% higher than Vietnam suppliers, the range is between 34%-
55%. Your onshore rates are 60% higher than Vietnam suppliers
› Your ITO scope can be covered by two Vietnam suppliers (further detail analysis required)
Discuss opportunities:
› Conduct a job specific benchmark analysis to determine rate negotiation strategy – Immediate
› Evaluate Vietnam suppliers for some of the lower risk scope (QA testing, migration support) and
project scope (MobileApp, Microsoft App dev, workflow optimization)
www.russell.com“Russell,” “Russell Investments,” “Russell 1000,” “Russell 2000,” and “Russell 3000”
are registered trademarks of the Frank Russell Company.
Contact information
Viet Ho
Russell Investments
PH: 206.321.5540
DE
NV
ER FALL
SU MMIT
2014
Session #WS06
A Low Cost Alternative: Vietnam, the New Offshore Location
VietHo
Russell Investments206-505-4637
Speaker:
www.russell.com“Russell,” “Russell Investments,” “Russell 1000,” “Russell 2000,” and “Russell 3000”
are registered trademarks of the Frank Russell Company.
Thank you
www.russell.com“Russell,” “Russell Investments,” “Russell 1000,” “Russell 2000,” and “Russell 3000”
are registered trademarks of the Frank Russell Company.
The opinions expressed in this material are not necessarily those held by Russell Investment Group, its affiliates or subsidiaries. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. Theinformation, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.
DE
NV
ER FALL
SU MMIT
2014
Session #WS06
A Low Cost Alternative: Vietnam, the New Offshore Location
VietHo
Russell Investments206-505-4637
Speaker: