Outsourcing with Impact: A Rural American Perspective on Global Outsourcing Rethinking Sourcing Strategies

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1 1 Outsourcing with Impact: A Rural American Perspective on Global Outsourcing Rethinking Sourcing Strategies Issue 1 Rethinking Sourcing Strategies A Closer Look At Onshore Jones Lang LaSalle engages Onshore Outsourcing to improve IT service quality and optimize IT spending North America s oldest retailer engages Onshore to provide contingent low-cost, domestic IT workforce From the Gartner File: Market Trends: Providers Expand U.S. Onshore Delivery, Invigorate Investments in Low-Cost Domestic and Rural Sourcing Options About Onshore Outsourcing Featuring research from

2 2 Rethinking Sourcing Strategies The socioeconomic conditions that spurred the offshore rush at the turn of the millennium are giving way to a backdrop of increasing US unemployment, stagnant wages, increasing monetary risk, and severe geopolitical destabilization. These macroeconomic forces coupled with ever-increasing competition, downward cost-pressure, constant technology disruption, and the realization that the costsavings promised or expected from offshore labor arbitrage never really materialized, are challenging CIOs to reimagine their global outsourcing strategy. Many are now re-balancing their global outsourcing portfolio by integrating a rural or domestic sourcing strategy. Whether referred to as rural sourcing, domestic sourcing, onshoring, farm-shoring, or right shoring, the growing trend for CIOs to seek more localized, low-cost alternatives to complement their global sourcing portfolio is changing the market. These homegrown solutions are reducing costs, eliminating time-zone, travel, and cultural disconnects; improving business outcomes, and diversifying buyers sourcing portfolios. In 2012, Gartner analysts inquiries on the topics of onshore, rural or domestic sourcing have increased 61% over the previous year; a similar pattern is evident in high client interest in the first three months of We believe that outsourcing buyers recognize the need for enhanced collaboration enabled by close (but not onsite) proximity as well as the oftenoverlooked advantage stemming from the closeknit relationships that team members form when Figure 1: Client expectations from rural sourcing Competitive Rates Control/Transparency Workforce Stability Productivity Scalability Talent Pool Collaboration they are uninhibited by cultural and language barriers. They have come to understand that an Onshore model can, in many cases, deliver improved scalability, quality, and agility at a more competitive price point than global outsourcing, especially as they consider Total Cost (TCO) factors such as outsourcing leverage, travel, rework, and the myriad of hidden costs associated with offshoring. Some buyers are influenced by Corporate Social Responsibility initiatives that seek to repatriate jobs, while others are subject to export control laws and data location restrictions. Finally many buyers seek more reliable Onshore alternatives to support initiatives the push toward a managed services model. Source: Onshore Outsourcing

3 3 A Closer Look At Onshore As a first-mover in this emerging segment, Onshore Outsourcing has developed, executed, and proven a comprehensive service delivery structure and operating model that benefits from the natural advantages of a rural delivery model (low-cost, same time-zone, cultural alignment, no language barriers, and stable workforce). Onshore s Rural Delivery Model is built upon three tenets, or towers, as shown in Figure 2. FIGURE 2 Three Towers of the Rural Delivery Model Rural Workforce Development Ecosystems A key tenet of Onshore s rural sourcing model is the inherent agility of our rural mid-american workforce. There are 60 million people in rural America, most of who were completely overshot by the economic and social advances brought by an information technology-centric economy. This has created a natural phenomenon resulting in a highly scalable, yet stable, workforce that is fiercely loyal and asymmetrically motivated to keep their clients happy. Their high level of commitment makes it possible to adjust or configure engagements to different problem sets. Onshore has worked aggressively in Northeast Missouri and Southeast Georgia taking a holistic view of two small, rural towns in order to retool their workforces; overcoming the barriers that prevent people from obtaining meaningful careers in IT such as: education, healthcare, infrastructure, and even childcare. The community impact is profound. The business outcomes are stunning. 2 Source: Onshore Outsourcing FIGURE 3 Onshore Outsourcing Delivery Centers Source: Onshore Outsourcing

4 4 Organic Workforce Development A key differentiator of Onshore is our Rural Organic Workforce Development Model, which leverages our own proprietary methods, tools, and processes to retool workers as IT professionals, with emphases on Software Development, Data Analyst, IT Support, and even Business Support Services. Curricula are often developed to the unique demands of an industry/technology combination, and at times to very specific client needs. Onshore s bootcamp graduates are work-ready and able to support run-the-business engagements enabling essential, non-differentiated services. Most run-the-business functions include things like: Infrastructure investments, IT security, regulatory compliance, break / fix, maintenance, new releases. Onshore benefits from a very high employee retention rate, so our associates are well known by client stakeholders who perceive them as critical or highly important to the fundamentals of delivering continuous business operations and in meeting / sustaining quality of performance levels. Ongoing Leadership Development Onshore s rural workforce builds on the strong foundation of a rural work ethic, technical training received during Onshore bootcamps, and experiential learning gained from working with Onshore s Fortune 500 clients to deliver world class products and services. Onshore employees also benefit from a rigorous continuing education program, including college courses delivered ON- SITE at Onshore s rural delivery centers.delivery Structure and Value-added Processes. Onshore has developed a number of business solution architectures that are comprised of variable team configurations, business and technology patterns, and process models that are instantiated to jumpstart solutions specific to client needs. Our location strategy blends the advanced capabilities of our consultants located in St. Louis and Atlanta, with the very reliable, stable, and low-cost attributes of our rural teams.

5 5 Full Service Outsourcing Firm. A key differentiator among other rural and lowcost domestic pure-plays is that Onshore has evolved into a full-service outsourcing firm with a full complement of run-the-business, grow-thebusiness, and transform-the business offerings. Onshore s unique capability to house software development teams, data analyst teams, help desk teams, and business support teams all under one roof is enabled by the intrinsic asymmetry of motivation that exists in our workforce. FIGURE 4 Onshore Services Service Portfolio Source: Onshore Outsourcing Source: Onshore Outsourcing

6 6 Jones Lang LaSalle engages Onshore Outsourcing to improve IT service quality and optimize IT spending Services Provided: IT Outsourcing Tier 1 Service Desk Industry: Financial Services Rural Delivery Center: Macon, Missouri Business Challenge: Jones Lang LaSalle s tierone support team in Canada was meeting service level agreement targets but their customers were not happy with the service they received; impersonal, poor communications skills, and not focused on owning the problem and taking responsibility for resolving it were common complaints. Solution: Onshore developed a high-touch servicedesk support solution leveraging its rural delivery center in Macon, Missouri. Onshore s rural team supports password resets, access and entitlement management, mobile device setup and syncing, desktop and LAN support and application support services. Onshore also worked closely with the Company to strengthen the overall governance by adopting ITIL-based processes as well as a new approach to Knowledge Management. Six months into the transition, the Onshore team achieved SLA targets and cut the previous operations margin for error in half. Benefits: Significant improvement in the level of confidence end-users have in IT support. Increased sales efficiency Offers a variable pricing model with modular contract terms, helping the company optimize IT spending Reinforces the client s focus on customer service as a key enabler of how IT can drive business outcomes. Source: Onshore Outsourcing

7 7 North America s oldest retailer engages Onshore to provide contingent low-cost, domestic IT workforce Services Provided: Strategic Rural Outsourcing Industry: Retail Rural Delivery Center: Macon, Missouri Business Challenge: One of America s oldest commercial corporations with retail stores throughout the United States and Canada needed a low-cost, stable, domestic workforce to help shift support of legacy applications, freeing key personnel focus on forward-looking, strategic applications. Solution: Onshore built a dedicated, but flexible pool of 27 well-trained resources to support web application maintenance using classic ASP, VB.NET, and C#.net with SQL and vbscript back end processes. Onshore also provided teams to focused on COBOL and Unix applications supporting revenue cycle management and sales efforts. Operating from Onshore s rural delivery center in Macon, Missouri, Onshore teams benefit from close proximity and cultural alignment with key client resources located in nearby St. Louis, Missouri and have become an integral part of client s daily activities. Benefits: A very stable, rural workforce with low attrition A prices structure that is competitive with nearshore and even some offshore firms Contextual understanding of North American retail business practices. Ability to rapidly scale up a new workforce to support transition of operations from Canada to U.S. Reinforces the client s focus on customer service as a key enabler of how IT can drive business outcomes. Source: Onshore Outsourcing

8 8 From the Gartner File: Market Trends: Providers Expand U.S. Onshore Delivery, Invigorate Investments in Low-Cost Domestic and Rural Sourcing Options U.S. buyers expect new onshore service delivery options to complement their offshore sourcing. IT services providers can capitalize on U.S. onshore delivery that is closer to home, including lowercost domestic locations, but they can t lose sight of buyer expectations for business value. Key Findings In 2012, Gartner analysts inquiries on the topics of onshore, rural or domestic sourcing have increased 61% over the previous year; a similar pattern is evident in high client interest in the first three months of Gartner predicts continued growth in IT services providers U.S. onshore delivery presence to satisfy buyer requirements for more proximity in delivering key services where greater business impact not just lowest-cost services is desired. More providers will seek onshore delivery locations in low-cost metropolitan or rural settings that have proven to effectively close the offshore value gap when factoring in both cost (labor rates) and qualitative factors (customer experience). Positive market conditions exist in the U.S. to support providers build-out of onshore capacity, ranging from financial incentives to an untapped U.S. IT labor pool. Recommendations Specialized providers leveraging low-cost and rural sourcing delivery: Continue programs to build a scalable workforce (with local government agencies and universities), and evolve higher-level skills that can deliver business-led value to support greater innovation and differentiation. India-based providers: Expand client-centric and general-purpose delivery centers in the U.S. low-cost delivery settings and promote the total value benefits of U.S. onshore; build expertise in local hiring and train salespeople to sell the client value of onshore services as well as offshore service delivery. Global market leaders and full-service providers: Prioritize onshore delivery centers where a substantial IT labor pool exists, but also where potential for advanced skill sets through university relationships can be developed in shortened time frames. Introduction This document was revised on 28 May, The document you are viewing is the corrected version. For more information, see the Corrections page on gartner.com. In this research, we look at some changing supplyside and demand-side dynamics in the globalization of IT services talent and service delivery. This research focuses on key market trends driving provider investments in the U.S. onshore service delivery model. U.S. onshore options for low-cost domestic and rural sourcing options open new possibilities and reinvigorate investments in U.S. delivery for IT services, ranging from applications and infrastructure services to business process services and emerging technology solutions. For the past decade, the vast majority of global service providers have concentrated on establishing offshore services and a global delivery strategy, either directly or indirectly. 1 While the initial urgency to go offshore was to address the threat of Indian providers competitive threat of low labor costs, over time the move to a global delivery model also proved effective in helping providers drive increased profitability, address the very real aspects of globalization and in some cases, IT skills shortage, which they, along with other organizations, faced in the marketplace. 2 Simultaneously, the Indian providers expanded their hiring in India, while broadening their delivery footprint to other global locations (China, Eastern Europe and Latin America) and U.S. onshore. Changing economic and geopolitical conditions, as well as a level of user frustration with offshore delivery for some work, have driven new considerations on how to evolve the global delivery model.

9 9 With more than a decade of perfecting the global delivery model, providers and buyers have learned best practices in process and methodologies to make global sourcing work effectively. They have learned what does and doesn t work well in remote delivery via offshore models. We are now at a tipping point in the evolution of the global delivery model for IT services, where more balance and more holistic global delivery models are being used. In addition to offshore and nearshore delivery, the benefits from onshore service delivery are growing in recognition. Gartner research indicates that opportunities exist for service providers to establish a U.S.-based labor pool (hire experienced, train, or recruit new hires through university programs) to complement offshore strategies and deliver a competitive set of benefits that clients seek. Many providers serving the U.S. market have demonstrated how quality, scalable, and lower-cost IT labor pools can be developed onshore specifically leveraging smaller metropolitan locations for lower-cost delivery and rural settings. Offshore service delivery strategies will continue to be developed, but providers must focus on building labor pools that bring enhanced value and quality, as well as competitive IT labor rates. Note: Sandra Notardonato contributed to this report. Premise of Research Our hypotheses for this document are the following: Many providers have been stealthily building their U.S. onshore delivery strategies, proving the efficacy and success of this model, and applying creative ways to bring client value and develop skills. There is still a window of opportunity for these and other providers to further exploit the potential for expansion of U.S. delivery locations, particularly in untapped low-cost domestic and rural centers, and with university/ college partners. The attractiveness of a U.S. onshore/low-cost delivery model entails a combination of many factors that must be balanced (skills, cultural alignment, client experience, value and cost). Providers striving to compete on cost alone via a U.S. onshore/low-cost model are doomed to fail; providers that effectively develop their U.S. onshore strategy to address client needs will increase their chances of success: Quality skills at competitive rates, with a total cost perspective Ability to favorably impact business outcomes Access to critical skill sets that will increase competitiveness This Market Trends report focuses on the U.S. IT services market. We review the market context, examine the most important trends shaping the U.S. onshore market, and review provider types/ strategies to use U.S. onshore strategically to demonstrate the viability of a dedicated onshore strategy to support U.S. clients. Our strategic guidance for providers focuses on an opportunity to capitalize on buyers willingness to adopt U.S. onshore delivery through understanding market trends, and new options and alternatives for global delivery in the use of U.S.-based resourcing, including low-cost delivery and rural sourcing. Definitions Gartner has published extensively on the definitions terminology for global delivery of services, such as offshore, nearshore, onshore, and on-site options. 3 For this report, the following are the most relevant and valuable to provide clarification for U.S. onshore strategies: Low-Cost Domestic: The delivery of IT services resources in domestic locations (either onsite on the buyer s premises or onshore at a location beyond the buyer s premises but in the same country). These locations could include smaller metropolitan locations, economically challenged metropolitan locations, or rural areas where salaries and operating costs are typically lower. Rural Sourcing: An alternative to low-cost delivery premised on low-cost labor from nonmetropolitan settings. Rural sourcing relies on delivery from suburban or semiurban areas (small/very small cities) for two purposes even lower cost and lower attrition (due to limited other employment opportunities in those areas). Pure-play rural sourcing firms

10 10 are typically domestically headquartered and provide only rural sourcing options to their outsourcing clients. Offshore Services: An overarching term to describe the incorporation of globally dispersed creation and consumption of IT-enabled services (domestic and nondomestic resources). Domestic service delivery includes on-site or onshore services, and nondomestic service delivery includes nearshore or offshore. On-site refers to services performed on company premises; onshore refers to services performed away from company premises but in the same country; nearshore refers to services performed in a country near the client company s location (shared physical border, or time zone proximity); and offshore services refers to services performed in a remote country/region. Market Trend Pendulum Swing: From Offshore Global Delivery of IT Services to New Focus for U.S. Onshore Strategies The U.S. market was the global trendsetter for broadly embracing the offshore service delivery model more than a decade ago. While some of the earliest adopters of the offshore model built captive centers (GE Capital Service, American Express, Citibank, HSBC, to name a few), soon these and other large organizations turned to India-based and global IT services providers for offshore support. The services taken offshore were initially application services, but quickly this expanded to business process outsourcing (BPO) and infrastructure and some selective counseling. U.S. organizations tested and quickly embraced the offshore service model to access considerably lower IT labor rates and a talented labor pool. IT services providers responded (at varying speeds) with more investment, commitment and expertise to build an offshore presence (at first for application services and call center activity, but then into other service areas BPO, infrastructure, SAP, Oracle, and so forth, and most recently, consulting). The offshoring trend had a resulting impact on the U.S. IT labor market IT jobs took a big hit as work moved to Indian resources. IT careers became less appealing and, as a result, fewer U.S. graduates pursued IT degrees, leading to the IT skills gap that is widely debated today; recent unemployment reports show that the unemployment rate in the IT sector is 3.3% less than half the national average. Changing Demand-Side and Supply-Side Conditions in U.S. Market Nonetheless, today Gartner identifies changing conditions that have led to a pendulum swing from offshore-centric thinking to more considerations of onshore delivery options in the U.S. market in essence, a more balanced and holistic view of global delivery. Gartner Client Interest and Research Findings Some noteworthy indicators of greater interest in the U.S. onshore trend include the following: User inquiries and vendor briefings identify the following IT services as being most often exploited in U.S. onshore delivery: application design/development, use of agile development projects, staff augmentation for software support; solutions development/integration (including new nexus technologies), application management; testing services and customer contact services. Gartner analysts have also noted new trending on U.S. onshore delivery topics, with increases in inquiry levels and proactive provider communication over the past three years: Emerging specialty providers, with specific U.S. rural and low-cost domestic delivery strategies, have escalated their communication, along with their participation at Gartner s U.S. Outsourcing Summits. Many of these providers are doubling their head count and growth year over year, validating client adoption of onshore delivery. They are also forging highly publicized relationships with towns and partners, and with universities (to build talent development degree programs). Comparisons of their pricing with offshore (mainly India) substantiate that in some cases, clients find them slightly more costly or even less costly when looking at the net cost of onshore delivery versus offshore. Although this is a small sector with a limited number of employees, these emerging players are showing great creativity in developing their talent pool, and have effectively displaced some of the larger providers based on their pricing and value.

11 11 We see an increased number of marketleading IT services providers reporting their expansion of U.S. onshore delivery with the formation of new delivery centers established in notably low-cost locations. Although some of these centers have alignment with key clients, other centers are specifically intended to develop new talent pools. In 2012, Gartner s inquiry database showed increased activity in onshore delivery topics. Gartner analysts inquiries on the topics of onshore, rural or domestic sourcing have increased 61% over the previous year; with a similar pattern in inquiry numbers evident first three months of Buyers Trend U.S. Buyers Evolve Their Global Sourcing Strategies to Reconsider Onshore Services Some U.S. organizations many with more than a decade of using offshore sourcing strategies are taking their experiences and learning from global sourcing to evolve their next-generation sourcing strategy. They are more discerning as to the why and when and where of global sourcing. We would not classify this as displacing offshore but rather evolving global sourcing which, for many, means developing onshore strategies. Some will build U.S. captive centers to enable this; more will turn to IT services providers. With higher maturity and applying experiential learning, buyers now examine not only the type of work to place in a global model, but where the work is optimally performed, where the best skills can be found, and where the optimum physical locations can support the desired relationship model: Buyers are looking for business impact not just lowest-cost options. Gartner s 2013 CIO data validates this finding, with increasing enterprise growth again the top business strategy (while reducing cost is No. 3). Delivering business solutions is again the top CIO strategy (while reducing the cost of IT dropped to fourth position from No. 2 position in 2012). 4 The value of IT and IT services must support these objectives. Innovative U.S. organizations that have gotten high competitive benefits from offshore service delivery are now examining a more holistic model; specifically they are giving onshore delivery strong consideration in a global delivery strategy for services or functions that benefit from more-localized support. Some will consider a captive model still others will look to service providers to develop the delivery capabilities. Reassessment of enterprise maturity meant that some organizations also began assessing what work was best-suited for offshore delivery based on their own enterprise maturity, as well as the type of delivery work being performed. Application development, such as agile development, was often strained when using delivery resources that were far away in vastly different time zones. Other U.S. buyers have expressed concerns to Gartner that they offshored too much, offshored too quickly, or had sent the wrong work offshore. These buyers are candidates to readjust their global sourcing model and evolve an onshore strategy to address less-thansuccessful experiences. U.S. government (federal and local) sourcing executives, seeking new and innovative ways to meet objectives for lowering IT costs (but in compliance with regulations) are considering low-cost delivery centers and rural sourcing options. U.S. organizations lacking experience in using offshore (or that have expressly avoided offshore) are amenable to considering external providers to complement internal staff for specific point services or outsourcing need. Some small and midsize organizations will consider a smaller provider with a low-cost onshore or rural sourcing model to deliver benefits. U.S. organizations became more cognizant of hidden costs of the offshore delivery model that impaired quality, agility or user satisfaction: time zone separation causing delays, cultural misalignment, language issues, faulty communication of ideas, inadequate project management across regions, and lack of innovation are some examples. Macrofactors and Trends Favor Onshore Delivery Consideration Complementing shifting buyer sentiment for value, Gartner identifies the following underlying trends leading to an increased attention to use U.S. onshore delivery strategies.

12 12 Impact of macroeconomic change on labor rates Rising labor costs in many emerging countries have continued. India and China, for example, experienced annual labor increases in the range of 10% to 20% (although recent trends are below 10% in some countries). At the same time, depressed economies in mature markets effectively caused labor rates to fall in home markets. While labor rates are, and will remain higher in mature markets, the extreme difference in labor rates with India and China is moderating, and local currency appreciation has further moderated the India or China advantage. Political issues favor U.S. job creation As the recovery in the U.S. languished, and as more government bailout money went to protect companies from failure, widespread consciousness of the importance of job creation in the U.S. increased. Some deemed these moves politically inspired protectionism, but other business leaders considered it prudent to bring work back onshore. 5 (Government bailout in industries such as financial services actually prohibited offshoring jobs.) H-1B visa and immigration issues Core to the India-centric providers and other outsourcers is importing technical talent to the U.S. market on H1-B and L-1 visas. In fact, government data shows that some Indian firms are the top recipients of visas, yet the applicants for U.S. work visas exceed the allowed (in April 2013, of 124,000 recent visa applicants with job offers, only 40,000 received visas). 7 Although the cap on visas could increase, based on newly proposed legislation, U.S. visa policies and current restrictions make it unpredictable for providers to rely on importing talent to fulfill U.S. positions; hiring U.S. domestic-based talent becomes an important option. Furthermore, The Border Security, Economic Opportunity, and Immigration Modernization Act of 2013 suggests the following changes, which if passed, could disrupt the current offshoring model and potentially act as a catalyst to lowcost domestic and rural sourcing: H-1B-dependent employers, defined by a specific percentage of the U.S.-based workforce on visas, will incur higher costs than normal users of the program. The bill prohibits companies whose U.S. workforce largely consists of foreign guest workers from obtaining additional H-1B and L visas. The bill would require recruiting American workers prior to hiring an H-1B nonimmigrant. New authorities and penalties to prevent, detect, and deter fraud and abuse of the H-1B and L-1 visa systems by fraudulent employers. Offshore talent issues emerge that compromise quality With success and growth, opportunity in the Indian labor market soared, resulting in widespread country-level talent issues: rising attrition from revolvingdoor hiring, inconsistency in talent quality, unprepared workers, ineffective project management (due to time zone differential), and difficulties from language, cultural, and time zone challenges. Gartner inquiries on the topic of India s rising rates and declining quality have been common. Other industry sectors reverse offshoring Most notably, manufacturing is a key sector that has gained widespread coverage in national/international media for reversing the global labor arbitrage trend. Major brands (GE, Google, Ford, and Caterpillar) determined that critical value and innovation suffered, or was lost, in separating manufacturing from design and marketing. They also discovered that process innovation in onshore (U.S.) manufacturing, coupled with high costs of oil (affecting transportation) resulted in U.S.- manufactured items being less expensive to design/build in the U.S. 8 When these noted bellwether companies with leading global CEOs publicly take a new strategic position, other sectors also reconsider their strategies in this case, for the potential onshore strategies even as it pertains to IT. As mentioned before the economic benefit of a depressed dollar is a major driver of this trend. Market Trends That Challenge Providers Abilities to Adequately Address Onshore Service Demand Despite the user dynamics of U.S. onshore potential, the shift is not without challenges for

13 13 providers. Probably the greatest one is in building or, in some cases, rebuilding a U.S. onshore delivery talent base. This also entails building out the physical locations, and investing to ensure an adequate, scalable talent pool. Some factors are indisputable: The U.S. IT sector took a hit in the first wave of offshoring when U.S. jobs went offshore. Although there is disagreement as to the true extent of the IT skills shortage (as well as alternative theories of science, technology, engineering and mathematics (STEM) skills shortage as a broader topic, 9 the offshore trend has had a negative impact on IT career development in U.S. universities for several years. Enforcing the view that an IT skills gap exists, the 2012 study from the Computing Technology Industry Association (CompTIA) 10 found that: Of 502 U.S. employers, 93% indicated there is an overall skills gap (a difference between existing and desired skills levels) among their IT staff. Eighty percent of organizations said their business has been affected by this skills gap: Staff productivity (41%), customer service/ customer engagement (32%), security (31%), and speed to market (20%) are some of the factors. Note: Although these respondents are from multiple vertical sectors, a similar backdrop influences IT services providers ability to find talent. Competitive issues in finding skilled IT workers especially value workers and experienced managers are corroborated by providers who identify these challenges: Aging workforce Anecdotally, providers acknowledge the impact of an aging IT workforce in the past 10 years; while U.S. IT skills were not being developed due to the offshore trend, knowledge workers (especially of legacy environments) were also dropping out of the U.S. talent pool as workers reached retirement age. New IT skills, such as cloud, mobility, social, and analytics On the other hand, the development of new skills is of paramount importance for providers U.S. skill sets; the dynamic nature of IT and the evolution of skills to include cloud, mobile, analytics/big data and social mean that training programs for these new skills may not even exist. Providers must creatively lead the market to bring these new skills. University programs must ramp up IT programs to support development of these new technologies. Scalable labor pool The other clear labor challenge for providers in the U.S. market is scale potential. Although some low-cost domestic areas can provide some immediate level of skilled IT workers (say, from military or corporations that have exited certain facilities), it is the long-term ability to scale that matters. On the positive side, providers report that addressing the labor challenges is occurring in pockets, where state/local universities are rebuilding IT career/degree programs. Some of this new development is occurring and gaining visibility at a national level; a recent report from the National Association of Colleges pointed to Computer Science and Engineering careers as bringing the highest average starting salaries for 2013 graduates with very strong annual salary increases. 11 Gartner is also aware of providers working directly with universities and colleges to build their talent pool, for example: CGI has developed formal relationships with the Ohio University and Hocking College to support its Athens, Ohio, center. 12 Eagle Creek Software Services and the state of South Dakota, in conjunction with the University of South Dakota, Vermillion South Dakota, have launched a new scholarship program to bring 1,000 IT jobs to the state in the coming three to five years. 13 IBM Global Services expansion of a delivery center in Baton Rouge Louisiana, includes investing in a high-performance computing center at Louisiana State University and prioritizing digital media skills development. 14 Market Structure Trend Provider Categories: Strategies Used by Service Providers to Develop U.S. Onshore Strategies Different provider types pursue different strategies to build U.S. onshore delivery. We have seen client-centric expansion strategies (establishing U.S. onshore delivery that satisfy the needs of a particular key client) and location-specific strategies (establishing U.S. onshore delivery based

14 14 on a more generic approach of finding a favorable location that supports a broader strategy). Both have proven effective and support the strategic value that the provider seeks to deliver. For example, in discussing with service providers how they respond to buyer trends in U.S. onshore delivery strategies, the following common themes tend to align with provider types: Specialized providers leveraging low-cost and rural sourcing delivery Will emphasize how onshore delivery addresses buyers who have experienced dissatisfaction, or fatigue with offshore services, or who have quality concerns (attrition, productivity) of the offshore model; they will emphasize the productivity of their onshore talent and the suitability for particular tasks to be done through U.S.-based resources. Many also have specific U.S. jobscreation motivation, to include jobs for military personnel. Many can also offer compelling proof of the price competitiveness of using U.S. talent from nonmetropolitan resources when looking at the total cost of services (for example, quality first-time right is considerably less costly than the total cost of reworks, impact on client satisfaction, or even business performance). The majority of these specialty firms have less than $100 million in annual revenue and fewer than 500 resources. India-based providers Will address client expectations for localized talent and skills through establishing U.S. onshore options; their onshore model will complement the offshore labor pools, but harmonize globally consistent processes. Many will establish major delivery centers near key clients, and some of these centers will be dedicated to a single client. Current visa legislation suggests that this segment s U.S. workforce would include fewer workers from offshore on H1-B visas, and more local hires, based on the laws prohibition to importing skills based on specific criteria. Although some of these providers have already started to establish some centers in the U.S., we expect an increase in capacity build-out, and more important, expect the prototypical staffer to be more U.S.-centric. As a result, the costs of doing delivery will increase, which will force the India-based providers to establish multiclient general delivery centers and deploy more technology-based solutions offset higher labor expenses Global market leaders and full-service providers Will focus on ways to optimize their long-standing investments and commitment to workers in the U.S., their ability to invest in and evolve a U.S. onshore delivery model on par with their offshore expansion efforts; they will emphasize worker quality and scalability, their responsiveness to client needs (especially premier clients), and their advanced skill set available in the U.S. market. They will target locations where scalability of talent pool exists, invariably near major universities with computer science and engineering specialization. Client Value Potential From U.S. Onshore Delivery Client values premised on tapping into U.S. onshore delivery (and the potentially lower labor rates from low-cost domestic/rural locations) are extensive: Ease of use and less disruption to use U.S. resources particularly for first-time users of external providers due to language, cultural similarity, time zone, and so forth. Potential for more innovation from client/ time zone proximity and higher success in specific technology skills/methods, such as agile development and knowledge process outsourcing) and in utilizing emerging IT skill sets trained in U.S. universities. Tax advantages and incentives (which lower cost of operations, and can be passed on in pricing). Greater control of regulatory and compliance guidelines (for example, processing certain date within country), security with cloud-based services, specific industry compliance for IT and data. Derisking strategy (too much work offshore or in one location) for geopolitical and economic issues, higher comfort level with U.S. resources and assurance of knowing who is doing their work, where they are, and how to contact them readily. Still cost-conscious, but... sentiments reveal that buyers still need to focus on cost of services, but without sacrificing quality,

15 15 reliability, productivity, or user experience, which was sometimes experienced in offshore models. Pricing/value of onshore outweighs lowest cost of offshore services when client business objectives are successfully delivered: Example: Gartner research finds that on an hourly basis, U.S. onshore rates will be greater than offshore rates, even in the lowcost domestic or rural settings. For example, Gartner estimates that Indian rates for the market-leading providers range from $24 to $29 per hour for mainstream skills (that is, an entry-level person with one to two years of experience) while the comparable skills labor rates in a U.S. low-cost delivery center would be $45 to $85 per hour. However, when assessing the total costs or true cost of the offshore-delivered services versus onshore delivered services, there is often a very different picture: True costs involve hourly labor costs + quality + client experience + outcomes. The first time right argument can be compelling proof that onshore can be less expensive than lowcost Indian labor rates). Also supporting the value proposition is a more positive client experience due to a more stable workforce and high retention, thus the recruiting, training, onboarding costs are lower per person. Performance of onshore may be more desirable than offshore or nearshore for key services for the following reasons: Agile development is an example of a growing application development technique that delivers more consistency in productivity and project success when using an onshore model. Recent Gartner pricing analysis for help desk services found that work was shifting away from India due to lower-than-required Level 1 first-call resolution and customer satisfaction results; and similarly, nearshore-delivered performance for Level 1 support was also low. This has resulted in a replacement strategy for some clients who have moved work back to North America via rural and nonrural support capabilities. Rurally-sourced services proved a more competitive location with better performance, and other U.S. onshore (nonrural) provided better Level 1 call results. 15 More innovation possible: Many U.S. organizations thought they were less innovative when technical teams were so widely separated from the business users. Location Selection for Onshore Delivery Centers Onshore development and localization efforts are sometimes driven by client-specific requirements (opportunistic) or near centers of industry concentration. These locations are often in smaller metropolitan locations, sometimes by coincidence. Other approaches can be to optimize locations for adequate resource pools and ease of transportation, or to tap into unexploited areas where talent exists or can be developed. Some providers have evolved a formula that supports their strategic commitment to developing and evolving their U.S. onshore strategy, which entails: A formal, and typically repeatable, strategy and decision-making process for location selection Dedicated, executive leadership with expertise in launching onshore centers involved in the process A value proposition to their clients that explicitly relies on the onshore delivery strategy (cost, value, and so forth), and that is aligned to support broader strategic initiatives and is prioritized in their communications Choosing a U.S. Onshore Location For service providers that take a multifaceted approach to finding and evaluating prospective locations to establish U.S. onshore presence, their focus is typically not to simply find the locations that offer the absolute lowest cost (wages and operations) although the benefit of low wages is a core attribute in selection to close the price gap with offshore pricing. Without exception, providers interviewed by Gartner pointed out that lower cost of operations is just one piece of the puzzle to find the ideal location.

16 16 Although providers have developed individualized strategies for U.S. onshore location priorities, most of them mentioned the following considerations in their location selection: Proximity to IT talent pool: Pre-existing IT talent that can be readily hired and trained in the city/region, perhaps from other industries that had been large IT employers that have closed offices/relocated, in cities that have suffered economically, or even military bases. Future access to IT skills (through universities/ colleges) is also critical. Proximity to colleges/universities: Developing future talent is critical. Proximity to neighboring universities and colleges willing to form partnerships to train undergraduates is considered essential to site selection. Also important is the ability to jointly develop training programs to produce trained graduates (and job opportunities) for scaling the business Low/moderate cost of living: Ideally, U.S. onshore delivery centers are located where cost of living and wages provide competitive benefit. These are usually small metropolitan locations or towns. The rural sourcing model will concentrate on urban settings. This does not negate the possibility of large metropolitan cities, particularly when depressed economic conditions make these cities ripe for regeneration (Detroit, Michigan, for example), but that type of location is less commonly used. Quality of living: Locating in desirable areas where employees value the lifestyle helps minimize attrition and provide stability in the workforce. Favorable political and business climate or where a town/city is seeking business expansion: These locations may have experienced high unemployment or be recovering from economic problems or longterm decline, or even the loss of a once-major employer in the area. The city/town values job creation, and/or welcomes the provider with economic incentives, such as low-cost office space and tax incentives). Economic advantages: Multiple considerations in overall cost of doing business are factored in to decision making (cost of living/wages, real estate costs, communications, and transportation availability. Potential for expansion: Collaborative arrangements with the provider and the local metropolitan/town and universities are not uncommon. This is also indicative of the positive impact U.S. onshore development can have on local economies through hiring and job creation. Potential to have employer of choice status is positive indicator. Technology Trend Technology Trends Open Opportunities for Onshore Delivery U.S. onshore delivery centers for traditional global services providers and, increasingly, the fullservice India-heritage providers, span the full life cycle of application services and functionality, some infrastructure services including help desk support, and BPO, particularly higher-value services that are more cost-effectively supported. However, many initial efforts have focused on the application service space in general. Expertise in IT consulting, software implementation and integration, application testing and user support, solution areas, such as business intelligence/ data analytics, and industry specialization, are also being expanded. The niche specialization firms, due to size, tend to focus on one tower, or one specialty for differentiation for example, application services domain expertise, verticalspecific services/solutions, staff augmentation, or agile development. Some onshore delivery firms are responding to client demand for established older technology needs where skills are scarce (such as COBOL programming). In the future, more build-out of vertical expertise is likely. Client needs for cloud technologies (and associated security concerns), new analytics and knowledge process outsourcing (in BPO) should be considered for onshore delivery, because these jobs require higher-caliber skills, U.S. business knowledge, and having resources in-city to facilitate higher-level interactions. We also anticipate dedicated customer contact solutions,

17 17 e-learning, and mobility support, along with specialized services such as agile development, will be highly suited to requirements for U.S. onshore high-touch involvement with providers and their clients In this evolving U.S. onshore delivery scenario, providers with global delivery strategies will want to optimize (and harmonize) onshore strategies with global strategies, using U.S. onshore to offer higher skill roles (but potentially from lower-cost cities) but continue to offer and utilize offshore or even nearshore delivery for more routine, predictable work, or more transactional where dynamic changes are minimal and processes are more routinely organized. Contrarian View Potential Challenges for Advancing the U.S. Onshore Model What factors could cause the U.S. onshore strategy to be less favorable? We provide four scenarios that could have a negative impact on the growth and optimization of the U.S. onshore model, beginning with the most likely scenarios. Scenario No. 1: The pendulum swings back to offshore, and services industrialization continues; clients are again drawn to lowest-cost options. Given that global delivery (in its truest sense) will continue, the increase in industrialized services may create an environment in which there is less need for IT support. If customized services are required, organizations will be unwilling to pay top dollar for them except for very high business impact: More prebuilt, proven solutions are available out of the box. A diminishing need for IT resources may hit onshore more than offshore, with just a very thin layer of onshore resources required. The real question becomes how much can be industrialized and then where can we access the (reduced level) of customized services we need at the best global price. Scenario No. 2: One scenario, more general in nature, is that the U.S. IT labor market proves inadequate to meet the scale and expertise levels needed for the U.S. onshore option to grow sufficiently and be viable. Although it may be sufficient for large providers to build key delivery centers to meet client-specific needs, or adequate for emerging players to gradually ramp up their onshore labor force over a multiyear period to fuel their growth, the large-scale momentum at the country level must also exist. If confidence and investment do not exist at a country level to rebuild the IT sector, then U.S. onshore delivery will be viewed as the exception We will use U.S. onshore only when absolutely imperative for select IT work. Scenario No. 3: An emerging phenomenon is the advance of crowdsourcing instead of providerdelivered labor pools for individual client engagements. If organizations can effectively get innovation at lower prices through crowdsourced models, this could slow demand for U.S. onshore. This scenario is also a possibility if the U.S. IT labor market is insufficient in scale or quality: Crowdsourcing allows access to global labor pools for application programming, but remains untested and not appropriate for all work. Scenario No. 4: Newly proposed visa legislation passes, which will dramatically increase demand for U.S.-based employees. At first, the cost will be borne by the providers that rely mostly on imported technical talent. Longer-term, the imbalance would act as a catalyst to train the underemployed, increase the graduate pool, and drive greater use of technology to further minimize the reliance on labor. Additionally we could see consolidation of U.S.-centric providers as a means of building scale more quickly. Vendors to Watch The U.S. onshore service delivery opportunity through client-proximate onshore facilities, or low-cost delivery and rural sourcing models is being defined by key players that have seen the opportunity to capitalize on a U.S.-centric labor force for a competitive advantage. As we have discussed, there is always the element of competitive labor rates for service providers. However, providers that accurately judge the market need and leverage other benefits and values (beyond cost) of onshore delivery all the time building an adequate labor pool (skills and scale) will prove the efficacy of the onshore model and the long-term viability of their investments. Providers of different orientation and size/scale are active, expanding their U.S. onshore strategy. Table 1, not an exhaustive list, gives some examples of leading provider types that have explicit strategies for developing the onshore model for competitiveness and client value proposition.

18 18 Table 1. Examples of IT Services Providers With U.S. Onshore (Low-Cost Domestic or Rural Sourcing) Model Provider Website U.S. Onshore Strategy Locations (Examples) Specialized Providers With Low-Cost Domestic and Rural Sourcing Models Alpine Access Access to home-based employees. Alpine Access offers distributed workforce solutions and capabilities, including virtual contact center services, SaaS-based talent management platforms and services, security solutions in the cloud, and consulting services. Catalyst Specialization on agile development projects; commitment to on-site personnel in 24-hour time frame; unique hiring model and analyticsbased team assembly Collaborative Consulting Specialization in agile development, testing, BI with globally competitive rates; testing from its Collaborative Domestic Solution Center Cross USA Serves the Fortune 1000; application development for project, staff augmentation, or outsourcing; Rural Development Centers (in small rural locations) Eagle Creek Software Services Galmont Rural Outsourcing OnShore Technology Services services/galmont-ruraloutsourcing/ Dakota Model for rural sourcing delivery; software services for front office CRM, BI, ecommerce; Oracle expertise; formal partnership with the University of South Dakota IT degree programs (undergraduate and master s) Specialty consulting business focused on testing and quality assurance; evolved to include outsourcing with larger Testing deals, and established Galmont Rural Outsourcing to achieve lower labor and operating costs with a high quality domestic talent Targets Fortune 500 clients; BI and architecture, data and infrastructure management, software development, business process outsourcing, and help desk administration Denver, Colorado Baltimore, Maryland; Portland, Oregon Wausau, Wisconsin Eveleth, Minnesota (Iron Range); Sebeka, Minnesota North and South Dakota; Vermillion, South Dakota Lexington, Kentucky Macon and St. Louis, Missouri,

19 19 Provider Website U.S. Onshore Strategy Locations (Examples) RSI (Rural Sourcing Inc.) Early leader in relying on a dedicated U.S. onshore delivery model; application development, testing, analytics, BI Saturn Systems Software engineering services to support SMB, commercial and government Augusta, Georgia; Jonesboro, Arkansas Duluth, Minnesota Systems in Motion Software development, consulting, testing, engineering services WaveCreste Developed Texas rural sourcing model: software services and network management; telecom industry focus, BSS/OSS solutions; spun off from Genesis Networks in 2011 Ann Arbor, Michigan Abilene, Texas Market Leaders: Full-Service Providers With U.S. Onshore and Low-Cost Domestic Delivery Accenture Evolved strategy from starting point of many locations in the U.S. that were downsized due to offshore shift, then shifted to a targeted strategy based on client demand and new workforce models; collaborated to form the Confederated Tribes of the Umatilla Indian Reservation in rural Oregon on the Umatilla Indian Reservation. Capgemini Evolving U.S. onshore delivery to support U.S. client requirements for a more balanced delivery model and support major clients in key centers CGI Strategic expansion of U.S. onshore delivery in response to clients expectations for a more balanced global delivery model; serves commercial and federal/state government clients IBM Focused build-out of U.S. delivery centers to capitalize on skilled U.S. talent force and extend global delivery model at key U.S. centers; targets locations with favorable cost structure and skills access at university Oregon Victoria, Texas; Sarasota, Florida; Kansas City, Kansas Lebanon, Virginia; Troy, Alabama; Belton Texas; Athens, Ohio Lansing, Michigan; Baton Rouge, Louisiana

20 20 Provider Website U.S. Onshore Strategy Locations (Examples) Unisys Expanding U.S. onshore for clients with requirements that cannot be moved offshore; onshore strategy complements Unisys Global Sourcing model India-Based Providers With Onshore and Low-Cost Domestic Options HCL Evolving U.S. onshore presence to complement Indian delivery; address client requirements for time zone, security, compliance Infosys Client-centric onshore delivery centers; focused on building U.S. local and domestic presence; extension of India-centric GDM Mahindra Satyam Low-cost onshore facilities align with broader IT services offering, and extends global delivery processes TCS Complements Indian offshore delivery with U.S. onshore; SAP center of excellence in U.S. center St. Louis, Missouri; Rochester, New York; Salt Lake City, Utah Cary, North Carolina Charlotte, North Carolina; Atlanta, Georgia; Milwaukee Wisconsin Fargo, North Dakota; Eerie, Pennsylvania; Louisville, Kentucky Cincinnati, Ohio Wipro Focused on a U.S. specific delivery centers for U.S. onshore for two primary reasons: specific client demand for onshore and specific practice areas that almost exclusively onshore (public-sector state and local healthcare business and energy and utilities) BI = business intelligence BSS = business support system OSS = operations support system SMB = small and midsize business GDM = global delivery model Atlanta, Georgia Source: Gartner (May 2013)

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