First , IDC and Forrester Research lowered their forecasts for global IT spending in 2008. Worldwide IT marketgrowth is now predicted to be 5% from 6% by IDC; and 6% from 9% by Forrester. U.S. IT market growth is predicted to be 4% from 6% by IDC; and 2.8% from 4.6% by Forrester. ChangeWave’s latest corporate IT spending survey points to a negative growth rate for the 2nd Quarter of 2008, and confirms that U.S. business spending has already entered into a recession.
Changewave survey finds that nearly one-in-four respondents ) say their company’s ITspending will decrease (or there will be no spending at all) in the 2nd Quarter – 3-pts worse than the previous survey. Only 15% say spending will increase – an unprecedented 9-pt drop from previously.
Amidst all these things, we also see that customer appetite for innovative technologies and delivery models seems to have not diminished. IDC’s Albert Pang finds that customer win announcements from enterprise applications vendors came in at a steady clip throughout the month of January 2008 suggesting that deals were still being consummated.
Offshore headquartered service providers may not be hit says Everest Group. The rationale : In bad times, companies tend to go in for bigger pieces than smaller ones. For example, if a large retailer is was doing $5 million with one vendor, they would now prefer to do $10 million. If it was $25 million, it might go up to $50 million. While you won’t be able to track this for individual clients, what you will see is that SWITCH companies will start reporting more $50 million- $100 million deals than last year.
Earlier, I wrote that captives are imploding. Everest Group now confirms that the proportion of work done by captives is reducing compared to that done by third-party firms but that doesn’t mean captives are not growing, but points out sellouts are getting more difficult than anticipated.
Labels: Captives, Emerging Trends, IT Spending
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While writing on captives, I concluded that today’s reality is that barring those that are focused on product development, or support functions involving multiple of hundreds of people working or those focusing on research – the R part of the R&D line item, most of them are grappling with which exit option to choose - ranging from closure to outright sale.
Vinnie points out that the drivers for setting up captive units are margin protection, IP protection, ability to realize some capital gains upon eventual sale. Vinnie – you are definitely right, Symphony & GlobalLogic have reportedly bought over a few captives( Forrester points out that those bought out were actually stagnating/struggling units).I have also pointed out earlier that firms that are focused on product development on a medium to large scale, or support functions involving multiple of hundreds of people working or those focusing on research – the R part of the R&D line item would find it attractive to run captives. Software product majors employing huge numbers or those focusing on niche(s) generally manage to run captives to their corporate satisfaction. But cost advantages and scaling up are proving to be far more difficult things to achieve.
My experience in talking to captive managers who have run captives suggest a sense of dissatisfaction and a majority of them have failed to meet their HQ expectations – on multiple fronts. The issues that run captives to the ground include busting of the myth that they can be in general be more profitable – the loaded costs of captives are on an average more than the loaded costs of third party service providers( even when factoring in a reasonable margin for service providers). Forrester is bang on when it reports that generally, over time, service providers can manage the inflationary pressure, improve productivity measures much better, for high end works.
Hindustan Lever sold its captive unit Indigo recently to Cap Gemini. The valuation, it was widely believed was very subdued as Levers made it look as if a cost center was getting sold. HLL, one of the largest multinational operating in India (it recently lost its largest multinational status in India to Nokia) unarguably India’s corporate icon and Unilever’s crown jewel would not have taken such a decision without working out its near and medium term benefits. Its likely the case that HLL must have thought that sustaining captive BPO center may not be the best option available in front of it – seem from an expertise, economics ascaling up perspective & near-medium-long term valuations. Apple failed in running a successful captive unit in India. There are number of additional examples that come to my mind - Citi, Deutsche and a lot more. Firms like Yahoo & BEA are fine tuning their approach. Amongst the notable exception in running a successful captive is Dell,which seems to be going from strength to strength. In my view, where having a captive is not a strategic decision( should be well justified and unbiased), the era of having captives for the sake of having one, in the hope that in present or in future, in some form benefits may be forthcoming looks doubtful.
Labels: Captives, Offshoring, Outsourcing
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I recently wrote offshore based'Captive' IT companies/units, serving dedicated western clients will have to consolidate to drive scale and increase attractiveness to talented prospective employees. The attraction for larger players to buy them out is on account of their highly trained staff and acquiring a marquee western client (or a few clients) in the process. Captive units of large global business providing offshoring business may also find the goings unattractive and may opt towards taking services from service providers. Third-party service providers generally outperform captive offshore facilities – a point that I have repeatedly highlighted.
The trend of establishing a "captive center" in offshore locations like India, China, or Russia continues to find converts – these are setup with an aim to lower the costs of product development or back-office operations. The recently released Forrester report report finds that the majority of the reasons firms cite for building their own facility versus outsourcing to a third party are flawed. Lack of management support, spiraling costs, skyrocketing attrition, and a lack of integration all contribute to the adding list of struggling captives. Forrester believes that more than 60% of captive centers set up in places like India fail to meet expectations. Common reasons for failure: a poor delivery track record, operational problems, a lack of scale, poor morale, rampant attrition, and high costs. The report points out that the loaded cost of captives with nil margin on transfer pricing may be more than the loaded cost of third party providers even after factoring in a reasonable margin. The problem is not just relevant to India but extends to wannabes like china, Malaysia etc. In fact research throw up same levels of attrition and wage inflation pressures as captives set up shop there. The best indication of how tough operations management in offshore comes from Manish who points to TCS challenges in china (though this is not related to a captive unit but is a pointer to the cahllenges even established players can face in retaining competitive talent). And more importantly the cultural idiosyncrasies of locations like Malaysia and Brazil tend to make staff much less amenable to travel and shifting work hours to better align with the parent country time zones. Today’s reality is that barring those that are focused on product development, or support functions involving multiple of hundreds of people working or those focusing on research – the R part of the R&D line item, most of them are grappling with which exit option to choose - ranging from closure to outright sale.
Labels: Captives, Emerging Trends
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