21/04/2008 Insee Average charge-out rate in IT in relation to offshore outsourcing 23rd Voorburg Group Meeting Aguascalientes, Mexico September 2008 Denis Gac Sanna Nieminen Vera Norrman Seppo Varjonen

Page 2 23 rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 offshore outsourcing in IT and average charge-out rates › Last year in Seoul, a discussion took place on the relations between offshore outsourcing in IT and the price formulation of computing services in accordance with the method of "charge-out rates" › What impact does this have on prices? › What impact does this have on the formulation of the prices?

Page 3 23 rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 outsourcing › Outsourcing is a business activity through which business firms attempt to reduce or eliminate their non-core areas of operation. › Outsourcing is based on the principle that no organisation can perform all of its activities optimally and with same efficiency as others. › Offshore outsourcing is a concept in which the buyer of the service is located in a different country to the service provider. (offshoreoutsourcing.org)

Page 4 23 rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 outsourcing

Page 5 23 rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 outsourcing › For several years now, offshore outsourcing has been aimed at development –in IT –in the call centres –in other areas…development will be made › Because the speed of communications allows it (internet) › Because the existing skills in some low-cost countries allow it (as well as the language and cultural similarities) › The proposals: –to increase competitiveness –to decrease costs (lower overhead expenses) –to be more reactive –to be more flexible –to work in a "follow-the-sun" timetable, throughout the day

Page 6 23 rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 outsourcing

Page 7 23 rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 Example: Accenture

Page 8 23 rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 Example: Accenture –Accenture proposes to outsource: –The management of applicative property –The development of applications –The applicative maintenance –The "build-run" design –The applicative third formula –The applicative maintenance of software packages (Oracle, SAP, Microsoft…) –The modernisation of specific software packages –… –All 62.01, 62.02, 62.03, operations

Page 9 23 rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 outsourcing –INSEE Survey (TIC): ‐ 29% of companies (with more than 10 employees) have outsourced a computing function ‐ 20% of companies with between 10 and 20 employees ‐ 72% of companies with more than 250 employees –Professional association study: ‐ IT activity offshore has increased to 4% from 2% in 2007 ‐ And this proportion should increase in 2008

Page rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 outsourcing –The outsourcers are varied –The "big five" of offshore outsourcing carry out 75% of "IT offshore outsourcing": ‐ Accenture, ACS, CSC, HP+EDS and IBM –There are also Indian companies ‐ Infosys, Satyam, Wipro, TCS and HCL –Countries ‐ United Kingdom17% of global demand ‐ Germany 7% ‐ Holland3% ‐ France2%

Page rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 India › these countries (through subsidiary or independent companies) ‐ 44% of IT offshore outsourcing › Development engineer = 2 to 3 times cheaper than a US or European engineer › although sometimes this is not the case, it is easy to understand why large enterprises are interested in working in these countries (through subsidiary or independent companies)

Page rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 What is our problem? › average daily charge-out rates are often monitored in IT › The charge-out rates include all costs taken on by the client, including salaries and other variable costs, fixed costs and profit margins › The use of charge-out rates as prices presupposes that the quantity and quality of work per time unit is unchanged over time › The method works best if an activity is stable, that is to say there are no major changes in the work, such as the adoption of new technology or the re-organisation of work.

Page rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 What is our problem? › In a period of increased outsourcing (the same is true for subcontracting), the structure of activity is not stable: › An hour's work for an engineer is not identical in time (or in quality), because it includes work carried out by other people in another country.

Page rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 What is our problem? › For an identical service (the same payment): › The service price decreases –(it is often on request of the client) › The number of local engineers decreases › The charge-out-rate increases –(if the Indian engineer is paid less than the Western engineer) › This leads to an inconsistency between the the price development and the tool used for calculating this price. (In accordance with what a CapGemini manager told us: "Our prices go down but our charge-out rates go up")

Page rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 What are the solutions? › The problem only really presents itself for very big companies, and when the numbers involved are very high and of substantial significance › It is necessary, however, that these companies understand this price/offshore relationship › If the calculation of unit values is not possible, the monitoring of charge-out rates can be a difficult process, and a solution lies in model pricing.

Page rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 What are the solutions? › IBM Global Services –Model pricing in the form of rate ‐ Implementing an operation in its hardware, software and labour sections ‐ Labour divided between local and offshore sites ‐ Application of variation rates, HW CPU rate and average labour rate › Accenture –All-qualification charge-out rate › Hewlett Packard –Rates based on operations with large accounts, within the constant perimeter of "taking offshore into account"

Page rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008 Additional problem › If the calculation of the production price proves to be more difficult than expected, the calculation of the imported service price will obviously be used, in addition to the calculation of the importations.

Page rd Voorburg Group meeting - Aguascalientes - MEXICOseptembre 2008