Outsourcing Then , Now & Tomorrow

May 2008
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CONFIDENTIAL
Confidential and proprietary - Not to be distributed without the prior written consent of Copal Partners
2
The Industrialization of Service represents one of the biggest trends in the technology and services sectors
INDUSTRIALIZATION OF SERVICES



Cheap
Transportation
(railroad)






Standardization
of parts / mass
customization

Cheap,
controllable energy
(steam power)
THEN


Internet / global
networking





Standardization of
processes

Computing power /
global labor pool
NOW
Industrial Revolution Industrialized Services Revolution
Repeatability Measurability (6) Mass customization

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3
HIGH COMPLEXITY GENERALLY MEANS MORE SAVINGS
Value Addition
Low Medium High
Increased
complexity can
lead to higher
savings with
potentially less
risk
RESEARCH &
ANALYTICS
(40-60%)
TRANSACTION
PROCESSING
(25-40%)
ACCOUNTING / CALL
CENTRES (35-40%)
IT SERVICES
(25-50%)
INSURANCE
(40-60%)
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4
EVOLUTION TOWARDS MORE KNOWLEDGE INTENSIVE WORK AND THE FRONT END
KPO
Intellectual
arbitrage allows
outsourcing of core
processes
Repeat initial
successes by
developing robust
knowledge
management
methodologies for
KPO
BPO
Cost Arbitrage Emergence of
Quality
certifications like
CPOC
Focus on business
domains
Focus on
developing robust
knowledge
management
methodologies
Multi-geography
strategies
ITO
Cost Arbitrage Global Delivery
Model comes of
age with changing
telecom scenario
Emergence of
Quality
certifications (CMM,
ISO)
Focus on
knowledge
management
Focus on business
domains enabling
access to complex
business-facing IT
systems
Geographical
diversification by
setting up delivery
centres in multiple
locations
Evolve to provide
end-to-end
consulting services
Mid 80s 1990-1994 1995-1999 2000-2004 2004-2007 2008-2010
Infancy Growth Maturity
Source: KPMG, Knowledge Process Outsourcing, February 2008
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5
KPO THE EMERGING WAVE
Source: KPMG, Knowledge Process Outsourcing, February 2008
High
Complexity
Moderate Complexity
Low Complexity
30-45
15-25
10-12
TIERI and II MBA, CA,
CFA, CPA, Post Graduates
(Finance & Accounting)
TIERII and III MBA, CA,
CPA, Graduates (Finance
& Accounting)
Finance & Accounting
Under Graduates
B
i
l
l
i
n
g

R
a
t
e

(
U
S
D

p
e
r

h
o
u
r
)

S
k
i
l
l

S
e
t

R
e
q
u
i
r
e
m
e
n
t
s

HIGH
LOW
HIGH
LOW
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6
MOST FUNCTIONS CAN BE OUTSOURCED TODAY
Source: KPMG, Knowledge Process Outsourcing, February 2008
Offshoring
Scoping matrix
Retail Banking
Wealth management, life and
general insurance
Institutional, Investment &
business banking
IT, Infrastructure
and administration
support (ITO)
Core banking systems Life policy systems maintenance and
application development
Loan accounting and equity / Fixed Income
trading systems
Application development and maintenance
Remote infrastructure management
Package implementation and support
Database administration, data mining and warehousing solutions
Middleware development and support
Product based
transaction
processing and
customer contact
centres (BPO)
Mortgage and personal loan origination,
processing and servicing collections
eDisputes processing
Credit card processing
Consumer finance
Cash management / Fund transfers and
reconciliations

Insurance claims administration and
payment
Policy underwriting
Insurance agency management
Fraud detection
Recoveries
Trial balance analysis
Brokerage operations
Commissions administration
Project finance documentation
Support FX, currency ops and derivatives
settlement
Trade finance and LCs advice and
settlement
Corporate finance
Risk management
Securities processing
Custody operations and trade
Inbound/outbound contact center
Customer query handling
Data entry, indexing and content management
Customer background verification and finalization
Loyalty retention (customer care program)
Customer statement and other periodic reporting
Regulatory requirements/mandate related support and administration
Payment processing
Analytics
Outsourcing
activities (KPO)
Mortgage and personal loans
Portfolio pricing
Data warehousing
Data-mining
Marketing analytics
Fund performance analysis
Reporting and accounting
Actuarial support
Product pricing including Dynamic Financial
Analysis (DFA) models
Financial model validations
Equity research and M&A analytics support
(valuation and related financial modeling)
Credit proposal analysis, preparation and
documentation, portfolio analytics
Library services

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7
SERVICES OUTSOURCING PITFALLS & PREVENTIVE MEASURES
SERVICES
OUTSOURCING
Absence of a Partnership Approach
Lack of Commitment and Consensus in the Client Organization
Lack of Effective Change Management in the Client Organization
Ineffective Governance Structure
Clients Lack of Knowledge of its Processes
Measuring the Wrong Performance Aspects
Rigid, Inflexible Contract
Inadequate Security, Disaster-Recovery, and Business-Continuity
Plans
Communication Clarity with a partnership approach
C-level champion and sponsorship for the outsourcing initiative
Eliminate the practice of having shadow personnel
Create mechanisms and forums that facilitate an open exchange of
information and objective feedback
Developing a contractual obligation for both parties to commit
appropriate executive involvement
Create a summary process flow map and prevent micro-
management
Regular review of SLAs as to their appropriateness
Contract must include provision for a fair exit process
Thorough testing of the disaster-recovery and business-continuity
processes
Lack of Effective Communication
PITFALLS PREVENTIVE MEASURES
Source: Outsourcing Partners International
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8
Source: Gartner 2007, Copal Analysis
One of the biggest challenges in an outsourcing contract is to ensure
that the customer continues to obtain the level of service it requires at
a competitive price
Given the length of some outsourcing contracts, what starts out as
a competitively priced contract may not remain the same.
Contracts must therefore be drafted to effectively manage this risk
Given the dynamic nature of business requirements and the time taken
to negotiate an outsourcing contract, a signed contract may not reflect
all of the customers original requirements & additional ones
Therefore, outsourcing contracts need to comprise of a control
mechanism which would contain procedures for proposing and
accepting changes, as well as an escalation process for resolving
disputes
Data protection and related issues of security have always been areas
of concern for companies considering outsourcing
Solutions to this issue include negotiations of any gaps between
the solution offered by the supplier and what the customer
believes is appropriate security for its needs
Both parties in an Outsourcing contract need to draft an effective exit
strategy to avoid the possibility of being tied into an unfavorable
outsourcing deal. Reasons why a party might want to terminate an
outsourcing contract include:
Material breach by the other party
Insolvency, winding up or change of control of the other party
Right for the buyer to terminate for convenience, where there is no
fault on the part of the supplier
Competitive Pricing Change Control
Data Protection Termination
Transferring analytics business processes to an external provider is a complex process that involves transitioning high-value data and
knowledge about a company's internal plans and objectives. For this reason, contractual issues relating to extensive due diligence on privacy
laws pertaining to that country, security & confidentiality aspects, and planning & documentation of knowledgetransfer processes become
absolutely critical
SERVICES OUTSOURCING CONTRACTUAL ISSUES
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9
The global KPO business is expected to grow to USD 16.7bn by
201011 from approx. USD 4.4bn in 200607, increasing at a
growth rate of 54%
Indian KPO industry is expected to grow to approx. USD 11.2bn by
201011, up from USD 3.05bn in 200607. By 201011, the
industry will employ approx. 255,000 professionals, increasing
from 75,400 in 200607
KPO is expected to contribute around 1.8% to the Indian service
sector by 201011
India is the leading destination for offshoring services, followed by
China and Malaysia
Businesses outsource a growing proportion of their processes to
India as:
India has a large, growing and highly educated English-
speaking workforce
Employee costs in India are approx. 1520% of the US costs
The business and regulatory environment is conducive to the
growth of the outsourcing industry
Source: A.T. Kearney, KPMG, Knowledge Process Outsourcing, February 2008
Country
Current
Availability of
Talent
Potential
Availability of
Talent
Compensation
Cost Savings
Infrastructure
Cost Savings
Potential Risk Overall
India BBB
Canada AAA
Australia AA
Singapore AA
South Africa A
Ireland AAA
Wales AAA
Parameter is most favorable Parameter is least favorable
KPO Characteristics in Key Financial Services KPO Destinations
INDIA: CURRENTLY THE ONLY REAL PLAYER
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10
KEY TREND: SHIFT FROM CAPTIVE TO 3
RD
PARTY
Initially, most companies preferred establishing captive centers as they afforded them more control. The trend
has shifted recently, with companies increasingly opting for third-party vendors
The benefits of sourcing work from a third party vendor include low/no upfront investment, lower set up
time, low/no exit costs and reduced management time.
Nonetheless, a captive is still perceived to provide better data security and more control over operations.

Country Captive Joint Venture Third Party
Investment
Set-up Time
Perceived Level of Data Security
Control Over Operations
Management Time
Exit Costs
High Medium Low
Comparison of Sourcing Models
Source: PriceWaterhouseCoopers, Copal Analysis
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11
There has been gradual shift in the sourcing model from establishment of captive units to joint ventures or third
party outsourcing
HCL Technologies, a member of the USD 740mn HCL Group, formed a joint venture with Deutsche Bank AG by
acquiring a 51% stake in the holding company of Deutsche Software, Deutsche Bank's IT services subsidiary in
India
The call center operations of AOL were recently acquired by Aegis BPO, the business process outsourcing
company of the USD 50bn Essar Group in India. Aegis BPO will take over customer service and technical support,
both voice-based and non-voice, for AOL s customers
The Genpact transition is the subject of considerable interest in the outsourcing world. The company moved to a
third party operation from a captive model. Genpact began in 1997 as the India-based business process services
operation for GE Capital. In 2004, GE Capital divested 60 per cent of its stake in its BPO arm to General Atlantic
and Oak Hill Capital Partners at an estimated price of USD 500mn

Source: Gartner 2007, Copal Analysis
KEY TREND: SHIFT FROM CAPTIVE TO 3
RD
PARTY (cont)
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12
Key M&A Transactions, 2006 & 2007
Acquirer Type of Service Provider Target (Merged Company)
EXL Services BPO Inductis (July 2006)
WNS BPO Marketics (October 2007)
Cognizant CSI MarketRx (October 2007)
Copal Partners KPO Exevo (May 2008)
KEY TREND: INCREASED M&A ACTIVITY AND CONSOLIDATION
There have been a number of recent transactions in the BPO / KPO space
These transactions are primarily driven by:
BPOs needs to enter the KPO space, as this space is expected to have higher growth and margins
moving forward
Need to achieve greater scale by current KPO providers
Need to develop expertise in new markets / segments