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Transcript of Operations Excellene Report 2007
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operational excellence:
february 2007the next frontier inoffshoring
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February 2007
McKinsey & Company, Inc
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The information contained in this report prepared by McKinsey & Company, Inc. is furnishedto the recipient for information purposes only. Recipients should conduct their own
investigation and analysis of any such information contained in this report. No recipient is
entitled to rely on the work of McKinsey & Company, Inc. contained in this report for any
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accuracy or completeness of such information and expressly disclaims any liabilities based
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or distribute the information contained herein without the express prior written consent of
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contentsAcknowledgements 5
Preface 7
Executive Summary 9
Operational Excellence in Offshore IT Services: Process 360 0 11
Operational Excellence in Offshore IT Services: Project 3600
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acknowledgementsMany persons and organisations have assisted the study team in the preparation of
this report.
We thank all the member providers of NASSCOM as well as those providers that participated
in the Process 360º and Project 360º benchmarking surveys, provided data,
and assisted the study team in coordinating individual meetings. We also thank all members
of the Executive Council of NASSCOM, who gave us valuable inputs, suggestions andnecessary direction.
We acknowledge the special contributions of the Steering Committee of this report.
The report has been greatly enriched by the valuable insights and detailed inputs provided
by Ramalinga Raju, Chairman, NASSCOM; Kiran Karnik, President, NASSCOM; Arun Seth,
Chairman, BT India.
Finally, we thank the teams at NASSCOM and McKinsey who painstakingly worked on various
parts of this report and helped complete it.
Noshir Kaka Vivek Pandit
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prefaceThe IT and BPO sectors in India have continued to grow at a fast pace. With exports expected
to grow from US$ 23.9 billion in 2005-06 to US$ 31.9 billion in 2006-07, the industry
continues to be the single-largest foreign exchange earner for the nation, making it a
signifcant contributor to India’s economic development.
The third NASSCOM-McKinsey study, conducted in 2005, confrmed India’s potential in this
area. It validated that exports of US$ 60 billion are achievable by 2010 and noted that therewas room for further growth through innovation. This study also highlighted operational
excellence as one of the key enablers of sustained growth for offshoring in India.
Since then, McKinsey has worked closely with the IT and BPO industries to defne and
measure the operational excellence of providers in these sectors. The assessments
conducted at over 10 IT and 20 BPO providers have produced several interesting insights,
revealing areas where providers are strong and practices they need to work on for
future growth.
This report contains the results of that benchmarking-cum-diagnostic effort and presentsthe key fndings at the industry level. I am sure that IT and BPO providers will continue to
recognise the urgent need to attain operational excellence and work on bridging any gaps
in the coming months. I believe efforts in this direction are imperative for Indian industry to
sustain its competitive advantage in the longer term.
Kiran Karnik
President
National Association of Software and Services Companies
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Operational Excellence: The Next Frontier in Offshoring
In the last decade, Information Technology (IT) and Business Process Outsourcing (BPO)
industries have embraced offshoring in a big way. India has been the major bene ciary of this
wave and is the leading offshore destination at present, having captured 65 and 46 per cent
of the global offshore IT and BPO markets respectively. India’s success is driven primarily by
the fact that providers (whether third party or subsidiaries of MNCs, usually called captives)
have upheld the value proposition of providing quality services * delivered at much lower cost.
Hence, clients of remote IT and BPO services in India are a highly satis ed lot.
But the goal posts are shifting. Our work with global corporations in developed markets and
IT and BPO providers in India clearly indicates that clients’ expectations of their providers
are growing rapidly. To keep up their stellar performance, remote centres in India (and other
low cost destinations) must now provide additional bene ts such as speed, exible operating
models, innovation and productivity enhancements. They can do so only by excelling in
operations.
Over the last 12 months we have worked closely with the industry to develop an operational
excellence framework that can be used to identify what providers are already doing well
and what they need to improve. The toolkit seeks inputs from clients offshoring processes
or services as well as engineers/associates, operations managers and senior executives at
remote centres to provide a 360º view of performance metrics and key operating practices. **
This framework is unique for four reasons. Firstly, as far as we know, this is the rst
operational excellence framework developed explicitly for remote centres. Secondly, by
providing a 360º view, it gathers deep insight into how well various stakeholders are aligned
– a critical challenge in remote centres where end customers, clients and operating teams are
many miles and cultures apart. Thirdly, the framework places much emphasis on identifying
and improving underlying operational practices (such as recruitment, governance, transition
management) that are critical to sustained performance. Finally, the framework contains
an expansive collection of offshore benchmark metrics (captive and third party) across IT
services, BPO and software-product companies.
executive summary
* Of the same quality as those in originating counties
** For more detail or to assess how this framework can be applied to your organisation, please contactNoshir Kaka or Vivek Pandit at [email protected] or [email protected]
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operational excellence: the next frontier inoffshoring10
Named Project 360º (IT services), Process 360º (BPO services) and Product 360º (software
products and engineering services) the toolkits have been deployed at over 30 leading
captives and third party providers across the industry.
Data gathered from these surveys reveals three broad themes:
Clients are satis ed with current remote services and operations: Over 250 customers,
consistently expressed high satisfaction with offshore partners or their captive operations.For example, across Application Development, maintenance and package software
implementation, over 85% of customers said they were satis ed or highly satis ed with the
performance of offshore units.
Performance is, however, delivered through capable people, not institutionalised
practices: Our data have clearly shown that effective practices are not applied consistently
even within the same centre. Performance depends heavily on attracting and retaining
high quality talent (particularly team/project managers), who, in the absence of
institutionalised practices, are still able to deliver effective outcomes.
The presence of “Islands of excellence” shows that centres can enhance performance,with the right approach: Replicating effective practices found in isolated processes or
“islands of excellence” across an organisation is very valuable. For example, in BPO, our
research has shown that the costs of the average captive are 30% higher than those of a
comparable third party provider, due mainly to less effective operating practices.
Having met with great success in the rst wave of offshoring, India is moving rapidly to sustain
its advantage in the face of rising customer expectations and a diminishing talent pool.
Furthermore, the next wave of customers is likely to be less mature than the pioneers and,
in some cases, has unclear objectives and inadequate experience in offshoring. By reaching
the next frontier in operational excellence, India and India-centric providers can maintain theirleadership in a US$ 300 billion potential market for offshore services. Even greater things
must lie beyond.
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•
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process 360 o
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Process 360 o is a benchmarking-cum-diagnostic framework to assess the level of excellence
in globally dispersed BPO centres. The framework evaluates remote processing centres on
12 operating practices critical to superior performance across ve key metrics: (1) cost, (2)
quality, (3) speed and exibility, (4) innovation and productivity and (5) risk. * Twenty-three
of the top 40 BPO providers in India were assessed. In the process, we built a database
containing responses from over 4,800 stakeholders across 162 processes.
The key ndings of the study are as follows:
• Clients are highly satis ed with the performance of remote centres
• Data operations are generally performing better than voice operations
• Third party providers usually outperform captives in practices as well as metrics; but best-
in-class captives show that this gap can be bridged
• Operating practices, rather than location, determine performance on key metrics such as
cost and quality
• While clients focus initially on cost and quality, their priorities shift rapidly once offshore
processes/services are well established
• Remote centres are unable to perform consistently across processes and locations.
Providers have successfully delivered India’s value proposition of quality services at a lower
cost. Now that client expectations are growing and increasingly complex processes are being
offshored, remote centres must institutionalise key operating practices in talent management,
the support eco-system and execution methods. Mature practices will ensure a healthy andsustainable industry.
summary
* The benchmarking study evaluated operating practices such as requirements gathering, solution design, projectmanagement and solution delivery, leading to outcomes (performance indicators) as indicated by scores or rankingon metrics (e.g., customer satisfaction, schedule over-runs, cost over-runs and cost of poor quality).
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Process 360º is an innovative framework, developed in collaboration with leading BPO
providers in India, to assess performance of remote centres. It is an integrated benchmarking-
cum-diagnostic toolkit that measures performance of remote centre processes on the
12 operating practices and across the ve metrics listed above.
Our diagnostic has shown that centres focusing on underlying operating practices consistently
perform well. The core of this framework is therefore a survey that tests the maturity of these
practices at remote centres. The toolkit links practice scores to output metrics, enabling BPO
centres to identify poor performance, if any. For example, sound recruiting practices such as
de ning job descriptions clearly and ensuring joint resource planning between operations and
hiring teams brings in people with the right skills at the right time. This, in turn, decreases
attrition in the rst 90 days and increases utilisation levels, enabling the centre to perform
better on cost (US$ per hour per FTE *) as well as speed (number of days to ramp up and
stabilise operations).
Source: McKinsey 360º benchmarking
The process 360 o framework assesses operational excellencein BPO services
* Full-Time Equivalent
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Source: McKinsey 360º benchmarking
The Process 360º framework classi es processes into six groups based on the inherent
complexity of process and the skill required. The benchmarking-cum-diagnostic is tailored to
enable accurate assessment of each process group. The basic voice group includes processes
that are scripted and typically require minimal training such as telesales and accepting sales
orders. The specialised voice group, on the other hand, comprises processes with more
complex interactions such as technical help desk and services that can not be fully scripted
and require some domain familiarity.
Similarly, the basic data group includes simple activities such as data entry and data
conversion from one electronic format to another. On the other hand, rules-based
decision-making includes processes that require agents to make decisions based on
pre-speci ed business rules and guidelines, e.g., account reconciliation and insurance claims.
Going further up the complexity ladder, knowledge services include processes that
are not governed by standard rules and metrics and require deep domain knowledge,
e.g., research requests. Research and analytics includes processes that require the
greatest domain knowledge and typically involve extensive analysis through analytical
tools and techniques.
The framework is tailored to the needs of six process groups andinvolves all stakeholders
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So far, 23 out of the top 40 BPO providers in India have run Process 360º at their centres,including 14 leading captives and nine major third party providers. In the process, we have
built a rich database that includes responses from over 4,800 stakeholders across 162processes. The 162 processes are split among various industry verticals: 53 from nancialservices, 34 from high-tech, 17 from insurance and the rest from the telecom, healthcare,retail, hospitality, transportation and logistics industries.
This benchmarking-cum-diagnostic exercise was conducted at participating providers in threesteps over a period of 8-10 weeks:
Step 1: Administer web-based survey covering 10-15 processes across different processgroups to four types of stakeholders.
Step 2: Gather company-level operational and nancial data through a nominatedproject manager.
Step 3: Conduct diagnostic discussions with a selected set of respondents, and withfunctional heads such as those of Quality, HR, Training, Finance and Migration.
Inputs from all three sources were collated and analysed to develop a holistic perspective onthe performance of the company and to identify strengths as well as improvement areas for
the centre. The pages that follow lay out the major industry level ndings from this survey.
* Overall 23 providers participated in the sur vey with several nominating processes across groupsSource: McKinsey 360º benchmarking
Process 360 o covered 162 processes andover 4,800 respondents
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Source: McKinsey 360º benchmarking
On the whole, clients are fairly satis ed with performance across most processes. Satisfaction
is highest with basic data and, research and analytics processes. Voice processes have
lower satisfaction ratings, but not by too high a margin. Interestingly, the pattern is similar
across processes from different verticals, with early movers in banking and late entrants in
healthcare reporting highly positive experiences.
Our diagnostic interviews with clients revealed that their satisfaction is due largely to the
ability of providers, captives or third party, to achieve the intended objective of lowering
processing cost while maintaining quality levels. Across the board, clients stated that they
were gaining steady-state savings of 40-50% in line with their expectations. Meanwhile,
quality levels were more or less similar to those in the originating location.
Clients are highly satis ed with offshoring
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A closer look at quality levels achieved shows that, while clients are satis ed overall,
satisfaction is much higher with data services than with voice services. Figures collected from
remote centres indicate that SLA compliance, in both basic data and rules-based decision-
making processes, is much greater than in voice processes. Further, compliance levels have
increased in the last quarter (prior to the survey) for data processes but have stayed the
same or decreased marginally for voice processes. The primary reason for this trend in voice
processes is high attrition levels and the related dif culty in matching skills to jobs.
Source: McKinsey 360º benchmarking
Data processes are performing better than voice processes
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Source: McKinsey 360º benchmarking
A notable nding of this study is that, on an average, third party providers are performing
better than their captive counterparts.
For example, the fully loaded cost of an average captive is about 30% higher than that of an
average third party for a rules based decision-making process. The difference is due to higher
wages, lower span of control, and poor infrastructure procurement and utilisation. Notably, we
found that the higher cost structure did not lead to lower attrition or better quality.
Captive centres also need to strengthen operating practices. For example, on an average,
more than a third of clients were dissatis ed with the migration approaches of captives.
In contrast, only 16% of client respondents expressed dissatisfaction with the migration
approaches of third party providers.
However, an exception must be noted. One best-in-class captive was operating at a 14% cost
advantage over the best-in-class third party provider essentially through better operational
practices.
Third-party providers outperform captives; but best-in-classcaptives show this gap can be bridged
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Another notable nding of the survey is that location is not the sole determinant of a BPO
company’s performance.
For example, in basic data processes, a best-in-class centre in Mumbai is operating at 40%
lower cost than its counterparts in relatively cheaper cities such as Chennai. The provider has
offset the higher wage and infrastructure costs by containing attrition, ensuring an optimal
skill and tenure mix among employees, and achieving higher infrastructure utilisation. This
effective cost management has not come at the cost of other metrics such as SLA compliance
and time-to-stabilise operations. Similarly, contrary to expectations, a Chennai-based BPO
company showed the highest SLA compliance in basic voice processes. While this is an
isolated case that should not be generalised, it does suggest that operational practices drive
performance and not location advantages.
* Figures are for units with best-in-class cost for data entry processes at each of the locationsSource: McKinsey 360º benchmarking
Players in high cost cities have been able to deliver superiorcost and quality performance
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Source: McKinsey 360º benchmarking
While clients are relatively pleased to have achieved their initial objectives of lowering costs at
similar quality levels, they also state that their expectations of providers change over time.
The Process 360º framework asks the clients and the offshore teams to distribute 100 points
across 5 performance metrics to ascertain their relative focus on these areas. The results
show that client priorities shift over time, and the change in focus depends on performance.
For basic data processes in operation for less than a year, clients typically focus on cost and
quality. Beyond this time and as the process matures, clients start looking for speed and
exibility as well, including the ability to address demand peaks and ramp up quickly. On the
other hand, in specialised voice operations, the focus on quality typically increases over time.
Notably, we found that operations teams usually maintain their focus on cost and quality
despite a change in client priorities. The result is a disjunction between providers’ priorities
and client expectations.
While clients’ initial focus is on cost and quality, prioritiesshift quickly
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Most providers do not perform consistently well across different process groups. For instance,
a Bangalore-based centre engaged in rules-based decision-making and basic data processes
delivers above average performance on most metrics for rules-based decision-making, while
lagging behind in data processes. This usually happens because providers typically replicate
practices for their dominant process group in others. In this case, since about half of the
business comes from rules-based decision-making processes, for basic data processes as
well, the provider recruited from the same colleges and looked for the same skill sets.
This led to dissatisfaction among recruits engaged in basic data processing, leading to high
early-stage attrition.
Further, within a centre, islands of excellence can be found even within a process group, with
particular processes excelling in operations. With no institutionalisation of best practices,
performance is driven more by people than by processes.
Source: McKinsey 360º benchmarking
In general, consistently high performance across process groupsremains elusive
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Source: McKinsey 360º benchmarking
As stated above, survey data clearly show that practice maturity or outcome scores are the
best predictors of a centre’s operational performance. Our diagnostics revealed that most
clients and providers, captives and third parties included, were focusing disproportionately on
output metrics as opposed to practices driving performance. As the chart above shows, clients
and operating teams believe that substantial improvements are required in seven of the 12
key operating practices. That apart, performance varies considerably among different centres
and even within different processes within the same centre, creating what we call “islands of
excellence”. BPO centres must institutionalise sound practices to consistently perform well
and meet changing client needs.
Remote centres need to enhance outcomes in 7 of the12 practices
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Our diagnostics revealed that recruitment and employee engagement need to be
strengthened considerably.
As illustrated above, over 30% of clients report delays in deployment of the required number
of people on the project. This is due to the lack of an established hiring process and of
coordination between the recruiting and operations teams. In today’s environment of high
industry growth and increasing attrition, such inef ciencies can be costly.
Similarly, employee engagement with their organisation and career must be increased to
motivate high performers and reduce attrition. Diagnostics across remote centers reveal the
need for better performance management and clearly de ned career paths. Introducing goal
and target setting, conducting timely appraisals and encouraging high performers through
monetary and non-monetary incentives will go far in retaining talent.
Source: McKinsey 360º benchmarking
Effective talent management is critical
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Source: McKinsey 360º benchmarking
Execution methodology is another area in which clients see the need for improvement.
Migration, transition, workforce management and continuous improvement need to be
enhanced.
Most remote centres need to strengthen solution design. Evaluating all alternatives before
a process is considered for migration is important. It is also critical to capture on-site tacit
knowledge. Managing transition through strict adherence to timelines and other measures will
avoid time and cost over-runs.
In workforce management, handling demand uctuations continues to be a challenge for most
remote centres. Enhanced forecasting, exible shifts and cross training are some practices
that will help manage demand peaks and troughs.
Finally, clients would like to see more continuous improvement in execution methodologies.
Experienced clients are continually focusing on driving productivity rises and innovation,
making these an important focus for remote centres as well. Institutionalising structured
programs to generate, evaluate and implement ideas will be critical to meeting the evolving
needs of clients.
Execution methodologies need strengthening
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The chart above shows the impact of sound operating practices at a Bangalore-based centre.
Practices must meet the different priorities of different clients even in similar processes. Tomeet changing client needs, practices should be strengthened at a client process unit. This
will entail creating an encouraging environment, tracking client expectations, identifying
sound practices and monitoring their effectiveness. For example, unit managers for a client
seeking fast ramp-up in addition to cost and quality, should anticipate this need, monitor
recruiting effectiveness in terms of quicker hiring and higher quality of recruits, and generate
ideas for year-on-year improvement.
This kind of rigour will ensure the sustained dominance of the offshore BPO industry.
Source: McKinsey 360º benchmarking
Identifying and xing practice gaps will ensure success
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project 360 o
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The Project 360 o benchmarking aims to assess IT services delivered by globally dispersed
project teams, focusing on two aspects: (1) customer interaction and solution delivery, and (2)
resource management. Phase 1 covered close to 60 projects run by third party providers and
captive units (divisions of multinational providers).
Our initial ndings are as follows:
• The momentum and value proposition of IT offshoring is strengthening. Over 85%
of customers say they are satis ed or highly satis ed with offshore units/providers.
Customers and operating teams report strong performance in nine of 11 outcomes *
de ned for the study. There is encouraging evidence of productivity improvements,
especially in application maintenance projects. Finally, the nancial case for offshoring
remains strong despite wage in ation of 15-18% p.a.
• However, maintaining current satisfaction levels is likely to be a challenge. Customer
expectations are rising – pushing providers to undertake more advanced activities (e.g.,
requirements gathering), where practices are relatively immature. There are early signsof stress in six out of 11 operating practices and signi cant variance in performance on
metrics and practices across and within service providers.
• Sound practices are key to sustained excellence. Providers need to benchmark practices
and strengthen key operational areas. Innovations in customer interaction and resource
management are likely to become sources of competitive differentiation. In addition,
given the continuing war for talent, sound recruiting and performance management will
be essential. Institutionalising these practices can yield a 3-6 per cent EBIT increase
for providers.
summary
* The benchmarking study evaluated operating practices such as requirements gathering, solution design, projectmanagement and solution delivery, leading to outcomes (performance indicators) as indicated by scores or rankingon metrics (e.g., customer satisfaction, schedule over-runs, cost over-runs and cost of poor quality).
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Project 360 o aims to assess and benchmark IT services delivered through globally dispersed
project teams. It focuses on two critical aspects: (1) customer interaction and solution delivery
and (2) resource management. The current survey covered core delivery and sales operations.
It did not explicitly cover support processes such as Internal IT, Finance and Accounting.
* Includes analysis, design, coding, testing and nal acceptance ** Attributable to people issues (e.g., non-availability, attrition)*** In a way also captures employee satisfaction ratingSource: McKinsey 360 o benchmarking
The project 360 o framework assesses operational excellence inIT services
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* Output metrics are collected through a nominated data-coordinator at the company levelSource: McKinsey 360 o benchmarking
Project 360 o is conducted at participating providers in three steps:
1. Collect company level data, through a nominated data coordinator, on over 30 criticaloutput metrics that in uence customer satisfaction and margins.
2. Electronically administer survey for selected projects. Typically two to three projects are
selected per project type (Application Development, Application Maintenance, Package
Implementation).
3. Conduct diagnostic discussions with selected stakeholders from hand-picked projects,
and with functional heads of Quality, HR, Training and Finance. This provides a qualitative
assessment of the areas covered.
The approach and framework provide insights into the following areas:
• The linkage between performance metrics, outcomes and underlying practices.
• Potential performance trajectory (based on soundness of practices).
• Alignment among stakeholders, a crucial factor in satisfaction and performance.
The survey collects feedback on practices and performance fromkey stakeholders
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Phase 1 of Project 360 o covered about 60 projects, by third party providers as well as captive
units. These organisations fell into three categories – (1) rms with more than $500 million in
revenues, (2) those with revenues between $100 million and $500 million, and (3) those with
revenues less than $100 million.
Phase 1 was a pilot with the additional objective of testing and re ning our methodology.
Participating providers provided valuable suggestions, which will be incorporated in the next
version of the framework. Project 360 o will subsequently be rolled out to a larger set of Indian
IT services providers, global IT services majors and internal IT service teams of Fortune 1000
providers. The aspiration is to make this a global benchmarking database that can truly help
providers calibrate their performance globally.
Source: McKinsey 360 o benchmarking
Phase 1 of project 360 0 covered 58 projects and 395respondents
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Source: McKinsey 360 o benchmarking
Customers have reported high levels of satisfaction with offshore IT services. Average
customer satisfaction ratings range between 80-90% across the project types listed above.
This implies that, on an average, customers awarded satisfaction ratings of more than four on
a ve-point scale.
Over 85 per cent of customers continue to be highly satis edwith offshore IT services
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The industry has achieved stellar performance in 9 out of 11 outcomes assessed in the
survey. Project management and customer interaction received the highest scores, with
over 90% of customer respondents indicating that desired outcomes are being achieved.
Satisfaction is de ned as the per cent of respondents assigning a score of 3 and 4 on
a 4-point scale. Overall, customers have shown lower satisfaction in two areas: (1) people
planning and utilisation management, (2) recruitment.
Source: McKinsey 360 o benchmarking
Customers and operating teams report strong performancein 9 out of 11 operating outcomes
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Source: Customer interviews; McKinsey High-Tech practice
The survey revealed welcome signs of productivity improvement. In addition to one-time
productivity improvement in some projects, year-on-year productivity improvements have
been achieved in others. This is especially true in projects related to multi-year application
maintenance, where the number of full-time professionals supporting the application is used
as a measure of productivity.
There is anecdotal evidence of productivity improvements in Application Development and
Package Implementation, although there are no concrete data as yet.
Productivity improvements are evident, especially in ApplicationMaintenance projects
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A notable trend discernible in the survey is that providers offshoring since the 1990s or early
2000 are now gaining bene ts beyond low labour cost. These include faster time-to-market,
process redesign and offshore-led innovation in services. Nevertheless, labour cost advantage
continues to be the business case for the majority of providers embracing offshoring in the
last two to three years.
Relatively new or potential users of offshore IT services often worry about how long the
offshore labour cost advantage will last. Rapid wage in ation is behind this worry. Wages
in India have risen at a steady 15-18% p.a. for the last two to three years, driven by the
increasing talent shortage. However, while the relative labour cost differential between the
US and India will narrow (from 14% in 2005 to an estimated 29% by 2010), the absolute cost
difference (the more relevant number for the offshoring case) will remain substantial.
But what must be recognised is that wage in ation at these levels could reduce India’s
comparative advantage vis-à-vis other potential low-cost destinations (e.g., China, Brazil,
Eastern Europe).
Source: McKinsey analysis
Labour cost advantage over developed markets will remainsubstantial, despite 15-18% annual wage in ation
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Source: Customer interviews; McKinsey BTO practice
To sustain their edge in the global market, Indian players need to meet rising
customer expectations.
Lack of customer preparedness to outsource will pose fresh challenges for providers. Many
customers have said that they expect vendor staff to be trained suitably, and be prepared to
manage poor/vague speci cations.
Customers are also seeking higher accountability (managing service contracts as opposed
to managing programmers) and transparency (be their own general contractors). These
requirements might lead to more performance-oriented models such as T&M with productivity
targets and xed price contracts. This will transfer operating risk to the vendor. As one
customer admitted, “Given that we are outsourcing more end-to-end xed price developments,
vendors are expected to undertake this higher level of risk.”
Customers are also seeking increased exibility through offshore arrangements. Offshore
vendors are being expected to shorten response times and provide resources on demand
according to the changing needs of the customer.
Yet another customer expectation is faster delivery and stricter adherence to milestones.
Providers will need to increasingly use iterative development methodologies and interact with
customers much more than they have traditionally done.
Customer expectations are rising
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Source: McKinsey 360 o benchmarking
The Project 360 o survey also assessed underlying practices in each of the 11 operating
outcomes. This revealed that the superior abilities of some employees rather than sound
institutional processes are responsible for high satisfaction among customers.
It appears that providers are managing outcomes (and therefore satisfying customers) by
hand-picking capable project or functional managers. These individuals in uence superior
solution design, requirements gathering, training and so on. With continued industry growth of
25-30% a year and middle management talent becoming even scarcer, “managing by people”
may not remain a sustainable model.
While the situation is not grave, the survey revealed that some providers need to pay more
attention to requirements gathering, solution design and proposal writing, pricing and
negotiation, training, and performance management. Recruitment practices emerged as
robust, although people planning needs strengthening, probably due to the lack of a strong
central resource management process in most providers.
Early signs of stress on 6 out of 11 operating practices
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Players were also assessed on several project-related operating metrics that in uence
customer satisfaction and margins (cost of quality, people ful llment rate, proportion of
projects with cost over-runs, T&M revenue leakage). Survey results reveal variance in company
performance, implying that providers could nd it dif cult to maintain customer satisfaction
and their own pro tability.
Our diagnostic discussions revealed a signi cant variance in revenue leakage in T&M projects
across providers. Fixed-price projects experience cost over-runs, mainly due to a lack of strong
underlying practices.
As the industry tries to move into more solution-led services, getting xed-price projects right
will be an important determinant of success.
Source: McKinsey 360 o benchmarking
Signi cant variance in performance in well-understoodproject-related metrics
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Source: McKinsey 360 o benchmarking
Apart from variance in practices between providers, there can be performance variations
within the same company too. As the chart above shows, scores can vary quite sharply even
on parameters that are not substantially in uenced by external factors.
This was borne out in our diagnostic discussions. Participants accept that a lot more
standardisation is needed in de ning and implementing practices.
Signi cant uctuations in performance across projects within aprovider
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Source: McKinsey 360 o benchmarking
Requirements gathering: Most customers pointed out the need for joint problem solving.
They feel that the focus of requirements gathering should shift from lengthy, incomprehensible
documentation to include more scenario building and problem solving. They want the vendor
to understand their present and future business needs and explain the trade-offs and
implications for system design. Providers will need to build up the skilled resources, tools and
exible approach to capture requirements systematically and thoroughly. Prototyping should
also be considered. It is more effective for communicating the implications of system design
to the customer and reduces the number of iterations required for development. It also shows
the customer at the design stage that all scenarios and sensitivities have been planned for,
reducing the number of change requests and rework.
Solution design: Most IT services providers have struggled to establish a robust productivity
measurement system to reliably estimate efforts and schedules. Many challenges exist in
measuring productivity at the end of a project and comparing that with the estimates at the
design stage. The problem is further compounded by low time-sheet adherence among project
teams and use of shadow resources.
Pricing and negotiations: Some players do not have any clear guidelines on pricing and
discounts and may not review pricing periodically. This leaves an important lever of pro tability
unexploited. In some cases, although the guidelines exist, adherence is patchy. Finally, in
some cases, negotiation skills could be strengthened. Addressing all these factors would
improve growth and pro tability.
Providers need to strengthen customer interaction practices
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Recruitment: We have found that recruitment teams don’t have a robust enough resource
requirement plan. Often, they don’t have a well-de ned employee mix from various channels
(e.g., web-based recruitment, head-hunters and employee referrals). In addition, organisations
need to start tapping unconventional sources (e.g., graduates in Electronics and Computer
Sciences, diploma holders) to meet the increasing demand for talent.
Well-established recruitment teams must be set up to attract fresh talent and maintain
on-campus relationships. Most importantly, systems must be set up to accurately pro le
candidates. This will reduce hiring errors and early attrition.
Performance management: Some organisations need to strengthen performance appraisal
by setting Key Result Areas (KRAs) and reviewing performance on KRAs at the end of the year.
Many of the rms surveyed do not link performance, incentives and career growth. As a result,
there is no clear differentiation between high and average performers.
Training: The quality of training needs improvement in many organisations. Technical training
is largely classroom-based. Many rms do not follow a training calendar or assess training
needs systematically. Finally, the quality of role-based training needs to be improved.
Source: McKinsey 360 o benchmarking
Providers need to strengthen resource management practices
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Source: McKinsey 360 o benchmarking
Initially, IT providers focused on fairly standard work and enjoyed abundant talent, given the
attractiveness of the IT industry. The focus was thus on strong project management and basic
account management.
But now offshore providers are being asked to build new systems, implement core packaged
applications, and run mission-critical business processes. In this more challenging
environment, users are also sometimes unclear about full functionality speci cations.
Providers require in-depth business process knowledge and a exible approach to capture and
re ne requirements. A disciplined approach to pricing and building the capabilities to manage
complex RFPs are also essential.
There is almost a frenzy in India to nd senior staff to keep more complex projects on track.
In this scenario, resource management is a competitive differentiator. The following practices
will be key: appropriate people planning to deploy resources at optimum levels and in the
right places; training less experienced people in managerial roles; and a robust performance
management system to retain the best talent.
Innovations in resource management and training should also be encouraged. Some providers
are recruiting non-engineering graduates and providing training to them, before they formally
join the organisation.
Customer interaction and resource management practices canbe sources of competitive differentiation
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Most mature (or maturing) industries face the classic price-cost squeeze, where prices
remain at or decline due to competition whereas input costs go up. The Indian IT services
industry and all its leading players have been facing the same squeeze over the last few years.
However, players can improve operating pro ts by 3-6 per cent through several measures,
depending on strategic focus and growth aspirations. One of these could be broadening
the employee base to keep average employee cost down. But this would need to be
supplemented by robust recruitment and training processes, stronger account management
and larger projects. Greater pricing discipline with clear discounting guidelines and margin
targets are also needed. Utilisation could be increased by ensuring optimum deployment of
resources through an empowered centralised resource pool and by holding project managers
accountable for lower utilisation of deployed resources, to avoid hoarding.
Rigorously following these and other practices will ensure that offshore IT services providers
maintain their leading edge.
Source: McKinsey 360 o benchmarking
Average companies can improve EBIT by 3-6 percentage points
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list of authors andbenchmarking teamAuthors
Sujit Chakrabarty [email protected]
Prashant Gupta [email protected]
Noshir Kaka [email protected]
Shailesh Kekre [email protected]
Vivek Pandit [email protected]
Saipriya Sarangan [email protected]
Madhukar Tata [email protected]
McKinsey 360 o benchmarking team
Shilpa Aggarwal [email protected]
Gaurav Bansal [email protected]
Avijit Biswas [email protected]
Abhimanyu Ganesh [email protected]
Karthik Kesavan [email protected]
Sheetal Rishi [email protected]
Gurpreet Sethy [email protected]
Vikrant Shirdade [email protected]
Mohit Singh [email protected]
Gunjan Soni [email protected]
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