Q&A: Former Apple and Dell Executive Says Fundamentals Key to Survival in 2009
Baird Private Equity Operating Partner Mohan Kharbanda Shares Outlook for the Business Services Industry, Insights on Offshoring
CHICAGO, December, 2008
As an Operating Partner with Baird Private Equity, Mohan Kharbanda works with Baird Venture Partners and Baird Capital Partners to source and evaluate new investment opportunities and contribute value-added operating experience to portfolio companies. Prior to joining Baird Private Equity, Kharbanda worked at Apple as a Vice President reporting to the Chief Operating Officer. While there, he led a team focused on establishing offshore operations in India and Eastern Europe. Prior to Apple, Kharbanda was Vice President and Managing Director of Dell International Services, where he was responsible for establishing and rapidly scaling Dell’s India operations to 6,400 employees in two years. Kharbanda was also the Vice President of the AsiaPac region for a division of Cummins and Vice President and General Manager of the global service business for the Home & Building Controls division of Honeywell.
Baird Private Equity talked with Kharbanda to get his insights on the impact of the recent attacks in Mumbai, offshoring best practices and the outlook for the business services industry going into 2009.
What is your perspective on the recent terrorist attacks in Mumbai?
As a former resident of Mumbai the recent attacks really hit home. Over the last decade, India has seen several incidences like this - though this one was more daring, spectacular and played out to a global audience. After each incidence the country and markets recovered. When I was setting up Dell in Bangalore, India and Pakistan, both nuclear armed nations, reached the threshold of a war in 2002 and Michael Dell asked me if we should shut down the operations. My answer then, as now, is that the long term risk/reward ratio still favors India and we can not afford not to be there. The threat then subsided and Indian economy grew at some 8+% rate for several years.
India's prime minister has so far shown extraordinary forbearance but the next few months will be telling. Some developments already offer comfort. At present, the attacks have not led to an outbreak of Hindu-Muslim violence in other parts of India. Politicians, who are often quick to react to such incidents and mobilize protests, have been remarkably discreet. Muslims and Hindus have condemned the attacks without indulging in a blame game. It appears that the dialogue is more measured and India/Pakistan/U.S. are all looking for sustainable answers.
Again, the next few months will be telling but I believe that India is resilient, will recover, and India will continue to have a place in any company strategy.
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Briefly, what are some of the challenges and opportunities facing the global business services sector as we go into 2009?
Broadly speaking, the service sector will face some of the same secular challenges facing the global economy, such as access to credit, managing liquidity, declining revenues and transaction volumes. The most severely impacted areas will be services like staffing, consulting and project-oriented services. A select few areas, like outplacement services, may see incremental growth. The service companies that have annuity revenue streams will likely have some additional cushion to help carry them through the current challenging environment.
The downturn can be an opportunity for certain companies if they use it to revisit their business models, value proposition and streamline their cost structures.
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In your opinion, overall, what are the keys to success in 2009 for business services companies?
The winners in 2009 will be those that focus on the fundamentals - companies that focus on customers and customer retention, have sound balance sheets to ride out the storm, constantly re-evaluate their business models and value proposition in the changing economic environment, and manage costs well. These fundamentals may require that service companies utilize a hybrid of in-house and offshore resources that can help materially reduce costs or increase revenues. As a result, offshoring will likely be increasingly considered in 2009 in industries where adoption has been slower as well as in the small- and mid-sized enterprise segment.
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The importance of offshoring to the growth of U.S. and European business services companies has been well documented. How do you see the impact of offshoring evolving over the next decade?
Offshoring is really the culmination of fundamental trends coming together. During the technology bubble era, hundreds of millions of dollars were invested in global broadband connectivity, undersea cables, and similar infrastructure elements. At the same time, computers became cheaper and dispersed all over the world and proprietary software could be developed through the collaboration of team's in Chicago, Bangalore and Shanghai, making it easy for anyone to do remote software development or transaction processing. That meant that complex work could be disaggregated, distributed, processed and then reassembled at the source.
In terms of trends, it may be hard to believe, but offshoring is still in the nascent stage. McKinsey has estimated that the total eligible market for outsourcing is $475 billion, of which only 15% has been currently offshored. The offshoring market is still growing at roughly 35% annually and this secular trend has a number of countries, from Ghana to Bangladesh, pursuing the market.
Second, the current recession may delay, but will not alter the upcoming talent shortage in the United States, driven by slowing growth in the labor force, increasing number of retirees, low unemployment among college-educated, and increased turnover. By the end of this decade, more than 40% of the US labor force will reach traditional retirement age, according to the Conference Board.
Third, countries like India will continue to move upstream. The companies there have moved from simple cost arbitrage where the focus was to simply 'lift and shift' the process, to delivering much better quality through tools like Lean 6 Sigma, and re-engineering/business transformations through the usage of technology to further lower costs. These are not always the core competencies of mid-sized companies in the U.S. that are offshoring.
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How should a company begin the process of exploring whether offshoring fits into its business strategy?
Offshoring is more complex than outsourcing operations to a domestic supplier. In addition to the time and cultural differences, there are challenges in process transitioning, establishing service level agreements, joint governance and remote operations management. But companies have learned the recipe, and there are now good templates for RFP's, onsite due diligence, price negotiations, contract structures, process transitioning and ongoing management. Generally, large companies have some in-house capabilities, but the small and medium-sized companies usually need to seek outside assistance from experienced operating professionals if they have never offshored before.
The other challenge is managing expectations in terms of potential savings. For example, while the salary differences can be up to 80% lower for an offshore location, the realized savings usually are closer to 30% due to the hidden costs. Savings of 30% are still significant, but it is vital for companies to understand what to expect. Baird Private Equity’s network of operating experts are intimately familiar with foreign business practices and policies so that we can effectively assist our small- and medium-sized portfolio companies in determining the most appropriate strategies for pursuing offshoring opportunities.
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What are the typical criteria you evaluate in helping a Baird Private Equity portfolio company develop its strategy for pursuing opportunities in India?
We typically take into account a company's size, potential savings, project complexity, Intellectual Property (IP) protection needs, and in-house capability to transition work and subsequently manage the remote supplier.
In general, the larger the company, the more potential for savings in offshoring since the cost of transitioning and managing the operations can be amortized over a larger number of employees.
The complexity of the process determines vendor selection. One vendor that is ideal for a simpler project or process may not be a good fit for a more complex project, and vice versa. At Baird Private Equity, we look at potential partners who not only can 'lift and shift' the current process, but also add value through CMMI, COPC and Lean 6 Sigma tools and apply technology to help re-engineer the processes.
When it comes to IP protection, offshore companies have developed very effective means of securing the confidentiality of data like social security numbers or pin numbers. Safeguards may include anything from randomly auditing and monitoring work, to modifying computers so that there is no CD, disk or USB drive. The work environments tend to be paper- and pen-less. In cases where a new technology or design needs to be kept secure, companies might choose to dissect a project, outsourcing certain elements but not the most sensitive pieces.
We also help ensure a company's processes are clearly documented, which helps facilitate a smooth transition to an offshore team. We consider initial training needs and make sure the appropriate personnel are in place to manage the operation both locally and remotely.
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Are there any business services companies for which it doesn't make sense to consider opportunities in India?
Yes, there are some situations where this is the case. For example, for some companies with proprietary technologies that need to be protected, offshoring may be risky in the earlier stages. For companies that need all of their suppliers to be in the nearshore supply chain ecosystem, offshoring could be a challenge. And, for some very small companies looking to transfer the work of only a handful of people, the hidden costs to offshoring can make the strategy expensive to the point where it might not be the best solution.
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About Baird Private Equity
Baird Private Equity, the global private equity group affiliated with Robert W. Baird & Co. (Baird), makes venture capital, growth equity and buyout investments in smaller, high potential companies in the United States through Baird Venture Partners and Baird Capital Partners, in China through Baird Capital Partners Asia, and in Europe through Baird Capital Partners Europe and Granville Baird, an affiliated fund manager that invests in Germany. Baird Private Equity has a global team of 80 professionals in nine offices across the United States, Europe and Asia, including approximately 20 operating professionals in Asia. Baird Private Equity and its affiliates have raised and managed approximately $2.4 billion in capital and invested in over 225 companies since the 1980s. For more information, please visit www.bairdprivateequity.com.
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