ITES/BPO–Opportunitytomoveupthevaluechain?January13,2004Thisreportissolelyfortheuseofclientpersonnel.Nopartofitmaybecirculated,quoted,orreproducedfordistributionoutsidetheclientorganizationwithoutpriorwrittenapprovalfromMcKinsey&Company.ThismaterialwasusedbyMcKinsey&Companyduringanoralpresentation;itisnotacompleterecordofthediscussion.PresentationatiTECH2004Source: Gartner;Dataquest;Aberdeengroup;McKinseyanalysisSupply-sideenablersTelecomcostsdownby90%inthelast3years;world-classreliabilityOver2.5millionlow-costtalentedworkersincountriessuchasIndiaandPhilippinesEmergenceofacrediblevendorcommunity0.00.81.01.82.0199219931994199519961997199819992000200120022003EBPOtotalrevenues-Indiaexample*$billionCONTEXT:BUSINESSPROCESSOFFSHORINGHASEXPLODEDINTHELASTFEWYEARS…EncouragingtrackrecordofearlymoversDemandingU.SmarketenvironmentSuccessfultrackrecordofI/ToffshoringDemandsideforces1“TechjobsleaveU.S.forIndia,Russia.Who’stoblame?”–July2003“Isyourjobnext?”–February2003…BUTHASALSOCREATEDGREATANXIETYINPRIMARYMARKETS“AmericanlegislatorsareaccusingIndiaofstealingjobs”–June2003“America’spain,India’sgain”–January2003“3.3millionU.S.servicejobstogooffshoreby2015”–November2002“CanAmericaLoseTheseJobsandStillProsper?”–July2003U.S.House

Sub-businessCommittee2INTHISCONTEXT,SEVERALDOUBTSHAVEARISENABOUTTHEFUNDAMENTALLONGEVITYANDEVOLUTIONOFBPOASANINDUSTRYWilltheBPOphenomenonplateauoutinthenextfewyears?Evenifitsurvives,movingupthevaluechainwillbedifficultandwilltakeseveralyears?Valuechainmoveswillbethedomainofcaptivesbecausethetrustrequiredistoohigh?3INTHISCONTEXT,SEVERALDOUBTSHAVEARISENABOUTTHEFUNDAMENTALLONGEVITYANDEVOLUTIONOFBPOASANINDUSTRYWilltheBPOphenomenonplateauoutinthenextfewyears?Evenifitsurvives,movingupthevaluechainwillbedifficultandwilltakeseveralyears?Valuechainmoveswillbethedomainofcaptivesbecausethetrustrequiredistoohigh?40.33 * EstimatebasedonhistoricalU.S.reemploymenttrends Source: McKinseyGlobalInstitute1.OFFSHORINGACTUALLYGENERATESGREATERVALUEFORTHEGLOBALECONOMYTaxes($0.04)Revenues($0.20)Localsuppliers($0.09)...delivers

valuetoIndia...0.67Costsavings($0.58)Goodssold($0.05)ProfitsfromIndianventures($0.04)...bringsreturns

toU.S....1.45-1.47...andmakestheglobalpiethatmuchbigger0.45-0.47...createsnewvaluefromre-employingU.S.labor*

...$1previously

spentinU.S.,

nowoffshoredtoIndia...$1.0050.030.330.100.090.100.01ProfitsretainedinIndiaINDIACAPTURES33CENTSFROMEACHDOLLAR

OFSPENDOFFSHOREDBYTHEU.S.Valueaccruedfrom$1ofU.S.spendoffshored1Dollars;2002Centralgovern-ment3Stategovern-ment4TotalvalueaccruedtoIndiaLaborSuppliers2Offshoringsector 1 EstimatedusingtheIndiaoffshoredservicesindustrycase 2 Includesrevenueaccruedtothesupplierindustrieslesssalestaxes,incometaxestoemployeesandcorporatetaxes 3 Includesincometaxfromlaboremployedintheoffshoredservicessectorandthesupplierindustriesandcorporatetax

onthesupplierindustries 4 Includessalestaxonthesupplierindustriesandrevenuefromthesaleofpowertooffshoredserviceproviders Source: McKinseyGlobalInstitute6JOBSOFFSHOREDWILLBEASMALLFRACTIONOFTHESHORTAGEINELIGIBLEWORKERSNumberofworkersMillions,2000-2015 Source: U.S.Census;McKinseyGlobalInstituteJobsprojectedtogooffshoreDeclineinworkingpopulationduetoaging7JOBSOFFSHOREDAREAFRACTIONOFALLMASSLAYOFFS 1 Bureauoflaborstatisticsdefinesmasslayoffsasjoblossactionsleadingtothedisplacementof50ormoreworkersbyagivenestablishmentduringa5-weekperiod 2 Average1996-99 3 Average1989-2000 4 Average2003-13 Source: NBER;BLS;Kletzer;McKinseyGlobalInstituteAverageannualmasslayoffs1MillionsAllmasslayoffs2Offshoringprojection4Trade-relatedlayoffs38Economicvalueofoff-shoringrealOff-shoringcreates40-50%greatervaluefortheglobaleconomyIndiacaptures33%ofeveryoff-shoreddollarwhiletheUSretains67%andtheincremental40-50%valuecreationOff-shoredjobssmallfractionofexpectedretirements/lay-offsTHEREFORE,BUSINESSLOGICWOULDINDICATETHATBPOHERETOSTAY…BUTWILLREQUIREHANDLINGCUSTOMERCONCERNSWITHCOMPASSIONNegativeemotionalimpactatthecustomerequallyrealRealpeopleandcommunitiesareeffectedRe-trainingtakestimeManufacturinghang-overstillfelt9INTHISCONTEXT,SEVERALDOUBTSHAVEARISENABOUTTHEFUNDAMENTALLONGEVITYANDEVOLUTIONOFBPOASANINDUSTRYWilltheBPOphenomenonplateauoutinthenextfewyears?Evenifitsurvives,movingupthevaluechainwillbedifficultandwilltakeseveralyears?Valuechainmoveswillbethedomainofcaptivesbecausethetrustrequiredistoohigh?10Completedthefirstroundofoff-shoringsuccessfullyBuiltsubstantialscaleinoperationsinIndiaPenetrated1-2businessesindepthStartedcapturinglabourcostsavingsBase

A:“Accelerate,extendbreadthanddepth”IncreasebreadthanddepthofservicesStrengthenandstabilizearchitectureInsource-outsource,onshore-offshorearchitectureGlobalhubarchitectureStrategicoutsourcingB:“Re-engineer”DrivetowardsoperationalimprovementTasklevelandprocesslevelreengineeringConsolidationandaggregationoffunctionsLeveragelowcostpositiontostartofferingnewservicestocustomersandimprovecompetitivepositioninhomemarketsC:“Externalize”TakerobustplatformsexternalandcreatevalueoutofthesharedservicesutilitySpecializedservicebureauGenericthirdpartyBPOproviderD:Tackletough(butlarge)industriesFOURPOSSIBLEVALUECHAINMOVESPOSSIBLE11Simple,standardizedactivitiesAdvanced

technicalskillandsomejudgmentrequiredExtensive

judgmentandanalyticalskillrequiredA.MOVESUPTHEVALUECHAINALREADYHAPPENINGINTERMSOFBREADTHANDDEPTHOFPROCESSESOFF-SHOREDAXAInsuranceclaimsprocessingCitibankCheckprocessing,accountapplicationprocessing,loanprocessingbyasubsidiary(e-Serve)HSBCAccountopeningandclosing,retailloanprocessing,mortgageprocessingAmericanExpressLivebrokerageadvicefromqualifiedagentsthroughavendorinthePhilippines(eTelecare)Extensiveoffshoringofcreditcardservices(includingriskmodelingandcreditevaluation)ExtensivefinancialanalysesGECapitalBusinessSolutionsRiskmodeling,actuarialservices,underwritingCitibankCreditcardprocessing,collectioncalls,inboundandoutboundservicecentersHSBCInboundcustomerservicecenterformortgageCapitalOneInboundcustomerservicecenter,outboundtelemarketing(MSourcE)CitibankFinanceandaccountingGECapitalInsuranceclaimsprocessingOutboundtelemarketing,inboundcustomerserviceMBNAProcessingofonlineapplications(TransWorks)GECapitalPayrollaccountingInvoiceandpaymentprocessingMcKinsey&CompanyResearchandknowledgemanagementforworld-wideofficesinGurgaonGECapitalRiskanalysis,strategicplanningandforecastingFinancialstatementanalysisExamplesofsector-specific(“vertical””)processesExamplesofcorporatecenter(““horizontal”)processesGEUKautoapplicationsdataentry12INFIs,VENDORSATPOINTOFSERVICINGTHEWHOLERANGEOFCOREBANKINGANDSUPPORTPROCESSESSource:Vendorinterviews,literaturesearches,vendorwebsites,McKinseyanalysisSampleprocessesTelesalesCustomerserviceTechnicalsupporthelpdeskE-mailsupportFaxresponsesLiveinteraction(chatroomcustomerservice)CustomerfacingVoiceNon-voiceInboundOutboundTelemarketingCollections(bucketone)Businessprocessoff-shoringservicesBenefitsadministrationPayrollprocessingRetailbanking(accountmaintenance,opening,checkprocessing)FundadministrationReferencedatamanagementClaimsprocessingDatabaseintegration&analyticalservicesSecondaryresearchA/RandA/PmanagementReconciliationBackofficeCorebusinessSupportHR/AdminConsumerbankingWholesalebankingInsuranceResearchFinance&Acctg.Illustrativevendors13B.REENGINEERINGANDPROCESSIMPROVEMENTCANPROVIDEADDITIONALGAINSOF30-40%100OriginalcostbaseFactorcostsavingsAdditi-onaltelecom&manag-ementcostsOff-shorelocationcostConsoli-dation,standar-dization&superiorskillsTaskreengi-neeringEcono-miesofscaleProcessreengine-eringNewcostbase60-6510-1545-558-135-73-51530-35DoesnotincludegainsfromrevenueenhancementTaskaggregationandprocesslevelimprovementTaskmigrationTasklevelimprovementFactorcostbenefits(45-55%savings)Additionalbenefits(30-40%savings)14Productivityandprocessre-engineeringEconomiesofscaleAggregatedchequeorderprocessingtasksandbought-incross-trainedagents,whichhassignificantlyincreasedstaffutilisationDecreasedtimetakenformonth-endclosingfrom5to2daysbymodifyingandeliminatingtasksRe-engineering(end-to-end)INFACT,OVERTIMECOMPANIESHAVECAPTUREDADDITIONALPRODUCTIVITYGAINSReduced40FTEsbydigitisingthe‘‘backlining’’processinthecontactcentreTechnologyapplicationEfficiencySource:Expertinterviews;literaturesearchesReducedaveragecallcentretalktimefrom180to100secondsthroughuseofmorequalifiedagentsImprovedtotalcustomersatisfactionscorefrom85%to92%afteroffshoringcallcentreservicestoIndiaBettertalentandtrainingEfficiencyIncreasedfirsttimeresolutionratesfromUSbenchmarkof59%to74%resultinginreductioninrepeatsupportcallsandon-sitedispatchcallsleadingtosavingsof~$2

millionperannum15C.F-1000INSTITUTIONSHAVEINCREASINGLYBEGUNTOREALISEOPPORTUNITIESFORREVENUEENHANCEMENTLivebrokerageadviceformassaffluentcustomersfromSeries7qualifiedagentsthroughvendorinthePhilippines(eTelecare)￡50million/yeargainedthroughrevenueaudits–interline,agent,andusedticketsAbilitytopriceinsurancepoliciesatsignificantlybelowcompetitionleadingto5-7%marketshareimprovementinhomemarketsResearchplatformtoservicecustomersforafee––offercustomizedresearchforstrategiccustomersDevelopmodelingplatformtoprovidefee-basedanalyticalcapabilitiestoSMEfinancialservicescustomers–offercustomizedservicestolargefinancialinstitutionsOffertradefinanceservicestoSMEcustomersthatareotherwiseuneconomicaltoserveOffshoreR&D(pharma,chemicals)usingcollaborationsKnowledgeoncallservicesforcoreclients––customizedresearchandanalyticsRevenueopportunitiescreatedthroughoffshoringPotentialideasforF-1000institutionsCustomisedresearchforglobalcustomers––potentialtocreateplatformtoserviceotherbanks16ColumbiaBank&Trust(laterSynovus)transitionsinternalcredit-cardprocessingbusinessintothird-partycompany(1982)CB&Tsells19%ofcompany

inIPO(1983)TSYSgrowstobecomethesecondlargestprocessorintheworldSIGNIFICANTVALUECANBECAPTUREDBYTRANSFORMINGINTERNALCAPABILITIESINTOTHIRD-PARTYBUSINESSESAmExtransitionsinternalprocessingunitintothird-partycompany(FDR)andsellsoffmajorityownershipstake(1992)FDRmergeswithlargestcompetitorandgrowstobecomegloballeaderintransactionprocessingParentNewbusinessTransition* March1,2002Sources:Hoovers;analystreports;McKinseyanalysisManagementbuyoutofMidlandBankprocessingunitfollowingmergerwithFirstBankSystem(1984)IPOin1986GrowntobecomeleadingprovideroftechnologyandprocessingservicesforfinancialinstitutionsMidlandBank$5billioninmarketcap*,growingat5%CAGRinthelast5years$8billioninmarketcap*,growingat31%CAGRinthelast5years$17billioninmarketcap*,growingat26%CAGRinthelast5yearsValuecreationU.S.$billion17D.NEWINDUSTRIESTHATHAVEPLAYED“WAITANDWATCH”GAMETRADITIONALLYNOWACTIVELYEXPLORINGANDCOMMENCINGOFFSHORING––PHARMACEUTICALEXAMPLEAreaIToffshoringSupportfunctionsAttitudetowardsoutsourcing/offshoringKeyfactorsdrivingincreasingmomentum“Waitandwatch”towardsoffshoringuntillate2001Significantlyhigheracceptancein2002“Triggerspulled””in2003byseveralplayersincludingBMS,Novartis,AbbottMainstreamingofIToffshoringandemergenceofcrediblesuccessstoriesoncostandqualityimprovementsSolidvendorbase(e.g.,Infosys,Satyam,TCS)withproventrackrecordObservedactionsofcompetingplayers!“Waitandwatch”towardsoutsourcingofbusinessprocessthrough2002andearly2003Numerousongoingdiscussionsin2003withvendorsonfinance&accountingandHRoffshoringIncreasingfocusonrationalizingsupportfunctioncostsEmergenceofcrediblesuccessstoriesandvendorsforF&AandHRObservedactionsofcompetingplayersManycompaniesarticulating““overallaspiration”cuttingacrossnumerousopportunitiessuchasIT,BPO,R&DR&DConcernsaroundIPandqualityofmedicalinfrastructurePositiveexperienceoffirstmoversinaddressingconcernsandbenefitingsignificantlye.g.,AZandBMSinR&D;Pfizer&EliLilyinclinicaldevelopment;Novartis&PfizerindatamanagementImprovedmedicalinfrastructureandfavorableregulatoryenvironment18OPPORTUNITIESFOROFFSHORINGEXISTACROSSTHEPHARMACEUTICALVALUECHAINR&DSupportFunctionsIndustrialOperationsStrategicandcommercialbusi-nessplanning(pre-launch)ProductdevelopmentandlifecyclemanagementPricingandhealtheconomicsMarketaproduct(newandlegacy)CustomerrelationshipmanagementCustomerandconsumerservicesSalesmanagementLogistics&distributionAftersalesservicesFinance&AccountingInformationTechnologyHumanresourcesLegalLegalcounselingadvocacyandlitigationIntellectualpropertycounselingSalesforcesupportTargetidentification&validationLeadgeneration&optimizationPreclinical/ToxicologyClinicalDevelopment&TrialsDataManagementNewproductiondevelopmentProcurementPlanningandmanufacturingPlantmaintenanceQualitymanagementProcesscontrolSupplychainmanagementPerformancemonitoringandcontrolCommercialOperationsSource:Interviews;McKinseyanalysisFocusofdocumentOffshorepotential19RECENTACTIVITYPOINTSTOGROWINGINTERESTOFPHARMACOSINOFFSHORING–DATAMANAGEMENTEXAMPLESource:InterviewsGlobalstatisticaloperationsbusinesssystemSavingsofaround40-60%vis-à-visglobalCROswithinfirstyearTargeting80-100globaltrialsin2003Planstostartrelatedareasoffilingandreportwriting,efficacyreportingandstatisticaldesignforPhaseIVstudiesEnteringintoPhaseIreportingforcomplexoncologytrialsandtraditionallyoutsourced,PhaseIVtrialsStatisticalstudydesignStatisticalprogrammingDocumentmanagementDatabaselockingReportwritingandfilingtomedicalauthoritiesOperationsinIndiaStartedoperationsin2001Approximately30statisticiansoutofglobalteamof250locatedinIndiaFocusonstandardsafetyreportingforPhaseIIandIIItrialsReportsfocusedonUSFDAandEMEAOver40globaltrialssupportedinfirstyearofoperationSupporting2megatrialsofover10,000patientrecordseachConductseveralshortturn-aroundanalysesforclinicalpharmacologystudiesNOVARTISEXAMPLE20OFFSHORINGCANRAPIDLYMOVEUPTHEPHARMAVALUECHAINSupportfunctionsFinanceandaccountingInformationtechnologyHumanresourcesR&DClinicaldevelopmentDatamanagement,includingbio-statsContractmanufacturingDrugmanufacturing(TBD)FormulationsdevelopmentCustomchemicalsynthesisR&DBio-informaticsAnaloggenerationSupportfunctionsSalesforcesupportContractmanufacturingNewproductdevelopmentR&DLeadgenerationandoptimisationPhase1:““Earlywins””Phase2:MinimalriskmovePhase3:High-endactivitiesRationaleSignificantexperienceacrossotherindustriesStrongvendorbasePharmasalreadydoingitSignificantbottomlineimpactpotentialvisibleEmergingvendorbaseIPRissuesneedtobeclarifiedComfortaroundAsianeedstobeestablishedOpportunity1234521INTHISCONTEXT,SEVERALDOUBTSHAVEARISENABOUTTHEFUNDAMENTALLONGEVITYANDEVOLUTIONOFBPOASANINDUSTRYWilltheBPOphenomenonplateauoutinthenextfewyears?Evenifitsurvives,movingupthevaluechainwillbedifficultandwilltakeseveralyears?Valuechainmoveswillbethedomainofcaptivesbecausethetrustrequiredistoohigh?22INTHEENDSTATE,LARGEINSTITUTIONSWILLUSEACOMBINATIONOFCAPTIVEANDVENDORFACILITIESExamplesStartedoffhandlingallprocessesin-houseNowoutsourcescallcentreservicestomultiplethirdpartyvendorsStartedoffshoringoperationsbyoutsourcingInadditiontooutsourcing,nowalsorunsacaptivecentreJV/AllianceIndianbest-of-breedvendorDelayOutsourcetoGlobalbrandCaptiveJV/AllianceIndianbest-of-breedvendorDelayCaptiveFromprimarilycaptive……tohybridmodelFeasibilityofoutsourc-ingtheprocessCross-borderoperationsophisticationOutsourcetoGlobalbrand23INFACT,MATUREOFFSHORERSHAVEDEVELOPEDANINTEGRATEDARCHITECTUREOVERTIMEStartedwith150personcompletelycaptiveunitin1994primarilyforbackendprocessingEntryintoknowledgeintensiveactivitiesin2000-01Significantexpansionofheadcountandservicelinein2001GeographicaldiversificationintoPhilippinesin2001ModelThirdparty––PhilippinesReducescountryriskProvidesBCPThirdparty––IndiaExclusivesupporttoAMEXCreatesscalewithminimalinvestmentDiversifiesriskCompeteswithcaptiveandprovidesBCPCaptiveoperationsLeveragesbrand,ImportantforregulatoryissuesPreservesproprietaryprocessknowledge%oftotaloffshoredservices700FTEsVoicebasedcustomersupportforcreditcardoperationsOver2000FTEsacrossvendorssuchasSpectramind,Daksh,EFundsVoicebasedcustomersupportforcreditcardoperationsOver1600FTEsInvolvedinhigh-endandlow-medium-end,proprietary/nonproprietaryservices(e.g.,A/Creconciliation,A/Copeningandclosing,Ledgeractivitiesforcreditcards,A/Cplanningandforecasting,Fraudandriskmodeling)Scale,scopeandmanagementmodel30%50%20%24DELETEDPAGES25RigorousanalyticapproachSponsor-ledapproachOutside-inapproachF-1000PLAYERSHAVEADOPTEDTHREEAPPROACHESTOSELECTPROCESSESFOROFFSHORINGDetailedanalysistoidentifyhighpotentialprocesses,percentIdentifyprocessesforoffshoringbasedonsimplecriteriaSponsorshipfromprocessowner(e.g.,insideGroupOps.inLTSB)Leastorganizationalresistance(e.g.,overflowwork)Lowreputation/servicequalityriskUseexternalbenchmarks(activitiesandphasing)toidentifyandprio-ritizethecorrespondingcandidateprocessinyourorganizationUsebenchmarkinformationonoff-shore-onshoresplitandinternalFTEmapping(foridentifiedcandidateprocesses)tosizetheopportunityFilteractivitiesbyoffshorabilityIdentifyprocesses/activitiesoffshoredbyexistingplayers'Buildandtheywillcome'––allowotherpartsoftheorganizationtodecideonoffshoringattheirownpace26RetailbankingMerchantacquiringFinancialservicessectorswithhighpotentialforoffshoring*RetailbankingMortgagesServicingOriginationLifeandhealthPersonalGroupandhealthPropertyandcasualtyDepositproductsConsumerloansCreditcardsCardissuance&servicingInvestmentbankingResearch7-1110-158-157-125-1010-205-105-125-128-15Percentofcostbaseoffshorable15-2020-2525-3020-2510-1530-4010-1520-3020-2525-30THISHASPRIMARILYBEENDRIVENBYTHESIGNIFICANT35-50%COSTSAVINGSOPPORTUNITY*Assetmanagementmoduleincludingretailbrokeragetobecompleted**DoesnotincludepotentialcostsavingsfromoffshoringITandcorporatecenterprocesses***Non-interestexpense-operatingcostonly,excludinginterestexpense,advertising,andcorporateG&Awhereseparable;assumesinstitutionisa““pure-player”Potentialinstitution-widesavings**35-50%savingsinoff-shoredactivitiesWholesalebankingInsurancePercentoftotalNIE***