One year from today, March 31, 2009, the Software Technology Parks of India tax scheme will sunset. When this happens, Indian companies will find their taxes increased from 10% to 20%. Depending on your specific contract terms addressing taxes, material changes, or other sections (talk with your legal team), vendor managers may be confronted with higher rates. What can you do to manage this?
First, some background information. STPI was created in 1991 to create tax incentives to stimulate India’s then-fledgling software export industry. It provides a combination of incentives, but the big incentive is the 10-year corporate tax exception granted to new organizations (Indian companies consistently create new organizations to restart the 10-year clock). Today, 95% of India’s software and BPO exports are subjective to this incentive. Exports are the services you are buying if you or one of your vendors outsourced work to a foreign country. Indian companies have been unsuccessfully lobbying the Indian government to extend STPI, but one never knows.
Whether it is next year or further in the future, the Indian government, given the social pressures of the country’s government faces, is clearly looking to cash-in on the enormous industry. This year, they introduces a Minimum Alternate Tax. They have also established Special Economic Zones (SEZs) that will will give tax incentives for fifteen years (100%, 50%, and up to 50% exceptions for each consecutive five year period). However, not ever Indian company operates in a SEZ, and it is unlikely will when STPI expires.
“If” is not the question, but “when” is. When it does, one thing is sure: the Indian outsourcing industry’s tax burdens will increase and they will undoubtedly look for you to pick-up the bill. More to the point, almost every country with significant ITO and BPO industries have similar tax incentive programs, and these governments will be carefully watching how India’s mature industry is monetized.
Here’s what you can do to mitigate your risk:
- Get more knowledgeable on this subject now. Talk with your attorneys, analysts and consultants. Do not wait for your vendor to “educate” you. There are many layers of taxes and your advisors will be able to separate hearsay from fact.
- Negotiate your pricing terms to reduce your exposure to changes in Indian taxes.
- Use the risk as another reason to diversify your offshore vendors and locations. Multi-location, multi-vendor strategies mitigate a wide variety of risks.
- Recognize that this change will not kill the Indian industry - it will just level the comparative costs among countries. India will likely become just as expensive as the Philippines.
- Adjust your financial plans now as you enter into 2009 budgeting and planning.
Other ideas? Other information about STPI or other incentives? Please share it by posting a comment!
Phil Fersht recently joined AMR as their outsourcing analyst. In Phil’s own words, analysts are “McKinsey by the drink”, meaning you get significant thought leadership without the need for an expensive 3-6 week project.
Phil has just published a research paper on Ten Things to Look for in an Outsourcing Advisor. There’s also a couple of long threads on Phil’s blog on this topic.
Also, Vinnie provides some insights on at Deal Architect.
Oh, and Phil, check out the usage rules around “Adviser” versus “Advisor“. A UK vs USA rhetorical feud won by the Brits finally?
The Philippines has been an outstanding outsourcing location over recent years. It has an American heritage with close proximity to Hong Kong, Singapore, Taiwan, Korea, and Japan. There is a reasonably robust telecommunications infrastructure and there has been extensive capital infusions from China and many other countries. For foreigners, travel and accommodations in the Philippines is easy. Probably the most impressive opportunity is the abundant, well-educated, and friendly English-speaking labor force. Any outsourcing executive who has traveled to India, China, or Costa Rica instantly finds the Philippine people irresistible.
Despite the never-ending flow of positives clients, vendors, advisory firms, and the Philippine government use to describe the Philippine outsourcing market, the present day reality is much different. The Philippines actually poses a significant future risk to your operations. Here’s why:
- Workforce Attrition - Less than 3-4 years ago, more than one well-known CEO in India explained to us, “There is an unlimited labor pool. Wages will never increase.” Well, that certainly wasn’t true. Vendors and captives also exploited low wages by bidding-up labor markets in a savage back and forth talent war. Many companies sought shelter in Tier 2 cities, but the peaceful period was brief, and companies turned for shelter in Tier 3 cities - where the same fate ha occurred. The Philippines are experiencing the exact same phenomenon. In fact, one CEO even recently pitched opening a center in the Southern islands, which is a place no company should consider, unless tapping into Tier 2 cities along the Indian-Pakistan border or Pakistan-Afghanistan appeals to you.
- Complex Services Meet Inexperience - One aspect of BPO that differs from ITO is that there is no education program to develop call center and backoffice outsourcing operations leaders. Consequently, there are insufficient quantities of talented middle management in the Philippines. Now that most companies have outsourced a little “easy stuff”, they are outsourcing significant amounts of simple work, more complex work, as well as acquiring transformational services. The management challenge is huge. Where a call center used to get by on relatively easy workforce management planning, large operations demand sophisticated WFM skills. These skills are incredibly hard to find in the Philippines, unless you import them or buy them from other vendors/captives (see the attrition issue above).
- Political Uncertainty - One of the great underestimated aspects of the Philippine political scene is its complete uncertainty. You’ve probably already read the annually updated US State Department Travel Advisory. However, take a moment to review all the other countries with similar warnings. Pundits will argue that 1) the problem is in the south and 2) no government would stop the expansion of the outsourcing industry. We generally agree, with two major caveats. First, it takes but one election to ruin a country’s future. Second, if the Philippines become an unsafe destination for business men to visit or for long term deployment of vendor management personnel, outcomes become difficult to manage.
- Currency - Currency instability is challenging in the Philippines. While Indian companies took significant steps to hedge their currency, most operations in the Philippines are owned by foreign companies. These companies don’t hedge, so they pass their costs onto you.
Essentially, the Philippines of today is the India of 3-4 years ago. There is no reason to expect a different outcome.
However, while there are challenges, sophisticated vendor managers can mitigate every one of these challenges if they focus on strategic, long term issues that accompany outsourcing efforts. Vendor managers who focus solely on day-to-day issues will run into profound problems if they don’t diversify locations, manage financial currency risk, or seek creative ways of bridging the middle management talent gap. If managed effectively, the promise of the Philippines is definitely positive.
Dealing with under-performing or culturally incompatible vendor personnel is one of the most delicate matters facing vendor managers. Certain vendor personnel are critical to operational success. When they don’t deliver, performance deteriorates. When friction or distrust develops, relationships go sour and communication doesn’t freely flow. Frankly, it’s an awkward situation.
The problem is that you’ve outsourced your operation and, while you’re still responsible for ensuring the vendor delivers, you did abdicate certain recruiting and hiring choices.
With that said, if you negotiated your contract thoughtfully, you have retained the right to remove certain vendor personnel from your account. And isn’t that great…you can simply send a letter and the person of your ire will disappear forever. In fact, it’s easier than terminating your own employee. It’s also far more devastating.
Keep in mind that you should never have arrived at this point. Here’s an ounce of prevention:
- Interview Key Resources - No matter how wonderful your vendor claims certain people are, you must interview these resources before accepting their appointment to key positions. These interviews must occur face-to-face, even if the resource resides in another country. Telephone interviews are insufficient. Furthermore, depending on the role, more than one interviewer should speak with candidates.
- Use the RFP/Vendor Selection Process - Effective RFP processes require actual key personnel to present key topics and respond to questions. These are opportunities to evaluate the potential key resources.
- Require a “Succession Plan” - Every key role should have a solid succession plan and developmental goals that must be achieved each year. The reason is simple: after a couple of years, most account teams experience turnover or promotions to greater opportunities. Vendors need a plan to ensure key roles are never vacated for long periods of time.
- Provide Regular Feedback - Your job isn’t to develop vendor employees or submit feedback on performance. After all, the vendor’s performance should be directly correlated to SLA and milestone performance. However, every key vendor resource should be required to participate in 360 degree performance feedback, including feedback from clients, at least semi-annually.
Despite preventative actions, sometimes things don’t work out. However, clients should be careful about the use of formal removal procedures, except in clearly dire situations triggered by ethical issues or significant performance problems. Rather, vendor managers should informally communicate concerns to senior vendor leaders and give these leaders opportunities to resolve issues behind the scenes. Often times, problematic situations can be resolved through a vendor reorganization that shift roles or moves certain people onto other accounts. In addition, it gives the vendor time to find qualified replacements.
When the time does to give formal notice, after multiple warnings have not been heeded, vendor managers should be firm and expect immediate removal. The communication should be done discreetly to key senior resources in order to avoid impacts on vendor morale and performance. The vendor may ask for more time and the client should listen to this feedback carefully. Also, timing should be considered - do not remove certain resources at critical junctures, as the impacts could be devastating. However, the client has every right allowable within the contract, and there are times when formal action needs to be taken.
Finally, the removal needs to be done tactfully. No matter the situation, the client is impacting a person and his or her team members…and empathy is important. How you handle the situation reflects on you and your company. If your goal is to become a strategic client with your vendor, managing this situation carefully is an important step toward remaining in good favor with vendor agents and leaders.
Here’s another article on the same topic was written by Carter Santos
Have you removed key vendor resources? How have you prevented this from occurring? When the time came, how was the situation handled? Share your stories with the ever growing readership here at 360 Degree Vendor Management.
Earlier we published When Roads are Rocky: Dispute Resolution in Outsourcing Relationships. After all, not all vendor-client relationships are blissful partnerships.
Stephen Guth just released a great article on the same subject. Given his legal background, it’s a very good read.
One of the principle concerns of any vendor manager is monitoring your outsourcing vendor’s financial instability. Witness the recent failure of Axium, Hollywood’s payroll vendor and owner of Ensemble Chimes Global, previously one of the leading managed services providers of contract labor. When Axium filed Chapter 7 bankruptcy, Hollywood clients and a wide variety of their vendor management system clients (which included Fortune #3 General Motors, Fortune #7 Ford, Fortune #21 UnitedHealth, unranked Toyota, and other companies such as Morgan Stanley, Kaiser Permanente, AT&T, and BellSouth) were left with significant vendor management problems that crippled their IT and operations teams. In some cases, such as several Hollywood production teams, writers, and, believe it or not, swimsuit models, received paychecks that bounced. It is a classic story of a vendor meltdown that impacts customers.
It wouldn’t be concerning if there wasn’t so much consolidation in the outsourcing industry. It also wouldn’t be bad if so many of the vendors weren’t private and therefore not subject to external audit and public disclosure scrutiny. Finally, it wouldn’t be so critical if companies weren’t outsourcing key business processes - processes and technology support teams that take months or years to climb learning curves and stabilize.
However, the industry is consolidating, the vendors are private (or based in countries with accounting rules that are not as strict as US or European standards), and clients are outsourcing major business processes. Imagine if you lost your entire application development or call center team overnight? Scary, right?
The pundits of the total meltdown concept will point to business continuity planning or multi-vendor sourcing strategies. No doubt, both of these items will ease the pain. If you haven’t built a business continuity planning or considered a multi-vendor strategy, do it. Now.
However, the ramp-up curve following a vendor meltdown takes time and customers will feel the impact. Here are a few items that vendor managers should focus on:
- Create Communication Channels - Simply monitoring a company’s financial statements (assuming they are made public) is insufficient. There are points of failure that are not disclosed publicly, such as organizational changes, changes in banking relationships, and investor changes (acquisitions, new partners/major shareholders, and divestitures). Good vendor managers create informal communication channels with their vendors to obtain insight into potential future changes. Furthermore, financial performance should be part of quarterly reviews (our suggestions for quarterly review are found here). Remember: just because a company is private does not mean it cannot share financial results with you. Require audited financial reports be provided on a quarterly basis, as well as disclosure of any material change to the ownership or financial standings of the company.
- Predicting Failure and Advance Notice - With few exceptions, financial failure is not sudden. While SEC or other government regulatory groups’ rules may prohibit sharing information in advance of public earnings announcements or other irregular communications, financial failure can be predicted. Use the Z-Score methodology. Stephen Guth discusses the use and formula here. Here is Wikipedia’s page. Every quarter, the VMO should plot the Z-Score of its suppliers and track it, potentially using a rolling three quarter average to predict the next month’s performance. Staying ahead of failure by predicting is critical to the success of your company and customers.
- Define Failure - One of the most common discussions in contract negotiations is termination for the vendor’s financial insolvency. This discussion must end with a clear quantitative definition of insolvency. This could be based on a financial ratio, revenues, sequential quarterly financial trends, liquidity, line of credit usage, or other triggers. The worst triggers are Chapter 11 or 7 (especially 7) filings. The reason is that once the company goes into bankruptcy procedures, your ability to obtain concessions for moving work to another vendor is limited. Of course, just because a company triggers the clause, it doesn’t mean you need to terminate. However, the financial health of your vendors results in sound operational results and reduced risk is easier to live with. Sticking with financial failures out of loyalty to them creates unnecessary risk. You have to fervently believe the company will turn the corner in a reasonable period of time.
Once failure has occurred or has been predicted, vendor managers must act quickly.
- Decide Internally Your Next Steps - Meet with internal customers, executives, and stakeholders. Present the information, discuss the risks, and decide on next steps. Do not let internal politics interfere with taking action.
- Failure Doesn’t Require Separation - All companies have bad quarters, years, or cycles. Misery begets misery, as they say. However, remember that termination is your last option. Vendors can turn the corner. They can be purchased by their competitors or other investors. With that said, during times of financial difficulty, expect the vendor to reduce administrative costs, cut investments, and not work as hard to retain staff. The results could be delayed implementations, lower service levels due to lower morale and turnover, and possible technology glitches. While service level credits will reduce the costs of poorly performing vendors’ services, they don’t fully offset the impact to your company or your customers.
- Meet with the Vendor (Frequently) - Meet with the vendor immediately and discuss the situation. Seek additional information and ask the vendor’s CEO and CFO to participate in the meeting. Understand what the vendor’s perspective is and ask them for their “Get Healthy” plan. Review the plan. Ask questions. Draw your own conclusions and take next steps. Remember, the actions you take, particularly if you’re a large client of the vendor, could complicate the vendor’s ability to manage operations, financial relationships, and people. Coordinate efforts, but be deliberate.
- Plan B - In most large environments, a multi-vendor strategy provides clear alternatives to the financially struggling vendor. Even in smaller environments, it pays to have a secondary vendor standing in the wings. This is when parallel negotiations that end with a single winner help - because the loser has an almost fully negotiated contract that can be rapidly finalized.
- Termination - Have your bases covered. Read our article on terminating an outsourcing relationship here.
Have you walked down lovers’ lane to discover financial instability rocking the foundation of your relationship? How did you handle it? Leave a comment and share your thoughts with others.
Earlier this week we posted an article describing vendor management job descriptions. Yesterday day, Tim Minaham’s article on the Supply Management Talent Crunch led us to reflect on the “talent crunch” also facing vendor management. Let’s face it - good vendor managers are hard to find. Why?
- The positions require deep operations experience.
- The positions require great relationship-building and alignment-building skills.
- Most vendor manager positions are individual contributor roles, even though they manage operations of hundreds or thousands of FTEs.
- Vendor management positions are typically paid less than their peers managing similar internal operations.
- Vendor management positions require great focus on details: metrics, processes, and contracts.
- Vendor managers must be big picture thinkers with moderate strategic thinking skills.
- Vendor managers rarely have clear career paths.
Sounds like a tough job, right? It is.
That’s why most vendor managers lack all the skills necessary to perform their jobs exceptionally well. More importantly, there are few training courses available to them. Organizations like IAOP sometimes appear to be more focused on developing vendor and advisor sales channels than developing the skills of vendor managers. The COPC offers good courses, but they aren’t hands-on. Companies like ICN offer negotiation, selection, and contract courses, but they are tuned for IT procurement/vendor management teams. All these organizations lack training in the operations or technology that vendors managers typically manage.
Simply put, vendor managers must be developed by building performance management processes that guide activities and gradually increasing the responsibility of vendor managers. Standardized vendor management processes result in regular, predictable performance. Increasing responsibilities of vendor managers allows vendor managers to build experience with more complex issues - experience that vendor managers can leverage with delving into root cause analyses, relationship development, and negotiations.
If you lack an experienced vendor manager to develop our processes and resources, it is usually better to hire an external resource or hire an advisory firm tasked with developing vendor management processes, templates, and stakeholders. Forward thinking executives hire these resources before or during vendor selection, which gives them a leader for transition management and the time to develop the necessary processes in advance of implementation.
Do you have a methodology for hiring or developing vendor managers? Share our thoughts!
The valley of despair in an outsourcing relationship is when vendor managers consult with their legal counsels. Disputes that go “contractual” (the vendor management version of “nuclear”) can irreparably damage a relationship. Your job as a vendor manager or vendor account manager is to ensure the client-vendor relationship never sours. However, what do you do when it does?
Today, we take a deeper look at dispute resolution.
Read the rest of this entry »
Job descriptions are difficult enough to write when roles are clearly defined. The ambiguity of vendor management organizations and the fuzzy lines that separate them from procurement, finance, project management, business analysis, and operations organizations make vendor management job descriptions many times more difficult to write. The importance of attracting and selecting the right talent to manage major outsourcing or service vendors is essential for the well-being of a company.
This article covers the details of vendor management job descriptions.
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Note from the Author: Today’s article is part four in a series of articles discussing outsourcing metrics. We encourage your to read our other three articles: An Overview on Outsourcing Metrics, Operational Metrics, and Key Performance Indicators.
Sustainable, successful outsourcing is all about leveraging other companies’ core competencies. Despite the labor arbitrage low cost country sourcing provides or the abundant availability skilled and unskilled labor in foreign countries, outsourcing is a fundamentally the purchase of another company’s superior service, technology, or product. Vertically integrated companies are simply non-existent. Our companies’ suppliers design products, manufacture components and finished goods, manage logistics and inventory, provide customer service, facilitate payments, and provide administrative human resources, finance, and IT support. While each new senior executive’s arrival will reopen the debate of his or her company’s core competencies (witness the CEO changes at Dell and Yahoo!), the simple fact is that no company can do everything, much less everything well.
Outsourcing provides your company the ability to obtain a level of specialization and performance it could otherwise never achieve - and with a shocking degree of immediacy. The challenge for clients who purchase these services is the transformational journey necessary to take advantage of the capabilities their suppliers provide. One of the chief gripes expressed by many vendors is that their clients fail to adopt some of the best practice processes they are capable of delivering. Vendors will offer free consulting assessments, networking and educational events with experts and other clients, and inexpensive pilot projects - almost anything to get clients to bite. As a result, clients leave quality, service and cost on the table - all elements that drive client satisfaction.
The rationale is simple. Companies who outsource typically see Read the rest of this entry »
