Creating a global-services strategy that blends a company’s core competencies with multiple service providers will increasingly top the agenda for management, executives and industry experts said the conference keynote speaker, Vivek Paul, Partner and Managing Director, Texas Pacific Group, at the 2006 Global Services Conference in New York on Feb. 2, 2006.

Labor arbitrage — the cost differential between labor rates in the United States and overseas — is driving companies from all the industries to seek out services partners with substantial presences in India and China. Leading India-based service providers such as Infosys, Satyam, Tata Consultancy and Wipro Technologies have an edge over U.S. companies in terms of being low-cost providers, said Paul.

Paul’s comments were the first public statements by Texas Pacific, since the private-equity firm went public with potential investments in ACS and CSC — two industry leading service providers. Both deals have reportedly fallen through.

The availability of knowledge workers worldwide has flattened the barriers to distributing people and processes to the most cost-effective regions. Knowledge, according to Paul, is the connective tissue that binds corporations with their offshore captive operations and outsourcers. “How do you create a uniform culture on a global scale?” asked Paul, rhetorically. Those companies that can master the rules of engagement will flourish; those that don’t will fall by the wayside.

Knowledge management is a tricky thing, one that even large companies have a tough time with. Fewer than 5% of engagements by service providers’ lead to creation of a “process map” that flow-charts the outsourced business processes, Paul said. Replicating the “tribal knowledge,” which accumulates over decades of close collaboration among employees, in a foreign environment was named by Paul as the other key challenge.

A host of issues concerning governance complicate the global-services equation. The question of what constitutes a service-level agreement and who actually reviews goals against objectives is largely unanswered, said Paul. The other burning issues include protection of intellectual property, confidentiality and extending professionalism to the sourcing process by the creation of a position on the likes of a “global-sourcing executive.”

Within the financial-services industry, offshoring isn’t new: support organizations are typically co-located with revenue centers in major cities. But wringing costs out of overseas service centers has become increasingly important. Four years ago, Lehman Brothers set a target of 40% savings through outsourcing, but “hit a wall” after achieving 20%, said Charlie Cortese, a recently retired Managing Director at Lehman Brothers. To get the remaining 20% savings, it was necessary for Lehman to build its own captive facility in Mumbai, India. “By establishing a captive operation, Lehman was able to exert more control and manage turnover better,” he said.

Cost savings are the most visible benefits to offshoring, yet there are others that are equally valuable, if less tangible. Companies have opportunities to re-engineer business processes, improve individual performance, concentrate on previously redundant operations and document business processes. A Project Management Office (PMO) is key to making the outsourcing process succeed, said Cortese. The upshot is that a well-executed business process-outsourcing plan can lead to previously unheard of possibilities, such as performing fixed income research in India, he said.

At the conference, a Procter & Gamble executive revealed that the multinational company has saved $500 million in IT infrastructure and business-process expenses by building out global service centers. “The value of global-business development is flexibility, quality and innovation,” said Bill Metz, the company’s IT External Business Relationship Manager. “Cost is not the only factor.”

General Motors, which on Feb. 2nd revealed a massive IT outsourcing plan spanning five service providers, is in its third generation of outsourcing. The first generation took place in the 1980s, when it acquired EDS. The second generation took place ten years ago, when it spun off EDS and created an internal IT organization led by CIO Ralph Szygenda. The third generation, which officially began on Feb. 2nd, involves the use of “strategic suppliers,” said Debbie Yedlin, GM’s Global Director, Verification and Validation of Systems.

Yedlin spoke at a conference session on how GM is leveraging the Capability Maturity Model (CMM) of the Software Engineering Institute to create a model for the acquisition of outside services. The acquisition model covers all phases of the supplier-acquirer relationship, from project planning through contract on through transition management.

At the heart of the model is metrics: supplier project plans, requirements, executable code, test plans, training plans and so on. All of the metrics from all suppliers are folded into a “supplier database” of common measures, she says, which enable GM’s management to perform operational analyses and view operating unit performance.

In deciding what to outsource and what to keep in house, GM focused on its core competencies. “From GM’s perspective,” Yedlin said, “the functions we decided to retain are project planning and definition, systems architecture and engineering and project management.”