IT outsourcing: between starvation diet and nouvelle cuisine. 32 nd General Assembly Association of Foreign Banks in Switzerland

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1 IT outsourcing: between starvation diet and nouvelle cuisine 32 nd General Assembly Association of Foreign Banks in Switzerland Dr. Jürgen Schaaf Zurich, June 18, 04

2 1 DB Research: Deutsche Bank's think tank 2 IT outsourcing: markets vs hierarchies 3 IT offshoring: the global dimension Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 2

3 1 DB Research: Deutsche Bank's think tank 2 IT outsourcing: markets vs hierarchies 3 IT offshoring: the global dimension Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 3

4 DB Research: Corporate Centre of Excellence g Deutsche Bank s think tank g g g g Top-notch research for board, executive committee and corporate centre Bridge to politics ( economic lobbying ) via agents in Berlin and Brussels Contribution to brand equity Centre for independent risk analysis Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 4

5 DB Research: Organisation Banking, Financial Markets, Regulation Norbert Walter Managing Director Macro Trends Structure of banking systems Strategies of financial service providers Structural issues in national and international financial markets International monetary policy (IMF) Supervision and regulation European capital market integration Banking policy Economic & European Policy Issues Economic policy (regulation, taxes etc.) Old-age provision and pension funds Labour market and social policy Demographics and immigration Issues affecting small and medium-sized enterprises European integration (EU enlargement, EMU, institutional issues etc.) eresearch Internet-driven structural change in financial services, e.g. e-banking, e-brokerage, ECNs, mobile banking Trends in e- and m-commerce Technology and structural change in bank markets A new regulatory framework for the internet society? New economy in Europe Identification and analysis of macroeconomic trends of relevance to Deutsche Bank, e.g. demographics, capital flows, wealth and asset development, long-term growth cycles Analysis of growth, interest rates and exchange rates for the Board of Managing Directors and Risk Management Risk Analysis Country analysis and stress testing of industrial countries and emerging markets Country, event and sector risk rating Participation in various risk committees: Group Risk, Event Risk, Risk and Resources Committees Contribution to industry batches for CRM EU Enlargement Monitor Sector Research Medium-term sector trends Analysis of cross-sector technologies Effects of the internet on key sectors Consequences of the eastward enlargement of the EU for agriculture, energy, construction, textiles etc. Real-estate market research Forecasts in the Sectoral Information System Other related aspects, e.g. effects of demographics on sectors Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 5

6 1 DB Research: Deutsche Bank's think tank 2 IT outsourcing: markets vs hierarchies 3 IT offshoring: the global dimension Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 6

7 German IT outsourcing market is booming Across all sectors of industry, the German IT outsourcing market has already assumed sizeable proportions. IT services worth in excess of EUR 10 bn were contracted out in 03. Growth continues dynamically: By 08 we expect this volume to have risen to almost EUR 17 bn IT outsourcing market Germany % yoy (left) EUR bn (right) Sources: M eta Group, DB Research estimate Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 7

Growth continues dynamically: By 08 we expect this volume to have risen to almost EUR 17 bn.

8 European outsourcing market at high stage with strong dynamics In 03 IT services worth EUR 45 bn in total were sourced out in Europe. By 08 we expect revenues to double to EUR 100 bn IT outsourcing market Europe % yoy (right) EUR bn (left) Source: DB Research, 04 Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 8

1 100 80 60 40 0 IT outsourcing market Europe % yoy (right) EUR bn (left) 02 03 04 05 06 07

9 Banks and insurers are catching up Since the mid 1990s outsourcing activities of banks have increased significantly. Since 00 insurers and other financial services providers have joined the race. Outsourcing contracts in different branches Insurers Other financial services providers Banks Number of outsourcing contracts * 0 *) estimate Source: E-Finance Lab, 03 Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 9

Outsourcing contracts in different branches Insurers Other financial services providers Banks Number of outsourcing

10 and still have plenty to give away Aggregated value of outsourcing contracts in the financial services sector was app. USD 1 bn per year until Sharp rise since then. CAGR ( ): 45% Value of outsourcing contracts in the financial services sector USD bn Total contract value Values of the service per year * *) estimate Source: E-Finance Lab, 03 0 Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 10

CAGR (1990 03): 45% Value of outsourcing contracts in the financial services sector USD bn Total contract value Values

11 Industrialisation of the financial services sector In periods of economic downswing pressure mounts to scale down costs in order to operate profitably. The earnings crisis has considerably heightened cost awareness at German banks. Also strategic reasons independent of cyclical cost pressure argue for outsourcing certain jobs. A leaner organisation that concentrates on its core business lines gains in punch. Vertical integration of banks and industry Automotive industry Electronics industry Banks Proprietary Outside production production Source: DB Research Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 11

Also strategic reasons independent of cyclical cost pressure argue for outsourcing certain jobs.

12 Look before you leap: procurement vs production Core processes Strategic importance General processes Commodity core processes Payment processing Securities processing Retail credits (production and settlement) Infrastructures Data centres Data networks Voice networks Desktop services Core business processes Customer services Sales Product development Risk management General business processes Facility management Procurement Accounting Commoditised processes specificity Specialised processes Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 12

Desktop services Core business processes Customer services Sales Product development Risk management General business processes Facility

13 Information technology as basic technology is indispensable but losing strategic importance IT devices and their use are getting cheaper and cheaper IT is becoming increasingly powerful Penetration of PCs and computer price index, USA Penetration of all parts of our life Its ubiquity reduces the strategic importance of IT, as certain sections degenerate into mass commodity inputs in % of population (left) 1996 = 100 (right) Source: DB Research, 04, Base: ITU, BITKOM Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 13

importance of IT, as certain sections degenerate into mass commodity inputs.

14 Sourcing management beats ownership of resources Standardised IT services require high-quality, trouble-free and low-cost access. Failures would cause considerable damage. Providing these services in-house does not give a company any competitive edge on its rivals. The quality of the sourcing management has strong impact on strategic position among competitors. Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 14

Providing these services in-house does not give a company any competitive edge on its rivals.

15 1 DB Research: Deutsche Bank's think tank 2 IT outsourcing: markets vs hierarchies 3 IT offshoring: the global dimension Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 15

16 IT offshoring: Value chains globally re-linked Via offshore outsourcing companies procure IT resources and processes from cost-efficient low-wage countries, mainly India. Structural shift: services have become internationally tradable. The cost benefits of remote locations can now also be exploited for services. Major reasons: Modern IT enables the digitisation of information-intensive services. That affects a large part of office work. Globally networked telecommunications lines and the tumbling costs of their use are paving the way for the global distribution of digital goods. Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 16

Major reasons: Modern IT enables the digitisation of information-intensive services. That affects a large part of office work.

17 Different preferences for offshore regions in different countries India Offshoring locations of choice* USA 90 India Hungary Central Europe China Slovakia 18 Philippines Canada Czech Rep. Mexico Australia Brazil Ireland % Sw itzerland Romania Austria Belarus Czech Rep. Ireland Liechtenstein Netherlands 9 % *used or planned, multiple responses possible Source: A.T. Kearney, 03 Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 17

Mexico Australia Brazil Ireland 5 5 5 10 10 15 % Sw itzerland Romania Austria Belarus Czech Rep.

18 IT offshoring: shifting of processes on global markets - with impacts at home Eastern Europe Russia India Simplification Standardisation China Philippines High-tech Innovations Cluster of value creation Commoditisation SE Asia For the coming five years we expect processes worth a total of EUR 300 bn to be contracted out. This compares with an estimated EUR 54 bn in 03. Trend: from near-shoring to farshoring Offshoring will put almost 50,000 IT jobs in Germany directly on the line by 08. That is 3.5% of the 1.4 million IT jobs in Germany. Processes and positions with high value creation and strategic importance are kept in the country. Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 18

This compares with an estimated EUR 54 bn in 03. Trend: from near-shoring to farshoring Offshoring will put almost 50,000 IT jobs in Germany directly on the line by 08.

19 Conclusion and outlook IT outsourcing is and will stay a dynamic market in Germany and Europe in the medium term. Especially dynamic growth will come from the financial services industry. IT loses strategic importance as certain sections degenerate into mass commodity inputs. These in particular are sacrificed on the outsourcing altar. Outsourcing IT services is not confined to the geographical borders alone. Moving processes into offshore regions is the logical continuation of the outsourcing idea from a cost angle. As a rule processes and positions with high value creation and strategic importance will stay in the country, though the threat to IT jobs at home cannot be denied. Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 19

Outsourcing IT services is not confined to the geographical borders alone. Moving processes into offshore regions is the logical continuation of the outsourcing idea from a cost angle.

20 IT outsourcing: between starvation diet and nouvelle cuisine 32 nd General Assembly Association of Foreign Banks in Switzerland Dr. Jürgen Schaaf Zurich, June 18, 04

21 CONTACT Dr. Jürgen Schaaf DB Research Download publication e-conomics N o 43 IT outsourcing: between starvation diet and nouvelle cuisine Dr. Jürgen Schaaf, Deutsche Bank Research June 18, 04 page 21

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